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FACULTY OF CIVIL LAW (1734)
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COMMERCIAL LAW
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A 2023 GOLDEN NOTES
FACULTY OF CIVIL LAW
UNIVERSITY OF SANTO TOMAS
MANILA
The UST GOLDEN NOTES is the annual student-edited bar review material of
the University of Santo Tomas, Faculty of Civil Law. Communications
regarding the Notes should be addressed to the Academics Committee of the
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Address: Academics Committee

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España, Manila 1008
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Tel. No: (02) 8731-4027
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(02) 8406-1611 loc. 8578
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Academics Committee
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Faculty of Civil Law
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All rights reserved by the Academics Committee of the Faculty of Civil Law of the Pontifical and Royal
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University of Santo Tomas, the Catholic University of the Philippines.
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2023 Edition.
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Released in the Philippines, 2023.

Faculty of Civil Law (1734)
ACADEMIC YEAR 2022-2023
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CIVIL LAW STUDENT COUNCIL
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NICOLO B. BONGOLAN PRESIDENT
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IVAN ARNIE C. QUIAMCO VICE PRESIDENT INTERNAL
JANNODIN D. DIPATUAN VICE PRESIDENT EXTERNAL
BRIAN CHOOYE S. LIM SECRETARY
ROMBERT JOSEPH EMIEL D. CRUZ TREASURER
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HARLEY JANSEN L. CALDERON AUDITOR
BIENVENIDO L. ORTIZ III PUBLIC RELATIONS OFFICER
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KAREN DARYL L. BRITO CHIEF-OF-STAFF
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UST BAR-OPS
T E JUSTINE RENEE GERVACIO

PAULINNE STEPHANY G. SANTIAGO
CHAIRPERSON
VICE-CHAIRPERSON
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KAREN DARYL L. BRITO HEAD, SECRETARIAT
JAN YSABEL U. DE LEON HEAD, PUBLIC RELATIONS OFFICER
GABRIEL C. LAPID HEAD, FINANCE COMMITTEE
BIANCA PATRICIA ALLEN C. FLORES HEAD, HOTEL ACCOMMODATIONS COMMITTEE
FRITZ N. CANTERO HEAD, LOGISTICS COMMITTEE
ARNET C. PAGUIRIGAN ASST. HEAD, SECRETARIAT
ANGELO RAFAEL V. CO ASST. HEAD, FINANCE
NEIL FRANCIS V. ALBUERO ASST. HEAD, LOGISTICS
JOSEPHINE GRACE W. ANG SENIOR MEMBER
MA. ANDREA D. CABATU SENIOR MEMBER
SABINA MARIA H. MABUTAS SENIOR MEMBER
JEDIDIAH R. PADUA SENIOR MEMBER
VANESSA A. SIENA SENIOR MEMBER
ATTY. AL CONRAD B. ESPALDON

ADVISER
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ACADEMICS COMMITTEE 2023
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ANGELA BEATRICE S. PEÑA KATHERINE S. POLICARPIO
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SECRETARIES-GENERAL
RON-SOPHIA NICOLE C. ANTONIO CRIMINAL LAW
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HERLENE MAE D. CALILUNG LABOR LAW AND SOCIAL LEGISLATION
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POLITICAL LAW AND
PATRISHA LOUISE E. DUMANIL
PUBLIC INTERNATIONAL LAW
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ALEXANDRA MAUREEN B. GARCIA LEGAL AND JUDICIAL ETHICS WITH
PRACTICAL EXERCISES
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HANNAH JOY C. IBARRA COMMERCIAL LAW
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JEDIDIAH R. PADUA CIVIL LAW
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PAULINNE STEPHANY G. SANTIAGO TAXATION LAW
DIANNE MICAH ANGELA D. YUMANG REMEDIAL LAW
EXECUTIVE COMMITTEE
PAULA ANDREA F. PEÑAFLOR COVER DESIGN ARTIST

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COMMERCIAL LAW COMMITTEE 2023
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NORIEL C. BERNABE
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COMMERCIAL LAW SUBJECT HEAD
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MARK C. CASTILLO
SHIBA ASHLEY A. FERNANDEZ
REICELLE D. NAVARRO
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COMMERCIAL LAW ASSISTANT SUBJECT HEADS
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MIGUEL JOSHUA G. AGUIRRE DANA MAE D. SALGADO
DANIELLE LOUISE CLEO C. ESQUILLO JONA CHRISTIA A. SALVADOR
LYONA THERESE B. GADDI VINICE NICOLE S. URSAL
A ADVISERS
ATTY. SHEEN JOSHUA B. BARRIETA
ATTY. MARIAN JOANNE K. CO-PUA
ATTY. JAY-R C. IPAC
ATTY. AMADO E. TAYAG
FACULTY OF CIVIL LAW
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UNIVERSITY OF SANTO TOMAS
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ACADEMIC OFFICIALS
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ATTY. NILO T. DIVINA REV. FR. ISIDRO C. ABAÑO, O.P.
DEAN REGENT
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ATTY. ARTHUR B. CAPILI
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FACULTY SECRETARY
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ATTY. ELGIN MICHAEL C. PEREZ
LEGAL COUNSEL
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UST CHIEF JUSTICE ROBERTO CONCEPCION LEGAL AID CLINIC
JUDGE PHILIP A. AGUINALDO

SWDB COORDINATOR
LENY G. GADIANA, R.G.C.

GUIDANCE COUNSELOR
OUR DEEPEST APPRECIATION TO OUR
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MENTORS AND INSPIRATION
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Dean Nilo T. Divina
Dean Amado L. Dimayuga Atty. Marian Joanne K. Co-Pua
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Dean Eduardo Juan F. Abella Atty. Allan B. Gepty
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Justice Japar B. Dimaampao Atty. Jacinto D. Jimenez
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Justice Gabriel T. Robeniol Atty. Albert R. Palacios
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Judge Maria Ella Cecilia D. Escalante Atty. Ma. Ninna Roem A. Bonsol
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Judge Edith Cynthia A. Wee Atty. Teofilo R. Ragadio
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Atty. Emma Ruby Aguilar-Aprado Atty. Amado E. Tayag
Atty. Fe T. Becina-Macalino Atty. Janna Mae B. Tecson
Atty. Mercy Jane B. Paras- Atty. Maria Zarah R. Villanueva-

Leynes Castro
Atty. Ronel U. Buenaventura Atty. Mary Ann L. Reyes
Atty. Anna Katrina T. Singcol Atty. Darwin R. Bawar

For being our guideposts in understanding the intricate sphere of Commercial Law.
– Academics Committee 2023
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DISCLAIMER
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THE RISK OF USE OF THIS BAR
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REVIEW MATERIAL SHALL BE
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BORNE BY THE USER
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TABLE OF CONTENTS
I. BUSINESS ORGANIZATIONS ........................................................................................................................................... 1
A. PARTNERSHIPS ........................................................................................................................................................... 1
1. GENERAL PROVISIONS .......................................................................................................................................... 1
a) DEFINITION, ELEMENTS, AND CHARACTERISTICS ............................................................................... 1
b) RULES TO DETERMINE EXISTENCE .......................................................................................................... 2
c) PARTNERSHIP TERM .................................................................................................................................... 3
d) PARTNERSHIP BY ESTOPPEL ..................................................................................................................... 4
e) PARTNERSHIP AS DISTINGUSHED FROM JOINT VENTURE ................................................................ 4
f) PROFESSIONAL PARTNERSHIP................................................................................................................... 5
g) MANAGEMENT ................................................................................................................................................ 5
2. RIGHTS AND OBLIGATIONS OF PARTNERSHIP AND PARTNERS ............................................................... 6
a) RIGHTS AND OBLIGATIONS OF THE PARTNERSHIP ............................................................................ 6
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b) OBLIGATIONS OF PARTNERS AMONG THEMSELVES ........................................................................... 6
c) OBLIGATIONS OF PARTNERSHIP/PARTNERS TO THIRD PERSONS .............................................. 12
3. DISSOLUTION AND WINDING UP ..................................................................................................................... 15
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4. LIMITED PARTNERSHIP..................................................................................................................................... 22
B. CORPORATIONS ....................................................................................................................................................... 26
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1. DEFINITION OF CORPORATION ....................................................................................................................... 26
2. CLASSES OF CORPORATIONS ............................................................................................................................ 30
3. NATIONALITY OF CORPORATIONS ................................................................................................................. 32
a) CONTROL TEST ........................................................................................................................................... 32
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b) GRANDFATHER RULE................................................................................................................................ 33
4. CORPORATE JURIDICAL ENTITY ..................................................................................................................... 34
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a) DOCTRINE OF SEPARATE JURIDICAL PERSONALITY ........................................................................ 34
b) DOCTRINE OF PIERCING THE CORPORATE VEIL .............................................................................. 40
5. CAPITAL STRUCTURE ......................................................................................................................................... 45
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a) NUMBER AND QUALIFICATIONS OF INCORPORATORS .................................................................... 45
b) SUBSCRIPTION REQUIREMENTS ............................................................................................................ 46
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c) CORPORATE TERM ..................................................................................................................................... 46
d) CLASSIFICATION OF SHARES................................................................................................................... 46
6. INCORPORATION AND ORGANIZATION ........................................................................................................ 52
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a) PROMOTER .................................................................................................................................................. 52
(1) LIABILITY OF PROMOTER ................................................................................................................ 52
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(2) LIABILITY OF CORPORATION FOR PROMOTER’S CONTRACT ................................................ 52
b) SUBSCRIPTION CONTRACT ...................................................................................................................... 52
c) PRE-INCORPORATION SUBSCRIPTION AGREEMENTS ...................................................................... 53
d) CONSIDERATION FOR STOCKS ............................................................................................................... 53
e) ARTICLES OF INCORPORATION .............................................................................................................. 54
(1) CONTENTS ............................................................................................................................................ 54
(2) NON-AMENDABLE ITEMS.................................................................................................................. 55
f) CORPORATE NAME AND LIMITATIONS ON ITS USE ........................................................................... 55
g) REGISTRATION, INCORPORATION, AND COMMENCEMENT OF CORPORATE
EXISTENCE................................................................................................................................................... 56
h) ELECTION OF DIRECTORS OR TRUSTEES ............................................................................................ 56
i) ADOPTION OF BY-LAWS ............................................................................................................................ 57
(1) CONTENTS OF BY-LAWS.................................................................................................................... 58
(2) BINDING EFFECTS ............................................................................................................................... 59
(3) AMENDMENTS ..................................................................................................................................... 59
j) EFFECTS OF NON-USE OF CORPORATE CHARTER .............................................................................. 59
7. CORPORATE POWERS ........................................................................................................................................ 59
a) GENERAL POWERS; THEORY OF GENERAL CAPACITY ..................................................................... 60
b) SPECIFIC POWERS; THEORY OF SPECIFIC CAPACITY ...................................................................... 62
c) POWER TO EXTEND OR SHORTEN CORPORATE TERM .................................................................... 63
d) POWER TO INCREASE OR DECREASE CAPITAL STOCK OR INCUR, CREATE,
INCREASE BONDED INDEBTEDNESS .................................................................................................... 63
e) POWER TO DENY PRE-EMPTIVE RIGHTS ............................................................................................. 66
f) POWER TO SELL OR DISPOSE CORPRORATE ASSETS ........................................................................ 67
g) POWER TO ACQUIRE OWN SHARES ....................................................................................................... 69
h) POWER TO INVEST CORPORATE FUNDS IN ANOTHER CORPORATION OR BUSINESS ............ 70
i) POWER TO DECLARE DIVIDENDS ........................................................................................................... 71
j) POWER TO ENTER INTO MANAGEMENT CONTRACT......................................................................... 74
k) DOCTRINE OF INDIVIDUALITY OF SUBSCRIPTION ........................................................................... 75
l) DOCTRINE OF EQUALITY OF SHARES..................................................................................................... 75
m) ULTRA VIRES DOCTRINE.......................................................................................................................... 75
n) TRUST FUND DOCTRINE........................................................................................................................... 79
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8. STOCKHOLDERS AND MEMBERS ..................................................................................................................... 81
a) FUNDAMENTAL RIGHTS OF A STOCKHOLDER ................................................................................... 81
b) PARTICIPATION IN MANAGEMENT ....................................................................................................... 81
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(1) PROXY .................................................................................................................................................... 82
(2) VOTING TRUST .................................................................................................................................... 84
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(3) CASES WHEN STOCKHOLDERS’ ACTION IS REQUIRED ............................................................. 86
(4) MANNER OF VOTING .......................................................................................................................... 89
c) PROPRIETARY RIGHTS.............................................................................................................................. 89
(1) RIGHTS TO DIVIDENDS ..................................................................................................................... 89
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(2) APPRAISAL RIGHT .............................................................................................................................. 90
(3) RIGHT TO INSPECT ............................................................................................................................. 92
(4) PREEMPTIVE RIGHT .......................................................................................................................... 95
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(5) RIGHT TO VOTE................................................................................................................................... 96
(6) RIGHT TO DIVIDENDS ....................................................................................................................... 97
d) REMEDIAL RIGHTS..................................................................................................................................... 97
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(1) INDIVIDUAL SUIT................................................................................................................................ 97
(2) REPRESENTATIVE SUIT .................................................................................................................... 97
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(3) DERIVATIVE SUIT ............................................................................................................................... 97
e) OBLIGATIONS OF A STOCKHOLDER ...................................................................................................... 99
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f) MEETINGS .................................................................................................................................................... 100
9. BOARD OF DIRECTORS AND TRUSTEES ...................................................................................................... 106
a) REPOSITORY OF CORPORATE POWERS ............................................................................................. 106
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b) TENURE, QUALIFICATIONS, AND DISQUALIFICATIONS OF DIRECTORS .................................... 106
c) REQUIREMENT OF INDEPENDENT DIRECTORS ................................................................................ 109
d) ELECTIONS ................................................................................................................................................. 110
e) REMOVAL .................................................................................................................................................... 113
f) FILLING OF VACANCIES ............................................................................................................................ 114
g) COMPENSATION ........................................................................................................................................ 115
h) DISLOYALTY .............................................................................................................................................. 116
i) BUSINESS JUDGMENT RULE .................................................................................................................... 117
j) SOLIDARY LIABILITIES FOR DAMAGES ............................................................................................... 119
k) PERSONAL LIABILITIES .......................................................................................................................... 124
l) RESPONSIBILITY FOR CRIMES ............................................................................................................... 124
m) SPECIAL FACT DOCTRINE ..................................................................................................................... 125
n) INSIDE INFORMATION ............................................................................................................................ 125
o) CONTRACTS ............................................................................................................................................... 126
(1) BY SELF-DEALING DIRECTORS WITH THE CORPORATION ................................................... 126
(2) BETWEEN CORPORATIONS WITH INTERLOCKING DIRECTORS .......................................... 127
10. CAPITAL AFFAIRS ........................................................................................................................................... 127
a) CERTIFICATE OF STOCK ......................................................................................................................... 127
(1) NATURE OF THE CERTIFICATE ..................................................................................................... 127
(2) UNCERTIFICATED SHARES ............................................................................................................. 128
(3) NEGOTIABILITY; REQUIREMENTS FOR VALID TRANSFER OF STOCKS .............................. 129
(4) ISSUANCE ............................................................................................................................................ 131
(5) STOCK AND TRANSFER BOOK ....................................................................................................... 132
(6) SITUS OF THE SHARES OF STOCKS............................................................................................... 133
b) WATERED STOCKS ................................................................................................................................... 133
(1) DEFINITION ........................................................................................................................................ 133
(2) LIABILITY OF DIRECTROS FOR WATERED STOCKS ................................................................ 134
(3) TRUST FUND DOCTRINE FOR LIABILITY FOR WATERED STOCKS ...................................... 134
c) PAYMENT OF BALANCE OF SUBSCRIPTION ....................................................................................... 134
(1) CALL BY BOARD OF DIRECTORS ................................................................................................... 135
(2) NOTICE REQUIREMENT................................................................................................................... 135
d) SALE OF DELINQUENT SHARES............................................................................................................ 135
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(1) EFFECT OF DELINQUENCY .............................................................................................................. 136
(2) CALL BY RESOLUTION OF THE BOARD OF DIRECTORS .......................................................... 136
e) ALIENATION OF SHARES........................................................................................................................ 136
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(1) ALLOWABLE RESTRICTIONS ON THE SALE OF SHARES ......................................................... 136
(2) REQUISITES OF A VALID TRANSFER ............................................................................................ 137
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f) CORPORATE BOOKS AND RECORDS ..................................................................................................... 137
(1) RIGHT TO INSPECT CORPORATE RECORDS .............................................................................. 137
(2) EFFECT OF REFUSAL TO INSPECT CORPORATE RECORDS .................................................... 138
11. DISSOLUTION AND LIQUIDATION .............................................................................................................. 138
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a) MODES OF DISSOLUTION....................................................................................................................... 138
(1) VOLUNTARY DISSOLUTION............................................................................................................ 139
(2) INVOLUNTARY DISSOLUTION ....................................................................................................... 142
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b) METHODS OF LIQUIDATION ................................................................................................................. 143
(1) BY THE CORPORATION ITSELF ..................................................................................................... 144
(2) CONVEYANCE TO A TRUSTEE WITHIN A THREE-YEAR PERIOD .......................................... 144
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(3) BY MANAGEMENT COMMITTEE OR REHABILITATION RECEIVER ...................................... 146
(4) LIQUIDATION AFTER THREE YEARS ........................................................................................... 147
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12. OTHER CORPORATIONS ................................................................................................................................ 148
a) CLOSE CORPORATIONS .......................................................................................................................... 148
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(1) CHARACTERISTICS ........................................................................................................................... 148
(2) VALIDITY OF RESTRICTIONS ON TRANSFER OF SHARES....................................................... 148
(3) PREEMPTIVE RIGHT ........................................................................................................................ 149
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(4) AMENDMENT OF ARTICLES OF INCORPORATION ................................................................... 150
b) NON-STOCK CORPORATIONS ................................................................................................................ 151
(1) DEFINITION ........................................................................................................................................ 151
(2) TREATMENT OF PROFITS............................................................................................................... 155
c) EDUCATIONAL CORPORATIONS .......................................................................................................... 155
d) RELIGIOUS CORPORATIONS .................................................................................................................. 155
(1) CORPORATION SOLE........................................................................................................................ 155
(2) RELIGIOUS SOCIETIES ..................................................................................................................... 155
e) ONE PERSON CORPORATIONS.............................................................................................................. 156
(1) EXCEPTED CORPORATIONS ........................................................................................................... 156
(2) CAPITAL STOCK REQUIREMENT................................................................................................... 157
(3) ARTICLES OF INCORPORATION AND BY-LAWS ........................................................................ 157
(4) CORPORATE NAME ........................................................................................................................... 157
(5) CORPORATE STUCTURE AND OFFICERS..................................................................................... 157
(6) NOMINEE ............................................................................................................................................. 157
(7) LIABILITY............................................................................................................................................ 158
(8) CONVERSION OF CORPORATION TO ONE PERSON CORPORATIONS
AND VICE-VERSA................................................................................................................................ 158
f) FOREIGN CORPORATIONS ...................................................................................................................... 159
(1) BASES OF AUTHORITY OVER FOREIGN CORPORATIONS ....................................................... 160
(a) CONSENT ....................................................................................................................................... 160
(b) DOCTRINE OF “DOING BUSINESS” .......................................................................................... 160
(2) NECESSITY OF A LICENSE TO DO BUSINESS ............................................................................... 161
(a) RESIDENT AGENT........................................................................................................................ 162
(3) PERSONALITY TO SUE ..................................................................................................................... 163
(4) SUABILITY OF FOREIGN CORPORATIONS .................................................................................. 164
(5) INSTANCES WHEN UNLICENSED FOREIGN CORPORATIONS MAY BE
ALLOWED TO SUE (ISOLATED TRANSACTIONS) ....................................................................... 165
(6) GROUNDS FOR REVOCATION OF LICENSE.................................................................................. 166
13. MERGER AND CONSOLIDATION .................................................................................................................. 167
a) CONCEPT ..................................................................................................................................................... 167
b) CONSTITUENT CORPORATION vs. CONSOLIDATED CORPORATION .......................................... 168
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c) PLAN OF MERGER OR CONSOLIDATION ............................................................................................ 168
d) ARTICLES OF MERGER OR CONSOLIDATION .................................................................................... 169
e) EFFECTS ...................................................................................................................................................... 171
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II. BANKING LAWS........................................................................................................................................................... 174
A. NEW CENTRAL BANK ACT (R.A. No. 7653, as amended by R.A. No. 11211) ............................................. 174
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1. STATE POLICIES ................................................................................................................................................. 174
2. MONETARY BOARD AND ITS POWERS AND FUNCTIONS ........................................................................ 174
3. THE BANGKO SENTRAL NG PILIPINAS AND BANKS IN DISTRESS ........................................................ 176
a) CONSERVATORSHIP ................................................................................................................................. 177
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b) CLOSURE ..................................................................................................................................................... 178
c) RECEIVERSHIP ........................................................................................................................................... 180
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d) LIQUIDATION ............................................................................................................................................ 182
B. GENERAL BANKING LAW OF 2000 (R.A. No. 8791) ........................................................................................ 184
1. DEFINITION AND CLASSIFICATION OF BANKS .......................................................................................... 184
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2. DISTINCTION OF BANKS FROM QUASI-BANKS AND TRUST ENTITIES ................................................ 186
3. NATURE OF BANK FUNDS AND BANK DEPOSITS ...................................................................................... 187
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4. DILIGENCE REQUIRED OF BANKS.................................................................................................................. 189
5. PROHIBITED TRANSACTIONS BY BANK DIRECTORS AND OFFICERS.................................................. 191
6. STIPULATION ON INTERESTS......................................................................................................................... 192
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C. SECRECY OF BANK DEPOSITS (R.A. No. 1405, as amended, and R.A. No. 6426, as amended) .............. 193
1. PURPOSE .............................................................................................................................................................. 193
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2. PROHIBITED ACTS ............................................................................................................................................ 193
3. DEPOSITS COVERED ......................................................................................................................................... 194
4. EXCEPTIONS FROM COVERAGE ..................................................................................................................... 194
5. GARNISHMENT OF DEPOSITS, INCLUDING FOREIGN DEPOSITS ........................................................... 200
D. THE ANTI-MONEY LAUNDERING ACT
(R.A. No. 9160, as amended by R.A. No. 9194, 10167, 10365, 10927, and 11521) ................................ 201
1. POLICY .................................................................................................................................................................. 201
2. COVERED INSTITUTIONS AND THEIR OBLIGATIONS .............................................................................. 201
3. COVERED TRANSACTIONS .............................................................................................................................. 204
4. SUSPICIOUS TRANSACTIONS .......................................................................................................................... 205
5. SAFE HARBOR PROVISION .............................................................................................................................. 205
6. MONEY LAUNDERING (HOW COMMITTED; UNLAWFUL ACTIVITIES OR PREDICATE CRIMES) ... 206
7. ANTI-MONEY LAUNDERING COUNCIL AND ITS FUNCTIONS ................................................................. 208
8. AUTHORITY TO INQUIRE INTO BANK DEPOSITS...................................................................................... 209
9. FREEZING OF MONETARY INSTRUMENT OR PROPERTY ........................................................................ 212
III. INSURANCE LAW ....................................................................................................................................................... 216
A. BASIC CONCEPTS .................................................................................................................................................... 216
1. ELEMENTS OF AN INSURANCE CONTRACT ................................................................................................. 218
2. CHARACTERISTICS/NATURE OF INSURANCE CONTRACTS .................................................................... 218
3. CLASSES OF INSURANCE .................................................................................................................................. 219
a) MARINE ....................................................................................................................................................... 219
b) FIRE .............................................................................................................................................................. 219
c) CASUALTY ................................................................................................................................................... 220
d) SURETYSHIP .............................................................................................................................................. 220
e) LIFE............................................................................................................................................................... 220
f) MICROINSURANCE .................................................................................................................................... 220
g) COMPULSORY MOTOR VEHICLE LIABILITY INSURANCE ............................................................... 220
h) COMPULSORY INSURANCE COVERAGE FOR AGENCY-HIRED WORKERS ................................... 221
4. INSURABLE INTEREST...................................................................................................................................... 221
5. DOUBLE INSURANCE AND OVERINSURANCE ............................................................................................. 228
6. NO FAULT, SUICIDE, AND INCONTESTABILITY CLAUSE .......................................................................... 232
B. PERFECTION OF THE INSURANCE CONTRACT ............................................................................................... 238
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C. RIGHTS AND OBLIGATIONS OF PARTIES ......................................................................................................... 241
1. INSURER ............................................................................................................................................................... 242
2. INSURED............................................................................................................................................................... 243
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3. BENEFICIARY ...................................................................................................................................................... 243
D. RESCISSION OF INSURANCE CONTRACTS ........................................................................................................ 248
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1. CONCEALMENT................................................................................................................................................... 249
2. MISREPRESENTATION OR OMISSIONS ........................................................................................................ 253
3. BREACH OF WARRANTIES............................................................................................................................... 255
IV. TRANSPORTATION LAW ......................................................................................................................................... 257
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A. COMMON CARRIERS .............................................................................................................................................. 257
1. DILIGENCE REQUIRED OF COMMON CARRIERS ........................................................................................ 260
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2. LIABILITIES OF COMMON CARRIERS............................................................................................................ 263
B. VIGILANCE OVER GOODS ..................................................................................................................................... 265
1. EXEMPTING CAUSES ......................................................................................................................................... 265
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2. CONTRIBUTORY NEGLIGENCE ....................................................................................................................... 269
3. DURATION OF LIABILITY ................................................................................................................................ 270
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a) ACTUAL OR CONSTRUCTIVE LIABILITY ............................................................................................. 271
b) TEMPORARY UNLOADING OR STORAGE ............................................................................................ 272
4. STIPULATION FOR LIMITATION OF LIABILITY ......................................................................................... 272
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a) VOID STIPULATIONS ............................................................................................................................... 273
b) LIMITATION OF LIABILITY TO FIXED AMOUNT ............................................................................... 274
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c) LIMITATION OF LIABILITY IN ABSENCE OF DECLARATION OF GREATER VALUE ................... 274
5. LIABILITY FOR BAGGAGE OF PASSENGERS ................................................................................................ 275
a) CHECKED-IN BAGGAGE ........................................................................................................................... 275
b) HAND-CARRIED BAGGAGE ..................................................................................................................... 275
C. SAFETY OF PASSENGERS ...................................................................................................................................... 276
1. VOID STIPULATIONS......................................................................................................................................... 277
2. DURATION OF LIABILITY ................................................................................................................................ 278
3. LIABILITY FOR ACTS OF OTHERS .................................................................................................................. 280
a) EMPLOYEES ................................................................................................................................................ 280
b) OTHER PASSENGERS AND STRANGERS .............................................................................................. 280
4. EXTENT OF LIABILITY FOR DAMAGES ......................................................................................................... 283
D. THE MONTREAL CONVENTION OF 1999 ......................................................................................................... 283
1. APPLICABILITY .................................................................................................................................................. 283
2. EXTENT OF LIABILITY OF AIR CARRIER ...................................................................................................... 285
a) DEATH OR INJURY OF PASSENGER ...................................................................................................... 285
b) LOST OR DELAYED BAGGAGE ............................................................................................................... 285
V. INTELLECTUAL PROPERTY CODE (R.A. No. 8293).............................................................................................. 288
A. PATENTS .................................................................................................................................................................. 288
1. PATENTABLE INVENTIONS ............................................................................................................................. 289
a) NOVELTY..................................................................................................................................................... 290
b) INVENTIVE STEP ....................................................................................................................................... 291
c) INDUSTRIAL APPLICABILITY ................................................................................................................ 291
2. NON-PATENTABLE INVENTIONS ................................................................................................................... 294
3. OWNERSHIP OF A PATENT ............................................................................................................................. 295
a) RIGHT OF A PATENT ................................................................................................................................ 295
b) FIRST-TO-FILE RULE ............................................................................................................................... 295
c) INVENTIONS CREATED PURSUANT TO A COMMISSION ................................................................. 295
d) RIGHT OF PRIORITY ................................................................................................................................ 296
4. GROUNDS FOR CANCELLATION OF A PATENT ........................................................................................... 298
5. REMEDY OF THE TRUE AND ACTUAL INVENTOR ..................................................................................... 298
6. RIGHTS CONFERRED BY A PATENT .............................................................................................................. 299
7. LIMITATIONS OF PATENT RIGHTS ............................................................................................................... 299
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a) PRIOR USER ............................................................................................................................................... 300
b) USE BY GOVERNMENT............................................................................................................................. 300
8. PATENT INFRINGEMENT ................................................................................................................................. 301
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a) TESTS IN PATENT INFRINGEMENT ...................................................................................................... 304
(1) LITERAL INFRINGEMENT................................................................................................................ 304
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(2) DOCTRINE OF EQUIVALENTS......................................................................................................... 304
b) DEFENSES IN ACTION FOR INFRINGEMENT ...................................................................................... 305
9. LICENSING............................................................................................................................................................306
a) VOLUNTARY ............................................................................................................................................... 306
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b) COMPULSORY............................................................................................................................................308
10. ASSIGNMENT AND TRANSMISSION OF RIGHTS....................................................................................... 311
B. TRADEMARKS.........................................................................................................................................................312
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1. MARKS vs. COLLECTIVE MARKS vs. TRADE NAMES ................................................................................. 312
2. ACQUISITION OF OWNERHSIP OF MARK ....................................................................................................314
3. ACQUISITION OF OWNERSHIP OF TRADE NAME ...................................................................................... 320
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4. NON-REGISTRABLE MARKS ............................................................................................................................ 321
5. TEST TO DETERMINE CONFUSING SIMILARITY BETWEEN MARKS ..................................................... 322
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a) DOMINANCY TEST .................................................................................................................................... 323
6. WELL-KNOWN MARKS .....................................................................................................................................324
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7. RIGHTS CONFERRED BY REGISTRATION .................................................................................................... 327
8. CANCELLATION OF REGISTRATION .............................................................................................................. 328
9. TRADEMARK INFRINGEMENT........................................................................................................................330
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10. UNFAIR COMPETITION .................................................................................................................................. 334
C. COPYRIGHT..............................................................................................................................................................338
1. BASIC PRINCIPLES (Sec. 172.2, 175, and 181 of the IPC).......................................................................... 338
2. COPYRIGHTABLE WORKS ............................................................................................................................... 339
a) ORIGINAL WORKS ............................................................................................................................................. 339
b) DERIVATIVE WORKS........................................................................................................................................ 339
3. NON-COPYRIGHTABLE WORKS ..................................................................................................................... 340
4. RIGHTS CONFERRED BY A COPYRIGHT ....................................................................................................... 342
5. OWNERSHIP OF A COPYRIGHT ...................................................................................................................... 346
6. LIMITATIONS ON COPYRIGHT ....................................................................................................................... 349
7. DOCTRINE OF FAIR USE ................................................................................................................................... 351
8. COPYRIGHT INFRINGEMENT .......................................................................................................................... 354
VI. ELECTRONIC COMMERCE ACT (R.A. No. 8792).................................................................................................. 360
A. LEGAL RECOGNITION OF ELECTRONIC DATA MESSAGES, DOCUMENTS, AND SIGNATURES ............. 360
B. PRESUMPTION RELATING TO ELECTRONIC SIGNATURES .......................................................................... 362
C. ADMISSIBILITY AND EVIDENTIAL WEIGHT OF ELECTRONIC DATA MESSAGE OR
ELECTRONIC DOCUMENT .................................................................................................................................. 362
D. OBLIGATION OF CONFIDENTIALITY ................................................................................................................. 363
VII. FOREIGN INVESTMENTS ACT (R.A. No. 7042, as amended by R.A. No. 11647) ......................................... 364
A. POLICY OF THE LAW (Sec. 1, R.A. No. 11647) .................................................................................................. 364
B. DEFINITION OF TERMS (Sec. 2, R.A. No. 11647) ............................................................................................. 364
1. FOREIGN INVESTMENT .................................................................................................................................... 365
2. DOING BUSINESS................................................................................................................................................ 365
3. EXPORT ENTERPRISE ....................................................................................................................................... 367
4. DOMESTIC MARKET ENTERPRISE ................................................................................................................ 367
C. REGISTRATION OF INVESTMENT OF NON-PHILIPPINE NATIONALS (Sec. 6, R.A. No. 11647)............. 368
D. FOREIGN INVESTMENTS IN EXPORT ENTERPRISES (Sec. 7, R.A. No. 11647).......................................... 368
E. FOREIGN INVESTMENTS IN DOMESTIC MARKET ENTERPRISES (Sec. 7, R.A. No. 7042) ...................... 369
AC No. 1001 F. FOREIGN INVESTMENT NEGATIVE LIST (Sec. 8, R.A. No. 11647)................................................................ 369
VIII. PUBLIC SERVICE ACT (C.A. 146, as amended by R.A. No. 11659) ................................................................ 371
A. CRITICAL INFRASTRUCTURE (Sec. 2(e), R.A. No. 11659) ............................................................................. 371
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B. FOREIGN STATE-OWNED ENTERPRISE (Sec. 2(g), R.A. No. 11659) .......................................................... 371
C. PUBLIC SERVICE AS PUBLIC UTILITY (Sec. 4, R.A. No. 11659) .................................................................... 371
D. UNLAWFUL ACTS (Sec. 9, R.A. No. 11659) ........................................................................................................ 372
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E. POWERS OF THE PRESIDENT TO SUSPEND OR PROHIBIT TRANSACTION OR INVESTMENT (Sec. 23,
R.A. No. 11659) ..................................................................................................................................................... 373
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F. INVESTMENTS BY AN ENTITY CONTROLLED BY OR ACTING ON BEHALF OF THE FOREIGN
GOVERNMENT, OR FOREIGN STATE-OWNED ENTERPRISES (Sec. 24, R.A. No. 11659) .....................373
G. RECIPROCITY CLAUSE (Sec. 25, R.A. No. 11659) ............................................................................................ 374
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A W
O L
N E
T E
A
I. BUSINESS ORGANIZATIONS
2. Onerous – Each of the parties aspires to
PART ONE: COMMERCIAL LAW procure for himself a benefit through the
giving of something;
3. Nominate – It has a special name or

I. BUSINESS ORGANIZATIONS designation in our law;
4. Consensual – Perfected by mere consent,

upon the express or implied agreement of
two or more persons;
A. PARTNERSHIPS
5. Commutative – The undertaking of each of
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the partners is considered as the equivalent
1. GENERAL PROVISIONS of that of the others;
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6. Principal – It does not depend for its
a) DEFINITION, ELEMENTS, AND
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existence or validity upon some other
CHARACTERISTICS
contracts;
Definition of Partnership
7. Preparatory – Because it is entered into as
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a means to an end, i.e. to engage in business
It is a contract whereby two or more persons bind
or specific venture for the realization of
themselves to contribute money, property, or
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profits with the view of dividing them
industry to a common fund, with the intention of
among the contracting parties; and
dividing the profits among themselves. (Art. 1767,
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New Civil Code)
8. Profit-oriented. (Art. 1770, NCC)
NOTE: Two or more persons may also form a
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NOTE: A partnership has a juridical personality
partnership for the exercise of a profession. (Ibid.)
separate and distinct from that each of the partners.
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(Art. 1768, NCC)
Essential Elements of Partnership
Typical Incidents of Partnership
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1. Agreement to contribute money, property,
or industry to a common fund (mutual
1. The partners share in profits and losses (Arts.
contribution to a common stock); and
1767, 1797-98, NCC)
2. Intention to divide the profits among the 2. The partnership has a juridical personality
contracting parties (joint interest in the separate and distinct from that of each of the
profits). (Jarantilla, Jr. v. Jarantilla,. G.R No. partners. Such juridical personality shall be
154486, 01 Dec. 2010) automatically acquired despite the failure to
register in the SEC; (Art. 1768, NCC)
Characteristics of Partnership
3. Partners have equal rights in the management
1. Bilateral – It is entered into by two or more and conduct of the partnership business; (NCC,
persons and the rights and obligations Art. 1803)
arising therefrom are always reciprocal; 4. Every partner is an agent of the partnership,
and entitled to bind the other partners by his
acts, for the purpose of its business. He may
1 U N I V E R S IT Y O F S A N T O T O M A S
FACULTY OF CIVI L LAW
COMMERCIAL LAW
also be liable for the entire partnership A: As a rule, NO. A partnership may be constituted
obligations; (Art. 1818, NCC) in any form. However, an exception is where
immovable property or real rights are contributed,
5. All partners are personally liable for the debts
in which case a public instrument shall be
of the partnership with their separate property
necessary. (Art. 1771, NCC)
except limited partners are not bound beyond
the amount of their investment; (Arts. 1816,
In addition, every contract of partnership having a
1822-24, 1843, NCC)
capital of P 3,000 or more, in money or property,
6. A fiduciary relation exists between the shall appear in a public instrument, which must be
partners; (Art. 1807, NCC) and recorded with the SEC. (Art. 1772, NCC)
7. On dissolution, the partnership is not b) RULES TO DETERMINE EXISTENCE
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terminated, but continues until the winding up
of partnership is completed. (Art. 1829, NCC) Rules to Determine Existence of Partnership
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NOTE: These incidents may be modified by 1. Except as provided by Art. 1825 of the NCC
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stipulation of the partners subject to the rights of (partnership by estoppel), persons who are not
third persons dealing with the partnership. partners as to each other are not partners as to
third persons;
Q: TRUE or FALSE. An oral partnership is valid
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(2009 BAR) 2. Co-ownership or co-possession does not of
itself establish a partnership, whether such co-
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A: TRUE. An oral contract of partnership is valid owners or co-possessors do or do not share any
even though not in writing. However, if it involves profits made by the use of the property;
contribution of an immovable property or a real
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right, an oral contract of partnership is void. In such 3. The sharing of gross returns does not of itself
a case, the contract of partnership to be valid, must establish a partnership, whether or not the
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be in a public instrument (Art. 1771, NCC), and the persons sharing them have a joint or common
inventory of said property signed by the parties right or interest in any property from which the
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must be attached to said public instrument. (Art. returns are derived;
1773, NCC; Litonjua, Jr. v. Litonjua, Sr., G.R. Nos.
166299-300, 13 Dec. 2005) The receipt by a person of a share of the profits
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4.
of a business is prima facie evidence that he is a
Essential Features of Partnership partner in the business, but no such inference
shall be drawn if such profits were received in
1. There must be a valid contract; payment: (D-W-A-I-C)
2. The parties (two or more persons) must a. As a Debt by installments or otherwise;
have legal capacity to enter into the
contract; b. As Wages of an employee or rent to a
3. There must be a mutual contribution of landlord;
money, property, or industry to a common
c. As an Annuity to a widow or
fund;
representative of a deceased partner;
4. The object must be lawful; and
5. The primary purpose must be to obtain d. As Interest on a loan, though the amount
profits and to divide the same among the of payment varies with the profits of the
parties. (De Leon, 2010) business;
e. As the Consideration for the sale of a

Q: Is a public instrument required to constitute
goodwill of a business or other property
a partnership?
U N I V E R S IT Y O F S A N T O T O M A S 2
2023 GOLDEN NOTES
by installments or otherwise. (Art. 1769, Fixing the Term of the Partnership Contract
NCC)
The partners may fix in their contract any term and
NOTE: In sub-paragraphs a–e, the profits in the they shall be bound to remain under such a relation
business are not shared as profits of a partner as a for the duration of the term.
partner, but in some other respects or for some
other purpose. Expiration of the Partnership Contract
Burden of Proving the Existence of a

The expiration of the term fixed, or the
Partnership
accomplishment of the particular undertaking
specified will cause the automatic dissolution of the
The existence of a partnership must be proved and
partnership.
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will not be presumed.
Partnership at Will
However, when a partnership is shown to exist, the
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presumption is that it continues in the absence of
One in which no fixed term is specified and is not
evidence to the contrary, and the burden of proof
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formed for a particular undertaking or venture
is on the person asserting its termination. (De
which may be terminated anytime by mutual
Leon, 2014)
agreement of the partners, or by the will of any one
partner alone; or one for a fixed term or particular
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NOTE: The use of the term “partner” in popular
undertaking which is continued by the partners
sense, or as a matter of business convenience, will
after the termination of such term or particular
not necessarily import an intention that a legal
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undertaking without express agreement. (De Leon,
partnership should result. But while the use of
2014)
“partnership” or “partners” in an alleged oral
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agreement claimed to have constituted
Termination or Dissolution of Partnership at
partnership is not conclusive that partnership did
Will
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not exist, non-use of such terms is entitled to
weight. Legal intention is the crux of partnership.
A partnership at will may be lawfully terminated or
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(De Leon, 2014)
dissolved at any time by the express will of all or any
of the partners.
c) PARTNERSHIP TERM
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The partner who wants the partnership dissolved
Partnership with a Fixed Term
must do so in good faith, not that the attendance of
bad faith can prevent the dissolution of the
It is one in which the term of its existence has been
partnership, but to avoid the liability for damages to
agreed upon by the partners either:
other partners.
1. Expressly – There is a definite period; or

