BAR OPERATIONS COMMISSIONS

KARIZ ELIZABETH TEH

Chairman

Honey Joy Belen Vice-Chair for Academics, Kathleen Trine De Lara Vice-Chair for
Administration, Jhoanna Paula Bitor Operations Officer, Michael Angelo Tamayo Secretary,
Rhian Lee Tiangco Treasurer, Shianne Camille Dionisio Auditor, Gillian Albay Public
Relations Officers, Mikyla Cordero Volunteer Core Head, Ayla Monica Cristobal Creative
Director

Charles Bautista Secretary, John Paul Nanit Treasurer

Israel Batan Roderick Wamil Van Regine Perlas Auditor ganRae Magsano
Ma. Cristina
Commissioner Richcelyn Marquez
Winflor Marie Barcelona Israel Batangan
Ernesto Alfoso Joje Mesana Winflor Marie Barcelona
Deputy Commisioner
Arianne Sercedillo Ernesto Alfoso
Jodyne Liz Tanay Arianne Sercedillo
John Evann Raymund DaniloBesid
Miñoza Jodyne Liz Tanay
Edmond
Ana Katrina Jones Gastanes
Dugan John Evann Raymund Besid
Reyna Amor Charmagne
Condes Cuevas Ana Katrina Dugan
Jengke Fabi Wendel Dinglasan Reyna Amor Condes
CamilleLantaka
Grace Katherine Bianca Pinto Jengke Fabi
Frances
Kristen Catherine
Roseljoy Balan Anenias Grace Katherine Lantaka
Mac Vincent Javier
Noel Capulong Kristen Roseljoy Balan
Kimberly MickeySubject
Ortega Heads Noel Capulong
Kimberlyn Batula-Nasiad Kimberly Mickey Ortega
Alvin DupanMark Genesis Rojas Kimberlyn Batula-Nasiad
Hariette Kim Tiongson Alvin Dupan
Chona Layugan Juan Pepito Dela Cruz
Members Members

ACKNOWLEDGEMENT
Justice Antonio E.B. Nachura, Retired
Dean Domingo M. Navarro
Asst. Dean Erik C. Lazo
Atty. Gabriel P. Dela Peña
Atty. Victor Carlo Antonio V. Cayco
Atty. Prime Ramos
Atty. Cris Tenorio

O
Atty. Calai Fabie

center
Atty. Roderick M. Villostas
for Director
legal
Atty. Antony J. Parreño, Atty. Lester Ople
CLEAR education Research Fellows

and Brando de Torres, Maricar Asuncion, Jayson Galapon

Research Staff
research

Table of Contents
 Table of Contents

I. INSURANCE................................................................................................. 1
A. Concepts of Insurance ……………………………………………………………………………… 1
B. Elements ………………………………………………………………………………………………… 1
C. Characteristics and Nature of Insurance Contacts ……………………………………….. 2
D. Classes …………………………………………………………………………………………………… 4
E. Variable Contracts ……………………………………………………………………………………. 18
F. Insurable Interest ……………………………………………………………………………………. 18
G. Perfection of the Contract Insurance …………………………………………………………. 23
H. Rescission of Insurance Contracts …………………………………………………………….. 27
I. Claims Settlement and Subrogation ……………………………………………………………. 33
J. Business Insurance; Requirements …………………………………………………………….. 36
K. Insurance Commissioner and it‘s Powers ……………………………………………………. 38

II. PRE – NEED………………………………………………………………………………. 42

A. Definition ………………………………………………………………………………………………… 42
B. Registration of Pre-need Plans ………………………………………………………………….. 43
C. Licensing of Sales Counselor and General Agent …………………………………………. 44
D. Default and Termination …………………………………………………………………………… 44
E. Claims Settlement ……………………………………………………………………………………. 44

III. TRANSPORTATION LAW……………………………………………………………… 46

A. Common Carriers …………………………………………………………………………………….. 46
B. Vigilance Over Goods ……………………………………………………………………………….. 50
C. Safety of Passengers ………………………………………………………………………………… 56
D. Bill of Lading …………………………………………………………………………………………… 60
E. Maritime Commerce …………………………………………………………………………………. 63
F. Public Service Act …………………………………………………………………………………….. 69
G. The Warsaw Convention …………………………………………………………………………… 72
IV. BUSINESS ORGANIZATIONS………………………………………………………… 73
A. Partnerships ……………………………………………………………………………………………. 73
B. Corporations ……………………………………………………………………………………………. 98

V. SECURITIES……………………………………………………………………………… 178
A. State Policy ……………………………………………………………………………………………… 178
B. Definition of Securities ……………………………………………………………………………… 178
C. Kinds of Securities …………………………………………………………………………………… 178
D. Powers and Functions of the Securities and Exchange Commission ……………… 181
E. Procedure for Registration of Securities …………………………………………………….. 182
F. Prohibitions on Fraud, Manipulation, and Insider Trading ……………………………. 183
G. Protection of Shareholder Interests ………………………………………………………….. 187

VI. BANKING………………………………………………………………………………….. 190

A. The New Central Bank Act ……………………………………………………………………….. 190
B. Law on Secrecy of Bank Deposits ……………………………………………………………… 206
C. General Banking Act ………………………………………………………………………………… 208
D. Philippine Deposit Insurance Corporation Act …………………………………………….. 217

VII. INTELLECTUAL PROPERTY…………………………………………………………… 225

A. Intellectual Property Rights in General ………………………………………………………. 225
B. Patents ………………………………………………………………………………………………….. 226
C. Trademarks ……………………………………………………………………………………………. 237
D. Copyright ………………………………………………………………………………………………. 244

VIII. SPECIAL LAWS…………………………………………………………………………… 251

A. Secured Transactions ………………………………………………………………………………. 251
B. Truth In Lending Act ……………………………………………………………………………….. 292
C. Anti – Money Laundering Act ……………………………………………………………………. 293
D. Foreign Investments Act …………………………………………………………………………. 305
E. Insolvency Laws ……………………………………………………………………………………… 309
F. Data Privacy Act of 2012 …………………………………………………………………………. 327
G. Philippine Competition Act ………………………………………………………………………. 334
 Purple Notes
I. INSURANCE CODE
(P.D. 612, as amended by R. A. No
10607)
A. CONCEPT OF INSURANCE
Contract of insurance, defined:
An agreement whereby one undertakes for a
consideration to indemnify another against loss,
damage or liability arising from an unknown or
contingent event (Sec. 2 [a], Insurance Code)
Test of insurance:
The test to determine if a contract is an
insurance contract or not, depends on the
nature of the promise, the act required to be
performed, and the exact nature of the
agreement in the light of the occurrence,
contingency, or circumstances under which the
performance becomes requisite. It is not by
what it is called. Basically, an insurance contract
is a contract of indemnity. In it, one undertakes
for a consideration to indemnify another against
loss, damage or liability arising from an
unknown or contingent event. (White Gold Marine
Services Inc. vs. Pioneer Insurance and Surety Corp.,
G.R. No.154514, July 28, 2005)
Doing an insurance business:
1. Making or proposing to make, as insurer,
any insurance contract;
2. Making or proposing to make, as surety,
any contract of suretyship as a vocation and
not as merely incidental to any other
legitimate business or activity of the surety;
3. Doing any kind of business, including
reinsurance business, specifically recognized
as constituting the doing of an insurance
business within the meaning of this Code;
4. Doing or proposing to do any business in
substance equivalent to any of the
foregoing in a manner designed to evade
the provisions of the Insurance Code.
The fact that no profit is derived from the
making of insurance contracts, agreements or
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Mercantile Law
transactions or that no separate or direct
consideration is received therefor, shall not be
deemed conclusive to show that the making
thereof does not constitute the doing or
transacting of an insurance business. (Sec. 2 [b],
Insurance Code)
B.ELEMENTS OF AN INSURANCE
CONTRACT
1. Payment of premium - As consideration for
the insurer‘s promise, the insured makes a
ratable contribution called premium, to a
general insurance fund.
2. Assumption of risk - The insurer assumes
that risk of loss for a consideration.
3. Risk of loss - The insured is subject to a
risk of loss through the destruction or
impairment of that interest by the
happening of designated perils.
4. Insurable interest - The insured must
possess an interest susceptible of
pecuniary estimation, known as ―insurable
interest.‖
5. Scheme to distribute losses - The
assumption of risk is part of a general
scheme to distribute actual losses among a
large group of persons bearing somewhat
similar risks.
Note: The above elements are in addition to
the
essential elements of an ordinary contract.
(Aquino, Essentials of Insurance Law, 2018, p. 16)
Parties to insurance contract
1. Insurer – The person who undertakes to
indemnify another. (Sundiang & Aquino,
Reviewer on Commercial Law, 2019, p. 103)
Insurers may be partnerships, associations
or corporations who are duly authorized by
the Insurance Commission to engage in
insurance business. (Secs. 190-193,
Insurance Code)
Insured – The person who applied for and to
whom an insurance policy is issued to cover his
life, property or the life or property of other
person/s in whose life or property he has
insurable interest or liability to other persons.
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 Purple Notes
Mercantile Law
The insured is the one who enters into a
contract with the insurer. (Aquino, Essentials of
Insurance Law, 2018, p. 40)
Anyone except a public enemy may be insured.
(Sec. 7, Insurance Code)
Public Enemy – a nation with whom the
Philippines is at war and it includes every citizen
or subject of such nation. (Filipinas Compania de
Seguros vs. Christern Huenefeld and Co., G.R. No. L-
2294, May 25, 1951)
2. Beneficiary – a person designated to
receive proceeds of policy when risk
attaches.
C. CHARACTERISTICS AND NATURE OF
INSURANCE CONTRACT
1. Consensual – It is perfected by the
meeting of the minds of the parties as to
the object, cause and consideration of the
insurance contract. There should be
acceptance of the application for
insurance.
2. Voluntary – The parties may incorporate
such terms and conditions as they may
deem convenient: Provided they do not
contravene any provision of law and are
not opposed to public policy, law, morals,
good customs, or public order. (De Leon,
The Insurance Code of the Philippines, 2010, p.
17)
General Rule: The taking out of an insurance
contract is not compulsory.
Exception: Liability insurance may be required
by law in certain instances (E.g. compulsory
motor vehicle liability insurance, or employees
under Labor Code, or as a condition to granting
a license to conduct a business or calling
affecting the public safety or welfare). (De Leon,
The Insurance Code of the Philippines, 2010, p. 18)
3. Aleatory – The liability of the insurer
depends upon the happening of some
contingent event. An aleatory contract is a
contract where one or both of the parties
reciprocally bind themselves to give or do
2 Center for Legal Education and Research
something upon the happening 2018of an event
which is uncertain, or which is to occur at
an indeterminate time. (Art. 2010, NCC)
4. Unilateral – It imposes legal duties only
on the insurer who promises to indemnify
in case of loss. It is executed as to the
insured after the payment of the premium,
and executory on the part of the insurer in
the sense that it is not executed until
payment for a loss.
5. Conditional – It is subject to conditions,
the principal one of which is the happening
of the event insured against.
6. Contract of indemnity – Recovery is
commensurate with the amount of the loss
suffered.
General Rule: The insurer promises to make
good only the loss of the insured.
Exception: The principle is not applicable to
life and accident insurance where the result is
death because life is not capable of pecuniary
estimation. (Aquino, Essentials of Insurance Law,
2018, p. 40)
Exception to the Exception: The principle of
indemnity is applicable to life insurance when
the interest of a person insured is capable of
exact pecuniary measurement. An example
would be in a case where a creditor insures the
life of his debtor to the extent of the latter‘s
debt to the former. (Ibid.)
7. Personal – Each party enters into the
contract in view of the character, credit
and conduct of the other. The law
presumes that the insurer considered the
personal qualifications of the insured in
approving the insurance application.
(Sundiang & Aquino, Reviewer on Commercial
Law, 2019, p. 92)
8. Property – Since insurance is a contract,
it is property in legal contemplation.
9. Risk-distributing device – Insurance
serves to distribute the risk of economic
loss among as many as possible to those
 Purple Notes
who are subject to the same kind of risk.
By paying a pre-determined amount into a
general fund out of which payment will be
made for an economic loss of a defined
type, each member contributes to a small
degree toward compensation for losses
suffered by any member of the group. This
broad sharing of economic risk is the
principle of risk-distribution. (Sundiang &
Aquino, Reviewer on Commercial Law, 2019, p.
90)
10. Onerous – There is a valuable
consideration called the premium.
Interpretation of insurance contracts:
When the terms are ambiguous, uncertain or
doubtful, the terms should be interpreted
strictly against the insurer and liberally in favor
of the insured because an insurance contract is
a contract of adhesion. If there is no doubt, the
provisions must be construed in their plain,
ordinary and popular sense. .(Rizal Surety and
Insurance Co. vs. CA, G.R. No. 112360, July 18,
2000)
Five cardinal principles in insurance
1. Insurable interest;
2. Principle of utmost good faith (uberrimae
fidei contract);
3. Contract of indemnity;
4. Contact of adhesion (fine print rule); and
5. Principle of subrogation.
Insurable Interest
General Rule: An insurable interest is that
interest which a person is deemed to have in
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 advantage from the preservation of
the subject matter insured and will suffer
pecuniary loss or damage from its destruction,
termination, or injury by the happening of the
event insured against. (Violeta R. Lalican vs. The
Insular Life Assurance Company Limited, G.R. No.
183526, August 25, 2009)
Exception: To have an insurable interest in the
3
Mercantile Law
life of a person, the expectation of benefit from
the continued life of that person need not
necessarily be of pecuniary nature. (De Leon,
2010)
The existence of an insurable interest gives a
person the legal right to insure the subject
matter of the policy of insurance. (Ibid.)
What may be insured
Anything having an appreciable pecuniary
value, which is subject to loss or deterioration
or of which one may be deprived so that his
pecuniary interest is or may be prejudiced.
Mere hope or expectancy
A mere contingent or expectant interest in any
thing, not founded on an actual right to the
thing, nor upon any valid contract for it, is not
insurable. (Sec. 16, Insurance Code)
Principle of utmost good faith
The contract of insurance is one of perfect good
faith (uberrimae fidei) not for the insured alone,
but equally so for the insurer. (Qua Chee Gan vs.
Law Union and Rock Insurance, Co. Ltd., G.R. No. L-
4611, December 17, 1955)
It requires the parties to the contract of
insurance to disclose conditions affecting the
risk of which he is aware, or material fact,
which the applicant knows, and those, which he
ought to know. This doctrine is essential on
account of the fact that the full circumstances
of the subject matter of insurance are, as a
rule, known to the insured only and the insurer,
in deciding whether or not to accept a risk,
must rely primarily upon the information
supplied to him by the applicant. (Sundiang Sr. &
Aquino, 2019)
Contract of indemnity
It is the basis of all property insurance. The
insured who has insurable interest over a
property is only entitled to recover the amount
of actual loss sustained and the burden is upon
him to establish the amount of such loss
(Sundiang & Aquino, Reviewer on Commercial Law,
Bar Operations C ommissions 3
 Purple Notes
Mercantile Law
2019, p. 91) 2018
Rules: Void insurance contract stipulations

1. Applies only to property insurance except
when the creditor insures the life of his
debtor.
2. Life insurance is not a contract of indemnity
3. Insurance contracts are not wagering
contracts (Sec. 4, Insurance Code)
Note: Not wagering contracts because they
are not a contract of chance and they are not
used for profit. (Sec. 4, Insurance Code)
Wagering Contract vs. Contract
Insurance
1. Stipulations for the payment of loss
regardless of whether the person injured
does or does not have any interest in the
subject matter of the insurance. (Sec. 25,
Insurance Code)
2. Stipulation that the policy shall be received
as proof of insurable interest. (Ibid.)
3. Policy executed by way of gaming or
wagering. (Ibid.)
4. Stipulations within the proscription of
Article 739 of the New Civil Code.
of 5. Stipulations against public policy, public
morals and public order. (Art. 1306, NCC)

WAGERING CONTRACT OF Principle of Subrogation

CONTRACT INSURANCE
The parties contemplate The parties seek to It is a process of legal substitution where the
gain through mere distribute the possible
insurer steps into the shoes of the insured and
chance. loss by reason of
mischance.
he avails of the latter‘s rights against the
Gambler courts Insured seeks to avoid wrongdoer at the time of the loss.
misfortune. misfortune.
Tends to increase the Tends to equalize The doctrine of subrogation has its roots in
inequality of fortune. fortune equity. It is designed to promote and to
Essence of gambling is What one insured gains accomplish justice and is the mode which equity
that whatever one wins is not at the expense of adopts to compel the ultimate payment of a
from a wager is lost by another insured. debt by one who in justice, equity and good
the other wagering conscience ought to pay. (Malayan Insurance Co.
party. vs. Alberto, G.R. No. 194320, February 1, 2012)
As soon as the party The purchase of
makes a wager, he insurance does not
Requisites for recovery upon insurance:
creates a risk of loss to create a new and non-
himself where no such existing risk of loss to
risk existed previously. the purchase. 1. The insured must have insurable interest in
(De Leon, The Insurance Code of the Philippines, the subject matter;
2010, p. 67) 2. That interest is covered by the policy;
3. There must be a loss; and
Contract of adhesion (Fine Print Rule): 4. The loss must be proximately caused by the
peril insured against. (Sec. 86, Insurance
A contract of adhesion is one wherein a party Code)
prepares the stipulations in the contract, which
the other party merely affixes his signature or D. CLASSES OF INSURANCE
his ―adhesion‖ thereto. (Gulf Resorts, Inc vs. Phil.
Charter Ins. Corp, G.R. No. 156167, May 16, 2005) Classes of insurance:

This principle is the very reason why in every 1. Marine;

doubt or ambiguity in an insurance contract is 2. Fire;
resolved in favor of the insured and against the 3. Casualty;
insurer. (Gulf Resorts, Inc vs. Phil. Charter Ins. 4. Suretyship;
Corp, G.R. No. 156167, May 16, 2005) 5. Life;
6. Microinsurance;

4 Center for Legal Education and Research


7. Compulsory motor vehicle liability
insurance;
8. Compulsory insurance coverage for agency-
hired workers.
MARINE INSURANCE
Marine insurance includes: (Sec. 101,
Insurance Code)
1. Insurance against loss of or damage to:
a. Vessels, craft, aircraft, vehicles, goods,
freights, cargoes, merchandise, effects,
disbursements, profits, moneys,
securities, choses in action, evidences
of debts, valuable papers, bottomry,
and respondentia interests and all other
kinds of property and interests therein,
in respect to, appertaining to or in
connection with any and all risks or
perils of navigation, transit
transportation, or while being
assembled, packed, crated, baled,
compressed or similarly prepared for
shipment or while awaiting shipment, or
during any delays, storage,
transhipment, or reshipment incident
thereto, including war risks, marine
builder's risks, and all personal property
floater risks;
b. Person or property in connection with
or appertaining to a marine, inland
marine, transit or transportation
insurance, including liability for loss of
or damage arising out of or in
connection with the construction,
repair, operation, maintenance or use
of the subject matter of such insurance
(but not including life insurance or
surety bonds nor insurance against loss
by reason of bodily injury to any person
arising out of ownership, maintenance,
or use of automobiles);
c. Precious stones, jewels, jewelry,
precious metals, whether in course of
transportation or otherwise; and
d. Bridges, tunnels and other
instrumentalities of transportation and
communication (excluding buildings,
their furniture and furnishings, fixed
contents and supplies held in storage);
Purple Notes
Mercantile Law
piers, wharves, docks and slips, and
other aids to navigation and
transportation, including dry docks and
marine railways, dams and appurtenant
facilities for the control of waterways.
2. Marine protection and indemnity
insurance," meaning insurance against, or
against legal liability of the insured for loss,
damage, or expense incident to ownership,
operation, chartering, maintenance, use,
repair, or construction of any vessel, craft
or instrumentality in use of ocean or inland
waterways, including liability of the insured
for personal injury, illness or death or for
loss of or damage to the property of
another person.
Major Divisions of Transportation
Insurance
or 1. Ocean marine insurance
Scope:
a. ships and hulls;
b. goods or cargoes;
c. earnings such as freight, passage,
money, commissions or profit; and
d. liability incurred by reason of maritime
perils.
2. Inland marine insurance
Classes:
a. Property in transit - provides protection
to property frequently exposed to loss
while it is being transported from one
location to another.
b. Bailee liability - insurance for those who
have temporary custody of the goods or
personal property of others.
c. Fixed transportation property - they are
so insured because they are held to be
an essential part of the transportation
system such as bridges, tunnels, etc.
d. Floater - provides an insurance to follow
the insured property wherever it may
be located, subject always to the
territorial limits of the contract.
5
Bar Operations C ommissions 5
 Purple Notes
Mercantile Law
Measure of indemnity 2018
Special Marine Insurance Contract and
Clauses
1. Valued Policy - the parties are bound by
the valuation if the insured had some 1. All Risks Policy
interest at risk and there is no fraud on his Insurance against all causes of conceivable
part. (Sec. 158, Insurance Code) loss or damage, except:

2. Open Policy- there is no conclusive value a. As otherwise excluded in the policy; or

that is fixed therein; the following rules b. Due to fraud or intentional misconduct
shall apply in estimating a loss: on the part of the insured. (Aquino,
Essentials of Insurance Law, 2018, p. 306)
a. Value of the ship - value at the
beginning of the risk; The insured has the initial burden of
b. Value of the cargo - actual cost when proving that the cargo was in good
laden on board or market value at the condition when the policy attached and that
time and place of lading; the cargo was damaged when unloaded
c. Value of freightage - gross freightage from the vessel; thereafter, the burden then
exclusive of primage; shifts to the insurer to show the exception
d. Cost of insurance - in each case, to be to the coverage. (Filipino Merchants Insurance
added to the estimated value (Sec. 163, Co. vs. CA, G.R. No. 85141, November 28, 1989)
Insurance Code)
2. Barratry Clause – a clause which provides
Risk or losses covered in marine insurance that there can be no recovery on the policy
in case any willful misconduct on the part of
1. Perils of the sea vs. Perils of the ship the master or crew in the pursuance of
2. ―All risks‖ in marine insurance policy some unlawful or fraudulent purpose
without consent of owners, and to the
Perils of the Perils of the Ship prejudice of the owner‘s interest. (Roque vs.
Sea/Perils of IAC, G.R. No. L-66935, November 11, 1985)
Navigation
 Include only those Loss which in the 3. Inchmaree Clause – a clause which
casualties due to ordinary course of
makes the insurer liable for loss or damage
the unusual events, results:
violence or  From the ordinary,
to the hull or machinery arising from the:
extraordinary natural and inevitable
causes connected action of the sea; a. Negligence of the captain, engineer,
with navigation. etc.
 From ordinary wear b. Explosions, breakage of shafts; and
 It includes only and tear of the ship; c. Latent defect of machinery or hull.
such losses as are and (Thames and Mersey Marine Insurance Co
of extraordinary Ltd vs. Hamilton, Fraser and Co, ‗Inchmaree‘
nature or arise  From the negligent (1887) 12 AC 484, HL)
from some failure of the ship‘s
overwhelming owner to provide the 4. Sue and Labor Clause – a clause wherein
power which vessel with the
the insurer may become liable to pay the
cannot be guarded proper equipment to
against by the convey the cargo
insured, in addition to the loss actually
ordinary exertion under ordinary suffered such expenses as the property
of human skill or conditions. against a peril for which the insurer would
prudence. have been liable. (Aquino, Essentials of
(De Leon, The Insurance Code of the Philippines, Insurance Law, 2018, p. 314)
2010, p. 323)

6 Center for Legal Education and Research

 Purple Notes
Insurable interest in marine insurance:
A. Shipowner:
1. Over the value of the vessel.
Exceptions:
a. If chartered and the charterer agreed to
pay the shipowner the value of the
vessel in case of loss, the insurer‘s
liability is only up to the amount not
recoverable from the charterer. (Sec.
102, Insurance Code);
b. If hypothecated by a bottomry loan, the
insurable interest is only up to the
excess of the value of the vessel over
the loan. (Sec. 103, Insurance Code).
2. Over expected freightage
B. Cargo owner/Shipper
1. Over the cargo and expected profits
(Sec. 107, Insurance Code)
C. Charterer
1. Over the vessel up to the extent of the
amount he is liable to be damnified if
the ship is lost or damaged during the
voyage (Sec. 108, Insurance Code)
2. Over his expected profits or freightage
if he accepts cargoes from other
persons for a fee.
3. Over his own cargo or his client‘s cargo.
D. In loans on bottomry and
respondentia, repayment of the loan is
subject to the condition that the vessels or
goods, respectively, given as security, shall
arrive safely at the port of destination.
1. Owner/Debtor – difference between the
value of vessel or goods and the
amount of loans (Sec. 101, Insurance
Code)
2. Creditor/Lender – amount of the loan.
(Sec. 103. Insurance Code)
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Mercantile Law
Concealment in marine insurance, defined
It is the failure to disclose any material fact or
circumstance which in fact or in law is within, or
which ought to be within the knowledge of one
party and which the other has no control or
presumptive knowledge. (De Leon, The Insurance
Code of the Philippines, 2010, p. 340)
Matters although concealed will not
vitiate the contract except when they
caused the loss:
1. National character of the insured;
2. Liability of the thing to capture or
detention;
3. Liability to seizure from breach of foreign
laws;
4. Want of necessary documents; and
5. Use of false or simulated papers. (Sec. 112,
Insurance Code)
Effect: It merely exonerates insurer from a loss
resulting from the risk concealed.
Effect of false representation by the
insured:
The insurance is voidable if:
1. False representation is intentional, or
2. It is not intentional but the fact
misrepresented is material. (Sec. 113,
Insurance Code)
Implied Warranties in Marine Insurance
1. That the ship is seaworthy at the inception
of the insurance; (Sec. 115, Insurance Code)
2. That the ship will not deviate from agreed
voyage unless deviation is proper (Sec. 123-
125, Insurance Code)
3. That the ship will not engage in an illegal
venture;
4. Warranty of neutrality: that the ship will
carry the requisite of documents of
nationality or neutrality of the ship or cargo
where such nationality or neutrality is
expressly warranted; (Sec. 122, Insurance
Code)
5. Presence of insurable interest.
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 Purple Notes
Mercantile Law
Insurer, general and particular loss 2018except
time of the commencement of the risk,
average losses: in the following cases:

The insurer of the vessel or cargo saved is liable 1. Time policy

for general average contribution and not for 2. When the insurance is upon the cargo
particular average. Only the insurer of the which, by the terms of the policy,
damaged cargo or vessel is liable for particular description of the voyage, or established
average if covered by the policy. (Sundiang and custom of the trade, is to be transshipped
Aquino, Reviewer on Commercial Law, 2017, p. 133) at an immediate port, at the
commencement of each particular voyage.
General average loss vs. Particular (Sec. 117(b), Insurance Code)
average loss 3. Where different portions of the voyage are
contemplated, at the commencement of
GENERAL AVERAGE PARTICULAR AVERAGE each portion (Sec. 119, Insurance Code)
LOSS LOSS 4. When the ship was seaworthy at the
Has inured to the Has not inured to the commencement of the voyage but becomes
common benefit and common benefit and unseaworthy during the voyage to which an
profit of all persons profit of all persons
insurance relates, an unreasonable delay in
interested in the vessel interested in the vessel
and cargo. and her cargo.
repairing the defect exonerates the insurer
To be borne equally by To be borne alone by the on ship or shipowner‘s interest from liability
all of the interests owner of the cargo or the from any loss arising therefrom (Sec. 120,
concerned in the vessel, as the case may Insurance Code).
venture. (Aquino, be. (Sec. 136, Insurance
Essentials of Insurance Code) Deviation, defined:
Law, 2018, p. 357)
It is a departure of vessel from the course of
the voyage, or an unreasonable delay in
Seaworthiness, defined: pursuing voyage, or the commencement of an
entirely different voyage. (Sec 125, Insurance
A ship is seaworthy, when reasonably fit to Code)
perform the service, and to encounter the
ordinary perils of the voyage, contemplated by When deviation is proper
the parties to the policy. (Sec. 116, Insurance 1. If due to circumstances outside the control
Code) of the ship captain or ship owner;
2. If done to comply with a warranty;
A warranty of seaworthiness extends not only to 3. If made in good faith to avoid a peril;
the condition of the structure of the ship itself, 4. If made to save human life or another
but requires that it be properly laden, and distressed vessel. (Sec. 126, Insurance Code)
provided with a competent master, a sufficient
number of competent officers and seamen, and Effect:
the requisite appurtenances and equipment, In case of loss, the insurer is liable.
such as ballasts, cables and anchors, cordage
and sails, foods, water, fuel and lights, and Kinds of loss:
other necessary or proper stores and
implements for the voyage . (Sec. 118, Insurance 1. Total loss
Code)
a. Actual total loss – if the subject matter
When ship should be seaworthy is destroyed or so damaged as to cease
to be a thing of the kind insured or
An implied warranty of seaworthiness is where the insured is irretrievably
complied with if the ship is seaworthy at the deprived thereof. (Sec. 132, Insurance
Code)

8 Center for Legal Education and Research

 Purple Notes
b. Constructive total loss - (Sec. 133, in
relation to Sec. 141, Insurance Code)
i. Actual loss of more than three-
fourths (3/4) of the value of the
object;
ii. Damage reducing value by more
than three-fourths (3/4) of the value
of the vessel and of cargo; and
iii. Expenses of shipment exceed three-
fourths (3/4) of value of cargo.
2. Partial loss – every loss which is not total
is partial. (Sec. 130, Insurance Code)
Abandonment, defined:
It is the act of the insured by which, after a
constructive total loss, he declares the
relinquishment to the insurer of his interest in
the thing insured. (Sec. 140, Insurance Code)
Requisites of valid abandonment
a. There must be an actual relinquishment by
the person insured of his interest in the
thing insured;
b. There must be a constructive total loss;
c. The abandonment be neither partial nor
conditional; (Sec. 142, Insurance Code)
d. It must be made within a reasonable time
after the receipt of reliable information of
the loss; (Sec. 143, Insurance Code)
e. It must be factual; (Sec. 144, Insurance Code)
f. It must be made by giving notice thereof to
the insurer which may be done orally or in
writing (Sec. 143, Insurance Code);
g. The notice of abandonment must be explicit
and must specify the particular cause of the
abandonment (Sec. 144, Insurance Code).
Effects:
It is equivalent to a transfer by the insured of
his interest to the insurer with all the chances of
recovery and indemnity. (Sec. 148, Insurance
Code)
Acts done in good faith by those who were
agents of the insured in respect to the thing
insured, subsequent to the loss, are at the risk
9
Mercantile Law
of the insurer and for his benefit. (Sec. 150,
Insurance Code)
If an insurer refuses to accept a valid
abandonment, he is liable upon an actual total
loss, deducting form the amount any proceeds
of the thing insured which may have come to
the hands of the insured. (Sec. 156, Insurance
Code)
FIRE INSURANCE
Fire insurance, coverage
It shall include insurance against loss by fire,
lightning, windstorm, tornado or earthquake
and other allied risks, when such risks are
covered by extension to fire insurance policies
or under separate policies. (Sec. 169, Insurance
Code)
Risk or loss covered:
1. Direct losses
2. Indirect or Consequential losses:
a. Physical damages
b. Loss of Earnings
c. Extra Expenses
Prerequisites to recovery:
1. Notice of loss - must be immediately
given, unless delay is waived expressly or
impliedly by the insurer; (Sec. 90, Insurance
Code) and
2. Proof of loss - according to best evidence
obtainable. Delay may also be waived
expressly or impliedly by the insurer. (Sec.
91, Insurance Code).
Measure of Indemnity
1. Open Policy - only the expense necessary
to replace the thing lost or injured in the
condition it was at the time of the injury.
2. Valued Policy - the parties are bound by
the valuation, in the absence of fraud or
mistake.
Bar Operations C ommissions 9
 Purple Notes
Mercantile Law
Marine insurance and fire insurance, 2018 (e.g.
person and/or property of the insured.
compared: Personal accident, robbery/theft insurance).

Marine Fire Insurance 2. Third party liability insurance -

Insurance insurance against specified perils which may
Rule on Constructive Does not apply give rise to liability on the part of the
Total Loss and insured for claims for injuries to or damage
abandonment applies to property of others. (De Leon, The
In case of partial total Express stipulation of co- Insurance Code of the Philippines, 2010, p. 407)
loss, insured is co- insurance as agreed by
insurer of uninsured the parties. (Section 174, THIRD PARTY LIABILITY
portion (Section 159, Insurance Code)
Insurance Code)
1. Casualty insurance may provide for third
Hostile Fire Friendly Fire party liability (stipulation pour atrui) in
Fire that escapes and Fire that burns in a place which case, the third party may directly sue
burns in a place where it is supposed to the insurer upon the occurrence of the loss.
where it is not burn. (e.g., gas stove, fire (First Integrated Bonding and Ins. Co. vs.
supposed to be or a place) Hernando, G.R. No. L-51221, 31 July 1991)
fire that started out
to be a friendly fire 2. If there is no stipulation in favor of a third
but escapes from its person but the insurance is an insurance
original place and against liability to third persons, any third
becomes too strong person who might be injured may not sue
as it becomes out of the insurer. Only the insured can recover
control. from the insurer. (Guingon vs. Del Monte, G.R.
Insurer is liable. Insurer is not liable. No. L-22042, August 17, 1967)
(Sundiang and Aquino, Reviewer on Commercial Law,
2017, p. 142) 3. Liabilities arising out of acts of negligence
which are criminal are also insurable on the
CASUALTY INSURANCE ground that such acts are accidental.

Casualty insurance, defined: Exception: Consequences of deliberate

It is an insurance covering loss or liability
arising from accident or mishap, excluding
certain types of loss which by law or custom are
considered as falling exclusively within the
scope of other types of insurance such as fire or
marine. It includes, but is not limited to,
employer's liability insurance, motor vehicle
liability insurance, plate glass insurance,
burglary and theft insurance, personal accident
and health insurance as written by non-life
insurance companies, and other substantially
similar kinds of insurance. (Sec. 176, Insurance
Code)
Classification
1. Accident or health insurance - insurance
against specified perils which may affect the
criminal acts are not insurable.
4. Insurable interest is based on the interest
of the insured in the safety of persons, and
their property, who may maintain an action
against him in case of their injury or
destruction, respectively. (De Leon, The
Insurance Code of the Philippines, 2010, p. 409)
5. In a third-party liability (TPL) insurance
contract, the insurer assumes the obligation
by paying the injured third party to whom
the insured is liable. Prior payment by the
insured to the third person is not necessary
in order that the obligation may arise. The
moment the insured becomes liable to third
persons, the insured acquires an interest in
the insurance contract which may be
garnished like any other credit. (Perla

10 Center for Legal Education and Research

 Purple Notes
Compania de Seguros, Inc. vs. Ramolete, G.R.
No. L-60887, November 13, 1991)
6. Aside from compulsory motor vehicle
liability insurance, casualty insurance are
governed by the general provisions
applicable to all types of insurance, and
outside of such statutory provisions, the
rights and obligations of the parties must be
determined by their contract, taking into
consideration its purpose and always in
accordance with the general principles of
insurance law. (Aquino, Essentials of Insurance
Law, 2018, p. 403)
7. In burglary, robbery and theft insurance,
the opportunity to defraud the insurer- the
moral hazard- is so great that insurer have
found it necessary to fill up the policies with
many restrictions designed to reduce the
hazard. Persons frequently excluded are
those in the insured‘s service and
employment. The purpose of the exception
is to guard against liability should theft be
committed by one having unrestricted
access to the property (Fortune Insurance vs.
CA, G.R. No. 115278, May 23, 1995)
8. Right of a third party injured to sue the
insurer of party at fault depends on
whether the contract of insurance is
intended to benefit third persons also or
only the insured. (Aquino, Essentials of
Insurance Law, 2018, p. 411)
Tests applied:
1. Indemnity against third party liability
- injured third party can directly sue the
insurer.
Purpose: To protect injured person against
the insolvency of the insured who causes
such injury.
2. Indemnity against actual loss or
payment - third party has no cause of
action against the insurer. The third
person‘s recourse is limited to the insured
alone. (Bonifacio Bros. vs. Mora, G.R. L-20853,
May 29, 1967)
11
Mercantile Law
INTENTIONAL vs. ACCIDENTAL
„Intentional‟ as used in an accident policy
excepting intentional injuries inflicted by the
insured or any other person implies the exercise
of the reasoning faculties, consciousness and
volition. Where a provision of the policy
excludes intentional injury, it is the intention of
the person inflicting the injury that is
controlling. If the injuries clearly resulted from
the intentional act of a third person, the insurer
is relieved from liability as stipulated. (Biagtan
vs. The Insular Life Assurance Co., G.R. No. L-25579,
March 29, 1972)
 The terms „accident‟ and „accidental‟ as
used in insurance contracts, have not
acquired any technical meaning. They are
construed by the courts in the ordinary and
common acceptation. Thus, the terms have
been taken to mean that which happens by
chance or fortuitously, without intention or
design, which is unexpected, unusual, and
unforeseen. (Pan Malayan Insurance Corp. vs.
CA, G.R. No. 81026, April 3, 1990)
NO ACTION CLAUSE
 A requirement in a policy of liability
insurance which provides that suit and final
judgment be first obtained against the
insured; that only thereafter can the person
injured recover on the policy (Guingon vs. Del
Monte, G.R. No. L-22042, August 17, 1967).
 A ―no action clause‖ must yield to the
provisions of the Rules of Court regarding
multiplicity of suits. (Shafer vs. RTC, G.R. No.
78848, November 14, 1988)
SURETYSHIP
Suretyship, defined:
It is an agreement whereby a party called the
surety guarantees the performance by another
party called the principal or obligor of an
obligation or undertaking in favor of a third
party called the obligee. It includes official
recognizances, stipulations, bonds or
undertakings issued by any company by virtue
of and under the provisions of Act No. 536, as
Bar Operations C ommissions 11
 Purple Notes
Mercantile Law
amended by Act No. 2206. (Sec. 177, Insurance condition of entertaining 2018 upon the
Code) duties of their offices. (De Leon, The
Insurance Code of the Philippines, 2010, p.
Nature of liability of surety 430)

1. Solidary; 3. Judicial bonds - they are those which are

2. Limited to the amount of the bond;
3. It is determined strictly by the terms of the
contract of suretyship in relation to the
principal contract between the obligor and
the obligee (Sec. 176, Insurance Code). A
surety is merely a collateral contract.
Types of Surety Bonds:
1. Contract Bonds - these are connected
with construction and supply contracts.
They are for the protection of the owner
against a possible default by the contractor
or his possible failure to pay material men,
laborers and sub-contractors.
required in connection with judicial
proceedings. (De Leon, The Insurance Code of
the Philippines, 2010, p. 429)
Fidelity guaranty insurance, defined:
It is contract whereby one, for a consideration,
agrees to indemnify the assured against loss
arising from the want of integrity, fidelity or
honesty of employees or other persons holding
positions of trusts. (Sundiang and Aquino,
Reviewer on Commercial Law, 2019, p. 151)
Suretyship deemed to be an insurance
contract:

The position of surety, therefore, is to Suretyship is deemed to be an insurance

answer for a failure of the principal to contract only if made by a surety who or which,
perform in accordance with the terms and as such, is doing an insurance business, i.e.,
specifications of the contract. making or proposing to make, as surety, any
contract of suretyship as a vocation and not
There may be two kinds: merely incidental to any other legitimate
business or activity of the surety. (De Leon, The
a. Performance bond - one covering the Insurance Code of the Philippines, 2010, p. 42)
faithful performance of the contract;
and Distinctions between suretyship and
b. Payment bond - one covering the property insurance:
payment of laborers and material men.
(De Leon, The Insurance Code of the Suretyship Property Insurance
Philippines, 2010, p. 429) Accessory contract Principal contract
There are 3 parties: Only 2 parties: insurer and
2. Fidelity Bonds - contract of insurance surety, debtor, and insured.
against loss from misconduct. creditor.
A credit A contract of indemnity.
For purposes of underwriting, they are accommodation with
classified as: insurer assuming
primary liability.
Insurer is entitled to No right of recovery for
a. Industrial bond- one required by private
reimbursement from the loss the insurer may
employers to cover loss through principal and sustain. Exception: when
dishonesty of employees (De Leon, The guarantors for the loss. there is right of
Insurance Code of the Philippines, 2010, p. subrogation.
429); and Bond can be cancelled Contract may be cancelled
only with the consent unilaterally either by the
b. Public official bond- one required of of oblige, insured or by the insurer
public officers for the faithful Commissioner or court. on grounds provided by
performances of their duties and as a law.

12 Center for Legal Education and Research

 Purple Notes
Mercantile Law
Suretyship Property Insurance 3. Limited payment policy – Insured pays
Acceptance of obligee Acceptance of third party premium for a limited period. If he dies
is necessary to be valid is unnecessary to be valid. within the period, his beneficiary is paid; if
and enforceable. he outlives the period, he does not get
It is a risk-shifting It is a risk-distributing anything.
device; premium paid device; premium paid as a
being in the nature of ratable contribution to a 4. Endowment policy – Insured pays
a service fee. common fund. premium for specified period. If he outlives
(De Leon, The Insurance Code of the Philippines,
the period, the face value of the policy is
2010, p. 425)
paid to him; if not, his beneficiaries receive
Distinctions between suretyship and guaranty the benefit.
Surety Guaranty
Assumes liability as a Liability depends upon an 5. Term insurance – Insured pays premium
regular party to the independent agreement to only once and he is insured for a specified
undertaking pay if the primary debtor period. If he dies within the period, the
fails to do so beneficiaries benefit. If he outlives the
Surety is primarily liable Guarantor is secondarily period, no person benefits from the
liable insurance.
Not entitled to the Has the right to have all the
benefit of exhaustion of property of the debtor and
6. Industrial life – life insurance entitling the
the debtor‘s assets legal remedies against the
debtor first exhausted before insured to pay premiums weekly, or where
he can be compelled to pay premiums are payable monthly or oftener
the creditor. (but not less than weekly), if the face value
(De Leon, The Insurance Code of the Philippines, is P2,000.00 or less, and the words
2010, p. 426) ―industrial policy‖ printed upon the policy.

LIFE INSURANCE 7. Variable Life or Variable Unit Linked

Life insurance, defined:
It is an insurance on human lives and insurance
appertaining thereto or connected therewith.
Every contract or undertaking for the payment
of annuities including contracts for the payment
of lump sums under a retirement program
where a life insurance company manages or
acts as a trustee for such retirement program
shall be considered a life insurance contract.
(Sec. 181, Insurance Code)
Kinds:
1. Ordinary life, general life or old line
policy - Insured pays a fixed premium
every year until he dies. Surrender value
after three (3) years.
2. Group life – Essentially a single insurance
contract that provides coverage for many
individuals.
(VUL) Insurance Contractor Policy -
policy or contract on either group/individual
basis issued by an insurance company
providing for benefits or other contractual
payments or values there under to vary so
as to reflect investment results of any
segregated portfolio of investment.
(Sundiang and Aquino, Reviewer on Commercial
Law, 2019, p. 152)
Mortgage redemption insurance, defined:
 It is life insurance taken pursuant to a
group mortgage redemption scheme by the
lender of money on the life of a mortgagor
who, to secure the loan, mortgages the
house constructed from the use of the
proceeds of the loan, to the extent of the
mortgage indebtedness such that if the
mortgagor dies, the proceeds of his life
insurance will be used to pay for his
indebtedness to the lender assured and the
deceased‘s heirs will thereby be relieved
from paying the unpaid balance of the loan.

13
Bar Operations C ommissions 13
 Purple Notes
Mercantile Law
(Great Pacific Life Assurance Corp. vs. Court of
Appeals, G.R. No. 113899, October 13, 1999)
Effect of death of insured:
1. Through suicide:
 The insurer shall be liable for suicide by
the insured if:
a. Suicide was committed after the policy
has been in force for a period of two
years from the date of its issue or its
last reinstatement, unless the policy
provides a shorter period. (Sec. 183,
Insurance Code)
b. Suicide committed in a state of insanity
regardless of the date of the
commission of the suicide (Sec. 183,
Insurance Code)
 Any stipulation extending the 2-year period
is null and void.
2. At the hands of law (i.e., execution by
lethal injection)
 It is one of the risks assumed by the insurer
under a life insurance policy in the absence
of a valid policy exception.
 The beneficiary of the insured who is
executed for a crime cannot recover from
the insurer for 2 reasons: 1.) his death is
caused through his connivance, and 2.) any
stipulation to render the insurer liable under
these circumstances would be contrary to
public policy. (Miravite, Bar Review Materials in
Commercial Law, 2009 ed)
3. Killing by the beneficiary
General rule: The interest of a beneficiary
in a life insurance policy shall be forfeited
when the beneficiary is the principal,
accomplice, or accessory in willfully bringing
about the death of the insured, in which
event, the nearest relative of the insured
shall receive the proceeds of said insurance
if not otherwise disqualified (Sec. 12,
Insurance Code).
14 Center for Legal Education and Research
Exceptions: 2018
1. Accidental killing;
2. Self-defense;
3. Insanity of the beneficiary at the time
he killed the insured. (De Leon, The
Insurance Code of the Philippines, 2010, p.
107)
Must distinguish when the policy does not
expressly state whether suicide is
excepted from the policy:
1. If committed while insane – Insurer is liable
2. If committed while sane – Insurer not liable
in the absence of an express stipulation, it
is an implied exception and is against public
policy.
Cash surrender value, defined:
As applied to a life insurance policy, it is the
amount the insured in case of default, after the
payment of at least 3 full annual premiums, is
entitled to receive if he surrenders the policy
and releases upon it. (Sec. 233[f], Insurance
Code)
MICROINSURANCE
Microinsurance is a financial product or service
that meets the risk protection needs of the poor
where:
1. The amount of contributions, premiums,
fees or charges, computed on a daily basis,
does not exceed seven and a half percent
(7.5%) of the current daily minimum wage
rate for nonagricultural workers in Metro
Manila; and
2. The maximum sum of guaranteed benefits
is not more than one thousand (1,000)
times of the current daily minimum wage
rate for nonagricultural workers in Metro
Manila. (Sec. 187, Insurance Code)
 Purple Notes
COMPULSORY MOTOR VEHICLE
LIABILITY INSURANCE
Compulsory motor vehicle liability
insurance policy, defined:
A contract of insurance against passenger and
third-party liability for death or bodily injuries
and damage to property arising from motor
vehicle accidents. (Sec. 386(f), Insurance Code)
The Insurance Code makes it unlawful for any
land transportation operator or owner of a
motor vehicle to operate the same in public
highways unless there is an insurance or
guaranty to indemnify the death or bodily injury
of a third party or passenger arising from the
use thereof. (Sec. 387, Insurance Code)
Insurance, a requirement for registration:
Registration of any vehicle will not be made or
renewed without complying with the
requirement. (Sec. 389, Insurance Code)
Purpose:
To give immediate financial assistance to
victims of motor vehicle accidents and/ or their
dependents, especially if they are poor
regardless of the financial capability of motor
vehicle owners or operators responsible for the
accident sustained. (Shafer vs. Judge RTC, G.R.
No. 78848, November 14, 1988; First Integrated
Bonding and Ins. vs. Hernando, G.R. No. L-51221,
July 31, 1991)
 Claimants/ victims may be a ―passenger‖ or
a ―3rd party.‖
 It applies to all vehicle whether public or
private vehicles. (Sec. 386, Insurance Code)
Note: It is the only compulsory insurance
coverage under the Insurance Code.
Methods of Coverage:
1. Insurance policy;
2. Surety bond;
3. Cash Deposit.
15
Mercantile Law
Passenger, defined:
Any fare paying person being transported and
conveyed in and by a motor vehicle for
transportation of passengers for compensation,
including persons expressly authorized by law
or by the vehicle‘s operator or his agents to ride
without fare. (Sec. 386(b), Insurance Code)
Third-party:
Any person other than a passenger and shall
also exclude a member of the household, or a
member of the family within the second degree
of consanguinity or affinity, of a motor vehicle
owner or land transportation operator, as
likewise defined herein, or his employee in
respect of death, bodily injury, or damage to
property arising out of and in the course of
employment. (Sec. 386(c), Insurance Code)
Special Clauses:
1. ―No fault‖ clause
2. Authorized driver clause
3. Theft clause
4. Cooperation clause
“No-Fault” clause:
The injured third party or passenger is given
the option to file a claim for death or injury
without the necessity of proving fault or
negligence of any kind under the following
conditions:
1. The total indemnity in respect of any person
shall be P15, 000.00 per claim for all motor
vehicle. (Sec. 391, Insurance Code; IMC No. 4-
2006, July 26, 2006)
2. Proof of loss
 Police report of accident;
 Death certificate and evidence sufficient
to establish the proper payee; and
 Medical report and evidence of medical
or hospital disbursement.
3. Claim may be made against 1 motor vehicle
only. (Sec. 391, Insurance Code)
Bar Operations C ommissions 15
 Purple Notes
Mercantile Law
From whom should the injured recover:
1. In the case of an occupant of a vehicle,
claim shall lie against the insurer of the
vehicle in which the occupant is riding,
mounting, or dismounting from.
2. If not an occupant, claim shall lie against
the insurer of the directly offending vehicle.
3. In all cases, the right of the party paying
the claim to recover against the owner of
the vehicle responsible for the accident shall
be maintained. (Sundiang and Aquino,
Reviewer on Commercial Law, 2017, p. 146)
The claimant is not free to choose from which
insurer he will claim the "no fault indemnity," as
the law, by using the word "shall‖, makes it
mandatory that the claim be made against the
insurer of the vehicle in which the occupant is
riding, mounting or dismounting from. That said
vehicle might not be the one that caused the
accident is of no moment since the law itself
provides that the party paying may recover
against the owner of the vehicle responsible for
the accident. (Perla Compania de Seguros, Inc. vs.
Ancheta, G.R. No. L-49599, August 8, 1988)
This no-fault claim does NOT apply to property
damage. If the total indemnity claim exceeds
P15, 000 and there is controversy in respect
thereto, the finding of fault may be availed of
by the insurer only as to the excess. The first
P15, 000 shall be paid without regard to the
fault. (De Leon, The Insurance Code of the
Philippines, 2010, p. 712)
Time to file and process claim under third
party liability:
a. Period to file notice - within six (6)
months from the date of the accident
otherwise the claim is deemed waived. (Sec.
397, Insurance Code)
b. Prescriptive period - action or suit for
recovery must be brought within one (1)
year from the denial of the claim with the
Commissioner or the courts. (Sec. 397,
Insurance Code)
c. If there is an agreement -The insurance
company concerned shall forthwith
16 Center for Legal Education and Research
2018
ascertain the truth and extent of the claim
and make payment within 5 working days
after reaching an agreement. (Sec. 398,
Insurance Code)
d. If no agreement is reached, the
insurance company shall pay only the ―no
fault‖ indemnity without prejudice to the
claimant from pursuing his claim further, in
which case, he shall not be required or
compelled by the insurance company to
execute any quit claim or document
releasing it from liability under the policy of
insurance or surety bond issued. (Sec. 398,
Insurance Code)
Authorized driver clause, defined:
It is a clause which aims to indemnify the
insured owner against loss or damage to the car
but limits the use of the insured vehicle to the
insured himself or any person who drives on his
order or with his permission (Villacorta vs.
Insurance Commissioner, GR No. L-54171, October
28, 1980)
Theft Clause, defined:
It is a clause which includes theft as among the
risks insured against. Where a car is unlawfully
and wrongfully taken without the knowledge
and consent of the owner, such taking
constitutes ―theft‖ and it is the theft clause, not
the authorized driver clause which should apply.
(Perla Compania de Seguros vs. CA, G.R. No. 96452,
May 7, 1992)
Cooperation clause, defined:
It is a clause which provides in essence that the
insured shall give all such information and
assistance as the insurer may require, usually
requiring attendance at trials or hearings.
COMPULSORY INSURANCE COVERAGE
FOR AGENCY-HIRED WORKERS
Each migrant worker deployed by a
recruitment/manning agency shall be covered
by a compulsory insurance policy which shall be
secured at no cost to the said worker. Such
insurance policy shall be effective for the
 Purple Notes
Mercantile Law
duration of the migrant worker's employment. Type of Definition Amount
(Section 37-A. of Republic Act No. 8042, as amended Benefit
by RA 10022) employment with
contract from a maximum
COVERAGE: case filed by an $1,000 per
OFW against the month
recruitment agency
Type of Definition Amount
before the NLRC.
Benefit
Compassionate This is given when Actual Cost
Accidental This includes but $15,000.00
Visit Benefit the insured OFW is
Death Benefit not limited to car
hospitalized,
accidents and
confined, or to be
work-related
confined for at
accidents in the
least 7 days.
workplace such as
Medical The insured OFW Actual Cost
factory or
Evaluation can avail of this
construction site.
Benefit benefit when the
Natural Death Death due to $10,000.00
medical needs
Benefit causes not related
cannot be provided
to accidents.
by the nearest
Permanent This refers to $7,500.00
medical facility and
Total permanent damage
evacuation is
Disablement to both eyes, both
necessary.
Benefit hands, both feet,
Medical This is when the Actual Cost
and the head. This
Repatriation insured OFW
should be due to
Benefit cannot perform due
accident or health-
to a medical
related sickness
condition.
during
(Rule XVI, Sec 15, Omnibus Rules and Regulations
employment.
Implementing the Migrant Workers and Overseas
Repatriation This covers illegal Actual Cost
Filipinos Act of 1995, as Amended by Republic Act
Cost Benefit termination or
No. 10022)
termination w/o
valid reason, non-
payment of salary, Qualifications of participating insurers
maltreatment, poor
living or working General Qualifications
conditions,
overwork, and Only reputable private life, non-life and
medical reasons. composite insurance companies duly licensed by
This also covers IC which are in existence and operational for at
Return of the
least five (5) years, with a net worth of at least
Mortal Remains
Benefit
Five Hundred Million Pesos
Subsistence This can be claimed $100/month (Php500,000,000.00) based on the audited
Allowance when the insured for a financial statements for the immediately
Benefit OFW files a case maximum preceding year, with a current year certificate of
against his/her of 6 months authority, and with an IC-approved standard
employer at the policy, shall be qualified to provide for the
Philippine Overseas Migrant Workers‘ Compulsory Insurance
Labor Office Coverage. (Rule XVI, Sec 4, Omnibus Rules and
(POLO) Regulations Implementing the Migrant Workers and
Money Claims This accounts for 3 months Overseas Filipinos Act of 1995, as Amended by
Benefit the settlement for every Republic Act No. 10022)
money for the year of
remaining months employment
or years of contract

17
Bar Operations C ommissions 17
 Purple Notes
Mercantile Law
Disqualification
Insurance companies who have directors,
partners, officers, employees, or agents with
relatives within the fourth civil degree of
consanguinity or affinity who work or have
interest in any of the licensed
recruitment/manning agencies or in any of the
government agencies involved in the overseas
employment program shall be disqualified from
providing the migrant worker‘s insurance
coverage. It shall be the duty of the said
directors, partners, officers, employees or
agents to disclose any such interest to the IC
and POEA.
Such insurance policy shall be effective for the
duration of the migrant worker‘s employment
contract, and shall cover, at the minimum the
benefits mentioned.
The incontestable and suicide clauses under the
Insurance Code shall not apply to compulsory
life insurance coverage under the Act.
In case of doubt, the provisions of the policy
shall be interpreted liberally in favor of the
migrant workers and in accordance with the
intent of the Act and its Omnibus Rules and
Section 2 of the Insurance Guidelines on Rule
XVI of the Omnibus Rules and Regulations
Implementing R.A. 8042, as amended by R.A.
10022.
E. VARIABLE CONTRACT
It is any policy or contract on either a group or
on an individual basis issued by an insurance
company providing for benefits or other
contractual payments or values thereunder to
vary so as to reflect investment results of any
segregated portfolio of investments or of a
insurance contract is a contract to pay
indemnity, the insurable interest of the insured
will be the measure of the upper limit of his
provable loss under the contract.
Wagering policy, defined:
Pretended insurance where the insured has no
interest in the thing insured and can sustain no
18 Center for Legal Education and Research
designated separate account in which 2018
amounts
received in connection with such contracts shall
have been placed and accounted for separately
and apart from other investments and
accounts. (Sec. 238 [b], Insurance Code)
F. INSURABLE INTEREST
Insurable interest, defined:
An insurable interest is that interest which a
person is deemed to have in 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 advantage from the
preservation of the subject matter insured and
will suffer pecuniary loss or damage from its
destruction, termination, or injury by the
happening of the event insured against. (Violeta
R. Lalican vs. The Insular Life Assurance Company
Limited, G.R. No. 183526, August 25, 2009)
NOTE: The existence of insurable interest is a
matter of public policy and is not susceptible to
the principle of estoppel. The existence of an
insurable interest gives a person the legal right
to insure the subject matter of the policy of
insurance. (Ibid.)
Reason for the requirement of insurable
interest:
1. To avoid wagering policy (Sec. 4, Insurance
Code) - As deterrence to the insured, the
requirement of an insurable interest to
support a contract of insurance is based
upon considerations of public policy which
render wager policies invalid. A wager policy
is obviously contrary to public interest.
2. To measure the limit of recovery- if and to
the extent that any particular insurance
contract is a extent that any particular.
loss by the happening of the misfortune insured
against. (De Leon, The Insurance Code of the
Philippines, 2010, p. 129)
 Purple Notes
Two classes of insurable interest in life
insurance:
1. On one‟s life
 The insured has unlimited interest.
 It is not necessary that the beneficiary
should have interest in the life of the
insured.
2. Upon life of another
 Insurable interest in the life of another
must be pecuniary.
 The assured must have an interest to
preserve the life insured in spite of the
insurance, rather than destroy it
because of the insurance.
INSURABLE INTEREST IN LIFE/ HEALTH:
(Sec. 10, Insurance Code)
Every person has an insurable interest in the
life and health:
1. Of himself, of his spouse and of his children;
2. Of any person on whom he depends wholly
or in part for education or support, or in
whom he has a pecuniary interest;
Note: The following have an insurable
interest in each other‘s life as they are
obliged to support each other:
a. The spouses;
b. Legitimate ascendants and descendants;
c. Parents and their legitimate children and
the legitimate or illegitimate children of
the latter;
d. Parents and their illegitimate children
and the legitimate or illegitimate
children of the latter;
e. Legitimate brothers and sister, whether
of the full or half-blood. (Art. 195, Family
Code)
3. Of any person under a legal obligation to
him for the payment of money, or
respecting property or services, of which
death or illness might delay or prevent the
performance; and
19
Mercantile Law
4. Of any person upon whose life any estate or
interest vested in him depends.
One may insure the life of a person where
the continuation of the estate or interest
vested in him who takes the insurance
depends upon the life of the insured. (De
Leon, The Insurance Code of the Philippines,
2010, p. 95)
INSURABLE INTEREST IN PROPERTY
Insurable interest in property is every interest in
property, whether real or personal, or any
relation thereto, or liability in respect thereof, of
such nature that a contemplated peril might
directly damnify the insured.
A person has an insurable interest in the
property, if he derives pecuniary benefit or
advantage from its preservation or would suffer
pecuniary loss, damage or prejudice by its
destruction whether he has or has no title in, or
lien upon, or possession of the property. (Filipino
Merchants Insurance Co., Inc. vs. CA, G.R. No.
85141, November 28, 1989)
Insurable interest in property may consist
in: (Sec. 14, Insurance Code)
1. An existing interest – The existing interest
in the property may be legal or equitable
title.
Examples of insurable interest arising from legal
title: a. Trustee, as in the case of the seller of
property not yet delivered; b. Mortgagor of the
property mortgaged; c. Lessor of the property
leased. (De Leon, The Insurance Code of the
Philippines, 2010, p. 111)
Examples of insurable interest arising from
equitable title: a. Purchaser of property before
delivery or before he has performed the
conditions of the sale b. Mortgagee of property
mortgaged; c. Mortgagor, after foreclosure but
before the expiration of the period within which
redemption is allowed. (De Leon, The Insurance
Code of the Philippines, 2010, p. 112)
2. An inchoate interest founded on an existing
interest.
Bar Operations C ommissions 19
 Purple Notes
Mercantile Law
Example: A stockholder has an inchoate interest
in the property of the corporation of which he is
a stockholder, which is founded on an existing
interest arising from his ownership of shares in
the corporation. (De Leon, The Insurance Code of
the Philippines, 2010, p. 112)
proceeds only after the payment 2018of the
corporation‘s debts. The stockholder or the
partner must prove actual injury, otherwise
cannot recover more than the nominal damages.
(De Leon, The Insurance Code of the Philippines,
2010, p. 112)

3. An expectancy coupled with an existing Insurable interest in life and in property,

interest in that out of which the expectancy compared:
arises. (Sec. 14, Insurance Code)
Insurable Insurable
Note: Expectancy to be insurable must be Interest in Interest in
coupled with an existing interest or founded on Life Property
As to extent
an actual right to the thing or upon any valid
Unlimited, except in life Limited to the actual
contract for it. (Sec. 16, Insurance Code)
insurance effected by a value of the interest in
creditor on the life of property.
Peril insured against: the debtor.
Any contingent or unknown event, whether past As to time when insurable interest must
or future, which may damnify a person having exist
an insurable interest, or create a liability against Must exist at the time Must exist when the
him. (Sec. 3, Insurance Code) the policy takes effect policy takes effect and
and need not exist at when the loss occurs
General rule: A future event is the only event the time of the loss.
that can be covered by an insurance contract. As to expectation of benefit to be derived
From the continued From the continued
Exception: A past event may be covered by a existence of life, existence of the
beneficiary need not property insured there
marine insurance if the loss of the vessel in the
have any legal basis. must be legal basis.
past could not have been known by ordinary
As to the beneficiary‟s interest
means of communication. (Sundiang and Aquino, Beneficiary need not Beneficiary must have
Reviewer on Commercial Law, 2017, p. 102) have insurable interest insurable interest over
over the life of the the thing insured in
Extent of insurable interest in the insured if the insured property insurance.
property: himself secured the
policy. However, if the
 Value of the loss or amount of loss suffered. life insurance was
 The measure of an insurable interest in obtained by the
property is the extent to which the insured beneficiary, the latter
might be damnified by loss or injury thereof. must have insurable
(Sec. 17, Insurance Code) interest over the life of
the insured.
Interest of a stockholder/ partner of a (Sundiang and Aquino, Reviewer on Commercial Law,
2017, p. 93)
firm:
Double insurance and over insurance
No contract or policy of insurance on property
shall be enforceable except for the benefit of
Double insurance, when existent:
some person having an insurable interest in the
It exists where the same person is insured by
property insured. (Sec. 18, Insurance Code)
several insurers separately in respect to the
same subject and interest (Sec. 93, Insurance
The stockholder has sufficient interest in the
Code)
property of the corporation. Interest is not
measured by value of what is destroyed. But the
interest is to share in the distribution of the

20 Center for Legal Education and Research

 Purple Notes
Mercantile Law
Requisites of Double Insurance 2. Where the policy under which the insured
claims is a valued policy, the insured must
1. Two or more insurers insuring separately give credit as against the valuation for any
2. Risk or peril insured against is the same sum received by him under any other policy
3. Interest insured is the same without regard to the actual value of the
4. Person insured is the same subject matter insured;
5. Subject matter is the same (De Leon, The 3. Where the policy under which the insured
Insurance Code of the Philippines, 2010, p. 298) claims is an unvalued policy, he must give
credit as against the full insurable value, for
Over-insurance, when existent: any sum received by him under any policy;
4. Where the insured received any sum in
It exists when the amount of insurance is excess of the valuation in the case of valued
beyond the value of the insured‘s insurable policies, or of the insurable value in the case
interest (De Leon, The Insurance Code of the of the unvalued policies, he must hold such
Philippines, 2010, p. 299) sum in trust for the insurers, according to
their right of contribution among
Effects of over-insurance in case of loss: themselves;
5. Each insurer is bound, as between himself
1. The insurer is bound only to pay to the and the other insurers, to contribute ratably
extent of the real value of the property lost; to the loss in proportion to the amount for
2. The insured is entitled to recover the which he is liable under his contract. (Sec.
amount of premium corresponding to the 94, Insurance Code)
excess in value of the property. (Sec. 96,
Insurance Code) Condition requiring disclosure that same
property is of other insurance coverage:
Over-insurance, double insurance,
compared: A condition in the policy requiring the insured to
inform the insurer of any other insurance
DOUBLE coverage of the property insured. It is lawful
OVER-INSURANCE
INSURANCE and specifically allowed under Sec. 75 which
When the amount of There may be no over-
provides that ―(a) policy may declare that a
the insurance is beyond insurance as when the
the value of the sum total of the
violation of a specified provision thereof shall
insured‘s insurable amounts of the avoid it, otherwise the breach of an immaterial
interest. policies issued does provision does not avoid it‖. It is also a
not exceed the stipulation against double insurance.
insurable interest of
the insured. Purposes:
There may only be one There are always
insurer involved. several insurers. 1. To prevent an increase in the moral hazard;
(De Leon, The Insurance Code of the Philippines, and
2010, p. 299)
2. To prevent over-insurance and fraud.
(Aquino, Essentials of Insurance Law, 2018, p.
Rules of payment where there is over- 279)
insurance by double insurance (application
of Principle of Contribution): Absence of notice of existence of other
insurance constitutes fraud
1. The insured, unless the policy otherwise
provides, may claim payment from the When the insurance policy specifically requires
insurers in such order as he may select, up that notice should be given by the insured of the
to the amount for with the insurers are existence of other insurance policies upon the
severally liable under their respective same property, the total absence of such notice
contracts; nullifies the policy. Such failure to give notice of

21
Bar Operations C ommissions 21
 Purple Notes
Mercantile Law
the existence of other insurance on the same
property when required to do so constitutes
deception and it could be inferred that had the
insurer known that there were many other
insurance policies on the same property, it could
have hesitated or plainly desisted from entering
into such contract. (Perez, 2006)
Cancellation of policy of insurance by
reason of over insurance
Upon discovery of other insurance coverage that
makes the total insurance in excess of the value
of the property insured, the insurer may cancel
such policy of insurance; provided there is prior
notice and such circumstance occurred after the
effective date of the policy. (Sec. 64, Insurance
Code)
Waiver of Violation
When the insurer, with the knowledge of the
existence of other insurances, which the insurer
deemed a violation of the contract, preferred to
continue the policy, its action amounted to a
waiver of annulment of the contract. (Perez, 2006
citing Gonzales Lao vs. Yek Tong Lin Fire & Marine
Ins. Co., G.R. No. L-33131, December 13, 1930)
Instances where more than one insurable
interest may exist in the same property
1. In trust, both trustor and trustee have
insurable interest over the property in trust.
2. In a corporation, both the corporation and
its stockholders have insurable interest over
the assets.
3. In partnership both the firm and partners
have insurable interest over its assets.
4. In assignment both the assignor and
assignee have insurable interest over the
property assigned.
5. In lease, the lessor, lessee and sub‐ lessees
have insurable interest over the property in
lease.
6. In mortgage, both the mortgagor and
mortgagee have insurable interest over the
property mortgaged.
22 Center for Legal Education and Research
Multiple or several interests in2018 the same
property:
This relates to the special rules on mortgagors
and mortgagees in the Insurance Code.
Insurable Interest of Mortgagor and
Mortgagee over the Mortgaged Property
1. Mortgagor – may insure the mortgaged
property to the full value of such property.
Reason: the loss or destruction of the
property insured will not extinguish the
mortgage property.
2. Mortgagee – can insure the mortgaged
property only to the extent of the amount of
his credit.
Reason: the property relied on as
mortgaged is only a security. In insuring the
property, he insures his interest or lien
thereon. (De Leon, The Insurance Code of the
Philippines, 2010, p. 76)
Insurable interest of mortgagor and
mortgagee in case of a mortgaged
property
Each has an insurable interest in the property
mortgaged and this interest is separate and
distinct from the other. Therefore, insurance
taken by one in his name only and in his favor
alone does not inure to the benefit of the other.
The same is not open to objection that there is
double insurance. (RCBC vs. CA, 289 G.R. Nos.
128833-34, 128866, April 20, 1998)
Standard / Union Mortgage Clause
It creates the relation of insured and insurer
between the mortgagee and the insurer
independent of the contract with the mortgagor.
Hence, subsequent acts of the mortgagor
cannot affect the rights of the assignee. (Sec. 9,
Insurance Code)
Open / Loss Payable Mortgage Clause
Acts of the mortgagor affects the mortgagee
because the mortgagor does not cease to be a
party to the contract (Sec. 8, Insurance Code)
 Purple Notes
Effects of insurance procured by the
mortgagor without assigning the loss to
the mortgagee
 Only the mortgagor may recover from the
insurer since the policy taken by the
mortgagor shall be applied exclusively to his
interest.
 However, the mortgage constituted shall
extend to the proceeds of the indemnity
paid by the insurer of the mortgaged
property upon occurrence of the loss and
therefore, the mortgagee has a lien on the
proceeds of the policy. (Ibid.)
Effects of Open or Loss Payable Clause
1. Insurance is still deemed to be upon the
interest of the mortgagor who does not
cease to be a party to the original contract.
If the policy is cancelled, notice is still given
to the mortgagee;
2. Any act of the mortgagor, prior to the loss,
which would otherwise avoid the insurance
will have the same effect although the
property is in the hands of the mortgagee;
3. Any act which, under the insurance contract,
is to be performed by the mortgagor, may
be performed by the mortgagee with the
same effect as if it had been performed by
the mortgagor;
4. Upon occurrence of the loss, mortgagee is
entitled to recover to the extent of his credit
and the balance, if any, is payable to the
mortgagor;
5. Upon recovery by the mortgagee to the
extent of his credit from the insurer, the
mortgagor is released from his
indebtedness. (Sec. 8, Insurance Code)
Note. If an insurer assents to the transfer of
an insurance from a mortgagor to a mortgagee,
and, at the time of his assent, imposes further
obligation on the assignee, making a new
contract with him, the act of the mortgagor
cannot affect the rights of said assignee. (Sec. 9,
Insurance Code)
23
Mercantile Law
G.PERFECTION OF CONTRACT OF
INSURANCE
Policy of insurance, defined:
It is the written instrument in which the contract
of insurance is set forth (Sec. 49). It is the
written document embodying the terms and
stipulations of the contract of insurance between
the insured and insurer.
The policy is not necessary for the perfection of
the contract. (Sundiang & Aquino, Reviewer on
Commercial Law, 2017)
Contract of insurance, when perfected:
The contract of insurance is perfected when the
assent or consent is manifested by the meeting
of the offer and the acceptance upon the thing
and the cause which are to constitute the
contract. Mere offer or proposal is not
contemplated.
The offer must be certain and the acceptance
absolute. A qualified acceptance constitutes a
counter-offer. (Art.1319, NCC)
Reason: It is Cognitive Theory that is being
applied under the New Civil Code, thus, an
insurance contract is perfected the moment the
offeror learns of the acceptance of his offer by
the other party.
Binding receipt, defined:
It is a mere acknowledgment on behalf of the
company that its branch office had received
from the applicant the insurance premium and
had accepted the application subject to
processing by the head office.
Offer and acceptance in property and
liability insurance:
It is the insured who makes an offer to the
insurer, who accepts the offer, rejects it, or
makes a counter-offer. The offer is usually
accepted by an insurance agent on behalf of the
insurer. (De Leon, The Insurance Code of the
Philippines, 2010, p. 178)
Bar Operations C ommissions 23
 Purple Notes
Mercantile Law
Offer and acceptance in Life and health
insurance:
 If insured does not pay premium with the
application – application is considered an
invitation to insurer to make an offer.
 If insured pays premium with the application
– application is considered an offer. (Ibid.)
When is there an acceptance?
Where the application for insurance constitutes
an offer by the insured, a policy issued strictly in
accordance with the offer is an acceptance of
the offer that perfects the contract. (De Leon,
The Insurance Code of the Philippines, 2010, p. 179)
Delay in acceptance, contract not
perfected:
In a situation where applicant submits
application for insurance, but due to negligence
of company,
which takes an unreasonable long time before
processing the application, and the applicant
dies before the application is processed, the
contract is not perfected.
Where the applicant died before he received
notice of the acceptance of his application for
the insurance, there is no perfected contract.
(Perez vs. Court of Appeals, G.R No. 112329, January
28, 2000)
Delay in acceptance of the insurance application
will not result in a binding contract. Court
cannot impose upon the parties a contract if
they did not consent. However, in proper cases,
the insurer may be liable for tort. (Sundiang &
Aquino, Reviewer on Commercial Law 2017)
Tort theory:
The insurance business is affected with public
interest, thus, it is the duty of the insurer to act
with reasonable promptness in either rejecting
or accepting the application. In case of
unreasonable delay and the applicant dies,
applicant would have been deprived of
opportunity to secure insurance from another
source.
24 Center for Legal Education and Research
Delivery of policy, defined: 2018
The act of putting the insurance policy – the
physical document – into the possession of the
insured.
Delivery of the policy is not necessary in the
formation of the contract of insurance since the
contract of insurance is consensual. The delivery
of policy is necessary to make the policy
binding. (Sundiang & Aquino, Reviewer on
Commercial Law 2019, p. 95)
Two Types of Delivery:
1. Actual - delivery to the person of the insured.
2. Constructive
a. By Mail - If policy was mailed already and
premium was paid and nothing is left to
be done by the insured, the policy is
constructively delivered if insured died
before receiving the policy.
b. By agent - If delivered to the agent of the
insurer, whose duty is ministerial, or
delivered to the agent of the insured, the
policy is considered constructively
delivered. (De Leon, The Insurance Code of
the Philippines, 2010, p. 180)
Requisites for a valid delivery:
1. Intention of the insurer to give legal effect
as a completed instrument;
2. Word or act by insurer putting the
instrument beyond his legal, though not
necessarily, physical control;
3. Insured must acquiesce in this intention.
Premium, defined:
It is an agreed price for assuming and carrying
the risk – that is, the consideration paid an
insurer for undertaking to indemnify the insured
against a specified peril. (43 Am. Jur. 2d 326.)
Premium vs. assessment
Premium is levied and paid to meet anticipated
losses, while assessment is collected to meet
actual losses. Also, while premium is not a debt,
assessment properly levied, unless otherwise
 Purple Notes
expressly agreed, is a debt. (De Leon, The
Insurance Code of the Philippines, 2010, p. 239)
Premium payment, insurer entitled to it:
An insurer is entitled to payment of the premium
as soon as the thing insured is exposed to the
peril insured against. Notwithstanding any
agreement to the contrary, no policy or contract
of insurance issued by an insurance company is
valid and binding unless and until the premium
thereof has been paid, except in the case of a
life or an industrial life policy whenever the
grace period provision applies. (Sec. 77, Insurance
Code)
Acknowledgment in the policy, conclusive
evidence of its payment:
An acknowledgment in a policy or contract of
insurance or the receipt of premium is
conclusive evidence of its payment, so far as to
make the policy binding, notwithstanding any
stipulation therein that it shall not be binding
until the premium is actually paid. (Sec. 79,
Insurance Code)
Non-payment of premiums
Non-payment of the premium will not entitle the
insured to recover the premium from the
insurer. The continuance of the insurer‘s
obligation is conditioned upon the payment of
the premium, so that no recovery can be had
upon a lapsed policy, the contractual relation
between the parties having ceased. If the peril
insured against had occurred, the insurer would
have had a valid defense against recovery under
the policy.
Non-payment of the first premium prevents the
contract from becoming binding notwithstanding
the acceptance of the application or the
issuance of the policy, unless waived. But
nonpayment of the balance of the premium due
does not produce the cancellation of the
contract.
With respect to subsequent premiums, non-
payment does not affect the validity of the
contracts unless, by express stipulation, it is
provided that the policy shall in that event be
25
Mercantile Law
suspended or shall lapse. (De Leon, The Insurance
Code of the Philippines, 2010, p. 247)
In contract of Insurance the consideration is the
premium, which must be paid at the time in the
way and manner specified in the policy. If not so
paid, the policy will lapse and be forfeited by its
own terms. (Gaisano vs. Development Insurance
and Surety Corporation, G.R. No. 190702, February
27, 2017)
Effect of Non-Payment:
General Rule: The obligation of the insurer will
not become valid and binding if the first
premium has not been paid.
Exceptions:
1. When grace period applies in case of life
and industrial life policy (Sec. 77, Insurance
Code);
2. When there is an acknowledgement in the
policy or receipt that the premium has been
paid (Sec. 78, Insurance Code);
3. When there is an agreement that the
premium shall be payable on installment
(Makati Tuscany Condominium vs CA, G.R. No.
95546, November 6, 1992);
4. When there is a credit extension (UCPB
General Insurance Co., Inc. vs. Masagana
Telemart, Inc., G.R. No. 137172, April 4, 2001);
and
5. When the equitable doctrine of estoppel
applies. (Jose Marques and Maxilite
Technologies, Inc. vs. FEBTC, G.R. No. 171379,
January 10, 2011)
Non-payment of premiums by reason of
the circumstances or conduct of the
insurer
General Rule: Non-payment of premiums does
not merely suspend but put an end to an
insurance contract since the time of the
payment is peculiarly of the essence of the
contract. (De Leon, The Insurance Code of the
Philippines, 2010, p. 247)
Exceptions:
1. The insurer has become insolvent and has
suspended business, or has refused without
Bar Operations C ommissions 25
 Purple Notes
Mercantile Law
justification a valid tender of premiums.
(Gonzales vs. Asia Life Ins. Co., G.R. No. L-5188,
Oct. 29, 1952)
2. Failure to pay was due to the wrongful
conduct of the insurer.
3. The insurer has waived his right to demand
payment (Sec. 79, Insurance Code)
When payment of premium becomes a
debt or obligation
1. In fire, casualty and marine insurance, the
premium payable becomes a debt as soon as
the risk attaches.
2. In life insurance, the premium becomes a
debt only when, in the case of the first
premium, the contract has become binding,
and in the case of subsequent premiums,
when the insurer has continued the
insurance after maturity. (De Leon, The
Insurance Code of the Philippines, 2010, p.246)
Non-Default Options In Life Insurance
Grace period:
In case of individual life or endowment
insurance and group life insurance, the policy
holder is entitled to a grace period of either 30
days or 1 month within which the payment of
any premium after the first may be made. (Sec.
233(a), 234 (a) Insurance Code)
In case of industrial life insurance, the grace
period is 4 weeks, where premiums are payable
monthly, either 30 days or 1 month. (Sec. 236(a)
Insurance Code)
Cash surrender value:
The amount the insurer agrees to pay to the
holder of the policy if he surrenders it and
releases his claim upon it. (De Leon, The
Insurance Code of the Philippines, 2010, p. 536)
Extended insurance:
Where the insurance originally contracted for is
continued for such period as the amount
available therefore will pay when it will
terminate. In such a case, the insurance will be
for the same amount as the original policy but
26 Center for Legal Education and Research
2018in the
for a period shorter than the period
original contract.
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, will purchase. It results to a
reduction of the original amount of insurance
but for the same period originally stipulated.
Automatic loan clause:
A 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. (Aquino, Essentials of Insurance Law,
2018, p. 125)
Reinstatement of a Lapsed Policy of Life
Insurance
The policyholder shall be entitled to have the
policy reinstated at any time within three years
from the date of default of premium payment
unless the cash surrender value has been duly
paid, or the extension period has expired, upon
production of evidence of insurability
satisfactory to the company and upon 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 in
the policy years prior to reinstatement. (Sec. 233
(j), Insurance Code)
Reinstatement is not an absolute right of the
insured, but discretionary on the part of the
insurer, which has the right to deny
reinstatement if it were not satisfied as to the
insurability of the insured, and if the latter did
not pay all overdue premiums and other
indebtedness to the insurer. (McGuire vs.
Manufacturer‘s Life Ins. Co., G.R. No. L-3581,
September 21, 1950)
 Purple Notes
Refund of premiums
A person insured is entitled to a return of
premium, as follows:
(a) To the whole premium if no part of his
interest in the thing insured be exposed to
any of the perils insured against;
(b) Where the insurance is made for a definite
period of time and the insured surrenders
his policy, to such portion of the premium as
corresponds with the unexpired time, at a
pro rata rate, unless a short period rate has
been agreed upon and appears on the face
of the policy, after deducting from the whole
premium any claim for loss or damage
under the policy which has previously
accrued; Provided, That no holder of a life
insurance policy may avail himself of the
privileges of this paragraph without
sufficient cause as otherwise provided by
law. (Sec. 80, Insurance Code)
A person insured is entitled to return of the
premium when the contract is voidable, on
account of fraud or misrepresentation of the
insurer, or of his agent, or on account of facts,
the existence of which the insured was ignorant
without his fault; or when by any default of the
insured other than actual fraud, the insurer
never incurred any liability under the policy.
(Sec. 82, Insurance Code)
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.
(Sec. 83, Insurance Code).
H.RESCISSION OF INSURANCE CONTRACT
Grounds for rescission:
1. Concealment;
2. Misrepresentation/omission; and
3. Breach of warranties. (Sec, 64, Insurance
Code)
27
Mercantile Law
CONCEALMENT
Concealment, defined:
Neglect to communicate that which a party
knows and ought to communicate (Sec. 26,
Insurance Code)
Good faith should be observed in
communicating all facts:
Each party to a contract of insurance must
communicate to the other, in good faith, all
facts within his knowledge which are material to
the contract and as to which he makes no
warranty, and which the other has not the
means of ascertaining. (Sec. 28, Insurance Code)
Requisites to constitute concealment:
1. The party involved must know the fact
concealed or at least he ought to know the
same (Sec. 26 and 27, Insurance Code);
2. The fact concealed must be material (Sec.
28, Insurance Code);
3. No warranty is extended by the party
regarding the fact concealed (Sec. 28,
Insurance Code); and
4. The other party does not have the means
of ascertaining. (Sec. 28, Insurance Code)
The obligation to communicate is the obligation
of each party, both the insurer and the insured.
The duty to disclose is required because
insurance contracts are described as contracts
uberrimae fidae, that is, of utmost good faith.
(Aquino, Essentials of Insurance Law, 2018, p. 178)
Effect of concealment:
Concealment, whether intentional or
unintentional, entitles the injured party to
rescind a contract of insurance. (Sec. 27,
Insurance Code)
General Rule: Concealment may either be
intentional or intentional to entitle the injured
party to rescission. (Ibid)
Exception: Insurer is entitled to rescind in case
of an omission by the insured to communicate
information of matters proving or tending to
Bar Operations C ommissions 27
 Purple Notes
Mercantile Law
prove the falsity of a warranty and such
omission is both intentional and
fraudulent. (Sec. 29, Insurance Code)
NOTE: The right to rescind should be exercised
previous to the commencement of an action on
the contract. (Sec. 48, Insurance Code)
Test of materiality of facts:
Materiality is determined not by the event, but
solely by the probable and reasonable influence
of the facts upon the party to whom the
communication is due, in forming his estimate of
the disadvantages of the proposed contract or in
making his inquiries or in fixing the premium
rate.(Sec. 31, Insurance Code)
 In relation to the insured, the matters he
concealed are considered material if such
matters will affect the insurer‘s action on his
application, either by approving it with the
corresponding adjustment for a higher
premium or rejecting the same or in fixing
the terms and conditions of the policy.
(Aquino, Essentials of Insurance Law, 2018, p.
179)
 In relation to the insurer, the matters
concealed are considered material if they
will affect the decision of the insured to
enter into the insurance contract.(Ibid.)
 The matter concealed by the insured is
considered material if it relates to physical
hazard or moral hazard. Hazard affects the
estimate of the disadvantages of the
proposed contract. If the insurer knows
about the circumstances relating to physical
or moral hazard, it will give a chance to the
insurer to make further inquiries and to
decide on the basis of such inquiry. (Aquino,
2014)
 The test of materiality is the effect which
the knowledge of the fact in question would
have on the making of the contract. It need
not increase the risk or contribute to any
loss or damage suffered. It is sufficient if
the knowledge of it would influence the
parties in making the contract. (Aquino,
Essentials of Insurance Law, 2018, p. 179)
28 Center for Legal Education and Research
The basis of the rule vitiating the2018 contract in
case of concealment is that it misleads or
deceives the insurer into accepting the risk, or
accepting it at the rate of premiums agreed
upon. The insurer, relying upon the belief that
the assured will disclose every material within
his actual or presumed knowledge, is misled into
a belief that the circumstances withheld does
not exist, and he is thereby induced to estimate
the risk upon a false basis that it does not exist.
The principal question, therefore, must be: Was
the assurer misled or deceived into entering a
contract obligation or in fixing the premium of
insurance by a withholding of material
information of facts within the assured‘s
knowledge or presumed knowledge? (Bernardo
Argente vs. West Coast Life Insurance, Inc., G.R. No.
L-24899, March 19, 1928)
The transfer of location of the insured
machineries was considered material
concealment that should have been disclosed
when the fire insurance policy was renewed.
The unconsented removal of the machineries to
another location made the said machineries at
the insured company‘s own risk. (Malayan
Insurance vs. PAP Co. Ltd., G.R. No. 200784, August
7, 2013)
The matter concealed need not be the cause of
the loss. (Aquino, Essentials of Insurance Law, 2018,
p. 182)
The insured need not die of the disease if he
had failed to disclose to the insurer the
existence of such disease. It is sufficient that his
non-disclosure misled the insurer in forming his
estimates of the risks of the proposed insurance
policy or in making inquiries. (Sun Assurance
Company of Canada vs. The Hon. Court of Appeals
and Sps. Rolando and Bernarda Bacani G.R. No.
105135, June 22, 1995)
Knowledge on the part of the agent of the
insured can be imputed to the insured himself
only if the following circumstances are present:
1. It was the duty of the agent to acquire and
communicate information of the facts in
question
2. It was possible for the agent, in the
exercise of reasonable diligence, to have
made such communication before the
 Purple Notes
making of the insurance contract. (Aquino,
Essentials of Insurance Law, 2018, p. 182)
Exceptions to Section 31:
1. Incontestability Clause
2. Matters under Sec. 110 (marine insurance)
Matters that must be communicated even
in the absence of inquiry:
1. Those material to the contract (Sec. 31, 34, 35,
Insurance Code);
2. Those which the other has no means of
ascertaining (Secs 20, 32, 33, Insurance Code);
3. Those as to which the party with the duty to
communicate makes no warranty (Secs 67-
76, Insurance Code)
General rule: Matters made subject of special
inquiries under Sec. 32 must be deemed
material, even though otherwise they might not
be so regarded and the insured is required to
make full and true disclosure to questions asked.
Exception: There is no duty to make a
disclosure on the following instances:
1. Those which the other knows; (Sec. 30,
Insurance Code)
2. 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; (Sec. 30, Insurance Code)
3. Those of which the other waives
communication; (Sec. 30, Insurance Code)
4. Those which prove or tend to prove the
existence of a risk excluded by a warranty,
and which are not otherwise material; (Sec.
30, Insurance Code)
5. Those which relate to a risk excepted from
the policy and which are not otherwise
material; (Sec. 30, Insurance Code)
6. Those which involves general causes that
are open to inquiry of each party and which
may affect the political or material perils
contemplated; (Sec. 32, Insurance Code.)
7. Those which are included in general usages
of trade; (Sec. 32, Insurance Code.)
8. Information of the nature or amount of the
interest of one need not be communicated
unless in answer to an inquiry, except as
29
Mercantile Law
prescribed by Sec. 51 (Sec. 34, Insurance
Code).
9. When what is involved is information of the
party‘s own judgment upon the matters in
question. (Sec. 35, Insurance Code.)
Ordinarily, the matters concealed need not be
the cause of the loss. In Marine Insurance, there
are instances when matters, although
concealed, will not vitiate the contract except
when they caused the loss:
1. National character of the insured;
2. Liability of the thing insured to and
detention;
3. The liability to seizure from breach of
foreign laws of trade;
4. Want of necessary documents; and
5. The use of false and simulated papers. (Sec.
112, Insurance Code)
Opinion should not be relied upon by the
insurer:
Where matters of opinion or judgment are called
for, answers made in good faith and without
intent to deceive will not avoid the policy even
though they are untrue.
Reason: The insurer cannot rely on those
statements. He must make further inquiry.
(Philamcare Health Systems vs. CA, G.R. No. 125678,
March 18, 2002)
Waiver of insurer
Where upon the face of the application, a
question appears to be not answered at all or
imperfectly answered, and the insurers issue a
policy without any further inquiry, they waive
the imperfection of the answer and render the
omission to answer more fully immaterial. (Ng
Gan Zee vs. Asian Crusader Life Insurance Corp., G.R.
No. L-30685, May 30, 1983)
MISREPRESENTATION/OMISSIONS
Misrepresentation defined:
A statement (1) as a fact of something which is
untrue, (2) which the insured stated with
knowledge that it is untrue and with an intent to
Bar Operations C ommissions 29
 Purple Notes
Mercantile Law
deceive, or which he states positively as true 2018 the
Note: When there is collusion between
without knowing it to be true and which has a insurer‘s agent and the insured, it, in effect,
tendency to mislead, and (3) where such fact in vitiates the policy even though the agent is
either case is material to the risk. (De Leon, The acting within the apparent scope of his
Insurance Code of the Philippines, 2010, p. 150) authority. The agent ceases to represent his
principal and thus, represents himself.
Requisites of false representation: Therefore, the insurer is not estopped from
avoiding the policy.
1. Insured stated a fact which is untrue;
2. Such fact was stated with knowledge that it Concealment and Representation,
is untrue and with intent to deceive or which compared:
he states positively as true without knowing
it to be true and which has a tendency to CONCEALMENT REPRESENTATION
mislead; It involves an It involves a positive
3. Such fact in either case is material to the omission – assertion or affirmation.
risk. (Ibid.) nondisclosure.
The insured withholds The insured makes
Characteristics of misrepresentation: information of erroneous statements of
material facts from facts with the intent of
1. It is not a part of the contract but merely a the insurer. inducing the insurer to
enter into the insurance
collateral inducement to it;
contract.
2. It may be oral or written; Concealment cannot Representation can
3. It is made at the time of, or before issuing refer to future acts. pertain to the future
the policy and not after; because it can be
4. It may be altered or withdrawn before the promissory.
insurance is affected but not afterwards; Same test of Same test of materiality
5. It always refers to the date the contract materiality applies. applies
goes into effect. A party can rescind. A party can rescind.

Kinds of Representation: Remedies available in case of concealment

or false representation
1. Affirmative - affirmation of a fact when
the contract begins. 1. Rescission;
2. Incontestability Clause.
2. Promissory - promise to be performed
after policy was issued. (De Leon, The Limitations on the right of the insured to
Insurance Code of the Philippines, 2010, p. 154) rescind contract:

Test of materiality: 1. In a NON-LIFE policy – such right must be

exercised prior to the commencement of an
Same as that of concealment. (Sec. 46, Insurance action in the contract (Sec. 48, Insurance
Code) Code).

Effect of misrepresentation: 2. In a LIFE insurance – defenses are available

It renders the insurance contract voidable at the
option of the insurer, although the policy is not
thereby rendered void ab initio. The injured
party is entitled to rescind from the time when
the representation becomes false. (De Leon, The
Insurance Code of the Philippines, 2010, p. 150)
only during the first two years of a life
insurance policy.
The injured party is entitled to rescind the
contract from the time when the representation
becomes false. (Sec. 45, Insurance Code)

30 Center for Legal Education and Research

 Purple Notes
When Rescission is Unavailable
1. When there is waiver;
2. When an action has already been
commenced on the contract; and
3. When the incontestable clause applies. (Sec.
48, Insurance Code)
Incontestability Clause:
Clauses in life insurance policies, which are
incontestable (after the requisites are shown to
exist), whereby the insurer shall be barred from
contesting the policy (i.e. policy is void ab initio)
or setting up a defense (i.e. fraudulent
concealment, misrepresentation etc.) except
when allowed by reason of public policy.
(Sundiang & Aquino, Reviewer on Commercial Law,
2017, p. 117)
Requisites for incontestability clause to
apply:
1. The insurance is a life insurance policy;
2. It is payable on the death of the insured;
3. It has been in force during the lifetime of
the insured for at least 2 years from the
date of its issue or its last reinstatement.
The period of two years may be shortened
but it cannot be extended by stipulation.
(Sec. 48, Insurance Code)
After the 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 two (2) years from the date of its issue
or its last reinstatement, the insurer cannot
prove that the policy is void ab initio or is
rescindable by reason of the fraudulent
concealment or misrepresentation of the insured
or his agent. (Sec. 48, Insurance Code)
The ―Incontestability Clause‖ under Section 48
of the Insurance Code regulates both the
actions of the insurers and prospective takers of
life insurance. It gives insurers enough time to
inquire whether the policy was obtained by
fraud, concealment, or misrepresentation; on
the other hand, it forewarns scheming
individuals that their attempts at insurance fraud
would be timely uncovered – thus deterring
them from venturing into such nefarious
31
Mercantile Law
enterprise. (Manila Bankers Life Insurance
Corporation vs. Aban, G.R. No. 175666, July 29,
2013.)
NOTE: After the two-year period lapses, or
when the insured dies within the period,
the insurer must make good on the policy, even
though the policy was obtained by fraud,
concealment, or misrepresentation. This is not
to say that insurance fraud must be rewarded,
but that insurers who recklessly and
indiscriminately solicit and obtain business must
be penalized, for such recklessness and lack of
discrimination ultimately work to the detriment
of bona fide takers of insurance and the public
in general.
The death of the insured within the two-year
period will render the right of the insurer to
rescind the policy nugatory. As such, the
incontestability period will now set in. (Sun Life of
Canada vs. Sibya, G.R. No. 211212, June 08, 2016)
Defenses available against incontestability
clause:
1. That the person taking the insurance lacked
insurable interest as required by law;
2. That the cause of the death of the insured is
an excepted risk;
3. That the premiums have not been paid;
4. That the conditions of the policy relating to
military or naval service have been violated;
5. That the fraud is of a particularly vicious
type;
6. That the beneficiary failed to furnish proof
of death or to comply with any condition
imposed by the policy after the loss has
happened;
7. That the action was not brought within the
time specified. (Sundiang & Aquino, Reviewer
on Commercial Law, 2017, p. 118)
Barred defenses of the insurer concerning
incontestability clause:
1. Policy is void ab initio;
2. Policy is rescissible by reason of the
fraudulent concealment or
misrepresentation of the insured or his
agent. (De Leon, The Insurance Code of the
Philippines, 2010, p. 167)
Bar Operations C ommissions 31
 Purple Notes
Mercantile Law
BREACH OF WARRANTIES
Breach of warranties as ground to rescind:
The violation of a material warranty or other
material provision of a policy, on the part of
either party thereto, entitles the other to
rescind. (Sec. 74, Insurance Code)
Breach of warranty without fraud:
A breach of warranty without fraud merely
exonerates an insurer from the time that it
occurs, or where it is broken in its inception,
prevents the policy from attaching to the risk.
(Sec. 76, Insurance Code)
Warranties, defined:
Statements or promise by the insured set forth
in the policy itself or incorporated in it by proper
reference, the untruth or non-fulfillment of
which in any respect and without reference to
whether the insurer was in fact prejudiced by
such untruth
or non-fulfillment. The same may be expressed,
implied, affirmative or promissory. (De Leon, The
Insurance Code of the Philippines, 2010, p. 221).
Kinds of warranties:
1. Express – agreement contained in the
policy or clearly incorporated therein as part
thereof
a. Must either be contained in the policy
itself; or
b. expressed in another instrument
provided that the separate instrument is
signed by the insured and referred to in
the policy.
2. Implied - warranties that are deemed
included in the contract, although not
expressly mentioned. They are found only
in marine insurance.
3. Affirmative - asserts the existence of a fact
or condition at the time it is made.
4. Promissory - the insured stipulates that
certain facts or conditions shall exist or a
thing shall be done or omitted. (Sundiang &
32 Center for Legal Education and Research
20182017, p.
Aquino, Reviewer on Commercial Law,
214)
 A warranty may relate to the past, the
present, the future or to any or all of
these (Sec. 68, Insurance Code)
 In case of promissory warranty, it refers
only to future events. (Sec. 73, Insurance
Code)
 No particular form of words is necessary
to create a warranty (Sec. 69, Insurance
Code)
 Warranty is presumed affirmative,
unless the contrary intention applies.
(De Leon, The Insurance Code of the
Philippines, 2010, p. 222)
Effects of breach of warranty:
1. Material Provisions
General rule: It gives the insurer the right
to rescind. (Sec. 74 and 76, Insurance Code)
Exceptions:
a. Loss occurs before the time of
performance of the warranty;
b. The performance becomes unlawful;
c. Performance becomes impossible. (Sec.
73, Insurance Code)
2. Immaterial Provisions
General rule: It will not avoid the policy.
(Sec. 75, Insurance Code)
Exception: When the parties stipulate that
violation of particular provisions, though
normally immaterial, shall avoid the policy.
In effect, the parties converted the
immaterial provision in to a material one.
(Ibid.)
Warranty vs. Representation
WARRANTY REPRESENTATION
Part of the contract. Collateral inducement.
Written on the policy or Need not be written.
in a valid rider or
attachment.
 Purple Notes
Mercantile Law
WARRANTY REPRESENTATION Transferability of Claim
Generally, it is Should be established
conclusively presumed to be material. General Rule: Before the occurrence of a loss,
to be material. the parties may stipulate not to transfer the
Facts warranted must Requires only being claim of the insured against the insurer. (Sec. 85,
be strictly complied substantially true.
Insurance Code)
with.
Falsity or non-fulfillment Falsity renders the But once the loss has occurred, the insured can
amounts to breach of policy voidable on the transfer already his interest, considering that the
contract. ground of fraud. rights and obligations of the parties are already
(De Leon, The Insurance Code of the Philippines, fixed by then, and the assignment is merely a
2010, p. 224) transfer of chose of action, a right of recovery,
against the insurer. (Aquino-Tambasacan, 2015)
CLAIMS SETTLEMENT AND SUBROGATION
Exceptions:
Claim settlement in life insurance:
1. Prohibition of transfer of fire insurance to a
1. The proceeds shall be paid immediately person who acts as agent of the insurer,
upon the maturity of the policy if there is and the transfer is void as it may affect the
such a maturity date. creditors of the insured. (Sec. 175, Insurance
2. If the policy matures by the death of the Code)
insured, within 60 days after presentation 2. In life insurance where the policy may pass
of the claim and filing of the proof of the to any person, regardless of presence of
death of the insured. (Sec. 248, Insurance insurable interest. Assignment may be made
Code) even before the loss. (Sec. 184, Insurance
Code)
Claim settlement in property insurance:
Notice of loss in fire insurance:
1. Proceeds shall be paid within thirty (30)
days after proof of loss is received by the Notice of loss should be given without
insurer and ascertainment of the loss or unnecessary delay; otherwise, the insurer is
damage is made either by agreement or by exonerated. (Sec. 90, Insurance Code)
arbitration.
2. If no ascertainment is made within 60 days Notice of loss in other types of insurance:
after receipt of proof of loss shall be paid
within 90 days after such receipt. (Sec. 249, It is not required and failure to give such will not
Insurance Code) exonerate the insurer; unless, there is a
stipulation in the policy requiring the insured to
Notice and proof of loss do so. (Aquino, Essentials of Insurance Law, 2018, p.
244)
Loss in insurance, defined:
Proof of loss, defined:
It is the injury, damage or liability sustained by
the insured in consequence of the happening of It is the more or less formal evidence given the
one or more of the perils against which the company by the insured or claimant under a
insurer, in consideration of the premium, has policy of the occurrence of the loss, the
undertaken to indemnify the insured. (Bonifacio particulars thereof and the data necessary to
Bros., Inc. et al. vs. Mora, G.R. No. L-20853, May 29, enable the company to determine its liability and
1967) It may be total, partial, or constructive in the amount thereof. (De Leon, The Insurance Code
marine insurance. of the Philippines, 2010, p. 292)

33
Bar Operations C ommissions 33
 Purple Notes
Mercantile Law
Purposes of proof of loss:
1. To give the insurer information by which he
may determine the extent of his liability.
2. To afford the insurer a means of detecting
any fraud that may have been practiced
upon him.
3. To operate as a check upon extravagant
claims. (De Leon, The Insurance Code of the
Philippines, 2010, p. 293)
Instances when the defects in the notice
or proof of loss are considered waived:
When the Insurer:
1. Writes to the insured that he considers the
policy null and void as the furnishing of
notice or proof of loss would be useless;
2. Recognizes his liability to pay the claim;
3. Denies all liability under the policy;
4. Joins in the proceedings for determining the
amount of the loss by arbitration, making no
objections on account of notice and
preliminary proof; or
5. Makes objection on any ground other than
the formal defect in the preliminary proof.
All defects in a notice of loss, or in preliminary
proof thereof, which the insured might remedy,
and which the insurer omits to specify to him,
without unnecessary delay, as grounds of
objection, are waived. (Sec. 92, Insurance Code)
Delay in the presentation to an insurer of notice
or proof of loss is waived if caused by any act of
him, or if he omits to take objection promptly
and specifically upon that ground. (Sec. 93,
Insurance Code)
If the policy requires, by way of preliminary
proof of loss, the certificate or testimony of a
person other than the insured, it is sufficient for
the insured to use reasonable diligence to
procure it, and in case of the refusal of such
person to give it, then to furnish reasonable
evidence to the insurer that such refusal was not
induced by any just grounds of disbelief in the
facts necessary to be certified or testified. (Sec.
94, Insurance Code)
34 Center for Legal Education and Research
Effect of fraudulent claim: 2018
The parties may agree that filing of fraudulent
claim ay exonerate the insurer from liability. This
is different from an honest mistake or error.
The most liberal human judgment cannot
attribute such difference to mere innocent error
in estimating or counting but to a deliberate
intention to demand from insurance companies‘
payment for indemnity of goods not existing at
the time of fire. This constitutes the so-called
―fraudulent claim: which, by express agreement,
between the insurers and the insured, is a
ground for the exemption of insurers from civil
liability. (United Merchants Corp. vs. Country Bankers
Insurance Inc., G.R. No. 198588, July 11, 2012.)
Guidelines on claims settlement
Claim Settlement, defined:
It is an indemnification for the loss suffered by
the insured. The claimant may be the insured or
reinsured, the insurer who is entitled to
subrogation, or a third party who has a claim
against the insured. (De Leon, The Insurance Code
of the Philippines, 2010, p. 565)
As a rule, no insurance company doing business
in the Philippines shall refuse, without justifiable
cause, to pay or settle claims arising under
coverage provided by its policies, nor shall any
such company engage in unfair claim settlement
practices. (Sec. 247 [a], Insurance Code)
Evidence as to numbers and types of valid and
justifiable complaints to the Commissioner
against an insurance company, and the
Commissioner‘s complaint experience with other
insurance companies writing similar lines of
insurance shall be admissible in evidence in an
administrative or judicial proceeding brought
under this section. (Sec. 247 [b], Insurance Code)
Effects of delay:
If the prescribed period for both life and
property insurance are not complied with, the
beneficiary is entitled to payment of:
 Purple Notes
1. Interest for the duration of the delay at the
rate of twice the legal interest (ceiling
prescribed by the Monetary Board);
2. Attorney‘s fees and other litigation
expenses;
3. Appropriate damages under the Civil Code
like moral and exemplary damages when
requisites are present (Sec. 249, Insurance
Code).
Unfair claims settlement; Sanctions:
Any of the following acts by an insurance
company, if committed without just cause and
performed with such frequency as to indicate a
general business practice, shall constitute unfair
claim settlement practices:
1. Knowingly misrepresenting to claimants
pertinent facts or policy provisions relating to
coverage at issue;
2. Failing to acknowledge with reasonable
promptness pertinent communications with
respect to claims arising under its policies;
3. Failing to adopt and implement reasonable
standards for the prompt investigation of
claims arising under its policies;
4. Not attempting in good faith to effectuate
prompt, fair and equitable settlement of
claims submitted in which liability has
become reasonably clear; or
5. Compelling policyholders to institute suits to
recover amounts due under its policies by
offering without justifiable reason
substantially less than the amounts ultimately
recovered in suits brought by them.
If it is found, after notice and an opportunity to
be heard, that an insurance company has
violated this section, each instance of non-
compliance with paragraph (1) may be treated
as a separate violation of this section and shall
be considered sufficient cause for the
suspension or revocation of the company's
certificate of authority. (Sec. 247 [c], Insurance
Code)
Prescription of action:
In the absence of an express stipulation in the
policy, it being based on a written contract, the
action prescribes in 10 years. However, the
35
Mercantile Law
parties may validly agree on a shorter period,
provided, it is not less than one year from the
time the cause of action accrues. The cause of
action accrues from the final rejection of the
claim of the insured and not from the time of
loss. (Sundiang & Aquino, Reviewer on Commercial
Law, 2017, p. 127)
A condition, stipulation, or agreement in any
policy of insurance, limiting the time for
commencing an action thereunder to a period of
less than one year from the time when the
cause of action accrued, is void. (Sec. 63,
Insurance Code)
 It shall commence from the denial of the
claim, not from the resolution of the motion
for reconsideration (Sun Insurance Office Ltd
vs. CA, G.R. No. 89741, March 13, 1991)
Principle of subrogation, stated, defined:
Legal subrogation is an equitable doctrine and
arises by operation of law, without any
agreement to that effect executed between the
parties. Subrogation is an arm of equity that
may guide or even force one to pay debt for
which an obligation was incurred but which was
in whole or in part paid by another. (Aquino,
Essentials of Insurance Law, 2018, p. 264)
Simply stated, it is the plaintiff‘s property has
been insured and he has received indemnity
from the insurance company for the injury or
loss arising out of the wrong or breach of
contract complained of, the insurance company
shall be subrogated to the rights of the insured
against the wrongdoer or the person who has
violated the contract. If the amount paid by the
insurance company does not fully cover the
injury or loss, the aggrieved party shall be
entitled to recover the deficiency from the
person causing the loss or injury. (Art. 2207, NCC)
Requisites of Subrogation:
1. The insurance involved is property
insurance;
2. There is a loss arising from the risk insured
against;
3. The insured received indemnity from the
insurer for the loss;
Bar Operations C ommissions 35
 Purple Notes
Mercantile Law
4. The indemnity is covered by the face value
of the policy. (Aquino, Essentials of Insurance
Law, 2018, p. 266)
Purposes of subrogation:
1. To make the person who caused the loss
legally responsible for it;
2. To prevent the insured from receiving
double recovery from the wrongdoer and
the insurer; and
3. To prevent the tortfeasors from being free
from liability and is thus founded on
consideration of public policy.
When the right of subrogation is
inapplicable:
1. Where the insured by his own act releases
the wrongdoer/third person liable for the
loss.
2. Where the insurer pays the insured for a
loss or risk not covered by the policy.
3. In life insurance because the value of
human life is regarded as unlimited and no
recovery from a third party can be deemed
adequate to compensate the insured‘s
beneficiary.
4. For the recovery of loss in excess of
insurance coverage. (Aquino, Essentials of
Insurance Law, 2018, p. 266)
J.BUSINESS OF INSURANCE
The term insurer or insurance company shall
include all partnerships, associations,
cooperatives or corporations, including
government-owned or -controlled corporations
or entities, engaged as principals in the
insurance business, excepting mutual benefit
associations. (Sec. 190, Insurance Code)
Requirements to operate:
1. It must possess the capital and assets
required of an insurance corporation doing
the same kind of business in the Philippines
and invested in the same manner; (Sec.
192, Insurance Code)
2. Obtained a certificate from the
Commissioner that it has complied with the
provisions of the Insurance Code; (Ibid.)
36 Center for Legal Education and Research
3. 2018 and
Obtained certificate of authority
payment of the fees prescribed; and
(Sec. 193, Insurance Code)
4. Filing of necessary documents to the
Commissioner. (Ibid.)
Capital and assets required
No corporation, partnership, or association of
persons shall transact any insurance business in
the Philippines except as agent of a corporation,
partnership or association authorized to do the
business of insurance in the Philippines, unless
possessed of the capital and assets
required of an insurance corporation doing the
same kind of business in the Philippines and
invested in the same manner. (Sec. 192,
Insurance Code)
Life or non-life Insurance Companies
Minimum Capital/Assets requirement
Requirement Amount
Paid-up Capital P 1,000,000,000
Net Worth:
by June 30, 2013 P 250,000,000
by December 31, 2016 P 550,000,000
by December 31, 2019 P 900,000,000
by December 31, 2022 P 1,300,000,000
The Commissioner may, as a pre-licensing
requirement of a new insurance company, in
addition to the paid-up capital stock, require the
stockholders to pay in cash to the company in
proportion to their subscription interests a
contributed surplus fund of not less than One
hundred million pesos (P100,000,000.00). (Sec.
194, Insurance Code)
In case of mutual company, in lieu of such net
worth, it must have available total members
equity in an amount to be determined by the
Insurance Commission above all liabilities for
losses reported; expenses, taxes, legal reserve,
and reinsurance of all outstanding risks, and the
contributed surplus fund equal to the amounts
required of stock corporations. (Ibid.)
In case of reinsurance companies, they must
have a capitalization of at least Three billion
pesos (P3,000,000,000.00) paid in cash of which
at least fifty percent (50%) is paid-up and the
 Purple Notes
remaining portion thereof is contributed surplus,
which in no case shall be less than Four hundred
million pesos (P400,000,000.00) or such
capitalization as may be determined by the
Secretary of Finance, upon the recommendation
of the Commissioner: Provided, That twenty-five
percent (25%) of the paid-up capital must be
invested in securities satisfactory to the
Commissioner consisting of bonds or other
instruments of debt of the Government of the
Philippines or its political subdivisions or
instrumentalities, or of government-owned or -
controlled corporations and entities, including
the Bangko Sentral ng Pilipinas, and deposited
with the Commissioner, and the remaining
seventy-five percent (75%) in such other
securities as may be allowed and permitted by
the Commissioner, which securities shall at all
times be maintained free from any lien or
encumbrance. (Sec. 289, Insurance Code)
Certificate of authority and Payment of the
fees required
No insurance company shall transact any
insurance business in the Philippines until after it
shall have obtained a certificate of authority
for that purpose from the Commissioner upon
application therefor and payment by the
company concerned of the fees hereinafter
prescribed. (Sec. 193, Insurance Code)
The Commissioner may refuse to issue a
certificate of authority to any insurance
company if, in his judgment, such refusal will
best promote the interest of the people of this
country. No such certificate of authority shall be
granted to any such company until the
Commissioner shall have satisfied himself by
such examination as he may make and such
evidence as he may require that such company
is qualified by the laws of the Philippines to
transact business therein, that the grant of such
authority appears to be justified in the light of
local economic requirements, and that the
direction and administration, as well as the
integrity and responsibility of the organizers and
administrators, the financial organization and
the amount of capital, reasonably assure the
safety of the interests of the policyholders and
the public. (Ibid.)
37
Mercantile Law
The certificate of authority issued by the
Commissioner shall expire on the last day of
December, three (3) years following its
date of issuance, and shall be renewable
every three (3) years thereafter. (Ibid.)
Filing of necessary documents
Every company must, before engaging in the
business of insurance in the Philippines, file with
the Commissioner the following:
1. A certified copy of the last annual statement
or a verified financial statement exhibiting
the condition and affairs of such company;
2. If incorporated under the laws of the
Philippines, a copy of the articles of
incorporation and bylaws, and any
amendments to either, certified by the
Securities and Exchange Commission to be a
copy of that which is filed in its Office;
3. If incorporated under any laws other than
those of the Philippines, a certificate from
the Securities and Exchange Commission
showing that it is duly registered in the
mercantile registry of that Commission in
accordance with the Corporation Code. A
copy of the articles of incorporation and
bylaws, and any amendments to either, if
organized or formed under any law requiring
such to be filed, duly certified by the officer
having the custody of same, or if not so
organized, a copy of the law, charter or
deed of settlement under which the deed of
organization is made, duly certified by the
proper custodian thereof, or proved by
affidavit to be a copy; also, a certificate
under the hand and seal of the proper
officer of such state or country having
supervision of insurance business therein, if
any there be, that such corporation or
company is organized under the laws of
such state or country, with the amount of
capital stock or assets and legal reserve
required by this Code;
4. If not incorporated and of foreign domicile,
aside from the certificate mentioned in
paragraph (c) of this section, a certificate
setting forth the nature and character of the
business, the location of the principal office,
the name of the individual or names of the
persons composing the partnership or
Bar Operations C ommissions 37
 Purple Notes
Mercantile Law
association, the amount of actual capital 2018
Administrative/Regulatory Powers
employed or to be employed therein, and
the names of all officers and persons by The Insurance Commissioner shall have the duty
whom the business is or may be managed. to see that all laws relating to insurance,
(Sec. 195, Insurance Code) insurance companies and other insurance
matters, mutual benefit associations, and trusts
Security Deposit for charitable uses are faithfully executed and to
perform the duties imposed upon him. (Sec. 437,
Every domestic insurance company shall, to the Insurance Code)
extent of an amount equal in value to twenty-
five percent (25%) of the minimum net worth The Commissioner may issue such rulings,
required under Section 194, invest its funds only instructions, circulars, orders and decisions as
in securities, satisfactory to the Commissioner, may be deemed necessary to secure the
consisting of bonds or other instruments of debt enforcement of the provisions of this Code, to
of the Government of the Philippines or its ensure the efficient regulation of the insurance
political subdivisions or instrumentalities, or of industry in accordance with global best practices
government-owned or -controlled corporations and to protect the insuring public. (Sec. 437,
and entities, including the Bangko Sentral ng Insurance Code)
Pilipinas: Provided, That such investments shall
at all times be maintained free from any lien or Pursuant to its regulatory powers, the
encumbrance: Provided, further, That such commissioner is authorized to:
securities shall be deposited with and held by
the Commissioner for the faithful performance (1) issue (or refuse to issue) certificates of
by the depositing insurer of all its obligations authority to persons or entities desiring to
under its insurance contracts. (Sec. 209, engage in insurance business in the
Insurance Code) Philippines;
(2) revoke or suspend these certificates of
Insurance Code expressly and clearly states that authority upon finding grounds for the
the security deposit shall be (1) answerable for revocation or suspension;
all the obligations of the depositing insurer (3) impose upon insurance companies, their
under its insurance contracts, (2) at all times directors and/or officers and/or agents
free from any liens or encumbrance, and (3) appropriate penalties – fines, suspension or
exempt from levy by any claimant. (Aquino, removal from office – for failing to comply
Essentials of Insurance Law, 2018, p.463) with the Code or with any of the
commissioner‘s orders, instructions,
K.INSURANCE COMMISSIONER AND ITS regulations or rulings, or for otherwise
POWERS conducting business in an unsafe or
unsound manner. (Aquino, Essentials of
Insurance Commissioner, how appointed Insurance Law, 2018, p.482)
and term of office:
Quasi-Judicial Powers
Insurance Commissioner shall be appointed by
the President of the Republic of the Philippines Original and Concurrent Original
for a term of six (6) years without Exclusive Jurisdiction Jurisdiction (with the
reappointment and who shall serve as such until regular courts)
the successor shall have been appointed and Any dispute in the Any claims and
enforcement of the complaints involving any
qualified. If the Insurance Commissioner is
provisions of any policy loss, damage or liability
removed before the expiration of his term of issued pursuant to under any kind of policy
office, the reason for the removal must be Chapter VI of the IC – or contract of insurance
published. Compulsory Motor where the amount
Vehicle Liability involved in any single
Insurance (Sec. 398, claim does not exceed P

