IVISAN, CAPIZ

COO – FORM 12

SUBJECT TITLE: LAW ON CORPORATION AND NEGOTIABLE INSTRUMENTS

INSTRUCTOR: MARY PRINCESS JERMAINE N. CABARON, CPA
SUBJECT CODE: RFBT4

MIDTERMS MODULE
LAW ON CORPORATION AND NEGOTIABLE INSTRUMENTS

Topic 1 : DISSOLUTION

LEARNING OBJECTIVES:

At the end of this topic, the students are expected to:

1. Elaborate the definition of Dissolution;

2. Identify and explain the situations of voluntary dissolution;
3. Identify and explain the situations of involuntary dissolution.

NOTES:

TITLE 14: DISSOLUTION

1.1. DISSOLUTION

A corporation formed or organized under the provisions of the Corporation Code may be
dissolved voluntarily or involuntarily.

1.2. VOLUNTARY DISSOLUTION

There are 3 situations of voluntary dissolution:

1) Voluntary dissolution where no creditors are affected;

2) Voluntary dissolution where creditors are affected;
3) Dissolution by shortening the corporate term.

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 Voluntary dissolution where no creditors are affected

The dissolution may be effected by majority vote of the Board of directors or Trustees
and by a resolution adopted by the affirmative vote of the majority of the outstanding
capital stock or majority of the members at a meeting called for the purpose.

A verified request for dissolution shall be filed with the SEC. Within fifteen (15) days
from receipt of the verified request for dissolution, the SEC shall approve the request
and issue the certificate of dissolution. The dissolution shall take effect only upon the
issuance by the SEC of a certificate of dissolution.

Voluntary dissolution where creditors are affected

A verified petition for Dissolution shall be filed with the SEC, signed by majority of the
board of directors or trustees, verified by the President or Corporate Secretary, the
dissolution must be approved by 2/3 of the outstanding capital stock or 2/3 of the
members at a meeting called for the purpose.

The SEC shall issue an Order fixing a deadline for filing objections to the petition which
shall not be less than 30 days nor more than 60 days after the entry of the Order.

The copy of the order shall be published at least once a week for three (3) consecutive
weeks in a newspaper of the general circulation published in the city or municipality
where the principal office of the corporation is located, or if there is none, in a newspaper
of general circulation in the Philippines.

A similar copy should be posted for 3 consecutive weeks in three (3) public places in
such municipality or city.

After 5 days’ notice given after the date on which the right to file objection has expired,
the SEC shall proceed to hear the petition.

If no objection is sufficient and the material allegations of the petition are true, the SEC
shall render judgment dissolving the corporation. The dissolution shall take effect only
upon the issuance by the SEC of a certificate of dissolution.

Dissolution by shortening the corporate term

Amending the Articles of Incorporation to shorten the corporate term pursuant to the
provisions of the Corporation Code.

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.

In case of the 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 issuance of a certificate of dissolution.

1.3. INVOLUNTARY DISSOLUTION

A corporation may be dissolved by the SEC motu propio or upon filing of a verified
complaint by any interested party. The following may be grounds for dissolution of the
corporation:

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 1) Non-use of corporate charter
If a corporation does not formally organize and commence its business within 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-year period.

2) Continuous inoperation of a corporation

If a corporation has commenced its business but subsequently becomes

inoperative for a period of at least 5 consecutive years, the SEC may, after due
notice and hearing, place the corporation under delinquent status. The corporation
has 2 years to resume operations.

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;

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 of the same;

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.

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Exercises:
I. Application.

1. Cite an instance where there is voluntary dissolution.

2. Cite an instance where there is involuntary dissolution.

3. What are the reasons that a corporation be dissolved?

-END OF TOPIC 1 OF MIDTERM MODULE-

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Topic 2 : FOREIGN CORPORATIONS

LEARNING OBJECTIVES:

At the end of this topic, the students are expected to:

1. Define Foreign Corporations;

2. Elaborate the characteristics and rights of an unlicensed foreign corporation; and
3. Identify the laws applicable to foreign corporations.

TITLE 15: FOREIGN CORPORATIONS

2.1. FOREIGN CORPORATIONS

A foreign corporation is 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

It shall have the right to transact business in the Philippines after it shall have obtained
a license to transact business in accordance with the Corporation Code and a certificate
of authority from the appropriate government agency.

An application for license shall be under oath and shall specifically contain the name and
address of its resident agent authorized to accept summons and processes in all legal
proceedings.

2.2. RESIDENT AGENT OF A FOREIGN CORPORATION

A resident agent may be either an individual residing in the Philippines or a domestic

corporation lawfully transacting business in the Philippines.

An individual resident agent must be of good moral character and of sound financial
standing. In case of a domestic corporation who will act as a resident agent, it must
likewise be of sound financial standing and must show proof that it is in good standing
as certified by the SEC.