Q: A, B, and C entered into a partnership to
2. Impliedly – A particular enterprise or
operate a restaurant business. When the
transaction is undertaken
restaurant had gone past break-even stage and
started to garner considerable profits, C died. A
The mere expectation that the business would be
and B continued the business without dissolving
successful and that the partners would be able to
the partnership. They in fact opened a branch of
recoup their investment is not sufficient to create a
the restaurant, incurring obligations in the
partnership for a term.
process. Creditors started demanding for the
payment of their obligations.
COMMERCIAL LAW
a. Who are liable for the settlement of the Liabilities in case of Estoppel
partnership’s obligations? Explain.
When Partnership is Liable
A: The two remaining partners, A and B, are liable.
When any partner dies and the business is If all actual partners consented to the
continued without any settlement of accounts as representation, then the liability of the person
between him or his estate, the surviving partners who represented himself to be a partner or who
are held liable for continuing the business despite consented to such representation and the actual
the death of C. (Arts. 1785(2), 1833 & 1841, NCC) partner is considered a partnership liability. (De
Leon, 2014)
b. What is/are the creditors’ recourse/s?
When Liability is PRO RATA
Explain. (2010 BAR)
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When there is no existing partnership and all
A: Creditors can file the appropriate actions. For those represented as partners consented to the
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instance, an action for the collection of sum of representation, then the liability of the person
money against the “partnership at will” and if there who represented himself to be a partner, and all
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are no sufficient funds, the creditors may go after who made and consented to such representation,
the private properties of A and B. (Art. 816, NCC) is joint or pro-rata. (De Leon, 2014)
Creditors may also sue the estate of C. The estate is
When Liability is SEPARATE
not excused from the liabilities of the partnership
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even if C is dead already but only up to the time that When there is no existing partnership and not all
he remained a partner. (Arts. 1829 and 1835(2), NCC, but only some of those represented as partners
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Testate Estate of Mota v. Serra, G.R. No. L-22825, 14 consented to the representation, or none of the
Feb. 1925) However, the liability of C’s individual partnership in an existing partnership consented
property shall be subject first to the payment of his to such representation, then the liability will be
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separate debts. (Art. 1835, NCC) separate. (De Leon, 2014)
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d) PARTNERSHIP BY ESTOPPEL e) PARTNERSHIP AS DISTINGUSHED FROM
JOINT VENTURE
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It is one who, by words or conduct, does any of the
following: Partnership v. Joint Venture (2015 BAR)
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1. Directly represents himself to anyone as a PARTNERSHIP JOINT VENTURE
partner in an existing partnership or in a
Coverage
non-existing partnership; or
Contemplates the Ordinarily limited to a
undertaking of a single transaction and
2. Indirectly represents himself by consenting
general and continuous not intended to
to another representing him as a partner in
business of a particular pursue a continuous
an existing partnership or in a non-existing
kind. business.
partnership.
Firm name
Required to operate
Elements before a Partner can be held Liable on Has no firm name.
under a firm name.
the Ground of Estoppel
Transfer of property
1. Defendant represented himself as partner The property used
The property used
or is represented by others as such and did becomes the property
remains undivided
not deny/refute such representation; of the business entity
property of its
2. Plaintiff relied on such representation; and and hence of all the
contributor.
3. Statement of defendant is not refuted. Partners.
2023 GOLDEN NOTES
Power In a professional partnership, it is the individual

partners who are deemed engaged in the practice
A partner acting in
of profession and not the partnership. Thus, they
pursuance of the firm
are responsible for their own acts.
business, binds not only None of the co-
himself as a principal, venturers can bind the
Prohibition in the Formation of a Professional
but as their agent as joint venture or his co-
Partnership
well, also the venturers.
partnership and the Partnership between lawyers and members of
partners. other profession or non-professional persons
should not be formed or permitted where any
Firm name and liabilities
part of the partnership’s employment consists of
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A partnership acquires the practice of law. (Canon 9, Code of Professional
personality after Responsibility)
following the
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requisites required by g) MANAGEMENT
law.
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A joint venture has no
Modes of Appointment of a Manager
legal personality.
NOTE: SEC registration
is not required before a APPOINTMENT
APPOINTMENT
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partnership acquires THROUGH THE
OTHER THAN IN THE
legal personality. (Art. ARTICLES OF
ARTICLES
1768, NCC)
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PARTNERSHIP
As to the revocability of the power to act
Power to act is
Joint Venture
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irrevocable without
just or lawful cause.
It is an association of persons or companies jointly
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undertaking some commercial enterprise.
NOTE: Vote required for
Generally, all contribute assets and share risks. It
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removal of manager:
requires a community of interest in the Power to act is
performance of the subject matter, a right to direct revocable anytime, with
1. For just cause –
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and govern the policy in connection therewith, and or without cause
Vote of the
a duty which may be altered by agreement to share (should be done by the
controlling
both in profits and losses. controlling interest).
partners
(controlling
NOTE: Sec. 36(h) of R.A. 11232 or the Revised
financial interest).
Corporation Code of the Philippines provides for
the power of a corporation, “to enter into a
2. Without just cause
partnership, joint venture, merger, consolidation or
- Unanimous vote.
other commercial agreement with natural or
As to the extent of power
juridical persons.”
1. If he acts in good
faith, he may do all As long as he is a
f) PROFESSIONAL PARTNERSHIP
acts of manager, he can
administration perform all acts of
It is a partnership formed by persons for the sole
(despite administration (if
purpose of exercising their common profession,
opposition of his others oppose, he can
no part of the income of which is derived from
partners). be removed).
engaging in any trade or business.
COMMERCIAL LAW
2. If he acts in bad a) RIGHTS AND OBLIGATIONS OF THE

faith, he cannot. PARTNERSHIP
Scope of the Power of a Managing Partner Rights and Obligations of the Partnership
(R-O-AR)
As a rule, a partner appointed as manager has all the
1. Refund the amounts disbursed by partner on
powers of a general agent as well as all the
behalf of the partnership plus corresponding
incidental powers necessary to carry out the object
interest from the time the expenses are made,
of the partnership in the transaction of its business.
not from the date of demand (e.g. loans and
The exception is when the powers of the manager
advances made by a partner to the partnership
are specifically restricted. (De Leon, 2010)
aside from capital contribution);
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2. RIGHTS AND OBLIGATIONS OF PARTNERSHIP 2. Answer for Obligations the partner may have
AND PARTNERS contracted in good faith in the interest of the
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partnership business; and
Industrial Partner vs. Capitalist Partner
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3. Answer for Risks in consequence of its
INDUSTRIAL CAPITALIST management. (Art. 1796, NCC)
PARTNER PARTNER
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Prohibition b) OBLIGATIONS OF PARTNERS AMONG
THEMSELVES
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Relative: Cannot
engage in business Withdrawal or Disposal of Money or Property by
Absolute: Cannot
(with same kind of a Contributing Partner
engage in business for
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business with the
himself unless the
partnership) for his Money or property contributed by a partner cannot
partnership expressly
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own account, unless be withdrawn or disposed of by the contributing
permits him to do so.
there is a stipulation to partner without the consent or approval of the
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the contrary. partnership or of the other partners because the
money or property contributed by a partner
Remedy becomes the property of the partnership. (De Leon,
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2010)
Capitalist partners
may: Capitalist partner, Q: Who bears the risk of loss of things
1. Exclude him from who violated shall: contributed?
the firm; or 1. Bring to the
common fund any A:
2. Avail themselves profits accruing to PARTNERS PARTNERSHIP
of the benefits him from said Things contributed are
The risk of specific and
which he may transaction; and fungible, or cannot be
determinate things,
have obtained; kept without
which are not fungible,
2. Personally bears deteriorating, or if they
contributed to the
3. Damages, in all losses. (Art. were contributed to be
partnership so that
either case. (Art. 1808, NCC) (2001 sold.
only their use and
1789, NCC) (2001 BAR) fruits may be for the
BAR) In absence of
common benefit, it
stipulation, the risk of
shall be borne by the
things brought and
2023 GOLDEN NOTES
partner who owns appraised in the 4. To pay the agreed or legal interest, if the
them inventory, it shall also partner fails to pay his contribution on time
be borne by the or in case he takes any amount from the
partnership, and in common fund and converts it to his own
such case the claim use.
shall be limited to the
value at which they Rule regarding Obligation to Contribute to
were appraised. Partnership Capital
(Art, 1796, NCC)
Unless there is a stipulation to the contrary, the
Effect if a Partner Fails to Contribute the partners shall contribute equal shares to the capital
Property which he Promised to Deliver to the of the partnership. It is not applicable to an
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Partnership industrial partner unless, besides his services, he
has contributed capital pursuant to an agreement.
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1. Partner becomes ipso jure a debtor of the (Art. 1790, NCC)
partnership even in the absence of any
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demand (Art. 1786, NCC); and Liability of a Capitalist Partner to Contribute
Additional Capital
2. Remedy of the other partner is not
rescission but specific performance with GR: A capitalist partner is not bound to contribute
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damages and interest from defaulting to the partnership more than what he agreed to
partner from the time he should have contribute.
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complied with his obligation.
XPNs:
When the capital or a part hereof which a partner is 1. In case of imminent loss of the business; and
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bound to contribute consists of goods, their 2. There is no agreement to the contrary.
appraisal must be made in the manner prescribed in
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the contract of partnership, and in the absence of He is under obligation to contribute an additional
stipulation, it shall be current prices, the subsequent share to save the venture. If he refuses to contribute,
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changes thereof being for the account of the he shall be obliged to sell his interest to the other
partnership. (Art. 1787, NCC) partners.
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Rules regarding Contribution of Money to the Requisites before Capitalist Partners are
Partnership Compelled to Contribute Additional Capital
1. To contribute on the date fixed the amount 1. Imminent loss of the business of the
the partner has undertaken to contribute to partnership;
the partnership;
2. Majority of the capitalist partners are of the
2. To reimburse any amount the partner may opinion that an additional contribution to
have taken from the partnership coffers the common fund would save the business;
and converted to his own use;
3. Capitalist partner refuses deliberately to
3. To indemnify the partnership for the contribute (not due to financial inability);
damages caused to it by delay in the and
contribution or conversion of any sum for
the partner’s personal benefit; and 4. There is no agreement to the contrary.
COMMERCIAL LAW
NOTE: The refusal of the partner to contribute his Obligation of a Partner who Receives Share of
additional share reflects his lack of interest in the Partnership Credit
continuance of the partnership. (De Leon, 2010) It
shall be obliged to sell his interest to the other To bring to the partnership capital what he has
partners except if there is an agreement to the received even though he may have given receipt for
contrary. (Art. 1791, NCC) his share only.
It is to be noted that the industrial partner is Requisites (Re-No-I)

exempted from the requirement to contribute an
additional share. Having contributed his entire 1. A partner has Received in whole or in part,
industry, he can do nothing further. (De Leon, 2010) his share of the partnership credit;
2. Other partners have Not collected their
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Obligations of Managing Partners who Collect shares; and
his Personal Receivable from a Person who also 3. Partnership debtor has become Insolvent.
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Owes the Partnership
Liability of a Person who has not Directly
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1. Apply sum collected to 2 credits in Transacted on behalf of an Unincorporated
proportion to their amounts; and Association for a Contract Entered into by such
2. If he received it for the account of Association
partnership, the whole sum shall be applied
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to partnership credit. The liability for a contract entered into on behalf of
an unincorporated association or ostensible
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Requisites corporation may lie in a person who may not have
directly transacted on its behalf, but reaped benefits
At least 2 debts, one where the collecting partner is from that contract. (Lim Tong Lim v. Philippine
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the creditor and the other, where the partnership is Fishing Gear Industries Inc., G.R. No. 136448, 03 Nov.
the creditor: 1999)
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1. Both debts are demandable; and
2. Partner who collects is authorized to Q: Joe and Rudy formed a partnership to operate
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manage and actually manages the a car repair shop in Quezon City. Joe provided
partnership. the capital while Rudy contributed his labor and
industry. On one side of their shop, Joe opened
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NOTE: The debtor is given the right to prefer and operated a coffee shop, while on the other
payment of the credit of the partner if it should be side, Rudy put up a car accessories store. May
more onerous to him in accordance with his right to they engage in such separate businesses? Why?
application of payment. (De Leon, 2014) (Art. 1252, (2001 BAR)
NCC)
A: Joe, the capitalist partner, may engage in the
Reason for Applying Payment to Partnership restaurant business because it is not the same kind
Credit of business the partnership is engaged in. On the
other hand, Rudy may not engage in any other
The law safeguards the interests of the partnership business unless their partnership expressly permits
by preventing the possibility of their being him to do so because as an industrial partner, he
subordinated by the managing partner to his own must devote his full time to the business of the
interest to the prejudice of the other partners. (De partnership. (Art. 1789, NCC)
Leon, 2010)
2023 GOLDEN NOTES
Rule with regard to the Obligation of a Partner primarily rests on the managing or active partner or
as to Damages Suffered by the Partnership the particular partner given record-keeping duties.
through his Fault (Art. 1805, NCC, De Leon, 2014)
GR: Every partner is responsible to the partnership Duty of the Partners with respect to Information
for damages suffered by it through his fault and he Affecting the Partnership
cannot compensate them with the profits and
benefits which he may have earned for the Partners shall render on demand true and full
partnership by his industry. information of all things affecting the partnership
to:
XPN: The courts may equitably lessen this 1. Any partner; or
responsibility if through the partner’s extraordinary 2. Legal representative of any deceased or
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efforts in other activities of the partnership, unusual any partner under legal disability. (Art.
profit has been realized. (Art. 1794, NCC) 1806, NCC)
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Set-off of Damages caused by a Partner NOTE: Under the same principle of mutual trust and
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confidence among partners, there must be no
GR: The damages caused by a partner to the concealment between them in all matters affecting
partnership cannot be offset by the profits of the partnership. The information, to be sure, must
benefits which he may have earned for the be used only for a partnership purpose. (De Leon,
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partnership by his industry. 2014)
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Ratio: The partner has the obligation to secure Accountability of Partners to Each Other as
benefits for the partnership. Hence, the profits Fiduciary
which he may have earned pertain as a matter of law
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or right, to the partnership Every partner must account to the partnership for
any benefit, and hold as trustee for it any profits
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XPN: If unusual profits are realized through the derived by him without the consent of the other
extraordinary efforts of the partner at fault, the partners from any transaction connected with the
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courts may equitably mitigate or lessen his liability formation, conduct, or liquidation of the
for damages. This rule rests on equity. partnership or from any use by him of its property.
Note that even in this case, the partner at fault is not (Art. 1807, NCC)
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allowed to compensate such damages with the
profits earned. The law does not specify as to when Duty of a Partner to Act with Utmost Good Faith
profits may be considered “unusual.” towards Co-partners Continues even after
Dissolution
Duty of the Partners with respect to Keeping the
Partnership Books The duty of a partner to act with utmost good faith
towards his co-partners continues throughout the
The partnership books shall be kept, subject to any entire life of the partnership even after dissolution
agreement between partners, at the principal place for whatever reason or whatever means, until the
of business of the partnership. (Art. 1805, NCC) relationship is terminated, i.e., the winding up of
partnership affairs is completed. (De Leon, 2014)
Duty to Keep Partnership Book belongs to Failure to disclose facts, when there is a duty to
Managing or Active Partner reveal them, as when parties are bound by
confidential relations, constitutes fraud. (Art. 1339,
The duty to keep true and correct books showing NCC)
the firm’s accounts, such books being at all times
open to inspection of all members of the firm,
COMMERCIAL LAW
Rights of Partners partnership cannot be doubted. An example under
No. (4) of Art. 1809 is where a partner has been
1. Right to reimbursement for amounts advanced assigned abroad for a long period of time in
to the partnership and to indemnification for connection with the partnership business and the
risks in consequence of management; (Art. partnership books during such period being in the
1796, NCC) possession of the other partners.
2. Right on the distribution of profits and losses; Partners’ Inspection Rights

(Art. 1797, NCC)
The partners’ inspection rights are not absolute. He
3. Right to associate another person with him in can be restrained from using the information
his share without the consent of the other gathered for other than partnership purpose.
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partners; (Art. 1804, NCC)
“Any reasonable hour”
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NOTE: Such partnership formed between a
member of a partnership and a third person for The rights of the partners with respect to
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a division of the profits coming to him from the partnership books can be exercised at “any
partnership enterprise is termed reasonable hour” (Art. 1805, NCC). This phrase has
subpartnership. (De Leon, 2010) been interpreted to mean reasonable hours on
business days throughout the year and not merely
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4. Right to free access and to inspect and copy at during some arbitrary period of a few days chosen
any reasonable hour the partnership books; by the managing partners. (Pardo v. The Hercules
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(Art. 1805, NCC) Lumber Co. Inc., G.R. No. L-22442, 01 Aug. 1924)
5. Right to formal account as to partnership Action for Accounting
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affairs:
a. If he is wrongfully excluded from the An action for accounting, asking that the assets of
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partnership business or possession of the partnership be accounted for, sold and
its property by his co-partners; distributed according to the agreement of the
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b. If the right exist under the terms of any partners is a personal action which under the Rules
agreement; of Court, may be commenced and tried where the
c. Duty to account as provided by Art. defendant resides or may be found or where the
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1807; and plaintiffs reside, at the election of the latter.
d. Whenever there are circumstances
render it just and reasonable; NOTE: The fact that some of the assets of the
partnership are real property does not materially
6. Right to have the partnership dissolved; and change the nature of the action. It is an action in
7. Property rights of a partner. (Art. 1810, NCC) personam because it is an action against a person for
the performance of a personal duty on his part, and
Rule as to Formal Accounting during the not an action in rem where the action is against the
Existence of the Partnership thing itself. It is only incidental that part of the
assets of the partnership subject to accounting or
GR: During the existence of the partnership, a under liquidation happen to be real property.
partner is not entitled to a formal account of (Emnace v. CA, G.R. No. 126334, 23 Nov. 2001)
partnership affairs.
XPN: However, in special and unusual situations

enumerated under Art. 1809, the justification for a
formal accounting even before dissolution of the
2023 GOLDEN NOTES
Rules regarding Distribution of Profits and Related Rights to the Property Rights of a
Losses Partner
1. Distribution of profits: 1. Right to the partnership and to

indemnification for risks in consequence of
The partners share in the profits according to their management; (Art. 1796, NCC)
agreement.
2. The right of access and inspection of
In the absence of such: partnership books;(Art. 1805, NCC)
a. Capitalist partner – in proportion to his
contribution. 3. The right to true and full information of all
b. Industrial partner – what is just and things affecting the partnership; (Art. 1806,
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equitable under the circumstances. NCC)
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NOTE: If the industrial partner has 4. The right to a formal account of partnership
contributed capital other than his services, affairs under certain circumstances; and
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he shall also receive a share in the profits in (Art. 1809, NCC)
proportion to his capital.
5. The right to have the partnership dissolved
2. Distribution of losses: also under certain conditions. (De Leon,
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2010; Arts. 1830 and 1831, NCC)
The partners share in the losses according to their
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agreement; Nature of a Partner's Right in Specific
Partnership Property
In the absence of such, according to their agreement
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as to profits. ; and 1. Equal right to possession for partnership
purposes;
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In the absence of profit agreement, in proportion to
his capital contribution. 2. Right is not assignable, except in
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connection with assignment of rights of all
Rule regarding a Stipulation excluding a Partner partners in the same property;
in the Sharing of Profits and Losses
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3. Right is limited to his share of what remains
GR: Such stipulation is void. (Art. 1799, NCC) after partnership debts have been paid;
XPN: Industrial partner is not liable for losses. (Art. 4. Right is not subject to attachment or
1797(2), NCC) However, he is not exempted from execution except on a claim against the
liability insofar as third persons are concerned. partnership; and
NOTE: Loss is different from liability. 5. Right is not subject to legal support
Property Rights of a Partner
1. Right in specific partnership property;

2. Interest in the partnership (share in the
profits and surplus); and
3. Right to participate in the management.
(Art. 1803, NCC)
COMMERCIAL LAW
Effects of Assignment of Partner’s Whole c) OBLIGATIONS OF PARTNERSHIP/PARTNERS
Interest in the Partnership TO THIRD PERSONS
1. Rights withheld from the assignee: The following are obligations of

partnership/partners to third persons: (2010,
Such assignment does not grant the assignee the 1993 BAR)
right to:
a. To interfere in the management; 1. Every partnership shall operate under a firm
b. To require any information or account; and name. (Art. 1815, NCC)
c. To inspect partnership books.
2. All partners shall be liable for contractual
2. Rights of assignee on partner’s interest: obligations of the partnership with their
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property, after all partnership assets have been
a. To receive in accordance with his contract exhausted:
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the profits accruing to the assigning
partner; a. Pro rata; and
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b. To avail himself of the usual remedies b. Subsidiary. (Art. 1816, NCC)
provided by law in the event of fraud in the
management; XPN: All partners shall be liable solidarily with
c. To receive the assignor’s interest in case of the partnership for everything chargeable to
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dissolution; and the partnership under Art. 1822 and 1823. (Art.
d. To require an account of partnership affairs, 1824, NCC)
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but only in case the partnership is
dissolved, and such account shall cover the NOTE: Any stipulation against the liability laid
period from the date only of the last down in Art. 1816 shall be void except as among
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account agreed to by all the partners. the partners. (Art. 1817, NCC)
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Q: Rosa received from Jois money, with the 3. Partner as an agent of the partnership; (Art.
express obligation to act as Jois’ agent in 1818, NCC) (1994 BAR)
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purchasing local cigarettes, to resell them to
several stores, and to give Jois the commission 4. Conveyance of real property belonging to the
corresponding to the profits received. However, partnership;(Art. 1819, NCC)
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Rosa misappropriated and converted the said
amount due to Jois to her personal use and 5. Admission or representation made by any
benefit. Jois filed a case of estafa against Rosa. partner concerning partnership affairs within
Can Rosa deny liability on the ground that a the scope of his authority is evidence against
partnership was formed between her and Rosa? the partnership; (Art. 1820, NCC)
A: NO. Even assuming that a contract of partnership 6. Notice to partner of any matter relating to
was indeed entered into by and between the parties, partnership affairs operates as notice to
when a partner receives any money or property for partnership except in case of fraud:
a specific purpose (such as that obtaining in the
instant case) and he later misappropriates the same, a. Knowledge of partner acting in the
he is guilty of estafa. (Liwanag v. CA, G.R. No. 114398, particular matter acquired while a
24 Oct. 1997) partner;
b. Knowledge of the partner acting in the

particular matter then present to his
mind;
2023 GOLDEN NOTES
c. Knowledge of any other partner who A: NO. As Judge, I would not dismiss the complaint
reasonably could and should have against A because A is still liable as a general partner
communicated it to the acting partner. for his pro rata share of 1/3. (Art. 1816) Dissolution
(Art. 1821, NCC) of a partnership caused by the termination of the
particular undertaking specified in the agreement
7. Partners and the partnership are solidarily does not extinguish obligations, which must be
liable to 3rd persons for the partner's tort or liquidated during the “winding up" of the
breach of trust; (Arts. 1822-24, NCC) partnership affairs. (Par. 1-a, Art. 1830, Art. 1829,
NCC)
8. Liability of incoming partner is limited to:
Importance of having a Firm Name
a. His share in the partnership property
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for existing obligations; and A partnership must have a firm name under which
b. His separate property for subsequent it will operate. It is necessary to distinguish the
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obligations. (Art. 1826, NCC) partnership which has a distinct and separate
juridical personality from the individuals
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9. Creditors of partnership are preferred in composing the partnership and from other
partnership property & may attach partner's partnerships and entities. (De Leon, 2010)
share in partnership assets. (Art. 1827, NCC)
Liability for the Inclusion of Name in the Firm
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NOTE: On solidary liability, Art. 1816 should be Name
construed together with Art. 1824 (in connection
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with Arts. 1822 & 1823). While the liability of the Persons who, not being partners, include their
partners is merely joint in transactions entered into names in the firm name do not acquire the rights of
by the partnership, a third person who transacted a partner but under Art. 1815, they shall be subject
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with said partnership may hold the partners to the liability of a partner insofar as third persons
solidarily liable for the whole obligation if the case without notice are concerned. (Art. 1816, NCC; De
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of the third person falls under Arts. 1822 and 1823. Leon, 2010)
(Muñasque v. CA, G.R. No. L-39780, 11 Nov. 1985)
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Remedies Available to the Creditors of a Partner
Q: A, B and C formed a partnership for the
purpose of contracting with the Government in 1. Separate or individual creditors should first
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the construction of one of its bridges. On June 30, secure a judgment on their credit; and
1992, after completion of the project, the bridge
was turned over by the partners to the 2. Apply to the proper court for a charging
Government. On 30 Aug. 1992, D, a supplier of order subjecting the interest of the debtor-
materials used in the project sued A for partner in the partnership for the payment
collection of the indebtedness to him. A moved of the unsatisfied amount of the judgment
to dismiss the complaint against him on the debt with interest thereon. (De Leon, 2014)
ground that it was the ABC partnership that is
liable for the debt. D replied that ABC NOTE: The court may resort to other courses of
partnership was dissolved upon completion of action provided in Art. 1814 of the NCC, (i.e.,
the project for which purpose the partnership appointment of receiver, sale of the interest, etc.) if
was formed. Will you dismiss the complaint the judgment debt remains unsatisfied,
against A if you were the judge? (1993 BAR) notwithstanding the issuance of charging order. (De
Leon, 2014)
COMMERCIAL LAW
Effects of the Acts of Partners Acting as an Agent 5. Entering into a
of the Partnership compromise
concerning a
ACTS OF A PARTNER EFFECT partnership claim
With binding effect or liability;
except:
1. When the partner 6. Submitting
so acting has in partnership claim
fact no authority or liability to
to act for the arbitration; and
Acts for apparently partnership in the
carrying on in the particular matter, 7. Renouncing claim
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unusual way the and of partnership.
business of the Partnership is not liable
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partnership. 2. The person with to third persons having
Acts in contravention
whom he is actual or presumptive
of a restriction or
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dealing has knowledge of the
authority.
knowledge of the restriction. (Art.
fact that he has no 1818(4), NCC)
such authority.
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(Art. 1818(1), NCC) Effect of Conveyance of Real Property
Do not bind
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Acts not in the partnership unless TITLE OF
EFFECT
ordinary course of authorized by other CONVEYANCE
business. partners. (Art. 1818, Conveyance passes
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NCC) title, but partnership
Acts of strict can recover unless:
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dominion or
ownership: 1.
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a. Conveyance
1. Assigning was done in
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partnership the usual way
GR: One or more, but
property in trust of business;
less than all the
for creditors; and
partners have no
authority. Title in the
2. Disposing of b. The partner so
partnership’s name;
goodwill of acting has the
XPNs: Conveyance in
business; authority to
1. Authorized by the partnership name.
act for the
other partners; or
3. Doing an act partnership;
2. Partners have
which would or
abandoned the
make it
business. (Art. 1818
impossible to 2. The property which
(3), NCC)
carry on the has been conveyed by
ordinary business the grantee or a person
of partnership; claiming through such
grantee to a holder for
4. Confessing a value without
judgment; knowledge that the
2023 GOLDEN NOTES
partner, in making the 3. DISSOLUTION AND WINDING UP

conveyance, has
exceeded his authority.
DISSOLUTION OF PARTNERSHIP
Conveyance does not

Final stages of partnership
pass title but only
equitable interest,
1. Dissolution;
provided:
2. Winding up; and
a. Conveyance
3. Termination
was done in
Title in the the usual way
Dissolution, Winding-up, and Termination
partnership’s name; of business; or
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Conveyance in
DISSOLUTION WINDING- UP TERMINATION
partner’s name b. The partner so
As to Definition
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acting has the
authority to
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act for the A change in
partnership. the relation of
(De Leon, partners Settling the
It signifies the
2014) caused by any partnership
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end of the
partner business or
partnership
ceasing to be affairs after
life.
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associated in dissolution
carrying on
Conveyance will only
business.
pass equitable interest,
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provided:
Title in the name of 1 a. The act is one As to When It Occurs
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or more or all within the
partners or 3rd authority of
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person in trust for the partner; It is that point
partnership; and in time when
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Conveyance executed the partners. It takes place
in partnership name b. Conveyance Cease to carry after both
or in the name of the was done in on the dissolution
It is the final
partners the usual way business and winding
step after
of the together. It up have
dissolution in
business. (De represents the occurred.
the
Leon, 2014) demise of a Point in time
termination of
partnership. when all
the
Thus, any time partnership
partnership.
a partner affairs are
leaves the wound up or
Title in the names of Conveyance will pass
business, the completed;
all the partners.; all the rights in such
partnership is
Conveyance executed property. (De Leon,
dissolved.
by all the partners 2014)
COMMERCIAL LAW
Causes of Dissolution c. A partner has been guilty of such
conduct as tends to affect prejudicially
1. Without violating the agreement: the carrying on of business;
a. Termination of the definite term or
specific undertaking; d. A partner willfully or persistently
commits a breach of the partnership
b. Express will of any partner in good faith, agreement;
when there is no definite tern and no
specified undertaking; e. The business of the partnership can
only be carried on at a loss; or
c. Express will of all partners (except those
who have assigned their interests or f. Other circumstances rendering a
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suffered them to be charged for their dissolution equitable. (Art. 1831, NCC)
separate debts) either before or after the
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termination pf any specified term or Effects of Dissolution
particular undertaking; and
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1. Partnership is not terminated;
d. Expulsion of any partner in good faith of a 2. Partnership continues for a limited purpose;
member. and
3. Transaction of new business is prohibited. (De
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2. Violating the agreement; Leon, 2005)
3. Unlawfulness of the business;
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As to previous obligations, the dissolution of
4. Loss; partnership does not mean that the partners can
a. Specific thing promised as contribution is evade previous obligations entered into. (Testate of
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lost or perished before delivery; or Motta v. Serra, G.R. No. L-22825, 14 Feb. 1925)
b. Loss of a specific thing contributed before
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or after delivery, if only the use of such is As to new obligations, the dissolution spares the
contributed. former partners from new obligations entered into
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by the partnership without their consent, implied or
NOTE: The partnership shall not be dissolved express, unless the obligations are essential for the
by the loss of the thing when it occurs after the winding up of partnership affairs. (Ibid.)
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partnership has acquired the ownership
thereof. NOTE: The dissolution of a partnership must not be
understood in the absolute and strict sense so that
5. Death of any of the partners; at the termination of the object for which it was
6. Insolvency of any partner or of the partnership; created the partnership is extinguished, pending the
7. Civil interdiction of any partner; and winding up of some incidents and obligations of the
partnership, but in such case, the partnership will be
8. By decree of court under Art. 1831; (Art. 1830, reputed as existing until the juridical relations
NCC) arising out of the contract are dissolved. (Testate of
a. A partner has been declared insane or Motta v. Serra, G.R. No. L-22825, 14 Feb. 1925)
of unsound mind;
Dissolution does not automatically result in the
b. A partner becomes in any other way termination of the legal personality of the
incapable of performing his part of the partnership, nor the relations of the partners among
partnership contract; themselves who remain as co-partners until the
partnership is terminated. (De Leon, 2005)
2023 GOLDEN NOTES
Effect of Dissolution on the Authority of a Liability of a Partner where the Dissolution is
Partner (2010 BAR) caused by the Act, Death or Insolvency of a
Partner
GR: The partnership ceases to be a going concern.
GR: Each partner is liable to his co-partners for his
XPN: The partner’s power of representation is share of any liability created by any partner for the
confined only to acts incident to winding up or partnership, as if the partnership had not been
completing transactions begun but not then dissolved.
finished. (Art. 1832, NCC)
XPNs: Partners shall not be liable when: (2010
NOTE: Subject to the qualifications set forth in BAR)
Articles 1833 and 1834 in relation to Article 1832: 1. The dissolution, being by act of any partner,
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In so far as the partners themselves are concerned– the partner acting for the partnership had
the authority of any partner to bind the partnership knowledge of the dissolution; or
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by a new contract is immediately terminated when
the dissolution is not by the act, insolvency, or death 2. The dissolution, being by the death or
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of a partner. insolvency of a partner, the partner acting
for the partnership had knowledge or
When the dissolution is by the act, insolvency, or notice of the death or insolvency. (Art. 1833,
death, the termination of authority depends upon NCC)
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whether or not the partner had knowledge or notice
of dissolution. (Art. 1833, NCC) Q: After the dissolution of a partnership, can a
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partner still bind the partnership?
Q: The articles of co-partnership provide that in
case of death of one partner, the partnership A: GR: A partner continues to bind partnership even
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shall not be dissolved but shall be continued by after dissolution in the following cases:
the deceased partner’s heirs. When H, a partner,
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died, his wife, W, took over the management of 1. Transactions to wind up partnership affairs or
some of the real properties with permission of to complete transactions unfinished at
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the surviving partner, X, but her name was not dissolution; or
included in the partnership name. She
eventually sold these real properties after a few 2. Transactions which would bind partnership if
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years. X now claims that W did not have the dissolution had not taken place, provided the
authority to manage and sell those properties as other party/obligee:
she was not a partner. Is the sale valid? a. Had extended credit to partnership
prior to dissolution; and had no
A: YES. The widow was not a mere agent, because knowledge/notice of dissolution; or
she had become a partner upon her husband's
death, as expressly provided by the articles of co- b. Did not extend credit to partnership;
partnership, and by authorizing the widow to Had known partnership prior to
manage partnership property, X recognized her as a dissolution; AND
general partner with authority to administer and
alienate partnership property. It is immaterial that c. Had no knowledge/notice of
W's name was not included in the firm name, since dissolution/fact of dissolution not
no conversion of status is involved, and the articles advertised in a newspaper of general
of co-partnership expressly contemplated the circulation in the place where
admission of the partner's heirs into the partnership is regularly carried on.
partnership. (Goquiolay v. Sycip, G.R. No. L-11840, 26 (Par 1, Nos. 1 &2, Art. 1834, NCC)
July 1960)
COMMERCIAL LAW
XPNs: Partner cannot bind the partnership 2. Those to limited partners in respect to their
anymore after dissolution: share of the profits and other compensation by
1. Where dissolution is due to unlawfulness to way of income on their contributions;
carry on business;
2. Where partner has become insolvent; 3. Those to limited partners in respect to the
3. Act is not appropriate for winding up or for capital of their contributions;
completing unfinished transactions;
4. Those to general partners other than for capital
4. Partner is unauthorized to wind up partnership and profits;
affairs, except by transaction with one who: 5. Those to general partners in respect to profits;
a. Had extended credit to partnership prior and
to dissolution; AND had no knowledge or 6. Those to general partners in respect to capital.
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notice of dissolution; or (Art. 1863, NCC)
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b. Did not extend credit to partnership prior NOTE: Subject to any statement in the certificate or
to dissolution; or to subsequent agreement, limited partners share in
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the partnership assets in respect to their claims for
c. Had known partnership prior to capital, and in respect to their claims for profits or
dissolution; AND had no for compensation by way of income on their
knowledge/notice of dissolution/fact of contribution respectively, in proportion to the
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dissolution not advertised in a respective amounts of such claims. (Art. 1863, NCC)
newspaper of general circulation in the
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place where partnership is regularly WINDING UP OF PARTNERSHIP
carried on (Art. 1834(3), NCC); or
It is during this time after dissolution that
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5. Completely new transactions which would bind partnership business or affairs are being settled. (De
the partnership if dissolution had not taken Leon, 2005)
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place with third persons in bad faith.
Ways of Winding Up
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Liability of the Estate of a Deceased Partner
The winding up of the dissolved partnership may be
In accordance with Article 1816, the individual done either:
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property of a deceased partner shall be liable for all 1. Judicially, under the control and direction
obligations of the partnership incurred while he was of the proper court upon cause shown by
a partner. Note that the individual creditors of the any partner, his legal representative, or his
deceased partner are to be preferred over assignee; or
partnership creditors with respect to the separate
property of said deceased partner. (De Leon, 2010) 2. Extrajudicially, by the partners
themselves without intervention of the
Order of Priority in the Distribution of Assets court. (De Leon, 2014)
during the Dissolution of a Limited Partnership
Action for Liquidation
In setting accounts after dissolution, the liabilities of
the partnership shall be entitled to payment in the An action for the liquidation of a partnership is a
following order: personal one; hence, it may be brought in the place
1. Those to creditors, in the order of priority as of residence of either the plaintiff or the defendant.
provided by law, except those to limited (De Leon, 2014)
partners on account of their contributions, and
to general partners;
2023 GOLDEN NOTES
Persons Authorized to Wind Up b. Those to limited partners in respect to their
share of the profits and other compensation
1. Partners designated by the agreement; by way of income on their contributions;
2. In the absence of such, all partners who
have not wrongfully dissolved the c. Those to limited partners in respect to the
partnership; and, capital of their contributions.
3. Legal representative of last surviving
partner who is not insolvent. (De Leon, d. Those to general partners other than for
2014) capital and profits;
NOTE: The court may, in its discretion, after e. Those to general partners in respect to
considering all the facts and circumstances of the profits; and
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particular case, appoint a receiver to wind up the f. Those to general partners in respect to
partnership affairs where such step is shown to be capital. (Art. 1863, NCC)
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to the best interests of all persons concerned.
Doctrine of Marshalling of Assets
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An insolvent partner does not have the right to wind
The doctrine of marshalling of assets provides that:
up partnership affairs. (De Leon, 2014)
1. Partnership creditors have preference in
Powers of Liquidating Partner partnership assets.
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2. Separate or individual creditors have
1. Make new contracts; preference in separate or individual
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2. Raise money to pay partnership debts; properties.
3. Incur obligations to complete existing 3. Anything left from either goes to the other.
contracts or preserve partnership assets;
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and NOTE: The doctrine of marshalling of assets
4. Incur expenses necessary in the conduct of involves the ranking of assets in a certain order
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litigation. (De Leon, 2014) toward the payment of outstanding debts. (De Leon,
2010)
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Order of Payment in Winding Up
Rights of a Partner where Dissolution is not in
A. In a general partnership:
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Contravention of the Agreement
a. Those owing to creditors other than
partners;
Unless otherwise agreed, the rights of each partner
b. Those owing to partners other than for
are as follows:
capital or profits;
c. Those owing to partners in respect of
1. To have the partnership property applied
capital;
to discharge the liabilities of partnership;
d. Those owing to partners in respect to
and
profits. (Art. 1839(2), NCC)
2. To have the surplus, if any, applied, to pay
B. In a limited partnership
in cash the net amount owing to the
a. Those to creditors, in the order of priority
respective partners. (De Leon, 2014)
as provided by law, except those to limited
partners on account of their contributions,
and to general partners;
COMMERCIAL LAW
Rights of a Partner where Dissolution is in Rights of Injured Partner where Partnership
Contravention of the Agreement Contract is Rescinded
The rights of a partner vary depending upon 1. Right of a lien on, or retention of, the surplus of
whether he is the innocent or guilty partner. partnership property after satisfying
1. Rights of partner who has not caused the partnership liabilities for any sum of money
dissolution wrongfully: paid or contributed by him;
a. To have partnership property applied
for the payment of its liabilities and to 2. Right of subrogation in place of partnership
receive in cash his share of the surplus; creditors after payment of partnership
liabilities; and
b. To be indemnified for the damages
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caused by the partner guilty of 3. Right of indemnification by the guilty partner
wrongful dissolution; against all debts and liabilities of the
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partnership. (De Leon, 2014)
c. To continue the business in the same
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name during the agreed term of the Settlement of Accounts between Partners
partnership, by themselves or jointly
with others; and 1. Assets of the partnership include:
d. To possess partnership property a. Partnership property (including
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should they decide to continue the goodwill); and
business. b. Contributions of the partners;
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2. Rights of partner who has wrongfully caused 2. Order of application of the assets:
the dissolution: a. First, those owing to partnership
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a. If the business is not continued by the other creditors.
partners, to have the partnership property
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applied to discharge its liabilities and to b. Second, those owing to partners other
receive in cash his share of the surplus less than for capital and profits such as
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damages caused by his wrongful loans given by the partners or
dissolution advances for business expenses.
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b. If the business is continued: c. Third, those owing for the return of the
i. To have the value of his interest in capital contributed by the partners.
the partnership at the time of the
dissolution, less any damage d. Fourth, the share of the profits, if any,
caused by the dissolution to his co- due to each partner. (De Leon, 2014)
partners, ascertained and paid in
cash, or secured by bond approved Q: A partnership was formed with Magdusa as
by the court; and the manager. During the existence of the
partnership, two partners expressed their
ii. To be released from all existing desire to withdraw from the firm. Magdusa
and future liabilities of the determined the value of the partners’ share
partnership. (De Leon, 2014) which were embodied in the document drawn in
the handwriting of Magdusa but was not signed
by all of the partners. Later, the withdrawing
partners demanded for payment but were
refused. Hence, they filed an action for recovery
of sum of money against Magdusa. Considering
2023 GOLDEN NOTES
that not all partners intervened in the 3. Rights of retiring/estate of deceased partner:
distribution of all or part of the partnership a. To have the value of his interest
assets, should the action prosper? ascertained as of the date of
dissolution; and
A: NO. A partner’s share cannot be returned without
first dissolving and liquidating the partnership, for b. To receive as ordinary creditor the
the return is dependent on the discharge of value of his share in the dissolved
creditors, whose claims enjoy preference over those partnership with interest or profits
of the partner, and it is self- evident that all attributable to use of his right, at his
members of the partnership are interested in its option.
assets and business, and are entitled to be heard in
the matter of the firm’s liquidation and distribution NOTE: The right to demand on accounting of the
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of its property. The liquidation prepared by value of his interest accrues to any partner or his
Magdusa not signed by the other partners is not legal representative after dissolution in the absence
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binding on them. (Magdusa v. Albaran, G.R. No. L- of an agreement to the contrary.
17526, 30 June 1962)
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Persons that are required to Render an Account
Since the capital was contributed to the partnership,
not to partners, it is the partnership that must 1. Winding up partner;
refund the equity of the retiring partners. Since it is 2. Surviving partner; and
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the partnership, as a separate and distinct entity 3. Person or partnership continuing the
that must refund the shares of the partners, the business.
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amount to be refunded is necessarily limited to its
total resources. (Villareal v. Ramirez, G.R. No. Q: Emnace and Tabanao decided to dissolve
144214, 14 July 2003) their partnership in 1986. Emnace failed to
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submit the statement of assets and liabilities of
Partner’s Lien the partnership, and to render an accounting of
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the partnership's finances. Tabanao’s heirs filed
It is the right of every partner to have the against Emnace an action for accounting, etc.
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partnership property applied, to discharge Emnace counters, contending that prescription
partnership liabilities and surplus assets, if any, has set in. Decide.
distributed in cash to the respective partners, after
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deducting what may be due to the partnership from A: Prescription has not yet set in. Prescription of
them as partners. the said right starts to run only upon the dissolution
of the partnership when the final accounting is done.
Effects when the Business of a Dissolved Contrary to Emnace’s protestations, prescription
Partnership is Continued had not even begun to run in the absence of a final
accounting. The right to demand an accounting
1. Creditors of old partnership are also creditors accrues at the date of dissolution in the absence of
of the new partnership who continues the any agreement to the contrary. When a final
business of the old one without liquidation of accounting is made, it is only then that prescription
the partnership affairs. begins to run. (Emnace v. CA, G.R. No. 126334, 23 Nov.
2001)
2. Creditors have an equitable lien on the
consideration paid to the retiring/deceased
partner by the purchaser when
retiring/deceased partner sold his interest
without final settlement with creditors.
COMMERCIAL LAW
4. LIMITED PARTNERSHIP FORMATION AND AMENDMENT OF LIMITED