38 Center for Legal Education and Research

 Purple Notes
Insurance Code) 5,000,000 (Sec 439,
Insurance Code)
Exception: In case of
maritime insurance which
is within the jurisdiction
of the MTC or the RTC
depending on the value
involved.
The power of the Commissioner does not cover
the relationship between the insurance company
and its agents/brokers but is limited to
adjudicating claims and complaints filed by the
insured against the insurance company. (Sec.
439, Insurance Code)
The authority to adjudicate granted to the
Commissioner under this section shall be
concurrent with that of the civil courts, but the
filing of a complaint with the Commissioner shall
preclude the civil courts from taking cognizance
of a suit involving the same subject matter. (Sec.
439, Insurance Code)
Sample Questions:
Q: How are contracts of insurance
construed?
A: Contracts of insurance, like other contracts,
are to be construed according to the sense and
meaning of the terms which the parties
themselves have used. If such terms are clear
and unambiguous, they must be taken and
understood in their plain, ordinary and popular
sense. Accordingly, in interpreting the exclusions
in an insurance contract, the terms used
specifying the excluded classes therein are to be
given their meaning as understood in common
speech. (Alpha Insurance and Surety Co. vs. Castor,
704 SCRA 550, September 2, 2013)
A contract of insurance is a contract of
adhesion. So, when the terms of the insurance
contract contain limitations on liability, courts
should construe them in such a way as to
preclude the insurer from non-compliance with
his obligation. It must be construed liberally in
favor of the insured and strictly against the
insurer in order to safeguard the latter‘s interest.
(Alpha Insurance and Surety Co. vs. Castor, 704
SCRA 550, September 2, 2013)
39
Mercantile Law
Q: Does the law on succession apply in
insurance?
A: Yes, but only when there is no designated
beneficiary or when the designation is void that
the laws of succession are applicable. (SSS vs.
Davac, et al., G.R. No. L-21642, July 30, 1966)
Q: What is the difference between the
materiality of information in relation to
concealment, in marine insurance with
other insurance policies?
A: In life insurance as in other non-life
insurance, the insured need not die of the
disease he had failed to disclose to the insurer;
it is sufficient that his non-disclosure misled the
insurer in forming his estimates of the risks of
the proposed insurance policy or in making
inquiries. (Sunlife Assurance Company of Canada vs.
Court of Appeals, G.R. No. 105135, June 22, 1995)
In marine insurance there are certain matters in
which the insurance is avoided only if the
information concealed is the cause of the loss.
Section 112 of the Insurance Code provides that
―a concealment in a marine insurance, in respect
to any of the following matters, does not vitiate
the entire contract, but merely exonerates the
insurer from a loss resulting from the risk
concealed:
(a) The national character of the insured;
(b) The liability of the thing insured to capture
and detention;
(c) The liability to seizure from breach of foreign
laws of trade;
(d) The want of necessary documents; and
(e) The use of false and simulated papers.‖
Q: When can an insurer exercise the right
to rescind?
A: An insurer can exercise its right to rescind an
insurance contract when the following conditions
are present, to wit:
1) the policy limits the use or condition of the
thing insured;
2) there is an alteration in said use or
condition;
Bar Operations C ommissions 39
 Purple Notes
Mercantile Law
3) the alteration is without the consent of the
insurer;
4) the alteration is made by means within the
insured's control; and
5) the alteration increases the risk of loss?
(Malayan Insurance Company Inc. vs. Pap Co.
Ltd., G.R. No. 200784, August 07, 2013)
Q: In exercising the right of subrogation,
is it necessary that the third person, to
whom the insurer is demanding
reimbursement after paying the proceeds
to the insured, be privy of the contract
between the insurer and the insured?
A: No. When the insurance company pays for
the loss, such payment operates as an equitable
assignment to the insurer of the property and all
remedies which the insured may have for the
recovery thereof. That right is not dependent
upon, nor does it grow out of any privity of
contract or upon written assignment of claim,
and payment to the insured makes the insurer
assignee in equity. (Malayan Insurance Co., Inc. vs.
Court of Appeals, G.R. No. L-36413, September 26,
1988)
Q: What are the exceptions to the rule on
subrogation?
A:
1. If the assured by his own act releases the
wrongdoer or third party liable for the loss
or damage, from liability, the insurer's right
of subrogation is defeated;
2. Where the insurer pays the assured the
value of the lost goods without notifying
the carrier who has in good faith settled the
assured's claim for loss, the settlement is
binding on both the assured and the
insurer, and the latter cannot bring an
action against the carrier on his right of
subrogation;
3. Where the insurer pays the assured for a
loss which is not a risk covered by the
policy, thereby effecting "voluntary
payment", the former has no right of
subrogation against the third party liable
for the loss. (Pan Malayan Insurance
Corporation vs. Court of Appeals, Fabie, G.R.
No. 81026, April 3, 1990)
40 Center for Legal Education and Research
2018 the
Q: X is an owner of a ship and insured
vessel with Y, an insurance company.
While the policy was in force, the
vessel was caught on fire. Y gave three
million pesos to X as loan but the loan
contract stipulated that the amount is
payable only to the extent of any
amount which X may recover from the
such loss. Y asked for refund of the
three million alleging that X made a
concealment. Y further contended that
the amount is a loan and not the
payment of insurance proceeds. X
argued that Y has the burden of
proving that there‟s breach of an
insurance policy provision.
1. Who has the burden of proving the
existence of breach of an insurance
policy provision?
2. Is the loan contract in the nature of
an advance claim for the insurance
proceed or is it really a loan.
A:
1. Y has the burden of proving the breach. In
our rules on evidence, X, the plaintiff,
necessarily has the burden of proof to show
proof of loss, and the coverage thereof, in
the subject insurance policy. However, in the
course of trial in a civil case, once plaintiff
makes out a prima facie case in his favor, the
duty or the burden of evidence shifts to
defendant to controvert plaintiff‘s prima facie
case, otherwise, a verdict must be returned
in favor of plaintiff.
2. Notwithstanding its designation, the tenor of
the "Loan and Trust Receipt" evidences that
the real nature of the transaction between
the parties was that the amount of
P3,000,000.00 was not intended as a loan
whereby X is obligated to pay Y, but rather,
the same was a partial payment or an
advance on the policy of the claims due to X.
The obligation of X to repay Y is highly
speculative and contingent, i.e., only in the
event and to the extent that any net recovery
is made by X from any person on account of
loss occasioned by the fire. The transaction,
therefore, was made to X, such that, if no
recovery from third parties is made, Y cannot
 Purple Notes
be repaid the amount. (Eastern Shipping Lines,
Inc. vs. Prudential Guarantee and Assurance, Inc.,
599 SCRA 565, September 11, 2009)
Q: X owns a property worth P1.2M. X
insured said property with A and B
with the amount of P500,000 and
P700,000 respectively, against fire. Is
there double insurance? If so, is this
kind of double insurance prohibited
under the law?
A: Yes, there is double insurance in the present
case, however the same is allowable under
the law.
Double insurance, under the Insurance Code,
requires the concurrence of the following
requisites: (1) that the person insured is the
same, (2) that the subject matter is the same,
(3) that the interest is the same, (4) that the
thing is insured for the same risk or peril and (5)
that there are 2 or more insurers. These are all
attendant in the present case.
Section 82 of the same Code, however, only
prohibits double insurance resulting in over
insurance. From the facts given, it is clear that
the subject property, while insured by 2 insurers
for the same risk and by the same person for
the same interest of the latter, was insured in an
amount equal to the value thereof. Hence, it
does not fall within the contemplation of said
prohibition.
Q: May a third person, a person sustaining
injury from the acts of the insured for
example, directly sue the insurer?
A: Generally, no. It is fundamental that
contracts take effect only between the
parties thereto, except in some specific
instances provided by law where the contract
contains some stipulation in favor of a third
person. Such stipulation is known as
stipulation pour autrui or a provision in favor
of a third person not a party to the contract.
Under this doctrine, a third person is allowed
to avail himself of a benefit granted to him by
the terms of the contract, provided that the
contracting parties have clearly and
deliberately conferred a favor upon such
41
Mercantile Law
person. Consequently, a third person not a
party to the contract has no action against
the parties thereto, and cannot generally
demand the enforcement of the same.
(Bonifacio Brothers, Inc. vs. Mora, G.R. No. L-
20853, May 29, 1967)
Q: Is the presentation of insurance
contract or policy between the insurer
and the consignee always indispensable
for the insurer to have cause of action
against a common carrier?
A: No, it is not always indispensable. Indeed,
jurisprudence has it that the marine
insurance policy needs to be presented in
evidence before the trial court or even
belatedly before the appellate court.
However, as in every general rule, there are
admitted exceptions. In Delsan Transport
Lines, Inc. vs. Court of Appeals, the Court
stated that the presentation of the insurance
policy was not fatal because the loss of the
cargo undoubtedly occurred while on board
the petitioner‘s vessel, unlike in Home
Insurance in which the cargo passed
through several stages with different parties
and it could not be determined when the
damage to the cargo occurred, such that the
insurer should be liable for it.
In said Delsan case, the Supreme Court
stated that ―the presentation in evidence of
the marine insurance policy is not
indispensable in this case before the insurer
may recover from the common carrier the
insured value of the lost cargo in the
exercise of its subrogatory right. The
subrogation receipt, by itself, is sufficient to
establish not only the relationship of herein
private respondent as insurer and Caltex, as
the assured shipper of the lost cargo of
industrial fuel oil, but also the amount paid
to settle the insurance claim. The right of
subrogation accrues simply upon payment
by the insurance company of the insurance
claim.‖ (Asian Terminals, Inc. vs. Malayan
Insurance, Co. Inc., G.R. No. 171406, April 4,
2011)
Bar Operations C ommissions 41
 Purple Notes
Mercantile Law
Q: The Insurance Code provides that every
domestic insurance company shall
invest its funds only in securities and
that such investments shall at all times
be maintained free from any lien or
encumbrance and that such securities
shall be deposited with and held by the
Commissioner for the faithful
performance by the depositing insurer
of all its obligations under its insurance
contracts.
May a single claimant ask for
garnishment of said security deposit or
contingency fund in case the insurance
company is unable to pay his claim?
A: No. The securities are held as a contingency
fund to answer for the claims against the
insurance company by all its policy holders
and their beneficiaries. This step is taken in
the event that the company becomes
insolvent or otherwise unable to satisfy the
claims against it. Thus, a single claimant may
not lay stake on the securities to the
exclusion of all others. The other parties may
have their own claims against the insurance
company under other insurance contracts it
has entered into. (Republic of the Philippines vs.
Del Monte Motors, Inc., G.R. No. 156956, October
9, 2006)
Q: May the insurer be ordered to pay the
proceeds of an insurance policy with
third party liability by issuing writ of
garnishment considering that the
insurer was not made a party in the civil
case and said insurer was not served
with summons?
A: Yes. Through service of the writ of
garnishment, the garnishee becomes a
"virtual party" to, or a "forced intervenor" in,
the case and the trial court thereby acquires
jurisdiction to bind him to compliance with
all orders and processes of the trial court
with a view to the complete satisfaction of
the judgment of the court.
There can be no doubt, therefore, that the
trial court actually acquired jurisdiction over
the insurer when it was served with the writ
42 Center for Legal Education and Research
2018liability
of garnishment of the third-party
insurance policy it had issued in favor of
judgment debtor, which is the insured. (Perla
Compania de Seguros vs. Ramolete, G.R. No. L-
60887, November 13, 1991)
II. PRE-NEED
(R. A. No 9829: Pre-Need Code of the
Philippines)
R. A. No 9829 or otherwise known as Pre-Need
Code of the Philippines, hereon PNC, became
effective on January 2, 2010. Pre-need plans are
previously governed by the Securities
Regulations Code.
A.Pre-need plan, defined
It is a contract, agreement, deed or plan for the
benefit of the planholders which provide for the
performance of a future service/s, payment of
monetary considerations or delivery of other
benefits at the time of actual need or agreed
maturity date, as specified therein, in exchange
for cash or installment amounts with or without
interest or insurance coverage and includes life,
pension, education, interment and other plans,
instruments, contracts or deeds as may in the
future be determined by the Commission. (Sec. 4
[b], PNC)
A pre-need plan covers a specific need of the
plan holder in the future, for which he invests to
cover such, saving ―pre-need‖ or before the
need.
Parties
1. Pre-need company;
2. Planholder;
3. Beneficiary.
Pre-need company - refers to any corporation
registered with the Commission and
authorized/licensed to sell or offer to sell pre-
need plans. The term "pre-need company" also
refers to schools, memorial chapels, banks,
nonbank financial institutions and other entities
which have also been authorized/licensed to sell
or offer to sell pre-need plans insofar as their
 Purple Notes
Mercantile Law
pre-need activities or business are concerned. 4. Audited financial statements;
(Sec. 4 [c], PNC) 5. Viability study with certification, under oath,
of pre-need actuary accredited by the
Planholder – refers to any natural or juridical Commission
person who purchases pre-need plans from a 6. Copy of the proposed pre-need plan; and
pre-need company for whom or for whose 7. Sample of sales materials.
beneficiaries‘ benefits are to be delivered, as
stipulated and guaranteed by the pre-need Such registration statements and sales materials
company. The term includes the assignee, required under this section shall contain the
transferee, and any successor-in-interest of the appropriate risk factors as may be determined
planholder. (Sec. 4 [d], PNC) by the Commission. (Sec. 15, PNC)
Beneficiary – refers to the person designated
C.LICENSING OF SALES COUNSELORS,
by the planholder as the recipient of the benefits
QUALIFICATIONS:
in the pre-need plan. (Sec. 4 [e], PNC)
1. The applicant must be of good moral
Other persons regulated by the character and must not have been
Commissioner convicted of any crime involving moral
turpitude;
1. Sales Counselors 2. The applicant has undergone a training
2. Actuary program approved by the Commission and
3. General agent such fact has been certified under oath by
4. Affiliate of, or affiliated with, a specified a duly authorized representative of a pre-
person need company; and
3. The applicant has passed a written
Basic Kinds of Pre-Need Plans examination administered by the.
Commission: Provided, That the
1. Life administration of the examination may be
2. Pension delegated to an independent organization
3. Educational under the supervision of the Commission.
4. Memorial of Interment
Such license shall automatically expire every
B.REGISTRATION OF PRE-NEED PLANS thirtieth (30th) day of June or such date of every
year as may be fixed by the Commission and
Within a period of forty-five (45) days after the may be accordingly renewed. (Sec. 23, PNC)
grant of a license to do business as a pre-need
company, and for every pre-need plan which the Interpretation
pre-need company intends to offer for sale to
the public, the pre-need company shall file with A pre-need plan is a contract of adhesion and
the Insurance Commission a registration the stipulations are generally unilaterally
statement for the sale of pre-need plans prepared and imposed by the company on a
pursuant to Pre-Need Code. (Sec. 14, PNC) take-it-or-leave-it basis. (Gaw vs. CA, G.R. No.
147748, April 19, 2006)
Requirements for registration of pre-need
Any doubt in the interpretation and
plans:
implementation of any provision in this code
shall be interpreted in favor of the rights and
1. Duly accomplished Registration Statements;
interest of the plan holder. (Sec. 3, PNC)
2. Board resolution authorizing the registration
of applicant‘s pre-need plans;
On advertising (Sec. 18, PNC): A cease and desist
3. Opinion of independent counsel on the
order against a company was held proper for an
legality of the issue;
advertisement of the pre-need plan products in
43
Bar Operations C ommissions 43
 Purple Notes
Mercantile Law
its website without securing a license. (Primanila
Plans, Inc. vs. SEC, G.R. 193791, Aug. 6, 2014)
D.DEFAULT AND TERMINATION
Lapsed plan, defined:
It refers to a plan that is delinquent in payment
of installments provided for in the contract, the
delinquency, of which extends beyond the grace
period provided for in the plan or contract. (Sec
4[o], PNC)
Grace period in case of default:
The pre-need company must provide in all
contracts issued to planholders a grace period of
at least sixty (60) days within which to pay
accrued installments, counted from the due date
of the first unpaid installment. (Sec. 23, PNC)
Reinstatement period:
It is a period given to the planholder for not less
than two (2) years from the lapse of the grace
period or a longer period as provided in the
contract within which to reinstate his plan. No
cancellation of plans shall be made by the issuer
during this period when reinstatement may be
effected. (Sec. 23, PNC)
Termination of the Plan
Termination may be done at the instance of
either the planholder or the pre-need company.
Planholder Pre-Need Company
 Matter of right  Always subject to
 Any time by giving the consent of the
written notice to the planholder (Aquino,
issuer Essentials
 Corresponding right Insurance Law,
to demand the 2018, p. 503)
termination value* of
the plan
Note: Termination value shall be pre-
determined by the actuary of the pre-need
company upon application for registration of the
pre-need plans with the Insurance Commission.
The same shall be disclosed in the contract. (Sec.
24, PNC; Sec. 26, Rule 6, IRR)
44 Center for Legal Education and Research
2018
Termination by the Pre-Need Company
Any offer by the pre-need company to terminate
the plan for consideration exceeding the
termination value of the same shall not require
the prior approval of the Insurance Commission
provided that the following concur:
1. Consideration shall be below the pre-need
reserves for the specific plan
2. Offer is accepted by the planholder
3. Offer shall not prejudice the planholders
who do not avail of such offer. (Sec. 26,
Implementing Rules and Regulations of RA 9829)
E.CLAIMS SETTLEMENT
The planholder is entitled to the benefits or
proceeds within the following period:
1. In the case of scheduled benefit plans, the
proceeds shall be paid immediately upon
maturity, unless made payable in
installments or as an annuity, which shall be
paid as they become due.
Refusal or failure to pay within 15 days from
maturity or due date will entitle the
beneficiary to collect interest (at the rate
twice the legal interest) on the proceeds of
the plan for the duration of the delay.
Exception: When the claim is fraudulent.
In the case of contingent benefit plans, pre-
need company shall pay the benefits 30 days
upon submission of all necessary documents.
(Sec. 26, PNC).
Delay in the payment
of
If found to have unreasonably denied or
withheld the claim, the pre-need company shall
be held liable to pay damages, consisting of:
1. Actual damages
2. Attorney‘s fees
3. Legal interest (Sec. 28, PNC)
In case of scheduled benefits plan, refusal or
failure to pay the claim within 15 days from
maturity or due date will entitle the beneficiary
to collect interest on the proceeds of the plan
 Purple Notes
for the duration of the delay at the rate twice
the legal interest unless such failure or refusal to
pay is based on the ground that the claim is
fraudulent. The planholder must have, however,
duly complied with the documentary
requirements of the pre-need company. (Sec. 26,
PNC).
Unfair Claims Settlement
No pre-need company shall refuse, without just
cause, to pay or settle claims arising under
coverages provided by its plans nor shall any
such company engage in unfair claim settlement
practices. (Sec. 25, PNC)
The following shall constitute unfair claims
settlement practices and may result in the
suspension or revocation of the company‘s
certificate of authority:
1. Knowingly misrepresenting to claimants the
pertinent facts of plan provisions relating to
coverages at issue
2. Failing to acknowledge with reasonable
promptness pertinent communications with
respect to claims
3. Failing to adopt and implement reasonable
standards for the prompt investigation of
claims
4. Failing to provide prompt, fair and equitable
settlement of claims submitted in which
liability has become reasonably clear
5. Compelling planholders to institute suits or
recover amounts due under its plan by
offering, without justifiable reason,
substantially less than the amounts
ultimately recovered in suits brought by
them
Any pre-need company found to have
committed unfair claims settlement practice shall
have its certificate of authority suspended or
revoked. (Sec. 25, PNC)
Note: In case the insolvency or bankruptcy is a
mere cover-up for fraud or illegality, the
planholder may institute the legal action directly
against the officers and/or controlling owners of
the said company. (Sec. 27, PNC)
45
Mercantile Law
Trust Fund
Fund set up from the planholders‘ payments to
pay for the cost of benefits and services,
termination values payable to planholders and
other costs necessary to ensure the delivery of
benefits or services to planholders as provided
for in the contracts. [Sec. 4 (j), PNC]
The trust fund is for the sole benefit of the
planholders and cannot be used to satisfy the
claims of other creditors of the insolvent pre-
need corporation. (Section 30, PNC) (SEC vs. Laigo,
GR No. 188639, September 2, 2015)
Exception: The only other claims which may be
satisfied by the Commission out of the trust
funds are the claims for trustees‘ fees which are
reasonable and can be shown to have been
incurred in the administration of the trust fund,
and taxes incurred under trust. (Section 52 [c],
PNC)
Trust Fund Surplus
The excess of the net asset value in the trust
fund over the pre-need reserve liability. The net
asset value is the Trust Fund balance at time of
valuation. The net asset value is also referred to
as Trust Fund Equity. (Circular Letter No. 2015-43
dated August 7, 2015: ―Guidelines on the
Management of the Trust Fund Surplus of Pre-Need
Companies‖)
Net surplus fund may be invested in instruments
enumerate under Section 34, PNC, without
having to comply with the prescribed limits in
terms of the amount of investment allowed in
particular investment instrument. Any
investment outlet not enumerated therein may
be allowed subject to the prior approval of the
Commission.
Rationale: These are already the surplus in the
trust fund, after retaining funds that are enough
to cover the preneed reserve liability of a
particular pre-need company.
Supervision was transferred from the DOH to
the Insurance Commission pursuant to EO No.
192 dated November 12, 2015.
Bar Operations C ommissions 45
 Purple Notes
Mercantile Law
III. TRANSPORTATION LAW
A. COMMON CARRIERS
Common carriers, defined:
Common carriers are persons, corporations,
firms or associations engaged in the business of
carrying or transporting passengers or goods or
both, by land, water, or air, for compensation,
offering their services to the public. (Art. 1732,
New Civil Code [NCC])
Requisites:
1. Must be a person, corporation, firm, or
association;
2. Engaged in the business of carrying or
transporting passengers or goods or both;
3. The carriage or transport must either be by
land, water, or air;
4. The service is for a fee;
5. The service is offered to the public. (Aquino
& Hernando, Essentials of Transportation and
Public Utilities Law, 2016, p. 22)
Test for determining whether one is a
common carrier:
The true test for a common carrier is 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.
The question must be determined by the
character of the business actually carried on by
the carrier, not by any secret intention or mental
reservation it may entertain or assert when
charged with the duties and obligations that the
law imposes. (Sps. Perena vs. Sps. Zarate, G.R. No.
157917, August 29, 2012)
Characteristics:
1. Article 1732 makes no distinction between
one whose principal business activity is the
carrying of persons or goods or both, and
one who does such carrying only as an
ancillary activity. (De Guzman vs. CA, G.R. No.
L-4782, December 22, 1988)
46 Center for Legal Education and Research
2018making
2. Article 1732 also carefully avoids
any distinction between a person or
enterprise offering transportation service on
a regular or scheduled basis and one
offering such service on an occasional,
episodic or unscheduled basis. (Ibid.)
3. Article 1732 does not distinguish between a
carrier offering its services to the ―general
public,‖ and one who offers services or
solicits its business only from a narrow
segment of the general population. (Ibid.)
4. A person or entity is a common carrier and
has the obligations of the common carrier
under the Civil Code even if he did not
secure a Certificate of Public Convenience.
(Ibid.)
5. The Civil Code makes no distinction as to
the means of transporting, as long as it is by
land, water or air. (First Philippine Industrial
Corporation vs. CA, G.R. no. 125948, December
29, 1998)
6. The Civil Code does not provide that the
transportation should be by motor vehicle.
(Ibid.)
7. A person or entity may be a common carrier
even if he has no fixed and publicly known
route, maintains no terminals, and issues no
tickets. (Asia Lighterage and Shipping, Inc. vs.
CA, G.R. No. 147246, August 19, 2003)
8. A person or entity need not be engaged in
the business of public transportation for the
provisions of the Civil Code on common
carriers to apply to them. (Fabre, Jr. vs. CA,
G.R. No. 111127, July 26, 1996)
9. The carrier can also be a common carrier
even if the operator does not own the
vehicle or vessel that he or she operates
(Cebu Salvage Corporation vs. Philippine. Home
Assurance Corp., G.R. No. 150403, January 25,
2007) (Aquino & Hernando, Essentials of
Transportation and Public Utilities Law, 2016, p.
14)
Governing Laws
Common carriers shall be governed by the
following laws:
1. Overland Transportation
a. New Civil Code – primary law
b. Code of Commerce – Suppletorily
 Purple Notes
2. Coastwise Shipping
a. New Civil Code– primary law
b. Code of Commerce – governs suppletorily
in the absence of Civil Code provisions
3. Carriage by Sea from Foreign Ports to
Philippine Ports
a. New Civil Code – primary law
b. Code of Commerce – all matters not
regulated by the Civil Code
c. Carriage of Goods by Sea Act (COGSA) –
suppletorily to the Civil Code
3. Carriage by Sea from Philippine Ports to
Foreign Ports
- The laws of the country to which the
goods are to be transported
4. Carriage by Sea by Foreign Vessels
sanctioned under R.A. No. 10668
- Cabbotage and co-loading of foreign
vessels that are covered by R.A. No.
10668 shall be governed by COGSA
5. Air Transportation
a. New Civil Code
b. Code of Commerce
c. For international carriage – Warsaw
Convention (Sundiang & Aquino, Reviewer on
Commercial Law, 2017, pp. 455-456)
 A Pipeline Operator is considered a
common carrier. (First Phil. Industrial Corp. vs.
CA, G.R. No. 125948, December 29, 1998)
Article 1732 of the Civil Code defines a "common
carrier" as "any person, corporation, firm or
association engaged in the business of carrying
or transporting passengers or goods or both, by
land, water, or air, for compensation, offering
their services to the public."
The definition of "common carriers" in the Civil
Code makes no distinction as to the means of
transporting, as long as it is by land, water or
air. It does not provide that the transportation
of the passengers or goods should be by motor
vehicle. In fact, in the United States, oil pipe line
operators are considered common carriers.
Furthermore, Article 86 of Petroleum Act of the
Philippines provides that ―a pipe line shall have
47
Mercantile Law
the preferential right to utilize installations for
the transportation of petroleum owned by him,
but is obligated to utilize the remaining
transportation capacity pro rata for the
transportation of such other petroleum as may
be offered by others for transport, and to charge
without discrimination such rates as may have
been approved by the Secretary of Agriculture
and Natural Resources." (Ibid.)
 A travel agency is NOT a common carrier.
It is not bound under the law to observe
extraordinary diligence in the performance of
its obligation.
A common carrier is defined under Article 1732
of the Civil Code as persons, corporations, firms
or associations engaged in the business of
carrying or transporting passengers or goods or
both, by land, water or air, for compensation,
offering their services to the public.
It is obvious from the above definition that a
travel agency is not an entity engaged in the
business of transporting either passengers or
goods and is therefore, neither a private nor a
common carrier. It did not undertake to
transport the passenger from one place to
another since its covenant with its customers is
simply to make travel arrangements in their
behalf. Its services as a travel agency include
procuring tickets and facilitating travel permits
or visas as well as booking customers for tours.
The object of the passenger‘s contractual
relation with the travel agency is the latter‘s
service of arranging and facilitating petitioner‘s
booking, ticketing and accommodation in the
package tour. In contrast, the object of a
contract of carriage is the transportation of
passengers or goods. It is in this sense that the
contract between the parties was an ordinary
one for services and not one of carriage .
(Crisostomo vs. CA, G.R. No. 138334, August 25,
2003)
Bar Operations C ommissions 47
 Purple Notes
Mercantile Law
Common carrier and private carrier, 2018 First
Chartering and Shipping N.V. vs. Philippine
distinguished: Insurance Co., Inc., G.R. No. 143133, June 5, 2002)

Common Carrier Private Carrier It is that extreme measure of care and caution
As to passengers which persons of unusual prudence and
Holds himself out for all Contracts with particular circumspection observe for securing and
people indiscriminately. individuals or groups preserving their own property or rights.
only. (Loadmasters Customs Services, Inc., vs. Glodel
As to required diligence Brokerage Corp., G.R. No. 179446, January 10, 2011)
Requires extraordinary Requires only ordinary Extraordinary diligence in carriage of
diligence. diligence. goods:
As to state regulation
Subject to regulation. Not subject to regulation. The extraordinary diligence over the goods
As to stipulation on limiting liability tendered for the shipment requires the common
Parties may not agree Parties may agree on
carrier to know and follow the required
on limiting the carrier‘s limiting the carrier‘s
liability except when liability, provided not
precaution for avoiding damage to, or
provided by law. contrary to law, morals or destruction of the goods entrusted to it for sale,
good customs. carriage and delivery. It requires common
Presumption as to fault and negligence carriers to render service with the greatest skill
Presumption of fault or No fault or negligence is and foresight and to ―use all reasonable means
negligence applies. presumed. to ascertain the nature and characteristic of
As to laws applicable on damages goods tendered for shipment, and to exercise
Law on common Law on obligations and due care in handling the stowage, including such
carriers. contracts. methods as their nature requires.‖ (Calvo vs.
(Sundiang & Aquino, Reviewer on Commercial Law, UPCB, G.R. No. 148496, March 19, 2002)
2017, p. 453)
Extraordinary diligence in carriage of
DILIGENCE REQUIRED OF COMMON passenger:
CARRIERS
A common carrier is bound to carry the
Common carriers, from the nature of their passenger as far as human care and foresight
business and for reasons of public policy, are can provide, using the utmost diligence of very
bound to observe extraordinary diligence on cautious persons, with a due regard for all
the vigilance over goods and for the safety of circumstances. (Art. 1755, NCC)
the passengers transported by them according
to all the circumstances of each case. (Art. 1733, Due diligence in the selection and
NCC)
supervision of employees:
Extraordinary diligence, defined:
In case of loss of effects of passengers or death
or injuries to passengers, the liability of the
Common carriers, from the nature of their
common carrier does NOT cease upon proof that
business and for reasons of public policy, are
they exercised all the diligence of a good father
bound to observe extraordinary diligence and
of the family in the selection and supervision of
vigilance with respect to the safety of the goods
their employees. (Art. 1759, NCC).
and the passengers they transport. Thus,
common carriers are required to render service
with the greatest skill and foresight and to use LIABILITIES OF COMMON CARRIERS:
all reasonable means to ascertain the nature
and characteristics of the goods tendered for 1. Culpa contractual – In the contract of
shipment, and to exercise due care in the carriage of passengers, it is the obligation of
handling and stowage, including such methods carrier to convey the passengers safely to
as their nature requires.‖ (Belgian Overseas the point of destination. In case the

48 Center for Legal Education and Research

 Purple Notes
passenger is not brought safely thereto,
there will be a breach of contract.
2. Culpa aquiliana – Damage caused to
another due to negligence.
3. Culpa criminal – The driver‘s act may
amount to a crime. (Villanueva, Commercial
Law Reviewer)
Registered Owner Rule
Under this rule, the person who is the registered
owner of a vehicle is liable for any damage
caused by the negligent operation of the vehicle
although the same was already sold or conveyed
to another person at the time of the accident.
(Filcar Transport Services vs. Espinas, G.R. No.
174156, June 20, 2012)
Exception: When the vehicle was stolen from a
garage without the owner‘s knowledge and
consent. (Duavit vs. Court of Appeals, GR 82318,
May 18, 1989)
CLASSIFICATION OF TRANSPORT
NETWORK VEHICLE SERVICES AND
TRANSPORT NETWORK COMPANIES
In recognition of technological innovations which
allowed for the proliferation of new ways of
delivering and offering public transportation, the
Department of Transportation and
Communications (DOTC) (now Department of
Transportation), through Department Order
(DO) Nos. 2015-11 dated May 8, 2015 and
2017-11 dated June 19, 2017, created two (2)
new classifications, namely:
1. Transport Network Companies (TNC); and
2. Transportation Network Vehicle Service
(TNVS).
Transport Network Company, defined:
It refers to a person or entity that provides pre-
arranged transportation services for
compensation using an internet-based
technology application or digital platform
technology to connect passengers with drivers
using their personal vehicles. (Sec. 1, DOTr
Department Order No. 2018-013)
49
Mercantile Law
Transportation Network Vehicle Service,
defined:
It refers to a TNC-accredited private vehicle
owner, which is a common carrier, using the
internet-based technology application or digital
platform technology transporting passengers
from one point to another, for compensation.
(Sec. 2, DOTr Department Order No. 2018-013)
TNVS and TNC: Classified as Common
Carrier
Irrespective of the application's limited market
scope, i.e., Angkas users, it remains that, on the
one hand, these bikers offer transportation
services to wiling public consumers, and on the
other hand, these services may be readily
accessed by anyone who chooses to download
the Angkas app. While DBDOYC further claims
that another distinguishing factor of its business
is that "its drivers may refuse at any time any
legitimate demand for service by simply not
going online or not logging in to the online
platform," still when they do so log-in, they
make their services publicly available. In other
words, when they put themselves online, their
services are bound for indiscriminate public
consumption. Again, as also mentioned above,
Article 1732 defining a common carrier "carefully
avoids making any distinction between a person
or enterprise offering transportation service on a
regular or scheduled basis and one offering such
service on an occasional, episodic or
unscheduled basis." This doctrinal statement
seems to be the apt response to DBDOYC's
assertion.
As the Court observes, the genius behind the
Angkas app is that it removes the inconvenience
of having to physically hail for public
transportation by creating a virtual system
wherein practically the same activity may now
be done at the tip of one's fingers. As such, the
fact that its drivers are not physically hailed on
the street does not automatically render Angkas-
accredited drivers as private carriers. (LTFRB vs.
Valenzuela, G.R. No. 242860, March 11, 2019)
Due to the established roles of TNCs and TNVS
in providing transport services to the public,
they should be treated as engaged in the
Bar Operations C ommissions 49
 Purple Notes
Mercantile Law
operation of a public utility. TNCs and TNVS are
considered as engaged in the business of
carrying or transporting passengers for
compensation and offering their services to the
public. As such, the operation of TNCs and TNVS
is imbued with public interest and must submit
to the full regulation by the State. (DOTr
Department Order No. 2018-013).
B. VIGILANCE OVER GOODS
Common carriers are responsible for the loss,
destruction or deterioration of the goods. (Art.
1734, NCC)
Presumption of negligence under the 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. The court need not make an express
finding of fault or negligence of common
carriers, the law imposes to common carriers
strict liability, as long it is shown that: (1) there
exists a contract between the passenger or the
shipper of the goods to be carried and the
common carrier; and (2) the loss, deterioration,
injury or death took place during the existence
of the contract. (Arts. 1735 and 1756, NCC)
Mere proof of delivery of the goods in good
order to a common carrier and of their arrival in
bad order at their destination (or failure to
transport the passenger safely) constitutes a
prima facie case of fault or negligence against
the carrier. If no adequate explanation is given
as to how the deterioration, the loss or the
destruction of the goods happened, the
transporter shall be held responsible (Belgian
Overseas Chartering and Shipping, N.V. vs. Phil. First
Ins. co., G.R. No. 143133, June 5, 2002).
The presumption also makes the doctrine of
proximate cause inapplicable to contract of
carriage. The presumption arises upon the
happening of the accident. (Calalas vs. CA, G.R.
No. 122039, May 31, 2000; Sundiang & Aquino,
Reviewer on Commercial Law, 2017, pp. 456 to 457)
50 Center for Legal Education and Research
Basic Obligations of the Carrier:2018
1. To accept passengers and goods without
discrimination;
2. To seasonably deliver the goods or bring the
passenger to the destination;
3. To deliver the goods or bring the passenger
to the proper place or destination;
4. To deliver the goods to the proper person;
and
5. To exercise extraordinary diligence in the
performance of its duties. (Aquino &
Hernando, Essential on Transportation and Public
Utilities Law, 2016, p. 56)
EXEMPTING CAUSES
Common carriers are responsible for the loss,
destruction, or deterioration of the goods, unless
the same is due to any of the following causes
only:
1. Flood, storm, earthquake, lightning or other
natural disaster or calamity;
2. Act of public enemy in war, whether
international or civil;
3. Act or omission of the shipper or the owner
of the goods;
4. The character of the goods or defects in the
packing or in the containers;
5. Order or act of competent authority; (Art.
1734, NCC);
6. Exercise of extraordinary diligence. (Arts.
1735 and 1755, NCC)
Requisites in raising the defense of
fortuitous event:
1. It must be independent of human will;
2. It must be impossible to foresee the event
which constitutes the ―caso fortuito‖, or if it
can be foreseen, it must be impossible to
avoid;
3. The occurrence must be such as to render it
impossible for the debtor (carrier) to fulfill
his obligations in a normal manner; and
4. The obligor (carrier) must be free from any
participation in the aggravation of the injury
resulting to the creditor. (Mindex Resources
Development vs. Morillo, G.R. No. 138123, March
12, 2002)
 Purple Notes
Fortuitous event, to be a valid defense, must be
established to be the proximate cause of the
loss (Asia Lighterage and Shipping, Inc. vs. CA G.R.
No. 147246, August 19, 2003).
Requisites in raising the defense of natural
disaster and public enemy:
In order that the common carrier may be
exempted from responsibility, the natural
disaster must have been the proximate and only
cause of the loss. However, the common carrier
must exercise due diligence to prevent or
minimize loss before, during and after the
occurrence of flood, storm or other natural
disaster in order that the common carrier may
be exempted from liability for the loss,
destruction, or deterioration of the goods. The
same duty is incumbent upon the common
carrier in case of an act of the public enemy
referred to in Article 1734, No. 2. (Art. 1739, NCC)
Note: The act of the public enemy must be the
proximate and only cause of the loss. (Aquino &
Hernando, Essentials of Transportation and Public
Utilities Law, 2016, pp. 210 to 211)
Requisites in raising the defense of
improper packing:
1. Even if the loss, destruction, or deterioration
of the goods should be caused by the
character of the goods, or the faulty nature
of the packing or of the containers, the
common carrier must exercise due diligence
to forestall or lessen the loss. (Art. 1742,
NCC)
2. Carrier must had not known the fact of
improper packing of goods upon ordinary
observation to be relieved of liability;
3. If the defect is existing upon acceptance,
the carrier must receive the goods under
protest and must be duly noted in the bill of
lading.
If the improper packing is known to the carrier
or his employees or is apparent upon ordinary
observation, but he nevertheless accepts the
same without protest or exception
notwithstanding such condition, he is not
relieved of liability for the resulting damage .
(Calvo vs. UPCB, G.R. No. 148496, March 19, 2002)
51
Mercantile Law
Even if the fact of improper packing was known
to the carrier or its crew or was apparent upon
ordinary observation, it is not relieved of liability
for loss or injury resulting therefrom, once it
accepts the goods notwithstanding such
condition. (Belgian Overseas Chartering and
Shipping N.V. vs. Philippine First Insurance Co., Inc.,
G.R. No. 143133, June 5, 2002)
Requisite in raising the defense of order
by public authority:
If through the order of public authority, the
goods are seized or destroyed, the common
carrier is not responsible, provided said public
authority had power to issue the order. (Art.
1743, NCC)
Absence of Delay:
Common carriers are not obligated by law to
carry and to deliver merchandise, and persons
are not vested with the right to prompt delivery,
unless such common carriers previously assume
the obligation to deliver at a given date or time.
(Mendoza vs. Philippine Air Lines, Inc., G.R. No. L-
3678, February 29, 1952)
The oft-repeated rule regarding a carrier's
liability for delay is that in the absence of a
special contract, a carrier is not an insurer
against delay in transportation of goods. When a
common carrier undertakes to convey goods,
the law implies a contract that they shall be
delivered at destination within a reasonable
time, in the absence, of any agreement as to
the time of delivery. But where a carrier has
made an express contract to transport and
deliver properly 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. This result logically follows from the well-
settled rule that where the law creates a duty or
charge, and the party is disabled from
performing it without any fault in himself, and
has no remedy over, then the law will excuse
him, but where the party by his own contract
creates a duty or charge upon himself, he is
bound to make it good notwithstanding any
accident or delay by inevitable necessity
because he might have provided against it by
contract. Whether or not there has been such an
Bar Operations C ommissions 51
 Purple Notes
Mercantile Law
undertaking on the part of the carrier is to be
determined from the circumstances surrounding
the case and by application of the ordinary rules
for the interpretation of contracts. (Saludo, Jr. vs.
CA, G.R. No. 95536, March 23, 1992)
A common carrier undertaking to transport
property has the implicit duty to carry and
deliver it within reasonable time, absent any
particular stipulation regarding time of delivery,
and to guard against delay. In case of any
unreasonable delay, the carrier shall be liable for
damages immediately and proximately resulting
from such neglect of duty. (Saludo, Jr. vs. CA, G.R.
No. 95536, March 23, 1992)
Consequences of a common carrier‘s delay in
the transportation of goods:
1. the carrier is still liable even if natural
disaster is caused the damage;
2. the stipulation limiting the liability of the
carrier is inoperative;
3. the carrier is liable for the damages caused
by the delay; and
4. the consignee may exercise his right to
abandon under Article 371 of the Code of
Commerce. (Aquino & Hernando, of
Transportation and Public Utilities Law, 2016, p.
66)
Due Diligence to Prevent or Lessen the
Loss
In order that the common carrier may be
exempted from responsibility, the natural
disaster must have been the proximate and only
cause of the loss. However, the common carrier
must exercise due diligence to prevent or
minimize loss before, during and after the
occurrence of flood, storm or other natural
disaster in order that the common carrier may
be exempted from liability for the loss,
destruction, or deterioration of the goods. (Art.
1739, NCC)
Even if the loss, destruction, or deterioration of
the goods should be caused by the character of
the goods, or the faulty nature of the packing or
of the containers, the common carrier must
exercise due diligence to forestall or lessen the
loss. (Art. 1742, NCC)
52 Center for Legal Education and Research
CONTRIBUTORY NEGLIGENCE 2018
If the shipper or owner merely contributed to
the loss, destruction or deterioration of the
goods, the proximate cause thereof being the
negligence of the common carrier, the latter
shall be liable in damages, which however, shall
be equitably reduced. (Art. 1741, NCC)
Contributory negligence is conduct on the part
of the injured party, contributing as a legal
cause to the harm he has suffered, which falls
below the standard which he is required to
conform for his own protection. It is an act or
omission amounting to want of ordinary care on
the part of the person injured which, concurring
with the defendant‘s negligence, is the
proximate cause of the injury. (National Power
Corp. vs. Heirs of Casionan, G.R. No. 165969,
November 27, 2008)
However, the carrier may be allowed to prove
that the only cause of the loss of the goods is
any of the following acts of the shipper:
1. failure of the shipper to disclose the nature
of the goods;
2. improper marking or direction as to
destination;
3. improper loading when he assumed such
responsibility. (Aquino & Hernando, of
Transportation and Public Utilities Law, 2016, p.
228)
Contributory negligence on the part of the
injured party is NOT a defense that will excuse
the carrier from liability. It will only mitigate
such liability. (Del Prado vs. Manila Electric Co., G.R.
No. L-29462, March 7, 1929)
Doctrine of Last Clear Chance
Under the doctrine of last clear chance, when
both parties involved in the accident were both
negligent, the negligence of the party will not be
considered the proximate cause if the other
party has the last clear chance of avoiding the
injury. Thus, if the plaintiff has the last clear
chance of avoiding the injury, the defendant
may no longer be held liable.
 Purple Notes
Note: The doctrine CANNOT be applied against
a passenger. In the case of Philippine Rabbit
Bus Lines, Inc. vs. IAC, et al., where it was the
Supreme Court citing the landmark decision in
Anuran, et al., vs. Buno, et al., ruled that the
principle of ―last clear chance‖ applies in a suit
between the owners and drivers of colliding
vehicles. It does not arise where a passenger
demands responsibility from the carrier to
enforce its contractual obligations. For it would
be inequitable to exempt the negligent driver of
the jeepney and its owners on the ground that
the other driver was likewise guilty of
negligence. (Aquino & Hernando, Essentials of
Transportation and Public Utilities Law, 2016, pp. 230
to 231)
DURATION OF LIABILITY OF COMMON
CARRIER:
1. Upon delivery of goods to common carrier;
2. During temporary unloading or storing in
transit;
3. Until delivery to the consignee or person who
has the right to receive them.
Delivery of Goods to Common Carrier
Responsibility of common carrier upon
delivery of goods:
The extraordinary responsibility of the common
carrier lasts from the time the goods are
unconditionally placed in the possession of, and
received by the carrier for transportation. (Art.
1736, NCC)
There is delivery to the 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. Where such a delivery has thus been
accepted by the carrier, the liability of the
common carrier commences eo instanti. (Saludo,
Jr. vs. CA, G.R. No. 95536, March 23, 1992)
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Mercantile Law
Actual or Constructive Delivery
Responsibility of common carrier ends
upon actual or constructive delivery to
consignee or person who has the right to
receive the goods:
The extraordinary responsibility of the common
carrier lasts from the time the goods are
unconditionally placed in the possession of, and
received by the carrier for transportation until
the same are delivered, actually or
constructively, by the carrier to the consignee,
or to the person who has a right to receive
them, without prejudice to the provisions of
Article 1738. (Art. 1736, NCC)
There is actual delivery in contracts for the
transport of goods 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. (Westwind Shipping
Corp. vs. UCPB General Insurance Co., Inc., G.R. Nos.
200289 and 200314, November 25, 2013)
Temporary Unloading or Storage
Common carrier‟s observance of
extraordinary diligence during temporary
unloading or storing in transit, or storing
in a warehouse:
The 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, unless
the shipper or owner has made use of the right
of stoppage in transit. (Art. 1737, NCC)
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 (Art. 1738, NCC).
General Rule: The common carrier‘s duty to
observe extraordinary diligence in the vigilance
over the goods remains in full force and effect
even when they are temporarily unloaded or
stored in transit, or when the goods are stored
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 Purple Notes
Mercantile Law
in a warehouse of the carrier at the place of
destination. (Art. 1737 – 1738, NCC)
Exception: The common carrier is not bound to
exercise such diligence when the shipper or
owner has made use of the right of stoppage in
transit. (Art. 1737, NCC)
Right of stoppage in transit
The right of stoppage in transit is the right of an
unpaid seller to resume possession of the goods
at any time while they are in transit, and he will
then become entitled to the same rights in
regard to the goods as he would have had if he
had never parted with the possession. (Art. 1530,
NCC)
Note: Such extraordinary liability continues 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. (Nedlloyd Lijnen B.V. Rotterdam vs. Glow
Laks Enterprises, Ltd., G.R. No. 156330, November
19, 2014)
STIPULATION FOR LIMITATION OF
LIABILITY
Requirements to be valid:
A stipulation between the common carrier and
the 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; and
3. Reasonable, just and not contrary to public
policy. (Art. 1744, NCC)
Void Stipulations:
Any of the following or similar stipulations shall
be considered unreasonable, unjust and
contrary to public policy:
1. That the goods are transported at the risk of
the owner or shipper;
54 Center for Legal Education and Research
2. That the common carrier will not 2018be liable
for any loss, destruction, or deterioration of
the goods;
3. That the common carriers need not observe
any diligence in the custody of the goods;
4. That the common carrier shall exercise a
degree of diligence less than that of a good
father of a family, or of a man of ordinary
prudence in the vigilance over the movables
transported;
5. That the common carrier shall not be
responsible for the acts or omission of his or
its employees;
6. That the 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;
7. That the 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.
(Art. 1745, NCC)
Limitation of Liability to Fixed Amount:
A contract fixing the sum that may be recovered
by the owner or shipper for the loss,
destruction, or deterioration of the goods is
valid, if it is reasonable and just under the
circumstances, and has been fairly and freely
agreed upon. (Art. 1750, NCC)
Limitation of Liability in Absence of
Declaration of Greater Value:
A stipulation that the common carrier's liability is
limited to the value of the goods appearing in
the bill of lading, unless the shipper or owner
declares a greater value, is binding. (Art. 1749,
NCC)
Note: If the common carrier, without just
cause, delays the transportation of goods or
changes the stipulated route, the contract
limiting the common carrier‘s liability cannot be
availed of in case of the loss, destruction, or
deterioration of the goods. (Art. 1747, NCC)
 Purple Notes
LIABILITY FOR BAGGAGE OF PASSENGERS
Checked-in Baggage
This refers to baggage delivered to the custody
of the common carrier and received by him, to
be carried in the same manner as other goods
being transported by him. As the common
carrier has custody of such baggage and are
carried like any other goods, the provisions on
carriage of goods shall apply (extraordinary
diligence in the vigilance over the goods). (Art.
1735, NCC)
Extraordinary responsibility of common
carrier on checked-in baggage:
From the very nature of their business and by
reasons of public policy, common carriers are
bound to observe extraordinary diligence in the
vigilance over the goods transported by them.
This extraordinary responsibility lasts from the
time the goods are unconditionally placed in the
possession of and received by the carrier until
they are delivered actually or constructively to
the consignee or person who has the right to
receive them. The only exceptions are those
causes provided under Article 1734, Civil Code
of the Philippines. (Sabena Belgian World Airlines
vs. CA, G.R. No. 104685, March 14, 1996)
Liability of common carrier even when the
baggage is not declared and charges are
not paid:
A common carrier is liable for the loss of
baggage although not declared and the charges
not paid, if it accepted them for transportation.
Where the common carrier accepted its
passenger's baggage for transportation and
even had it placed in the vehicle by its own
employee, its failure to collect the freight charge
is the common carrier's own lookout. It is
responsible for the consequent loss of the
baggage. (Sarkies Tours Philippines vs. CA, G.R. No.
108897 October 2, 1997)
Baggage in Possession of Passengers
Applicability of Articles 1733 to 1753 to
passenger‟s baggage which is not in his
personal custody or in that of the
employee:
55
Mercantile Law
The provisions of Articles 1733 to 1753 shall
apply to the passenger's baggage which is not in
his personal custody or in that of his employee.
(Art. 1754, NCC)
Applicability of Articles 1998, 2000 to
2003 with regard to other baggage:
As to other baggage, the rules in Articles 1998
and 2000 to 2003 concerning the responsibility
of hotel-keepers shall be applicable (Art. 1754,
NCC).
The baggage of passengers in their personal
custody or in that of their employees while being
transported shall be regarded as necessary
deposits. The common carrier shall be
responsible for such baggage as depositaries,
provided that:
1. Notice was given to them or to their
employees, of the baggage brought by their
passengers; and
2. That the passengers take the precautions
which said common carriers advised relative
to the care and vigilance of their baggage.
(Art. 1998, NCC)
The common carrier is NOT liable if the loss of
the baggage in the personal custody of the
passenger is due to the acts of the passengers,
his family, servants or visitors, or if the loss
arises from the character of the baggage. (Art.
2002, NCC)
Articles 1998, 2000 to 2003:
The deposit of effects made by travelers in
hotels or inns shall also be regarded as
necessary. The keepers of hotels or inns shall be
responsible for them as depositaries, provided
that notice was given to them, or to their
employees, of the
effects brought by the guests and that, on the
part of the latter, they take the precautions
which said hotel-keepers or their substitutes
advised relative to the care and vigilance of their
effects. (Art. 1998, NCC)
The responsibility referred to in the two
preceding articles shall include the loss of, or
injury to the personal property of the guests
caused by the servants or employees of the
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 Purple Notes
Mercantile Law
keepers of hotels or inns as well as strangers;
but not that which may proceed from any force
majeure. The fact that travellers are constrained
to rely on the vigilance of the keeper of the
hotels or inns shall be considered in determining
the degree of care required of him. (Art. 2000,
NCC)
The act of a thief or robber, who has entered
the hotel is not deemed force majeure, unless it
is done with the use of arms or through an
irresistible force. (Art. 2001, NCC)
The hotel-keeper is not liable for compensation
if the loss is due to the acts of the guest, his
family, servants or visitors, or if the loss arises
from the character of the things brought into the
hotel. (Art. 2002, NCC)
The hotel-keeper cannot free himself from
responsibility by posting notices to the effect
that he is not liable for the articles brought by
the guest. Any stipulation between the hotel-
keeper and the guest whereby the responsibility
of the former as set forth in Articles 1998 to
2001 is suppressed or diminished shall be void.
(Art. 2003, NCC)
C. SAFETY OF PASSENGERS
Duty to observe utmost diligence
A common carrier is bound to carry the
passengers safely as far as human care and
foresight can provide, using the utmost diligence
of very cautious person with due regard for all
circumstances. (Art. 1755, NCC)
The extraordinary diligence required of common
carriers is calculated to protect the passengers
from the tragic mishaps that frequently occur in
connection with rapid modern transportation.
The high standard of care is imperatively
demanded by the precariousness of human life
and by the consideration that every person must
in every way be safeguarded against all injuries.
The principles governing the liability of a
common carrier are:
1. The liability of a carrier is Contractual and
arises upon breach of its obligation;
56 Center for Legal Education and Research
2018 with
2. A carrier is obliged to carry passengers
Utmost diligence of a very cautious
person;
3. A carrier is Presumed to be at fault or to
have acted negligently in case of death
of, or injury to, passengers;
4. A carrier is Not an insurer against all
risk of travel. (Isaac vs. A.L. Ammen
Transportation, G.R. No. L-9671, August 23,
1957)
The contract of air carriage is a peculiar one.
Being imbued with public interest, the law
requires common carriers to carry the
passengers safely as far as human care and
foresight can provide, using the utmost diligence
of a very cautious person, with due regard for
all circumstances. If the cause of non-fulfillment
of the contract is due to a fortuitous event, it
has to be the sole and only cause. (PAL vs. CA,
G.R. No. L-82619, September 15, 1993)
Valid Stipulations (Carriage of Passengers)
A stipulation limiting liability for negligence is
valid, but not for willful acts or gross negligence,
when a passenger is carried gratuitously. (Art.
1758, NCC)
VOID STIPULATIONS (Carriage of
Passengers)
1. Absolutely exempting the common carrier
from liability for the passenger's death or
injuries;
2. Lessening the extraordinary diligence
required by law to the diligence of a good
father of a family;
3. Dispensing or reducing the responsibility of
a common carrier for the safety of
passengers as required in Articles 1733 and
1755, by the posting of notices, by
statements on tickets, or otherwise; (Art.
1757, NCC)
4. Limiting the common carrier's liability for
willful acts or gross negligence, when a
passenger is carried gratuitously.;
Note: The reduction of fare does not justify any
limitation of the common carrier's liability. (Art.
1758, NCC).
 Purple Notes
DURATION OF LIABILITY
Waiting for carrier or boarding of carrier:
The carrier is bound to exercise utmost diligence
with respect to passengers the moment the
person who purchases the ticket or a token from
the carrier presents himself at the proper place
and in a proper manner to be transported. Such
person must have a bona fide intention to use
the facilities of the carrier, possess sufficient
fare with which to pay for his passage, and
present himself to the carrier for transportation
in the place and manner provided. If he does
not do so, he will not be considered a passenger
and the carrier does not owe him extraordinary
diligence. (Jesusa Vda. de Nueca, et al. vs. The
Manila Railroad Company, CA,-G.R. No. 31731,
January 30, 1968)
Doctrine of Continuing Offer
It is the duty of the carriers of passengers 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. (Dangwa Transportation Co., Inc. vs CA, G.R. No.
95582, October 7, 1991)
Duty to exercise utmost diligence in carriage of
passengers begin if by TRAIN:
1. Purchase the ticket from the carrier;
2. Presents himself at the proper manner; and
3. Bona fide intention to ride the coach
Such duty of a common carrier to provide safety
to its passengers so 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. (LRTA vs. Navidad, G.R. No. 145804,
February 6, 2003)
Duty to exercise utmost diligence in carriage of
passengers begin if by SEA:
The duty of the carrier commences as soon as a
person with bona fide intention of taking
57
Mercantile Law
passage places himself in the employees and is
accepted as a passenger. (Aquino & Hernando,
Essentials of Transportation and Public Utilities Law,
2016, p. 97)
Duty to exercise utmost diligence in carriage of
passengers begin if by LAND:
The common carrier is duty bound to stop their
conveyances for reasonable length of time in
order to afford passengers and 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. (Continuing
Offer Doctrine) (Aquino & Hernando, Essentials of
Transportation and Public Utilities Law, 2016, p. 97)
Arrival at Destination
As a rule, the relation of carrier and passenger
does not cease at the moment the passenger
alights from the carrier's vehicle at a place
selected by the carrier at the point of
destination, but continues until the passenger
has had a reasonable time or a reasonable
opportunity to leave the carrier's premises. And,
what is a reasonable time or a reasonable delay
within this rule is to be determined from all the
circumstances. Thus, a person who, after
alighting from a train, walks along the station
platform is considered still a passenger. (La
Mallorca vs. CA, G.R. No. L-20761, July 27, 1966)
LIABILITY FOR ACTS OF OTHERS
Employees. Common carriers are liable for the
deaths 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.
(Art. 1759, par. 1, NCC)
This liability does not cease upon proof that
they exercised all the diligence of a good father
of the family in the selection and supervision of
their employees. (Art. 1759, par. 2, NCC)
Other passengers and strangers. A common
carrier is responsible for injuries suffered by a
passenger on account of the willful acts or
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 Purple Notes
Mercantile Law
negligence of the passengers or of strangers, if
the common carrier‘s employees through the
exercise of diligence of a good father of the
family could have prevented or stopped the act
or omission. (Art. 1763, NCC)
Although the employer was not inside the
vehicle at the time of the collision, he is still
solidarily liable with the employee. (Sps.
Hernandez vs. Sps. Dolor, G.R. No. 160286, July 30,
2004)
It is the carrier‘s strict obligation to select its
drivers and similar employees with due regard
not only to their technical competence and
physical ability, but also, no less important, to
their total personality, including their patterns of
behavior, moral fibers, and social attitude.
(Maranan vs. Perez, G.R. No. L-22272, June 26, 1967)
The rule of ordinary care and prudence is not so
exacting as to require one charged with its
exercise to take doubtful or unreasonable
precautions to guard against unlawful acts of
strangers. The carrier is not charged with the
duty of providing or maintaining vehicles as to
absolutely prevent any and all injuries to
passengers. Where the carrier uses cars of the
most approved type, in general use by others
engaged in the same occupation, and exercises
a high degree of care in maintaining them in
suitable condition, the carrier cannot be charged
with negligence in this respect. (Pilapil vs. CA,
G.R. No. 52159, December 22, 1989)
LIABILITY FOR DELAY IN
COMMENCEMENT OF VOYAGE
A delayed voyage refers to a voyage involving
late departure of the ship from its port of origin
or late arrival thereof to its port of destination
for a period of time not exceeding twenty-four
(24) hours from the Certificate of Public
Convenience (CPC) - authorized time of
departure or arrival of the ship.
MARINA Circular No. 2018-07 dated
September 20, 2018 – clearly orders to intensify
and ensure that protection of the public against
inefficient shipping and/or transport services and
in order to clearly establish their rights against
operators in cases of cancelled, delayed, or
58 Center for Legal Education and Research
unfinished/uncompleted voyages. It 2018
serves to
provide a clear outline of the rights of the
passengers and the obligation of the operators
as well as the remedies available to the former
in case of violations and/or non-compliance
therewith by the latter. Hence, in case of
delayed voyages, the operator/carrier
shall become liable to the passengers.
LIABILITY FOR DEFECTS IN EQUIPMENT
AND FACILITIES
A common carrier is bound to carry the
passengers safely as far as human care and
foresight can provide, using utmost diligence of
very cautious persons, with a due regard for all
circumstances. It is clear that the carrier is not
an insurer of the passengers' safety. His liability
rests upon negligence, his failure to exercise the
"utmost" degree of diligence that the law
requires, and in case of a passenger's death or
injury the carrier bears the burden of satisfying
the court that he has duly discharged the duty
of prudence required. The rule on the liability of
carriers for defects of equipment is thus
expressed: ―The preponderance of authority is in
favor of the doctrine that a passenger is entitled
to recover damages from a carrier for an injury
resulting from a defect in an appliance
purchased from a manufacturer, whenever it
appears that the defect would have been
discovered by the carrier if it had exercised the
degree of care which under the circumstances
was incumbent upon it, with regard to
inspection and application of the necessary
tests. For the purposes of this doctrine, the
manufacturer is considered as being in law the
agent or servant of the carrier, as far as regards
the work of constructing the appliance.
According to this theory, the good repute of the
manufacturer will not relieve the carrier from
liability.‖ (Necesito, et al., vs. Paras, et al., G.R. Nos.
L-10605 and L-10606, June 30, 1958)
The rationale of the carrier's liability is the
fact that the passenger has neither choice
nor control over the carrier in the selection
and use of the equipment and appliances
in use by the carrier. Having no privity
whatever with the manufacturer or vendor of
the defective equipment, the passenger has no
remedy against him, while the carrier usually
has. It is but logical, therefore, that the carrier,
 Purple Notes
while not an insurer of the safety of his
passengers, should nevertheless be held to
answer for the flaws of his equipment if such
flaws were at all discoverable. (Ibid.)
EXTENT OF LIABILITY FOR DAMAGES
Recoverable Damages
Damages in cases comprised in this Section shall
be awarded in accordance with Title XVIII of
this Book, concerning Damages. Article 2206
shall also apply to the death of a passenger
caused by the breach of contract by a common
carrier. (Art. 1764, NCC)
Kinds of damages:
1. Actual or Compensatory Damages (See
Arts. 2199 to 2215, NCC)
These are those awarded in satisfaction of, or in
recompense for, loss or injury sustained. They
proceed from a sense of natural justice and are
designed to repair the wrong that has been
done, to compensate for the injury inflicted and
not to impose a penalty. In actions based on
torts or quasi-delicts, actual damages include all
the natural and probable consequences of the
act or omission complained of.
There are two kinds of actual or compensatory
damages: one is the loss of what a person
already possesses (daño emergente), and the
other is the failure to receive as a benefit that
which would have pertained to him (lucro
cesante). (Marikina Auto Line Transport Corp vs.
People, G.R. No. 152040, March 21, 2006)
2. Moral Damages (See Arts. 2217 to 2220,
NCC)
General Rule: Moral damages are not
recoverable in culpa contractual.
Exceptions:
a. In case of death of passenger as a result of
the contractual breach.
b. When there is fraud or bad faith in the
breach of contract even if no death occurs.
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Mercantile Law
c. When passenger suffered social humiliation,
wounded feelings, serious anxiety etc., as a
result of lack of attention, discourtesy, want
of care, callous behavior or part of the
personnel of the carrier. (Trans World Airlines
vs. CA, G.R. No. 78656, August 30, 1988)
3. Exemplary damages (See Arts. 2229 to 2235,
NCC)
Our jurisprudence sets certain conditions when
exemplary damages may be awarded: First, they
may be imposed by way of example or
correction only in addition, among others, to
compensatory damages, and cannot be
recovered as a matter of right, their
determination depending upon the amount of
compensatory damages that may be awarded to
the claimant. Second, the claimant must first
establish his right to moral, temperate,
liquidated or compensatory damages. Third, the
wrongful act must be accompanied by bad faith,
and the award would be allowed only if the
guilty party acted in a wanton, fraudulent,
reckless, oppressive or malevolent manner.
(Mendoza vs. Sps. Gomez, G.R. No. 160110, June 18,
2014)
4. Nominal, Temperate and Liquidated
Damages (Arts. 2221 to 2228, NCC)
Articles 2221 and 2222 of the Civil Code make it
clear that nominal damages are NOT intended
for indemnification of loss suffered but for the
vindication or recognition of a right violated or
invaded. They are recoverable where some
injury has been done but the amount of which
the evidence fails to show, the assessment of
damages being left to the discretion of the court
according to the circumstances of the case.
Under Article 2224 of the New Civil Code, when
pecuniary loss has been suffered but the
amount cannot, from the nature of the case, be
proven with certainty, temperate damages may
be recovered. Temperate damages maybe
allowed in cases where from the nature of the
case, definite proof of pecuniary loss cannot be
adduced, although the court is convinced that
the aggrieved party suffered some pecuniary
loss. (Adriano vs. La Sala, G.R. No. 197842, October
9, 2013)
Bar Operations C ommissions 59
 Purple Notes
Mercantile Law
The liability for liquidated damages is
governed by Articles 2226-2228 of the New Civil
Code. They are those agreed upon by the
parties to a contract, to be paid in case of
breach thereof. The parties to a contract are
allowed to stipulate on liquidated damages to be
paid in case of breach. It is attached to an
obligation in order to ensure performance and
has a double function: (1) to provide for
liquidated damages, and (2) to strengthen the
coercive force of the obligation by the threat of
greater responsibility in the event of breach.
(Atlantic Erectors, Inc., vs. CA, G.R. No. 170732,
October 11, 2012)
5. Attorney‟s Fees and Interests
Article 2208 of the New Civil Code of the
Philippines states the policy that should guide
the courts when awarding attorney‘s fees to a
litigant. As a general rule, the parties may
stipulate the recovery of attorney‘s fees. In the
absence on such stipulation, this article
restrictively enumerates the instances when
these fees may be recovered. (PNCC vs. APAC
Marketing Corporation, G.R. No. 190957, June 5,
2013)
Note: The attorney‘s fees which may be
awarded under Article 2208 is defined as being
in the extraordinary concept as indemnity.
(Philippine National Construction Corporation vs.
APAC Marketing Corp., G.R. No. 190957, June 5,
2013)
Amount of damages for death by a crime or
quasi-delict; additional liability of defendant (Art.
2206, NCC):
The amount of damages for death caused by a
crime or quasi-delict shall be at least three
thousand pesos, even though there may have
been mitigating circumstances. In addition:
a. The defendant shall be liable for the loss of
the earning capacity of the deceased, and
the indemnity shall be paid to the heirs of
the
b. latter; such indemnity shall in every case be
assessed and awarded by the court, unless
the deceased on account of permanent
physical disability not caused by the
60 Center for Legal Education and Research
2018 at the
defendant, had no earning capacity
time of his death;
c. If the deceased was obliged to give support
according to the provisions of Article 291,
the recipient who is not an heir called to the
decedent's inheritance by the law of testate
or intestate succession, may demand
support from the person causing the death,
for a period not exceeding five years, the
exact duration to be fixed by the court;
d. The spouse, legitimate and illegitimate
descendants and ascendants of the
deceased may demand moral damages for
mental anguish by reason of the death of
the deceased.
D. BILL OF LADING
Bill of lading is a written acknowledgement of
receipt of goods and an agreement to transport
them to a specific place to a person named or to
his order. (Unsworth Transport International (Phils.),
Inc. vs. CA, G.R. No. 166250, July 26, 2010)
THREE-FOLD CHARACTER
A bill of lading serves three (3) fold character:
1. It is a Receipt for the goods shipped;
As a receipt, it recites the date and place of
shipment, describes the goods as to quantity,
weight, dimensions, identification marks and
condition, quality, and value. (Ace Navigation Co.,
Inc. vs. FGU Insurance Corp., G.R. No. 171591, June
25, 2012)
A bill of lading usually becomes effective upon
its delivery to and acceptance by the shipper. It
is presumed that the stipulations of the bill
were, in the absence of fraud, concealment or
improper conduct, known to the shipper, and he
is generally bound by his acceptance whether he
reads the bill or not. (Magellan Manufacturing
Marketing Corp. vs. CA, G.R. No. 95529, August 22,
1991)
2. It is a Contract by which three (3)
parties (shipper, carrier, and consignee)
undertake specific responsibilities and
assume stipulated obligations;
 Purple Notes
The acceptance of the bill of lading by the
shipper and the consignee, with full knowledge
of its contents, gives rise to the presumption
that it constituted a perfect binding contract. A
stipulation in the bill of lading limiting to a
certain sum the common carrier‘s liability for
loss or destruction of a cargo (unless the shipper
or owner declares a greater value) is sanctioned
by law. There are two (2) conditions to be
satisfied in order that the limitation in their
contract should be valid:
1. The contract is Reasonable and just
under the circumstances; and
2. It has been Fairly and freely agreed
upon by the parties. (Belgian Overseas
Chartering and Shipping N.V. vs. First Philippine
Insurance Co., Inc., G.R. No. 143133, June 5,
2002)
Note: A consignee, although not a signatory to
the contract of carriage between the shipper
and the carrier, becomes a party to the contract
by reason of either a) the relationship of agency
between the consignee and the shipper/
consignor; b) the unequivocal acceptance of the
bill of lading delivered to the consignee, with full
knowledge of its contents or c) availment of the
stipulation pour autrui, i.e., when the consignee,
a third person, demands before the carrier the
fulfillment of the stipulation made by the
consignor/shipper in the consignee‘s favor,
specifically the delivery of the goods/cargoes
shipped. (MOF Company, Inc. vs. Shin Yang
Brokerage Corp., G.R. No. 172822, December 18,
2009)
Contract of Adhesion
Bills of lading, as well as tickets, constitute a
class of contracts of adhesion. Hence, they are
normally contrued liberally in favor of the
passenger or shipper who adhered to such bill of
lading or ticket. (Aquino & Hernando, Essentials of
Transportation and Public Utilities Law, 2016, p. 265)
Contracts of adhesion wherein one party
imposes a ready made form of contract on the
other, are contracts not entirely prohibited. The
one who adheres to the contract is in reality free
to reject it entirely; if he adheres, he gives his
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Mercantile Law
consent. (Ong Yiu vs. CA, G.R. No. L-40597, June
29, 1979)
Note: A bill of lading is covered by the parol
evidence rule. Accordingly, evidence of a prior
or contemporaneous verbal agreement is
generally not admissible to vary, contradict or
defeat the operation of a valid instrument.
(Aquino & Hernando, Essentials of Transportation and
Public Utilities Law, 2016, p. 268)
3. It is a document of title that makes it a
symbol of the goods.
During the period of transit and voyage, the bill
of lading by the law merchant as universally
recognized as its symbol, and the indorsement
and delivery of the bill of lading operates as a
symbolic delivery of the cargo. Property in the
goods passes by such indorsement and delivery
of the bill of lading, whenever it is the intention
of the parties that the property should pass, just
as under the circumstances the property would
pass by an actual delivery of the goods. (Aquino
& Hernando, Essentials of Transportation and Public
Utilities Law, 2016, p. 300, citing Sanders Brothers vs.
McLean and Co., 11 QBD 327 [1883])
DELIVERY OF GOODS
Period of Delivery
Period of delivery where no period fixed,
liability for failure to deliver on time:
Carrier shall be bound to forward them in the
first shipment of the same or similar goods
which he may make point where he must deliver
them;
Failure to do so, the damages caused by the
delay should be for his account. (Art. 358, Code of
Commerce [CC])
Period of delivery where there is a fixed
period for delivery, liability for failure to
deliver on time:
If a period has been fixed for the delivery of the
goods, it must be made within such time, and,
for failure to do so, the carrier shall pay the
indemnity stipulated in the bill of lading, neither
the shipper nor the consignee being entitled to
anything else.
Bar Operations C ommissions 61
 Purple Notes
Mercantile Law
If no indemnity has been stipulated and the d. Contrabands or illegal goods; 2018
delay exceeds the time fixed in the bill of lading, e. Goods are injurious to health;
the carrier shall be liable for the damages which f. Goods will be exposed to untoward danger
the delay may have caused. (Art. 370, CC) like flood, capture by enemies and the like;
g. Goods like livestock will be exposed to
Period stipulated and when not stipulated, disease;
compared: h. Strike;
i. Failure to tender goods on time. (Aquino &
Stipulated in Hernando, Essentials of Transportation and Public
Contract/Bill of No stipulation Utilities Law, 2016, p. 59)
Lading
PERIOD OF FILING CLAIMS
Carrier is bound to 1. Within a reasonable
fulfill the contract time. a. Patent damage (damage is apparent):
and is liable for 2. Carrier is bound to
Shipper must file a claim against the carrier
any delay; no forward them in the 1st
matter from what shipment of the same or
immediately upon delivery (it may be
cause it may have similar goods which he oral or written); or
arisen. may make to the point
of delivery. (Art. 358, b. Latent damage (damage cannot be
CC) ascertained merely from outside packaging):
Shipper should file a claim against the
Delivery Without Surrender of Bill of carrier within 24 hours from delivery.
lading (Art. 366, CC)

In case the consignee, upon receiving the
goods, cannot return the bill of lading
subscribed by the carrier, due to its loss or for
any other cause, he shall give said carrier a
receipt for the goods delivered, this receipt
producing the same effect as the return of the
bill of lading.
The surrender of the original bill of lading is not
a condition precedent for a common carrier to
be discharged of its contractual obligation. If
surrender of the original bill of lading is not
possible, acknowledgment of the delivery by
signing the delivery receipt suffices. (National
Trucking and Forwarding Corp. vs. Lorenzo Shipping
and Shipping Corp., G.R. No. 153563, February 7,
2005)
Refusal of Consignee to Take Delivery
Carrier may validly refuse to accept the goods
when:
a. Goods sought to be transported are
dangerous objects, or substances including
dynamite and other explosives;
b. Goods are unfit for transportation;
c. Acceptance would result in overloading;
Note: The requirement to give notice of loss or
damage to the goods is not an empty formalism.
The fundamental reason or purpose of such a
stipulation is not to relieve the carrier from just
liability, but reasonably to inform it that the
shipment has been damaged and that it is
charged with liability therefor, and to give it an
opportunity to examine the nature and extent of
the injury. This protects the carrier by affording
it an opportunity to make an investigation of a
claim while the matter is still fresh and easily
investigated so as to safeguard itself from false
and fraudulent claims. (UCPB General Insurance
Co., Inc. vs. Aboitiz Shipping Corp., GR No. 168433,
February 10, 2009)
PRESCRIPTIVE PERIOD FOR FILING
ACTIONS IN COURT:
For coastwise or carriage within the
Philippines:
1. If no bill of lading was issued: within 6 years
(Art. 1145, NCC)
2. If bill of lading was issued: within 10 years
(Art. 1144, NCC)

62 Center for Legal Education and Research

 Purple Notes
For international carriage from foreign
port to the Philippines: within 1 year from
delivery of goods or the date when the goods
have been delivered. (Sec. 3, COGSA)
Note: The parties may stipulate to shorter
prescriptive period.
The validity of a contractual limitation of time for
filing the suit itself against a carrier shorter than
the statutory period therefor has generally been
upheld as such stipulation merely affects the
shipper's remedy and does not affect the liability
of the carrier. In the absence of any statutory
limitation and subject only to the requirement
on the reasonableness of the stipulated
limitation period, the parties to a contract of
carriage may fix by agreement a shorter time for
the bringing of suit on a claim for the loss of or
damage to the shipment than that provided by
the statute of limitations. (Phil. American General
Insurance Co., Inc. vs. Sweet Lines, Inc., G.R. No.
87434, August 5, 1992)
EFFECTS OF STIPULATIONS
There are three kinds of stipulation which have
often been made in a bill of lading:
1. Exempting the carrier from any and all
liability for loss or damaged occasioned by
its own negligence. (invalid)
2. Providing for an unqualified limitation
of such liability to an agreed valuation.
(invalid)
3. Limiting the liability of the carrier to an
agreed valuation unless the shipper declare
a higher value and pays a higher rate of
freight. (valid) (Freixas and Company, vs.
Pacific Mail Steamship Co., G.R. No. L-16569,
October 3, 1921)
A stipulation in a bill of lading which either
exempts the carrier from liability for loss or
damage occasioned by its negligence or
provides for an unqualified limitation of such
liability to an agreed valuation, is invalid as
being contrary to public policy. (H. E. Heacock
Company vs. Macondray & Company, Inc., G.R. No.
16598, October 3, 1921)
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Mercantile Law
But a stipulation in such bill of lading which
limits the liability of the carrier to a specified
amount unless the shipper declares a higher
value and pays a higher rate of freight, is valid
and enforceable. Thus, if a common carrier
gives to a shipper the choice of two rates, the
lower of them conditioned upon his agreeing to
a stipulated valuation of his property in case of
loss, even by the carrier‘s negligence, if the
shipper makes the choice understandingly and
freely, and names his valuation, he cannot
thereafter recover more than the value which he
thus places upon his property. (H.E. Heacock
Company vs. Macondray & Co., Inc., G.R. No. L-
16598, October 3, 1921)
E. MARITIME COMMERCE
Maritime or Admiralty Law is the system of laws
which particularly relates to the affairs and
business of the sea, to ships, their crews and
navigation, and to maritime conveyance of
persons and property. (Aquino & Hernando,
Essentials of Transportation and Public Utilities Law,
2016, p. 422, citing Francisco, The Law on
Transportation, 1951, p. 254)
CHARTER PARTIES
A charter party is a contract by which an entire
ship, or some principal part thereof, is let by the
ship owner to another person. (Caltex, [Phils.],
Inc. vs. Sulpicio Lines, Inc., G.R. No. 131166,
September 30, 1999)
Charter parties are of two types:
1. Bareboat/Demise Charter
2. Contract of Affreightment
Bareboat/Demise Charter:
Under a demise or bareboat charter, the
charterer mans the vessel with his own people
and becomes, in effect, the owner for the
voyage or service stipulated, subject to liability
for damages caused by negligence. (Caltex,
[Phils.], Inc. vs. Sulpicio Lines, Inc., G.R. No. 131166,
September 30, 1999)
Bar Operations C ommissions 63
 Purple Notes
Mercantile Law
Contract of Affreightment:
A contract of affreightment is one by which the
owner of a ship or other vessel lets the whole or
part of her to a merchant or other person for
the conveyance of goods, on a particular
voyage, in consideration of the payment of
freight. (Caltex, [Phils.], Inc. vs. Sulpicio Lines, Inc.,
G.R. No. 131166, September 30, 1999)
Two types of Contract of Affreightment:
1. Time Charter
2. Voyage or Trip Charter
Time Charter - wherein the leased vessel is
leased to the charterer for a fixed period of
time;
Voyage or Trip Charter - wherein the ship is
leased for a single voyage.
In both cases, the charter-party provides for the
hire of the vessel only, either for a determinate
period of time or for a single or consecutive
voyage, the ship owner to supply the ships
store, pay for the wages of the master of the
crew, and defray the expenses for the
maintenance of the ship and also for any loss or
injury during the voyage. The charterer is free
from liability to third persons and the charter
party did not convert the common carrier into a
private carrier. Here, the common carrier
deemed to have warrant impliedly the
seaworthiness of the ship. Likewise, the
charterer has no obligation to ensure that the
vessel complied with all legal requirements. The
duty rests upon the common carrier simply for
being engaged in public service. It demands,
however, diligence which is required by the
nature of the obligation and that which
corresponds with the circumstances of the
person, the time and the place. (Caltex, [Phils.],
Inc. vs. Sulpicio Lines, Inc., G.R. No. 131166,
September 30, 1999)
LIABILITY OF SHIPOWNERS AND
SHIPPING AGENTS
Liability for Acts of Captain
64 Center for Legal Education and Research
1. Civilly liable for the acts of the 2018
captain and
for the obligations contracted by the latter
to repair, equip, and provision the vessel,
provided the creditor proves that the
amount claimed was invested for the benefit
of the same. (Art. 586, CC)
2. Damages suffered by a third person for tort
committed by the captain; and
3. Damages in case of collision due to fault or
negligence or want of skill of the captain.
(Aquino & Hernando, Essentials of Transportation
and Public Utilities Law, 2016, p. 122)
The ship agent shall also be civilly liable for the
indemnities in favor of third persons which may
arise from the conduct of the captain in the care
of the goods which he loaded on the vessel; but
he may exempt himself therefrom by
abandoning the vessel with all her equipment
and the freight it may have earned during the
voyage. Loss and damage to the goods loaded
on the vessel without prejudice to their right to
free themselves from liability by abandoning the
vessel to the creditors. (Art. 587, CC)
Limited Liability Rule
The exclusively real and hypothecary nature of
maritime law operates to limit the liability of the
shipowner to the value of the vessel, earned
freightage, and proceeds of the insurance, if
any. It is also called the ―no vessel, no liability
doctrine.‖
The real and hypothecary nature of maritime
law simply means that the liability of the carrier
in connection with losses related to maritime
contracts is confined to the vessel, which is
hypothecated for such obligations or which
stands as the guaranty for their settlement.
Thus, the liability of the vessel owner and agent
arising from the operation of such vessel were
confined to the vessel itself, its equipment,
freight, and insurance, if any, which limitation
served to induce capitalists into effectively
wagering their resources against the
consideration of the large profits attainable in
the trade. (Aboitiz Shipping Corp. vs. Gen. Accident
Fire and Life Assurance Corp. Ltd., G.R. No. 100446,
January 21, 1993)
 Purple Notes
Exceptions to Limited Liability
1. In case the voyage is not maritime but only
in river, bay or gulf.
2. In case of expense for equipping, repairing
or provisioning of the vessel.
3. In case the vessel is not common but a
special carrier.
4. In case the vessel would totally sink or get
lost by reason of the ship owner or ship
agents fault.
5. When the injury to or death of a passenger
is due either to the fault of the ship owner
and the captain.
6. When the vessel is insured (to the extent of
the insurance proceeds); or
7. In workmen‘s compensation claims. (Yangco
vs. Laserna, G.R. No. L-47447 to 47449, October
29, 1941)
Who can avail of the Limited Liability
Rule?
It is the shipowner who can avail of the Limited
Liability Rule. He is the very person whom the
Limited Liability Rule has been conceived to
protect. The policy which the rule is designed to
promote is the encouragement of shipbuilding
and investment in maritime commerce. (Dela
Torre vs. CA, G.R. No. 160088, July 13, 2011)
ACCIDENTS AND DAMAGES IN MARITIME
COMMERCE
Accidents in maritime commerce:
1. Collision
2. Averages
3. Shipwreck
4. Arrival under stress
Averages, in general
1. All extraordinary or accidental expenses
during the voyage in order to preserve the
vessel, the cargo, or both;
2. Any damage or deterioration which the
vessel may suffer from the time it puts to sea
from the port of departure until it casts
anchor in the port of destination, and those
suffered by merchandise from the time they
65
Mercantile Law
are loaded in the port of shipment until they
are unloaded in the port of their
consignment. (Art. 806, CC)
General Average
It includes all damages and expenses, which are
deliberately caused in order to save the vessel
and/or its cargo from real and known risk
resulting in a common benefit. These expenses
and damages shall be borne ratably among all
those having interest in the vessel and cargo at
the time of the occurrence of the average . (Arts.
806, 808, 811, CC)
Requisites of general average:
1. Common Danger among ship and cargo
during voyage or in the port of loading or
unloading and such danger arises from the
accidents of the sea, dispositions of the
authority or faults of men, provided that the
circumstances producing the peril should be
ascertained and imminent or may be
rationally be said to be certain and imminent.
2. Deliberate Sacrifice made through jettison
of the cargo or part of the ship which is
thrown overboard during the voyage.
(Magsaysay, Inc. vs. Agan, G.R. No. L-6393,
January 31, 1955)
Exceptions:
a. Sinking on the vessel is necessary to
extinguish fire in a port, creek or bay.
b. Where cargo is transferred to lighten the
ship on account of a storm to facilitate entry
into a port (Arts. 815 to 817, CC)
3. Successful sacrifice - no general
contribution can be demanded if the vessel
and other cargo that are sought to be saved
were in fact not saved. (Arts. 860 and 861,
CC)
4. Compliance with proper formalities
and legal steps
a. Procedure for recovery
b. Assembly and deliberation
c. Resolution of the captain
d. Entry of the resolution in the logbook
Bar Operations C ommissions 65
 Purple Notes
Mercantile Law
e. Detailed minutes
f. Delivery of the minutes to the maritime
judicial authority of the first port within 24
hours from arrival
g. Ratification by captain under oath (Arts.
813 to 814, CC)
5. Order of jettison – the captain shall direct
the jettison, and shall order the goods cast
overboard in the following order:
a. Those which are on deck, beginning with
those which embarrass the maneuver or
damage of the vessel, preferring, if
possible, the heaviest ones with the least
utility and value.
b. Those which are below the upper deck,
always beginning with those of the
greatest weight and smallest value, to the
amount and number absolutely
indispensable. (Art. 815, CC)
Particular or Simple Average
It includes all the expenses and damages
caused to the vessel or to her cargo which have
not inured to the common benefit and profit of
all the persons interested in the vessel and her
cargo. (Art. 809, CC)
The owner of the goods which gave rise to the
expense or suffered the damage shall bear the
simple the simple or particular averages. (Art.
810, CC)
Collisions and Allisions
Collision – is an impact or sudden contact of a
vessel with another whether both are in motion,
or one is stationary. Strictly speaking, it refers to
the sudden contact of two moving vehicles.
Allision – refers to the contact of two vessels
where one is moving while the other is
stationary. (Aquino & Hernando, Essentials of
Transportation and Public Utilities Law, 2016, p. 643)
Zones of time in collision of vessels:
First Zone: All time up to the moment when
risk of collision begins. No rule is as yet
applicable or necessary. (Ibid.)
66 Center for Legal Education and Research
Second Zone: The time between 2018 moment
when risk of collision begins and moment it
becomes a practical certainty. It is in this period
where conduct of the vessels must strictly
observe nautical rules, unless a departure
therefrom becomes necessary to avoid imminent
danger. (Ibid.)
Third Zone: Covers the time of actual contact.
(Ibid.)
Doctrine of Error in Extremis
If a vessel having a right of way suddenly
changes its course during the third zone, in an
effort to avoid imminent collision due to the
fault of another vessel, such act may be said to
be done in extremis, and even if wrong cannot
create a responsibility on the part of the said
vessel with the right of way. (Sundiang & Aquino,
Reviewer on Commercial Law, 2017, p. 480)
Doctrine of Inscrutable Fault
Where fault is established but it cannot be
determined which if the two vessels were at
fault, both shall be deemed to have been at
fault. (Sundiang & Aquino, Reviewer on Commercial
Law , 2017, p. 479)
CARRIAGE OF GOODS BY SEA ACT
(COGSA)
Application of COGSA
1. Water/maritime transportation;
2. For the carriage of goods; and
3. Overseas, international, foreign (from
foreign port to Philippine port)
4. It can be applied in domestic sea
transportation if agreed upon by the parties.
(Clause Paramount or Paramount Clause)
(Sec. 1, COGSA)
Notice of Loss or Damage:
Patent Damage (apparent): Shipper should
file a claim with the carrier immediately upon
delivery
 Purple Notes
Latent Damage (not apparent): Shipper
should file a claim with the carrier within three
days from delivery. (Sec. 3, par. 6, COGSA)
Period of Prescription:
1. Coastwise or within the Philippines
a. When to file claim with carrier
i. Immediately – if damage is apparent;
or
ii. Within 24 hours from delivery – if
damage is not apparent.
b. When to file a case in court
i. Within 6 years, if no bill of lading has
been issued; or
ii. Within 10 years, if bill of lading has
been issued
2. International carriage from foreign port to
the Philippines (COGSA)
a. When to file claim with carrier
i. Upon discharge of goods, if the
damage is apparent, claim should
be filed immediately; or
ii. If damage is not apparent, claim
should be filed within 3 days from
delivery
b. When to file claim with carrier
 Within 1 year from delivery of
goods or the date when the goods
have been delivered. (Sec. 3, par. 6,
COGSA)
Limitation of Liability:
Limitation on the amount of the carrier‟s
liability:
1. The limitation is set at $500 per package or
customary freight unless the nature and
value of such goods is declared by the
shipper.
2. Shipper and carrier may stipulate on another
maximum amount, but not more than the
amount of damage actually sustained. (Sec.
4, par. 5, COGSA)
Note: When what would ordinarily be
considered packages are shipped in a container
67
Mercantile Law
supplied by the carrier and the number of such
units is disclosed in the shipping documents,
each of those units and not the container
constitutes the ―package.‖ (Aquino & Hernando,
Essentials of Transportation and Public Utilities Law,
2016, p. 289)
There is no liability under COGSA for loss or
damages resulting from any of the following:
1. Unseaworthiness not due to negligence
2. Any deviation in saving or attempting to
save life or property at sea, or any
reasonable deviation
3. Dangerous nature and character or the
goods without the consent of the carrier,
master or agent of the carrier
4. Any of the causes enumerated in Section 4,
par. 2, COGSA
5. Any cause without the act, or neglect of the
shipper, his agents, or his servants
6. Fraudulent misstatement by the shipper of
the nature or value of the goods
Any clause, covenant, or agreement in a
contract of carriage relieving the carrier of the
ship from liability for loss or damage to or in
connection with the goods, arising from
negligence, fault, or failure in the duties and
obligations provided in this section or lessening
such liability otherwise, than as provided in this
Act, shall be null and void and of no effect. A
benefit of insurance in favor of the carrier, or
similar clause, shall be deemed to be a clause
relieving the carrier from liability. (Sec. 3, par. 8,
COGSA)
Neither the carrier nor the ship shall be liable for
loss or damage arising or resulting from
unseaworthiness unless caused by want of due
diligence on the part of the carrier to make the
ship seaworthy and to secure that the ship is
properly manned, equipped, and supplied, and
to make the holds, refrigerating and cooling
chambers, and all other parts of the ship in
which goods are carried fit and safe for their
reception, carriage, and preservation, in
accordance with the provisions of paragraph (1)
of Section (3). Whenever loss or damage has
resulted from unseaworthiness, the burden of
proving the exercise of due diligence shall be on
the carrier or other person claiming exemption
under this section. (Sec. 4, par. 1, COGSA)
Bar Operations C ommissions 67
 Purple Notes
Mercantile Law
Neither the carrier nor the ship shall be
responsible for loss or damage arising or
resulting from:
a. Act, neglect, or default of the master,
mariner, pilot, or the servants of the carrier
in the navigation or in the management of
the ship;
b. Fire, unless caused by the actual fault or
privity of the carrier;
c. Perils, dangers, and accidents of the sea or
other navigable water;
d. Act of God;
e. Act of war;
f. Act of public enemies;
g. Arrest or restraint of princes, rulers, or
people, or seizure under legal process;
h. Quarantine restrictions;
i. Act or omission of the shipper or owner of
the goods, his agent or representative;
j. Strikes or lockouts or stoppage or restraint
of labor from whatever cause, whether
partial or general: Provided, that nothing
herein contained shall be construed to
relieve a carrier from responsibility for the
carrier‘s own acts;
k. Riots and civil commotions;
l. Saving or attempting to save life or property
at sea;
m. Wastage in bulk or weight or any other loss
or damage arising from inherent defect,
quality, or vice of the goods;
n. Insufficiency or packing;
o. Insufficiency or inadequacy of marks;
p. Latent defects not discoverable by due
diligence; and
q. Any other cause arising without the actual
fault and privity of the carrier and without
the fault or neglect of the agents or servants
of the carrier, but the burden of proof shall
be on the person claiming the benefit of this
exception to show that neither the actual
fault or privity of the carrier nor the fault or
neglect of the agents or servants of the
carrier contributed to the loss or damage.
(Sect. 4, par. 2, COGSA)
The shipper shall not be responsible for loss or
damage sustained by the carrier or the ship
arising or resulting from any cause without the
68 Center for Legal Education and Research
2018 or his
act, or neglect of the shipper, his agents,
servants. (Sec. 4, par. 3, COGSA)
Any deviation in saving or attempting to save
life or property at sea, or any reasonable
deviation shall not be deemed to be an
infringement or breach or this Act or of the
contract of carriage, and carrier shall not be
liable for any loss or damage resulting
therefrom: Provided, however, that if the
deviation is for the purpose of loading or
unloading cargo or passengers it shall, prima
facie, be regarded as unreasonable. (Sec. 4, par.
4, COGSA)
Neither the carrier nor the ship shall in any
event be or become liable for any loss or
damage to or in connection with the
transportation of goods in an amount
exceeding $500 per package of lawful
money of the United States, or in case of
goods not shipped in packages, per customary
freight unit, or the equivalent of that sum in
other currency, unless the nature and value of
such goods have been declared by the shipper
before shipment and inserted in the bill of
lading. This declaration, if embodied in the bill of
lading, shall be prima facie evidence, but shall
not be conclusive on the carrier.
By agreement between the carrier, master or
agent of the carrier, and the shipper another
maximum amount than that mentioned in
this paragraph may be fixed: Provided, that
such maximum shall not be less than the
figure above named. In no event shall the
carrier be liable for more than the amount
of damage actually sustained.
Neither the carrier nor the ship shall be
responsible in any event for loss damage to or in
connection with the transportation of the goods
if the nature or value thereof has been
knowingly and fraudulently misstated by the
shipper in the bill of lading. (Sec. 4, par. 5,
COGSA)
Goods of an inflammable, explosive, or
dangerous nature to the shipment whereof, the
carrier, master or agent of the carrier, has not
consented with knowledge of their nature and
character, may at any time before discharge be
 Purple Notes
landed at any place or destroyed or rendered
innocuous by the carrier without compensation,
and the shipper of such goods shall be liable for
all damages and expenses directly or indirectly
arising out of or resulting from such shipment. If
any such goods shipped with such knowledge
and consent shall become a danger to the ship
or cargo, they may in like manner be landed at
any place, or destroyed or rendered innocuous
by the carrier without liability on the part of the
carrier except to general average if any. (Sec. 4,
par. 6, COGSA)
Nothing contained in this Act shall prevent a
carrier or a shipper from entering into any
agreement, stipulation, condition, reservation, or
exemption as to the responsibility and liability of
the carrier or the ship for the loss or damage to
or in connection with the custody and care and
handling of goods prior to the loading on and
subsequent to the discharge from the ship on
which the goods are carried by sea. (Sec. 7,
COGSA)
F. PUBLIC SERVICE ACT (C.A. No. 146)
DEFINITION OF PUBLIC UTILITY
A ―public utility‖ is a business or service engaged
in regularly supplying the public with some
commodity or service of public consequence
such as electricity, gas, water, transportation,
telephone or telegraph service (Metropolitan Cebu
Water District vs. Adala, G.R. No. 168914, July 4,
2007). For example, the Water District is a public
utility.
Moreover, the SC explained that public utilities
are privately owned and operated businesses
whose services are essential to the general
public. (Kilusang Mayo Uno Labor Center vs. Garcia,
G.R. No. 115381, December 23, 1994)
NECESSITY FOR CERTIFICATE OF PUBLIC
CONVENIENCE
General Rule: No public service shall operate
without having been issued a certificate of public
convenience or a certificate of public
convenience and necessity. (Sec. 15, Public
Service Act [PSA])
Exceptions:
1. Warehouses;
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Mercantile Law
2. Animal drawn vehicles and bancas moved by
oar or sail, and tugboats and lighters;
3. Airships, except for the fixing of maximum
rates for fare and freight;
4. Radio companies, except for rates fixing;
5. Public services owned or operated by the
government, except as to rates fixing; (Sec.
14, PSA)
6. Ice plants; and
7. Public markets.
A certificate of public convenience (CPC) or a
certificate of public convenience and necessity
(CPCN) constitutes neither a franchise nor a
contract, confers no property right, and is a
mere license or a privilege. The holder of said
certificate does not acquire a property right in
the route covered thereby. Nor does it confer
upon the holder any proprietary right or interest
or franchise in the public highways. Revocation
of this certificate deprives him of no vested
right. New and additional burdens, alteration of
the certificate, or even revocation or annulment
thereof is reserved to the State. (Luque vs.
Villegas, G.R. No. L-22545, November 28, 1969)
Requisites for granting certificate of public
convenience:
1. Applicant must be a citizen of the
Philippines, or a corporation or a
partnership constituted and organized under
the laws of the Philippines at least 60% of
its stock or paid-up capital must belong
entirely to citizens of the Philippines;
2. Applicant must prove that its proposed
service will promote public interests;
Note: Public convenience or necessity
generally means something fitting or suited to
the public need. As one of the basic
requirements for the grant of a CPC, public
convenience and necessity exists when the
proposed facility or service meets a reasonable
want of the public and supply a need which the
existing facilities do not adequately supply. The
existence or non-existence of public convenience
and necessity is therefore a question of fact that
must be established by evidence, real and/or
testimonial; empirical data; statistics and such
other means necessary, in a public hearing
conducted for that purpose. The object and
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 Purple Notes
Mercantile Law
purpose of such procedure, among other things,
is to look out for, and protect, the interests of
both the public and the existing transport
operators. (Kilusang Mayo Uno vs. Garcia, G.R. No.
115381, December 23, 1994)
3. Applicant must have sufficient financial
capability to undertake the service. (Vda. De
Lat vs. The Public Service Commission, G.R. No. L-
34978, February 26, 1988).
Prior Operator Rule
Meaning
The rule allowing an existing franchised operator
to invoke a preferential right within the
authorized territory as long as he renders
satisfactory and economical service.
The policy is not to issue a certificate to a
second operator when a prior operator is
rendering sufficient, adequate and satisfactory
service. (Sundiang & Aquino, Reviewer on
Commercial Law, 2017, p. 507)
Purpose: To prevent ruinous and wasteful
competition in order that the interests of the
public would be conserved and preserved.
Note: While it is true that operators of public
convenience and service deserve some
protection from unnecessary or unlawful
competition, yet the rule is that nobody has any
exclusive right to secure a franchise or a
certificate of public convenience. Above any or
all considerations, the grant of franchises and
certificates of public convenience and service
should be guided by public service and interest;
the latter are the primordial considerations to be
taken into account. (Phil. Rabbit Bus Lines vs.
Gabatin, G.R. No. L-24472, July 31, 1968)
Exceptions to Prior Operator Rule:
1. Where public interest would be better
served by the new operator (Interstate Estate
of Teofilo Tingson vs. Commision, G.R L-24701,
December 16, 1970);
2. Where the old operator has failed to make
an offer to meet the increase in traffic
(Manila Yellow Taxicab Co., vs. Castelo, G.R. No.
L-131910, May 30, 1960);
3. Where the CPC granted to the new operator
is a maiden certificate, which does not
70 Center for Legal Education and Research
overlap with the entire route 2018 of the old
operator but only a short portion thereof as
a convergence point (Mandbusco, Co., vs.
Francisco, G.R. No. L-23688 April 30, 1970) ;
4. If the application of the rule will be
conducive to monopoly of the service, and
contrary to the orinciple that promotes
healthy competition (Villarey Transit, Inc., vs.
Pangasinan Transit Inc., G.R. L-17684-85, May
30, 1962);
5. If the old operator unjustifiably abandoned
his service for two or three years by not
registering the necessary equipment forfeits
his right to said equioment and the service
authorized to him (Farinas vs. Estate of
Florencio Buan, G.R. No. 12306-7, November 29,
1961);
6. The service of the prior operator is
inefficient;
7. The prior operation is operating less units
than he was authorized.
Ruinous Competition
Ruinous competition means that because of
the competition, the income of the first licensee
will be so reduced that it will not give him an
adequate return on his investment.
The mere possibility of reduction in the earnings
of a business is not sufficient to prove ruinous
competition. It must be shown that the business
would not have sufficient gains to pay a fair rate
of interest on its capital investment. (Manila
Electric Co. vs. Pasay Transportation Co. Inc., G.R.
No. 45239, July 28, 1938)
FIXING OF RATE
The rate to be fixed must be just, founded upon
conditions which are fair and reasonable to
both the owner and the public. (Sundiang &
Aquino, Reviewer on Commercial Law, 2017, p. 490)
Rate of return
It is one of the major factors to be considered in
determining the just and reasonable rates by the
regulating agency.
The rate of return is a judgment percentage
which, if multiplied with the rate base, provides
 Purple Notes
a fair return on the public utility for the use of
its property for service to the public.
The rate of return of a public utility is not
prescribed by statute but by administrative and
judicial pronouncements. The Supreme Court
has consistently adopted a 12% rate of return
for public utilities. (Republic vs. Manila Electric
Company, G.R. Nos. 141314 and 141369, November
15, 2002)
Exclusion of Income Tax as Expense
The income tax as Operating Expense cannot be
allowed for Rate-Determination purposes.
The SC held that the Energy Regulatory Board
correctly ruled that income tax should not be
included in the computation of operating
expenses of a public utility. In general,
operating expenses are those which are
reasonably incurred in connection with business
operations to yield revenue or income. They are
items of expenses which contribute or are
attributable to the production of income or
revenue.
Clearly, by its nature, income tax payments of a
public utility are not expenses which contribute
to or are incurred in connection with the
production of profit of a public utility. The
burden of paying income tax should be
Meralco's alone and should not be shifted to the
consumers by including the same in the
computation of its operating expenses (Republic
vs. Manila Electric Company, G.R. Nos. 141314 and
141369, November 15, 2002)
UNLAWFUL ARRANGEMENTS:
1. Boundary System
It is a scheme by an owner/operator engaged
in transporting passengers as a common
carrier to primarily govern the compensation
of the driver, that is, the latter‘s daily earnings
are remitted to the owner/operator less the
excess of the boundary which represents the
driver‘s compensation. Under this system, the
owner/operator exercises control and
supervision over the driver. (Villamaria vs. CA, G.R.
No. 165881, April 19, 2006)
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Mercantile Law
2. Kabit System
It is an arrangement whereby a person who
has been granted a certificate of public
convenience allows other persons who own
motor vehicles to operate under such license,
for a fee or percentage of the earnings. (Lim vs.
CA, G.R. No. 125817, January 16, 2002)
Having entered into an illegal contract, neither
can seek relief from the courts and each must
bear the consequences of his acts. (Lita
Enterprises, Inc. vs. IAC, G.R. No. L-64693, April 27,
1984)
One of the primary factors considered in the
granting of a certificate of public convenience
for the business of public transportation is the
financial capacity of the holder of the license, so
that liabilities arising from accidents may be duly
compensated. The kabit system renders illusory
such purpose and, worse, may still be availed of
by the grantee to escape civil liability caused by
a negligent use of a vehicle owned by another
and operated under his license. If a registered
owner is allowed to escape liability by proving
who the supposed owner of the vehicle is, it
would be easy for him to transfer the subject
vehicle to another who possesses no property
with which to respond financially for the damage
done. Thus, for the safety of passengers and the
public who may have been wronged and
deceived through the baneful kabit system, the
registered owner of the vehicle is not allowed to
prove that another person has become the
owner so that he may be thereby relived of
responsibility. (Lim vs. CA, G.R. No. 125817,
January 16, 2002, citing Dizon vs. Octavio, 51 O.G.
4059 [1955])
APPROVAL OF SALE, ENCUMBRANCE OR
LEASE OF PROPERTY
It shall be unlawful for any public service or for
the owner, lessee or operator thereof, without
the approval and authorization of the
Commission, to sell, alienate, mortgage,
encumber or lease its property, franchises,
certificates, privileges, or rights or any part
thereof; or merge or consolidate its property,
franchises privileges or rights, or any part
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Mercantile Law
thereof, with those of any other public service.
(Sec. 20, par. [g], PSA)
The approval shall be given, after notice to the
public and hearing the persons interested at a
public hearing, if it be shown that there are just
and reasonable grounds for making the
mortgaged or encumbrance, for liabilities of
more than one year maturity, or the sale,
alienation, lease, merger, or consolidation to be
approved, and that the same are not
detrimental to the public interest, and in case of
a sale, the date on which the same is to be
consummated shall be fixed in the order of
approval: Provided, however, that nothing
herein contained shall be construed to prevent
the transaction from being negotiated or
completed before its approval or to prevent the
sale, alienation, or lease by any public service of
any of its property in the ordinary course of its
business. (Sec. 20, par. [g], PSA)
G. THE WARSAW CONVENTION (WC)
(The Convention for the Unification of Certain
Rules Relating to International Transportation by Air)
APPLICABILITY
The transportation must be:
1. International transportation;
2. Air transportation; and
3. Carriage of passengers, baggage or goods.
(Art. 1[1], WC)
Other applications:
The Warsaw Convention shall also apply to
fortuitous events affecting transportation by
aircraft performed by an air transportation
enterprise.
International transportation - any
transportation in which the place of departure
and the place of destination are situated either:
1. Within the territories of two High Contracting
Parties regardless of whether or not there be
72 Center for Legal Education and Research
a break in the 2018
transportation or
transshipment, or
2. Within the territory of a single High
Contracting Party, if there is an agreed
stopping place within a territory subject to
the sovereignty, mandate or authority of
another power, even though that power is
not a party to the Convention. (Art. 1[2], WC)
Transportation to be performed by several
successive air carriers shall be deemed to be
one undivided transportation, if it has been
regarded by the parties as a single operation,
whether it has been agreed upon under the
form of a single contract or of a series of
contracts, and it shall not lose its international
character merely because one contract or a
series of contracts is to be performed entirely
within a territory subject to the sovereignty,
suzerainty, mandate, or authority of the same
High Contracting Party. (Art. 1[3], WC)
When inapplicable:
The Convention does not apply to transportation
performed under the terms of any international
postal convention. (Article 2[2], WC).
When the carrier is liable
1. Death or injury of a passenger if the
accident causing it took place on board the
aircraft or in the course of its operations of
embarking or disembarking (Art. 17, WC);
2. Destruction, loss or damage to any baggage
or goods, if it took place during the
―transportation by air‖; (Art. 18, WC) and
Transportation by air – The period during
which the baggage or goods are in the
charge of the carrier, whether in an airport
or on board an aircraft, or, in case of a
landing outside an airport, in any place
whatsoever.
3. Delay in the transportation by air of
passengers, baggage or goods. (Art. 19, WC)
Note: The list is not exclusive.
No Liability
 Purple Notes
1. If he proves that he and his agents have
taken all necessary measures to avoid the
damage or that it was impossible for him or
them to take such measures.
2. In the carriage of goods and luggage, the
carrier is not liable if he proves that the
damage was occasioned by negligent
pilotage or negligence in the handling of the
aircraft or in navigation and that, in all other
respects, he and his agents have taken all
necessary measures to avoid the damage.
3. If the carrier proves that the damage was
caused by or contributed to by the
negligence of the injured person, the Court
may, in accordance with the provisions of its
own law, exonerate the carrier wholly or
partly from his liability. (Arts. 20 and 21, WC)
Effect of Exculpating or Mitigating Liability
Any provision tending to relieve the carrier of
liability or to fix a lower limit than that which is
laid down in this Convention shall be null and
void, but the nullity of any such provision does
not involve the nullity of the whole contract,
which shall remain subject to the provisions of
this convention. (Art. 23, WC)
LIMITATION OF LIABILITY
1. Liability to Passengers – 250,000 francs
per passenger
Guatemala Protocol: $100,000 per
passenger
Exception: Agreement to a higher limit
2. Liability for Checked-in Baggage - 250
francs per kilogram
Guatemala Protocol: $1,000 per kilogram
Exception: In case of special declaration of
value and payment of a supplementary sum
by consignor, carrier is liable to not more
than the declared sum unless it proves that
the sum is greater than the actual value.
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Mercantile Law
3. Liability for Hand-Carried Baggage –
5,000 francs per passenger
Guatemala Protocol: $1,000 per
passenger
Note: The Guatemala Protocol has not yet been
ratified.
Defenses against limit of liability:
1. Willful misconduct;
2. Gross negligence;
3. Absence of baggage check;
4. If there was waiver on the part of the
carrier; and
5. If the carrier is stopped from invoking the
provision on said limit. (Aquino & Hernando,
Essentials of Transportation and Public Utilities
Law, 2016, p. 396)
WILLFUL MISCONDUCT
The carrier shall not be entitled to avail himself
of the provisions of this Convention which
exclude or limit his liability, if the damage is
caused by his willful misconduct or by such
default on his part, is considered to be
equivalent to willful misconduct.
Similarly the carrier shall not be entitled to avail
himself of the said provisions, if the damage is
caused as aforesaid by any agent of the carrier
acting within the scope of his employment. (Art.
25, WC).
IV. BUSINESS ORGANIZATIONS
A. PARTNERSHIPS
GENERAL PROVISIONS
Definition
A partnership is a contract of two or more
persons who bind themselves to contribute
money, property or industry to a common fund,
with the intention of dividing the profits among
themselves. Two or more persons may also form
a partnership for the exercise of a profession
(Art. 1767, New Civil Code).
Bar Operations C ommissions 73
 Purple Notes
Mercantile Law
It is both:
1. A contract (Art. 1767, NCC); and
2. A business organization.
 It is a juridical entity, which has a
personality separate and distinct from that
of each of the partners (Art. 1768, NCC). It
begins from the moment of the execution of
the contract, unless it is otherwise stipulated
(Art. 1784, NCC).
Elements of Partnership
1. A valid contract;
2. Legal capacity of partners to enter into a
contract;
3. A contribution of money, property or
industry to a common fund;
4. A lawful object or purpose;
5. An intention to divide the profits among the
partners. (De Leon & De Leon, Jr., Comments
and Cases on Partnership, Agency and Trusts,
2014, p.11)
Characteristics:
1. Consensual – it is perfected by mere
consent.
2. Principal – it does not depend upon any
other contract for its validity or existence.
3. Bilateral or multilateral – it is entered into by
two or more persons whose rights and
obligations are reciprocal.
4. Nominate – it has a special name or
designation given to it by law. (Art. 1767,
NCC)
5. Preparatory – it is a means by which other
contracts will be entered into as a
partnership pursues its business.
6. Onerous – the partners contribute money,
property, or industry to a common fund.
(Art. 1767, NCC)
7. Commutative – the undertaking of each of
the partners is considered as the equivalent
of that of the others. (De Leon & De Leon, Jr.,
Comments and Cases on Partnership, Agency and
Trusts, 2014, p.12)
74 Center for Legal Education and Research
Separate personality: 2018
1. Partnership has a juridical personality
separate and distinct from the partners (Art.
1768, NCC) EVEN IF:
a. It does not appear in a public
instrument and its capital is P3,000.00
or more, in money or property (Art.
1772; Art. 1768, NCC).
b. It is not recorded in the Office of the
Securities and Exchange Commission
(SEC) (Art. 1772; Art. 1768, NCC).
 The fact that there is no record in the SEC
of a public instrument embodying the
partnership did not cause the nullification of
the partnership. (Tocao vs. CA, G.R. No.
127405, October 4, 2000)
 Mere failure to register the contract of
partnership with the SEC does not invalidate
a contract that has the essential requisites
of a partnership. The purpose of registration
of the contract of partnership is to give
notice to third parties. Failure to register the
contract of partnership does not affect the
liability of the partnership and of the
partners to third persons. Neither does such
failure to register affect the partnership‘s
juridical personality. (Angeles vs. Sec. of
Justice, G.R. No. 142612, July 29, 2005)
2. However, associations or societies whose
articles are kept secret among the members,
and wherein any one of the members may
contract in his own name with third persons,
shall have no juridical personality and shall
be governed by the provisions relating to
co-ownership. (Art. 1775, NCC)
Effects:
1. As to the members inter se: There is no
partnership. They are governed by the rules
relating to co-ownership. (Art. 1775, NCC)
2. As to third persons: Under the Doctrine of
Estoppel, the absence of personality cannot
be invoked against third persons for the
purpose of exempting themselves from
complying with their obligations contracted
pursuant to the stipulations kept secret
 Purple Notes
among themselves. They cannot profit from
their own wrongdoing. (De Leon & De Leon,
Jr., Comments and Cases on Partnership, Agency
and Trusts, 2014, p. 69)
Validity of partnership
General Rule: Being consensual in nature, a
partnership may be constituted in any form.
(Arts. 1356 and 1771, NCC; Tocao vs. CA, supra)
Exception: Where immovable property or real
rights are contributed to the partnership, a
public instrument shall be necessary. Moreover,
whenever immovable property is contributed
thereto, an inventory of said property, signed by
the parties, and attached to the public
instrument, is indispensable to the validity of the
partnership. If this requirement is not complied
with, the partnership is void. (Arts. 1771 and
1773, NCC)
Purpose or object must be lawful:
1. If the purpose or object is unlawful, contract
of partnership is void (Art. 1409[1], NCC).
2. Effects upon partners inter se:
a. The partners have no right to enforce
claims which depend upon the validity
of contract (Arbes vs. Polistico, G.R. No.
31057, September 7, 1929). Hence, upon
the dissolution of the partnership by
judicial decree, profits shall be
confiscated in favor of the State (Art.
1770, NCC) and shall not enrich the
partners.
b. But partners may recover their
contributions from the manager or
administrator because such claim does
not depend upon the validity of the
contract (Arbes vs. Polistico, supra).
3. Effects upon third persons:
a. If the third person acted in good faith,
he may recover indemnity from the
partner who dealt with him.
b. If third person acted in bad faith, he
cannot recover. (De Leon & De Leon, Jr.,
Comments and Cases on Partnership,
Agency and Trusts, 2014, p. 58)
75
Mercantile Law
Who can be a partner?
General Rule: Anyone who is capable of
entering into contractual relations (capacity to
act).
Exceptions: In universal partnership (whether
of all present property or all profits), persons
who are prohibited from giving each other any
donation or advantage cannot enter into such
kind of partnership. (Art. 1782, NCC)
Hence, the following CANNOT become partners
in a universal partnership:
1. The spouses during their marriage (Art. 87,
FC);
2. Those cohabiting as husband and wife (Art.
87, FC); and
3. Those who cannot donate to each other
under Article 739 of the NCC:
a. Those made between persons who were
guilty of adultery or concubinage at the
time of donation;
b. Those made between persons found
guilty of the same criminal offense, in
consideration thereof; and
c. Those made to a public officer or his
wife, descendants and ascendants, by
reason of his office.
Note: While spouses cannot enter into a
universal partnership, they can enter into a
particular partnership or be members thereof.
(Paras, Civil Code of the Philippines Annotated, 2008,
p. 619)
Corporations now have a capacity to be a
partner
Corporations, under the Revised Corporation
Code, have the power and capacity to enter into
a partnership, joint venture, merger,
consolidation, or any other commercial
agreement with natural and juridical persons.
(Sec. 35[h], R.A. No. 11232)
Rules to determine existence of
partnership
1. Requirement of Consent:
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 Purple Notes
Mercantile Law
General Rule: Persons who are not partners as
to each other are not partners as to third
persons. (Art. 1769[1], NCC)
Exception: When a person represents himself
or consents to another representing him to
anyone, as a partner in an existing partnership
or with one or more persons not actual partners,
he is liable to persons who, in good faith, has
relied on such representation and given credit to
the actual or apparent partnership. (Partnership
by estoppel). (Art. 1825, NCC)
2. Co-ownership or Co-possession:
a. Co-ownership or co-possession does not
in itself establish a partnership, whether
such co-owners or co-possessors do or
do not share any profits made by the
use of the property (Art. 1769[2], NCC).
b. There must be a clear intent to form a
partnership.
3. Sharing of Gross Returns:
a. The sharing of gross returns does not of
itself establish a partnership, whether
or not the persons sharing them have a
joint or common right or interest in any
property from which the returns are
derived (Art. 1769[3], NCC).
b. There must be a clear intent to form a
partnership, the existence of a juridical
personality different from the individual
partners, and the freedom of each party
to transfer or assign the whole property.
(Pascual vs. CIR, G.R. No. 78133, October
18, 1988.
4. Sharing of Profits:
General Rule: Receipt by a person of a share
of the profits of a business is prima facie
evidence that he is a partner in the business
(Art. 1769[4], NCC).
Exception: No such inference shall be drawn if
profits were received in payment as:
a. Debt by installments or otherwise
b. Wages of an employee
76 Center for Legal Education and Research
c. Rent to a landlord 2018
d. Annuity to a widow or representative of a
deceased partner
e. Interest on a loan
f. Consideration for the sale of goodwill of a
business or other property by installments or
otherwise (Art. 1769[4], NCC).
Classifications of partnership and Kinds of
Partners
As to object:
1. Universal partnership – may refer to all the
present property or to all the profits. (Art.
1777, NCC).
a. Universal partnership of all present
property – is that in which the partners
contribute all the property, which
actually belongs to them to a common
fund, with the intention of dividing the
same among themselves, as well as the
profits, which they may acquire
therewith. (Art. 1778, NCC).
b. Universal partnership of profits –
comprises all that the partner may
acquire by their industry or work during
the existence of the partnership. (Art.
1780, NCC).
2. Particular partnership – is one which has for
its object determinate things, their use and
fruits, or a specific undertaking, or the
exercise of a profession or vocation. (Art.
1783, NCC).
As to liability of partners:
1. General partnership – is one where all the
partners are general partners (that is, they
are liable even with respect to their
individual properties, after the assets of the
partnership have been exhausted). (Paras,
Civil Code of the Philippines Annotated, 2013,
p.612)
2. Limited partnership – is one where at least
one partner is a general partner, and the
rest are limited partners. (Paras, Civil Code of
the Philippines Annotated, 2013, p.612). The
 Purple Notes
general partners are liable to the extent of
their separate property, while the limited
partners are liable only to the extent of their
investment in the partnership.
As to duration (Partnership Term):
1. Partnership at will – is one in which no time
is specified and is not formed for a particular
undertaking or venture and which may be
terminated at any time by mutual
agreement of the partners or by the will of
any of the partners; or one for a fixed term
or particular undertaking which is continued
by the partners after the expiration of such
term or completion of the particular
undertaking without any express agreement.
(De Leon & De Leon, Jr., Comments and Cases
on Partnership, Agency and Trusts, 2014, p.72)
2. Partnership with a fixed period – is one
where the term for which the partnership is
to exist is fixed or agreed upon or one
formed for a particular undertaking, and
upon the expiration of the term or
completion of the particular undertaking, the
partnership is dissolved, unless continued by
the partners. (Ibid)
3. Partnership for a particular undertaking – is
one which is organized for a certain
undertaking, which when attained, will
cause the termination of the partnership,
(Art. 1785, NCC) such as a partnership
formed to construct 20 residential houses.
As to legality of existence:
1. De jure partnership – is one which has
complied with all the legal requirements for
its establishment.
Where the capital of the partnership
amounts to P3,000.00 or more, the
following requirements must be met:
a. The contract must appear in a public
instrument; and
b. It must be recorded or registered with
the SEC. (Art 1772, NCC)
77
Mercantile Law
Where an immovable property, regardless of
its value, is contributed, the following
requirements must be complied with:
a. The contract must be in a public
instrument; (Art. 1771) and
b. An inventory of the property contributed
must be made, signed by the parties,
and attached to the public instrument.
(Art. 1773, NCC)
2. De facto partnership – is one which has
failed to comply with all the legal
requirements for its establishment. (Ibid)
As to representation to others:
1. Ordinary or real partnership – is one which
actually exists among the partners an also
as to third persons.
2. Ostensible or partnership by estoppel – is
one which in reality is not a partnership, but
is considered as one with respect to those
who, by reason of their conduct or
admission are precluded from denying its
existence. (Art. 1825, NCC) (De Leon & De
Leon, Jr., Comments and Cases on Partnership,
Agency and Trusts, 2014, p.72)
As to publicity:
1. Secret partnership – is one wherein the
existence of certain persons as partners is
not made known to the public by any of the
partners.
2. Notorious or open partnership – One whose
existence is made known to the public by
the members of the firm. (De Leon & De Leon,
Jr., Comments and Cases on Partnership, Agency
and Trusts, 2014, p.73)
As to purpose:
1. Commercial or trading – is one formed for
the transactions or business.
2. Professional or non-trading – is one formed
for the exercise of a profession. (De Leon
and De Leon, Jr., Comments and Cases on
Partnership, Agency and Trusts, 2014, p.73)
Universal Partnership
Bar Operations C ommissions 77
 Purple Notes
Mercantile Law
Object: It may refer either to—
1. All present properties of partners; or
2. All profits. (Art. 1777, NCC)
Universal Partnership of All Present
Property:
That in which the partners contribute all the
property which actually belongs to them to a
common fund, with the intention of dividing the
same among themselves, as well as all the
profits they may acquire therewith (Art. 1778,
NCC).
What are included:
1. The property, which belonged to each of the
partners at the time of the constitution of
the partnership (present property)
2. Profits which may be acquired from the
present property. (Art. 1779, NCC).
3. Property acquired by each partner after the
formation of the partnership but only if
stipulated. This property shall include:
a. The property itself except that the
stipulation shall not include property
acquired by inheritance, legacy or
donation.
b. The profits and fruits therefrom
including those from property acquired
by inheritance, legacy or donation. (Art.
1779, NCC)
Not included – Property, which might
thereafter be acquired by each of the partners
by way of donation, inheritance or legacy,
cannot be stipulated. However, the fruits thereof
may be included in the partnership by
agreement. (Art. 1779[2], NCC)
Universal Partnership of All Profits:
What are Included:
1. All that the partners may acquire by their
industry or work during the existence of the
partnership; and
2. The usufruct of their present property (Art.
1780, NCC).
78 Center for Legal Education and Research
2018
3. Profits and fruits, if expressly stipulated, of
property acquired by each partner after the
constitution of the partnership. (De Leon and
De Leon, Jr., Comments and Cases on
Partnership, Agency and Trusts, 2014, p.78)
Presumption in Favor of All Profits: Articles
of universal partnership entered without
specification of its nature (whether it is universal
partnership of all present property or of profits),
is presumed to be a universal partnership of
profits only (Art. 1781, NCC).
Particular Partnership
Object:
1. Determinate things, their use or fruits;
2. Specific undertaking; or
3. Exercise of a profession or vocation. (Art.
1783, NCC)
Kinds of partners
1. As to Nature of Contribution:
a. Capitalist – contributes money or property
to the common fund (Art. 1767, NCC);
b. Industrialist – contributes only his industry
or service. Such industry may be physical or
intellectual industry. (Art. 1767, NCC);
c. Capitalist – industrial partner – one who
contributes not only money or property but
also his services to the partnership. (Art.
1797, NCC)
2. As to Nature of Liability:
a. General partner – has control and
management of the business and is
personally liable for partnership obligations
with his separate properties.
b. Limited partner – is not entitled to
participate in the management and control
of the business, but is exempt from personal
liability for the partnership obligations
because his liability is limited only to his
capital contribution.
c. General-limited partner – one who has all
the rights and powers and is subject to all
the restrictions of a general partner, except
that, in respect to his contribution, he shall
 Purple Notes
Mercantile Law
have the rights against the other members, himself, unless the
which he would have had, is he were not partnership expressly
also a general partner. (Art. 1853, NCC) permits him to do so,
and if he should do so,
GENERAL vs. LIMITED PARTNERSHIP the capitalist partners
may either exclude him
from the firm or avail
GENERAL LIMITED
themselves of the
Personally liable for Liability is limited only
benefits which he may
partnership obligations to his capital
have obtained in
contributions
violation of this
When manner of No participation in the
provision, with a right to
management not management
damages in either case.)
agreed upon, all general
(Article 1789, NCC)
partners have equal
rights in the
management of the 3. As to Management:
business
Contributes cash, Contributes cash or a. Managing partner – is entitled to manage
property, or industry property only, not the business or affairs of the partnership.
industry (Art. 1800, NCC)
Proper party of a Not proper party to a b. Silent partner – does not take any active
proceeding by/against proceeding by/against part in the business although he may be
the partnership the partnership (except known to be a partner. (De Leon and De
when the issue in the Leon, Jr., Comments and Cases on Partnership,
case is his interest/ Agency and Trusts, 2014, p.75)
subject of suit) (De c. Secret partner – takes active part in the
Leon & De Leon, Jr.,, business but is not known to be a partner
Comments and Cases
by outside parties. (Ibid)
on Partnership, Agency
and Trusts, 2014, d. Liquidating partner – takes charge of the
p.322) winding up of partnership affairs upon
Interest not assignable Interest is freely dissolution. (Art. 1834, NCC)
without the consent of assignable
the partners 4. As to Exposure to Public Perception:

Name may appear in Name must not appear
the firm name in the firm name
Except:
(1) If it is also the
surname of a general
partner, or
(2) Prior to the time
when the limited
partner became such,
the business had been
carried on under a
name in which his
surname appeared.
(Article 1846, NCC)
Prohibition against No prohibition against
engaging in a business engaging in a business
(Qualification: An
industrial partner cannot
engage in business for
a. Ostensible partner – one who takes active
part and is known to the public as a partner
in the business (Art. 1834[2], NCC), whether
or not in reality he is such. If in fact he is
not a partner, he is subject to liability by the
doctrine of estoppel (Art. 1825, NCC).
b. Nominal partner – is held out to the world
as a partner but he has no real interest in
the firm. He then becomes a partner by
estoppel.
c. Dormant partner – one who does not take
active part in the business and is not known
or held out as partner (Art. 1834[2]).
d. Silent partner – one who does not take any
active part in the business although he may
be known to be a partner.
e. Secret partner – one who does not take
active part in the business although he may
be known to be partner (Art. 1834, NCC).