2.3. UNLICENSED FOREIGN CORPORATION DOING BUSINESS

A foreign corporation transacting business in the Philippines without a license shall not
be allowed to maintain or intervene in any suit, action or proceeding in any court or
administrative agency of the Philippines. Such corporation may be sued before the
Philippine courts.

Unlicensed foreign corporation may maintain an action under the following instances:

1. Isolated business transaction in the Philippines;

2. Protection of its intellectual property in the Philippines;
3. Non-business transaction in the Philippines.

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2.4. LAWS APPLICABLE TO FOREIGN CORPORATIONS

A foreign corporation doing business in the Philippines is subject to all laws, rules and
regulations applicable to domestic corporations of the same class except with regard to
the creation, formation, organization or dissolution of corporations and the relations,
liabilities, responsibilities, or duties of stockholders, members or officers of corporations
to each other or to the corporation.

2.5. REVOCATION OF LICENSE

Without prejudice to other grounds provided under special laws, the license of a foreign
corporation to transact business in the Philippines may be revoked or suspended by the
SEC upon any of the following grounds:

1) Failure to file its annual report or pay any fees as required by the Corporation
Code;

2) Failure to appoint and maintain a resident agent in the Philippines as required by

the Corporation Code;

3) Failure, after change of its resident agent or address, to submit to the SEC a
statement of such change as required by the Corporation Code;

4) Failure to submit to the SEC an authenticated copy of any amendment to its

articles of incorporation or bylaws or of any articles of merger or consolidation
within the time prescribed by the Corporation Code;

5) A misrepresentation of any material matter in any application, report, affidavit or

other document submitted by such corporation pursuant to the Corporation Code;

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 on 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.

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Exercises:
I. Application.

1. Cite one foreign corporation and explain its characteristics.

2. May a failure to file its annual report or pay any fees as required by the Corporation
Code be a reason for revocation of a foreign corporation’s license?

3. What will happen if a corporation does not formally organize and commence its
business within 5 years from the date of its incorporation?

-END OF TOPIC 2 OF MIDTERM MODULE-

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Topic 3 : FORMS OF NEGOTIABLE INSTRUMENT

LEARNING OBJECTIVES:

At the end of this topic, the students are expected to:

1. Identify and explain the elements of Negotiable Instrument;

2. Elaborate unconditional promise or order;
3. Identify the situations when the instrument is payable on demand;
4. Identify the situations when the instrument is payable to order;
5. Differentiate payable to order from payable to bearer.
6. Elaborate the definition of incomplete instrument;
7. Identify the situations when date may be inserted in an incomplete instrument;
8. Elaborate the definition of a complete instrument;
9. Identify the ways to interpret ambiguous instruments.

NOTES:

3.1. ELEMENTS OF NEGOTIABLE INSTRUMENT (SEC. 1, N.I.L.)

An instrument to be negotiable must conform to the following requirements:

A. It must be in writing and signed by the maker (PN) or drawer (BOE);

B. Must contain an unconditional promise or order to pay a sum certain in money;
C. Must be payable on demand, or at a fixed or determinable future time;
D. Must be payable to order or to bearer;
E. Where the instrument is addressed to a drawee, he must be named or otherwise
indicated therein with reasonable certainty

3.2. UNCONDITIONAL PROMISE OR ORDER

An unqualified order or promise to pay is unconditional even though coupled with:

a. An indication of a particular fund out of which reimbursement is to be made, or a

particular account to be debited with the amount; or
b. A statement of the transaction which gives rise to the instrument.

An order or promise to pay out of a particular fund is not unconditional.

The following words or statements amount to a promise or order to pay:

a. Payable or to be paid
b. I agree to pay
c. I guaranty to pay
d. Good for
e. Due X or order
f. Let the bearer have

3.3. PAYABLE IN SUM CERTAIN IN MONEY

The following do not affect the requirement of payable in sum certain in money:

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 a. With interest
b. By stated installment
c. By stated installment with acceleration clause
d. With exchange
e. With costs of collection or attorney’s fee

3.4. PAYABLE ON DEMAND

An instrument is payable on demand –

a. Where it is expressed to be payable on demand, or at sight or on presentation;

or
b. In which no time for payment is expressed.

Where an instrument is issued, accepted or indorsed when overdue, it is as regards the

person so issuing, accepting or indorsing it, payable on demand.

3.5. DETERMINABLE FUTURE TIME

An instrument is payable at a determinable future time, which is expressed to be

payable:

a. At a fixed period after date or sight;

b. On or before a fixed period or determinable future time specified therein;
c. On or at a fixed period after the occurrence of a specified event which is certain
to happen, though the time of happening be uncertain.