PARTNERSHIP
It is one formed by two or more persons having as

Essential Requirements for the Formation of
members one or more general partners and one or
Limited Partnership
more limited partners. The limited partners as such
shall not be bound by the obligations of the
1. Certificate of articles of limited partnership
partnership. (Art. 1843, NCC)
which states the matters enumerated in Art.
1844, must be signed and sworn; and
Characteristics of Limited Partnership
NOTE: Among the contents of the Certificate of

1. It is formed by compliance with the
Articles of Partnership should be the name of
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statutory requirements;
the partnership, adding thereto the word
“limited”.
2. One or more general partners control the
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business and are personally liable to
2. Certificate must be filed for record in the office
creditors;
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of the SEC. (De Leon, 2014)
3. One or more limited partners contribute to

NOTE: Strict compliance with legal
the capital and share in the profits but do
requirements is not necessary. It is sufficient
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not participate in the management of the
that there is substantial compliance in good
business and are not personally liable for
faith. If there is no substantial compliance, the
partnership obligations beyond their
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partnership becomes general partnership as far
capital contributions;
as third persons are concerned, in which the
member are liable as general partners. (Jo Chun
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4. The limited partners may ask for the return
v. Pacific Commercial Co., G.R. No. 19892, 06 Sep.
of their capital contributions under
1923)
conditions prescribed by law; and
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Cancellation of Certificate or Articles of Limited
5. Partnership debts are paid out of common
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Partnership
fund and the individual properties of
general partners. (De Leon, 2014)
1. When the partnership is dissolved; and
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2. When all the limited partners ceased to be
Consequences of Separate Personality of
such. (Art. 1864, NCC)
Limited Partnership
Instances when a General Partner Needs

The personality of a limited partnership being
Consent or Ratification of all the Limited
different from that of its members, it must, on
Partners
general principle, answer for, and suffer, the
consequence of its acts as such an entity capable of
When he:
being the subject of rights and obligations. If the
1. Does any act in contravention of the
limited partnership failed to pay its obligations, this
certificate;
partnership must suffer the consequences of such a
failure and must be adjudged insolvent. (Campos
2. Does any act which would make it
Rueda & Co. v. Pacific Commercial Co., et. al, G.R. No.
impossible to carry on the ordinary
L- 18703, 28 Aug. 1922)
business of the partnership;
3. Confesses judgment against partnership;
2023 GOLDEN NOTES
4. Possesses partnership property/assigns Transactions Allowed or Prohibited in a Limited
rights in specific partnership property Partnership
other than for partnership purpose;
1. Allowed:
5. Admits person as general partner; a. Granting loans to partnership
b. Transacting business with partnership
6. Admits person as limited partner – unless c. Receiving pro rata share of partnership
authorized in certificate; or assets with general creditors if he is not
also a general partner
7. Continues business with partnership
property on death, retirement, civil 2. Prohibited:
interdiction, insanity or insolvency of a. Receiving/holding partnership property as
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general partner unless authorized in the collateral security
certificate. (Art. 1850, NCC) b. Receiving any payment, conveyance,
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release from liability if it will prejudice
RIGHTS AND OBLIGATIONS OF A LIMITED right of 3rd persons
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PARTNER
NOTE: The prohibition is not absolute because
Rights of a Limited Partner there is no prohibition if the partnership assets are
sufficient to discharge partnership liabilities to
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1. To have partnership books kept at principal persons not claiming as general or limited partners.
place of business;
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Substituted Limited Partner
2. To inspect/copy books at reasonable
hours; It is a person admitted to all the rights of a limited
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partner who has died or assigned his interest in the
3. To have on demand true and full partnership.
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information of all things affecting
partnership; Rights and Liabilities of a Substituted Limited
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Partner
4. To have formal account of partnership
affairs whenever circumstances render it GR: He has all the rights and powers and is subject
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just and reasonable; to all the restrictions and liabilities of his assignor.
(Art. 1859, NCC)
5. To ask for dissolution and winding up by
decree of court; XPN: Those liabilities which he was ignorant of at
the time that he became a limited partner and which
6. To receive share of profits/other could not be ascertained from the certificate. (Ibid.)
compensation by way of income; and
Requirements for the Admission of a Substituted
7. To receive return of contributions provided Limited Partner
the partnership assets are in excess of all its
liabilities. (De Leon, 2014) (Art. 1851, NCC) 1. All the members must consent to the assignee
becoming a substituted limited partner or the
limited partner, being empowered by the
certificate must give the assignee the right to
become a limited partner;
COMMERCIAL LAW
2. The certificate must be amended in accordance 3. After the expiration of 6-month notice in
with Art. 1865 of the NCC; and writing given by him to the other partners
3. The certificate as amended must be registered if no time is fixed in the certificate for the
in the SEC. return of the contribution or for the
dissolution of the partnership.
Basis of Preference given to Limited Partners
over other Limited Partners NOTE: Even if a limited partner has contributed
property, he has only the right to demand and
Priority or preference may be given to some limited receive cash for his contribution.
partners over other limited partners as to the:
1. Return of their contributions; XPNs:
2. Their compensation by way of income; or 1. When there is stipulation to the contrary in
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3. Any other matter. the certificate; or
2. When all the partners (general and limited
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NOTE: In the absence of such statement in the partners) consent to the return other than
certificate, even if there is an agreement, all limited in the form of cash. (De Leon 2014)
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partners shall stand on equal footing in respect of
these matters. Liabilities of a Limited Partner
Requisites for Return of Contribution of a 1. To the partnership
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Limited Partner
Since limited partners are not principals in the
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1. All liabilities of the partnership have been transaction of a partnership, their liability as a rule,
paid or if they have not yet been paid, the is to the partnership, not to the creditors of the
assets of the partnership are sufficient to partnership. The general partners cannot, however
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pay such liabilities; waive any liability of the limited partners to the
prejudice of such creditors.
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2. The consent of all the members (general
and limited partners) has been obtained 2. To the partnership creditors and other
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except when the return may be rightfully partners
demanded; and
A limited partner is liable for partnership
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a.
3. The certificate of limited partnership is obligations when he contributed services
cancelled or amended. (Art. 1857, NCC) instead of only money or property to the
partnership;
When Return of Contribution is a Matter of Right
b. When he allows his surname to appear in
When all liabilities of the partnership, except the firm name;
liabilities to general partners and to limited
partners on account of their contributions, have c. When he fails to have a false statement in
been paid or there remains property of the the certificate corrected, knowing it to be
partnership sufficient to pay them and the false;
certificate is cancelled or so amended as to set forth
the withdrawal or reduction: d. When he takes part in the control of the
business;
1. On the dissolution of the partnership;
2. Upon the arrival of the date specified in the e. When he receives partnership property as
certificate for the return; or collateral security, payment, conveyance,
2023 GOLDEN NOTES
or release in fraud of partnership creditors; b. With the consent of all the partners.
or
2. Limited partner - The partnership is not
f. When there is failure to substantially dissolved except all limited partners cease to be
comply with the legal requirements such.
governing the formation of limited
partnerships. Rights of the Executor/Administrator on the
Death of the Limited Partner
3. To separate creditors
1. All the rights of a limited partner for the
As in a general partnership, the creditor of a limited purpose of settling his estate
partner may, in addition to other remedies allowed 2. To have the same power as the deceased
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under existing laws, apply to the proper court for a had to constitute his assignee as
charging order subjecting the interest in the substituted limited partner.
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partnership of the debtor partner for the payment
of his obligation. (De Leon, 2014) Order of Payment
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Requisites for Waiver or Compromise of In setting accounts after dissolution, the liabilities of
Liabilities the partnership shall be entitled to payment in the
following order:
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The waiver or compromise:
1. Is made with the consent of all partners; 1. Those to creditors, in the order of priority
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and as provided by law, except those to limited
2. Does not prejudice partnership creditors partners on account of their contributions,
who extended credit or whose claims arose and to general partners;
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before the cancellation or amendment of
the certificate. 2. Those to limited partners in respect to their
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share of the profits and other compensation
When may a Limited Partner have the by way of income on their contributions;
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Partnership Dissolved
3. Those to limited partners in respect to the
1. When his demand for the return of his capital of their contributions;
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contribution is denied although he has a
right to such return; or 4. Those to general partners other than for
capital and profits;
2. When his contribution is not paid although
he is entitled to its return because the other 5. Those to general partners in respect to
liabilities of the partnership have not been profits; and
paid or the partnership property is 6. Those to general partners in respect to
insufficient for their payment. capital. (Art. 1863, NCC)
Effect of Retirement, Death, Civil Interdiction, NOTE: Subject to any statement in the certificate or
Insanity or Insolvency of a Partner to subsequent agreement, limited partners share in
the partnership assets in respect to their claims for
1. General partner - The partnership is dissolved capital, and in respect to their claims for profits or
(Art. 1860, NCC) unless the business is continued for compensation by way of income on their
by the remaining general partners: contribution respectively, in proportion to the
a. Under the right stated in the certificate; respective amounts of such claims.
or
COMMERCIAL LAW
GR: A limited partner is not a proper party to NOTE: It cannot involve the right against self-
proceedings: incrimination. (Divina, 2021 citing BASECO v PCGG,
1. By a partnership; or G.R. No. 75885, 27 May 1987)
2. Against a partnership.
CORPORATION AS A CREATION OF LAW OR BY
XPNs: OPERATION OF LAW
1. If he is also a general partner.
2. Where the object is to enforce a limited A corporation is not created by mere agreement of
partner’s right against or liability to the the incorporators nor by their execution of the AOI.
partnership. (Art. 1866, NCC) There ought to be a law from which the corporation
derives its legal existence. This may be a general law
governing the formation of private corporations,
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B. CORPORATIONS which is the RCC, or a special law passed by
Congress to create a government-owned and
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controlled corporation. (Divina, 2021)
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1. DEFINITION OF CORPORATION The Creation of a Corporation is by Operation of
Law
Definition of Corporation
NOTE: Philippine jurisprudence adopted the
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A corporation is an artificial being created by Concession or Fiat Theory, which states that a
operation of law, having the right of succession and corporation is conceived as an artificial person
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the powers, attributes, and properties expressly owing its existence through creation by a sovereign
authorized by law or incidental to its existence. (Sec. power. Further, a corporation is without any
2, RCC) existence until it has received the imprimatur of the
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State acting according to law, through the SEC.
Attributes of a Corporation (A-L-S-P-A-P-I) (Tayag v. Benguet Consolidated, Inc., G.R. No. L-
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23145, 29 Nov. 1968)
1. It is an Artificial being;
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2. It is created by operation of Law; Q: Since Feb. 8, 1935, the legislature has not
3. It enjoys the right of Succession; and passed even a single law creating a private
4. It has the Powers, Attributes, and corporation. What provision of the constitution
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Properties expressly authorized by law or precludes the passage of such law? (2008 BAR)
Incidental to its existence.
A: Sec. 16, Art. XII of the 1987 Constitution provides
ARTIFICIAL BEING that the Congress shall not, except by general law,
provide for the formation, organization, or
A corporation is a legal or juridical person with a regulation of private corporations. Government-
personality separate and distinct from its individual owned and controlled corporations may be created
stockholders or members and from any other legal or established by special charters in the interest of
entity into which it may be connected or related. the common good and subject to the test of
economic viability.
A corporation is entitled to the rights of a person
under the Bill of Rights. It may even invoke the right Government Corporations
against unreasonable search and seizure. (Divina,
2021 citing Stonehill v. Diokno, G.R. No. L-19550, 19 Q: A Special Audit Team from COA audited the
June 1967) accounts of Leyte Metropolitan Water District
(LMWD). Subsequently, LMWD received a
request for payment of auditing fees from COA.
2023 GOLDEN NOTES
LMWD General Manager Feliciano sent a reply Although it is neither a subdivision, agency, or
informing COA that the water district could not instrumentality of the government nor a
pay the auditing fees, citing as basis for his government-owned or -controlled corporation or a
action P.D. 198 as well as R.A. No. 6758. subsidiary thereof, the PNRC enjoys a special status
Thereafter, Feliciano asked COA for a refund of as an important ally and auxiliary of the government
all auditing fees LMWD previously paid to COA. in the humanitarian field in accordance with its
The COA Chairman denied LMWD’s request. commitments under international law. The court
cannot all of a sudden refuse to recognize its
Feliciano maintains that Local Water Districts existence, especially since the issue of the
(LWDs) are not GOCCs with original charters. He constitutionality of the PNRC Charter was never
argues that LWDs are private corporations, and raised by the parties. (Liban, et al., v. Gordon, G.R.
thus, not subject to COA’s jurisdiction. Is an LWD No. 175352, 18 Jan. 2011)
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created under P.D. 198, as amended, a GOCC
subject to the audit jurisdiction of COA? Q: Pursuant to E.O. 123, the Ministry of National
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Defense and the Philippine Tourism Authority
A: YES. LWDs are GOCCs subject to the audit executed a MOA for the development of
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jurisdiction of COA. The Constitution and existing Corregidor. The Philippine Tourism Authority
laws mandate COA to audit all government agencies, Board of Directors adopted a Resolution,
including GOCCs with original charters. An LWD is a approving the creation of a foundation for the
GOCC with an original charter. development of Corregidor. The Corregidor
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Foundation, Inc. was incorporated.
The Constitution recognizes two classes of
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corporations. The first refers to private The Commission on Audit (COA) issued an Audit
corporations created under a general law. The Observation Memorandum noting that certain
second refers to GOCCs created by special charters. personnel of the Philippine Tourism Authority
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Congress cannot enact a law creating a private who were concurrently rendering services in
corporation with a special charter. Such legislation Corregidor Foundation, Inc. received honoraria
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would be unconstitutional. Private corporations and cash gifts. The Legal and Adjudication
may exist only under a general law. The Constitution Office-Corporate of the COA issued Notice of
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authorizes Congress to create GOCCs through Disallowance, disallowing in audit the
special charters. Since private corporations cannot honoraria and cash gift paid to said personnel.
have special charters, it follows that Congress can The personnel argue that Corregidor
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create corporations with special charters only if Foundation, Inc. is a private corporation created
such corporations are government-owned or under the Corporation Code and, therefore,
controlled. Obviously, LWDs are not private cannot be audited by the COA. Is Corregidor
corporations because they are not created under the Foundation, Inc. a GOCC under the audit
Corporation Code. (Feliciano v. COA, et al., G.R. No. jurisdiction of the COA?
147402, 14 Jan. 2004)
A: YES. The Corregidor Foundation, Inc. is a
Q: Is the Philippine National Red Cross (“PNRC”) government-owned or controlled corporation
a GOCC? under the audit jurisdiction of the COA. Corregidor
Foundation, Inc. was organized as a non-stock
A: Initially, the Supreme Court held PNRC is not a corporation under the Corporation Code. It was
GOCC. Although the PNRC was created by a special issued a certificate of registration by the SEC on 28
charter, it cannot be considered a GOCC in the Oct. 1987 and, according to its Articles of
absence of the essential elements of ownership and Incorporation, Corregidor Foundation, Inc. was
control by the government. organized and to be operated in the public interest.
Corregidor Foundation, Inc. was organized
primarily to maintain and preserve the war relics in
COMMERCIAL LAW
Corregidor and develop the area's potential as an corporation organized as a lending investor cannot
international and local tourist destination. engage in pawnbroking. (Divina, 2020)
Corregidor Foundation, Inc.'s purposes as stated in
its AOI are related to the promotion and Engagement into a Contract of Partnership or a
development of tourism in the country, a declared Joint Venture
state policy and, therefore, a function public in
character. Even a cursory reading of the statutory Corporations are empowered to enter into a
definitions of "government owned-or controlled partnership, joint venture, merger, consolidation, or
corporation" readily reveals that a non-stock any other commercial agreement with natural and
corporation may be government-owned or juridical persons. (Sec. 35(h), RCC)
controlled. Further, there is nothing in the law
which provides that government-owned or Another significant revision under the new law is
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controlled corporations are always created under the express grant of power to corporations to enter
an original charter or special law. (Oriondo v. COA, into any commercial agreement, including but not
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G.R. No. 211293, 04 June 2019) limited to partnership, joint venture, merger,
consolidation.
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RIGHT TO SUCCESSION
NOTE: Under Sec. 36 of the OCC, corporations were
The right of succession of a corporation does not expressly allowed to only enter into merger or
connote that a corporation is immortal. It simply consolidation with other corporations as a form of
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means that it has the power to exist continuously, corporate combination.
either by opting to have perpetual existence or to
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extend its corporate life if a fixed term is specified in Q: May a corporation enter into a joint venture?
its AOI. Its capacity for continued existence is not (1996 BAR)
affected by any changes in the composition of
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corporators. (Divina, 2020) A: YES. A corporation may enter into a joint venture
with another where the nature is in line with the
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POWERS, ATTRIBUTES AND PROPERTIES OF A business authorized by its charter. (Tuason v.
CORPORATION Bolaños, G.R. No. L-4935, 28 May 1954)
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This means that a corporation can only exercise As far back as the case of Aurbach v. Sanitary Wares
powers conferred upon it by law, its AOI, those Manufacturing Corporation, (G.R. No. 75875, 75951,
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implied from the conferred powers, or incidental to 75975-76, 15 Dec. 1989) the Supreme Court had
its existence. Any act of the corporation contrary to already ruled that a joint venture is a form of
or outside these powers is ultra vires. (Divina, 2020) partnership and should thus be governed by the law
of partnerships. The Supreme Court, however,
TEST: Whether the corporate act or transaction is recognized a distinction between these two
related to or in furtherance of the purposes of the business forms and held that although a corporation
corporation. cannot enter into a partnership contract, it may
however engage in a joint venture with others.
For instance, whether or not a corporation may (Divina, 2020)
acquire property will not only be tested by the
lawfulness of the consideration but whether such
property is necessary to achieve the purpose of the
corporation.
Thus, a corporation engaged in mining cannot

acquire properties for urban development. (Heirs of
Antonio Pael v. CA, G.R. No. 133547, 07 Dec. 2001) A
2023 GOLDEN NOTES
Advantages vs. Disadvantages of a Corporation Partnership vs. Corporation
ADVANTAGES DISADVANTAGES PARTNERSHIP CORPORATION

As to the creation and governing Law
It may sue and be sued, Created by the
enter into contracts, The ability of the Created by mere
operation of law and
and acquire properties stockholder to transfer agreement of the
governed by the
in its own name and in shares without having parties and governed
Revised Corporation
its own right. to secure the consent by the Civil Code.
Code.
of the corporation
As to the commencement of juridical
and/or other
personality and term of existence
stockholders may
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Stockholders are not Existence of the
result in persons From the moment of
liable for the corporation
having conflicting the meeting of minds of
obligations of the commences from the
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interests against the the partners.
corporation beyond date of issuance of the
same corporation.
their subscription. Certificate of
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The term of a
Incorporation by the
partnership may be
It is subject to more SEC.
It continues to exist established for any
stringent
despite changes in period of time
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administrative and Has perpetual
corporators’ stipulated by the
reportorial existence, unless its
composition. partners.
requirements. AOI provide otherwise.
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Shares are transferable As to number of formators
even without the Minority stockholders Any person,
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consent of the may be denied the partnership,
corporation and other right to actively association, or
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stockholders. participate in the corporation, singly or
management of the jointly with others but
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Management is clearly corporation and are May be organized by at not more than 15.
defined and subject to the will of least 2 persons.
NOTE: A corporation
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centralized through its the majority
board of directors or stockholders. with a single
trustees. stockholder is
considered a One
Person Corporation.
Business activities are
It can mobilize more limited by the powers As to Powers
capital through the provided by law, its
issuance of its shares. AOI, and those which GR: May exercise any
are incidental thereto. power authorized by
May exercise only such
the partners.
(Divina, 2020) powers as may be
conferred by law and
XPN: Acts which are
its AOI, those implied
contrary to law,
therefrom or
morals, good customs,
incidental thereto.
public order, public
policy.
COMMERCIAL LAW
As to Management 2. CLASSES OF CORPORATIONS
Managed by the
The business of a The following are the classes of corporations:
Managing Partner, or
corporation is
in the absence of
generally conducted by 1. As to Existence of Shares of Stock:
designation, by any of
the Board of Directors.
the General Partners.
a. Stock – one which has:
i. Capital stock divided into shares; and
As to the extent of liability to third persons
ii. Are authorized to distribute to the
holders of such shares dividends or
GR: Partners are liable allotments of the surplus profits on
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personally and the basis of the shares held. (Sec. 3,
Stockholders are liable RCC)
subsidiarily
only to the extent of the
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(sometimes solidarily)
shares subscribed by
for partnership debts
them whether paid or b. Nonstock – All other corporations not
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to third persons,
not. classified as stock corporation are
XPN: Limited partner nonstock corporations (Sec. 3, RCC). It is
one where no part of its income is
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distributable as dividends to its members,
As to the right of succession trustees, or officers (Sec. 86, RCC). These
corporations may be formed or organized
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No right of succession.
for charitable, religious, educational,
(i.e., a partnership
Has right of succession. professional, cultural, fraternal, literary,
dissolves upon death of
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scientific, social, civic service, or similar
a partner)
purposes. (Sec. 87, RCC)
As to transferability of interest
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2. As to Place of Incorporation:
A stockholder has the
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A partner cannot
right to transfer his a. Domestic – incorporated and organized
transfer his interest in
shares without prior under the laws of the Philippines.
the partnership
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consent of the other
without the consent of
stockholders, subject b. Foreign – formed, organized, or existing
all the other existing
to limitations under any laws other than those of the
partners.
embodied in the AOI. Philippines and whose laws allow Filipino
citizens and corporations to do business in
As to dissolution its own country or state. (Sec. 140, RCC)
May be dissolved any
Can only be dissolved 3. As to their Legal Status:
time by the will of any
with the consent of the
or all of the partners.
State. a. De jure – one that has fulfilled all the
Death, civil requirements mandated by law and can
Death or insolvency of successfully resist a suit by the State to
interdiction, and
shareholders will note challenge its existence. De jure means “a
insolvency of a partner
result to dissolution of matter of law” that validates the
dissolve the
the corporation. corporation as a legal entity.
partnership.
(Divina, 2021)
2023 GOLDEN NOTES
b. De facto – one organized with colorable d. By Prescription – one which has exercised
compliance with the requirements of a corporate powers for an indefinite period
valid law. Its existence cannot be inquired without interference on the part of the
collaterally. Such inquiry may be inquired sovereign power, e.g., Roman Catholic
only by a direct attack by the State through Church. (Divina, 2020)
a quo warranto proceeding. (Sec. 19, RCC)
4. As to their Relationship of Management and
c. By Estoppel – exists when two or more Control:
persons assume to act as a corporation
knowing it to be without authority to do a. Holding Corporation – a corporation that
so. They are liable as general partners for holds stocks in other companies for
all debts, liabilities, and damages incurred purposes of control rather than for mere
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or arising as a result thereof: Provided, investment.
however, that when any such ostensible
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corporation is sued on any transaction b. Subsidiary Corporation – a company that
entered by it as a corporation or on any is owned or controlled by another
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tort committed by it as such, it shall not be company, called the parent company.
allowed to use as a defense its lack of
corporate personality. (Sec. 20, RCC) c. Affiliates – two companies are affiliates
when one company owns less than the
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Q: MAGNA, a domestic corporation, majority of the voting stock of the other.
entered an agreement for professional
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services with ANDERSEN, a foreign d. Parent Company – a corporation that
corporation unlicensed to do business owns enough voting stock in another
in the Philippines and engaged in company to control management and
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consultation and design services. operation by influencing or electing its
MAGNA asked ANDERSEN to design its board of directors. Companies that
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cement plant. After the contract was operate under this management are
consummated, ANDERSEN sued deemed subsidiaries of the parent
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MAGNA for the unpaid balance under company. (Divina, 2020)
the agreement. MAGNA filed a motion
to dismiss, arguing that ANDERSEN has 5. As to whether they are for Public
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no legal capacity to sue because it was (government) or Private Purpose or Function
doing business in the Philippines (2004, 2001 BAR)
without the requisite license. Rule on
the motion. a. Public – formed or organized for the
government of a portion of the State (like
A: The motion to dismiss should be cities and municipalities) for the purpose
denied. MAGNA is already estopped from of serving the general good and welfare.
challenging ANDERSEN's legal capacity to (Aquino, 2014)
sue. A party cannot take undue advantage
by challenging the foreign corporation's b. Private – one formed for some private
personality or legal capacity to sue when purpose, benefit, or end. It may either be a
the former already acknowledged the stock or non-stock. (Ibid.)
same by entering into a contract with the
latter and derived benefits therefrom.
(Magna Ready Mix Concrete Corp. v.
Andersen Bjornstad Kane Jacobs, Inc., G.R.
No. 196158, 20 Jan. 2021, J. Hernando)
COMMERCIAL LAW
6. Other Classifications: 3. NATIONALITY OF CORPORATIONS
a. Closed Corporation ‐ one whose AOI

Tests in Determining the Nationality of
provides that all of the corporation’s
Corporations
issued stock of all classes, exclusive of
treasury shares, shall be held of record by
1. Control Test; and
not more than a specified number of
2. Grandfather Rule
persons, not exceeding twenty (20);
subject to specified restrictions on
a) CONTROL TEST
transfers; and it shall not list in any stock
exchange or make any public offering of its
It is a mode of determining the nationality of a
stocks of any class.
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corporation engaged in nationalized areas of
activities, provided for under the Constitution and
A corporation is “going private” when it is
other applicable laws, where corporate
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adopting the features of a closed
shareholders with foreign shareholdings are
corporation; (Divina, 2020)
present, by ascertaining the nationality of the
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controlling stockholder of the corporation. If the
b. Special Corporations – include
capital of the investing Corporation is at least 60%
educational corporations and religious
owned by Filipinos, then the entire shareholdings of
corporations; (Secs. 105-107, RCC)
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the investing Corporation shall be recorded as
Religious corporations include
Filipino-owned thus making both the investing and
corporation sole and religious societies.
investee - corporations Philippine national. (Divina,
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(Secs. 108 & 114, RCC) and
2021)
c. One-Person Corporation – a corporation
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In determining the nationality of a corporation, the
wherein all of the stocks are held directly
control test uses the nationality of the controlling
or indirectly by one person. It is not
stockholders or members of the corporation.
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necessarily illegal for as long as it follows
and observes the law throughout its
A corporation organized/incorporated abroad and
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existence and conducts its business affairs
registered as doing business in the Philippines
lawfully, otherwise, the doctrine of
under the Corporation Code, of which 100% of the
piercing the veil may be applied in such a
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capital stock outstanding and entitled to vote is
case. (Divina, 2020; Sec. 116, RCC)
wholly owned by Filipinos, may be considered a
Philippine National under the Foreign Investments
Act of 1991. This is the only exception to the place
of incorporation test. (SEC Opinion No. 04-14, 3 a.
2004; De Leon, 2010)
Who are Considered as Philippine Nationals
Under R.A. No. 7042 (Foreign Investments Act of

1991), other than a citizen of the Philippines, the
following are also considered Philippine Nationals:
1. Corporations organized under Philippine laws

of which at least 60% of the capital stock
outstanding and entitled to vote is owned and
held by Filipino citizens.
2023 GOLDEN NOTES
2. Corporations organized abroad and registered Thus, to arrive at the actual Filipino ownership and
as doing business in the Philippines under the control in a corporation, both the direct and indirect
Corporation Code of which 100% of the shareholdings in the corporation are determined. In
capital stock outstanding and entitled to the case of a multi-tiered corporation, the stock
vote is wholly owned by Filipinos or a trustee attribution rule must be allowed to run
of funds for pension or other employee continuously along the chain of ownership until it
retirement or separation benefits, where the finally reaches the individual stockholders. (Divina,
trustee is a Philippine national and at least sixty 2020)
percent (60%) of the fund will accrue to the
benefit of Philippine nationals: The purpose of this rule is to trace the nationality of
the stockholder of investor corporations to
NOTE: R.A. No. 7042 provides that where a ascertain the nationality of the corporation where
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corporation and its non-Filipino stockholders the investment is made. (SEC Opinion, 4 May 1987,
own stocks in a SEC-registered enterprise, at as cited in Divina, 2020)
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least 60% of the capital stock outstanding and
entitled to vote of each of both corporations and The Grandfather Rule implements the intent of the
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at least 60% of the members of the Board of Filipinization provisions of the Constitution. (Narra
Directors of each of both corporations must be Nickel Mining and Development Corp., et al. v.
citizens, in order that the corporation shall be Redmont Consolidated Mines Corp., G.R. No. 195580,
considered a Philippine national. (DOUBLE 28 Jan. 2015; SEC Opinion No. 16-15)
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60% RULE)
Rules Governing the Application of the
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NOTE: The fact that the religious organization has Grandfather Rule
no capital stock does not suffice to escape the
constitutional inhibition, since it is admitted that its 1. The grandfather rule should be used in
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members are of foreign nationality. The purpose of determining the nationality of a corporation
the 60% requirement is obviously to ensure that engaged in a partly nationalized activity. This
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corporations or associations allowed to acquire applies in cases where the stocks of a
agricultural land or to exploit natural resources corporation are owned by another corporation
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shall be controlled by Filipinos; and the spirit of the with foreign stockholders exceeding 40% of the
Constitution demands that in the absence of capital capital stock of the corporation. (SEC-OGC
stock, the controlling membership should be Opinion No. 10-31, 09 Dec. 2010)
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composed of Filipino citizens. (Register of Deeds v.
Ung Siu Si Temple, G.R. No. L-6776, 21 May 1955) 2. The Grandfather Rule will not apply in cases
where the 60-40 Filipino-alien equity
b) GRANDFATHER RULE ownership in a particular natural resource
corporation is not in doubt. If the stockholder
This is the method by which the percentage of corporation is 60% or more owned by Filipinos,
Filipino equity in a corporation engaged in all the stock held by the stockholder
nationalized and/or partly nationalized areas of corporation is deemed to be held by Filipinos.
activities, provided for under the Constitution and (DOJ Opinion No. 19, s. 1989)
other applicable laws, is accurately computed, in
cases where corporate shareholders with foreign 3. When there is doubt as to the actual extent of
shareholdings are present, by attributing the Filipino equity in the investee corporation, the
nationality of the second or even subsequent tier of SEC is not precluded from using the
ownership to determine the nationality of the Grandfather Rule. (SEC-OGC Opinion No. 22-07,
corporate shareholder. 07 Dec. 2007)
COMMERCIAL LAW
Q: What is the prevailing mode of determining of the Gamboa Decision stated that the term
the nationality of corporations engaged in ‘capital’ referred only to shares of stock entitled
nationalized activities? to vote in the election of directors, while there
were certain statements made in the body of the
A: The "control test" is the prevailing mode of Resolution to the effect that the 60-40 Filipino-
determining the nationality of corporations foreign ownership requirement applies to each
engaged in nationalized activities. However, when class of shares, whether voting or non-voting.
in the mind of the Court there is doubt as to where Hence, Roy filed a case alleging that SEC-MC No.
beneficial ownership and control reside, based on 8 is not compliant with the Gamboa Decision and
the attendant facts and circumstances of the case, Resolution as it did not apply the 60 to 40
then it may apply the "grandfather rule." (Narra Filipino-foreign ownership requirement
Nickel Mining and Development Corp. v. Redmont separately to each class of share. Is Roy correct?
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Consolidated Mining Corp., G.R. No. 195580, 21 Apr.
2014) A: NO. While there is a passage in the body of the
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Gamboa Resolution that might have appeared
The Grandfather Rule, standing alone, should not be contrary to the fallo of the Gamboa Decision, the
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used to determine the Filipino ownership and definiteness and clarity of the fallo of the Gamboa
control in a corporation, as it could result in an Decision must control over the obiter dictum in the
otherwise foreign corporation rendered qualified to Gamboa Resolution.
perform nationalized or partly nationalized
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activities. Hence, it is only when the Control Test is The Gamboa Decision already held, in no uncertain
first complied with that the Grandfather Rule may terms, that what the Constitution requires is "full
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be applied. and legal beneficial ownership of 60 percent of the
outstanding capital stock, coupled with 60 percent
The Supreme Court stressed, however, that when of the voting rights must rest in the hands of Filipino
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the 60% Filipino ownership, is never in doubt, the nationals." and, precisely that is what SEC-MC No. 8
control test prevails. In the relevant case, it was held provides, viz.: “For purposes of determining
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that the petition is severely wanting in facts and compliance with the constitutional or statutory
circumstances to raise legitimate challenges to the ownership, the required percentage of Filipino
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joint venture company's 60-40 Filipino-Foreigner ownership shall be applied to BOTH (a) the total
ownership. The application of the control test will number of outstanding shares of stock entitled to
already yield the result that the company is a vote in the election of directors; AND (b) the total
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Philippine national. The grandfather rule no longer number of outstanding shares of stock, whether or
applies. (Leo Querubin v. COMELEC, G.R. No. 218787, not entitled to vote." (Roy v. Herbosa, G.R. No.
08 Dec. 2015) 207246, 18 Apr. 2017)
NOTE: "Corporate layering" is admittedly allowed 4. CORPORATE JURIDICAL ENTITY

by the FIA; but if it is used to circumvent the
Constitution and pertinent laws, then it becomes
a) DOCTRINE OF SEPARATE JURIDICAL
illegal.
PERSONALITY
Q: Following the decision of the Court in the case