79
Bar Operations C ommissions 79
 Purple Notes
Mercantile Law
Partner by estoppel – although not an actual 2018
partner, he has made himself liable as such Exception: The
by holding himself out as a partner or allows industrial partner can
another to hold him out as a partner. (Art. engage in business
1825, NCC). for himself, unless
the partnership
5. As to Actual Membership: expressly permits him
to do so.
a. Actual or real partner – is really a partner by As to Profits
agreement among the parties. According to the The industrial partner
agreement among the receives a just and
b. Partner by estoppel – is not a real or actual
partners; if none, pro-rata equitable share. (Art.
partner but he becomes liable as a partner
to his contribution. (Art. 1797, NCC)
because he holds himself out as a partner or 1797, NCC)
allows another to hold him out as a partner. As to Losses
(Art. 1825, NCC) First, the stipulation as to Exempted as to
losses; losses as between
6. As to Timing of Membership: partners; but is liable
If none, the agreement against third person
a. Original partner – one who is a member of a as to profits; and if none, without prejudice to
partnership at the time of its organization. pro rata to his reimbursement from
b. Incoming partner – one who becomes a contribution. (Art. 1797, the capital partners.
member of an existing partnership. (De Leon NCC) (Art. 1797, NCC)
and De Leon, Jr., Comments and Cases on
Partnership, Agency and Trusts, 2014, p.75) Partnership by estoppel

7. As to Continuation of Business Affairs It exists when a non-partner, by words spoken

After Dissolution:
a. Continuing partner – one who continues the
partnership business after the dissolution of
the partnership due to admission of a new
partner, or retirement, death, or expulsion
of one or more partners. (Art. 1840, NCC)
b. Discontinuing partner – one who does not
participate in the partnership business after
its dissolution. (Art 1840 & 1841, NCC)
CAPITALIST vs. INDUSTRIAL PARTNER
or written or by conduct, represents himself, or
consents to another representing or with one or
more persons who are not actual partners. (Art.
1825, NCC)
In order for estoppel to apply, it is necessary
that the third person must have knowledge of
the representation and in good faith, acted in
reliance upon the same. (De Leon and De Leon,
Jr., Comments and Cases on Partnership, Agency and
Trusts, 2014, p.30)
When Estoppel Not Applicable

CAPITALIST PARTNER INDUSTRIAL When although there is misrepresentation, the

PARTNER
As to Contribution
Contributes money and Contributes industry
property. (Art. 1767, NCC) or personal service.
(Art. 1789, NCC)
As to Prohibition to Engage in Other Business
Cannot generally engage Cannot engage in any
in the same or similar business for himself
enterprise as that of his (Reason: all his
firm (the test is the industry is supposed
possibility of unfair to be contributed to
competition). (Art. 1808, the firm). (Art. 1789,
NCC) NCC)
third party is not deceived, the doctrine of
estoppel does not apply. (Paras, Civil Code of the
Philippines Annotated, 2013, p.693)
Who shall be liable:
1. A partnership liability results when all
members of the existing partnership consent
to the representation, in which case, the
partner by estoppel (or ostensible partner)
is liable as though he were an actual
member of the partnership. (Art. 1825, NCC)

80 Center for Legal Education and Research

 Purple Notes
2. When no partnership liability results because
not all the members of an existing
partnership consent to the representation-
a. The person acting and persons
consenting to the representation shall all
be liable as partners to a third person
who deals with them upon the faith of
such representation, the transaction
being considered their joint act or
obligation.
b. The partner by estoppel is liable pro rata
with the other persons so consenting to
the contract or representation, if any
(Art. 1825, NCC).
Liability of Incoming Partner for
Obligations Arising Prior to His Admission:
He is liable as though he had been a partner
when such obligations were incurred. But his
obligations shall be satisfied only out of
partnership property unless there is a stipulation
to the contrary (Art. 1826, NCC).
Partnership vs. Joint Venture
Joint Venture: An association or persons or
companies jointly undertaking some commercial
enterprise; generally contribute assets and share
risks. It requires a community of interest in the
performance of the subject matter, a right to
direct and govern the policy in connection
therewith, and a duty which may be altered to
share both in profits and losses. (Kilosbayan vs.
Guingona, G.R. No. 113375, May 5, 1994)
Requisites of a Joint Venture:
1. A community of interest in the performance
of the subject matter.
2. A right to direct and govern the policy in
connection therewith; duty to share profits
and losses. (Kilosbayan vs. Guingona, supra)
Partnership Joint Venture
As to existence
81
Mercantile Law
Partnership Joint venture is formed
contemplates a general for the execution of a
business with some single transaction, and
degree of continuity is thus of a temporary
(Primelink Properties vs. nature (Primelink
Lazatin, G.R. No. Properties vs.
167379 June 27, 2006) Lazatin,supra)
Professional Partnership
Two or more persons may also form a
partnership for the exercise of a profession (Art.
1767, NCC).
The law does not allow the practice of a
profession as a corporate entity. Personal
qualifications for such practice cannot be
possessed by a corporation. (De Leon and De
Leon, Jr., Comments and Cases on Partnership,
Agency and Trusts, 2014, p.10)
Exception: A corporation may be registered or
licensed for the practice of architecture provided
that certain conditions are met, one of which is:
registered and licensed architects shall compose
at least seventy-five percent (75%) of the
owners, shareholders, members, incorporators,
directors, executive officers, as the case may be.
(Sec. 37, RA 9266)
Who shall bear the risk of things
contributed to the partnership?
1. Specific and determinate things which are
not fungible where only the use and fruits
may be for the common benefit – the risk of
loss is borne by the partner who owns them.
(Art. 1795[1], NCC)
2. Specific and determinate things the
ownership of which is transferred to the
partnership – the risk of loss is for the
account of the partnership.
3. Fungible things or things which cannot be
kept without the deteriorating even if they
were contributed only for the use of the
partnership – the risk of loss is borne by the
partnership for evidently the ownership was
being transferred since use is impossible
without the things being consumed or
impaired.
Bar Operations C ommissions 81
 Purple Notes
Mercantile Law
4. Things contributed to be sold – the
partnership bears risk of loss for there
cannot be any doubt that the partnership
was intended to be the owner; otherwise,
the partnership could not effect the sale.
Things brought and appraised in the
inventory – the partnership bears the risk of
loss because the intention of the parties was
to contribute to the partnership the price of
the things contributed with an appraisal in
the inventory (De Leon & De Leon, Jr.,
Comments and Cases on Partnership, Agency and
Trusts, 2014, p.108)
Management of Partnership
No Agreement as to Manner of
Management:
1. All the partners shall be considered agents
and whatever any one of them may do
alone shall bind the partnership (Art. 1803[1],
NCC).
2. But if any of them should oppose the acts of
the others, the decision of the majority shall
prevail, and in case of a tie, the matter shall
be decided by the parties owning the
controlling interest (Art. 1803, in relation to
Art. 1801, NCC).
3. In case of important alteration in the
immovable property of the partnership,
unanimous consent is required even if the
same is useful to partnership (Art. 1803 [2],
NCC).
When Manner of Management Has Been
Agreed Upon:
1. When a managing partner has been
appointed: The managing partner may
execute all acts of administration despite the
opposition of his partners unless he acts in
bad faith. (Art. 1800, NCC)
General Rule: Power is irrevocable without just
or lawful cause (Art. 1800, NCC)
Exceptions:
a. To remove him for JUST CAUSE, vote of
partners having controlling interest is
necessary (Art. 1800, NCC);
82 Center for Legal Education and Research
b. To remove him WITHOUT JUST 2018CAUSE,
unanimous vote is necessary, including his
own vote. (5 Paras, Civil Code of the Philippines,
2016, p. 645)
2. When a partner has been appointed
manager after the partnership has been
constituted:
Scope of authority: He/she may execute all
acts of administration but in case of opposition
by the other partners, the partners owning the
controlling interest may resort to voting for his
removal as manager. (Tai Tong Chuache vs.
Insurance Commission, G.R. No. L055397, February
29, 1988)
Revocation of his/her appointment:
He/she may be removed with or without just
cause by the vote of the partners owning the
controlling interest. (Art. 1800, NCC)
This is because such partner is only an agent
whose authority may be revoked at any time by
his principal, which is the partnership. (Art. 1920,
NCC)
3. When two or more partners have been
appointed as managers:
a. When there is specification of their
respective duties
b. When there is no specification of their
respective duties or there is no
stipulation that one shall not act without
the consent of the others.
i. Each one may separately execute all
acts of administration (Art. 1801, NCC)
ii. If there any opposition:
1. The decision of the majority of
the managing partners shall
prevail (per head)
2. In case of tie, the decision of the
managing partner/s owning the
controlling interest shall prevail.
(Art. 1801, NCC)
4. When the manner of management has not
been agreed upon:
 Purple Notes
a. All the partners shall be considered
agents of the partnership
b. Whatever any one of them may do
alone shall bind the partnership
c. In case of opposition of the other
partners:
i. The decision of the majority shall
prevail.
ii. In case of a tie, the decision of the
partners owning the controlling
interest shall prevail.
d. None of the partners may, without the
consent of the others, make any
important alteration in the immovable
property even if it may be useful to the
partnership (Arts. 1801, 1803, NCC)
5. Where stipulation requires unanimous
consent
Unanimous consent of all the managing partners
shall be necessary for the validity of the acts,
and the absence or disability of any one of
them cannot be alleged, except when there is
imminent danger of grave or irreparable injury
to the partnership (Art. 1802, NCC).
Where there is opposition by a managing
partner, imminent danger of grave or irreparable
injury to the partnership is not applicable when
one of the managers is not absent or disabled,
and in the exercise of his right to oppose,
objects to the proposed act. (De Leon and De
Leon, Jr., Comments and Cases on Partnership,
Agency and Trusts, 2014, p.148)
RIGHTS AND OBLIGATIONS OF
PARTNERSHIP AND PARTNERS
Rights and Obligations of the Partnership:
1. Refund the amounts disbursed by partner
in behalf of the partnership plus
corresponding interest from the time the
expenses are made, not from the date of
demand (e.g. loans and advances made by
a partner to the partnership aside from
capital contribution);
83
Mercantile Law
2. Answer for the obligations the partner may
have contracted in good faith in the interest
of the partnership business;
3. Answer for risks in consequence of its
management. (Art. 1796, NCC; De Leon & De
Leon, Jr., Comments and Cases on Partnership,
Agency and Trusts, 2014, p.110)
Rights of Partners
1. Property rights:
a. Rights in specific partnership property
b. Interest in the partnership (share in the
profits and surplus).
c. Right to participate in the management
(Art. 1810, NCC).
 This right to participate in the
management is not given to the limited
partner. (Art. 1848, NCC)
2. Right to associate with another person in his
share. (Art. 1804, NCC)
3. Right to reimbursement for amounts
advanced to the partnership and to
indemnification for risks in consequence of
management. (Art. 1796, NCC)
4. Right of access and inspection partnership
books. (Art. 1805, NCC)
5. Right to demand a formal account of
partnership affairs (Art. 1809, NCC).
6. Right to have the partnership dissolved
under certain conditions (Arts. 1830-1831,
NCC).
Distribution of Profits and Losses
1. Distribution is Primarily Determined by
Agreement of the Partners:
a. The losses and profits shall be
distributed in conformity with the
agreement. (Art. 1797[1], NCC)
b. However, none of them can be excluded
from participation in the profits and
losses. A stipulation, which excludes one
or more partners from any share in the
profits or losses, is void. (Art. 1799, NCC)
Bar Operations C ommissions 83
 Purple Notes
Mercantile Law
2. In the Absence of Agreement
As to Profits:
The profits shall be divided in proportion to their
respective contribution, except that in the case
of the industrial partner he shall receive such
share as may be just and equitable under the
circumstances (Art. 1797[2], NCC).
As to Losses:
The partners share in the losses according to
their agreement.
If there is NO AGREEMENT as to the share of
each partner in the losses, but there is an
agreement as to the share in the profits, the
loss shall be borne in the same proportion as
that in which they share in the profits. (Art.
1797[1], NCC)
The purely industrial partner shall not be liable
for the losses. (Art. 1797[2], NCC)
3. If Designation Entrusted to Third
Persons:
The partners may agree to entrust to a third
person the designation of the share of each one
in the profits and losses.
Such designation may be impugned only when it
is manifestly inequitable.
A partner cannot impugn the decision of a third
person if:
a. He has begun to execute said decision; or
b. He has not impugned the same within a
period of three months from the time he
had knowledge thereof (not from the time
of making). (Art. 1798 [1], NCC)
4. Designation by One Partner, Prohibited
The designation of losses and profits cannot
be entrusted to one of the partners (Art.
1798[2], NCC).
84 Center for Legal Education and Research
Right to Enter Into 2018
Sub-Partnership
Property
A partner may associate another person with
him in his share without the consent of the
other partners (Art. 1804, NCC). The contract
between them is called a sub-partnership.
The sub-partners are partners inter se.
However, the sub-partner does not become a
member of the original partnership in the
absence of the mutual assent of all the other
partners, even if the partner having an associate
should be a manager (Art. 1804, NCC).
He does not acquire the rights of the partner nor
is he liable for its debts.
Property Rights of a Partner:
1. His rights in specific partnership property;
2. His interest in the partnership; and
3. His right to participate in the management
(Art. 1810, NCC)
Rights in Specific Partnership Property (Art.
1811, NCC):
Nature of Right – A partner is co-owner with
his partners of specific partnership property.
1. Contemplates tangible property;
2. The specific partnership property belongs to
the partnership. The partners have no
actual interest in it until after dissolution.
(De Leon & De Leon, Jr., Comments and Cases
on Partnership, Agency and Trusts, 2014, p.153)
The right over a specific partnership property is
not subject to attachment or execution except if
it is based on a claim against the partnership
itself.
The rules on ―co-ownership in partnership‖ are
detailed in the subsequent paragraphs.
Right to possess – Has an equal right to
possess specific partnership property for
partnership purposes. He has no right to
possess such property for any other purpose
without the express or implied consent of the
other partners. (De Leon & De Leon, Jr., Comments
and Cases on Partnership, Agency and Trusts, 2014,
p.152)
 Purple Notes
Right not assignable – a partner cannot
separately assign his right to specific
partnership property but all of them can
assign their rights in the same property. (De
Leon & De Leon, Jr., Comments and Cases on
Partnership, Agency and Trusts, 2014, p.153)
Reasons:
1. Assignment would in effect allow a stranger
to become a partner without the consent of
all other partners;
2. It prevents interference by outsiders in
partnership affairs;
3. It protects the right of other partners and
partnership creditors to have partnership
assets applied to firm debts;
4. It is impossible to measure or value a
partner‘s beneficial interest in a particular
partnership asset. (De Leon & De Leon, Jr.,
Comments and Cases on Partnership, Agency and
Trusts, 2014, p.155)
Right is NOT SUBJECT to Attachment or
Execution, except on a claim against the
partnership.
 If there is partnership debt, the specific
property can be attached.
Right is NOT SUBJECT to Legal Support under
Art. 195 of the Family Code.
Reason: The property belongs to the
partnership and not to the partners. His interest
in the partnership, however, is subject to legal
support.
Partner‟s Interest in the Partnership:
A partner‘s interest in the partnership is his
share of the profits and surplus. (Art. 1812, NCC)
Profit – the excess of returns over expenditure
in a transaction or series of transactions. (De
Leon & De Leon, Jr., Comments and Cases on
Partnership, Agency and Trusts, 2014, p.159)
Surplus – refers to the assets of the
partnership after debts and liabilities are paid
and settled and the rights of the partners among
themselves are adjusted. (Ibid.)
85
Mercantile Law
Only a partner‘s share in interest and not the
whole profit of the partnership can be assigned,
be attached, and be subjected to legal support
(Arts. 1813 and 1814, NCC).
Procedure for Enforcement of Claim
Against Partner‟s Interest:
1. Charging Order: Any judgment creditor of
a partner may apply in court for a charging
order. In said order, the court may charge
the interest of the debtor partner with
payment of the unsatisfied amount of such
judgment debt with interest thereon (Art.
1814[1], NCC).
 This remedy is without prejudice to the
preferred rights of partnership creditors
under Article 1827. It means that the
claims of partnership creditors must be
satisfied first before the separate
creditors of the partners can be paid out
of the interest charged (Art.1839[8],
NCC).
2. Redemption of Interest Charged.
Redemption – the extinguishment of the
charge on or attachment of the partner‘s
interest in the profits.
How is Redemption Made
1. The ―interest charged‖ may be redeemed or
bought at any time BEFORE foreclosure.
2. AFTER the foreclosure, it may still be bought
with separate property (by any one or more
of the partners) OR with partnership
property (with consent of all the other
partners). (De Leon & De Leon, Jr., Comments
and Cases on Partnership, Agency and Trusts,
2014, p.162)
Preferred Rights of Partnership Creditors
The creditors of the partnership shall be
preferred to those of each partner as regards
the partnership property (Art. 1827, NCC).
Assignment of Partner‟s Whole Interest in
the Partnership (Art. 1813, NCC)
Bar Operations C ommissions 85
 Purple Notes
Mercantile Law
1. Right to Convey – Since a partner‘s interest
in the partnership is his personal property,
he has the right to convey such property.
2. Such conveyance does not of itself dissolve
the partnership. However, the non-assigning
partners may dissolve the partnership if they
so desire.
3. The purchaser of a partner‘s interest may
secure from the court a decree of
dissolution in two instances:
a. After the termination of the specified
term or particular undertaking; or
b. In case of partnership at will, when the
interest was assigned or when the
charging order was issued. (Art. 1830,
NCC)
4. The assignee does not become a partner
without the concurrence of all of the other
partners. Hence, during the continuance of
the partnership, he does not acquire the
right:
a. To interfere in the management or
administration of the partnership
business or affairs;
b. To require any information or account of
partnership transactions; or
c. To inspect the partnership books.
5. Rights of Assignee
a. To receive in accordance with his
contract the profits to which the
assigning partner would otherwise be
entitled.
b. In case of fraud in the management of
the partnership, the assignee may avail
himself of the usual remedies.
c. In case of dissolution of partnership, the
assignee is entitled to receive his
assignor‘s interest and may require an
account from the date only of the last
account agreed to by all the partners.
(Art. 1813, NCC)
Obligations of Partners
A. Obligation to Contribute to Capital
 Proportion of Capital Due from Partners
86 Center for Legal Education and Research
In the absence of contrary 2018 stipulation,
partners shall contribute equal shares to the
capital of partnership (Art. 1790, NCC);
An industrial partner cannot be required to
contribute capital without stipulation to that
effect.
 Debtor of Partnership
Every partner is a debtor of the partnership
for whatever he may have promised to
contribute thereto (Art. 1786, [1], NCC).
1. Contribution of Property:
a. To deliver to the partnership at the
time it was constituted or on the date
stipulated the property he has
promised to contribute.
b. To take care of the property before
its delivery to the partnership with
the diligence of a good father of a
family as a rule. (Art. 1163, NCC)
c. To be liable for damages in case of
default.
d. The partner shall also be liable for
the fruits of the specific and
determinate things, which he may
have promised to contribute from the
time they should have been
delivered, without the need of any
demand (Art. 1786[2], NCC).
e. He shall also be bound for warranty
in case of eviction with regard to
specific and determinate things,
which he may have contributed to
the partnership (Art. 1786[2], NCC).
2. Contribution of Money
A partner who has undertaken to
contribute a sum of money and fails to
do so becomes a debtor for the interest
and damages from the time he should
have complied with his obligation (Art.
1788, NCC).
Note that no demand is necessary. The
interest and damages accrue ipso jure.
 Purple Notes
3. Contribution of Additional Capital to
Save Venture
In case of imminent loss of the business
of the partnership, the partners can be
compelled to contribute an additional
share to the capital to save the venture.
Exception: Industrial partners (Art.
1791, NCC).
Effect of Refusal to Contribute: The
partner who refuses to contribute shall
be obliged to sell his interest to the
other partners, except if there is an
agreement to the contrary (Art. 1791,
NCC).
B. Obligation to Observe Good Faith
1. Private Use of Partnership Money - If a
partner uses partnership money for his
own use, he is liable to pay interest and
damages to the partnership from the
time he converted said amount to his
own use. (Art. 1788[2], NCC).
2. Individual Transactions in Connection
with Partnership Affairs or Involving Use
of Firm Property:
a. Partner must account to the
partnership for any benefit, and
hold as trustee for it any profits
derived by him without the consent
of the other partners from any
transaction connected with the
formation, conduct, or liquidation of
the partnership or from any use by
him of its property. (Art. 1807, NCC).
b. He is holding any such profit only
as a trustee for the partnership (Art.
1807, NCC).
Engagement in Individual Business:
By an Industrial Partner:
 Prohibition: Prohibited from engaging in
any kind of business, unless expressly
permitted by all partners (Art. 1789, NCC).
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Mercantile Law
 Effect of Violation: The capitalist partner
may either:
1. Exclude the industrial partner from the
firm; or
2. Avail themselves of the benefits, which
he may have obtained in violation of the
prohibition, with a right to damages in
either case. (Art. 1789, NCC)
By a Capitalist Partner
 Prohibition: Prohibited from engaging in
business of same nature as that of
partnership, unless there is a stipulation to
the contrary (Art. 1808, [1], NCC).
 Effect of Violation: He is required to
bring to the common funds any profits
accruing to him from his transactions, and
shall personally bear all the losses (Art.
1808[2], NCC)
Equal Knowledge of Partnership Affairs:
1. Right to Examine Partnership Books: Every
partner shall at any reasonable hour have
access to and may inspect and copy the
partnership books. (Art. 1805, NCC)
2. Matters Affecting Partnership: Partners shall
render ON DEMAND true and full
information of all things affecting the
partnership to any partner or the legal
representative of any deceased partner or of
any partner under legal disability. (Art. 1806,
NCC)
Obligations of Partners among Themselves
1. Obligation with Respect to Contribution of
Property
a. To contribute what was promised;
b. To answer for eviction in case the
partnership is deprived of determinate
property contributed;
c. To answer to the partnership for the
fruits of the specific property, , from the
time they should have been contributed
to the time of actual delivery (Art. 1786,
NCC);
Bar Operations C ommissions 87
 Purple Notes
Mercantile Law
d. To preserve the property with the
diligence of a good father of a family
pending delivery to the partnership (Art.
1163, NCC); and
e. To indemnify the partners for any
damages caused to it by the retention of
the same or by delay in its contribution.
(Art. 1788, NCC)
2. Obligation With Respect to Contribution of
Money and Money Converted to Personal
Use
a. To contribute on the date due the
amount he has undertaken to contribute
to the partnership;
b. To reimburse any amount he may have
taken from the partnership coffers and
converted to his own personal use;
c. To pay interest if he fails to pay his
contribution on time or in case he takes
any amount from the common fund and
converts to his own personal use; and
d. To indemnify the partnership for the
damages caused to it by the delay in the
contribution or the conversion of any
sum for his personal benefit. (Art. 1788,
NCC)
3. Obligation Not to Engage in Other Business
for Himself
 Industrial partner – cannot engage in
any business for himself unless the
partnership expressly permits him to do
so; and if he should do so, the capitalist
partners may either exclude him from
the firm or avail themselves of the
benefits which he may have obtained in
the firm or avail themselves of the
benefits which he may have obtained in
violation of this provision, with a right to
damages in either case. (Art. 1789, NCC)
The prohibition is absolute and applies whether
the industrial partner is to engage in the same
business in which the partnership is engaged or
in any kind of business.(De Leon & De Leon, Jr.
Comments and Cases on Partnership, Agency and
Trusts, 2014, p.100, citing Evangelista & Co. vs. Abad
Santos, G.R. No. L-31684 June 28, 1973)
88 Center for Legal Education and Research
 Capitalist partner – the 2018 prohibition
extends only to any operation which is
of the same kind of business in which
the partnership is engaged unless there
is stipulation to the contrary (Art. 1808,
NCC).
4. Obligation to Contribute Additional Capital
(Art. 1791, NCC)
General Rule: A capitalist partner is not bound
to contribute to the partnership more than what
he agreed to contribute.
Exception: In case of imminent loss of the
business, and there is no agreement to the
contrary, he is under obligation to contribute an
additional share to save the venture.
If he refuses to contribute, he shall be obliged
to sell his interest in the partnership to the other
partners.
Requisites before capitalist partners may be
obliged to sell his interest to the others:
1. Imminent loss of the business of the
partnership;
2. Majority of the capitalist partners are of the
opinion that an additional contribution to
the common fund would save the business;
3. Capitalist partner refuses deliberately to
contribute (not due to financial inability to
do so);
4. There is no agreement to the contrary. (De
Leon & De Leon, Jr., Comments and Cases on
Partnership, Agency, and Trusts, 2014, p.102)
5. Obligation of Managing Partners who
Collect Debt (Art. 1792, NCC)
Where a person is separately indebted to the
partnership and to the managing partner at the
same time, any sum collected by the managing
partner shall be applied to the two credits in
proportion to their amount, even though receipt
has been given for the latter‘s own account only,
except where he received it entirely for the
account of the partnership credit only.

Requisites:
1. The existence of two debts (one where
the collecting partner is a creditor, the
other, where the partnership is
creditor);
2. Both debts are demandable;
3. The partner who collects is authorized
to manage and actually manages the
partnership (De Leon & De Leon, Jr.,
Comments and Cases on Partnership,
Agency, and Trusts, 2014, p.103)
5. Obligation of Partner Who Receives Shares
in Partnership Credit
A partner who receives in whole or in part his
share in the partnership credit, when the others
have not collected theirs, shall be obliged, if the
debtor should thereafter become insolvent, to
bring to the partnership capital what he received
even though he may have given receipt for his
share only. (Art. 1793, NCC)
Requisites:
1. A partner has received, in whole or in part,
his share of the partnership credit;
2. The other partners have not collected their
shares;
3. The partnership debtor has become
insolvent. (De Leon & De Leon, Jr., Comments
and Cases on Partnership, Agency,
and Trusts, 2014, p.105)
Art. 1792 In comparison with Art. 1793
(Where a Partner Receives His Share of a
Partnership)
Art. 1792 Art. 1793
Two debts One debt only
Applies only to Applies to any partner
managing partner
6. Obligation of Partner for Damages
Partnership (Art. 1794, NCC)
Every partner is responsible to the partnership
for damages suffered by it through his fault. He
cannot compensate them with the profits and
benefits which he may have earned for the
partnership by his industry.
Purple Notes
Mercantile Law
However, the court may equitably lessen his
responsibility if thru the partner‘s
EXTRAORDINARY efforts in other activities of
the partnership, UNUSUAL PROFITS have been
realized.
7. Duty to Render Information (Art. 1806, NCC)
Partners shall render on demand true and full
information of all things affecting the
partnership to any partner or the legal
representative of any deceased partner of any
partner under legal disability.
8. Obligation to Account for Any Benefit and
Hold as Trustee Unauthorized Personal
Profits (Art. 1807, NCC)
Every partner must account to the partnership
for any benefit, and hold as trustee for it any
profits derived by him without the consent of
the other partners from any transaction
connected with the formation, conduct,
liquidation of the partnership or from any use by
him of a property.
Obligations of Partnership/ Partners to
Third Persons
Use of partnership name
1. Requirement of firm name: Every
partnership is required to operate under a
firm name (Art. 1815, NCC).
2. Name to be adopted:
 It can adopt any name, which may or
may not include the name of one or
more of the partners (Art.1815, NCC).
 In case of limited partnership, it is
required that the word ―Ltd.‖ be
included in the name of the partnership
to (Art. 1844[1], NCC).
3. Use of Name of Non-Partner. Article 1825 of
the Civil Code prohibits a third person from
including his name in the firm name under
pain of assuming the liability of a partner (In
re: Petition for Authority to Continue Use of the
Firm Name ―Sycip,‖ July 30, 1979).
89
Bar Operations C ommissions 89
 Purple Notes
Mercantile Law
Those who, not being members of the
partnership, include their names in the firm
name shall be subject to the liability of a partner
(Art. 1815[2], NCC).
Liability for contractual obligations:
Nature and Extent of liability:
a. Pro-rata – The Liability of the partnership
shall be equally divided among the partners,
including industrial ones.
b. Subsidiary – Each partner shall be liable with
his separate property after all the assets of
the partnership have been extinguished.
(Art. 1816, NCC)
Stipulation against liability
Any stipulation against the foregoing liability is:
 Void, in so far as third persons are
concerned;
 Valid, as among the partners (Art. 1817,
NCC).
Separate obligation by a partner – If a
partner undertakes in his individual capacity and
on his individual credit to perform a partnership
contract, he becomes primarily (not secondarily)
liable for the same (Art. 1816, NCC).
Right of representation
General Rule: Every partner is an agent of the
partnership and his act binds the partnership if it
is for apparently carrying on in the usual way
the business of the partnership.
Exception:
1. The partner so acting has in fact no authority
to act for the partnership in the particular
matter; and
2. The person with whom he is dealing has
knowledge of the fact he has no such
authority (Art. 1818, NCC).
Partnership is NOT BOUND by act of a
partner if:
90 Center for Legal Education and Research
2018 on of
1. Act is not apparently for the carrying
business of the partnership in the usual
way, unless authorized by other partners.
(Art. 1818[2], NCC)
2. Although the act is for apparently carrying
on in the usual way the business of the
partnership, the partner so acting has no
authority to act in the particular matter and
the person with whom he dealt with had
knowledge of such fact. (Art. 1818[1], NCC)
3. Act is in contravention of a restriction on
authority and the person he dealt with had
knowledge of the restriction. (Art. 1818, last
par., NCC)
Acts requiring unanimous consent of all
partners (if business has not been
abandoned):
1. Assignment of partnership property in trust
for creditors or on the assignee‘s promise to
pay the debts of the partnership;
2. Disposition of goodwill of the business;
3. Doing of any other act which would make it
impossible to carry on the ordinary business
of partnership;
4. Confession of judgment;
5. Entering into a compromise concerning
partnership claim or liability;
6. Submission of partnership claim or liability
to arbitration; and
7. Renunciation of a partnership claim (Art.
1818[3], NCC).
Conveyance of Real Property
Where title is in partnership‟s name: Can
be conveyed only in the partnership name (Art.
1774, NCC).
Effect of conveyance by a single partner:
1. If conveyance is in the usual course of
business, the same is within the scope of
the partner‘s apparent authority, therefore
binding upon the principal.
2. If conveyed in partnership name but not
authorized, the partnership may recover the
property unless the same has been
conveyed by the grantee to a holder for
value without knowledge that the partner
has exceed his authority. (Art. 1819[1], NCC)
 Purple Notes
3. If conveyed in his own name and the act is
one within the authority of the partner the
conveyance passes the equitable interest of
the partnership. (Art. 1819[2], NCC)
Where title is in name of one or more but
not all the partners and the record does
not disclose the right of the partnership
and the conveyance is executed without
authority in the name of the partner or
partners in whose name the title stands:
The partners in whose name the title stands
may convey title to such property.
But the partnership may recover such property if
the partners act does not bind the partnership
under the provisions of Article 1818, unless the
purchaser or his assignee, is a holder for value,
without knowledge. (Art. 1819[3], NCC)
Where title is in name of one or more or all
partners, or in a third person in trust for
the partnership:
A conveyance executed by a partner in the
partnership name, or in his own name, passes
the equitable interest of the partnership,
provided the act is one within the authority of
the partner under the provisions of the first
paragraph of Article 1818. (Art. 1819[3], NCC)
Where title in names of all partners: A
conveyance executed by all the partners passes
all their rights in such property. (Art. 1819[5],
NCC)
Effect of admission and representation by
a partner - It binds the partnership when:
1. It concerns partnership affairs; and
2. It is within the scope of his authority (Art.
1820, NCC).
Notice to, or knowledge of, a partner of
matter affecting partnership affairs:
Notice to, or knowledge of, a partner of any
matter relating to partnership affairs operates as
notice to or knowledge the partnership except in
case of fraud on the partnership, committed by
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Mercantile Law
or with the consent of that partner. (Art. 1821,
NCC)
Liability arising from partner‟s tort or
breach of trust:
Instances giving rise to liability:
1. Where a partner, by any wrongful act or
omission and acting in the ordinary course
of the business of the partnership or with
the authority of his co-partners, causes loss
or injury to a non-partner (Art. 1822, NCC).
2. Where a partner acting within the scope of
his apparent authority receives money or
property of a third person and misapplies it
(Art. 1823[1], NCC).
3. Where the partnership in the course of its
business receives money or property of a
third person and the money or property so
received is misapplied by any partner while
it is in the custody of the partnership (Art.
1823[2], NCC)
Who shall be liable:
1. The partnership is liable to the same
extent as the partner so acting or
omitting to act (Art. 1822, 1823, NCC).
2. But all the partners are liable solidarily
with the partnership for everything
chargeable to the partnership in the
abovementioned instances (Art. 1824,
NCC).
3. In such representation, the transaction
would be considered as their joint act or
obligation.
4. The partner by estoppel is liable pro rata
with the other persons so consenting to
the contract or representation, if any
(Art. 1825, NCC).
Liability of incoming partner for
obligations arising prior to his admission:
1. He is liable even though he had not been a
partner when such obligations were
incurred.
2. But his obligations shall be satisfied only out
of partnership property.
Bar Operations C ommissions 91
 Purple Notes
Mercantile Law
3. His own property shall not be liable, unless
there is a stipulation to the contrary. (Art.
1826, NCC)
Principle of Delectus Personae
A rule inherent in every partnership wherein no
one can become a member of the partnership
without the consent of all of the partners.
This does not hold true, however, to a limited
partner who is referred to as mere contributor
under Art. 1866 of the NCC. He is practically a
stranger in the limited partnership whose liability
is limited to his interest in the firm without any
right and power to participate in the
management and control of the business. (De
Leon & De Leon, Jr., Comments and Cases on
Partnership, Agency, and Trusts, 2014, p. 319)
DISSOLUTION AND WINDING UP
Dissolution, defined:
It is the change in the relation of the partners
caused by any partner ceasing to be associated
in carrying on of the business (Art.1828, NCC).
3. Dissolution by Operation of Law
Winding Up, defined:
It is the process of settling the partnership
business or affairs after dissolution.
Termination:
It is the point when all partnership affairs are
wound up or completed and is the end of the
partnership life. It takes place after both
dissolution and winding up have occurred.
Causes of Dissolution:
The parties may agree to expand the grounds
provided under Article 1830 but NOT to DELIMIT
them. The causes are enumerated as follows:
1. Extrajudicial Dissolution – by act of the
parties WITHOUT violation of their
agreement
4. Judicial Dissolution
92 Center for Legal Education and Research
2018 term
a. By the termination of the definite
or particular undertaking specified in the
agreement;
b. By the express will of any partner, who
must act in good faith, when no definite
term or particular undertaking is
specified;
c. By the express will of all the partners
who have not assigned their interests or
suffered them to be charged for their
separate debts, either before or after
the termination of any specified term or
particular undertaking;
d. By the expulsion of any partner from the
business bona fide in accordance with
such a power conferred by the
agreement between the partners.
2. Extrajudicial Dissolution – by act of the
parties WITH violation of their agreement
In contravention of the agreement between
the partners, where the circumstances do
not permit, dissolution under any other
provision of this article by the express will of
any partner at any time.
a. By any event which makes it unlawful
for the business of the partnership to be
carried on or for the members to carry it
on in partnership;
b. When a specific thing, which a partner
had promised to contribute to the
partnership, perishes before the
delivery; in any case by the loss of the
thing, when the partner who contributed
it having reserved the ownership
thereof, has only transferred to the
partnership the use or enjoyment of the
same; but the partnership shall not be
dissolved by the loss of the thing when
it occurs after the partnership has
acquired the ownership thereof;
c. By the death of any partner;
d. By the insolvency of any partner or of
the partnership;
e. By the civil interdiction of any partner.
 Purple Notes
When so decreed by the court, the presiding
judge may place the partnership under
receivership and direct an accounting to be
made towards winding up the partnership
affairs. (Art. 1831, NCC)
Effects of Dissolution
1. Partnership not terminated – dissolution
does not automatically result in the
termination of the legal personality of the
partnership, or the cessation of his business,
nor the relations of the partners among
themselves who remain as co-partners until
the partnership is terminated. (Art. 1829,
NCC)
2. Partnership continues for a limited purpose
– for the purpose of making good all
outstanding engagements, of taking and
settling accounts, and collecting all the
property, means and assets of the
partnership existing at the time of its
dissolution for the benefit of all interested.
(De Leon & De Leon, Jr., Comments and Cases
on Partnership, Agency and Trusts, 2014, p.215)
3. Transaction of new business prohibited –
the partnership remains viable only for the
purpose of winding up its affairs. (De Leon &
De Leon, Jr., Comments and Cases on
Partnership, Agency and Trusts, 2014, p.216)
Grounds for Dissolution by Decree of Court
On application by or for a partner:
1. A partner declared insane in any judicial
proceeding or shown to be of unsound
mind;
2. A partner becomes in any other way
incapable of performing his part of the
partnership contract;
3. A partner has been guilty of such conduct as
tends to affect prejudicially the carrying on
of the business;
4. A partner willfully or persistently commits a
breach of the partnership agreement, or
otherwise conducts himself in matters
relating to the partnership business that it is
not reasonably practicable to carry on the
business in partnership with him;
93
Mercantile Law
5. The business of the partnership can only be
carried on at a loss;
6. Other circumstances which render a
dissolution equitable. (Art. 1831, NCC)
Upon application by purchaser of partner‘s
interest under Art. 1813 or 1814:
1. After termination of specified term or
particular undertaking; or
2. At any time if the partnership was a
partnership at will when interest was
assigned or when the charging order was
issued.
Effect of dissolution on authority of a
partner
Dissolution terminates all authority of any
partner to act for the partnership, except with
respect to the following:
1. Acts to wind up partnership affairs.
2. Acts to complete transactions begun before
dissolution (Art. 1832, NCC)
In the above cases, the act of the partner binds
the partnership. If the assets of the partnership
are not sufficient to pay the liabilities, the
partners can be held liable to the extent of their
separate properties. (Art. 1839, NCC)
Right of Partners upon Dissolution
1. If dissolution is WITHOUT violation of
partnership agreement:
a. To have partnership property applied to
discharge the liabilities of the
partnership;
b. To have surplus applied to pay in cash
the net amount owing to respective
partners.
2. If dissolution is due to expulsion of a
partner, rights of expelled partner:
a. To be discharged from all partnership
liability;
b. To receive in cash only the net amount
due him from the partnership.
3. If dissolution is due to violation of
partnership agreement
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 Purple Notes
Mercantile Law
Partner who has not caused dissolution
wrongfully (Innocent partner):
a. To have partnership property applied for
payment of its liabilities
b. To receive in cash his share in the surplus
c. To demand damages from the guilty partner
for breach of the agreement
d. To continue the business under the same
name
e. To possess the partnership property should
they decide to continue the business
Rights of a partner who has wrongfully caused
the dissolution (Guilty Partner):
1. If the business is NOT continued –
a. To have partnership property applied to
discharge partnership liabilities
b. To receive his share of the surplus less
damages owing to the innocent partner
2. If the business is continued –
a. To have the value of his interest less
damages and
b. To be released from all existing and
future liabilities of the partnership (NCC,
Art. 1837)
4. Right of a retiring partner or the estate of
the deceased partner when business is
continued without settling the accounts
Unless otherwise agreed, retiring partner or his
legal representative shall receive as an ordinary
creditor:
An amount equal to the value of his interest in
the dissolved partnership with interest, or, at his
option or at the option of his legal
representative, in lieu of interest, the profits
attributable to the use of his right in the
property of the dissolved partnership;
Provided that the creditors of the dissolved
partnership as against the separate creditors, or
the representative of the retired or deceased
partner, shall have priority on any claim arising
under this article. (Art. 1841, NCC)
94 Center for Legal Education and Research
Rescission on the ground of2018 fraud or
misrepresentation of one of the parties
thereto, renders the party entitled to
rescind, without prejudice to any other
right, entitled to: (Art. 1838, NCC)
1. Right of lien or retention
2. Right of subrogation
3. Right of indemnification
 Although the law uses ―rescind‖ the
proper technical term should be
―annulled‖
Rules in settling accounts between
partners after dissolution (Art. 1839, NCC)
Assets of partnership for payment of
liabilities:
1. The partnership property;
2. The contributions of the partners necessary
for the payment of all the liabilities.
Partnership property insufficient to pay all
liabilities
1. Contributions of the partners shall be in
accordance with their:
a. Agreement as to sharing of losses;
b. If there is no agreement as to losses,
according to their agreement as to
sharing of profits;
c. If there is no agreement as to sharing of
both profit and losses, then in
accordance with their capital
contribution.
2. If any partner does not pay his share in the
loss, the remaining partner shall have to
pay. However, the latter or his legal
representative who paid in excess of his
share in the liability shall have the right to
enforce the rule specified in the preceding
paragraph;
3. In case one of the partners died, his
individual property shall be liable for his
share of the loss.
 Purple Notes
Priority in Partnership Property and
Individual Property
When partnership property and the individual
properties of the partners are in possession of
the court for distribution, partnership creditors
shall have priority on partnership property and
separate creditors on individual property, saving
the rights of lien or secured creditors.
Where a partner has become insolvent or
his estate is insolvent, the claims against his
separate property shall rank in the following
order:
1. Those owing to separate creditors;
2. Those owing to partnership creditors;
3. Those owing to partners by way of
contribution.
 Insolvency here of the partner or his
estate does not necessarily mean that
there is no more money or property; it
is enough that the assets are less than
the liabilities. (Paras, Civil Code of the
Philippines Annotated, 2013, p. 713)
Liquidation of dissolved partnership
Concept: This involves the sale of the assets of
the partnership, the payment of its liabilities,
and the distribution of the remaining cash or
other property to the partners. (De Leon & De
Leon, Jr., Comments and Cases on Partnership,
Agency and Trusts, 2014, p.259)
Order of Payment of Partnership Liabilities
1. Those owing to creditors other than
partners;
2. Those owing to partners other than for
capital and profits;
3. Those owing to partners in respect of capital
4. Those owing to partners in respect of
profits. (Art. 1839(2), NCC)
Who has the right or duty to wind up or
liquidate partnership affairs?
 If it is judicial, the right or duty to wind up
or liquidate partnership affairs devolves
upon partner or legal representative or
assignee designated by the court (NCC, Art.
1836), whereas if it is extrajudicial, the
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Mercantile Law
right or duty devolves upon the managing
partner.
 But where there is no managing partner, or
even where there is, he dies, then the right
or duty devolves upon the partners who
have not wrongfully dissolved the
partnership or the legal representative of
the last surviving partner, not insolvent. (Art.
1836, NCC)
When does the four (4) years prescription
period of the right of a partner to demand
an accounting of the partnership business
start to run?
The partnership, although dissolved, continues
to exist and its legal personality is retained, at
which time it completes the winding up of its
affairs, including the partitioning and distribution
of the net partnership assets to the partners.
For as long as the partnership exists, any of the
partners may demand an accounting of the
partnership business. Prescription of the said
right starts to run only upon the dissolution of
the partnership and when the final accounting is
done. (Emnace vs. Court of Appeals, G.R. No.
126334, November 23, 2001)
LIMITED PARTNERSHIP
Definition
A limited partnership is a partnership which has
one or more general partners and one or more
limited partners. The limited partners as such
shall not be bound by the obligations of the
partnership (Art. 1843, NCC), except up to the
extent of their contribution.
Limited partnership is not created by mere
voluntary agreement.
 A limited partner as such cannot be held
liable for partnership obligations (NCC, Art.
1843). However, if his surname appears in
the partnership or firm name or if he
participates in the management or control of
the business, he can be held liable (Arts.
1846 & 1848, NCC).
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Essential Requirements for Formation of
Limited Partnership
1. A certificate or articles of limited partnership
which states the matters enumerated in
Article 1844, which must be signed and
sworn;
2. Such certificate must be filed for record in
the Office of the Securities and Exchange
Commission.
 It is only the property of the partnership
that can be pursued by the creditors.
Execution of the Prescribed Certificate
A prime requisite to the formation of a limited
partnership, under Article 1844, is the execution
of the prescribed certificate. This document, as
a rule, must contain the matters enumerated in
said article. Thus, a limited partnership cannot
be constituted orally.
The statements required in the certificate must
be true at the time the certificate and other
required papers are filed with the SEC.
A strict compliance with the legal requirements
is not necessary. It is sufficient that there is
substantial compliance in good faith.
The firm becomes a general partnership only as
to its relation to third persons. It is, in form, still
a limited partnership subject to all the rules
applicable to a limited partnership. (De Leon & De
Leon, Jr., Comments and Cases on Partnership,
Agency and Trusts, 2014, p.285)
In the following cases, a certificate shall
be amended (Art. 1864, NCC):
1. There is a change in the name of the
partnership or in the amount or character of
the contribution of any limited partner;
2. A person is substituted as a limited partner;
3. An additional limited partner is admitted;
4. A person is admitted as a general partner;
5. A general partner retires, dies, becomes
insolvent or insane, or is sentenced to civil
interdiction and the business is continued
under Article 1860;
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2018 of the
6. There is a change in the character
business of the partnership;
7. There is a false or erroneous statement in
the certificate;
8. There is a change in the time as stated in
the certificate for the dissolution of the
partnership or for the return of a
contribution;
9. A time is fixed for the dissolution of the
partnership, or the return of a contribution,
no time having been specified in the
certificate; or
10. The members desire to make a change in
any other statement in the certificate in
order that it shall accurately represent the
agreement among them.
 The certificate must be signed and
sworn to by all the members, and an
amendment substituting a limited
partner or adding a limited or general
partner shall be signed also by the
member to be substituted or added, and
when a limited partner is to be
substituted, the assigning limited
partner shall also sign the amendment.
(Art. 1865, NCC)
The cancellation or amendment must be
recorded in the SEC.
Specific Rights of Limited Partners:
1. To have partnership books kept at principal
place of business;
2. To inspect and copy at a reasonable hour
partnership books or any of them.
3. To demand true and full information of all
things affecting the partnership;
4. To demand formal account of partnership
affairs whenever circumstances render it
just and reasonable;
5. To ask for dissolution and winding up by
decree of court;
6. To receive a share of profits or other
compensation by way of income;
7. To receive return of his contribution
provided the partnership assets are in
excess of all its liabilities. (Art. 1851, NCC)
Obligations of a Limited Partner
 Purple Notes
1. Not to allow the inclusion of his surname in
the partnership name. (Art. 1846, NCC)
Exceptions:
a. If it is also the surname of a general
partner.
b. The business had been carried on under a
name in which his surname appeared prior
to his admission as a limited partner.
2. To be liable as a general partner if he takes
part in the control of the business;
3. To be liable to the partnership for the
following:
a. For the difference between his actual
contribution and that stated in the
certificate.
b. For any unpaid contribution which he
agreed in the certificate to make in the
future at the time and on the conditions
stated in the certificate. (Art. 1858, NCC)
4. To hold as trustee for the partnership the
following:
a. Specific property stated in the certificate
as contributed by him, but which was
not contributed.
b. Specific property, which has been
wrongfully returned to him.
c. Money or property wrongfully paid or
conveyed to him on account of his
contribution. (Art. 1858, NCC)
5. To be liable to the partnership after he has
rightfully received the return of his capital
contribution, for any sum not in excess of
such return with interest, which is necessary
to discharge its liabilities to all creditors
which extended credit or whose claims arose
before such return. (Art. 1858, NCC)
6. Not to receive or hold as collateral security
any partnership property on account of his
claims for loan granted to or other business
transaction with the partnership. (Art. 1854
NCC)
7. Not to receive from a general partner or the
partnership on account of such claims any
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Mercantile Law
payment, conveyance, or release from
liability, if at the time the assets of the
partnership are not sufficient to discharge
partnership liabilities to persons not claiming
as general or limited partnership. (Art. 1854,
NCC)
Liability for Unpaid Contribution:
1. For the difference between his contribution
as actually made and that stated in the
certificate as having been made;
2. For any unpaid contribution, which he has,
agree in the certificate to make in the future
at the time and conditions stated in the
certificate.
Liability as Trustee:
1. Specific property stated in the certificate to
be contributed by him, but which was not
contributed or which has been wrongfully
returned; and
2. Money or other property wrongfully paid or
conveyed to him on account of his
contribution.
Waiver of Liabilities of Limited Partner:
These liabilities can be waived or compromised
only by consent of all the members.
Assignment of a Limited Partner‟s Interest
(Art. 1859, NCC)
A limited partner‘s interest is assignable.
Substituted limited partner – is a person
admitted to all the rights of a limited partner
who has died or has assigned his interest in a
partnership. (Art. 1859, NCC)
Rights and Powers, Restrictions and
Liabilities of Substituted Limited Partner
General Rule: He has all the rights and powers
and is subject to all the restrictions and liabilities
as assignor (Art. 1859, NCC).
Exception: Those liabilities, which he was
ignorant at the time he became a limited partner
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and which could not be ascertained from the
certificate (Art. 1859, NCC).
Prohibited Transactions
The limited partner is prohibited from:
1. Receiving or holding as collateral security
any partnership property;
2. Receiving any payment, conveyance, or
release from liability if it will prejudice the
right of third persons. (Art. 1854, NCC)
Order of Payment of Partnership Liabilities
1. Those owing to creditors other than
partners;
2. Those owing to limited partners in respect
to their share of the profits and other
compensation by way of income on their
contributions;
3. Those owing to limited partners in respect
to their capital contribution;
4. Those owing to general partners other than
for capital and profits;
5. Those owing to general partners in respect
to profits;
6. Those owing to general partners in respect
to capital. (Art. 1863, NCC)
B. CORPORATION
Corporation, defined:
A corporation is an artificial being created by
operation of law, having the right of succession
and the powers, attributes and properties
expressly authorized by law or incident to its
existence. (Sec. 2, Revised Corporation Code [RCC])
Attributes of the corporation:
1. It is an artificial being;
2. It is created by operation of law;
3. It has the right of succession; and
4. It has only the powers, attributes and
properties expressly authorized by law or
incident to its existence. (Sec. 2, RRC)
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Doctrine of Limited Capacity: 2018
Only such powers as are expressly granted to it
by law and by its articles of incorporation
including others which are incidental to such
conferred powers, those reasonably necessary
to accomplish its purpose and those which may
be incidental to its existence
Note: Can do things as the law asks or allows
it to do. If it does anything beyond, it shall be
considered as ULTRA VIRES, except when
necessary or incidental to the exercise of the
powers expressly conferred. (Sec. 44, RCC)
Revised Corporation Code, the general law
governing corporation:
The general law under which a private
corporation may be formed or organized.
Mere consent of parties, not sufficient to
form a corporation:
Mere consent of the parties to form a
corporation is NOT sufficient; the State must
give its consent either through a special law (in
the case of government corporation) or a
general law (for a private corporation). (Sundiang
& Aquino, Reviewer on Commercial Law, 2019, p.
209)
Corporate Entity Theory:
A corporation comes into existence upon the
issuance of the Certificate of Incorporation. Only
then will it acquire a juridical personality to sue
and be sued, enter into contracts, hold or
convey property or perform any legal act, in its
own name. As a legal entity, it is possessed with
a personality separate and distinct from the
individual stockholders or members. The
properties it possesses belong to it exclusively
as a separate juridical entity. The corporation is
not likewise liable for debt, obligation or
liabilities of its stockholder. (Sec. 19, RCC)
CLASSES OF CORPORATION
1. Public or private corporation
2. Corporate aggregate or corporate sole
 Purple Notes
3. De jure, de facto, corporation by estoppel,
or corporation by prescription
4. Parent or holding, subsidiary, or affiliated
corporation
5. Stock or non-stock corporation
6. Domestic or foreign corporation
7. Ecclesiastical or religious, or lay corporation
8. Eleemosynary or civil corporation
9. Open or close corporation
10. Others - investment companies, quasi-
public corporation, or quasi-corporation
11. One Person Corporation
12. Corporations Vested with Public Interest
1. AS TO WHETHER FOR PUBLIC OR
PRIVATE PURPOSE
a. Public corporations:
Formed or organized for the government or a
portion of the State or any of its political
subdivisions for the general good and welfare;
governed by special laws. Their subsidiaries are
entirely different or independent from that of
the other. They are not immune from suit unless
provided by the law of their creation. (Ladia, The
Corporation Code of the Philippines, 2007, p. 16)
b. Private corporations:
Formed by private persons alone or with the
State; governed by the law on Private
Corporations. They may be stock or non-stock
corporations. (Aquino, Philippine Corporation Law
Compendium, p. 114, 2018)
Test whether public or private
corporation:
The true test to determine the nature of a
corporation as public or private is found in the
relation of the body to State. Strictly speaking, a
public corporation is one that is created, formed
or organized for political or governmental
purposes with political powers to be exercised
for purposes connected with the public good in
the administration of civil government. (Ladia,
The Corporation Code of the Philippines, 2015, p. 15)
Dual status of public corporations:
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Mercantile Law
Every local government unit created or
recognized under the Code is a body politic and
corporate endowed with powers to be exercised
by it in conformity with law. As such, it shall
exercise powers as a political subdivision of the
national government and as a corporate entity
representing the inhabitants of its territory. (Sec.
15, Local Government Code of 1991)
A public or municipal corporation possesses two
kinds of power, governmental or public and
proprietary or private. In the exercise of the
former, it is a municipal government, while as to
the latter; it is a ―corporate legal individual.‖
2. AS TO THE NUMBER OF PERSONS WHO
COMPOSE THE CORPORATION
a. Corporation aggregate:
Composed of a number of individuals vested
with corporate powers.
b. Corporation sole:
A religious corporation which consists of one
person or individual and who is made as body
corporate and politics in order to give them
some legal capacity and advantage which as
natural persons, they cannot have (may be
formed by the chief archbishop, bishop, priest,
minister, rabbi or other presiding elder of
religious denominations, sects or churches. (Sec.
108, RCC)
3. AS TO THEIR LEGAL RIGHT TO
CORPORATE EXISTENCE
a. De jure corporation:
Juridical entities created or organized in strict or
substantial compliance with the statutory
requirements of incorporation and whose rights
to exist as such cannot be successfully attacked
even by the State in a quo warranto proceeding.
(Ladia, The Corporation Code of the Philippines, 2007,
p. 20)
b. De facto corporation:
Exists by virtue of an irregularity or a defect in
the organization or constitution or from some
Bar Operations C ommissions 99
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Mercantile Law
omission to comply with the conditions
precedent by which corporations de jure are
created; organized with a colorable compliance
with the requirements of a valid law. Its
existence cannot be inquired collaterally, such
inquiry may be made by the Solicitor General in
a quo warranto proceeding. (Sec. 19, RCC)
Requisites of a De Facto Corporation:
1. A valid law under which the corporation is
organized;
2. A bona fide attempt on good faith to
incorporate;
3. An assumption of corporate powers; and
4. Good faith in claiming to be and doing
business as a corporation. (Ladia, The
Corporation Code of the Philippines, 2007, p. 69)
The filing of Articles of Incorporation and the
issuance of the certificate of incorporation are
essential for the existence of a de facto
corporation. An organization not registered with
the Securities and Exchange Commission (SEC)
cannot be considered a corporation in any
concept, not even as a corporation de facto.
(Seventh Day Adventist Conference Church of
Southern Philippines, Inc. vs. Northeastern Mindanao
Mission of Seventh Day Adventist, Inc., G.R. No.
150416, July 21, 2006)
The officers and directors of a de facto
corporation are subject to all the liabilities and
penalties attending to officers and directors duly
chosen by a corporation de jure, including the
liability under the criminal law, and their acts are
binding when such acts would be within the
power of such officers of the corporation were
one de jure. (De Leon, Corporation Code)
Instances when there is a de facto
corporation:
1. Failure to give the notice required by the
statue for the meeting for its organization;
2. Failure to fix and limit the amount of capital
stock of the company at the first meeting;
3. Failure to issue stocks;
4. Informalities in the proceedings of
corporate meetings;
5. Lack of certificate of organization filed or
executed;
100 Center for Legal Education and Research
6. 2018
Lack of elected Board of Directors;
7. Irregularities with respect to the number,
term, place of residence, and meeting of
the Board of Directors;
8. Some of the persons elected as directors
are disqualified; and
9. In general, when there is defect in the
organization of the corporation and not on
its creation. (Chung Ka Bio vs. IAC, G.R. No.
71837, July 26, 1988)
c. Corporation by estoppel:
Exists when a group of persons assumes to act
as a corporation knowing it to be without
authority to do so, and enters into a transaction
with a third person on the strength of such
appearance. It cannot be permitted to deny its
existence in an action under said transaction.
(Sec. 20, RCC)
General Rule:
All persons, not stockholders and members, 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.
(Sec. 20, RCC)
Exceptions:
1. When such persons are not trying to
escape liability from the contract from
which they have benefited but rather are
the ones claiming from the contract.
(International Express vs. CA, G.R. No. 119002,
October 19, 2000)
2. While as a general rule, as person who has
contracted or dealt with an association in
such a way as to recognize its existence as
a corporate body is estopped from denying
the same in an action arising out of such
transaction or dealing, yet this doctrine
may not be held to be applicable where
fraud takes part in the said transaction.
(Salvatierra vs. Garlitos, G.R. No. L-11442, May
23, 1958)
An unincorporated association, which
represented itself to be a corporation, will be
estopped from denying its corporate capacity in
a suit against it by a third person who relied in
 Purple Notes
Mercantile Law
good faith on such representation. Also, a third that holds stocks in other companies for
party who, knowing an association to be purposes of control rather than for mere
unincorporated, nonetheless treated it as a investment. (Ladia, The Corporation Code of the
corporation and received benefits from it, may Philippines, 2007, p. 19)
be barred from denying its corporate existence
in a suit brought against the alleged corporation. b. Subsidiary corporation:
(Lim vs. Philippine Fishing Gear Industries, Inc, G.R.
No. 136448, November 3, 1999) A corporation under the control of another
corporation which is the holding company. (Ibid.)
De Facto Corporation Corporation by
Estoppel c. Affiliated corporation
As to who can question its corporate existence
Only the State (Sec. 20, The State or any third
Corporations which are subject to common
RCC) person who relied in its
representation in good control of the mother holding company and
faith (Sec. 21, RCC) operated as part of a system. They are
As to being subject of a direct or collateral sometimes called ―sister‖ company. (Ladia, The
attack Corporation Code of the Philippines, 2007, p. 20)
Direct only (Ibid.) Both direct and collateral
(Ibid.) 5. AS TO THE EXISTENCE OF SHARES OF
As to creation STOCK
Has not complied with all Absence of conditions
requirements, only precedent needed for a a. Stock corporation:
colorable compliance de facto corporation
As to liabilities of officers and directors A corporation whose capital stock is divided into
Liable only to the extent Those who have
shares and which is authorized to distribute to
of their unpaid knowledge of its lack of
subscription unless acted authority to act as such
holders thereof dividends on the basis of the
in bad faith are liable as general shares held. (Sec. 3, RCC)
partners
As to capacity to sue or be sued Requisites of a stock corporation:
Can sue or be sued Cannot sue or be sued
except by a third party a. It has a capital stock divided into shares;
who relied on its and,
representation in good b. It is authorized to distribute dividends or
faith allotments as surplus profits to its
(Ladia, The Corporation Code of the Philippines, 2007, stockholders on the basis of the shares held
p. 20)
by each of them.
d. Corporation by prescription:
Although a corporation has a capital stock
divided into shares if it is not authorized to
A corporation that was not formally organized as
distribute dividends and allotment of surplus and
such, but has been duly recognized by
profits to its stockholders, it may not be
immemorial usage as a corporation, with rights
classified as a stock corporation because it lacks
and duties maintainable at law. (Sundiang &
the second requisite. (Republic vs. City of
Aquino, Reviewer on Commercial Law, 2017, p. 185)
Parañaque, G.R. No. 191109, July 18, 2012)
4. AS TO THEIR RELATION TO ANOTHER
b. Non–stock corporation:
CORPORATION
One where no part of its income is distributable
a. Parent or holding corporation:
as dividends to its members, trustees, or
officers, subject to the provisions of the
Corporation that controls another as a subsidiary
Corporation Code on dissolution. (Sec. 86, RCC)
by the power to elect management. It is one

101
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Mercantile Law
Requisites of a Non-stock corporation: b. Foreign corporations: 2018

1. It does not have a capital stock divided into Formed or organized or existing under any laws
shares; other than the Philippines and whose laws allow
2. No part of its income is distributable as Filipino citizens and corporations to do business
dividends to its members; and. in its own country. (Sec. 140, RCC)
3. It may be formed or organized for
charitable, religious, educational, 7. AS TO WHETHER THEY ARE FOR
professional, cultural, civic service, RELIGIOUS PURPOSE OR NOT
fraternal, literary, or similar purposes like
trade, industry, agricultural and like a. Ecclesiastical or religious corporations:
chambers or any combination thereof. (Sec.
86 and 87, RCC) Composed exclusively of ecclesiastics organized
for spiritual purposes or for administering
Purposes of non-stock corporations properties held for religious ones.

Non-stock corporations may be formed or b. Lay corporation:

organized subject to the special provisions
governing particular classes of non-stock One organized for purposes other than for
corporations for: religion.

1. charitable, 8. AS TO WHETHER THEY ARE FOR

2. religious, CHARITABLE PURPOSE OR NOT
3. educational,
4. professional, a. Eleemosynary corporation:
5. cultural,
6. fraternal, One established for or devoted to charitable
7. literary, purposes or those supported by charity.
8. scientific,
9. social, b. Civil corporation:
10. civic service,
11. or similar purposes, like trade, industry, One established for business or profit.
agricultural and like chambers,
12. or any combination thereof. (Sec. 87, RCC) 9. AS TO WHETHER THEY ARE OPEN TO
THE PUBLIC OR NOT
Treatment of profits
a. Open Corporations:
Any profit which a non-stock corporation may
obtain as an incident to its operations shall, Formed to openly accept outsiders or
whenever necessary or proper, be used for the stockholders or investors.
furtherance of the purpose or purposes for
which the corporation was organized, subject to b. Close corporations:
the provisions of this Title. (Sec. 86, RCC)
One which is limited to selected persons or
6. AS TO THE STATE UNDER OR BY WHICH members of a family or other closely-knit group.
LAW THEY HAVE BEEN CREATED
10. OTHER CLASSIFICATION OF
a. Domestic corporations: CORPORATIONS

Organized or created under or by a virtue of a. Investment companies

Philippine laws, either by legislative act or under
the provisions of the General Corporation Law.

102 Center for Legal Education and Research

 Purple Notes
Active in the sale or purchase of shares of stock
or securities, parent or holding companies that
have passive portfolios and hold the securities
merely for purposes of control and
management.
b. Quasi-public corporations:
Private corporations which have accepted from
the State the grant of a franchise or contract
involving the performance of public duties.
c. Quasi-corporations:
Possess some corporate functions and attributes
but they are primarily political subdivisions.
11. ONE PERSON CORPORATION
A corporation with a single stockholder, who
may be a natural person, a trust, or an estate.
(Sec. 116, RCC)
The following cannot be a One Person
Corporation:
1. Banks and quasi-banks, preneed, trust,
insurance, public and publicly-listed
companies, and non-chartered government-
owned and controlled corporations;
2. A natural person who is licensed to exercise
a profession except as provided under
special laws. (Sec. 116, RCC).
12. CORPORATIONS VESTED WITH PUBLIC
INTEREST
1. Publicly-held corporations under Section
17.2 of the SRC whose securities are
registered with the SEC, corporations
listed with an exchange or with assets of
at least P50,000,000.00 and having 200
or more holders of shares, each holding
at least 100 shares of a class of its equity
shares;
2. Banks and quasi-banks, non-stock
savings and loan associations,
pawnshops, corporations engaged in
money service business, preneed, trust
and insurance companies, and other
financial intermediaries; and
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Mercantile Law
3. Other corporations engaged in
businesses vested with public interest
similar to the above, as may be
determined by the SEC. (Sec. 22, RCC)
NATIONALITY OF CORPORATIONS
Test in determining the nationality of a
corporation:
1. Control test
2. Grandfather rule
Control test:
Nationality is determined by the nationality of
the controlling stockholders or members. In
times of war, this test shall apply. (Sundiang &
Aquino, Reviewer on Commercial Law, 2019, p. 191)
Philippine Nationals
Under the Foreign Investment Act of 1991 (RA
No. 7042), a corporation shall be considered a
―Philippine National‖ if it is:
1. A corporation organized under Philippine
laws of which 60% of the capital stock
outstanding and entitled to vote is owned
and held by Filipino citizens; or
2. A corporation organized abroad and
registered as doing business in the
Philippines under the Corporation Code of
which 100% of the capital stock entitles to
vote belong to Filipinos.
Note: Where a corporation and its non-Filipino
stockholders own stocks in an SEC-registered
enterprise, 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 and at least 60% of
the members of the Board of Directors of each
of both corporations must be citizens of the
Philippines, in order that the corporation shall be
considered a Philippine national. (Double 60%
rule) (Sec. 3(a), RA No. 7042, as amended by RA
No. 8179)
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Mercantile Law
Grandfather rule:
In case of doubt, it is the method of attributing
the shareholdings of a given corporate
shareholder to the second or even the
subsequent tier of ownership to determine the
ultimate ownership in a corporation. (Sundiang
and Aquino, Reviewer on Commercial Law, 2017, p.
173)
When Grandfather Rule applies
The Grandfather Rule Applies if:
1. The Filipino equity is less than 60% of the
outstanding capital of a corporation that
owns shares in a partly nationalized
enterprise; or
2. There is attempt to circumvent the
nationalization requirement or when there
is doubt as to the real owners, as in the
case where there is layering. (Sundiang and
Aquino 2017, Ibid.; Narra Nickel Mining and
Development Corp. vs. Redmont Consolidated
Mines Corp., G.R. No. 195580, January 2015)
Note: 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.
(SEC OGC Opinion No. 16-19; Narra Nickel
Mining and Development Corp. vs. Redmont
Consolidated Mines Corp., Ibid.)
CORPORATE JURIDICAL PERSONALITY
DOCTRINE OF SEPARATE JURIDICAL
PERSONALITY (Doctrine of Corporate
Entity)
A corporation has a personality separate and
distinct from its members. It has a personality
separate and distinct from the persons
composing it as well as from that of any other
entity to which it may be related. (Aquino 2018,
Philippine Corporation Code Compendium, p. 44, 2018
Edition; Secosa, Et. Al. vs. Heirs of Erwin Suarez
Francisco, G.R. No. 160039, January 2004)
LIABILITY FOR TORTS AND CRIMES
104 Center for Legal Education and Research
2018
A corporation may be held civilly liable for
torts
A corporation is civilly liable in the same manner
as natural persons for torts, because ―generally
speaking, the rules governing the liability of a
principal or master for a tort committed by an
agent or servant are the same whether the
principal be a natural person or a corporation,
and whether the servant or agent be a natural
or artificial person. All of the authorities agree
that a principal or master is liable for every tort
which he expressly directs or authorizes, and
this is just true of a corporation as of a natural
person. A corporation is liable, therefore,
whenever a tortious act is committed by the
officer or agent under express direction or
authority from the stockholder or members
acting as a body, or generally, from directors as
governing body. (PNB vs. Court of Appeals, G.R.
No. L-27155, May 1978)
Corporations are incapable of intent
Corporations are incapable of intent, hence, they
cannot commit felonies that are punishable
under the Revised Penal Code. They cannot
commit crimes that are punishable under special
laws because crimes are personal in nature
requiring a personal performance of overt acts.
In addition, the penalty of imprisonment cannot
be imposed. (Sec. 171, RCC)
Criminal liability of corporations
Since a corporation is a mere legal fiction, it
cannot be held liable for a crime committed by
its officers since it does not have malice. In such
case, the responsible officers would be criminally
liable. (People vs. Tan Boon Kong, G.R. No. 32652,
March 1930)
Exceptions: A corporation may be charged and
prosecuted for a crime if the imposable penalty
is fine. Even if the statute prescribes both fines
and imprisonment as penalty, a corporation may
be prosecuted and, if found guilty, may be fined.
(Ching vs. Secretary of Justice, G.R. No. 164317,
February 6, 2006)
Moreover, if by express provision of law (e.g.
Sections 9 and 14 of Anti-Dummy Act Law and
 Purple Notes
Anti-Money Laundering Act), the corporation is
held criminally liable.
Doctrine of corporate negligence:
 The hospital‘s failure to supervise its
resident physicians and nurses and to take
an active step in order to remedy their
negligence renders it directly liable. The
duty of providing quality medical service is
no longer the sole prerogative and
responsibility of the physician. This is
because the modern hospital now tends to
organize a highly-professional medical staff
whose competence and performance need
also to be monitored by the hospital
commensurate with its inherent
responsibility to provide quality medical
care. Such responsibility includes the proper
supervision of the members of its medical
staff. Accordingly, the hospital has the duty
to make a reasonable effort to monitor and
oversee the treatment prescribed and
administered by the physicians practicing in
its premises. (Professional Services, Inc. vs
Court of Appeals, G.R. No. 126297, February
2008)
RECOVERY OF MORAL DAMAGES
Corporations not entitled to moral
damages
A corporation is not entitled to moral damages
because it has no feelings, no emotions and no
senses. (ABS-CBN vs. Court of Appeals, GR. 128690,
January 1999)
Exceptions:
1. When the corporation has a good reputation
that is debased, resulting in its humiliation
in the business realm. (Coastal Pacific Trading,
Inc. vs. Southern Rolling Mills Co., Inc., G.R. No.
118692, July 28 2006);
2. In cases of libel, slander or any other form
of defamation. Article 2219(7) does not
qualify whether the plaintiff is a natural or
juridical person. (Filipinas Broadcasting
Network, Inc. vs. AMEC-BCCM, G.R. No. 141994,
January 17, 2005)
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Mercantile Law
Note: While the Court may allow the grant of
moral damages to corporations, it is not
automatically granted; there must still be proof
of the existence of the factual basis of the
damage and its causal relation to the
defendant‘s acts. This is so because moral
damages, though incapable of pecuniary
estimation, are in the category of an award
designed to compensate the claimant for actual
injury suffered and not to impose a penalty on
the wrongdoer. (Crystal vs. Bank of the Philippine
Islands, G.R. No. 172428, November 2008)
DOCTRINE OF PIERCING THE CORPORATE
VEIL
Under the doctrine of piercing the corporate veil,
the corporate existence is disregarded when the
corporation is formed or used for illegitimate
purposes, particularly, as a shield to perpetuate
fraud, defeat public convenience, justify wrong,
evade a just and valid obligation or defend a
crime.
The corporate mask may be removed or the
corporate veil pierced when the corporation is
just an alter ego of a person or of another
corporation. For reasons of public policy and in
the interest of justice, the corporate veil will
justifiably be impaled only when it becomes a
shield for fraud, illegality or inequity committed
against third persons. (Zambrano vs. Philippine
Carpet Manufacturing Corporation, G.R. No. 224099,
June 21, 2017)
Note: This is an exception to the rule that a
corporation has a personality distinct from its
stockholders and members.
Who may be held liable:
In cases where personal liability attaches, not
even all officers are made accountable. Rather,
only the ―responsible officer,‖ i.e., the person
directly responsible and for who ―acted in bad
faith‖ in committing the illegal dismissal or any
act violative of the Labor Code, is held solidarily
liable, in cases wherein the corporate veil is
pierced. In other instances, such as cases of so-
called corporate tort of a close corporation, it is
the person ―actively engaged‖ in the
Bar Operations C ommissions 105
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Mercantile Law
management of the corporation is held liable.
(Guillermo vs. Uson, G.R. No. 198967, March 7, 2016)
Directors or trustees who willfully and knowingly
vote for or assent to patently unlawful acts of
the corporation or who are guilty of gross
negligence or bad faith in directing the affairs of
the corporation or acquire any personal or
pecuniary interest in conflict with their duty as
such directors, or trustees, shall be liable jointly
and severally for all damages resulting
therefrom suffered by the corporation, its
stockholders or members and other persons.
(Section 30, Revised Corporation Code; People‘s
Security, Inc. vs. Flores, G.R. No. 211312, December
5, 2016)
Nature of the doctrine of piercing the veil
of corporate fiction:
1. A corporation will not look upon as a
separate legal entity, unless and until
sufficient reason to the contrary appears.
(Secosa vs. Heirs of Erwin Suarez Francisco, G.R.
No. 160039, June 29, 2004)
2. The doctrine of piercing the corporate veil is
an equitable doctrine developed to address
situations where the separate corporate
personality is abused or used for wrongful
purposes. (PNB vs. Ritratto Group, Inc., G.R.
142616, July 31, 2001)
3. Piercing can be applied only if it can be
shown that the corporate fiction was the
very tool used to commit fraud or to do
wrong, or the very means to avoid the
consequences of one‘s wrongdoing, or to
evade one‘s liabilities. (PNB vs. Andrada
Electric and Engineering Co., G.R. No. 142936,
April 17, 2002)
4. It is essentially a judicial prerogative only to
pierce the veil of corporate fiction being a
power belonging to the courts. A sheriff who
has ministerial duty to enforce a final and
executory decision cannot pierce the veil of
corporate fiction by enforcing the decision
against the stockholders who are not parties
to the action. (Cruz vs. Dalisay, Adm. Matter
No. R-181-P, July 31,1987)
106 Center for Legal Education and Research
2018 is a
5. The question of whether a corporation
mere alter ego is purely one of fact. (Heirs of
Ramon Durano, Sr. vs. Uy, G.R. No. 136456,
October 24, 2000)
6. The doctrine has res judicata effect. (Cesar
Villanueva, Philippine Corporate Law, 2001)
7. The doctrine could not be employed by a
corporation to complete its claims against
another corporation and cannot therefore be
employed by the claimant who does not
appear to be the victim of any wrong or
fraud. The court must be sure that the
corporate fiction was misused, to such an
extent that injustice, fraud, or crime was
committed upon another, disregarding, thus,
his, her, or its rights. (Traders Royal Bank vs.
CA, G.R. No. 93397, March 3, 1997)
8. When the piercing doctrine is applied
against a corporation in a particular case,
such corporation still possessed such
separate personality in any other case, or
with respect to other issues. (Tantoco vs.
Kaisahan ng mga Manggagawa sa La Campana
and CIR, G.R. No. L-13119, September 22, 1959)
9. Must be shown to be necessary and with
factual basis. To disregard the separate
juridical personality of a corporation, the
wrongdoing must be clearly and
convincingly established. It cannot be
presumed. (Symex Security Services, Inc. vs.
Rivera, Jr., G.R. No. 202613, November 8, 2017).
Guidelines in piercing the corporate veil
1. Mere ownership by a single stockholder or
by another corporation of all or nearly all of
the capital stock of a corporation is not of
itself sufficient ground for disregarding the
separate corporate personality. (PNB vs.
Hydro Resources Contractors Corporation, G.R.
No. 167530, March 13, 2013)
2. While ownership by one corporation of all or
a great majority of stocks of another
corporation and their interlocking
directorates may serve as indicia of control,
by themselves, these circumstances are
insufficient to establish an alter ego
relationship that will justify the puncturing
 Purple Notes
of corporate cover. (PNB vs. Hydro Resources
Contractors Corporation, G.R. No. 167530, March
13, 2013)
3. Any application of the doctrine of piercing
the corporate veil should be done with
caution. A court should be mindful of the
milieu where it is to be applied. It must be
certain that the corporate fiction was
misused to such an extent that injustice,
fraud, or crime was committed against
another, in disregard of rights. (Sarona vs.
NLRC, G.R. No. 185280, January 18, 2012)
Basic areas where piercing the corporate
veil is applicable:
1. Defeat of public convenience as when
the corporate fiction is used as a vehicle for
the evasion of an existing obligation.
(Equity Piercing);
2. Fraud cases or when the corporate entity
is used to justify a wrong, protect fraud, or
defend a crime (Fraud Piercing);
3. Alter ego cases, where a corporation is
merely 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 are so conducted as to make
it merely an instrumentality, agency, conduit
or adjunct of another corporation (Alter
Ego Piercing or The Instrumentality
Test) (Zambrano vs. Philippine Carpet
Manufacturing Corporation, G.R. No. 224099,
June 21, 2017)
Reverse Piercing of the Corporate Veil
As held in the U.S. Case, C.F. Trust, Inc., vs.
First Flight Limited Partnership, "in a traditional
veil-piercing action, a court disregards the
existence of the corporate entity so a claimant
can reach the assets of a corporate insider. In a
reverse piercing action, however, the plaintiff
seeks to reach the assets of a corporation to
satisfy claims against a corporate insider."
Reverse-piercing flows in the opposite direction
(of traditional corporate veil-piercing) and makes
the corporation liable for the debt of the
shareholders.
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Mercantile Law
It has two (2) types: outsider reverse piercing
and insider reverse piercing. Outsider reverse
piercing occurs when a 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. In
contrast, in insider reverse piercing, the
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. (IAEM vs. Litton, G.R. No. 191525, December
13, 2017)
Grounds for application of the doctrine of
piercing the veil of corporate fiction:
1. Used as a cloak to cover fraud, illegality, or
it results in injustice;
2. Used to defeat public convenience, justify
wrong, defend crime;
3. Where necessary to achieve equity or to
protect creditors and other valid grounds;
4. Where two factories are made to appear as
one and used as a device to defeat the ends
of law, or as a shield to confuse legitimate
issues;
5. Where the parent corporation assumes
complete control of its subsidiary‘s business.
(Ladia, The Corporation Code of the Philippines, 2007,
p. 101)
Conditions or considerations under which
the distinct and separate juridical entity
may be disregarded:
1. Stock ownership by one or common
ownership of both corporations;
2. Identity of directors and officers;
3. The manner of keeping corporate books and
records
4. Methods of conducting the business.
(Concept Builders Inc., vs. National Labor
Relations Commission, G.R. No. 108734, May 29,
1996)
 The circumstance that a single stockholder
owns 40% of the outstanding capital stock
of two corporations, standing alone, is
insufficient to establish identity. There must
be at least a substantial identity of
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Mercantile Law
stockholders for both corporations in order
to consider this factor to be constitutive of
corporate identity. (Kukan International Corp.
vs. Reyes, G.R. No. 182729, September 29,
2010)
Two identities not separate when is mere
continuation of the other:
 The two entities cannot be deemed as
separate and distinct, where there is a
showing that one is merely the continuation
of the other. In fact, even a change in the
corporate name does not make a new
corporation, whether effected by a special
act or under a general law. It has no effect
on the identity of the corporation or on its
property, rights or liabilities. (Avon Dale
Garments, Inc. vs. NLRC, G.R. No. 117932, July
20, 1995)
Tests in determining the applicability of
the doctrine:
1. Control, not mere majority or complete
stock control, but complete domination, not
only of finances but of policy and business
practice in respect to the transaction
attacked so that the corporate entity as to
this transaction had at the time no separate
mind, will or existence of its own;
2. 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
rights; and
3. The aforesaid control and breach of duty
must proximately cause the injury or unjust
loss complained of. (Concept Builders Inc., vs.
National Labor Relations Commission, G.R. No.
108734, May 29, 1996)
When not applied (when the veil cannot
be pierced):
1. When the director has no participation to a
representation made by the President, and
the execution of a promissory note with
―we‖ as maker has a reference to the
corporation and not to the directors.
2. The mere fact that a corporation owns all of
the stocks of another corporation, taken
108 Center for Legal Education and Research
alone is not sufficient to justify2018
their being
treated as one entity. If used to perform
legitimate functions, a subsidiary‘s separate
existence may be respected, and the liability
of the parent corporation as well as the
subsidiary will be confined to those arising
in their respective business.
3. Fiction of separate and distinct entities
cannot be disregarded there being no
indication that the second corporation is a
dummy or serves as a client of the first
corporate entity.
4. Piercing the veil cannot be availed of by one
who is not a victim of a fraud or wrong.
5. Where real properties included in the
inventory of the estate of a decedent are in
the possession of and are registered in the
name of the corporations, in the absence of
any cogency to shred the veil of corporate
fiction, the presumption of the
conclusiveness of said titles in favor of the
said corporations should stand undisturbed.
(Aranas vs. Mercado, G.R. No. 156407, January
15, 2014)
Effects of piercing the corporate veil:
1. If only one corporation is involved, to regard
its existence as an association of persons;
and
2. If two corporations participate, to merge
them, and consider them only as one entity.
(Remo vs. IAC, G.R. No. L-67626, April 1989);
3. The corporation continues for other
legitimate objectives, the corporate
character not necessarily abrogated.
(Reynoso IV vs. CA, G.R. Nos. 116124-25,
November 22, 2010)
CAPITAL STRUCTURE
Stock corporations shall not be required to have
a minimum capital stock, except as otherwise
provided specifically provided by special law.
(Sec. 12, RCC)
NUMBER AND QUALIFICATIONS OF
INCORPORATORS
Required Number of Incorporators
 Purple Notes
Any person, partnership, association, or
corporation, singly or jointly with others but not
more than fifteen (15) in number, may organize
a corporation for lawful purpose or purposes.
(Sec. 10, RCC)
For the purpose of forming a new domestic
corporation under the RCC, two or more
persons, but not more than 15, may organize
themselves and form a corporation.
Only a One Person Corporation (OPC) may have
a single stockholder, as well as a sole director.
Accordingly, its registration must comply with
the corresponding separate guidelines on the
establishment of an OPC. (Sec. 1, SEC MC No. 16-
2019)
Partnerships as Incorporators
In the event that an SEC-recorded partnership is
made an incorporator, the application for
registration must be accompanied by a Partner‘s
Affidavit, duly executed by all the partners, to
the effect that they have authorized the
partnership to invest in the corporation about to
be formed and that they have designated one of
the partners to become a signatory to the
incorporation documents.
Partnerships under ―dissolved‖ or ―expired‖
status with the SEC shall not be authorized to
become an incorporator. (Sec. 5, SEC MC No. 16-
2019)
Domestic Corporations or Associations as
Incorporators
In the event that an SEC-registered domestic
corporation or association is made an
incorporator, its investment in the new
corporation must be approved by a majority of
the board of directors or trustees and ratified by
the stockholders representing at least 2/3 of the
outstanding capital stock, or by at least 2/3 of
the members in the case of nonstock
corporations, at a meeting duly called for the
purpose.
A Director‘s/Trustees‘ Certificate or a Secretary‘s
Certificate, indicating the necessary approvals,
as well as the authorized signatory to the
109
Mercantile Law
incorporation documents, shall be executed
under oath and submitted by the applicant.
Domestic corporations under ―delinquent‖,
―suspended‖, ―revoked‖ or expired‖ status with
the SEC shall not be authorized to become an
incorporator. (Sec. 5, SEC MC No. 16-2019)
Foreign Corporations as Incorporators
In the event that a foreign corporation is made
an incorporator, the application for registration
must be accompanied by a copy of a document
(i.e., Board resolution, Director‘s Certificate,
Secretary‘s Certificate, or its equivalent), duly
authenticated by a Philippine Consulate or with
an apostille affixed thereto, authorizing the
foreign corporation to invest in the corporation
being formed and specifically naming the
designated signatory on behalf of the foreign
corporation. (Sec. 6, SEC MC No. 16-2019)
Qualifications of Incorporators
1. Each incorporator of a stock corporation
must own or be a subscriber to at least one
(1) share of stock. (Sec. 10, RCC)
2. Incorporators who are natural persons
must be of legal age; and
3. Incorporators must sign the Articles of
Incorporation/Bylaws. (Sec. 3, SEC MC No.
16-2019)
Note: Natural persons who are licensed to
practice a profession, and partnerships or
associations organized for the purpose of
practicing a profession, shall not be allowed to
organize as a corporation unless otherwise
provided under special laws. (Sec. 10, RCC)
SUBSCRIPTION REQUIREMENTS
Since stock corporations are not required to
have a minimum capital stock, there is no
requirement for minimum subscribed and paid
up capital. (Sec. 12, RCC)
CORPORATE TERM
A corporation shall have perpetual existence
unless its articles of incorporation provides
otherwise. (Sec. 11, RCC)
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Mercantile Law
Perpetual Term of Existing Corporation
Corporations with certificates of incorporation
issued prior to the effectivity of the Revised
Corporation Code, and which continue to exist,
shall have perpetual existence, unless they elect
to retain their specific corporate term provided
in their Articles of Incorporation.
An existing corporation may elect to retain its
specific corporate term upon a vote of its
stockholders representing a majority of its
outstanding capital stock without prejudice to
the appraisal right of dissenting stockholders.
(Sec. 11, RCC)
Existing corporations need not do anything if
they want to have perpetual term because they
will automatically be considered to have a
perpetual term by virtue of the express wordings
of Sec. 11 of the RCCP, notwithstanding the
fixed term indicated in their existing Articles of
Incorporation. (Aquino, Revised Corporation Code of
the Philippines 2019)
Revival of Corporate Existence
No extension can be made after the expiration
of the term. The remedy is now revival of
corporate existence under the RCCP. A
corporation whose term has expired may apply
for a revival of its corporate existence, together
with all rights and privileges under its certificate
of incorporation and subject to all of its duties,
debts, liabilities existing prior to its revival. Upon
approval by the SEC, the corporation shall be
deemed revived and a certificate of revival of
corporate existence shall be issued, giving its
perpetual existence, unless its application for
revival provides otherwise. (Sec. 11, RCC)
However, no application for revival of certificate
of incorporation of banks, banking and quasi-
banking institutions, preneed, insurance and
trust companies, nonstock savings and loan
associations, pawnshops, corporations engaged
in money service business, and other financial
intermediaries shall be approved by the SEC
unless accompanied by a favorable
recommendations of the appropriate
government agency. (Sec. 11, RCC)
110 Center for Legal Education and Research
Who May Not Apply for Revival 2018
(a) An expired corporation which has
completed the liquidation of its assets;
(b) A corporation whose Certificate of
Registration has been revoked for reasons
other than non-filing of reports
(c) A corporation dissolved by virtue of
Sections 6(c) and 6(d) of PD 902-A, as
amended by PD 1799; or
(d) An expired corporation which already
availed of re-registration, in accordance
with MC No. 13-2019, or other
memorandum circulars issued by the
Commission pertaining to re-registration,
except when:
1. The re-registered corporation has given
its consent to the Petitioner to use its
corporate name, and has undertaken to
undergo voluntary dissolution
immediately after the issuance of the
Petitioner‘s Certificate of Revival; or
2. The re-registered corporation has given
its consent to the Petitioner to use its
corporate name, and has undertaken to
change its corporate name immediately
after the issuance of the Petitioner‘s
Certificate of Revival. (Sec. 2, SEC MC 23-
2019)
Required Vote to Initiate Revival
The required number of votes for the revival of
an expired stock corporation is at least a
majority vote of the board of directors, and the
vote of at least majority of the outstanding
capital stock. For nonstock corporations, at least
a majority vote of the board of trustees, and the
vote of at least majority of the members. (Sec. 3,
SEC MC 23-2019)
Appraisal Right
The revival of the corporate existence is without
prejudice to the appraisal right of dissenting
stockholders in accordance with the provisions
of the Revised Corporation Code. (Sec. 10, SEC
MC 23-2019)
 Purple Notes
CLASSIFICATION OF SHARES
1. Common stock - represents the residual
ownership interest in the corporation. It is a
basic class of stock ordinarily and usually
issued without extraordinary rights or
privileges and entitles the shareholder to a
pro rata division of profits. It usually carries
with it the right to vote, and frequently, the
exclusive the right to do so.
A class of stock entitling the holder to vote
incorporate matters, to receive dividends
after other claims and dividends have been
paid (especially to preferred shareholders),
and to share in the asset s upon liquidation.
(Chavez Corporation Code Simplified 2012, p.
119)
It is a basic class of stock ordinarily and
usually issued without extraordinary rights
or privileges and entitles the shareholder to
a pro rata division of profits.
Note: It is often called capital stock or the
residual ownership interest in the
corporation if it is the corporation‘s only
class of stock outstanding.
General Rule: Common shares cannot be
deprived of the right to vote in any
corporate meeting, and any provision in the
articles of incorporation restricting the right
of common shareholders to vote is invalid.
(Gamboa vs. Teves G.R. No. 176579 June 28,
2011)
Exception: where the exclusive right to
vote and be voted for in the election of
directors is granted to Founder‘s Shares, for
a limited period not exceeding five (5) years
from the date of incorporation. (Sec. 7, RCC)
2. Preferred stocks - are those which
entitle the shareholder to some priority
on dividends and asset distribution and
other preferences as may be stated in
the Articles of Incorporation which are
not violative of the provision of the
Code. The amount of preference is
stated in the contract of subscription
and is usually on a fixed percentage or
by a specified amount indicated therein.
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Mercantile Law
a. Participating - the holder is still given
a right to participate with the common
stocks holder dividends beyond the
stated preference.
b. Non-participating - where there is no
such participation.
c. Cumulative - those that entitle the
owner to the payment of not only
current dividend but also back dividends
not previously paid whether or not
during the past years, dividends were
declared or paid. In order that a
preferred stock may be considered
cumulative, the same must be provided
for and specified in the contract of
subscription.
d. Non-cumulative - those which entitle
the holder of such share only to the
payment of current dividends when
dividends are paid, to the extent agreed
upon before any other stockholders are
paid the same. Dividends in arrears do
not have to be paid. Once a periodic
dividend is omitted, it will not be paid.
(Chavez Corporation Law Simplified 2012, p.
122)
i. Discretionary dividend type -
gives the holder of such share the
right to have dividends paid in a
particular years depending on the
judgment and discretion of the
board.
ii. Mandatory if earned type -
impose a positive duty on directors to
declare dividends every year when
profits are earned.
iii. Earned cumulative or dividend
credit type - the holder has the
right to arrears in dividends every
year when profits are earned during
the previous year but dividends were
not declared. The right to receive
dividends is merely postponed to a
later date. (Ladia, The Corporation Code
of the Philippines, 2007, p. 56)
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Mercantile Law
Scope of Voting Rights Subject to
Classification
The classification of shares, their corresponding
rights, privileges, or restrictions, and their stated
par value, if any, must be indicated in the
articles of incorporation. Each share shall be
equal in all respects to every other share,
except as otherwise provided in the articles of
incorporation and in the certificate of stock. (Sec.
6, RCC)
Preferred and redeemable shares may be
deprived of voting rights
No share may be deprived of voting rights
except those classified and issued as ―preferred‖
or ―redeemable‖ shares, unless otherwise
provided in this Code: Provided, That there shall
always be a class or series of shares with
complete voting rights. (Sec. 6, RCC)
Note: The following shares may also be
deprived of voting rights:
1. Treasury shares
2. Common shares when declared delinquent
3. After the exercise of appraisal right (Chavez,
Corporation Law Simplified, 2012, p. 116)
However, holders of non-voting shares shall
nevertheless be entitled to vote on the following
matters (AASI-IMID):
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
the Code; and
8. Dissolution of the corporation. (Sec. 6, RCC)
112 Center for Legal Education and Research
Founders‟ shares: 2018
Issued to the founders of the corporation and
may be given certain rights and privileges not
enjoyed by the owners of other stocks. Where,
however, the exclusive right to vote and be
voted for in the election of directors is granted,
said right cannot exceed five (5) years from the
date of incorporation: Provided, That such
exclusive right shall not be allowed if its exercise
will violate the Anti Dummy Law, Foreign
Investment Act of 1991, and other pertinent
laws. (Sec. 7, RCC)
Redeemable shares
Those which may be issued by the corporation
when expressly so provided in the articles of
incorporation and certificate of stock
representing said shares, and which may be
purchased or taken up by the corporation upon
the expiration of a fixed period, regardless of
the existence of unrestricted retained earnings.
(Sec. 8, RCC)
Treasury shares
Those are shares of stock which have been
issued and fully paid for, but subsequently
reacquired by the issuing corporation by
purchase, redemption, or donation or through
some other lawful means. Such shares may
again be disposed of for a reasonable price fixed
by the Board. (Sec. 9, RCC)
Previous ruling concerning capital:
The term ―capital‖ in Section 11, Article XII of
the Constitution refers only to shares of stock
entitled to vote in the election of directors, and
thus in the present case only to common shares,
and not to the total outstanding capital stock
comprising both common and non-voting
preferred shares. (Gamboa vs. Teves, G.R. No.
176579, June 28, 2011)
New ruling concerning capital
It is clear that the framers of the Constitution
intended public utilities to be majority Filipino-
owned and controlled. To ensure that Filipinos
control public utilities, the framers of the
 Purple Notes
Constitution approved, as additional safeguard,
the inclusion of the last sentence of Section 11,
Article XII of the Constitution commanding that
"[t]he participation of foreign investors in the
governing body of any public utility enterprise
shall be limited to their proportionate share in its
capital, and all the executive and managing
officers of such corporation or association must
be citizens of the Philippines." In other words,
the last sentence of Section 11, Article XII of the
Constitution mandates that (1) the participation
of foreign investors in the governing body of the
corporation or association shall be limited to
their proportionate share in the capital of such
entity; and (2) all officers of the corporation or
association must be Filipino citizens. (Gamboa
vs. Teves, G.R. No. 176579, October 9, 2011)
INCORPORATION AND ORGANIZATION
PROMOTER
A promoter is an organizer or projector who
brings persons to unite in forming a corporation.
Liability of Promoter
A promoter, although he may assume to act for
and on behalf of a projected corporation and not
for himself, will be held personally liable on
contracts made by him for the benefit of a
corporation he intends to organize. The personal
liability continues even after the formation of the
corporation unless there is novation or other
agreement to release him from liability. As such,
the promoter may do either of the following
options:
1. He may make a continuing offer on behalf of
the corporation, which, if accepted after
incorporation, will become a contract. In this
case, the promoter does not assume any
personal liability, whether or not the
corporation will accept the offer;
2. He may make a contract at the time binding
himself, with the understanding that if the
corporation, once formed, accepts or adopts
the contract, he will be relieved of
responsibility; or
3. He may bind himself personally and assume
responsibility of looking to the proposed
corporation, when formed, for
113
Mercantile Law
reimbursement. (Ladia, The Corporation Code of
the Philippines, 2007, p. 23)
Liability of corporation for promoter's
contracts
Where the promoter‘s contract has been
adopted or ratified, by the corporation, the latter
becomes liable thereon and likewise acquires all
the rights pertaining thereunder. (Ibid.)
SUBSCRIPTION CONTRACT
Any contract for the acquisition of unissued
stocks in an existing corporation or a
corporation still to be formed. (CIR vs. First
Express Pawnshop, Inc., G.R. Nos. 172045-46, June
16, 2009)
Kinds of subscription contract
1. Pre-incorporation subscription
2. Post-incorporation subscription
PRE-INCORPORATION SUBSCRIPTION
AGREEMENTS
A subscription of shares in a corporation still to
be formed shall be irrevocable for a period of at
least six (6) months from the date of
subscription, unless all of the other subscribers
consent to the revocation, or the corporation
fails to incorporate within the same period or
within a longer period stipulated in the contract
of subscription.
No pre-incorporation subscription may be
revoked after the articles of incorporation is
submitted to the Commission. (Sec. 60, RCC)
Post-incorporation subscription:
Subscription entered into after incorporation.
CONSIDERATION FOR STOCKS
Consideration for the issuance of stock may be
(OIL CUPSO):
1. Outstanding shares exchanged for stocks in
the event of reclassification or conversion;
Bar Operations C ommissions 113
 Purple Notes
Mercantile Law
2. Previously incurred indebtedness of the
corporation;
3. Labor performed for or services actually
rendered to the corporation;
4. Actual cash paid to the corporation;
5. Amounts transferred from unrestricted
retained earnings to stated capital;
6. Property, tangible or intangible, actually
received by the corporation and necessary
or convenient for its use and lawful
purposes at a fair valuation equal to the par
or issued value of the stock issued;
7. Shares of stock in another corporation;
and/or
8. Other generally accepted form of
consideration. (Sec. 61, RCC)
Limitations concerning the consideration
for stocks:
1. Stocks shall not be issued for a
consideration less than the par or issued
price thereof.
2. Where the consideration is other than
actual cash, or consists of intangible
property such as patents or copyrights, the
valuation thereof shall initially be
determined by the stockholders or the
board of directors, subject to the approval
of the SEC.
3. Shares of stock shall not be issued in
exchange for promissory notes or future
service. (Sec. 61, RCC)
NOTE: The issued price of no-par value shares
may be fixed in the articles of incorporation or
by the board of directors pursuant to authority
conferred by the articles of incorporation or the
bylaws, or if not so fixed, by the stockholders
representing at least a majority of the
outstanding capital stock at a meeting duly
called for the purpose. (Sec. 61, RCC)
ARTICLES OF INCORPORATION
Nature and Function of Articles of
Incorporation:
It is one that defines the charter of the
corporation and the contractual relationships
between the State and the corporation, the
stockholders and the State, and between the
114 Center for Legal Education and Research
corporation and its stockholders. 2018 (Lanuza vs.
Court of Appeals, G.R. No. 131394, March 28, 2005)
Contents of Articles of Incorporation:
1. Name of corporation;
2. Purpose/s, indicating the primary and
secondary purposes;
3. Place of principal office (must be within the
Philippines);
4. Term for which the corporation is to exist (if
it did not elect perpetual existence);
5. Names, nationalities and residences of
incorporators;
6. Number of directors (number of directors
shall not be more than 15, number of
trustees may be more than 15);
7. Names, nationalities, and residences of the
persons who shall act as directors of
trustees until the first regular ones are duly
elected and qualified;
8. If it be a stock corporation, amount of
authorized capital stock, number of shares
and in case of par value stock corporations,
the par value of each shares, names,
nationalities, residences, and the amount
subscribed and paid by each on his
subscription, and if some or all of the shares
are without par value, such fact must be
stated;
9. If it be a non-stock corporation, the amount
of its capital, the names, nationalities and
residences of the contributors and the
amount contributed by each.
10. Such other matters consistent with law and
which the incorporators may deem
necessary and convenient.
11. An arbitration agreement may be provided
in the articles of incorporation pursuant to
Section 181 of the Code. (Sec. 13, RCC)
Non-amenable items of Articles of
Incorporation:
1. The names and address of incorporators and
incorporating directors or trustees.
2. The name of treasurer originally or first
elected by the subscribers or members to
act as such until his successor has been duly
elected and qualified.
 Purple Notes
3. The number of shares and amount originally
subscribed and paid out of the original
authorized capital stock of the corporation.
4. The date and place of execution of the
Articles of Incorporation.
5. The signatories and acknowledgement
thereof.
6. Nationalities of founders. (Ladia, The
Corporation Code of the Philippines, 2007, p.
143)
Amendment to the Articles of
Incorporation:
Unless otherwise prescribed by the Corporation
Code or by special law and for legitimate
purposes, any provision or matter in the Articles
of Incorporation may be amended by:
1. Majority vote of the Board of
Directors/Trustees; and
2. Vote or written assent of the stockholders
representing at least 2/3 of the outstanding
capital stock (OCS) or members if it be a
non-stock.
Note: Amendments shall take effect upon
approval by the SEC or shall retroact to the date
of filing if not acted upon by SEC within 6
months without fault attributable to the
corporation (the latter is NOT applicable to
special amendments).
Rule amending restriction and transfer:
General rule: Restriction and transfer of
shares may be amended.
Exception: In case of close corporations,
restriction and transfer of shares cannot be
amended otherwise it will cease to be a close
corporation (in a close corporation, all the issued
stock of all classes shall be subject to one or
more specified restrictions on transfer).
CORPORATE NAME
Limitations on use of corporate name:
No corporate name shall be allowed:
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Mercantile Law
1. If it is not distinguishable from that already
reserved or registered for the use of another
corporation;
2. If such name is already protected by law; or
3. When its use is contrary to existing law,
rules and regulations. (Sec. 17, RCC)
Test:
 Whether the similarity is such as to mislead
a person using ordinary care and
discrimination and the court must look to
the record as well as the names themselves.
Actual confusion need not be shown; it
suffices that confusion is probably or likely
to occur. (Philips Export B.VS. vs. Court of
Appeals, G.R. No. 96161, February 21, 1992)
Guidelines on Use of Corporate and
Partnership Names (Sec. MC No. 13-2019)
1. The corporate name shall contain the word
―Corporation‖ or ―Incorporated‖, or the
abbreviations ―Corp.‖ or ―Inc.‖ respectively;
2. In the case of a One Person Corporation,
the corporate name shall contain the word
―OPC‖ either below or at the end of its
corporate name;
3. The partnership name shall bear the word
―Company‖ or ―Co.‖ and if it is a limited
partnership, the word ―Limited‖ or ―Ltd.‖. A
professional partnership name may bear the
word ―Company‖, ―Associates‖ or ―Partners‖,
or other similar description.
4. The corporate name of a foundation shall
use the word ―Foundation‖;
5. The corporate name of all non-stock, non-
profit corporations, including non-
governmental organizations and
foundations, engaging gin microfinance
activities shall use the word ―Microfinance‖
or ―Microfinancing‖; provided that said
corporations shall state in the purpose
clause of its AOI that they shall conduct
microfinance operations pursuant to RA
8425 or the Social reform and Poverty
Alleviation Act.
Doctrine of secondary meaning:
A word or phrase originally incapable of
exclusive appropriation (usually generic) with
Bar Operations C ommissions 115
 Purple Notes
Mercantile Law
reference to an article in the market, because of
geographically or otherwise descriptive, might
nevertheless have been used so long and so
exclusively by one producer with reference to
his article that, in that trade and to that branch
of the purchasing public, the word or phrase has
become to mean that the article was his
product. (Lyceum of the Philippines vs. CA, G.R. No.
101897. March 5, 1993)
Note: Parties organizing a corporation must
choose a name at their peril; and the use of a
name similar to one adopted by another
corporation, whether a business or a nonprofit
organization, if misleading or likely to injure in
the exercise of its corporate functions,
regardless of intent, may be prevented by the
corporation having a prior right, by a suit for
injunction against the new corporation to
prevent the use of the name. (Ang Mga Kaanib sa
Iglesia ng Diyos kay Kristo Hesus, H.S.K. sa Bansang
Pilipinas, Inc. vs. Iglesia ng Diyos kay Kristo Hesus,
Haligi at Suhay ng Katotohanan, G.R. No. 137592,
December 21, 2001)
REGISTRATION, INCORPORATION AND
COMMENCEMENT OF CORPORATE
EXISTENCE
A private corporation formed or organized under
the Code commences to have corporate
existence and juridical personality and is
deemed incorporated from the date the SEC
issues a certificate of incorporation under its
official seal; and thereupon the incorporators,
stockholders/members and their successors shall
constitute a body corporate under the name
stated in the articles of incorporation for the
period of time mentioned therein, unless said
period is extended or the corporation is sooner
dissolved in accordance with law. (Sec. 18, RCC)
Exception to the Commencement of
Corporate Existence Upon Issuance of
Certificate of Incorporation
1. Corporations created by special
laws/charter (Sec. 4, RCC);
2. Corporation by estoppel;
3. Corporation Sole (Sec. 110, RCC);
4. Corporations under the Bureau of
Cooperatives and Home Insurance
116 Center for Legal Education and Research
2018 which
Guarantee Corporation (two agencies
can grant juridical personality).
ELECTION OF DIRECTORS OR TRUSTEES
Except when the exclusive right is reserved for
holders of founders‘ shares, each stockholder or
member shall have the right to nominate any
director or trustee who possesses all of the
qualifications and none of the disqualifications
set forth in the Code. (Sec. 23, RCC)
Quorum
At all elections of directors and trustees, there
must be present the owners of majority of the
outstanding capital stock, or if there be no
capital stock, a majority of the members entitled
to vote. Presence for purposes of quorum may
either be:
1. In person;
2. Through a representative by written proxy;
3. When authorized in the by-laws or by a
Majority of the Board:
a. Through remote communication; or
b. In absentia (Sec. 23, RCC).
ADOPTION OF BY-LAWS
Procedure in adopting by-laws:
Pre-incorporation: By-laws adopted and filed
prior to incorporation shall be approved and
signed by all the incorporators and submitted to
the SEC, together with the Articles of
Incorporation. (Sec. 45, RCC)
Post-incorporation: For the adoption of by-
laws after incorporation, the affirmative vote of
the stockholders representing at least a majority
of the outstanding capital stock, or at least a
majority of the members in case of nonstock
corporations, shall be necessary. The
stockholders or members voting for the by-laws
shall sign them and a copy thereof, duly certified
by a majority of the board of directors or
trustees and countersigned by the secretary,
shall be filed with the SEC and attached to the
Articles of Incorporation. (Ibid.)
 Purple Notes
Nature and function of by-laws
By-laws signifies the rules and regulations or
private laws enacted by the corporation to
regulate, govern and control its own actions,
affairs and concerns and its stockholders or
members and directors and officers with relation
thereto and among themselves in their relation
to it. (China Banking Corporation vs. CA, G.R. No.
117604, March 26, 1997)
Requisites of valid by-laws:
1. It must be general and uniform in its effect
or applicable to all alike or those similarly
situated;
2. It must be reasonable, not arbitrary.
3. It must be consistent with the Articles of
Incorporation.
4. It must not be contrary to law, public policy
or morals;
5. It must not impair obligations and contracts
and vested rights. (Ladia, The Corporation Code
of the Philippines, 2007, p. 315)
Contents of By-laws
1. Time, place and manner of calling and
conducting meetings of directors or
trustees;
2. Time and manner of calling and conducting
of stockholders‘ or members‘ meetings and
mode of notifying them;
3. The required quorum and the manner of
voting;
4. The modes by which a stockholder,
member, director or trustee may attend
meetings and cast their votes;
5. The form for proxies of stockholders or
members and the manner voting them;
6. The directors‘ or trustees‘ qualifications,
duties and responsibilities, guidelines for
setting the compensation of directors or
trustees and officers, and the maximum
number of other board representations that
an independent director or trustee may
have;
7. The time for holding the annual election of
directors or trustees and the mode or
manner of giving notice thereof;
8. The manner of election or appointment of
officers other than directors or trustees;
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Mercantile Law
9. The penalties for violation of bylaws;
10. In case of stock corporations, the manner
of issuing stock certificates;
11. Such other matters necessary for the
proper and convenient transaction of its
corporate affairs.
12. An arbitration agreement may be provided
in the by-laws pursuant to Section 181 of
the RCC. (Sec. 46, RCC)
Binding effects of by-laws:
 By-laws are subordinates to the charter of
the corporation and part of its charter is its
articles of incorporation.
 A by-law which is not consistent with the
charter but is in conflict with it is void.
 A by-law can neither enlarge the rights and
powers conferred by the charter nor restrict
the duties and liabilities imposed thereby,
and in case it attempts to do so, the charter
will prevail. (Sundiang & Aquino, Reviewer on
Commercial Law, 2019, p. 233)
 By-laws are binding upon all stockholders
or members. They do not bind, however,
third persons unless the latter have
knowledge of the by-laws‘ existence or
contents. (China Banking Corporation vs. CA,
G.R. No. 117604, March 26, 1997)
Amendment of by-laws, voting
requirements:
1. By a majority vote of the directors or
trustees and the majority vote of the
owners of outstanding capital stock or
members in a non-stock corporation, at a
regular or special meeting called for that
purpose.
2. By the Board of Directors alone when
delegated by the owners of 2/3 of the
outstanding capital stock or 2/3 of
members in a non-stock corporation. (Sec.
47, RCC)
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 Purple Notes
Mercantile Law
EFFECTS OF THE NON-USE OF CORPORATE
CHARTER AND CONTINUOUS IN
OPERATION
1. If a corporation does not formally organize
and commence its business within five (5)
years from the date of its incorporation, its
certificate of incorporation shall be deemed
revoked as of the day following the end of
the five (5) year period.
2. If a corporation has commenced its
business but subsequently becomes
inoperative for a period of at least five (5)
consecutive years, the SEC may, after due
notice and hearing, place the corporation
under delinquent status.
3. A delinquent corporation shall have a
period of two (2) years to resume
operations and comply with all
requirements that the SEC shall prescribe.
Upon compliance by the corporation, the
SEC shall issue an order lifting the
delinquent status. Failure to comply with
the requirements and resume operations
within the period given by the Commission
shall cause the revocation of the
corporation‘s certificate of incorporation.
(Sec. 21, RCC).
CORPORATE POWERS
A corporation has no power except those
expressly conferred on it by the Corporation
Code and its charter, and those that are implied
or incidental to its existence.
A corporation exercises its power through the
BOD and/or its duly authorized officers and
agents (Philippine Corporate Law, Villanueva, 2013,
p. 227)
Kinds of corporate powers:
1. Express powers – powers expressly
provided by the Corporation Code,
applicable special laws, administrative
regulations, and the Articles of Incorporation
of the corporation.
Note: The powers expressly provided for in
the Corporation Code are deemed part of
the Articles of Incorporation even if such
118 Center for Legal Education and Research
powers are not enumerated 2018therein.
(Corporation Code of the Philippines, Aquino,
2011, p. 318)
2. Inherent/Incidental powers – not
expressly stated but are deemed to be
within the capacity of corporate entities;
powers that are deemed conferred on the
corporation because they are incidental to
the existence of the corporation. (Sec. 2,
RCC)
3. Implied/Necessary powers – exist as a
necessary consequence of the exercise of
the express powers of the corporation or the
pursuit of its purposes.
Implied powers test:
To determine whether an act is within the
implied powers of a corporation, it must be
ascertained whether the act in question is in
direct and immediate furtherance of the
corporation‘s business, fairly incident to the
express powers and reasonably necessary to
their exercise. (University of Mindanao vs. BSP,
G.R. No. 194964-65, January 11, 2016)
Other classification of corporate powers:
1. General powers
2. Special powers
GENERAL POWERS, THEORY OF GENERAL
CAPACITY
Theory of general capacity:
The Corporation is said to hold such powers as
are not prohibited or withheld from it by general
laws.
General powers of a corporation:
1. To sue and be sued in its corporate name
(Sec. 35, RCC);
 This power is exercised by the corporation
through the Board. Hence, the Supreme
Court now requires corporations to attach a
copy of the Board Resolution authorizing
the filing of the complaint or petition.
(Aquino, 2011, p. 322)
 Purple Notes
 Venue of action – instituted at the place
where the principal office of the corporation
is located. (Clavecillia vs. Antillon, G.R. No. L-
22238, February 18, 1967)
 Service upon domestic private juridical
entity may be made through: (PMGCTIS)
a. President;
b. Managing partner;
c. General partner;
d. Corporate secretary;
e. Treasurer;
f. In-house Counsel; or
g. In case of the absence or unavailability
of the above-mentioned, on their
secretaries. (Sec. 12, A.M. No. 19-10-20-
SC)
Note: Prior to the effectivity of the 2019
Amendments, Sec. 11 of Rule 14 of the
Rules of Court does not allow service of
summons to the secretaries of the above-
mentioned.
Note: In case of intra-corporate dispute,
service shall be deemed adequate if made upon
any of the statutory or corporate officers as
fixed by the by-laws or their respective
secretaries.
(Sec. 5, Rule 2, A.M. No. 01-2-04-SC, March 13,
2001)
2. Of succession by its corporate name
perpetually or for the period of time stated
in the Articles of Incorporation and the
certificate of incorporation; (Sec. 36, RCC)
3. To adopt and use a corporate seal; (Sec.
36[c], RCC)
 Under the Corporation Code, a seal is not
indispensable for the transactions or
contracts of the corporation. (Ladia, The
Corporation Code of the Philippines, 2015, p.
239)
 A document may be considered valid and
binding even in the absence of a seal.
(Ibid.)
119
Mercantile Law
 HOWEVER, one instance when a seal is
necessary is with respect to the certificate
of stock under Sec. 62 (Aquino, 2011)
4. To amend its articles of incorporation in
accordance with the provisions of this Code;
5. To adopt by-laws, not contrary to law,
morals, or public policy, and to amend or
repeal the same in accordance with this
Code;
6. In case of stock corporations, to issue or
sell stocks to subscribers and to sell treasury
stocks in accordance with the provisions of
this Code; and to admit members to the
corporation if it be a non-stock corporation;
7. To purchase, receive, take or grant, hold,
convey, sell, lease, pledge, mortgage and
otherwise deal with such real and personal
property, including securities and bonds of
other corporations, as the transaction of the
lawful business of the corporation may
reasonably and necessarily require, subject
to the limitations prescribed by law and the
Constitution;
 The power under the provision can be
exercised by the Board without
concurrence of the stockholders.
 Stockholders‘ approval is necessary only
in cases covered by Sections 39 and 41:
Sec. 39 – disposition of all or substantially all of
properties
Sec. 41 – investment of corporate funds in
another corporation/business or any other
purposes
Even in the cases which are not covered by
Sections 39 and 41, the by-laws of the
Corporation may expressly require the approval
of the stockholders for the sale of the corporate
property (Aquino, 2011, p. 325)
8. To enter into a partnership, joint venture,
merger, consolidation, or any other
commercial agreement with natural and
juridical persons;
Bar Operations C ommissions 119
 Purple Notes
Mercantile Law
 The power to enter into a partnership is
an additional power granted by the
Revised Corporation Code.
9. To make reasonable donations, including
those for the public welfare or for hospital,
charitable, cultural, scientific, civic, or similar
purposes: Provided, that no foreign
corporation shall give donations in aid of
any political party or candidate or for
purposes of partisan political activity;
 Under the Old Corporation Code, both
domestic and foreign corporations are
prohibited from giving donations in aid
of any political party or candidate or for
purposes of partisan political activity.
The Revised Corporation Code expressly
limited the prohibition to foreign
corporations.
10. To establish pension, retirement, and other
plans for the benefit of its directors,
trustees, officers and employees; and
11. To exercise such other powers as may be
essential or necessary to carry out its
purpose or purposes as stated in the articles
of incorporation.
SPECIFIC POWERS, THEORY OF SPECIFIC
CAPACITY
Theory of specific capacity:
No corporation under the Corporation Code shall
possess or exercise any corporate powers,
except those conferred by law, its articles of
incorporation, those implied from express
powers, and those as are necessary or incidental
to the exercise of the powers so conferred. (Sec.
44, RCC)
Specific powers:
1. Power to extend or shorten corporate term
(Sec. 36)
2. Power to amend the Articles of
Incorporation (Sec. 35[d])
3. Power to increase or decrease capital stock
or incur, create, increase bonded
indebtedness (Sec. 37)
4. Power to deny pre-emptive rights (Sec. 38)
120 Center for Legal Education and Research
5. Power to sell or dispose 2018 of all or
substantially all corporate assets (Sec. 39)
6. Power to acquire own shares (Sec. 40)
7. Power to invest corporate funds in another
corporation or business (Sec. 41)
8. Power to declare dividends (Sec. 42)
9. Power to enter into management contracts
(Sec. 43)
POWER TO EXTEND OR SHORTEN
CORPORATE TERM
Requirement and procedure in the
exercise of power to extend or shorten
corporate term (Sec. 36, RCC)
1. Approval by the majority vote of the board
of directors or trustees.
2. Ratification by the stockholders
representing at least 2/3 of the outstanding
capital stock or 2/3 of the members in case
of non-stock corporation.
3. Written notice of the proposed action and
of the time and place of the meeting shall
be addressed to each stockholder or
member at his place of residence as shown
on the books of the corporation and be
given by mail, through personal service or
electronically, if allowed in the by-laws or
done with the consent of the stockholder.
4. Any dissenting stockholder may exercise his
appraisal right;
5. A copy of the of the amended articles of
incorporation shall be submitted to the SEC
for its approval;
Note: In case of extension, the same cannot be
made earlier than 3 years prior to the original or
subsequent expiry date unless there are
justifiable reasons for an earlier extension.
Moreover, the same must be made during the
lifetime of the corporation. (Sec. 11, RCC)
 The shortening of the corporate term may be
designed to have the effect of dissolving the
corporation
 The dissolution takes effect on the date of
the approval of the Amended Articles of
Corporation by the SEC
 The three-year liquidation period shall
likewise be reckoned from the date of the
SEC approval of the Amended Articles of
Incorporation (Aquino, 2011, p. 335)
 Purple Notes
POWER TO INCREASE OR DECREASE
CAPITAL STOCKS OR TO INCUR, CREATE,
INCREASE BONDED INDEBTEDNESS
Methods of increasing the capital stock:
1. Increasing the par value of the existing
number of shares without increasing the
number of shares;
2. Increasing the number of existing shares
without increasing the par value;
3. Increasing the number of existing shares
and at the same time increasing the par
value of the shares. (Ladia, The Corporation
Code of the Philippines, Annotated, 2007, p. 256)
Valid reasons for increasing the capital
stock:
1. To generate more working capital.
2. To issue shares to sell to acquire assets.
3. To have extra shares to meet the
requirement for declaration of stock
dividend. (Miravide, Bar Review Materials in
Commercial Law, 2002)
Methods of decreasing the capital stock:
1. Decreasing the number of shares and
retaining the par value;
2. Decreasing the par value of existing shares
without changing the number of shares;
3. Decreasing the number of shares and
decreasing the par value. (Aquino, 2011, p.
339)
Valid reasons for decreasing the capital
stock:
1. To reduce or wipe out existing deficit where
no creditors would thereby be affected.
2. When the capital is more than what is
necessary to procreate the business or
reduction of capital surplus.
3. To write down the value of its fixed assets to
reflect their present actual value in case
where there is a decline in the value of the
fixed assets of the corporation. (Ladia, The
Corporation Code of the Philippines, 2007, p. 257)
Requirements for the exercise of the
power of increasing and decreasing capital
stocks:
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Mercantile Law
1. Approval by the majority vote of the board
of directors.
2. Ratification by the stockholders holding or
representing at least 2/3 of the outstanding
capital stock at a meeting duly called for
that purpose.
3. Prior written notice of the proposed
increase or decrease of the capital stock
indicating the time and place of meeting
addressed to each stockholder must made
either by personal service or through
electronic means recognized in the by-laws
and/or SEC‘s rules.
4. A certificate must be signed by a majority
of the directors, countersigned by the
chairman and the secretary of the
stockholders meeting.
5. In case of increase in capital stock, 25% of
such increase in capital must be subscribed
and at least 25% of the amount must be
paid either in cash or property,
accompanied by a sworn statement of the
treasurer of the corporation lawfully holding
office at the time of the filing of the
certificate, attesting to such fact.
6. In case of decrease in capital stock, the
same must not prejudice the right of
creditors, as such, the consent of the
creditors needs to be secured.
7. Filing of the certificate of increase or
decrease and amended articles with SEC.
8. Approval thereof by the SEC.
Power to incur, create, or increase bonded
indebtedness:
The weight of authority is to the effect that in
the course of corporate dealings, the
corporation may need additional funds to carry
the purpose of its organization such that it may
source its funding requirements by borrowing
them evidenced by bonds, notes or debentures.
(Ladia, The Corporation Code of the Philippines,
Annotated, 2007, p. 260)
Bond, defined:
A security representing denominated units of
indebtedness issued by a corporation to raise
money or capital obliging the issuer to pay the
maturity value at the end of a specified period.
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Mercantile Law
(SEC Interim Guidelines for Registration of Bonds,
SRC Rule 8 and 12)
Bonded indebtedness, defined:
A long term indebtedness secured by real or
personal property (corporate assets).
Note: Not all borrowings made by a corporation
need the approval of the stockholders. Only
bonded indebtedness requires such approval.
(Sec. 37, RCC)
Requirements before the exercise of the
power to incur, create, or increase bonded
indebtedness:
Same with the power to increase or decrease
capital stock.
POWER TO DENY PRE-EMPTIVE RIGHTS
Pre-emptive right, defined:
It is the preferential right of shareholders to
subscribe to all issues or dispositions of shares
of any class, in proportion to their respective
shareholdings, unless such right is denied by the
Articles of Incorporation or any amendment
thereto. (Sec. 38, RCC)
Purpose of pre-emptive right:
The purpose of pre-emptive right is to enable
the shareholder to retain his proportionate
control in the corporation and retain his equity
in the surplus.
Pre-emptive rights shall not extend to
shares:
1. Issued in compliance with laws requiring
stock offerings or minimum stock ownership
by the public; or
2. Issued in good faith with the approval of the
stockholders representing 2/3 of the
outstanding capital stock:
a. In exchange for property needed for
corporate purposes; or
b. In payment of a previously contracted
debt.
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2018
3. In case the right is denied in the articles of
incorporation or an amendment thereto.
(Sec. 38, RCC)
Note: Exceptions nos. 1 and 2 will not apply to
close corporations:
1. The corporation shall not list in any stock
exchange or make any public offering of
any of its stock of any class (Sec. 95, RCC);
2. The pre-emptive right of stockholders in
close corporations shall extend to all stock
to be issued, including reissuance of
treasury shares, whether for money,
property or personal services, or in
payment of corporate debts, unless the
articles of incorporation provide otherwise.
(Sec. 101, RCC).
POWER TO SELL OR DISPOSE OF
CORPORATE ASSETS
Liability of the buying corporation (Nell
Doctrine):
General rule: Where one corporation sells or
otherwise transfers all of its assets to another
corporation, the latter is not liable for debts and
liabilities of the transferor. (Fletcher Cyclopedia
Corporations, Vol. 15, Sec. 7122, pp. 160-161)
Exceptions:
1. Where the purchaser expressly or impliedly
agrees to assume such debts;
2. Where the transaction amounts to a
consolidation or merger of the corporation;
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. (The Edward J. Nell Co. vs. Pacific
Farms, Inc., L-20850, November 1965)
Conditions for valid exercise of the power
to dispose of corporate assets:
1. Majority vote of the board of
directors/trustees.
2. Authorization by the vote of stockholders
representing at least 2/3 of the outstanding
capital stock or 2/3 of the members in case
 Purple Notes
of non-stock corporation in a meeting duly
called for that purpose.
3. Written notice of the proposed action and of
the time and place of meeting addressed to
each stockholder or member at his place of
residence as shown on the books of the
corporation and deposited to the addressee
in the post office with postage prepaid,
served personally, or electronically when
allowed in the by-laws or with consent of
the stockholder.
4. The sale of the assets shall be subject to the
provisions of existing laws on illegal
combinations and monopolies. (Sec. 39, RCC).
Note:
 Any dissenting stockholder shall have the
option to exercise his appraisal right.
 Board of Directors or Trustees may abandon
the sale or disposition of all or substantially
all corporate assets even after having
authorized by the stockholders or member
without further action by the latter, subject
to the rights of third parties under any
contract relating thereto. (Sec. 39, RCC)
POWER TO ACQUIRE OWN SHARES
A stock corporation shall have the power to
purchase or acquire its own shares for legitimate
corporate purposes, provided that the
corporation has unrestricted retained earnings in
its books to cover the shares to be
purchased/acquired. (Sec. 40, RCC)
Cases/Instances when a corporation may
redeem its own share:
1. To redeem redeemable shares;(Sec. 8, RCC)
2. To acquire treasury shares;(Sec. 9, RCC)
3. To eliminate fractional shares arising out of
stock dividends. (Sec. 40(a), RCC)
4. To collect or compromise an indebtedness to
the corporation arising out of unpaid
subscription in a delinquency sale, and to
purchase delinquent shares sold during said
sale; (Sec. 40(b), RCC)
5. To pay dissenting or withdrawing
stockholders entitled to payment for their
shares – in the exercise of appraisal right;
(Sec. 40(c), RCC)
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Mercantile Law
6. To effect a decrease of capital stock;
7. In close corporations, when there is a
deadlock in the management of the
business. (Sec. 103, RCC)
8. In close corporations, a stockholder may
compel the corporation to purchase his
shares, for any reason, provided only that
the corporation has sufficient assets in its
books to cover its debts and liabilities
exclusive of capital stock (Sec. 104, RCC)
Conditions before a corporation may
acquire its own share:
1. The corporate capital is not thereby
impaired;
2. It should be for legitimate and proper
corporate objectives;
3. The condition of the corporate affairs
warrants it;
4. The transaction is designed to carry out in
good faith and without prejudice to the
rights of creditors and stockholders;
5. There is no intended and there results no
undue advantage to a few favored
stockholders at the expense of the
reminder;
6. The rights of the creditor are not
jeopardized;
7. There must be surplus (profit) to reacquire
them. (Ladia, The Corporation Code of the
Philippines, Annotated, 2007, p.270, citing SEC
Opinion addressed to Trident Dev‘t Corp.,
December 1982)
General rule: Corporation cannot use its
capital stock to purchase its own shares, that is,
corporate assets below the Legal or Stated
Capital but only Surplus Profits. (Ladia, The
Corporation Code of the Philippines, Annotated, 2007,
p.271)
Exceptions:
1. In the redemption of redeemable shares
(Sec. 8, RCC);
2. In case of deadlock in a close corporation,
when SEC orders the corporation to purchase
shares of any stockholder at fair value (Sec. 103,
RCC); and
3. In case of a close corporation, any
stockholder may, for any reason, exercise their
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Mercantile Law
right to compel the corporation to purchase their
share at their fair value which shall not be less
than par or issued value when the corporation
has sufficient assets in its books to cover its
debts and liabilities exclusive of capital stock.
(Sec. 104, RCC)
The requirement of unrestricted retained
earnings to cover the shares is based on the
trust fund doctrine which means that the
capital stock, property and other assets of a
corporation are regarded as equity in trust for
the payment of corporate creditors. The reason
is that creditors of the corporation are preferred
over the stockholders in the distribution of
corporate assets. There can be no distribution of
assets among stockholders without first paying
corporate creditors. Hence, any disposition of
corporate funds to the prejudice of creditors is
null and void. (Boman Environmental Development
Corporation vs. CA, G.R. No. 77860, November 22,
1988)
POWER TO INVEST CORPORATE FUNDS IN
ANOTHER CORPORATION OR BUSINESS
Requirements and Steps to be followed for
valid investment:
1. Resolution by the majority of the board of
directors or trustees.
2. Ratification by the stockholders representing
at least 2/3 of the outstanding capital stock
or 2/3 of the members in case of non-stock
corporations.
3. The ratification must be made in a meeting
duly called for that purpose.
4. Prior written notice of the proposed
investment and the time and place of the
meeting shall be made, addressed to each
stockholder or member by mail, personal
service or electronically. (Sec. 41, RCC)
Note:
 Any dissenting stockholder shall have the
option to exercise his appraisal right.
 Only approval by majority of the Board of
Directors or Trustees is required if
investment is in line with the corporation‘s
primary purpose. (Ibid.)
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2018
POWER TO DECLARE DIVIDENDS
Dividends, defined, condition for
declaration:
Part or portion of the profits of the enterprise
which the corporation sets apart for ratable
distribution among the holders of the capital
stock.
Dividends are corporate profits allocated,
lawfully declared and ordered by the directors to
be paid to the stockholders on demand or at a
fixed time. (Aquino, 2011, p. 376, citing SEC
Memorandum Circular No. 11, Series of 2009)
Requirements for dividend declaration:
1. Unrestricted retained earnings;
2. Resolution of the board; and,
3. If stock dividends are declared, there must
be resolution of the board with the
concurrence of the 2/3 of the outstanding
capital. (Aquino, Philippine Corporate Law
Compendium, 2011, p. 372)
Unrestricted retained earnings, defined:
It is the amount of accumulated profits and
gains realized out of the normal and continuous
operations of the company after deducting
therefrom distributions to stockholders and
transfers to capital stock or other accounts, and
which is: (1) not appropriated by its Board of
Directors for corporate expansion projects or
programs; (2) not covered by a restriction for
dividends declaration under a loan agreement;
and (3) not required to be retained under
special circumstances obtaining in the
corporation such as when there is a need for a
special reserve for probable contingencies. (Sec.
2, SEC MC No. 11-2008)
Interim Income
General Rule: The presence of unrestricted
retained earnings can be determined only at the
end of the fiscal year, thus, there can be no
dividend declaration for profits in a fiscal year
that has not yet expired.
 Purple Notes
Exceptions:
1. The amount of the dividends involved would
not be impaired by losses during the
remaining period of the year;
2. The projected income for the remaining
period shall be submitted to the SEC; and
3. Should the company sustain losses during
the remaining period, the dividends should
be refunded. (Aquino, (Philippine Corporate Law
Compendium, 2011, p. 384)
Stock corporation prohibited from
retaining surplus profit in excess 100%
General Rule: Stock corporations are
prohibited from retaining surplus profits in
excess of 100% of their paid-up capital stock.
Exception to the prohibition:
1. When justified by definite corporate
expansion projects or programs approved by
the board of directors;
2. When the corporation is prohibited under
any loan agreement with any financial
institution or creditor, whether local or
foreign, from declaring dividends without
its/his consent, and such consent has not
yet been secured; or
3. When it can be clearly shown that such
retention is necessary under special
circumstances obtaining in the corporation,
such as when there is a need for special
reserve for probable contingencies. (Sec. 42,
RCC)
Effects of Stock Delinquency on Dividends
Declared
1. Any cash dividends due on delinquent stock
shall first be applied to the unpaid balance
on the subscription plus costs and expenses.
2. Stock dividends shall be withheld from the
delinquent stockholders until their unpaid
subscription is fully paid. (Sec. 42, RCC)
POWER TO ENTER INTO MANAGEMENT
CONTRACT
Management contract, defined:
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Mercantile Law
One entered into between two corporations
whereby one corporation undertakes to manage
all or substantially all of the business of the
other corporation for a certain period of time.
(Sec. 43, RCC)
Note: Section 43 of the Revised Corporation
Code do not cover every contract denominated
as ―Management Contract.‖ It applies only to
every contract whereby a corporation
undertakes to manage or operate all or
substantially all of the business of another
corporation, whether such contracts are called
service contracts, operating agreements or
otherwise.
Rationale behind the allowance of
management contract:
Because of the nature of the business of a
corporation or because of the loans a
corporation may incur, it may be necessary to
assure not only technical competence but
continuity in management policy in running
corporation affairs which can be achieved
through management contract. (Proceedings of
Corporation Code as cited in Ladia, The Corporation
Code of the Philippines, Annotated, 2007, p.286)
Requirements for the exercise of power to
enter into management contract:
1. Resolution of the Board of
Directors/Trustees; and
2. Majority vote of the outstanding capital
stock or members, as the case may be, of
both the managing and managed
corporation, in a meeting duly called for the
purpose. (Sec. 43, RCC)
Exceptions:
a. Where a stockholder or stockholders
representing the same interest of both the
managing and the managed corporations
own and control more than one-third (1/3)
of the total outstanding capital stock entitled
to vote of the managing corporation; or
b. Where a majority of the members of the
Board of Directors of the managing
corporation also constitute a majority of the
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Mercantile Law
members of the Board of Directors of the
managed corporation. Ibid.)
In cases (a) or (b), the management contract
must be approved by the stockholders of the
managed corporation owning at least two-thirds
(2/3) of the total outstanding capital stock
entitled to vote or the members in case of a
non-stock corporation. Ibid.)
General Rule: No management contract shall
be entered into for a period longer than five (5)
years for any one (1) term.
Exception: Service contracts or operating
agreements which relate to the exploration,
development, exploitation, or utilization of
natural resources that may be entered into for
such periods as may be provided by pertinent
laws or regulations. Ibid.)
Maximum term
The maximum term prescribed under Sec. 43 is
five (5) years. However, it was intended that
this period may be subject to renewal.
A period is provided for to give the stockholders
the opportunity to review the management
contract and to decide if the contract will be
continued. (Aquino, 2011, p. 393)
LIMITATIONS ON CORPORATE POWERS
Ultra vires act, defined:
It refers to one which is not within the corporate
powers conferred by the Corporation Code or
articles of incorporation or not necessary or
incidental in the exercise of the powers so
conferred. (Lopez Realty, Inc. vs. Florentina
Fontecha, G.R. No. 76801, August 11, 1995)
Unauthorized acts that are merely beyond the
powers of the corporation under its articles of
incorporation are not void ab initio.
Ultra vires acts merely voidable; subject to
ratification
A distinction should be made between corporate
acts or contracts which are illegal and those
126 Center for Legal Education and Research
which are merely ultra vires. 2018 The former
contemplates the doing of an act which is
contrary to law, morals, or public order, or
contravene some rules of public policy or public
duty, and are, like similar transactions between
individuals, void. They cannot serve as basis of a
court action, nor acquire validity by
performance, ratification, or estoppel. Mere ultra
vires acts, on the other hand, or those which are
not illegal and void ab initio, but are not merely
within the scope of the articles of incorporation,
are merely
voidable and may become binding and
enforceable when ratified by the stockholders.
(Pirovano vs. De La Rama Steamship, G.R. No. L-
5377, December 29, 1954)
Thus, even though a person did not give
another person authority to act on his or her
behalf, the action may be enforced against him
or her if it is shown that he or she ratified it or
allowed the other person to act as if he or she
had full authority to do so. (University of Mindanao
vs BSP G.R. No. 194964-65, January 11, 2016)
Applicability of ultra vires doctrine:
1. Acts done beyond the powers of the
corporation as provided in the law or its
articles of incorporation;
2. Acts or contracts entered into in behalf of a
corporation by persons who have no
corporate authority
Note: This is technically ultra vires acts of
officers and not of the corporation.
3. Acts or contracts, which are per se illegal as
being contrary to law. (Villanueva, 2013, p.
176)
Consequences of ultra vires acts:
1. On the corporation: The franchise or
certificate of incorporation may be
suspended or revoked, after proper notice
and hearing, for serious misrepresentation
as to what the corporation can do or is
doing to the great damage or prejudice of
the general public.
 Purple Notes
2. On the rights of stockholders:
Stockholders may bring either an individual
or derivative suit to enjoin a threatened
ultra vires act or contract. If the act or
contract has already been performed, a
derivative suit for damages against the
directors may be filed, but their liability will
depend on whether they acted in good faith
and with reasonable diligence in entering
into the contract. (SEC Adm. Case No. 03-07-
173)
3. On the immediate parties:
a. If the contract is fully executed on both
sides, the contract is effective and the
courts will not interfere to deprive either
party of what has been acquired under it.
b. If the contract is executory to both sides,
as a rule, neither party can maintain an
action for its non-performance
(unenforceable).
c. If the contract is executory on one side
and has been fully performed on the
other, the party who has received benefits
from the performance is estopped in
claiming that the contract is ultra vires
(Aquino, 2011, p. 397)
4. A corporation that is engaged in ultra vires
business is liable for torts committed by its
agents within their authority in the course
of that business. (Aquino, 2011, p. 397)
5. If a corporation acted outside its authority
in taking or holding title to property, the
validity of the Torrens Certificate of Title
cannot be questioned on the ground that
the corporation was without authority or
exceeded its authority in taking or holding
the property. (Aquino, 2011, p. 397)
Party who received benefits estopped to
set up the defense that the contract is
ultra vires
Where the contract is executed on one side
only, and has been fully performed on the other,
the courts differ as to whether an action will lie
on the contract against the party who has
received benefits of performance under it. The
party who has received benefits from the
performance is estopped to set up that the
127
Mercantile Law
contract is ultra vires to defeat an action on the
contract. (Ladia, The Corporation Code of the
Philippines, 2015, p. 291)
DOCTRINE OF INDIVIDUALITY OF
SUBSCRIPTION
Subscription to shares of stock are deemed
indivisible and no certificate of stock can be
issued unless and until the full amount of the
subscription including interest and expenses, if
any, is paid. (Sec. 62, RCC)
DOCTRINE OF EQUALITY OF SHARES
All stocks issued by the corporation are
presumed equal with the same privileges and
liabilities, provided that the Articles of
Incorporation is silent on such differences.
(Commissioner of Internal Revenue vs. CA, et al.,
G.R. No. 108576, January 20, 1999)
TRUST FUND DOCTRINE
The capital stock, property and other assets of
the corporation are regarded as equity in trust
for the payment of the corporate creditors. The
subscribed capital stock of the corporation is a
trust fund for the payment of debts of the
corporation which the creditors have the right to
look up to satisfy their credits. Corporation may
not dissipate this and the creditors may sue
stockholders directly for the unpaid subscription.
(CIR vs. Court of Appeals, G.R. No. 108576, January
20, 1999)
The requirement of unrestricted retained
earnings to cover the shares is based on the
trust fund doctrine which means that the capital
stock, property and other assets of a corporation
are regarded as equity in trust for the payment
of corporate creditors. The reason is that
creditors of a corporation are preferred over the
stockholders in the distribution of corporate
assets. There can be no distribution of assets
among the stockholders without first paying
corporate creditors. Hence, any disposition of
corporate funds to the prejudice of creditors is
null and void. Creditors of a corporation have
the right to assume that so long as there are
outstanding debts and liabilities, the board of
directors will not use the assets of the
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Mercantile Law
corporation to purchase its own stock. (Turner vs.
Lorenzo Shipping Corporation, G.R. No. 157479,
November 24, 2010)
Corporate Powers, How Exercised
Who exercise corporate powers?
1. The shareholders
2. The Board of Directors
3. The officers
Corporate powers, how exercised by the
shareholders
By exercising their right to vote in the following:
a. Election or removal of directors/trustees;
b. Management contract;
c. Adoption, amendment or repeal of by-laws;
d. Fixing the issued price of no-par value
shares, if Board of Directors (BOD) is not
authorized by the articles of incorporation;
e. Amendment of articles of incorporation;
f. Ratification of certain acts of directors;
g. Extension or shortening of corporate term;
h. Increase or decrease of capital stock;
i. Incur, create or increase in bonded
indebtedness;
j. Denial of pre-emptive right;
k. Sale, lease, exchange, mortgage, pledge or
disposal of all or substantially all of
corporate assets;
l. Investment of corporate funds in another
corporation or business or for any other
purpose other than the primary purpose
m. Issuance of stock dividends;
n. Merger or consolidation. (Sundiang & Aquino,
Reviewer on Commercial Law, 2019, p. 243)
Corporate powers, how exercised by the
Board of Directors:
The Board of Directors exercises the powers of
the corporation. Generally, the Board alone,
without the concurrence of the stockholders,
cannot overrule the directors in its exercise of
the corporate powers. (Sec. 22, RCC)
Corporate powers, how exercised by the
officers:
128 Center for Legal Education and Research
In some cases, corporate officers 2018
like the
President can also bind the corporation. The
authority of such individuals to bind the
corporation is generally derived from:
1. Law,
2. Corporate by-laws,
3. Authorization from the board, either
expressly or impliedly by habit, custom or
acquiescence in the general course of
business. (Sundiang & Aquino, Reviewer on
Commercial Law, 2019, p. 241)
Corporate officer or agent may bind the
corporation; powers which he can
exercise:
A corporate officer or agent may represent and
bind the corporation in transactions with third
persons to the extent that the authority to do so
has been conferred upon him, and these
include:
1. Powers that, in the usual course of the
particular business, are incidental to those
expressly provided,
2. Powers that may be implied from the
powers intentionally conferred,
3. Powers added by custom and usage, as
usually pertaining to the particular officer or
agent,
4. Such apparent powers as the corporation
has caused person dealing with the officer
or agent to believe that it has conferred.
(University Of Mindanao, Inc., vs. Bangko Sentral
Ng Pilipinas, et al., G.R. No. 194964-65, January
11, 2016)
Officials who can sign the verification and
certification even without a board
resolution:
1. The Chairperson of the Board of Directors,
2. the President of the corporation,
3. the General Manager or Acting General
Manager,
4. Personnel Officer, and
5. Employment Specialist in a labor case.
(Cagayan Valley Drug Corporation vs. CIR, G.R.
No. 151413, February 13, 2008)
 Purple Notes
Mercantile Law
Note: The above do not provide a complete 15. Right to petition the SEC to arbitrate in the
listing of authorized signatories to the event of a deadlock, in case of a close
verification and certification required by the corporation
rules, the determination of the sufficiency of the 16. Right to withdraw from a closed corporation
authority was done on a case to case basis. for any reason, and compel the corporation
to purchase his shares (Ladia, The Corporation
STOCKHOLDERS AND MEMBERS Code of the Philippines, Annotated, 2015, p. 406)