An instrument payable upon a contingency is not negotiable and the happening of the
event does not cure the defect.

3.6. ADDITIONAL STIPULATION NOT AFFECTING NEGOTIABILITY

An instrument which contains an order or promise to do any act in addition to the

payment of money is not negotiable. But the negotiable character of an instrument
otherwise negotiable is not affected by a stipulation which:

a. Authorizes the sale of collateral securities in case the instrument be not paid at
maturity

b. Authorizes confession of judgment if the instrument be not paid at maturity

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

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

of money

3.7. PAYABLE TO ORDER

“The instrument is payable to order where it is drawn payable to the order of a specified
person or to him or his order. It may be drawn payable to the order of –

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 a. A payee who is not a maker, drawer or drawee; or
b. The drawer or maker
c. The drawee
d. Two or more payees jointly
e. One or some of several payees
f. The holder of an office for the time being

Where the instrument is payable to order, the payee must be named or otherwise
indicated therein with reasonable certainty.”

3.8. PAYABLE TO BEARER

“The instrument is payable to bearer –

a. When it is expressed to be so payable

b. When it is payable to a person named therein or bearer
c. When it payable to the order of a fictitious or non-existing person, and such
fact was known to the person making it so payable
d. When the name of the payee does not purport to be the name of any person;
e. When the only or last indorsement is an indorsement in blank”

3.9. WHEN DATE MAY BE INSERTED

a. Where an instrument is payable at a fixed period after date but its issue is undated

b. Where the instrument is payable at a fixed period after sight but the acceptance is
undated.

3.10. INCOMPLETE BUT DELIVERED INSTRUMENT

2 kinds of incomplete instrument

a. Lacking in material particular

b. Signature in a blank paper

Requisites for prima facie authority to complete an instrument lacking in material

particular:

a. Want of material particular in instrument

b. Possession by a person

Requisites for prima facie authority to fill up an amount in a blank paper on the which
the signature appears:

a. Signature in a blank paper

b. The person signing delivers it to another in order that it may be converted into
a negotiable instrument

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 Requisites to enforce the incomplete instrument against parties prior to completion

a. The blanks must be filled up strictly in accordance with the authority given
b. Within a reasonable time

3.11. INCOMPLETE AND UNDELIVERED

Where an incomplete instrument has not been delivered, it will not, if completed and
negotiated, without authority, be a valid contract in the hands of any holder, as against
any person whose signature was placed thereon before delivery.

3.12. COMPLETE BUT UNDELIVERED

Delivery is essential to the validity of any negotiable instrument.

As between immediate parties and as regards a remote party other than a holder in due
course, delivery must have been with the intention of passing title.

A complete instrument in the possession of a holder in due course gives rise to a

conclusive presumption of delivery.

A previously incomplete instrument in the possession of a holder in due course gives

rise to a prima facie presumption of delivery.

There is a prima facie presumption of delivery even if the holder is not a holder in due
course.

3.13. AGENT AND PROCURATION AGENT

Requisites in order that an agent signing the instrument may not be personally liable
thereon:

a. The agent is duly authorized

b. The agent adds to his signature words indicating that he signs for or on behalf of
a principal or in a representative capacity

c. The agent must disclose his principal

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

3.14. EFFECT OF INDORSEMENT BY MINOR OR CORPORATION

The indorsement or assignment of the instrument by a corporation or minor passes the

property therein, notwithstanding that from want of capacity, the corporation or minor
may incur no liability thereon.

If a minor or corporation indorses an instrument, the indorsee acquires title to it and

can enforce it against the maker or acceptor or other parties prior to the minor. Such

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 prior parties cannot escape liability by setting up as a defense the incapacity of the
indorser.

3.15. CONSTRUCTION OR INTERPRETATION WHERE THE INSTRUMENT

IS AMBIGUOUS

The following rules of construction or interpretation apply:

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

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

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

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

e. Where the instrument is so ambiguous that there is doubt whether it is a bill or

note, the holder may treat as either at his election;

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

g. Where an instrument containing the word “I promise to pay” is signed by two or

more persons, they are deemed to be jointly and severally liable thereon.

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Exercises:
I. Application.

1. Create a sample of a negotiable instrument and identify the different elements.

2. Create a sample of a non - negotiable instrument and identify the lacking elements.

3. Differentiate payable to order from payable to bearer.

4. When does an instrument still be negotiable even containing an order or promise to

do any act in addition to the payment of money?

5. When do we consider an instruments as payable in a future determinable time?

6. Cite situations when instruments become incomplete.

7. Can an instrument be fixed when it is undated?

8. When are the situations that instruments are considered undelivered?

-END OF TOPIC 3 OF MIDTERM MODULE-

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Topic 4 : CONSIDERATION AND NEGOTIATION

LEARNING OBJECTIVES:

At the end of this topic, the students are expected to:

1. Elaborate consideration in a negotiable instrument.

2. Elaborate negotiation of instruments;
3. Identify and explain different kinds of indorsements;
4. Differentiate the kinds of indorsements;
5. Identify situations where indorsement is not needed to transfer an instrument;
6. Explain the striking out of an indorsement.