The doctrine of corporate juridical personality
of Gamboa v. Teves, the SEC issued a
states that a corporation is a juridical entity with
Memorandum Circular (SEC-MC No. 8), which
legal personality separate and distinct from those
are guidelines on compliance with the Filipino-
acting for and, in its behalf, and, in general, from the
foreign ownership requirement prescribed in
people comprising it. (Francisco v. Mallen Jr., G.R. No.
the Constitution and/or existing laws by
173169, 22 Sept. 2010)
corporations engaged in nationalized and partly
nationalized activities. The dispositive portion
2023 GOLDEN NOTES
Q: An employee of Price Richardson Corporation stock of a corporation is not itself a sufficient ground
executed a sworn affidavit at the NBI’s Interpol for disregarding the separate corporate personality.
Division, alleging that Price Richardson was (Secosa v. Heirs of Erwin Suarez Francisco, G.R. No.
"engaged in boiler room operations, wherein 160039, 29 June 2004)
the company sells non-existent stocks to
investors using high pressure sales tactics." The Q: A contract of sale was entered into between
SEC filed before the DOJ its complaint against, DHLFMC and ASIAMED whereby the former
along with its incorporators and directors, Price agreed to purchase machines from the latter for
Richardson, for violation of Art. 315(1)(b) of the a consideration of P31 million to be paid no later
Revised Penal Code (RPC) and Secs. 26.3 and 28 than two days from the date of delivery. Despite
of the Securities Regulation Code (SRC). Velarde- receiving the machines, with invoices signed by
Albert was its Director for Operations and Anthony and Alejandro, DHLFMC did not pay the
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Resnick was its Associated Person. Can Velarde- whole consideration. The RTC found DHLFMC
Albert and Resnick be indicted for violations of and Anthony jointly and severally liable. On
A
the SRC and the RCC? appeal, the CA ruled that the DHLFMC and
Anthony were estopped from raising the
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A: NO. Velarde-Albert and Resnick cannot be separate juridical personality of DHLFMC in
indicted for violations of the SRC and the RPC. view of their denial of the allegation that
Petitioner failed to allege the specific acts of DHLFMC was an entity representing itself to be a
respondents Velarde-Albert and Resnick that could corporation duly organized and existing, stating
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be interpreted as participation in the alleged that they never represented that DHLFMC was a
violations. There was also no showing, based on the corporate entity duly organized and existing.
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complaints, that they were deemed responsible for Hence, he should be held solidarily liable. Are
Price Richardson's violations. To be held criminally they estopped from invoking the separate
liable for the acts of a corporation, there must be a juridical personality of DHLFMC?
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showing that its officers, directors, and
shareholders actively participated in or had the A: YES. DHLFMC and Anthony do not dispute that
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power to prevent the wrongful act. A corporation’s they specifically denied the allegation regarding
personality is separate and distinct from its officers, DHLFMC's corporate circumstances, the truth being
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directors, and shareholders. (SEC v. Price Richardson that they never represented that DHLFMC is a
Corp, G.R. No. 197032, 26 July 2017) corporate entity duly organized and existing under
and by virtue of the laws of the Republic of the
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Q: Richard owns 90% of the shares of the capital Philippines. They merely insist that petitioner
stock of GOM Co. On one occasion, GOM Anthony was not shown to have acted in bad faith,
represented by Richard as President and and thus, cannot be held solidarily liable with
General Manager executed a contract to sell a petitioner DHLFMC. However, petitioners do not
subdivision lot in favor of Tomas. For failure of point to anything on record to counter their own
GOM to develop a subdivision, Tomas filed an specific denial that would establish DHLFMC's
action for rescission and damages against GOM existence as a corporation with separate juridical
and Richard. Will the action prosper? Explain personality. (Dee Hwa Liong Foundation v. ASIAMED,
(1996 BAR) G.R. No. 205638, 23 Aug. 2017)
A: The action will prosper against GOM Corporation Q: Rodriguez Tan, doing business under the
but not against Richard. Richard has a separate and name and style of Yon Mitori, is a depositor
distinct personality from GOM. His mere ownership maintaining a Current Account with Union Bank.
of 90% of the shares of the capital stock of GOM does In said account, Tan deposited P420,000
not make him one and the same as the corporation. through BPI Check drawn against the account of
Mere ownership by a single stockholder, or by Angli Lumber & Hardware, Inc, which is one of
another corporation, of all or nearly all of the capital Tan’s clients. The BPI Check was entered in
COMMERCIAL LAW
Tan’s bank records. Tan withdrew from said A: YES. Tan is bound to return the proceeds of the
account the amount of P480,000.00. Later that dishonored BPI Check based on the principle of
day, however, the BPI Check was returned to unjust enrichment. Art. 22 of the NCC states that
Union Bank as the account against which it was “every person who through an act of performance
drawn had been closed. Union Bank discovered by another, or any other means, acquires or comes
that Tan’s account had been mistakenly credited into possession of something at the expense of the
so their branch manager immediately called Tan latter without just or legal ground, shall return the
to recover the funds mistakenly released but same to him.”
Tan refused. During Union Bank’s investigation,
it was discovered that Tan previously deposited Here, it was unequivocally established that Tan
five BPI checks drawn by Angli Lumber against withdrew and utilized the proceeds of the BPI Check
the same BPI account, and these checks were all fully knowing that he was not entitled thereto. To
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previously dishonored. Union Bank sent Tan a note, Tan had deposited five other checks drawn
letter demanding the reimbursement of against the same account. He was fully aware that
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P420,000, but Tan refused. Angli Lumber's account with BPI had been closed.
So, he could not have expected that the BPI Check in
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Union Bank then debited the available balance question would be honored. (Yon Mitori
in Tan’s account as a set-off, and thereafter International Industries v. Union Bank of the
instituted a Complaint for Sum of Money for the Philippines, G.R. No. 225538, 14 Oct. 2020)
recovery of the remaining balance. Tan argues
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that Union Bank should not be allowed to Significance of the Doctrine of Separate Juridical
recover the amount erroneously deposited in Personality
E
his account because of Union Bank’s own gross
negligence. On appeal before the CA, Tan named 1. Liability for acts or contracts – As a
Yon Mitori as co-appellant. In appealing to the general rule, the obligation of the
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Supreme Court, Yon Mitori was named as sole corporation is not the liability of the
petitioner in the Petition. stockholders, directors, or officers.
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(2010,1996, 1992 BAR)
a. Is Yon Mitori a real party in interest?
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A corporation may not, generally, be made
A: NO. Yon Mitori has no separate juridical to answer for acts or liabilities of its
personality. A single proprietorship is not stockholders or those of the legal entities to
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considered a separate juridical person under the which it may be connected, and vice versa.
Civil Code. The Petition should have been filed in (Cease v. CA, G.R. No. L-33172, 18 Oct. 1979)
Tan's name, the latter being the real party in interest
who possesses the legal standing to file this Petition. 2. Right to bring actions – may bring civil
Nevertheless, the Court permits the substitution of and criminal actions in its own name in the
Tan as petitioner. Sec. 4, Rule 10 of the ROC provides same manner as natural persons. (Art. 46,
that “a defect in the designation of the parties and NCC)
other clearly clerical or typographical errors may be
summarily corrected by the court at any stage of the NOTE: Rights belonging to the corporation
action, at its initiative or on motion, provided no cannot be invoked by the stockholders (or
prejudice is caused thereby to the adverse party.” directors and officers) even if the latter
own substantial majority of the shares in
b. Is Tan obligated to return the value of the that corporation; and rights of the
BPI Check? stockholders, directors and officers cannot
be invoked by the corporation. (Stonehill v.
Diokno, G.R. No. L- 19550, 19 June 1967)
2023 GOLDEN NOTES
3. Right to acquire and possess property – Moreover, under the trust fund doctrine, the capital
property conveyed to or acquired by the stock, property, and other assets of a corporation
corporation is in law the property of the are regarded as equity in trust for the payment of
corporation itself as a distinct legal entity corporate creditors which are preferred over the
and not that of the stockholders or stockholders in the distribution of corporate assets.
members. (Boyer-Roxas v. CA, G.R. No. The distribution of corporate assets and property
100866, 14 July 1992) cannot be made to depend on the whims and
caprices of the stockholders, officers, or directors of
4. Acquisition of jurisdiction – When the the corporation unless the indispensable conditions
defendant is a corporation, partnership or and procedures for the protection of corporate
association organized under the laws of the creditors are followed. (Yamamoto v. Nishino
Philippines with a juridical personality, Leather Industries, Inc., G.R. No. 150283, 16 Apr.
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service may be made on the president, 2008)
managing partner, general manager,
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corporate secretary, treasurer, or in-house Q: RISCO ceased operation due to business
counsel of the corporation wherever they reverses. Due to Aznar et. al’s desire to
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may be found, or in their absence or rehabilitate RISCO, they contributed a total
unavailability, on their secretaries. amount of P212,720.00 which was used in the
purchase of three (3) parcels of land located in
If such service cannot be made upon any of various areas in the Cebu Province. Pursuant to
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the foregoing persons, it shall be made the Minutes of the Special Meeting of the Board
upon the person who customarily receives of Directors of RISCO, the contributed amounts
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the correspondence for the defendant at its constitute liens and encumbrances on the
principal office. (Sec. 12, Rule 14, ROC) aforementioned properties as annotated in the
titles of the said parcels of land. Thereafter,
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5. Changes in individual membership – various subsequent annotations were made on
corporation remains unchanged and the same titles in favor of PNB. As a result, a
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unaffected in its identity by changes in its Certificate of Sale was issued in favor of PNB,
individual membership or ownership of its being the lone and highest bidder of the three
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stocks. parcels of land and was also issued Transfer
Certificate of Title over the said parcels of land.
Stockholders are NOT the Owners of Corporate
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Properties and Assets (2000, 1996 BAR) Aznar, et. al filed a complaint seeking the
quieting of their supposed title to the subject
A corporation is a juridical person distinct from the properties. They alleged that the subsequent
members composing it. Properties in the name of annotations on the titles are subject to the prior
the corporation are owned by it as an entity annotation of their liens and encumbrances. On
separate and distinct from its members. While the other hand, PNB assert that, as mere
shares of stocks constitute personal property, they stockholders of RISCO, they do not have any
do not represent property of the corporation. The legal or equitable right over the properties of
corporation has properties of its own. A share of the corporation. Do Aznar et. al. have the legal or
stock only represents an aliquot part of the equitable rights over the subject properties?
corporation’s property, or the right to share in its
proceeds but its holder is not the owner of any. A: NO. Aznar, et al., have no right to ask for the
(Silverio v. Filipino Business Consultants, Inc., G.R. No. quieting of title of the properties at issue because
143312, 12 Aug. 2005; Saw v. CA, G.R. No. 90580, 08 they have no legal and/or equitable rights over the
Apr. 1991) properties that are derived from the previous
registered owner which is RISCO.
COMMERCIAL LAW
Aznar, et al., who are stockholders of RISCO, cannot Q: Ronald Sham, doing business under the name
claim ownership over the properties at issue in this of SHAMRON Machineries (Shamron), sold to
case on the strength of the Minutes which, at most, Turtle Mercantile (Turtle) a diesel farm tractor.
is merely evidence of a loan agreement between In payment, Turtle’s President and Manager
them and the company. There is no indication or Dick Seldon issued a check for P50,000 in favor
even a suggestion that the ownership of said of Shamron. A week later, Turtle sold the tractor
properties were transferred to them which would to Briccio Industries (Briccio) for P60,000.
require no less that the said properties be registered Briccio discovered that the engine of the tractor
under their names. While a share of stock was reconditioned so it refused to pay Turtle. As
represents a proportionate or aliquot interest in the a result, Dick Seldon ordered the “Stop
property of the corporation, it does not vest the Payment” of the check issued to Shamron.
owner thereof with any legal right or title to any of Shamron sued Turtle and Dick Seldon. Shamron
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the property, his interest in the corporate property obtained a favorable judgment holding co-
being equitable or beneficial in nature. defendants Turtle and Dick Seldon jointly and
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Shareholders are in no legal sense the owners of severally liable. Comment on the decision of the
corporate property, which is owned by the trial court. Discuss fully. (1995 BAR)
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corporation as a distinct legal person. (PNB v. Aznar,
et al, G.R. No. 171805, 30 May 2011) A: I disagree with the trial court’s ruling. Dick
Seldon should not be held solidarily liable with
NOTE: Where stockholders granted a loan to the Turtle in his capacity as President and Manager of
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corporation to finance the acquisition of property Turtle. Turtle has a separate juridical personality
which was eventually mortgaged to a bank to secure from its officers. (Consolidated Bank and Trust Corp.
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a corporate loan, the right of the stockholders is v. CA, G.R. No. 114286, 19 Apr. 2001)
subordinate to the mortgagee. The stockholder has
the right to be paid the loan but not to the property Non-applicability of Doctrine of Separate
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of the corporation. (Divina, 2021 citing PNB v. Aznar, Juridical Personality in Examination of Officers
supra) to ascertain Properties, Income which can be
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subjected to Execution
Stockholders are NOT Real Parties in Interest to
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Claim Damages and Recover Compensation The Doctrine of Separate Juridical Personality does
not apply if the judgment creditor wanted the
The stockholders were clearly not vested with any officers to be examined not for the purpose of
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direct interest in the personal properties coming passing unto them the liability of the judgment
under the levy on attachment by virtue alone of obligor but to ascertain the properties and income
their being stockholders of the corporation. Their of the latter which can be subjected for execution in
stockholdings represented only their proportionate order to satisfy the final judgment and nothing else.
or aliquot interest in the properties of the (Linden Suites, Inc. v. Meridien Far East Properties,
corporation but did not vest in them any legal right Inc., G.R. No. 211969, 04 Oct. 2021)
or title to any specific properties of the corporation.
Without doubt, the corporation remained the owner Officers NOT Liable for Dismissal of Employee
as a distinct legal person. Given the separate and except in Cases of Evident Malice and/or Bad
distinct legal personality of the corporation, the Faith
stockholders lacked the legal personality to claim
the damages sustained from the levy of the former’s Q: Respondents had been employed as security
properties. (Stronghold Insurance Company, Inc. v. guards by petitioner Symex. They were not given
Cuenca, G.R. No. 173297, 06 Mar. 2013) a rest day, and were not paid their overtime pay,
five-day service incentive leave pay, and 13th
month pay. Thus, respondents filed a complaint
against Symex and its President and Chairman of
2023 GOLDEN NOTES
the Board, Arcega. Capt. Cura, the operations imprisonment. (Ching v. Secretary of Justice, G.R. No.
manager of Symex, told respondents that they 164317, 06 Feb. 2006)
would not be given a duty assignment unless
they withdrew the complaint they filed. XPN: However, a corporation may be charged and
Respondents refused to obey Capt. Cura, who prosecuted for a crime if the imposable penalty is
then told them that they were dismissed. Is fine. Even if the statute prescribes both fine and
Arcega solidarily liable for the obligations of imprisonment as penalty, a corporation may be
Symex to respondents? prosecuted and, if found guilty, may be fined. (Ibid.)
A: NO, there was no showing that Arcega, as RECOVERY OF DAMAGES

President of Symex, willingly and knowingly voted
or assented to the unlawful acts of the company. A Recovery of Moral Damages
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corporation is a juridical entity with a legal
personality separate and distinct from those acting GR: A corporation is not entitled to moral damages
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for and, in its behalf, and, in general, from the people because, being an artificial person and having
comprising it. Thus, as a rule, an officer may not be existence only in legal contemplation, it has no
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held liable for the corporation's labor obligations feelings, no emotions, no senses. (ABS-CBN
unless he acted with evident malice and/or bad faith Broadcasting Corp. v. CA, G.R. No. 128690, 21 Jan.
in dismissing an employee. To hold a director or 1999)
officer personally liable for corporate obligations,
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two requisites must concur: (1) it must be alleged in XPNs:
the complaint that the director or officer assented to 1. A corporation may recover moral damages
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patently unlawful acts of the corporation or that the under item 7 of Art. 2219 of the NCC because
officer was guilty of gross negligence or bad faith; said provision expressly authorizes the
and (2) there must be proof that the officer acted in recovery of moral damages in cases of libel,
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bad faith. (Symex Security Services, Inc. v. Rivera, Jr., slander, or any other form of defamation. Said
G.R. No. 202613, 08 Nov. 2017) provision does not qualify whether the injured
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party is a natural or juridical person. (Filipinas
LIABILITY FOR TORTS AND CRIMES Broadcasting Network, Inc. v. AMEC-BCCM, G.R.
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No. 141994, 17 Jan. 2005)
A Corporation may be held Liable for Torts
2. When the corporation has a reputation that is
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A corporation is liable whenever a tortious act is debased, resulting in its humiliation in the
committed by an officer or agent under express business realm. But in such a case, it is
direction or authority from the stockholders or imperative for the claimant to present proof to
members acting as a body, or, generally, from the justify the award. It is essential to prove the
directors as the governing body. (PNB v. CA, G.R. No. existence of the factual basis of the damage and
L-27155, 18 May 1978) its causal relation to petitioner’s acts. (MERALCO
v. T.E.A.M. Electronics Corp., et. al., G.R. No.
Liability of a Corporation in Case of Crimes 131723, 13 Dec. 2007)
GR: If the crime is committed by a corporation or NOTE: While the court may allow the grant of moral
other juridical entity, the directors, officers, damages to corporations, it is not automatically
employees, or other officers thereof responsible granted; there must still be proof of the existence of
for the offense shall be charged and penalized for the factual basis of the damage and its causal
the crime, precisely because of the nature of the relation to the defendant’s acts. This is so because
crime and the penalty therefor. A corporation moral damages, though incapable of pecuniary
cannot be arrested and imprisoned; hence, cannot estimation, are in the category of an award designed
be penalized for a crime punishable by to compensate the claimant for actual injury
COMMERCIAL LAW
suffered and not to impose a penalty on the Grounds for Application of Doctrine of Piercing
wrongdoer. (Crystal v. BPI, G.R. No. 172428, 28 Nov. the Corporate Veil
2008)
It applies upon the following circumstances:
b) DOCTRINE OF PIERCING THE (F-A-C-O)
CORPORATE VEIL 1. If the fiction is used to perpetrate fraud
(Fraud Test);
The Doctrine of Piercing the Corporate Veil is the
doctrine that allows the State to disregard, for 2. If a certain corporation is only an adjunct or
certain justifiable reasons, the notion that a an extension of the personality of the
corporation has a personality separate and distinct corporation (Alter Ego or Instrumentality
from the persons composing it. Test);
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Where it appears that business enterprises are 3. If the complete control of one corporate
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owned, conducted, and controlled by the same entity to another which perpetuated the
parties, law and equity will disregard the legal wrong is the proximate cause of the injury
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fiction that these corporations are distinct entities (Control Test); or
and shall treat them as one. This is in order to
protect the rights of third persons. (Vicmar 4. If the fiction is pierced to make the
Development Corporation v. Elarcosa, et al., G.R. No. stockholders liable for the obligation of the
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202215, 09 Dec. 2015) corporation (Objective Test).
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Absent any allegation or proof of fraud or other Q: Romeo Morales was able to obtain a favorable
public policy considerations, the existence of judgment for a sum of money against Kukan, Inc.
interlocking directors, officers and stockholders is With the judgment attaining finality, the sheriff
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not enough justification to pierce the veil of levied on execution various personal properties
corporate fiction as in the instant case. (Hacienda found at what was supposed to be Kukan’s office.
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Luisita Incorporated v. Presidential Agrarian Reform Kukan International Corporation (KIC) filed a
Council, G.R. No. 171101, 22 Nov. 2011) third-party complaint, alleging that it was the
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owner of the levied properties. Morales prayed
Effect of Piercing the Corporate Veil that the principle of piercing the veil of
corporate fiction be applied in order to satisfy
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1. The corporation will be treated merely as the judgment debt of Kukan. The RTC granted
an association of persons, undertaking a the motion of Morales and declared KIC and
business and the liability will attach Kukan as one and the same corporation. The CA
directly to the officers and stockholders. affirmed the RTC. Did the RTC properly apply the
doctrine?
2. Where there are two (2) corporations, they
will be merged into one, the one being A: NO. The principle of piercing the veil of
merely regarded as the instrumentality, corporate fiction, and the resulting treatment of
agency, conduit, or adjunct of the other. two related corporations as one and the same
juridical person with respect to a given transaction,
NOTE: Notwithstanding that the corporate veil has is basically applied only to determine established
been pierced, the corporation continues for other liability; it is not available to confer on the court a
legitimate objectives, the corporate character is not jurisdiction it has not acquired over a party not
necessarily abrogated. (Reynoso IV v. CA, G.R. Nos. impleaded in a case. Elsewise put, a corporation not
116124-25, 22 Nov. 2000) impleaded in a suit cannot be subject to the courts
process by piercing the veil of its corporate fiction.
In that situation, the court has not acquired
2023 GOLDEN NOTES
jurisdiction over the corporation and, hence, any to settle the judgment; thus a tourist bus was
proceedings taken against that corporation and its levied.
property would infringe on its right to due process.
Gold Line Tours Inc. filed a third-party claim,
Two-fold Implication claiming that the levied tourist bus be returned to
it because it was its owner, it had not been made
1. The court must first acquire jurisdiction over a party to the case, and it was a corporation
the corporation or corporations involved entirely different from TTAI. Is Gold Line’s
before its or their separate personalities are contention, correct?
disregarded; and
A: NO. Whenever necessary for the interest of the
2. The doctrine of piercing the veil of corporate public or for the protection of enforcement of their
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entity can only be raised during a full-blown rights, the notion of legal entity should not and is not
trial over a cause of action duly commenced to be used to defeat public convenience, justify
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involving parties duly brought under the wrong, protect fraud, or defend crime. There is
authority of the court by way of service of sufficient factual basis to find that Goldline and TTAI
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summons or what passes as such service. were one and the same entity, specifically: (a)
(Kukan International Corp v. Reyes, G.R. No. documents submitted showing that Cheng, who
182729, 29 Sept. 2010) claimed to be the operator of TTAI, is also the
President/Manager and an incorporator of Gold Line;
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NOTE: The Supreme Court, however, ruled and (b) Travel and Tours Advisers, Inc. had been
differently in Gold Line Tours v. Lacsa (G.R. No. known in Sorsogon as Goldline.
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159108, 18 June 2012). It held that if the RTC had
sufficient factual basis to conclude that the two The RTC was correct in finding that the two
corporations are one and the same entity as when companies are actually one and the same, hence the
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they have the same president and controlling levy for the bus in question was proper. The RTC thus
shareholder and it is generally known in the place rightly ruled that Goldline might not be shielded from
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where they do business that they are one, the third- liability under the final judgment through the use of
party claim filed by the other corporation was the doctrine of separate corporate identity. Truly,
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properly set aside and the levy on its property held this fiction of law could not be employed to defeat the
valid even though the latter was not made a party ends of justice. (Gold Line Tours, Inc. v. Heirs of Maria
to the case. The judgment may be enforced against Concepcion Lacsa, G.R. No. 159108, 18 June 2012)
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the other corporation to prevent multiplicity of
suits and save the parties unnecessary expenses Q: Gesolgon and Santos (Petitioners) alleged that
and delays. (Divina, 2021) they were hired by Mikrut, the CEO of both
CyberOne AU and CyberOne PH (Respondents), as
Q: Ma. Concepcion Lacsa was riding a Goldline part-time home-based remote Customer Service
passenger bus owned and operated by Travel & Representatives of CyberOne AU. They were
Tours Advisers, Inc. (TTAI) when the bus collided asked to become dummy directors and/or
with a passenger jeepney, causing her instant incorporators of CyberOne PH. They were
death. The Heirs of Concepcion instituted a suit in promoted as Managers and were given increases
the RTC for damages due to breach of contract, in their salaries, which were made to appear as
with the complaint set against “Travel & Tours paid for by CyberOne PH. Mikrut made them
Advisers, Inc. (Goldline)” and the bus driver. The choose one from three options: (a) to take an
RTC ruled in favor of the Heirs, holding TTAI indefinite furlough and be placed in a manpower
liable to pay the heirs damages and expenses. A pool to be recalled in case there is an available
writ of execution was served upon TTAI and position; (b) to stay with CyberOne AU but with an
Cheng, operator of the Goldline bus. Cheng failed entry level position; or (c) to tender their
irrevocable resignation.
COMMERCIAL LAW
Petitioners alleged that they were constrained to Circumstances which did NOT result to the
pick the first option in order to save their jobs. Piercing of the Corporate Veil
They later filed a case against respondents and
CyberOne AU for illegal dismissal; and claimed The mere fact that: (Fi-Co-S)
for non-payment or underpayment of their
salaries and 13th month pay. CyberOne PH, 1. A corporation owns Fifty (50%) of the
Mikrut and Juson denied that any employer- capital stock of another corporation, or the
employee relationship existed between majority ownership of the stocks of a
petitioners and CyberOne PH. They insisted that corporation is not per se a cause for
petitioners were incorporators or directors and piercing the veil.
not regular employees of CyberOne PH. They
claimed that petitioners were employees of 2. Two corporations have Common directors
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CyberOne AU. Should the doctrine of piercing the or same or single stockholder who has all or
corporate veil be applied in this case? nearly all of the capital stock of both
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corporations is not in itself sufficient
A: NO, the application of the doctrine of piercing the ground to disregard separate corporate
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corporate veil is unwarranted in the present case. entities.
No evidence was presented to prove that CyberOne
PH was organized for the purpose of defeating public 3. There is a Substantial identity of the
convenience or evading an existing obligation. incorporators of the two (2) corporations
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Petitioners failed to allege any fraudulent acts does not necessarily imply fraud and does
committed by CyberOne PH to justify a wrong, not warrant piercing the corporate veil.
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protect a fraud, or defend a crime. The mere fact that
CyberOne PH's major stockholders are CyberOne AU Three-pronged Test to Determine the
and respondent Mikrut does not prove that CyberOne Application of the Alter Ego or Instrumentality
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PH was organized and controlled, and its affairs Theory (C-F-H)
conducted in a manner that made it merely an
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instrumentality, agency, conduit or adjunct of 1. Control, not mere majority or complete
CyberOne AU. stock control, but complete domination, not
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only of finances but of policy and business
Petitioners failed to prove that CyberOne AU and practice in respect to the transaction
Mikrut, acting as the Managing Director of both attacked so that the corporate entity as to
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corporations, had absolute control over CyberOne this transaction had at the time no separate
PH. Even granting that CyberOne AU and Mikrut mind, will or existence of its own
exercised a certain degree of control over the (Instrumentality or Control test);
finances, policies, and practices of CyberOne PH, such
control does not necessarily warrant piercing the veil 2. Such control must have been used by the
of corporate fiction since there was not a single proof defendant to commit fraud or wrong, to
that CyberOne PH was formed to defraud petitioners perpetuate the violation of a statutory or
or that CyberOne PH was guilty of bad faith or fraud. other positive legal duty, or dishonest and
Hence, the doctrine of piercing the corporate veil unjust act in contravention of plaintiff’s
cannot be applied in the instant case. (Gesolgon v. legal right (Fraud test); and
CyberOne PH., Inc., G.R. No. 210741, 14 Oct. 2020, J.
Hernando) 3. The aforesaid control and breach of duty
must have proximately caused the injury or
unjust loss complained of. (Harm test)
2023 GOLDEN NOTES
INSTRUMENTALITY OR CONTROL TEST corporate veil. (DBP v. Hydro Resources Contractors
Corp., G.R. Nos. 167603, 167561, & 167530, 13 Mar.
This test requires that the subsidiary be completely 2013)
under the control and domination of the parent. It
examines the parent corporation’s relationship with Piercing the Veil of Corporate Fiction on the
the subsidiary. It inquires whether a subsidiary Basis of Equity
corporation is so organized and controlled and its
affairs are so conducted as to make it a mere Equity cases applying the piercing doctrine are what
instrumentality or agent of the parent corporation are termed the "dumping ground," where no fraud
such that its separate existence as a distinct or alter ego circumstances can be culled by the
corporate entity will be ignored. It seeks to establish Court to warrant piercing.
whether the subsidiary corporation has no
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autonomy and the parent corporation, though Specifically, the equity test can be applied when:
acting through the subsidiary in form and
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appearance, “is operating the business directly for 1. The corporate personality would be
itself.” inconsistent with the business purpose of the
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legal fiction;
FRAUD TEST
2. The piercing the corporate fiction is necessary
This test requires that the parent corporation’s to achieve justice or equity for those who deal
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conduct in using the subsidiary corporation be in good faith with the corporation; or
unjust, fraudulent, or wrongful. It examines the
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relationship of the plaintiff to the corporation. It 3. The use of the separate juridical personality is
recognizes that piercing is appropriate only if the used to confuse legitimate issues.
parent corporation uses the subsidiary in a way that
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harms the plaintiff creditor. As such, it requires a Indications that a Subsidiary Corporation is a
showing of “an element of injustice or fundamental Mere Instrumentality of its Parent Corporation
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unfairness.”
1. The parent corporation owns all or most of
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HARM TEST the capital stock of the subsidiary;
This test requires the plaintiff to show that the 2. The parent and subsidiary corporations
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defendant’s control, exerted in a fraudulent, illegal, have common directors or officers;
or otherwise unfair manner toward it, caused the
harm suffered. A causal connection between the 3. The parent corporation finances the
fraudulent conduct committed through the subsidiary;
instrumentality of the subsidiary and the injury
suffered or the damage incurred by the plaintiff 4. The parent corporation subscribes to all the
should be established. The plaintiff must prove that, capital stock of the subsidiary or otherwise
unless the corporate veil is pierced, it would have causes its incorporation;
been treated unjustly by the defendant’s exercise of
control and improper use of the corporate form and, 5. The subsidiary has grossly inadequate
thereby, suffer damages. capital;
NOTE: Piercing the corporate veil based on the alter 6. The parent corporation pays the salaries
ego theory requires the concurrence of the three and other expenses or losses of the
elements – (1) control, (2) fraud or fundamental subsidiary;
unfairness, and (3) harm or damage. The absence of
any of these elements prevents piercing the
COMMERCIAL LAW
7. The subsidiary has substantially no satisfy claims against a corporate insider.
business except with the parent Reverse-piercing flows in the opposite
corporation or no assets except those direction (of traditional corporate veil-
conveyed to or by the parent corporation; piercing) and makes the corporation liable for
the debt of the shareholders." (IAM/E v. Litton
8. In the papers of the parent corporation or and Company Inc., G.R. No. 191525, 13 Dec.
in the statements of its officers, the 2017)
subsidiary is described as a department or
division of the parent corporation, or its Two (2) Types of Reverse Piercing
business or financial responsibility is
referred to as the parent corporation’s 1. Outsider reverse piercing occurs when a
own; party with a claim against an individual or
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corporation attempts to be repaid with assets
9. The parent corporation uses the property of a corporation owned or substantially
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of the subsidiary as its own; controlled by the defendant.
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10. The directors or executives of the 2. Insider reverse piercing, the controlling
subsidiary do not act independently in the members will attempt to ignore the corporate
interest of the subsidiary but take their fiction in order to take advantage of a benefit
orders from the parent corporation; available to the corporation, such as an interest
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in a lawsuit or protection of personal assets.
11. The formal legal requirements of the (IAM/E v. Litton and Company Inc., supra)
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subsidiary are not observed. (PNB v.
Ritratto Group, G.R. No. 142616, 13 July Q: Plaintiffs filed a collection action against X
2001) Corporation. Upon execution of the court's
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decision, X Corporation was found to be without
Piercing the Corporate Veil May Apply to Natural assets. Thereafter, the plaintiffs filed an action
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Persons against its present and past stockholder, Y
Corporation, which owned substantially all of
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1. When the Corporation is the Alter Ego of a the stocks of X corporation. The two
Natural Person – the piercing of the corporate corporations have the same board of directors
veil may apply to corporations as well as and Y Corporation financed the operations of X
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natural persons involved with corporations. corporation. May Y Corporation be held liable
The "corporate mask may be lifted and the for the debts of X Corporation? Why? (2001
corporate veil may be pierced when a BAR)
corporation is just but the alter ego of a person
or of another corporation." A: YES. Y Corporation may be held liable for the
debts of X Corporation. The doctrine of piercing the
2. Reverse Piercing of the Corporate Veil – from veil of corporation fiction applies to this case. The
American parlance of what is called Reverse two corporations have the same board of directors,
Piercing or Reverse Corporate Piercing or Y Corporation owned substantially all of the stocks
piercing the corporate veil "in reverse." As held of X Corporation, and Y Corporation controls the
in the U.S. Case, C.F. Trust, Inc., v. First Flight finances of X Corporation. These facts justify the
Limited Partnership, "in a traditional veil- conclusion that the latter is merely an extension of
piercing action, a court disregards the the personality of the former, and that the former
existence of the corporate entity so a claimant controls the policies of the latter. An overall
can reach the assets of a corporate insider. In a appraisal of the circumstances presented by the
reverse piercing action, however, the plaintiff facts of the case, yields to the conclusion that the X
seeks to reach the assets of a corporation to Corporation is merely an adjunct, business conduit
2023 GOLDEN NOTES
or alter ego, of Y Corporation and that the fiction of Number of Incorporators/Corporators
corporate entities, separate and distinct from each,
GR: No limit.
should be disregarded. (CIR v. Norton & Harrison
Company, G.R. No. L‐17618, 31 Aug. 1964)
XPN: Close
corporations – not
NOTE: There is no hard and fast rule when to apply
more than a specified
the doctrines of separate legal entity and piercing
number of persons, not
the veil of corporate fiction. Each case must be
Not more than 15. exceeding 20. (Sec. 95,
judged based on its own particular circumstances.
RCC)
The undeniable yardstick though is that lacking any
harm or injury to another, or in the absence of
NOTE: There must
abuse of the legal fiction of the corporation, the
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only be one
doctrine of separate legal entity stands. (Divina,
stockholder in a One
2020)
Person Corporation.
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Incorporator vs. Corporator Filipino Citizenship
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GR: Filipino citizenship is not a requirement.
INCORPORATOR CORPORATOR
Who are they XPN: When engaged in a business which is
Those who compose a wholly or partly-nationalized. In the case of
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corporation, whether partly-nationalized, the requisite percentage of
as stockholders or as Filipino stockholdings /membership must be
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members. attained, and the Board of Directors / Trustees
Those stockholders or must be to the same extent.
members mentioned in A stockholder may or
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the AOI as originally may not be a 5. CAPITAL STRUCTURE
forming and subscriber.
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composing the Subscribers are
a) NUMBER AND QUALIFICATIONS OF
corporation and who persons who have
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INCORPORATORS
are signatories thereof. agreed to take and pay
for original, unissued
1. The RCC provides that any person, partnership,
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shares of a corporation
association, or corporation, singly or jointly
formed or to be
with others;
formed.
Signatory of the AOI
NOTE: The word “singly” pertains to a One
May or may not be Person Corporation, which may only be
A signatory of the AOI.
signatory of the AOI. incorporated by a natural person, trust, or
Effect upon the Sale of his Shares estate;
Ceases to be a
2. Incorporators must not be more than 15;
corporator by sale of
3. A natural person incorporator must be of legal
his shares in case of
age;
Does not cease to be stock corporation.
4. Each must own or subscribe to at least one (1)
an incorporator upon
share of the capital stock. (Sec. 10, RCC)
sale of his shares. In case of non-stock
corporation, the
Q: Must all incorporators and directors be
corporator ceases to be
residents of the Philippines? (2006 BAR)
a member.
COMMERCIAL LAW
A: NO. The RCC has removed the residency c) CORPORATE TERM
requirement. Thus, incorporators and directors do
not need to be residents of the Philippines A corporation shall have perpetual existence unless
its articles of incorporation provides otherwise.
Capital Stock Requirements
Extension of Corporate Term
GR: Stock corporations shall not be required to have
a minimum capital stock. (Sec. 12, RCC) The period to extend corporate term should be
made within 3 years prior to the original or
XPN: As otherwise specifically provided by special subsequent expiry date(s) unless there are
law. justifiable reasons for an earlier extension as may be
determined by the SEC (Sec. 11, RCC)
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b) SUBSCRIPTION REQUIREMENTS
NOTE: Extension of corporate term shall take effect
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Subscription and Capital Requirements only on the day following the original or subsequent
expiry date(s). (Divina, 2021)
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Under the old law, at least 25% of the authorized
capital stock must be subscribed and at least 25% of Requisites for Extension or Shortening of
the subscribed capital should be paid at the time of Corporate Term
incorporation. However, Sec. 12, RCC provides that
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stock corporations are no longer required to have a 1. Amendment of articles of incorporation;
minimum subscription and paid-up capital
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requirement, except as otherwise provided by a 2. The extension must be approved by at least
special law. (Divina, 2021) the majority of the board of directors and
the stockholders rep resenting at least
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NOTE: The 25%-25% rule, though not applicable in 2/3 of the outstanding capital stock;
incorporation, should still be complied with in case
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of increase of capital stock. 3. No extension may be made earlier than 3
years prior to the original or subsequent
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Q: Sec. 11, Art. 12 of the 1987 Constitution expiry date(s), unless there are justifiable
provides that “at least 60% of the ‘capital’ of reasons;
corporations engaged in public utility should be
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owned by Filipinos.” What does the term 4. Extension of corporate term shall take
“capital” in the aforementioned provision refer effect only on the day following the original
to? or subsequent expiry date(s); and
A: The SC clarified that the term “capital” in Sec. 11, 5. The extension or shortening of term is
Art. 12 of the 1987 Constitution refers to shares effective only upon approval of the SEC.
with voting rights, as well as with full beneficial
ownership. This is precisely because the right to d) CLASSIFICATION OF SHARES
vote in the election of directors, coupled with full
beneficial ownership of stocks, translates to Kinds or Classifications of Shares
effective control of a corporation. (Divina, 2021
citing Roy III v. Herbosa, G.R. No. 207246, 22 Nov. 1. Par value shares;
2016) 2. No par value shares;
3. Common shares;
4. Preferred shares;
5. Redeemable shares;
6. Treasury shares;
2023 GOLDEN NOTES
7. Founder’s share; 2. The entire consideration received by the
8. Voting shares; corporation for its no-par value shares shall be
9. Non-voting shares; and treated as capital and shall not be available for
10. Convertible shares; distribution as dividends. (Sec. 6, RCC) Banks,
trust, insurance, and pre-need companies,
Who may Classify Shares public utilities, building and loan associations,
and other corporations authorized to obtain or
1. Incorporators – the classes and number of access funds from the public, whether publicly
shares which a corporation shall issue are first listed or not, shall not be permitted to issue no-
determined by the incorporators as stated in par value shares of stock. (ibid.)
the AOI filed with the SEC;
NOTE: Preferred shares of stock may be issued
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2. Board of directors and stockholders – after only with a stated par value.
the corporation comes into existence,
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classification of shares may be altered by the COMMON SHARES
board of directors and the stockholders by
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amending the AOI pursuant to Sec. 15, RCC. Common shares are the basic class of stock
ordinarily and usually issued without privileges or
PAR VALUE SHARES advantages except that they cannot be denied the
right to vote. Owners are entitled to a pro-rata share
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Shares with a value fixed in the AOI and the in the profits of the corporation and in its assets
certificates of stock. The par value fixes the upon dissolution and liquidation, and in the
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minimum issue price of the shares. management of its affairs. (Divina, 2020)
NO PAR VALUE SHARES PREFERRED SHARES
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These are shares having no stated par value in the Preferred shares are par-value shares given
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AOI. preference in the distribution of dividends and in
the distribution of corporate assets in case of
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Shares of capital stock issued without par value liquidation, or such other preferences. The board of
shall be deemed fully paid and nonassessable and directors, where authorized in the AOI, may fix the
the holder of such shares shall not be liable to the terms and conditions of preferred shares of stock or
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corporation or to its creditors in respect thereto any series thereof: Provided, further, That such
(Sec. 6, RCC). terms and conditions shall be effective upon filing of
a certificate thereof with the SEC. . (Sec. 6, RCC)
Limitations on No Par Value Shares
Kinds of Preferred Shares
1. The issued price of no-par value shares may be
fixed in the AOI or by the board of directors 1. As to Preference –
pursuant to authority conferred by the AOI or
the bylaws, or if not so fixed, by the a. Preferred shares as to assets – gives the
stockholders representing at least a majority of holder preference in the distribution of the
the outstanding capital stock at a meeting duly assets of the corporation in case of
called for the purpose provided that the issued liquidation.
price of no-par value shares shall not be less
than P5.00. (Sec. 6 in relation to Sec. 61, RCC) b. Preferred shares as to dividends –
entitled to receive dividends on said share
to the extent agreed upon before any
COMMERCIAL LAW
dividends at all are paid to the holders of Common vs. Preferred shares
common stock.
COMMON SHARES PREFERRED SHARES
2. As to Participation – Definition
Stock which entitles