Three (3) ways by which a person may be Note: A stockholder may compel the
a stockholder: corporation to declare dividends when the
unrestricted retained earnings exceed 100% of
1. Contract of subscription with the its paid up capital, subject to certain exceptions
corporation; provided by law. (Sec. 42, RCC)
2. Purchase of treasury shares from the
corporation; and PARTICIPATION IN MANAGEMENT
3. Purchase or acquisition of shares from
existing stockholders. (Ladia, The Corporation Right to vote
Code of the Philippines, Annotated, 2015, p. 339
citing Ballantine)
Stockholders and members may vote in person
or by proxy in all meetings of stockholders or
FUNDAMENTAL RIGHTS OF A
members. (Sec. 57, RCC)
STOCKHOLDER AND MEMBER

1. Participation in the management of the The right to vote is a right that is inherent in
corporate affairs by exercising their right to and incidental to the ownership of corporate
vote and be voted upon either personally or stock, and as such, it is a property right.
by proxy
2. Right to enter into a voting trust agreement This right is generally vested with the legal
3. Right to receive dividends and to compel owner of the shares. Whoever owns the shares
their declaration if warranted as appearing in the books of the corporation
4. Right to transfer shares of stock subject only exercises, therefore, the right to vote. (Ladia, The
Corporation Code of the Philippines, Annotated, 2007,
to reasonable restrictions such as options
p. 326)
and preferences as may be allowed by law
inclusive of the right of the transferee to
Limitations on the right to vote:
compel the registration of the transfer in the
books of the corporation
1. Where the Articles of Incorporation
5. Right to be issued a certificate of stock for
provides for classification of shares
fully paid-up shares
pursuant to Sec. 6, non-voting shares are
6. Pre-emptive rights
not entitled to vote except as provided
7. Appraisal right
under the same section.
8. Right to institute derivative suit
2. Preferred or redeemable shares may be
9. Right to recover shares of stock unlawfully
deprived of the right to vote unless
sold for delinquency as may be allowed
otherwise provided in the RCC.
10. Right to inspect the books of the
3. Fractional shares of stock cannot be voted
corporation, subject to limitations
unless they constitute at least one full
11. Right to be furnished by the most recent
share.
financial statements
4. Treasury shares have no voting rights as
12. Right to be issued a new stock certificate in
long as they remain in the treasury;
lieu of the lost or destroyed one
5. Holders of stock declared delinquent by the
13. Right to have the corporation dissolved
board of directors for unpaid subscription
14. Right to participate in the distribution of the
are not entitled to vote or a representation
assets of the corporation upon dissolution
at any stockholder‘s meeting;
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6. A transferee of stock cannot vote if his
transfer is not registered in the stock and
transfer book of the corporation; and,
7. A stockholder is still entitled to vote even if
the shares are mortgaged or pledged
unless he authorizes the creditor in writing
to vote. (Sundiang & Aquino, Reviewer on
Commercial Law, 2017, p. 249)
Representative Voting:
1. Proxy
2. Trust agreement
Proxy, defined
 A proxy is properly the authority given by
the stockholder or member to another to
vote for him at a stockholders‘ or members‘
meeting.
 The term is also used to refer to the
instrument or paper which is evidence of the
authority of an agent or the holder thereof
to vote for and in behalf of the stockholder
or member. (Ladia, The Corporation Code of the
Philippines, Annotated, 2007, p. 328)
Proxy, allowed in the exercise of voting
rights by the stockholder/member
Stockholders and members may vote in person
or by proxy in all meetings of stockholders or
members. (Sec. 57, RCC)
Characteristics of a proxy:
1. It shall be in writing
2. It shall be signed and filed by the
stockholder or member in any form
authorized in the by-laws.
3. It shall be received by the corporate
secretary within. Reasonable tome before
the schedule meeting;
4. It shall be valid only for the meeting for
which it is intended, unless otherwise
provided in the proxy; and
5. No proxy shall be valid and effective for a
period longer than five (5) years at any one
time. (Sec. 57, RCC)
130 Center for Legal Education and Research
Voting trust, defined 2018
An agreement whereby one or more
stockholders of a stock corporation may create a
voting trust for the purpose of conferring upon a
trustee or trustees the right to vote and other
rights pertaining to the shares for a period not
exceeding 5 years at any one time. (Sec. 58,
RCC)
Limitations on the voting trust:
1. Cannot be entered into for a period
exceeding 5 years at any 1 time except
when it is a condition in a loan agreement
but said contract shall automatically expire
upon full payment of the loan.
2. The agreement must not be used for the
purpose of fraud.
3. It must be in writing and notarized and
specify the terms and conditions thereof.
4. A certified copy of the agreement must be
filed with the corporation and with the SEC.
5. The agreement shall be subject to
examination by any stockholder of the
corporation.
6. Unless expressly renewed, all rights granted
in the agreement shall automatically expire
at the end of the agreed period.
Note: A corporation cannot enforce the voting
trust agreement executed by the stockholder
and trustees. Voting is personal in nature for
those who are qualified and willing to vote. The
voting trust is personal to the stockholder and
trustees. (NIDC vs. Aquino, G.R. No. L-34192 and
G.R. No. L-34213, June 30, 1988)
Powers or rights of voting trustees:
1. Shall possess the right to vote and other
rights pertaining to the shares so transferred
and registered in his or their names subject
to the terms and conditions of and for the
period specified in the agreement.
2. May vote in person or by proxy unless the
agreement provides otherwise.
3. The trustee may exercise the rights of
inspection of all corporate books and
records.
4. The trustee is the legal title holder or owner
of the shares so transferred under the
 Purple Notes
Mercantile Law
agreement. He is therefore qualified to be a 3. Grant of compensation to directors or trustees
director. (Sundiang & Aquino, Reviewer on (Sec. 29, RCC)
Commercial Law, 2019, p. 302) 4. Management contract, except those subject
to ⅔ votes of the outstanding capital stock
Voting trust agreement, and proxy, (Sec. 43, RCC)
compared 5. Adoption of by-laws, (Sec. 45, RCC)
6. Amendment or repeal of by-laws, (Sec. 45,
Voting trust Proxy RCC)
Trustee votes as an Proxy holder votes as an 7. Revocation of the power to amend, repeal
owner rather a mere agent. or adopt a by-laws delegated to the Board
agent. (Sec. 47, RCC)
The trustee may vote in Proxy must vote in 8. Fixing the issued price of no-par value
person or by proxy person. shares, if BOD is not authorized by the
unless the agreement articles of incorporation. (Sec. 61, RCC)
provides otherwise. 9. Voluntary Dissolution where no creditors are
Trustee acquires legal Proxy has no legal title affected (Sec. 134, RCC)
title to the share/s of the to the share/s of the
transferring stockholder. principal. Cases when stockholders‟ action is
The agreement is Revocable at any time required by a two-thirds vote:
irrevocable. except when coupled
with interest
1. Amendment of articles of incorporation (Sec.
A trustee can vote and A proxy can only vote in 15, RCC)
exercise all the rights of the absence of the 2. Removal of directors/trustees (Sec. 27, RCC)
a stockholder even when owner of the stock.
3. Ratification of a contract of self-dealing
the latter is present.
directors (Sec. 31, RCC)
Trustee is not limited to A proxy can only act at 4. Ratification of an act of a disloyal director
act at any particular a specified stockholders‘ (Sec. 33, RCC)
meeting meeting (if not 5. Extension or shortening of corporate term
continuing) (Sec. 36, RCC)
Agreement must be Proxy need not be 6. Increase or decrease of capital stock (Sec.
notarized. notarized. 37, RCC)
The agreement must not Unless otherwise 7. Incur, create or increase bonded
exceed 5 years at any provided in the proxy, it indebtedness (Sec. 37, RCC)
one time, except when shall be valid for the 8. Denial of pre-emptive right (Sec. 38, RCC)
the same is made a meeting for which it was 9. Sale, lease, exchange, mortgage, pledge or
condition of a loan. intended but it cannot disposal of all or substantially all of
exceed 5 years at any
corporate assets (Sec. 39, RCC)
one time
10. Investment of corporate funds in another
The voting right is The right to vote is
corporation or business or for any other
divorced from the inherent in or
ownership of stocks inseparable from the purpose other than the primary purpose
right to ownership of (Sec. 41, RCC)
stock. 11. Issuance of stock dividend (Sec. 42, RCC)
12. Managed corporation in a management
contract:
CASES WHEN STOCKHOLDERS‟ ACTION IS
REQUIRED a. where a stockholder or stockholders
representing the same interest of both
Cases when stockholders‟ action is the managing and the managed
required by a majority vote: corporations own or control more than
one-third (1/3) of the total outstanding
1. Retention of existing corporate term (Sec. capital stock entitled to vote of the
11, RCC) managing corporation; or
2. Election of directors/trustees, (Sec. 23, RCC)

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b. where a majority of the members of the
board of directors of the managing
corporation also constitute a majority of
the members of the board of directors of
the managed corporation (Sec. 43, RCC)
13. Delegation of the power to amend, repeal or
adopt new by-laws to the Board of Directors
(Sec. 47, RCC)
14. Merger or consolidation (Sec. 76, RCC)
15. Amendment to the plan of merger or
consolidation (Sec. 76, RCC)
16. Adoption of plan or distribution of assets of
non-stock corporation (Section 94, RCC)
17. Voluntary dissolution where creditors are
affected (Sec. 135, RCC)
Cases when stockholders‟ action is
required by cumulative voting:
In the election of Directors, a stockholder may
cast as many votes as there are number of
directors to be elected multiplied by the number
of the shares owned and either:
1. Give all the votes to one (1) candidate; or
2. Distribute them among as many candidates
as he may see fit. (Sec. 23, RCC)
Manner of Voting; Voting Trust
Stockholders or members may vote in all
meetings of stockholders or members:
1. In person
2. By proxy
3. Through remote communication
4. In absentia (Sec. 57, RCC)
Note: Voting through remote communication or
in absentia shall be allowed only when so
authorized in the by-laws or by majority of the
Board of Director or Trustees, except in
corporations vested with public interest where
voting through remote communication or in
absentia is available despite absence of
provision in the by-laws allowing the same. (Sec.
58, in relation to Sec. 49, RCC)
PROPRIETARY RIGHTS
Proprietary rights of stockholders and
members:
132 Center for Legal Education and Research
1. Right to dividends 2018
2. Right of appraisal
3. Right to inspect
4. Pre-emptive right
5. Right to vote
6. Right of first refusal
Right to dividends, defined
The right of the stockholder to demand payment
of dividends after board declaration.
Right to dividends
 Stockholders are entitled to dividends pro
rata based on the total number of shares
that they own and not on the amount paid
for the shares.
 The right of the stockholders to be paid
dividends vest as soon as they have been
lawfully and finally declared by the board of
Directors. From that time, the corporation
becomes indebted to each stockholder who
may recover the debt, as an ordinary
unsecured creditor may do, against the
corporation.
 In case of transfer of shares, dividends
declared before the transfer shall belong to
the transferor while those declared after the
transfer shall belong to the transferee.
(Ladia, The Corporation Code of the Philippines,
Annotated, 2007, p. 282)
Right of appraisal, defined:
It is the right of a stockholder who dissents from
certain corporate actions to demand payment of
the fair value of his or her shares. (Turner vs.
Lorenzo Shipping Corporation, G.R. No. 157478,
November 24, 2010)
Instances when the right of appraisal may
be exercised:
1. In case an amendment to the articles of
incorporation has the effect of changing or
restricting the rights of any stockholder or
class of shares, or of authorizing preferences
in any respect superior to those of
outstanding shares of any class, or of
 Purple Notes
extending or shortening the term of
corporate existence;
2. In case of sale, lease, exchange, transfer,
mortgage, pledge or other disposition of all
or substantially all of the corporate property
and assets as provided in the Code;
3. In case of merger or consolidation; and
4. In case of investment of corporate funds for
any purpose other than the primary purpose
of the corporation. (Sec. 80, RCC)
5. In a close corporation, stockholder may, for
any reason, compel the corporation to
purchase shares held at fair value, which
shall not be less than the par or issued value,
when the corporation has sufficient assets in
its books to cover its debts and liabilities
exclusive of capital stock. (Sec. 104, RCC)
Requirements for the exercise of appraisal
right:
1. The stockholder must have voted against the
corporate action which involves any of those
instances where the exercise of appraisal
right is allowed;
2. A written demand must be made by the
stockholder on the corporation for the
payment of the fair value of shares held
within thirty (30) days from the date on
which the vote was taken; and
3. The stockholder must surrender the
certificate of stock representing his shares for
notation in the corporate books. (Sec. 81,
RCC)
Note: The value of the shares to be paid shall
be the fair value of the share as of the day
before the vote was taken, excluding any
appreciation or depreciation in anticipation of
such corporate action.
In case the fair value cannot be agreed upon by
the withdrawing stockholder and the
corporation, it shall be determined and
appraised by three (3) disinterested persons,
one of whom shall be named by the stockholder,
another by the corporation, and the third by the
two (2) thus chosen. The finding of the majority
of the appraisers shall be final.
No payment shall be made to any dissenting
stockholder unless the corporation has
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Mercantile Law
unrestricted retained earnings in its books to
cover such payment. (Sec. 81, RCC)
All rights accruing to the dissenting stockholder‘s
shares, including voting and dividend rights,
shall be suspended, except the right of such
stockholder to receive payment of the fair value
thereof. (Sec. 82, RCC)
Effect of the exercise of right of appraisal
All rights accruing to the dissenting stockholder‘s
shares, including voting and dividend rights,
shall be suspended, except the right of such
stockholder to receive payment of the fair value
thereof. (Sec. 82, RCC)
Right to inspect, requirements:
Directors, trustees, stockholders or members of
the corporation have the right to inspect records
of all business transactions and minutes of any
meetings of the corporation provided the
following requisites are present:
1. It must be exercised at reasonable hours on
business days;
2. The stockholder inspecting has not
improperly used any information he has
secured through any prior examination of
the records of such corporation or any other
corporation;
3. Must act in good faith or for a legitimate
purpose in making his demand
The act of refusing to allow inspection of the
stock and transfer book of a corporation, when
done in violation of the Corporation Code is
punishable as an offense under same code.
(Yujuico vs. Quiambao G.R No. 180416, June 2, 2014)
Distinction of the right of inspection of a
stockholder and that of a director as to
access to highly qualified sensitive and
qualified information:
STOCKHOLDER/MEMBER DIRECTOR
May inspect and examine the Absolute and
books and records as provided in unqualified
Sections 73 and 74 but may not and without
gain access to highly sensitive and regard to
confidential information. motive
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Mercantile Law
Pre-Emptive right, defined:
It is the preferential right granted to all
stockholders of a corporation to subscribe to all
issues or disposition of shares of any class, in
proportion to their respective shareholdings.
(Sec. 38, RCC)
The right may be restricted or denied by the
articles of incorporation, and subject to certain
exceptions and limitations. The stockholder must
be given a reasonable time within which to
exercise their preemptive rights. Upon the
expiration of said period, any stockholder who
has not exercised such right will be deemed to
have waived it.
The validity of issuance of additional shares may
be questioned if done in breach of trust by the
controlling stockholders. Thus, even if the pre-
emptive right does not exist, either because the
issue comes within the exceptions in Section 38
or because it is denied or limited in the articles
of incorporation, an issue of shares may still be
objectionable if the directors acted in breach of
trust and their primary purpose is to perpetuate
or shift control of the corporation, or to "freeze
out" the minority interest. (Majority Stockholders
vs. Lim G.R. No. 165887, June 6, 2011)
Note: Right to vote was discussed in the topic
―Participation in Management‖
Right of first refusal; defined:
It is the right granted to stockholders of existing
corporations to buy the shares of stock of
another stockholder at a fixed price and only
valid if made on reasonable terms and
consideration. (Fletcher, Vol. 5, p.6266)
Note: A right of first refusal is a contractual
grant, not of the sale of a property, but of the
first priority to buy the property in the event the
owner sells the same. As distinguished from an
option contract, in a right of first refusal, while
the object might be made determinate, the
exercise of the right of first refusal would be
dependent not only on the owner‘s eventual
intention to enter into a binding juridical relation
134 Center for Legal Education and Research
with another but also on terms, including2018 the
price, that are yet to be firmed up. (Polytechnic
University of the Philippines vs. Golden Horizon Realty
Corporation, G.R. No. 183612, March 15, 2010)
REMEDIAL RIGHTS AVAILABLE TO
STOCKHOLDERS AND MEMBERS
Remedial rights available:
1. Individual suit – a suit instituted by a
shareholder individually for his own behalf
against the corporation for injury to his or
her interest as a shareholder.
Here, the right of action and recovery belongs to
the shareholders (direct action). (Cua, Jr. vs. Tan,
G.R. No. 181455-56, December 4, 2009)
2. Representative suit – a suit filed by a
shareholder in his behalf and in behalf
likewise of other stockholders similarly
situated and with a common cause against
the corporation; (Republic Bank vs. Cuaderno,
G.R. No. L-22399, March 30, 1967)
3. Derivative suit – an action brought by one
or more stockholders or members in the
name and on behalf of the corporation to
redress wrongs committed against it or to
protect or vindicate corporate rights,
whenever the officials of the corporation
refuse to sue or are the ones to be sued or
hold control of the corporation. (Ching vs.
Subic Bay Golf & Country Club, Inc., GR No.
174353, September 10, 2014)
 A derivative action is a suit by a shareholder
to enforce a corporate cause of action. The
corporation is a necessary party to the suit.
And the relief which is granted is a
judgment against a third person in favor of
the corporation. Similarly, if a corporation
has a defense to an action against it and is
not asserting it, a stockholder may intervene
and defend on behalf of the corporation.
(Chua vs. Court of Appeals, Hao, G.R. No.
150793, November 19, 2004)
 It [derivative suit] has been proven to be
aneffective remedy of the minority against
the abuses of management. Thus, an
individual stockholder is permitted to
institute a derivative suit on behalf of the
 Purple Notes
Mercantile Law
corporation wherein he holds stock in order 3. No appraisal rights are available for the act
to protect or vindicate corporate rights, or acts complained of; and
whenever officials of the corporation refuse 4. The suit is not a nuisance or harassment
to sue or are the ones to be sued or hold suit. (Ching vs. Subic Bay Golf and Country
the control of the corporation. In such Club, Inc., et al. G.R. No. 174353, September
actions, the suing stockholder is regarded as 10, 2014)
the nominal party, with the corporation as 5. The action brought by the stockholder or
the party in interest.(Cua, Jr. vs. Tan, G.R. No. member must be "in the name of the
181455-56, December 4, 2009) corporation or association. (Florete vs.
Florete, G.R. No. 174909 and 177275, January
Individual, Representative, and Derivative 20, 2016)
suits, distinguished: 6. The corporation be made a party to the
case. (Florete vs. Florete, G.R. No. 174909 and
Individual suits are filed when the cause of 177275, January 20, 2016)
action belongs to the individual stockholder
personally, and not to the stockholders as a OBLIGATIONS OF A STOCKHOLDER
group or to the corporation, e.g., denial of right
to inspection and denial of dividends to a A stockholder has the following
stockholder. If the cause of action belongs to a obligations:
group of stockholders, such as when the rights
violated belong to preferred stockholders, a 1. Liability for failure to create corporation;
class or representative suit may be filed to (Sec. 10, RCC)
protect the stockholders in the group. Derivative 2. To pay the corporation for unpaid
suit, on the other hand, is an action filed by subscription including interest, when
stockholders to enforce a corporate action. It required by the by-laws; (Sec. 65, RCC)
concerns "a wrong to the corporation itself." The 3. To pay the creditors of the corporation for
real party in interest is the corporation, not the unpaid subscription under the Trust Fund
stockholders filing the suit. The stockholders are Doctrine; (Sec. 66, RCC)
technically nominal parties but are nonetheless 4. Liability for watered stock; (Sec. 64, RCC)
the active persons who pursue the action for 5. To be liable, as general partners, for all
and on behalf of the corporation. (Villamor vs. debts, liabilities, and damages of on
Umale, G.R. No. 172843, September 24, 2014) determinable corporation as envisioned
under Section 20 (corporation by estoppels);
Requisites of derivative suits: Sec. 20, RCC)
6. To be personally liable for torts, in the event
Section 1, Rule 8 of the Interim Rules of that a stockholder in a close corporation
Procedure Governing Intracorporate actively participates in the management of
Controversies imposes the following the corporate affairs; and, (Sec. 99, RCC)
requirements for derivative suits: 7. Liability for dividends unlawfully paid. (Sec.
42 RCC)
1. He was a stockholder or member at the
time the acts or transactions subject of the MEETINGS OF STOCKHOLDERS AND
action occurred and at the time the action MEMBERS
was filed;
2. He exerted all reasonable efforts, and Kinds of stockholders‟ meetings:
alleges the same with particularity in the
complaint, to exhaust all remedies available 1. Regular
under the articles of incorporation, by-laws, 2. Special
laws or rules governing the corporation or
partnership to obtain the relief he desires
(exhaustion of all intra-corporate
remedies);

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Requisites of a valid meeting
1. The meeting must be held on the date fixed
in the by-laws or in accordance with law;
2. Prior notice must be given to the
stockholders or members;
3. It must be held at the proper place; and
4. It must be called by the proper person.
(Ladia, The Corporation Code of the Philippines,
Annotated, 2007, p. 317)
Note: All proceedings and any business
transacted at a meeting of the stockholders or
members, if within the powers or authority of
the corporation, shall be valid even if the
meeting is improperly held or called: Provided,
that all the stockholders or members of the
corporation are present or duly represented at
the meeting and not one of them expressly
states at the beginning of the meeting that the
purpose of their attendance is to object to the
transaction of any business because the meeting
is not lawfully called or convened. (Sec. 50, RCC)
Notice requirement of stockholders‟ or
members‟ meeting
Written notice must be sent to stockholders or
members:
In case of Regular Meeting:
1. Within the period required in the by-laws,
law, or regulation; or
2. In the absence of such period, at least 21
days prior to the meeting. (Sec. 49, RCC)
In case of Special Meeting:
1. Within the period provided in the bylaws,
law, or regulation; or
2. In the absence of such period, at least 1
week written notice. (Sec. 49, RCC)
Note: Notice of any meeting may be waived,
expressly or impliedly, by any stockholder or
member.
Place and Time of Meetings
Where meetings are held:
136 Center for Legal Education and Research
Stockholders' or members' meetings, 2018
whether
regular or special, shall be held in the:
1. Principal office of the corporation as set
forth in the Articles of Incorporation; or,
2. If not practicable, in the city or municipality
where the principal office of the corporation
is located.
Note:
 Metro Manila, Metro Cebu, Metro Davao,
and other Metropolitan areas shall be
considered a city or municipality. (Sec. 50,
RCC)
 A non-stock corporation may provide in its
by-laws for any place within the Philippines
provided the requisite proper notice is sent
to all members. (Sec. 92, RCC)
When meetings are held:
Regular meetings of stockholders or members
shall be held annually:
1. On the date fixed in the by-laws; or
2. If not so fixed, on any date after April 15 of
every year as determined by the board of
directors or trustees. (Sec. 49, RCC)
Special meetings of stockholders or members
shall be held:
1. At any time deemed necessary; or
2. As provided in the bylaws. (Sec. 49, RCC)
Proper party to call the meetings:
The following persons who may call the
meeting:
1. The person designated in the bylaws; (Sec.
49, RCC)
2. In the absence of such designation, the
President of the corporation; (Ibid)
3. The petitioning stockholder or member, on
order of the SEC directing him to call a
meeting of the corporation, in cases where
there is no person authorized or the person
authorized refuses to call a meeting; (Ibid)
 Purple Notes
4. In case of removal of director or trustee, the
secretary on order of the president, or upon
written demand of the stockholders
representing at least majority of the
outstanding capital stock. (Sec. 27, RCC)
 A Special Meeting of the Stockholders or
members of a corporation for the purpose
of removal of Directors or Trustees, or any
of them, must be called by the Secretary on
order of the President or on the written
demand of the Stockholders representing or
holding at least a majority of the
outstanding capital stock, or if it be non-
stock corporation, on the written demand
of a majority of the members entitled to
vote.(Jose Bernas vs. Jovencio Cinco, G.R. NO.
163356-57, Sept. 8, 2016)
Quorum
General rule: Quorum consists of the
stockholders representing a majority of the
outstanding capital stock or a majority of the
members in the case of non-stock corporations.
(Sec. 51, RCC)
Exception: Unless otherwise provided for in
this Code or in the by-laws (Ibid.)
Contents of the minutes of meetings
The minutes of all meetings must set forth in
detail the following:
1. Time and place of holding the meeting,
2. How authorized
3. The notice given,
4. The agenda,
5. Whether the meeting was regular or special;
and its object if special,
6. Those present and absent, and
7. Every act done or ordered done at the
meeting. (Sec. 73[g], RCC)
Details which must be noted in the
minutes upon demand by any director,
trustee, stockholder or member:
Upon demand of any director, trustee,
stockholder or member, the following must be
noted in the minutes:
137
Mercantile Law
1. Time when any director, trustee,
stockholder or member entered or left the
meeting;
2. Yeas and nays on any motion or proposition;
and
3. Protest on any action or proposed action.
(Sec. 73, RCC)
Minutes of meetings, subject to inspection
at reasonable hours on business days:
Minutes of meetings are subject to inspection by
any director, trustee, stockholder or member of
the corporation at reasonable hours on business
days and a copy of excerpts of said records may
be demanded. (Ibid)
BOARD OF DIRECTORS AND TRUSTEES
REPOSITORY OF CORPORATE POWERS
Unless otherwise provided in the Code, the
board of directors or trustees shall exercise the
corporate powers, conduct all business, and
control all properties of the corporation. (Sec. 22,
RCC)
TENURE, QUALIFICATION, AND
DISQUALIFICATION OF DIRECTORS AND
TRUSTEES
Tenure of directors or trustees:
General rule: In stock corporations, Directors
shall be elected for a term of one (1) year, while
in non-stock corporation, Trustees shall be
elected for a term not exceeding three (3)
years.
Exception: If no election is held, the directors
and officers shall hold position under a
hold‐over capacity until their successors are
elected and qualified. (SEC Opinion, Dec. 15, 1989)
Note: Hold-over situation arises only when no
successors are elected due to valid and
justifiable reasons (SEC-OGC Opinion No. 07-08,
April 2007)
Difference between Term and Tenure:
Term refers to the time during which the officer
may claim to hold the office as a matter of right
Bar Operations C ommissions 137
 Purple Notes
Mercantile Law
and fixes the interval after which the several
incumbents shall succeed one another. The term
of office is not affected by the holdover. Tenure,
on the other hand, represents the term during
which the incumbent actually holds office. (Valle
Verde Country Club vs. Africa, G.R. No. 151969,
September 4, 2009)
Hold-over period; defined:
It refers to the time from the lapse of one year
from a member‘s election to the Board and until
his successor‘s election and qualification. It is
not part of the director‘s original term of office,
nor is it a new term; the holdover period,
however, constitutes part of his tenure. (Valle
Verde Country Club vs. Africa, G.R. No. 151969,
September 4, 2009)
Qualifications of a director:
1. Must own at least 1 share of the capital
stock in his own name, or if the corporation
is a non-stock corporation, he must be a
member thereof; (Sec. 23, RCC)
Note:
 Ownership of stock shall stand in his
name on the books of the corporation.
 A person who does not own a stock at
the time of his election or appointment
does not disqualify him as director if he
becomes a shareholder before assuming
the duties of his office. (SEC Opinions,
November 9, 1987 and April 5, 1990)
 It is sufficient that the legal title as it
appears in the books is in the director
since the legal title is what counts. What
is material is the legal title, not
beneficial ownership of the stock as
appearing on the books of the
corporation.
2. Must be of legal age; and
3. Must possess such other qualifications as
may be prescribed by special laws or
regulations or in the by-laws of the
138 Center for Legal Education and Research
corporation. (Sundiang & Aquino,2018
Reviewer on
Commercial Law, 2017, p. 219)
Grounds for disqualification of a director:
1. When a director ceases to own at least 1
share of stock or when a trustee ceases to
be a member;
2. If within 5 years prior to the election or
appointment, the person was:
a. Convicted by final judgment of an
offense punishable by imprisonment for
a period exceeding 6 years, or for
violation the RCC, or for violating the RA
No. 8799, otherwise known as ―The
Securities Regulation Code‖;
b. Found administratively liable for any
offense involving fraudulent acts; and
c. By a foreign court or equivalent foreign
regulatory authority for acts, violations
or misconduct similar to (a) and (b); or
3. Such other disqualifications which the SEC
or Philippine Competition Commission may
impose. (Sec. 26, RCC)
REQUIREMENT OF INDEPENDENT
DIRECTORS
Independent Director, defined:
An independent director is a person who, apart
from shareholdings and fees received from the
corporation, is independent of management and
free from any business or other relationship
which could, or could reasonably be perceived to
materially interfere with the exercise of
independent judgment in carrying out the
responsibilities as a director. (Sec. 22, RCC)
The following corporations vested with public
interest shall have independent directors
constituting at least twenty percent (20%) of
their board:
1. Corporations covered by ―The Securities
Regulations Code‖, namely those whose
securities are registered with SEC,
corporations listed with an exchange or with
assets of at least P50 Million and having 200
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or more holders of shares, each holding at
least 100 shares of a class of equity shares;
2. Banks and quasi-banks, NSSLAs,
pawnshops, corporations engaged in money
service business, pre-need, trust and
insurance companies, and other financial
intermediaries; and
3. Other corporations vested with public
interest as may be determined by the SEC
(Ibid.)
Election of Independent Directors
Independent directors are elected by the
shareholders present or entitled to vote in
absentia during the elections of directors. They
are subject to rules and regulations governing
their qualifications, disqualifications, voting
requirements, duration of term and term limit,
maximum number of board memberships and
other requirements that the SEC will prescribe.
(Ibid.)
ELECTION OF DIRECTORS OR TRUSTEES
Except when the exclusive right is reserved for
holders of founders‘ shares, each stockholder or
member shall have the right to nominate any
director or trustee who possesses all of the
qualifications and none of the disqualifications
set forth in the Code. (Sec. 23, RCC)
Cumulative voting/straight voting:
Straight voting – every stockholder may vote
such number of shares for as many persons as
there are directors to be elected.
Cumulative voting for one candidate – a
stockholder is allowed to concentrate his votes
and give one candidate, as many votes as the
number of directors to be elected multiplied by
the number of his shares shall equal.
For example, in an election of the Board of
Directors where 5 members of the board are to
be elected, a stockholder who owns 100,000
shares of stock may cast all of his 500,000 votes
to a particular nominee. The number of votes he
is entitled to cast was derived by multiplying his
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Mercantile Law
shareholdings to the number of directors to be
elected.
Cumulative voting by distribution – a
stockholder may cumulate his shares by
multiplying the number of his shares by the
number of directors to be elected and distribute
the same among as many candidates as he
shall see fit. (De Leon, The Philippine Corporate
Law, 2010, p. 249)
Note:
 Cumulative voting in case of non‐stock
corporations may only be done if it is
provided in the Articles of Incorporation.
 Nominees for directors or trustees receiving
the highest number of votes shall be
declared elected. (Sec. 23, RCC)
Quorum
There must be present, either in person or
through a representative authorized to act by
written proxy, the owners of majority of the
outstanding capital stock or in case of non-stock
corporations, a majority of members entitled to
vote. (Sec. 23, RCC)
ELECTION OF CORPORATE OFFICERS
Immediately after their election, the directors of
a corporation must formally organize and elect:
1. President – must be a director;
2. Treasurer – must be a resident of the
Philippines;
3. Secretary – must be a citizen and resident
of the Philippines;
4. Such other officers as may be provided in
the bylaws; and;
5. Compliance officer – if the corporation is
vested with public interest. (Sec. 24, RCC)
Note: No one shall act as president and
secretary or as president and treasurer at the
same time, unless otherwise allowed in the RCC.
(Ibid.)
In case of a One Person Corporation (OPC), the
single stockholder may be self-appointed as
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Mercantile Law
treasurer but not as corporate secretary. (Sec.
122, RCC)
Instances when the BOD/BOT does not
elect the officers:
1. In case of a non-stock corporation, the
members may directly elect officers, unless
otherwise provided in the articles of
incorporation or in the bylaws. (Sec. 91,
RCC)
2. In case of a close corporation, its articles of
incorporation may provide that all officers
or employees or that specified officers or
employees shall be elected or appointed by
the stockholders, instead of by the board
of directors. (Sec. 96, RCC)
3. In case of an OPC, the single stockholder
shall appoint the corporate officers as it
may deem necessary. (Sec. 122, RCC)
REMOVAL OF DIRECTORS OR TRUSTEES
Power to remove
The power to remove directors or trustees is
lodge to the following:
1. Stockholders; and
2. SEC - shall, motu proprio or upon verified
complaint, and after due notice and hearing,
order the removal of a director or trustee
elected despite the disqualification, or
whose disqualification arose or is discovered
subsequent to an election. (Sec. 27, RCC)
Requisites:
1. It must take place either at regular meeting
or special meeting of the stockholders or
members called for the purpose;
2. Previous notice to the stockholders
or members of the intention to remove a
director;
3. A vote of the stockholders representing 2/3
of outstanding capital stock or 2/3 of
members. (Sec. 27, RCC)
Cause of removal
General rule: Removal may be with or without
cause.
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2018 was
Exception: If the director to be removed
elected by the minority, there must be cause for
removal because the minority may not be
deprived of the right to representation to which
they may be entitled under Sec. 23 of the Code.
(Sec. 27, RCC)
FILLING OF VACANCIES
Stockholders or members may fill the
vacancy, if it is due to:
1. If the vacancy may be filled by the
remaining directors or trustees but the
board refers the matter to stockholders or
members;
2. Expiration of term
3. Removal
4. Increase in the number of directors
5. Grounds other than removal or expiration
of term, e.g. death, resignation,
abandonment, or disqualification where the
remaining directors do not constitute a
quorum for the purpose of filling the
vacancy. (Sec. 28, RCC)
Effect of vacancy
The board may continue to function even if
there is a vacancy so long as there is a quorum.
Any act, transaction, or resolution of the board
shall be considered as valid even if there is a
vacancy so long as there is a quorum to do
business. (Aquino, 2011, p. 281)
Filling by vote of remaining directors,
when allowed:
1. If the ground for vacancy is other than
removal, term expiration or increase in the
number of directors or trustees, the vacancy
may be filled up by the vote of at least a
majority of the remaining directors or
trustees, if they still constitute a quorum.
2. When the vacancy prevents the remaining
directors from constituting a quorum and
emergency action is required to prevent
grave, substantial, and irreparable loss or
damage, the vacancy may be temporarily
filled up from among the officers of the
corporation by unanimous vote of the
remaining directors. (Sec. 28, RCC)
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Term
The replacement will serve only for the
remaining period of the original term of the
director that he replaced. (SEC Opinion dated
February 8, 1993, as cited in Aquino, 2011, p. 282)
(Section 28, RCC)
COMPENSATION
Right to compensation
General rule: Directors or trustees, in their
capacity as such, are not entitled to receive any
compensation except for reasonable per
diems. Sec. 29, RCC)
Exceptions:
1. If compensation is fixed in the by‐laws;
2. If granted by stockholders representing at
least a majority of the outstanding capital
stock or majority of the members; and
3. When they rendered services to the
corporation in a capacity other than as
directors or trustees, e.g. corporate officer.
In no case shall the total yearly compensation of
directors, as such directors, exceed ten percent
(10%) of the net income before income tax of
the corporation during the preceding year. (Sec.
29, RCC)
NOTE: The phrase ―as such directors‖ in Sec. 29
of the Corporation Code delimits the scope of
the prohibition to compensation given to them
for services performed purely in their capacity as
directors or trustees. The unambiguous
implication is that members of the board may
receive compensation, in addition to reasonable
per diems, when they render services to the
corporation in a capacity other than as
directors/trustees. (Western Institute of
Technology, Inc., vs. Salas, G.R. No. 113032, August
21, 1997)
Fiduciary duties and liability rules
Directors are bearing fiduciary relation to
the corporation and stockholder:
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Mercantile Law
Directors are considered in equity as bearing a
―fiduciary relation‖ to the corporation and its
stockholders. Directors are expected and are
obliged to act with utmost candor and fair
dealing for the interest of the corporation and
without taint of selfish motives. (Ladia, The
Corporation Code of the Philippines, Annotated, 2007,
p. 194 citing Fletcher)
Three-fold duties of directors:
1. Obedience
2. Diligence
3. Loyalty
Doctrine of corporate opportunity
 It provides that when a director acquires
profit by seizing a business opportunity
which should belong to the corporation, he
must account for a refund the same to the
corporation. (Sec. 33, RCC)
 One phase of the cardinal rule of ―undivided
loyalty‖ on the part of fiduciaries (directors).
This is pursuant to jurisprudence which rules
that ―one who occupies a fiduciary
relationship to a corporation may not
acquire in opposition to the corporation,
property in which the corporation has an
interest or tangible expectancy or which is
essential to its existence. (Section 31,
Corporation Code; SEC Opinion, March 1982)
 Section 33 is consistent with the duty of the
loyalty of a director. The duty of loyalty
mandates that directors should not give
preference to their own personal
amelioration by taking the opportunity
belonging to the corporation. (Aquino, 2011,
p. 308)
 Note: The prohibition no longer applies if
the action was made after the resignation of
the director. (Aquino, 2011, p. 309)
Burden of Proof
The burden of proof on the questions of good
faith, fair dealing, and loyalty of the officer to
the corporation should rest upon the officer who
appropriated the business opportunity for his
own advantage. (Aquino, 2011, p. 309)
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Ratification
The corporation may choose to ratify the acts of
the director. However, this requires a vote of
two-thirds (2/3) of the outstanding capital stock.
Otherwise, he must account all the profits by
refunding the same to the corporation. (Aquino,
2011, p. 310)
DISLOYALTY OF A DIRECTOR
There is disloyalty on the part of director
when:
1. A director or trustee acquires any personal
or pecuniary interest in conflict with (his)
duty as such director or trustee;
2. He attempts to acquire or acquires, in
violation of his duty, any interest adverse to
the corporation in respect to any matter
which has been reposed in him in
confidence;
3. He, by virtue of his office, acquires for
himself a business opportunity which should
belong to the corporation, thereby obtaining
profit to the prejudice of such corporation.
(Ladia, The Corporation Code of the Philippines,
Annotated, 2007, p. 195)
Note: The above enumerations are the grounds
by which a director may be held liable for
damages and thus, the veil of corporate fiction
may be pierced. (De Leon, 2010, p. 305)
BUSINESS JUDGMENT RULE
Business judgment rule; defined:
It provides that questions of policy or
management are left solely to the honest
decision of officers and directors of a
corporation and the courts are without authority
to substitute their judgment for the judgment of
the board of directors; the board is the business
manager of the corporation and so long as it
acts in good faith, its orders are not reviewable
by the courts or SEC. (Montelibano vs. Bacolod-
Murcia Milling Co. Inc., G.R. No. L-15092, May 18,
1962)
 When a resolution is passed in good faith by
the BOD, it is valid and binding, and
142 Center for Legal Education and Research
whether or not it will cause2018 losses or
decrease in profits, the court has no
authority to review them. (Montelibano vs.
Bacolod-Murcia Milling Co., G.R. No. L-15092,
May 18, 1962)
 The members of the Board of Directors hold
such office charged with the duty to act for
the corporation according to their best
judgment, and in so doing, they cannot be
controlled in the reasonable exercise and
performance of such duty. (SEC Opinion No.
15-05, November 2005)
 The will of the majority controls in corporate
affairs, and contracts intra vires entered into
by the board of the directors are binding on
the corporation and courts will not interfere
unless such contracts are so unconscionable
and oppressive as to amount to a wanton
destruction of rights of the minority.
(Ingersoll vs. Malabon Sugar Co., G.R. No. L-
27770, Dec. 31, 1927)
Exceptions to business judgment rule:
1. When the contracts are so unconscionable
and oppressive as to amount to a wanton
destruction of rights of the minority.
(Ingersoll vs. Malabon Sugar Co., G.R. No.
L‐16977, April 21, 1922)
2. When there is bad faith or gross negligence
by the directors. (Republic Communications
Inc. vs. CA, GR No. 135074, January 29, 1999)
Consequences of business judgment rule
1. Resolutions approved, contracts and
transactions entered into by the Board
within the powers of the corporation cannot
be reversed by the courts not even on the
behest of the stockholders; and
2. Directors and officers acting within such
business judgment cannot be he held
personally liable for such acts. (Villanueva,
Philippine Corporate Law, 2013, p. 316)
Note: A board resolution authorizing a
corporate officer to obtain a loan includes the
authority to assign the receivables to secure the
loan if the resolution also empowers the officer
to agree to the terms and conditions of the loan
 Purple Notes
and sign the implementing documents. The
officer who signed the deed of assignment is
however, not personally liable if he indicated in
the deed that he was signing in behalf of the
corporation. (Divina, 2010, p. 79)
SOLIDARY LIABILITIES FOR DAMAGES
Personal liability may also attach when the
director:
1. Assents:
a. to a patently unlawful act of the
corporation, or
b. for bad faith or gross negligence in
directing its affairs, or
c. conflict of interest, resulting in damages
to the corporation, its stockholders or
other persons; (Sec. 30, RCC)
2. Consents to the issuance of watered stocks
or who, having knowledge thereof, does not
file with the corporate secretary his written
objection thereto;
3. Is made personally liable by specific
provision of law (e.g., BP 22, Labor Code);
4. Agrees to hold himself personally and
solitarily liable with the corporation (Tramat
Mercantile Inc., vs. Court of Appeals, G.R. No.
111008, November 7, 1994)
RESPONSIBILITY FOR CRIMES
Director or officer, when criminally liable:
A director or officer may be held criminally liable
when he was directly required by law to do an
act in a given manner, and the same law makes
the person who fails to perform the act in the
prescribed manner expressly liable criminally.
Where a law requires a corporation to do a
particular act, failure of which on the part of the
responsible officer to do so constitutes the
offense, the responsible officer is criminally
liable therefore. (People vs. Tan Boon Kong, GR No.
L-35262, March 15, 1930)
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Mercantile Law
Rationale:
The performance of the act is an obligation
directly imposed by the law on the corporation.
Since it is a responsible officer or officers of the
corporation who actually perform the act for the
corporation, they must of necessity be the ones
to assume the criminal liability; otherwise this
liability as created by the law would be illusory,
and the deterrent effect of the law, negated . (Sia
vs. People, G.R. No. L-30896, April 28, 1983)
SPECIAL FACT DOCTRINE
Special Fact Doctrine, defined:
It states that where special circumstances or
facts are present which make it inequitable for
the director to withhold information from the
stockholder, the duty to disclose arises, and
concealment is fraud. (American T. Co. vs.
California etc. Ins. Co., 15 Cal. 2d 42, 1940)
INSIDE INFORMATION
Inside information, defined:
Knowledge obtained or acquired by reason of his
position as director or officer of, or connection
with, the corporation; and the fact is material if
it induces or tends to induce or otherwise affect
the sale or purchase of the security. (Amended
Rules Regulating Trading by broker or dealer who is a
director or officer of the issuer of a listed security)
Information not known to the public that one
has obtained by virtue of being an insider
like a director. (Miriam Webster Dictionary, 2006)
CONTRACTS
Self-dealing directors, trustees, or officers
Those who personally contract with the
corporation in which they are directors, trustees
or officers.
 Discouraged because they have fiduciary
relationship with the corporation and there
can be no real bargaining where the same is
acting on both sides of the trade. (Aquino,
2011, p. 302)
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Status of contracts by self-dealing
directors with the corporation
A contract of the corporation with one or more
of its directors or trustees or officers or their
spouses and relatives within the fourth civil
degree of consanguinity or affinity is voidable, at
the option of such corporation, unless all of the
following conditions are present:
1. The presence of such director or trustee in
the board meeting in which the contract was
approved was not necessary to constitute a
quorum for such meeting;
2. The vote of such director or trustee was not
necessary for the approval of the contract;
3. The contract is fair and reasonable under
the circumstances;
4. In case of corporations vested with public
interest, material contracts are approved by
at least two-thirds (2/3) of the entire
membership of the board, with at least a
majority of the independent directors voting
to approve the material contract; and
5. In case of an officer, the contract has been
previously authorized by the board of
directors. (Sec, 31. RCC)
In the absence of the first three requisites,
contracts by self-dealing directors may be
ratified; requirements:
Where any of the first three conditions set forth
in the preceding paragraph is absent, in the
case of a contract with a director or trustee,
such contract may be ratified, provided:
1. The contract is ratified by the vote of the
stockholders representing at least two-thirds
(2/3) of the outstanding capital stock or of
at least two-thirds (2/3) of the members;
2. Such ratification is made at a meeting called
for that purpose;
3. Full disclosure of the adverse interest of the
directors or trustees involved is made at
such meeting; and
4. The contract is fair and reasonable under
the circumstances. (Ibid.)
Interlocking directorship, meaning:
144 Center for Legal Education and Research
When one (or some or all) of the 2018 directors in
one corporation is (or are) a director(s) in
another corporation. (Aquino, 2011, p. 305)
Effect of Interlocking directorship
A contract between two (2) or more
corporations having interlocking directors shall
not be invalidated on that ground alone,
provided that the following conditions are
present:
1. Fraud is not attendant to the contract;
2. The contract is fair and reasonable under
the circumstances; and
3. The interest of the interlocking director in
both corporations must either be
substantial or nominal. (Sec. 32, RCC)
Substantial interest, how determined:
Stockholdings exceeding twenty (20%)
percent of the outstanding capital stock shall
be considered substantial for purposes of
interlocking directors. (Sec. 32, RCC)
EXECUTIVE AND OTHER SPECIAL
COMMITTEES
Creation of executive committee
If the by-laws so provide, the board of a
corporation may create an executive committee,
composed of at least three (3) members of the
board. (Sec. 34, RCC)
Limitations on the powers of the executive
committee
The committee may act, by majority vote of all
its members, on such specific matters within the
competence of the board, as may be delegated
to it in the by-laws or on a majority vote of the
board except with respect to the:
1. Approval of any action for which
shareholders' approval is also required;
2. Filling of vacancies in the board;
3. Amendment or repeal of by-laws or the
adoption of new by-laws;
 Purple Notes
4. Amendment or repeal of any resolution of
the board which by its express terms is not
so amendable or repealable; and
5. Distribution of cash dividends to the
shareholders. (Sec. 34, RCC)
Note: The decision of the executive committee
is not subject to appeal to the board. They are
valid and unappealable. However, the board
may ratify the resolution if the resolution of the
executive committee is invalid (as for instance it
is not one of the powers conferred thereto).
Additionally, just like any board resolution, the
resolution of the executive committee may be
repealed by subsequent board resolutions unless
what is involved is an accomplished fact or a
contract that is binding on third persons.
(Aquino, 2011, p. 314)
MEETINGS OF THE BOARD
Kinds of meetings of the board:
1. Regular
2. Special
When meetings are held:
Regular meetings of Directors or Trustees
shall be held:
1. During such periods as the by-laws may
provide; or
2. In the absence of provision in the by-laws,
shall be held monthly. (Sec. 52, RCC)
Special meetings of Directors or Trustees shall
be held anytime:
1. As provided in the by-laws; or
2. Upon the call of the president (Sec. 52, RCC)
Where meeting are held:
Meetings of directors or trustees of corporations
may be held anywhere in or outside of the
Philippines, unless the by-laws provide
otherwise. (Sec. 52, RCC)
Notice requirement of regular or special
meeting
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Mercantile Law
Notice of regular or special meetings stating the
date, time and place of the meeting must be
sent to every director or trustee at least two (2)
days prior to the scheduled meeting, unless
otherwise provided by the by-laws. (Sec. 52, RCC)
Attendance in meetings:
Directors or trustees who cannot physically
attend or vote at board meetings can participate
and vote through remote communication such
as videoconferencing, teleconferencing, or other
alternative modes of communication that allow
them reasonable opportunities to participate.
Directors or trustees cannot attend or vote by
proxy at board meetings. (Sec. 52, RCC; Sec. 4,
SEC MC 06-2020)
A director or trustee who participates through
remote communication, shall be deemed present
for the purpose of attaining quorum. (Sec. 57,
RCC; Ibid)
Attendance through Remote
Communication
Remote Communication means the transfer
of data between two or more devices not
located at the same site. (Sec. 3[a], SEC MC 06-
2020)
Teleconferencing is the holding of a
conference among people remote from one
another by means of telecommunication devices
such as telephone or computer terminals. It
refers to an interactive group communication
(three or more people in two or more locations)
through an electronic medium. In general terms,
teleconferencing can bring people together
under one roof even though they are separated
by hundred miles. (Sec. 3[b], SEC MC 06-2020)
Videoconferencing is the holding of a
conference among people in remote locations by
means of transmitted audio and video signals.
(Sec. 3[c], SEC MC 06-2020)
Computer Conferencing is teleconferencing
supported by one or more computers. (Sec. 3[d],
SEC MC 06-2020)
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Mercantile Law
Audio Conferencing is a conference in which
people at different locations speak to each other
via telephone or internet connections. (Sec. 3[e],
SEC MC 06-2020)
Roll Call: At the start of the meeting, the
Presiding Officer shall instruct the Corporate
Secretary to make a roll call. Thereafter, the
Corporate Secretary shall confirm and note the
participants and certify the existence of quorum.
(Sec. 9, SEC MC 06-2020)
Voting: In case of a need to vote in any item or
matter in the agenda, the Presiding Officer shall
direct the Corporate Secretary to note the vote
of each director or trustee.
The director or trustee participating in the
meeting via remote communication may cast his
vote through electronic mail, messaging service
or such other manner as may be provided in the
internal procedures. The vote shall be sent to
the Presiding Officer and the Corporate
Secretary for notation. (Sec. 8, SEC MC 06-2020)
Who presides board meeting
1. The person designated in the bylaws;
2. In no person is designated in the bylaws,
the chairman of the board;
3. In the absence of the chairman, the
president.
4. The Petitioning stockholder or member -
upon issue of order of the SEC directing
him to call a meeting of the corporation by
giving proper notice required by the Code
or by its by-laws, until at least majority of
the stockholders or members present have
chosen one of their member as presiding
officer. (Ladia, The Corporation Code of the
Philippines, Annotated, 2007, p. 272)
Quorum:
General rule: A majority of the directors or
trustees as stated in the articles of incorporation
shall constitute a quorum for the transaction of
corporate business.
146 Center for Legal Education and Research
Exceptions: 2018
1. Unless the articles of incorporation or the
by-laws provides for a greater majority.
2. Election of officers which shall require the
vote of majority of all the members of the
board. (Sec. 52, RCC)
 An independent director should always be in
attendance. However, the absence of an
independent director may not affect the
quorum requirements if he is duly notified of
the meeting but deliberately and without
justifiable cause fails to attend the meeting.
Justifiable cause may only include grave
illness or death of immediate family and
serious accidents. (SEC Memorandum Circular
No. 02-02, April 2002)
Rule on abstention
A director with a material interest in any
transaction affecting the corporation should
abstain from taking part in the deliberations for
the same. The abstention of a director from
participating in a meeting when related party
transactions, self-dealings or any transactions or
matters on which he/she has a material interest
are taken up ensures that he has no influence
over the outcome of the deliberations. The
fundamental principle to be observed is that a
director does not use his position to profit or
gain some benefit or advantage for his himself
and/or his/her related interests. (SEC
Memorandum Circular No. 19-16, November 2016)
CAPITAL AFFAIRS
Subscription contract, defined:
It is any contract for the acquisition of unissued
stock in an existing corporation or a corporation
still to be formed. (Sec. 59, RCC)
Rule on pre-incorporation subscription:
General rule: Pre-incorporation subscriptions
shall be irrevocable for a period of at least 6
months from the date of subscription.
 Purple Notes
Exceptions:
1. All of the subscribers consent to the
revocation; and
2. The corporation fails to incorporate within
the same period or within a longer period
stipulated in the contract of subscription
Exception to the exceptions: No pre-
incorporation subscription may be revoked after
the articles of incorporation is submitted to the
SEC. (Sec. 59, RCC)
CERTIFICATE OF STOCK
A piece of paper or document which evidences
the ownership of shares and a convenient of
instrument for the transfer of title. (Ladia, The
Corporation Code of the Philippines, Annotated, pg.
347)
 It expresses the contract between the
corporation and the stockholder, but is not
essential to the existence of a share of stock
or the nature of the relation of stockholder
to the Corporation. (Makati Sports Club Inc. vs.
Cheng, G.R. No, 178523 June 16, 2010)
Formal requisites for certificate of stock
and transfer of stock (Sec 62, RCC)
1. The certificates must be signed by the
president or vice-president, countersigned
by the secretary or assistant secretary or
asst. secretary, and sealed with the seal of
the corporation.
Note: A mere typewritten statement advising a
stockholder of the extent of his ownership in a
corporation without qualification and/ or
authentication cannot be considered as a formal
certificate of stock.
2. Delivery of the certificate.
There is no issuance of a certificate of
stock where it is never detached from the
stock books although blanks therein are
properly filled up if the person whose name
is insert therein has no control over the
books of the company.
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Mercantile Law
3. The par value, as to par value shares, or
the full subscription as to no par value
share must first be fully paid.
4. Surrender the original certificate for the
issuance of new certificate to the
transferee. (Chavez Corporation Law Simplified
2012, p. 129)
Note: While it appears that a subscriber to a
shares of stock cannot be entitled to the
issuance of a certificate of stock until the full
amount of his subscription together with interest
and expenses (in case of delinquent shares) if
any is due, has been paid, a subscriber to a
shares of stock, even if not fully paid, is entitled
to exercise all the rights of a stockholder and
the corresponding liability that attach
thereunder as provided by Sec. 71 of the
Revised Corporation Code.
Nature of the certificate
Shares of stock so issued are personal property
and may be transferred by delivery of the
certificate or certificates indorsed by the owner
or his attorney-in-fact or other person legally
authorized to make the transfer. No transfer,
however, shall be valid, except as between the
parties, until the transfer is recorded in the
books of the corporation showing the names of
the parties to the transaction, the date of the
transfer, the number of the certificate or
certificates and the number of shares
transferred. (Sec. 62, RCC)
 It is a prima facie proof of the holder's
interest in the corporation, his ownership of
the share represented thereby and that the
stock described therein is valid and genuine
in the absence of an evidence to the
contrary. (Sundiang & Aquino, Reviewer on
Commercial Law, 2019, p. 290)
 It is a written instrument signed by the
proper officer of a corporation stating or
acknowledging that the person named
therein is the owner of a designated
number of shares of stock. (Sec. 62, RCC)
 It indicates the name of the holder, the
number, kind and class of shares
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Mercantile Law
represented, and the date of issuance.
(Ibid.)
Uncertificated Shares
An uncertificated share is a subscription duly
recorded and paid in the corporate books but
has no corresponding certificate of stock yet
issued. (Ibid.)
Negotiability; requirements for valid
transfer of stocks
A certificate of stock is not regarded as
negotiable in the same sense that a bill or note
is negotiable, even if it is endorsed in blank.
Thus, while it may be transferred by
endorsement coupled with delivery thereof, and
therefore merely quasi-negotiable, it is
nonetheless non-negotiable in that the
transferee takes it without prejudice to
all the rights and defenses which are true and
lawful owner may have except in so far as the
principles governing estoppel may apply. (Ladia,
The Corp. Code, 3rd ed., pg. 348)
Requirements for valid transfer of stocks
1. The certificate of stock must be duly
endorsed by the transferor or his legal
representative;
2. There must be delivery of the stock
certificate; and
3. To be valid against third parties, the
transfer must be recorded in the books of
the corporation. (Rural Bank of Lipa vs. CA,
G.R. No. 124535, September 28, 2001)
Issuance
A transaction by which a person becomes the
owner of shares and by which new share
contracts are created. (Ladia, The Corporation
Code of the Philippines, Annotated)
Subscription to shares of stock are deemed
indivisible and no certificate of stock shall be
issued to a subscriber until the full amount of
the subscription together with interest and
expenses (in case of delinquent shares), if any is
due, has been paid. (Sec. 63, RCC)
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2018
Full payment
It is now mandated by law that a certificate of
stock cannot be issued until the amount of the
entire subscription has been paid in full. (Ladia,
The Corporation Code of the Philippines, Annotated)
Pro-rata Payment
Partial payments cannot be applied as full
payment for a corresponding number of shares.
To apply otherwise shall constitute a violation of
the doctrine of individuality of subscription.
Subscriptions to shares of stock are deemed
invisible and certificate of stock may be issued
only upon payment of the full amount of
subscription. Hence, partial payment shall be
applied pro-rata to the total number of
subscribed shares. (Sec. 62, RCC)
Stock and transfer book
The stock and transfer book, or STB, is the
registry of ownership in a corporation. It is the
quintessential record of all stockholders and
their corresponding stockholdings in the
corporation (SEC Opinion dated 03 July 2015).
 It is the official record of equity ownership,
of stockholder status, and of those who are
entitled in vote in meetings. It is such an
important corporate register that a
corporate secretary is required to serve as
custodian thereof, to make the proper and
necessary entries therein, and to preserve
these records.
 While directors and stockholders are given
the right to have access to the STB, there is
no express provision in the law making it a
duty of a corporation to supply any
stockholder, upon his request, with a list of
its stockholders showing their respective
subscriptions. To do so would result to a
great inconvenience on the part of the
corporation, especially when there are
thousands of stockholders. It seems,
therefore, unnecessary for a stockholder to
 Purple Notes
request that he be supplied with a list of
stockholders inasmuch as he can directly
inspect the STB subject, of course, to such
limitation as to proper time, place, purpose
and conditions of inspection (De Leon, The
Corporation Code, p. 627, citing Ballantine, p.
385).
Contents of Stock and transfer book
As described in the law, the STB shall contain
the following:
1. Record of all stocks in the names of the
stockholders alphabetically arranged;
2. The installments paid and unpaid on all
stocks for which subscription has been
made, and the date of payment of any
installment;
3. A statement of every alienation, sale or
transfer of stock made, the date thereof, by
and to whom made; and
4. Such other entries as the bylaws may
prescribe (Sec. 73, RCC)
Who may make valid entries in the stock
and transfer book:
1. Corporate Secretary - the corporate
secretary is the custodian of corporate
records. Corollarily, he keeps the stock and
transfer book and makes proper and
necessary entries therein. (Torres vs CA, G.R.
No. 120138, September 5, 1997)
2. Stock and transfer agent
Mandamus will lie to compel officers of the
corporation to transfer stock in the books of the
corporation. (Rural Bank of Salinas vs. CA, G.R. No.
96674 June 26, 1992)
Where is the stock and transfer book kept:
1. Principal office of the corporation; or
2. Office of the stock transfer agent.
Stock transfer agent
One who is engaged principally in the business
of registering transfers of stocks in behalf of a
stock corporation. He also has a duty to keep
the stock and transfer book.
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Mercantile Law
Note: A stock transfer agent shall be allowed to
operate in the Philippines upon securing a
license from the Commission and the payment
of a fee to be fixed by the Commission, which
shall be renewable annually: Provided, That a
stock corporation is not precluded from
performing or making transfers of its own
stocks, in which case all the rules and
regulations imposed on stock transfer agents,
except the payment of a license fee herein
provided, shall be applicable: Provided,
further, That the Commission may require
stock corporations which transfer and/or trade
stocks in secondary markets to have an
independent transfer agent. (Sec. 73, RCC)
Lost or destroyed certificates
Procedure in case of lost or destroyed
certificates:
The following procedure shall be followed for
the issuance by a corporation of new certificates
of stock in lieu of those which have been lost,
stolen or destroyed:
1. Filing of affidavit of circumstance or
affidavit of loss
2. Verification of the
3. Publication of notice by the corporation
4. Cancellation of the lost, stolen, or
destroyed certificate of stock and issuance
of new certificate, if there is no contest.
(Sec. 72, RCC)
Affidavit of circumstances or affidavit of
loss:
The registered owner of a certificate of stock or
such person‘s legal representative shall file with
the corporation an affidavit in triplicate setting
forth, if possible, the circumstances as to how
the certificate was lost, stolen or destroyed, the
number of shares represented by such
certificate, the serial number of the certificate
and the name of the corporation which issued
the same. He shall also submit such other
information and evidence which he may deem
necessary. (Section 72[1], RCC)
Verification and publication:
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Mercantile Law
After verifying the affidavit and other
information and evidence with the books of the
corporation, said corporation shall publish a
notice in a newspaper of general circulation
published in the place where the corporation has
its principal office, once a week for three (3)
consecutive weeks at the expense of the
registered owner of the certificate of stock
which has been lost, stolen or destroyed. The
notice shall state the name of said corporation,
the name of the registered owner and the serial
number of said certificate, and the number of
shares represented by such certificate. (Sec.
72[2], RCC)
Cancellation and issuance
After the expiration of one (1) year from the
date of the last publication, if no contest has
been presented to said corporation regarding
said certificate of stock, the right to make such
contest shall be barred and said corporation
shall cancel in its books the certificate of stock
which has been lost, stolen or destroyed and
issue in lieu thereof new certificate of stock.
(Sec. 72[2], RCC)
Bond
If the registered owner files a bond or other
security effective for a period of one (1) year, a
new certificate may be issued even before the
expiration of the one (1) year period. (Sec. 72[b],
RCC)
Suspension of issuance of certificate of
stock if there is a contest
If a contest has been presented to said
corporation or if an action is pending in court
regarding the ownership of said certificate of
stock which has been lost, stolen or destroyed,
the issuance of the new certificate of stock in
lieu thereof shall be suspended until the final
decision by the court regarding the ownership of
said certificate of stock which has been lost,
stolen or destroyed. (Sec. 72[b], RCC)
Situs of shares of stock:
150 Center for Legal Education and Research
The property in the shares may be2018 deemed to
be situated in the province in which the
corporation has its principal office or place of
business. (Guan vs. Samahang Magsasaka, G.R. No.
L-42091, November 2, 1935)
WATERED STOCKS
Watered stocks, definition:
Those issued for a consideration less than par or
issued value or those issued not in exchange for
its equivalent either in cash, property, share,
stock dividends, or services. These include
stocks:
a. Issued without consideration (Bonus
Share);
b. Issued as fully paid when the corporation
has received less sum of money than its par
or issued value (Discounted Shares);
c. Issued for consideration other than actual
cash (property or service), the fair valuation
of which is less than its par or issued value;
d. Issued as stock dividends when there are
no sufficient retained earnings or surplus to
justify it.
Note: Watered stocks refer only to original
issue of stocks but not to a subsequent transfer
of such stocks by the corporation, for then it
would no longer be an issue but a sale thereof.
(De Leon, The Corporation Code of the Philippines)
Liability of directors for watered stocks
Directors shall be liable to the corporation or its
creditors for the issuance of watered stocks
when they:
1. Consent to the issuance of stocks for a
consideration less than its par or issued
value;
2. Consent to the issuance of stocks for a
consideration other than cash, valued in
excess of its fair value; or
3. Having knowledge of the insufficient
consideration, do not file a written
objection with the corporate secretary. (Sec.
64, RCC)
 Purple Notes
Note: The liability shall be solidary with the
stockholder concerned for the difference
between the value received at the time of
issuance of the stock and the par or issued
value of the same. The solidary liability of the
directors emanates from the fiduciary character
of the position of
director or corporate officer. (Ladia, The
Corporation Code of the Philippines, Annotated, 2007,
p.386)
Trust fund doctrine for liability for watered
stocks
The subscribed capital stock of a corporation is a
trust fund for the payment of debts of the
corporation which the creditors have the right to
look up to satisfy their credits. Thus, the
creditors shall have the right to sue to satisfy
their credits the liable directors and stockholders
for the difference between the value received at
the time of issuance of the stock and the par or
issued value of the same. (Sec. 64, RCC)
PAYMENT OF BALANCE OF SUBSCRIPTION
Payment of balance of subscription:
The balance of unpaid subscription shall be
paid:
1. On the date specified in the specified on
the subscription contract;
2. On the date specified on the call made by
the Board of Directors, if no date was
specified on the subscription contract; or
3. When the corporation becomes insolvent,
without need for a call. (Sundiang & Aquino,
Reviewer on Commercial Law, 2019, p. 307)
Consequences of failure to pay the any
unpaid subscription when due:
1. The entire balance of subscription shall
become due and demandable;
2. Stockholder shall be liable for legal interest
on such balance, unless the subscription
contract provided for a different interest
rate; and
3. Stocks shall become delinquent if payment
not made within 30 days from the date
specified in the subscription contract or on
the call. (Sec. 66, RCC)
151
Mercantile Law
Call by board of directors, and when not
necessary to declare unpaid subscription
due and demandable:
The Board of Directors may, at any time, by a
formal Resolution, declare the whole or any
percentage of unpaid subscriptions to be due
and payable on a specified date. However, if the
contract of subscription provides the date or
dates when payment is due, no ―call‖ or
declaration by the Board is necessary. (Sec. 66,
RCC)
Notice requirement on when subscription
becomes due and demandable, how, when
and when not necessary:
The stockholders concerned are given notice of
the Resolution by the corporation either
personally or by registered mail. Publication of
the notice of call is not required unless the by-
laws provide otherwise. Notice is likewise not
necessary if the contract of subscription
stipulates a specific date when any unpaid
portion is due and payable.
To make out a prima facie case in a suit against
stockholders of an insolvent corporation to
compel them to contribute to the payment of its
debts by making good unpaid balances upon
their subscriptions, it is only necessary to
establish that the stockholders have not in good
faith paid the par value of the stocks of the
corporation. (Halley vs. Printwell, Inc., G.R. No.
157549, May 30, 2011)
SALES OF DELINQUENT SHARES
Effect of delinquency
1. Delinquent stocks shall be subject to
delinquent sale;
2. The delinquent stockholder shall be
deprived of his right:
a. To vote;
b. To be voted for; and
c. To be represented at any stockholder‘s
meeting;
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Mercantile Law
3. The delinquent stockholder shall not be
entitled to any of the rights of a stockholder
except the right to dividends. (Sec. 70, RCC)
Call by resolution of the board of directors
for the sale of delinquent stock
The Board of Directors may, by resolution, order
the sale of delinquent stock and shall specifically
state the amount due on each subscription plus
all accrued interest, and the date, time and
place of the sale which shall not be less than
thirty (30) days nor more than sixty (60) days
from the date the stocks become delinquent.
(Sec. 67, RCC)
Notice of sale of delinquent stock to be
sent to delinquent stockholder, publication
also required
Notice of said sale, with a copy of the resolution,
shall be sent to every delinquent stockholder
either personally or by registered mail or
through other means provided in its bylaws. The
same shall furthermore be published once a
week for two (2) consecutive weeks in a
newspaper of general circulation in the province
or city where the principal office of the
corporation is located. (Sec. 67, RCC)
Auction sale when delinquent stockholder
failed to pay his delinquent stock
 Unless the delinquent stockholder pays to
the corporation, on or before the date
specified for the sale of the delinquent
stock, the balance due on former‘s
subscription, plus accrued interest, costs of
advertisement and expenses of sale, or
unless the board of directors otherwise
orders, said delinquent stock shall be sold
at public auction.
 The delinquent stocks shall be sold to the
highest bidder. The highest bidder is the
person who shall offer to pay the full
amount of the balance on the subscription
together with accrued interest, costs of
advertisement and expenses of sale, for the
smallest number of shares or fraction of a
share.
152 Center for Legal Education and Research
 The stock so purchased shall be2018
transferred
to such purchaser in the books of the
corporation and a certificate for such stock
shall be issued in purchaser‘s favor.
 The remaining shares, if any, shall be
credited in favor of the delinquent
stockholder who shall likewise be entitled to
the issuance of a certificate of stock
covering such shares. (Sec. 67, RCC)
Corporation may bid in the absence of
bidder at the public auction
Should there be no bidder at the public auction,
the corporation may, subject to the
availability of Unrestricted Retained
Earnings, bid for the same, and the total
amount due shall be credited as paid in full in
the books of the corporation. The reacquired
shares shall be considered as Treasury Shares
and may be disposed of by said corporation in
accordance with the provisions of the RCC. (Sec.
67, RCC)
Note: Should there be no bidder and the
corporation has no Unrestricted Retained
Earnings, it may resort to collecting the unpaid
subscription through court action. (Ibid.)
ALIENATION OF SHARES
Allowable restrictions on the sales of
shares
No transfer of stock or interest which shall
reduce the ownership of Filipino citizens to less
than the required percentage of the capital stock
as provided by existing laws shall be allowed or
permitted to be recorded in the proper books of
the corporation and this restriction shall be
indicated in all stock certificates issued by the
corporation. (Sec. 14, RCC)
Sale of partially paid shares
It refers to sale of shares whose full par value
has not been paid by their holders. Holders of
subscribed shares not fully paid which are not
delinquent shall have all the rights of a
stockholder, including the right to alienate his
shares. However, the transfer cannot be
 Purple Notes
recorded in the corporate books because no
shares of stock against which the corporation
holds any unpaid claim shall be transferable in
the books. (Sec. 71, RCC)
Sale of a portion of shares not fully paid
The Commission consistently opined that the
stockholder shall only be entitled to the issuance
of his certificate of stock upon payment of the
full amount of his subscription together with the
interest and expenses (in case of delinquent
shares), if any is due pursuant to the doctrine of
indivisibility of subscription contract under Sec.
63 of the Code. Thus, there is a prohibition to
prevent the partial disposition of a subscription
which is not fully paid. (SEC OGC Opinion No. 16-
05)
Sale of all shares not fully paid
Failure to pay on the specified date shall render
the entire balance due and payable. If within 30
days from the specified date in the subscription
contract or in the call, the stockholder does not
pay, the whole subscription shall automatically
become delinquent and shall be subject to
delinquency sale at public auction, unless the
BOD declares otherwise. (Sec. 66, RCC)
Sale of fully paid shares
It involves sale of shares issued in which no
more money is required to be paid to the
company by shareholders on the value of the
shares. Sale of fully paid shares is allowed even
without the consent of the corporation for as
long as the requisites of a valid transfer are
present. (Sec. 62, RCC)
Requisites of valid transfer
In case of shares represented by a certificate,
the transfer must strictly comply with the
following conditions:
1. There must be a delivery of stock certificate;
2. The certificate must be indorsed by the
owner or his attorney-in-fact or other
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Mercantile Law
persons legally authorized to make the
transfer; and
3. To be valid against 3rd parties, the transfer
must be recorded in the books of the
corporation (Rural Bank of Lipa vs. CA, G.R. no.
124535, September 28, 2001)
Transfer of stocks not represented by
certificate or certificate not in possession
of the stockholder:
If the certificate of stock has not been issued or
is not in the possession of the stockholder,
transfer of stock may be made by means of a
notarized deed of assignment provided such is
duly recorded in the books of the corporation.
(Sundiang and Aquino, Reviewer on Commercial Law)
Involuntary dealings
It refers to such writ, order, or process issued
by a court of record affecting shares of stocks
which by law should be registered to be
effective, and also to such instruments which
are not the willful acts of the registered owner
and which may have been executed even
without his knowledge or against his consent.
(Rule 57, Rules of Court)
CORPORATE BOOKS AND RECORDS
These shall refer to all Books and Records of the
Company relating to the Company‘s corporate
existence, equity arrangements, accounting
practices and tax returns, and including the
Company‘s stock ledgers, auditor‘s letters,
business and financial records. (Sec. 73, RCC)
Records to be kept at principal office
Every corporation shall keep and carefully
preserve at its principal office all information
relating to the corporation including, but not
limited to:
1. Articles of Incorporation and bylaws and all
their amendments;
2. Current ownership structure and voting
rights of the corporation, including lists of
stockholders or members, group structures,
intra-group relations, ownership data, and
beneficial ownership;
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Mercantile Law
3. Names and addresses of all the members of
the board of directors or trustees and the
executive officers;
4. Record of all business transactions;
5. Record of the resolutions of the board of
directors or trustees and of the stockholders
or members;
6. Copies of the latest reportorial requirements
submitted to the SEC; and
7. The minutes of all meetings of stockholders
or members, or of the board of directors or
trustees. (Sec. 73, RCC)
Right to inspect corporate records
Corporate records, regardless of the form in
which they are stored, shall be open to
inspection by any director, trustee, stockholder
or member of the corporation in person or by a
representative at reasonable hours on business
days, and a demand in writing may be made by
such director, trustee or stockholder at their
expense, for copies of such records or excerpts
from said records. (Sec. 73, RCC)
Effect of refusal to inspect corporate
records
Any officer or agent of the corporation who shall
refuse to allow the inspection and/or
reproduction of records in accordance with the
provisions of this Code shall be:
1. Liable to such director, trustee, stockholder
or member for damages, and
2. In addition, shall be guilty of an offense
which shall be punishable under Section 161
of this Code.
Penalty under Section 161, RCC:
The unjustified failure or refusal by the
corporation, or by the responsible office or
agent, on the inspection and reproduction of
records shall be punished with a fine ranging
from P10,000.00 to P200,000.00, at the
discretion of the court.
Note: If such refusal is made pursuant to a
resolution or order of the board of directors or
trustees, the liability for such action shall be
154 Center for Legal Education and Research
2018 who
imposed upon the directors or trustees
voted for such refusal.
Valid defenses for the refusal to allow the
inspection of corporate records and books:
1. The person demanding to examine the
corporation‘s records and minutes has
improperly used any information secured
through any prior examination of the
records or minutes of such corporation or of
any other corporation;
2. The person was not acting in good faith or
for a legitimate purpose; and
3. The person is a competitor, director, officer,
controlling stockholder or otherwise
represents the interests of a competitor.
(Sec. 73, RCC)
Aggrieved party may report to SEC:
If the corporation denies or does not act on a
demand for inspection and/or reproduction, the
aggrieved party may report such to the SEC.
Within five (5) days from receipt of such report,
the Commission shall conduct a summary
investigation and issue an order directing the
inspection or reproduction of the requested
records. (Sec. 73, RCC)
DISSOLUTION AND LIQUIDATION
Dissolution, defined:
It is the act of terminating or shortening the life
of a corporation.
Liquidation, defined:
It is the process of settling the affairs of a
corporation, which consists of adjusting the
debts and claims that is, collecting all that is due
the corporation, the settlement and adjustment
of claims against it and payment of its just
debts. Winding up the affairs of the corporation
means the collection of all assets, the payment
of all its creditors and the distribution of the
remaining assets, if any among the stockholders
in accordance with their contracts, or if there be
no special contract, on the basis of their
respective interests. (Yu vs. Yukayguan, et al., G.R.
No. 177549, June 18, 2009)
 Purple Notes
MODES OF DISSOLUTION
1. Voluntary
2. Involuntary
VOLUNTARY DISSOLUTION
Types of voluntary dissolution:
a. Where no creditors are affected
b. Where creditors are affected
c. Shortening of corporate term
Voluntary dissolution where no creditors
are affected (Sec. 134, RCC):
Mercantile Law
A verified request for dissolution shall be
filed with the SEC. The Corporation shall
submit the following to the SEC:
a. A copy of the resolution authorizing the
dissolution, certified by a majority of the
board of directors or trustees and
countersigned by the secretary of the
corporation;
b. Proof of publication; and
c. Favorable recommendation from the
appropriate regulatory agency, when
necessary.
4. Issuance of Certificate of Dissolution

Within fifteen (15) days from receipt of the

1. Board Resolution
verified request for dissolution, and in the
absence of any withdrawal within said
Majority of the board of directors or trustees
period, the Commission shall approve the
must vote for the dissolution.
request and issue the certificate of
dissolution.
2. Stockholders‘ or members‘ approval
The dissolution shall take effect only upon
There must be a resolution adopted by the
the issuance by the Commission of a
affirmative vote of the stockholders owning
certificate of dissolution.
at least majority of the outstanding capital
stock or majority of the members of a
Voluntary dissolution where creditors are
meeting to be held upon the call of the
affected (Sec. 135, RCC):
directors or trustees.
1. Filing of a verified Petition for dissolution
a. Notice - At least twenty (20) days prior to
to the SEC
the meeting, notice shall be given to each
shareholder or member of record personally,
Formalities:
by registered mail, or by any means
authorized under its bylaws whether or not
The petition must:
entitled to vote at the meeting and shall
state that the purpose of the meeting is to
a. Be signed by a majority of its board of
vote on the dissolution of the corporation.
directors or trustees;
b. Be verified by its president or secretary or
b. Publication - Notice of the time, place, and
one of its directors or trustees;
object of the meeting shall be published
c. Contain affirmative vote of the stockholders
once prior to the date of the meeting in a
representing at least 2/3 of the outstanding
newspaper published in the place where the
capital stock or by at least 2/3 of the
principal office of said corporation is located,
members at a meeting of its stockholders
or if no newspaper is published in such
or members at a meeting called for the
place, in a newspaper of general circulation
purpose.
in the Philippines.

3. Submission to the SEC Contents - set forth all claims and demands
against it

2. Submission to the SEC

155
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Mercantile Law
The Corporation shall submit the following
to the SEC:
a. A copy of the resolution authorizing the
dissolution, certified by a majority of the
board of directors or trustees and
countersigned by the secretary of the
corporation; and
b. A list of all its creditors.
3. Procedure by the SEC:
a. Issuance of an order fixing the deadline
for filing objections to the petition which
date shall not be less than 30 days nor
more than 60 days after the entry of the
order,
b. Publication of a copy of the order at
least once a week for 3 consecutive
weeks in a newspaper of general
circulation published in the municipality
or city where the principal office of the
corporation is situated, or if there be no
such newspaper, then in a newspaper of
general circulation in the Philippines,
and a similar copy shall be posted for 3
consecutive weeks in 3 public places in
such municipality or city,
c. Hearing of the petition and objections
raised upon 5 days‘ notice given after
the expiration of the period for filing
objection.
4. Issuance of Certificate of Dissolution
If no such objection is sufficient, and the
material allegations of the petition are true,
SEC shall render judgment dissolving the
corporation and directing such disposition of
its assets as justice requires, and may
appoint a receiver to collect such assets and
pay the debts of the corporation.
The dissolution shall take effect only upon
the issuance by the Commission of a
certificate of dissolution.
Voluntary dissolution by shortening of
corporate term
A voluntary dissolution may be effected by
amending the articles of incorporation to
156 Center for Legal Education and Research
shorten the corporate term. A copy 2018of the
amended articles of incorporation shall be
submitted to the SEC. (Sec. 136, RCC)
Expiration of corporate term results to
automatic dissolution
Upon the expiration of the shortened term, as
stated in the approved amended articles of
incorporation, the corporation shall be deemed
dissolved without any further proceedings,
subject to the provisions on liquidation.
In the case of expiration of corporate term,
dissolution shall automatically take effect on the
day following the last day of the corporate term
stated in the articles of incorporation, without
the need for the issuance by the SEC of a
certificate of dissolution. (Ibid.)
Withdrawal of dissolution
Withdrawal of request for dissolution
A withdrawal of the request for dissolution shall
be:
1. In writing;
2. Duly verified by any incorporator, director,
trustee, shareholder, or member;
3. Signed by the same number of
incorporators, directors, trustees,
shareholders, or members necessary to
request for dissolution; and
4. Submitted to SEC not later than fifteen (15)
days from the latter‘s receipt of the request
for dissolution. (Sec. 137, RCC)
Action by the SEC
Upon receipt of a withdrawal of request for
dissolution, the Commission shall withhold
action on the request for dissolution and shall,
after investigation:
1. Make a pronouncement that the request for
dissolution is deemed withdrawn;
2. Direct a joint meeting of the board of
directors or trustees and the stockholders
or members for the purpose of ascertaining
whether to proceed with dissolution; or
3. Issue such other orders as it may deem
appropriate. (Sec. 137, RCC)
 Purple Notes
Withdrawal of petition for dissolution
A withdrawal of the petition for dissolution shall
be in the form of a motion and similar in
substance to a withdrawal of request for
dissolution but shall be verified and filed prior to
publication of the order setting the deadline for
filing objections to the petition. (Sec. 137, RCC)
INVOLUNTARY DISSOLUTION
Grounds for involuntary dissolution:
1. Non-use of corporate charter within five (5)
years from the date of its incorporation;
2. Failure of the corporation to resume
operations within two (2) years after the
same has been placed under delinquent
status (Continuous inoperation);
3. Upon receipt of a lawful court order
dissolving the corporation;
4. Upon finding by final judgment that the
corporation procured its incorporation
through fraud; and
5. Upon finding by final judgment that the
corporation:
a. Was created for the purpose of
committing, concealing or aiding the
commission of securities violations,
smuggling, tax evasion, money
laundering, or graft and corrupt
practices;
b. Committed or aided in the commission
of securities violations, smuggling, tax
evasion, money laundering, or graft and
corrupt practices, and its stockholders
knew; and
c. Repeatedly and knowingly tolerated the
commission of graft and corrupt
practices or other fraudulent or illegal
acts by its directors, trustees, officers,
or employees. (Sec. 138, RCC)
Dissolution by the SEC on grounds under
Sec. 6(i) of P.D. 902 - SEC Reorganization
Act:
1. Fraud in procuring its certificate of
registration;
2. Serious misrepresentation as to what the
corporation can do or is doing to the great
157
Mercantile Law
prejudice of or damage to the general
public;
3. Refusal to comply or defiance of any lawful
order of the Commission restraining
commission of acts which would amount to
a grave violation of its franchise;
4. Failure to file required reports in appropriate
forms as determined by the Commission
within the prescribed period.
Dissolution by the SEC on grounds under
the Corporation Code
1. Violation of any of the provisions of the
Revised Corporation Code committed by the
corporation (Sec. 170, RCC)
2. Deadlock in a close corporation (Sec. 103,
RCC)
3. In a close corporation, any act of directors,
officers or those in control of the
corporation which is illegal or fraudulent or
dishonest or oppressive or unfairly
prejudicial to the corporation or any
stockholder or whenever corporate assets
are being misapplied or wasted (Sec. 104,
RCC)
METHODS OF LIQUIDATION
Methods of liquidation:
1. By the corporation itself;
2. By conveyance to a Trustee within a three-
year period;
3. By Management Committee or Rehabilitation
Receiver;
4. By liquidation after three years. (Ladia, The
Corporation Code of the Philippines, Annotated,
2015, p. 513)
Liquidation by the corporation itself
The power of the board to manage the
corporate affairs is broad enough to cover a
situation where the corporation affairs are to be
liquidated. If this method is resorted to, the
board will only have a period of 3 years to
finish its task of liquidation. Claims for or against
the corporation not filed within the period
become unenforceable as there exists no
corporate entity against which they can
Bar Operations C ommissions 157
 Purple Notes
Mercantile Law
be enforced. Actions pending for or against the
corporation when the 3-year period expires are
abated since after that period, the corporation
ceases for all intents and purposes and is no
longer capable of suing or being sued. (Ladia,
The Corporation Code of the Philippines, Annotated,
2007, p. 511)
The continued existence for three (3) years shall
be for the purpose of:
1. Prosecuting and defending suits by or
against it;
2. Enabling it to settle and close its affairs;
3. Permitting it to dispose of and convey its
property; and
4. Allowing it to distribute its assets.
The continued existence shall not be for the
purpose of continuing the business for which the
corporation was established. (Sec. 139, RCC)
Liquidation by conveyance to a trustee
within a 3-year period
If this method is used, the 3-year period
limitation imposed will not apply provided the
designation of the trustee is made within that
period. Should the corporation find it difficult to
finish its liquidation, it may, at any time during
the 3-year period, convey all its assets and
receivables to a trustee to prosecute and defend
suits by or against the corporation begun before
the expiration of said period.
During the period of liquidation, but before
completion thereof, a corporation, as
represented by its trustee, can sue and be sued
even beyond the 3-year period fixed by law.
(Ladia, The Corporation Code of the Philippines,
Annotated, 2007, p. 511)
Period of trusteeship:
The trustee has authority to close the affairs of
the corporation even after the expiration of the
statutory 3-year period if no time limit has been
fixed with respect to the existence of trusteeship
and, as such, claims can be presented and
allowed until the liquidation is terminated.
Liquidation by management committee or
rehabilitation receiver
158 Center for Legal Education and Research
A receiver may be appointed by 2018 the proper
forum on petition or motu proprio upon the
dissolution of the corporation. Appointment of a
receiver is permissive and may be granted only
upon special circumstances. If a receiver is
appointed, the 3-year period fixed by law within
which to complete the task of liquidation will not
likewise apply because the dissolved corporation
is substituted by the receiver who may sue or be
sued even after that period. However, mere
appointment of a receiver without anything
more does not result in the dissolution of a
corporation. (Ladia, The Corporation Code of the
Philippines, Annotated, 2007, p. 512)
Period of receivership:
When the corporation is dissolved and the
liquidation of its assets is placed in the hands of
a receiver or assignee, the period of 3 years is
not applicable, and the assignee may institute all
actions leading to the liquidation of the assets of
the corporation even after the expiration of 3
years. (Sumera vs. Valencia, G.R. No. 45485, May 3,
1939)
Liquidation after three years
If the 3-year extended life has expired without a
trustee or receiver having been expressly
designated by the corporation within that
period, the board of directors (or trustees) itself
may be permitted to so continue as trustees by
legal implication to complete the corporate
liquidation. Still in the absence of board of
directors or trustees, those having pecuniary
interest in the assets, including not only the
shareholders but likewise the creditors of the
corporation, acting for and in its behalf, might
make proper representation with SEC. (Clemente
vs. Court of Appeals, G.R. No. 82407, March 27,
1995)
OTHER CORPORATIONS
CLOSE CORPORATIONS
Those whose shares of stock are held by a
limited number of persons like the family or
other closely-knit group. There are no public
investors and the shareholders are active in the
conduct of the corporate affairs.
 Purple Notes
Requisites of a close corporation:
1. All the corporation‘s issued stock of all
classes, exclusive of treasury shares, shall
be held of record by not more than a
specified number of persons, not exceeding
twenty (20);
2. All the issued stock of all classes shall be
subject to one or more specified restrictions
on transfer;
3. The corporation shall not list in any stock
exchange or make any public offering of its
stocks of any class; and
4. At least 2/3 of its voting stock or voting
rights must not be owned or controlled by
another corporation which is not a close
corporation.
Any corporation may be incorporated as close
corporation, except:
1. Mining or oil companies
2. Stock exchanges
3. Banks
4. Insurance companies
5. Public utilities
6. Educational institutions; and
7. Corporations declared to be vested with
public interest (Sec. 95, RCC)
Characteristics of a Close Corporation
1. The number of stockholders cannot exceed
twenty (20); (Sec. 95, RCC)
2. To the extent that all stockholders can be
deemed directors, the number of directors
can effectively be more than fifteen (15);
(Sec. 13 [f], RCC)
3. Shares of stock are subject to specified
restrictions; (Sec. 95, RCC)
4. Shares of stock are prohibited from being
listed in the stock exchange or offered for
sale to the public; (Ibid)
5. Stockholders may take an active part in
corporate management by vesting
management to them rather than a Board of
Director; (Sec. 96, RCC)
6. Those active in management are personally
liable for corporate torts unless the
corporation has obtained an adequate
liability insurance; (Sec. 99, RCC)
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Mercantile Law
7. Directors may validly act even without a
meeting; (Sec. 100, RCC)
8. Agreements between stockholders regarding
the operations of the business can validly be
made; (Sec. 99, RCC)
9. To the extent that directors may be
classified into one or more classes and to be
voted solely by a particular class of stock,
cumulative voting may, in effect, be
restricted; (Sec. 96, RCC)
10. The articles of incorporation may provide
that all officers shall be elected or appointed
by the stockholders; (Ibid)
11. It may provide for greater quorum and
voting requirements in meetings of
stockholders and directors; (Ibid)
12. Restriction on transfer of shares should be
indicated in the articles of incorporation, by-
laws and stock certificates; (Sec. 97, RCC)
13. Pre-emptive rights of stockholders is
broader as it include all issues without
exception; (Sec. 101, RCC)
14. A stockholder may withdraw and compel the
corporation to purchase his shares for any
reason with the limitation only that the
corporation has sufficient assets to cover its
liabilities exclusive of capital stock; (Sec. 104,
RCC)
15. The proper forum may interfere in the
management of a close corporation in case
of deadlocks under Section 103, even of the
directors/stockholders are acting in good
faith; and (Sec. 103, RCC)
Any stockholder may petition the SEC for
corporate dissolution on grounds among
others, provided for in section 104. (Sec.
104, RCC)
Validity of Restrictions on Transfer of
Shares
In order to be binding on any purchaser in good
faith, the restrictions on the right to transfer
shares must appear in the articles of
incorporation, in the bylaws, as well as in the
certificate of stock. (Sec. 97, RCC)
The restriction shall not be more onerous than
granting the existing stockholders or the
corporation the option to purchase the shares of
the transferring stockholder with such
reasonable terms, conditions or period stated.
Bar Operations C ommissions 159
 Purple Notes
Mercantile Law
If, upon the expiration said period, the existing
stockholders or the corporation fails to exercise
the option to purchase, the transferring
stockholder may sell their shares to any third
person. (Sec. 97, RCC)
Issuance or Transfer of Stock in Breach of
Qualifying Conditions; Effects
1. If a stock is issued or transferred to a
person who is not eligible to be a holder of
record thereof, and if the certificate for
such stock clearly shows the qualifications
of persons entitled to be holders of record
thereof, such person is conclusively
presumed to have notice of the fact of his
ineligibility to be a stockholder.
2. If the articles of incorporation states the
number of persons, not exceeding twenty,
who are entitled to be holders of record of
stocks, and if the certificate for such stock
clearly states such number, and the
issuance or transfer would cause the stock
to be held by more than such number in
persons, the person to whom the stock is
issued or transferred is conclusively
presumed to have notice of such fact.
3. If a stock certificate conspicuously shows a
restriction on transfer of stock and the
transferee acquires the stock in violation of
such restriction, the transferee is
conclusively presumed to have notice of the
fact that he has acquired stock in violation
of the restriction, if such acquisition violates
the restriction.
4. Whenever any person to whom stock of a
close corporation has been issued or
transferred has, or is conclusively presumed
to have, notice either (1) that he is a
person not eligible to be a holder of stock
of the corporation, or (2) that transfer of
stock would cause the stock of the
corporation to be held by more than the
number of persons
permitted by its articles of incorporation to
hold stock of the corporation, or (3) that
the transfer of stock is in violation of a
restriction on transfer of stock, the
corporation may, at its option, refuse to
160 Center for Legal Education and Research
register the transfer of stock in 2018
the name of
the transferee.
5. The provisions of subsection (4) shall not
applicable if the transfer of stock, though
contrary to subsections (1), (2) of (3), has
been consented to by all the stockholders
of the close corporation, or if the close
corporation has amended its articles of
incorporation.
6. The term "transfer", as used in this section,
is not limited to a transfer for value.
7. The provisions of this section shall not
impair any right which the transferee may
have to rescind the transfer or to recover
under any applicable warranty, express or
implied. (Sec. 98, RCC)
When Board Meeting is Unnecessary or
Improperly Held
Unless the bylaws provide otherwise, any action
by the directors of a close corporation without a
meeting shall nevertheless be deemed valid
if:
1. Before or after such action is taken, written
consent thereto is signed by all the
directors;
2. All the stockholders have actual or implied
knowledge of the action and make no
prompt objection thereto in writing;
3. The directors are accustomed to take
informal action with the express or implied
acquiescence of all the stockholders; or
4. All the directors have express or implied
knowledge of the action in question and
none of them makes prompt objection
thereto in writing.
Note: The director who failed to attend the
meeting due to lack of proper call or notice may
file his written objection with the secretary of
the corporation over the action taken therein
after having knowledge thereof, otherwise it is
deemed ratified. (Sec. 100, RCC)
 Purple Notes
Preemptive Right in Close Corporations
Preemptive rights of stockholders in close
corporations shall extend to all stock to be
issued, including reissuance of treasury shares,
whether for money, property or personal
services, or in payment of corporate debts,
unless otherwise provided in the Articles of
Incorporation. (Sec. 101, RCC)
Amendment of Articles of Incorporation
(Sec. 102, RCC)
Voting requirements:
1. At least two-thirds (2/3) of the outstanding
capital stock, whether voting or non-voting;
or
2. A greater proportion of shares as the
articles of incorporation may provide
Kinds of amendments:
Any amendment to the articles of incorporation
which:
1. Seeks to delete or remove any provision
required by Title XII; or
2. Seeks to reduce a quorum or voting
requirement stated in the articles of
incorporation. (Sec. 102, RCC)
Deadlock
Deadlock signifies a standstill in the
management of the corporate affairs resulting
from the evenly divided action of directors or
stockholders in a close corporation.
In case of deadlock, the SEC shall have the
authority to make such orders as it deems
appropriate, such as:
1. Canceling or altering any provision
contained in the articles of incorporation,
by-laws, or any stockholders‘ agreement;
2. Canceling, altering or enjoining any
resolution or act of the corporation or its
BOD, stockholders or officers;
3. Directing or prohibiting any act of the
corporation or its BOD, stockholders,
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Mercantile Law
officers, or other persons party to the
action;
4. Requiring the purchase at their fair value of
shares of any stockholder, either by the
corporation regardless of the availability of
unrestricted retained earnings in its books,
or by the other stockholders;
5. Appointing a provisional director;
6. Dissolving the corporation; or
7. Granting such other relief as the
circumstances may warrant. (Sec. 103, RCC)
Provisional director
A provisional director shall be an impartial
person who is neither a stockholder nor a
creditor of the corporation or any of its
subsidiaries or affiliates, and whose further
qualifications, if any, may be determined by the
SEC. He is not a receiver of the corporation but
shall have all the rights and powers of a duly
elected director until removed by the order of
SEC or by all the stockholders. (Sec. 103, RCC)
NON-STOCK CORPORATIONS
Definition
One where no part of its income is distributable
as dividends to its members, trustees, or
officers. Any profit which it may obtain
incidental to its operations shall, whenever
necessary or proper, be used for the furtherance
of the purpose or purposes for which the
corporation was organized. (Sec. 86, RCC)
Note: A corporation having a capital stock
divided into shares may still be considered a
non-stock corporation provided no part of its
income is distributable as dividends to its
members, trustees, or officers. (Collector of
Internal Revenue vs. The Club Filipino, Inc. de Cebu,
G.R. No. L-12719, May 31, 1962)
Treatment of profits
Any profit which a non-stock corporation may
obtain as an incident to its operations shall,
whenever necessary or proper, be used for the
furtherance of the purpose or purposes for
which the corporation was organized, subject to
the provisions of this Title. (Sec. 86, RCC)
Bar Operations C ommissions 161
 Purple Notes
Mercantile Law
Plan and Distribution of Assets Upon
Dissolution
Rules on Distribution
In case of dissolution of a non-stock corporation
in accordance with the provisions of the Code,
its assets shall be applied and distributed as
follows:
1. All liabilities and obligations of the
corporation shall be paid, satisfied and
discharged, or adequate provision shall be
made therefore;
2. Assets held by the corporation upon a
condition requiring return, transfer or
conveyance, and which condition occurs by
reason of the dissolution, shall be returned,
transferred or conveyed in accordance with
such requirements;
3. Assets received and held by the corporation
subject to limitations permitting their use
only for charitable, religious, benevolent,
educational or similar purposes, but not
held upon a condition requiring return,
transfer or conveyance by reason of the
dissolution, shall be transferred or
conveyed to one (1) or more corporations,
societies or organizations engaged in
activities in the Philippines substantially
similar to those of the dissolving
corporation according to a plan of
distribution adopted;
4. All other assets, if any, shall be distributed
in accordance with the provisions of the
articles of incorporation or the by-laws, to
the extent that the articles of incorporation
or the by-laws, determine the distributive
rights of members, or any class or classes
of members, or provide for distribution.
5. In any other case, assets may be
distributed to such persons, societies,
organizations or corporations, whether or
not organized for profit, as may be
specified in a plan of distribution adopted.
(Sec. 93, RCC)
Plan of Distribution of Assets
A plan providing for the distribution of assets
may be adopted by a nonstock corporation in
162 Center for Legal Education and Research
2018
the process of dissolution in the following
manner:
1. A resolution recommending a plan of
distribution of assets by the board of
trustees and directing the submission
thereof to a vote at a regular or special
voting members‘ meeting.
2. Written notice is given to each member
entitled to vote.
3. Approval by at two-thirds of the members
having voting rights present or represented
by proxy during the meeting. (Sec. 94, RCC)
EDUCATIONAL CORPORATIONS
Incorporation
Educational corporation shall be governed by
special laws and by the general provisions of the
Revised Corporation Code. (Sec. 105, RCC)
Board of Directors or Trustees, number
and term of office:
In case of educational institutions organized as
nonstock corporations, the number of trustees
shall not be less than five (5) nor more than
fifteen (15) and shall be in multiples of five (5).
They shall hold office for five (5) years.
However, in case of newly organized
corporations, the term of 1/5 of the trustees
shall expire every year. Those elected thereafter
to fill vacancies caused by expiration of term
shall hold office for five (5) years.
In case of educational institutions organized as
stock corporations, the number of directors shall
not be more than fifteen (15). They shall hold
office for one (1) year. (Sec. 106, RCC)
Constitutional provision on Filipino
ownership: par. 2, Sec. 4 of Article XIV
(Education, Science and Technology, Arts,
Culture and Sports)
Educational institutions, other than those
established by religious groups and mission
boards, shall be owned solely by citizens of the
Philippines or corporations or associations at
least sixty per centum of the capital of which is
owned by such citizens. The Congress may,
 Purple Notes
however, require increased Filipino equity
participation in all educational institutions. The
control and administration of educational
institutions shall be vested in citizens of the
Philippines.
No educational institution shall be established
exclusively for aliens and no group of aliens shall
comprise more than one-third of the enrollment
in any school. The provisions of this sub section
shall not apply to schools established for foreign
diplomatic personnel and their dependents and,
unless otherwise provided by law, for other
foreign temporary residents.
RELIGIOUS CORPORATIONS
Classes of Religious Corporations
Religious corporations may be incorporated by
one or more persons. Such corporations may be
classified into:
1. Corporations sole; and
2. Religious societies (Sec. 107, RCC)
Corporation Sole
A religious corporation which consists of one
person or individual and who is made as body
corporate and politic in order to give it some
legal capacity and advantage which as a natural
person, it cannot have.
Purpose of incorporation and persons who
may incorporate:
For the purpose of administering and managing,
as trustee, the affairs, property and
temporalities of any religious denomination, sect
or church, a corporation sole may be formed by
the chief archbishop, bishop, priest, minister,
rabbi or other presiding elder of such religious
denomination, sect or church. (Sec. 108, RCC)
Beginning of corporate existence:
The corporate existence shall begin upon filing
of the verified Articles of Incorporation with the
SEC together with the documents required
under Sec. 110. This serves as an exception to
the rule that a corporation acquires juridical
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Mercantile Law
personality only upon the issuance of a
certificate of incorporation by the said
government agency.
Power to alienate properties, limitation:
The extent of the its power to mortgage or sell
real properties is, however, subject to certain
restriction, that is, a proper court order (RTC)
must first be secured for that purpose, which is
not otherwise imposed in any other corporation.
Intervention of the court may be dispensed with
only if the rules, regulations and discipline of the
religious denomination, sect or church
concerned provide or regulate the manner or
method of holding or alienating properties. (Sec.
111, RCC)
Nationality of Corporation Sole
A corporation sole does not have any nationality,
but for purposes of applying nationalization
laws, nationality is determined not by the
nationality of its presiding elder but by the
nationality of its members, constituting the sect
in the Philippines. Also, the framers of the
Constitution did not have in mind the religious
corporations sole when they provided that sixty
(60) percent of the capital stock of a corporation
who wants to acquire public land shall be owned
by Filipino citizens. (Roman Catholic Apostolic
Church vs. LRC, G.R. No. L-8451, December 20,
1957)
Religious Societies
Under common law, a religious society is a body
of persons associated together for the purpose
of maintaining religious worship. The religious
society and the church are distinct bodies,
independent of each other, though they may
exist with each other.
Under Philippine Law, a religious society, order,
diocese, synod or district organization of any
religious denomination, sect or church may upon
written consent and/or by an affirmative vote at
a meeting called for the purpose of at least 2/3
of its membership, incorporate for the
administration of its temporalities or for the
management of its affairs, properties and estate
Bar Operations C ommissions 163
 Purple Notes
Mercantile Law
by filing with the SEC a verified Articles of
Incorporation. (Sec. 114, RCC)
ONE PERSON CORPORATIONS
A One Person Corporation is a corporation with
a single stockholder formed only by a natural
person, trust, or an estate. (Sec. 116, RCC)
2018
1. If the single stockholder is a trust or an
estate, the name, nationality, and residence
of the trustee, administrator, executor,
guardian, conservator, custodian, or other
person exercising fiduciary duties together
with the proof of such authority to act on
behalf of the trust or estate; and

Incorporator in an OPC 2. Name, nationality, residence of the

The incorporator in an OPC being a natural
person must be of legal age. As an incorporator,
the ―trust‖ as used by the law does not refer to
a trust entity, but the subject being managed by
a trustee. If the single stockholder is a trustee,
administrator, executor, guardian, conservator,
custodian, or other person exercising fiduciary
duties, proof of authority to act on behalf of the
trust or estate must be submitted at the time of
incorporation. (Sec. 1, SEC MC 07-2019)
Excepted Corporations
The following may not incorporate as One
Person Corporations:
1. Banks and quasi-banks
2. Pre-need companies
3. Trust
4. Insurance companies
5. Public and publicly-listed companies
6. Non-chartered GOCCs
7. Natural persons who are licensed to
exercise a profession for the purpose of
exercising such profession, except as
otherwise provided under special laws. (Sec.
116, RCC)
Capital Stock Requirements
A One Person Corporation shall not be required
to have a minimum authorized capital stock,
except as otherwise provided in by special law.
(Sec. 117, RCC)
nominee and alternate nominee, and the
extent, coverage and limitation of the
authority. (Sec. 118, RRC)
Term of Existence
The term of existence of an OPC shall be
perpetual. However, in case of trust or estate,
its term shall be co-terminous with the existence
of the trust or estate.
The OPC under the name of the estate may be
dissolved upon proof of Partition, such as Order
of Partition issued by the Court in case of
Judicial Settlement and Deed of Extrajudicial
Settlement in case of summary settlement of
estate.
The OPC under the name of the Trustee may be
dissolved upon proof of termination of the trust.
(Sec. 2, SEC MC 07-2019)
By-laws
One Person Corporations are not required to
submit bylaws. (Sec. 119, RCC)
Only Articles of Incorporation is needed. (Sec. 6,
SEC MC 07-2019)
Corporate Name
A One Person Corporation shall indicate the
letters ―OPC‖ either below or at the end of its
corporate name. (Sec. 120, RRC)

Articles of Incorporation Corporate Structure and Officers

A One Person Corporation shall file its articles of 1. The single stockholder shall be the sole
incorporation in accordance with the director and president of the OPC. (Sec. 121,
requirements of Sec. 14 and shall substantially RCC)
contain:

164 Center for Legal Education and Research

 Purple Notes
2. The OPC shall, within 15 days from
incorporation, appoint a treasurer,
corporate secretary, and other officers as
necessary, and shall notify the SEC of such
appointment within 5 days from
appointment.
3. The single stockholder cannot be appointed
as corporate secretary.
4. The single stockholder who is at the same
time the self-appointed treasurer shall give
a bond to the SEC and shall undertake in
writing to faithfully administer the OPC‘s
funds. The bond shall be renewed every 2
years or as may be required. (Sec. 122, RCC)
Note: One Person Corporation is an exception
to the rule that no one shall act as president and
treasurer at the same time as provided in the
Sec. 24.
Bond Requirement for the Self-Appointed
Treasurer (Sec 10, SEC MC 07-2019)
ACS Bond
P1.00 to P1,000,000 P1,000,000.00
P1,000,001.00 to
P2,000,000.00 P2,000,000.00
P2,000,001.00 to
P3,000,000.00 P3,000,000.00
P3,000,001.00 to
P4,000,000.00 P4,000,000.00
P4,000,001.00 to
P5,000,000.00 P5,000,000.00
P5,000,001.00 and above = Amount of bond
shall be equal to the OPC‘s ACS
The bond shall be a continuing requirement for
so long as the single stockholder is the self-
appointed Treasurer of the OPC.
The bond may be cancelled upon proof of
appointment of another person as the Treasurer
and Filing of Amended Form for Appointment of
Officers.
Nominee and Alternate Nominee
They are the persons designated by the single
stockholder who shall take the place of the
latter, in case of the latter‘s death, as director
and shall manage the corporation‘s affairs.
Mercantile Law
The Articles on Incorporation shall state the
names, residence addresses and contact details
of the nominee and alternate nominee, as well
as the extent and limitations of their authority.
(Sec. 124, RCC)
Term of Nominee and Alternate Nominee
1. In case of temporary incapacity of the
single stockholder: the nominee shall sit as
director and manage the affairs of the
corporation until the stockholder, by self-
determination, regains capacity to assume
such duties.
2. In case of death or permanent incapacity of
the single stockholder: the nominee shall sit
as director and manage the affairs of the
corporation until the legal heirs have been
lawfully determined and the heirs have
designated one of them or have agreed
that the estate shall be the single
stockholder of the OPC.
3. The alternate nominee shall sit as director
and manage the affairs of the OPC in case
of nominee‘s inability, incapacity, death, or
refusal to discharge functions as director
and manager of the corporation. (Sec. 125,
RRC)
Change of Nominee and Alternate
Nominee
The single stockholder may, at any time, change
its nominee and alternate nominee by
submitting to the SEC the names of the new
nominees and their written consent. The articles
of incorporation need not be amended. (Sec.
126, RCC)
Minutes and Records of the OPC
1. The OPC shall maintain a minutes book
which shall contain all actions, decisions,
and resolutions taken by the OPC. (Sec. 127,
RCC)
2. Written resolution in lieu of meetings shall
be sufficient for any action needed, signed
and dated by the single stockholder and