NOTES:

4.1. CONSIDERATION

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

b. What constitutes holder for value?

A holder for value is one who has given a valuable consideration for the instrument
issued or negotiated to him. He is considered a holder for value in respect to all
parties who become such prior to that time.

c. Effects of want of consideration:

1. If there is a total absence or failure of consideration, the defense is only against

persons who are not holders in due course.

2. If it is partial failure, only partial defense.

d. Accomodation party – is one who has signed the instrument as maker, drawer,
acceptor, or indorser, without receiving value therefore, and for the purpose of
lending his name to some other persons.

Liability of accommodation party – liable on the instrument to a holder for value,

notwithstanding such holder at the time of taking the instrument knew him to be only
an accommodation party.

4.1 NEGOTIATION

a. Negotiation is the transfer of an instrument from one person to another in such

manner as to constitute the transferee the holder of the instrument.

Holder vs. Bearer

i. Who is a holder? --- A holder is a payee or indorsee of a bill or note who is in

possession of it; or, the bearer thereof.

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 If the instrument is payable to order, holder means a person who is the payee or
indorsee therein and who is in possession thereof.

If it is payable to bearer, holder means the person who is in possession thereof.

ii. Who is a bearer? --- A person who is in possession of a bill or note which is
payable to bearer.

Means of negotiation:

i. If the instrument is payable to order, it is negotiated by indorsement plus

delivery.

ii. If the instrument is payable to bearer, it is negotiated only by delivery.

4.2 KINDS OF INDORSEMENT

i. Special indorsement - specifies the person to whom, or to whose

order, the instrument is to be payable; and
the indorsement of such indorsee is necessary
to the further negotiation of the instrument.

ii. Indorsement in blank - specifies no indorsee, and the instrument so

indorsed is payable to bearer, and may be
negotiated by delivery. (conversion)

iii. Restrictive indorsement - an indorsement is restrictive which either:

a. prohibits the further negotiation of the

instrument
b. constitutes the indorsee the agent of the
indorser
c. vests the title in the indorsee in trust for
or to the use of some other person

iv. Qualified indorsement - constitutes the indorser a mere assignor of the

title to the instrument. It may be made by
adding to the indorser’s signature the words
“without recourse” of any words of similar
import.

v. Conditional - one by which the indorser annexes some other

indorsement condition to his liability, that is where there is
some condition in the indorsement.

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 Where an indorsement is conditional, a party required to pay the
instrument may disregard the condtion, and make payment to the
indorsee or his transferee, whether the condition has been fulfilled or
not.

vi. Absolute indorsement - One by which the indorser binds himself to pay
upon no other condition than the failure of
prior parties to do so, and due notice to him of
such failure.

vii. Joint indorsement - One which requires the indorsement of all the
payees or indorsees to whom the instrument is
payable

viii Successive - One which consists of two or more

indorsemnent indorsements made in succession.

ix. Irregular indorsement - One made by a person not otherwise a party

to an instrument, who places thereon his
signature in blank before delivery

x. Facultative - One where the indorser enlarges his liability by

indorsement waiving the usual demand and notice of
dishonor.

Where the instrument originally payable to bearer is indorsed specially, it may

nevertheless be further negotiated by delivery. The person indorsing specially is liable
as indorser only to such holders as make title through his indorsement.

4.3 STRIKING OUT INDORSEMENT

The holder of a negotiable instrument may at any time strike out any indorsement which
is not necessary to his title; he may strike out all intervening indorsements and aver
that the first holder indorsed immediately to him.

Effect of striking out indorsement – the following indorsers are relieved from
liability on the instrument:

a. the indorser whose indorsement is

struck out.

b. all indorsers subsequent to him

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4.4 TRANSFER WITHOUT INDORSEMENT

Where the holder of an instrument payable to his order transfers it for value without
indorsing it, the transfer vests in the transferee such title as the transferor had therein,
and the transferee acquires in addition, the right to have the indorsement of the
transferor. But for the purpose of determining whether the transferee is a holder in due
course, the negotiation takes effect as of the time when the indorsement is actually
made.

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Exercises:

I. Application.

1. Where the sum payable is expressed in words and also in figures and there is a
discrepancy between the two, what will be considered as the correct amount?

2. What constitutes holder for value?

3. Cite one type of indorsement and its usage.

END OF MIDTERMS MODULE.

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 REFERENCE

Rosada, F. (2017). Regulatory Framework for Business Transactions Reviewer.

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