a. Participating preferred shares – entitled
Stock which entitles the holder to some
to participate with the common shares in
the owner to an equal preference, either in
excess distribution.
pro rata division of the dividends, or in
profits. distribution of assets,
b. Non-participating preferred shares – not
or both.
entitled to participate with the common
shares in excess distribution. Value
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3. As to Cumulation – Depends if it is a par or
Par value.
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no-par value share.
a. Cumulative preferred shares – if a Voting Rights
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dividend is omitted in any year, it must be
made up in a later year before any dividend May be deprived of
may be paid on the common shares in the Usually vested with the voting rights except in
later year. exclusive right to vote. the instances provided
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by law. (Sec. 6, RCC)
b. Non-cumulative preferred shares – there
Preference upon liquidation
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is no need to make up for undeclared
dividends. No advantage, priority,
Has preference over
or preference over any
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dividends/profits/
Holders of Preferred Shares are Not Creditors of other stockholder in
distribution of assets.
the Corporation the same class.
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Preferences granted to preferred stockholders do REDEEMABLE SHARES
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not give them a lien upon the property of the
corporation nor make them creditors of the These are shares which may be purchased by the
corporation, the right of the former being always
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corporation from the holders of such shares upon
subordinate to the latter. Dividends are thus the expiration of a fixed period, regardless of the
payable only when there are profits earned by the existence of unrestricted retained earnings in the
corporation and as a general rule, even if there are books of the corporation, and upon such other terms
existing profits, the board of directors has the and conditions stated in the AOI and the certificate
discretion to determine whether or not dividends of stock representing the shares, subject to rules
are to be declared. Shareholders, both common and and regulations issued by the Commission. (Sec. 8,
preferred, are considered risk takers who invest RCC)
capital in the business and who can look only to
what is left after corporate debts and liabilities are Kinds of Redeemable Shares
fully paid. (Republic Planters Bank v. Agana, Sr., G.R.
No. 51765, 03 Mar. 1997) 1. Mandatory – the issuing corporation must
redeem the shares after the expiration of a
stated period or when demanded by the holder;
provided that the corporation has sufficient
assets to pay for the shares or the redemption
will not bring about the insolvency of the
corporation.
2023 GOLDEN NOTES
2. Optional – the issuing corporation may or may (Republic Planters Bank v. Judge Agana, G.R. No.
not redeem the shares after a stated period. 51765. March 3, 1997)
If the terms of the preferred shares are silent, the Reissuance of Redeemed Shares
redemption is at the option of the corporation.
(Divina, 2020) In the case of redeemable shares reacquired, the
same shall be considered retired and no longer
Limitations on Redeemable Shares (A-T-V-I) issuable, unless otherwise provided in the Articles
of Incorporation. (SEC-OGC Opinion 19-20 dated 17
1. The issuance of redeemable shares must be May 2019, citing 1982 SEC Rules Governing
expressly provided in the Articles of Redeemable and Treasury Shares)
incorporation.
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TREASURY SHARES
2. The Terms and conditions affecting said shares
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must be stated both in the AOI and in the Shares that have been earlier issued and fully paid
certificates of stock. for, but have been reacquired by the corporation
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through purchase, donation, redemption or through
3. Redeemable shares may be deprived of Voting some other lawful means. (Sec. 9, RCC)
rights in the AOI, unless otherwise provided in
the Code. (Sec. 6, RCC) NOTE: Treasury shares do not revert to the
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unissued shares of the corporation but are regarded
4. Redemption may not be made where the as property acquired by the corporation which may
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corporation is Insolvent or if such redemption be reissued or sold by the corporation at a price to
will cause insolvency or inability of the be fixed by the Board of Directors. (SEC-OGC Opinion
corporation to meet its debts as they mature. 19-20 dated 17 May 2019, citing 1982 SEC Rules
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(Republic Planters Bank v. Agana, Sr., G.R. No. Governing Redeemable and Treasury Shares)
51765, 03 Mar. 1997)
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Legitimate Purpose to Acquire Own Share
Q: Planters Bank issued preferred redeemable
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shares with a feature that entitles them to be 1. To collect or compromise unpaid
preferred in the payment of dividends. indebtedness to the corporation arising out
Subsequently, the bank experienced liquidity of unpaid subscription, in a delinquency
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problems. The Central Bank ruled that the bank sale, and to purchase delinquent shares
has a reserve deficiency. Despite the condition, sold during said sale;
one of the stockholders holding the preferred
shares filed an action against the corporation to 2. To eliminate fractional shares arising out of
redeem his shares and pay the dividends due. stock dividends;
Will the suit prosper?
3. To pay dissenting or withdrawing
A: NO. While redeemable shares may be redeemed stockholders entitled to payment for their
regardless of the existence of unrestricted retained shares under the provisions of this Code;
earnings, this is subject to the condition that the
corporation has, after such redemption, assets in its 4. Redemption of Redeemable Shares; and
books to cover debts and liabilities inclusive of
capital stock. Redemption, therefore, may not be 5. Purchase of Shares when ordered by the
made where the corporation is insolvent or if such SEC due to a deadlock in a Close
redemption will cause insolvency or inability of the corporation.
corporation to meet its debts as they mature.
COMMERCIAL LAW
Limitations on Treasury Shares NOTE: Although a treasury share, not having been
retired by the corporation re-acquiring it, may be
1. It may be re-issued or sold again as long as re-issued or sold again, such share, as long as it is
it is for a reasonable price fixed by the BOD; held by the corporation as a treasury share,
participates neither in dividends, because dividends
2. Cannot participate in dividends; cannot be declared by the corporation to itself, nor
in the meetings of the corporation as voting stock,
3. It has no voting right as long as such for otherwise equal distribution of voting powers
remains in the Treasury, hence cannot among stockholders will be effectively lost and the
participate in meetings as voting stocks; directors will be able to perpetuate their control of
and the corporation, though it still represents a paid-for
interest in the property of the corporation. (CIR v.
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4. The amount of unrestricted retained Manning, G.R. No. L-28398, 06 Aug. 1975)
earnings (URE) equivalent to the cost of
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treasury shares being held shall be Treasury Shares vs. Redeemable Shares
restricted from being declared and issued
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as dividends. REDEEMABLE
TREASURY SHARES
SHARES
Apart from reacquiring the shares through some Description
lawful means, the Corporation Code is also explicit
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that while a corporation has the power to purchase Shares so acquired by
or acquire its own shares, the corporation must the corporation Issued by the
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have unrestricted retained earnings in its books to through purchase, corporation when
cover the shares to be purchased or acquired. In donation, redemption, expressly so provided
addition, in cases where the reason for reacquiring or any other lawful in the AOI.
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the shares is because of the unpaid subscription, the means.
Corporation Code is likewise explicit that the
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corporation must purchase the same during a Manner of Acquisition
delinquency sale. (Salido, Jr. v. Aramaywan Metals
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Development Corp., G.R. No. 233857, 18 Mar. 2021) Redeemable shares
Can only be acquired in may be acquired even
Treasury Shares Distributed via Dividends
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the presence of without URE for as long
unrestricted retained as it will not result in
They can be distributed only as property dividends. earnings (URE). the insolvency of the
They cannot be declared as stock or cash dividends corporation.
because they are not considered part of earned or
surplus profits. The distribution of cash or stock Applicability of the Trust Fund Doctrine
dividends out of treasury shares would be
converting the corporation into both a debtor and
Must comply with the Is an exception to the
creditor for the same amount at the same time or
trust fund doctrine. trust fund doctrine.
requiring it to take money or stock from one of its
pockets and putting it in another, which is absurd.
Effect of Redemption
Treasury shares may be declared as property
dividend to be issued out of the retained earnings While redeemable,
previously used to support their acquisition Are not redeemable; they are not re-issued,
provided that the amount of the said retained they may be re-issued. unless otherwise
earnings has not been subsequently impaired by provided.
losses. (SEC Opinion, 17 July 1984)
2023 GOLDEN NOTES
FOUNDERS' SHARES 4. Incurring, creating, or increasing bonded
Indebtedness;
Shares classified as such in the AOI, and which may
be given certain rights and preferences not enjoyed 5. Increase or decrease of capital stock;
by the owner of other stocks. (Sec. 7, RCC)
6. Merger or consolidation of the corporation
NOTE: Where the exclusive right to vote and be with another corporation or other
voted for in the election of directors is granted, it corporations;
must be for a limited period not to exceed five (5)
years from the date of incorporation: Provided, That 7. Investment of corporate funds in another
such exclusive right shall not be allowed if its corporation or business in accordance with
exercise will violate Commonwealth Act No. 108, this Code; and
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otherwise known as the “Anti-Dummy Law”; R.A.
No. 7042, otherwise known as the “Foreign 8. Dissolution of the corporation. (Sec. 6, RCC)
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Investments Act of 1991”; and other pertinent laws.
(Sec. 7, RCC) NOTE: Except as provided in the foregoing eight (8)
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instances, the vote required under the RCC to
VOTING SHARES approve a particular corporate act shall be deemed
to refer only to stocks with voting rights (Sec. 6, RCC)
Shares with a right to vote on all corporate acts.
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Usually refers to common shares, although the CONVERTIBLE SHARES
corporation may also grant voting rights to
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preferred shares under its AOI. A share that is changeable by the stockholder from
one class to another at a certain price and within a
NON-VOTING SHARES certain period. (Divina, 2020)
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Shares without the right to vote. The law only Other Kinds of Shares:
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authorizes the denial of voting rights in the case of
redeemable shares and preferred shares, provided 1. Fractional Share – A fractional share is a
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that there shall always be a class or series of shares share of equity that is less than one full
which have complete voting rights (common share.
shares). (Sec. 6, RCC)
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2. Shares in Escrow – A stock deposited with
Instances when Holders of Non-voting Shares a third person to be delivered to a
are still entitled to Vote stockholder or his assign, after complying
with certain conditions, usually the full
These redeemable and preferred shares, when such payment of subscription or purchase price.
voting rights are denied, shall nevertheless be (Divina, 2020)
entitled to vote on the following fundamental
matters: (A-A-S-I-I-M-I-D) NOTE: The classification of shares, their
corresponding rights, privileges, or restrictions, and
1. Amendment of articles of incorporation; their stated par value, if any, must be indicated in
the AOI. A corporation may further classify its
2. Adoption and amendment of By-laws; shares for the purpose of ensuring compliance with
constitutional or legal requirements. (Sec. 6, RCC)
3. Sale, Lease, Exchange, Mortgage, Pledge or
Other disposition (Sa-Le-M-P-O) of all or
substantially all of the corporate property;
COMMERCIAL LAW
6. INCORPORATION AND ORGANIZATION a prior complete organization before a corporation

enters into any kind of contract, one of the
exceptions that is recognized by American courts is
a) PROMOTER
that “a contract made by promoters of a corporation
on its behalf may be adopted, accepted or ratified by
A promoter is a person who brings about the
the corporation when organized.” (Rizal Light v. PSC,
formation and organization of a corporation by
G.R. No. L-20993, 28 Sep. 1968)
bringing together the incorporators or person
interested in the enterprise, procuring
b) SUBSCRIPTION CONTRACT
subscriptions or capital to the corporation.
It is a contract for the acquisition of unissued stock

NOTE: Notwithstanding the role of the promoter of
in an existing corporation or a corporation still to be
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“bringing together” the incorporators, a promoter is
formed, notwithstanding the fact that the parties
not in any sense an agent of a corporation. (Divina,
refer to it as purchase or some other contract. (Sec.
2021)
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59, RCC)
(1) LIABILITY OF PROMOTER
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Nature of Subscription Contract
GR: Promoters are personally liable on their

A subscription contract is indivisible. Consequently,
contracts made on behalf of the corporation to be
where stocks were subscribed and part of the
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formed.
subscription contract price was not paid, the whole
subscription shall be considered delinquent and not
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only the shares which correspond to the amount not
XPN: If there is an express or implied agreement to
paid. This is called the Doctrine of Individuality
the contrary. It must be noted that the corporation-
(Indivisibility) of Subscription. (Sec. 63, RCC)
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to-be-formed has adopted or ratified the contract
does not release the promoter from responsibility
Purchase vs. Subscription
unless a novation was intended.
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PURCHASE SUBSCRIPTION
(2) LIABILITY OF CORPORATION FOR
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As to what it pertains to
PROMOTER’S CONTRACT
Pertains to shares
Pertains to unissued
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already issued by the
GR: A corporation is not bound by the promoter’s shares.
contract. Since a corporation is yet to be made with corporation.
the assistance of a promoter, it still has no legal As to exercise of rights
existence. (Cagayan Fishing Development Co., Inc. v. Subscriber is entitled
Buyer cannot exercise
Sandiko, G.R. No. L-43350, 23 Dec. 1937) to exercise the rights of
the rights pertaining to
a stockholder even
the purchased sales
XPN: A corporation may be bound by the contract if without full payment of
without full payment of
it makes the contract its own through: the subscription;
purchase price unless
provided the
the sale agreement
1. Adoption or ratification of the contract in subscriber is not
provides otherwise.
entirety; delinquent
2. Acceptance of the contract’s benefits with As to enforcement of payment
knowledge of the terms thereof. The creditor of the The creditor of the
corporation cannot corporation may
NOTE: The rule held by the SC in Cagayan Fishing enforce payment of the enforce payment on
Development v. Sandiko is NOT absolute. Although unpaid purchase price the unpaid
the Cagayan Fishing case states that there should be for lack of privity to the subscriptions under
2023 GOLDEN NOTES
contract. the trust fund doctrine. at a fair valuation equal to the par or issued
(Divina, 2021) value of the stock issued;
c) PRE-INCORPORATION SUBSCRIPTION 3. Labor or services actually rendered to the

AGREEMENTS corporation;
Kinds of Subscription 4. Prior corporate obligations or

indebtedness;
1. Pre-incorporation Subscription – entered
into before incorporation; (Sec. 60, RCC) 5. Amounts transferred from unrestricted
2. Post-incorporation Subscription – retained earnings to stated capital (in case
entered into after incorporation. of declaration of stock dividends);
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Rules governing pre-incorporation contracts 6. Outstanding shares in exchange for stocks
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in the event of reclassification or
GR: A pre-incorporation subscription agreement is conversion;
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irrevocable for a period of 6 months from the date
of subscription. 7. Shares of stock in another corporation;
and/or
XPNs:
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1. If all of the other subscribers consent to the 8. Other generally accepted form of
revocation; consideration. (Sec. 61, RCC)
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2. If the incorporation of said corporation fails NOTE: Promissory notes or future services are not
to materialize within said period or within valid considerations.
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a longer period as may be stipulated in the
contract of subscription. Amount of Consideration
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PROVIDED: No pre-incorporation subscription may Shares of stock issued from the unissued portion of
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be revoked after the submission of the AOI to the the authorized capital stock shall not be issued for a
Securities and Exchange Commission. (Sec. 60, RCC) consideration less than the par or issued price
thereof.
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Stockholder is entitled to the rights pertaining
to shares of stock subscribed although not fully When Property is Accepted as a Consideration
paid for the Issuance of its Shares of Stock
As long as the shares are not considered delinquent, A corporation may accept property as consideration
stockholders are entitled to all rights granted to said for the issuance of its shares of stock under the
shares whether or not the subscription is fully paid. following conditions:
1. It must be necessary or convenient for its
d) CONSIDERATION FOR STOCKS use and lawful purposes.
2. It must be fairly valued, at least equal to the
Valid Considerations in a Subscription par or issued value of the stock issued.
Agreement 3. The valuation thereof shall initially be
determined by the stockholders or the
1. Actual cash paid to the corporation; board of directors.
2. Property, tangible or intangible, actually 4. The valuation is subject to the approval of
received the corporation and necessary or the SEC. (Sec. 61, RCC)
convenient for its use and lawful purposes
COMMERCIAL LAW
If the shares will not be issued in favor of existing 3. Place of principal office;
stockholders, the issuance should be approved by
the board of directors, as well as by the stockholders 4. Term of existence (if the corporation has
representing at least 2/3 of the outstanding capital not elected perpetual existence);
stock, otherwise, it will amount to a violation of the
preemptive right of the stockholders. (Sec. 38, RCC; 5. Names, nationalities and residences of
Divina, 2022) Incorporators;
e) ARTICLES OF INCORPORATION 6. Number of directors, which shall not be

more than 15 or the number of trustees
Articles of Incorporation which may be more than 15;
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It is the document prepared by the incorporators 7. Names, nationalities, and residences of the
organizing a corporation containing the matters persons who shall Act as directors or
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required by the RCC. It offers the ultimate evidence trustees until the first regular ones are
of the nature and purpose of a corporation. (Divina, elected and qualified;
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2021)
8. If a Stock corporation, the amount of its
Three-fold nature of AOI authorized capital stock, number of shares
and in case the shares are par value shares,
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An AOI, which stands as the corporate charter, is a the par value of each share;
contract of three-fold nature because it is a contract
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between: 9. Names, nationalities, number of shares, and
the amounts subscribed and paid by each of
1. The State and the corporation; the Original subscribers;
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2. The corporation and the stockholders; and
3. The stockholders inter se. 10. If Non-stock, the amount of capital, the
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names, residences, and amount paid by
(1) CONTENTS each contributor;
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11. Other matters as are not inconsistent with
All corporations organized under the Code shall file law and which the incorporators may deem
with the SEC an AOI in any of the official languages necessary and convenient. (Sec. 13, RCC)
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duly signed and acknowledged or authenticated, in
such form and manner as may be allowed by the Importance of indicating the principal office in
Commission, containing substantially the following the AOI
matters, except as otherwise prescribed by the Code
or by special law: (Na-P- Pla-T-I-Num-A-S-O-N-O) The principal office of a corporation determines its
residence or domicile. As such, the place indicated
1. Name of corporation; in the corporation’s AOI becomes controlling in
determining the venue for the filing of legal action
2. Purpose/s, indicating the primary and involving the corporation.
secondary purposes (Purpose clause);
NOTE: The principal office of the corporation is that
NOTE: The purpose clause determines which is stated in the AOI and NOT the place of its
whether the acts performed by the actual operations. (Divina, 2021)
corporation are authorized or beyond its
powers. Acts beyond the corporation’s
powers are called ultra vires acts.
2023 GOLDEN NOTES
(2) NON-AMENDABLE ITEMS (1) Not distinguishable from a name already
reserved or registered for the use of
Non-amendable items in the AOI another corporation;
Those matters referring to accomplished facts, (2) Already protected by law; or

except to correct mistakes, such as:
(3) Contrary to law, rules and regulations, may
1. Name of incorporators; summarily order the corporation to
2. Name of original subscribers to the capital immediately cease and desist from using
stock of the corporation and their such name and require the corporation to
subscribed and paid-up capital; register a new one. The Commission shall
3. Name of the original directors; also cause the removal of all visible
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4. Treasurer elected by the original signages, marks, advertisements, labels,
subscribers; prints and other effects bearing such
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5. Members who contributed to the initial corporate name. Upon the approval of the
capital of the non‐stock corporation; or new corporate name, the Commission shall
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6. Witnesses to the execution of the AOI. issue a certificate of incorporation under
7. Notarial Certificate the amended name.
f) CORPORATE NAME AND LIMITATIONS ON ITS If the corporation fails to comply with the
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USE Commission’s order, the Commission may hold the
corporation and its responsible directors or officers
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Corporate Name in contempt and/or hold them administratively,
civilly and/or criminally liable under this Code and
No corporate name shall be allowed by the other applicable laws and/or revoke the
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Commission if it is not distinguishable from that registration of the corporation. (Sec. 17, RCC)
already reserved or registered for the use of another
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corporation, or if such name is already protected by NOTE: A name is not distinguishable even if it
law, or when its use is contrary to existing law, rules contains one or more of the following:
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and regulations.
(a) The word “corporation”, “company”,
A name is not distinguishable even if it contains one “incorporated”, “limited”, “limited liability”,
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or more of the following: or an abbreviation of one of such words;
and
(a) The word “corporation”, “company”,
“incorporated”, “limited”, “limited liability”, (b) Punctuations, articles, conjunctions,
or an abbreviation of one of such words; contractions, prepositions, abbreviations,
and different tenses, spacing, or number of the
same word or phrase.
(b) Punctuations, articles, conjunctions,
contractions, prepositions, abbreviations, NOTE: Priority of adoption determines the right to
different tenses, spacing, or number of the the exclusive use of a corporate name with freedom
same word or phrase. from infringement. Further, to determine whether a
given corporate name is “deceptively” or
The Commission, upon determination that the “confusingly similar” with another entity’s
corporate name is: corporate name, the corporate names must be
evaluated in their entirety. (Lyceum of the
Philippines v. CA, G.R. No. 101897, 05 Mar. 1993)
COMMERCIAL LAW
Q: When may a corporation prohibit the use of a h) ELECTION OF DIRECTORS OR TRUSTEES
corporate name by another corporation?
A: Requirements and Limitations for the Election
1. When the complainant corporation of Directors or Trustees during the Regular
acquired a prior right over the use of such Meeting of the Stockholders or Members
corporate name through earlier
registration; and 1. Presence of Stockholders representing a
majority of the outstanding capital stock of
2. The proposed name is either: not the corporation or majority of the
distinguishable from that already reserved members, either in person or by proxy;
or registered for the use of the complainant
corporation; already protected by law or; NOTE: Sec. 23 of the RCC provides new
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its use is contrary to existing law, rules, and ways to vote such as through remote
regulations. (Divina, 2021) communication or in absentia.
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A Corporation that Changes its Corporate Name GR: It must be authorized in the by-laws or
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is NOT considered as a New Corporation by a majority of the Board of Directors.
A corporation that changes its corporate name is not XPN: The right to vote through such modes
considered as a new corporation. It is the same may be exercised in corporations vested
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corporation with a different name, and its character with public interest notwithstanding the
is in no respect changed. (Republic Planters Bank v. absence of a provision in the bylaws of such
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CA, G.R. No. 93073, 21 Dec. 1992; Zuellig Freight and corporations.
Cargo Systems vs. NLRC, et al., G.R. No. 157900, 22 July
2013) 2. The election must be by ballot, if requested
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by any voting stockholder or member;
g) REGISTRATION, INCORPORATION, AND
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COMMENCEMENT OF CORPORATE EXISTENCE 3. The total number of votes cast by him must
not exceed the number of shares owned by
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Corporation’s Commencement of Corporate him as shown in the books of the
Existence and Juridical Personality corporation multiplied by the whole
number of directors to be elected;
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A private corporation organized under the RCC
commences its corporate existence and juridical 4. No delinquent stock shall vote or be voted
personality from the date the SEC issues the for;
Certificate of Incorporation under its official seal.
5. A stockholder cannot be deprived in the
NOTE: A corporation does not acquire legal articles of incorporation or in the by-laws
personality from the mere execution of AOI or its of his statutory right to use any of the
filing with the SEC. (Divina, 2021) methods of voting in the election of
directors;
A corporation created under a special law acquires
legal personality upon effectivity of the special law 6. The candidates receiving the highest
creating it or compliance with the conditions number of votes shall be declared elected.
imposed by such law for the commencement of (Sec. 23, RCC)
corporate existence. (Ibid.)
2023 GOLDEN NOTES
Reportorial Requirement The non-holding of elections and the reasons
therefor shall be reported to the SEC within 30 days
Within 30 days after the election of directors, from the date of the scheduled election. The report
trustees and officers of the corporation, the shall specify a new date for the election, which shall
secretary or any other officer of the corporation, not be later than 60 days from the scheduled date.
shall submit to the Commission, the names,
nationality, shareholdings, and residence addresses If no new date has been designated, or if the
of the directors, trustees and officers elected. (Sec. rescheduled election is likewise not held, the SEC
25, RCC) may, upon the application of a stockholder, member,
director or trustee, and after verification of the
Q: In case where there are 2 lists of BOD unjustified non-holding of the election, summarily
submitted to SEC, which one is controlling? order that an election be held. The SEC shall have
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the power to issue such orders as may be
A: It is the list of directors in the latest general appropriate, including orders directing the issuance
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information sheet as filed with the SEC which is of a notice stating the time and place of the election,
controlling. (Premium Marble Resources, Inc. v. CA, designated presiding officer, and the record date or
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G.R. No. 96551, 04 Nov. 1996) dates for the determination of stockholders or
members entitled to vote.
Different Methods of Voting
Notwithstanding any provision of the articles of
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1. Straight Voting - every stockholder may incorporation or bylaws to the contrary, the shares
vote such number of shares for as many of stock or membership represented at such
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persons as there are directors to be elected. meeting and entitled to vote shall constitute a
quorum for purposes of conducting an election
2. Cumulative voting for one candidate - a under this section. (Sec. 25, RCC)
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stockholder is allowed to concentrate his
votes and give one candidate, as many votes i) ADOPTION OF BY-LAWS
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as the number of directors to be elected
multiplied by the number of his shares shall By-laws are rules and regulations or private laws
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equal. enacted by the corporation to regulate, govern and
control its own actions, affairs and concerns and of
3. Cumulative voting by distribution - a its stockholders or members and directors and
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stockholder may cumulate his shares by officers in relation thereto and among themselves in
multiplying the number of his shares by the their relation to it. (Sec. 23, RCC; Valley Golf &
number of directors to be elected and Country Club, Inc. vs. Vda. De Caram, G.R. No. 158805,
distribute the same among as many 16 Apr. 2009)
candidates as he shall see fit.
By-laws are adopted either prior to
Q: What happens if no election was held, or the incorporation or after incorporation
owners of majority of the outstanding capital
stock or majority of the members entitled to Prior to Incorporation:
vote are not present? 1. By-laws shall be approved and signed by
the incorporators; and
A: The meeting may be adjourned, and the outgoing
directors or trustee shall serve in a hold-over 2. By-laws together with Articles of
capacity. (Sec.23, RCC) Incorporation shall be submitted to
Securities and Exchange Commission. (Sec.
46, RCC)
COMMERCIAL LAW
After Incorporation: case, be more than the number prescribed by
1. Affirmative vote of stockholders the Commission;
representing at least a majority of the
outstanding capital stock or atleast a 7. Time for holding the annual election of
majority of the members in case of directors or trustees and the mode or manner
nonstock corporations; of giving notice thereof.
2. By-laws shall be signed by stockholders or 8. Manner of election or appointment and the

members voting for them; term of office of all officers other than directors
or trustees.
3. By-laws shall be kept in the principal office
of the corporation subject to the inspection 9. Penalties for violation of the by-laws.
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of the stockholders or members during
office hours and; 10. In case of stock corporations, the manner of
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issuing certificates.
4. A copy thereof, duly certified by a majority
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of the directors or trustees and 11. Such other matters as may be necessary for the
countersigned by the secretary of the proper or convenient transaction of its
corporation, shall be filed with the SEC and corporate business and affairs for the
attached to the original articles of promotion of good governance and anti-graft
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incorporation. (Sec. 45, RCC) and corruption measures. (Sec. 46, RCC)
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(1) CONTENTS OF BY-LAWS NOTE: An arbitration agreement may be provided
in the by-laws pursuant to Sec. 181 of RCC.
1. Time, place and manner of calling and
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conducting regular or special meetings of Non-submission of By-laws
directors or trustees.
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Non-filing of by-laws will not result in the automatic
2. Time and manner of calling and conducting dissolution of corporation. In actuality, one of SEC’s
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regular or special meetings of the stockholder documentary requirements for incorporation is the
or members. by-laws of the proposed corporation. Nevertheless,
it is submitted that a corporation which has not
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3. The required quorum in meeting of adopted by-laws, after incorporation, should be
stockholders or members and the manner of considered a de facto corporation. It has all the
voting therein. powers and privileges of a corporation under the
RCC until the State assails its existence in a direct
4. The modes by which a stockholder, member, proceeding. (Sawadjaan v. CA, G.R. No. 141735, 08
director, or trustee may attend meetings and June 2005)
cast their votes;
NOTE: Section 46 of the old Corporation Code
5. The form for proxies of stockholders and provides that there is a 1-month period to adopt by-
members and the manner of voting them. laws after corporation, but this has been removed
by the Revised Corporation Code. (Divina, 2021)
6. The directors’ or trustees’ qualifications, duties
and responsibilities, the 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 which shall, in no
2023 GOLDEN NOTES
(2) BINDING EFFECTS j) EFFECTS OF NON-USE OF CORPORATE
CHARTER
The following are the binding effects of by-laws:
If a corporation does not formally organize and
1. As to members/ stockholders, officers, commence its business within five (5) years from
trustees/ directors and corporation - the date of its incorporation, its certificate of
They are bound by and must comply with it. incorporation shall be deemed revoked as of the day
They are presumed to know the provisions following the end of the five-year period.
of the by-laws.
If a corporation has commenced its business but
2. As to third persons subsequently becomes inoperative for a period of at
least five (5) consecutive years, the Commission
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GR: They are not bound. may, after due notice and hearing, place the
XPN: They have knowledge or notice of the corporation under delinquent status.
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by-laws at the time the contract was
executed. (China Banking Corp. v. CA, G.R. A delinquent corporation shall have a period of two
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No. 117604, 26 Mar. 1997) (2) years to resume operations and comply with all
requirements that the Commission shall prescribe.
Q: When do by-laws become effective? Upon compliance by the corporation, the
Commission shall issue an order lifting the
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A: By-laws become effective only upon issuance of delinquent status. Failure to comply with the
SEC of a certification that the by-laws are in requirements and resume operations within the
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accordance with the RCC. (Sec. 45, RCC) period given by the Commission shall cause the
revocation of the corporation’s certificate of
(3) AMENDMENTS incorporation. (Sec. 21, RCC)
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Ways of Amending, Repealing or Adopting New 7. CORPORATE POWERS
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By-laws:
Kinds of Corporate Powers
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1. Amendment may be made by stockholders
together with the Board – by majority vote
1. Express Powers – granted by law, the
of directors and owners of at least a
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Corporation Code, and its Articles of
majority of the outstanding capital
Incorporation or Charter, and administrative
stock/members; or
regulations;
2. By the board only after due delegation by
2. Inherent/Incidental Powers – not expressly
the stockholders owning 2/3 of the
stated but are deemed to be within the capacity
outstanding capital stock/members.
of corporate entities; and
Provided, that such power delegated to the
board shall be considered as revoked
3. Implied/Necessary Powers – exists as a
whenever stockholders owning at least
necessary consequence of the exercise of the
majority of the outstanding capital stock or
express powers of the corporation or the
members, shall vote at a regular or special
pursuit of its purposes as provided for in the
meeting. (Sec. 47, RCC)
Charter.
COMMERCIAL LAW
Q: Eliodoro Cruz was the former president of Three (3) Levels of Control in the Corporate
Filport. During the general stockholders’ Hierarchy
meeting, he wrote a letter to the corporation’s
Board of Directors questioning the board’s 1. The board of directors – responsible for
creation of certain positions and their corporate policies and the general
corresponding monthly remuneration. Because management of the business affairs of the
his letter was not heeded favorably, Cruz, corporation;
purportedly in representation of Filport and its
stockholders, filed with SEC a petition which he 2. The officers of the corporation – execution of
describes as a derivative suit against the the policies laid down by the board, but in
incumbent members of Filport’s BOD, for practice often have wide latitude in
alleged acts of mismanagement detrimental to determining the course of business operations;
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the interest of the corporation and its
shareholders at large. 3. The stockholders – have the residual power
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over fundamental corporate changes, like
Did Filport’s BOD act within its powers in amendments of the AOI. (Citibank, N.A. v. Chua,
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creating the executive committee and the G.R. No. 102300, 17 Mar. 1993)
positions of AVPs for Corporate Planning,
Operations, Finance and Administration, and a) GENERAL POWERS; THEORY OF GENERAL
those of the Special Assistants to the President CAPACITY
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and the Board Chairman, each with
corresponding remuneration? Theory of General Capacity
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Under the Theory of General Capacity, a corporation
A: YES. The governing body of a corporation is its
holds such powers which are not prohibited or
board of directors. Sec. 22 of the RCC provides that
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withheld from it by general laws. (Divina, 2021)
unless otherwise provided in this Code, the Board of
directors or trustees shall exercise the corporate The general powers of a corporation are the
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powers, conduct all business, and control all following: (Su-Per-C-A-B-S-P-E-D-R-O)
properties of the corporation. Thus, with the
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exception only of some powers expressly granted by 1. To Sue and be sued;
law to stockholders (or members, in case of non- 2. To have Perpetual existence unless the
stock corporations), the board of directors (or certificate of incorporation provides otherwise;
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trustees, in case of non-stock corporations) has the 3. To adopt and use of Corporate seal;
sole authority to determine policies, enter into 4. To amend its Articles of Incorporation;
contracts, and conduct the ordinary business of the 5. To adopt its By-laws;
corporation within the scope of its charter, i.e., its
AOI, by-laws and relevant provisions of law. Verily, 6. For stock corporations: issue and Sell stocks to
the authority of the board of directors is restricted subscribers and treasury stocks; for non-stock
to the management of the regular business affairs of corporations: admit members;
the corporation, unless more extensive power is
expressly conferred. 7. To Purchase, receive, take, or grant, hold,
convey, sell, lease, pledge, mortgage and deal
In the present case, the board’s creation of the with real and personal property, securities, and
subject positions was in accordance with the regular bonds subject to the Constitution and existing
business operations of Filport as it is authorized to laws;
do so by the corporation’s by-laws, pursuant to the
Corporation Code. (Filipinas Port Services, Inc., v. Go, 8. To Enter into merger or consolidation, (To
et al., G.R. No. 161886, 16 Mar. 2007) enter into a partnership, joint venture, merger,
2023 GOLDEN NOTES
consolidation, or any other commercial Commencement of the Power to Sue and be Sued
agreement with natural and juridical persons);
The power to sue and be sued commences upon
9. To make reasonable Donations, including those issuance by SEC of the Certificate of Incorporation.
for public welfare, or for hospital, charitable,
cultural, scientific, civic, or similar purposes: The Power of the Corporation to Sue and be Sued
Provided, that no foreign corporation shall give is Exercised by the Board of Directors
donations in aid of:
a. Any political party; The power of the corporation to sue and be sued is
b. Candidate; or exercised by the board of directors. The physical
c. Partisan political activity. acts of the corporation, like the signing of
documents, can be performed only by natural
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NOTE: It shall be unlawful for any foreigner, persons duly authorized for the purpose by
whether judicial or natural person, to aid any corporate by-laws or by a specific act of the board.
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candidate or political party, directly or Absent the said board resolution, a petition may not
indirectly, or take part in or influence in any be given due course. (Esguerra, et al. vs Holcim
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manner any election, or to contribute or make Philippines, Inc., G.R. No. 182571, 02 Sept. 2013)
any expenditure in connection with any election
campaign or partisan political activity. (Sec. 81, If the real party in interest is a corporate body, an
Omnibus Election Code) officer of the corporation can sign the verification
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against forum shopping so long as he has been duly
10. To establish pension, Retirement, and other authorized by a resolution of its board of directors.
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plans for the benefit of its directors, trustees, (San Miguel Bukid Homeowners Association, Inc. v.
officers, and employees – basis of which is the City of Mandaluyong, et al., G.R. No. 153653, 02 Oct.
Labor Code; and 2009; Republic v. Coalbrine International Philippines,
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et al., G.R. No. 161838, 07 Apr. 2010)
11. To exercise Other powers essential or
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necessary to carry out its purpose or purposes An Unregistered Corporation has No Right to Sue
as stated in the articles of incorporation. (Sec. or be Sued for Want of Corporate Personality
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35, RCC)
“Lideco Corporation” had no personality to
Limitation on Corporation’s Exercise of Acts of intervene since it had not been duly registered as a
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Property of Ownership corporation. If petitioner “Laureano Investment &
Development Corporation” legally and truly wanted
The power of the corporation to exercise acts of to intervene, it should have used its corporate name
ownership over its assets and properties is limited as the law requires and not another name which it
by the following: had not registered. (Laureano Investment &
Development Corp. v. CA, G.R. No. 100468, 06 May
1. The transaction of corporate property is 1997)
reasonably and necessarily required by the
lawful business of the corporation; and Limitations of the Corporation in Dealing with
Property
2. The transaction is done within the limits
prescribed by law or Constitution. (Sec. 35(g), 1. It must be in the furtherance of the purpose
RCC) for which the corporation was organized;
2. Constitutional limitations – Private

corporations or associations may not hold
such alienable lands of the public domain
COMMERCIAL LAW
except by lease; (Sec. 3, Article XII, 1987 b) SPECIFIC POWERS; THEORY OF
Constitution) SPECIFIC CAPACITY
With regard to private land, 60% of the Theory of Specific Capacity