165
Bar Operations C ommissions 165
 Purple Notes
Mercantile Law
recorded in the minutes book. (Sec. 128,
RCC)
Liability of the Single Stockholder
1. A sole shareholder claiming limited liability
has the burden of affirmatively showing
that the corporation was adequately
financed.
2. Where the single stockholder cannot prove
that the property of the OPC is independent
of the stockholder‘s personal property, the
stockholder shall be jointly and severally
liable for the debts and other liabilities of
the OPC.
The principles of piercing the corporate veil
applies with equal force to OPC as with other
corporations. (Sec. 130, RCC)
Conversion from an Ordinary Corporation
to a One Person Corporation
Requirements:
1. Acquisition by the single stockholder of all
the stocks of an ordinary stock corporation;
2. Filing of application for conversion with the
SEC;
3. Submission of such documents as the SEC
may require; and
4. Issuance by the SEC of a certificate of filing
of amended articles of incorporation
reflecting the conversion if the application
for conversion is approved.
The One Person Corporation converted from an
ordinary stock corporation shall succeed the
latter and be legally responsible for all the
latter‘s outstanding liabilities as of the date of
conversion. (Sec. 131, RCC)
Conversion from a One Person Corporation
to an Ordinary Stock Corporation
Requirements:
1. Submission to SEC of due notice fact and of
the circumstances leading to the conversion
within sixty (60) days from the occurrence
of the circumstances leading to the
166 Center for Legal Education and Research
conversion into an 2018 stock
ordinary
corporation;
2. Compliance with all the requirements for
stock corporations;
3. Issuance by the SEC of a certificate of filing
of amended articles of incorporation
reflecting the conversion if all the
requirements have been complied with.
In case of death of the single stockholder, the
heirs shall notify the SEC of their decision to
either wind up and dissolve the OPC or convert
it into an ordinary stock corporation.
The ordinary stock corporation converted from a
One Person Corporation shall succeed the latter
and be legally responsible for all the latter‘s
outstanding liabilities as of the date of
conversion. (Sec. 132, RCC)
FOREIGN CORPORATIONS
Foreign corporations, defined:
One formed, organized or existing under any
laws other than those of the Philippines and
whose laws allow Filipino citizens and
corporations to do business in its own country or
state. (Sec. 123, RCC)
BASES OF AUTHORITY OVER FOREIGN
CORPORATION
Bases of authority over foreign
corporations:
1. Consent
2. Doctrine of ―doing business‖ (related to the
definition under R.A. No. 7042, The Foreign
Investments Act, as amended by RA 8179)
Consent
A corporation may give actual consent to judicial
jurisdiction manifested normally by compliance
with the State‘s foreign corporation qualification
requirements such as licensing requirements
and other requirements to lawfully transact
business in the Philippines. (Sec. 142, RCC)
“Doing business” pertaining to foreign
corporation:
 Purple Notes
Doing business shall include:
1. Soliciting orders, service contracts, opening
offices, whether called "liaison" offices or
branches;
2. Appointing representatives or distributors
domiciled in the Philippines or who in any
calendar year stay in the country for a
period or periods totaling one hundred
eighty (180) days or more Participating in
the management, supervision and control of
any domestic business;
3. Participating in the management,
supervision or control of any domestic
business, firm, entity or corporation in the
Philippines;
4. Any other act or acts that imply a continuity
of commercial dealings or arrangements,
and contemplate to that extent the
performance of acts or works, or the
exercise of some of the functions normally
incident to, and in progressive prosecution
of, commercial gain or of the purpose and
object of the business organization. (Sec.
3[d], Foreign Investments Act of 1991)
Excluded from “doing business”
However, That the phrase "doing business: shall
not be deemed to include mere investment as a
shareholder by a foreign entity in domestic
corporations duly registered to do business,
and/or the exercise of rights as such investor;
nor having a nominee director or officer to
represent its interests in such corporation; nor
appointing a representative or distributor
domiciled in the Philippines which transacts
business in its own name and for its own
account. (Sec. 3[d], RA 7042, as amended by RA
8179)
The following acts shall not be deemed "doing
business" in the Philippines:
1. Mere investment as a shareholder by a
foreign entity in domestic corporations duly
registered to do business, and/or the
exercise of rights as such investor;
2. Having a nominee director or officer to
represent its interest in such corporation;
167
Mercantile Law
3. Appointing a representative or distributor
domiciled in the Philippines which transacts
business in the representative's or
distributor's own name and account;
4. The publication of a general advertisement
through any print or broadcast media;
5. Maintaining a stock of goods in the
Philippines solely for the purpose of having
the same processed by another entity in the
Philippines;
6. Consignment by a foreign entity of
equipment with a local company to be used
in the processing of products for export;
7. Collecting information in the Philippines; and
8. Performing services auxiliary to an existing
isolated contract of sale which are not on a
continuing basis, such as installing in the
Philippines machinery it has manufactured
or exported to the Philippines, servicing the
same, training domestic workers to operate
it, and similar incidental services. (Steelcase,
Inc. vs. Design International Selections, Inc.,
G.R. No. 171995, April 18, 2012)
Isolated transaction does not constitute
doing business:
An ―isolated transaction‖, even if it is in pursuant
of the usual business does not constitute doing
business the doing of which would not bar a
foreign corporation from access to Philippine
Courts. (Bulakhidas vs. Navarro, G.R. No. L-49695,
April 7, 1986)
Isolated transaction, defined:
It is a transaction or series of transaction set
apart from the common business of a foreign
enterprise in the sense that there is no intention
to engage in progressive pursuit of the purpose
and object of the business organization. (Lorenzo
Shipping Corp. vs. Chubb and Sons, G.R. no. 147724,
June 8, 2004)
Test of doing business:
The test of doing business is whether the
foreign corporation is continuing the body or
substance
of the business or enterprise for which it was
organized or whether it has substantially retired
Bar Operations C ommissions 167
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Mercantile Law
from it and turned it over to another. The term
implies a continuity of commercial dealings and
arrangements, and contemplates to that extent
the performance of acts or works or the exercise
of some of the functions normally incident to,
and in progressive prosecution of, the purpose
and object of its organization. (Mentholatum Co.,
Inc. vs. Mangaliman, G.R. No. L-47701, June 27,
1941)
The question whether or not a foreign
corporation is doing business is dependent
principally upon the facts and circumstances of
each particular case, considered in the light of
the purposes and language of the pertinent
statute or statutes involved and of the general
principles governing the jurisdictional authority
of the state over such corporations. (MR Holdings,
Ltd. vs. Bajar, G.R. No. 138104, April 11, 2002)
Requirements for foreign corporation to
have the right to transact business in the
Philippines:
1. License;
2. Certificate of authority from the appropriate
government agency;
3. Resident agent. (Secs. 140 and 142, RCC)
NECESSITY OF LICENSE, RESIDENT
AGENT, FOR FOREIGN CORPORATION TO
DO BUSINESS
Object of the law for requiring license
 The object of the statute was not to prevent
the foreign corporation from performing
single acts, but to prevent it from acquiring
a domicile for the purpose of business
without taking the steps necessary to render
it amenable to suit in the local courts.
(Marshall-Wells vs. Elser, G.R. No. 22015,
September 1, 1924)
For banking institutions, a certificate of
authority from the Board of Investment is
no longer required
For banking institutions, a certificate of authority
from the Board of Investment is no longer
required under Foreign Investments Act of 1991
(R.A. 7042). Said certificate of authority is
necessary only for the purpose of availing of the
168 Center for Legal Education and Research
incentives granted and allowed 2018 under the
Omnibus Investment Code. (Ladia, The
Corporation Code of the Philippines, Annotated, 2007,
p. 529)
Requisites for issuance of a license:
1. Certified copy of Articles of incorporation
and by-laws;
2. The application, which shall be under oath;
3. Certification under oath duly executed by
the authorized official of the jurisdiction of
its incorporation attesting that the laws of
its country allow Filipino citizens and
corporations to do business therein;
4. Statement under oath that applicant foreign
corporation is solvent and in sound financial
condition, setting forth the assets and
liabilities of the corporation as of the date
not exceeding one (1) year immediately
prior to the filing of application;
5. Compliance with existing laws applicable to
applicant foreign corporation in the case of
banks and insurance corporations, or
authority from appropriate government
agency, in all other cases. (Sec. 142, RCC)
Required Articles of Incorporation:
A foreign corporation applying for a license to
transact business in the Philippines shall submit
to the Securities and Exchange Commission a
copy of its articles of incorporation and by-laws,
certified in accordance with law, and their
translation to an official language of the
Philippines, if necessary. The application shall be
under oath and, unless already stated in its
articles of incorporation, shall specifically set
forth the following:
1. The date and term of incorporation;
2. The address, including the street number, of
the principal office of the corporation in the
country or state of incorporation;
3. The name and address of its resident agent
authorized to accept summons and process
in all legal proceedings and, pending the
establishment of a local office, all notices
affecting the corporation;
4. The place in the Philippines where the
corporation intends to operate;
 Purple Notes
5. The specific purpose or purposes which the
corporation intends to pursue in the
transaction of its business in the Philippines:
Provided, that said purpose or purposes are
those specifically stated in the certificate of
authority issued by the appropriate
government agency;
6. The names and addresses of the present
directors and officers of the corporation;
7. A statement of its authorized capital stock
and the aggregate number of shares which
the corporation has authority to issue,
itemized by classes, par value of shares,
shares without par value, and series, if any;
8. A statement of its outstanding capital stock
and the aggregate number of shares which
the corporation has issued, itemized by
classes, par value of shares, shares without
par value, and series, if any;
9. A statement of the amount actually paid in;
and
10. Such additional information as may be
necessary or appropriate in order to enable
the Securities and Exchange Commission to
determine whether such corporation is
entitled to a license to transact business in
the Philippines, and to determine and assess
the fees payable. (Sec. 142, RCC)
Required certification under oath attesting
that the laws of its country allow Filipino
citizens and corporations to do business
therein
Attached to the application for license shall be a
duly executed certificate under oath by the
authorized official or officials of the jurisdiction
of its incorporation, attesting to the fact that the
laws of the country or state of the applicant
allow Filipino citizens and corporations to do
business therein, and that the applicant is an
existing corporation in good standing. If such
certificate is in a foreign language, a translation
thereof in English under oath of the translator
shall be attached thereto. (Sec. 142, RCC)
Required statement under oath that
applicant foreign corporation is solvent
and in sound financial condition
The application for a license to transact business
in the Philippines shall likewise be accompanied
169
Mercantile Law
by a statement under oath of the president or
any other person authorized by the corporation,
showing to the satisfaction of the Securities and
Exchange Commission and other governmental
agency in the proper cases that the applicant is
solvent and in sound financial condition, and
setting forth the assets and liabilities of the
corporation as of the date not exceeding one (1)
year immediately prior to the filing of the
application. (Sec. 142, RCC)
Compliance with existing laws applicable
to applicant foreign corporation in the
case of banks and insurance corporations,
or authority from appropriate government
agency, in all other cases
Foreign banking, financial and insurance
corporations shall, in addition to the above
requirements, comply with the provisions of
existing laws applicable to them. In the case of
all other foreign corporations, no application for
license to transact business in the Philippines
shall be accepted by the Securities and
Exchange Commission without previous
authority from the appropriate government
agency, whenever required by law. (Sec. 142,
RCC)
Resident Agent
Resident agent, purpose:
1. The resident agent shall be authorized to
accept summons and processes in all legal
proceedings.
2. Pending the establishment of a local office,
he shall receive all notices affecting
corporation.
Effect when no Resident Agent appointed
The failure of a foreign corporation to appoint or
maintain a resident agent is a ground for the
revocation of the license granted to a foreign
corporation to do business without prejudice to
other grounds provided under special laws. (Sec.
151, RCC)
Who can be a resident agent:
Bar Operations C ommissions 169
 Purple Notes
Mercantile Law
1. An Individual who is residing in the
Philippines and of good moral character and
of sound financial standing; or
2. A domestic corporation lawfully transacting
business in the Philippines and of sound
financial standing. (Sec. 144, RCC)
Resident agent, not necessarily authorized
to execute certification against forum
shopping
A resident agent is not necessarily authorized to
execute the requisite certification against forum
shopping. This is because while a resident agent
may be aware of actions filed against his
principal (a foreign corporation doing business in
the Philippines), such resident may not be aware
of actions initiated by its principal, whether in
the Philippines against a domestic corporation or
private individual, or in the country where such
corporation was organized and registered,
against a Philippine registered corporation or a
Filipino citizen. (Expertravel vs. Court of Appeals,
G.R. No. 152392, May 26, 2005)
Amendment of license; when required:
1. In the event the foreign corporation
changes its corporate name; or
2. When the foreign corporation desires to
pursue other or additional purposes in the
Philippines. (Sec. 148, RCC)
The application shall be submitted to SEC and
must be favorably endorsed by the appropriate
government agency in proper cases.
PERSONALITY OF FOREIGN
CORPORATION TO SUE
Personality to sue:
1. A foreign corporation transacting or doing
business in the Philippines with a license can
sue before Philippine courts.
2. Subject to certain exceptions, a foreign
corporation doing business in the country
without a license cannot sue in Philippine
courts.
3. If it is not transacting business in the
Philippines, even without a license, it can
sue before Philippine courts. (Ladia, The
170 Center for Legal Education and Research
2018
Corporation Code of the Philippines, Annotated,
2007)
Foreign corporation not licensed to do
business not absolutely incapacitated to
sue:
Only when that foreign corporation is
"transacting" or "doing business" in the country
will a license be necessary before it can institute
suits. It may, however, bring suits on isolated
business transactions, which is not prohibited
under Philippine law. It is the act of engaging in
business without the prescribed license, and not
the lack of license per se, which bars a foreign
corporation from access to our courts. (Aboitiz
Shipping Corp. vs. Insurance Co. of NA, G.R. No.
168402, August 6, 2008)
Suability of foreign corporations:
1. A foreign corporation transacting business in
the Philippines with the requisite license can
be sued in Philippine courts.
2. A foreign corporation transacting business in
the Philippines without a license can be sued
in Philippine courts.
3. If it is not doing business in the Philippines,
it cannot be sued in Philippine courts for
lack of jurisdiction. (Ladia, The Corporation
Code of the Philippines, Annotated, 2015)
Doing business without license
No foreign corporation transacting business in
the Philippines without a license, or its
successors or assigns, shall 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. (Sec. 150, RCC)
Single act which constitute doing business
in the Philippines thus can be sued in
Philippine courts:
The rule that the doing of a single act does not
constitute business within the meaning of
statutes prescribing the conditions to be
complied with the foreign corporation must be
 Purple Notes
qualified to this extent, that a single act may
bring the corporation within the purview of the
statute where it is an act of the ordinary
business of the corporation. In such a case, the
single act of transaction is not merely incidental
or casual, but is of such character as distinctly to
indicate a purpose on the part of the operations
for the conduct of a part of corporation‘s
ordinary business. (Far East Int‘l. Import vs. Nankai
Kogyo Co. Ltd., G.R. No. L-13525, November 30,
1962)
Where a single act or transaction is not merely
incidental or casual but indicates the foreign
corporation‘s intention to do other business in
the Philippines, said single act or transaction
constitutes ―doing‖ or ―engaging‖ or
―transacting‖ business in the Philippines.
(Communication Materials and Design, Inc. vs. CA,
260 SCRA 673, August 22, 1996)
Instances when unlicensed foreign
corporations may be allowed to sue:
1. If the act or transaction involved is an
isolated transaction or the corporation is not
seeking to enforce any legal or contractual
rights arising from, or growing out of, any
business which it has transacted in the
Philippines; (Western Supply vs. Reyes, G.R.
No. L-27897, December 2, 1927)
2. If the purpose of the suit is to protect its
trademark, trade name, corporate name,
reputation or goodwill; (Fredco Manufacturing
vs. Harvard, G.R. No. 185917, June 1, 2011)
3. Where it is based on violation of the Revised
Penal Code; (Time, Inc. vs. Reyes, G.R. No. L-
28882, May 31, 1971)
4. If it is merely defending a suit filed against
it; (Ibid)
5. Where the party is estopped to challenge
the personality of the corporation by
entering into a contract with it. (Rimbunan
Hijau vs. Oriental Wood, G.R. No. 152228,
September 23, 2005)
Grounds for revocation of license:
1. Failure to file its annual report or pay any
fees as required by the Code;
2. Failure to appoint and maintain a resident
agent in the Philippines;
171
Mercantile Law
3. Failure, after change of its resident agent or
of his address, to submit to the Securities
and Exchange Commission a statement of
such change;
4. Failure to submit to the SEC an
authenticated copy of any amendment to its
articles of incorporation or by-laws or of any
articles of merger or consolidation within the
time prescribed by this Title;
5. A misrepresentation of any material matter
in any application, report, affidavit or other
document submitted by such corporation
pursuant to this Title;
6. Failure to pay any and all taxes, imposts,
assessments or penalties, if any, lawfully
due to the Philippine Government or any of
its agencies or political subdivisions;
7. Transacting business in the Philippines
outside of the purpose or purposes for
which such corporation is authorized under
its license;
8. Transacting business in the Philippines as
agent of or acting for and in behalf of any
foreign corporation or entity not duly
licensed to do business in the Philippines; or
9. Any other ground as would render it unfit to
transact business in the Philippines;
10. Other grounds that may be provided by
special laws. (Sec. 151, RCC)
MERGER AND CONSOLIDATION
MERGER AND CONSOLIDATION,
DEFINITION AND CONCEPT:
Two or more corporations may merge into a
single corporation which shall be one of the
constituent corporations or may consolidate into
a new single corporation which shall be the
consolidated corporation. (Sec. 75, RCC)
Merger, defined:
A merger is a union effected by absorbing one
or more existing corporations by another which
survives and continues the combined business.
(Ballantine on Corporations, Rev. Ed., p. 681)
Bar Operations C ommissions 171
 Purple Notes
Mercantile Law
Consolidation, defined: 2. The terms and mode of carrying 2018out the
merger or consolidation;
Consolidation is the uniting or amalgamation of 3. A statement of the changes, if any, in the
two or more existing corporations to form a new articles of incorporation of the surviving
corporation. (Ballantine, supra, pp. 680-681) corporation in case of merger; and, in case
of consolidation, all the statements required
Merger and consolidation, distinguished: to be set forth in the articles of
(Ladia, The Corporation Code of the Philippines, incorporation for corporations organized
Annotated, 2007, p. 424) under this Code; and
4. Such other provisions with respect to the
MERGER CONSOLIDATION proposed merger or consolidation as are
Uniting of two or Uniting or amalgamation
deemed necessary or desirable. (Sec. 75,
more corporations by of two or more existing
RCC)
the transfer of corporations to form a
property to one of new corporation.
them which continue ARTICLES OF MERGER OR
in existence, the CONSOLIDATION
other or the others Contents of Articles of Merger or
being dissolved and consolidation
merged therein.
There is no new A single new corporation After the approval of the plan of merger or
corporation created. is created. consolidation by the Board and by the
The other constituent All corporations are stockholders or members, articles of merger or
corporations are dissolved, but a new one articles of consolidation shall be executed by
dissolved except the is created.
each of the constituent corporations, to be
surviving corporation.
signed by the president or vice-president and
The surviving All assets, liabilities, and
corporation acquires capital stock of all certified by the secretary or assistant secretary
all the assets, consolidated corporation of each corporation setting forth:
liabilities, and capital are transferred to the new
stock of all corporation 1. The plan of the merger or the plan of
constituent consolidation;
corporations. 2. As to stock corporations, the number of
shares outstanding, or in the case of non-
stock corporations, the number of members;
CONSTITUENT AND CONSOLIDATED 3. As to each corporation, the number of
CORPORATION, DISTINGUISHED: shares or members voting for or against
(Ladia, The Corporation Code of the Philippines, such plan, respectively;
Annotated, 2007, p. 425) 4. The carrying amounts and fair values of the
assets and liabilities of the respective
Constituent Consolidated
companies as of the agreed cut-off date;
Corporation Corporation
5. The method to be used in the merger or
One of the parties to a The newly created
merger or consolidation. corporation when two consolidation of accounts of the companies;
or more corporations 6. The provisional or pro-forma values, as
are consolidated. merged or consolidated, using the
accounting method; and
PLAN OF MERGER OR CONSOLIDATION 7. Such other information as may be
prescribed by the Commission. (Sec. 77, RCC)
Contents of plan of merger or
consolidation PROCEDURE IN MERGER OR
CONSOLIDATION
1. The names of the corporations proposing to
merge or consolidate; Procedure in merger or consolidation

172 Center for Legal Education and Research

 Purple Notes
1. Approval of merger or consolidation plan by
Board of Directors/Trustees of each
constituent corporations, setting forth the
matters required in Sec. 75.
2. Approval of the plan by stockholders
representing 2/3 of the outstanding capital
stock, or 2/3 of the members in non-stock
corporations, of each of such corporations at
separate corporate meetings called for the
purpose.
3. Prior notice of such meeting, with a copy or
summary of the plan of merger or
consolidation, shall be given to all
stockholders or members at least twenty-
one (21) days prior to the scheduled
meeting, either personally of by registered
mail, stating the purpose thereof.
4. Execution of the articles of merger or
consolidation by each constituent
corporation to be signed by the president or
vice-president and certified by the corporate
secretary or assistant secretary, setting forth
the matters required in Sec. 77.
5. Submission of the articles of merger or
consolidation to the SEC, subject to the
requirement of Sec. 78, that if it involves
corporations under the direct supervision of
any other government agency or governed
by special laws, the favorable
recommendation of the government agency
concerned shall first be secured.
6. Issuance of the certificate of merger or
consolidation by the SEC at which time the
merger or consolidation shall be effective.
EFFECTIVITY OF MERGER OR
CONSOLIDATION
Effectivity of merger or consolidation
The merger or consolidation shall take effect
upon issuance by the SEC of the certificate
approving the articles and plan of merger or of
consolidation.
In the case of merger or consolidation of banks
or banking institutions, building and loan
associations, trust companies, insurance
companies, public utilities, educational
institutions and other special corporations
governed by special laws, the favorable
173
Mercantile Law
recommendation of the appropriate government
agency shall first be obtained. (Sec. 78, RCC)
The merger shall only be effective upon the
issuance of a certificate of merger by the SEC,
subject to its prior determination that the
merger is not inconsistent with the Corporation
Code or existing laws. The same rule applies to
consolidation which becomes effective not upon
the mere agreement of the members but only
upon issuance of the certificate of consolidation
by the SEC. (Mindanao Savings and Loan Assoc vs.
Wilkom, G.R. No. 178618, October 11, 2010)
LIMITATIONS ON MERGER OR
CONSOLIDATION
Limitations on merger or consolidation
1. It should not result to an illegal
combination as proscribed in Act No. 3518;
2. It should not substantially lessen the
competition between the corporations;
3. It should not restrain commerce in any
section of the community; and
4. It should not create a monopoly of any line
of commerce. (Ladia, The Corporation Code of
the Philippines, Annotated, 2007)
EFFECTS OF CONSOLIDATION OR MERGER
Effects of consolidation or merger
1. The constituent corporations shall become a
single corporation.
In case of merger, the surviving corporation
shall be that 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;
Bar Operations C ommissions 173
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Mercantile Law
4. The surviving or the consolidated
corporation shall possess all the rights,
privileges, immunities and franchises of each
of the constituent corporation; and all real
or personal property, all receivables due on
whatever account, including subscriptions to
shares and other choses in action, and every
other interest of, 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 for all the liabilities and
obligations of each constituent corporation
as though such surviving or consolidated
corporation had itself incurred such liabilities
or obligations; and any pending claim,
action or proceeding brought by or against
any constituent corporations may be
prosecuted by or against the surviving or
consolidated corporation. The rights of
creditors or liens upon the property of such
constituent corporations shall not be
impaired by the merger or consolidation.
(Sec. 79, RCC)
Note: The surviving or consolidated corporation
assumes automatically the liabilities of the
dissolved corporations, regardless of whether
the creditors have consented or not to such
merger or consolidation. (Mcleod vs. NLRC, G.R.
No. 146667, January 23, 2007)
Employees of the absorbed corporation
are absorbed by the surviving corporation
It is more in keeping with the dictates of social
justice and state policy of according full
protection to labor to deem employment
contracts as automatically assumed by the
surviving corporation in a merger, even in the
absence of the express stipulation in the Articles
of merger or merger plan.
However, nothing in the Resolution shall impair
the right of an employer to terminate the
employment of the absorbed employees for a
lawful or authorized cause or the right of such
employee to resign, retire, or otherwise sever
his employment, whether before or after the
174 Center for Legal Education and Research
merger, subject to existing 2018 contractual
obligations. (BPI vs. BPI Employees Union, G.R. No.
164301, October 11, 2011)
Liabilities of transferee corporation to
debts and other liabilities
General Rule: Under the Nell Doctrine, where
one corporation sells or otherwise transfers all of
its assets to another corporation, the latter is
not liable for the debts and liabilities of the
transferor.
Exceptions:
1. Purchaser expressly or impliedly agrees to
assume such debts;
2. Fraudulent transaction to escape liability for
debts;
3. Transaction amounts to a consolidation or
merger of the corporations;
4. Purchasing corporation is merely a
continuation of the selling corporation;
(Edward J. Nell Company vs. Pacific Farms Inc.,
G.R. No. L-20850, November 1965)
De facto Merger
A de facto merger can be pursued by one
corporation acquiring 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 basically its only
remaining assets being the shares of stock of
the acquiring corporation. (Bank of Commerce vs.
RPN, Inc., G.R. No. 195615, April 21, 2014)
INVESTIGATIONS, OFFENSES, AND
PENALTIES
AUTHORITY OF COMMISSIONER
Investigation and Prosecution of Offenses:
The Commission may:
1. Investigate an alleged violation of the
Code, or of rule, regulation, or order of the
Commission.
 Purple Notes
2. Publish its findings, orders, opinions,
advisories, or information concerning any
such violation, as may be relevant to the
general public or to the parties concerned,
subject to the provisions of Republic Act
No. 10173, otherwise known as the ―Data
Privacy Act of 2012‖, and other pertinent
laws.
3. Shall give reasonable notice to and
coordinate with the appropriate regulatory
agency prior to any such publication
involving companies under their special
regulatory jurisdiction. (Sec. 154, RCC)
Administration of Oaths, Subpoena of
Witnesses and Documents
The Commission, through its designated officer,
may:
1. Administer oaths and affirmations,
2. Issue subpoena and subpoena duces
tecum,
3. Take testimony in any inquiry or
investigation, and
4. May perform other acts necessary to the
proceedings or to the investigation. (Sec.
155, RCC)
Cease and Desist Orders
Whenever the SEC has reasonable basis to
believe that a person has violated, or is about to
violate this Code, a rule, regulation, or order of
the Commission, it may direct such person to
desist from committing the act constituting the
violation. (Sec. 156, RCC)
When may be issued ex parte:
The Commission may issue a cease and desist
order ex parte to enjoin an act or practice
which:
1. is fraudulent, or
2. can be reasonably expected to cause
significant, imminent, and irreparable
danger or injury to public safety or welfare.
The ex parte order shall be valid for a maximum
period of twenty (20) days, without prejudice to
175
Mercantile Law
the order being made permanent after due
notice and hearing.
Thereafter, the SEC may proceed
administratively against such person in
accordance with Section 158 of this Code,
and/or transmit evidence to the Department of
Justice for preliminary investigation or criminal
prosecution and/or initiate criminal prosecution
for any violation of this Code, rule, or regulation.
(Sec. 156, RCC)
Contempt
The SEC shall, after due notice and hearing,
hold in contempt any person who, without
justifiable cause, fails or refuses to comply with
any lawful order, decision, or subpoena issued
by the former. In addition, that person shall be
fined in an amount not exceeding Thirty
thousand pesos (P30,000.00). When the refusal
amounts to clear and open defiance of the
Commission‘s order, decision, or subpoena, the
SEC may impose a daily fine of One thousand
pesos (P1,000.00) until the order, decision, or
subpoena is complied with. (Sec. 157, RCC)
SANCTIONS FOR VIOLATIONS
Administrative Sanctions
If, after due notice and hearing, the Commission
finds that any provision of this Code, rules or
regulations, or any of the Commission‘s orders
has been violated, the Commission may impose
any or all of the following sanctions, taking into
consideration the extent of participation, nature,
effects, frequency and seriousness of the
violation:
1. Imposition of a fine ranging from Five
thousand pesos (P5,000.00) to Two million
pesos (P2,000,000.00), and not more than
One thousand pesos (P1,000.00) for each
day of continuing violation but in no case to
exceed Two million pesos (P2,000,000.00);
2. Issuance of a permanent cease and desist
order;
3. Suspension or revocation of the certificate
of incorporation; and
4. Dissolution of the corporation and forfeiture
of its assets under the conditions in Title
XIV of this Code. (Sec. 158, RCC)
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Mercantile Law
PROHIBITED ACTS AND PENALTIES 2018
public, penalty shall be
a fine ranging from
P400,000 to
Prohibited Acts Penalties P5,000,000. (Sec. 165,
RCC)
Fine ranging from Fine ranging from
1. Unauthorized use of 8. Acting as
P10,000 to P200,000. P100,000 to
corporate name intermediaries for graft
(Sec. 159, RCC) P5,000,000. (Sec. 166,
Fine ranging from and corrupt practices
RCC)
P10,000 to P200,000 Fine ranging from
and shall be 9. Engaging
P100,000 to
permanently disqualified intermediaries for graft
P1,000,000. (Sec. 167,
from being a director, and corrupt practices
RCC)
2. Violation of trustee or officer of any Fine ranging from
disqualification provision corporation. If injurious 10. Tolerating graft and P500,000 to
or detrimental to the corrupt practices P1,000,000. (Sec. 168,
public, penalty shall be RCC)
a fine ranging from Fine ranging from
P20,000 to P400,000. 11. Retaliation against P100,000 to
(Sec. 160, RCC) whistleblowers P1,000,000. (Sec. 169,
Fine ranging from RCC)
P10,000 to P200,000. If Fine of not less than
3. Violation of duty to injurious or detrimental 12. Other violation of P10,000 but not more
maintain records, to to the public, penalty the Code than P1,000,000. (Sec.
allow their inspection or shall be a fine ranging 170, RCC)
reproduction from P20,000 to
P400,000. (Sec. 161,
Liability of Directors, Trustees, Officers, or
RCC)
Fine ranging from
Other Employees
P20,000 to P200,000. If
4. Willful certification of injurious or detrimental If the offender is a corporation, the penalty
incomplete, inaccurate, to the public, penalty may, at the discretion of the court, be imposed
false, or misleading shall be a fine ranging upon such corporation and/or upon its directors,
statements or reports from P40,000 to trustees, stockholders, members, officers, or
P400,000. (Sec. 162, employees responsible for the violation or
RCC) indispensable to its commission. (Sec. 171, RCC)
Fine ranging from
P80,000 to P500,000. If
Liability of Aiders and Abettors and Other
has the effect of
5. Independent auditor causing injury to the Secondary Liability
collusion public, penalty shall be
a fine ranging from Anyone who shall aid, abet, counsel, command,
P100,000 to P600,000. induce, or cause any violation of this Code, or
(Sec. 163, RCC) any rule, regulation, or order of the Commission
Fine ranging from shall be punished with a fine not exceeding that
P200,000 to imposed on the principal offenders, at the
P2,000,000. If injurious discretion of the court, after taking into account
6. Obtaining corporate or detrimental to the
their participation in the offense. (Sec. 172, RCC)
registration through public, penalty shall be
fraud a fine ranging from
P400,000 to AUTHORITY OF THE SECURITIES AND
P5,000,000. (Sec. 164, EXCHANGE COMMISSION
RCC)
Fine ranging from Regulatory and Adjudicative Functions
7. Fraudulent conduct P200,000 to
of business P2,000,000. If injurious
or detrimental to the

176 Center for Legal Education and Research

 Purple Notes
The Securities and Exchange Commission
("SEC") has both regulatory and adjudicative
functions.
Under its regulatory responsibilities, the SEC
may pass upon applications for, or may suspend
or revoke (after due notice and hearing),
certificates of registration of corporations,
partnerships and associations (excluding
cooperatives, homeowners‘ associations, and
labor unions); compel legal and regulatory
compliance; conduct inspections; and impose
fines or other penalties for violations of the
Revised Securities Act, as well as implementing
rules and directives of the SEC, such as may be
warranted.
Relative to its adjudicative authority, the SEC
has original and exclusive jurisdiction to hear
and decide controversies and cases involving —
a. Intra-corporate and partnership relations
between or among the corporation, officers
and stockholders and partners, including
their elections or appointments;
Note: The jurisdiction to hear and decide cases
involving intra-corporate disputes was already
transferred from SEC to RTC, acting as a Special
Commercial Court.
b. State and corporate affairs in relation to the
legal existence of corporation, partnership
and associations or to their franchises; and
c. Investors and corporate affairs, particularly in
respect of devices and scheme, such as
fraudulent practices, employed by directors,
officers, business associates, and/or other
stockholders, partners, or members of
registered firms; as well as
d. Petitions for suspension of payment filed by
corporations, partnership or associations
possessing sufficient property to cover all
their debts but which foresee the
impossibility of meeting them when they
respectively fall due, or possessing
insufficient assets to cover their liabilities
and said entities are upon petition or motu
proprio, placed under the management of a
Rehabilitation Receiver or management
177
Mercantile Law
Committee. (Securities and Exchange
Commission vs. Court of Appeals, G.R. Nos.
106425 & 106431-32, July 21, 1995)
Powers, Functions, and Jurisdiction of the
Commission
The Commission shall have the power and
authority to:
1. Exercise supervision and jurisdiction over all
corporations and persons acting on their
behalf, except as otherwise provided under
this Code;
2. Pursuant to Presidential Decree No. 902-A,
retain jurisdiction over pending cases
involving intra-corporate disputes submitted
for final resolution. The Commission shall
retain jurisdiction over pending suspension
of payment/rehabilitation cases filed as of
30 June 2000 until finally disposed;
3. Impose sanctions for the violation of this
Code, its implementing rules and orders of
the Commission;
4. Promote corporate governance and the
protection of minority investors, through
among others, the issuance of rules and
regulations consistent with international
best practices;
5. Issue opinions to clarify the application of
laws, rules, and regulations;
6. Issue cease and desist orders ex parte to
prevent imminent fraud or injury to the
public;
7. Hold corporations in direct and indirect
contempt;
8. Issue subpoena duces tecum and summon
witnesses to appear in proceedings before
the Commission;
9. In appropriate cases, order the
examination, search and seizure of
documents, papers, files and records, and
books of accounts of any entity or person
under investigation as may be necessary
for the proper disposition of the cases,
subject to the provisions of existing laws;
10. Suspend or revoke the certificate of
incorporation after proper notice and
hearing;
11. Dissolve or impose sanctions on
corporations, upon final court order, for
committing, aiding in the commission of, or
Bar Operations C ommissions 177
 Purple Notes
Mercantile Law
in any manner furthering securities
violations, smuggling, tax evasion, money
laundering, graft and corrupt practices, or
other fraudulent or illegal acts;
12. Issue writs of execution and attachment to
enforce payment of fees, administrative
fines, and other dues collectible under this
Code;
13. Prescribe the number of independent
directors and the minimum criteria in
determining the independence of a
director;
14. Impose or recommend new modes by
which a stockholder, member, director, or
trustee may attend meetings or cast their
votes, as technology may allow, taking into
account the company‘s scale, number of
shareholders or members, structure, and
other factors consistent with the basic right
of corporate suffrage;
15. Formulate and enforce standards,
guidelines, policies, rules and regulations to
carry out the provisions of this Code; and
16. Exercise such other powers provided by law
or those which may be necessary or
incidental to carrying out the powers
expressly granted to the Commission.
In imposing penalties and additional monitoring
and supervision requirements, the Commission
shall take into consideration the size, nature of
the business, and capacity of the corporation.
No court below the Court of Appeals shall have
jurisdiction to issue a restraining order,
preliminary injunction, or preliminary mandatory
injunction in any case, dispute, or controversy
that directly or indirectly interferes with the
exercise of the powers, duties and
responsibilities of the Commission that falls
exclusively within its jurisdiction. (Sec. 179, RCC)
V. SECURITIES
A. STATE POLICY
The State shall:
1. Establish a socially conscious, free market
that regulates itself,
178 Center for Legal Education and Research
2. Encourage the widest participation 2018 of
ownership in enterprises,
3. Enhance the democratization of wealth,
4. Promote the development of the capital
market,
5. Protect investors,
6. Ensure full and fair disclosure about
securities,
7. Minimize if not totally eliminate insider
trading and other fraudulent or
manipulative devices and practices which
create distortions in the free market. (Sec.
2, Securities Regulation Code)
C. SECURITIES, DEFINED:
These are shares, participation or interests in a
corporation or in a commercial enterprise or
profit-making venture and evidenced by a
certificate, contract, instrument, whether written
or electronic in character. (Sec. 3.1, SRC)
D. KINDS OF SECURITIES:
1. Shares of stocks, bonds, debentures, notes,
evidences of indebtedness, asset-backed
securities;
2. Investment contracts, certificates of
interest or participation in a profit-sharing
agreement, certifies of deposit for a future
subscription;
3. Fractional undivided interests in oil, gas or
other mineral rights;
4. Derivatives like option and warrants;
5. Certificates of assignments, certificates of
participation, trust certificates, voting trust
certificates or similar instruments;
6. Proprietary or nonproprietary membership
certificates in corporations; and
7. Other instruments as may in the future be
determined by the Commission. (Sec. 3.1,
SRC)
Registration requirement, as general rule:
Securities shall not be sold or offered for sale or
distribution within the Philippines, without a
registration statement duly filed with and
approved by the SEC. Prior to such sale,
information on the securities, in such form and
with such substance as the SEC may prescribe,
 Purple Notes
shall be made available to each prospective
purchaser. (Sec. 8, SRC)
As a general rule, securities, as defined under
Section 3, cannot be sold or offered for sale of
distribution to the public without a Registration
Statement duly filed by the ―issuer‖, or
originator, maker, obligator or creator of the
said security and approved by the SEC. This is
the clear mandate of Section 8 of RA 8799.
Section 28, on the other hand, prohibits any
person to engage in the business of buying, or
selling securities in the Philippines as a broker or
dealer, or act as salesman for such securities
unless registered and authorized as such by the
SEC. (Ladia, The Corporation Code of the Philippines
(annotated) with The Securities Regulation Code (R.A.
8799) and Presidential Decree No. 902-A, pp. 641-
642, Third Edition)
Purpose of Registration requirement:
Registration aids the State in protecting the
investing public by mandating the disclosure of
the important financial information. This
information, which becomes available to the
public upon registration, enables investors to
make informed judgement about whether to
purchase corporation securities. (Dizon, Securities
Regulation Code, 2011, pp. 69-70)
Exceptions to the general rule:
1. Securities exempt from registration under
Section 9; and
2. Securities sold in exempt transactions
under Section 10.
Exception to the Exception:
The re-sale of securities sold in an exempt
transaction must be registered. (Rule 10.2.6 of
2015 Implementing Rules and Regulations of the
Securities Regulation Code)
EXEMPT SECURITIES (Securities exempt
from registration)
1. Any security issued or guaranteed by the
Government of the Philippines, or by any
political subdivision or agency thereof, or
179
Mercantile Law
by any person controlled or supervised by,
and acting as an instrumentality of said
Government.
2. Any security issued or guaranteed by the
government of any country with which the
Philippines maintains diplomatic relations,
or by any state, province or political
subdivision thereof on the basis of
reciprocity: Provided, That the Commission
may require compliance with the form and
content of disclosures the Commission may
prescribe.
3. Certificates issued by a receiver or by a
trustee in bankruptcy duly approved by the
proper adjudicatory body.
4. Any security or its derivatives the sale or
transfer of which, by law, is under the
supervision and regulation of the Office of
the Insurance Commission, Housing and
Land Use Regulatory Board, or the Bureau
of Internal Revenue.
5. Any security issued by a bank except its
own shares of stock. (Sec. 9.1, SRC)
The Commission may, by rule or regulation after
public hearing, add to the foregoing any class of
securities if it finds that the enforcement of this
Code with respect to such securities is not
necessary in the public interest and for the
protection of investors. (Sec. 9.2, SRC)
Reason for Exemption:
1. Guaranteed by the government
2. Regulated by other government agency
other than SEC. (Sec. 9.1, SRC)
EXEMPT TRANSACTIONS (Transactions
exempt from registration)
1. At any judicial sale, or sale by an executor,
administrator, guardian or receiver or
trustee in insolvency or bankruptcy.
2. By or for the account of a pledge holder, or
mortgagee or any other similar lien holder
selling or offering for sale or delivery in the
ordinary course of business and not for the
purpose of avoiding the provisions of this
Bar Operations C ommissions 179
 Purple Notes
Mercantile Law
Code, to liquidate a bona fide debt, a
security pledged in good faith as security
for such debt.
3. An isolated transaction in which any
security is sold, offered for sale,
subscription or delivery by the owner
thereof, or by his representative for the
owner‘s account, such sale or offer for sale,
subscription or delivery not being made in
the course of repeated and successive
transactions of a like character by such
owner, or on his account by such
representative and such owner or
representative not being the underwriter of
such security.
4. The distribution by a corporation, actively
engaged in the business authorized by its
articles of incorporation, of securities to its
stockholders or other security holders as a
stock dividend or other distribution out of
surplus.
5. The sale of capital stock of a corporation to
its own stockholders exclusively, where no
commission or other remuneration is paid
or given directly or indirectly in connection
with the sale of such capital stock.
6. The 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. The issue and delivery of any security in
exchange for any other security of the
same issuer pursuant to a right of
conversion entitling the holder of the
security surrendered in exchange to make
such conversion: Provided, That the
security so surrendered has been registered
under this Code or was, when sold, exempt
from the provisions of this Code, and that
the security issued and delivered in
exchange, if sold at the conversion price,
would at the time of such conversion fall
within the class of securities entitled to
registration under this Code. Upon such
conversion the par value of the security
surrendered in such exchange shall be
deemed the price at which the securities
issued and delivered in such exchange are
sold.
180 Center for Legal Education and Research
8. Broker‘s transactions, executed 2018 upon
customer‘s orders, on any registered
Exchange or other trading market.
9. Subscriptions for shares of the capital stock
of a corporation prior to the incorporation
thereof or in pursuance of an increase in its
authorized capital stock under the
Corporation Code, when no expense is
incurred, or no commission, compensation
or remuneration is paid or given in
connection with the sale or disposition of
such securities, and only when the purpose
for soliciting, giving or taking of such
subscriptions is to comply with the
requirements of such law as to the
percentage of the capital stock of a
corporation which should be subscribed
before it can be registered and duly
incorporated, or its authorized capital
increased.
10. The exchange of securities by the issuer
with its existing security holders exclusively,
where no commission or other
remuneration is paid or given directly or
indirectly for soliciting such exchange.
11. The sale of securities by an issuer to fewer
than twenty (20) persons in the Philippines
during any twelve-month period.
12. The sale of securities to any number of the
following qualified buyers:
a. Bank;
b. Registered investment house;
c. Insurance company;
d. Pension fund or retirement plan
maintained by the Government of the
Philippines or any political subdivision
thereof or managed by a bank or other
persons authorized by the Bangko
Sentral to engage in trust functions;
e. Investment company; or
f. Such other person as the Commission
may by rule determine as qualified
buyers, on the basis of such factors as
financial sophistication, net worth,
knowledge, and experience in financial
and business matters, or amount of
assets under management. (Sec. 10,
SRC)
The SEC may exempt other transactions, if it
finds that the requirements of registration under
 Purple Notes
this Code is not necessary in the public interest
or for the protection of the investors such as by
reason of the small amount involved or the
limited character of the public offering. (Sec.
10.2, SRC)
Any person applying for an exemption under this
Section, shall file with the SEC a notice
identifying the exemption relied upon on such
form and at such time as the Commission by the
rule may prescribe and with such notice shall
pay to the Commission fee equivalent to 1/10 of
1% of the maximum value aggregate price or
issued value of the securities. (Sec. 10.3, SRC)
NOTE: Exempt from Registration, But Not From
Other Requirements and Liabilities
Notwithstanding that a particular class of
securities issued under Section 10 of the Code is
exempt from registration, the conduct by any
person in the purchase, sale, distribution of such
securities, settlement and other post-trade
activities shall comply with the provisions of the
Code and the rules issued thereunder.
Moreover, the sale or offer for sale of a security
in an exempt transaction under Section 10 of
the Code shall not be exempt from civil liability
and other related liabilities and other applicable
provisions of the Code on fraud, among others.
Consistent with public interest and for the
protection of investors, the SEC, may require an
issuer of a class of securities falling under
exempt transactions, to make available to
investors and file with the SEC periodic
disclosures regarding the Issuer, its business
operations, its financial condition, its governance
principles and practices, its use of investor
funds, and other appropriate matters, and may
also provide for suspension and termination of
such requirement with respect to such Issuer.
(Rule 10.1.9 of 2015 Implementing Rules and
Regulations of the Securities Regulation Code)
D. POWERS AND FUNCTIONS OF THE
SECURITIES AND EXCHANGE
COMMISSION
The Commission has the following powers and
functions:
181
Mercantile Law
1. Have jurisdiction and supervision over all
corporations, partnerships or associations
who are the grantees of primary franchises
and/or a license or permit issued by the
Government;
2. Formulate policies and recommendations on
issues concerning the securities market,
advise Congress and other government
agencies on all aspects of the securities
market and propose legislation and
amendments thereto;
3. Approve, reject, suspend, revoke or require
amendments to registration statements, and
registration and licensing applications;
4. Regulate, investigate or supervise the
activities of persons to ensure compliance
5. Supervise, monitor, suspend or take over
the activities of exchanges, clearing
agencies and other SROs;
6. Impose sanctions for the violation of laws
and the rules, regulations and orders issued
pursuant thereto;
7. Prepare, approve, amend or repeal rules,
regulations and orders, and issue opinions
and provide guidance on and supervise
compliance with such rules, regulations and
orders;
8. Enlist the aid and support of and/or deputize
any and all enforcement agencies of the
Government, civil or military as well as any
private institution, corporation, firm,
association or person in the implementation
of its powers and functions under the Code;
9. Issue cease and desist orders to prevent
fraud or injury to the investing public;
10. Punish for contempt of the Commission,
both direct and indirect, in accordance with
the pertinent provisions of and penalties
prescribed by the Rules of Court;
11. Compel the officers of any registered
corporation or association to call meetings
of stockholders or members thereof under
its supervision;
12. Issue subpoena duces tecum and summon
witnesses to appear in any proceedings of
the Commission and in appropriate cases,
order the examination, search and seizure of
all documents, papers, files and records, tax
returns, and books of accounts of any entity
or person under investigation as may be
necessary for the proper disposition of the
Bar Operations C ommissions 181
 Purple Notes
Mercantile Law
cases before it, subject to the provisions of
existing laws;
13. Suspend, or revoke, after proper notice and
hearing the franchise or certificate of
registration of corporations, partnerships or
associations, upon any of the grounds
provided by law; and
14. Exercise such other powers as may be
provided by law as well as those which may
be implied from, or which are necessary or
incidental to the carrying out of, the express
powers granted the Commission to achieve
the objectives and purposes of these laws.
(Sec. 5, SRC)
The SEC's jurisdiction over all cases enumerated
under Section 5 of Presidential Decree No. 902-
A is hereby transferred to the Courts of general
jurisdiction or the appropriate Regional Trial
Court: Provided, that the Supreme Court in the
exercise of its authority may designate the
Regional Trial Court branches that shall exercise
jurisdiction over these cases. The SEC shall
retain jurisdiction over pending cases involving
intra-corporate disputes submitted for final
resolution which should be resolved within one
(1) year from the enactment of the Code. The
SEC shall retain jurisdiction over pending
suspension of payments/ rehabilitation cases
filed as of 30 June 2000 until finally disposed.
E.PROCEDURE FOR REGISTRATION OF
SECURITIES
1. All securities required to be registered shall
be registered through the filing by the
issuer in the main office of the SEC, of a
sworn registration statement with respect
to such securities, in such form and
containing such information and documents
as the SEC shall prescribe. The registration
statement shall include any prospectus
required or permitted to be delivered.
2. In promulgating rules governing the
content of any registration statement
(including any prospectus made a part
thereof or annexed thereto), the SEC may
require the registration statement to
contain such information or documents as it
may, by rule, prescribe. It may dispense
with any such requirement, or may require
182 Center for Legal Education and Research
additional information or 2018 documents,
including written information from an
expert, depending on the necessity thereof
or their applicability to the class of
securities sought to be registered.
3. The information required for the
registration of any kind, and all securities,
shall include, among others, the effect of
the securities issue on ownership, on the
mix of ownership, especially foreign and
local ownership.
4. The registration statement shall be signed
by the issuer‘s executive officer, its
principal operating officer, its principal
financial officer, its comptroller, principal
accounting officer, its corporate secretary
or persons performing similar functions
accompanied by a duly verified resolution
of the board of directors of the issuer
corporation. The written consent of the
expert named as having certified any part
of the registration statement or any
document used in connection therewith
shall also be filed. Where the registration
statement includes shares to be sold by
selling shareholders, a written certification
by such selling shareholders as to the
accuracy of any part of the registration
statement contributed to by such selling
shareholders shall also be filed.
5. A) Upon filing of the registration statement,
the issuer shall pay to the Commission a
fee of not more than one-tenth (1/10) of
one per centum (1%) of the maximum
aggregate price at which such securities are
proposed to be offered. The Commission
shall prescribe by rule diminishing fees in
inverse proportion to the value of the
aggregate price of the offering.
B) Notice of the filing of the registration
statement shall be immediately published
by the issuer, at its own expense, in two
(2) newspapers of general circulation in the
Philippines, once a week for two (2)
consecutive weeks, or in such other manner
as the Commission by rule shall prescribe,
reciting that a registration statement for the
sale of such security has been filed, and
that the aforesaid registration statement, as
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well as the papers attached thereto are
open to inspection at the Commission
during business hours, and copies thereof,
photo static or otherwise, shall be furnished
to interested parties at such reasonable
charge as the Commission may prescribe.
6. Within forty-five (45) days after the date of
filing of the registration statement, or by
such later date to which the issuer has
consented, the Commission shall declare
the registration statement effective or
rejected, unless the applicant is allowed to
amend the registration statement as
provided in Section 14 hereof. The
Commission shall enter an order declaring
the registration statement to be effective if
it finds that the registration
statement together with all the other
papers and documents attached thereto is
on its face complete and that the
requirements have been complied with. The
Commission may impose such terms and
conditions as may be necessary or
appropriate for the protection of the
investors.
7. Upon effectivity of the registration
statement, the issuer shall state under oath
in every prospectus that all registration
requirements have been met and that all
information are true and correct as
represented by the issuer or the one
making the statement. Any untrue
statement of fact or omission to state a
material fact required to be stated therein
or necessary to make the statement therein
not misleading shall constitute fraud. (Sec.
12, SRC)
F.PROHIBITION ON FRAUD,
MANIPULATION AND INSIDE TRADING
Manipulation of security prices
It shall be unlawful for any person acting for
himself or through a dealer or broker, directly or
indirectly:
1. To create a false or misleading appearance
of active trading in any listed security
traded in an Exchange or any other trading
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Mercantile Law
market (hereafter referred to purposes of
this Chapter as ―Exchange‖):
a. By effecting any transaction in such
security which involves no change in the
beneficial ownership thereof;
b. By entering an order or orders for the
purchase or sale of such security with
the knowledge that a simultaneous
order or orders of substantially the same
size, time and price, for the sale or
purchase of any such security, has or
will be entered by or for the same or
different parties; or
c. By performing similar act where there is
no change in beneficial ownership.
2. To effect, alone or with others, a series of
transactions in securities that:
a. Raises their price to induce the purchase
of a security, whether of the same or a
different class of the same issuer or of a
controlling, controlled, or commonly
controlled company by others;
b. Depresses their price to induce the sale
of a security, whether of the same or a
different class, of the same issuer or of
a controlling, controlled, or commonly
controlled company by others; or
c. Creates active trading to induce such a
purchase or sale through manipulative
devices such as marking the close,
painting the tape, squeezing the float,
hype and dump, boiler room operations
and such other similar devices.
3. 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 the security for the purpose of
inducing the purchase or sale of such
security.
4. 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
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Mercantile Law
inducing the purchase or sale of any
security listed or traded in an Exchange.
5. To effect, either alone or others, 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 such security, unless otherwise
allowed by this Code or by rules of the
Commission. (Sec. 24.1, SRC)
No person shall use or employ, in connection
with the purchase or sale of any security ay
manipulative or deceptive device or contrivance.
Neither shall any short sale be effected nor any
stop-loss order be executed in connection with
the purchase or sale of any security except in
accordance with such rules and regulations as
the Commission may prescribe as necessary or
appropriate in the public interest or for the
protection if investors. (Sec. 24.2, SRC)
The Commission, having due regard to the
public interest and the protection of investors,
may, by rules and regulations, allow certain acts
of transaction that may otherwise be prohibited
under this Section. (Section 24.3, SRC)
Wash Sale
It is any transaction in a security which involves
no change in the beneficial ownership thereof.
Thus, a series of buy and sale transaction may
be placed by one and the same beneficial owner
in the Exchange which would not affect any
change of ownership of the shares transacted.
(Sec. 24.1(a)(i), SRC)
Matched Order
It is an order/s for the purchase or sale of
security with the knowledge that a simultaneous
order/s of substantially the same size, time, and
price for the sale or purchase of such security
has, or will be entered by or for the same or
different parties. (Sec. 24.1[a][ii], SRC)
Wash sale and marched ordered are NOT
by themselves illegal.
To be illegal, thus subject to the penal sanctions
provided for in Section 73, they must be used as
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a means ―to create a false or2018 misleading
appearance of active trading‖ in the security
concerned. (Sec. 24.1 [a], SRC)
Marking the close
It is placing of purchase or sale order at or near
the close of the trading period. The person
making the order would thus post a higher or
lower price for the security just barely before
the close of the market thereby increasing or
lowering the closing price. The price of the
security on the following trading day will thus be
the same price as marked or taped on the close
the day before. (Sec. 24.1[b][4][ii], SRC)
Painting the tape
It is akin to marking the close but the activity is
made during normal trading hours. It involves
buying activity among nominee accounts at
increasingly higher or lower prices or causing
fictitious reports to appear on the ―ticker tape.‖
(Sec. 24.1[b][4][i], SRC)
Squeezing the float
It is a part or portion of the issue/security which
is outstanding but intentionally held by dealers
or other persons with a view of reselling them
later for profit. There would thereby be a short
on supply or availability of the stock vis-à-vis the
demand which would generally raise the price of
the security involved. (Sec. 24.1[b][4][vi], SRC)
Hype and Dump
It is an act employed by a person or group of
persons of purchasing the outstanding capital
stock of a dormant public shell company for a
nominal amount and merges it with their
privately held company. They would then gain
control of the majority of the stocks of the
merged entity. The shares of the Shell Company
are often reverse-split four to one or more to
reduce the number of shares. Stock certificates
are often re-issued in the name if the merged
entity to relatives and associates who act as
nominees of the person or group pf persons
employing the device. They would then look for
a broker-dealer who would be willing to make a
market relative to the stocks of the newly
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merged company; then hire a promoter who
would ―hype‖ the virtues of the company; its
products and stocks. The broker-dealer then
generates volume and advances bid price. When
the market reaches a high price, they would
―dump‖ their shareholdings and bail out. (Sec.
24.1[b][4][iv], SRC)
Boiler Room Operations
It involves an intensive selling campaign through
numerous salesmen by telephone or through
direct mail offerings for securities of either a
certain type or from a specific issuer.
Investors are induced to purchase through hard-
sell techniques based on unfounded predictions
and mailing of misleading market letters.
Marking the close/painting the tape, squeezing
the float, hype and dump, boiler room
operations become unlawful if it is effected to
either:
1. Raise the price or induce the purchase of a
security or of a controlling, controlled, or
commonly controlled company by others;
2. Depresses their price to induce the sale of a
security, whether of the same or of a
different class, of the same issuer or of a
controlling, controlled company, or common
controlled company by others; and
3. Creates active trading to induce such
purchase or sale through said devices or
schemes.
Circulating or Disseminating Information
that the price of any security listed in the
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 the security
and thus inducing the purchase or sale of such
security is outlawed under Section 24.1 (c).
Marking False or Misleading Statements
with respect to any material fact, which he knew
or had reasonable grounds to believe was so
false or misleading for the purpose of inducing
the purchase or sale of any security is likewise
illegal under Section 24.1 (d).
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Mercantile Law
Pegging or Fixing or stabilizing the price of
security effected either alone or with others
through any series of transactions for the
purchase or sale thereof, if done for such
purpose is also illegal under Section 24.1 (e).
Short Sale
It is the selling of security which the vendor
does not own, and is now illegal per se under
Section 24.2, unless, it is done in accordance
with the rules and regulations of the SEC. Sec.
24.2-2, IRR of SRC)
Option Trading, regulation:
No member of an Exchange shall, directly or
indirectly endorse or guarantee the performance
of any put, call, straddle, option or privilege in
relation to any security registered on a securities
exchange. The terms ―put‖, ―call‖, ―straddle‖,
―option‖, or ―privilege‖ shall not include any
registered warrant, right or convertible security.
(Sec. 26, SRC)
Fraudulent transactions
It shall be unlawful for any person, directly or
indirectly, in connection with the purchase or
sale of any securities to:
1. Employ any device, scheme, or artifice to
defraud;
2. Obtain money or property by means of any
untrue statement of a material fact of any
omission to state a material fact necessary
in order to make the statements made, in
the light of the circumstances under which
they were made, not misleading; or
3. Engage in any act, transaction, practice or
course of business which operates or would
operate as a fraud or deceit upon any
person. (Sec. 26, SRC)
Insider Trading
It is the act of an ―insider‖ to buy or sell security
of the issuer while in possession of material
information with respect thereto that is not
generally available to the public is illegal unless
the conditions set forth in Section 27 are
present. (Ladia, The Corporation Code of the
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Mercantile Law
Philippines (annotated) with The Securities Regulation
Code (R.A. 8799) and Presidential Decree No. 902-A,
pp. 647-649, Third Edition)
Prohibition on insider trading,
requirements for a valid defense against
the prohibition:
It shall be unlawful for an insider to sell or buy a
security of the issuer, while in possession of
material information with respect to the issuer
or the security that is not generally available to
the public, unless:
1. The insider proves that the information was
not gained from such relationship; or
2. If the other party selling to or buying from
the insider (or his agent) is identified, the
insider proves:
a. that he disclosed the information to the
other party, or
b. that he had reason to believe that the
other party otherwise is also in
possession of the information.
Presumption of sale being effected while
in possession of material non-public
information
A purchase or sale of a security of the issuer
made by an insider, or such insider‘s spouse or
relatives by affinity or consanguinity within the
second 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: Provided, however, That this
presumption shall be rebutted upon a showing
by the purchaser or seller that he was not aware
of the material non-public information at the
time of the purchase or sale. (Sec. 27, SRC)
What sought to be addressed:
What is sought to be addressed here is the
asymmetry in information about a ―public
company‖ (such as a company listed on the
186 Center for Legal Education and Research
Philippine Stock Exchange) between 2018
insiders and
outsiders.
Insiders could have material information not yet
known to the public about the company, and
they might use this information to benefit
themselves at the expense of the outsiders or
the public. Therefore, they must not trade in the
shares of the company pending the disclosure of
such information to the public.
Insider
An insider means:
1. The issuer;
2. A director or officer (or any person
performing similar functions) of, or a
person controlling the issuer; gives or gave
him access to material information about
the issuer or the security that is not
generally available to the public;
3. A government employee, 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; or
4. A person who learns such information by a
communication from any foregoing insiders
(Section 3.8, SRC)
Information is “material non-public” if:
1. 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
2. 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.
Prohibition on insider of communicating
material non-public information about the
issuer to another who becomes an insider
and who is likely to buy or sell security of
the issuer
It shall be unlawful for any insider to
communicate material non-public information
 Purple Notes
about the issuer or the security to any person
who, by virtue of the communication, becomes
an insider as defined in Subsection 3.8, where
the insider communicating the information
knows or has reason to believe that such person
will likely buy or sell a security of the issuer
while in possession of such information.
Prohibition on Tender Offer
It shall be unlawful where a tender offer has
commenced or is about to commence for:
1. Any person (other than the tender offeror)
who is in possession of material non-public
information relating to such tender offer, to
buy or sell the securities of the issuer that
are sought or to be sought by such tender
offer if such person knows or has reason to
believe that the information is non-public
and has been acquired directly or indirectly
from the tender offeror, those acting on its
behalf, the issuer of the securities sought or
to be sought by such tender offer, or any
insider of such issuer; and
2. Any tender offeror, those acting on its
behalf, the issuer of the securities sought or
to be sought by such tender offer, and any
insider of such issuer to communicate
material non-public information relating to
the tender offer to any other person where
such communication is likely to result in a
violation of Subsection 27.4 (a)(i). (Sec. 27,
SRC)
Included in the term “securities of the
issuer sought or to be sought by such
tender offer”
For purposes of this subsection the
term ―securities of the issuer sought or to be
sought by such tender offer‖ shall include any
securities convertible or exchangeable into such
securities or any options or rights in any of the
foregoing securities. (Subsection 27.4 [b])
G.PROTECTION OF SHAREHOLDER
INTERESTS
Tender Offer Rule
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Mercantile Law
Tender offer is a publicly announced intention
by a person acting alone or in concert with other
persons to acquire equity securities of a public
company. Stated differently, a tender offer is an
offer by the acquiring person to stockholders of
a public company for them to tender their
shares therein on the terms specified in the
offer. Tender offer is in place to protect minority
shareholders against any scheme that dilutes
the share value of their investments. It gives the
minority shareholders the chance to exit the
company under reasonable terms, giving them
the opportunity to sell their shares at the same
price as those of the majority shareholders.
(Cemco Holdings, Inc. vs. National Life Insurance
Company, Inc. G.R. No. 171815, August 7, 2007)
Mandatory Tender Offers
1. Any person or group of persons acting in
concert, who intends to acquire fifteen
percent (15%) of equity securities in a
public company in one or more transactions
within a period of twelve (12) months,
shall file a declaration to that effect with
the SEC.
2. Any person or group of persons acting in
concert, who intends to acquire thirty five
percent (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 twelve (12)
months, shall disclose such intention and
contemporaneously make a tender offer for
the percentage sought to all holders of
such securities within the said period.
If the 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. For
purposes of SRC Rule 19.2.2, the last sale
that meets the threshold shall not be
consummated until the closing and
completion of the tender offer]
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Mercantile Law
3. Any person or group of persons acting in
concert, who intends to acquire thirty five
percent (35%) of the outstanding voting
shares or such outstanding voting shares
that are sufficient to gain control of the
board in a public company through the
Exchange trading system shall not be
required to make a tender offer even if
such person or group of persons acting in
concert acquire the remainder through a
block sale if, after acquisition through the
Exchange trading system, they fail to
acquire their target of thirty five percent
(35%) or such outstanding voting shares
that is sufficient to gain control of the
board.
4. Any person or group of persons acting in
concert, who intends to acquire thirty five
percent (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 shall be required
to make a tender offer for all the
outstanding voting shares. The 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.
5. If any acquisition that would result in
ownership of over fifty percent (50%) of
the total outstanding equity securities of a
public company, the acquirer shall be
required to make a tender offer under this
Rule for all the outstanding equity securities
to all remaining stockholders of the said
company at a price supported by a fairness
opinion provided by an independent
financial advisor or equivalent third party.
The acquirer in such a tender offer shall be
required to accept all securities tendered.
(Rule 19. 2 of 2015 Implementing Rules and
Regulations of the Securities Regulation Code)
Purpose of tender offer
The purpose of tender offer rule is to protect the
interest of minority stockholders of a target
company against any scheme that dilutes the
share value of their investments. It affords such
minority shareholders the opportunity to
withdraw or exit from the company under
188 Center for Legal Education and Research
reasonable terms or a chance to sell2018
their shares
at the same price as those of majority
stockholders. (Cemco Holdings, Inc. vs. National Life
Insurance Company, Inc. G.R. No. 171815, August 7,
2007)
The coverage of the mandatory tender
offer rule covers not only direct acquisition
but also indirect acquisition or “any type
of acquisition.”
The legislative intent of Section 19 of the
Securities Regulation Code is to regulate
activities relating to acquisition of control of the
listed company and for the purpose of
protecting the minority stockholders of a listed
corporation. Whatever may be the method by
which control of a public company is obtained,
either through the direct purchase of its stocks
or through an INDIRECT means, mandatory
tender offer applies. What is decisive is the
determination of the power of control. The
legislative intent behind the tender offer rule
makes clear that the type of activity intended to
be regulated is the acquisition of control of the
listed company through the purchase of shares.
Control may [be] effected through a direct and
indirect acquisition of stock, and when this takes
place, irrespective of the means, a tender offer
must occur. The bottom line of the law is to give
the shareholder of the listed company the
opportunity to decide whether or not to sell in
connection with a transfer of control. (Cemco
Holdings, Inc. vs. National Life Insurance Company,
G.R. No. 171815, August 7, 2007)
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 the SEC.
2. Proxies must be in writing, signed by the
stockholder or his duly authorized
representative and filed before the
scheduled meeting with the corporate
secretary.
3. Unless otherwise provided in the proxy, it
shall be valid only for the meeting for which
it is intended. No proxy shall be valid and
effective for a period longer than five (5)
years at one time.
 Purple Notes
4. No broker or dealer shall give any proxy,
consent or 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. A broker or dealer who holds or acquires the
proxy for at least ten per centum (10%) or
such percentage as the SEC may prescribe
of the outstanding share of the issuer, shall
submit a report identifying the beneficial
owner within ten (10) days after such
acquisition, for its own account or customer,
to the issuer of the security, to the
Exchange where the security is traded and
to the SEC. (Sec. 20, SRC)
Disclosure rule
All information filed with the SEC in compliance
with the requirements of SRC shall be made
available to any member of the general public,
upon request, in the premises and during
regular office hours of the SEC, except as set
forth in this Section. Nothing in this Code shall
be construed to require, or to authorize the
Commission to require, the revealing of trade
secrets or processes in any application, report,
or document filed with the SEC.
Any person filing any such application, report or
document may make written objection to the
public disclosure of information contained
therein, stating the grounds for such objection,
and the SEC may hear objections as it deems
necessary. The SEC may, in such cases, make
available to the public the information contained
in any such application, report, or document
only when a disclosure of such information is
required in the public interest or for the
protection of investors; and copies of
information so made available may be furnished
to any person having a legitimate interest
therein at such reasonable charge and under
such reasonable limitations as the SEC may
prescribe.
It shall be unlawful for any member, officer, or
employee of the SEC to disclose to any person
other than a member, officer or employee of the
SEC or to use for personal benefit, any
information contained in any application, report,
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Mercantile Law
or document filed with the SEC which is not
made available to the public pursuant to
Subsection 66.3. (Sec. 66, SRC)
Who are required?
Issuers, equity holders, and insiders are
required to disclose certain information to the
SEC. (Secs. 17, 18, and 23 of SRC)
Disclosure by the Issuer
(To the SEC) (Sec. 17, SRC)
Every issuer shall file with the SEC:
1. Annual Report within one hundred thirty-five
(135) days, after the end of the issuer‘s
fiscal year, or such other time as the SEC
may prescribe
2. Such other periodical reports for interim
fiscal periods and current reports on
significant developments of the issuer as the
SEC may prescribe as necessary to keep
current information on the operation of the
business and financial condition of the
issuer.
Note: Under this Section, ‗issuer‘ includes:
1. An issuer which has sold a class of its
securities pursuant to a registration under
section 12 hereof.
BUT the requirement shall be suspended for
any fiscal year after the year such
registration became effective if such issuer,
as of the first day of any such fiscal year,
has less than one hundred (100) holder of
such class of securities or such other
number as the SEC shall prescribe and it
notifies the SEC of such;
2. An issuer with a class of securities listed for
trading on an Exchange; and
3. An issuer with assets of at least Fifty million
pesos (50,000,000.00) or such other
amount as the SEC shall prescribe, and
having two hundred (200) or more holders
each holding at least one hundred (100)
share of a class of its equity securities.
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The obligation of such issuer to file report shall
be terminated ninety (90) days after notification
to the SEC by the issuer that the number of its
holders holding at least one hundred (100)
shares is reduced to less than one hundred
(100).
Disclosure by the Issuer (To the equity
holders)
An annual report shall be furnished by every
issuer which has a class of equity securities
Disclosure by Equity Holders
Any person who acquires directly or indirectly
the beneficial ownership of more than five of per
centum (5%) of such class or in excess of such
lesser per centum as the SEC by rule may
prescribe, shall, within ten (10) days after such
acquisition or such reasonable time as fixed by
the SEC, submit to: (1) the issuer of the
securities; (2) to the Exchange where the
security is traded; and (3) to the SEC, the
following information:
1. The personal background, identity,
residence, and citizenship of, and the
nature of such beneficial ownership by,
such person and all other persons by whom
or on whose behalf the purchases are
effected; in the event the beneficial owner
is a juridical person, the line of business of
the beneficial owner shall also be reported;
2. If the purpose of the purchases or
prospective purchases is to acquire control
of the business of the issuer of the
securities, any plans or proposals which
such persons may have that will effect a
major change in its business or corporate
structure;
3. The number of shares of such security
which are beneficially owned, and the
number of shares concerning which there is
a right to acquire, directly or indirectly, by;
(i) such person, and (ii) each associate of
such person, giving the background,
identity, residence, and citizenship of each
such associate; and
4. Information as to any contracts,
arrangements, or understanding with any
person with respect to any securities of the
190 Center for Legal Education and Research
issuer including but not limited2018
to transfer,
joint ventures, loan or option
arrangements, puts or call guarantees or
division of losses or profits, or proxies
naming the persons with whom such
contracts, arrangements, or understanding
have been entered into, and giving the
details thereof.
Note: If it appears to the SEC that securities
were acquired by person in the ordinary course
of his business and were not acquired for the
purpose of and do not have the effect of
changing or influencing the control of the issuer
nor in connection with any transaction having
such purpose or effect it may permit any person
to file in lieu of the statement required, a notice
stating:
1. The name of such person;
2. The shares of any equity securities which
are owned by him;
3. The date of their acquisition; and
4. Such other information as the commission
may specify.
DISCLOSURE BY INSIDER
An insider has the duty to disclose material
information with respect to the issuer or the
security that is not generally available to the
public.
A beneficial owner of 10% of a public company
becomes a ―principal shareholder‖ required to
disclose his interest to the SEC, the company,
and the Philippine Stock Exchange (if the
company is listed there). (Sec. 23, SRC)
VI. BANKING
A. THE NEW CENTRAL BANK ACT (Republic
Act [R.A.] No. 7653, as amended by R.A.
11211)
Bangko Sentral ng Pilipinas (Bangko
Sentral)
Bangko Sentral is a body corporate which serves
as an independent central monetary authority of
the State. (Sec. 2, New Central Bank Act [NCBA])
 Purple Notes
Bangko Sentral is the government agency
charged with the responsibility of administering
the monetary, banking and credit system of the
country and is granted the power of supervision
and examination over banks and non-bank
financial institutions performing quasi-banking
functions. (Busuego vs. CA, G.R. No. 95326, March
11, 1999)
STATE POLICIES
The State shall maintain a central monetary
authority, which shall enjoy fiscal and
administrative autonomy while being a
government-owned corporation, and function
and operate as an independent and accountable
body corporate in the discharge of mandated
responsibilities concerning money, banking
and credit. (Sec. 1, NCBA)
CREATION OF THE BANGKO SENTRAL
The capital of Bangko Sentral shall be Two
hundred billion pesos (P200,000,000,000) fully
subscribed by the Government of the Republic
of the Philippines (Government): provided, that
the increase in capitalization shall be funded
solely from the declared dividends of the Bangko
Sentral in favor of the National Government.
Any and all declared dividends of the Bangko
Sentral in favor of the National Government shall
be deposited in a special account in the General
Fund, and earmarked for the payment of
Bangko Sentral‘s increase in capitalization. Such
payment shall be released immediately and shall
continue until the increase in capitalization has
been fully paid. (Sec. 2, NCBA)
RESPONSIBILITY AND PRIMARY
OBJECTIVE
The Bangko Sentral has the following
responsibilities:
1. To provide policy directions in the areas of
money, banking, and credit;
2. To supervise bank operations and exercise
such regulatory and examination powers as
provided by the NCBA and other pertinent
laws over the quasi-banking operations of
non-bank financial institutions.
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Mercantile Law
3. To exercise regulatory and examination
powers over money service businesses,
credit granting businesses, and payment
system operators. (Sec. 3, NCBA)
The Bangko Sentral has the following primary
objectives:
1. To maintain price stability conducive to a
balance and sustainable growth of the
economy and employment; and
2. To promote and maintain monetary stability
and convertibility of the peso.
The Bangko Sentral shall closely work with the
National Government, including, but not limited
to, the Department of Finance, Securities and
Exchange Commission, the Insurance
Commission, and the Philippine Deposit
Insurance Corporation. It shall oversee the
payment and settlement systems in the
Philippines, including critical financial market
infrastructures, in order to promote sound and
prudent practices consistent with the
maintenance of financial stability. In the
attainment of its objectives, the Bangko Sentral
shall promote broad and convenient access to
high quality financial services and consider the
interest of the general public. (Sec. 3, NCBA)
CORPORATE POWERS
The Bangko Sentral is authorized to:
1. Adopt, alter, and use a corporate seal which
shall be judicially noticed;
2. Enter into contracts;
3. Lease or own real and personal property, to
sell or otherwise dispose of the same;
4. Sue and be sued;
5. Do and perform any and all things that may
be necessary or proper to carry out the
purposes of the NCBA;
6. Acquire and hold such assets and incur such
liabilities in connection with its operations
authorized by the provisions of the NCBA, or
as are essential to the proper conduct of
such operations; and
7. Compromise, condone or release, in whole
or in part, any claim of or settled liability to
the Bangko Sentral, regardless of the
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Mercantile Law
amount involved, under such terms and
conditions as may be prescribed by the
Monetary Board. (Sec. 5, NCBA)
OPERATIONS OF THE BANGKO SENTRAL
(Art. IV, NCBA):
Authority to Obtain Data
The Bangko Sentral shall have the authority to
require from any person or entity, including
government offices and instrumentalities, or
government -owned or controlled corporations,
any data, for statistical and policy development
purposes in relation to the proper discharge of
its functions and responsibilities. (Sec. 23, NCBA)
Note: The disaggregated data gathered are
subject to prevailing confidentiality laws.
Power to issue subpoena:
The Bangko Sentral, through the Governor or in
his absence, a duly authorized representative
shall have the power to issue subpoena for the
production of books and records for the
aforesaid purpose. Those who refuse the
subpoena without justifiable cause, or who
refuse to supply the Bangko Sentral with data
required, shall be subject to punishment for
contempt in accordance with the provisions of
the Rules of Court.
Authority to require data from banks:
The authority of the Bangko Sentral to require
data from banks shall continue to be exercised
pursuant to its supervisory powers set forth in
this Act and other applicable laws.
Data, other than those gathered from
banks, shall not be made available to
person or entity outside Bangko Sentral:
Data on individual and firms, other than banks,
gathered by the Bangko Sentral shall not be
made available to any person or entity outside
of the Bangko Sentral whether public or private
except under order of the court or under such
conditions as may be prescribed by the
Monetary Board: Provided, however, That the
collective data on firms may be released to
interested persons or entities.
192 Center for Legal Education and Research
Note: In the case of data on 2018 banks, the
provisions of Section 27 of the NCBA shall apply.
Supervision and Examination
The Bangko Sentral shall have:
 Supervision over, and conduct regular or
special examinations of banking institutions
and quasi-banks, including their
subsidiaries and affiliates engaged in allied
activities.
 Regulatory authority over, and conduct
regular or special examinations, of entities
which under the NCBA or by special laws
are subject to its jurisdiction. (Sec. 25,
NCBA)
Subsidiary – a corporation more than fifty
percent (50%) of the voting stock of which is
directly or indirectly owned, controlled or held
with power to vote by a bank or quasi-bank.
(Ibid.)
Affiliate – a corporation the voting stock of
which, to the extent of fifty percent (50%) or
less, is owned by a bank or quasi-bank or which
is related or linked directly or indirectly to such
institution or intermediary through common
stockholders or such other factors as may be
determined by the Monetary Board. (Ibid.)
Mechanism for issues arising from bank
examinations:
The Bangko Sentral shall establish a mechanism
for issues arising from bank examinations. It
shall be independent and reports directly to the
Monetary Board, without prejudice to the
authority of the Bangko Sentral and its Monetary
Board to take enforcement and supervisory
actions against supervised entities. (Sec 25,
NCBA)
Authority to administer oaths and to
compel presentation of documents:
The department heads and the examiners of the
supervising and/or examining departments are
authorized:
 Purple Notes
1. To administer oaths to any director, officer
or employee of any institution under their
respective supervision or subject to their
examination, and
2. To compel the presentation of all books,
documents, paper or records necessary
their judgment to ascertain facts relative to
the condition of any institution as well as
the books and records of persons and
entities relative to or in connections with
the operations, activities or transactions of
the institution under examination. (Ibid.)
Rule on issuance of restraining or
injunction:
General Rule: No restraining order or
injunction shall be issued by the court enjoining
the Bangko Sentral from examining any institute
subject to supervision or examination by the
Bangko Sentral.
Exception: There is convincing proof that the
action of the Bangko Sentral is plainly arbitrary
and made in bad faith and the petitioner or
plaintiff files with the clerk or judge in which the
action is pending, a bond executed in favor of
the Bangko Sentral, in an amount to be fixed by
the court. (Ibid.)
Bank Deposits and Investments
Any director, officer or stockholder shall be
required by the lending bank to waive the
secrecy of his deposits of whatever nature in all
banks in the Philippines when he, together with
his related interest, contracts a loan or any form
of accommodation, from:
1. his bank;
2. a bank which both his bank and the lending
bank are subsidiaries; or
3. a bank in which a controlling proportion of
the share is owned by the same interest
that owns a controlling proportion of the
shares of his bank, in excess of 5% of the
capital and surplus of the bank or the
maximum amount permitted by law,
whichever is lower. (Sec. 26, NCBA)
Note: Any information obtained from an
examination of his deposits shall be held strictly
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Mercantile Law
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. (Ibid.)
Prohibitions
Personnel of the Bangko Sentral are prohibited
from:
1. Being an officer, director, lawyer or agent,
employee, consultant or stockholder,
directly or indirectly, of any institution
subject to supervision or examination by
the Bangko Sentral, except non-stock
savings and loan associations and provident
funds exclusive for employees of the
Bangko Sentral, and except as otherwise
provided in the NCBA;
2. Directly or indirectly requesting or receiving
any gift, present or pecuniary or material
benefit for himself or another, from any
institution subject to supervision or
examination by the Bangko Sentral;
3. Revealing in any manner, except under
orders of the court, the Congress or any
government office or agency authorized by
law, or under such conditions as may be
prescribed by the Monetary Board or the
Governor of the Bangko Sentral, or to any
person authorized by either of them, in
writing, to receive such information; and
4. Borrowing from any institution subject to
supervision or examination by the Bangko
Sentral unless said borrowing is transacted
on an arm‘s length basis, fully disclosed to
the Monetary Board, and shall be subject to
rules and regulations as the Monetary
Board may prescribe. (Sec 27, NCBA)
Examination and Fees
The supervising and examining department
head, personally or by deputy, shall examine the
operations of every bank and quasi-bank,
including their subsidiaries and affiliates
engaged in allied activities, and other entities
which under the NCBA or special laws are
subject to Bangko Sentral supervision, in
accordance with the guidelines set by the
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Mercantile Law
Monetary Board taking into consideration sound
and prudent practices, provided that:
1. There shall be an interval of at least twelve
(12) months between regular examinations;
and
2. By an affirmative vote of at least five (5)
members of the Monetary Board, a special
examination may be authorized, if the
circumstances warrant. (Sec 28, NCBA)
The institution concerned shall afford to the
head of the appropriate supervising and
examining departments and to his authorized
deputies‘ full opportunity to:
1. Examine its books and records, cash and
assets and general condition; and
2. Review its systems and procedures at any
time during business hours when requested
to do so by the Bangko Sentral. (Ibid.)
Note: None of the reports and other papers
relative to such examinations shall be open to
inspection by the public.
Exceptions: Such publicity is incidental to the
proceedings authorized or is necessary for the
prosecution of violations in connection with the
business of such institutions. (Ibid.)
Payment of annual supervision fee:
Supervised institutions shall pay the Bangko
Sentral, not later than May 31 of each year, an
annual supervision fee as may be prescribed by
the Monetary Board. The Monetary Board shall
consider costs of supervision. (Ibid.)
MONETARY BOARD; POWERS AND
FUNCTIONS
The powers and functions of the Bangko Sentral
shall be exercised by the Bangko Sentral
Monetary Board (Monetary Board), composed of
seven (7) members appointed by the President
of the Philippines for a term of six (6) years.
The seven (7) members are:
1. the Governor of the Bangko Sentral, who
shall be the Chairman of the Monetary
194 Center for Legal Education and Research
Board. Whenever he is unable2018 to attend a
meeting of the Board, he shall designate a
Deputy Governor to act as his alternate. In
such event, the Monetary Board shall
designate one of its members as acting
Chairman;
2. a member of the Cabinet to be designated
by the President of the Philippines.
Whenever the designated Cabinet Member
is unable to attend a meeting of the Board,
he shall designate an Undersecretary in his
Department to attend as his alternate; and
3. five (5) members who shall come from the
private sector, all of whom shall serve full-
time: Provided, however, That of the
members first appointed under the
provisions of this subsection, three (3) shall
have a term of six (6) years, and the other
two (2), three (3) years.
No member of the Monetary Board may be
reappointed more than once. (Sec. 6, NCBA)
Powers of the Monetary Board:
1. Issue rules and regulations necessary for
the effective discharge of responsibilities
and powers of the Monetary Board and
Bangko Sentral;
2. Direct the management, operations, and
administration of the Bangko Sentral;
3. Establish a human resource management
system in the Bangko Sentral;
4. Adopt an annual budget for and authorize
such expenditures by the Bangko Sentral as
are in the interest of the effective
administration and operations thereof;
5. Indemnify its members and other officials of
the Bangko Sentral for expenses and costs
in connection with any civil or criminal
action, suit or proceedings to which he is a
party by reason of the performance of his
functions or duties, unless he is finally
adjudged in such action or proceeding to be
liable for willful violation of the NCBA, or
performed in evident bad faith or with gross
negligence (Sec. 15, NCBA);
6. Authorize entities or persons to engage in
money service businesses (Sec. 3, NCBA);
7. Assess price developments and outlook and
use its policy instruments to attain and
maintain price stability (Sec. 61, NCBA);
 Purple Notes
8. Issue subpoena, to sue for contempt those
refusing to obey the subpoena without
justifiable reason, to administer oaths and
compel presentation of books, records and
others, needed in its examination, to impose
fines and other sanctions and to issue cease
and desist order. (UCPB vs. E. Ganzon, Inc.,
G.R. Nos. 168859 and 168897, June 30, 2009)
Currency, Monetary and Stabilization
Functions of the Bangko Sentral
Money functions:
The Bangko Sentral shall have the sole power
and authority to issue currency, within the
territory of the Philippines. No other person or
entity, public or private, may put into circulation
notes, coins or any other object or document
which, in the opinion of the Monetary Board,
might circulate as currency, nor reproduce or
imitate the facsimiles of Bangko Sentral notes
without prior authority from the Bangko Sentral.
(Sec. 50, NCBA)
Powers regarding money function:
1. The Monetary Board may issue such
regulations as it may deem advisable in
order to prevent the:
a. circulation of foreign currency or of
currency substitutes; and
b. reproduction of facsimiles of Bangko
Sentral notes.
2. The Bangko Sentral shall have the authority
to investigate, make arrests, conduct
searches and seizures in accordance with
law, for the purpose of maintaining the
integrity of the currency. (Sec. 50, NCBA)
Domestic Monetary Stabilization
The Monetary Board shall regularly assess price
developments and outlook and, based on its
analysis and evaluation of inflationary pressures,
use its policy instruments to attain and maintain
price stability. (Sec. 61, NCBA)
Supervisory Function of the Bangko
Sentral
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Mercantile Law
Supervisory Powers:
The Bangko Sentral shall have supervision over
the operations of banks and exercise such
regulatory and examination powers as provided
in the NCBA and other pertinent laws over the
quasi-banking operations of non-bank financial
institutions. It shall likewise exercise regulatory
and examination powers over money service
businesses, credit granting businesses, and
payment system operators. (Sec. 3, NCBA)
The Bangko Sentral shall have supervision over,
and conduct regular or special examinations of
banking institutions and quasi-banks, including
their subsidiaries and affiliates engaged in allied
activities. (Sec. 25, NCBA)
Authority to approve transfer of shares:
Transfers or acquisitions, or a series thereof, of
at least ten percent (10%) of the voting shares
in banks or quasi-banks shall require the prior
approval of the Bangko Sentral. The selling or
conveying stockholder shall submit such transfer
or acquisition for approval by the Bangko Sentral
within such period as may be prescribed by the
Monetary Board. (Sec. 25-A, NCBA)
HOW THE BANGKO SENTRAL HANDLES
BANKS IN DISTRESS
Whenever a bank is in distress, whether
seriously or otherwise, as in where it is having
liquidity problems – the Banko Sentral ng
Pilipinas (BSP) may perform any of the
following:
1. Grant emergency loans to the bank;
2. Appoint a Conservator; and
3. Appoint a Receiver and order the liquidation
of the bank.
Note: The grounds for receivership include
cases when a bank is not in financial distress,
e.g. bank is being operated in a fraudulent
manner. (Aquino, Essentials of Credit Transactions
and Banking Laws, 2015, p. 783)
1. Conservatorship
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Mercantile Law
Appointment of Conservator:
Whenever, on the basis of a report submitted by
the appropriate supervising or examining
department, the Monetary Board finds that a
bank or a quasi-bank is in a state of continuing
inability or unwillingness to maintain a condition
of liquidity deemed adequate to protect the
interest of depositors and creditors, the
Monetary Board may appoint a conservator with
such powers as the Monetary Board shall deem
necessary. (Sec. 29, NCBA)
Powers of Conservator:
1. To take charge of the assets, liabilities, and
the management thereof;
2. To reorganize the management;
3. To collect all monies and debts due said
institution; and
4. To exercise all powers necessary to restore
its viability. (Sec. 29, NCBA)
General Rule: The conservator shall have the
power to overrule or revoke the actions of the
previous management and board of directors of
the bank or quasi-bank. (Sec. 29, NCBA)
Exception:
While admittedly, the Central Bank law gives
vast and far-reaching powers to the conservator
of a bank, it must be pointed out that such
powers must be related to the preservation of
the assets of the bank, the reorganization of the
management thereof and the restoration of) its
viability. Such powers, enormous and extensive
as they are, cannot extend to the post-
facto repudiation of perfected transactions,
otherwise they would infringe against the non-
impairment clause of the Constitution. (First
Philippine International Bank vs. CA, G.R. No. 115849,
January 24, 1996)
Qualifications:
The conservator should be competent and
knowledgeable in bank operations and
management. (Sec. 29, NCBA)
Duration: The conservatorship shall not exceed
1 year. (Sec. 29, NCBA)
196 Center for Legal Education and Research
2018
Remunerations:
The conservator shall receive remuneration to
be fixed by the Monetary Board in an amount
not to exceed two-thirds (2/3) of the salary of
the president of the institution in one (1) year,
payable in twelve (12) equal monthly payments:
Provided: If at any time within the one-year
period, the conservatorship is terminated on the
ground that the institution can operate on its
own, the conservator shall receive the balance
of the remuneration which he would have
received up to the end of the year; but if the
conservatorship is terminated on other grounds,
the conservator shall not be entitled to such
remaining balance. (Sec. 29, New NCBA)
Termination:
The Monetary Board shall terminate the
conservatorship when:
1. It is satisfied that the institution can
continue to operate on its own and the
conservatorship is no longer necessary; and
On the basis of the report of the
conservator or of its own findings, the
Monetary Board determines 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 (Proceedings in
Receivership and Liquidation) shall apply.
(Sec. 30, NCBA).
2. Closure
Grounds for closure: Bank or a Quasi-bank
1. Notice to Bangko Sentral or public
announcement of a unilateral closure (Sec.
30, NCBA);
2. Being dormant for at least 60 days or
suspension of payment of deposit/deposit
substitute liabilities (Sec. 30, NCBA);
3. Cash Flow test - Inability to pay liabilities as
they become due in the ordinary course of
business (Sec. 30, NCBA);
 Purple Notes
4. Balance sheet test – Insufficiency of
realizable assets to meet its liabilities (Sec.
30, NCBA);
5. Inability to continue business without
involving probable losses to its depositors
and creditors (Sec. 30, NCBA);
6. Willful violation of a cease and desist order
under Section 37 of the NCBA that has
become final, involving acts or transactions
which amount to fraud or a dissipation of
the assets (Sec. 30, NCBA);
7. Notification to the BSP or public
announcement of a bank holiday (Sec. 53,
General Banking Law[GBL]);
8. Suspension of payment of its deposit
liabilities continuously for more than 30 days
(Sec. 53, GBL); and
9. Persisting in conducting its business in an
unsafe or unsound manner (Sec. 56, GBL)
“Close Now – Hear Later” Doctrine
No prior hearing is necessary in appointing a
receiver. Whether a rural bank's continuance in
business would involve probable loss to its
clients or creditors and that it cannot resume
business with safety, is a matter of appreciation
and judgment that the law entrusts primarily to
the Monetary Board. Equally apparent is that if
the rural bank affected is in the condition
previously adverted to, every minute of delay in
securing its assets from dissipation inevitably
increases the danger to the creditors. For this
reason, the statute has provided for a
subsequent judicial review of the Monetary
Board, in lieu of a previous hearing. (Rural Bank
of Lucena, Inc. vs. Arca, GR No. L-21146, September
20, 1965)
The Monetary Board may summarily and without
need for prior hearing, immediately implement
its resolution prohibiting a banking institution to
do business in the Philippines and, thereafter,
appoint the PDIC as receiver. The procedure
for the involuntary closure of a bank is
summary and expeditious in nature.
(Aquino, Essentials of Credit Transactions and
Banking Laws, 2015, p. 794-795, citing Vivas vs. The
Monetary Board, G.R. No. 191424, August 7, 2013)
Q: May the Monetary Board summarily
place a bank under receivership without
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Mercantile Law
prior notice and hearing? What is the
“Close Now Hear Later Scheme?” Is this a
violation of due process?
A: Yes. Under the ―Close Now Hear Later
Scheme,‖ the Monetary Board, in cases of
existence of grounds for receivership, may
summarily and without need for prior hearing
forbid the institution from doing business in the
Philippines and designate the Philippine Deposit
Insurance Corporation as receiver of the banking
institution.
There is no violation of due process since
―Closure Now – Hear Later Scheme‖ is grounded
on practical and legal considerations to prevent
unwarranted dissipation of the bank‘s assets and
as a valid exercise of police power to protect the
depositors, creditors, stockholders, and the
general public. (Central Bank vs. CA, G.R. No.
76118, March 30, 1993)
The "close now, hear later" doctrine has already
been justified as a measure for the protection of
the public interest. Swift 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 taken by the government against
distressed and mismanaged banks, public faith
in the banking system is certain to deteriorate to
the prejudice of the national economy itself, not
to mention the losses suffered by the bank
depositors, creditors, and stockholders, who all
deserve the protection of the government. (Vivas
vs. Monetary Board of the Bangko Sentral ng
Pilipinas, G.R. No. 191424, August 7, 2013)
Q: Is it necessary to secure tax clearance
from the BIR in compliance with the Tax
Code before a bank can be closed or
placed under liquidation?
A: No. Section 52(C) of the Tax Code of 1997 is
not applicable to banks ordered placed under
liquidation by the Monetary Board, and a tax
clearance is not a prerequisite to the approval of
the project of distribution of the assets of a
bank under liquidation by the PDIC. The reasons
are given below.
First, Section 52(C) of the Tax Code of 1997
pertains only to a regulation of the relationship
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Mercantile Law
between the SEC and the BIR with respect to
corporations contemplating dissolution or
reorganization. On the other hand, banks under
liquidation by the PDIC as ordered by the
Monetary Board constitute a special case
governed by the special rules and procedures
provided under Section 30 of the New Central
Bank Act, which does not require that a tax
clearance be secured from the BIR. Section
52(C) of the Tax Code of 1997 and the BIR-SEC
Regulations No. 120 regulate the relations only
as between the SEC and the BIR, making a
certificate of tax clearance a prior requirement
before the SEC could approve the dissolution of
a corporation.
Second, only a final tax return is required to
satisfy the interest of the BIR in the liquidation
of a closed bank, which is the determination of
the tax liabilities of a bank under liquidation by
the PDIC. In view of the timeline of the
liquidation proceedings under Section 30 of the
New Central Bank Act, it is unreasonable for the
liquidation court to require that a tax clearance
be first secured as a condition for the approval
of project of distribution of a bank under
liquidation. (PDIC vs. BIR, G.R. No. 172892, June
13, 2013)
3. Receivership
Q: Who is a receiver?
A: A receiver is a person who is a temporary
caretaker of the property for the court or agency
that appointed the receiver. (Aquino, Essentials of
Credit Transactions and Banking Laws, 2015, p.786)
Authority to appoint receiver:
The Monetary Board may summarily and without
need for prior hearing forbid the institution from
doing business in the Philippines and designate
the Philippine Deposit Insurance Corporation
(PDIC) as receiver in the case of banks and
direct the PDIC to proceed with the liquidation
of the closed bank. (Sec. 30, NCBA)
Grounds for Receivership:
198 Center for Legal Education and Research
Whenever, upon report of the head 2018of the
supervising or examining department, the
Monetary Board finds that a bank or quasi-bank:
1. Has notified the Bangko Sentral or publicly
announces a unilateral closure;
2. Has been dormant for at least 60 days or in
any manner has suspended the payment of
deposit/deposit substitute liabilities;
3. Is unable to pay its liabilities as they
become due in the ordinary course of
business: Provided, that this shall not
include inability to pay caused by
extraordinary demands induced by financial
panic in the banking community;
4. Has insufficient realizable assets, as
determined by the Bangko Sentral, to meet
its liabilities; or
5. Cannot continue in business without
involving probable losses to its depositors or
creditors; or
6. 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.
In these cases, the Monetary Board may
summarily and without need for prior hearing
forbid the institution from doing business in the
Philippines and designate the PDIC as receiver
of the banking institution. (Sec. 30, NCBA)
Q: Who may be designated as receiver?
A: For Banks: Philippine Deposit Insurance
Corporation (PDIC). (Sec. 30, NCBA)
For quasi-banks and non-stock savings
and loan associations: Any person of
recognized competence in banking, credit or
finance. (Sec. 30, NCBA)
Jurisdiction of Monetary Board
Regular courts do not have jurisdiction to hear
and decide cases to place the bank under
receivership. It is the Monetary board that
exercises exclusive jurisdiction over proceedings
for receivership of banks. (Aquino, Essentials of
Credit Transactions and Banking Laws, 2015, p. 786)
 Purple Notes
Important: Actions of the Monetary Board
taken under Section 29 or 30 of the New Central
Bank Act shall be final and executory and may
not be restrained or set aside by the court
except on a petition for certiorari. A petition
for prohibition is not a proper remedy. (Vivas vs.
The Monetary Board, G.R. No. 191424, August 7,
2013)
4. Liquidation
Liquidation connotes a winding up or settling
with the creditors. It is the winding up of the
corporation so that assets are distributed to
those entitled to receive them. It is the process
of reducing assets to cash, discharging liabilities
and dividing surplus or loss. (Philippine Veterans
Bank Employees Union vs. Vega, G.R. No. 105364,
June 28, 2001)
Whenever, upon report of the head of the
supervising or examining department, the
Monetary Board finds that a bank or quasi-bank:
1. Has notified the Bangko Sentral or publicly
announces a unilateral closure;
Mercantile Law
2. Has been dormant for at least 60 days or in
any manner has suspended the payment of
deposit/deposit substitute liabilities;
3. Is unable to pay its liabilities as they
become due in the ordinary course of
business: Provided, that this shall not
include inability to pay caused by
extraordinary demands induced by financial
panic in the banking community;
4. Has insufficient realizable assets, as
determined by the Bangko Sentral, to meet
its liabilities; or
5. Cannot continue in business without
involving probable losses to its depositors or
creditors; or
6. 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.
In these cases, the Monetary Board may
summarily and without need for prior hearing
forbid the institution from doing business in the
Philippines and designate the PDIC as receiver
of the banking institution, and direct the PDIC to
proceed with the liquidation of the closed bank.

Conservatorship, Closure, Receivership, Liquidation, compared:

GROUNDS
CONSERVATORSHIP CLOSURE RECEIVERSHIP LIQUIDATION*

A. A state of continuing A. Notice to the Bangko A. Notice to the Bangko A. Notice to the Bangko
inability; or Sentral or public Sentral or public Sentral or public
announcement of a announcement of a announcement of a
unilateral closure; unilateral closure; unilateral closure;
B. Unwillingness to
maintain a B. Has been dormant B. Has been dormant B. Has been dormant for
condition of for at least 60 days for at least 60 days at least 60 days or in
liquidity deemed or in any manner has or in any manner has any manner has
adequate to suspended the suspended the suspended the
protect the payment of payment of payment of
interest of deposit/deposit deposit/deposit deposit/deposit
depositors and substitute liabilities; substitute liabilities; substitute liabilities;
creditors. (Sec.
29, NCBA) C. Inability to pay C. Inability to pay its C. Inability to pay its
liabilities as they liabilities as they liabilities as they
become due in the become due in the become due in the
ordinary course of ordinary course of ordinary course of
business business business

Note: This shall not Note: This shall not Note: This shall not
include inability to include inability to include inability to

199
Bar Operations C ommissions 199
 Purple Notes
Mercantile Law
pay caused by pay caused by pay 2018 by
caused
extraordinary extraordinary extraordinary
demands induced by demands induced by demands induced by
financial panic in the financial panic in the financial panic in the
banking community; banking community; banking community;

D. Insufficiency of D. Insufficiency of D. Insufficiency of

realizable assets, as realizable assets, as realizable assets, as
determined by the determined by the determined by the
BSP, to meet BSP, to meet its BSP, to meet its
liabilities; liabilities; liabilities;

E. Cannot continue in E. Cannot continue in E. Cannot continue in

business without business without business without
involving probable involving probable involving probable
losses to its losses to its losses to its depositors
depositors or depositors or or creditors; or
creditors; or creditors; or
F. Willful violation of a
F. Willful violation of a F. Willful violation of a cease and desist order
cease and desist cease and desist under Section 37 that
order under Section order under Section has become final,
37 that has become 37 that has become involving acts or
final, involving acts final, involving acts transactions which
or transactions or transactions which amount to fraud or a
which amount to amount to fraud or a dissipation of the
fraud or a dissipation of the assets of the
dissipation of the assets of the institution. (Sec. 30,
assets of the institution. (Sec. 30, NCBA)
institution. (Sec. 30, NCBA)
NCBA)

EFFECTS

CONSERVATORSHIP CLOSURE RECEIVERSHIP LIQUIDATION

A. Banks retain their An insolvent bank that A. Juridical personality An insolvent bank that was
juridical personality. was closed by the BSP is retained; closed by the BSP shall not
B. Conservator may shall not be liable to pay be liable to pay interest on
revoke contracts interest on bank deposits B. Assets of the bank bank deposits which
that are, under which accrued during the are held in trust for accrued during the period
existing law, period when the bank is the equal benefit of when the bank is actually
deemed to be actually closed and non- all creditors, and closed and non-
defective. (First Phil. operational. (Fidelity after its insolvency, operational. (Fidelity
Intl. Bank vs. Court Savings and Mortgage one cannot obtain Savings and Mortgage
of Appeals, G.R. No. Bank vs. Cenzon, G.R. an advantage or a Bank vs. Cenzon, G.R. No.
115849, January 24, No. L-46208, April 5, preference over L-46208, April 5, 1990)
1996) 1990) another by an A bank which had been
attachment, ordered closed by the
Conversely, a execution, or monetary board retains its
conservator cannot otherwise. (Sps. juridical personality which
repudiate valid Lipana vs. Dev‘t can sue and be sued
obligations of the Bank of Rizal, G.R. through its liquidator. The
bank. (Ibid.) No. 73884, only limitation being that
September 24, the prosecution or defense
1987); of the action must be done
through the liquidator.
Otherwise, no suit for or

200 Center for Legal Education and Research

 Purple Notes
Mercantile Law
C. The bank would not against an insolvent entity
be able to do ―new would prosper. In such
business‖ i.e. to situation, banks in
grant new loans or to liquidation would lose what
accept new deposits. justly belongs to them
(Provident Savings through a mere
Bank vs. CA, G.R. No. technicality. (Manalo vs.
97218, May 17, CA, G.R. No. 141297,
1993); October 8, 2001)

D. BSP may forbid the

bank from doing
business but can still
foreclose and the
prescriptive period to
foreclose is not
tolled. (Sps. Larrobis
vs. Phil. Veterans
Bank, G.R. No.
135706, October 1,
2004)

*as amended by RA 11211

ADMINISTRATIVE SANCTIONS ON
SUPERVISED ENTITIES
The Monetary Board may, at its discretion,
impose upon any bank or quasi-bank, including
subsidiaries and affiliates, administrative
sanctions, without prejudice to the criminal
sanctions against the culpable persons provided
in Sections 34, 35, and 36 of the New Central
Bank Act, for the following acts:
1. Willful violation of its charter or by laws;
2. Willful delay in the submission of reports or
publications as required by laws, rules, and
regulations;
3. Any refusal to permit examination into the
affairs of the institution;
4. Any willful making of a false or misleading
statement to the Board or the appropriate
supervising and examining department or its
examiners;
5. Any willful failure or refusal to comply with,
or violation of, any banking law or any order,
instruction or regulation issued by the
Monetary Board, or any order, instruction or
ruling by the Governor; or
6. Any commission of irregularities, and/or
conducting business in an unsafe or unsound
manner as may be determined by the
Monetary Board. (Sec. 37, NCBA)
201
Administrative sanctions:
1. Fines in amounts as may be determined by
the Monetary Board to be appropriate, but in
no case to exceed One million pesos
(₱1,000,000) for each transactional violation
or One hundred thousand pesos (₱100,000)
per calendar day for violations of a
continuing nature, taking into consideration
the attendant circumstances.
Note: In case profit is gained or loss is
avoided as a result of the violation, a fine no
more than three (3) times the profit gained
or loss avoided may also be imposed;
2. Suspension of rediscounting privileges or
access to Bangko Sentral credit facilities;
3. Suspension of lending or foreign exchange
operations or authority to accept new
deposits or make new investments;
4. Suspension of interbank clearing privileges;
and/or
5. Suspension or revocation of quasi-banking or
other special licenses.
 Resignation or termination from office shall
not exempt such director, officer or employee
from administrative or criminal sanctions.
Bar Operations C ommissions 201
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Mercantile Law
 The Monetary Board may, whenever
warranted by circumstances, preventively
suspend any director, officer or employee of
the institution pending an investigation. (Sec.
37, NCBA)
Note: Should the case be not finally decided by
the Bangko Sentral within 120 days after the date
of suspension, the sanctioned director, officer or
employee shall be reinstated in his position.
However, if the delay in the disposition of the
case is due to the fault, negligence or petition of
the director or officer, the period of delay shall
not be counted in computing the period of
suspension.
 The administrative sanctions need not be
applied in the order of their severity. (Ibid.)
Issuance of cease and desist order:
Whether or not there is an administrative
proceeding, if the institution and/or the directors,
officers or employees concerned continue with or
otherwise persist in the commission of the
indicated practice or violation, the Monetary
Board may issue an order requiring the institution
and/or the directors, officers or employees
concerned to cease and desist from the indicated
practice or violation, and may further order that
immediate action be taken to correct the
conditions resulting from such practice or
violation. The cease and desist order shall be
immediately effective upon service on the
respondents. (Ibid.)
Opportunity to defend action:
The respondents shall be afforded an opportunity
to defend their action in a hearing before the
Monetary Board or any committee chaired by any
Monetary Board member created for the purpose,
upon request made by the respondents within
five (5) days from their receipt of the order. If no
such hearing is requested within said period, the
order shall be final. If a hearing is conducted, all
issues shall be determined on the basis of
records, after which the Monetary Board may
either reconsider or make final its order. (Ibid.)
Authority of the Governor to impose fines:
202 Center for Legal Education and Research
2018
The Governor is hereby authorized, at his
discretion, to impose upon banks and quasi-
banks, including their subsidiaries and affiliates
engaged in allied activities, and other entities
which under this Act or special laws are subject
to Bangko Sentral supervision for any failure to
comply with the requirements of law, Monetary
Board regulations and policies, and/or
instructions issued by the Monetary Board or by
the Governor, fines not in excess of One hundred
thousand pesos (₱100,000.00) for each
transactional violation or Thirty thousand pesos
(₱30,000.00) per calendar day for violations of a
continuing nature, the imposition of which shall
be final and executory until reversed, modified or
lifted by the Monetary Board on appeal. (Ibid.)
RULES ON BANK DEPOSITS AND
INVESTMENTS BY DIRECTORS, OFFICERS,
STOCKHOLDERS AND THEIR RELATED
INTERESTS
Any director, officer or stockholder shall be
required by the lending bank to waive the
secrecy of his deposits of whatever nature in all
banks in the Philippines when he, together with
his related interest, contracts a loan or any form
of accommodation, from:
1. his bank;
2. a bank which both his bank and the lending
bank are subsidiaries; or
3. a bank in which a controlling proportion of
the share is owned by the same interest that
owns a controlling proportion of the shares
of his bank, in excess of 5% of the capital
and surplus of the bank or the maximum
amount permitted by law, whichever is
lower.
Note: 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. (Sec. 26, NCBA)
SUPERVISION AND REGULATION OF BANK
OPERATIONS
 Purple Notes
Loans and Other Credit Accommodation
The rediscounts, discounts, loans and advances
which the Bangko Sentral is authorized to extend
to banking institutions shall be used to influence
the volume of credit consistent with the objective
of price stability. (Sec. 82, NCBA)
 Normal Credit Operations (Article IV (B),
R.A 7653)
Authorized types of operations:
1. Commercial credits - The Bangko Sentral
may rediscount, discount, buy and sell bills,
acceptances, promissory notes and other
credit instruments with maturities of not
more than one hundred eighty (180) days
from the date of their rediscount, discount
or acquisition by the Bangko Sentral and
resulting from transactions related to:
a. the importation, exportation, purchase or
sale of readily saleable goods and
products, or their transportation within
the Philippines; or
b. the storing of non-perishable goods and
products which are duly insured and
deposited, under conditions assuring
their preservation, in authorized bonded
warehouses or in other places approved
by the Monetary Board.
2. Production credits - The Bangko Sentral
may rediscount, discount, buy and sell bills,
acceptances, promissory notes and other
credit instruments having maturities of not
more than three hundred sixty (360) days
from the date of their rediscount, discount
or acquisition by the Bangko Sentral and
resulting from transactions related to the
production or processing of agricultural,
animal, mineral, or industrial products.
Note: The crops or products need not be
pledged to secure the documents if the original
loan granted by the Bangko Sentral is secured by
a lien or mortgage on real estate property
seventy percent (70%) of the appraised value of
203
Mercantile Law
which equals or exceeds the amount of the loan
granted.
3. Other credits - Special credit instruments
not otherwise rediscountable under the
commercial and production credits may be
eligible for rediscounting in accordance with
rules and regulations which the Bangko
Sentral shall prescribe.
4. Advances - The Bangko Sentral may grant
advances against the following kinds of
collaterals for fixed periods which, with the
exception of advances against collateral
named in clause (4) of the present
subsection, shall not exceed one hundred
eighty (180) days:
a. gold coins or bullion;
b. securities representing obligations of the
Bangko Sentral or of other domestic
institutions of recognized solvency;
c. the credit instruments to which reference
is made in commercial credits;
d. the credit instruments to which reference
is made in production credits, for periods
which shall not exceed three hundred
sixty (360) days;
e. utilized portions of advances in current
amount covered by regular overdraft
agreements related to operations
included under commercial and
production credits, and certified as to
amount and liquidity by the institution
soliciting the advance;
f. negotiable treasury bills, certificates of
indebtedness, notes and other negotiable
obligations of the Government maturing
within three (3) years from the date of
the advance; and
g. negotiable bonds issued by the
Government of the Philippines, by
Philippine provincial, city or municipal
governments, or by any Philippine
Government instrumentality, and having
maturities of not more than ten (10)
years from the date of advance.
Note: The rediscounts, discounts, loans and
advances made may not be renewed or extended
unless extraordinary circumstances fully justify
such renewal or extension. Advances made
Bar Operations C ommissions 203
 Purple Notes
Mercantile Law
against the collateral named in clauses (6) and
(7) of subsection (d) of this section may not
exceed eighty percent (80%) of the current
market value of the collateral.
 Special Credit Operation
The Bangko Sentral may extend loans and
advances to banking institutions for a period of
not more than seven (7) days without any
collateral for the purpose of providing liquidity to
the banking system in times of need. (Sec. 83,
NCBA)
 Emergency Credit Operation
In periods of national and/or local emergency or
of imminent financial panic which directly
threaten monetary and financial stability, the
Monetary Board may, by a vote of at least five
(5) of its members, authorize the Bangko Sentral
to grant extraordinary loans or advances to
banking institutions, secured by assets. (Sec. 84,
NCBA)
Note: While such loans or advances are
outstanding, the debtor institution shall not,
except upon prior authorization by the Monetary
Board, expand the total volume of its loans or
investments.
Emergency Loan or Advance during Normal
Periods:
The Monetary Board may, at its discretion,
likewise authorize the Bangko Sentral to grant
emergency loans or advances to banking
institutions, even during normal periods, for the
purpose of assisting a bank in a precarious
financial condition or under serious financial
pressures brought by unforeseen events, or
events which, though foreseeable, could not be
prevented by the bank concerned. (Ibid.)
Requirements:
1. The Monetary Board should have
ascertained that the bank is not insolvent
and has the assets to secure the advances;
2. A concurrent vote of at least five (5)
members of the Monetary Board should
have been obtained. (Ibid.)
204 Center for Legal Education and Research
2018
Manner of Release:
1. The amount of any emergency loan or
advance shall not exceed the sum of fifty
percent (50%) of total deposits and deposit
substitutes of the banking institution, and
shall be disbursed in two (2) or more
tranches.
2. The amount of the first tranche shall be
limited to twenty-five percent (25%) of the
total deposit and deposit substitutes of the
institution and shall be secured by (a)
government securities; (b) acceptable
guarantees backed up by the national
government or its securities; (c) other
unencumbered first class collaterals; and (d)
other kinds of collaterals as may be
authorized by the Monetary Board in
accordance with sound risk management
principles.
3. If as determined by the Monetary Board, the
circumstances surrounding the emergency
warrant a loan or advance greater than the
amount provided hereinabove, the amount
of the first tranche may exceed twenty-five
percent (25%) of the bank‘s total deposit
and deposit substitutes if the same is
adequately secured by any of the collaterals
set forth above as approved by the Monetary
Board, and the principal stockholders of the
institution furnish an acceptable undertaking
to indemnify and hold harmless from suit a
conservator whose appointment the
Monetary Board may find necessary at any
time.
4. Prior to the release of the first tranche, the
banking institution shall submit to the
Bangko Sentral a resolution of its board of
directors
authorizing the Bangko Sentral to evaluate
other assets of the banking institution
certified by its external auditor to be good
and available for collateral purposes should
the release of the subsequent tranche be
thereafter applied for.
5. The Monetary Board may, by a vote of at
least five (5) of its members, authorize the
 Purple Notes
release of a subsequent tranche on condition
that the principal stockholders of the
institution: (a) furnish an acceptable
undertaking to indemnify and hold harmless
from suit a conservator whose appointment
the Monetary Board may find necessary at
any time; and (b) provide acceptable
security which, in the judgment of the
Monetary Board, would be adequate to
supplement, where necessary, the assets
tendered by the banking institution to
collateralize the subsequent tranche. (Id.)
Credit Terms:
The Bangko Sentral shall collect interest and
other appropriate charges on all loans and
advances it extends, the closure, receivership or
liquidations of the debtor-institution
notwithstanding. This provision shall apply
prospectively.
The Monetary Board shall fix the interest and
rediscount rates to be charged by the Bangko
Sentral on its credit operations in accordance
with the character and term of the operation, but
after due consideration has been given to the
credit needs of the market, the composition of
the Bangko Sentral's portfolio, and the general
requirements of the national monetary policy.
Interest and rediscount rates shall be applied to
all banks of the same category uniformly and
without discrimination. (Sec. 85, NCBA)
Collaterals not subject of attachment,
execution, or any court process or
administrative restrictions:
Collaterals on loans and advances granted by the
Bangko Sentral, whether or not the interest of
the Bangko Sentral is registered, shall not be
subject to attachment, execution or any other
court
process or administrative restrictions on land use,
nor shall they be included in the property of
insolvent persons or institutions. (Sec. 88-A, NCBA)
Advances to the National Government:
The Bangko Sentral may make direct provisional
advances with or without interest to the National
Government to finance expenditures authorized
205
Mercantile Law
in its annual appropriation: Provided, That said
advances shall be repaid before the end of three
(3) months extendible by another three (3)
months as the Monetary Board may allow
following the date the National Government
received such provisional advances and shall not,
in their aggregate, exceed twenty percent (20%)
of the average annual income of the borrower for
the last three (3) preceding fiscal years. (Sec. 89,
NCBA)
Selective Regulations
The Monetary Board shall use the powers
granted to ensure that the supply, availability and
cost of money are in accord with the needs of the
Philippine economy and that bank credit is not
granted for speculative purposes prejudicial to
the national interests. Regulations on bank
operations shall be applied to all banks of the
same category, as may be defined by the
Monetary Board, uniformly and without
discrimination. (Sec. 104, NCBA)
Margin Requirements against Letters of
Credit
The Monetary Board may at any time prescribed
minimum cash margins for the opening of letters
of credit, and may relate the size of the required
margin to the nature of the financed transaction.
(Sec. 105, NCBA)
Required Security Against Bank Loans
The Monetary Board may issue regulations as
necessary to the maximum permissible maturities
of the loans and investments which the banks
may make, and the kind and amount of security
to be required against the various types of credit
operations of the banks, to promote the liquidity
and solvency of the banking system. (Sec. 106,
NCBA)
Portfolio Ceilings
The Board may set an upper limit on the amount
of loans and investments which the banks may
hold, or may place a limit on the rate of increase
of such assets within specified period of time
whenever it is advisable to prevent or check an
expansion of bank credit. (Sec. 107, NCBA)
Bar Operations C ommissions 205
 Purple Notes
Mercantile Law
Note: In no case shall the Monetary Board
establish limits which are below the value of the
loans or investments of the banks on the date on
which they are notified of such restrictions. The
restrictions shall be applied to all banks uniformly
and without discrimination. (Ibid.)
Minimum Capital Ratios
The Board may lay down:
1. minimum risk-based capital adequacy ratios
based on internationally accept standards,
and;
2. may alter said ratios whenever it deems
necessary. (Sec. 108, NCBA)
Note: The Monetary Board may require banks to
hold capital beyond the minimum requirements
commensurate to then risk profile.
RATE OF EXCHANGE
The exchange rate policy of the country shall be
determined by the Monetary Board.
In addition, the Monetary Board shall determine
the exchange rates at which the Bangko Sentral
shall buy and sell spot exchange, and establish
deviation limits from the effective exchange rate
or rates.
The Monetary Board shall similarly determine the
rates for other types of foreign exchange
transactions by the Bangko Sentral, including
purchases and sales of foreign notes and coins,
but the margins between the effective exchange
rates and the rates thus established may not
exceed the corresponding margins for spot
exchange transactions by more than the
additional costs or expenses involved in each
type of transactions. (Sec. 74, NCBA)
B. LAW ON SECRECY OF BANK DEPOSITS
(R.A. NO. 1405, AS AMENDED BY P.D. NO.
1792)
PURPOSE
1. To encourage the people in depositing their
money in banking institutions; and
206 Center for Legal Education and Research
2018
2. To discourage private hoarding so that
money may be properly utilized by banks in
granting loans to assist in the economic
development of the country. (Sec. 1, RA 1405,
as amended)
PROHIBITED ACTS
1. The examination, inquiry or looking into all
deposits of whatever nature with banks or
banking institutions in the Philippines,
including investments in bonds issued by the
Government of the Philippines, its political
subdivisions and its instrumentalities, by any
person, government official, bureau or
office. (Sec. 2, RA 1405, as amended)
2. The disclosure by any official or employees
of any banking institution to any
unauthorized person of any information
concerning said deposit. (Sec. 3, R.A. No.
1405, as amended)
Deposits, absolutely confidential in nature:
All deposits of whatever nature are considered as
absolutely confidential. (Sec. 2, R.A. No. 1405, as
amended)
DEPOSITS COVERED:
1. All deposits of whatever nature with banks or
banking institutions in the Philippines.
2. Investments in bonds issued by the
Government of the Philippines, its political
subdivisions and its instrumentalities.
3. Deposits under Trust Agreement (Ejercito vs.
Sandiganbayan, G.R. No. 157294-95, November
30, 2006)
Deposits under trust agreement, covered
by the protection of R.A. No. 1405:
 Deposits under a trust agreement are
intended not merely to remain with the
bank but to be invested by it
elsewhere. To hold that this type of
account is not protected by R.A. 1405 would
encourage private hoarding of funds that
could otherwise be invested by banks in
other ventures, contrary to the policy
behind the law. (Ejercito vs. Sandiganbayan,
G.R. No. 157294-95, November 30, 2006)
 Purple Notes
EXCEPTIONS:
1. Upon written permission of the depositor; or
2. In cases of impeachment; or
3. Upon order of a competent court in cases of
bribery or dereliction of duty of public
officials; or
4. In cases where the money deposited or
invested is the subject matter of the
litigation.
5. If authorized by the Monetary Board, if it has
reasonable ground to believe that such
account is used to defraud the bank.
6. When made by an independent auditor hired
by the bank for the exclusive use of the
bank. (Sec. 2, RA 1405, as amended);
7. Anti-graft cases (PNB vs. Gancayco, G.R. No.
L-18343, September 30, 1965);
8. Inquiry of Commissioner of BIR into bank
deposits of:
a. Decedent to determine his gross
estate.
b. Taxpayer who has filed an application for
compromise of his tax liability by reason
of financial incapacity (Sec 6 (F), NIRC).
c. Taxpayer has signed a waiver authorizing
the Commissioner or his duly authorized
representatives to inquire into the bank
deposits.
d. A specific taxpayer or tax payer‘s subject
of a request for the supply of tax
information from a foreign tax authority
pursuant to an international convention
or agreement on tax matters to which
the Philippines is a signatory or a party
of. (Sec. 3, RA 10021)
9. Garnishment of a bank deposit of a judgment
debtor does not violate Secrecy of Bank
Deposits Law (R.A. No. 1405). It was not the
intention of the lawmakers to place bank
deposits beyond the reach of execution to
satisfy a final judgment. (China Banking
Corporation vs. Ortega, G.R. No. L-34964, January
31, 1973)
10. Disclosure to the Treasurer of the Philippines
for dormant deposits for at least 10 years
under the Unclaimed Balances Act. (Sec. 2, RA
3936)
207
Mercantile Law
11. Inquiry or examination by the Anti-Money
Laundering Council upon court order in cases
of violation of R.A. No. 9160 where there is
probable cause that deposits or investments
are related to the crime or unlawful activities,
and in some instances, even without court
order when the offense of unlawful activity
involved is any of the following: (Sec. 11, RA
9160)
a. Kidnapping for ransom under the
Revised Penal Code, as amended
b. Sections 4, 5, 7, 8, 9, 10, 12, 13, 14,
15 and 16 of the Comprehensive
Dangerous Drugs Act of 2002
c. Hi-jacking and other violations under
RA 6235
d. Destructive arson and murder under
the Revised Penal Code, as amended,
including those perpetrated by
terrorists against non-combatant
persons and similar targets.
Q: Sally is the cashier of a corporation and
during her employment as a cashier, she
received checks from customers and
endorsed the checks and deposited the
same to her personal account in Security
Bank. A complaint for qualified theft was
filed against Sally alleging that she took,
stole and carried away cash money. The
trial court issued subpoena duces tecum
/ad testificandum against managers of the
bank. A representative of Security Bank
gave testimony which sought to prove that
as cashier, Sally was able to endorse the
checks and to deposit the same to her bank
account. Sally questioned the admissibility
of testimony of the bank representative
since the information charged her of
qualified theft of cash money and not theft
of checks. She contended that taking such
testimony as evidence against her is a
violation of R.A. No. 1405. If the testimony
of the bank representative is admitted, will
there be violation of R.A. No. 1405?
A: Yes, the testimony and any inquiry concerning
the transactions will be inadmissible as evidence
for violating R.A. No. 1405 because such
Bar Operations C ommissions 207
 Purple Notes
Mercantile Law
information concerning respondent‘s account do
not appear to have any logical and reasonable
connection to the prosecution of respondent for
committing the crime of qualified theft.
In the criminal Information filed with the trial
court, respondent, unqualifiedly and in plain
language, was charged with qualified theft by
abusing petitioner‘s trust and confidence and
stealing cash in the amount of P1,534,135.50.
The said Information makes no factual allegation
that in some material way involves the checks
subject of the testimonial and documentary
evidence sought to be suppressed. Neither do the
allegations in said Information make mention of
the supposed bank account in which the funds
represented by the checks have allegedly been
kept.
Without needlessly expanding the scope of what
is plainly alleged in the Information, the subject
matter of the action in this case is the money
amounting to P1,534,135.50 alleged to have
been stolen by respondent, and not the money
equivalent of the checks which are sought to be
admitted in evidence.
It comes clear that the admission of testimonial
and documentary evidence relative to
respondent‘s Security Bank account serves no
other purpose than to establish the existence of
such account, its nature and the amount kept in
it. It constitutes an attempt by the prosecution at
an impermissible inquiry into a bank deposit
account the privacy and confidentiality of which is
protected by law. (BSB Group, Inc. vs. Go, G.R. No.
168644, February 16, 2010)
GARNISHMENT OF DEPOSITS, INCLUDING
FOREIGN DEPOSITS
The prohibition against examination of or inquiry
into a bank deposit under Republic Act 1405 does
not preclude its being garnished to insure
satisfaction of a judgment. Thus, garnishment of
a bank deposit of a judgment debtor does not
violate RA 1405. Its purpose is merely to secure
information as to whether or not the defendant
had a deposit in said bank, only for purposes of
garnishment, so that the bank would hold the
same intact. It was not the intention of the
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lawmakers to place bank deposits beyond the
reach of execution to satisfy a final judgment.
(China Banking Corporation vs. Ortega, G.R. No. L-
34964, January 31, 1973)
Garnishment of Foreign Currency Deposits:
General rule: 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, RA
6426)
Exception: The application of Section 8 of R.A.
6426 depends on the extent of its justice. The
garnishment of a foreign currency deposit should
be allowed to prevent injustice and for equitable
grounds, otherwise, it would negate Article 10 of
the New Civil Code which provides that in case
of doubt in the interpretation or application of
laws, it is presumed that the lawmaking body
intended right and justice to prevail. (Salvacion
vs. Central Bank of the Philippines, G.R. No. 94723,
August 21, 1997)
PENALTIES FOR VIOLATION
Violation of the secrecy of bank deposits will
subject the offender upon conviction to:
1. Imprisonment of not more than five (5)
years; or
2. Fine not more than P20,000 or
3. Both, in the discretion of the court. (Sec. 5, RA
1405, as amended)
C. GENERAL BANKING LAW OF 2000 (R.A.
NO. 8791)
DEFINITION AND CLASSIFICATION OF
BANKS
Banks, defined:
Banks refer to entities engaged in the lending of
funds obtained in the form of deposits. (Sec. 3.1,
General Banking Law [GBL])
How are banks classified:
1. Universal bank
2. Commercial banks
 Purple Notes
3. Thrift banks
a. Saving and mortgage banks
b. Stock saving and loan associations;
c. Private development banks
4. Rural banks
5. Cooperative banks
6. Islamic banks
7. Other classification of banks as may be
determined by the Monetary Board (Sec. 3.2,
GBL)
Universal banks, defined:
Universal banks are those that have the authority
to exercise, in addition to the powers of a
commercial bank, powers of investment house
and the power to invest in non-allied enterprises.
(Sec. 23, GBL)
Note: An Investment House is any enterprise
which engages or purports to engage, whether
regularly or on an isolated basis, in the
underwriting of securities of another person or
enterprise, including securities of the Government
and its instrumentalities. (Sec. 2a, IRR of P.D. 129)
Commercial banks, defined:
Commercial Banks are those that are given, in
addition to the general power incident to a
corporation, all such powers as may be necessary
to carry on the business of commercial banking.
It has the following powers (Sec. 29, GBL, BSP
Circular No. 271 Series of 2001):
Powers of a commercial bank:
1. Accepting drafts
2. Issuing letters of credit
3. Discounting and negotiating promissory
notes, drafts, bills of exchange, and other
evidences of debt
4. Accepting or creating demand deposits
5. Receiving other types of deposits and
deposit substitutes
6. Buying and selling foreign exchange and
gold or silver bullion
7. Acquiring marketable bonds and other debt
securities
8. Extending credit, subject to such rules as the
Monetary Board may promulgate. (Ibid.)
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Mercantile Law
Thrift banks, governed by Thrift Banks Act
These are savings and mortgage banks, stock
savings and loan associations, and private
development banks, which are primarily
governed by the Thrift Banks Act (RA 7906).
Rural banks, defined:
These banks are designed to make needed credit
available and readily accessible in the rural areas
on reasonable terms. (Sec. 1, RA 7353)
Cooperative banks, defined:
Banks which are organized by, the majority
shares of which is owned and controlled by,
cooperatives primarily to provide financial and
credit services to cooperatives. Include
cooperative rural banks. (Sec. 102, RA 6938).
Islamic banks, defined:
 These banks are known as the Al-Amanah
Islamic Investment Bank of the Philippines
(Sec. 2, RA 6848).
 Its primary purpose is to promote and
accelerate the socio-economic development
of the Autonomous Region by performing
banking, financing and investment operations
and to establish and participate in
agricultural, commercial and industrial
ventures based on the Islamic concept of
banking. (Sec. 2, RA 6848).
DISTINCTION OF BANKS FROM QUASI-
BANKS AND TRUST ENTITIES
Quasi-Banks:
These are entities engaged in the borrowing of
funds through the issuance, endorsement or
assignment with recourse or acceptance of
deposit substitutes for purposes of re-lending or
purchasing of receivables and other obligations.
(Sec. 4, GBL)
Quasi-banks do not accept deposits, unlike in the
case of banks. Moreover, funds obtained are not
insured with PDIC.
Bar Operations C ommissions 209
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Mercantile Law
Trust Entities:
These are entities engaged in trust business that
act as a trustee or administer any trust or hold
property in trust or on deposit for the use,
benefit, or behalf of others (Sec. 79, GBL).
A bank does not act as a trustee.
BANK POWERS AND LIABILITIES
1. Corporate Powers
a. All powers provided by the Corporation
Code, like issuance of stocks and entering
into merger or consolidation with other
corporation or banks.
b. It can only acquire real property when it
is needed for business, in settlement of
debt incurred in the course of the
business, property as may be mortgaged
to it to secure of a debt in good faith and
property it may acquire during execution
sale to satisfy judgment. Banks cannot
acquire real property in settlement of a
civil liability arising from crime.
c. A universal and commercial bank can
both invest in equity but only universal
bank is allowed to invest in equity of non-
allied enterprises. (Sec 24, 30 GBL)
2. Banking and Incidental Powers
Certificate of Authority to Register
The Security and Exchange Commission shall not
register articles of incorporation of any bank, or
any amendment thereto, unless accompanied by
a certificate of authority issued by the Monetary
Board, under it seal. Such certificate shall not be
issued unless the Monetary Board is satisfied
from the evidence submitted to it that:
a. All requirements of existing laws and
regulations to engage in the business for
which the applicant is proposed to be
incorporated have been complied with;
b. The public interest and economic conditions,
both general and local, justify the
authorization; and
210 Center for Legal Education and Research
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c. The amount of capital, the financing,
organization, direction and administration, as
well as the integrity and responsibility of the
organizers and administrators reasonably
assure the safety of deposits and the public
interest.
The Securities and Exchange Commission shall
not register the by-laws of any bank, or any
amendment thereto, unless accompanied by a
certificate of authority from the Bangko Sentral.
(Sec 14, GBL)
General powers and functions of a bank:
A commercial bank shall have, in addition to the
general powers incident to corporations, all such
powers as may be necessary to carry on the
business of commercial banking such as:
a. accepting drafts and issuing letters of credit;
b. discounting and negotiating promissory
notes, drafts, bills of exchange, and other
evidences of debt;
c. accepting or creating demand deposits;
d. receiving other types of deposits and deposit
substitutes;
e. buying and selling foreign exchange and gold
or silver bullion;
f. acquiring marketable bonds and other debt
securities;
g. extending credit, subject to such rules as the
Monetary Board may promulgate;
h. determination of bonds and other debt
securities eligible for investment, the
maturities and aggregate amount of such
investment; and
i. All other powers as may be necessary to
carry on the business of a bank. (Sec. 29, GBL)
Powers or Functions of Banks; distinctions:
1. Only universal banks and commercial banks
can create and accept demand deposits
without the separate authority from the
Monetary Board; (Sec. 33, GBL)
2. Only universal banks may act as an
investment house; (Sec. 23, GBL)
3. Generally, only universal banks and
commercial banks may be involved in quasi-
banking functions. (Sec. 6, GBL)
 Purple Notes
Basic Functions:
1. Deposit Function
Types of Deposits
a. Demand Deposit
- All liabilities of banks which are
denominated in Philippine currency and are
subject to payment in legal tender upon
demand by presentation of checks subject
to the following rules:
- Generally, only universal banks or
commercial banks can accept or create
demand deposits.
- A bank, other than a universal bank or
commercial bank cannot accept demand
deposits except upon prior approval of the
Monetary Board.
- temporary overdrawing against current
accounts shall not be allowed unless
caused by normal bank charges and other
fees incidental to handling such accounts.
- drawings against uncollected deposits are
generally prohibited.
b. Savings Account
- Banks are usually prohibited from
issuing/accepting withdrawal slips or any
other similar instruments designed to
effect withdrawals of savings deposits
without requiring the depositors
concerned to present their passbooks and
accomplishing the necessary withdrawal
slips, except for banks authorized by the
BSP to adopt the no passbook withdrawal
system.
c. Negotiable Order of Withdrawal
Accounts (NOW)
- Interest-bearing deposit accounts that
combine the payable on demand feature
of checks and investment feature of
savings account
d. Time Deposit
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Mercantile Law
- An account with fixed term. (Sundiang &
Aquino, Reviewer on Commercial Law, 2017, p.
320)
2. Loan Function
- A bank shall grant loans and other credit
accommodations only in amounts and for
the periods of time essential for the
effective completion of the operations to
be financed.
- Such grant of loans and other credit
accommodations shall be consistent with
safe and sound banking practices.
- Before granting a loan or other credit
accommodation, a bank must ascertain
that the debtor is capable of fulfilling his
commitments to the bank. (Sundiang &
Aquino, Reviewer on Commercial Law, 2017, p.
335)
DILIGENCE REQUIRED OF BANKS IN VIEW
OF FIDUCIARY NATURE OF BANKING
Degree of diligence:
General Rule: Extraordinary Diligence. The
degree of diligence required of banks, is more
than that of a good father of a family where the
fiduciary nature of their relationship with their
depositors is concerned.
The fiduciary nature of banking requires banks to
assume a degree higher than that of a good
father of a family. Section 2 of RA 8791
prescribes the statutory diligence from banks that
banks must observe high standards and
performance in servicing their depositors.
(Consolidated Bank and Trust Corp. vs. CA, G.R. No.
138569, September 11, 2003)
R.A. No. 8791, or the General Banking Law,
recognizes the vital role of banks in providing an
environment conducive to the sustained
development of the national economy and the
fiduciary nature of banking; thus, the law
requires banks to have high standards of integrity
and performance. The fiduciary nature of banking
requires banks to assume a degree of diligence
higher than that of a good father of a family.
(Metropolitan Bank and Trust Company vs. Centro
Bar Operations C ommissions 211
 Purple Notes
Mercantile Law
Development Corp. et. al., G.R. No. 180974, June 13,
2012)
It is required to treat the accounts and deposits
of these individuals with meticulous care. The
banking system has become an indispensable
institution in the modern world and plays a vital
role in the economic life of every civilized society
– banks have attained a ubiquitous presence
among the people, who have come to regard
them with respect and even gratitude and most
of all, confidence, and it is for this reason, banks
should guard against injury attributable to
negligence or bad faith on its part. (Westmont
Bank vs. Dela Rosa-Ramos, et. al., G.R. No. 160260,
October 24, 2012).
Exception: But the said ruling applies only to
cases where banks act under their fiduciary
capacity, that is, as depositary of the deposits of
their depositors. But the same higher degree of
diligence is not expected to be exerted by banks
in commercial transactions that do not involve
their fiduciary relationship with their depositors.
(Reyes vs. CA, G.R. No. 118492, August 15, 2001)
Q: Tan maintained a current and savings
account with PCIB. On May 13, he issued a
postdated check dated May 30 in favor of
Sulpicio Lines, Inc. On May 14, same year,
Sulpicio Lines deposited the check with its
bank notwithstanding that the check was
postdated and PCIB cleared the same.
Meanwhile Tan issued three checks on
various dates but prior to May 30 all were
dishonored for insufficiency of funds. The
dishonor caused the power supply of saw
mills operated by Tan to be cut. Tan filed an
action against PCIB. Will the action
prosper?
A: Yes. The law imposes on banks high standards
in view of the fiduciary nature of banking. The
diligence required of banks, therefore, is more
than that of a good father of a family. In
every case, 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. The bank must
record every single transaction accurately,
down to the last centavo, and as promptly as
possible. This has to be done if the account is
212 Center for Legal Education and Research
2018
to reflect at any given time the amount of
money the depositor can dispose of as he sees
fit, confident that the bank will deliver it as
and to whomever he directs. (Equitable PCI
Bank vs. Tan, G.R. No. 165339, 628 SCRA 520,
August 23, 2010)
3. Nature of Bank Funds and Bank Deposits
Bank deposits are in the nature of irregular
deposits. They are really loan because they earn
interest. All kinds of bank deposits, whether
fixed, savings, or current are to be treated as
loans and are to be covered by the law on
loans. Current and savings deposit are loans to a
bank because it can use the same. (Serrano vs.
Central Bank, G.R. No. L- 30511, February 14,1980)
In a contract of deposit, there is a debtor –
creditor relationship between the bank and its
depositor. The bank is the debtor and depositor
is the creditor. The depositor lends the bank
money and the bank agrees to pay the depositor
on demand. (Consolidated Bank and Trust Corp. vs.
CA, G.R. No. 138569, September 11, 2003)
The fiduciary nature of a bank-depositor
relationship does not convert the contract
between the bank and its depositors from a
simple loan to a trust agreement, whether
express or implied. Failure by the bank to pay the
depositor is failure to pay a simple loan, and not
a breach of trust. (Ibid.)
GRANT OF LOANS AND SECURITY
REQUIREMENTS
Ratio of Net Worth to Total Risk Assets
Net Worth shall mean the total of the
unimpaired paid-in capital including paid-in
surplus, retained earnings and undivided profit,
net of valuation reserves and other adjustments
as may be required by the Bangko Sentral. (Sec.
24.2, GBL)
Risk Based Capital
The Monetary Board shall prescribe the minimum
ratio which the net worth of a bank must bear to
its total risk assets which may include contingent
accounts. The Monetary Board may require such
ratio be determined on the basis of the net worth
 Purple Notes
and risk assets of a bank and its subsidiaries,
financial or otherwise, as well as prescribe the
composition and the manner of determining the
net worth and total risk assets of banks and their
subsidiaries.
Note: The Monetary Board may alter or suspend
compliance with such ratio whenever necessary
for a maximum period of one (1) year: Provided,
finally, that such ratio shall be applied uniformly
to banks of the same category.
In case a bank does not comply with the
prescribed minimum ratio, the Monetary Board:
1. May limit or prohibit the distribution of net
profits by such bank and may require that
part or all of the net profits be used to
increase the capital accounts of the bank
until the minimum requirement has been
met; or
2. May, furthermore, restrict or prohibit the
acquisition of major assets and the making
of new investments by the bank, until the
minimum required capital ratio has been
restored.
Exception: Purchases of readily marketable
evidences of indebtedness of the Republic of the
Philippines and Bangko Sentral and any other
evidences of indebtedness or obligations the
servicing and repayment of which are fully
guaranteed by the Republic of the Philippines.
(Sec. 34, GBL)
Single Borrower‟s Limit
Limitations imposed upon banks with
respect to its loan functions:
1. General Rule: Single borrower‟s limit -
The total amount of loans, credit
accommodations and guarantees as may be
defined by the Monetary Board that may be
extended by a bank to any person,
partnership, association, corporation or
other entity shall at no time exceed twenty
percent (20%) of the net worth of such
bank. (Sec. 35.1, GBL, as amended by BSP
Circular No. 779, s. 2013)
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Mercantile Law
Exceptions:
a. As the Monetary Board may otherwise
prescribe for reasons of national interest.
b. Deposits of rural banks with GOCC financial
institutions like DBP, PNB, and LBP.
2. The total amount of loans, credit
accommodations and guarantees in no. 1
may be increased by an additional ten
percent (10%) of the net worth of such bank
provided the additional liabilities of any
borrower are adequately secured by trust
receipts, shipping documents, warehouse
receipts or other similar documents
transferring or securing title covering readily
marketable, non-perishable goods which
must be fully covered by insurance (Sec.
35.2, GBL);
3. Except as the Monetary Board may
otherwise prescribe, loans and other credit
accommodations against real estate shall not
exceed seventy-five percent (75%) of the
appraised value of the respective real estate
security, plus sixty percent (60%) of the
appraised value of the insured
improvements (Sec. 37, GBL);
4. Except as the Monetary Board may
otherwise prescribe, loans and other credit
accommodations on security of chattels and
intangible properties such as, but not limited
to, patents, trademarks, trade names, and
copyrights shall not exceed seventy-five
percent (75%) of the appraised value of the
security (Sec. 38, GBL);
5. The amortization schedule of bank loans and
other credit accommodations shall be
adapted to the nature of the operations to
be financed. In case of loans and other
credit accommodations with maturities of
more than five (5) years, provisions must be
made for periodic amortization payments,
but such payments must be made at least
annually:
Provided, however, That when the borrowed
funds are to be used for purposes which do
not initially produce revenues adequate for
regular amortization payments therefrom,
Bar Operations C ommissions 213
 Purple Notes
Mercantile Law
the bank may permit the initial amortization
payment to be deferred until such time as
said revenues are sufficient for such
purpose, but in no case shall the initial
amortization date be later than five (5) years
from the date on which the loan or other
credit accommodation is granted. In case of
loans and other credit accommodations to
micro finance sectors, the schedule of loan
amortization shall take into consideration the
projected cash flow of the borrower and
adopt this into the terms and conditions
formulated by banks. (Sec. 44, GBL);
6. No director or officer of any bank shall,
directly or indirectly, for himself or as the
representative or agent of others, borrow
from such bank nor shall he become a
guarantor, endorser or surety for loans from
such bank to others, or in any manner be an
obligor or incur any contractual liability to
the bank except with the written approval of
the majority of all the directors of the bank,
excluding the director concerned.
The Monetary Board may regulate the
amount of loans, credit accommodations and
guarantees that may be extended, directly
or indirectly, by a bank to its directors,
officers, stockholders and their related
interests (DOSRI), as well as investments of
such bank in enterprises owned or controlled
by said directors, officers, stockholders and
their related interests. However, the
outstanding loans, credit accommodations
and guarantees which a bank may extend to
each of its stockholders, directors, or officers
and their related interests, shall be limited to
an amount equivalent to their respective
unencumbered deposits and book value of
their paid-in capital contribution in the bank
(Sec. 36, GBL).
Note: Loans, credit accommodations and
guarantees secured by assets considered as non-
risk by the Monetary Board shall be excluded
from such limit. Loans, credit accommodations
and advances to officers in the form of fringe
benefits granted in accordance with rules as may
be prescribed by the Monetary Board shall not be
subject to the individual limit. The limit on loans,
214 Center for Legal Education and Research
2018
credit accommodations and guarantees
prescribed shall not apply to loans, credit
accommodations and guarantees extended by a
cooperative bank to its cooperative shareholders.
(Ibid.)
Exclusions to the limitations:
1. Loans and other credit accommodations
secured by obligations of the Bangko Sentral
or of the Philippine Government;
2. Loans and other credit accommodations fully
guaranteed by the government as to the
payment of principal and interest;
3. Loans and other credit accommodations
covered by assignment of deposits
maintained in the lending bank and held in
the Philippines;
4. Loans, credit accommodations and
acceptances under letters of credit to the
extent covered by margin deposits; and
5. Other loans or credit accommodations which
the Monetary Board may from time to time,
specify as non-risk items. (Sec. 35.5, GBL)
Restrictions on Bank Exposure to Directors,
Officers, Stockholders and Their Related
Interests (DOSRI)
General Rule: No director or officer of any bank
shall directly or indirectly, for himself or as the
representative or agent of others:
1. borrow from such bank;
2. become a guarantor, endorser or surety for
loans from such banks to others;
3. be an obligor or incur, in any manner, any
contractual liability to the bank (Sec. 36, GBL)
Exception: There is a written approval of the
majority of all the directors of the bank,
excluding the director concerned.
Requirements in case of DOSRI accounts:
1. Written approval of the majority of all the
directors of the bank, excluding the director
concerned, which shall be entered upon the
records of the bank and a copy of such entry
shall be transmitted to the appropriate
supervising and examining department of
 Purple Notes
the Bangko Sentral (Approval and
Reportorial Requirements) (Sec. 36, GBL);
2. The 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 (Ceiling Requirement) (Sec. 36,
GBL)
Prohibited Acts of Borrowers
1. Fraudulently overvalue property offered as
security for a loan or other credit
accommodation from the bank;
2. Furnish false or make misrepresentation or
suppression of material facts for the purpose
of obtaining, renewing, or increasing a loan
or other credit accommodation or extending
the period thereof;
3. Attempt to defraud the said bank in the
event of a court action to recover a loan or
other credit accommodation; or
4. Offer any director, officer, employee or
agent of a bank any gift, fee, commission, or
any other form of compensation in order to
influence such persons into approving a loan
or other credit accommodation application.
(Sec. 55.2, GBL)
Prohibited Transactions of Director, Officer,
Employee, or Agent
1. Make false entries in any bank report or
statement or participate in any fraudulent
transaction;
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;
3. Accept gifts fees or commissions or any
other form of remuneration in connection
with the approval of a loan or 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
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Mercantile Law
5. Outsource inherent banking functions. (Sec.
55.1, GBL)
PENALTY FOR VIOLATIONS
Fine, imprisonment
Unless otherwise herein provided, the violation of
any of the provisions of this Act shall be subject
to Sections 34, 35, 36 and 37 of the New Central
Bank Act (NCBA).
1. Refusal to Make Reports or Permit
Examination (Sec. 34): Fine of not less
than Fifty thousand pesos (₱50,000) nor
more than Two million pesos (₱2,000,000)
or by imprisonment of not less than one (1)
year nor more than five (5) years, or both,
at the discretion of the court.
Applicable to: Any officer, owner, agent,
manager, director or officer-in-charge of any
institution who, being required in writing by the
Monetary Board or by the head of the supervising
and examining department within the purview of
this Act and relevant laws willfully refuses to file
the required report or permit any lawful
examination into the affairs of such institution
2. False Statement (Sec. 35): Fine of not less
than One hundred thousand pesos
(₱100,000) nor more than Two million pesos
(₱2,000,000), or by imprisonment of not
more than five (5) years, or both, at the
discretion of the court.
Applicable to: willful making of a false or
misleading statement on a material fact to the
Monetary Board or to the examiners of the
Bangko Sentral
3. Proceedings Upon Violation of New
Central Bank Act and Other Banking
Laws, Rules, Regulations, Orders or
Instructions (Sec.36): Fine of not less than
Fifty thousand pesos (₱50,000) nor more
than Two million pesos (₱2,000,000) or by
imprisonment of not less than two (2) years
nor more than ten (10) years, or both, at
the discretion of the court
Bar Operations C ommissions 215
 Purple Notes
Mercantile Law
Applicable to: Bank, quasi-bank, including their
subsidiaries and affiliates engaged in allied
activities or other entity which under NCBA or
special laws is subject to Bangko Sentral
supervision or whenever any person or entity
willfully violates NCBA or other pertinent banking
laws being enforced or implemented by the
Bangko Sentral or any order, instruction, rule or
regulation issued by the Monetary Board
Note: Whenever a bank or quasi-bank persists in
carrying on its business in an unlawful or unsafe
manner, the Board may, without prejudice to the
penalties provided in the preceding paragraph of
this section and the administrative sanctions
provided in Section 37 of this Act.
4. Administrative Sanctions on
Supervised Entities (Sec. 37): Fines in
amounts as may be determined by the
Monetary Board to be appropriate, but in no
case to exceed One million pesos
(₱1,000,000) for each transactional violation
or One hundred thousand pesos (₱100,000)
per calendar day for violations of a
continuing nature.
Note: In case profit is gained or loss is avoided
as a result of the violation, a fine no more than
three (3) times the profit gained or loss avoided
may also be imposed.
Applicable to: Any bank, quasi-bank, including
their subsidiaries and affiliates engaged in allied
activities, or other entity which under NCBA or
special laws are subject to the Bangko Sentral
supervision, and/or their directors, officers or
employees, for any willful violation of its charter
or bylaws, willful delay in the submission of
reports or publications thereof as required by
law, rules and regulations; any refusal to permit
examination into the affairs of the institution; any
willful making of a false or misleading statement
to the Board or the appropriate supervising and
examining department or its examiners; any
willful failure or refusal to comply with, or
violation of, any banking law or any order,
instruction or regulation issued by the Monetary
Board, or any order, instruction or ruling by the
Governor; or any commission of irregularities,
and/or conducting business in an unsafe or
216 Center for Legal Education and Research
2018
unsound manner as may be determined by the
Monetary Board.
In addition: Fines not in excess of One hundred
thousand pesos (₱100,000) for each transactional
violation or Thirty thousand pesos (₱30,000) per
calendar day for violations of a continuing nature,
the imposition of which shall be final and
executory until reversed.
Applicable to: Banks and quasi-banks, including
their subsidiaries and affiliates engaged in allied
activities, and other entities which under NCBA or
special laws are subject to Bangko Sentral
supervision for any failure to comply with the
requirements of law, Monetary Board regulations
and policies, and/or instructions issued by the
Monetary Board or by the Governor.
Suspension or Removal of Director or
Officer
1. If the offender is a director or officer of a
bank, quasi-bank or trust entity, the
Monetary Board may also suspend or
remove such director or officer (Sec. 66, GBL)
2. The Monetary Board may preventively
suspend any director, officer or employee of
the institution pending an investigation. (Sec.
37, NCBA)
Note: Should the case be not finally decided by
the Bangko Sentral within a period of one
hundred twenty (120) days after the date of
suspension, said director, officer or employee
shall be reinstated in his position. However, when
the delay in the disposition of the case is due to
the fault, negligence or petition of the director or
officer, the period of delay shall not be counted
in computing the period of suspension. (Sec. 37,
NCBA)
Dissolution of Bank
If the violation is committed by a corporation,
such corporation may be dissolved by quo
warranto proceedings instituted by the Solicitor
General. (Sec. 66, GBL)
 Purple Notes
D. PHILLIPPINE DEPOSIT INSURANCE
CORPORATION (PDIC) (R.A. No. 3591, as
amended)
BASIC POLICY
The Corporation shall, as a basic policy, promote
and safeguard the interests of the depositing
public by providing insurance coverage on all
insured deposits and helping maintain a sound
and stable banking system. (Sec. 1, R.A. No. 3591,
as amended [PDIC Law])
State Policy
It is the policy of the State to strengthen the
mandatory deposit insurance coverage system to
generate, preserve, maintain faith and confidence
in the country‘s banking system, and protect it
from illegal schemes and machinations. (Sec. 2,
PDIC Law)
PDIC, while being a government instrumentality
with corporate powers, shall enjoy fiscal and
administrative autonomy, in view of its crucial
role and the nature of its functions and
responsibilities.
POWERS AND FUNCTIONS OF THE PDIC;
PROHIBITIONS
The powers and functions of the PDIC are to be
vested in and exercised by the Board of Directors
which is composed of seven (7) members.
Powers as a Corporate Body:
1. To adopt and use a corporate seal;
2. To have succession until dissolved by an Act
of Congress;
3. To make contracts;
4. To sue and be sued, complain and defend,
in any court of law in the Philippines;
5. To appoint by its Board and Directors such
officers and employees as are not otherwise
provided in the PDIC Law, to define their
duties, fix their compensation, require bonds
of them and fix penalty thereof and to
dismiss such officers and employees for
cause;
6. To prescribe, by its Board and Directors, by-
laws not inconsistent with law;
217
Mercantile Law
7. To exercise, by its Board of Directors, or
duly authorized officers or agents, all powers
specifically granted by the provisions of the
PDIC Law, and such incidental powers as
shall be necessary to carry on the powers so
granted;
8. To conduct examination of banks with prior
approval of the Monetary Board;
9. To act as receiver;
10. To prescribe by its Board of Directors such
rules and regulations as it may deem
necessary to carry out the provisions of the
PDIC Law;
11. To establish its own provident fund;
12. To compromise, condone or release, in
whole or in part, any claim or settled liability
to the PDIC, regardless of the amount
involved, and to write-off the PDIC‘s
receivables and assets which are no longer
recoverable or realizable;
13. To determine qualified interested acquirers
or investors for any of the modes of
resolution method and to implement the
same for a bank subject of resolution; and
14. To determine the appropriate mode of
liquidation of a closed bank and to
implement the same. (Sec. 9, PDIC Law)
Primary Functions:
1. Deposit insurer
2. Co-regulator of banks
3. Receiver and liquidator of closed banks.
Insurer of Deposit
The PDIC shall, as a basic policy, promote and
safeguard the interest of the depositing public by
way of providing permanent and continuing
insurance coverage on all insured deposits and
helping maintain a sound and stable banking
system. (Sec. 1, PDIC Law)
Regulator: Examination and Investigation
of Banks
As a bank regulator, the PDIC is empowered to
examine and investigate banks.
1. Examination - involves an evaluation of
the current status of a bank and determines
its compliance with the set standards
Bar Operations C ommissions 217
 Purple Notes
Mercantile Law
regarding solvency, liquidity, asset valuation,
operations, systems, management and
compliance with banking laws, rules and
regulations. Such a process then involves an
intrusion into a bank‘s records. It requires
prior consent of the Monetary Board (MB).
(PDIC vs. Phil. Countryside Rural Bank, Inc., G.R.
No. 176438, January 24, 2011)
2. Investigation - conducted based on
specific findings of certain acts or omissions
which are subject of a complaint or a Final
Report of Examination made by PDIC. It
zeroes in on specific acts and omissions
uncovered via an examination or which are
cited in a complaint. It centers on specific
acts of omissions and thus, requires a less
invasive assessment. It does not require
prior consent from the MB. (PDIC vs. Phil.
Countryside Rural Bank, Inc., G.R. No. 176438,
January 24, 2011)
Rehabilitation Receiver of Banks
The PDIC, designated as receiver, shall proceed
with the takeover and liquidation of the closed
banks. Banks closed by the MB shall NO longer
be rehabilitated. (Sec. 12[a], PDIC Law)
Takeover refers to the act of physically taking
possession and control of the premises, assets
and affairs of a closed bank for the purpose of
liquidating the bank. (Sec. 5[w], PDIC Law)
A. Suspension of Powers and Benefits
Effective immediately upon take over as receiver
of such bank, the powers, functions and duties,
as well as all allowances, remunerations and
perquisites of the directors, officers and
stockholders of such bank are terminated and the
relevant provisions of the Articles of
Incorporation and by-laws of the closed bank are
likewise deemed suspended. (Sec. 13[e][2], PDIC
Law)
B. Properties in Custodia Legis
All the assets of the closed bank under
receivership shall be deemed in custodia legis in
the hands of the receiver.
218 Center for Legal Education and Research
2018
Assets shall not be subject to attachment,
garnishment, execution, levy or any other court
processes. (Sec. 13[e][3], PDIC Law)
C. Power to collect loans and claims
Includes the power to collect loans and other
claims of the closed bank and for the purpose,
modify, compromise or restructure the terms and
conditions of such loans or claims as may be
deemed advantageous to the interests of the
creditors and claimants of the closed bank. (Sec.
13[b][8], PDIC Law)
Deposit liability and other obligations
The liability of the banks to pay interests on
deposits and all other obligations as of closure
shall cease upon closure by the MB. (Sec.13[e ][6],
PDIC Law)
Prohibitions
Personnel of the PDIC are prohibited from:
1. Being an officer, director, consultant,
employee or stockholder, directly or
indirectly, of any bank or banking institution
except as otherwise provided in the PDIC
Law;
2. Receiving any gift or thing of value from any
officer, directory or employee thereof;
3. Revealing in any manner, except as provided
in the PDIC Law or under order of the court,
information relating to the condition or
business of any such institution. This
prohibition shall not apply to the giving of
information to the giving of information to
the Board of Directors, the President of
PDIC, Congress, any agency of government
authorized by law, or to any person
authorized by either of them in writing to
receive such information. (Sec. 9[e][1][2][3],
PDIC Law)
CONCEPT OF INSURED DEPOSITS
Insured Deposit
Insured deposit is the amount due to any bona
fide depositor for legitimate deposits in an
insured bank as of date of closure but not to
 Purple Notes
exceed FIVE HUNDRED THOUSAND PESOS
(PHP 500,000.00).
1. In determining the 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.
2. A joint account regardless of whether the
conjunction ―and‖, ―or‖, ―and/or‖ is used
shall be insured separately from any
individual owned deposit PROVIDED:
a. If the account is held by two (2) or more
natural persons or two (2) or more
juridical persons or entities, the
maximum insured deposit shall be
divided into as many shares as there are
individuals, juridical persons or entities,
unless a different sharing is stipulated in
the document of deposit; AND
b. 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.
3. The aggregate of the interest of each co –
owner over several joint accounts, whether
owned by the same or different
combinations of individuals, juridical persons
or entities shall likewise be subject to the
maximum insured deposit of Php
500,000.00.
4. No owner/holder of any passbook, certificate
of deposit or other evidence of deposit shall
be recognized as a depositor entitled to the
rights provided unless the passbook,
certificate of deposit or other evidence of
deposit is determined by the PDIC to be an
authentic document or record of the issuing
bank.
5. In case of a condition that threatens the
monetary and financial stability of the
banking system that may have systematic
consequences as determined by the
Monetary Board, the maximum deposit
insurance cover may be adjusted in such
219
Mercantile Law
amount, for such a period, and/or for such
deposit products, as may be determined by
unanimous vote of the Board of Directors of
PDIC in a meeting called for the purposed
and chaired by the Secretary of Finance
subject to the approval of the President of
the Philippines. (Section 5[j], PDIC Law)
LIABILITY TO DEPOSITORS
The fact that the certificates state that the
certificates are insured by PDIC does not ipso
facto make the latter liable for the same should
the contingency insured against arise. The
deposit liability of PDIC is determined by the
provisions of R.A. No. 3519 and statements in the
certificate that the same are insured by the PDIC
are not binding upon the latter. In order that a
claim for deposit insurance with the PDIC may
prosper, the law requires that a corresponding
deposit be placed in the insured bank. (PDIC vs.
CA, G.R. No. 118917, December 22, 1997)
Deposit Liabilities Required to be Insured
with PDIC:
The deposit liabilities of any bank which is
engaged in the business of receiving deposits as
defined on the effective date of the PDIC Law, as
amended, or which thereafter may engage in the
business of receiving deposits, shall be insured
with the PDIC. (Sec. 6, PDIC Law)
Commencement of Liability
PDIC shall commence the determination of
insured deposits due the depositors of a closed
bank upon its actual takeover of the closed bank.
Notice to Depositors:
PDIC shall give notice to the depositors of a
closed bank of the insured deposits due them by
whatever means deemed appropriate by the
Board of Directors. The notice shall be published
once a week for at least three (3) consecutive
weeks in a newspaper of general circulation or,
when appropriate, in a newspaper circulated in
the community/ies where the closed bank or its
branches are located. (Sec. 21[a], PDIC Law)
Bar Operations C ommissions 219
 Purple Notes
Mercantile Law
Deposits Not Entitled to Payment
1. Any obligation of a bank which is payable at
the office of the bank located outside of the
Philippines shall not be a deposit for any of
the purposes of the PDIC Law, as amended,
or included as part of the total deposits or of
insured deposit;
2. Investment products such as bonds and
securities, trust accounts, and other similar
instruments;
3. Deposit accounts or transactions which are
fictitious or fraudulent as determined by the
Corporation;
4. Deposit accounts or transactions constituting,
and/or emanating from, unsafe and unsound
banking practice/s, as determined by the
Corporation, in consultation with the Bangko
Sentral ng Pilipinas, after due notice and
hearing, and publication of a directive to
cease and desist issued by the Corporation
against such deposit accounts, transactions
or practices; and
5. Deposits that are determined to be the
proceeds of an unlawful activity as defined
under Republic Act No. 9160, as amended.
Note: Subject to the approval of the Board of
Directors, any insured bank which is incorporated
under the laws of the Philippines which maintains
a branch outside the Philippines MAY elect to
include for insurance its deposit obligations
payable only at such branch. (Sec. 5[g], PDIC Law)
When OCCIDENTAL Bank folded up due to
insolvency, Manuel had the following
separate deposits in his name: P200,000 in
savings deposit; P250,000 in time deposit;
P50,000 in a current account; P1 million in
a trust account; and P3 million in money
market placement. Under the Philippine
Deposit Insurance Corporation Act, how
much could Manuel recover? Explain.
Manuel may only recover P500,000.00 covering
his savings and time deposits and his current
account. He may not recover for his trust account
and money market placement as they are
considered investment products.
The PDIC Act provides that the term ‗deposit‘
means the unpaid balance of money or its
220 Center for Legal Education and Research
2018
equivalent received by a bank in the usual course
of business and for which it has given or is
obliged to give credit to a commercial, checking,
savings, time or thrift account, or issued in
accordance with Bangko Sentral rules and
regulations and other applicable laws, together
with such other obligations of a bank, which,
consistent with banking usage and practices, the
Board of Directors shall determine and prescribe
by regulations to be deposit liabilities of the bank.
The Act also provides that ―the Corporation shall
not pay deposit insurance for investment
products such as bonds and securities, trust
accounts, and other similar instruments, whether
denominated, documented, recorded or booked
as deposit by the bank.
Extent of Liability
The amount of insured deposit is not to exceed
FIVE HUNDRED THOUSAND PESOS (PHP
500,000.00). (Sec. 5[j], PDIC Law)
The term deposit means the unpaid balance of
money or its equivalent received by a bank in the
usual course of business and for which it has
given or is obliged to give credit to a commercial,
checking, savings, time or thrift account,
evidenced by a passbook, certificate of deposit,
or other evidence of deposit issued in accordance
with Bangko Sentral ng Pilipinas rules and
regulations and other applicable laws, together
with such other obligations of a bank, which,
consistent with banking usage and practices.
(Sec. 5[g], PDIC Law)
Determination of Insured Deposits
1. In determining the 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.
2. A joint account regardless of whether the
conjunction ―and‖, ―or‖, ―and/or‖ is used
shall be insured separately from any
individual owned deposit PROVIDED:
 Purple Notes
1. If the account is held by two (2) or more
natural persons or two (2) or more
juridical persons or entities, the
maximum insured deposit shall be
divided into as many shares as there are
individuals, juridical persons or entities,
unless a different sharing is stipulated in
the document of deposit; AND
Mercantile Law
deposits in an insured bank as of the date of
closure but not to exceed Five hundred thousand
pesos (P500,000.00). 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. (Sec. 5[j], PDIC Law)

2. If the account is held by a juridical Thus, the maximum deposit coverage is

person or entity jointly with one or more P500,000.00 per depositor. All deposit accounts
natural persons, the maximum insured by a depositor in a closed bank maintained in the
deposit shall be presumed to belong same right and capacity shall be added together.
entirely to such juridical person or entity.
2. Joint Accounts
3. The aggregate of the interest of each co –
owner over several joint accounts, whether A joint account regardless of whether the
owned by the same or different conjunction ‗and‘, ‗or‘, ‗and/or‘ is used, shall be
combinations of individuals, juridical persons insured separately from any individually-owned
or entities shall likewise be subject to the deposit account provided:
maximum insured deposit of Php
500,000.00. a. If the account is held by two (2) or more
natural persons or two (2) or more juridical
4. No owner/holder of any passbook, certificate persons or entities, the maximum insured
of deposit or other evidence of deposit shall deposit shall be divided into as many shares
be recognized as a depositor entitled to the as there are individuals, juridical persons or
rights provided unless the passbook, entities, unless a different sharing is
certificate of deposit or other evidence of stipulated in the document of deposit; and
deposit is determined by the PDIC to be an
authentic document or record of the issuing b. If the account is held by a juridical person or
bank. entity jointly with one or more natural
persons, the maximum insured deposit shall
5. In case of a condition that threatens the be presumed to belong entirely to such
monetary and financial stability of the juridical person or entity. (Sec. 5[j], PDIC Law)
banking system that may have systematic
consequences as determined by the XYZ Bank was ordered closed by the
Monetary Board, the maximum deposit Monetary Board. The following were the
insurance cover may be adjusted in such accounts of Lemuel with XYZ Bank:
amount, for such a period, and/or for such
deposit products, as may be determined by
unanimous vote of the Board of Directors of Account Type of Amount
PDIC in a meeting called for the purposed Name Account (Php)
and chaired by the Secretary of Finance Lemuel Savings* 5M
subject to the approval of the President of Lemuel Checking 1M
the Philippines. (Sec. 5[j], PDIC Law) Lemuel Time 500k
Deposit
Calculation of Liability Lemuel Time 10M
and/or Deposit
1. Per Depositor, Per Capacity Rule Daniel
(Joint)
The term insured deposit means the amount Lemuel Trust 2M
due to any bonafide depositor for legitimate
221
Bar Operations C ommissions 221
 Purple Notes
Mercantile Law
Salbros Checking 1M
Corporation
and Lemuel
Lemuel savings account is the subject of
the freeze order issued by the CA pursuant
to AMLA. How much of Lemuel‟s deposit are
insured? Explain.
a. Lemuel Checking and Time Deposit
Total insured amount is Php 500,000. All deposits
bank in the same right and capacity should be
added together
b. Lemuel and/or Daniel Joint Account
Total insured amount is Php 500,000.00 and
Lemuel is entitled to Php 250,000. A joint account
regardless of whether the conjunction ―and‖,
―or‖, ―and/or‖, is used shall be insured separately
from any individually owned deposit account and
the maximum insured deposit shall be divided
into two (2) equal shares.
c. Lemuel Trust Account
PDIC shall not pay deposit insurance for trust
accounts.
d. Lemuel Savings Deposit
PDIC shall not pay deposit insurance for accounts
that are determined to be proceeds of unlawful
activity as defined under RA 9160, as amended
e. Salbros Corporation and Lemuel Checking
Account
An account that is held by a juridical person or
entity jointly with one or more natural persons,
the maximum insured deposit of Php 500,000
shall be presumed entirely to the juridical person
or entity, Salbros Corporation.
Mode of Payment
1. Cash
2. Transferred deposit in another insured bank
in an amount equal to insured deposit of
such depositor subject to submission of
proof of claims. (Sec. 19, PDIC Law)
222 Center for Legal Education and Research
2018
Effects of Payment of Insured Deposits
1. Payment of an insured deposit to any person
by the PDIC shall discharge the PDIC; and
(Sec. 21[b], PDIC Law)
2. Upon the payment of any depositor, PDIC
shall be subrogated to all the rights of the
depositor against the closed bank to the
extent of such payment. (Sec. 20, PDIC Law)
Payment of Insured Deposits as Preferred
Credit
All payments by the Corporation of insured
deposits in closed banks partake of the nature of
public funds, and as such, must be considered a
preferred credit in the order of preference under
Article 2244 (9) of the New Civil Code. (Sec. 20,
PDIC Law)
Failure to Settle Claim of Insured Depositor
Failure to settle the claim, within six (6) months
from the date of filing of claim for insured
deposit, where such failure was due to grave
abuse of discretion, gross negligence, bad faith,
or malice, shall, upon conviction, subject the
directors, officers or employees of the
Corporation responsible for the delay, to
imprisonment from six (6) months to one (1)
year. (Sec. 19, PDIC Law)
Note: The period shall not apply if the validity of
the claim requires the resolution of issues of facts
and or law by another office, body or agency.
Failure of Depositor to Claim Insured
Deposits
Unless otherwise waived by the PDIC, if the
depositor in the closed bank shall fail to claim his
insured deposits with the PDIC within two (2)
years from actual takeover of the closed bank by
the receiver, or does not enforce his claim filed
with the PDIC within two (2) years after the two-
year period to file a claim, all rights of the
depositor against the PDIC shall be barred.
However, all rights of the depositor against the
closed bank and its shareholders or the
 Purple Notes
receivership estate to which the PDIC may have
become subrogated, shall revert to the depositor.
PDIC shall thereafter be discharged from any
liability on the insured deposit. (Sec. 21[e], PDIC
Law)
1. Examination of Banks and Deposit
Accounts
When there is a failure of prompt corrective
action as declared by the Monetary Board (MB)
due to capital deficiency, the PDIC, its duly
authorized officers or employees, may examine,
inquire or look into the deposit records of a bank.
Note: Such authority may not be exercised when
the failure of prompt corrective action is due to
grounds other than capital deficiency. Banks,
their officers and employees are mandated to
disclose and report to the Corporation or its duly
authorized officers and employees, deposit
account information in said bank. (Sec. 11[c], PDIC
Law)
2. Prohibition Against Splitting of
Deposits
Splitting of deposits or creation of fictitious or
fraudulent loans or deposit accounts is
punishable with the penalty of imprisonment of
not less than
six (6) years but not more than twelve (12) years
or a fine of not less than Fifty thousand pesos
(P50,000.00) but not more than Ten million
pesos (P10,000,000.00), or both, at the
discretion of the court.
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 persons is broken down and transferred
into two (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 one hundred twenty (120)
days immediately preceding or during a bank-
declared bank holiday, or immediately preceding
a closure order issued by the MB of the Bangko
Sentral ng Pilipinas for the purpose of availing of
223
Mercantile Law
the maximum deposit insurance coverage. (Sec.
26[1][e], PDIC Law)
3. Prohibition Against Issuances of
Temporary Restraining Orders
No court, except the Court of Appeals, shall issue
any temporary restraining order, preliminary
injunction or preliminary mandatory injunction
against the PDIC for any under the PDIC Law .
(Sec. 27, PDIC Law)
Note: This prohibition shall apply in all cases,
disputed or controversies instituted by a private
party, the insured bank, or any shareholder of
the insured bank.
When matter is of extreme urgency:
The Supreme Court may issue a restraining order
or injunction when the matter is of extreme
urgency involving a constitutional issue, such that
unless a temporary restraining order is issued,
grave injustice and irreparable injury will arise.
The party applying for the issuance of a
restraining order or injunction shall file a bond in
an amount to be fixed by the Supreme Court,
which bond shall accrue in favor of the
Corporation if the court should finally decide that
the applicant was not entitled to the relief
sought. (Ibid.)
Restraining order issued in violation of this
prohibition:
Any restraining order or injunction issued in
violation of this Section is void and of no force
and effect and any judge who has issued the
same shall suffer the penalty of suspension of at
least sixty (60) days without pay. (Ibid.)
CONCEPT OF BANK RESOLUTION
Resolution refers to the actions undertaken by
the PDIC to:
1. Protect depositors, creditors and the Deposit
Insurance Fund (DIF);
2. Safeguard the continuity of essential banking
services or maintain financial stability; and
3. Prevent deterioration or dissipation of bank
assets. (Sec. 5[s], PDIC Law)
Bar Operations C ommissions 223
 Purple Notes
Mercantile Law
The PDIC, in coordination with the Bangko
Sentral ng Pilipinas, may commence the
resolution of a bank upon:
1. Failure of prompt corrective action as
declared by the Monetary Board; or
2. Request by a bank to be placed under
resolution (Sec. 11, PDIC Law)
The Corporation shall inform the bank of its
eligibility for entry into resolution.
Within a period of one hundred eighty (180) days
from a bank‘s entry into resolution, the
Corporation, through the affirmative vote of at
least five (5) members of the PDIC Board, shall
determine whether the bank may be resolved
through the purchase of all its assets and
assumption of all its liabilities, or merger or
consolidation with, or its acquisition, by a
qualified investor.
Determination of Resolution Package:
The Corporation may:
1. Determine a resolution package for the
bank;
2. Identify and, with the approval of the
Monetary Board, pre-qualify possible
acquirers or investors;
3. Authorize pre-qualified acquirers or investors
to conduct due diligence on the bank, for
purposes of determining the valuation of a
bank through an objective and thorough
review and appraisal of its assets and
liabilities, and assessment of risks or events
that may affect its valuation; and
4. Conduct a bidding to determine the acquirer
of the bank.
In determining the appropriate resolution method
for a bank, the Corporation shall consider the:
1. Fair market value of the assets of the bank,
its franchise, as well as the amount of its
liabilities;
2. Availability of a qualified investor;
3. Least cost to the DIF; and
4. Interest of the depositing public. (Sec. 11,
PDIC Law)
224 Center for Legal Education and Research
2018
ROLE OF THE PDIC IN RELATION TO BANKS
IN DISTRESS
a. Closure and takeover
Whenever a bank is ordered closed by the MB,
the PDIC shall be designated as receiver and
it shall proceed with the takeover and liquidation
of the closed bank. Banks closed by the MB shall
no longer be rehabilitated. (Sec. 12[a], PDIC Law)
Takeover refers to the act of physically taking
possession and control of the premises, assets
and affairs of a closed bank for the purpose of
liquidating the bank. (Sec. 5[w], PDIC Law)
b. Conservatorship
When the MB finds that a bank or a quasi-bank is
in a state of continuing inability or unwillingness
to maintain a condition of liquidity deemed
adequate to protect the interest of depositors and
creditors, it may appoint a conservator with such
powers as the it shall deem necessary to take
charge of the assets, liabilities, and the
management thereof, reorganize the
management, collect all monies and debts due
said institution, and exercise all powers necessary
to restore its viability. The conservatorship shall
not exceed one (1) year and may be terminated
before the lapse of 1 year
when the MB is satisfied that the institution can
continue to operate on its own and the
conservatorship is no longer necessary. (Sec. 29,
NCBA)
c. Receivership and Liquidation
The MB may summarily and without need of prior
hearing forbid the institution from doing business
in the Philippines and designate the PDIC as
receiver in the case of banks. The PDIC shall be
directed to proceed with the liquidation of the
closed bank. (Sec. 30[d], NCBA)
Note: For quasi-banks and non-stock savings
and loan associations, any person of recognized
competence in banking, credit or finance may be
designated by the Bangko Sentral as a receiver.
(Sec. 30, NCBA)
 Purple Notes
Mercantile Law
The receiver is authorized to adopt and protection is 20 term of protection is 10
implement, without need of consent of the years from the protection is years and may
stockholders, board of directors, creditors or filing of during the be renewed.
depositors of the closed bank, any or a application, non- author‘s (Sec 145, IPC)
renewable. (Sec lifetime and
combination of the following modes of
54, IPC) 50 years
liquidation: after his
death. (Sec
a. Conventional liquidation; and 213, IPC)
b. Purchase of assets and/or assumption of IP rights vest IP rights vest IP rights vest
liabilities. upon issuance of from the upon
letter of patents moment of registration.
VII. INTELLECTUAL PROPERTY CODE creation. (Sec 122, IPC)
(Sec 172.1,
(R.A. 8293, as amended by R.A. 9150, IPC)
R.A. 9502, and R.A. 10372)
A trademark is any visible sign capable of
A.INTELLECTUAL PROPERTY RIGHTS IN
distinguishing the goods (trademark) or services
GENERAL
(service mark) of an enterprise and shall include
Intellectual property right, defined:
a stamped or marked container of goods; a trade
name refers to the name or designation
The term ―intellectual property rights" consists of:
identifying or distinguishing an enterprise.
Copyright is confined to literary and artistic works
a. Copyright and Related Rights;
which are original intellectual creations in the
b. Trademarks and Service Marks;
literary and artistic domain protected from the
c. Geographic Indications;
moment of their creation. On the other hand,
d. Industrial Designs;
patentable inventions refer to any technical
e. Patents;
solution of a problem in any field of human
f. Layout-Designs (Topographies) of Integrated
activity which is new, involves an inventive step
Circuits; and
and is industrially applicable. (Pearl & Dean (Phil.),
g. Protection of Undisclosed Information (Sec. Inc. vs. Shoemart, Inc., G.R. No. 148222, August 15,
4.1, Intellectual Property Code [IPC]) 2003)

Differences between patent, copyright and Technology Transfer Arrangement, defined:

trademark It refers to contracts or agreements involving the
transfer of systematic knowledge for the
Patents Copyright Trademark manufacture of a product, the application of a
Any technical Confined to Any visible sign process, or rendering of a service including
solution of a literary and capable of
management contracts, and the transfer,
problem in any artistic works distinguishing
field of human which are the goods
assignment or licensing of all forms of intellectual
activity which is original (trademark) or property rights, including licensing of computer
new, involves an intellectual services software except computer software developed for
inventive step creations in (service mark) mass market. (Sec. 4.2, IPC)
and is industrially the literary of an enterprise
applicable. (Sec and artistic and shall PATENT
21, IPC) domain include a
protected stamped or Patent is a set of exclusive rights granted by a
from the marked
state to an inventor or his assignee for a fixed
moment of container of
their goods. (Sec period of time in exchange for a disclosure of an
creation. 121, IPC) invention. (E. Salao, 2016, .Essentials of Intellectual
(Sec 172.1, Property Law;Third Edition. p.57)
IPC)
Term of Generally, Term of

225
Bar Operations C ommissions 225
 Purple Notes
Mercantile Law
B.PATENTABLE VS. NON – PATENTABLE
INVENTIONS
Patentable invention, defined:
Any technical solution of a problem in any field of
human activity which is new, involves an
inventive step and is industrially applicable. It
may be, or may relate to, a product, or process,
or an improvement of any of the foregoing. (Sec.
21, IPC)
2018
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.

Elements of a patentable invention: 2. Schemes, rules and methods of performing

mental acts, playing games or doing
1. Novelty business, and programs for computers;
2. Inventive step; and
3. Industrial applicability. 3. Methods for treatment of the human or
animal body by surgery or therapy and
Novelty diagnostic methods practiced on the human
or animal body. This provision shall not
An invention shall not be considered new if it apply to products and composition for use in
forms part of a prior art. (Sec. 23, IPC) any of these methods;

Prior Art 4. Plant varieties or animal breeds or

1. Everything that is already available to the
public not only in the country but anywhere
in the world, before the filing date of the
priority date of the application claiming the
invention; and
2. Those that are actually subject of application
for patent registration. (Sec 24, IPC)
Inventive step
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. (Sec. 22, IPC)

An invention shall involve an inventive step if,
having regard to prior art, it is not obvious to a
person skilled in the art at the time of the filing
date or priority date of the application claiming
the invention. (Sec. 26, IPC)
Industrial applicability
An invention that can be produced and used in
any industry shall be industrially applicable. (Sec.
27, IPC)
What is goal of a patent system?
The ultimate goal of a patent system is to bring
new designs and technologies into the public
through disclosure; hence, ideas, once disclosed
to the public without protection of a valid patent,
are subject to appropriation without significant
restraint. (Pearl & Dean (Phil.), Inc. vs. Shoemart,
Inc., G.R. No. 148222, August 15, 2003)
Three-fold purpose of patent law:

Non-patentable inventions, defined: 1. It seeks to foster and reward invention;

2. It promotes disclosure of inventions to
1. Discoveries, scientific theories and stimulate further innovation and to permit
mathematical methods.

226 Center for Legal Education and Research


the public to practice the invention once the
patent expires; and
3. The stringent requirements for patent
protection seek to ensure that ideas in the
public domain remain there for the free use
of the public and it is only after an
exhaustive examination by the patent office
that patent
is issued. (Pearl & Dean (Phil.), Inc. vs.
Shoemart, Inc., G.R. No. 148222, August 15,
2003)
Ownership of a patent
1. Right to a patent
The right to a patent belongs to:
a. the inventor,
b. his heirs, or
c. his assigns.
When two (2) or more persons have jointly made
an invention, the right to a patent shall belong to
them jointly. (Sec. 28, IPC)
2. 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. (Sec. 29, IPC)
Applicability:
There must be at least two persons who have
made the invention separately and independent
of each other. Otherwise, joint ownership under
Sec 28 may exist or the situation may call for the
application of Sec. 67. (E. Salao [2016] Essentials of
Intellectual Property Law; Third Edition. P.66)
3. Inventions created pursuant to
Commission
a. The person who commissions the work
shall own the patent, unless otherwise
provided in the contract.
Purple Notes
Mercantile Law
b. In case the employee made the invention
in the course of his employment contract,
the patent shall belong to:
i. 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.
ii. 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. (Sec. 30,
IPC)
4. 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 the an English tradition is filed within six (6)
months from the date of filing in the Philippines.
(Sec. 31, IPC)
Grounds for cancellation of a patent:
1. That what 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; or
3. That the patent is contrary to public order or
morality. (Sec. 61, IPC)
Partial Cancellation
a Where the grounds for cancellation relate to
some of the claims or parts of the claim,
cancellation may be affected to such extent only.
(Sec. 61, IPC)
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Bar Operations C ommissions 227
 Purple Notes
Mercantile Law
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:
1. Order for his substitution as patentee, or
2. At the option of the true inventor, cancel the
patent, and award actual and other damages
in his favor if warranted by the
circumstances. (Sec. 68, IPC)
Rights conferred by a patent
These rights are exclusive to the owner of the
patent.
If the subject matter is a:
1. Product - to restrain, prohibit and prevent
any unauthorized person or entity from
making, using, offering for sale, selling or
importing that product;
2. 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.
3. For both, patent owners shall also have the
right to assign, or transfer by succession the
patent, and to conclude licensing contracts
for the same. (Sec. 71, IPC)
Note: Patent is broader when its subject matter
is a process since the owner does not only
control the use of the process but also the
product obtained from such process, even those
that are obtained directly from the same process.
(Salao, 2019)
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
228 Center for Legal Education and Research
2018
published patent application, as if a patent had
been granted for that invention.
However, such third person must:
1. Have an actual knowledge that the invention
that he was using was the subject matter of
a published application; or
2. Have 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. (Sec .46, IPC)
For years, Y has been engaged in the
parallel importation of famous brands,
including shoes carrying the foreign brand
MAGIC. Exclusive distributor X demands
that Y cease importation because of his
appointment as exclusive distributor of
MAGIC shoes in the Philippines. Y
countered that the trademark MAGIC is not
registered with the Intellectual Property
Office as a trademark and therefore no one
has the right to prevent its parallel
importation. Suppose the shoes are
covered by a Philippine patent issued to the
brand owner, what would your answer be?
Explain. (Bar, 2010)
A patent for a product confers upon its owner the
exclusive right of importing the product. The
importation of a patented product without
authorization of the owner of a patent constitutes
infringement of the patent. X can prevent the
parallel importation of such shoes by Y without
its authorization.
Limitation on patent rights
1. Those provided for under Article 72 as
amended by R.A. No. 9502;
2. Use by a prior user;
3. Use by the government.
Those provided for under Article 72 as
amended by R.A. No. 9502 (Sundiang, 2019)
 Purple Notes
The 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 (Sec.
72.1, IPC);
2. Parallel Importation. Importation of
drugs and medicines by a government
agency or by any private third party
(Intellectual Property Code, Secs. 72.1 and 72.5).
Private parties
must secure a license to import from BFAD.
However, parallel importation for other
patented products is not allowed without the
authority of the owner and may constitute
infringement (Secs. 71.1 and 76.1, IPC);
3. Non-Commercial. Where the act is done
privately and on a non-commercial scale or
for a non-commercial purpose: Provided,
that it does not significantly prejudice the
economic interests of the owner of the
patent (Sec.72.2, IPC);
4. Experimental Use. Where the 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 (Sec.72.3, IPC);
5. Drugs and Medicines. In the case of
drugs and medicines, where the act includes
testing, using, making or selling the
invention including any data related thereto,
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 (Sec.72.4, IPC);
6. Medicine Individual Preparation. Where
the act consists of the preparation for
individual cases, in a pharmacy or by a
229
Mercantile Law
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 (Sec. 72.5,
IPC);
7. Patent Exhaustion. The exclusive right of
the patent owner is exhausted after the first
authorized sale, meaning, the purchaser
may thereafter use, repair and resell the
product (Keeler vs Standard Folding-Bed Co.,
157 U.S. 659 [1895]). However, the purchaser
may not reconstruct the product from the
parts of products that were already used.
Right of a 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.
(Sec. 73.1, IPC)
Transfer of right of a prior user
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. (Sec. 73.2,
IPC)
Use of Invention by the Government
A Government agency or third person authorized
by the Government may exploit the invention
even without agreement of the patent owner
where:
1. The public interest, in particular, national
security, nutrition, health or the
development of other sectors, as determined
by the appropriate agency of the
government, so requires; or
2. A judicial or administrative body has
determined that the manner of exploitation,
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 Purple Notes
Mercantile Law
by the owner of the patent or his licensee, is
anti-competitive. (Sec. 74, IPC)
Additional exceptions provided by Republic Act
9502 otherwise known as ―Universally Accessible
Cheaper and Quality Medicines act‖:
3. In the case of drugs and medicines, there is
a national emergency or other circumstance
of extreme urgency requiring the use of
invention;
4. In the case of drugs and medicines, there is
public non-commercial use of patent by
patentee without satisfactory reason; or
5. In the case of drugs and medicines, the
demand for the patented article in the
Philippines is not being met to an adequate
extent and on reasonable terms, as
determined by the Secretary of the
Department of Health.
The use by the Government, or third person
authorized by the Government, shall be subject,
where applicable, to the following provisions:
1. In situations of national emergency or other
circumstances of extreme urgency, the right
holder shall be notified as soon as reasonably
practicable;
2. In the case of public non-commercial use of
the patent by the patentee, without
satisfactory reason, the right holder shall be
informed promptly;
3. If the demand for the patented article in the
Philippines is not being met to an adequate
extent and on reasonable terms as
determined by the Secretary of Health, the
right holder shall be informed promptly;
4. The scope and duration of such use shall be
limited to the purpose for which it was
authorized;
5. Such use shall be non-exclusive;
6. The right holder shall be paid adequate
remuneration in the circumstances of each
case, taking into account the economic value
of the authorization; and
7. The existence of national emergency or other
circumstances of extreme urgency, in the
case of drugs and medicines shall be subject
to the determination of the President of the
Philippines for the purpose of determining
230 Center for Legal Education and Research
2018
the need for such use or other exploitation,
which shall be immediately executory.
Cezar works in a car manufacturing
company owned by Joab. Cezar is quite
innovative and loves to tinker with things.
With the materials and parts of the car, he
was able to invent a gas-saving device that
will enable cars to consume less gas.
Francis, a co-worker, saw how Cezar
created the device and likewise, came up
with a similar gadget, also using scrap
materials and spare parts of the company.
Thereafter, Francis filed an application for
registration of his device with the Bureau
of Patents. Eighteen months later, Cezar
filed his application for the registration of
his device with the Bureau of Patents.
Assuming that it is patentable, who is
entitled to the patent, is it Joab, Cezar, or
Francis?
Francis is entitled to the patent. Our jurisdiction
follows the ―First-to-File‖ rule as embodied in
Section 29 of the Intellectual Property Code
which states that ―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.‖
Section 30 on the other hand provides that in
case the employee made the invention in the
course of his employment contract, the patent
shall belong to 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.
Patent infringement
Infringement is 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. (Sec. 76.1, IPC)
 Purple Notes
Tests in Patent Infringement:
1. Literal Infringement
2. Doctrine of Equivalents
Literal Infringement
There is infringement of patent under this test if
one makes, uses or sells an item that contains all
the elements of the patent claim. (Sundiang, 2019)
In using literal infringement as a test, resort must
be had to the words of the claim. If accused
matter clearly falls within the claim, infringement
is made out and that is the end of it. (Godines vs.
Court of Appeals, G.R. No. 97343, September 13,
1993)
In considering literal infringement, the patent's
claims must be read in connection with patent's
specification and its file history, and the claims of
patent cannot be given a construction broader
than the teachings expressed in the patent.
(Studiengesellschaft Kohle mbH vs. Eastman Kodak
Company, 616 F. 2d 1315, May 15, 1980)
To determine whether the particular item falls
within the literal meaning of the patent claims,
the court must juxtapose the claims of the patent
and the accused product within the overall
context of the claims and specifications, to
determine whether there is exact identity of all
material elements. (Godines vs. Court of Appeals,
G.R. No. 97343, September 13, 1993)
Doctrine of Equivalents
The doctrine of equivalents provides that an
infringement also takes place when a device
appropriates a prior invention by incorporating its
innovative concept and, although with some
modification and change, performs substantially
the same function in substantially the same way
to achieve substantially the same result . (Smith
Kline Corporation vs. Court of Appeals, G. R. No.
126627, August 14, 2003, citing Godines vs. Court of
Appeals, G.R. No. 97343, September 13, 1993)
The doctrine of equivalents recognizes that minor
modifications in a patented invention are
sufficient to put the item beyond the scope of
literal infringement. (Godines vs. Court of Appeals,
G.R. No. 97343, September 13, 1993)
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Mercantile Law
The reason for the doctrine of equivalents is that
to permit the imitation of a patented invention
which does not copy any literal detail would be to
convert the protection of the patent grant into a
hollow and useless thing. Such imitation would
leave room for — indeed encourage — the
unscrupulous copyist to make unimportant and
insubstantial changes and substitutions in the
patent which, though adding nothing, would be
enough to take the copied matter outside the
claim, and hence outside the reach of the law.
(Godines vs. Court of Appeals, G.R. No. 97343,
September 13, 1993)
Note: the doctrine of equivalents cannot be
applied when the infringing invention is clearly
beyond what is written in the claim . (Sundiang,
2019)
Explain the concept of “secondary
meaning”
A word or phrase originally incapable of exclusive
appropriation with reference to an article on the
market, because geographically or otherwise
descriptive, might nevertheless have been used
so long and so exclusively by one producer with
reference to his article that, in that trade and to
that branch of the purchasing public, the word or
phrase has come to mean that the article was his
product. (Lyceum of the Phils. vs. Court of Appeals,
G.R. No. 101897, March 5, 1993)
Remedies for infringement
Civil action for infringement:
1. Any patentee, or anyone possessing any
right, title or interest in and to the patented
invention, whose rights have been infringed,
may bring a civil action before a court of
competent jurisdiction, to recover from the
infringer such damages sustained thereby,
plus attorney‘s fees and other expenses of
litigation, and to secure an injunction for the
protection of his rights. (Sec. 76.2, IPC)
2. If the damages are inadequate or cannot be
readily ascertained with reasonable certainty,
the court may award by way of damages a
sum equivalent to reasonable royalty. (Sec.
76.3, IPC)
Bar Operations C ommissions 231
 Purple Notes
Mercantile Law
3. The court may, according to the
circumstances of the case, award damages in
a sum above the amount found as actual
damages sustained: Provided, That the
award does not exceed three (3) times the
amount of such actual damages. (Sec. 76.4,
IPC)
4. The court may, in its discretion, order that
the infringing goods, materials and
implements predominantly used in the
infringement be disposed of outside the
channels of commerce or destroyed, without
compensation. (Sec. 76.5, IPC)
5. Anyone who actively induces the
infringement of a patent or provides the
infringer with a component of a patented
product or of a product produced because of
a patented process knowing it to be
especially adopted for infringing the patented
invention and not suitable for substantial
non-infringing use shall be liable as a
contributory infringer and shall be jointly and
severally liable with the infringer. (Sec. 76.6,
IPC)
Note: Where the amount of damages claimed is
not less than P200, 000.00, the patentee may
choose to file an administrative action against the
infringer with the Bureau of Legal Affairs (BLA).
The BLA can issue injunctions, order direct
infringer to pay patentee damages, but unlike
regular courts, the BLA may not issue search and
seizure warrants or warrants of arrest. (Sec. 10,
IPC)
Any foreign national or juridical entity who meets
the requirements of Section 3 of the Code 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. (Sec. 77, IPC)
Criminal action for repetition of
infringement
If infringement is repeated by the infringer or by
anyone in connivance with him after finality of
the judgment of the court against the infringer,
the offenders shall, without prejudice to the
institution of a civil action for damages, be
232 Center for Legal Education and Research
2018
criminally liable therefore and, upon conviction,
shall suffer:
1. imprisonment for the period of not less than
six (6) months but not more than three (3)
years, and/or;
2. a fine of not less than One hundred
thousand pesos (P100,000) but not more
than Three hundred thousand pesos
(P300,000), at the discretion of the court.
(Sec. 84, IPC)
Defenses in Action for Infringement
1. Prescription
2. Notice requirement
3. Invalidity of patent (Salao, Essentials of
Intellectual Property Law, 2019, p. 97)
Prescriptive Periods
Criminal action
The criminal action herein provided shall
prescribe in three (3) years from date of the
commission of the crime. (Sec. 84, IPC)
Civil Action
No damages can be recovered for acts of
infringement committed more than four (4) years
before the institution of the action for
infringement. (Sec. 79, IPC)
Notice requirement before damage can be
recovered
Damages cannot be recovered for acts of
infringement committed before the infringer had
known, or had reasonable grounds to know of
the patent. It is presumed that the infringer had
known of the patent if on the patented product,
or on the container or package in which the
article is supplied to the public, or on the
advertising material relating to the patented
product or process, are placed the words
"Philippine Patent" with the number of the
patent. (Sec. 80, IPC)
Invalidity of patent as a defense in action
for infringement
 Purple Notes
In an action for infringement, the defendant, in
addition to other defenses available to him, may
show the invalidity of the patent, or any claim
thereof, on any of the grounds on which a
petition of cancellation can be brought under
Section 61 hereof. (Sec. 81, IPC)
The patent or any claim on it is invalid, based on
the following:
1. What is claimed as the invention is not new
or patentable:
2. The patent does not disclose the invention in
a manner sufficiently clear and complete for
it to be carried out by any person skilled in
the art; or
3. The patent is contrary to public order or
morality. (Sec. 61, IPC)
Licensing
Modes of obtaining license to exploit patent
rights:
1. Voluntary Licensing
2. Compulsory Licensing
Voluntary Licensing
The grant of patent to enterprises that can
commercially exploit the invention, whether by
manufacturing, distributing or retail selling.
(Salao, Essentials of Intellectual Property Law, 2019, p.
111)
Two objectives of the law:
1. To encourage transfer and dissemination of
technology; and
2. To prevent practices that may have an
adverse effect on competition and trade.
(Ibid.)
Mandatory Provisions in the Voluntary
Licensing Contract
1. That the laws of the Philippines shall govern
the interpretation of the same and in the
event of litigation, the venue shall be the
proper court in the place where the licensee
has its principal office;
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Mercantile Law
2. Continued access to improvements in
techniques and processes related to the
technology shall be made available during
the period of the technology transfer
arrangement;
3. In the event the technology transfer
arrangement shall provide for arbitration, the
Procedure of Arbitration of the Arbitration
Law of the Philippines or the Arbitration Rules
of the United Nations Commission on
International Trade Law (UNCITRAL) or the
Rules of Conciliation and Arbitration of the
International Chamber of Commerce (ICC)
shall apply and the venue of arbitration shall
be the Philippines or any neutral country; and
4. The Philippine taxes on all payments relating
to the technology transfer arrangement shall
be borne by the licensor. (Sec. 88, IPC)
Prohibited Clauses
1. Those which impose upon the licensee the
obligation to acquire from a specific source
capital goods, intermediate products, raw
materials, and other technologies, or of
permanently employing personnel indicated
by the licensor;
2. Those pursuant to which the licensor
reserves the right to fix the sale or resale
prices of the products manufactured on the
basis of the license;
3. Those that contain restrictions regarding the
volume and structure of production;
4. Those that prohibit the use of competitive
technologies in a non-exclusive technology
transfer agreement;
5. Those that establish a full or partial purchase
option in favor of the licensor;
6. Those that obligate the licensee to transfer
for free to the licensor the inventions or
improvements that may be obtained through
the use of the licensed technology;
7. Those that require payment of royalties to
the owners of patents for patents which are
not used;
8. Those that prohibit the licensee to export the
licensed product unless justified for the
protection of the legitimate interest of the
licensor such as exports to countries where
exclusive licenses to manufacture and/or
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 Purple Notes
Mercantile Law
distribute the licensed product(s) have
already been granted;
9. Those which restrict the use of the
technology supplied after the expiration of
the technology transfer arrangement, except
in cases of early termination of the
technology transfer arrangement due to
reason(s) attributable to the licensee;
10. Those which require payments for patents
and other industrial property rights after their
expiration, termination arrangement;
11. Those which require that the technology
recipient shall not contest the validity of any
of the patents of the technology supplier;
12. Those which restrict the research and
development activities of the licensee
designed to absorb and adapt the transferred
technology to local conditions or to initiate
research and development programs in
connection with new products, processes or
equipment;
13. Those which prevent the licensee from
adapting the imported technology to local
conditions, or introducing innovation to it, as
long as it does not impair the quality
standards prescribed by the licensor;
14. Those which exempt the licensor for liability
for non-fulfilment of his responsibilities under
the technology transfer arrangement and/or
liability arising from third party suits brought
about by the use of the licensed product or
the licensed technology; and
15. Other clauses with equivalent effects. (Sec.
87, IPC)
Exceptional Cases
In exceptional or meritorious cases where
substantial benefits will accrue to the economy,
such as high technology content, increase in
foreign exchange earnings, employment
generation, regional dispersal of industries and/or
substitution with or use of local raw materials, or
in the case of Board of Investments, registered
companies with pioneer status, exemption from
any of the above requirements may be allowed
by the Documentation, Information and
Technology Transfer Bureau after evaluation
thereof on a case by case basis. (Sec. 91, IPC)
234 Center for Legal Education and Research
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Effect of non-conformance with the
prohibited clauses and mandatory
provisions:
Non-conformance with any of the provisions of
Sections 87 and 88, however, shall automatically
render the technology transfer arrangement
unenforceable, unless said technology transfer
arrangement is approved and registered with the
Documentation, Information and Technology
Transfer Bureau under the provisions of Section
91 on exceptional cases. (Sec. 92, IPC)
Example of Voluntary License Contract
A technology transfer arrangement is in the
nature of Voluntary License Contract. (Salao,
Essentials of Intellectual Property Law, 2019, p. 114)
Compulsory Licensing
License issued by the Director General of the
Intellectual Property Office to exploit a patented
invention without the permission of the patent
holder, either by manufacture or through parallel
importation. (Sec. 4, RA 9502)
Grounds:
1. National emergency or other circumstances
of extreme urgency;
2. Where the public interest, in particular,
national security, nutrition, health or the
development of other vital sectors of the
national economy as determined by the
appropriate agency of the Government, so
requires; or
3. Where a judicial or administrative body has
determined that the manner of exploitation
by the owner of the patent or his licensee is
anti-competitive; or
4. In case of public non-commercial use of the
patent by the patentee, without satisfactory
reason;
5. If the patented invention is not being worked
in the Philippines on a commercial scale,
although capable of being worked, without
satisfactory reason: Provided, That the
importation of the patented article shall
constitute working or using the patent.
 Purple Notes
6. Where the demand for patented drugs and
medicines is not being met to an adequate
extent and on reasonable terms, as
determined by the Secretary of the
Department of Health. (Sec. 93, IPC)
Compulsory Licensing of Patents Involving
Semi-Conductor Technology
In the case of compulsory licensing of patents
involving semi-conductor technology, the license
may only be granted in case of public non-
commercial use or to remedy a practice
determined after judicial or administrative
process to be anti-competitive. (Sec. 96, IPC)
Compulsory License Based on
Interdependence of Patents
If the invention protected by a patent, hereafter
referred to as the ―second patent,‖ within the
country cannot be worked without infringing
another patent, hereafter referred to as the ―first
patent,‖ granted on a prior application or
benefiting from an earlier priority, a compulsory
license may be granted to the owner of the
second patent to the extent necessary for the
working of his invention, subject to the following
conditions:
1. The invention claimed in the second patent
involves an important technical advance of
considerable economic significance in relation
to the first patent;
2. The owner of the first patent shall be entitled
to a cross-license on reasonable terms to use
the invention claimed in the second patent;
3. The use authorized in respect of the first
patent shall be non-assignable except with
the assignment of the second patent; and
4. The terms and conditions of Sections 95, 96
and 98 to 100 of this Act.
Period for Filing a Petition for a Compulsory
License
A compulsory license may not be applied for on
the ground stated in Subsection 93.5 before the
expiration of a period of four (4) years from the
date of filing of the application or three (3) years
from the date of the patent whichever period
expires last.
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Mercantile Law
A compulsory license which is applied for on any
of the grounds stated in Subsections 93.2, 93.3,
93.4, and 93.6 and Section 97 may be applied for
at any time after the grant of the patent. (Sec. 94,
IPC)
Requirement to Obtain a License on
Reasonable Commercial Terms.
General Rule:
The license will only be granted after the
petitioner has made efforts to obtain
authorization from the patent owner on
reasonable commercial terms and conditions but
such efforts have not been successful within a
reasonable period of time. (Sec. 95.1, IPC)
Exceptions:
1. Where the petition for compulsory license
seeks to remedy a practice determined after
judicial or administrative process to be anti-
competitive;
2. In situations of national emergency or other
circumstances of extreme urgency;
3. In cases of public non-commercial use; and
4. In cases where the demand for the patented
drugs and medicines in the Philippines is not
being met to an adequate extent and on
reasonable terms, as determined by the
Secretary of the Department of Health. (Sec.
95.2, IPC)
Terms and Conditions of Compulsory
License
The basic terms and conditions including the rate
of royalties of a compulsory license shall be fixed
by the Director of Legal Affairs subject to the
following conditions:
1. The scope and duration of such license shall
be limited to the purpose for which it was
authorized;
2. The license shall be non-exclusive;
3. The license shall be non-assignable, except
with that part of the enterprise or business
with which the invention is being exploited;
4. Use of the subject matter of the license shall
be devoted predominantly for the supply of
the Philippine market: Provided, That this
Bar Operations C ommissions 235
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Mercantile Law
limitation shall not apply where the grant of
the license is based on the ground that the
patentee‘s manner of exploiting the patent is
determined by judicial or administrative
process, to be anti-competitive.
5. The license may be terminated upon proper
showing that circumstances which led to its
grant have ceased to exist and are unlikely to
recur: Provided, that adequate protection
shall be afforded to the legitimate interest of
the licensee; and
6. The patentee shall be paid adequate
remuneration taking into account the
economic value of the grant or authorization,
except that in cases where the license was
granted to remedy a practice which was
determined after judicial or administrative
process, to be anti-competitive, the need to
correct the anti-competitive practice may be
taken into account in fixing the amount of
remuneration. (Sec. 100, IPC)
Amendment of compulsory license
Upon the request of the patentee or the licensee,
the Director of Legal Affairs may amend the
decision granting the compulsory license, upon
proper showing of new facts or circumstances
justifying such amendment. (Sec. 101.1, IPC)
Cancellation of Compulsory License
Contract
Upon the request of the patentee, the Director of
Legal Affairs may cancel the compulsory license:
1. If the ground for the grant of the compulsory
license no longer exists and is unlikely to
recur;
2. If the licensee has neither begun to supply
the domestic market nor made serious
preparation therefor;
3. If the licensee has not complied with the
prescribed terms of the license. (Sec. 101.2,
IPC)
Surrender of compulsory license
The licensee may surrender the license by a
written declaration submitted to the Intellectual
Property Office. The Director shall cause the
amendment, surrender, or cancellation in the
Register, notify the patentee, and/or the licensee,
236 Center for Legal Education and Research
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and cause notice thereof to be published in the
IPO Gazette. (Sec. 101.3 & 101.4, IPC)
Licensee‟s Exemption from Liability.
Any person who works a patented product,
substance and/or process under a license granted
under this Chapter, shall be free from any liability
for infringement: Provided, however, that in the
case of voluntary licensing, no collusion with the
licensor is proven. This is without prejudice to the
right of the rightful owner of the patent to
recover from the licensor whatever he may have
received as royalties under the license. (Sec. 102,
IPC)
Assignment and transmission of rights
Patents or applications for patents and invention
to which they relate, shall be protected in the
same way as the rights of other property under
the Civil Code.
Inventions and any right, title or interest in and
to patents and inventions covered thereby, may
be assigned or transmitted by inheritance or
bequest or may be the subject of a license
contract. (Sec. 103, IPC)
Assignment of Inventions
An assignment may be of the entire right, title or
interest in and to the patent and the invention
covered thereby, or of an undivided share of the
entire patent and invention, in which event the
parties become joint owners thereof. An
assignment may be limited to a specified
territory. (Sec. 104, IPC)
Form of Assignment
The assignment must be in writing,
acknowledged before a notary public or other
officer authorized to administer oath or perform
notarial acts, and certified under the hand and
official seal of the notary or such other officer.
(Sec. 105, IPC)
G. Philippine Competition Act …………………………………………
Recording
The Intellectual Property Office shall record
assignments, licenses and other instruments
 Purple Notes
relating to the transmission of any right, title or
interest in and to inventions, and patents or
application for patents or inventions to which
they relate, which are presented in due form to
the Office for registration, in books and records
kept for the purpose. (Sec. 106.1, IPC)
Effect if the assignment was not recorded
in the IPO
A deed of assignment affecting title shall be void
as against any subsequent purchaser or
mortgagee for valuable consideration and without
notice unless, it is so recorded in the Office,
within three (3) months from the date of said
instrument, or prior to the subsequent purchase
or mortgage.
However, even without recording, the
instruments are binding upon the parties. (Sec.
106.2, IPC)
Rights of Joint Owners
If two (2) or more persons jointly own a patent
and the invention covered thereby, either by the
issuance of the patent in their joint favor or by
reason of the assignment of an undivided share
in the patent and invention or by reason of the
succession in title to such share, each of the joint
owners shall be entitled to personally make, use,
sell, or import the invention for his own profit:
Provided, however, That neither of the joint
owners shall be entitled to grant licenses or to
assign his right, title or interest or part thereof
without the consent of the other owner or
owners, or without proportionally dividing the
proceeds with such other owner or owners. (Sec.
107, IPC)
C.TRADEMARKS
Any visible sign capable of distinguishing the
goods (trademark) or services (service mark) of
an enterprise and shall include a stamped or
marked container of goods. (Sec. 121.1, IPC)
Purpose of trademark:
1. To indicate origin or ownership of the articles
to which they are attached
237
Mercantile Law
2. To guarantee that those articles come up to a
certain standard of quality
3. To advertise the articles, they symbolized
(Mirpuri vs. CA, G.R. No. 114508, November 19,
1999)
Functions of trademark:
1. Economic Function- trademarks serve as
an essential means of distinguishing the
products of one manufacturer or dealers from
those of others.
2. Source-Indicating Function- to indicate
the source or origin of the goods on which it
is used. Its immediate object is to distinguish
the goods of one manufacturer from those of
his competitors through the association of
goods thus marked with a particular
producer.
3. Guarantee Function- trademark serve to
guarantee that the product to which it is
affixed comes up to a certain standard of
quality.
4. Advertisement Function- the more widely
advertised the product is, the more readily
may courts concede that it has become
distinctive of its proprietor‘s goods (Amador,
2007)
Definitions of Marks, collective marks, and
trade names
Mark
Any visible sign capable of distinguishing the
goods (trademark) or services (service mark) of
an enterprise and shall include a stamped or
marked container. (Sec. 121.1, IPC)
Collective mark
Any visible sign designated in the application 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 collection mark. (Sec. 121.2, IPC)
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Mercantile Law
Trade name
The name or designation identifying or
distinguishing an enterprise. (Sec. 121.3, IPC)
Acquisition of ownership of mark
The rights in a mark shall be acquired through
registration made validly in accordance with the
provisions of this law. (Sec. 122, IPC)
The right to register a trademark should be based
on ownership. When the applicant is not the
owner of the trademark being applied for, he has
no right to apply for the registration of the same.
Under the Trademark Law, only the owner of the
trademark, trade name or service mark used to
distinguish his goods, business or service from
the goods, business or service of others is
entitled to register the same. An exclusive
distributor does not acquire any proprietary
interest in the principal's trademark and cannot
register it in his own name unless it has been
validly assigned to him. (Superior Commercial
Enterprises, Inc. vs. Kunnan Enterprises, G.R. No.
169974, April 20, 2010)
Acquisition of ownership of trade name
Ownership of a mark or trade name may be
acquired not necessarily by registration but by
adoption and use in trade or commerce. (Shangri-
la International Hotel Management, Ltd., et al. vs.
Developers Group of Companies, Inc., G.R. No.
159938, March 31, 2006)
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. (Section 165.1, IPC)
Non-registrable marks
1. 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;
238 Center for Legal Education and Research
2018
2. 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;
3. 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;
4. Is identical with a registered mark belonging
to a different proprietor or a mark with an
earlier filing or priority date, in respect of:
a. The same goods or services, or
b. Closely related goods or services, or
c. If it nearly resembles such a mark as to
be likely to deceive or cause confusion;
5. 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;
6. 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;
7. Is likely to mislead the public, particularly as
to the nature, quality, characteristics or
geographical origin of the goods or services;
8. Consists exclusively of signs that are generic
for the goods or services that they seek to
identify;
9. 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;
10. Consists exclusively of signs or of indications
that may serve in trade to designate the
kind, quality, quantity, intended purpose,
value, geographical origin, time
production of the goods or rendering of the
services, or other characteristics of the
goods or services;
11. 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;
12. Consists of color alone, unless defined by a
given form; or
13. Is contrary to public order or morality.
(Section 123.1, IPC)
Marks which become distinctive can be
registered
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.
(Section 123.2, IPC)
PRIOR USE OF MARK AS REQUIREMENT
Prior use in the Philippines is not required before
registration. What is necessary is that there must
be actual use after registration. The 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 valid reasons for non-use
within 1 year from the fifth anniversary date of
registration. (Sundiang & Aquino, Reviewer on
Commercial Law, 2017, p. 540)
Purple Notes
Mercantile Law
TEST TO DETERMINE CONFUSING
SIMILARITY BETWEEN MARKS
Tests to determine confusing similarity
between marks:
or
1. Dominancy test
2. Holistic test
3. Idem sonans
Dominancy test:
The dominancy test focuses on the similarity of
the prevalent features of the competing
trademarks that might cause confusion or
deception. (McDonald Corporation vs. MacJoy
Fastfood Corporation, G.R. No. 166115, February 2,
2007)
By focusing not simply on similarities in size, form
or color but on the main or essential features of
each mark taken together. Duplication is not
necessary, and similarity, while relevant, is not
conclusive. (Asia Brewery, Inc. vs. Court of Appeals,
G.R. No. 103543, July 5, 1993)
The test was similarity or "resemblance between
the two (trademarks) such as would be likely to
cause the one mark to be mistaken for the
others. But this is not such similitude as amounts
to identity." (Asia Brewery, Inc. vs. Court of Appeals,
G.R. No. 103543, July 5, 1993, citing Forbes, Munn &
Co. (Ltd.) vs. Ang San To, 40 Phil. 272)
Holistic test:
The holistic test requires the court to consider the
entirety of the marks as applied to the products,
including the labels and packaging, in
determining confusing similarity. Under the latter
test, a comparison of the words is not the only
determinant factor. (McDonald Corporation vs.
MacJoy Fastfood Corporation, G.R. No. 166115,
February 2, 2007)
It considers the entirety of the marks, including
labels and packaging, in determining confusing
similarity. The focus is not only on the
predominant words but also on the other features
appearing on the labels. (Societe Des Produits
Nestle S.A. vs. Dy, G.R. No. 172276, August 8, 2010)
Idem sonans:
239
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 Purple Notes
Mercantile Law
Two names are said to be ―idem sonans‖ if the
attentive ear finds difficulty in distinguishing
them when pronounced. (Martin vx. State, 541 S.W.
2d 605)
Well-known marks
How determined:
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. (Sec. 123, IPC)
Criteria in determining whether a mark is
well known (Rule 102 of the Rules and Regulations
on Trademarks, Service Marks, Trade Names and
Marked or Stamped Containers)
1. The duration, extent and geographical area
of any use of the mark in particular the
duration, extent and geographical area of
any promotion of the mark including
advertising or publicity and presentation, at
fairs or exhibitions, of the goods and/or
services to which the mark applies;
2. The market share in the Philippines and in
other countries of the goods and/ or services
to which the mark applies;
3. The degree of the inherent or acquired
distinction of the mark;
4. The quality-image or reputation acquired by
the mark;
5. The extent to which the mark has been
registered in the world;
6. The exclusivity of the registration attained
by the mark in the world;
7. The extent to which the mark has been used
in the world;
8. The exclusivity of the use attained by the
mark in the world;
9. The commercial value attributed to the mark
in the world;
10. The record of successful protection of the
rights in the mark;
11. The outcome of litigations dealing with the
issue of whether the mark is a well-known
mark; and
12. The presence of absence of identical or
similar marks validly registered for or used
240 Center for Legal Education and Research
2018
on identical or similar goods or services and
owned by persons other than the person
claiming that his mark is a well-known mark.
Is it necessary that a foreign well-known
mark be registered in the Philippines
before said well-known mark may be
protected in the Philippines?
No. The fact that [respondent‘s] marks are
neither registered nor used in the Philippines is of
no moment. The scope of protection initially
afforded by Article 6b of the Paris Convention has
been expanded in the 1999 Joint
Recommendation Concerning Provisions on the
Protection of Well-Known Marks, wherein the
World Intellectual Property Organization (WIPO)
General Assembly and the Paris Union agreed to
a nonbinding recommendation that a well-known
mark should be protected in a country even if the
mark is neither registered nor used in that
country. (Sehwani Incorporated and/or Benita‘s Frites
Inc. vs. In-N-Out Burger, Inc. G.R. No. 171053,
October 15, 2007)
Rights conferred by registration:
1. Right to the exclusive use of the mark for
one‘s own goods or services. (Sec 138, IPC)
2. Exclusive right to prevent all third parties
from using identical or similar signs or
containers. (Sec 147.1, IPC)
3. Exclusive right to prevent all third person
from
using mark indicating a connection between
those goods and services of third persons
and those of the owner of registered mark.
(Sec 147.2, IPC)
Right to the exclusive use of the mark for
one‟s own goods or services
A certificate of registration of a mark shall be
prima facie evidence of the validity of the
registration, the registrant‘s ownership of the
mark, and of the registrant‘s exclusive right to
use the same in connection with the goods or
services and those that are related thereto
specified in the certificate. (Sec 138, IPC)
 Purple Notes
Exclusive right to prevent all third parties
from using identical or similar signs or
containers
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. (Sec. 147.1, IPC)
Exclusive right to prevent all third person
from using mark indicating a connection
between those goods and services of third
persons and those of the owner of
registered mark
The exclusive right of the owner of a well-known
mark which is registered in the Philippines, shall
extend to goods and services which are not
similar to those in respect of which the mark is
registered: 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. (Sec. 147.2, IPC)
Effect of Registration
It must be emphasized that registration of a
trademark, by itself, is not a mode of acquiring
ownership. If the applicant is not the owner of
the trademark, he has no right to apply for its
registration. Registration merely creates a prima
facie presumption of the validity of registration,
of the registrant‘s ownership of the trademark
and of the exclusive right to use thereof. Such
presumption, just like the presumptive regularity
in the performance of official function, is
rebuttable and must give way to evidence to the
contrary‖ (Birkenstock Orthopaedie GMBH and Co. Kg
vs. Philippine Shoe Expo Marketing Corporation. G.R.
No. 194307, November 20, 2013)
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Mercantile Law
Exception to Registration Requirement:
Well-known Mark
A trade name of a national of a State that is a
party to the Paris Convention, whether or not the
trade name forms part of a trademark is
protected without the obligation of filing or
registration‖ (Fredco Manufacturing Corp. vs.
President and Fellows of Harvard College, G.R. No.
185917, June 1, 2011)
Use of third parties of names, etc. Similar
to registered trademark
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. (Rule 104, 2nd par., IPOPHL
Memorandum Circular No. 17-010)
Infringement and remedies
Elements of trademark infringement
(RISCW)
1. The trademark being infringed is registered
in the Intellectual Property Office;
2. The trademark is reproduced, counterfeited,
copied, or colorably imitated by the
infringer;
3. The infringing mark is used in connection
with the sale, offering for sale, or
advertising of any goods, business or
services; or the infringing mark is applied to
labels, signs, prints, packages, wrappers,
receptacles or advertisements intended to be
used upon or in connection with such goods,
business or services;
4. The use or application of the infringing mark
is likely to cause confusion or mistake or
to deceive purchasers or others as to the
goods or services themselves or as to the
source or origin of such goods or services or
the identity of such business; and
Bar Operations C ommissions 241
 Purple Notes
Mercantile Law
5. The use or application of the infringing mark
is without the consent of the trademark
owner or the assignee thereof. (Diaz vs.
People of the Philippines, G.R. No. 180677,
February 18, 2013)
Acts constituting trademark infringements
Any person who shall, without the consent of the
owner of the registered mark:
1. Use in commerce any reproduction,
counterfeit, copy, or colorable imitation of a
registered mark or the same container or a
dominant feature thereof in connection with
the sale, offering for sale, distribution,
advertising of any goods or services including
other preparatory steps necessary to carry
out the sale of any goods or services on or in
connection with which such use is likely to
cause confusion, or to cause mistake, or to
deceive; or
2. Reproduce, counterfeit, copy or colorably
imitate a registered mark or a dominant
feature thereof and apply such reproduction,
counterfeit, copy or colorable imitation to
labels, signs, prints, packages, wrappers,
receptacles or advertisements intended to be
used in commerce upon or in connection with
the sale, offering for sale, distribution, or
advertising of goods or services on or in
connection with which such use is likely to
cause confusion, or to cause mistake, or to
deceive, shall be liable in a civil action for
infringement by the registrant for the
remedies hereinafter set forth: Provided,
That the infringement takes place at the
moment any of the acts stated in Subsection
155.1 or this subsection are committed
regardless of whether there is actual sale of
goods or services using the infringing
material. (Sec. 155, IPC)
Remedies against trademark infringer:
1. The owner of a registered mark may recover
damages from any person who infringes his
rights, and the measure of the damages
suffered shall be either the reasonable profit
which the complaining party would have
made, had the defendant not infringed his
rights, or the profit which the defendant
242 Center for Legal Education and Research
2018
actually made out of the infringement, or in
the event such measure of damages cannot
be readily ascertained with reasonable
certainty, then the court may award as
damages a reasonable percentage based
upon the amount of gross sales of the
defendant or the value of the services in
connection with which the mark or trade
name was used in the infringement of the
rights of the complaining party.
2. On application of the complainant, the court
may impound during the pendency of the
action, sales invoices and other documents
evidencing sales.
3. In cases where actual intent to mislead the
public or to defraud the complainant is
shown, in the discretion of the court, the
damages may be doubled.
4. The complainant, upon proper showing, may
also be granted injunction. (Sec. 156, IPC)
Damages which can be recovered from
infringer
1. The reasonable profit which the complaining
party would have made, had the defendant
not infringed his rights;
2. The profit which the defendant actually made
out of the infringement; or
3. A reasonable percentage based upon the
amount of gross sales of the defendant or
the value of the services in connection with
which the mark or trade name was used in
the infringement of the rights of the
complaining party, which the court may
award as damages in the event such
measure of damages cannot be readily
ascertained with reasonable
certainty. (Section 156.1, IPC)
Notice requirement in recovering damages
for infringement
In any suit for infringement, the owner of the
registered mark shall not be entitled to recover
profits or damages unless the acts have been
committed with knowledge that such imitation is
likely to cause confusion, or to cause mistake, or
to deceive. Such knowledge is presumed if the
registrant gives notice that his mark is registered
by displaying with the mark the words
‗‖Registered Mark‖ or the letter R within a circle
 Purple Notes
or if the defendant had otherwise actual notice of
the registration. (Sec. 158, IPC)
Penalties
Independent of the civil and administrative
sanctions imposed by law, a criminal penalty of
imprisonment from 2 to 5 years and a fine
ranging from P50,000.00 to P200,000.00. (Sec
170, IPC)
Unfair competition
Person who has property right in goodwill
of identified goods, business or services
protected
A person who has identified in the mind of the
public the goods he manufactures or deals in, his
business or services from those of others,
whether or not a registered mark is employed,
has a property right in the goodwill of the said
goods,
business or services so identified, which will be
protected in the same manner as other property
rights. (Sec. 168.1, IPC)
Acts constituting unfair competition
Any person shall be guilty of unfair competition
who shall:
1. Employ deception, or any other means
contrary to good faith by which he shall pass
off the goods manufactured by him or in
which he deals, or his business, or services
for those of the one having established such
goodwill, or
2. Commit any acts calculated to produce said
result. (Sec. 168.2, IPC)
Does an infringement case constitute a
prejudicial question to an unfair
competition case?
No. There is no prejudicial question since the two
actions are independent of each of other. The
basis of an action for unfair competition is fraud,
while that of infringement, the fact of
registration.
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Mercantile Law
There is no prejudicial question if the civil
(infringement) and criminal (unfair competition)
action can, according to law, proceed
independently of each other. Under Rule 111,
Section 3 of the Revised Rules on Criminal
Procedure, in the cases provided in Articles 32,
33, 34 and 2176 of the Civil Code, the
independent civil action may be brought by the
offended party. It shall proceed independently of
the criminal action and shall require only a
preponderance of evidence. (Samson vs. Hon.
Reynaldo B. Daway, GR Nos. 100054-55, July 21 2004)
Particular acts constituting unfair
competition, person liable:
In particular, and without in any way limiting the
scope of protection against unfair competition,
the following shall be deemed guilty of unfair
competition:
1. Any person, who is selling his goods and
gives them the general appearance of goods
of another manufacturer or dealer, either as
to the goods themselves or in the wrapping
of the packages in which they are contained,
or the devices or words thereon, or in any
other feature of their appearance, which
would be likely to influence purchasers to
believe that the goods offered are those of a
manufacturer or dealer, other than the actual
manufacturer or dealer, or who otherwise
clothes the goods with such appearance as
shall deceive the public and defraud another
of his legitimate trade, or any subsequent
vendor of such goods or any agent of any
vendor engaged in selling such goods with a
like purpose;
2. Any person who by any artifice, or device, or
who employs any other means calculated to
induce the false belief that such person is
offering the services of another who has
identified such services in the mind of the
public; or
3. Any person who shall make any false
statement in the course of trade or who shall
commit any other act contrary to good faith
of a nature calculated to discredit the goods,
business or services of another. (Sec. 168.3,
IPC)
Bar Operations C ommissions 243
 Purple Notes
Mercantile Law
2018
Difference between infringement of Requirements for registration
trademark and unfair competition:
The following minimum requirements shall be
INFRINGEMENT OF
UNFAIR COMPETITION
contained in the application form:
TRADEMARK
It is the unauthorized It is the passing off of 1. Name and address and contact details of the
use of a trademark; one‘s goods as those of
applicant or the address and contact details
another;
Fraudulent intent is Fraudulent intent is
of his representative, if any;
unnecessary; essential; 2. The Designated Contracting Parties;
Prior registration of the Registration is not 3. Reproduction of the mark; and
trademark is a necessary. 4. Indication of the goods and services for
prerequisite to the which registration of the mark is sought.
action. (Rule 5, IPOPHL Memorandum 17-011,
(Del Monte Corp. vs. CA, GR Nos. L-78325, January 25, "Philippine Madrid Regulations")
1990)
Term of protection
REGISTRATION OF MARKS UNDER THE
MADRID SYSTEM The term of protection under the Madrid Protocol
is valid for ten (10) years from the date of
Coverage registration. The registration is renewable at the
end of each 10-year period directly with the
These Regulations and the Common Regulations WIPO with effect in the designated Contracting
shall apply to all international applications filed Parties concerned. (Art. 6, Madrid Protocol)
under the Madrid Protocol where IPOPHL is the
Office of Origin, and international registrations D.COPYRIGHT
where the Philippines is a Designated Contracting
Party. (Rule 3, IPOPHL Memorandum 17-011, BASIC PRINCIPLES
"Philippine Madrid Regulations")
Rights conferred 1. Works are protected by the sole fact of their
creation. (Sec 172.2, IPC)
1. An international registration designating the 2. Copyright is distinct from the property in the
Philippines shall have the same effect, from material object subject to it. (Sec 181, IPC)
the date of the international registration, as News of today, office text of legislative or
if an application for the registration of the administrative or legal nature, not protected.
mark had been filed directly with the IPOPHL (Sec 175, IPC)
under the IP Code and the TM Regulations.
Works are protected by the sole fact of
2. If no refusal is notified by the IPOPHL to the their creation
International Bureau in accordance with the
Madrid Protocol and the Common Works are protected by the sole fact of their
Regulations, or if a refusal has been so creation, irrespective of their mode or form of
notified but has been subsequently expression, as well as of their content, quality
withdrawn, or if a statement of grant of and purpose. (Sec. 172.2, IPC)
protection is sent by the IPOPHL, the
protection of the mark in the Philippines Copyright is distinct from the property in
shall be the same as if the mark had been the material object subject to it
registered directly by the IPOPHL on the
date of the international registration. (Rule The copyright is distinct from the property in the
15, IPOPHL Memorandum 17-011, "Philippine material object subject to it. Consequently, the
Madrid Regulations") transfer or assignment of the copyright shall not
itself constitute a transfer of the material object.
Nor shall a transfer or assignment of the sole

244 Center for Legal Education and Research

 Purple Notes
copy or of one or several copies of the work
imply transfer or assignment of the copyright.
(Sec. 181 IPC)
Copyrightable works
1. Original works
2. Derivative works
Original works:
Literary and artistic works, hereinafter referred to
as "works", are original intellectual creations in
the literary and artistic domain protected from
the moment of their creation and shall include in
particular:
1. Books, pamphlets, articles and other writings;
2. Periodicals and newspapers;
3. Lectures, sermons, addresses, dissertations
prepared for oral delivery, whether or not
reduced in writing or other material form;
4. Letters;
5. Dramatic or dramatico-musical compositions;
choreographic works or entertainment in
dumb shows;
6. Musical compositions, with or without words;
7. Works of drawing, painting, architecture,
sculpture, engraving, lithography or other
works of art; models or designs for works of
art;
8. Original ornamental designs or models for
articles of manufacture, whether or not
registrable as an industrial design, and other
works of applied art;
9. Illustrations, maps, plans, sketches, charts
and three-dimensional works relative to
geography, topography, architecture or
science;
10. Drawings or plastic works of a scientific or
technical character;
11. Photographic works including works produced
by a process analogous to photography;
lantern slides;
12. Audiovisual works and cinematographic
works and works produced by a process
analogous to cinematography or any process
for making audio-visual recordings;
13. Pictorial illustrations and advertisements;
14. Computer programs; and
245
Mercantile Law
15. Other literary, scholarly, scientific and artistic
works. (Sec. 172.1, IPC)
Derivative works
1. Dramatizations, translations, adaptations,
abridgments, arrangements, and other
alterations of literary or artistic works; and
2. Collections of literary, scholarly or artistic
works, and compilations of data and other
materials which are original by reason of the
selection or coordination or arrangement of
their contents. (Sec. 173.1, IPC)
Derivative works protected as new works
The above works shall be protected as a new
works: Provided however, that such new work
shall not affect the force of any subsisting
copyright upon the original works employed or
any part thereof, or be construed to imply any
right to such use of the original works, or to
secure or extend copyright in such original works.
(Sec. 173.2, IPC)
Non-copyrightable works
1. Unprotected subject matters
2. Works of the government
3. Collection of an author‘s works, said author
has exclusive right to it
Unprotected subject matters (Section 175,
Intellectual Property Code)
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. (Sec. 175, IPC)
Works of the government
No copyright shall subsist in any work of the
Government of the Philippines. (Sec. 176.1, IPC)
Bar Operations C ommissions 245
 Purple Notes
Mercantile Law
Prior approval of the government necessary
for exploitation of its works
However, prior approval of the government
agency or office wherein the work is created shall
be necessary for exploitation of such work for
profit. Such agency or office may, among other
things, impose as a condition the payment of
royalties. (Sec. 176.1, IPC)
Prior approval, not necessary in these
government works
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.
(Sec 176.1, IPC)
Collection of an author‟s work, author has
exclusive right
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. (Section
176.2, IPC)
Rights of copyright owner
1. Economic rights
2. Moral rights
3. Rights to proceeds in subsequent transfer
Economic rights of copyright owner:
It is the exclusive right to carry out, authorize or
prevent the following acts:
1. Reproduction of the work or substantial
portion of the work;
2. Dramatization, translation, adaptation,
abridgment, arrangement or other
transformation of the work;
3. The first public distribution of the original and
each copy of the work by sale or other forms
of transfer of ownership;
4. Rental of the original or a copy of an audio-
visual or cinematographic work, a work
246 Center for Legal Education and Research
2018
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;
5. Public display of the original or a copy of the
work;
6. Public performance of the work; and
7. Other communication to the public of the
work. (Sec. 177, IPC)
Moral rights of copyright owner
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:
1. 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;
2. To make any alterations of his work prior to,
or to withhold it from publication;
3. 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
4. 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. (Sec. 193, IPC)
Rights to proceeds in subsequent transfer
In every sale or lease of an original work of
painting or sculpture or of the original manuscript
of a writer or composer, subsequent to the first
disposition thereof by the author, the author or
his heirs shall have an inalienable right to
participate in the gross proceeds of the sale or
lease to the extent of 5%. This right shall exist
during the lifetime of the author and for 50 years
after his death. (Sec. 200, IPC)
Exception to the rights to proceeds in
subsequent transfer
This shall not apply to prints, etchings,
engravings, works of applied art, or works of
similar kind wherein the author primarily derives
 Purple Notes
gain from the proceeds of reproductions. (Sec.
201, IPC)
Rules on ownership of copyright
In original literary and artistic work, in
general
In the case of original literary and artistic works,
copyright shall belong to the author of the work.
(Sec. 178.1, IPC)
In cases of joint ownership:
1. In the case of works of joint authorship, the
co-authors shall be the original owners of the
copyright and in the absence of agreement,
their rights shall be governed by the rules on
co-ownership.
2. If, however, a work of joint authorship
consists of parts that can be used separately
and the author of each part can be identified,
the author of each part shall be the original
owner of the copyright in the part that he
has created. (Sec. 178.2, IPC)
In cases where there is employer-employee
relationship:
In the case of work created by an author during
and in the course of his employment, the
copyright shall belong to:
1. The employee, if the creation of the object of
copyright is not a part of his regular duties
even if the employee uses the time, facilities
and materials of the employer.
2. The employer, if the work is the result of the
performance of his regularly-assigned duties,
unless there is an agreement, express or
implied, to the contrary. (Sec. 178.3, IPC)
In cases of commissioned work
The person who so commissioned the work shall
have ownership of the work, but the copyright
thereto shall remain with the creator, unless
there is a written stipulation to the contrary. (Sec.
178.4, IPC)
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Mercantile Law
In cases of audio-visual works
In the case of audiovisual work, the copyright
shall belong to the producer, the author of the
scenario, the composer of the music, the film
director, and the author of the work so adapted.
However, subject to contrary or other stipulations
among the creators, the producer shall exercise
the copyright to an extent required for the
exhibition of the work in any manner, except for
the right to collect performing license fees for the
performance of musical compositions, with or
without words, which are incorporated into the
work. (Sec. 178.5, IPC)
In cases of letters:
In respect of letters, the copyright shall belong to
the writer subject to the provisions of Article 723
of the Civil Code. (Sec. 178.6, IPC)
Letters and other private communications in
writing are owned by the person to whom they
are addressed and delivered, but they cannot be
published or disseminated without the consent of
the writer or his heirs. However, the court may
authorize their publication or dissemination if the
public good or the interest of justice so requires.
(Art. 723, NCC)
In cases of anonymous and pseudonymous
works
The publishers shall be deemed to represent the
authors of articles and other writings published
without the names of the authors or under
pseudonyms, unless the contrary appears, or the
pseudonyms or adopted name leaves no doubt as
to the author‘s identity, or if the author of the
anonymous works discloses his identity. (Sec. 179,
IPC)
Summary on rules on copyright ownership:
CREATOR OWNER
Author, heirs, assigns. Sec.
Single creator
178.1, 180, and 183 IPC)
Co-authors
If no agreement, co
ownership (no identifiable
Joint creation
part)
Identifiable parts: author of
part he has created. (Sec.
Bar Operations C ommissions 247
 Purple Notes
Mercantile Law
178.2, IPC)
Person commissioned,
Commissioned work Unless there is stipulation.
(Sec. 178.4, IPC)
Producer (for exhibit)
Producer, author of scenario,
Audio Visual composer, film director,
author of work (other
purposes). (Sec 178.5, IPC)
Presumption: publisher
Pseudonyms and
unless proved otherwise.
Anonymous Works
(Sec 179, IPC)
Employer if part of his duties,
Employees if not part of his duties,
employee. (Sec 178.3, IPC)
Duration of copyright protection:
DURATION
TYPE OF WORK
(+ = AFTER DEATH)
Single creator / Life time and 50 years after
Newspaper article of death of creator. (Sec. 213,
creator IPC)
Lifetime of last surviving co-
creator and 50 years after
Joint creator
death of last surviving co-
creator. (Ibid.)
50 years after 1st publication
If author is revealed or
came to be known, lifetime
and 50 years after death of
the author.
Anonymous or In case of co-authorship
pseudonymic work (authors became known),
lifetime and 50 years after
death of last surviving
author or co-creator. (Ibid.)
25 years from date of
Work of applied art. making or creation. (Ibid.)
Published – 50 years from
publication
Photographic work.
Unpublished- from
making. (Ibid.)
Limitations on copyright
1. Limitation to copyright ownership; acts not
constituting infringement:
a. Acts provided for by Article 184.1 which
do not constitute infringement of
copyright
b. Doctrine of fair use
248 Center for Legal Education and Research
2018
2. Limitation to use; acts constituting copyright
infringement
Limitation to copyright ownership
Acts which do not constitute infringement
of copyright
1. 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;
2. 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;
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 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;
3. 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;
4. 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;
5. The recording made in schools, universities,
or educational institutions of a work included
in a broadcast for the use of such schools,
 Purple Notes
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;
6. The making of ephemeral recordings by a
broadcasting organization by means of its
own facilities and for use in its own
broadcast;
7. 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;
8. 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;
9. 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
10. Any use made of a work for the purpose of
any judicial proceedings or for the giving of
professional advice by a legal practitioner.
(Sec. 184.1, IPC)
Doctrine of Fair Use
The fair use of a copyrighted work for criticism,
comment, news reporting, teaching including
multiple copies for classroom use, scholarship,
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Mercantile Law
research, and similar purposes is not an
infringement of copyright. (Sec. 185.1, IPC)
Factors in determining if the use of a
copyrighted work is within the limits of the
doctrine of fair use
In determining whether the use made of a work
in any particular case is fair use, the factors to be
considered shall include:
1. The purpose and character of the use,
including whether such use is of a
commercial nature or is for non-profit
educational purpose;
2. The nature of the copyrighted work;
3. The amount and substantiality of the portion
used in relation to the copyrighted work as a
whole; and
4. The effect of the use upon the potential
market for or value of the copyrighted work.
(Sec. 185.1, IPC)
Above factors also applicable to
unpublished work
The fact that a work is unpublished shall not by
itself bar a finding of fair use if such finding is
made upon consideration of all the above factors.
(Sec. 185.2, IPC)
Copyright Infringement
How committed:
A person infringes a right protected under this
Act when one:
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. (Sec. 216,
IPC as amended by Sec. 22, RA 10372)
Bar Operations C ommissions 249
 Purple Notes
Mercantile Law
Remedies against copyright infringer
1. To an injunction restraining such
infringement.
The court may also order the defendant to
desist from an infringement, among others,
to prevent the entry into the channels of
commerce of imported goods that involve an
infringement, immediately after customs
clearance of such goods.
2. To pay to the copyright proprietor or his
assigns or heirs such actual damages,
including legal costs and other expenses, as
he may have incurred due to the
infringement as well as the profits the
infringer may have made due to such
infringement.
And in proving profits the plaintiff shall be
required to prove sales only and the
defendant shall be required to prove every
element of cost which he claims, or, in lieu of
actual damages and profits, such damages
which to the court shall appear to be just and
shall not be regarded as penalty. Provided,
That the amount of damages to be awarded
shall be doubled against any person who:
a. Circumvents effective technological
measures; or
b. Having reasonable grounds to know that
it will induce, enable, facilitate or conceal
the infringement, remove or alter any
electronic rights management
information from a copy of a work, sound
recording, or fixation of a performance,
or distribute, import for distribution,
broadcast, or communicate to the public
works or copies of works without
authority, knowing that electronic rights
management information has been
removed or altered without authority.
3. Deliver under oath, for impounding during
the pendency of the action, upon such terms
and conditions as the court may prescribe,
sales invoices and other documents
evidencing sales, all articles and their
packaging alleged to infringe a copyright and
implements for making them
250 Center for Legal Education and Research
2018
4. Deliver under oath for destruction without
any compensation all infringing copies or
devices, as well as all plates, molds, or other
means for making such infringing copies as
the court may order.
5. Such other terms and conditions, including
the payment of moral and exemplary
damages, which the court may deem proper,
wise and equitable and the destruction of
infringing copies of the work even in the
event of acquittal in a criminal case. (Sec. 216,
IPC)
Other remedies:
 In an infringement action, the court shall also
have the power to order the seizure and
impounding of any article which may serve as
evidence in the court proceedings, in
accordance with the rules on search and
seizure involving violations of intellectual
property rights issued by the Supreme Court.
(Sec. 216.2, IPC)
 The foregoing shall not preclude an
independent suit for relief by the injured
party by way of damages, injunction,
accounts or otherwise. (Sec. 216.2, IPC)
Criminal penalties
Any person infringing any right secured by
provisions of Part IV of this Act or aiding or
abetting such infringement shall be guilty of a
crime punishable by:
1. Imprisonment of one (1) year to three (3)
years plus a fine ranging from Fifty thousand
pesos (P50,000) to One hundred fifty
thousand pesos (P150,000) for the first
offense.
2. Imprisonment of three (3) years and one (1)
day to six (6) years plus a fine ranging from
One hundred fifty thousand pesos
(P150,000) to Five hundred thousand pesos
(P500,000) for the second offense.
3. Imprisonment of six (6) years and one (1)
day to nine (9) years plus a fine ranging
from five hundred thousand pesos
(P500,000) to One million five hundred
thousand pesos (P1,500,000) for the third
and subsequent offenses.
 Purple Notes
4. In all cases, subsidiary imprisonment in
cases of insolvency. (Sec. 217.1, IPC)
Determination of number of years of
imprisonment
In determining the number of years of
imprisonment and the amount of fine, the court
shall consider the value of the infringing materials
that the defendant has produced or
manufactured and the damage that the copyright
owner has suffered by reason of the
infringement: Provided, that the respective
maximum penalty stated in Section 217.1. (a),
(b) and (c) herein for the first, second, third and
subsequent offense, shall be imposed when the
infringement is committed by:
1. The circumvention of effective technological
measures;
2. The removal or alteration of any electronic
rights management information from a copy
of a work, sound recording, or fixation of a
performance, by a person, knowingly and
without authority; or
3. The distribution, importation for distribution,
broadcast, or communication to the public of
works or copies of works, by a person
without authority, knowing that electronic
rights management information has been
removed or altered without authority. (Sec.
217.2, IPC)
Purposes by which any person may be held
liable for possession of property with
subsisting copyright
Any person shall be guilty of an offense and shall
be liable on conviction to imprisonment and fine
as above mentioned who at the time when
copyright subsists in a work has in his possession
an article which he knows, or ought to know, to
be an infringing copy of the work for the purpose
of:
1. Selling, letting for hire, or by way of trade
offering or exposing for sale, or hire, the
article;
2. Distributing the article for purpose of trade,
or for any other purpose to an extent that
will prejudice the rights of the copyright
owner in the work; or
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Mercantile Law
3. Trade exhibit of the article in public. (Sec.
217.3, IPC)
VIII. SPECIAL LAWS
A. SECURED TRANSACTIONS
PERSONAL PROPERTY SECURITIES ACT
(PPSA) (Republic Act [RA] No. 11057
approved on August 17, 2018)
Declaration of Policy
It is the policy of the State to promote economic
activity by increasing access to least cost credit,
particularly for micro, small, and medium
enterprise (MSMEs), by establishing a unified and
modern legal framework for securing obligations
with personal property. (Sec. 2 of RA No. 11057)
Definitions and Scope
Definition of terms: Section 3 of RA No. 11057
and Section 1.05 of its Implementing Rules and
Regulations (IRR)
Commodity contract – a commodity futures
contract, an option on a commodity futures
contract, a commodity option, or another
contract if the contract of option is:
1. Traded on or subject to the rules of a board of
trade that has been designated as a contract
market for such a contract; or
2. Traded on a foreign commodity board of
trade, exchange, or market, and is carried on
the books of a commodity intermediary for a
commodity customer.
Competing claimant – a creditor of a grantor
or other person with rights in an encumbered
asset that may be in competition with the rights
of a secured creditor in the same encumbered
asset.
Consumer goods – Goods that are used or
acquired for use primarily for personal, family or
household purposes.
Control agreement – an agreement in writing
between the grantor and secured creditor which
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 Purple Notes
Mercantile Law
2018
perfects the security interests over intangible primarily used or intended to be used by the
asset. grantor in the operation of its business.