corporation must be owned by the
Filipinos, same with the acquisition of a Under the Theory of Specific Capacity, a corporation
condominium unit. cannot exercise powers except those expressly or
impliedly given to it. (Divina, 2021)
NOTE: No law disqualifies a person from
purchasing shares in a landholding The specific powers of a corporation are the
corporation even if the latter will exceed following:
the allowed foreign equity, what the law 1. Power to extend or shorten corporate term;
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disqualifies is the corporation from owning (Sec. 36, RCC)
land. (JG Summit Holdings, Inc. v. CA, G.R. No. 2. Increase or decrease capital stock; (Sec. 37,
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124293, 31 Jan. 2005) RCC)
3. Incur, create, or increase bonded
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3. Special law – subject to the provisions of indebtedness; (Sec. 37, RCC)
the Bulk Sales Law and law against 4. Deny pre-emptive right; (Sec. 38, RCC)
monopoly, illegal combination, or restraint 5. Sell, dispose, lease, encumber all or
of trade. substantially all of corporate assets; (Sec.
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39, RCC)
Requisites for a Valid Donation (P-A-I-R) 6. Purchase or acquire own shares; (Sec. 40,
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RCC)
1. The donation must be Reasonable; 7. Invest corporate funds in another
corporation or business or for other
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2. It must be for valid Purposes including purpose other than primary purpose; (Sec.
public welfare, hospital, charitable, 41, RCC)
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cultural, scientific, civic, or similar 8. Declare dividends; (Sec. 42, RCC)
purposes; 9. Enter into management contract with
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another corporation;(Sec. 43, RCC) and
3. The donation must bear a reasonable 10. Amend Articles of Incorporation. (Sec. 15,
relation to the corporation’s Interest and RCC)
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must not be so remote and fanciful; and 11. Elect, Appoint, and Remove Directors and
Corporate Officers; (Secs. 23, 24, and 27,
4. For foreign corporations, it must not be an RCC)
Aid in any: 12. Create Executive Committees and Special
a. Political party; Committees; (Sec 34, RCC)
b. Candidate; or 13. Adopt and Amend Bylaws; (Secs. 45 and 46,
c. Partisan political activity. (Divina, RCC)
2020) 14. Enter into merger and consolidation. (Sec.
75, RCC) and
Implied Powers of a Corporation 15. Apply for voluntary dissolution. (Secs. 134
and 135, RCC)
A corporation is not restricted to the exercise of
powers expressly conferred upon it by its charter
but has the power to do what is reasonably
necessary or proper to promote the interest or
welfare of the corporation. (NAPOCOR v. Vera, G.R.
No. 83558, 27 Feb. 1989)
2023 GOLDEN NOTES
c) POWER TO EXTEND OR SHORTEN A: In the case of PNB v. CFI of Rizal, Pasig (G.R. No.
CORPORATE TERM 63201, 27 May 1992), the Supreme Court ruled that
upon the expiration of the period fixed in the AOI, in
Procedural Requirements in Extending or the absence of compliance with the legal requisites
Shortening Corporate Term for the extension of the period, the corporation
ceases to exist and is dissolved ipso facto.
1. Majority vote of the Board of Directors or
Board of Trustees; The automatic dissolution of the corporation is no
longer applicable under the RCC given the option
2. Ratification by shareholders representing available to the corporation to revive the corporate
at least 2/3 of the outstanding capital stock term (Sec. 11, RCC). Since the period of revival is not
(OCS), or by at least 2/3 of the members in indicated in the RCC, the option may be exercised
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case of non-stock corporation; within a reasonable period, but prior to the
dissolution and liquidation of the corporation. What
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3. Written notice of the proposed action and is a reasonable period is for the SEC to determine.
of the time and place of the meeting shall be (Divina, 2021)
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addressed to each stockholder or member
at his place of residence as shown on the Remedy of the Stockholder Not in Favor of
books of the corporation and deposited to Extending or Shortening the Corporate Term
the addressee in the post office with
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postage prepaid, or served personally or The stockholder not in favor of extension of the
when allowed in the bylaws or done with corporate term may exercise his appraisal right,
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the consent of the stockholder, sent that is, he may get out of the corporation and
electronically in accordance with the rules demand for the payment of the fair value of his
and regulations of the Commission on the shares subject to the conditions specified in Sec. 80
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use of electronic data messages; of the RCC. (Ibid.)
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4. Copy of the amended AOI shall be A stockholder may also exercise appraisal right in
submitted to the SEC for its approval; (Sec. case of shortening of the corporate term. While Sec.
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36, RCC) 36 of the RCC refers to the remedy of appraisal right
only in case of extension of corporate term, Sec. 80
5. In case of banks, banking, and quasi- of the RCC also provides for the same remedy in case
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banking institutions, preneed, insurance a stockholder votes against the shortening of
and trust companies, NSSLAS, pawnshops, corporate term. (Ibid.)
and other financial intermediaries, a
favorable recommendation of appropriate d) POWER TO INCREASE OR DECREASE CAPITAL
government agency; (Sec. 16, RCC) STOCK OR INCUR, CREATE, INCREASE BONDED
INDEBTEDNESS
6. The extension must be done during the
lifetime of the corporation not earlier than Procedural Requirements in Increasing or
3 years prior to the expiry date unless there Decreasing Capital Stock
is justifiable reason for an earlier extension
(Sec. 11, RCC) 1. Approved by majority vote of the Board of
Directors;
Q: What is the effect of the failure of the
corporation to extend its corporate term? 2. Approved by stockholders representing at least
2/3 of the OCS;
COMMERCIAL LAW
3. Written notice of the time and place of the Prior to the approval of the SEC of the increase in the
stockholder’s meeting and the purpose of the authorized capital stock, such payments cannot yet
said meeting must be sent to the stockholders be deemed part of the corporation’s paid-up capital,
at their places of residence as shown in the technically speaking, because its capital stock has
books of the corporation and served on the not yet been legally increased. Such payments
stockholders personally or through electronic constitute deposits on future subscriptions, money
means recognized in the corporation’s bylaws which the corporation will hold in trust for the
and/or the Commission’s rules as a valid mode subscribers until it files a petition to increase its
for service of notices; capitalization and a certificate of filing of increase of
capital stock is approved and issued by the SEC.
4. A certificate in duplicate must be signed by a (Central Textile Mills, Inc. v. NWPC, et al., G.R. No.
majority vote of the directors of the corporation 104102, 07 Aug. 1996)
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and countersigned by the chairperson and the
secretary of the stockholders’ meeting, setting Additional Requirement with Respect to
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forth: Increase of Capital Stock – Treasurer’s Affidavit
(25%-25% Rule)
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a. That the requirements of Sec. 37 of the RCC
have been complied with; The application to be filed with the SEC shall be
accompanied by the sworn statement of the
b. The amount of increase or decrease of the treasurer of the corporation, showing that at least
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capital stock; 25% of the increase in the capital stock was
subscribed and that at least 25% of the said amount
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c. In case of an increase of the capital stock, has been paid either in actual cash to the
the amount of capital stock or number of corporation or that property, the valuation of which
shares of no par stock actually subscribed, is equal to 25% of the subscription. (Sec. 37, RCC)
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the names, nationalities and residences of
the persons subscribing, the amount of Ways of Effecting the Increase or Decrease of the
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capital stock or number of no par stock Capital Stock
subscribed by each, and the amount paid by
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each on his subscription in cash or By increasing or decreasing the:
property, or the amount of capital stock or 1. Number of shares and retaining the par
number of shares of no par stock allotted to value;
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each stockholder if such increase is for the 2. Par value of existing shares and retaining
purpose of making effective stock dividend the number of shares; or
authorized; 3. Number of shares as well as the par value.
d. Any bonded indebtedness to be incurred, NOTE: The following will result to decrease in
created, or increased; capital stock, provided the shares are cancelled or
retired thereafter:
e. The amount of stock represented at the
meeting; and 1. Redemption of redeemable shares; (Sec. 8,
RCC)
f. The vote authorizing the increase or 2. Purchase of own shares; (Sec. 40, RCC)
diminution of the capital stock, or the 3. Cancelling shares which have not yet been
incurring, creating, or increasing of any issued.
bonded indebtedness. (Sec. 37, RCC)
2023 GOLDEN NOTES
Limitation on Power to Decrease Authorized stockholders and cannot be enjoined either by
Capital Stock the courts or the creditors. It found no basis to
grant the prayer for the issuance of a cease and
No decrease in the capital stock shall be approved desist order. The CA upheld the findings of the
by the Commission if its effect shall prejudice the SEC. Is the CA correct in upholding the findings
rights of corporate creditors. (Sec. 37, RCC) of the SEC?
Q: If the subscribed capital stock is P60,000,000 A: YES. Sec. 38 is clear that a corporation can only
divided into 60,000,000 shares with par value of decrease its capital stock if the following are
Php 1.00 per share and the paid-up capital stock present:
is Php 50,000,000 divided into 50,000,000 1. Approval by a majority vote of the board of
shares with par value of P 1.00 per share, can the directors;
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corporation reduce the capital stock to Php
50,000,000? 2. Written notice of the proposed diminution
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of the capital stock, and of the time and
A: NO, the capital stock of the corporation may be place of a stockholders' meeting duly called
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decreased only if it will not result in prejudice to for the purpose, addressed to each
corporate creditors. In this case, the reduction of the stockholder at his place of residence;
capital stock to 50,000,000 will mean the release or
condonation of the 10,000,000 unpaid subscription, 3. 2/3 of the outstanding capital stock voting
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thereby causing prejudice to the creditors as favorably at the said stockholders' meeting
subscriptions to the capital stock are funds held in duly;
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trust for their benefit under the trust fund doctrine.
(Divina, 2021) 4. Certificate in duplicate, signed by majority
of the directors and countersigned by the
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Q: In August 1998, Sinophil entered into a Share chairman and secretary of the
Swap Agreement with Metroplex and Paxell. In stockholders' meeting stating that legal
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2001, Sinophil and Belle executed a requirements have been complied with;
Memorandum Of Agreeement with Metroplex
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and Paxell rescinding the 1998 Swap 5. Prior approval of the SEC; and
Agreement. In 2002 and 2005, the shareholders
of Sinophil voted for the reduction of the 6. Effects do not prejudice the rights of
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company's authorized capital stock. The corporate creditors.
Company Registration and Monitoring
Department (CRMD); the Corporation Finance So long as written notice of the proposed increase or
Department (CFD) of SEC approved the first diminution of the capital stock was made to all
amendment of the AOI of Sinophil. In 2007, stockholders, the presence and approval of at least
Sinophil’s shareholders’ approved the further 2/3 of the capital stock is enough to make the
reduction of the ACS. The CRMD and the CFD also increase or diminution valid. This is the plain
approved the second amendment. language of the provision over which no other
interpretation may be made. After a corporation
Metroplex and Paxell filed a Petition for Review faithfully complies with the requirements laid down
Ad Cautelam Ex Abundanti before the SEC in Section 38, the SEC has nothing more to do other
assailing the approvals. The SEC, in denying the than approve the same. For third persons or parties
petition, found that the decrease complied with outside the corporation like the SEC to interfere
the requirements imposed by Sec. 38 of the with the decrease of the capital stock without
Corporation Code. It held that the equal or reasonable ground is a violation of the "business
unequal reduction of a corporation's capital judgment rule." (Metropolex Berhad v. Sinophil Corp.,
stock is a matter solely between the G.R. No. 208281, 28 June 2021, J. Hernando)
COMMERCIAL LAW
The Board of Directors may Issue Additional incorporation or an amendment thereto. (Sec. 38,
Shares of Stock Without Stockholder Approval RCC)
A stock corporation is expressly granted the power This means that except in the cases provided by law,
to issue or sell stocks. The power to issue stocks is shares of stock of the corporation should first be
lodged with the Board of Directors and no offered to the stockholders prior to any offer to non-
stockholders’ meeting is required to consider it stockholders.
because additional issuance of stock (unlike
increase in capital stock) does not need approval of Purpose of Pre-emptive Right
the stockholders. What is only required is the board
resolution approving the additional issuance of the The purpose of pre-emptive right is to enable the
shares. The corporation shall also file the necessary shareholder to retain his proportionate control in
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application with the SEC to exempt these from the the corporation and to retain his equity in the
registration requirements under the SRC. (Majority surplus.
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Stockholders of Ruby Industrial Corp. v. Miguel Lim
and Minority Stockholders of Ruby Industrial Corp., NOTE: Pre-emptive right shall not extend to shares
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G.R. Nos. 165887 & 165929, 06 June 2011) to be issued in compliance with laws requiring stock
offerings or minimum stock ownership by the
Bonded Indebtedness public; or to shares issued in good faith with the
approval of the stockholders representing 2/3 of
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It is a borrowing by the corporation which is long the OCS, in exchange for property needed for
term in nature involving a large number of lenders corporate purposes or in payment of a previously
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and secured by the encumbrance on corporate contracted debt; (Sec. 38, RCC)
assets. Since bonds are securities, they should also
be registered with the SEC. (Divina, 2021) Pre-emptive Right is Available on the Re-
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issuance of Treasury Shares
NOTE: The requirements for the power to incur,
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create or increase bonded indebtedness is also the Since Sec. 38 of the RCC uses the phrase “all issues
same with the power to increase or decrease capital or disposition of shares of any class”, pre-emptive
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stock, except that this power may also be exercised right extends not only to the issuance of new shares
by a non-stock corporation. resulting from an increase in capital stock but also
to the issuance of previously subscribed shares
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Registration of the Bonds Issued by the which form part of the existing authorized capital
Corporation stock, as well as to the disposition of treasury
shares. (Divina, 2020)
Bonds issued by a corporation shall be registered
with the SEC which shall have the authority to Pre-emptive Right may be Waived (2019 BAR)
determine the sufficiency of the terms thereof. (Sec.
37, RCC) 1. The pre-emptive right may be waived by the
stockholder. However, the waiver should be given
e) POWER TO DENY PRE-EMPTIVE RIGHTS individually by the stockholder concerned or by
another by way of Special Power of Attorney. Being
Pre-emptive Right (2019 BAR) a personal right, the waiver cannot be waived by the
corporation itself through a stockholders’
All stockholders shall enjoy the pre-emptive right to resolution. (SEC Opinion, 12 Dec. 1994)
subscribe to all issues or disposition of shares
2. of any
class in proportion to their present shareholdings,
3. A stockholder cannot be forced to waive the right
unless such right is denied by the articles of even if the majority of the stockholders opt to waive
it. (SEC Opinion No. 08-08, 31 Mar. 2008)
2023 GOLDEN NOTES
NOTE: If the board resolution approving the Pre-emptive Right vs. Right of First Refusal
issuance of shares prescribes a certain number of
days to exercise pre-emptive right and the RIGHT OF FIRST
PRE-EMPTIVE RIGHT
stockholder fails to exercise such right within the REFUSAL
fixed period, the stockholder is deemed to have Description
impliedly waived his right. (Divina, 2021)
Right to subscribe to all
issuance or
Remedies of a Stockholder whose Pre-emptive Right to purchase
dispositions of shares
Right is Violated shares of a
of the corporation even
stockholder.
to the subsequent sale
A stockholder whose pre-emptive right is violated
of treasury stocks.
may maintain an action to compel the corporation
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to give him that right. If the denial is by amendment To What does it Pertain
to the AOI, he may exercise his appraisal right as Pertains to Pertains to the sale of
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such action restricts his rights as a stockholder. (Sec. unsubscribed portion the stocks already
80(a), RCC) of the authorized owned by another
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capital stock. stockholder.
Non-Existence of Pre-Emptive Right does NOT Against Whom is it Exercised
Bar Challenge to Validity of Issuance of
Additional Shares if done in Breach of Trust Right exercised against Right exercised against
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the corporation. a co-stockholder.
Even if pre-emptive right does not exist either
Effect of the Absence of Express
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because the issue comes within the exceptions in
Provision in the AOI
Sec. 38, RCC or because it is denied in the AOI, an
issue of shares may still be objectionable if the
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May be exercised even Can only be exercised
directors acted in breach of trust and their primary when there is no when so provided in
purpose is to perpetuate or shift control of the express provision in the AOI, by-laws and
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corporation or to “freeze out” the minority interest. the AOI or amendment printed in the stock
The issuance of unissued shares out of the original thereto. certificate.
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authorized capital stock pursuant to a rehabilitation
plan the propriety or validity of which was on Treasury Shares
question by the minority stockholders and
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subsequently disapproved by the Supreme Court It includes treasury Does not include
amounts to unlawful dilution of the minority shares. treasury shares.
shareholdings. (Majority Stockholders of Ruby
Industrial Corp. v. Miguel Lim and Minority
f) POWER TO SELL OR DISPOSE CORPRORATE
Stockholders of Ruby Industrial Corp., supra; Divina,
ASSETS
2014)
Procedural Requirements for Sale, Lease,

Exchange, Mortgage, Pledge, and any Other
Disposition (Sa-L-E-M-P-O) of All or
Substantially All of Corporate Assets
1. Majority vote of the BOD or BOT;
2. Approval by stockholders representing at least

2/3 of the OCS, or by at least 2/3 of the
members in case of nonstock corporation; and
COMMERCIAL LAW
3. Written notice of the proposed action and of the Abandonment of the Plan for SaLEMPO Even
time and place of the meeting addressed to each After Approval of the Stockholders or Members
stockholder or member at his place of residence
as shown on the books of the corporation and The BOD, in its discretion, may abandon the plan for
deposited to the addressee in the post office SaLEMPO even after such authorization or approval
with postage prepaid, served personally, or by the stockholders, subject to the rights of third
when allowed by the bylaws or done with the parties under any contract relating thereto, without
consent of the stockholder, sent electronically: further action or approval by the stockholders or
Provided, That any dissenting stockholder may members. (Sec. 39, RCC)
exercise the right of appraisal under the
conditions provided in this Code. (Sec. 39, RCC) Nell Doctrine (2017 BAR)
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NOTE: The sale of the assets shall be subject to the GR: Where one corporation sells or otherwise
provisions of existing laws on illegal combinations transfers all of its assets to another corporation, the
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and monopolies, including R.A. No. 10667, latter is not liable for the debts and liabilities of the
otherwise known as the “Philippine Competition transferor.
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Act.”
XPNs: The transferee of corporate assets or
Further, in case of non-stock corporations, where property is liable for the debts of the transferor in
there are no members with voting rights, the vote of case of:
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at least a majority of the trustees in office will be
sufficient authorization for the corporation to enter 1. Express assumption of liability - where the
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into any transaction authorized by this section. (Sec. purchaser expressly or impliedly agrees to
39, RCC) assume such debts;
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Substantially All of Corporate Assets 2. Transaction amounts to a consolidation or
merger of the corporations - The surviving or
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A sale or other disposition shall be considered shall the consolidated corporation shall possess all
be deemed to cover substantially all the corporate the rights, privileges, immunities and franchises
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property and assets if in the process thereof, the of each constituent corporation; and all real or
corporation would be rendered: personal property, all receivables due on
whatever account, including subscriptions to
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1. Incapable of continuing the business; or shares and other choses in action, and every
2. Incapable of accomplishing the purpose for other interest of, belonging to, or due to each
which it was incorporated. (Sec. 39, RCC) constituent corporation, shall be deemed
transferred to and vested in such surviving or
Instances When Approval of Stockholders or consolidated corporation without further act or
Members is NOT Required deed; (Sec. 79 (d), RCC)
1. If sale is necessary in the usual and regular 3. Business Enterprise Transfer – where the
course of business; or purchasing corporation is merely a
continuation of the selling corporation; and
2. If the proceeds of the sale or other
disposition of such property and assets are 4. Entered Fraudulently - Where the transaction
to be appropriated for the conduct of the is entered into fraudulently in order to escape
remaining business. liability for such debts. (Nell v. Pacific Farms,
G.R. No. L-20850, 29 Nov. 1965)
2023 GOLDEN NOTES
Q: Divine Corporation, engaged in the c. The list of inventory must be filed with the
manufacture of garments for export, was able to DTI.
obtain loans from individuals and financing
institutions. However, due to the drop in the Where an asset constitutes the only property of the
demand for garments in the international corporation, its sale to a 3rd party is a sale or
market, Divine Corporation could not meet its disposition of all the corporate property and assets
obligations. It decided to sell all its equipment of the corporation falling squarely within the
such as sewing machines, permapress machines, contemplation of Sec. 39 of the RCC. Hence, for the
high-speed sewers, cutting tables, ironing sale to be valid, the majority vote of the legitimate
tables, etc., as well as its supplies and materials Board of Trustees, concurred in by the vote of at
to Top Grade Fashion Corporation, its least 2/3 of the bona fide members of the
competitor. corporation should have been obtained. (Islamic
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Directorate of the Philippines, et al., v. CA, G.R. No.
a. How would you classify the transaction? 117897, 14 May 1997)
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A: The transaction is deemed classified as a sale of g) POWER TO ACQUIRE OWN SHARES
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all or substantially all of the corporate assets
because the corporation would be rendered Q: May a corporation acquire its own shares of
incapable of continuing the business or stock?
accomplishing the purpose for which it was
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incorporated. A: Ordinarily, a stock corporation has no power to
acquire its own shares as it is illogical for the
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b. Can Divine Corporation sell aforesaid items corporation to be its own stockholder. Moreover,
to its competitor, Top Grade Fashion the funds of the corporation should be devoted to
Corporation? What are the requirements to attain the purposes of incorporation. However, the
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validly sell the items? Explain. (2005 BAR) RCC allows the corporation to acquire or purchase
its own shares in certain instances. (Divina, 2020)
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A: YES. The law does not prohibit sale of all or
substantially all of corporate assets to competitor- Instances When a Corporation May Acquire its
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company provided said sale is subject to laws Own Shares (1991, 1992, 2005 BAR)
against illegal combination, monopoly, or restraint
of trade and Bulk Sales Law. The facts did not state 1. To eliminate fractional shares arising out of
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that the competitor-company lies within the stock dividends; (Sec. 40, RCC)
restrictions provided for by law. For the transaction
to be valid, it needs a majority vote of its board of 2. To collect or compromise an indebtedness
directors and approval of the stockholders to the corporation, arising out of unpaid
representing at least 2/3 of outstanding capital subscription, in a delinquency sale and to
stock. Further, the provisions of the Bulk Sales Law purchase delinquent shares sold during
must be complied with: said sale; (Ibid.)
a. The seller must provide the buyer with a 3. To pay dissenting or withdrawing
verified list containing the name of the stockholders; (Ibid.)
creditors, their addresses, amounts owing
to each of them, and the respective 4. To acquire treasury shares; (Sec. 9, RCC)
maturity dates; 5. To acquire redeemable shares; (Sec. 8, RCC)
6. To effect a decrease of capital stock; (Sec.
b. A full detailed inventory of the properties 37, RCC) and
or assets to be sold, including their cost or
acquisition price; and
COMMERCIAL LAW
7. In close corporations, when there is a 3. Condition of the corporate affairs warrants
deadlock in the management of the it.
business, the SEC may order the purchase
at their fair value of the shares of any 4. Transaction is designed and carried out in
stockholder by a corporation (Sec. good faith.
103(1)(d), RCC)
5. Interest of creditors is not impaired, that is,
Rule in Acquisition of Own Shares the same is not violative of the trust fund
doctrine. (Sec. 41, SEC Opinions, 12 Oct.
GR: The corporation may only acquire its own 1992, 11 Sept. 1985, and 11 Apr. 1994)
stocks if there are unrestricted retained earnings
(URE). Trust Fund Doctrine
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XPNs: (Re-Do-L-D) The requirement of unrestricted retained earnings
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to cover the share is based on the trust fund doctrine
1. Redemption of redeemable shares; which means that the capital stock, property, and
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2. Donation of shares to the corporation; other assets of a corporation are regarded as equity
3. Levy/garnishment of shares to satisfy the in trust for the payment of corporate creditors. The
judgment in favor of the corporation; reason is that the creditors of a corporation are
4. Conveyance of shares to the corporation in preferred over the stockholders in the distribution
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payment of a Debt. (Divina, 2020) of corporate assets. (Boman Environmental
Development Corp v. CA, G.R. No. 77860, 22 Nov.
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Unrestricted Retained Earnings (URE) 1988)
Unrestricted Retained Earnings represent the h) POWER TO INVEST CORPORATE FUNDS IN
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amount of accumulated profits and gains realized ANOTHER CORPORATION OR BUSINESS
out of the normal and continuous operations of the
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company after deducting therefrom distributions of Corporation may pursue the business/es as
stockholders and transfers to capital stock or other indicated in its Articles of Incorporation under its
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accounts, and which are: primary and secondary purposes. However, if the
business is listed under secondary purpose, the
1. Not appropriated by its BOD for corporate corporation must follow the procedure under Sec.
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expansion projects or programs; 41.
2. Not covered by a restriction for dividend
declaration under a loan agreement; and Statutory Requirements for Investing in another
3. Not required to be retained under special Corporation, Business, or Purpose other than
circumstances obtaining in the corporation Primary Purpose (1995, 1996 BAR)
such as when there is a need for a special
reserve for probable circumstances. (SEC 1. Approval by the majority vote of the BOD or
Circular No. 11, Series of 2008) BOT;
Guidelines for Acquisition of Own Shares 2. Ratification by stockholders representing at

least 2/3 of the OCS or by at least 2/3 of the
1. The capital of the corporation must not be members in case of non-stock corporations;
impaired. There shall be URE’s to purchase
the shares. 3. Ratification must be made at a meeting duly
called for the purpose; and
2. Legitimate or proper corporate objective is
advanced.
2023 GOLDEN NOTES
4. Notice of the proposed investment and the time NOTE: In case stock dividend is to be declared, an
and place of the meeting shall be addressed to additional requirement of:
each stockholder or member at the place of
residence as shown in the books of the 1. A vote representing 2/3 of outstanding
corporation and deposited to the addressee in capital stock. (Sec. 42, RCC)
the post office with postage prepaid, served
personally, or sent electronically in accordance 2. A corporation must have also a sufficient
with the rules and regulations of the number of authorized unissued shares for
Commission on the use of electronic data distribution to stockholders or should
message, when allowed by the bylaws or done apply for an increase of authorized capital
with the consent of the stockholders. (Sec. 41, stock.
RCC)
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Q: During the annual stockholders meeting,
NOTE: Any dissenting stockholder shall have Riza, a stockholder proposed that a part of the
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appraisal right as provided in the RCC. Ratification corporation’s unreserved earned surplus be
of stockholders is not needed where the investment capitalized, and stock dividends be distributed
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by the corporation is reasonably necessary to to the stockholders, arguing that as owners of
accomplish its primary purpose as stated in the AOI. the company, the stockholders, by a majority
vote, can do anything. As chairman of the
i) POWER TO DECLARE DIVIDENDS meeting, how would you rule on the motion to
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declare stock dividends? (1991, 2001 BAR)
Dividends
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A: As the chairman of the meeting, I would rule
Dividends are corporate profits allocated, lawfully against the motion considering that a declaration of
declared, and ordered by the directors to be paid stock dividends should initially be taken by the BOD
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proportionately to the stockholders in the form of and thereafter to be concurred in by the vote of the
cash, property, or stocks. (Divina, 2021) stockholders representing 2/3 of the outstanding
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capital stock. (Sec. 42, RCC) The stockholders cannot
Q: Are profits the same as dividends? compel the corporation to declare dividends as the
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determination thereof rests with the sound
A: Profits are the sources of dividends. Profits are discretion of the board.
dividends only when they have been set aside for
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distribution to stockholders under the conditions Form of Dividends
specified by law.
1. Cash;
Profits belong to the corporation while dividends 2. Stock; and
once declared, belong to the stockholder. (Divina, 3. Property.
2021) (2005 BAR)
Requirements for the Declaration of Dividends
1. Existence of URE’s. (Unrestricted Retained

Earnings)
2. Resolution of the board.
COMMERCIAL LAW
Cash Dividends vs. Stock Dividends As to Revocation
Can be revoked despite
CASH STOCK Cannot be revoked
announcement but
DIVIDENDS DIVIDENDS after announcement.
before issuance.
As to Where it Forms Part
As to Application on Unpaid Balance
Part of general fund. Part of capital.
Can be withheld until
As to Cash Outlay Applied to the unpaid
payment of unpaid
balance if delinquent
Results in cash outlay. No cash outlay. balance if delinquent
shares.
As to Levy by Corporate Creditors shares.
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Once issued, can be NOTE: Declaration of cash dividends may not be
levied by creditors of revoked since, upon declaration, a creditor-debtor
Not subject to levy by the corporate relationship is established between the stockholder
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corporate creditors. stockholder because and the corporation. Hence, the debtor-corporation
they are part of is bound to make good its obligation to the creditor-
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corporate asset. stockholder to pay the cash dividends. Stock
dividends may be revoked even after declaration
As to how Approvals Needed but prior to the actual issuance of shares because
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Declared by the board what consummates stock dividend is not the
Declared only by the declaration but the share issuance. (Divina, 2022)
with the concurrence
board of directors at its
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of the stockholders
discretion. Q: From what funds are cash and stock dividends
representing at least
(majority of the sourced? Explain why. (2005 BAR)
2/3 of the outstanding
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quorum only, not
capital stock at a
majority of all the A: Dividends either cash or stock dividend must be
regular/special
board)
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meeting. declared out of unrestricted retained earnings
because of the Trust Fund Doctrine. The Trust Fund
As to Effect on Corporate Capital Doctrine provides that subscriptions to the capital
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stock of a corporation constitute a fund to which the
Does not increase the Corporate capital is
creditors have the right to look for the satisfaction
corporate capital increased.
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of their claims. (Ong v. Tiu, G.R. No. 144476, 18 Apr.
As to whether Declaration creates Debt 2003) Thus, dividends must never impair the
subscribed capital stock.
Its declaration creates
a debt from the No debt is created by Stock Split vs. Stock Dividends
corporation to each of its declaration.
its stockholders. STOCK SPLIT STOCK DIVIDENDS
As to Taxability A mere increase in the Capitalization of
number of shares earnings or profits,
If received by
which evidence together with a
individual: subject to
Not subject to tax ownership without distribution of the
tax;
Whether received by altering the amount of added shares which
individual or a the capital, surplus, or evidence the assets
If received by
corporation. segregated earnings. transferred to capital.
corporation: not
subject to tax.
2023 GOLDEN NOTES
Q: Can the board be compelled to declare Wrongful or Illegal Declaration of Dividends
dividends every year?
The Board of Directors is liable in case of wrongful
A: NO. Declaration of dividends is discretionary or illegal declaration of dividends. The stockholders
upon the board. Dividends are payable only when should return the dividends to the corporation
there are profits earned by the corporation and as a based on the principle of solutio indebiti.
general rule, even if there are existing profits, the
Board of Directors has the discretion to determine Persons Entitled to Receive Dividends
whether or not dividends are declared. (Republic
Planters Bank v. Agana, G.R. No. 51765, 03 Mar. 1997) Dividends are payable to the stockholders of record
as of the date of the declaration of dividends or
Prohibition Imposed by Law on UREs of a Stock holders of record on a certain future date, as the
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Corporation case may be, unless the parties have agreed
otherwise. (Cojuangco and Prime Holdings, Inc., v.
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GR: Stock corporations are prohibited from Sandiganbayan G.R. No. 183278, 24 Apr. 2009)
retaining surplus profits in excess of 100% percent
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of their paid-in capital stock. Transfers of Shares Unrecorded in the Books of
the Corporation
XPNs: (2001 BAR)
Transfer of shares which is not recorded in the
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1. When justified by definite corporate books of the corporation is valid only as between
expansion projects or programs approved by the parties, hence, the transferor has the right to
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the board of directors; dividends as against the corporation without notice
of transfer, but it serves as trustee of the real owner
2. When the corporation is prohibited under any of the dividends, subject to the contract between the
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loan agreement with any financial institution transferor and transferee as to who is entitled to
or creditor, whether local or foreign, from receive the dividends. (Ibid.)
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declaring dividends without its/his consent,
and such consent has not yet been secured; or Receipt of Dividends in Case of Mortgaged or
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Pledged Shares
3. When it can be clearly shown that such
retention is necessary under special GR: The mortgagor or the pledgor has the right to
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circumstances obtaining in the corporation, receive the dividends.
such as when there is need for special reserve
for probable contingencies. (Sec. 42, RCC) XPN: When the mortgagor or pledgor defaults and
the mortgagee or pledgee acquires the pledged
Q: May dividends be paid out of the paid-in stocks and the transfer is recorded in the books of
capital? the corporation, the mortgagee or pledgee is
entitled to receive the dividends.
A: Additional Paid-In Capital Stock shall neither be
declared as dividend nor shall it be reclassified to Q: May stock dividends be issued to a person
absorb deficiency except through an organizational who is not a stockholder in payment of services
restructuring duly approved by the SEC. (Divina, rendered?
2021)
A: NO. Only stockholders are entitled to payment of
stock dividends. (Nielson & Co., Inc. v. Lepanto
Consolidated Mining Co., G.R. No. L-217601, 17 Dec.
1966)
COMMERCIAL LAW
Distinction between Distribution in Liquidation a. Stockholders representing the same
and Ordinary Dividend interest in both of the managing and the
managed corporation own or control more
If the distribution is in the nature of a recurring than 1/3 of the total outstanding capital
return on stock, it is an ordinary dividend. However, stock entitled to vote of the managing
if the corporation is really winding up its business corporation (Interlocking Stockholders);
or recapitalizing and narrowing its activities, the
distribution may properly be treated as incomplete b. Majority of the members of the BOD of the
or partial liquidation and as payment by the managing corporation also constitute a
corporation to the stockholder for his stock or as majority of the BOD of the managed
return of the capital invested by him. (Wise & Co., corporation. (Interlocking Directors)
Inc. v. Meer, G.R. No. 48231, 30 June 1947)
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4. No management contract shall be entered into
j) POWER TO ENTER INTO MANAGEMENT for a period longer than five (5) years for any
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CONTRACT one (1) term except for service contracts or
operating agreements which relate to the
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Management Contract exploration, development, exploitation, or
utilization of natural resources may be entered
A Management Contract is any contract whereby a into for such periods as may be provided by the
corporation undertakes to manage or operate all or pertinent laws or regulations. (Sec. 43, RCC)
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substantially all of the business of another
corporation, whether such contracts are called Q: ABC Management Inc. presented to the DEF
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service contracts, operating agreements or Mining Co, the draft of its proposed Management
otherwise. (Sec. 43, RCC) Contract. As an incentive, ABC included in the
terms of compensation that ABC would be
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NOTE: Sec. 43 refers only to a management contract entitled to 10% of any stock dividend which DEF
with another corporation. Hence, it does not apply may declare during the lifetime of the
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to management contracts entered into by a Management Contract. Would you approve of
corporation with natural persons. such provision? If not, what would you suggest
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as an alternative? (1991 BAR)
Requirements for Validity of Management
Contract A: NO. I would not approve of a proposed
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stipulation in the management contract that the
1. The contract must be approved by at least managing corporation, as an additional
majority of the BOD or BOT of both managing compensation to it, should be entitled to 10% of any
and managed corporation; stock dividend that may be declared. Stockholders
are the only ones entitled to receive stock dividends.
2. The contract must be approved by the (Nielson & Co., Inc. v. Lepanto Consolidated Mining,
stockholders owning at least the majority of the G.R. No. L-21601, 17 Dec. 1966)
OCS, or members in case of a non-stock
corporation, of both the managing and the I would add that the unsubscribed capital stock of a
managed corporation, at a meeting duly called corporation may only be issued for cash or property
for the purpose; or for services already rendered constituting a
demandable debt. (Sec. 61, RCC) As an alternative, I
3. The contract must be approved by the would suggest that the managing corporation
stockholders of the managed corporation should instead be given a net profit participation
owning at least 2/3 of the OCS entitled to vote and, if it later so desires, to then convert the amount
or 2/3 of the members when: that may be due thereby to equity or shares of stock
at no less than the par value thereof.
2023 GOLDEN NOTES
k) DOCTRINE OF INDIVIDUALITY OF Unlike illegal acts which contemplate the doing of an
SUBSCRIPTION act that is contrary to law, morals, or public policy
or public duty, and are void, ultra vires acts are not
A subscription is one, entire, and indivisible whole illegal and void ab initio but are not merely within
contract. This indivisibility of subscription is the scope of the articles of incorporation. They are
absolute as Sec. 63 of the RCC speaks no exception. merely voidable and may become binding and
enforceable when ratified by the stockholders.
The purpose of the doctrine is to prevent the partial (Maria Clara Pirovana, et al. v. the De La Rama
disposition of a subscription, which is not fully paid, Steamship Co., G.R. No. L-5377, 29 Dec. 1954)
because if it is permitted and the stockholder
subsequently becomes delinquent in the payment of Types of Ultra Vires Acts
his subscription, the corporation may not be able to
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sell as many of his subscribed shares as would be 1. Acts done beyond the powers of the corporation
necessary to cover the total amount from him as provided in the law or its articles of
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pursuant to Sec. 67 of the RCC. (Divina, 2021) incorporation;
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l) DOCTRINE OF EQUALITY OF SHARES 2. Acts entered into on behalf of the corporation
by persons who have no corporate authority or
Under the doctrine of equality of shares, all stocks exceeded the scope of their authority; and
issued by the corporation are presumed equal with
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the same privileges and liabilities, provided that the 3. Acts or contracts which are per se illegal as
Articles of Incorporation is silent on such being contrary to law. (Divina, 2020)
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differences. (CIR v. CA, G.R. No. 108576, 20 Jan. 1999)
Q: When is there an ultra vires act on the part of
In considering the proposed dividend distribution (a) the corporation; (b) the board of directors;
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system, the entitlement of certain kinds of stocks to and (c) the corporate officers? (2009 BAR)
preferences and benefits must be clearly and
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expressly stated in the articles of incorporation of A:
BFDC. (SEC Opinion No. 10-20) a. Corporation – Under Sec. 45 (now Sec. 44, RCC)
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of the Corporation Code, no corporation shall
m) ULTRA VIRES DOCTRINE possess or exercise any corporate power except
those conferred by the Code or by its AOI and
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No corporation shall possess or exercise any except such as are necessary or incidental to the
corporate powers except those conferred by this exercise of the powers so conferred. When a
Code or by its articles of incorporation and except corporation does an act or engages in an activity
such as are necessary or incidental to the exercise of which is outside of its express, implied, or
the powers so conferred. (Sec. 44, RCC) incidental powers set out in its AOI, the act is
deemed to be ultra vires.
Ultra Vires Act
An ultra vires act is one committed outside the b. Board of Directors – When the Board engages
object for which a corporation is created as defined in an activity or enters into a contract without
by the law of its organization and therefore beyond the ratificatory vote of the stockholders in those
the power conferred upon it by law. (Atrium instances where the Corporation Code so
Management Corporation v. CA, G.R. No. 109491, 28 requires such ratificatory vote, such as when
Feb. 2001) the corporation is made to invest in another
corporation or engage in a business which is not
in pursuit of its primary purpose, the board
resolution not ratified by stockholders owning
COMMERCIAL LAW
or representing at least 2/3 of the outstanding the resulting act is not The latter is sometimes
capital stock would make the transaction void, an ultra vires act of the referred to as ultra
as being ultra vires. corporation. vires act of the officer.
The law on agency
c. Corporate Officers – When a corporate officer applies.
enters into a contract on behalf of the
corporation without having been so expressly Q: The board of directors of Lopez Realty, Inc.
or impliedly authorized by the Board of passed a resolution providing gratuity pay for
Directors, even when the act or contract falls its employees in a special meeting called for the
within the corporation’s express, implied or purpose. At the time, however, Asuncion (a
incidental power, then the unauthorized act of member of the board), was still out of the
the corporate officer is deemed to be ultra vires. country. Asuncion assailed the validity of the
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said board resolution contending that the same
Ultra Vires Acts by Reason of Lack of Authority was ultra vires on the ground that she was not
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vs. Ultra Vires Acts by Reason of Illegality (Illegal duly notified of the special meeting in which it
Acts) was passed. Is the disputed board resolution
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ultra vires as urged by Asuncion?
ULTRA VIRES ACT ILLEGAL ACTS
Lawfulness A: NO. The assailed resolution covers a subject
Not necessarily which concerns the benefit and welfare of the
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Unlawful; against law,
unlawful, but outside company’s employees. To stress, providing gratuity
morals, public policy,
the powers of the pay for its employees is one of the express powers
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and public order.
corporation. of the corporation under the Corporation Code,
Enforceability hence, Asuncion cannot invoke the doctrine of ultra
Merely voidable and vires to avoid any liability arising from the issuance
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may be enforced by of the subject resolution. (Lopez Realty, Inc. v.
Void; cannot be
performance, Fontecha, G.R. No. 76801, 11 Aug. 1995)
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validated.
ratification, or
estoppel. Q: Sea Lion International Port Terminal
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Ratification Services, Inc. filed a complaint for prohibition
and mandamus against National Power
Can be ratified. Cannot be ratified.
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Corporation (NPC) and Philippine Ports
Binding Effect Authority (PPA), wherein Sea Lion alleged that
NPC had acted in bad faith and with grave abuse
Can bind the parties if
Cannot bind the of discretion in not renewing its contract for
wholly or partly
parties. stevedoring services for coal-handling
executed.
operations at NPC's plant, and in taking over its
stevedoring services. NPC seeks to annul the
Acts that do NOT Comply with Formalities vs. order of the RTC in issuing a writ of preliminary
Unauthorized Acts injunction which enjoined NPC from further
undertaking stevedoring and arrastre services
ACTS THAT DO NOT in its pier and directing it either to enter into a
UNAUTHORIZED
COMPLY WITH contract for stevedoring and arrastre services
ACTS
FORMALITIES or to conduct a public bidding therefor. Does
If certain procedures The act may be within NPC have the power to undertake stevedoring
or formalities are the powers of the and arrastre services in its pier?
prescribed in the AOI corporation but not
or bylaws and the same within the powers of
are not complied with, the particular officer.
2023 GOLDEN NOTES
A: YES. NPC has the power to undertake stevedoring faith dealt with it through such agent, be estopped
and arrastre services. To carry out the national from denying the agent’s authority.
policy of total electrification of the country, the NPC
was created and empowered not only to construct, Its existence may be ascertained through:
operate and maintain power plants, reservoirs, 1. The general manner in which the
transmission lines, and other works, but also to corporation holds out an officer or agent as
exercise such powers and do such things as may be having the power to act, or in other words,
reasonably necessary to carry out the business and the apparent authority to act in general,
purposes for which it was organized, or which, from with which it clothes him; or
time to time, may be declared by the Board to be
necessary, useful, incidental or auxiliary to 2. The acquiescence in his acts of a particular
accomplish said purpose. nature, with actual or constructive notice
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thereof, within or beyond the scope of his
If that act is one which is lawful in itself and not ordinary powers.
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otherwise prohibited and is done for the purpose of
serving corporate ends, and reasonably contributes It requires presentation of evidence of similar act(s)
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to the promotion of those ends in a substantial and executed either in its favor or in favor of other
not in a remote and fanciful sense, it may be fairly parties. It is not the quantity of similar acts which
considered within the corporation's charter establishes apparent authority but the vesting of a
powers. corporate officer with the power to bind the
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corporation. (Advance Paper Corp. v. Arma Traders
The rule is that a corporation is not restricted to the Corp., G.R. No. 176897, 11 Dec. 2013)
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exercise of powers expressly conferred upon it by
its charter but has the power to do what is Q: The Spouses Macam opened Savings Account
reasonably necessary or proper to promote the Allied Bank-Pasong Tamo (AB-PT) Branch. The
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interest or welfare of the corporation. Spouses Macam were able to make withdrawals
in the total amount of P490,000.00, leaving a
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The stevedoring services which involve the balance of P1.1 Million in their savings account
unloading of the coal shipments into the NPC pier with AB-PT.
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for its eventual conveyance to the power plant are
incidental and indispensable to the operation of the Caña, head of branch, instructed the bank teller
plant. (NPC v. Vera, et al., G.R. No. 83558, 27 Feb. to debit specific amounts from different
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1989) accounts. Mamalayan, the Branch Operating
Officer, learned of the debiting of the three
Instances When the Acts of Officers Bind the accounts. Caña instructed Mamalayan to book
Corporation (P-R-A-DA) the amount of P20.3 Million under "Accounts
Receivable" corresponding to the unrecovered
1. If it is Provided in the By-laws; amount from the P46 Million which had been
2. When the act was Ratified; earlier transferred to various deposit accounts.
3. If Authorized by the board; or Angela Barcelona, Region Head, Retail Banking
4. Under the Doctrine of Apparent Authority Group for Allied Bank's South Metro Manila
Branches, ordered the debit of the remaining
Doctrine of Apparent Authority (2015 BAR) P1.1 Million from the account of the Spouses
Macam which resulted in the closure thereof.
If a corporation knowingly permits one of its The Sps. Macam learned of the closure after they
officers or any other agent to act within the scope of were unable to withdraw from their account.
an apparent authority, it holds him out to the public Hence, the Sps. Macam filed the complaint for
possessing the power to do those acts; and thus, the Damages. Is Allied Bank liable?
corporation will, as against anyone who has in good
COMMERCIAL LAW
A: YES. All banks are charged with extraordinary When Corporation is Estopped to Deny
diligence in the handling and care of their deposits Ratification of Acts Entered by Officers or Agents
as well as the highest degree of diligence in the
selection and supervision of its employees. Generally, when the corporation has knowledge
that its officers or agents exceed their power, it must
The authority of a corporate officer or agent in promptly disaffirm the contract or act, and allow the
dealing with third persons may be actual or other party or third person to act in the belief that it
apparent. The apparent authority to act for and to was authorized or has been ratified. Otherwise, if it
bind a corporation may be presumed from acts of acquiesces, with knowledge of the facts, or if it fails
recognition in other instances, wherein the power to disaffirm, ratification will be implied. (Premiere
was exercised without any objection from its board Development Bank v. CA, G.R. No. 159352, 14 Apr.
or shareholders. 2004)
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Caña's act of approving the P46 Million fund
transfer and the subsequent transfers to different So settled is the precept that ratification can be
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accounts in various branches of Allied Bank leading made by the corporate board either expressly or
to the P1,590,000.00 transfer to the account of the impliedly. Implied ratification may take various
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Spouses Mario Macam all appear to have been forms - like silence or acquiescence; by acts showing
clothed with authority. Indeed, the subsequent approval or adoption of the contract; or by
transfers were approved by several Branch Heads. acceptance and retention of benefits flowing
therefrom. (MWSS v. CA, G.R. No. 126000, 07 Oct.
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Apparent authority is derived not merely from 1998)
practice. Its existence may be ascertained through:
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Consequences of Ultra Vires Acts
1. The general manner in which the
corporation holds out an officer or agent as These are the effects for the specific acts:
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having the power to act, or in other words,
the apparent authority to act in general, 1. If the contract is executed on both sides – the
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with which it clothes him; or courts will not set aside or interfere to deprive
either party of what has been acquired under
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2. the acquiescence in his acts of a particular them.
nature, with actual or constructive
knowledge thereof, within or beyond the 2. If the contract is executory on both sides – it
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scope of his ordinary powers. (Allied will not be enforced at the suit of either party,
Banking Corporation v. Spouses Macam, G.R. because their enforcement is not required by
No. 200635, 01 Feb. 2021, J. Hernando) any equitable principles and will be contrary to
public policy.
Apparent Authority is Determined by Acts of
Principal, Not by Acts of Agent 3. If the contract is executed on one side, and
executory on the other – courts in some
The Doctrine of Apparent Authority is determined jurisdictions, although not in all, will enforce in
by the acts of the principal and not by the acts of the favor of the party who has executed the same on
agent. As applied to corporations, the doctrine of his part against the other party who has
apparent authority provides that “a corporation is received and retained the benefits on the
estopped from denying the officer's authority if it ground that equitable principles and
knowingly permits such officer to act within the outweighing considerations of public policy
scope of an apparent authority, and it holds him out require that the latter should not be permitted,
to the public as possessing the power to do those while retaining the benefits of the contract, to
acts.” (Agro Food and Processing Corp. v. Vitarich escape liability on the ground that it was ultra
Corp., G.R. No. 217454, 11 Jan. 2021) vires.
2023 GOLDEN NOTES
4. Contracts, whether wholly executory or outstanding capital stock in a meeting called for the
executed on one side, apparently authorized, purpose: Provided, that full disclosure of the
but in fact, ultra vires because they are made adverse interest of the directors or trustees
for a purpose not within the scope of the involved is made at such meeting: Provided,
business of the corporation, the ultra vires however, That the contract is fair and reasonable
purpose being unknown to the other party – under the circumstances.
enforceable against the corporation. (Divina,
2020)
b. The Board of Directors of XL Foods
Remedies in Case of Ultra Vires Acts Corporation declared and paid cash
dividends without approval of the
If the act is yet to be done, the remedy is one of stockholders.
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injunction to enjoin the performance or continued
performance of the ultra vires act. A: VALID – Approval of the stockholders is not
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required in declaring cash dividends.
If the act has already been performed, a stockholder
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may file a derivative suit on behalf of the c. XL Foods Corporation guaranteed the loan
corporation to set aside the ultra vires act. (Divina, of its sister company XL Meat Products, Inc.
2020) (2002 BAR)
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Q: X Corp., whose business purpose is to A: VOIDABLE – This is an ultra vires act on part of
manufacture and sell vehicles, invested its funds XL Foods Corporation and is not one of the powers
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in Y Corp., an investment firm, through a provided for in Sec. 35 of the RCC. It can be ratified
resolution of its Board of Directors. The provided it is not illegal per se but merely beyond
investment grew tremendously on account of Y the powers of the corporation by the approval of the
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Corp.'s excellent business judgment. But a majority of the board and vote of the stockholders
minority stockholder in X Corp. assails the representing at least two thirds of the outstanding
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investment as ultra vires. Is he right and, if so, capital stock. Where the contract or act is not illegal
what is the status of the investment? (2011 BAR) per se but merely beyond the power of the
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corporation, the same is merely voidable and may
A: YES. It is an ultra vires act of its Board of Directors be enforced by performance, ratification, or
but voidable only, subject to stockholders’ estoppels, or on equitable especially if no creditors
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ratification. are prejudiced thereby and no rights of the state or
the public are involved. (Fletcher, p.585; Republic v.
Q: Which of the following corporate acts is valid, Acoje Mining Co., Inc., G.R. No. L-18062, 28 Feb. 1963)
void, or voidable?
n) TRUST FUND DOCTRINE
a. XL Foods Corporation, which is engaged in
the fast-food business, entered into a Trust Fund Doctrine (2015, 2019 BAR)
contract with its President, Jose Cruz,
whereby the latter would supply the The trust fund doctrine provides that subscriptions
corporation with its meat and poultry to the capital stock of a corporation constitute a
requirements. fund to which the creditors have a right to look for
the satisfaction of their claims. (Ong v. Tiu, G.R. Nos.
A: VOIDABLE – A contract of the corporation with 144476 and 144629, 08 Apr 2003)
one or more of its directors or trustees or officers is
voidable, at the option of such corporation (Sec. 31, In a sense, they have to be unimpaired for the
RCC). Such contract can be ratified by the vote of the protection of creditors. These cover the entire
stockholders representing at least two-thirds of the consideration received for the issuance of no par
COMMERCIAL LAW
value shares or the aggregate amount for the par required for a corporate action cannot be
value shares issued by the corporation. (Divina, obtained, with the consequence that the
2020) business and affairs of the corporation can
no longer be conducted to the advantage
Trust fund doctrine is not limited to the of the stockholders generally, the SEC,
stockholders’ subscriptions. The scope of the upon written petition by any stockholder,
doctrine when the corporation is insolvent may require the purchase at their fair
encompasses not only the capital stock, but also value of shares of any stockholder, either
other property and assets generally regarded in by the corporation regardless of the
equity as a trust fund for the payment of corporate availability of unrestricted retained
debts. All assets and property belonging to the earnings in its books, or by the other
corporation held in trust for the benefit of creditors stockholders. (Sec. 103(d), RCC)
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that were distributed or in the possession of the
stockholders, regardless of full payment of their 4. Rescission of a subscription agreement is not
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subscriptions, may be reached by the creditor in allowed since it will effectively result in the
satisfaction of its claim. (Halley v. Printwell, Inc., G.R. unauthorized distribution of the capital assets
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No. 157549, 30 May 2011) and property of the corporation. (Ong v. Tiu, G.R.
No. 144476, 08 Apr. 2003)
Effects of the Trust Fund Doctrine
Exceptions to the Trust Fund Doctrine
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1. Dividends must never impair the subscribed
capital stock; (NTC v. CA, G.R. No. 127937, 28 July The Code allows distribution of corporate capital
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1999) only in the instances of:
2. Subscription commitments cannot be condoned 1. Amendment of the AOI to reduce
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or remitted; (Ibid.) authorized capital stock;
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3. GR: The corporation cannot buy its own shares 2. Purchase of redeemable shares by the
using the subscribed capital as the corporation regardless of existence of
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consideration therefor. (Ibid.) unrestricted retained earnings; or
XPNs: 3. Dissolution and eventual liquidation of the
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a. Redeemable shares may be acquired even corporation.
without surplus profit for as long as it will
not result to the insolvency of the When Creditor is Allowed to Maintain an Action
Corporation; (Republic Planters Bank v. Upon Unpaid Subscriptions
Hon. Agana, G.R. No. 51765, 03 Mar. 1997)
A corporate creditor cannot immediately invoke the
b. In a close corporation, a stockholder may trust fund doctrine to proceed against unpaid
demand the payment of the fair value of subscriptions of stockholders of the debtor
shares regardless of existence of retained corporation except in these two (2) instances when
earnings for as long as it will not result to the creditor is allowed to maintain an action upon
the insolvency of the corporation; (Sec. any unpaid subscriptions based on the trust fund
104, RCC) doctrine:
c. In case of a close corporation, if the 1. Where the debtor corporation released the
directors or stockholders are so divided subscriber to its capital stock from the
on the management of the corporation’s obligation of paying for their shares, in
business and affairs that the votes whole or in part, without a valuable
2023 GOLDEN NOTES
consideration, or fraudulently, to the 2. Proprietary Rights
prejudice of creditors; and a. To transfer stock in the corporate book;
(Sec. 62, RCC)
2. Where the debtor corporation is insolvent b. To receive dividends when declared; (Sec.
or has been dissolved without providing for 42, RCC)
the payment of its creditors. (Enano-Bote v. c. To the issuance of certificate of stock or
Alvarez, G.R. No. 223572, 10 Nov. 2020) other evidence of stock ownership; (Sec.
63, RCC)
8. STOCKHOLDERS AND MEMBERS d. To participate in the distribution of
corporate assets upon dissolution; (Sec.
117, 118, RCC) and
A person becomes a shareholder the moment he:
e. To pre-emption in the issue of shares. (Sec.
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1. Enters into a subscription contract with an
38, RCC)
existing corporation (he is a stockholder
upon acceptance of the corporation of his
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3. Remedial Rights
offer to subscribe whether the
a. To inspect corporate books; (Sec. 73, RCC)
consideration is fully paid or not);
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b. To recover stock unlawfully sold for
delinquent payment of subscription; (Sec.
2. Purchase treasury shares from the
68, RCC)
corporation; or
c. To be furnished with most recent financial
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statements or reports of the corporation’s
3. Acquires shares from existing shareholders
operation; (Sec. 73, 74, RCC)
by sale or any other contract or acquires
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d. To bring suits (derivative suit, individual
shares by operation of law like succession.
suit, and representative suit); and
(Sundiang Sr. & Aquino, 2009)
e. To demand payment in the exercise of
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appraisal right. (Sec. 40, 81, RCC)
a) FUNDAMENTAL RIGHTS OF A STOCKHOLDER
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b) PARTICIPATION IN MANAGEMENT
Rights of a Stockholder and Member
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Under the RCC, stockholders or members
1. Management Rights
periodically elect the board of directors or trustees,
a. To attend and vote in person or by proxy
who are charged with the management of the
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at a stockholders’ meetings; (Sec. 49, 57,
corporation. The board, in turn, periodically elects
RCC)
officers to carry out management functions on a
b. To elect and remove directors; (Sec. 23, 27,
day-to-day basis. As owners, though, the
RCC)
stockholders or members have residual powers
c. To approve certain corporate; (Sec. 57,
over fundamental and major corporate changes.
RCC)
d. To adopt and amend or repeal the by-laws
While stockholders and members (in some
of adopt new by-laws; (Sec. 45, 47, RCC)
instances) are entitled to receive profits, the
e. To compel the calling of the meetings; (Sec.
management and direction of the corporation are
49, RCC)
lodged with their representatives and agents – the
f. To enter into a voting trust agreement;
board of directors or trustees. In other words, acts
(Sec. 58, RCC) and
of management pertain to the board; and those of
g. To have the corporation voluntarily
ownership, to the stockholders or members. In the
dissolved. (Sec. 117, 118, RCC)
latter case, the board cannot act alone, but must
seek approval of the stockholders or members. (Tan
v. Sycip, G.R. No. 153468, 17 Aug. 2006)
COMMERCIAL LAW
(1) PROXY Who May Be a Proxy
Stockholders and members may vote in person or Any person whom the stockholder or member sees
by proxy in all meetings of stockholders or fit to represent him.
members. (Sec. 57, RCC)
NOTE: By-laws restricting the stockholder’s or
However, the right of members to vote by proxy member’s right in this respect are void.
may be denied under the AOI or by-laws of a non-
stock corporation. (Sec. 88, RCC) Further, the same person may act as proxy for one
or several stockholders or members.
The term “proxy” is a written instrument signed by
the stockholder authorizing another person to Duration of Proxy
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exercise the voting rights of the former. It may also
refer to the person exercising the voting authority 1. Specific proxy – authority granted to the
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granted by the stockholder. (Divina, 2021) proxy holder to vote only for a particular
meeting on a specific date.
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It is also used to apply to the holder of the authority
or person authorized by an absent stockholder or 2. Continuing proxy – authority granted a
member to vote for him at a stockholders’ or proxy to appear and vote for and on behalf
members’ meeting. of a shareholder for a continuing period
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which should not be more than five (5)
NOTE: A proxy is a special form of agency. A proxy years at any one time. By-laws may provide
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holder is an agent and as such a fiduciary. for a shorter duration of a continuing proxy.
Since a proxy acts for another, he may act as such Extent of Authority
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although he himself is disqualified to vote his
shares. A proxy-stockholder disqualified to vote 1. General Proxy – A general discretionary
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because his stock has been declared delinquent may power to attend and vote at an annual
vote the stocks of his principal which are not meeting, with all the powers the
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delinquent. undersigned would possess if personally
present, to vote for directors and all
Purposes of Proxies ordinary matters that may properly come
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before a regular meeting.
1. Assures the presence of a quorum in
meetings of stockholders of large NOTE: A holder of a general proxy has no
corporations; authority to vote for a fundamental change
in the corporate charter or other unusual
2. Enables those who do not wish to attend a transactions such as merger or
stockholders’ or members’ meeting to consolidation.
protect their interest by exercising their
right to vote through a representative; and 2. Limited Proxy – Restrict the authority to
vote to specified matters only and may
3. One of the devices in securing voting direct the manner in which the vote shall be
control or management control in the cast. (Ibid.)
corporation. (Ibid.)
2023 GOLDEN NOTES
Requirements of a Valid Proxy 4. Voting by members in nonstock corporations.
(Sec. 88, RCC)
1. Proxies shall be in writing and shall be
signed by the stockholder or member NOTE: In nonstock corporations the right to
concerned. Oral proxies are NOT valid; vote by proxy, or even the right to vote may be
denied to members in the AOI or the by-laws as
2. The proxy shall be filed within a reasonable long as the denial is not discriminatory.
time before the scheduled meeting with the
corporate secretary; 5. In considering other matters:
a. Pledge or mortgage of shares; (Sec. 54,
3. Unless otherwise provided (continuing in RCC)
nature) in the proxy, it shall be valid only b. In all other matters as may be provided in
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for the meeting for which it is intended. The the by-laws; and
authority may be general or limited; and c. In all meetings of stockholders or
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members. (Sec. 57, RCC)
4. No proxy shall be valid and effective for a
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period longer than 5 years at any one time. Power to Appoint a Proxy is a Purely Personal
(Sec. 57, RCC) Right
Instances when the Right to Vote by Proxy may The right to vote is inseparable from the right of
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be Exercised ownership of stock. The appointment of proxy is,
therefore, purely personal and to be valid, a proxy to
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1. Election of the BOD/BOT; (Sec. 23, RCC) vote stock must have been given by the person who
is the legal owner of the stock entitled to vote the
NOTE: When proxies are solicited in relation to same at the time it is voted. (SEC Opinion, 03 Dec.
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the election of corporate directors, the resulting 1993, citing 5 Fletcher, Sec. 2053)
controversy, even if it ostensibly raised the
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violation of the SEC rules on proxy solicitation, Unless the stockholder or member who executed a
should be properly seen as an election proxy gives his consent in writing, a designated
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controversy within the original and exclusive proxy may not further re-designate another under
jurisdiction of the trial courts by virtue of Sec. the same proxy. An alternate proxy can only act as
5.2 of the SRC in relation to Sec. 5(c) of P.D. No. proxy in case of non-attendance of the other
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902-A. From the language of Sec. 5(c) of P.D. No. designated proxy. (De Leon, supra)
902-A, it is indubitable that controversies as to
the qualification of voting shares, or the validity Revocation of Proxy
of votes cast in favor of a candidate for election
to the board of directors are properly A proxy may be revoked in writing, orally or by
cognizable and adjudicable by the regular conduct.
courts exercising original and exclusive
jurisdiction over election cases. (GSIS v. CA, G.R. GR: One who has given a proxy the right to vote may
No. 183905, 06 Apr. 2009) revoke the same at any time.
2. Voting in case of joint ownership of stock; (Sec. XPN: If said proxy is coupled with interest, even if it
55, RCC) may appear by its terms to be revocable. (De Leon,
supra)
3. Voting by trustee under Voting Trust
Agreements; (Sec. 58, RCC) and Last proxy given revokes all previous proxies. (SEC
Opinion, 14 Oct. 1991)
COMMERCIAL LAW
NOTE: It must be noted however that directors or 7. To enable two holding companies to
trustees cannot vote by proxy at board meetings. operate jointly a corporation controlled by
(Sec. 52, RCC) them;
(2) VOTING TRUST 8. To effect a plan for reorganization of a