1. With respect to securities, means an Finance lease – ―finance leasing‖ of movable

agreement in writing among the issuer or the properties as defined in Section 3(d) of RA No.
intermediary, the grantor and the secured 5980, as amended by RA No. 8556, or the
creditor, according to which the issuer or the ―Financing Company Act of 1998‖.
intermediary agrees to follow instructions
from the secured creditor with respect to the Fixtures – property attached to an immovable or
security, without further consent from the a movable.
grantor.
Future property – means any movable property
2. With respect to rights to deposit account, which does not exist or which the grantor does
means an agreement in writing among the not have rights in or the power to encumber at
deposit-taking institution, the grantor and the the time the security agreement is concluded.
secured creditor with respect to the payment
of funds credited to the deposit account Grantor –
without further consent from the grantor.
1. The person who grants a security interest in
3. With respect to commodity contracts, means collateral to secure its own obligation or that
an agreement in writing among the grantor, of another person;
secured creditor, and intermediary, according 2. A buyer or the transferee of a collateral that
to which the commodity intermediary will acquires its right subject to a security interest;
apply any value distributed on account of the 3. A transferor in an outright transfer of an
commodity contract as directed by the accounts receivable; or
secured creditor without further consent by 4. A lessee of goods.
the commodity customer or grantor.
Intangible asset – means any movable
Default – the failure of a debtor to pay or property other than a tangible asset including,
otherwise perform a secured obligation, and any but not limited to:
other event that constitutes default under the
terms of an agreement between the grantor and 1. investment property;
the secured creditor. 2. deposit accounts;
3. commodity contracts; and
Deposit account – consists of deposits in 4. receivables.
deposit-taking institutions.
Intellectual property – shall refer to
Deposit-taking institutions – refers to: ―intellectual property rights‖ defined in Section
4.1 of RA No. 8293 or the ―Intellectual Property
1. a bank as defined under RA No. 8791, Code of the Philippines‖. It shall include:
otherwise known as the ―General Banking
Law‖; 1. Copyrights;
2. a non-stock savings and loan association as 2. Trademarks;
defined under RA No. 8367, or the ―Revised 3. Service marks;
Non-Stock Savings and Loan Association Act 4. Patents;
of 1997‖; or 5. Industrial design; and
3. a cooperative as defined under RA 9520 6. Trade secrets.
otherwise known as ―Philippine Cooperative
Code‖. Intermediary – a person that in the ordinary
course of business or activity maintains an
Equipment – means a tangible asset other than account for such securities or assets, for another
inventory or consumer goods, or livestock, that is

252 Center for Legal Education and Research

 Purple Notes
person, and is acting in that capacity, including,
but not limited to:
1. A bank;
2. Trust entity;
3. Depositary;
4. Broker; or
5. Central security depositary.
Intermediated securities – means securities
credited to a securities account and rights in
securities resulting from the credit of securities to
a securities account.
Inventory – means tangible assets held by the
grantor for sale or lease in the ordinary course of
the grantor‘s business, including raw materials
and work in process.
Investment property – means any property
right arising from an investment. The term shall
include but will not be limited to property in
securities and commodity contracts.
Lien – a qualified right or proprietary interest,
which may be exercised over the property of
another.
Non-intermediated securities - securities
other than securities credited to a securities
account and rights in securities resulting from the
credit of securities to a securities account.
Or simply, securities other than Intermediated
Securities. (Sec. 1.05 (t), IRR of RA No. 11057)
Notice – a statement of information that is
registered in the Registry relating to a security
interest or lien. The term includes an initial
notice, amendment notice, and termination
notice.
Operating lease – an agreement by which the
owner temporarily grants the use of his property
to another who undertakes to pay rent therefor.
Perfection – any act authorized by the PPSA
and these Rules that makes a security interest
binding as against third parties.
Possession – the holding of a thing or
enjoyment of a right.
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Mercantile Law
Priority – the right of a person in an
encumbered asset in preference to the right of a
competing claimant.
Proceeds – any property received upon sale,
lease or other disposition of collateral, or
whatever is collected on or distributed with
respect to collateral, claims arising out of the loss
or damage to the collateral, as well as a right to
insurance payment or other compensation for
loss or damage of the collateral.
Product – a tangible asset which results when a
tangible asset is so physically associated or
united with one or more other tangible asset of a
different kind, or when one or more tangibles
assets are so manufactured, assembled or
processed, that they have lost their separate
identities.
Purchase money security interest – a
security interest in goods taken by the seller to
secure the price or by a person who gives value
to enable the grantor to acquire the goods to the
extent that the credit is used for that purpose.
Receivable – means a right to payment of a
monetary obligation, excluding:
1. a right to payment evidenced by a negotiable
instrument;
2. a right to payment of funds credited to a bank
account; and
3. a right to payment under a non-intermediated
security.
Recognized market – an organized market in
which large volumes of similar assets are bought
and sold between many different sellers and
buyers, and accordingly one in which prices are
set by the market and not negotiated between
individual sellers and buyers.
Registration – the process of filing a notice as
defined under these Rules with the Registry.
Registry – the centralized and nationwide
electronic registry established in the Land
Registration Authority (LRA) where notice of a
security interest and a lien in personal property
may be registered.
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Mercantile Law
Secured creditor – a person that has a security
interest. For purposes of registration and
priority only, it includes a buyer of an account
receivable and a lessor of goods under an
operating lease for not less than one (1) year.
Securities account – an account maintained by
an intermediary to which securities may be
credited or debited.
Security – shares, participation or interests in a
corporation or in a commercial enterprise or
profit-making venture and evidenced by a
certificate, contract, instruments, whether written
or electronic in character. It includes but is not
limited to:
1. Shares of stocks, bonds, debentures, notes as
evidenced of indebtedness, asset-backed
securities;
2. Investment contracts, certificates of interest
or participation in a profit-sharing agreement,
certificates of deposit for a future
subscription;
3. Fractional undivided interest in oil, gas or
other mineral rights;
4. Derivatives like options and warrants;
5. Certificates of assignments, certificates of
participation, trust certificates, voting trust
certificates or similar instruments;
6. Proprietary or nonproprietary membership
certificates in corporations; and
7. Other instruments as may in the future be
determined by the SEC.
Security interest – a property right in collateral
that secures payment or other performance of an
obligation, regardless of whether the parties have
denominated it as a security interest, and
regardless of the type of asset, the status of the
grantor or secured creditor, or the nature of the
secured obligation; including the right of a buyer
of accounts receivable and a lessor under an
operating lease for not less than one (1) year.
Tangible asset – means any tangible asset.
Exceptions:
1. Rule 3.07 – Security interest over intangible
assets commingled in a mass;
254 Center for Legal Education and Research
2018
2. Rule 3.08 – Security interest in certain
accounts receivables;
3. Rule 4.09 – Disposition of perfected security
interest before default; and
4. Rule 6.05 – Priority of purchase money
security interest
Under the exceptions, this term includes money,
negotiable instruments, negotiable documents
and certificated non-intermediated securities but
only if the mere possession of such instruments
results in the ownership of the underlying rights
or property embodied by them, in accordance
with the laws governing such instruments.
Writing – for the purpose of the PPSA and its
Rules, includes electronic records.
Scope
General rule: The PPSA shall apply to all
transactions of any form that secure an obligation
with movable collateral. (Sec. 4, RA 11057)
A security interest may be created over all forms
of tangible or intangible asset or personal
property as defined by the Civil Code, including,
but not limited to:
1. Right arising from a contract, including but
not limited to:
a. Securities
b. Commodity contracts
c. Lease of goods including financial leases
and operating leases for a period of not
less than one (1) year
2. Equipment;
3. Inventory;
4. Deposit accounts;
5. Negotiable instruments;
6. Negotiable documents of title;
7. Consumer goods;
8. Intellectual property;
9. Livestock;
10. Fixture, accessions, and commingled goods;
or
11. Future property or after-acquired assets.
Note: A security interest can only be created on
the asset over which the grantor has a legal
right. (Sec. 2.03, IRR of RA 11057)
 Purple Notes
Exceptions:
1. Interests in aircrafts subject to RA No.
9497, or the "Civil Aviation Authority Act of
2008"; and
2. Interests in ships subject to Presidential
Decree (PD) No. 1521, or the "Ship Mortgage
Decree of 1978". (Sec. 4, RA 11057)
Asset-Specific Rules:
Future Property
Rules:
1. A security agreement may provide for the
creation of a security interest in future
property of after-acquired assets, but the
security interest in that property is created
only when the grantor acquires rights in it or
the power to encumber it.
2. A security agreement may provide that a
security interest in a tangible asset that is
transformed into a product extends to the
product. A security interest extends to a
product is limited to the value of the
encumbered asset immediately before it
became part of the product.
3. A security agreement may provide that a
security interest in tangible asset extends to
its replacement. A security interest extends to
a replacement is limited to the value of the
encumbered asset immediately before it was
replaced. (Sec. 3.05, IRR of RA 11057)
Rights to proceeds and comingled funds
Rules:
1. A security interest in personal property shall
extend to its identifiable or traceable
proceeds.
2. Where proceeds in the form of funds credited
to a deposit account or money are
commingled with other funds or money:
a. The security interest shall extend to the
commingled money or funds,
notwithstanding that the proceeds have
ceased to be identifiable to the extent they
remain traceable;
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Mercantile Law
b. The security interest in the commingled
funds or money shall be limited to the
amount of the proceeds immediately
before they were commingled; and
c. If at any time after the commingling, the
balance credited to the deposit account or
the amount of the commingled money is
less than the amount of the proceeds
immediately before they were commingled,
the security interest against the
commingled funds or money shall be
limited to the lowest amount of the
commingled funds or money between the
time when the proceeds were commingled
and the time the security interest in the
proceeds is claimed. (Sec. 3.06, IRR of RA
11057)
Tangible Assets Comingled in a Mass
Rules:
1. A security interest in a tangible asset that is
commingled in a mass extends to the mass.
2. A security interest that extends to a mass is
limited to the same proportion of the mass as
the quantity of the encumbered asset bore to
the quantity of the entire mass immediately
after the commingling. (Sec. 3.07, IRR of RA
11057)
Accounts Receivables
Rules:
1. A security interest in an account receivable
shall be effective notwithstanding any
agreement between the grantor and the
account debtor or any secured creditor
limiting in any way the grantor‘s right to
create a security interest; Provided: Nothing in
this section affects the right of a buyer to
create a security interest over the account
receivable.
Provided, further: that any release of
information is subject to agreements on
confidentiality.
2. Nothing in this section shall affect any
obligation or liability of the grantor for breach
of the agreement in subsection (a).
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Mercantile Law
3. Any stipulation limiting the grantor‘s right to
create security interest shall be void.
4. This section applies only to accounts
receivable arising from:
a. A contract for supply or lease of goods or
services other than financial services;
b. A construction contract or contract for the
sale or lease of real property; and
c. A contract for the sale, lease or license of
intellectual property. (Sec. 3.08, IRR of RA
11057)
Perfection of Security Interests
A security interest shall be perfected when it has
been created and the secured creditor has taken
one of the actions in accordance with the
following means:
1. Registration of a notice with the Registry;
2. Possession of the collateral by the secured
creditor; and
3. Control of investment property and deposit
account. (Secs. 11 (a) and 12, RA 11057)
Effect of perfection
A security interest becomes effective against third
parties. (Sec. 11 (b), RA 11057)
Means of perfection of the following
security interests:
1. A security interest in tangible asset may
be perfected by:
a. Registration of a notice with the Registry;
or
b. Possession, whether actual or
constructive, of the tangible asset either
by the secured creditor or a depositary
acting for the secured creditor. Provided,
that the debtor or the grantor cannot
possess the collateral on behalf of the
secured creditor for purposes of
perfecting and maintaining the security
interest over such collateral.
If a security interest in a tangible asset is
effective against third parties, a security interest
256 Center for Legal Education and Research
2018
in a mass to which a security interest extends is
effective against third parties without any further
act. (Sec. 4.02, IRR of RA 11057)
2. Security interest in intangible asset may
be perfected by:
a. Registration of a notice with the Registry;
or
b. Conclusion of control agreement. (Sec.
4.03, IRR of RA 11057)
3. Security interest in intermediated
securities or deposit accounts may be
perfected by:
a. Registration of a notice with the Registry;
b. Creation of a security interest in favor of
the deposit-taking institution or the
intermediary; or
c. Conclusion of a control agreement. (Sec.
4.04, IRR of RA 11057)
Note:
 Nothing in the Rules shall require a deposit-
taking institution or an intermediary under
subsection (b) to enter into a control
agreement, even if the grantor so requests.
 A deposit-taking institution or an
intermediary that has entered into such an
agreement shall not be required to confirm
the existence of the agreement to another
person unless requested to do so by the
grantor. (Sec. 4.04, IRR of RA 11057)
4. Security interest in electronic securities
non-intermediated securities may be
perfected by:
a. Registration of a notice with the Registry;
b. Execution of a control agreement
between the grantor and secured
creditor; or
c. Control, through notation of a security
interest in the books maintained by or on
behalf of the issuer for the purpose of
recording the name of the holder of the
securities. (Sec. 4.05, IRR of RA 11057)
5. Security interest in investment property
that is electronic (i.e. a scripless or
 Purple Notes
Mercantile Law
uncertificated) security held by an 3. With respect to commodity contracts, a
intermediary may be perfected by: control agreement shall:

a. Registration of a notice with the Registry; a. Be executed in writing among the grantor,
or secured creditor, and intermediary; and
b. Execution of a control agreement among b. Stipulate that the commodity intermediary
the intermediary, the grantor and will apply any value distributed on account
secured creditor. (Sec. 4.06, IRR of RA of the commodity contract as directed by
11057) the secured creditor without further
consent by the commodity customer or
Note:
grantor.
Continuity of Perfected Security Interest
 A security that is not registered remains valid
between the parties. (Sec. 4.06 (a), IRR of RA
A security interest shall remain perfected despite
11057)
a change in the means for achieving perfection:
Provided, that there was no time when the
 For purposes of determining the time of
security interest was not perfected. (Sec. 15, RA
perfection of the security interest, the control
No. 11057 and Sec. 4.08, IRR of RA 11057)
agreement shall:
Rules on Disposition of Perfected Security
 Be executed under oath; and
Interest Before Default
Include the date and time of its
execution. (Sec. 4.06, IRR of RA 11057)
1. As to Transferee, exceptions
Parties to, Form and Contents of a Control
Any party who obtains, in the ordinary course
Agreement (Sec. 4.07, IRR of RA 11057)
of business, any movable property containing
a security interest shall take the same free of
1. With respect to intermediated securities,
such security interest provided he was in
a control agreement shall:
good faith. No such good faith shall exist if
the security interest in the movable property
a. Be executed in writing by the issuer or the
was registered prior to his obtaining the
intermediary, the grantor and secured
property. (Sec. 4.09[a]), IRR of RA 11057)
creditor; and
b. Stipulate that the issuer or the
2. As to Perfection in Proceeds
intermediary agrees to follow instructions
from the secured creditor with respect to
a. Before default, upon disposition of the
the security, without further consent from
collateral, a security interest shall extend
the grantor.
to proceeds of the collateral without
further act and be continuously
2. With respect to rights to deposit account,
perfected, if the proceeds are in the form
a control agreement shall:
of money, accounts receivable,
negotiable
a. Be executed in writing among the deposit-
taking institution, the grantor and the
instruments or deposit accounts
secured creditor; and
(MAND).
b. Stipulate that the deposit-taking institution
agrees to follow instructions from the
b. Before default, upon disposition of the
secured creditor with respect to the
collateral, if the proceeds are in a form
payment of funds credited to the deposit
different from MAND, the security
account without further consent from the
interest in such proceeds must be
grantor.
perfected by one of the means applicable
to the relevant type of collateral within
257
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 Purple Notes
Mercantile Law
fifteen (15) days after the grantor
receives such proceeds; otherwise, the
security interest in such proceeds shall
not be effective against third parties.
(Sec. 14, RA 11057 and Sec. 4.09[b]), IRR of
RA 11057)
Fixtures, Accessions, and Commingled
Goods
A perfected security interest in a movable
property which has become a fixture, or has
undergone accession or commingling shall
continue provided the movable property involved
can still be reasonably traced. In determining
ownership over fixtures, accessions and
commingled goods, the provisions of Book II of
RA No. 386 or the ―Civil Code of the Philippines‖
shall apply. (Sec. 4.10, IRR of RA 11057)
Registration
Establishment Registry
The LRA shall:
1. Establish and administer the centralized,
nationwide Registry, which shall contain,
among others, the following information:
a. Initial notice of security interest and lien
in personal property;
b. Amendment notice providing new
information or continuing the period of
effectiveness of an initial notice; and
c. Termination notice.
2. Provide electronic means for registration and
searching of notices.
3. Issue the necessary guidelines on the use
and management of the Registry. (Sec. 5.01,
SIRR of RA 11057)
Registry Duties:
1. For each registered notice, the Registry shall:
a. Assign a unique registration number;
b. Create a record that bears the number
assigned to the initial notice and the date
and time of registration; and
c. Maintain the record for public inspection.
258 Center for Legal Education and Research
2018
2. The Registry shall index notices by the
identification number of the grantor and, for
notices containing a serial number of a motor
vehicle, by serial number.
3. The Registry shall provide a copy of the
electronic record of the notice, including the
registration number and the date and time of
registration to the person who submitted it.
4. The Registry shall maintain the capability to
retrieve a record by the identification number
of the grantor, and by serial number of a
motor vehicle.
5. The Registry shall maintain records of lapsed
notices for a period of ten (10) years after
the lapse.
6. The duties of the Registry shall be merely
administrative in nature. By registering a
notice or refusing to register a notice, the
Registry does not determine the sufficiency,
correctness, authenticity, or validity of any
information contained in the notice. (Sec. 35,
RA 11057 and its Sec. 5.04, IRR of RA 11057)
Registration of Notice
When sufficient:
1. An initial notice shall not be rejected if it:
a. Identifies the grantor by an indication
number;
b. Identifies the secured creditor or an agent
of the secured creditor by name;
c. Provides an address for the grantor and
secured creditor or its agent;
d. Describes the collateral; and
e. The prescribed fee has been tendered, or
an agreement has been made for payment
of fees by other means. (Sec. 28, RA 11057
and Sec. 5.05 (a), IRR of RA 11057)
 Natural person shall be identified
through the name appearing in any of
the grantor‘s government issued
identification.
 Juridical person shall be identified
through its name in the most recently
registered articles of incorporation, or in
an agreement constituting the legal
person. (Sec. 5.05 (a), IRR of RA 11057)
 Purple Notes
 A notice that does not provide the
identification number of the grantor
shall be seriously misleading. (Sec. 31
of RA 11057)
 If the Registry rejects to register a
notice, it shall promptly communicate to
the person who submitted the notice the
facts and reasons for its rejection within
three (days) from the rejection. (Sec. 5.05
(b), IRR of RA 11057)
 Description of the collateral in a notice
shall be entered in English. (Sec. 5.05 (f),
IRR of RA 11057)
2. Each grantor must authorize the registration
of an initial notice by signing a security
agreement or otherwise in writing. (Sec.
5.05[c]), IRR of RA 11057)
 A notice may be registered before a
security agreement is concluded.
 Once a security agreement is concluded,
the date of registration of the notice shall
be reckoned from the date the notice
was registered. (IRR of RA 11057, Sec.
5.05[d])
3. A notice of lien may be registered by a lien
holder without the consent of the person
against whom the lien is sought to be
enforced. (IRR of RA 11057, Sec. 5.05[e])
4. Registration of a single notice may relate to a
security interests created by the grantor
under one (1) or more than one security
agreement. (Sec. 29, RA 11057 and Sec. 5.06,
IRR of RA 11057)
Effectiveness of Notice
1. A notice shall be effective at the time it is
discoverable on the records of the Registry.
2. A notice shall be effective for the duration of
the term indicated in the notice unless a
continuation notice is registered before the
term lapses.
Note: The copy of the electronic record of
the notice provided to the person who
submitted it indicating the date and time of
effectivity shall be conclusive. (Sec. 5.07, IRR
of RA 11057)
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Mercantile Law
3. A notice substantially complying with the
requirements shall be effective unless it is
seriously misleading.
Note: Seriously misleading notices include
notices which do not provide the
identification number of the grantor. (Ibid.)
4. A notice that may not be retrieved in a
search of the Registry against the correct
identifier of the grantor shall be ineffective
with respect to that grantor. (Ibid.)
Note:
 The registration of a notice shall neither
expand nor diminish the security interest
beyond the terms of the security agreement,
except as otherwise provided by the PPSA or
these Rules.
 Any error or misrepresentation in the notice
with respect to the description of the
security interest shall not affect any rights
beyond those granted in the original security
agreement. (Ibid.)
Continuation of effectiveness of a notice:
The period of effectiveness of a notice may be
continued by registering an amendment notice
that identifies the initial notice by its registration
number. (Sec. 33[a]), RA 11057)
Limitation:
Continuation of notice may be registered only
within six (6) months before the expiration of the
effective period of the notice. (Sec. 33[b]), RA
11057)
Termination of effectiveness of a notice:
May be made by registering a termination notice
that:
1. Identifies the initial notice by its registration
number; and
2. Identifies each secured creditor who
authorizes the registration of the termination
notice.
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 Purple Notes
Mercantile Law
A termination notice terminates effectiveness as
to each authorizing secured creditor. (Sec. 34, RA
11057)
Amendment of Notice
1. Notice may be amended by the registration
of an amendment notice that:
a. Identifies the initial notice by its
registration number; and
b. Provides new information. (Sec. 32[a]), RA
No. 11057)
2. An amendment notice that adds collateral
that is not proceeds must be authorized by
the grantor in writing.
3. An amendment notice that adds a grantor
must be authorized by the added grantor in
writing.
4. Amendment notice shall be effective only to
each secured creditor who authorizes it.
5. An amendment notice that adds collateral or
a grantor shall be effective as to the added
collateral or grantor from the date of its
registration.
If the secured creditor assigns a perfected
security interest, an amendment notice may be
registered to reflect the assignment. (Sec. 5.08,
IRR of RA 11057)
Cases when the grantor may give a written
demand to the secured creditor for the
amendment or termination of effectiveness
of a notice:
a. All the obligations under the security
agreement to which the registration relates
have been performed and there is no
commitment to make future advances;
b. The secured creditor has agreed to release
part of the collateral described in the notice;
c. The collateral described in the notice
includes an item or kind of property that is
not a collateral under a security agreement
between the secured creditor and the
grantor;
260 Center for Legal Education and Research
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d. No security agreement exists between the
parties; or
e. The security interest is extinguished in
accordance with PPSA and its IRR. (Sec. 39,
RA 11057)
A secured creditor shall not charge any fee for
compliance with a demand received under
Section 39. (Sec. 43, RA 11057)
Within fifteen (15) working days upon receipt of
the demand submitted under Section 39 of RA
No. 11057, the secured creditor must register an
amendment or termination of notice as follows:
Termination (a), (d) or (e)
Amendment (c)
(Sec. 40, RA 11057)
If the secured creditor fails to comply with the
demand within fifteen (15) working days after its
receipt, the person giving the demand under
Section 39 may ask the proper court to issue an
order terminating or amending the notice as
appropriate. (Sec. 41, RA 11057)
Compulsory Amendment or Termination of
a Notice by Court Order
The court may, on application by the grantor,
issue an order that the notice be amended or
terminated in accordance with the demand,
which order shall be conclusive and binding on
the LRA.
Note: The secured creditor who disagrees with
the order of the court may appeal the order.
The court may make any other order it deems
proper for the purpose of giving effect to an
order under (a).
The LRA shall amend or terminate a notice in
accordance with a court order made under (a) as
soon as reasonably practicable after receiving the
order.
When Registration and Search Constitutes
Interference with Privacy of Individual
A person who submitted a notice for registration
or carried out a search of the Registry with a
 Purple Notes
frivolous, malicious or criminal purpose or intent
shall be subject to civil and criminal penalties
according to the relevant laws. (Sec. 44, RA 11057)
Priority of Security Interests
Time of perfection
General Rule: The priority of security interests
and liens on the same collateral shall be
determined according to the time of
registration of a notice or perfection by
other means, without regard to the order of
creation of the security interests and liens, or to
the mode of perfection. (Sec. 6.01, IRR of RA
11057)
Exceptions:
Tangible Assets; Intangible Assets
Priority for investment property and deposit
accounts. The following rules shall govern when
applicable:
a. A security interest in a deposit account
with respect to which the secured creditor is
the deposit-taking institution or the
intermediary shall have the priority over the
competing security interest perfected by any
method.
b. A security interest in a deposit account or
investment property that is perfected by
control agreement shall have priority
over competing security interest except a
security interest of the deposit-taking
institution or the intermediary.
c. The order of priority among competing security
interests in a deposit account or investment
property that were perfected by the
conclusion of control agreements shall be
determined on the basis of the time of the
conclusion of the control agreements.
d. Any rights to set-off that the deposit-taking
institution may have against a grantor‘s right
to payment of funds credited to a deposit
account shall have priority over a security
interests in the deposit account.
e. A security interest in electronic non-
intermediated securities perfected by a
notation of the security interests in the books
261
Mercantile Law
maintained for that purpose by or on behalf of
the issuer shall have priority over a security
interest in the same securities perfected by
any other method.
f. A security interest in electronic securities not
held with an intermediary perfected by the
conclusion of a control agreement shall have
priority over a security interest in the same
securities perfected by registration of a notice
in the Registry.
g. A security interest in electronic securities held
with an intermediary and perfected through a
control agreement shall have priority over a
security interest in the same securities
perfected by any other method.
h. The order of priority among competing
security interests in electronic securities held
with an intermediary perfected by the
conclusion of control agreements is
determined on the basis of the time
conclusion of the control agreements. (Sec.
6.02, IRR of RA 11057)
2. Priority for tangible assets embodied in
instruments. The following rules shall govern
when applicable:
a. A security interest in a security certificate
perfected by the secured creditor‘s
possession of the certificate shall have
priority over a competing security interest
perfected by registration of a notice in the
Registry.
b. A security in an instrument or negotiable
document that is perfected by possession
of the instrument or the negotiable
document shall have priority over a
security interest in the instrument or
negotiable document that is perfected by
registration of a notice in the Registry.
c. A perfected security interest in livestock
securing an obligation incurred to enable
the grantor to obtain food or medicine for
the livestock shall have priority over any
other security interest in the livestock,
except for a perfected purchase money
security interest in the livestock, if the
secured creditor providing credit for food
or medicine gives written notification to the
holder of the conflicting perfected security
interest in the same livestock before the
Bar Operations C ommissions 261
 Purple Notes
Mercantile Law
grantor receives possession of the food or
medicine. (Rule 6.03, IRR of RA 11057)
3. A person who provides services or materials
with respect to the goods, in the ordinary
course of business, and retains possession of
the goods shall have priority over a perfected
security interest in the goods until payment
thereof. (Sec. 6.04[a]), IRR of RA 11057)
4. Subject to the applicable insolvency law, a
security interest perfected prior to the
commencement of insolvency proceedings in
respect of the grantor shall remain perfected
and retain the priority it had before the
commencement of the insolvency
proceedings. (Sec. 6.04[b]), IRR of RA 11057)
Note: During the insolvency proceedings, the
perfected security interest shall constitute a lien
over the collateral. (Ibid.)
5. Purchase money security interest
a. A purchase money security interest in
equipment and its proceeds shall gave
priority over a conflicting security interest,
if a notice relating to the purchase money
security interest is registered within three
(3) business days after the grantor
receives possession of the equipment.
b. A purchase money security interest in
consumer goods that is perfected by
registration notice not later than three (3)
business days after the grantor obtains
possession of the consumer goods shall
have priority over a conflicting security
interest.
c. A purchase money security interest in
inventory, intellectual property or livestock
(IIL) shall have priority over conflicting
perfected security interest in the same IIL
if:
i. A purchase money security interest is
perfected when the grantor receives
possession of the inventory or
livestock, or acquires rights to intellectual
property; and
262 Center for Legal Education and Research
2018
ii. Before the grantor receives
possession of the inventory or
livestock, or acquires rights to
intellectual property, the purchase
money secured creditor gives written
notification to the holder of the
conflicting perfected security interest
may in the same types of IIL. The
notification sent to the holder of the
conflicting security interest may
cover multiple transactions between
the purchase money secured creditor
and the grantor without the need to
identify each transaction.
d. Purchase money security interest in
equipment or consumer goods perfected
timely in accordance with subsection (a)
and (b), shall have priority over the rights
of a buyer, lessee, or lien holder which
arise between delivery of the equipment
or consumer goods to the grantor and the
time the notice is registered. (Sec. 6.05,
IRR of RA 11057)
Enforcement of Security Interests
Secured Creditor‟s Rights
1. Right of Redemption
General Rule: Any person who is entitled to
receive a notification of disposition is entitled to
redeem the collateral by paying or otherwise
performing the secured obligation in full,
including the reasonable cost of enforcement.
Exception:
The right of redemption may be exercised,
unless:
a. The person entitled to redeem has not, after
the default, waived in writing the right to
redeem;
b. The collateral is sold or otherwise disposed of,
acquired or collected by the secured creditor
or until the conclusion of an agreement by the
secured creditor for that purpose; and
c. The secured creditor has retained the
collateral. (Sec. 45, RA No. 11057)
 Purple Notes
2. Right of Higher-Ranking Secured
Creditor to Take Over Enforcement
Even if another secured creditor or a lien
holder has commenced enforcement, a
secured creditor whose security-interest has
priority over that of the enforcing secured
creditor or lien holder shall be entitled to take
over the enforcement process.
1. May be invoked:
a. At any time before the collateral is sold or
otherwise disposed of, or retained by the
secured creditor; or
b. Until the conclusion of an agreement by
the secured creditor for that purpose.
The right of the higher-ranking secured creditor
to take over the enforcement process shall
include the right to enforce the rights by any
method available to a secured creditor under the
PPSA. (Sec. 46, RA 11057)
3. Expedited Repossession of Collateral
a. Extrajudicial
Requisites:
i. The security agreement so stipulates;
ii. Possession can be taken without breach
of the peace. (Sec. 7.02, IRR of RA 11057)
Breach of the peace shall include:
i. Entering the private residence of the
grantor without permission;
ii. Resorting to physical violence or
intimidation; or
iii. Being accompanied by a law enforcement
officer when taking possession or
confronting the grantor. (Ibid)
Where the collateral is a fixture, the secured
creditor may remove the fixture from the real
property to which it is affixed without judicial
process, if he has priority over all owners and
mortgagees. The secured creditor shall exercise
due care in removing the fixture. (Ibid)
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Mercantile Law
b. Judicial - if, upon default, the secured
creditor cannot take possession of collateral
without breach of the peace.
Procedures:
i. The secured creditor shall be entitled to an
expedited hearing upon application for an
order granting the secured creditor possession
of the collateral. Such application shall include
a statement by the secured creditor, under
oath, verifying the:
• Existence of the security agreement
attached to the application; and
• Identifying at least one event of default by
the debtor under the security agreement.
(Sec. 7.03 [a], IRR of RA 11057)
ii. The secured creditor shall provide a copy of
the application, including all supporting
documents and evidence for the order
granting the secured creditor possession of
the collateral to the following:
• Debtor;
• Grantor; and
• Real estate mortgagee, if the collateral is a
fixture (Sec. 7.03 [b], IRR of RA 11057)
iii. The secured creditor is entitled to an order
granting possession of the collateral upon the
court finding that a default has occurred
under the security agreement and that the
secured creditor has a right to take
possession of the collateral. The court may
direct the grantor to take such action as the
court deems necessary and appropriate so
that the secured creditor may take
possession of the collateral. (Sec. 7.03 [c],
IRR of RA 11057)
4. Recovery by the secured creditor without
judicial process upon default in the following
cases
a. Instruct the account debtor to make
payment to the secured creditor, and
apply such payment to the satisfaction of
the obligation secured by the security
interest after deducting the secured
creditor‘s reasonable collection expenses.
Bar Operations C ommissions 263
 Purple Notes
Mercantile Law
On request of the account debtor, the
secured creditor shall provide evidence of
its security interest to the account debtor
when it delivers the instruction to the
account debtor;
b. In a negotiable document that is
perfected by possession, proceed as to
the negotiable document or goods
covered by the negotiable document;
c. In a deposit account maintained by the
secured creditor, apply the balance of the
deposit account to the obligation secured
by the deposit account; and
d. In other cases of security interest in a
deposit account perfected by control,
instruct the deposit-taking institution to
pay the balance of the deposit account to
the secured creditor‘s account. (Sec. 48,
RA 11057)
5. Right to Dispose of Collateral
Requirements:
a. Default (Sec. 49[a]), RA 11057);
b. The secured creditor act in a
commercially reasonable manner (Sec.
50[a]), RA 11057);
c. Not later than ten (10) days before the
disposition, notice of disposition by the
secured creditor to the following:
i. The grantor;
ii. Any other secured creditor or lien
holder who, five (5) days before the
date notification is sent to the grantor,
held a security interest or lien in the
collateral that was perfected by
registration; and
iii. Any other person from whom the
secured creditor received notification of
a claim of an interest in the collateral if
the notification was received before the
secured creditor gave notification of
the proposed disposition to the
grantor.
• The grantor may waive the right to be
notified.
• It is sufficient if it:
264 Center for Legal Education and Research
2018
i. identifies the grantor and the secured
creditor;
ii. describes the collateral;
iii. states the method of intended
disposition; and
iv. states the time and place of a public
disposition or the time after which other
disposition is to be made.
• The requirement to send a notification under
this section shall not apply if the collateral is:
i. Perishable or threatens to decline
speedily in value; or
ii. of a type customarily sold on a
recognized market. (Sec. 51, RA 11057)
Procedures:
a. After default, a secured creditor may sell or
otherwise dispose of the collateral, publicly or
privately, in its present condition or following
any commercially reasonable preparation or
processing.
• In disposing of collateral, the secured
creditor shall act in a commercially
reasonable manner.
• A disposition is commercially reasonable
if the secured creditor disposes of the
collateral in conformity with commercial
practices among dealers in that type of
property.
• A disposition is not commercially
unreasonable merely because a better
price could have been obtained by
disposition at a different time or by a
different method from the time and
method selected by the secured creditor.
• If a method of disposition of collateral
has been approved in any legal
proceeding, it is conclusively commercially
reasonable.
b. The secured creditor may buy the collateral
at any public disposition, or at a private
disposition but only if the collateral is of a
kind that is customarily sold on a recognized
market or the subject of widely distributed
standard price quotations. (Secs. 49 and 50,
RA 11057)
 Purple Notes
Order of Application of Proceeds of Sale
a. The reasonable expenses of taking, holding,
preparing for disposition, and disposing of
the collateral, including reasonable attorneys‘
fees and legal expenses incurred by the
secured creditor.
• Shall include all expenses incurred by
the secured creditor in the preservation
and
care of the collateral in his possession with
diligence of a good father of a family. (Sec.
7.11[c]), IRR of RA 11057)
b. The satisfaction of the obligation secured by
the security interest of the enforcing
secured creditor.
c. The satisfaction of obligations secured by
any subordinate security interest or lien in
the collateral if a written demand and proof
of the interest are received before
distribution of the proceeds is completed.
(Sec. 52, RA No. 11057)
Mercantile Law
i. The debtor and the grantor;
ii. Any other secured creditor or lien
holder who, five (5) days before the
proposal is sent to the debtor and the
grantor, perfected its security interest
or lien by registration; and
iii. Any other person with an interest in
the collateral who has given a written
notification to the secured creditor
before the proposal is sent to the
debtor and the grantor. (Sec. 54[a], RA
11057)
The secured creditor may retain the
collateral in the case of:
a. A proposal for the acquisition of the
collateral in full satisfaction of the
secured obligation, unless the secured
creditor receives an objection in writing
from any person entitled to receive
such a proposal within twenty (20)
days after the proposal is sent to that
person; or

Obligation of the secured creditor: b. A proposal for the acquisition of the

collateral in partial satisfaction of the
a. Account to the grantor for any surplus, secured obligation, only if the secured
and, unless otherwise agreed, the debtor is creditor receives the affirmative
liable for deficiency. consent of each addressee of the
b. In case of loss or deterioration in value of proposal in writing within twenty (20)
the collateral due to his failure to preserve days after the proposal is sent to that
and care, he shall be liable to the grantor person. (Sec. 54[b], RA 11057)
for the value of the loss or deterioration.
(Sec. 7.11[c] and [e], of RA No. 11057) Rights of the Buyers and Other Third
Parties
Retention of Collateral by Secured Creditor
Compliant Mode of Rights of the
Kinds of retention of collateral: with the enforcement buyers and
law* other third
a. Full; and parties
b. Partial Yes Sale The buyer shall
acquire the
grantor‘s right in
Requisites:
the asset free of
the rights of any
a. Default; secured creditor
b. Proposal by the secured creditor to the or lien holder.
debtor and grantor to take all or part of the Lease or The lessee or
collateral in total or partial satisfaction of licensing licensee shall be
the secured obligation; entitled to the
c. Such proposal shall be sent to: benefit of the
lease or license

265
Bar Operations C ommissions 265
 Purple Notes
Mercantile Law
2018
during its term.
No Sale, lease or The buyer, b. The expiration of the transitional
licensing lessee or period. (Sec. 57[a]), RA 11057)
licensee of the
collateral shall
Note: If the perfection requirements of the
acquire the
rights or benefits
PPSA are satisfied before the perfection of
described in the a prior interest ceases, the prior interest
two (2) continues to be perfected under the PPSA from
preceding the time when it was perfected under the prior
scenarios in law. (Sec. 57[b], RA 11057)
this table.
If a prior interest referred herein was perfected
Provided, that it by the registration of a notice under prior law,
had no
the time of registration under the prior law shall
knowledge of a
violation of this
be the time to be used for purposes of applying
Chapter* that the priority rules of the PPSA. (Sec. 57[e]), RA
materially 11057)
prejudiced the
rights of the 5. If the perfection requirements of the PPSA
grantor or are not satisfied before the perfection of
another person. a prior interest ceases, the prior interest is
*Chapter 6, RA 11057 perfected only from the time it is perfected
under the PPSA. (Sec. 57[c]), RA 11057)
Prior Interests and the Transitional Period
If the perfection requirements of the PPSA
Prior interests are not satisfied before the perfection of
a prior interest ceases, the prior interest is
Priority interest means a security interest perfected only from the time it is perfected
created or provided for by an agreement or under the PPSA. (Sec. 57[c]), RA 11057)
other transaction that was made or entered into
before the effectivity of the PPSA and that had 6. A written agreement between a grantor and
not been terminated before the effectivity of the a secured creditor creating a prior interest is
said Act. sufficient to constitute authorization by the
grantor of the registration of a notice
1. It excludes a security interest that is covering assets described in that agreement
renewed or extended by a security under the PPSA. (Sec.[d]), RA 11057)
agreement or other transaction made or
entered into on or after the effectivity of 7. Priority of Prior Interests as against the
the Act. (Sec. 55[c]), RA 11057) rights of a competing claimant is determined
2. Its creation shall be determined by prior by the prior law if:
laws.
3. It remains effective between the parties a. The security interest and the rights of all
notwithstanding its creation did not competing claimant arose before the
comply with the creation requirements effectivity of the PPSA; and
of PPSA. (Sec. 56, RA 11057) b. The priority status of these rights has
4. A prior interest that was perfected under not changed since the effectivity of the
prior law continues to be perfected PPSA. For this purpose, the priority
under the PPSA until the earlier of: status of a prior interest has changed
only if:
a. The time the prior interest would
cease to be perfected under prior law;
and

266 Center for Legal Education and Research

 Purple Notes
i. It was perfected when the PPSA
took effect, but ceased to be
perfected; or
ii. It was not perfected under prior
law when the PPSA took effect,
and was only perfected under the
PPSA. (Sec. 58, RA 11057)
Enforcement of Prior Interest
1. If any step or action has been taken to
enforce a prior interest before the effectivity
of the PPSA, enforcement may continue
under prior law or may proceed under the
PPSA.
2. Subject to (1), prior law shall apply to a
matter that is the subject of proceedings
before a court before the effectivity of the
PPSA. (Sec. 59, RA 11057)
Transitional Period
It is the period from the date of effectivity of the
PPSA until the date when the Registry has been
established and operational. (Sec. 55 (d) of RA
11057)
REAL ESTATE MORTGAGE LAW
Definition
Real estate mortgage is an accessory contract
by virtue of which real property is conveyed by
way of security and a lien is created over a
specific real property or properties with the
condition that if the obligation secured is not
paid, the mortgage may be foreclosed and the
property sold to answer for the mortgage credit.
(Aquino, Essentials of Credit Transaction and Banking
Laws, 2015, p.308)
Parties:
1. Mortgagor - the person who conveys
the real property by way of mortgage
to secure an obligation
2. Mortgagee - the creditor whose credit
is secured by the mortgage. (Ibid.)
Characteristics:
1. It creates a real right of security;
267
Mercantile Law
2. It is an accessory contract;
3. It is a real security contract;
4. It is unilateral in the sense that only
the mortgagor‘s signature is necessary
to constitute it; and
5. It is subsidiary because the thing
pledged will answer for the principal
obligation only upon default of the
principal debtor. (Ibid.)
In the accessory contract of real mortgage, in
which immovable property or real rights thereto
are used as security for the fulfillment of the
principal loan obligation, the bid price may be
lower than the property‘s fair market value. The
loan value itself is only 70 per cent of the
appraised value. A low bid price will make it
easier for the owner to effect redemption by
subsequently reacquiring the property or by
selling the right to redeem and thus recover
alleged losses. No personal notice is even
required, because an extrajudicial foreclosure is
an action in rem, requiring only notice by
publication and posting, in order to bind parties
interested in the foreclosed property. (New
Sampaguita Builders Construction Inc. et al., Phil.
Nat‘l Bank, G.R. No. 148753, July 30, 2004)
Obligations Secured by Real Estate Mortgage
1. Valid obligations;
2. Voidable obligations;
3. Unenforceable obligations;
4. Natural obligations; and
5. Conditional obligations. (Aquino Essentials of
Credit Transaction and Banking Laws, 2015,
p.248)
Mortgage constituted to secure future
advances
Mortgage constituted to secure future advances
is valid. It is a continuing security and not
discharged by repayment of the amount named
in the mortgage, until the full amount of the
advances is paid. However, a chattel mortgage
can only cover obligations existing at the time
the mortgage is constituted and not to
obligations subsequent to the execution of the
mortgage. (Aquino Essentials of Credit Transaction
and Banking Laws, 2015, p.311)
Bar Operations C ommissions 267
 Purple Notes
Mercantile Law
Nature
The mortgage constitutes an encumbrance on
the real property. The right of the mortgagee is
a right in rem. The registered mortgage follows
the property even if there is a change of
ownership. (Ibid.)
Security Interest
Only security interest is acquired, thus, the right
to possession and jus disponendi are not
included unless otherwise stipulated. The
mortgagor is also not personally liable to pay the
obligation because the right of the mortgagee is
only limited to a lien on the mortgaged property.
(Ibid.)
After-Incurred or Future Obligations
After-incurred or future obligations may be
covered by real estate mortgage if the same is
expressly provided for. The Deed of Real Estate
Mortgage may expressly state that it may secure
future advancements. In the absence of
stipulation, the general rule is that the amount
secured by a mortgage is limited to the amount
expressly mentioned in the mortgage.
(Quintanilla vs. CA, G.R. No. 101747, September 24,
1997)
Blanket Mortgage or Dragnet Clause
A clause, which implies an understanding that
subsequent loans need not be secured by other
securities, as to loans, will be secured by the first
mortgage.
A blanket mortgage clause, also known as
dragnet clause is one, which is specifically
phrased to subsume all debts of past or future
origins. Such clauses are carefully scrutinized and
strictly construed. Mortgages of this character
enable the parties to provide continuous dealings,
the nature or extent of which may not be known
or anticipated at the time, and they avoid the
expense and inconvenience of executing a new
security on each new transaction. (Prudential Bank
vs. Alviar, GR No. 150197, July 28, 2005)
It is a continuing security. A mortgage with a
dragnet clause makes available future loans
268 Center for Legal Education and Research
2018
without the need of executing another set of
security document. (Aquino Essentials of Credit
Transaction and Banking Laws, 2015, p.311)
Object of Real Estate Mortgage
Only the following property may be the object of
a contract of mortgage:
1. Immovable; and
2. Alienable real rights in accordance with the
laws, imposed upon immovables.
Nevertheless, movables may be the object of
chattel mortgage. (Art. 2124, New Civil Code [NCC])
Movables treated as real properties
There are instances when certain movables are
treated as real properties by estoppel. The
parties may be estopped although innocent third
parties are not affected. The view expressed in
People‘s Bank & Trust Company and Atlantic Gulf
& Pacific Company vs. Dahican Lumber is that the
parties are bound, through estoppel, if they treat
a movable as immovable. Nevertheless, only the
parties are estopped.
Future property cannot be an object of a contract
of mortgage (Art. 2085[2], NCC). However, a
stipulation subjecting to the mortgage lien,
properties (improvements) which the mortgagor
may subsequently acquire, install, or use in
connection with real property already mortgaged
belonging to the mortgagor is valid (People‘s Bank
and Trust Co. vs. Dahican Lumber Co., G.R. No. L-
17500, May 16, 1967)
Extent of Mortgage
Absent any express stipulation to the contrary,
the mortgage includes the natural accessions,
improvements, growing fruits and income of the
property not yet received when the obligation
becomes due and to the amount of the indemnity
granted or owing to the proprietor from the
insurers of the property mortgaged, or in virtue
of expropriation for public use. (Art. 2127, NCC)
When not applicable
 Purple Notes
The Court explained that Article 2127 is
predicated on the presumption that the
ownership of accessions and accessories also
belongs to the mortgagor as the owner of the
principal. After all, it is an indispensable requisite
of valid real estate mortgage that the mortgagor
be the absolute owner of the encumbered
property, thus, all improvements subsequently
introduced or owned by the mortgagor on the
encumbered property, thus, all improvements are
to be considered so incorporated only if so owned
by the mortgagor is a rule that can hardly be
debated since a contract of security, whether,
real or personal, needs as an indispensable
element thereof the ownership by the pledgor or
mortgagor of the property pledged or mortgaged.
(Castro, Jr. vs. CA, G.R. No. 97401, December 6, 1995)
Corollary, any evidence sufficiently overthrowing
the presumption that the mortgagor owns the
mortgaged property precludes the application of
Article 2127. Otherwise stated, the provision is
irrelevant and inapplicable to mortgages and their
resultant foreclosures if the mortgagor is later on
found or declared to be not the true owner of the
property. (PNB vs. Sps. Maranon, G.R. No. 189316,
June 1, 2013)
After-acquired property
 One of the basic requirements of mortgage is
that the mortgagor must be the owner of the
thing mortgaged. Thus, a mortgage of
property not owned by the mortgagor is
without any effect. Nevertheless, Article 2092
of the NCC sanctions a promise to mortgage
in the future. Hence, one may promise to
mortgage property that he or she does not
own subject to his acquisition before
constituting the mortgage.
In addition, Article 2127 contemplates after-
acquired properties like fruits and income.
Accessions and improvements are not
separate properties but are part of the
properties originally mortgaged.
After-acquired properties may also be
included by stipulation; the parties may
stipulate that after-acquired properties are
automatically included in the mortgage. It
should be noted that the stipulation usually
269
Mercantile Law
involves contracts where there is a main
object of the contract, like land owned by the
mortgagor which will be first mortgaged and
the properties that are subject to stipulation
are properties other than the property
originally mortgaged. Thus, the parties may
stipulate that all buildings, machineries and
equipment attached to the mortgaged
property shall be subject to the mortgage.
(Aquino Essentials of Credit Transaction and
Banking Laws, 2015, p.321)
Right to Alienate Mortgage Credit
The mortgage credit may be alienated or
assigned to a third person, in whole or in part,
with the
formalities required by law. (Art. 2128, NCC)
 The mortgagee acquires real right when
property is mortgaged. The mortgage right is
real property in itself under par. 10 of Article
of 415 of the NCC because it is an
encumbrance over an immovable. Hence, the
mortgagee is an owner of an intangible
property that is the mortgage credit. As an
owner, he has the right to dispose the
mortgage credit.
 Transfer of mortgage credit is an assignment
of a right contemplated under Article 1625 of
the NCC. Hence, the assignment must be
registered in order to affect third persons.
However, registration is not enough because
it is also required that the debtor is notified.
―The transfer of the mortgage credit does not
affect the debtor unless he is notified of it.‖
(5 Tolentino 562)
Payment by third person
The creditor may claim form a third person in
possession of the mortgaged property, the
payment of the part of the credit secured by the
property, the payment of the part of the credit
secured by the property which said third person
possesses, in the terms and with the formalities
which the law establishes. (Art. 2129, NCC)
Normally, a third person cannot be made to pay
the obligation. However, Article 2129 allows
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recovery from a third person who is in possession
of the mortgaged property up to the extent of
the value of the property.
However, if the third person buys the mortgaged
property with notice that it was mortgaged, the
buyer only undertook either to pay or else allow
the land to be sold if the mortgage creditor could
not or did not obtain payment from the principal
debtor when the debt matured. The obligation to
discharge the mortgage indebtedness remained
on the shoulders of the original debtors. The
reason is plain: the mortgage is merely an
encumbrance on the property, entitling the
mortgagee to have the property foreclosed, i.e.,
sold, in case the principal obligor does not pay
the mortgage debt, and apply the proceeds of
the sale to the satisfaction of his credit. The
encumbrance would make the purchaser,
eventually liable to discharge the mortgage by
paying or settling with mortgage creditor, should
the original mortgagors fail to satisfy the debt.
(Rodriguez vs. Reyes, G.R. L-22958 January 30, 1971;
Art. 2129, NCC)
Right to Alienate Collateral
To alienate the mortgaged property, the
mortgage shall remain attached to the property.
1. A stipulation forbidding the owner from
alienating the immovable mortgage shall be
void. (Art. 2130, NCC)
The mortgagor remains to be the owner of
the property despite the mortgage. Hence,
the mortgagor has the right to dispose the
property. The mortgage contract cannot
stipulate that mortgagor is prohibited from
transferring the mortgaged property. ―Such
a prohibition would be contrary to the public
good, inasmuch as the transmission of
property should not be unduly impeded.
(Report of the Code Commission, p. 158)
2. In a sale with assumption of mortgage, the
alienation needs the consent of the
mortgagee.
Essential Requisites:
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1. Constituted to secure the fulfillment of a
principal obligation; (Art. 2085, NCC)
2. Pledgor, mortgagor or antichretic debtor
must be the absolute owner of the thing
pledged or mortgaged; (Ibid.)
3. Pledgor, mortgagor or antichretic debtor have
the free disposal of their property, or are
legally authorized for the purpose;
Reason for requisites 2 and 3 - in anticipation
of a foreclosure sale; and (Ibid.)
4. When the principal obligation becomes due,
the subject matter of the pledge, mortgage
or antichresis may be alienated for the
payment to the creditor. (Art. 2087, NCC)
An essential requisite of a contract of mortgage is
that the mortgagor be the absolute owner of the
thing mortgaged. The effect of a mortgage by a
co-owner shall be limited to the portion that may
be allotted to that person upon the termination of
the co-ownership. (Ocampo, et al., vs. Ocampo, et
al., G.R. No. 150707, April 14, 2004)
 A mortgage cannot exist without a principal
obligation. Hence, principal obligation may
be valid and binding even if the mortgage is
not valid and binding; the mortgage is not
binding if the principal obligation is not valid
and binding.
 The consideration of the principal obligation
is the consideration for the mortgage.
(Filipinas Marble Corporation vs. Intermediate
Appellate Court, G.R. No. L-68010, May 30,
1986)
 Real right is the power belonging to a
person over a specific thing without a
definite passive subject against whom such
right may be exercised. It is enforceable
against the whole world. Mortgage fall
under the classification of real right that is a
real right of security. (Aquino Essentials of
Credit Transactions and Banking Laws, 2015,
p.246)
Special Requisites:
1. It can cover only immovable property and
alienable real rights imposed upon
immovables;
2. It must appear in a public instrument; and
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Mercantile Law
3. Registration in the registry of property is Order of the courts cuts
There is a right of
necessary to bind 3rd persons, but not for off all rights of the
redemption
the validity of the contract. parties impleaded.
Period of redemption Period to redeem starts
starts from the finality of from the date of
Order of foreclosure cannot be refused on the
the judgment until the registration of the
ground that the mortgage was not registered order of confirmation certificate of sale.
provided no innocent 3rd parties are involved. Special power of
No need for a special
attorney in favor of
Foreclosure power of attorney in the
mortgagee is needed in
contract of mortgage
the contract.
It is the remedy available to the mortgagee by Governed by Rule 68 of
which he subjects the mortgaged property to the the Rules of Court Governed by Act. 3135
satisfaction of the obligation to secure that for (ROC).
which the mortgage was given. (De Leon,
Comments and Cases on Credit Transactions, 2010, p. Redemption is the transaction by which the
398) mortgagor reacquires or buys back the property
which may have passed under the mortgage, or
Validity and Effect: divests the property of the lien which the
mortgage may have created. (De Leon, Comments
1. When the principal obligation is not paid and Cases on Credit Transactions, 2010, p. 426)
when due, the mortgagee has the right to
foreclose the mortgage and to have the The sale by a mortgagor to a third party of the
property seized and sold, and to apply the mortgaged property during the period for
proceeds thereof to the payment of principal redemption transfers only to said third person the
obligation; right to redeem the property and the right to
2. The power to foreclose resides on the possess, use and enjoy the same during said
mortgagee; period. (De Leon, Comments and Cases on Credit
3. In case of deficiency, the debtor is required Transactions, 2010, p. 432)
to pay the same even after foreclosure; and
4. The rule governing public notice of Where the sale with assumption of mortgage was
foreclosure must be strictly complied with not registered and made without the consent of
and slight deviations will invalidate the sale the mortgagee, the buyer, thereof, was not
or render it voidable. (De Leon, Comments and validly substituted as debtor and, hence, had no
Cases on Credit Transactions, 2016, p. 495) right to redeem. (Bonnevie vs. CA G.R. No. L-4910,
October 24, 1983)
Kinds of Foreclosure:
Kinds of Redemption:
Judicial – Ordinary action for foreclosure under
Rule 68 of the Rules of Court 1. Equity of Redemption is the right of the
defendant mortgagor to extinguish and retain
Extrajudicial – when the mortgagee is given a ownership of the property by paying the
special power of attorney to sell the mortgaged amount fixed in the decision of the court
property by public auction, under Act. No. 3135, within ninety (90) days to one hundred
as amended. twenty (120) days after entry of judgment or
even after the sale but prior to its
JUDICIAL EXTRAJUDICIAL confirmation.
FORECLOSURE FORECLOSURE
There is court 2. Right of Redemption, on the other hand, is
No court intervention the right granted to the debtor- mortgagor,
intervention
his successor in interest or any judicial
Not appealable because
Decisions are appealable it is immediately
creditor of said debtor-mortgagor or any
executor person having a lien in the property
271
Bar Operations C ommissions 271
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Mercantile Law
subsequent to its mortgagor deed of trust
under which the property is sold to redeem
the property within one (1) year from
registration of the sheriff‘s certificate of sale.
A foreclosure sale retroacts to the date of
registration of the mortgage and that a person
who takes a mortgage on good faith and for
valuable consideration, the record showing clear
title to the mortgagor will be protected against
equitable claims on the title in favor of 3rd
persons, of which he had no actual or
constructive notice. (St. Dominic Corp. vs. IAC, G.R.
No. 70623, June 30, 1987)
Mere inadequacy of the price obtained at the
sheriff‘s sale will not be sufficient to set aside the
sale unless ―the price is so inadequate as to
shock the conscience of the court‖ taking into
consideration the peculiar circumstances
attendant thereto. (Sulit vs. CA, G.R. No. 119247,
Feb. 17, 1997)
Should there remain a balance due to the
mortgagee after applying the proceeds of the
sale; the mortgagee is entitled to recover the
deficiency (Rule 68, ROC). This rule does not apply
to extrajudicial foreclosure of real estate
mortgage.
The action to recover a deficiency after
foreclosure prescribed after 10 years from the
time the right of action accrues. (Arts. 1142 and
1144, NCC)
Period of Redemption:
1. Extra-Judicial (Act. No. 3135)
Natural Person – One year from registration of
certificate of sale with the Registry of Deeds
Juridical Person- same as a natural person.
Juridical person (mortgagor) and bank
(mortgagee) – Three months after foreclosure or
before registration of certificate of foreclosure
whichever is earlier (Sec. 47, General Banking Law)
2. Judicial – before confirmation of the sale by
the court except when the mortgagee is a
banking institution, redemption will then be
one year from the registration of sale (Sec. 25,
272 Center for Legal Education and Research
2018
P.D. 694) (De Leon Comment and Cases on Credit
Transactions, 2006, p. 418)
Nature of Judicial Foreclosure proceedings:
1. Quasi in rem action.
2. Foreclosure is only the result or incident of the
failure to pay debt.
3. Survives the death of the mortgagor.
Right of the mortgagee to recover
deficiency (for judicial foreclosure only):
1. Mortgagee is entitled to recover deficiency.
2. If the deficiency is embodied in a judgment, it
is referred to as deficiency judgment.
3. Action for recovery of deficiency may be filed
even during redemption period.
4. Action to recover prescribed after 10 years
from the time the right of action accrues . (De
Leon Comment and Cases on Credit Transactions,
2010, p. 413)
Extrajudicial foreclosure of real property
Extrajudicial foreclosure must be STIPULATED in
the contract.
The law covers only real estate mortgages. It is
intended merely to regulate the extrajudicial sale
of property mortgaged. (Act No. 3135)
The authority to sell is not extinguished by the
death of the mortgagor (or mortgagee) as it is an
essential and inseparable part of a bilateral
agreement (Perez vs. PNB, G.R. No. L- 21813, July
30, 1966)
Nature of the power of foreclosure by
extrajudicial sale:
1. Conferred for mortgagee‘s protection.
2. An ancillary stipulation
3. A prerogative of the mortgagee.
Effects of inadequacy of price in foreclosure
sale:
1. Where there is right to redeem, inadequacy of
price is immaterial because the judgment
 Purple Notes
debtor may redeem the property. (PNB vs. CA,
G.R. No. 121739, June 14, 1999
2. Exception: Where the price is so inadequate
as to shock the conscience of the court,
taking into consideration the peculiar
circumstances. (United Coconut Planters Bank
vs. CA, G.R. No. 155912, August 17, 2007)
3. Property may be sold for less than its fair
market value, upon the theory that the lesser
the price, the easier it is for the owner to
redeem. (Sps. Rabat vs. PNB, G.R. No. 158755,
June 18, 2012)
4. The value of the mortgaged property has no
bearing on the bid price at the public auction,
provided that the public auction was regularly
and honestly conducted.
Waiver of security by creditor:
1. Mortgagee may waive right to foreclose his
mortgage and maintain a personal action for
recovery of the indebtedness.
2. Mortgagee cannot have both remedies.
 The mortgagor and mortgagee have no
right to waive the posting and publication
requirements under Act. No. 3135. Notices
are given to secure bidders and prevent a
sacrifice of the property. Clearly, the
statutory requirements of posting and
publication are mandated, not for the
mortgagor‘s benefit, but for the public or
3rd persons. Failure to comply with the
statutory requirements as to publication of
notice of auction sale constitutes a
jurisdictional defect which invalidates the
sale. Lack of republication of notice of
foreclosure sale made subsequently after
the original date renders such sale void.
(PNB vs. Nepomuceno Productions, Inc. G.R.
No. 139479, Dec. 27, 2002)
 Sec. 3 of Act. 3135 does not require
personal or any particular notice on the
mortgagor much less on his successors-
interest where there is no contractual
stipulation thereof. Hence, unless required
in the mortgage contract, the lack of such
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Mercantile Law
notice is not a ground to set aside a
foreclosure sale.
 Mortgages given to secure future
advancements are valid and legal contracts;
that the amounts named as consideration in
said contract do not limit the amount for
which the mortgage may stand as security,
if from the four corners of the instrument
the intent to secure future and other
indebtedness can be gathered. A mortgage
given to secure advancement is a continuing
security and is not discharged by repayment
of the amount named in the mortgage, until
the full amount of the advancements is paid.
(Mojica vs. CA, G.R. No. 94247, September 11,
1991)
 The creditor may claim from the third
person in possession of the property
payment of the credit up to the extent
secured by the property which the third
party possesses, in terms and with the
formalities which the law establishes. (Art.
2129, NCC)
 A foreclosure sale is not complete until it is
confirmed and before such confirmation, the
court retains control of the proceedings by
exercising sound discretion in regard to it
either granting or withholding confirmation
as the rights and interests of the parties and
the ends of justice may require. (Rural Bank
of Oroquieta vs. CA, No. 53466, November 10,
1980)
 If there be a balance due to the mortgagee
after applying the proceeds of the sale, the
mortgagee is entitled to recover the
deficiency. (DBP vs. Mirang, G.R. No. L‐29130,
Aug. 8, 1975)
 The purchaser at the foreclosure sale merely
acquired an inchoate right to the property
which could ripen into ownership only upon
the lapse of the redemption period without
his credit having been discharged, it is
illogical to hold that during that same period
of twelve months the mortgagor was
"divested" of his ownership, since the absurd
result would be that the land will
consequently be without an owner although
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Mercantile Law
it remains registered in the name of the
mortgagor. Such mortgage does not involve
a transfer, cession or conveyance of the
property but only constitutes a lien thereon.
(Medida vs. CA, G.R. No. 98334, May 8, 1992)
GUARANTY
Definition:
By guaranty, a person, called the guarantor,
binds himself to the creditor to fulfill the
obligation of the principal debtor in case the
latter should fail to do so. (Art. 2047, NCC)
Classifications of Guaranty:
1. In the broad sense:
a. Personal – the guaranty is the credit
given by the person who guarantees the
fulfillment of the principal obligation.
b. Real – the guaranty is the property,
movable or immovable.
2. As to its Origin:
a. Conventional – agreed upon by the
parties
b. Legal – one imposed by virtue of a
provision of a law.
c. Judicial – one which is required by a
court to guarantee the eventual right of
one of the parties in a case.
3. As to consideration:
a. Gratuitous – the guarantor does not
receive any price or remuneration for
acting as such.
b. Onerous – the guarantor receives
valuable consideration.
4. As to the Person Guaranteed:
a. Single – one constituted solely to
guarantee or secure performance by the
debtor of the principal obligation.
b. Double or sub-guaranty – one constituted
to secure the fulfillment by the guarantor
of a prior guaranty.
274 Center for Legal Education and Research
2018
5. As to Scope and Extent:
a. Definite – the guaranty is limited to
the principal obligation only, or to a
specific portion thereof.
b. Indefinite or simple – one which not
only includes the principal obligation
but also all its accessories including
judicial costs.
6. As to whether it covers future debts:
a. Continuing – one where it is given as
security for future debts, the amount
of which is not yet known; or
b. Not continuing – one where the
contract does not stipulate that the
security covers future debts. (Art.
2053, NCC)
A guaranty may be conventional, legal or
judicial, gratuitous, or by onerous title.
It may also be constituted, not only in favor
of the principal debtor, but also in favor of
the other guarantor, with the latter‘s
consent, or without his knowledge, or even
his objection. (Art. 2051, NCC)
Nature and Extent of Guaranty
Characteristics of Guaranty
The following are the characteristics of
guaranty:
1. Gratuitous. A guaranty is gratuitous,
unless there is a stipulation to the
contrary; (Art. 2048, NCC)
2. Accessory. Guaranty secures the
payment of a principal obligation;
hence, it cannot exist without a principal
obligation;
3. Subsidiary. The guarantor will pay only
if the principal debtor cannot pay and
has no properties to answer for the
obligation;
4. Conditional. Certain conditions (i.e., the
requirement of exhaustion) must be
complied with before the guarantor can be
made liable;
 Purple Notes
5. Unilateral. The obligation is only on the part
of the guarantor in favor of the creditor. The
debtor need not even give his consent;
6. Express. A guaranty is not presumed; it
must be express and cannot extend to more
than what is stipulated therein; (Art. 2055,
NCC)
7. Covered by Statutes of Fraud. Guaranty
which is a collateral contract, is a promise to
answer for a debt, hence, it must be in
writing. (Ewan, MacKendrick, Goode on
Commercial Law, 2010 Ed., p.880, hereinafter
referred to as Goode, p. 880)
 The contracts of guaranty and suretyship
are personal security transactions that
secure a principal obligation. This should be
distinguished from a Real Security
Agreement like mortgage, pledge and
antichresis where property is given by way
of collateral.
 Guaranty may be entered into even against
the will or without the consent of the
debtor.
Consideration:
 A guaranty is gratuitous, unless there is a
stipulation to the contrary. The cause of the
contract is the same cause, which supports
the obligation as to the principal debtor.
 The peculiar nature of a guaranty or surety
agreement is that it is regarded as valid
despite the absence of any direct
consideration received by the guarantor or
surety either from the principal debtor or
from the creditor; a consideration moving to
the principal alone will suffice.
 It is never necessary that the guarantor or
surety should receive any part or benefit, if
such there be, accruing to the principal.
(Willex Plastic Industries Corp. vs. CA, G.R. No.
103066, April 25, 1996)
Obligations Secured by Guaranty
1. Valid obligations; (Art. 2052, NCC)
2. Voidable obligations, unless it is annulled by
proper action in court; (Art. 2052, NCC)
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Mercantile Law
3. Unenforceable obligations; (Art. 2052, NCC)
4. Natural obligations -When the debtor
himself offers a guaranty for his liability,
thereby transforming the obligation from a
natural into a civil one; (Art. 2052, NCC) and
5. Conditional obligations – In the case of
suspensive condition, it‘s happening gives
rise to the principal obligation and hence, it
also gives rise to the accessory obligation.
(Art. 2053, NCC)
There can be a guaranty for:
1. Present debts; and
2. Future debts, even if the amount is not yet
known. (Art. 2053, NCC)
Liquidated debt – a debt for the price of
goods to be delivered in the future is liquidated
when it is for a price fixed by the contract and
the seller offers to deliver said goods within the
period stipulated and according to the terms of
the contract. (Smith, Bell & Co. vs. Phil. National
Bank, G.R. No. 16482, February 1, 1992)
A valid principal obligation necessary in contract
of guaranty since guaranty is an accessory
contract; it is an indispensable condition for its
existence that there must be a principal
obligation. Hence, if the principal obligation is
void, it is also void.
Parties to a Guaranty
The parties in a contract of guaranty are:
1. Principal-obligor;
2. Obligee; and
3. Guarantor.
The principal is the person whose obligation is
secured by the guarantor. The obligee is the
person in whose favor the guarantee is made;
he will be paid or reimbursed if the principal fails
to performs his obligation and the proper
procedure is complied with.
 The obligor cannot claim that he is only a
mere guarantor of his own obligation. One
cannot be both the primary debtor and the
guarantor of his own debt. This is
inconsistent with the very purpose of a
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Mercantile Law
guarantee that is for the creditor to proceed
against a third person if the debtor defaults
in his obligation. Certainly, to accept such
an argument would make a mockery of
commercial transactions. (Velasquez vs.
Solidbank Corp., G.R. No. 157309, March 28,
2008)
 Similarly, it was held in once case that it is
absurd to accept the submission of the
petitioner that he signed as surety as a
representative of a corporation if the latter
corporation is also the principal debtor.
The principle behind suretyship will be
negated if the allegation will be accepted
because the borrower cannot at the same
time be a guarantor/surety to assure the
fulfillment of its own loan application. The
Court therefore concluded that the
petitioner signed in his personal capacity
as surety of the corporation‘s loan.
(Madrigal vs. DOJ, G.R. No. 168903, June 18,
2014)
Benefit of Excussion
The guarantor cannot be compelled to pay the
creditor unless the latter has exhausted all the
property of the principal debtor, and has
resorted to all of the legal remedies against
debtor. (Art. 2058 NCC)
It is axiomatic that the liability of the guarantor
is only subsidiary. All the properties of the
principal debtor must first be exhausted before
his own is levied upon. Thus, the creditor may
hold the guarantor liable only after judgment
has been obtained against the principal debtor
and the latter is unable to pay, for obviously
the exhaustion of the principal‘s property – the
benefit of which the guarantor claims – cannot
even begin to take place before judgment has
been obtained. (Baylon vs. CA, G.R. No. 109941,
August 17, 1999)
Note: Please also refer to the topic on Effects
of Guaranty between Guarantor and the
Creditor for further discussion on the benefit of
excussion.
Right to Protection
276 Center for Legal Education and Research
2018
A compromise between the creditor and the
principal debtor benefits the guarantor but
does not prejudice him. That which is entered
into between the guarantor and the creditor
benefits but does not prejudice the principal
debtor. (Art. 2063, NCC)
Right to Indemnification
The guarantor who pays for a debtor must be
indemnified by the latter. (Art. 2066, NCC)
If a guaranty is entered into without the
knowledge or consent, or against the will of the
principal debtor, the provisions of Article 1236
and 1237 shall apply. (Art. 2050, NCC)
Whoever pays for another may demand from
the debtor what he has paid, except that if he
paid without the knowledge or against the will
of the debtor, he can recover only insofar as
the payment has been beneficial to the debtor.
(Art. 1236, NCC)
Right to Subrogation
The guarantor who pays is subrogated by virtue
to all the rights which the creditor had against
the debtor. (Art. 2067, NCC)
Whoever pays on behalf of the debtor without
the knowledge or against the will of the latter,
cannot compel the creditor to subrogate him in
his rights, such as those arising from a
mortgage, guaranty, or penalty. (NCC, Art. 1237)
Rights of Co-Guarantors
Should there be several guarantors of only one
debtor and for the same debt, the obligation to
answer for the same is divided among all. The
creditor cannot claim from the guarantors
except the shares which they are respectively
bound to pay, unless solidarity has been
expressly stipulated. (Art. 2065, NCC)
General Rule: Joint liability
Exceptions:
1. When solidarity is stipulated; or
 Purple Notes
2. If any of the circumstances enumerated in
Article 2059 should take place.
Effects of Guaranty between the
Guarantor and the Creditor:
1. Benefit of Excussion or Exhaustion
(Art. 2058, NCC)
How it is exercised:
1. Demand for payment upon the guarantor
only after judgment upon the debt; and
2. Point out the available property (not in
litigation or encumbered) of the debtor
within the Philippines, sufficient to cover
the amount of the debt. (Art. 2060, NCC)
Effect of failure of the creditor to exhaust
and resort to all legal remedies
The creditor shall suffer the loss but only to the
extent of the said property, for the insolvency
of the debtor resulting from such negligence.
(Art. 2061, NCC)
 Not applicable to a contract of suretyship
(Arts. 2047[2]2, 2059[2] NCC)
When guarantor not entitled to the
benefit of excussion (Art. 2059, NCC)
1. Renunciation has been expressly made by
the guarantor;
2. It would be useless because execution on
the property of the principal debtor would
not after all result in the satisfaction of the
obligation; (Not necessary that the debtor
be judicially declared insolvent or bankrupt)
3. When guarantor has bound himself
solidarily with the principal debtor;
4. Insolvency of the debtor; (Must be actual;
proven by unsatisfied writ of execution)
5. When the debtor has absconded or cannot
be sued within the Philippines, unless he
has left a manager or representative;
6. If he is a judicial bondsman or sub-surety;
7. If he fails to interpose it as a defense
before
judgment is rendered against him;
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Mercantile Law
8. If the guarantor does not set up the benefit
against the creditor upon the latter‘s
demand for payment from him;
a. Demand can be made only after
judgment on the debt
b. Demand must be actual; joining the
guarantor in the suit against the
principal debtor is not the demand
intended by law
9. Where the pledge or mortgage has been
given by him as special security.
Procedure When Creditor Sues:
The guarantor cannot be sued with the
principal, much less alone, except in Article
2059.
1. The guarantor is still given the benefit of
exhaustion even if judgment should be
rendered against him and the principal
debtor. His voluntary appearance does not
constitute a renunciation of his right to
excussion. The guarantor may appear so
that he may, if he so desire, set up such
defenses as are granted him by law.
(Art.2062, NCC)
 Guarantor cannot set up the defenses if he
does not appear and it may no longer be
possible for him to question the validity of
the judgment.
2. A guarantor is entitled to be heard before
execution can be issued against him where
he is not a party in the case involving his
principal (procedural due process).
2. Benefit of Division
Should there be several guarantors of only one
debtor and for the same debt, the obligation to
answer for the same is divided among all. (Art.
2065, NCC)
Note: The benefit of division against the co-
guarantors ceases in the same cases and for
the same reasons as the benefit of excussion
against the principal ceases.
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Effects of Guaranty between the Debtor
and the Guarantor
Rights of the Guarantor after Payment of
the Principal‟s Obligation:
1. Reimbursement comprised by the
following:
a. Total amount of the debt
b. Interest (legal) from the time payment
was made known to the debtor.
c. Expenses incurred by the guarantor
after having notified the debtor that
payment had been demanded of him
d. Damages, if they are due (Art. 2066,
NCC)
Exceptions to guarantor‟s right to
reimbursement:
1. Where the guaranty is constituted without
the knowledge or against the will of the
principal debtor, the guarantor can recover
only insofar as the payment had been
beneficial to the debtor. (Art. 1236, NCC)
2. Payment by a 3rd person who does not
intend to be reimbursed by the debtor is
deemed to be a donation, which, however,
requires the debtor‘s consent. But the
payment is in any case valid as to the
creditor who has accepted it. (Art. 1238,
NCC)
3. Waiver of the right to demand
reimbursement.
2. Subrogation
Subrogation transfers to the person
subrogated, the credit with all the rights
thereto appertaining either against the debtor
or against 3rd persons, be they guarantors or
possessors of mortgages, subject to the
stipulation in conventional subrogation.
 The guarantor who pays is subrogated by
virtue thereof to all the rights, which the
creditor had against the debtor. If the
guarantor has compromised with the
creditor, he cannot demand of the debtor
278 Center for Legal Education and Research
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more than what he has really paid. (Art.
2067, NCC)
Reminders:
 This right of subrogation is necessary to
enable the guarantor to enforce the
indemnity given in Article 2066.
 It arises by operation of law upon payment
by the guarantor. It is not necessary that
the creditor cede to the guarantor the
former‘s rights against the debtor.
 It is not a contractual right. The right of
guarantor who has paid a debt to
subrogation does not stand upon contract
but upon the principles of natural justice.
 The guarantor is subrogated by virtue of
the payment to the right of the creditor,
not those of the debtor.
 If the guarantor paid a smaller amount by
virtue of a compromise, he cannot demand
more than he actually paid.
 Guarantor cannot exercise the right of
redemption of his principal. (Umutia & Co.
vs. Moreno et al., G.R. No. 8147, Oct. 26, 1914)
Effect of payment by guarantor:
1. Without notice to debtor – The debtor may
interpose against the guarantor those
defenses which he could have set up
against the creditor at the time the
payment was made, e.g. the debtor can set
up against the guarantor the defense of
previous extinguishment of the obligation
by payment. (Art. 2068, NCC)
2. Before maturity – The guarantor is not
entitled to reimbursement unless the
payment was made with the consent or has
been ratified by the debtor (Ratification
may be express or implied). (Art. 2069, NCC)
Notice to the debtor:
General Rule: Before the guarantor pay the
creditor, he must first notify the debtor,
otherwise the latter may set up defenses he
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Mercantile Law
could have set up against the creditor (Art. 2068, available to the surety. (Manila Surety &
NCC). If he fails to give such notice and the Fidelity Co., Inc. vs. Batu Construction & Co.,
debtor repeats payment, the guarantor can only G.R. No. L-9353, May 21, 1957)
collect from the creditor and guarantor has no
cause of action against the debtor for the return Remedies of Guarantor (Alternative
of the amount paid by guarantor even if the remedies):
creditor should become insolvent. (Art. 2070,
NCC) 1. Obtain release from the guaranty (can only
be exercised against the principal debtor);
Exceptions: The guarantor can still claim 2. Demand a security that shall protect him
reimbursement from the debtor in spite of lack from any proceedings by the creditor, and
of notice if the following conditions are present; against the danger of insolvency of the
debtor. (Art. 2071, NCC)
1. Guarantor was prevented by fortuitous event
to advise the debtor of the payment; ART. 2066 ART. 2071
2. The creditor becomes insolvent; and Provides for the Provides for the
3. The guaranty is gratuitous. (Art. 2070, NCC) enforcement of the guarantor‘s protection
rights of the before he has paid but
When Guarantor May Proceed Against guarantor/surety after he has become
Principal Debtor Even Before Payment: against the debtor after liable
he has paid the debt
General Rule: Guarantor has no cause of Gives a right of action Protective remedy
action against debtor until after the former has after payment before payment
paid the obligation. Substantive right Preliminary remedy

Exceptions: The guarantor, even before having Guarantor of 3rd person at request of
paid, may proceed against the principal debtor: another

1. When he is sued for the payment;
2. In case of insolvency of the principal debtor;
3. When the debtor has bound himself to relieve
him from the guaranty within a specified
period, and this period has expired;
4. When the debt has become demandable, by
reason of the expiration of the period for
payment;
5. After the lapse of ten years, when the
principal obligation has no fixed period for its
maturity, unless it be of such nature that it
cannot be extinguished except within a
period longer than ten years;
6. If there are reasonable grounds to fear that
the principal debtor intends to abscond;
7. If the principal debtor is in imminent danger
of becoming solvent. (Art. 2071, NCC)
 In all cases, the action of the guarantor is to
obtain release from the guaranty, or to
demand a security that shall protect him from
any proceedings by the creditor and from the
danger of insolvency of the debtor. (Art.
2071, NCC) Art. 2071 is applicable and
279
Guarantor may demand payment from:
1. Person who requested him to be a guarantor;
2. Debtor (Art. 2072, NCC)
Right to contribution of co-guarantor who
pays:
When there are two or more guarantors of the
same debtor and for the same debt, the one
among them who has paid may demand of each
of the others the share which proportionally
owing from him. (Art. 2073, NCC)
Restrictions
It is required that the payment made to the
creditor by the guarantor who is seeking for the
reimbursement from his co-guarantor(s) the
share which is proportionately owing him, must
have been made (a) in virtue of a judicial
demand or (b) because the principal debtor is
insolvent. (Sadaya vs. Sevilla, G.R. No. L-17845, April
27, 1967)
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Effect of insolvency of any co-guarantor:
If any of the guarantors should be insolvent, his
share shall be borne by the others, including the
paying guarantor, in the same proportion. (Art.
2073, NCC)
Accrual/Basis of Right: Acquired ipso jure by
virtue of said payment without any prior cession
of rights to such guarantor. (Ibid.)
Defenses: The co-guarantors may set up
against the one who paid, the same defenses
which would have pertained to the principal
debtor against the creditor, and which are not
purely personal to the debtor. (Art. 2074, NCC)
Liability of sub-guarantor in case of
insolvency of guarantor
A sub-guarantor is liable to the co-guarantors in
the same manner as the guarantor whom he
guaranteed. (Art. 2075, NCC)
Extinguishment of Guaranty
1. Extinguished at the same time as the
obligation of the debtor (Art. 2076, NCC);
2. Release by the creditor in favor of one of
the guarantors, without the consent of the
others, benefits all to the extent of the
share of the guarantor to whom it has been
granted (Art. 2078, NCC);
3. If the creditor voluntarily accepts immovable
or other property in payment of the debt,
even if he should afterwards lose the same
through eviction (Art. 2077, NCC);
4. Whenever by some act of the creditor, the
guarantors even though they are solidarily
liable cannot be subrogated to the rights,
mortgages and preferences of the former
(Art. 2080, NCC);
5. For the same causes as all other obligations
under Art. 1231;
6. Extension granted to the debtor by the
creditor without the consent of the
guarantor. However, the mere failure on the
part of the creditor to demand payment
after the debt has become due does not of
itself constitute any extension of time
referred to herein. (Art. 2079, NCC)
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 The guarantor may also set up against the
creditor all the defenses which pertain to the
principal debtor and are inherent in the
debt; but not those that are purely personal
to the debtor. (Art. 2081, NCC)
Exceptions:
1. Creditor did not collect from 3rd persons
2. Obligations payable in installments
3. Waiver by guarantor
4. Extension granted by creditor on bond
5. Extension granted to first tier obligors
cannot prejudice second tier parties
Legal and Judicial Bonds
Bonds. The obligation of a surety often appears
in the form of a bond. The surety business of
insurance companies usually takes the forms of
issuance of bonds.
Kinds of Bonds:
1. Fidelity Bond is a bond that answers for
the loss of an employer who is the obligee,
for the dishonesty of the employee.
2. Surety Bond may be further classified into
the following: (1) Contract Bonds which
include (a) Bid Bond, (b) Performance Bond,
(c) Payment Bond, and (d) Maintenance
Bond; (2) Legal Bonds; and (3) Judicial
Bonds;
3. Contract Bonds. As the term implies, this
bond guarantees the performance of
contractual obligations.
a. Bid Bond – has for its purpose the
assurance of the owner of the project,
the good faith of the bidder and that the
bidder will enter into a contract with the
project owner should his proposal be
accepted.
b. Performance Bond - is designed to
afford the project owner security that
the bidder (the contractor) will faithfully
comply with the requirements of the
contract awarded to the contractor and
make good damages sustained by the
 Purple Notes
project owner in case of the contractor‘s
failure to so perform. (Trade and
Investment Development Corporation of the
Phils vs. Roblett Industrial and Construction
Corporation, et al., No. 139290, November
11, 2005)
c. Payment Bond – secures the payment of
bills for the labor and materials used in
building a project.
d. Maintenance Bond – answers for breach
of warranties in a building project; the
principal agrees to correct poor
workmanship and to replace defective
materials.
e. Legal Bonds. are bonds that are
submitted ―in virtue of a provision of law.‖
(Article 2082, NCC) This includes ―License
and Permit Bonds‖ which are bonds imposed
by law to guarantee that the persons
concerned will comply with the provisions of
the license or permit issued to him.
f. Judicial Bonds. are bonds that are issued
in virtue of judicial orders and/or pursuant
to the Rules of Court. Examples are:
a. Replevin Bond – is a bond posted by
the petitioner to repossess a personal
property. The purpose of this bond is to
answer for any and all expenses that
the opposing party may suffer if the
petitioner is not entitled to the remedy
of repossession. (Rule 60 of the Rules of
Court)
b. Supersedeas Bond – is a bond posted
by the losing party as a requirement for
perfecting an appeal. The purposes of
the bond are to stay the execution of
the judgment pending appeal and to
answer for any and all damages that the
opposing party may suffer if it will
sustain the inferior court‘s decision.
c. Administrator‟s Bond – a pre-
condition for the issuance of the letter
of administration. It is a security for the
satisfaction of any judgment. The
property subject of the attachment is a
real or immovable property. (Rule 81 of
the Rules of Court)
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Mercantile Law
d. Attachment Bond – it guarantees the
payment of all costs which may be adjudged
to the adverse party and all damages which
he may sustain by reason of attachment if
the court finds that the Principal is not
entitled to the remedy of attachment. (Rule
57, Rules of Court).
At the commencement of the action or at
any time before entry of judgment, a
plaintiff or any proper party may have the
property of the adverse party attached as
security for the satisfaction of any
judgment that may be recovered in the
following cases: (a) In an action for the
recovery of a specified amount of money or
damages, other than moral and exemplary,
on a cause of action arising from law,
contract, quasi-contract, delict or quasi-
delict against a party who is about to
depart from the Philippines with intent to
defraud his creditors; (b) In an action for
money or property embezzled or
fraudulently misapplied or converted to his
own use by a public officer, or an officer of
a corporation, or an attorney, factor,
broker, agent, or clerk, in the course of his
employment as such, or by any other
person in a fiduciary capacity, or for a
willful violation of duty; (c) In an action to
recover the possession of property unjustly
or fraudulently taken, detained or
converted, when the property, or any part
thereof, has been concealed, removed, or
disposed of to prevent its being found or
taken by the applicant or an authorized
person; (d) In an action against a party
who has been guilty of a fraud in
contracting the debt or incurring the
obligation upon which the action is brought,
or in the performance thereof; (e) In an
action against a party who has removed or
disposed of his property, or is about to do
so, with intent to defraud his creditors; or
(f) In an action against a party who does
not reside and is not found in the
Philippines, or on whom summons may be
served by publication. (Ibid.)
e. Heir‟s Bond – It answers for the payment
of any claim by an heir who has been
deprived of his lawful participation in the
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Mercantile Law
estate and/ or any creditor who has a claim
against the estate which has not been paid.
(Rule 74, Rules of Court)
f. Injunction Bond - shall finally adjudge
that the plaintiff was not entitled to such
provisional remedy. A preliminary injunction
bond is an order by the court at any stage
of an action prior to final judgment,
requiring a person to refrain from doing a
particular act. It shall answer for all the
damages which the party enjoined by order
of injunction is directed, in such amount the
court may fix. (Rule 58 of the Rules of
Court). A preliminary injunction or
temporary restraining order may be granted
only when:(a) The application in the action
or proceeding is verified, and shows facts
entitling the applicant to the relief
demanded; and (b) Unless exempted by the
court the applicant files with the court
where the action or proceeding is pending, a
bond executed to the party or person
enjoined, in an amount to be fixed by the
court, to the effect that the applicant will
pay to such party or person all damages
which he may sustain by reason of the
injunction or temporary restraining order if
the court should finally decide that the
applicant was not entitled thereto. Upon
approval of the requisite bond, a writ of
preliminary injunction shall be issued. (4a)
(c) When an application for a writ of
preliminary injunction or a temporary
restraining order is included in a complaint
or any initiatory pleading, the case, if filed in
a multiple-sala court, shall be raffled only
after notice to and in the presence of the
adverse party or the person to be enjoined.
In any event, such notice shall be preceded,
or contemporaneously accompanied, by
service of summons, together with a copy of
the complaint or initiatory pleading and the
applicant's affidavit and bond, upon the
adverse party in the Philippines. However,
where the summons could not be served
personally or by substituted service despite
diligent efforts, or the adverse party is a
resident of the Philippines temporarily
absent therefrom or is a nonresident
thereof, the requirement of prior or
contemporaneous service of summons shall
282 Center for Legal Education and Research
2018
not apply. (d) The application for a
temporary restraining order shall thereafter
be acted upon only after all parties are
heard in a summary hearing which shall be
conducted within twenty-four (24) hours
after the sheriff‘s return of service and/or
the records are received by the branch
selected by raffle and to which the records
shall be transmitted.
The rules on the issuance of the Certificates of
Accreditation and Authority for corporate surety
bonds are embodied in Circular No. 04-970-SC
entitled Guidelines on Corporate Surety Bond
issued by the Supreme Court on August 6, 2004.
Classification of the Insurance Commission:
In the Rules and Regulations Governing the
Issuance of Bonds in the Philippines issued by the
Insurance Commission, bonds are classified into:
(1) Judicial Civil Bonds; (2) Judicial Criminal
Bonds; (3) Firearms Bonds; (4) Internal Revenue
Bonds; (5) Customs Bonds; (6) Guaranty Bonds;
(7) Fidelity Bonds; (8) Promissory Notes; and (9)
Immigration Bonds.
Qualifications of a Personal Bondsman:
The bondsman who is to be offered in virtue of
a provision of law or of a judicial order shall
have the qualifications required of a guarantor
under Article 2056 and in special laws. (Art.
2082, NCC)
1. He possesses integrity;
2. He has capacity to bind himself; and
3. He has sufficient property to answer for the
obligation, which he guarantees. (Art. 2056,
NCC)
Pledge or Mortgage in lieu of Bond:
If the person bound to give a bond should not be
able to do so, a pledge or mortgage considered
sufficient to cover his obligation shall be admitted
in lieu thereof. (Art. 2083, NCC)
Benefit of Excussion Not Available to Judicial
Bondsman and Sub-surety:
 Purple Notes
A judicial bondsman cannot demand the
exhaustion of the property of the principal
debtor. A sub-surety in the same case, cannot
demand the exhaustion of the property of the
debtor or the surety. (Art. 2084, NCC)
SURETY
Concept: A contract of surety is an agreement
where a party called the surety guarantees the
performance by another party called the principal
or obligor of an obligation or undertaking in favor
of a third party called the obligee. Specifically,
suretyship is a contractual relation resulting from
an agreement whereby one person, the surety,
engages to be answerable for the debt, default or
miscarriage of another, known as the principal.
(Visayan Surety & Insurance Corp. vs. Court of
Appeals, G.R. No. 127261, September 7, 2001)
The Court expounds that a surety‘s liability is
joint and several, limited to the amount of the
bond, and determined strictly by the terms of
contract of suretyship in relation to the principal
contract between the obligor and the obligee. It
bears stressing, however, that although the
contract of suretyship is secondary to the
principal contract,
the surety‘s liability to the obligee is nevertheless
direct, primary and absolute. (The Manila Insurance
Company, Inc. vs. Sps. Amurao, G.R. No. 179628,
January 16, 2013)
Characteristics
1. It is an accessory contract because its
validity depends upon the existence of a
principal obligation guaranteed by it. It
cannot exist without a valid obligation (Article
2052, NCC). It is indispensable that there
must be a principal contract, thus, if the
principal obligation is void, it also voids.
2. It is subsidiary and conditional because it
takes effect only when the principal fails in
his obligation subject to certain limitations.
(Government vs Tizon, G.R. No. L-22108, August
30, 1967)
Parties to a contract of suretyship:
1. Principal – is the person whose obligation is
secured by the bond or suretyship. He is the
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Mercantile Law
person who agrees to perform certains acts –
the person who fulfills certain obligations.
(Aquino Essentials of Credit Transactions and
Banking Laws, 2015, p.235)
2. Surety – is the party who answers for the
debt, default or obligations of the principal.
The liability of surety or sureties shall be joint
and several with the obligor and shall be
limited to the amount fixed in the agreement .
(Ibid.)
3. Obligee – the oblige is the person in whose
favor the bond is issued or the undertaking of
the surety is made. He will be paid or
reimbursed if the principal fails to perform his
obligation. In relation to the obligation of the
principal and the surety, the obligee is the
creditor or the active subject. (Ibid)
Nature of liability of surety
1. Solidary;
2. Limited to the amount of the bond; and
3. Determined strictly by the terms of the
contract of suretyship in relation to the
principal contract between the obligor and the
obligee (Sec. 176,
Insurance Code of the Philippines [ICP]). A surety is
merely a collateral contract.
Forms of Surety
A contract of suretyship is also known as a
tripartite agreement. There are 3 closely
intertwined contracts in the suretyship
transaction, namely:
1. Principal Contract – the agreement
between the principal and the obligee. The
faithful compliance of the terms of which is
the one that will be guaranteed by the
surety bond. Examples of which include, but
is not limited to, construction contract,
service agreement, lease agreement, or loan
agreement. It could be a provision of the
law like the following: (1) Rules of Court in
the case of heirs bond, administrators bond,
executors bond, and Replevin Bond, (2)
Republic Act No. 26 in the case of
reconstituted title bond (3) Presidential
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 Purple Notes
Mercantile Law
2018
Decree No. 957 in the case of performance both ensure against the obligor‘s non-
bond required by HLURB, (4) Presidential performance. They function, however, in different
Decree No. 1464, otherwise known as the ways.
Tariff and Customs Code of the Philippines,
in the case of customs bonds.
2. Surety Bond – the agreement by and STANDBY LETTER
SURETYSHIP
between the principal and the surety in OF CREDIT
favor of the obligee. In this contract, the The beneficiary Upon obligor‘s
surety guarantees that the principal shall reasonably expects default, the surety
perform its obligations set forth in the that he will receive undertakes to
principal contract. If not, the surety shall be cash in the event of complete the
solidarily liable with the principal to nonperformance. The obligor‘s
indemnify the oblige. Standby letter of credit performance, which
has this opposite effect often involves costs
3. Indemnity Agreement – is a contract of the surety contract: of determining
executed by the principal and its co- it reverses the financial whether the obligor
indemnitor in favor of the surety. It is a burden of parties defaulted (a matter
form of a side agreement between the during litigation. over which surety
principal and its co-indemnitors and surety. and the beneficiary
Under this agreement, the principal often litigate) plus
undertakes to indemnify the surety for any the cost of
loss, damage, expense, and costs which it performance.
may incur by reason of its default. In standby credit, the In the surety
beneficiary avoids the contract setting,
Obligations Secured burden of litigation there is no duty to
and receives his indemnify the
A continuing guaranty or suretyship covers all money promptly upon beneficiary until the
transactions, including those arising in the future, presentation of the beneficiary
which are within the description or contemplation required documents. It establishes the face
of the contract of guaranty until the expiration or may be that the of the obligor‘s
termination thereof. applicant has, performance.The
performed his beneficiary may
A guaranty may be given to secure even future obligation and that the have to establish
debts; the amount of which may not be known at beneficiary‘s the fact in litigation.
the time the guaranty is executed. This is the presentation of those
basis for contracts denominated as continuing documents is not
guaranty or suretyship. It covers all transactions, rightful.
including those arising in the future, which are During litigation to During the litigation,
within the description or contemplation of the determine whether the the surety holds the
contract of guaranty, until the expiration or applicant has in fact money and the
termination thereof. (Diño vs. CA, G.R. No. 89775, breached the beneficiary bears
November 26, 1992) obligation to perform, most of the cost of
the beneficiary, not delay in
Surety Distinguished from Standby Letter the applicant, holds performance.
of Credit the money.
Contracting parties and courts should not confuse Parties that use a standby credit and courts
the different functions of the surety contract on construing such a credit should understand this
the one hand and the standby credit on the allocation of burdens. There is a tendency in
other. The distinction between surety contracts some quarters to overlook this distinction
and credits merits some reflection. The two between surety contracts and standby credit and
commercial devices share common purpose since to reallocate burdens by permitting the obligor or

284 Center for Legal Education and Research

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Mercantile Law
the issuer to litigate the performance question Surety distinguished from Solidary
before payment to the beneficiary. (Transfield Obligations (Escaño vs. Ortigas, Jr., G.R. No.
Philippines, Inc. vs. Luzon Hydro Corporation, et al., 151953, June 29, 2007)
G.R. No. 146717, November 22, 2004, citing J. Dolan, SOLIDARY
The Law on Letters of Credit, Revised Ed. 2000) SURETYSHIP
OBLIGATIONS
Solidarity signifies The surety alone
Surety Distinguished from Guaranty that the creditor can answers for the
compel any one of entirety of the
GUARANTY SURETYSHIP the joint and several principal debt.
Liability depends upon Surety assumes debtors to answer
an independent liability as regular the entirety of the
agreement to pay the party to the principal debt
obligation if the undertaking. Solidary co-debtor Surety, outside of the
primary debtor fails to has no other rights liability, assumes to
do so. than those bestowed pay the debt before
Collateral undertaking Original promisor upon him in Section the property of the
Guarantor is Surety primarily 4, Chapter 3, Title I, principal debtor has
secondarily liable. liable. Book IV of the Civil been exhausted,
Insurer of the Insurer of the debt. Code. retains all the other
insolvency of debtor. rights, actions and
Guarantor can avail of Surety cannot avail benefits which pertain
benefit of excussion of such benefit. to him.
and division in case In the case of joint In contrast, even as
the creditor proceeds and several debtors, the surety is solidarily
against him. the solidary debtor bound with the
Guarantor binds Surety undertakes who effected the principal debtor to the
himself to pay if the to pay if the payment to the creditor, the surety
principal CANNOT PAY. principal does not creditor may claim who does pay the
pay. from his co-debtors creditor has the right
Not bound to take Held to know every only the share which to recover the full
notice of the non- default of his corresponds to each, amount paid, and not
performance of his principal with the interest for just any proportional
principal the payment already share, from the
Often discharged by Not discharged by made. principal debtor or
the mere indulgence of mere indulgence of debtors.
the creditor or want of the creditor or want Solidary debtor will Right to full
notice of default of notice of default. not be able to reimbursement falls
recover from the co- within the other rights,
Guaranty and surety are nearly related for there debtors the full actions and benefits
is a promise to answer for the debt or default of amount already paid which pertain to the
another. Surety is usually bound with his principal to the creditor, surety by reason of
by the same instrument executed at the same because the right to the subsidiary
time and on the same consideration. The recovery extends obligation assumed by
guarantor‘s own separate undertaking is often only to the the surety.
supported by a consideration separate from that proportional share of
supporting the contract of the principal; the the other co-
original contract of his principal is not his debtors, and not as
contract. (Phil. Export & Foreign Loan Guarantee to the particular
Corp. vs. V.P. Usebio Construction, Inc., G.R. No. proportional share of
140047, July 13, 2004) the solidary debtor
who already paid.

285
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LETTERS OF CREDIT
Definition
A letter of credit is an engagement by a bank or
other person made at the request of a customer
that the issuer will honor drafts or other demands
for payment upon compliance with the conditions
specified in the credit. (Bank of Commerce vs.
Serrano, G.R.s No. 151895, February 16, 2005;
Prudential Bank vs. Intermediate Appellate Court, et
al., G.R. No. 74886, December 8, 1992)
Purpose:
Through a letter of credit, the bank merely
substitutes its own promise to pay for the
promise to pay for one of its customers who in
return promises to pay the bank the amount of
funds mentioned in the letter of credit plus credit
or commitment fees mutually agreed upon.
Although letters of credit are normally used in
trade of goods, it is also used as a security for
other types of obligations including those arising
from loan agreements, contracts for the supply of
services or construction of buildings and
infrastructure. (Aquino Essential of Credit
Transactions and Banking Laws, 2015 ep., p.393)
Concept:
Those issued by one merchant to another for the
purpose of attending to a commercial transaction.
(Article 567, CC)
Letters of credit were developed for the purpose
of insuring to a seller payment of a definite
amount upon the presentation of documents and
is thus a commitment by the issuer that the party
in whose favor it is issued and who can collect
upon it will have his credit against the applicant
of the letter, duly paid in the amount specified in
the letter. (Metropolitan Waterworks and Sewerage
System vs. Daway, G.R. No. 160732, June 21, 2004)
 A letter of credit is a written instrument
whereby the writer requests or authorizes
the addressee to pay money or deliver
goods to a third person and assumes for
payment of debt therefore to the addressee.
A letter of credit, however, changes its
nature as different transactions occur and if
286 Center for Legal Education and Research
2018
carried to completion ends up as a binding
contract between the issuing and honoring
banks without any regard or relation to the
underlying contract or disputes between the
parties thereto. (Transfield Philippines, Inc. vs.
Luzon Hydro Corp, GR No, 146717, May 19,
2006)
Nature of Letter of Credit:
1. The letter of credit evolved as a
mercantile specialty, and the only way to
understand all its facets is to recognize
that it is an entity unto itself.
2. The relationship between the beneficiary
and the issuer of a letter of credit is not
strictly contractual, because both privity
and a meeting of the minds are lacking,
yet strict compliance with its terms is an
enforceable right.
3. Nor is it a third-party beneficiary contract,
because the issuer must honor drafts
drawn against a letter regardless of
problems subsequently arising in the
underlying contract.
4. Since the bank's customer cannot draw on
the letter, it does not function as an
assignment by the customer to the
beneficiary.
5. Nor, if properly used, is it a contract of
suretyship or guarantee, because it entails
a primary liability following a default.
6. Finally, it is not, in itself a negotiable
instrument, because it is not payable to
order or bearer and is generally
conditional, yet the draft presented under
it is often negotiable. (Transfield Philippines,
Inc. vs. Luzon Hydro Corporation, G.R. No.
146717, November 22, 2004)
Letter of credit constitutes a primary
obligation:
The letter of credit constitutes the primary
obligation, and not merely an accessory contract,
of the issuing bank separate from the underlying
contract that it may support. Consequently, the
beneficiary of a letter of credit issued to secure
payment of a loan may collect on its entirety,
even if the borrower claims it made partial
payments already. (Villanueva, Commercial Law
 Purple Notes
Reviewer; see Insular Bank of Asia vs. Intermediate
Appellate Court, G.R. No. 74834, November 17, 1988)
Letters of credit are security arrangement
but are not converted into contracts of
guaranty:
1. They are primary obligations and not
accessory contracts and while they are
security arrangements, they are not
converted thereby into contracts of guaranty.
(Metropolitan Waterworks and Sewerage System
vs. Daway, G.R. No. 160732, June 21, 2004)
2. The concept of guarantee and the concept of
an irrevocable credit are inconsistent with
each other. In contracts of guarantee, the
guarantor's obligation is merely collateral and
it arises only upon the default of the person
primarily liable. On the other hand, in an
irrevocable credit, the bank undertakes
aprimary obligation. (Feati Bank & Trust
Company vs. Court of Appeals, G.R. No. 94209,
April 30, 1991)
Letters of credit is not a negotiable
instrument:
The essential conditions of letters of credit shall
be issued in favor of a definite person and not to
order. (Article 568(1), CC)
Mercantile Law
Standby Letter of Credit:
 It is a security arrangement for the
performance of certain obligations like
performance of work or service. It can be
drawn against only if another business
transaction is not performed. It may be issued
in lieu of a performance bond.
 A Standby Letter of Credit secures the
performance of some service or work. The
issuer of Standby Letter of Credit is committed
to honor the credit upon evidence or a mere
declaration of the customer‘s default in the
underlying transaction with the beneficiary.
(Black‘s Law Dictionary, 6th Ed. 1990, p. 904)
Kinds of Commercial Credit:
1. Confirmed letter of credit
A confirmed letter of credit pertains to the kind
of
obligation assumed by the correspondent bank.
In this case, the correspondent bank gives an
absolute assurance to the beneficiary that it will
undertake the issuing bank's obligation as its
own according to the terms and conditions of
the credit. (Feati Bank & Trust Company vs. Court of
Appeals, G.R. No. 94209, April 30, 1991)

It is not in itself a negotiable instrument, because 2. Irrevocable letter of credit

it is not payable to order or bearer and is
generally conditional, yet the draft presented
under it is often negotiable. (Transfield Philippines,
Inc. vs. Luzon Hydro Corporation, G.R. No. 146717,
November 22, 2004)
Kinds of Letter of Credit:
1. Standby Credit; or
2. Commercial Letter of Credit
An irrevocable letter of credit refers to the
duration of the letter of credit. What it simply
means is that the issuing bank may not, without
the consent of the beneficiary (seller) and the
applicant (buyer), revoke his undertaking under
the letter. The issuing bank does not reserve the
right to revoke the credit. (Feati Bank & Trust
Company vs. Court of Appeals, G.R. No. 94209, April
30, 1991)