corporation in financial difficulty or in
Voting Trust Agreement bankruptcy proceedings;
A voting trust agreement (VTA) is an agreement 9. To aid a financially embarrassed

whereby one or more stockholders confer upon a corporation to obtain a loan and protect its
trustee/s the right to vote and other rights creditors.
pertaining to the shares for a period generally not
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exceeding five (5) years at any time and in return, NOTE: Unless expressly renewed, all rights granted
trust certificates are given to the stockholder/s, in a voting trust agreement shall automatically
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which are transferable like stock certificates, expire at the end of the agreed period, and the
subject, to the trust agreement. voting trust certificates as well as the certificates of
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stock in the name of the trustee or trustees shall
Principal Purpose: To acquire control of the thereby be deemed cancelled and new certificates of
corporation. stock shall be reissued in the name of the trustors.
(Sec. 58, RCC)
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Other Purposes
Effects of Voting Trust Agreement with Respect
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1. To make possible a unified control of the to Trustee
affairs of the corporation and a consistent
policy by binding stockholders to vote as a It is the trustee of the shares who acquires legal title
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unit; to the shares under the voting trust agreement and
thus entitled to the right to vote and the right to be
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2. To assure continuity of policy and elected in the board of directors while the trustor-
management especially of a new stockholder has the beneficial title which includes
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corporation desirous of attracting the right to receive dividends. (Lee v. CA, G.R. No.
investors; 93695, 04 Feb. 1992)
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3. To enable the owners of the majority of the But, having conveyed his legal title to the trustee,
stock of the corporation to control the the transferring stockholder is disqualified from
corporation; being elected as a director.
4. To vest and retain the management of the If the transferring stockholder executes the VTA
corporation in the persons originally during his term as director, he shall cease to be a
promoting it; director for the corporation. (Divina, 2021)
5. To prevent a rival concern from acquiring NOTE: The voting trust agreement filed with the
control of the corporation; corporation shall be subject to examination by any
stockholder in the same manner as any other
6. To carry out a proposed sale of the corporate book or record. Both the transferor and
corporation’s assets and to facilitate its the trustee may exercise the right of inspection of all
dissolution; corporate books and records. (Sec. 58, RCC)
A Trustee has the right to terminate a voting trust

agreement when the trustee has committed a
2023 GOLDEN NOTES
breach of trust. (Everett v. Asia Banking Corp., G.R. As to Extent of Right
No. L-25241, 03 Nov. 1926)
A trustee can vote and
exercise all the rights A proxy can only vote
Voting Trust Agreement vs. Proxy
of the stockholder even in the absence of the
when the latter is stockholder.
VOTING TRUST PROXY
present.
As to Revocability
As to Term or Duration
If validly executed, VTA
A proxy, unless A proxy is usually of
is intended to be An agreement must not
coupled with interest, shorter duration
irrevocable for a exceed 5 years at any
is revocable at any
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definite and limited although under Sec. 58
time. one time except when
period of time. it can be for a longer
the same is made a
period not to exceed 5
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condition of a loan.
years at any one time.
As to Legal Title
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As to Governing Law
Trustee acquires legal
Proxy has no legal title
title to the shares of the Governed by the law on Governed by the law on
to the shares of the
transferring trust. agency.
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principal.
stockholder.
As to Right to Inspect
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As to Rights Included
A trustee has the right A proxy does not have
Right to vote as well as to inspect corporate a right of inspection of
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other rights may be books. corporate books.
given except the right
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to receive dividends. Only the right to vote is
Pooling Agreement
The trustee may vote in given.
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person or by proxy
Pooling or voting agreements are agreements by
unless the agreement
which two or more stockholders agree that their
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provides otherwise.
shares shall be voted as a unit. They are usually
concerned with the election of directors to gain
As to Limitations to Act
control of the management. The parties remain the
legal owners of their stocks with the right to vote
Trustee is not limited them. (De Leon, supra)
Proxy can only base on
to act at any particular
authority given.
meeting. NOTE: This does not involve a transfer of stocks but
is merely a private agreement. (Sec. 99, RCC)
As to Cancellation of Stock Certificate
Example: Shareholders A, B, C, D, and E hold 50% of
The stock certificate
the outstanding capital stock, entered into a pooling
shall be cancelled and a
agreement to vote for F as a member of the board of
new one in the name of No cancellation of the
directors.
the trustee shall be certificate shall be
issued stating that they made.
are issued pursuant to
a VTA.
COMMERCIAL LAW
Validity of Pooling Agreements The said stockholder may:
a. Vote such number of shares for as many
Pooling agreements are valid as long as they do not persons as there are directors to be elected;
limit the discretion of the BOD in the management
of corporate affairs or work any fraud against b. Cumulate said shares and give one (1)
stockholders not party to the contract. candidate as many votes as the number of
directors to be elected multiplied by the
The validity and legality of such pooling agreements number of the shares owned; or
depend upon the objects sought to be attained and
the acts which are done under them, and the other c. Distribute them on the same principle
circumstances. There is some authority for holding among as many candidates as may be seen
pooling agreements to be invalid if the fit.
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consideration for entering into the same gives a
private benefit to the stockholder. GR: Members of nonstock corporations may cast as
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many votes as there are trustees to be elected but
Pooling Agreement vs. Voting Trust Agreement may not cast more than one (1) vote for one (1)
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candidate.
In a Pooling Agreement, the stockholders
themselves exercise their right to vote. On the other XPN: Cumulative voting is allowed in the AOI or in
hand, the trustees are the ones who exercise the the bylaws.
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right to vote under the Voting Trust Agreement.
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(3) CASES WHEN STOCKHOLDERS’ ACTION IS
REQUIRED
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When Stockholders’ Action is Required
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Under Sec. 6 of the Corporation Code, each share of
stock is entitled to vote, unless otherwise provided
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in the AOI or declared delinquent under Sec. 67 of
the Corporation Code (now Sec. 66, RCC). (Tan v.
Sycip, G.R. No. 153468, 17 Aug. 2006)
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Stockholders’ action is required either by:
1. Majority vote
2. Two-thirds votes; or
3. Cumulative voting. (Divina, 2021)
For the discussion on Majority Vote and Two-

thirds Votes, please refer to the table on page 87.
Cumulative Voting
In stock corporations, stockholders entitled to vote

shall have the right to vote the number of shares of
stock standing in their own names in the stock
books of the corporation at the time fixed in the
bylaws or where the bylaws are silent, at the time of
the election.
2023 GOLDEN NOTES
Corporate Powers Exercised Jointly by the BOD and Stockholders (I4-P-A2-G-E2-S-M-A-V)
BOARD OF DIRECTORS STOCKHOLDERS

Amendments, Repeal, or Adoption of New By-laws
GR: Majority vote of the outstanding capital stock.
Majority vote of the BOD.
XPN: If delegated by the stockholders to the board.
Entering into Management Contract
GR: Vote of the majority of the outstanding shares of stock or
members of both the managing and the managed corporation.
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XPN: The vote required for the managed corporation is not merely
majority but 2/3 of the outstanding capital stock in cases where:
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1. A stockholder or stockholders representing the same interest of
Majority of the quorum of the BOD.
both the managing and the managed corporations own or
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control more than one-third (1/3) of the total OCS entitled to
vote of the managing corporation; or
2. Majority of the members of the board of directors of the
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managing corporation also constitute a majority of the
members of the board of directors of the managed corporation.
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Issuance of Stock Dividends
Majority of the quorum of the BOD. Vote representing 2/3 of the OCS.
Amendment to Articles of Incorporation
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Majority vote of the BOD. Vote representing 2/3 of the OCS.
Grant of Compensation to Directors
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Approval of the Board. Majority vote of the OCS.
Extending or Shortening the Corporate Term
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Increase or Decrease of Capital Stock
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Incur, Create, or Increase Bonded Indebtedness
Deny Pre-emptive Right
Investment of Corporate Funds in Another Corporation or Business or
for Any Other Purpose other than the Primary Purpose
The Sale or Other Disposition of All or Substantially All of the Corporate Assets
Majority vote of the board. Vote representing 2/3 of the OCS.
Merger or Consolidation
Majority vote of the BOD Vote representing 2/3 of the OCS.
Voluntary Dissolution
To Adopt a Plan of Distribution of Assets of a Non-stock Corporation
Majority vote of the Trustees. 2/3 of the members having voting rights.
COMMERCIAL LAW
Corporate Powers Exercised Solely by the Stockholders
CORPORATE POWERS
Election of directors or trustees; Filling up of vacancies by the stockholders due to the expiration of
term, removal from office or increase in the number of board seats
Candidates receiving the highest number of votes from the outstanding capital stock or members entitled to
vote. (plurality, NOT majority)
To elect officers of the corporation
Plurality vote of the BOD listed in the AOI, not merely those present constituting a quorum.
Fixing the issued price of no-par value shares
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Majority of the quorum of the BOD if authorized by the AOI or in the absence of such authority, by a majority
of the outstanding capital stock.
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Declaration of cash and other dividends
other than stock dividends
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Majority of the quorum of the board.
To adopt by-laws
Majority of the OCS or of the members.
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To revoke the power delegated to the BOD to amend or repeal the by-laws
or adopt new by laws
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Majority of the OCS or of the members.
To call a special meeting to remove directors or trustees
N
Majority of the OCS or of the members entitled to vote.
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Removal of directors
Vote representing 2/3 of the OCS or of members entitled to vote.
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Delegation of the power to amend by-laws to
the board of directors
A
Vote representing 2/3 of the OCS.
Ratification of corporate contract
with a director
Vote representing 2/3 of the OCS.
To delegate to the BOD the power to amend or repeal the by-laws
or adopt new by laws
2/3 of the OCS or of the members.
2023 GOLDEN NOTES
(4) MANNER OF VOTING XPNs:
1. When justified by definite corporate
Modes of Voting in a Stockholders’ or Members’ expansion projects or programs approved by
Meeting the board of directors;
The right to vote of stockholders or members may 2. When the corporation is prohibited under any
be exercised: loan agreement with any financial institution
or creditor, whether local or foreign, from
1. In person; declaring dividends without its/his consent,
2. Through a proxy; or and such consent has not yet been secured; or
3. Through remote communication; or
4. In absentia. (Divina, 2021) 3. When it can be clearly shown that such
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retention is necessary under special
NOTE: Voting through remote communication and circumstances obtaining in the corporation,
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in absentia must be authorized in the bylaws. (Ibid.) such as when there is need for special reserve
for probable contingencies. (Sec. 42, RCC)
However, the right to vote through such modes may
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be exercised in corporations vested with public
Entitlement to Receive Dividends
interest, notwithstanding the absence of a provision
in the bylaws of such corporations. A stockholder or
GR: Those stockholders at the time of declaration
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member who participates through the said modes
are entitled to dividends. (Sundiang Sr. & Aquino,
shall be deemed present for purposes of quorum.
2009, citing SEC Opinion, 15 July 1994)
(Sec. 23, RCC)
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NOTE: Dividends declared before the transfer of
c) PROPRIETARY RIGHTS
shares belong to the transferor and those declared
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after the transfer, belong to the transferee. (Ibid.)
The following are the proprietary rights of the
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stockholders:
XPN: In case a record date is provided for.
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1. Right to Dividends;
A record date is the date fixed in the resolution
2. Right of Appraisal;
declaring dividends, when the dividend shall be
3. Right to Inspect;
payable to those who are stockholders of record on
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4. Pre-emptive Right; and
a specified future date or as of the date of the
5. Right of First Refusal.
meeting declaring said dividend. (De Leon, supra)
(1) RIGHTS TO DIVIDENDS

Right of Holders of Non-Delinquent, But Not
Fully Paid Shares
It is the right of the stockholder to demand payment
of dividends after the board’s declaration.
Holders of shares not fully paid which are not
Stockholders are entitled to dividends pro rata
delinquent shall have all the rights of a stockholder.
based on the total number of shares that they own
and not on the amount paid for the shares. (SEC
GR: Prior to the declaration of a dividend, a
Opinion, 10 Oct. 1992 and 16 July 1996)
stockholder cannot maintain an action at law to
recover his share of the accumulated profits
GR: Stock corporations are prohibited from
because such stockholder has no individual interest
retaining surplus profits in excess of 100% of their
in the profits of a corporation until a dividend has
paid-in capital stock.
been declared.
COMMERCIAL LAW
XPN: An action at law may be maintained where it NOTE: In case of disagreement, the value
is alleged that sufficient net profits have been will be determined by appraisal of 3
earned to obligate the corporation to pay, however, disinterested persons. (Sec. 81, RCC)
there must be a prior application with the directors
for the relief sought. If it appears that the directors 5. The corporation has sufficient Unrestricted
have wantonly violated their duty, and such retained earnings to pay. The trust fund
application would be inefficacious, such application doctrine backstops the requirement of
need not be made. unrestricted retained earnings to fund the
payment of the shares of stocks of the
No dividends can be declared out of capital, except withdrawing stockholders (Turner vs.
when liquidating dividends distributed at Lorenzo G.R. No. 157479, 24 Nov. 2010)
dissolution. (Sec. 139, RCC)
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Instances of Exercise of Appraisal Right
Applying Dividends to Delinquent Shares
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Any stockholder of a corporation shall have the right
Cash to dissent and demand payment of the fair value of
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his shares in the following instances:
Cash dividends due on delinquent stock shall
first be applied to the unpaid balance on the
1. In case any amendment to the AOI has the
subscription plus cost and expenses.
effect of changing or restricting the rights of
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Stock any stockholder or class of shares, or of
authorizing preferences in any respect
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Stock dividends are withheld from the superior to those of outstanding shares of
delinquent stockholder until his unpaid any class, or of extending or shortening the
subscription is fully paid. term of corporate existence;
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(2) APPRAISAL RIGHT 2. In case of sale, lease, exchange, transfer,
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mortgage, pledge or other disposition of all
The right of a stockholder to dissent and demand or substantially all of the corporate
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payment of the fair value of the shares in the certain property and assets as provided in the
instances provided in the RCC. (Sec. 80, RCC) Code;
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Requisites: (G-W-A-F-U) 3. In case of merger or consolidation; and
1. Any of the Grounds for appraisal must be 4. In case of investment of corporate funds for
present; any purpose other than the primary
purpose of the corporation; (Sec. 80, RCC)
2. A Written demand on the corporation must
be made within 30 days after the date when NOTE: Any stockholder of a close corporation may,
the vote was taken; for any reason, compel said corporation to purchase
his shares at their fair value, which shall not be less
3. The dissenting stockholders Attend the than their par or issued value, when the corporation
meeting of the stockholders and voted has sufficient assets in its books to cover its debts
against the proposed action; and and liabilities exclusive of capital stock. (Sec. 104,
RCC)
4. The price of the Fair Market Value of the
shares on the day before the date of voting;
2023 GOLDEN NOTES
Q: Assuming a stockholder disagrees with the status as a stockholder shall thereupon be
issuance of new shares and the pricing for the permanently restored. (Sec. 83, RCC)
shares; may the stockholder invoke his
appraisal rights and demand payment for his Cost of Appraisal
shareholdings? (1999 BAR)
The costs and expenses of appraisal shall be borne
A: NO. The stockholder may not invoke his appraisal as follows:
right because disagreement with the issuance of
new shares and its pricing do not fall under any of 1. By the corporation –
the instances where the appraisal right is available. a. Where the price which the corporation
offered to pay the dissenting stockholder
Effects of Exercise is lower than the fair value as determined
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by the appraisers named by them; or
1. Once the dissenting stockholder demands
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payment of the fair value of his shares: b. Where an action is filed by the dissenting
stockholder to recover such fair value and
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a. All rights accruing to such shares including the refusal of the stockholder to receive
voting and dividend rights shall be payment is found by the court to be
suspended; justified.
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b. He shall be entitled to receive payment of 2. By the dissenting stockholder –
the fair value of his shares as agreed upon a. Where the price offered by the
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between him and the corporation or as corporation is approximately the same as
determined by the appraisers chosen by the fair value ascertained by the
him; appraisers; or
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c. GR: He is not allowed to withdraw his b. Where the same action is filed by the
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demand for payment of his shares dissenting stockholder and his refusal to
accept payment is found by the court to be
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XPN: Unless the corporation consents unjustified. (Divina, 2020)
thereto.
Q: In case of disagreement between the
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2. If the dissenting stockholder was not paid the corporation and a withdrawing stockholder
value of his shares within 30 days after the who exercises his appraisal right regarding the
award, his voting and dividend rights shall be fair value of his shares, a three-member group
immediately restored until payment of his shall by majority vote resolve the issue with
shares (Sec. 82, RCC); finality. May the wife of the withdrawing
stockholder be named to the three member
NOTE: Even if his rights as stockholder are group? (2011 BAR)
suspended after his demand in writing is made,
he cannot be considered as an ordinary creditor A: NO. The wife of the withdrawing shareholder is
of the corporation (SEC Opinion, 11 Jan 1982); not a disinterested person.
3. Upon payment of the stockholder’s shares, all Q: When does the right to payment cease?
his rights as stockholders are terminated, not
merely suspended (Sec. 81, RCC); and A: The right of the dissenting stockholder to be paid
the fair value of his shares shall cease, his status as
4. If before the stockholder is paid, the proposed a stockholder shall thereupon be restored, and all
corporate action is abandoned, his rights and
COMMERCIAL LAW
dividend distributions which would have accrued Valid Purposes for Inspection
on his shares shall be paid to him if:
1. Ascertainment of financial condition of
1. Demand for payment is withdrawn with the corporation or propriety of dividends;
consent of the corporation; 2. Value of the shares of stock for sale or
investment;
2. The proposed corporate action is 3. Existence of mismanagement;
abandoned by the corporation; 4. Obtainment of list of stockholders to solicit
proxies or influence voting; and
3. The proposed corporate action is rescinded 5. Obtainment of information in aid of
by the corporation; litigation with the corporation or its officers
regarding corporate transactions.
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4. The proposed corporate action is
disapproved by the SEC where such Books and Records Required to be Kept
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approval is necessary; or
The following are the books and records required to
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5. The SEC determines that the dissenting be kept by private corporations:
stockholder is not entitled to the appraisal
right. (Sec. 83, RCC) 1. The AOI and bylaws of the corporation and
all their amendments;
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NOTE: A dissenting stockholder who demands
payment of his shares is no longer allowed to 2. The current ownership structure and
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withdraw from his decision unless the corporation voting rights of the corporation, including
consents thereto. lists of stockholders or members, group
structures, intra-group relations,
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(3) RIGHT TO INSPECT ownership data, and beneficial ownership;
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The stockholder’s right of inspection of the 3. The names and addresses of all the
corporation’s book and records is based upon his members of the board of directors or
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ownership of shares in the corporation and the trustees and the executive officers;
necessity for self-protection. (Puno v. Puno
Enterprises, Inc., G.R. No, 177066, 11 Sept. 2009) 4. A record of all business transaction;
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The stockholder's right of inspection of the 5. A record of the resolutions of the board of
corporation's books and records is based upon their directors or trustees and of the
ownership of the assets and property of the stockholders or members;
corporation. It is, therefore, an incident of
ownership of the corporate property. (Republic v. 6. Copies of the latest reportorial
Sandiganbayan, G.R. No. 88809, 10 July 1991) requirements submitted to the
Commission;
The mere fact that the shareholding of a stockholder
is merely .001 per cent of the issued shares of stock 7. The minutes of all meetings of stockholders
does not justify the denial of the request of or members, or of the board of directors or
inspection of the corporate records. (Terelay v. Yulo, trustees;
G.R. No. 160924, 05 Aug. 2015)
8. Corporate records; and
9. Stock and transfer book, in case of stock

corporations. (Sec. 73, RCC)
2023 GOLDEN NOTES
NOTE: The duty to keep these books is imperative Act of 2012”, R.A. No. 8799, otherwise known as
and mandatory. The stockholder can likewise “The Securities Regulation Code”, and the Rules
inspect the financial statements of the corporation. of Court.
(Sec. 73, RCC).
7. It is subject to limitations under special laws,
Place Where Books and Records Shall be Kept e.g. Secrecy of Bank Deposits and FCDA or the
Foreign Currency Deposits Act.
GR: All the above books and records must be kept at
the principal office of the corporation. NOTE: The right extends, in compliance with equity,
good faith, and fair dealing, to a foreign subsidiary
XPN: The stock and transfer book may be kept in the wholly-owned by the corporation.
principal office of the corporation or in the office of
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its stock transfer agent, if one has been appointed by Extent of Right
the corporation. (Sec. 73, RCC)
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The right to inspect extends to the books and
Requirements for the Exercise of the Right of records of the wholly-owned subsidiary of the
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Inspection corporation. It would be more in accord with equity,
good faith and fair dealing to construe the statutory
1. The right must be exercised during reasonable right of the stockholder to inspect the books and
hours on business days; records of the corporation as extending to books
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and records of its wholly-owned subsidiary which
2. The person demanding the right has not are in the corporation’s possession and control.
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improperly used any information obtained (Gokongwei v. SEC, et al., G.R. No. L-45911, 11 Apr.
through any previous examination of the books 1979)
and records of the corporation;
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Persons Entitled to Right
3. The demand is made in writing and good faith
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or for legitimate purpose germane to his The following are entitled to inspect the corporate
interest as a stockholder. (Sec. 73, RCC) books:
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Good purposes may be: 1. Any director, trustee, or stockholder or
a. To investigate acts of management; member of the corporation at reasonable
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b. To investigate financial conditions; fix hours on business day (Sec. 73, RCC);
value of shares;
c. Mailing list for proxies; or 2. Voting trust certificate holder – The term
d. Information for litigation. “stockholder”, as used in Sec. 73, RCC
means not only a stockholder of record; it
4. It should follow the formalities that may be includes a voting trust certificate holder
required in the by-laws; who has become merely an equitable
owner of the shares transferred (Sec. 58,
5. The right does not extend to trade secrets; and RCC);
6. The inspecting or reproducing party shall 3. Stockholder of a sequestered company