a. Confirmed letter of credit; A credit may be an irrevocable credit and at the

b. Irrevocable letter of credit; same time a confirmed credit or vice-versa.
c. Revolving letter of credit; (Feati Bank & Trust Company vs. Court of Appeals,
G.R. No. 94209, April 30, 1991)
d. Back-to-back letter of credit;
e. General Letter of Credit;
3. Revolving Letter of Credit
f. Special Letter of Credit;
g. Straight Letter of Credit;
It is a credit that provides for renewed credit to
h. Fixed Letter of Credit; and
become available as soon as the opening bank
i. Sight Letter of Credit.
287
Bar Operations C ommissions 287
 Purple Notes
Mercantile Law
has advised that the negotiating or paying bank
that the drafts already drawn by the beneficiary
have been reimbursed to the opening bank by
the buyer. (Oppenhein, supra, at p. 205)
This type of letter of credit is desirable when a
series of shipments are to be made over a
period of time and the total amount is greater
than the amount the bank or the buyer is willing
to have outstanding at any given time.
(Oppenhein, supra, at p. 101)
4. Back-to-Back Letter of Credit
A credit with identical documentary
requirements and covering the same
merchandise as another letter of credit, except
for a difference in the price of the merchandise
as shown by the invoice and the draft. The
second letter of credit can be negotiated only
after the first is negotiated. (Oppenhein, supra, at
p. 201)
5. General Letter of Credit
It ―is one addressed to any and all persons
without naming any one in particular‖ (Black‘s
Law Dictionary, 6th Ed., p. 904). It does not
restrict the beneficiary‘s right to transfer his
interest thereunder. (Folsom, Gordon and
Spanogle, International Business Transactions, 5th
Ed., 1996, pp. 66-71)
6. A Special Letter of Credit is addressed to
a particular individual, firm or corporation by
name. (Black‘s Law Dictionary, supra). In other
words, there is a limit to permissible transfer.
(Folsom, Gordon and Spanogle, International
Business Transactions, 5th Ed., 1996, pp. 66-71)
7. Straight Letter of Credit is one that does
not run in favour of purchases of drafts drawn
thereunder.
8. Fixed Letter of Credit can be exhausted
either when drafts for payment have been
drawn by the beneficiary for the full amount of
the credit or when the time or period for
drawing upon the letter has expired.
288 Center for Legal Education and Research
2018
9. Sight Letter of Credit is payable on
demand as distinguished from Time Letter of
Credit which payable with a certain period.
Contracts involved in a letter of credit:
In a letter of credit arrangement, there are three
distinct and independent contracts, thus:
1. Sale between buyer and seller;
2. Contract of buyer with issuing bank; and
3. Letter of credit proper, in which the bank
promises to pay seller pursuant to the terms
and conditions stated therein.
Relationship between the Seller-Beneficiary and
Issuing Bank is not strictly contractual because
privity is lacking, yet strict compliance with its
terms is an enforceable right. Nevertheless,
Letter of Credit is not a contract pour autrui
because Issuing Bank must honor the drafts
drawn against the Letter of Credit regardless of
the problems subsequently arising in the
underlying contract. (Transfield Philippines, Inc. vs.
Luzon Hydro Corporation, G.R. No. 146717, November
22, 2004)
While Issuing Bank is bound to honor the credit,
it is Seller-Beneficiary, not Buyer-Applicant, who
has the right to ask Issuing Bank to honor the
credit by allowing him to draw thereon. Since the
Issuing Bank‘s client, Buyer-Applicant, cannot
draw on the Letter of Credit, it does not function
as an assignment by Buyer-Applicant to Seller-
Beneficiary. (Transfield Philippines, Inc. vs. Luzon
Hydro Corporation, G.R. No. 146717, November 22,
2004)
Perfection of letter of credit:
Letter of credit is perfected the moment when
the correspondent bank pays to the person in
whose favor the letter of credit has been opened.
(Belman, Inc. vs. Central Bank, G.R. No. L-10195,
November 29, 1958)
Parties to a letter of credit:
There would be at least three (3) parties to a
letter of credit arrangement:
 Purple Notes
1. Buyer (applicant), who procures the letter of
credit and obliges himself to reimburse
Issuing Bank upon receipt of the documents
of title;
2. Bank issuing the letter of credit, which
undertakes to pay Seller upon receipt of the
draft and proper documents of titles and to
surrender the documents to Buyer upon
reimbursement; and
3. Seller (Beneficiary), who in compliance with
the contract of sale ships the goods to Buyer
and delivers the documents of title and draft
to the Issuing Bank to recover payment.
But the parties may increase, such requiring the
services of:
1. Advising (notifying) bank, to convey to Seller
the existence of the credit. It undertakes only
to notify and/or transmit to Beneficiary
existence of the Letter of Credit.
2. Confirming bank, which expressly assumes
the direct and primary obligation to the Letter
of Credit to Seller-Beneficiary.
3. Paying bank, which undertakes to encash the
drafts drawn by the exporter.
4. Negotiating bank, where instead of going to
the place of the Issuing Bank to claim
payment, Seller may approach Negotiating
Bank to have draft discounted.
Notifying, negotiating, or confirming
banks may be referred to as corresponding
bank:
 The correspondent bank may be called a
notifying bank, a negotiating bank, or a
confirming bank. (Feati Bank & Trust Company
vs. Court of Appeals, G.R. No. 94209, April 30,
1991)
Buyer, the one who initiates the operation:
The buyer of the merchandise, who is also the
buyer of the credit instrument, is the party who
initiates the operation. His contract is with the
bank which is to issue the instrument and is
represented by the Commercial Credit of
Agreement which he signs, supported by the
mutually made promise contained in the
Agreement. (De Leon, The Philippine Negotiable
Instruments Law, 2010)
289
Mercantile Law
The seller is the beneficiary of the credit
instruments; the consideration paid by the
buyer to the bank is the same consideration
flowing from the seller to the issuing bank:
 The seller of the merchandise is called the
beneficiary of the credit instrument. The
instrument is addressed to him and is in his
favor. It is the written contract of the bank
which has created the instrument. While the
bank cannot compel the beneficiary to ship
and avail himself of the benefits of the
instrument, the seller may recover from the
bank the value of his shipment if made within
the terms of the instrument, even though he
had not given the bank any direct
consideration for the bank‘s promises
contained in the instrument. By stretch of
imagination, and in order to support the
instrument as a two-sided contract, the
consideration paid or to be paid by the buyer
to the bank is also the consideration flowing
from the seller to the bank. (De Leon, The
Philippine Negotiable Instruments Law, 2010)
Rights and Obligations of Parties
Applicability of Uniform Customs and
Practice for Documentary Credit (U.C.P.):
There being no specific provision which governs
the legal complexities arising from transactions
involving letters of credit not only between the
banks themselves but also between banks and
seller and/or buyer, the applicability of the U.C.P.
is undeniable. (Feati Bank & Trust Company vs. Court
of Appeals, G.R. No. 94209, April 30, 1991)
Being the product of international commerce, the
impact of this commercial instrument transcends
national boundaries, and it is not uncommon to
find a dearth of national law that can adequately
provide for its governance. It is no wonder then
why great reliance was placed on commercial
usage and practice, which in any case, can be
justified by the universal acceptance of the
autonomy of contracts rule. The rules were then
later developed into what is now known as the
Uniform Customs and Practice for Documentary
Credits (U.C.P.) issued by the International
Chamber of Commerce. It is by no means a
Bar Operations C ommissions 289
 Purple Notes
Mercantile Law
complete text by itself, for to be sure, there are
other principles, which, although part of lex
mercatoria, are not dealt with the U.C.P. (De
Leon, The Philippine Negotiable Instruments Law,
2010)
Obligation of the seller, beneficiary:
The tender of documents by the beneficiary
(seller) must include all documents required by
the letter. (Feati Bank & Trust Company vs. Court of
Appeals, G.R. No. 94209, April 30, 1991)
Obligation of banks, in general:
Banks must examine all documents with
reasonable care to ascertain that they appear on
their face to be in accordance with the terms and
conditions of the credit. (Article 7, Uniform Customs
and Practice for Documentary Credit)
Obligations of issuing bank:
 Art. 9 of U.C.P. defines the liability of the
issuing banks on an irrevocable letter of
credit as a "definite undertaking of the
issuing bank, provided that the stipulated
documents are presented to the nominated
bank or the issuing bank and the terms and
conditions of the Credit are complied with,
to pay at sight if the Credit provides for
sight payment. (Metropolitan Waterworks and
Sewerage System vs. Daway, G.R. No. 160732,
June 21, 2004)
 Except when a letter of credit specifically
stipulates otherwise, the obligation of the
banks issuing letters of credit are solidary
with that of the person or entity requesting
for its issuance, the same being a direct,
primary, absolute and definite undertaking
to pay the beneficiary upon the presentation
of the set of documents required therein.
(Metropolitan Waterworks and Sewerage System
vs. Daway, G.R. No. 160732, June 21, 2004)
Obligation of corresponding bank:
 In commercial transactions involving letters
of credit, the functions assumed by a
correspondent bank are classified according
to the obligations taken up by it. The
correspondent bank may be called a
290 Center for Legal Education and Research
2018
notifying bank, a negotiating bank, or a
confirming bank. (Feati Bank & Trust
Company vs. Court of Appeals, G.R. No. 94209,
April 30, 1991)
Obligation of a notifying bank:
 In case of a notifying bank, the
correspondent bank assumes no liability
except to notify and/or transmit to the
beneficiary the existence of the letter of
credit. (Feati Bank & Trust Company vs. Court
of Appeals, G.R. No. 94209, April 30, 1991)
Obligation of a negotiating bank:
 A negotiating bank, on the other hand, is a
correspondent bank which buys or
discounts a draft under the letter of credit.
Its liability is dependent upon the stage of
the negotiation. If before negotiation, it
has no liability with respect to the seller but
after negotiation, a contractual relationship
will then prevail between the negotiating
bank and the seller. (Feati Bank & Trust
Company vs. Court of Appeals, G.R. No. 94209,
April 30, 1991)
Obligation of a confirming bank:
 In the case of a confirming bank, the
correspondent bank assumes a direct
obligation to the seller and its liability is a
primary one as if the correspondent bank
itself had issued the letter of credit. (Feati
Bank & Trust Company vs. Court of Appeals,
G.R. No. 94209, April 30, 1991)
Basic principles of letter of credit:
1. Doctrine of Strict Compliance.
2. Doctrine of Independence;
3. Fraud Exception Principle;
Rule of Strict Compliance
It is a settled rule in commercial transactions
involving letters of credit that the
documents tendered must strictly conform
to the terms of the letter of credit. The
tender of documents by the beneficiary
(seller) must include all documents required
by the letter. A correspondent bank which
 Purple Notes
departs from what has been stipulated
under the letter of credit, as when it accepts
a faulty tender, acts on its own risks and it
may not thereafter be able to recover from
the buyer or the issuing bank, as the case
may be, the money thus paid to the
beneficiary. (Feati Bank & Trust Company vs.
Court of Appeals, G.R. No. 94209, April 30, 1991)
 The issuing bank must see to it that the
terms of the letters of credit are strictly
complied with. The issuing bank is duty
bound to examine the tender documents
and to make sure that the same tender
documents strictly complies with the
specifications in the Letter of Credit. For
instance, the enumeration of the specific
documents that must be submitted is
controlling. In addition, the required
provisions in the tender documents must
also be complied with. The issuing bank
has no discretion to waive any of the
requirements. (Aquino Essentials of Credit
Transactions and Banking Laws, 2015, p.403)
 It was explained: ―There is no room in
documentary transactions for the doctrine
of substantial performance. All of the
obligations of all the parties must be
measured by the documents tendered, and
must not encompass anything outside the
―four corners‖ of the documents. And, the
documents tendered must be perfect and
strictly comply with the letter of credit, as
issued.‖ (Folson, Gordon & Spanogle, Jr., p.
251)
Independence Principle
It means that Issuing Banks assume no
responsibility or liability for the form, sufficiency,
accuracy genuineness, falsification or legal effect
of any documents, or the general and/or
particular conditions stipulated in the documents
or superimposed thereon, nor do they assume
any liability or responsibility for the description,
quantity, weight, quality, condition, packing,
delivery, value or existence of the goods
represented by any documents, or for the good
faith or acts and/or omissions, solvency,
performance or standing of the consignor, the
carriers, or the insurers of the goods, or any
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Mercantile Law
other person whomsoever. (Transfield Philippines,
Inc. vs. Luzon Hydro Corporation, G.R. No. 146717,
November 22, 2004)
 Precisely, the independence principle
liberates the issuing bank from the duty of
ascertaining compliance by the parties in
the main contract. As the principle's
nomenclature clearly suggests, the
obligation under the letter of credit is
independent of the related and originating
contract. In brief, the letter of credit is
separate and distinct from the underlying
transaction. (Transfield Philippines, Inc. vs.
Luzon Hydro Corporation, G.R. No. 146717,
November 22, 2004)
 The so-called "independence principle"
assures the seller or the beneficiary of
prompt payment independent of any
breach of the main contract and precludes
the issuing bank from determining whether
the main contract is actually accomplished
or not. (Transfield Philippines, Inc. vs. Luzon
Hydro Corporation, G.R. No. 146717, November
22, 2004)
 By this so-called "independence principle,"
the bank determines compliance with the
letter of credit only by examining the
shipping documents presented; it is
precluded from determining whether the
main contract is actually accomplished or
not. (Bank of America, NT & SA vs. Court of
Appeals, G.R. No. 105395, December 10, 1993)
Principle of Independence may also be
invoked by the beneficiary:
 To say that the independence principle may
only be invoked by the issuing banks would
render nugatory the purpose for which the
letters of credit are used in commercial
transactions. As it is, the independence
doctrine works to the benefit of both the
issuing bank and the beneficiary. (Transfield
Philippines, Inc. vs. Luzon Hydro Corporation,
G.R. No. 146717, November 22, 2004)
 The independent nature of the letter of credit
may be: (a) independence in toto where the
credit is independent from thejustification
aspect and is a separate obligation from the
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 Purple Notes
Mercantile Law
underlying agreement like for instance a
typical standby; or (b) independence may be
only as to the justification aspect like in a
commercial letter of credit or repayment
standby, which is identical with the same
obligations under the underlying agreement.
In both cases the payment may be enjoined
if in the light of the purpose of the credit
the payment of the credit would constitute
fraudulent abuse of the credit. (Transfield
Philippines, Inc. vs. Luzon Hydro Corporation, G.R. No.
146717, November 22, 2004)
Fraud Exception Principle
Most writers agree that fraud is an exception to
the independence principle. Professor Dolan
opines that the untruthfulness of a certificate
accompanying a demand for payment under a
standby credit may qualify as fraud sufficient to
support an injunction against payment. The
remedy for fraudulent abuse is an injunction.
(Transfield Philippines, Inc. vs. Luzon Hydro
Corporation, G.R. No. 146717, November 22, 2004)
B. TRUTH IN LENDING ACT
(RA No. 3756)
PURPOSE
1. To protect a debtor from lack of awareness
of the true cost of credit;
2. To allow the debtor to fully appreciate and
evaluate the true cost of his borrowing; and
3. To avoid circumvention of usury laws. (Sec.
2, RA 3756)
OBLIGATION OF CREDITORS TO PERSON
TO WHOM CREDIT IS EXTENDED
Any creditor shall furnish to each person to whom
credit is extended, prior to the consummation
of the transaction, a clear statement in writing
setting forth, to the extent applicable and in
accordance with rules and regulations prescribed
by the Monetary Board of the Bangko Sentral ng
Pilipinas (Board), the following information:
1. The cash price or delivered price of the
property or service to be acquired;
292 Center for Legal Education and Research
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2. The amounts, if any, to be credited as down
payment and/or trade-in;
3. The difference between the amounts set
forth under clauses (1) and (2);
4. The charges, individually itemized, which are
paid or to be paid by such person in
connection with the transaction but which
are not incident to the extension of credit;
5. The total amount to be financed;
6. The finance charge expressed in terms of
pesos and centavos; and
7. The percentage that the finance bears to
the total amount to be financed expressed
as a simple annual rate on the outstanding
unpaid balance of the obligation. (Sec. 4, RA
No. 3765)
COVERED AND EXCLUDED TRANSACTIONS
The Truth in Lending Act (TLA) applies to
creditors who are engaged in the business of
extending credit including loans, mortgages,
conditionals sales contracts, sales in installments,
and other credit transactions or series of
transactions having a similar purpose or effect.
It applies only to transactions involving extension
of credit and not to those on cash basis. (Sec. 3[2]
and [4], RA No. 3765)
Credit includes:
1. Loan, mortgage, deed of trust, advance or
discount;
2. Conditional sales contract;
3. Contract to sell, or sale or contract of sale of
property or services, either for present or
future delivery;
4. Rental-purchase contract;
5. Contract or arrangement for the hire,
bailment, or leasing of property;
6. Option, demand, lien, pledge, or other claim
against, or for the delivery of, property or
money;
7. Acquisition or purchase of any credit upon
security of any obligation arising out of any
of the above; and
8. Any transaction or series of transactions
having a similar purpose or effect. (Sec. 3[2],
RA No. 3765)
Creditor – means any person engaged in the
business of extending credit (including any
 Purple Notes
person who as a regular business practice make
loans or sells or rents property or services on a
time, credit, installment basis, either as principal
or as agent) who requires as an incident to the
extension of credit, the payment of a finance
charge. (Sec. 3[4], RA No. 3765)
CONSEQUENCES OF NON-COMPLIANCE
WITH OBLIGATION
1. Any creditor who in connection with any
credit transaction fails to disclose to any
person any information in violation of this
Act or any regulation issued thereunder
shall be liable to such person in:
a. The amount of P100; or
b. An amount equal to twice the finance
charged required by such creditor in
connection with such transaction,
whichever is the greater
Limitation: Such liability shall not exceed
P2,000 on any credit transaction.
Prescriptive period: Action to recover such
penalty may be brought by such person within
one year from the date of the occurrence of the
violation, in any court of competent jurisdiction.
In any action under this subsection in which any
person is entitled to a recovery, the creditor shall
be liable for reasonable attorney's fees and court
costs as determined by the court. (Section 6 (a),
RA No. 3756)
2. Except as specified in subsection (a) of this
section, nothing contained in this Act or any
regulation contained in this Act or any
regulation thereunder shall affect the
validity or enforceability of any contract or
transactions.
3. Any person who willfully violates any
provision of this Act or any regulation issued
thereunder shall be fined by:
a. not less than P100 or more than P5,000;
or
b. imprisonment for not less than 6 months,
nor more than one year; or
c. both.
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Mercantile Law
4. No punishment or penalty provided by this
Act shall apply to the Philippine Government
or any agency or any political subdivision
thereof.
5. A final judgment hereafter rendered in any
criminal proceeding under this Act to the
effect that a defendant has willfully violated
this Act shall be prima facie evidence
against such defendant in an action or
proceeding brought by any other party
against such defendant under this Act as to
all matters respecting which said judgment
would be an estoppel as between the
parties thereto.
C. ANTI-MONEY LAUNDERING ACT
(R.A. No. 9160, AS AMENDED BY R.A. NO.
9194 AND R.A. NO. 10365)
[hereinafter referred as AMLA]
POLICY OF THE LAW
1. To protect and preserve the integrity and
confidentiality of bank accounts;
2. To ensure that the Philippines shall not be
used as a money laundering site for the
proceeds of any unlawful activity;
3. To extend cooperation in transnational
investigations and prosecutions of persons
involved in money laundering activities
wherever committed. (Sec. 2, AMLA)
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. Securities dealers, brokers, salesmen,
investment houses and other similar persons
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 Purple Notes
Mercantile Law
managing securities or rendering services as
investment agent, advisor, or consultant,
4. Mutual funds, close-end investment
companies, common trust funds, and other
similar persons, and
5. 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);
6. 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);
7. 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);
8. Company service providers which, as a
business, provide any of the following
services to third parties:
a. acting as a formation agent of juridical
persons;
b. 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;
c. 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
d. acting as (or arranging for another
person to act as) a nominee shareholder
for another person; and
9. Persons who provide any of the following
services:
a. managing of client money, securities or
other assets;
b. management of bank, savings or
securities accounts;
c. organization of contributions for the
creation, operation or management of
companies; and
294 Center for Legal Education and Research
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d. creation, operation or management of
juridical persons or arrangements, and
buying and selling business entities.
Excluded from the covered persons
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. (Sec. 3(a), AMLA)
Obligations of Covered Institutions
1. Customer identification
2. Record keeping
3. Reporting of covered and suspicious
transactions
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. (Sec. 9[a], AMLA)
Record keeping
All records of all transactions of covered
institutions shall be maintained and safely stored
for five (5) years from the date 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. (Sec. 9[b], AMLA)
Reporting of covered and suspicious
transactions
 Purple Notes
Covered institutions shall report to the Anti-
Money Laundering Council (AMLC) all covered
and suspicious transactions within five (5)
working days from occurrence thereof, unless the
AMLC prescribes a longer period not exceeding
15 working days. (Sec. 9[c], AMLA)
Lawyers and Accountants Subject to
Professional Secrecy or Legal Professional
Privilege
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. (Sec. 3(a), AMLA)
Prohibited Communications
When reporting covered or suspicious
transactions to the AMLC, covered persons and
their officers and employees are prohibited from:
1. Communicating, directly or indirectly, in any
manner or by any means, to any person, the fact
that a covered or suspicious transaction report
was made, the contents thereof, or any other
information in relation thereto.
NOTE: If the reporting is done by any person in
the regular performance of his duties in good
faith, no administrative, criminal or civil
proceedings shall lie against said person, whether
or not such reporting results in any criminal
prosecution under this Act of any other law (Safe
Harbor Provision).
2. Communicating, directly or indirectly, in any
manner or by any means, to any person or entity,
the media, the fact that a covered or suspicious
transaction has been reported or is about to be
reported, the contents of the report, or any other
information in relation thereto.
3. Publishing or airing such reporting in any
manner or form by the mass media, electronic
mail, or other similar devices.
In case of violation of these prohibitions, the
concerned officer and employee of the covered
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person and media shall be held criminally liable
(Sec. 9, AMLA)
COVERED AND SUSPICIOUS
TRANSACTIONS
Covered Transactions
―Covered transaction‖ is a transaction in cash or
other equivalent monetary instrument involving a
total amount in excess of Five hundred thousand
pesos (Php 500,000.00) within one (1) banking
day. (Sec. 3[b], AMLA)
Suspicious Transactions
―Suspicious transactions‖ are 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. The client is not properly identified;
3. The amount involved is not commensurate
with the business or financial capacity of the
client;
4. Taking into account all known circumstances,
it may be perceived that the client‘s
transaction
is structured in order to avoid being the
subject of reporting requirements under Act;
5. Any circumstance relating to the transaction
which is observed to deviate from profile of
the client and/or the client‘s past transactions
with the covered institution.
6. The transactions is in anyway related to an
unlawful activity or offense under this Act
that is about to be, is being or has been
committed; or
7. Any transaction that is similar or analogous to
any of the foregoing. (Sec. 3[b-1], AMLA)
MONEY LAUNDERING (ML)
DEFINITION
A crime whereby the proceeds of an unlawful
activity are transacted, thereby making them
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Mercantile Law
appear to have originated from legitimate
sources. (Sec. 4, AMLA)
HOW ML IS COMMITTED
ML is committed by any person who, knowing
that any monetary instrument or property
represents, involves, or relates to the proceeds of
any unlawful activity:
1. Transacts said monetary instrument or
property;
2. Converts, transfers, disposes of, moves,
acquires, possesses or uses said monetary
instrument or property;
3. Conceals or disguises the true nature, source,
location, disposition, movement or ownership
of or rights with respect to said monetary
instrument or property;
4. Attempts or conspires to commit money
laundering offenses referred to in paragraphs
(1), (2) or (3);
5. Aids, abets, assists in or counsels the
commission of the money laundering offenses
referred to in paragraphs (1), (2) or (3)
above; and
6. Performs or fails to perform any act as a result
of which he facilitates the offense ofmoney
laundering referred to in paragraphs (1), (2)
or (3) above.
7. ML 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. (Sec. 4,
AMLA)
UNLAWFUL ACTIVITIES OR PREDICATE
CRIMES
‗Unlawful activity‘ refers to any act or omission or
series or combination thereof involving or having
direct relation to the following:
1. Kidnapping for ransom under Article 267 of
Act No. 3815, otherwise known as the
Revised Penal Code, as amended;
2. Sections 4, 5, 6, 8, 9, 10, 11, 12, 13, 14, 15
and 16 of Republic Act No. 9165, otherwise
known as the Comprehensive Dangerous
Drugs Act of 2002;
3. Section 3 paragraphs B, C, E, G, H and I of
Republic Act No. 3019, as amended,
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otherwise known as the Anti-Graft and
Corrupt Practices Act;
4. Plunder under Republic Act No. 7080, as
amended;
5. Robbery and extortion under Articles 294,
295, 296, 299, 300, 301 and 302 of the
Revised Penal Code, as amended;
6. Jueteng and Masiao punished as illegal
gambling under Presidential Decree No.
1602;
7. Piracy on the high seas under the Revised
Penal Code, as amended and Presidential
Decree No. 532;
8. Qualified theft under Article 310 of the
Revised Penal Code, as amended;
9. Swindling under Article 315 and Other Forms
of Swindling under Article 316 of the Revised
Penal Code, as amended;
10. Smuggling under Republic Act Nos. 455 and
1937;
11. Violations of Republic Act No. 8792,
otherwise known as the Electronic Commerce
Act of 2000;
12. Hijacking and other violations under Republic
Act No. 6235; destructive arson and murder,
as defined under the Revised Penal Code, as
amended;
13. Terrorism and conspiracy to commit terrorism
as defined and penalized under Sections 3
and 4 of Republic Act No. 9372;
14. Financing of terrorism under Section 4 and
offenses punishable under Sections 5, 6, 7
and 8 of Republic Act No. 10168, otherwise
known as the Terrorism Financing Prevention
and Suppression Act of 2012:
15. Bribery under Articles 210, 211 and 211-A of
the Revised Penal Code, as amended, and
Corruption of Public Officers under Article
212 of the Revised Penal Code, as amended;
16. Frauds and Illegal Exactions and Transactions
under Articles 213, 214, 215 and 216 of the
Revised Penal Code, as amended;
17. Malversation of Public Funds and Property
under Articles 217 and 222 of the Revised
Penal Code, as amended;
18. Forgeries and Counterfeiting under Articles
163, 166, 167, 168, 169 and 176 of the
Revised Penal Code, as amended;
19. Violations of Sections 4 to 6 of Republic Act
No. 9208, otherwise known as the Anti-
Trafficking in Persons Act of 2003;
 Purple Notes
20. Violations of Sections 78 to 79 of Chapter IV,
of Presidential Decree No. 705, otherwise
known as the Revised Forestry Code of the
Philippines, as amended;
21. Violations of Sections 86 to 106 of Chapter
VI, of Republic Act No. 8550, otherwise
known as the Philippine Fisheries Code of
1998;
22. Violations of Sections 101 to 107, and 110 of
Republic Act No. 7942, otherwise known as
the Philippine Mining Act of 1995;
23. Violations of Section 27(c), (e), (f), (g) and
(i), of Republic Act No. 9147, otherwise
known as the Wildlife Resources
Conservation and Protection Act;
24. Violation of Section 7(b) of Republic Act No.
9072, otherwise known as the National Caves
and Cave Resources Management Protection
Act;
25. Violation of Republic Act No. 6539, otherwise
known as the Anti-Carnapping Act of 2002,
as amended;
26. Violations of Sections 1, 3 and 5 of
Presidential Decree No. 1866, as amended,
otherwise known as the decree Codifying the
Laws on Illegal/Unlawful Possession,
Manufacture, Dealing In, Acquisition or
Disposition of Firearms, Ammunition or
Explosives;
27. Violation of Presidential Decree No. 1612,
otherwise known as the Anti-Fencing Law;
28. Violation of Section 6 of Republic Act No.
8042, otherwise known as the Migrant
Workers and Overseas Filipinos Act of 1995,
as amended by Republic Act No. 10022;
29. Violation of Republic Act No. 8293, otherwise
known as the Intellectual Property Code of
the Philippines;
30. Violation of Section 4 of Republic Act No.
9995, otherwise known as the Anti-Photo and
Video Voyeurism Act of 2009;
31. Violation of Section 4 of Republic Act No.
9775, otherwise known as the Anti-Child
Pornography Act of 2009;
32. Violations of Sections 5, 7, 8, 9, 10(c), (d)
and (e), 11, 12 and 14 of Republic Act No.
7610, otherwise known as the Special
Protection of Children Against Abuse,
Exploitation and Discrimination;
33. Fraudulent practices and other violations
under Republic Act No. 8799, otherwise
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known as the Securities Regulation Code of
2000; and
34. Felonies or offenses of a similar nature that
are punishable under the penal laws of other
countries.‖ (Sec. 3[i], AMLA)
ANTI-MONEY LAUNDERING COUNCIL
(AMLC)
Creation of AMLC
The Anti-Money Laundering Council is hereby
created and shall be composed of the Governor
of the Bangko Sentral ng Pilipinas as Chairman,
the Commissioner of the Insurance Commission
and the Chairman of the Securities and Exchange
Commission, as members. The AMLC shall act
unanimously in the discharge of its functions as
defined hereunder: (Sec. 7, AMLA)
FUNCTIONS OF AMLC
1. to require and receive covered transaction
reports from covered institutions;
2. to issue orders addressed to the appropriate
Supervising Authority or the covered
institution to determine the true identity of
the owner of any monetary instrument or
property subject of a covered transaction
report or request for assistance from a
foreign State, or believed by the Council, on
the basis of substantial evidence, to be, in
whole or in part, wherever located,
representing, involving, or related to, directly
or indirectly, in any manner or by any means,
the proceeds of an unlawful activity;
3. to institute civil forfeiture proceedings and
all other remedial proceedings through the
Office of the Solicitor General;
4. to cause the filing of complaints with the
Department of Justice or the Ombudsman for
the prosecution of money laundering
offenses;
5. to investigate suspicious transactions and
covered transactions deemed suspicious after
an investigation by the AMLC, money
laundering activities and other violations of
this Act;
6. to apply before the Court of Appeals, ex
parte, for the freezing of any monetary
instrument or property alleged to be
laundered, proceeds from, or
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Mercantile Law
instrumentalities used in or intended for use
in any unlawful activity as defined in Section
3(i) hereof;
7. to implement such measures as may be
necessary and justified under this Act to
counteract money laundering;
8. to receive and take action in respect of, any
request from foreign states for assistance in
their own anti-money laundering operations
provided in this Act;
9. to develop educational programs on the
pernicious effects of money laundering, the
methods and techniques used in money
laundering, the viable means of preventing
money laundering and the effective ways of
prosecuting and punishing offenders;
10. to enlist the assistance of any branch,
department, bureau, office, agency or
instrumentality of the government, including
government-owned and -controlled
corporations, in undertaking any and all anti-
money laundering operations, which may
include the use of its personnel, facilities and
resources for the more resolute prevention,
detection and investigation of money
laundering offenses and prosecution of
offenders;
11. to impose administrative sanctions for the
violation of laws, rules, regulations and
orders and resolutions pursuant thereto.
12. to require the Land Registration Authority
and all its Registries of Deeds to submit to
the AMLC, reports on all real estate
transactions involving an amount in excess of
Five hundred thousand pesos (P500,000.00)
within fifteen (15) days from the date of
registration of the transaction, in a form to
be prescribed by the
AMLC. The AMLC may also require the Land
Registration Authority and all its Registries of
Deeds to submit copies of relevant
documents of all real estate transactions.‖
(Sec. 7, AMLA)
SAFE HARBOR PROVISION
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
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criminal prosecution under the AMLA or any other
Philippine law. (Sec. 9[c], AMLA)
APPLICATION OF FREEZE ORDERS
Who May Apply?
1. Court-issued Freeze Order –
By authority of the Council, the AMLC
Secretariat shall file before the Court of
Appeals, through the Office of the Solicitor
General, an Ex Parte Petition for Issuance of
Freeze Order. (Section 2.1, Rule 10, 2018 RIRR
of AMLA)
2. AMLC-issued Freeze Order. (Section 3, Rule
10, 2018 RIRR of AMLA)
Freezing of Monetary Instrument or
Property
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 Section 3(i) hereof, the
Court of Appeals may issue a freeze order
which shall be effective immediately, and
which shall not exceed six (6) months
depending upon the circumstances of the
case: Provided, That if there is no case filed
against a person whose account has been
frozen within the period determined by the
court, the freeze order shall be deemed ipso
facto lifted: Provided, further, That this new
rule shall not apply to pending cases in the
courts. In any case, the court should act on
the petition to freeze within twenty-four (24)
hours from filing of the petition. If the
application is filed a day before a nonworking
day, the computation of the twenty-four (24)-
hour period shall exclude the nonworking days.
(Sec. 10, AMLA)
Motion to lift freeze order:
A person whose account has been frozen may file
a motion to lift the freeze order and the court
must resolve this motion before the expiration of
the freeze order. (Ibid.)
 Purple Notes
No court, except Supreme Court, can issue
a temporary restraining order or writ of
injunction against any freeze order:
No court shall issue a temporary restraining order
or a writ of injunction against any freeze order,
except the Supreme Court. (ibid.)
What are the requisites for the issuance of
a freeze order in relation to AMLA?
There are only two requisites for the issuance of
a freeze order: (1) the application ex parte by the
AMLC and (2) the determination of probable
cause by the CA. The probable cause required for
the issuance of a freeze order differs from the
probable cause required for the institution of a
criminal action, and the latter was not an issue
before the CA nor is it an issue before us in this
case.
In resolving the issue of whether probable cause
exists, the CA‘s statutorily-guided determination‘s
focus is not on the probable commission of an
unlawful activity (or money laundering) xxx, but
on whether the bank accounts, assets, or other
monetary instruments sought to be frozen are in
any way related to any of the illegal activities
enumerated under RA No. 9160, as amended.
Thus, a freeze order is not dependent on a
separate criminal charge; much less does it
depend on a conviction. (Ligot vs. Republic, GR No.
176944, March 6, 2013)
Effectivity of Freeze Orders
The freeze order shall be effective immediately
and shall not exceed six (6) months depending
upon the circumstances of the case. On motion
of
the AMLC filed before the expiration of the
original period of the freeze order, the court may,
for good cause shown, extend its effectivity.
Upon the timely filing of such motion and
pending resolution by the Court of Appeals, the
freeze order shall remain effective. (Sec. 2, Rule
10, 2018 RIRR of AMLA)
Under the amendments introduced to Anti-
Money Laundering Act, how long is a freeze
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Mercantile Law
order be effective? When is the freeze
order ipso facto lifted?
Section 10 of the AMLA, as amended by R.A. No.
10365, states that the Court of Appeals may
issue a freeze order which shall be effective
immediately, and which shall not exceed six (6)
months depending upon the circumstances of the
case.
The same section provides that if there is no case
filed against a person whose account has been
frozen within the period determined by the court,
the freeze order shall be deemed ipso facto lifted.
Duties of Covered Institutions (Sec. 4, Rule 10,
2018 RIRR of AMLA)
1. Implement Freeze Order. - Upon receipt of
the notice of the freeze order, the covered
person and government agency concerned
shall immediately freeze the monetary
instrument or property subject thereof, and
shall immediately desist from and not allow
any transaction, withdrawal, transfer,
removal, conversion, other movement or
concealment thereof.
2. Freeze and Report Related Accounts. - Upon
receipt of the freeze order and upon
verification by the covered person that there
are accounts related to the monetary
instrument or property subject of the freeze
order, the covered person shall immediately
freeze these related accounts wherever these
may be found.
If the related accounts cannot be determined
within twenty-four (24) hours from receipt of
the freeze order due to the volume and/or
complexity of the transactions, or any other
justifiable factors, the covered person shall
effect the freezing of the related accounts
within a reasonable period and shall submit a
supplemental return thereof to the Court of
Appeals and the AMLC within twenty-four
(24) hours from the freezing of said related
accounts.
Relevant transactions of related accounts
shall be reported to the AMLC as suspicious
transactions.
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 Purple Notes
Mercantile Law
3. Furnish Copy of Freeze Order to Owner or
Holder. - The covered person and
government agency concerned shall likewise
immediately furnish a copy of the notice of
the freeze order upon the owner or holder of
the monetary instrument or property or
related accounts subject thereof.
4. Submit Detailed Return. - Within twenty-four
(24) hours from receipt of the freeze order,
the covered person and government agency
concerned shall submit, by personal delivery,
to the Court of Appeals and to the AMLC, a
written detailed return on the freeze order.
The covered person shall also submit to the
AMLC, through the internet, an electronic
detailed return in a format to be prescribed
by the latter.
5. Contents of the Detailed Return. - The
detailed return on the freeze order shall
specify all the pertinent and relevant
information, which shall include the
following:
a. For covered persons: The account
numbers and/or description of the
monetary instrument, property, or
proceeds involved;
b. For concerned government agencies:
i. Certificates of title numbers of
registered real property and the
volumes and pages of the registration
books of the Register of Deeds where
the same are registered;
ii. Registration in the Primary Entry Book
and corresponding Registration Book
in
the Register of Deeds
unregistered real property;
iii. Registration with the Register of
Deeds of the enabling or master
deed for a condominium project,
declaration of restrictions relating to
such condominium project,
certificate of title conveying a
condominium and notice
assessment upon any condominium;
300 Center for Legal Education and Research
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iv. Tax declarations for improvements
built on land owned by a different
party, together with the annotation
of the contract of lease on the title
of the owner of the land as
registered in the Register of Deeds;
v. Certificates of registration for motor
vehicles and heavy equipment
indicating the engine numbers,
chassis numbers and plate numbers;
vi. Certificates of numbers for seacraft;
vii. Registration certificates for aircraft;
or
viii. Commercial invoices or notarial
identification for personal property
capable of manual delivery;
c. For covered persons and government
agencies, whichever are applicable:
i. The names of the account holders,
personal property owners or
possessors, or real property owners
or occupants;
ii. The value of the monetary
instrument, property, or proceeds as
of the time the assets were ordered
frozen;
iii. All relevant information as to the
status and nature of the monetary
instrument, property, or proceeds;
iv. The date and time when the freeze
order were served; and
v. The basis for the identification of
the related accounts.
AUTHORITY TO INQUIRE INTO BANK
DEPOSITS
The AMLC may inquire into or examine any
particular deposit or investment with any banking
institution or non-bank financial institution. This
for can be either upon order of the court or even
without court order in certain exceptional cases.
(Sec. 11, AMLA)
A court order ex parte must first be obtained
before the AMLC can inquire into Related
Accounts. (Sec. 1[1.2], Rule 11, 2018 IRR of AMLA)
of
 Purple Notes
Related Accounts.
Related accounts shall refer to accounts, funds
and sources of which originated from and/or are
materially linked to the monetary instruments or
properties subject of the freeze order(s) or an
order of inquiry, regardless of the layer of
accounts that the funds had passed through or
transactions that they had undergone. (Sec. 1,
Rule 2, 2018 IRR of AMLA)
Note: The Court of Appeals must act on the
application within 24 hours from the filing
thereof.
Examination by AMLC when court order is
required:
In cases of violations of Republic Act No. 9160 as
amended, when it has been established that
there is probable cause that the deposits or
investments, including related accounts involved,
are related to (1) an Unlawful Activity or (2) a
money laundering offense. (Sec. 1[1.6], Rule 11,
2018 IRR of AMLA)
Note: On the issue of constitutionality of Sec. 11
of AMLA, the Supreme Court held that the Sec.
11 providing for ex-parte application and inquiry
by the AMLC into certain bank deposits and
investments does not violate substantive due
process, there being no physical seizure of
property involved at that stage. A bank inquiry
order under Sec. 11 does not necessitate any
form of physical seizure of property of the
account holder. What the bank inquiry order
authorizes is the examination of the particular
deposits or investments in banking institutions or
non-bank financial institutions. The monetary
instruments or property deposited with such
banks or financial institutions are not seized in a
physical sense, but are examined on particular
details such as the account holder's record of
deposits and transactions. (Subido vs. CA, G.R. No.
216914, December 06, 2016)
Cases of examination by AMLC where court
order is not required:
1. Kidnapping for ransom under Article 267 of
Act No. 3815, otherwise known as the
Revised Penal Code, as amended;
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Mercantile Law
2. Sections 4, 5, 6, 8, 9, 10, 11, 12, 13, 14, 15
and 16 of Republic Act No. 9165, otherwise
known as the Comprehensive Dangerous
Drugs Act of 2002;
3. Hijacking and other violations under Republic
Act No. 6235; destructive arson and murder,
as defined under the Revised Penal Code, as
amended;
4. Felonies or offenses of a nature similar to
those mentioned in Section 3(i) (1), (2), and
(12) which are punishable under the penal
laws of other countries; Terrorism and
conspiracy to commit terrorism as defined
and penalized under Republic Act No. 9372;
and (Sec. 11, AMLA)
5. Financing of terrorism under Section 4 and
offenses punishable under Sections 5, 6, 7
and 8 of the Terrorism Financing Prevention
and Suppression Act (TFPSA). (Sec. 2.1, 2018
RIRR of AMLA)
Q: May AMLC inquire into the bank deposits
even without court order?
A: Yes, but only in exceptional cases. Section
11, AMLA, as amended by R.A. No. 10167,
provides that the ―AMLC may inquire into or
examine any particular deposit or
investment, including related accounts, with
any banking institution or non-bank financial
institution. This can be either upon order of
the court or even without court order in
certain exceptional cases.‖
Section 11 allows the AMLC to inquire into bank
accounts without having to obtain a judicial order
in cases where there is probable cause that the
deposits or investments are related to kidnapping
for ransom, certain violations of the
Comprehensive Dangerous Drugs Act of 2002,
hijacking and other violations under R.A. No.
6235, destructive arson and murder. Absent any
of the mentioned predicate crimes, a court order
is necessary to inquire into bank deposits.
(Republic vs. Eugenio, G.R. No. 174629, February 14,
2008)
Note: By virtue of R.A. No. 10168, Anti-Financing
of Terrorism is now included as one of the
predicate crimes where a court order is not
necessary to examine or inquire into bank
deposits.
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 Purple Notes
Mercantile Law
Examination by AMLA should comply with
the requirement of the Constitution:
The authority of AMLC to inquire into or examine
the main account and the related accounts shall
comply with the requirements of Article III,
Sections 2 and 3 of the 1987 Constitution.
Inquiry into deposit does not require pre-
existing criminal case:
 Inquiry into deposits under Section 11 does
not require a pre-existing criminal case.
(Republic vs. Eugenio, G.R. No. 174629, February 14,
2008)
Forfeiture Provisions
Civil Forfeiture (CF) refers to the non-
conviction-based proceedings aimed at forfeiting,
in favor of the government, monetary
instruments or properties related to an unlawful
activity or money laundering offense defined
herein. (Sec. 1[r], Rule 2, 2018 RIRR of AMLA)
Who initiates CF?
The AMLC shall institute civil forfeiture
proceedings and all other remedial proceedings,
through the Office of the Solicitor General, to
confiscate all monetary instruments or properties
related to ML/TF or associated unlawful activity,
in accordance with Rule 12 hereof. (Sec. 1.11, Rule
6[D)], 2018 RIRR of AMLA)
When and Where to file?
Upon determination that probable cause exists
that any monetary instrument or property is in
any way related to an unlawful activity or ML
offense, the AMLC shall file with the regional trial
court, through the Office of the Solicitor General,
a verified petition for civil forfeiture.
 The petition for civil forfeiture shall include
other monetary instrument or property of
equal value in cases where the monetary
instrument or property that should be subject
of forfeiture:
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2018
a. cannot be located despite due diligence;
b. has been substantially altered, destroyed,
diminished in value or otherwise
rendered worthless by any act or
omission;
c. has been concealed, removed, converted,
or otherwise transferred;
d. is located outside the Philippines or has
been placed or brought outside the
jurisdiction of the court; or
e. 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.
(Sections 1.1 and 1.2, Rule 12, 2018 RIRR of
AMLA, in relation to Section 12[a] of the said
Act) – Equal Asset Value
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 ML 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 executory. (Sec. 12[b],
AMLA)
 This provision shall also apply in both civil
and criminal forfeiture. (Sec. 12[b], AMLA)
Payment in Lieu of Forfeiture
Where the court has issued an order of forfeiture
of the monetary instrument or property subject of
an ML offense, and said order cannot be enforced
because:
1. any particular monetary instrument or
property cannot, with due diligence, be
located;
 Purple Notes
2. it has been substantially altered, destroyed,
diminished in value or otherwise
renderedworthless by any act or omission,
directly or indirectly, attributable to the
offender;
3. it has been concealed, removed, converted,
or otherwise transferred to prevent the same
from being found or to avoid forfeiture
thereof;
4. it is located outside the Philippines or has
been placed or brought outside the
jurisdiction of the court; or
5. 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. (Sec. 12[c], AMLA)
 This provision shall apply in both civil and
criminal forfeiture.
Mutual Assistance among States
Mutual Legal Assistance (MLA) refers to the
formal method of cooperation between two
jurisdictions for purposes of seeking assistance in
the production of documents, asset freezing and
forfeiture, extradition, enforcement of foreign
judgment, and other kinds of legal assistance in
criminal matters. (Sec. 1[jjj], Rule 2, 2018 RIRR of
AMLA)
Where a foreign State makes an MLA request in
the investigation or prosecution of a said person, including specific monetary
ML/Terrorism Financing (TF) offense, the AMLC
may execute the request or refuse to execute the
same and inform the foreign State of any valid
reason for not executing the request or for
delaying the execution thereof.
Exception:
The AMLC may refuse to comply with any MLA
request where the action sought in the request:
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1. contravenes any provision of the
Constitution; or
2. the execution of the request is likely to
prejudice the national interest of the
Philippines.
Exception to Exception:
There is a treaty between the Philippines and the
requesting State relating to the provision of
assistance in relation to ML/TF or associated
unlawful activity. (Sec. 1, Rule 29, 2018 RIRR of
AMLA)
Basis for Making and Acting on MLA
Request
A foreign State may make, and the Philippines
may execute, an MLA request pursuant to
conventions, treaties and international
agreements over which the Philippines is a party.
The principles of mutuality and reciprocity shall,
at all times, be recognized. (Sec. 2, Rule 29, 2018
IRR of AMLA)
Requirements for MLA Requests from
Foreign States
All MLA requests from a foreign State must:
1. confirm that an investigation or prosecution
is being conducted in respect of a money
launderer or terrorism financer named
therein, or that he has been convicted of any
ML/TF offense or associated unlawful activity;
2. state the grounds on which any person is
being investigated or prosecuted for ML/TF or
associated unlawful activity or the details of
his conviction;
3. give sufficient particulars as to the identity of
instrument or property;
4. give particulars sufficient to identify any
covered person believed to have any
information, document, material or object
which may be of assistance to the
investigation or prosecution;
5. specify the concerned covered person from
which any information, document, materia lor
object that may be of assistance to the
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investigation or prosecution may be
gathered;
6. specify the manner in which and to whom
said information, document, material or
object obtained pursuant to said request, is
to be produced;
7. give all the particulars necessary for the
issuance by the court in the requested State
of the writs, orders or processes needed by
the requesting State; and
8. contain such other information as may assist
in the execution of the request, including the
statement of the specific legal provision of
the penal law on ML/TF or associated
unlawful that was violated in the requested
State. Provided, that the felonies or offenses
punishable under the penal laws of the
requesting State are of a nature similar to the
unlawful activities as herein defined. (Sec. 3,
Rule 29, 2018 RIRR of AMLA)
Procedure for MLA Requests from Foreign
States (Sec. 4, Rule 29, 2018 IRR of AMLA)
 Receipt of MLA Request
MLA requests shall be received by the following
government agencies:
1. All MLA requests from foreign States shall be
filed with the DOJ, as the central authority on
all MLA matters; or
2. The AMLC may directly receive and act on
MLA requests made on the basis of
reciprocity; Provided, that all actions taken
on such requests shall be transmitted to the
DOJ for formal response to the requesting
State. (Sec. 4[4.1], Rule 29, 2018 IRR of AMLA)
 Powers of the AMLC to Act on MLA Requests
The AMLC may execute an MLA request
from a foreign State by:
1. tracking down, freezing, restraining and
seizing assets alleged to be proceeds of or
related to any unlawful activity under the
procedures laid down in the AMLA and
TFPSA, their respective IRR, and other AMLC
issuances;
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2. giving information or documents needed by
the foreign State, for evidentiary purposes,
within the procedures laid down in the AMLA
and TFPSA, their respective IRR, and other
AMLC issuances; and
3. applying for an order of forfeiture of any
monetary instrument or property with the
court: Provided, that the court shall not issue
such an order unless the application is
accompanied by an authenticated copy of the
order of a court in the requesting State
ordering the forfeiture of said monetary
instrument or property of a person who has
been convicted of a ML/TF offense or an
unlawful activity in the requesting State, and
a certification or an affidavit of a competent
officer of the requesting State stating that
the conviction and the order of forfeiture are
final and that no further appeal lies in respect
of either. (Sec. 4[4.2], Rule 29, 2018 IRR of
AMLA)
 Investigation, Freeze Order, Bank Inquiry and
Civil Forfeiture
1. The provisions on AMLC investigation, and
freeze order, bank inquiry and civil forfeiture,
shall apply to MLA requests when necessary
to affect the assistance to be extended.
2. The AMLC shall adopt a flexible mechanism
for:
a. coordinating with other States regarding
requests for freezing and forfeiture of
assets; and
b. managing, including disposal, of frozen,
preserved and forfeited assets.
3. The AMLC shall coordinate, if necessary, with
the requesting State on the, procedure for,
and mode of, turnover of the portion of the
forfeited assets that belongs to the relevant
persons in the requesting State. (Sec. 4[4.3],
Rule 29, 2018 IRR of AMLA)
 Suppletory Application of the Rules of Court
For attachment of Philippine properties in the
name of persons convicted of any unlawful
activity, execution and satisfaction of final
 Purple Notes
judgments of forfeiture, application for
examination of witnesses, procuring search
warrants, production of bank documents and
other materials, and all other actions not
specified in the AMLA and TFPSA, their respective
IRR, and other AMLC issuances, and assistance
for any of the aforementioned actions, which is
subject of a request by a foreign State, resort
may be had to the proceedings pertinent thereto
under the Rules of Court. (Sec. 4[4.4], Rule 29,
2018 IRR of AMLA)
 Results of AMLC Action
The results of the actions taken by the AMLC
shall be transmitted to the DOJ for formal
response to the requesting State. (Sec. 4[4.5], Rule
29, 2018 IRR of AMLA)
D. FOREIGN INVESTMENT ACT
(R.A. No. 7042, as amended by R.A. No.
8179)
POLICY OF THE LAW
• It is the policy of the State to attract, promote
and welcome productive investments from
foreign individuals, partnerships, corporations,
and governments, including their political
subdivisions, in activities which significantly
contribute to national industrialization and
socio-economic development to the extent
that foreign investment is allowed in such
activity by the Constitution and relevant laws.
• Foreign investments shall be encouraged in
enterprises that significantly expand livelihood
and employment opportunities for Filipinos;
enhance economic value of farm products;
promote the welfare of Filipino consumers;
expand the scope, quality and volume of
exports and their access to foreign markets;
and/or transfer relevant technologies in
agriculture, industry and support services.
• Foreign investments shall be welcome as a
supplement to Filipino capital and technology
in those enterprises serving mainly the
domestic market. (Sec. 2, RA 7042, as amended
by RA 8179)
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DEFINITION OF TERMS
Foreign investment
It is an equity investment made by a non-
Philippine national in the form of foreign
exchange and/or other assets actually transferred
to the Philippines and duly registered with the
Central Bank which shall assess and appraise the
value of such assets other than foreign exchange.
(Sec. 3(c), RA 7042, as amended by RA 8179)
“Doing business” in the Philippines
It shall include:
1. Soliciting orders, service contracts, opening
offices, whether called ―liaison‖ offices or
branches;
2. Appointing representatives or distributors
domiciled in the Philippines or who in any
calendar year stay in the country for a period
or periods totaling one hundred eighty (180)
days or more;
3. Participating in the management, supervision
or control of any domestic business, firm,
entity or corporation in the Philippines; and
4. Any other act or acts that imply a continuity
of commercial dealings or arrangements, and
contemplate to that extent the performance
of acts or works, or the exercise of some of
the functions normally incident to, and in
progressive prosecution of, commercial gain
or of the purpose and object of the business
organization. (Sec. 3(d), RA 7042, as amended
by RA 8179)
Acts not be deemed “doing business” in the
Philippines:
1. Mere investment as a shareholder by a
foreign entity in domestic corporations duly
registered to do business, and/or the exercise
of rights as such investor;
2. Having a nominee director or officer to
represent its interests in such corporation;
3. Appointing a representative or distributor
domiciled in the Philippines which transacts
business in the representative‘s or
distributor‘s own name and account;
4. The publication of a general advertisement
through any print or broadcast media;
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Mercantile Law
5. Maintaining a stock of goods in the
Philippines solely for the purpose of having
the same processed by another entity in the
Philippines;
6. Consignment by a foreign entity of
equipment with a local company to be used
in the processing of products for export;
7. Collecting information in the Philippines; and
8. Performing services auxiliary to an existing
isolated contract of sale which are not on a
continuing basis, such as installing in the
Philippines machinery it has manufactured or
exported to the Philippines, servicing the
same, training domestic workers to operate
it, and similar incidental services. (Sec. 1(f),
Rule 1, IRR of RA 7042)
Export enterprise
It is an enterprise wherein a manufacturer,
processor or service (including tourism)
enterprise exports sixty percent (60%) or more
of its output, or wherein a trader purchases
products domestically and exports sixty percent
(60%) or more of such purchases. (Sec. 3(e), RA
7042, as amended by RA 8179)
Domestic market enterprise
It is an enterprise which produces goods for sale,
or renders services to the domestic market
entirely or if exporting a portion of its output fails
to consistently export at least sixty percent
(60%) thereof. (Sec. 3(f), RA 7042, as amended by
RA 8179)
REGISTRATION OF INVESTMENTS OF NON
PHILIPPINE NATIONALS
Qualifications
1. Any non-Philippine national may do business
or invest in a domestic enterprise up to one
hundred percent (100%) of its capital
provided:
a. it is investing in a domestic market
enterprise in areas outside the Foreign
Investment Negative List (FINL); or
b. it is investing in an export enterprise
whose products and services do not fall
within Lists A and B (except for defense-
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related activities, which may be approved
pursuant to Section 8(b)(1) of the Act) of
the FINL.
Provided further that, as required by
existing laws, the country or state of the
applicant must also allow Filipino citizens
and corporations to do business therein.
2. Non-Philippine national qualified to do
business per paragraph (a) above, but who
will engage in more than one investment
area, one or more of which is in the FINL,
may be registered under the Act. However,
said non-Philippine national will not be
allowed to engage in the investment areas
which are in the FINL. (Sec. 1, Rule 4, IRR of
RA 7042)
REGISTRATION OF INVESTMENTS OF NON-
PHILIPPINE NATIONALS
1. Filing of Application:
a. Applications for registration shall be filed
with the SEC in the case of foreign
corporations and domestic corporations
or partnerships which are non-Philippine
nationals.
b. In the case of single proprietorships,
applications for Metro Manila shall be
filed with the Bureau of Trade Regulation
and Consumer Protection (BTRCP) or the
DTI-National Capital Region. In the
provinces, applications may be filed with
the extension offices of the SEC for
corporations/partnerships and the
provincial offices of the DTI for sole
proprietorships. (Sec. 2(a), Rule 4, IRR of
RA 7042)
2. Pre-Processing of Documents
It shall be undertaken to assist the investor
in determining the completeness of his
documents. All applications are considered
officially accepted only upon submission of
complete documents to either SEC or BTRCP.
(Sec. 2(b), Rule 4, IRR of RA 7042)
3. Approval
 Purple Notes
a. Applications shall be acted by the SEC or
BTRCP within 15 working days from
official acceptance.
b. If not acted within such period for a
cause not attributable to the applicant, it
shall be considered automatically approved.
(Sec. 2(c), Rule 4, IRR of RA 7042)
Note: Enterprises seeking to remit foreign
exchange abroad for purposes of remittance of
profits and dividends and capital repatriation in
connection with the foreign investment made
pursuant to the Act shall be deemed registered
with the BSP after SEC or BTRCP registration. For
this purpose, BSP rules and regulations covering
procedures for registration of foreign investments
shall be observed. (Sec. 1, Rule 5, IRR of RA 7042)
FOREIGN INVESTMENTS IN EXPORT
ENTERPRISE
Allowable foreign equity participation
Foreign equity participation in export enterprises
shall be allowed up to one hundred percent
(100%) provided that the products and services
of such enterprises do not fall within Lists A and
B of the FINL. (Sec. 1, Rule 6, IRR of RA 7042)
Registration
• Export enterprises shall be deemed
registered with the Board of Investments
(BOI) upon registration with the SEC or
BTRCP.
• All duly-registered export enterprises under
this Rule shall submit to the BOI a duly
accomplished form within six (6) months
after the end of each taxable year.
• Failure of export enterprises to submit the
required reports within the prescribed period
of time or the submission of fraudulent
reports shall be a ground for the SEC or
BTRCP to impose appropriate sanctions as
provided for under Section 1, Rule 18 of the
IRR of RA 7042
FOREIGN INVESTMENTS IN DOMESTIC
MARKET ENTERPRISES
Allowable foreign equity participation
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Mercantile Law
Foreign equity participation in domestic market
enterprises shall be allowed up to one hundred
percent (100%) unless such participation is
prohibited or limited by existing laws or the FINL.
(Sec. 1, Rule 7, IRR of RA 7042)
Change of Status from domestic market
enterprise to export enterprise
A domestic market enterprise may change its
status to an export enterprise any time by
notifying the SEC or BTRCP. However, such
application shall be supported by relevant reports
as evidence that the applicant enterprise has
exported sixty percent (60%) or more of its
output. (Sec. 2, Rule 7, IRR of RA 7042)
FOREIGN INVESTMENT NEGATIVE LIST
(FINL)
11th Foreign Investment Negative List
(under EO 65)
LIST A
No Foreign Equity
• Mass media, except recording and internet
business
• Practice of professions, including radiologic
and x-ray technology, law, criminology, and
marine deck officers and marine engine
officers
o Subject to the Annex on Professions
indicating professions where foreigners
are allowed to practice in the Philippines
subject to reciprocity and where corporate
practice is allowed; and
o Foreigners may teach at higher education
levels if subject being taught is not a
professional subject (included in a
government board or bar examination).
• Retail trade enterprises with paid-up capital of
less than US$2.5 million
• Cooperatives
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Mercantile Law
• Organization and operation of private
detective, watchmen or security guards
agencies
• Small-scale mining
• Utilization of marine resources in archipelagic
waters, territorial sea, and exclusive
economic zone as well as small-scale
utilization of natural resources in rivers,
lakes, bays, and lagoons
• Ownership, operation, and management of
cockpits
• Manufacture, repair, stockpiling, and/or
distribution of nuclear weapons
• Manufacture, repair, stockpiling, and/or
distribution of biological, chemical, and
radiological weapons and anti-personnel
mines
• Manufacture of firecrackers and other
pyrotechnic devices
Up to 25% Foreign Equity
• Private recruitment, whether for local or
overseas employment
• Contracts for the construction of defense-
related structures
Up to 30% Foreign Equity
• Advertising
Up to 40% Foreign Equity
• Contracts for the construction and repair of
locally-funded public works, except:
o Infrastructure/development projects
covered in Republic Act (RA) No. 7718;
and
o Projects which are foreign-funded or
assisted and required to undergo
international competitive bidding.
• Exploration, development, and utilization of
natural resources
• Ownership of private lands
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• Operation of public utilities, except power
generation and the supply of electricity to the
contestable market and similar businesses or
services not covered by the definition of
public utilities
• Educational institutions other than those
established by religious groups and mission
boards, for foreign diplomatic personnel and
their dependents and other foreign
temporary residents, or for short-term high-
level skills development that do not form part
of the formal education system as defined in
Section 20 of Batas Pambansa (BP) No. 232
(1982)
• Culture, production, milling, processing,
trading except retailing, of rice and corn and
acquiring, by barter, purchase or otherwise,
rice and corn and the by-products thereof
• Contracts for the supply of materials, goods,
and commodities to Government-Owned and
Controlled Corporation (GOCC), company,
agency or municipal corporation
• Operation of deep-sea commercial fishing
vessels
• Ownership of condominium units
• Private radio communications network
List B
Up to 40% Foreign Equity
• Manufacture, repair, storage, and/or
distribution of products and/or ingredients
requiring Philippine National Police (PNP)
clearance:
o Firearms (handguns to shotguns), parts of
firearms and ammunition therefor,
instruments or implements used or
intended to be used in the manufacture of
firearms;
o Gunpowder;
o Dynamite;
o Blasting supplies;
o Ingredients used in making explosives:
 Chlorates of potassium and sodium;
 Purple Notes
 Nitrates of ammonium, potassium,
sodium barium, copper (11), lead (11),
calcium, and cuprite;
 Nitric acid;
 Nitrocellulose;
 Perchlorates of ammonium, potassium,
and sodium;
 Dinitrocellulose;
 Glycerol;
 Amorphous phosphorus;
 Hydrogen peroxide;
 Strontium nitrate powder;
 Toluene; and
o Telescopic sights, sniper scope, and other
similar devices.
However, the manufacture or repair of these
items may be authorized by the Chief of the PNP
to non-Philippine nationals; provided that a
substantial percentage of output, as determined
by the said agency, is exported. Provided further
that the extent of foreign equity ownership
allowed shall be specified in the said
authority/clearance. (RA No. 7042, as amended by
RA No. 8179)
• Manufacture, repair, storage, and/or
distribution of products requiring Department
of National Defense (DND) clearance:
o Guns and ammunition for warfare;
o Military ordinance and parts thereof
(e.g., torpedoes, depth charges,
bombs, grenades, missiles);
o Gunnery, bombing, and fire control
systems and components;
o Tactical aircraft (fixed and rotary-
winged), parts, and components
thereof;
o Space vehicles and component
systems;
o Combat vessels (air, land, and naval)
and auxiliaries;
o Weapons repair and maintenance
equipment;
o Military communications equipment;
o Night vision equipment;
o Stimulated coherent radiation devices,
components, and accessories;
o Armament training devices; and
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Mercantile Law
o Others as may be determined by the
Secretary of the DND.
However, the manufacture or repair of these
items may be authorized by the Secretary of
National Defense to non-Philippine nationals;
provided that a substantial percentage of
output, as determined by the said agency, is
exported. Provided further that the extent of
foreign equity ownership allowed shall be
specified in the said authority/clearance (RA
No. 7042 as amended by RA No. 8179).
• Manufacture and distribution of dangerous
drugs (RA No. 7042 as amended by RA No.
8179)
• Sauna and steam bathhouses, massage
clinics, and other like activities regulated by
law because of risks posed to public health
and morals, except wellness centers
• All forms of gambling, except those covered
by investment agreements with Philippine
Amusement and Gaming Corporation
(PAGCOR)
• Domestic market enterprises with paid-in
equity capital of less than the equivalent of
US$200,000
• Domestic market enterprises which involve
advanced technology or employ at least fifty
(50) direct employees with paid-in equity
capital of less than the equivalent of
US$100,000.
E. INSOLVENCY LAWS
CONCURRENCE AND PREFERENCE OF
CREDITS
It implies the possession by two or more
creditors of equal rights or privileges over the
same property or all the property of a debtor.
Preference of Credits, defined:
It is the right held by a creditor to be preferred in
the payment of his claim above others out of the
debtor‘s assets. It is the right to be paid first.
Preference of credit is a method adopted to
determine and specify the order in which credits
should be paid in final distribution of the
proceeds of the insolvent's assets. It is the right
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to a first preference in the discharge of the funds
of the judgement debtor. (Yngson, Jr. vs. Philippine
National Bank, G.R. No. 171132, August 15, 2012)
Exempt Properties
1. Under the Revised Rules of Court (Section 13,
Rule 39)
Except as otherwise expressly provided by law,
the following property, and no other, shall be
exempt from execution:
a. The judgment obligor's family home as
provided by law, or the homestead in which
he resides, and land necessarily used in
connection therewith;
b. Ordinary tools and implements personally
used by him in his trade, employment, or
livelihood;
c. Three horses, or three cows, or three
carabaos, or other beasts of burden, such as
the judgment obligor may select necessarily
used by him in his ordinary occupation;
d. His necessary clothing and articles for
ordinary personal use, excluding jewelry;
e. Household furniture and utensils necessary
for housekeeping, and used for that purpose
by the judgment obligor and his family, such
as the judgment obligor may select, of a
value not exceeding one hundred thousand
pesos;
f. Provisions for individual or family use
sufficient for four months;
g. The professional libraries and equipment of
judges, lawyers, physicians, pharmacists,
dentists, engineers, surveyors, clergymen,
teachers, and other professionals, not
exceeding three hundred thousand pesos in
value;
h. One fishing boat and accessories not
exceeding the total value of one hundred
thousand pesos owned by a fisherman and
by the lawful use of which he earns his
livelihood;
i. So much of the salaries, wages, or earnings
of the judgment obligor for his personal
services within the four months preceding the
levy as are necessary for the support of his
family
j. Lettered gravestones
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k. Monies, benefits, privileges, or annuities
accruing or in any manner growing out of
any life insurance;
l. The right to receive legal support, or money
or property obtained as such support, or any
pension or gratuity from the Government;
m. Properties specially exempted by law.
But no article or species of property mentioned in
this section shall be exempt from execution
issued upon a judgment recovered for its price or
upon a judgment of foreclosure of a mortgage
thereon.
2. Exemption of Family Home (Art. 155, Family
Code)
The family home shall be exempt from execution,
forced sale or attachment except:
a. For non-payment of taxes;
b. For debts incurred prior to the constitution
of the family home;
c. For debts secured by mortgages on the
premises before or after such constitution;
and
d. For debts due to laborers, mechanics,
architects, builders, materialmen and others
who have rendered service or furnished
material for the construction of the building.
3. Other Exemptions under the Law
a. 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. (As amended by PD No.
1035, and further amended by PD No.
1246, prom. November 21, 1977)
b. Properties of public dominion are
outside the commerce of man. The
ownership of a property of public
dominion is a special collective
ownership that resides in the social
group for general use and enjoyment.
Hence, the properties of public
dominion are exempt from attachment
and execution. (Aquino, Essentials of
Credit Transactions and Banking Laws,
2015, p. 453)
 Purple Notes
c. Government funds are not subject to
execution. ―The universal rule that
where the State gives its consent to be
sued by private parties either by
general or special law, it may limit
claimant's action 'only up to the
completion of proceedings anterior to
the stage of execution' and that the
power of the
Courts ends when the judgment is rendered,
since government funds and properties may
not be seized under writs of execution or
garnishment to satisfy such judgments, is
based on obvious considerations of public
policy. Disbursements of public funds must
be covered by the corresponding
appropriation as required by law. The
functions and public services rendered by the
State cannot be allowed to be paralyzed or
disrupted by the diversion of public funds
from their legitimate andspecific objects, as
appropriated by law." (Republic vs. Villasor,
G.R. No. L-30671, November 28, 1973)
Classification of Credits
1. Special preferred credits listed in Articles
2241 and 2242 of NCC;
2. Ordinary preferred credits listed in Article
2244 of NCC; and
3. Common Credits under Article 2245 of NCC.
Special Preferred Credits
With reference to specific movable property:
1. Duties, taxes and fees due thereon to the
State or any subdivision thereof;
2. Claims arising from misappropriation, breach
of trust, or malfeasance by public officials, on
the movables, money or securities obtained
by them;
3. Claims for the unpaid price of movables sold,
on said movables, so long as they are in the
possession of the debtor, up to the value of
the same;
If the movable has been resold by the debtor and
the price is still unpaid, the lien may be enforced
on the price.
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Mercantile Law
4. Credits guaranteed with a pledge, or by a
chattel mortgage, upon the things pledged or
mortgaged, up to the value thereof;
5. Credits for the making, repair, safekeeping or
preservation of personal property, on the
movable thus made, repaired, kept or
possessed;
6. Claims for laborers' wages, on the goods
manufactured or the work done;
7. For expenses of salvage, upon the goods
salvaged;
8. Credits between the landlord and the tenant,
arising from the contract of tenancy on
shares, on the share of each in the fruits or
harvest;
9. Credits for transportation, upon the goods
carried, for the price of the contract and
incidental expenses, until their delivery and
for thirty days thereafter;
10. Credits for lodging and supplies usually
furnished to travelers by hotel keepers, on
the movables belonging to the guest as long
as such movables are in the hotel, but not for
money loaned to the guests;
11. Credits for seeds and expenses for cultivation
and harvest advanced to the debtor, upon
the fruits harvested;
12. Credits for rent for one year, upon the
personal property of the lessee existing on
the immovable leased and on the fruits of the
same, but not on money or instruments of
credit;
13. Claims in favor of the depositor if the
depositary has wrongfully sold the thing
deposited, upon the price of the sale . (Art.
2241, NCC)
With reference to specific immovable property:
1. Taxes due upon the land or building;
2. For the unpaid price of real property sold,
upon the immovable sold;
3. Claims of laborers, masons, mechanics and
other workmen, as well as of architects,
engineers and contractors, engaged in the
construction, reconstruction or repair of
buildings, canals or other works, upon said
buildings, canals or other works;
4. Claims of furnishers of materials used in the
construction, reconstruction, or repair of
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2018
buildings, canals or other works, upon said 8. Legal expenses, and expenses incurred in the
buildings, canals or other works; administration of the insolvent's estate for
5. Mortgage credits recorded in the Registry of the common interest of the creditors, when
Property, upon the real estate mortgaged; properly authorized and approved by the
court;
6. Expenses for the preservation or
9. Taxes and assessments due the national
improvement of real property when the law
government, other than those mentioned in
authorizes reimbursement, upon the
articles 2241, No. 1, and 2242, No. 1;
immovable preserved or improved;
10. Taxes and assessments due any province,
7. Credits annotated in the Registry of Property,
other than those referred to in articles 2241,
in virtue of a judicial order, by attachments
No. 1, and 2242, No. 1;
or executions, upon the property affected,
11. Taxes and assessments due any city or
and only as to later credits;
municipality, other than those indicated in
8. Claims of co-heirs for warranty in the
articles 2241, No. 1, and 2242, No. 1;
partition of an immovable among them,
12. Damages for death or personal injuries
upon the real property thus divided;
caused by a quasi-delict;
9. Claims of donors or real property for
13. Gifts due to public and private institutions of
pecuniary charges or other conditions
charity or beneficence;
imposed upon the donee, upon
14. Credits which, without special privilege,
theimmovable donated;
appear in (a) a public instrument; or (b) in a
10. Credits of insurers, upon the property
final judgment, if they have been the
insured, for the insurance premium for two
subject of litigation. These credits shall have
years. (Art. 2242, NCC)
preference among themselves in the order
of priority of the dates of the instruments
Ordinary Preferred Credits
and of the judgments, respectively. (Art.
2244, NCC)
1. Proper funeral expenses for the debtor, or
children under his or her parental authority
Common Credits
who have no property of their own, when
approved by the court;
Credits of any other kind or class, or by any other
2. Credits for services rendered the insolvent by
right or title not comprised in the four preceding
employees, laborers, or household helpers for
one year preceding the commencement of articles, shall enjoy no preference. (Art. 2245,
NCC)
the proceedings in insolvency;
3. Expenses during the last illness of the debtor
Order of preference of credits
or of his or her spouse and children under his
or her parental authority, if they have no
1. There is preference with respect to taxes
property of their own;
only under Articles 2241 and 2242 of the
4. Compensation due the laborers or their
New Civil Code (NCC).
dependents under laws providing for
indemnity for damages in cases of labor
2. As to all other claims or liens mentioned in
accident, or illness resulting from the nature
Articles 2241 and 2242 of the NCC, there is
of the employment;
no order of preference and the balance
5. Credits and advancements made to the
(after taxes are deducted) of the proceeds
debtor for support of himself or herself, and
of the specific movable or immovable
family, during the last year preceding the
property as the case may be shall be divided
insolvency;
among the claimants or creditors in
6. Support during the insolvency proceedings,
proportion to the value of the claims or pro
and for three months thereafter;
rata.
7. Fines and civil indemnification arising from a
3. The excess of the specific property, if any,
criminal offense;
after the payment of the credits which enjoy
preference, shall be added to the free

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 Purple Notes
property which the debtor may have, for the
payment of the other credits and shall be
disposed in accordance with the order of
preference under Article 2244 of the NCC
as modified by Article 110 of the Labor
Code that elevated labor claims to No. 1
and removed the one year limit.
4. If there is an excess after satisfying the
claims or liens under Article 2244, all other
common credits shall be satisfied pro rata.
FINANCIAL REHABILITATION AND
INSOLVENCY ACT OF 2010 (RA 10142)
Declaration of Policy
1. To encourage debtors, both juridical and
natural persons, and their creditors to
collectively and realistically resolve and
adjust competing claims and property
rights.
2. To ensure a timely, fair, transparent,
effective and efficient rehabilitation or
liquidation of debtors.
3. To ensure or maintain certainly and
predictability in commercial affairs,
preserve and maximize the value of the
assets of these debtors, recognize creditor
rights and respect priority of claims, and
ensure equitable treatment of creditors
who are similarly situated.
4. When rehabilitation is not feasible, to
facilitate a speedy and orderly liquidation of
these debtor's assets and the settlement of
their obligations. (Sec. 2, RA 10142)
Nature of the Proceedings
1. In rem - Jurisdiction over all persons affected
by the proceedings shall be considered as
acquired upon publication of the notice of the
commencement of the proceedings in any
newspaper of general circulation in the
Philippines.
2. Summary and non-adversarial (Sec. 3, RA
10142)
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Mercantile Law
Persons covered
1. Individual debtor– a natural person who is a
resident and citizen of the Philippines that has
become insolvent (Sec. 4[o], RA 10142)
2. Debtor – unless specifically excluded by a
provision of this Act, refers to:
a. A sole proprietorship duly registered with
the Department of Trade and Industry
(DTI);
b. A partnership duly registered with the
Securities and Exchange Commission
(SEC);
c. A corporation duly organized and existing
under Philippine laws; or
d. An individual debtor who has become
insolvent. (Sec. 4[k], RA 10142)
Insolvency, defined:
It refers 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. (Section
5[k], Rule I, A.M. No. 12-12-11-SC)
Excluded from the term debtor:
1. Bank – refers to any duly licensed bank or
quasi-bank that is potentially or actually
subject to conservatorship, receivership or
liquidation proceedings under the New
Central Bank Act (RA 7653) or successor
legislation;
2. Insurance companies – refer to those
companies that are potentially or actually
subject to insolvency proceedings under the
Insurance Code (PD 1460) or successor
legislation;
3. Pre-need company – refers to any
corporation authorized/licensed to sell or
offer to sell pre- need plans.
4. National and local government agencies or
units
Government financial institutions other than
banks and government-owned or -controlled
corporations are covered by this Act, unless their
specific charter provides otherwise. (Sec. 5, RA
10142)
Bar Operations C ommissions 313
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Mercantile Law
Suspension of Payments
Upon motion filed by the individual debtor, the
court may issue an order suspending any pending
execution against the individual debtor: Provided,
that properties held as security by secured
creditors shall not be the subject of such
suspension order.
The suspension order shall lapse when three
(3) months shall have passed without the
propose agreement being accepted by the
creditors or as soon as such agreement is
denied.
No creditor shall sue or institute proceedings to
collect his claim from the debtor from the time
of the filing of the petition for suspension of
payments and for as long as proceedings
remain pending except:
1. Those creditors having claims for personal
labor, maintenance, expense of last illness
and funeral of the wife or children of the
debtor incurred in the sixty (60) days
immediately prior to the filing of the
petition; and
2. Secured creditors (Sec. 96, RA 10142)
Rehabilitation
It shall 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. (Section 4 [gg], RA 10142)
Types of Rehabilitation
1. Court Supervised Rehabilitation
a. Voluntary Rehabilitation
b. Involuntary Rehabilitation
2. Pre-Negotiated Rehabilitation
Who may initiate the proceedings?
In Court Supervised Voluntary Rehabilitation:
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By the Debtor, when approved by:
1. The owner – in case of sole proprietorship,
2. Majority of the partners – in case of
partnership,
3. Majority vote of the board of directors or
trustees and authorized by the vote of the
stockholders representing at least two-thirds
(2/3) of the outstanding capital stock – in
case of a Corporation, or
4. The vote of at least two-thirds (2/3) of the
members, in a stockholder's or member's
meeting duly called for the purpose – in case
of a non-stock corporation (Sec. 12, RA 10142)
In Court Supervised Involuntary Rehabilitation:
Any creditor or group of creditors with a claim of,
or the aggregate of whose claims is, at least One
million pesos (Php1,000,000.00) or at least
twenty-five percent (25%) of the subscribed
capital stock or partners' contributions, whichever
is higher. (Sec. 13, RA 10142)
In Pre-Negotiated Rehabilitation:
An insolvent debtor, by itself or jointly with any
of its creditors (Sec. 76, RA 10142)
How initiated?
In Court Supervised Voluntary Rehabilitation:
• An insolvent debtor may initiate voluntary
proceedings by filing a petition for
rehabilitation with the court and on the
grounds hereinafter specifically provided. The
petition shall be verified to establish the
insolvency of the debtor and the viability of
its rehabilitation.
• A group of debtors may jointly file a petition
for rehabilitation under this Act when one or
more of its members foresee the impossibility
of meeting debts when they respectively fall
due, and the financial distress would likely
adversely affect the financial condition and/or
operations of the other members of the group
and/or the participation of the other members of
the group is essential under the terms and
conditions of the proposed Rehabilitation Plan.
(Sec. 12, RA 10142)
 Purple Notes
In Court Supervised Involuntary Rehabilitation:
• By filing a petition for rehabilitation with the
court if:
1. There is no genuine issue of fact on law
on the claim/s of the petitioner/s, and
that the due and demandable payments
thereon have not been made for at least
sixty (60) days or that the debtor has
failed generally to meet its liabilities as
they fall due; or
2. A 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.
• The petition for rehabilitation shall be verified
to establish the substantial likelihood that the
debtor may be rehabilitated.
In Pre-Negotiated Rehabilitation:
• By filing a verified petition with the court
for the approval of a pre-negotiated
Rehabilitation Plan which has been
endorsed or approved by creditors holding
at least two-thirds (2/3) of the total
liabilities of the debtor, including:
1. secured creditors holding more than fifty
percent (50%) of the total secured claims
of the debtor; and
2. unsecured creditors holding more than fifty
percent (50%) of the total unsecured
claims of the debtor. (Sec. 76, RA 10142)
Contents of the Petition
In Court Supervised Voluntary Rehabilitation:
1. Identification of the debtor, its principal
activities and its addresses;
2. Statement of the fact of and the cause of
the debtor's insolvency or inability to pay
its obligations as they become due;
3. The specific relief sought pursuant to this
Act;
4. The grounds upon which the petition is
based;
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Mercantile Law
5. Other information that may be required
under this Act depending on the form of
relief requested;
6. Schedule of the debtor's debts and
liabilities including a list of creditors with
their addresses, amounts of claims and
collaterals, or securities, if any;
7. An inventory of all its assets including
receivables and claims against third parties;
8. A Rehabilitation Plan;
9. The names of at least three (3) nominees
to the position of rehabilitation receiver;
and
10. Other documents required to be filed with
the petition pursuant to this Act and the
rules of procedure as may be promulgated
by the Supreme Court. (Sec. 12, RA 10142)
In Court Supervised Involuntary Rehabilitation:
1. Identification of the debtor, its principal
activities and its address;
2. The circumstances sufficient to support a
petition to initiate involuntary rehabilitation
proceedings under Sec. 13 of FRIA;
3. The specific relief sought under FRIA;
4. A Rehabilitation Plan;
5. The names of at least 3 nominees to the
position of rehabilitation receiver;
6. Other information that may be required
under FRIA depending on the form of relief
requested; and
7. Other documents required to be filed with
the petition pursuant to FRIA and the rules
of procedure as may be promulgated by
the Supreme Court. (Sec. 14, RA 10142).
In Pre-Negotiated Rehabilitation:
1. A schedule of the debtor's debts and
liabilities;
2. An inventory of the debtor's assets;
3. The pre-negotiated Rehabilitation Plan,
including the names of at least three (3)
qualified nominees for rehabilitation
receiver; and
4. a summary of disputed claims against
thedebtor and a report on the provisioning
of funds to account for appropriate
payments should any such claims
be ruled valid or their amounts adjusted.
Bar Operations C ommissions 315
 Purple Notes
Mercantile Law
(Sec. 76, RA 10142)
Commencement Order
Within five (5) working days from the filing of the
petition for rehabilitation, the court shall issue a
Commencement Order if it finds the petition to
be sufficient in form and substance. If, within the
same period, the court finds the petition deficient
in form or substance, the court may, in its
discretion, give the petitioner/s a reasonable
period of time within which to amend or
supplement the petition, or to submit such
documents as may be necessary or proper to put
the petition in proper order. In such case, the
five (5) working days provided above for the
issuance of the Commencement Order shall be
reckoned from the date of the filing of the
amended or supplemental petition or the
submission of such documents. (Sec. 15, RA
10142)
The rehabilitation proceedings shall commence
upon the issuance of the Commencement Order,
which shall:
1. Identify the debtor, its principal business or
activity/ies and its principal place of business;
2. Summarize the ground/s for initiating the
proceedings
3. State the relief sought under this Act and any
requirement or procedure particular to the
relief sought;
4. State the legal effects of the Commencement
Order, including those mentioned in Section
17 hereof;
5. Declare that the debtor is under
rehabilitation;
6. Direct the publication of the Commencement
Order in a newspaper of general circulation in
the Philippines once a week for at least two
(2) consecutive weeks, with the first
publication to be made within seven (7) days
from the time of its issuance;
7. If the petitioner is the debtor direct the
service by personal delivery of a copy of the
petition on each creditor holding at least ten
percent (10%) of the total liabilities of the
debtor as determined from the schedule
attached to the petition within five (5) days;
if the petitioner/s is/are creditor/s, direct the
316 Center for Legal Education and Research
2018
service by personal delivery of a copy of the
petition on the debtor within five (5) days;
8. Appoint a rehabilitation receiver who may or
not be from among the nominees of the
petitioner/s and who shall exercise such
powers and duties defined in this Act as well
as the procedural rules that the Supreme
Court will promulgate;
9. Summarize the requirements and deadlines
for creditors to establish their claims against
the debtor and direct all creditors to their
claims with the court at least five (5) days
before the initial hearing;
10. Direct Bureau of internal Revenue (BIR) to
file and serve on the debtor its comment on
or opposition to the petition or its claim/s
against the debtor under such procedures as
the Supreme Court provide;
11. Prohibit the debtor's suppliers of goods or
services from withholding the supply of
goods and services in the ordinary course of
business for as long as the debtor makes
payments for the services or goods supplied
after the issuance of the Commencement
Order;
12. Authorize the payment of administrative
expenses as they become due;
13. Set the case for initial hearing, which shall
not be more than forty (40) days from the
date of filing of the petition for the purpose
of determining whether there is substantial
likelihood for the debtor to be rehabilitated;
14. Make available copies of the petition and
rehabilitation plan for examination and
copying by any interested party;
15. Indicate the location or locations at which
documents regarding the debtor and the
proceedings under Act may be reviewed and
copied;
16. State that any creditor or debtor who is not
the petitioner, may submit the name or
nominate any other qualified person to the
position of rehabilitation receiver at least five
(5) days before the initial hearing;
17. Includes Stay or Suspension Order. (Sec. 16,
RA 10142)
Effects of the Commencement Order
1. It vests the rehabilitation with all the
powers and functions provided for this Act,
such as the right to review and obtain
 Purple Notes
records to which the debtor's management
and directors have access, including bank
accounts or whatever nature of the debtor
subject to the approval by the court of the
performance bond filed by the
rehabilitation receiver;
2. It prohibits or otherwise serves as the legal
basis rendering null and void the results of
any extrajudicial activity or process to seize
property, sell encumbered property, or
otherwise attempt to collection or enforce a
claim against the debtor after
commencement date.
Exception: The court may authorize the
sale, transfer, conveyance or disposal of
encumbered property of the debtor, or
property of others held by the debtor
where there is a security interest pertaining
to third parties under a financial, credit or
other similar transactions if, upon
application of the rehabilitation receiver
and with the consent of the affected
owners of the property, or secured
creditor/s in the case of encumbered
property of the debtor and, after notice
and hearing, the court determines that:
a. such sale, transfer, conveyance or
disposal is necessary for the continued
operation of the debtor's business; and
b. the debtor has made arrangements to
provide a substitute lien or ownership
right that provides an equal level of
security for the counter-party's claim
or right.
Provided, that properties held by the debtor
where the debtor has authority to sell such
as trust receipt or consignment
arrangements may be sold or disposed of by
the .debtor, if such sale or disposal is
necessary for the operation of the debtor's
business, and the debtor has made
arrangements to provide a substitute lien or
ownership right that provides an equal level
of security for the counter-party's claim or
right.
317
Mercantile Law
Sale or disposal of property under this
section shall not give rise to any criminal
liability under applicable laws. (Sec. 50, RA
10142)
3. It serves as the legal basis for rendering null
and void any setoff after the
commencement date of any debt owed to
the debtor by any of the debtor's creditors;
4. It serves as the legal basis for rendering null
and void the perfection of any lien against
the debtor's property after the
commencement date; and
5. It consolidates the resolution of all legal
proceedings by and against the debtor to
the court Provided. However, That the court
may allow the continuation of cases on
other courts where the debtor had initiated
the suit.
Attempts to seek legal of other resource against
the debtor outside these proceedings shall be
sufficient to support a finding of indirect
contempt of court. (Sec. 17, RA 10142)
Stay or Suspension Order
A Stay or Suspension Order shall:
1. Suspend all actions or proceedings, in court
or otherwise, for the enforcement of claims
against the debtor;
2. Suspend all actions to enforce any
judgment, attachment or other provisional
remedies against the 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; and
4. Prohibit the debtor from making any
payment of its liabilities outstanding as of
the commencement date except as may be
provided herein. (Sec. 16[q], RA 10142)
The Stay or Suspension Order shall not apply:
1. To cases already pending appeal in the
Supreme Court as of commencement date
Provided, that any final and executory
judgment arising from such appeal shall be
referred to the court for appropriate action;
Bar Operations C ommissions 317
 Purple Notes
Mercantile Law
2. Subject to the discretion of the court, to
cases pending or filed at a specialized court
or quasi-judicial agency which, upon
determination by the court 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;
3. To the enforcement of claims against
sureties and other persons solidarily liable
with the debtor, and third party or
accommodation mortgagors as well as
issuers of letters of credit, unless the
property subject of the third party or
accommodation mortgage is necessary for
the rehabilitation of the debtor
as determined by the court upon
recommendation by the rehabilitation
receiver;
4. To 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;
5. To the 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 Securities Regulation Code
and its implementing rules and regulations;
6. The 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 the
Bangko Sentral ng Pilipinas (BSP) and
theSEC as well as any form of actions of
such agencies or entities to reimburse
themselves for any transactions settled for
the debtor; and
7. Any criminal action against individual debtor
or owner, partner, director or officer of a
debtor shall not be affected by any
proceeding commend under this Act. (Sec.
18, RA 10142)
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2018
The effects of the Commencement Order and the
Stay or Suspension Order on the suspension of
rights to foreclose or otherwise pursue legal
remedies shall apply to government financial
institutions, notwithstanding provisions in their
charters or other laws to the contrary (Sec. 20, RA
10142).
Rehabilitation Receiver
It shall refer to the person or persons, natural or
juridical, appointed as such by the court pursuant
to this Act and which shall be entrusted with such
powers and duties as set forth herein (Sec. 4[hh],
RA 10142)
If the rehabilitation receiver is a juridical entity, it
must designate a natural person/s who
possess/es all the qualifications and none of the
disqualifications as its representative, it being
understood that the juridical entity and the
representative/s are solidarily liable for all
obligations and responsibilities of the
rehabilitation receiver. (Sec. 28, RA 10142)
Qualifications of a Rehabilitation Receiver
1. A citizen of the Philippines or a resident of
the Philippines in the six (6) months
immediately preceding his nomination;
2. Of good moral character and with
acknowledged integrity, impartiality and
independence;
3. Has the requisite knowledge of insolvency
and other relevant commercial laws, rules
and procedures, as well as the relevant
training and/or experience that may be
necessary to enable him to properly
discharge the duties and obligations of a
rehabilitation receiver; and
4. Has no conflict of interest: Provided, that
such conflict of interest may be waived,
expressly or impliedly, by a party who may
be prejudiced thereby. (Sec. 29, RA 10142)
Powers, duties and responsibilities of
Rehabilitation Receiver
The rehabilitation receiver shall be deemed an
officer of the court with the principal duty:
 Purple Notes
1. Of preserving and maximizing the value of
the assets of the debtor during the
rehabilitation proceedings;
2. Of determining the viability of the
rehabilitation of the debtor;
3. Of preparing and recommending a
Rehabilitation Plan to the court; and
4. Of implementing the approved Rehabilitation
Plan; (Sec. 31, RA 10142)
5. To take an oath and file a bond, in such
amount to be fixed by the court, conditioned
upon the faithful and proper discharge of his
powers, duties and responsibilities (Sec. 34,
RA 10142).
6. To make an appropriate disclosure of
conflict of interest either to the court or to
the creditors in case of out-of-court
rehabilitation proceedings (Sec. 40, RA
10142).
The rehabilitation receiver shall have the
following powers, duties and
responsibilities:
1. To verify the accuracy of the factual
allegations in the petition and its annexes;
2. To verify and correct, if necessary, the
inventory of all of the assets of the debtor,
and their valuation;
3. To verify and correct, if necessary, the
schedule of debts and liabilities of the
debtor;
4. To evaluate the validity, genuineness and
true amount of all the claims against the
debtor;
5. To take possession, custody and control,
and to preserve the value of all the property
of the debtor;
6. To sue and recover, with the approval of the
court, all amounts owed to, and all
properties pertaining to the debtor;
7. To have access to all information necessary,
proper or relevant to the operations and
business of the debtor and for its
rehabilitation;
8. To sue and recover, with the approval of the
court, all property or money of the debtor
paid, transferred or disbursed in fraud of the
debtor or its creditors, or which constitute
undue preference of creditor/s;
9. To monitor the operations and the business
of the debtor to ensure that no payments or
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Mercantile Law
transfers of property are made other than in
the ordinary course of business;
10. With the court's approval, to engage the
services of or to employ persons or entities
to assist him in the discharge of his
functions;
11. To determine the manner by which the
debtor may be best rehabilitated, to review,
revise and/or recommend action on the
Rehabilitation Plan and submit the same or
a new one to the court for approval;
12. To implement the Rehabilitation Plan as
approved by the court, if so provided under
the Rehabilitation Plan;
13. To assume and exercise the powers of
management of the debtor, if directed by
the court pursuant to Section 36 hereof;
14. To exercise such other powers as may, from
time to time, be conferred upon him by the
court; and
15. To submit a status report on the
rehabilitation proceedings every quarter or
as may be required by the court motu
proprio, or upon motion of any creditor, or
as may be provided, in the Rehabilitation
Plan
16. Unless appointed by the court, pursuant to
Section 36 hereof, the rehabilitation receiver
shall not take over the management and
control of the debtor but may recommend
the appointment of a management
committee over the debtor in the cases
provided by this Act. (Sec. 31, RA 1012)
Removal of the Rehabilitation Receiver
The rehabilitation receiver may be removed at
any time by the court, either motu proprio or
upon motion by any creditor/s holding more than
fifty percent (50%) of the total obligations of the
debtor, on such grounds as the rules of
procedure may provide which shall include, but
are not limited to, the following:
1. Incompetence, gross negligence, failure to
perform or failure to exercise the proper
degree of care in the performance of his
duties and powers;
2. Lack of a particular or specialized
competency required by the specific case;
Bar Operations C ommissions 319
 Purple Notes
Mercantile Law
3. Illegal acts or conduct in the performance of
his duties and powers;
4. Lack of qualification or presence of any
disqualification;
5. Conflict of interest that arises after his
appointment; and
6. Manifest lack of independence that is
detrimental to the general body of the
stakeholders (Sec. 32, RA 10142)
Management Committee
When appointed, the management committee
shall take the place of the management and the
governing body of the debtor and assume their
rights and responsibilities.
The specific powers and duties of the
management committee, whose members shall
be considered as officers of the court, shall be
prescribed by the procedural rules. (Sec. 37, RA
10142)
Appointment of Management Committee
Upon motion of any interested party, the court
may appoint a management committee that will
undertake the management of the debtor. upon
clear and convincing evidence of any of the
following circumstances:
1. Actual or imminent danger of dissipation,
loss, wastage or destruction of the debtor‘s
assets or other properties;
2. Paralyzation of the business operations of the
debtor; or
3. Gross mismanagement of the debtor. or
fraud or other wrongful conduct on the part
of, or gross or willful violation of this Act by.
existing management of the debtor Or the
owner, partner, director, officer or
representative/s in management of the
debtor. (Sec. 36, RA 10142)
Qualifications of Members of the
Management Committee
The qualifications and disqualification‘s of the
members of the management committee shall be
set forth in the procedural rules, taking into
consideration the nature of the business of the
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2018
debtor and the need to protect the interest of all
stakeholders concerned. (Sec. 38, RA 10142).
Rehabilitation plan, defined:
It refers to a plan by which the financial well-
being and viability of an insolvent debtor can be
restored using various means including, but not
limited to, debt forgiveness, debt rescheduling,
reorganization or quasi-reorganization, dacion en
pago, debt- equity conversion and sale of the
business (or parts of it) as a going concern, or
setting-up of new business entity as prescribed in
Section 62 hereof, or other similar arrangements
as may be approved by the court or creditors.
(Sec. 4[ii], RA 10142)
Contents of Rehabilitation Plan
1. Specify the underlying assumptions, the
financial goals and the procedures proposed
to accomplish such goals;
2. Compare the amounts expected to be
received by the creditors under the
rehabilitation plan with those that they will
receive if liquidation ensues within the next
one hundred twenty (120) days;
3. Contain information sufficient to give the
various classes of creditors a reasonable
basis for determining whether supporting the
plan is in their financial interest when
compared to the immediate liquidation of the
debtor, including any reduction of principal
interest and penalties payable to the
creditors;
4. Establish classes of voting creditors;
5. Establish subclasses of voting creditors if
prior approval has been granted by the court;
6. Indicate how the insolvent debtor will be
rehabilitated including, but not limited to,
debt forgiveness, debt rescheduling,
reorganization or quasi-reorganization,
dacion en pago, debt- equity conversion and
sale of the business (or parts of it) as a going
concern, or setting-up of a new business
entity or other similar arrangements as may
be necessary to restore the financial well-
being and viability of the insolvent debtor;
7. Specify the treatment of each class or
subclass described in subsections (d) and (e);
8. Provide for equal treatment of all claims
within the same class or subclass, unless a
 Purple Notes
particular creditor voluntarily agrees to less
favorable treatment;
9. Ensure that the payments made under the
plan follow the priority established under the
provisions of the civil code on concurrence
and preference of credits and other
applicable laws;
10. Maintain the security interest of secured
creditors and preserve the liquidation value
of the security unless such has been waived
or modified voluntarily;
11. Disclose all payments to creditors for pre-
commencement debts made during the
proceedings and the justifications thereof; l
12. Describe the disputed claims and the
provisioning of funds to account for
appropriate payments should the claim be
ruled valid or its amount adjusted;
13. Identify the debtor's role in the
implementation of the plan;
14. State any rehabilitation covenants of the
debtor, the breach of which shall be
considered a material breach of the plan;
15. Identify those responsible for the future
management of the debtor and the
supervision and implementation of the plan,
their affiliation with the debtor and their
remuneration;
16. Address the treatment of claims arising after
the confirmation of the rehabilitation plan;
17. Require the debtor and its counter-parties to
adhere to the terms of all contracts that the
debtor has chosen to confirm;
18. Arrange for the payment of all outstanding
administrative expenses as a condition to the
plan's approval unless such condition has
been waived in writing by the creditors
concerned;
19. Arrange for the payment of all outstanding
taxes and assessments, or an adjusted
amount pursuant to a compromise settlement
with the BIR or other applicable tax
authorities;
20. Include a certified copy of a certificate of tax
clearance or evidence of a compromise
settlement with the BIR;
21. Include a valid and binding resolution of a
meeting of the debtor's stockholders to
increase the shares by the required amount
in cases where the plan contemplates an
additional issuance of shares by the debtor;
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Mercantile Law
22. State the compensation and status, if any, of
the rehabilitation receiver after the approval
of the plan; and
23. Contain provisions for conciliation and/or
mediation as a prerequisite to court
assistance or intervention in the event of any
disagreement in the interpretation or
implementation of the rehabilitation plan.
(Sec. 62, RA 10142)
Confirmation of Rehabilitation Plan
If no objections are filed within the relevant
period or, if objections are filed, the court finds
them lacking in merit, or determines that the
basis for the objection has been cured, or
determines that the debtor has complied with an
order to cure the objection, the court shall issue
an order confirming the Rehabilitation Plan.
The court may confirm the Rehabilitation Plan
notwithstanding unresolved disputes over claim if
the Rehabilitation Plan has made adequate
provisions for paying such claims.
For the avoidance of doubt, the provisions of
other laws to the contrary notwithstanding, the
court shall have the power to approve or
implement the Rehabilitation Plan despite the
lack of approval, or objection from the owners,
partners or stockholders of the insolvent debtor:
Provided, that the terms thereof are necessary to
restore the financial well- being and viability of
the insolvent debtor. (Sec. 68, RA 10142)
Effects of Confirmation of Rehabilitation
Plan
1. The Rehabilitation Plan and its provisions
shall be binding upon the debtor and all
persons who may be affected by it,
including the creditors, whether or not such
persons have participated in the proceedings
or opposed the Rehabilitation Plan or
whether or not their claims have been
scheduled;
2. The debtor shall comply with the provisions
of the Rehabilitation Plan and shall take all
actions necessary to carry out the Plan;
3. Payments shall be made to the creditors in
accordance with the provisions of the
Rehabilitation Plan;
Bar Operations C ommissions 321
 Purple Notes
Mercantile Law
4. Contracts and other arrangements between
the debtor and its creditors shall be
interpreted as continuing to apply to the
extent that they do not conflict with the
provisions of the Rehabilitation Plan;
5. Any compromises on amounts or
rescheduling of timing of payments by the
debtor shall be binding on creditors
regardless of whether or not the Plan is
successfully implemented; and
6. Claims arising after approval of the Plan that
are otherwise not treated by the Plan are
not subject to any Suspension Order. (Sec.
69, RA 10142)
Liquidation
Liquidation, defined:
It shall refer to the proceedings on liquidation of
insolvent juridical debtors. (Section 4[u], RA 10142)
Types of Liquidation
1. Voluntary Liquidation
2. Involuntary Liquidation
Voluntary Liquidation
An insolvent debtor may apply for liquidation by
filing a petition for liquidation with the court. The
petition shall be verified, shall establish the
insolvency of the debtor and shall contain,
whether as an attachment or as part of the body
of the petition:
1. A schedule of the debtor's debts and
liabilities including a list of creditors with their
addresses, amounts of claims and collaterals,
or securities, if any;
2. An inventory of all its assets including
receivables and claims against third parties;
and
3. The names of at least three (3) nominees to
the position of liquidator.
At any time during the pendency of court-
supervised or pre-negotiated rehabilitation
proceedings, the debtor may also initiate
liquidation proceedings by filing a motion in the
same court where the rehabilitation proceedings
322 Center for Legal Education and Research
2018
are pending to convert the rehabilitation
proceedings into liquidation proceedings. The
motion shall be verified, shall contain or set forth
the same matters required in the preceding
paragraph, and state that the debtor is seeking
immediate dissolution and termination of its
corporate existence.
If the petition or the motion, as the case may be,
is sufficient in form and substance, the court shall
issue a Liquidation Order. (Sec. 90, RA 10142)
Involuntary Liquidation
Three (3) or more creditors the aggregate of
whose claims is at least either One million pesos
(Php1,000,000,00) or at least twenty-five percent
(25% of the subscribed capital stock or partner's
contributions of the debtor, whichever is higher,
may apply for and seek the liquidation of an
insolvent debtor by filing a petition for liquidation
of the debtor with the court. The petition shall
show that:
1. there is no genuine issue of fact or law on
the claims/s of the petitioner/s, and that the
due and demandable payments thereon have
not been made for at least one hundred
eighty (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.
At any time during the pendency of or after a
rehabilitation court-supervised or pre-negotiated
rehabilitation proceedings, three (3) or more
creditors whose claims is at least either One
million pesos (Php1,000,000.00) or at least
twenty-five percent (25%) of the subscribed
capital or partner's contributions of the debtor,
whichever is higher, may also initiate liquidation
proceedings by filing a motion in the same court
where the rehabilitation proceedings are pending
to convert the rehabilitation proceedings into
liquidation proceedings. The motion shall be
verified, shall contain or set forth the same
matters required in the preceding paragraph, and
state that the movants are seeking the immediate
liquidation of the debtor.
 Purple Notes
If the petition or motion is sufficient in form and
substance, the court shall issue an Order:
1. Directing the publication of the petition or
motion in a newspaper of general circulation
once a week for two (2) consecutive weeks;
and
2. Directing the debtor and all creditors who are
not the petitioners to file their comment on
the petition or motion within fifteen (15) days
from the date of last publication.
If, after considering the comments filed, the
court determines that the petition or motion is
meritorious, it shall issue the Liquidation Order.
(Sec. 91, RA 10142)
Conversion of Rehabilitation to Liquidation
Proceedings
During the pendency of court-supervised or pre-
negotiated rehabilitation proceedings, the court
may order the conversion of rehabilitation
proceedings to liquidation proceedings:
1. Upon a finding that:
a. The debtor is insolvent; and
b. There is no substantial likelihood for the
debtor to be successfully rehabilitated as
determined in accordance with the rules
to be promulgated by the Supreme
Court. [Sec. 25(c), RA 10142];
2. If there is no rehabilitation plan confirmed
within 1 year from filing a petition to confirm
a rehabilitation plan (Sec. 72, RA 10142);
3. If the termination of proceedings is due to
failure of rehabilitation or dismissal of the
petition for reasons other than technical
grounds (Sec. 75, RA 10142);
4. In voluntary liquidation of juridical debtors
(Sec. 90, RA 10142); or
5. At any other time upon the recommendation
of the rehabilitation receiver that the
rehabilitation of the debtor is not feasible.
(Sec. 92, RA 10142)
Liquidation order
The Liquidation Order shall:
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Mercantile Law
1. Declare the debtor insolvent;
2. Order the liquidation of the debtor and, in
the case of a juridical debtor, declare it as
dissolved;
3. Order the sheriff to take possession and
control of all property of the debtor, except
those that may be exempt from execution;
4. Order the publication of the petition or
motion in a newspaper of general circulation
once a week for two (2) consecutive weeks;
5. Direct payments of any claims and
conveyance of any property due the debtor
to the liquidator;
6. Prohibit payments by the debtor and the
transfer of any property by the debtor;
7. Direct all creditors to file their claims with the
liquidator within the period set by the rules of
procedure;
8. Authorize the 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;
and
10. Set the case for hearing for the election and
appointment of the liquidator, which date
shall not be less than thirty (30) days nor
more than forty-five (45) days from the date
of the last publication. (Sec. 112, RA 10142)
Effects of Liquidation Order
Upon the issuance of a liquidation order:
1. The 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, except those that may be exempt
from execution, shall be deemed vested in
the liquidator or, pending his election or
appointment, with the court;
3. All contracts of the debtor shall be deemed
terminated and/or breached, unless the
liquidator, within ninety (90) days from the
date of his assumption of office, declares
otherwise and the contracting party agrees;
4. No separate action for the collection of an
unsecured claim shall be allowed. Such
actions already pending will be transferred to
the Liquidator for him to accept and settle or
contest. If the liquidator contests or disputes
Bar Operations C ommissions 323
 Purple Notes
Mercantile Law
the claim, the 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; and
5. No foreclosure proceeding shall be allowed
for a period of one hundred eighty (180)
days. (Sec. 113, RA 10142)
Rights of secured creditors
The Liquidation Order shall not affect the right of
a secured creditor to enforce his lien in
accordance with the applicable contract or law. A
secured creditor may:
1. Waive his right under the security or lien,
prove his claim in the liquidation proceedings
and share in the distribution of the assets of
the debtor; or
2. Maintain his rights under the security or lien:
If the secured creditor maintains his rights under
the security or lien:
1. The value of the property may be fixed in a
manner agreed upon by the creditor and the
liquidator.
When the value of the property is less than
the claim it secures, the liquidator may
convey the property to the secured creditor
and the latter will be admitted in the
liquidation proceedings as a creditor for the
balance. If its value exceeds the claim
secured, the liquidator may convey the
property to the creditor and waive the
debtor's right of redemption upon receiving
the excess from the creditor;
2. The liquidator may sell the property and
satisfy the secured creditor's entire claim
from the proceeds of the sale; or
3. The secured creditor may enforce the lien or
foreclose on the property pursuant to
applicable laws. (Sec. 114, RA 10142)
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2018
Liquidator, defined:
It shall refer to the natural person or juridical
entity appointed as such by the court and
entrusted with such powers and duties as set
forth in this Act: Provided, That, if the liquidator
is a juridical entity, it must designated a natural
person who possesses all the qualifications and
none of the disqualifications as its representative,
it being understood that the juridical entity and
the representative are solidarity liable for all
obligations and responsibilities of the liquidator.
(Sec. 4[w], RA 10142)
Election of Liquidator
Only creditors who have filed their claims within
the period set by the court, and whose claims are
not barred by the statute of limitations, will be
allowed to vote in the election of the liquidator.
A secured creditor will not be allowed to vote,
unless:
1. He waives his security or lien; or
2. He has the value of the property subject of
his security or lien fixed by agreement with
the liquidator, and is admitted for the balance
of his claim.
The creditors entitled to vote will elect the
liquidator in open court. The nominee receiving
the highest number of votes cast and who is
qualified shall be appointed as the liquidator.
(Sec. 115, RA 10142)
Court-Appointed Liquidator
The court may appoint the liquidator if:
1. On the date set for the election of the
liquidator, the creditors do not attend;
2. The creditors who attend, fail or refuse to
elect a liquidator;
3. After being elected, the liquidator fails to
qualify; or
4. A vacancy occurs for any reason whatsoever,
in any of the cases provided herein, the court
may instead set another hearing of the
election of the liquidator.

Nothing in this section shall be construed to
prevent a rehabilitation receiver, who was
administering the debtor prior to
commencement of the liquidation, from being
appointed as a liquidator. (Sec. 116, RA 10142)
Requirement of Oath and Bond of the
Liquidator
Prior to entering upon his powers, duties and
responsibilities, the liquidator shall take an oath
and file a bond, in such amount to be fixed by
the court, conditioned upon the proper
andfaithful discharge of his powers, duties and
responsibilities. (Sec. 117, RA 10142)
Qualifications of the Liquidator
1. A citizen of the Philippines or a resident of
the Philippines in the six (6) months
immediately preceding his nomination;
2. Of good moral character and with
acknowledged integrity, impartiality and
independence;
3. Has the requisite knowledge of insolvency
and other relevant commercial laws, rules
and procedures, as well as the relevant
training and/or experience that may be
necessary to enable him to properly
discharge the duties and obligations of a
rehabilitation receiver; and
4. Has no conflict of interest: Provided, that
such conflict of interest may be waived,
expressly or impliedly, by a party who may
be prejudiced thereby. (Sec. 29, RA 10142)
He may be removed at any time by the court for
cause, either motu proprio or upon motion of any
creditor entitled to vote for the election of the
liquidator. (Sec. 118, RA 10142)
Powers, Duties and Responsibilities of the
Liquidator
The liquidator shall be deemed an officer of the
court with the principal duly of preserving and
maximizing the value and recovering the assets
of the debtor, with the end of liquidating them
and discharging to the extent possible all the
claims against the debtor. The powers, duties
Purple Notes
Mercantile Law
and responsibilities of the liquidator shall include,
but not limited to:
the
1. To sue and recover all the assets, debts and
claims, belonging or due to the debtor;
2. To take possession of all the property of the
debtor except property exempt by law from
execution;
3. To sell, with the approval of the court, any
property of the debtor which has come into
his possession or control;
4. To redeem all mortgages and pledges, and
so satisfy any judgement which may be an
encumbrance on any property sold by him;
5. To settle all accounts between the debtor
and his creditors, subject to the approval of
the court;
6. To recover any property or its value,
fraudulently conveyed by the debtor;
7. To recommend to the court the creation of a
creditors' committee which will assist him in
the discharge of the functions and which
shall have powers as the court deems just,
reasonable and necessary; and
8. Upon approval of the court, to engage such
professional as may be necessary and
reasonable to assist him in the discharge of
his duties.
In addition to the rights and duties of a
rehabilitation receiver, the liquidator, shall have
the right and duty to take all reasonable steps to
manage and dispose of the debtor's assets with a
view towards maximizing the proceedings
therefrom, to pay creditors and stockholders, and
to terminate the debtor's legal existence. Other
duties of the liquidator in accordance with this
section may be established by procedural rules.
A liquidator shall be subject to removal pursuant
to procedures for removing a rehabilitation
receiver. (Sec. 119, RA 10142)
Discharge of Liquidator
In preparation for the final settlement of all the
claims against the debtor, the liquidator will
notify all the creditors, either by publication in a
newspaper of general circulation or such other
mode as the court may direct or allow, that will
apply with the court for the settlement of his
account and his discharge from liability as
325
Bar Operations C ommissions 325
 Purple Notes
Mercantile Law
liquidator. The liquidator will file a final
accounting with the court, with proof of notice to
all creditors. The accounting will be set for
hearing. If the court finds the same in order, the
court will discharge the liquidator. (Sec. 122, RA
10142)
Determination of Claims
Registry of Claims
Within twenty (20) days from his assumption into
office the liquidator shall prepare a preliminary
registry of claims of secured and unsecured
creditors.
Secured creditors who have waived their security
or lien, or have fixed the value of the property
subject of their security or lien by agreement with
the liquidator and is admitted as a creditor for the
balance, shall be considered as unsecured
creditors.
The liquidator shall make the registry available
for public inspection and provide publication
notice to creditors, individual debtors owner/s of
the sole proprietorship-debtor, the partners of
the partnership-debtor and shareholders or
members of the corporation-debtor, on where
and when they may inspect it. All claims must be
duly proven before being paid. (Sec. 123, RA
10142)
Right of Set-off
If the 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.
(Sec. 124, RA 10142)
Opposition or Challenge to Claims
Within thirty (30) days from the expiration of the
period for filing of applications for recognition of
claims, creditors, individual debtors, owner/s of
the sole proprietorship-debtor, partners of the
partnership-debtor and shareholders or members
of the corporation -debtor and other interested
parties may submit a challenge to claim or claims
326 Center for Legal Education and Research
2018
to the court, serving a certified copy on the
liquidator and the creditor holding the challenged
claim.
Upon the expiration of the (30) day period, the
rehabilitation receiver 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 filling of
the register and may be subsequently set aside
only on grounds or fraud, accident, mistake or
inexcusable neglect. (Sec. 125, RA 10142)
Submission of Disputed to the Court
The liquidator shall resolve disputed claims and
submit his findings thereon to the court for final
approval. The liquidator may disallow claims .
(Sec. 126, RA 10142)
Liquidation Plan
Within three (3) months from his assumption into
office, the Liquidator shall submit a Liquidation
Plan to the court. The Liquidation Plan shall, as
a minimum enumerate all the assets of the
debtor and a schedule of liquidation of the assets
and payment of the claims. (Sec. 129, RA 10142)
Exempt Property to be Set Apart
It shall be the duty of the court, upon petition
and after hearing, to exempt and set apart, for
the use and benefit of the said insolvent, such
real and personal property as is by law exempt
from execution, and also a homestead; but no
such petition shall be heard as aforesaid until it is
first proved that notice of the hearing of the
application therefor has been duly given by the
clerk, by causing such notice to be posted it at
least three (3) public places in the province or
city at least ten (10) days prior to the time of
such hearing, which notice shall set forth the
name of the said insolvent debtor, and the time
and place appointed for the hearing of such
application, and shall briefly indicate the
homestead sought to be exempted or the
property sought to be set aside; and the decree
must show that such proof was made to the
satisfaction of the court, and shall be conclusive
evidence of that fact. (Sec. 130, RA 10142)
 Purple Notes
Exempt Property to be Set Apart
It shall be the duty of the court, upon petition
and after hearing, to exempt and set apart, for
the use and benefit of the said insolvent, such
real and personal property as is by law exempt
from execution, and also a homestead; but no
such petition shall be heard as aforesaid until it is
first proved that notice of the hearing of the
application therefor has been duly given by the
clerk, by causing such notice to be posted it at
least three (3) public places in the province or
city at least ten (10) days prior to the time of
such hearing, which notice shall set forth the
name of the said insolvent debtor, and the time
and place appointed for the hearing of such
application, and shall briefly indicate the
homestead sought to be exempted or the
property sought to be set aside; and the decree
must show that such proof was made to the
satisfaction of the court, and shall be conclusive
evidence of that fact. (Sec. 130, RA 10142)
Sale of Assets in Liquidation
The liquidator may sell the unencumbered assets
of the debtor and convert the same into money.
The sale shall be made at public auction.
However, a private sale may be allowed with the
approval of the court if:
1. The goods to be sold are of a perishable
nature, or are liable to quickly deteriorate in
value, or are disproportionately expensive to
keep or maintain; or
2. The private sale is for the best interest of the
debtor and his creditors.
With the approval of the court, unencumbered
property of the debtor may also be conveyed to a
creditor in satisfaction of his claim or part
thereof. (Sec. 131, RA 10142)
Concurrence and Preference of Credits
The Liquidation Plan and its Implementation shall
ensure that the concurrence and preference of
credits as enumerated in the Civil Code of the
Philippines and other relevant laws shall be
observed, unless a preferred creditor voluntarily
327
Mercantile Law
waives his preferred right. For purposes of this
chapter, credits for services rendered by
employees or laborers to the debtor shall enjoy
first preference under Article 2244 of the Civil
Code, unless the claims constitute legal liens
under Article 2241 and 2242 thereof. (Sec. 133,
RA 10142)
Order Removing the Debtor from the List of
Registered Entitles at the Securities and
Exchange Commission
Upon determining that the liquidation has been
completed, the court shall issue an Order
approving the report and ordering the SEC to
remove the debtor from the registry of legal
entities. (Sec. 134, RA 10142)
Termination of Proceedings
Upon receipt of evidence showing that the debtor
has been removed from the registry of legal
entities at the SEC. The court shall issue an Order
terminating the proceedings. (Sec. 135, RA 10142)
F. DATA PRIVACY ACT OF 2012
(R.A. No. 10173)
DEFINITION OF TERMS
Personal information - refers to any
information whether recorded in a material form
or not, from which the identity of an individual is
apparent or can be reasonably and directly
ascertained by the entity holding the information,
or when put together with other information
would directly and certainly identify an individual.
Consent of the data subject - refers to any
freely given, specific, informed indication of will,
whereby the data subject agrees to the collection
and processing of personal information about
and/or relating to him or her.
Consent shall be evidenced by:
1. written;
2. electronic; or
3. recorded means.
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 Purple Notes
Mercantile Law
It may also be given on behalf of the data
subject by an agent specifically authorized by the
data subject to do so.
Data subject - refers to an individual whose
personal information is processed.
Personal information controller - refers to a
person or organization who controls the
collection, holding, processing or use of personal
information, including a person or organization
who instructs another person or organization to
collect, hold, process, use, transfer or disclose
personal information on his or her behalf.
The term excludes:
1. A person or organization who performs such
functions as instructed by another person or
organization; and
2. An individual who collects, holds, processes
or uses personal information in connection
with the individual‘s personal, family or
household affairs
Processing - refers to any operation or any set
of operations performed upon personal
information including, but not limited to:
1. Collection;
2. Recording;
3. Organization;
4. Storage;
5. Updating or modification;
6. Retrieval;
7. Consultation;
8. Use;
9. Consolidation;
10. Blocking;
11. Erasure or destruction of data.
Privileged information - refers to any and all
forms of data which under the Rules of Court and
other pertinent laws constitute privileged
communication.
Sensitive personal information - refers to
personal information:
1. About an individual‘s race, ethnic origin,
marital status, age, color, and religious,
philosophical or political affiliations;
328 Center for Legal Education and Research
2018
2. About an individual‘s health, education,
genetic or sexual life of a person, or to any
proceeding for any offense committed or
alleged to have been committed by such
person, the disposal of such proceedings, or
the sentence of any court in such
proceedings;
3. Issued by government agencies peculiar to
an individual which includes, but not limited
to, social security numbers, previous or
current health records, licenses or its denials,
suspension or revocation, and tax returns;
and
4. Specifically established by an executive order
or an act of Congress to be kept classified.
Commission - refers to the National Privacy
Commission created by virtue of this Act. (Sec. 3,
RA 10173)
SCOPE
The Act applies to the processing of all types of
personal information and to any natural and
juridical person involved in personal information
processing including those personal information
controllers and processors who, although not
found or established in the Philippines, use
equipment that are located in the Philippines, or
those who maintain an office, branch or agency
in the Philippines subject to the immediately
succeeding paragraph: (Provided, That the
requirements of Section 5 are complied with)
(Note: Sec. 5, RA 10173- Protection Afforded to
Journalists and Their Sources. – Nothing in this
Act shall be construed as to have amended or
repealed the provisions of Republic Act No. 53,
which affords the publishers, editors or duly
accredited reporters of any newspaper, magazine
or periodical of general circulation protection
from being compelled to reveal the source of any
news report or information appearing in said
publication which was related in any confidence
to such publisher, editor, or reporter.)
This Act does not apply to the following:
1. Information about any individual who is or
was an officer or employee of a government
institution that relates to the position or
functions of the individual, including:

a. The fact that the individual is or was an
officer or employee of the government
institution;
b. The title, business address and office
telephone number of the individual;
c. The classification, salary range and
responsibilities of the position held by the
individual; and
d. The name of the individual on a
document prepared by the individual in
the course of employment with the
government;
2. 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;
3. 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;
4. Personal information processed
journalistic, artistic, literary or research
purposes;
5. 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.
6. Information necessary for banks and other
financial institutions under the jurisdiction of
the independent, central monetary authority
or Bangko Sentral ng Pilipinas to comply
with Republic Act No. 9510, and Republic
Act No. 9160, as amended, otherwise known
as the Anti-Money Laundering Act and other
applicable laws; and
7. Personal information originally collected
from residents of foreign jurisdictions in
accordance with the laws of those foreign
jurisdictions, including any applicable data
privacy laws, which is being processed in
the Philippines. (Sec. 4, RA 10173)
Purple Notes
Mercantile Law
EXTRATERRITORIAL APPLICATION
This Act applies to an act done or practice
engaged in and outside of the Philippines by an
entity if:
1. The act, practice or processing relates to
personal information about a Philippine
citizen or a resident;
2. The entity has a link with the Philippines,
and the entity is processing personal
information in the Philippines or even if the
processing is outside the Philippines as long
as it is about Philippine citizens or residents
such as, but not limited to, the following:
a. A contract is entered in the Philippines;
b. A juridical entity unincorporated in the
Philippines but has central
management and control in the
country; and
c. An entity that has a branch, agency, office or
subsidiary in the Philippines and the parent
or affiliate of the Philippine entity has access
to personal information; and
for
3. The entity has other links in the Philippines
such as, but not limited to:
a. The entity carries on business in the
Philippines; and
b. The personal information was collected
or held by an entity in the Philippines.
(Sec. 6, RA 10173)
PROCESSING OF PERSONAL INFORMATION
General 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:
1. Collected for specified and legitimate
purposes determined and declared before, or
329
Bar Operations C ommissions 329
 Purple Notes
Mercantile Law
as soon as reasonably practicable after
collection, and later processed in a way
compatible with such declared, specified and
legitimate purposes only;
2. Processed fairly and lawfully;
3. 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;
4. Adequate and not excessive in relation to the
purposes for which they are collected and
processed;
5. 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
6. 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. (Sec. 11, RA
10173)
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:
1. The data subject has given his or her
consent;
2. 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;
330 Center for Legal Education and Research
2018
3. The processing is necessary for compliance
with a legal obligation to which the personal
information controller is subject;
4. The processing is necessary to protect vitally
important interests of the data subject,
including life and health;
5. 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
6. 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.
(Sec. 12, RA 10173)
Sensitive and Privileged Communication
The processing of sensitive personal information
and privileged information shall be prohibited,
except in the following cases:
1. 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;
2. 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;
3. 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;
4. The processing is necessary to achieve the
lawful and noncommercial objectives of
public organizations and their associations:
 Purple Notes
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;
5. 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
6. 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. (Sec. 13, RA 10173)
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:
1. Proper safeguards are in place to ensure
the confidentiality of the personal information
processed
2. Prevent its use for unauthorized purposes,
and;
3. 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. (Sec. 14, RA 10173)
Extension of Privileged Communication
Personal information controllers may invoke the
principle of privileged communication
overprivileged information that they lawfully
control or process.
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Mercantile Law
Subject to existing laws and regulations, any
evidence gathered on privileged information is
inadmissible. (Sec. 15, RA 10173)
RIGHTS OF THE DATA SUBJECT
1. Be informed whether personal information
pertaining to him or her shall be, are being or
have been processed;
2. 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:
a. Description of the personal information to be
entered into the system;
b. Purposes for which they are being or are to
be processed;
c. Scope and method of the personal
information processing;
d. The recipients or classes of recipients to
whom they are or may be disclosed;
e. Methods utilized for automated access, if the
same is allowed by the data subject, and the
extent to which such access is authorized;
f. The identity and contact details of the
personal information controller or its
representative;
g. The period for which the information will be
stored; and
h. 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 (2) shall not apply should the personal
information be needed 1. 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.
Bar Operations C ommissions 331
 Purple Notes
Mercantile Law
3. Reasonable access to, upon demand, the
following:
a. Contents of his or her personal
information that were processed;
b. Sources from which personal
information were obtained;
c. Names and addresses of recipients
of the personal information;
d. Manner by which such data were
processed;
e. Reasons for the disclosure of the
personal information to recipients;
f. 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;
g. Date when his or her personal
information concerning the data subject
were last accessed and modified; and
h. The designation, or name or identity
and address of the personal
information controller;
4. 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 be informed
of its inaccuracy and its rectification upon
reasonable request of the data subject;
5. 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:
a. Incomplete;
332 Center for Legal Education and Research
2018
b. Outdated;
c. False;
d. Unlawfully obtained;
e. Used for unauthorized purposes; or
f. 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
6. Be indemnified for any damages sustained
due to such inaccurate, incomplete,
outdated, false, unlawfully obtained or
unauthorized use of personal information.
(Sec. 16, RA 10173)
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. (Sec. 17, RA 10173)
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. (Sec. 18, RA 10171)
Non-Applicability
The immediately preceding sections are not
applicable if:
1. The processed personal information are used
only for the needs of scientific and statistical
 Purple Notes
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.
2. Processing of personal information gathered
for the purpose of investigations in relation to
any criminal, administrative or tax liabilities of
a data subject. (Sec. 19, RA 10173)
DUTIES AND RESPONSIBILITIES OF
PERSONAL INFORMATION CONTROLLER
Security of Personal Information
1. The personal information controller must
implement reasonable and appropriate
organizational, physical and technical
measures intended for the protection of
personal information against any accidental
or unlawful destruction, alteration and
disclosure, as well as against any other
unlawful processing.
2. The personal information controller shall
implement reasonable and appropriate
measures to protect personal information
against natural dangers such as accidental
loss or destruction, and human dangers such
as unlawful access, fraudulent misuse,
unlawful destruction, alteration and
contamination.
3. The determination of the appropriate level of
security under this section must take into
account the nature of the personal
information to be protected, the risks
represented by the processing, the size of the
organization and complexity of its operations,
current data privacy best practices and the
cost of security implementation. Subject to
guidelines as the Commission may issue from
time to time, the measures implemented
must include:
a. Safeguards to protect its computer network
against accidental, unlawful or unauthorized
usage or interference with or hindering of
their functioning or availability;
b. A security policy with respect to the
processing of personal information;
333
Mercantile Law
c. A process for identifying and accessing
reasonably foreseeable vulnerabilities in its
computer networks, and for taking
preventive, corrective and mitigating action
against security incidents that can lead to a
security breach; and
d. Regular monitoring for security breaches and
a process for taking preventive, corrective
and mitigating action against security
incidents that can lead to a security breach.
4. The personal information controller must
further ensure that third parties processing
personal information on its behalf shall
implement the security measures required by
this provision.
5. The employees, agents or representatives of
a personal information controller who are
involved in the processing of personal
information shall operate and hold personal
information under strict confidentiality if the
personal information are not intended for
public disclosure. This obligation shall
continue even after leaving the public
service, transfer to another position or upon
termination of employment or contractual
relations.
6. The personal information controller shall
promptly notify the Commission and affected
data subjects when sensitive personal
information or other information that may,
under the circumstances, be used to enable
identity fraud are reasonably believed to
have been acquired by an unauthorized
person, and the personal information
controller or the Commission believes (bat
such unauthorized acquisition is likely to give
rise to a real risk of serious harm to any
affected data subject.
The notification shall at least describe the nature
of the breach, the sensitive personal information
possibly involved, and the measures taken by the
entity to address the breach.
Notification may be delayed only to the extent
necessary to determine the scope of the breach,
to prevent further disclosures, or to restore
reasonable integrity to the information and
communications system. (Sec. 20, RA 10173)
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 Purple Notes
Mercantile Law
Accountability for Transfer of Personal
Information
Principle of Accountability
Each personal information controller is
responsible for personal information under its
control or custody, including information that
have been transferred to a third party for
processing, whether domestically or
internationally, subject to cross-border
arrangement and cooperation.
1. The personal information controller is
accountable for complying with the
requirements of this Act and shall use
contractual or other reasonable means to
provide a comparable level of protection
while the information are being processed by
a third party.
2. The personal information controller shall
designate an individual or individuals who are
accountable for the organization‘s compliance
with this Act. The identity of the individual(s)
so designated shall be made known to any
data subject upon request. (Sec. 21, RA 10173)
G. PHILIPPINE COMPETITION ACT
(R.A. No. 10667)
SCOPE OF APPLICATION
1. The PCA shall be enforceable against any
person or entity engaged in any trade,
industry and commerce in the Republic of the
Philippines.
2. It shall likewise be applicable to international
trade having direct, substantial, and
reasonably foreseeable effects in trade,
industry, or commerce in the Republic of the
Philippines, including those that result from
acts done outside the Republic of the
Philippines.
3. The Act shall not apply to the combinations
or activities of workers or employees nor to
agreements or arrangements with their
employers when such combinations,
activities, agreements, or arrangements are
designed solely to facilitate collective
334 Center for Legal Education and Research
2018
bargaining in respect of conditions of
employment. (Sec. 3, PCA)
DEFINITIONS
Acquisition - refers to the purchase of securities
or assets, through contract or other means, for
the purpose of obtaining control by:
1. One (1) entity of the whole or part of
another;
2. Two (2) or more entities over another; or
3. One (1) or more entities over one (1) or
more entities.
Agreement - refers to any type or form of
contract, arrangement, understanding, collective
recommendation, or concerted action, whether
formal or informal, explicit or tacit, written or
oral.
Conduct - refers to any type or form of
undertaking, collective recommendation,
independent or concerted action or practice,
whether formal or informal.
Confidential business information - refers to
information which concerns or relates to the
operations, production, sales, shipments,
purchases, transfers, identification of customers,
inventories, or amount or source of any income,
profits, losses, expenditures.
Control - refers to the ability to substantially
influence or direct the actions or decisions of an
entity, whether by contract, agency or otherwise.
Dominant position - refers to a position of
economic strength that an entity or entities hold
which makes it capable of controlling the relevant
market independently from any or a combination
of the following: competitors, customers,
suppliers, or consumers.
Entity - refers to any person, natural or juridical,
sole proprietorship, partnership, combination or
association in any form, whether incorporated or
not, domestic or foreign, including those owned
or controlled by the government, engaged
directly or indirectly in any economic activity.
 Purple Notes
Joint venture - refers to a business
arrangement whereby an entity or group of
entities contribute capital, services, assets, or a
combination of any or all of the foregoing, to
undertake an investment activity or a specific
project, where each entity shall have the right to
direct and govern the policies in connection
therewith, with the intention to share both profits
and risks and losses subject to agreement by the
entities.
Market - refers to the group of goods or services
that are sufficiently interchangeable or
substitutable and the object of competition, and
the geographic area where said goods or services
are offered
Merger - refers to the joining of two (2) or more
entities into an existing entity or to form a new
entity, including joint ventures
Relevant market - refers to the market in
which a particular good or service is sold and
which is a combination of the relevant product
market and the relevant geographic market,
defines as follows:
1. A relevant product market comprises all
those goods and/or services which are
regarded as interchangeable or substitutable
by the consumer or the customer, by reason
of the goods and/or services‘ characteristics,
their prices and their intended use; and
2. The relevant geographic market comprises
the area in which the entity concerned is
involved in the supply and demand of goods
and services, in which the conditions of
competition are sufficiently homogenous and
which can be distinguished from neighboring
areas because the conditions of competition
are different in those areas.
Ultimate parent entity - is the juridical entity
that, directly or indirectly, controls a party to the
transaction, and is not controlled by any other
entity. (Rule 2, IRR of PCA)
POWERS OF THE PHILIPPINE
COMPETITION COMMISSION
335
Mercantile Law
The Philippine Competition Commission (PCC)
shall have original and primary jurisdiction over
the enforcement and implementation of the
provisions of the PCA, and its implementing rules
and regulations. The PCC shall exercise the
following powers and functions:
1. Conduct inquiry, investigate, and hear and
decide on cases involving any violation of the
PCA and other existing competition laws
motu proprio or upon receipt of a verified
complaint from an interested party or upon
referral by the concerned regulatory agency,
and institute the appropriate civil or criminal
proceedings;
2. Review proposed mergers and acquisitions,
determine thresholds for notification,
determine the requirements and procedures
for notification, and upon exercise of its
powers to review, prohibit mergers and
acquisitions that will substantially prevent,
restrict, or lessen competition in the relevant
market;
3. Monitor and undertake consultation with
stakeholders and affected agencies for the
purpose of understanding market behavior;
4. Upon finding, based on substantial evidence,
that an entity has entered into an anti-
competitive agreement or has abused its
dominant position after due notice and
hearing, stop or redress the same, by
applying remedies, such as, but not limited
to, issuance
of injunctions, requirement of divestment,
and disgorgement of excess profits under
such reasonable parameters that shall be
prescribed by the rules and regulations
implementing the Act;
5. Conduct administrative proceedings, impose
sanctions, fines or penalties for any
noncompliance with or breach of the Act and
its implementing rules and regulations (IRR)
and punish for contempt;
6. Issue subpoena duces tecum and subpoena
ad testificandum to require the production of
books, records, or other documents or data
which relate to any matter relevant to the
investigation and personal appearance before
the PCC, summon witnesses, administer
oaths, and issue interim orders such as show
cause orders and cease and desist orders
Bar Operations C ommissions 335
 Purple Notes
Mercantile Law
after due notice and hearing in accordance
with the rules and regulations implementing
the Act;
7. Upon order of the court, undertake
inspections of business premises and other
offices, land and vehicles, as used by the
entity, where it reasonably suspects that
relevant books, tax records, or other
documents which relate to any matter
relevant to the investigation are kept, in
order to prevent the removal, concealment,
tampering with, or destruction of the books,
records, or other documents;
8. Issue adjustment or divestiture orders
including orders for corporate reorganization
or divestment in the manner and under such
terms and conditions as may be prescribed in
the rules and regulations implementing the
Act.
Adjustment or divestiture orders, which are
structural remedies, should only be imposed:
a. Where there is no equally effective behavioral
remedy; or
b. Where any equally effective behavioral
remedy would be more burdensome for the
enterprise concerned than the structural
remedy. Changes to the structure of an
enterprise as it existed before the
infringement was committed would only be
proportionate to the substantial risk of a
lasting or repeated infringement that derives
from the very structure of the enterprise;
9. Deputize any and all enforcement agencies of
the government or enlist the aid and support
of any private institution, corporation, entity
or association, in the implementation of its
powers and functions;
10. Monitor compliance by the person or entities
concerned with the cease and desist order or
consent judgment;
11. Issue advisory opinions and guidelines on
competition matters for the effective
enforcement of the Act and submit annual
and special reports to Congress, including
proposed legislation for the regulation of
commerce, trade, or industry;
12. Monitor and analyze the practice of
competition in markets that affect the
Philippine economy; implement and oversee
336 Center for Legal Education and Research
2018
measures to promote transparency and
accountability; and ensure that prohibitions
and requirements of competition laws are
adhered to;
13. Conduct, publish, and disseminate studies
and reports on anti-competitive conduct and
agreements to inform and guide the industry
and consumers;
14. Intervene or participate in administrative and
regulatory proceedings requiring
consideration of the provisions of the Act that
are initiated by government agencies such as
the Securities and Exchange Commission, the
Energy Regulatory Commission and the
National Telecommunications Commission;
15. Assist the National Economic and
Development Authority, in consultation with
relevant agencies and sectors, in the
preparation and formulation of a national
competition policy;
16. Act as the official representative of the
Philippine government in international
competition matters;
17. Promote capacity building and the sharing of
best practices with other competition-related
bodies;
18. Advocate pro-competitive policies of the
government by:
a. Reviewing economic and administrative
regulations, motu proprio or upon
request, as to whether or not they
adversely affect relevant market
competition, and advising the concerned
agencies against such regulations; and
b. Advising the Executive Branch on the
competitive implications of government
actions, policies and programs; and
19. Charging reasonable fees to defray the
administrative cost of the services
rendered. (Sec. 12, PCA)
PROHIBITED ACTS
Anti-competitive agreements
1. Per se violations
a. Restricting competition as to price, or
components thereof, or other terms of
trade; and
 Purple Notes
b. Fixing price at an auction or in any form
of bidding including cover bidding, bid
suppression, bid rotation and market
allocation and other analogous practices
of bid manipulation.
2. Not per se violations
a. Setting, limiting, or controlling
production, markets, technical
development, or investment;
b. Dividing or sharing the market, whether
by volume of sales or purchases,
3. Other agreements, between or among
competitors which have the object or effect
of substantially preventing, restricting or
lessening competition. (Sec. 14, PCA)
Exceptions:
1. Agreements which contribute to improving
the production or distribution of goods and
services or to promoting technical or
economic progress, while allowing consumers
a fair share of the resulting benefits, may not
necessarily be deemed a violation of the Act.
2. An entity that controls, is controlled by, or is
under common control with another entity or
entities, have common economic interests,
and are not otherwise able to decide or act
independently of each other, shall not be
considered competitors for purposes of anti-
competitive agreements. (Sec. 14, PCA)
Abuse of dominant position
The following acts constitute abuse of dominant
position
1. Selling goods or services below cost with the
object of driving competition out of the
relevant market;
2. Imposing barriers to entry or committing acts
that prevent competitors from growing within
the market in an anti-competitive manner,
except those that develop in the market as a
result of or arising from a superior product or
process, business acumen, or legal rights or
laws
3. Making a transaction subject to acceptance
by the other parties of other obligations
which, by their nature or according to
337
Mercantile Law
commercial usage, have no connection with
the transaction;
4. Setting prices or other terms or conditions
that discriminate unreasonably between
customers or sellers of the same goods or
services, where such customers or sellers are
contemporaneously trading on similar terms
and conditions, where the effect may be to
lessen competition substantially;
Exceptions:
a. Socialized pricing for the less fortunate
sector;
b. Price differential which reasonably or
approximately reflect differences in the cost
of manufacture, sale or delivery;
c. Price differential or terms of sale offered in
response to the competitive price of
payments, services or changes in the facilities
furnished by a competitor; and
d. Price changes in response to changing
market conditions, marketability of goods or
services, or volume.
5. Imposing restrictions on the lease or contract
for sale or trade of goods or services
concerning where, to whom, or in what forms
goods or services may be sold or traded,
such as:
a. Fixing prices;
b. Giving preferential discounts or rebate
upon such price; or
c. Imposing conditions not to deal with
competing entities, where the object or
effect of the restrictions is to prevent,
restrict or lessen competition
substantially‘
Exceptions:
a. Permissible franchising, licensing,
exclusive merchandising or exclusive
distributorship agreements; and
b. Agreements protecting intellectual
property rights, confidential information,
or trade secrets.
Bar Operations C ommissions 337
 Purple Notes
Mercantile Law
6. Making supply of particular goods or services
dependent upon the purchase of other goods
or services from the supplier which have no
direct connection with the main goods or
services to be supplied;
7. Directly or indirectly imposing unfairly low
purchase prices for the goods or services of,
among others, marginalized agricultural
producers, fisherfolk, micro-, small-, medium-
scale enterprises, and other marginalized
service providers and producers Directly or
indirectly imposing unfair purchase or selling
price on their competitors, customers,
suppliers or consumers, provided that prices
that develop in the market as a result of or
due to a superior product or process,
business acumen or legal rights or laws shall
not be considered unfair prices
8. Limiting production, markets or technical
development to the prejudice of consumers,
except limitations that develop in the market
as a result of or due to a superior product or
process, business acumen or legal rights.
Exceptions:
1. Having a dominant position in a relevant
market or on acquiring, maintaining and
increasing market share through legitimate
means that do not substantially prevent,
restrict or lessen competition
2. Any conduct which contributes to improving
production or distribution of goods or
services
within the relevant market, or promoting
technical and economic progress while
allowing consumers a fair share of the
resulting benefit
Note: In items no. 2, 8 and 9 above, the
concerned entity or entities invoking the
exception shall clearly establish to the PCC‘s
satisfaction, that the barrier to entry or anti-
competitive act is an indispensable and natural
result of the superior product or process,
business acumen, or legal rights or laws. (Sec. 15,
PCA)
Prohibited mergers and acquisitions
Merger or acquisition agreements that
substantially prevent, restrict, or lessen
338 Center for Legal Education and Research
2018
competition in the Philippines in the relevant
market or in the market for goods or services, as
may be determined by the PCC.
Exceptions:
1. 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; and
2. 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
COVERED TRANSACTIONS
Threshold for compulsory notification
Under PCC Advisory 2019-001, effective March 1,
2019, parties to a merger or acquisition shall be
required to provide notification when:
a. The 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, including that of all entities that the
ultimate parent entity controls, directly or
indirectly, exceeds Five Billion Six Hundred
Million Pesos (PhP 5,600,000,000.00); and
b. The value of the transaction exceeds Two
Billion Two Hundred Million Pesos (PhP
2,200,000,000.00)
Parties to the merger or acquisition agreement
referred to in the preceding section wherein the
value of the transaction exceeds the threshold
are prohibited from consummating their
agreement until thirty (30) days after providing
notification to the PCC in the form and containing
the information specified in the regulations issued
by the PCC.
Notifying Entities
1. Parties to a merger or acquisition that satisfy
the thresholds are required to notify the PCC
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before the execution of the definitive
agreements relating to the transaction.
2. If notice to the PCC is required for a merger
or acquisition, then all acquiring and acquired
pre-acquisition ultimate parent entities or any
entity authorized by the ultimate parent
entity to file notification on its behalf must
each submit a Notification Form (the ―Form‖)
and comply with the procedure set forth in
Section 5 of this Rule. The parties shall not
consummate the transaction before the
expiration of the relevant periods provided in
this Rule.
3. In the formation of a joint venture (other
than in connection with a merger or
consolidation), the contributing entities shall
be deemed acquiring entities, and the joint
venture shall be deemed the acquired entity.
(Sec. 2, Rule 4, IRR, RA 10667)
DETERMINING THE RELEVANT MARKET
For purposes of determining the relevant market,
the following factors, among others, affecting the
substitutability among goods or services
constituting such market, and the geographic
area delineating the boundaries of the market
shall be considered:
1. The possibilities of substituting the goods or
services in question with others of domestic
or foreign origin, considering the
technological possibilities, the extent to which
substitutes are available to consumers and
the time required for such substitution;
2. The cost of distribution of the good or
service, its raw materials, its supplements
and substitutes from other areas and abroad,
considering freight, insurance, import duties,
and non-tariff restrictions; the restrictions
imposed by economic agents or by their
associations; and the time required to supply
the market from those areas;
3. The cost and probability of users or
consumers seeking other markets; and
4. National, local or international restrictions
which limit the access by users or
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Mercantile Law
consumers to alternate sources of supply or
the access of suppliers to alternate
consumers. (Sec 1, Rule 5, IRR of PCA)
DETERMINING CONTROL OR DOMINANCE
OF MARKET
What constitutes control of an entity
Control refers to the ability to substantially
influence or direct the actions or decisions of an
entity, whether by contract, agency or otherwise.
In determining the control of an entity, the PCC
may consider the following:
1. Control is presumed to exist when the parent
owns directly or indirectly, through
subsidiaries, more than one half (1/2) of the
voting power of an entity, unless in
exceptional circumstances, it can clearly be
demonstrated that such ownership does not
constitute control.
2. Control also exists even when an entity owns
one half (1/2) or less of the voting power of
another entity when:
a. There is power over more than one half
(1/2) of the voting rights by virtue of an
agreement with investors;
b. There is power to direct or govern the
financial and operating policies of the
entity under a statute or agreement;
c. There is power to appoint or remove the
majority of the members of the board of
directors or equivalent governing body;
d. There is power to cast the majority votes
at meetings of the board of directors or
equivalent governing body;
e. There exists ownership over or the right
to use all or a significant part of the
assets of the entity; or
f. There exist rights or contracts which
confer decisive influence on the decisions
of the entity. (Sec 1, Rule 6, IRR of PCA)
Assessment of dominance
In determining whether an entity has a
market dominant position, the PCC shall
consider the following illustrative and
non-exhaustive criteria:
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Mercantile Law
1. The share of the entity in the relevant
market and the ability of the entity to fix
prices unilaterally or to restrict supply in
the relevant market;
2. The share of other market participants in
the relevant market;
3. The existence of barriers to entry and the
elements which could foreseeably alter
both the said barriers and the supply
from competitors;
4. The existence and power of its
competitors;
5. The credible threat of future expansion
by its actual competitors or entry by
potential competitors (expansion and
entry);
6. Market exit of actual competitors;
7. The bargaining strength of its customers
(countervailing power);
8. The possibility of access by its
competitors or other entities to its
sources of inputs;
9. The power of its customers to switch to
other goods or services;
10. Its recent conduct;
11. Its ownership, possession or control of
infrastructure which are not easily
duplicated;
12. Its technological advantages or
superiority, compared to other
competitors;
13. It‘s easy or privileged access to capital
markets or financial resources;
14. Its economies of scale and of scope;
15. Its vertical integration; and
16. The existence of a highly developed
distribution and sales network. (Sec 2,
Rule 8, IRR of PCA)
Presumption of dominance
There shall be a rebuttable presumption of
market dominant position if the market share of
an entity in the relevant market is at least fifty
percent (50%), unless a new market share
threshold is determined by the PCC for that
particular sector.
DETERMINING THE EXISTENCE OF ANTI-
COMPETITIVE CONDUCT
In determining whether an anti-competitive
agreement or conduct substantially prevents,
340 Center for Legal Education and Research
2018
restricts, or lessens competition, the PCC, in
appropriate cases, shall, inter alia:
1. Define the relevant market allegedly affected
by the anti-competitive agreement or
conduct, following the principles laid out in
Section 24 of the Act and Rule 5 of these
Rules;
2. Determine if there is actual or potential
adverse impact on competition in the
relevant market caused by the alleged
agreement or conduct, and if such impact is
substantial and outweighs the actual or
potential efficiency gains that result from the
agreement or conduct;
3. Adopt a broad and forward-looking
perspective, recognizing future market
developments, any overriding need to make
the goods or services available to consumers,
the requirements of large investments in
infrastructure, the requirements of law, and
the need of our economy to respond to
international competition, but also taking
account of past behavior of the parties
involved and prevailing market conditions;
4. Balance the need to ensure that competition
is not prevented or substantially restricted
and the risk that competition efficiency,
productivity, innovation, or development of
priority areas or industries in the general
interest of the country may be deterred by
overzealous or undue intervention; and
5. Assess the totality of evidence on whether it
is more likely than not that the entity has
engaged in anti-competitive agreement or
conduct, including whether the entity‘s
conduct was done with a reasonable
commercial purpose, such as but not limited
to, phasing out of a product or closure of a
business, or as a reasonable commercial
response to the market entry or conduct of a
competitor. (Sec. 1, Rule 7, IRR of PCA)
FORBEARANCE BY THE PHILIPPINE
COMPETITION COMMISSION
The PCC may forbear from applying the
provisions of this Act, for a limited time, in whole
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Mercantile Law
or in part, in all or specific cases, on an entity or
group of entities, if in its determination:

1. Enforcement is not necessary to the

attainment of the policy objectives of the Act;
2. Forbearance will neither impede competition
in the market where the entity or group of
entities seeking exemption operates nor in
related markets; and
3. Forbearance is consistent with public interest
and the benefit and welfare of the
consumers.

A public hearing shall be held to assist the PCC in

making this determination.

The PCC‘s order exempting the relevant entity or

group of entities under this section shall be made
public. Conditions may be attached to the
forbearance if the PCC deems it appropriate to
ensure the long-term interest of consumers.

In the event that the basis for the issuance of the

exemption order ceases to be valid, the order
may be withdrawn by the PCC. (Sec. 28, PCA)

HAIL TO THE CHIEFS!

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