remain bound by confidentiality rules under (Republic v. Sandiganbayan, supra); and
prevailing laws, such as the rules on trade
secrets or processes under R.A. No. 8293, 4. Beneficial owner of shares – pledgee,
otherwise known as the “Intellectual Property judgment debtor, buyer from record owner.
Code of the Philippines”, as amended, R.A. No. This is provided that his interest is clearly
10173, otherwise known as the “Data Privacy established by evidence.
COMMERCIAL LAW
Q: The deceased Carlos Puno, was an A: It is clear that a criminal action based on the
incorporator of Puno Enterprises, Inc. (Puno, violation of the second or fourth paragraphs of Sec.
Inc). Joselito Musni Puno, claiming to be an heir 74 (now Sec. 73) can only be maintained against
of Carlos Puno, initiated a complaint for specific corporate officers or such other persons that are
performance against Puno, Inc. Joselito averred acting on behalf of the corporation. Violations of the
that he is the son of the deceased with the second and fourth paragraphs of Sec. 74 (now Sec.
latter’s common-law wife, Amelia Puno. As 73) contemplates a situation wherein a corporation,
surviving heir, he claimed entitlement to the acting thru one of its officers or agents, denies the
rights and privileges of his late father as right of any of its stockholders to inspect the
stockholder of Puno, Inc. The complaint thus records, minutes and the stock and transfer book of
prayed that Joselito be allowed to inspect its such corporation. (Yujuico v. Quiambao, G.R. No.
corporate book and be given an accounting and 180416, 02 June 2014)
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all the profits pertaining to the shares of Puno.
Remedies for Enforcement
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May an heir of a stockholder automatically
exercise the rights (inspection, accounting, 1. Action for mandamus or damages; and
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dividends) pertaining to the deceased? 2. Civil and criminal liability.
A: NO. The stockholder’s right of inspection of the Q: PASARC filed an Amended Petition for
corporation’s books and records is based upon his Injunction and Damages with prayer for
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ownership of shares in the corporation and the Preliminary Injunction and/or Temporary
necessity for self-protection. After all, a shareholder Restraining Order seeking to restrain
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has the right to be intelligently informed about respondents, who are stockholders of the
corporate affairs. Such right rests upon the corporation, from demanding inspection of its
stockholder’s underlying ownership of the confidential and inexistent records. The RTC
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corporation’s assets and property. Similarly, only issued an Order granting PASAR's prayer for a
stockholders of record are entitled to receive writ of preliminary injunction. On appeal, the CA
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dividends declared by the corporation, a right held that there was no basis to issue an
inherent in the ownership of the shares. injunctive writ. Will injunction lie to prevent the
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respondents from invoking their right to
Upon the death of a shareholder, the heirs do not inspect?
automatically become stockholders of the
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corporation and acquire the rights and privileges of A: NO. An action for injunction filed by a corporation
the deceased as shareholder of the corporation. The generally does not lie to prevent the enforcement by
stocks must be distributed first to the heirs in estate a stockholder of his or her right to inspection. The
proceedings, and the transfer of the stocks must be Corporation Code provides that a stockholder has
recorded in the books of the corporation. During the right to inspect the records of all business
such interim period, the heirs stand as the equitable transactions of the corporation and the minutes of
owners of the stocks, the executor or administrator any meeting at reasonable hours on business days.
duly appointed by the court being vested with the However, this right is not absolute and may be
legal title to the stock. (Puno v. Puno Enterprises, Inc., refused when the information is not sought in good
G.R. No. 177066, 11 Sept. 2009) faith or is used to the detriment of the corporation.
But the impropriety of purpose such as will defeat
Q: Who are the persons who may be held liable enforcement must be set up by the corporation
under Sec. 73, RCC? defensively if the Court is to take cognizance of it as
a qualification.
2023 GOLDEN NOTES
In other words, corporations may raise their Defenses that can be set up against inspecting
objections to the right of inspection through party
affirmative defense in an ordinary civil action for
specific performance or damages, or through a 1. Improper use of the information obtained
comment (if one is required) in a petition for in the past;
mandamus. In this case, the petitioner did not raise 2. Not acting in good faith or legitimate
such limitations as a matter of defense. (PASARC v. purpose; and
Lim, G.R. No. 172948, 05 Oct. 2016) 3. Is a competitor, director, officer, controlling
stockholder or otherwise represents the
Requisites for Existence of Probable Cause to interests of a competitor. (Sec. 73, RCC)
File a Criminal Case of Violation of a
Stockholder’s Right to Inspect Corporate Books (4) PREEMPTIVE RIGHT
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1. A director, trustee, stockholder or member It is the right of shareholders to subscribe to all
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has made a prior demand in writing for a issues or disposition of shares of any class in
copy or excerpts from the corporation’s proportion to their respective shareholdings, unless
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records or minutes; such right is denied by the AOI or an amendment
thereto, and subject to certain exceptions. (Sec. 38,
2. Any officer or agent of the concerned RCC)
corporation shall refuse to allow the said
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director, etc., to examine and copy said NOTE: The preemptive right of stockholders in
excerpts; close corporations shall extend to all stock to be
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issued, including reissuance of treasury shares,
3. If such refusal is made pursuant to a whether for money, property, or personal services,
resolution or order of the BOD’s the liability or in payment of corporate debts, unless the AOI
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for such action shall be imposed upon the provides otherwise. (Sec.101, RCC)
directors or trustees who voted such
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refusal; and Purpose of Preemptive Right
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4. Where the officer or agent of the To enable the shareholder to retain his
corporation sets up the defense that the proportionate control in the corporation (non-
person demanding to examine and copy dilution) and to retain his equity in the surplus.
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excerpts from the records and minutes has
improperly used any information secured Exercise of Preemptive Right
through any prior examination of the same
or was not acting in good faith or for a Preemptive right must be exercised in accordance
legitimate purpose in making his demand, with the AOI or the By-Laws. When the AOI and the
the contrary must be shown or proved. By-Laws are silent, the Board may fix a reasonable
(Ang-Abaya v. Ang, G.R. No. 178511, 04 Dec. time within which the stockholders may exercise
2008) the right.
The Corporation Code has granted to all Stock transactions covered includes:
stockholders the right to inspect the corporate 1. The issuance of shares pursuant to an
books and records, and in so doing has not required increase in the authorized capital stock;
any specific amount of interest for the exercise of 2. Opening for subscription the unissued
the to inspect. (Terelay Investment and Development portion of existing authorized capital stock;
Corp. v. Yulo, G.R. No. 160924, 05 Aug. 2015) and
3. Re-issuance of treasury shares.
COMMERCIAL LAW
Transferability of Preemptive Right Conditions for Issuance of Non-Voting Shares
Preemptive right is transferable unless there is an Non-voting shares may be issued provided the
express restriction in the AOI. following conditions under Sec. 6 of the RCC are
complied with:
Waiver of Preemptive Right by the Stockholder
1. No share may be deprived of voting rights
The stockholder may waive his pre-emptive right except those classified and issued as
either expressly or impliedly as when the “preferred” or “redeemable” shares, unless
stockholder fails to exercise his pre-emptive right otherwise provided in this Code; and
within the applicable period after being notified and
given an opportunity to avail of such right. 2. There shall always be a class or series of
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shares with complete voting rights; and
The stockholder must be given a reasonable time
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within which to exercise their preemptive rights. 3. Holders of nonvoting shares shall
Upon the expiration of said period, any stockholder nevertheless be entitled to vote on certain
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who has not exercised such right is deemed to have matters provided in the RCC.
waived it. (Majority Stockholders of Ruby Industrial
Corp. v. Lim, G.R. Nos. 165887 & 165929, 06 June Instances when Non-Voting Shares shall
2011) nevertheless be Entitled to Vote
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Denial of Preemptive Right The non-voting shares may still vote in the following
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matters: (A-A-S-I-I-M-I-D)
There is preemptive right unless such right is
denied by the AOI or an amendment thereto. 1. Amendment of the articles of
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incorporation;
(5) RIGHT TO VOTE
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2. Adoption and amendment of By-laws;
Right to Vote
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3. Sale, lease, exchange, mortgage, pledge or
The stockholders can exercise their right to vote other disposition of all or substantially all
through the election, replacement and removal of of the corporate property;
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Board of Directors or Trustees and on other
corporate acts which require stockholders’ 4. Incurring, creating or increasing bonded
approval. (Divina, 2021) indebtedness;
Nature of Right to Vote 5. Increase or decrease of authorized capital

stock;
One of the rights of a stockholder is the right to
participate in the control and management of the 6. Merger or consolidation of the corporation
corporation that is exercised through his vote. The with another corporation or other
right to vote is a right inherent in and incidental to corporations;
the ownership of corporate stock, and such is a
property right. The stockholder cannot be deprived 7. Investment of corporate funds in another
of the right to vote his stock, nor may the right be corporation or business in accordance with
essentially impaired, either by the legislature or by the Revised Corporation Code; and
the corporation, without his consent, through
amending the charter, or the by-laws (Castillo v. 8. Dissolution of the corporation (Sec. 6, RCC)
Balinghasay, G.R. No. 150976, 18 Oct. 2004)
2023 GOLDEN NOTES
Right to vote in the following cases: d) REMEDIAL RIGHTS
a. Shares under security interest - In case a (1) INDIVIDUAL SUIT

stockholder grants security interest in his
or her shares in stock corporations, the Individual suit
stockholder-grantor shall have the right to
attend and vote at meetings of An individual suit is filed when the cause of action
stockholders, unless the secured creditor is belongs to the individual stockholder personally,
expressly given by the stockholder-grantor and not to the stockholders as a group or to the
such right in writing which is recorded in corporation. (Divina, 2021 citing Villamor v. Umale,
the appropriate corporate books. (Sec. 54, G.R. Nos. 172843, 172881, 24 Sept. 2014)
RCC)
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NOTE: Authorization from the board of directors is
b. Shares subject of a settlement of estate not necessary. Since the wrong is done to him
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proceeding or under receivership - personally and not to the other stockholder or the
Executors, administrators, receivers, and corporation, the cause of action belongs to him
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other legal representatives duly appointed alone. (CMH Agricultural Corp. v. CA, G.R. No.
by the court may attend and vote in behalf 112625, 07 Mar. 2002)
of the stockholders or members without
need of any written proxy. (Sec. 54, RCC) (2) REPRESENTATIVE SUIT
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c. Shares under joint ownership - The Representative suit
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consent of all the co-owners shall be
necessary in voting shares of stock owned one brought by a person on his own behalf and on
jointly by two (2) or more persons, unless behalf of all similarly situated or to a group of
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there is a written proxy, signed by all the co- stockholders, such as when the rights violated
owners, authorizing one (1) or some of belong to a preferred stockholder, or denial of the
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them or any other person to vote such share pre-emptive right to a group or class of
or shares: Provided, That when the shares stockholders. (Divina, 2021)
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are owned in an "and/or" capacity by the
holders thereof, any one of the joint owners (3) DERIVATIVE SUIT
can vote said shares or appoint a proxy
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therefor. (Sec. 55, RCC) Derivative suit
d. Treasury shares - Treasury shares shall an action filed by stockholders in the name and on
have no voting right as long as such shares behalf of the corporation to enforce a corporate
remain in the treasury. (Sec. 56, RCC) right or cause of action to set aside the wrongful acts
of the corporation’s directors and officers. (Divina,
(6) RIGHT TO DIVIDENDS 2021)
See previous discussion on page 89. In derivative suit, the real party in interest is the
corporation, not the stockholders filing the suit. The
stockholders are technically nominal parties but are
nonetheless the active persons who pursue the
action for and on behalf of the corporation. (Florete
v. Florete, G.R. No. 174909, 20 Jan. 2016)
COMMERCIAL LAW
Requisites for the existence of a derivative suit Q: Royal Links Golf Club obtained a loan from a
(C-S-E-N-A) bank which is secured by a mortgage on a titled
lot where holes 1, 2, 3 and 4 are located. The
1. Corporate cause of action – the cause of bank informed the Board of Directors (Board)
action must devolve upon the corporation that if the arrearages are not paid within thirty
itself; the wrongdoing or harm having been (30) days, it will extra-judicially foreclose the
caused to the corporation and not the mortgage. The Board decided to offer to the
particular stockholder bringing suit. (Reyes members 200 proprietary membership shares,
v. Hon. RTC Of Makati Br. 142, G.R. No. which are treasury shares, at the price of
165744, 11 Aug. 2008); P175,000.00 per share even when the current
market value is P200,000.00.
2. Stockholder – the party bringing the suit
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must be a stockholder; In behalf and for the benefit of the corporation,
a. At the time of acts or transaction Peter, a stockholder, filed a derivative suit
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subject of the action occurred; and against the members of the Board for breach of
b. At the time the action was filed trust for selling the shares at P25,000.00, lower
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than its market value, and asked for the
NOTE: If the cause of action is continuing in nullification of the sales and the removal of the
nature, it is sufficient that the party is a board members. Peter claims the Club incurred
stockholder at the time the action was filed. a loss of PS million. The Board presented the
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(Villamor v. Umale, G.R. Nos. 172843, defense that in its honest belief any delay in the
172881, 24 Sept. 2014) payment of the arrearages will be prejudicial to
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the Club as the mortgage on its assets will be
3. Exhaustion of all intra-corporate remedies foreclosed and the sale at a lower price is the
available under the AOI, By-laws or rules best solution to the problem. Decide the suit.
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governing the corporation or partnership (2016 BAR)
to obtain the relief he desires;
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A: The derivative suit will not prosper because
4. Not a Nuisance or Harassment suit; and while it was filed by a stockholder on behalf of the
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corporation the complaint did not allege the other
5. Appraisal right is not available. (Rule 8 of elements of derivative suit namely, the exhaustion
the Interim Rules of Procedure Governing of intra corporate remedies available, that it is not a
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Intra-Corporate Controversies, cited in Yu et nuisance suit, and that appraisal right was not
al., v. Yukayguan, et al., G.R. No. 177549, 18 available. (Ching v. Subic Bay Golf and Country Club,
June 2009) G.R. No. 174353, 10 Sept. 2014)
Where a stockholder or member is denied the right Furthermore, there was no wrongful act on the part
of inspection, his suit would be individual because of the board of directors for simply selling the
the wrong is done to him personally and not to the treasury shares below market value given the
other stockholders or the corporation. Where the circumstances obtaining in the corporation. The
wrong is done to a group of stockholders, as where terms and conditions of the sale of treasury shares
preferred stockholders' rights are violated, a class are reasonably determined by the board of directors
or representative suit will be proper for the under the business judgment rule. Under such rule,
protection of all stockholders belonging to the same questions of policy and management are left to the
group. But where the acts complained of constitute sound discretion of the board of directors and their
a wrong to the corporation itself, the cause of action acts are valid for as long as they acted in good faith
belongs to the corporation and not to the individual and not contrary to law. (Divina, 2020)
stockholder or member. (Legaspi Towers 300, Inc. v.
Muer, G.R. No. 170783, 18 June 2012)
2023 GOLDEN NOTES
Q: In May 2018, ABC Corp. enters into a As to prayer
merchandising contract which terms and
conditions were totally lopsided in favor of the Seeks to recover for
counterparty, XYZ, Inc. As a result, ABC Corp. the benefit of the
suffered tremendous financial losses. corporation and its
whole body of
A year after, or in May 2019, Mr. X became a Seeks vindication for
shareholders when
stockholder of ABC Corp. Learning about the injury to his or her
injury is caused to the
circumstances surrounding the merchandising interest as a
corporation that may
contract, Mr. X filed a derivative suit against ABC stockholder
be otherwise be
Corp. 's directors to claim damages on behalf of redressed because of
ABC Corp. due to their mismanagement.
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failure of the
corporation to act
Was Mr. X's filing of a derivative suit proper?
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(2019 BAR) As to rights concerned
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A: The filing of a derivative suit is not proper. One of Deals with individual
the requisites of a derivative suit is that the person Deals with corporate
stockholder or class of
filing the suit must be a stockholder of the rights
stockholder’s rights
corporation at the time the acts or transactions
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subject of the action occurred and the time the
action was filed. (Sec. 1, Rule 8, Interim Rules) In the e) OBLIGATIONS OF A STOCKHOLDER
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present case, the transaction subject of the
derivative suit occurred when X was not yet a The following are the obligations of the stockholder:
stockholder. In fact, X only became a stockholder
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one year thereafter. (Divina, 2020) 1. Liability to the corporation for unpaid
subscription; (Sec. 65-69, RCC)
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Remedies of Representative and Derivative Suit 2. Liability to the corporation for interest on
are Mutually Exclusive unpaid subscription if so required by the
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subscription contract; (Sec. 65, RCC)
The two actions are mutually exclusive, i.e., the right 3. Liability to the creditors of the corporation
of action and recovery belongs to either the
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for unpaid subscription; (Sec. 59, RCC)
shareholders (direct action) or the corporation 4. Liability for watered stock; (Sec. 64, RCC)
(derivative action). (Cua v. Tan, G.R. No. 182008, 04 5. Liability for dividends unlawfully paid;
Dec. 2009) (Sec. 42, RCC) and
6. Liability for failure to create a corporation.
REPRESENTATIVE DERIVATIVE (Sundiang Sr. & Aquino, 2014; Sec. 10, RCC)
SUIT SUIT
As to who initiates the suit While a stockholder has no personal liability for the
debts of the corporation beyond the amount of his
capital investment, he is personally liable for the
Initiated by the above obligations. In addition, he may become
stockholder under his Initiated by the personally liable for damages or otherwise for any
own name or on behalf stockholder on behalf wrongful disposition of corporate assets, breaches
of the other of the corporation of fiduciary duties, fraud, gross negligence,
stockholders unauthorized acts, violations of law, or improper
use of the corporate form.
COMMERCIAL LAW
f) MEETINGS
Types of Meetings covered by the RCC
Only two types of meetings are covered by the RCC:

1. Meetings of the board of directors or
trustees; and
2. Meetings of the stockholders or members.
(Divina, 2020)
NOTE: Management meeting are not indicated in

the RCC. (Ibid.)
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T E
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2023 GOLDEN NOTES
STOCKHOLDERS’/MEMBERS’ MEETINGS
DATE AND PLACE REQUIRED WRITTEN NOTICE
Regular Meeting
The notice of meetings shall be in writing, and the

time and place thereof stated therein.
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NOTE: The written notice of regular meetings may be
sent through electronic mail or such other manner as
the commission shall allow under its guidelines. (Sec.
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49, RCC)
1. Annually on date fixed in the by-laws; or
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2. If not so fixed, on any date after April 15 of every
The notice shall be sent to the stockholder or
year as determined by the board of directors or
member:
trustees. (Sec. 49, RCC)
1. At least 21 days prior to the meeting;
2. Unless a different period is required in the
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Venue:
bylaws, law, or regulation (Sec. 49, RCC)
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Stock Corporations: In the principal office of the
Notice may be waived, expressly or impliedly, by any
corporation as set forth in the articles of
stockholder or member.
incorporation, or, if not practicable, in the city or
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municipality where the principal office of the
Each notice of meeting shall further be accompanied
corporation is located. (Sec. 50, RCC)
by the following:
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NOTE: Any city or municipality in Metro Manila,
1. Agenda for the meeting;
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Metro Cebu, Metro Davao, and other Metropolitan
areas shall, for purposes of this section, be considered
2. Proxy form which shall be submitted to the
a city or municipality. (Ibid.)
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corporate secretary within a reasonable time
prior to the meeting;
Non-stock Corporations: Any place even outside the
place where the principal office of the corporation is
3. When attendance, participation, and voting are
located, as long as within Philippine territory and
allowed by remote communication or in absentia,
proper notice is sent to all members. (Sec. 92, RCC)
the requirements and procedures to be followed
when a stockholder or member elects either
option; and
When the meeting is for the election of directors or

trustees, the requirements and procedure for
nomination and election. (Sec. 50, RCC)
COMMERCIAL LAW
Special Meeting
1. Any time deemed necessary; or

2. As provided in the by-laws.
The notice of meetings shall be in writing, and the

Venue: in the principal office of the corporation as set
time and place thereof stated therein.
forth in the AOI, or, if not practicable, in the city or
municipality where the principal office of the
The notice shall be sent to the stockholder or
corporation is located. (Sec. 50, RCC) In the city or
member:
municipality where the principal office is located, and
1. At least one (1) week prior to the meeting;
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if practicable in the principal office of the corporation:
2. Unless a different period is provided in the
Provided, that Metro Manila shall be considered a city
bylaws, law or regulation.
or municipality.
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Notice may be waived, expressly or impliedly, by any
NOTE: Any city or municipality in Metro Manila,
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stockholder or member.
Metro Cebu, Metro Davao, and other Metropolitan
areas shall, for purposes of this section, be considered
a city or municipality. (Sec. 50, Ibid.)
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2023 GOLDEN NOTES
Requirements for a Valid Meeting b. There is an imminent danger of
dissipation, thus necessitating the
1. It must be held in the proper place; continued sequestration of the shares
2. It must be held at the stated date and at the and authority to vote thereupon by the
appointed time or at a reasonable time PCGG while the main issue is pending
thereafter; before the Sandiganbayan. (Trans
3. It must be called by the proper person Middle East [Phils.] v. Sandiganbayan,
G.R. No. 172556, 09 June 2006)
Rules Applicable to Certain Shares
However, the two-tiered test contemplates
1. Delinquent shares – shall not be entitled to a situation where the registered
vote. (Sec. 23, RCC) stockholders were in control and had been
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dissipating company assets and the PCGG
2. Treasury shares – have no voting rights wanted to vote the sequestered shares to
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while they remain in the treasury. (Sec. 56, save the company. This was not the
RCC) situation in ETPI in 1997. It was the PCGG
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elected board that remained in control
3. Fractional shares – shall not be entitled to during that year and it apparently had done
vote. well in the preceding years guarding
company assets. (Africa v. Sandiganbayan,
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4. Escrow shares – shall not be entitled to G.R. Nos. 172222, 174493 & 184636, 11 Nov.
vote before the fulfillment of the condition 2013)
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imposed thereon.
XPN to the XPN: The two-tiered test does
5. Unpaid shares – if not delinquent, are not apply in cases involving funds of public
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entitled to all the rights of a stockholder character (public character exception). In
including the right to vote. such cases, the government is granted the
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authority to vote said shares, namely:
6. Sequestered shares
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a. Where the government shares are
GR: The registered owner of the shares of a taken over by private persons or
corporation, even if they are sequestered entities who or which registered them
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by the government through the PCGG, in their own names; and
exercises the right and the privilege of
voting on them. b. Where the capitalization of shares that
were acquired with public funds
As a mere conservator, the PCGG cannot, as somehow landed in private hands.
a rule, exercise acts of dominion by voting (Republic v. Sandiganbayan, G.R. No.
these shares. 107789, 30 Apr. 2003)
XPN: Two-tiered test: The registered 7. Secured Creditors and Administrators –

owner of sequestered shares may only be In case a stockholder grants security
deprived of these voting rights, and the interest in his or her shares in stock
PCGG authorized to exercise the same, only corporations, the stockholder-grantor shall
if it is able to establish that: have the right to attend and vote at
meetings of stockholders, unless the
a. There is prima facie evidence showing secured creditor is expressly given by the
that the said shares are ill-gotten and stockholder-grantor such right in writing
thus belong to the State; and
COMMERCIAL LAW
which is recorded in the appropriate A: NO. The agenda for the meeting, which includes
corporate books. the elections of the new board of directors and
ratification of acts of the incumbent board of
Executors, administrators, receivers, and directors and management, was the standard order
other legal representatives may attend and of business in a regular annual meeting of
vote in behalf of the stockholder or stockholders of a corporation. Thus, the March 15,
members without need of any written 2002 annual stockholders' meeting was a regular
proxy (Sec. 54, RCC). In Gochan v. Young, G.R. meeting. Hence, the requirement to state the object
No. 131889, 12 Mar. 2001, it was held that and purpose in case of a special meeting as provided
heirs are not prohibited from representing for in Art. VIII (5) of the PSI’s by-laws does not apply
the deceased in a suit, especially when no to the Notice for the 15 Mar. 2002 annual
administrator has yet been appointed. stockholders' meeting.
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8. Shares jointly owned – consent of all the Regarding the time for serving notice of the meeting
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co-owners is necessary, unless there is a to all the stockholders, Sec. 50 of B.P. No. 68 reads in
written proxy signed by all the co-owners part:
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authorizing one (1) or some of them or any
other person to vote such share or shares. Sec. 50 (now Sec. 49, RCC). Regular and Special
If shares are owned in an “and/or” capacity Meetings of Stockholders or Members. – Regular
by the holders thereof, any one of the joint meetings of stockholders or members shall be
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owners can vote or appoint a proxy thereof. held annually on a date fixed in the by-laws, or
(Sec. 55, RCC) if not so fixed, on any date in April of every year
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as determined by the board of directors or
Q: On 15 Mar. 2002, a general stockholders' trustees: Provided, that written notice of regular
meeting was held wherein Lao, Ong, Henry Sy, Sy meetings shall be sent to all stockholders or
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Tian Tin, Sy Tian Tin, Jr. and Paul Chua were members of record at least two (2) weeks prior
elected as members of the board of directors, to the meeting, unless a different period is
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with Chua Lian as chairman of the board. required by the by-laws.
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Yao Bio Lim and King filed a Petition against the Under PSI's by-laws, notice of every regular or
newly elected board of directors. They sought, special meeting must be mailed or personally
among others, to annul: (1) the elections held on delivered to each stockholder not less than five (5)
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March 15, 2002 and all corporate acts of the days prior to the date set for the meeting.
supposedly new board of directors and officers
of PSI. The CA affirmed the RTC Decision holding In this case, the PSI's by-laws providing only for a
that there were valid grounds to nullify the five (5)-day prior notice must prevail over the two
March 15, 2002 stockholders' meeting. First, the (2)-week notice under the Corporation Code. By its
Notice of meeting did not state the purpose of express terms, the Corporation Code allows "the
the stockholders' meeting as required by Art. shortening (or lengthening) of the period within
VIII (5) of PSI's by-laws. Additionally, it was not which to send the notice to call a special (or regular)
sent to the stockholders at least two (2) weeks meeting." Thus, the mailing of the Notice to
prior to the meeting as required under Sec. 50 of respondents on March 5, 2002 calling for the annual
the Corporation Code. stockholders' meeting to be held on March 15, 2002
is not irregular, since it complies with what was
Is the 2002 Meeting a special meeting, and thus stated in PSI's by-laws. (Lao v. Lim, G.R. No. 201306,
require the purpose to be specified? Does it need 09 Aug. 2017)
to follow the 2-week notice requirement?
2023 GOLDEN NOTES
NOTE: Sec. 49 of the RCC provides that written stockholders or members (Sec. 27, RCC)
notice of regular meetings shall be sent at least
twenty-one (21) days prior to the meeting, unless a Quorum
different period is required in the bylaws, law, or
regulation. GR: Quorum shall consist of the stockholders
representing at least majority of the outstanding
Who Calls the Meeting capital stock or a majority of the actual and living
members with voting rights, in the case of non-stock
The “call” for a meeting is exercised by the person corporation. (Tan v. Sycip, G.R. No. 153468, 17 Aug.
who has the power to call the meeting. The 2006).
following persons may exercise the power to “call”
for a meeting: XPN: A different quorum may be provided for in the
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by-laws.
1. The person or persons designated in the by-
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laws to have the authority to call stockholders’/ Minutes of the Meeting
members’ meeting;
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The minutes are a brief statement not only of what
2. In the absence of such provision in the by-laws, transpired at a meeting, usually of stockholders/
the director/trustee or officer entrusted with members or directors/trustees, but also at a
the management of the corporation unless meeting of an executive committee.
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otherwise provided by law;
The minutes are usually kept in a book especially
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A stockholder/member may make the call on designed for that purpose, but they may also be kept
order of the SEC whenever for any cause, there in the form of memoranda or in any other manner in
is no person authorized to call a meeting (Sec. which they can be identified as minutes of a
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49, RCC) or the officers authorized fail or refuse meeting. (People v. Dumlao, G.R. No 168918, 02 Mar.
to call a meeting; and 2009)
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NOTE: SEC may compel the officers of any Probative Value of Meetings
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corporation registered by it to call meetings of
stockholders/members thereof under its The minutes of board meetings should be signed by
supervision. (Sec. 6 [f], P.D. No. 902-A) the corporate secretary. Without such signature,
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neither probative value nor credibility could be
3. Corporate Secretary on order of the president, accorded such minutes. (Union of Supervisors [RB]-
or upon written demand of the stockholders NATU v. Sec. of Labor, G.R. No. L- 39889, 12 Nov.
representing or holding at least a majority of 1981)
the outstanding capital stock, or a majority of
the members entitled to vote for a special Minutes of meetings without the signature of the
meeting intended for the removal of directors corporate secretary have no probative value, and
or trustees, provided: therefore cannot be demanded for inspection or
examination. (Villanueva, 2018)
a. There must be a previous notice;
b. There must be a quorum. (Sec. 27, RCC)
NOTE: If there is no secretary, or if the secretary,

despite demand, fails or refuses to call the special
meeting or to give notice thereof, the stockholder or
member of the corporation signing the demand may
call for the meeting by directly addressing the
COMMERCIAL LAW
9. BOARD OF DIRECTORS AND TRUSTEES authorizing such acts and designating the person
who will carry them out on behalf of the
corporation. (Divina, 2021)
Unless otherwise provided in the RCC, the board of
directors or trustees shall exercise the corporate
b) TENURE, QUALIFICATIONS, AND
powers, conduct all business, and control all
DISQUALIFICATIONS OF DIRECTORS
properties of the corporation. (Sec. 22, RCC)
Term of Office
Stated otherwise, corporate acts must be approved
by the board of directors, otherwise, such acts are
Directors shall be elected for a term of one (1) year
generally not binding on the corporation. They do
from among the holders of stocks registered in the
not create rights nor impose obligations upon the
corporation’s books, while trustees shall be elected
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corporation. Thus, if a corporation will enter into
for a term not exceeding three (3) years from among
contracts, initiate legal action or perform any of the
the members of the corporation. (Sec. 22, RCC)
corporate acts under the RCC, the same must be
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supported by a resolution that the board has duly
If no election is held, the directors and officers will
adopted authorizing such acts and designating the
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continue to occupy position even after the lapse of
person who will carry them out on behalf of the
one (1) year under a hold-over capacity until their
corporation. (Divina, 2020)
successors are elected and qualified.
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The general rule is that a corporation, through its
Term, Tenure, and Holdover Period
Board of Directors, should act in a manner and
within the formalities, if any, prescribed by its
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Term – time during which the officer may claim to
charter or by the general law. Directors must act as
hold the office as a matter of right and fixes the
a body in a meeting called for the pursuant to the
interval after which the several incumbents shall
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law or the corporation’s by laws, otherwise, any
succeed one another. The term of office is not
action taken therein may be questioned by any
affected by the holdover. It is fixed by statute and
objecting director or shareholder; but an action of
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does not change simply because the office may have
the Board of Directors during a meeting, which was
become vacant, nor because the incumbent holds
illegal for lack of notice, may be ratified expressly,
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office beyond his term when a successor has not
by the action of directors in a subsequent legal
been elected.
meeting, or impliedly, by the corporation’s
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subsequent course of conduct. (Lopez Realty, Inc., v.
Tenure – represents the term during which the
Fontecha, et al., G.R. No. 76801, 11 Aug. 1995)
incumbent actually holds office. The tenure may be
shorter (or, in case of holdover, longer) than the
a) REPOSITORY OF CORPORATE POWERS
term for reasons within or beyond the power of the
incumbent.
Unless otherwise provided in the RCC, the board of
directors or trustees shall exercise the corporate
Holdover Period – the time from the lapse of one
powers, conduct all business, and control all
year from a member’s election to the Board and
properties of the corporation. Stated otherwise,
until his successor’s election and qualification. It is
corporate acts must be approved by the board of
not part of the director’s original term of office, nor
directors, otherwise, such acts are generally not
is it a new term; the holdover period, however,
binding on the corporation. They do not create
constitutes part of his tenure. (Valle Verde Country
rights nor impose obligations upon the corporation.
Club v. Africa, G.R. No. 151969, 04 Sept. 2009)
Thus, if a corporation will enter into contracts,
initiate legal action, or perform any of the corporate
acts under the RCC, the same must be supported by
a resolution that the board has duly adopted
2023 GOLDEN NOTES
Common Qualifications of Directors and Trustee a. Convicted by final judgment:
i. Of an offense punishable by imprisonment
The directors and trustees must have all the for a period exceeding six (6) years;
qualifications provided under Sec. 22, in relation to ii. For violating the RCC; and
Secs. 10, 13, and 91, of the RCC as well as those iii. For violating R.A. No. 8799, otherwise
provided under the bylaws, and none of the known as “The Securities Regulation Code”;
disqualifications under Sec. 26 of the RCC and the
bylaws. (Divina, 2020) b. Found administratively liable for any offense
involving fraudulent acts; and
Below are the qualifications for directors or trustees
under the RCC: c. By a foreign court or equivalent foreign
regulatory authority for acts, violations, or
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1. The director or trustee must be of legal age. misconduct similar to those enumerated in
(Sec. 10, RCC) paragraphs (a) and (b) above.
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2. The director must own at least one (1) share of The foregoing is without prejudice to qualifications
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stock of the corporation and the trustee must be or other disqualifications, which the SEC, the
a member of the corporation, (Sec. 22, RCC), primary regulatory agency, or the Philippine
except with respect to independent trustees of Competition Commission may impose in its
nonstock corporations vested with public promotion of good corporate governance or as a
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interest. (Sec. 91, RCC) sanction in its administrative proceedings. (Sec. 26,
RCC)
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NOTE: A provision in the bylaws which allots a
permanent seat in the board to a non-member Director must be a Stockholder
of the association is contrary to law. Similarly,
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the fact that said permanent seat was held for A person who does not own a stock at the time of his
fifteen (15) years cannot give rise to a vested election or appointment does not disqualify him as
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right and estoppel cannot forestall a challenge director if he becomes a shareholder before
against an act that is contrary to law. (Grace assuming the duties of his office. (SEC Opinions, 09
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Christian High School v. CA, et al., G.R. No. Nov. 1987 & 05 Apr. 1990)
108905, 23 Oct. 1997),
Q: Is it necessary that the director be the owner
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3. Trustees of educational institutions organized of the share of the corporation in his own right
as nonstock corporations or religious societies to qualify as such director?
shall not be less than five (5) nor more than
fifteen (15). However, with respect to A: In order to be eligible as a director, what is
educational institutions, the number of trustees material is the legal title to, not beneficial ownership
shall only be in multiples of five (5). (Secs. 106 of, the stock as appearing on the books of the
and 114, RCC) corporation (Lee v. CA, G.R. No. 93695, 04 Feb. 1992)
Similarly, when a director loses his legal title over
Disqualifications all his shares, he automatically forfeits his director
position. (Divina, 2020)
On disqualification, the RCC expanded and qualified
the grounds such that a person shall be disqualified
from being a director, trustee or officer of any
corporation if, within five (5) years prior to the
election or appointment as such, the person was:
COMMERCIAL LAW
Additional Qualifications Provided by the competitor from being elected to the board of
Revised Code of Corporate Governance (RCCG) directors is a reasonable exercise of corporate
authority. Sound principles of corporate
A director should have the following: (C-P-M-P) management counsel against sharing sensitive
information with a director whose fiduciary duty to
1. College education or equivalent academic loyalty may well require that he discloses this
degree; information to a competitive rival. When a person
2. Practical understanding of the business of buys stock in a corporation, he does so with the
the corporation; knowledge that its affairs are dominated by a
3. Membership in good standing in relevant majority of the stockholders. (Gokongwei v. SEC, et
industry, business, or professional al., G.R. No. L-45911, 11 Apr. 1979)
organizations; and
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4. Previous business experience. (Art. 3(D), Disqualification of Foreigners
RCCG)
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While foreigners are disqualified from being
Q: John Gokongwei Jr., as stockholder of San elected/ appointed as corporate officers in wholly
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Miguel Corporation, filed with SEC a petition for or partially nationalized business activities, they are
declaration of nullity of amended by-laws allowed representation in the BOD or governing
against the majority of the members of the body of said entities in proportion to allowable
Board of Directors and San Miguel Corporation. foreign ownership, in no case more than the actual
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Gokongwei claimed that prior to the questioned percentage owned by foreigners. (Sec. 2-A, Anti-
amendment, he had all the qualifications to be a Dummy Law; Sec. 11, Art. XII, 1987 Constitution)
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director of the corporation, being a substantial
stockholder thereof, Gokongwei had acquired Q: Are directors or trustees required to be
rights inherent in stock ownership, such as the residents of the Philippines?
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rights to vote and to be voted upon in the
election of directors, and that in amending the A: The requirement of the OCC which provides that
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by-laws, Soriano, et. al. purposely provided for a majority of the directors or trustees of all
Gokongwei's disqualification and deprived him corporations organized under this Code must be
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of his vested right as aforementioned, hence the residents of the Philippines was removed under the
amended by-laws are null and void. RCC. As such, it is possible that a majority or even all
directors or trustees may be non-residents. (Divina,
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Is a provision on the by-laws disqualifying a 2020)
person for a position in the board of directors on
the ground that he is engaged in a business Q: Are directors or trustees required to be
which competes with that of the Corporation Filipino citizens?
valid?
A: Similar to the OCC, the RCC does not require
A: YES. A corporation is authorized to prescribe the Filipino citizenship for the directors or trustees of a
qualifications of its directors. A provision in the by- corporation. However, if the corporation is engaged
laws of the corporation that no person shall qualify in nationalized activities, citizenship becomes a
or be eligible for nomination for elections to the qualification. Foreigners cannot be appointed to the
board of directors if he is engaged in any business board of corporations engaged in wholly
which compete with that of the Corporation is valid; nationalized activities. For partly nationalized
provided, however, that before such nominee is activities, foreigners can be elected to the board of
disqualified, he should be given due process to show directors in proportion to their foreign equity, as
that he is covered by the disqualification. A director allowed by law. (Divina, 2020)
stands in fiduciary relation to the corporation and
its stockholders. The disqualification of a
2023 GOLDEN NOTES
Q: A Korean national joined a corporation and c) REQUIREMENT OF INDEPENDENT
was elected to the Board of Directors. To DIRECTORS
complement its furniture manufacturing
business, the corporation also engaged in the An independent director is a person who, apart from
logging business. With the additional logging the shareholdings and fees received from the
activity, can the Korean national still be a corporation, is independent of the management and
member of the Board of Directors? Explain free from any business or other relationship which
(2005 BAR) could reasonably be perceived to materially
interfere with the exercise of independent judgment
A: YES. The Korean national can still be a member of in carrying out the responsibilities as a director.
the Board of Directors as long as 60% of the Board (Sec. 22, RCC)
of Directors are Filipinos and there is at least 20%
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foreign ownership justifying one (1) board seat for Requirement of Independent Directors
a foreigner. Corporations that are 60% owned by
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Filipinos can engage in the business of exploration, The board of the following corporations vested with
development, and utilization of natural resources public interest shall have independent directors
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(Sec. 2, Art. XII, 1987 Constitution). The election of constituting at least 20% of the board: (Co-B-O)
aliens as members of the Board of Directors
engaging in partially nationalized activities is 1. Corporations covered by Sec. 17.2 of R.A. No.
allowed in proportion to their allowable 8799, otherwise known as “The Securities
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participation or share in the capital of such entities Regulation Code,” such as (Re-Li-Ass):
(Sec. 2-A, Anti-Dummy Law). There is also nothing in a. Corporations whose securities are
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the facts that shows that more than forty percent Registered with the Commission;
(40%) of the Board of Directors are foreigners. b. Corporations Listed with an exchange;
c. Public Companies; meaning, Corporations
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Independent Directors with:
i. Assets of at least P50 million;
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An independent director is a person who apart from ii. Having 200 or more shareholders;
shareholdings and fees received from the iii. Each shareholder holding at least 100
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corporation, is independent of management and shares of a class of its equity shares.
free from any business or other relationship which
could or could reasonably be perceived to 2. Banks, quasi-banks, Preneed, Insurance and
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materially interfere with the exercise of trust companies, Nonstock savings and loan
independent judgment in carrying out the associations, Pawnshops, corporations
responsibilities as a director. (Sec. 22, RCC) Engaged in money service business and other
Financial intermediaries; (B-P-I-N-P-E-F) and
Independent directors must be elected by the
shareholders present or entitled to vote in absentia 3. Other corporations engaged in business vested
during the election of directors. Independent with public interest similar to the above, as may
directors shall be subject to rules and regulations be determined by the Commission, after taking
governing their qualifications, disqualifications, into account relevant factors which are
voting requirements, duration of term and term germane to the objective and purpose of
limit, the maximum number of board memberships, requiring the election of independent director,
and other requirements that the SEC will prescribe such as the extent of minority ownership, type
to strengthen their independence and align with of financial products or securities issued or
international best practices. (Sec. 22, RCC) offered to investors, public interest involved in
the nature of business operations, and other
analogous factors.
COMMERCIAL LAW
Q: Two years since it began to operate, a 2. The election must be by ballot, if requested by
corporation has amassed assets valued at over any voting stockholder or member;
Php 60,000,000.00. It also has 250 shareholders,
each holding at least 150 shares. Under the 3. Stockholders entitled to vote shall have the
Revised Corporation Code, is the corporation right to vote the number of shares of stock
required to have an independent director? standing in their own names in the stock books
Explain briefly. (2020-21 BAR) of the corporation at the time fixed in the
bylaws or where the bylaws are silent, at the
A: Under Sec. 23 of the RCC, corporations vested time of the election;
with public interest are required to have
independent directors in their Boards. Corporations 4. The said stockholder may:
vested with public interest include public a. vote such number of shares for as many
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companies as described under the Securities persons as there are directors to be
Regulation Code. elected;
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A public company is any corporation with class of b. cumulate said shares and give one (1)
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equity shares listed for trading on an exchange OR candidate as many votes as the number of
with assets in excess of Php 50,000,000.00 and has directors to be elected multiplied by the
200 or more stockholders, at least 200 of which hold number of the shares owned; or
at least 100 shares each. (Sec. 23, RCC)
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c. distribute them on the same principle
Based on the facts provided, the corporation has among as many candidates as may be seen
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assets of more than P50 million with 250 fit: Provided, That the total number of
shareholders, each one holding more than 100 votes cast by him must not exceed the
shares each. Thus, being a public company, the number of shares owned by him as shown
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corporation is required to have independent in the books of the corporation multiplied
directors. (UPLC Commercial Law Suggested by the whole number of directors to be
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Answers) elected;
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d) ELECTIONS 5. No delinquent stock shall vote or be voted for;
and
Requirements and Limitations for the Election
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of Directors or Trustees 6. Except when the exclusive right is reserved for
holders of founders’ shares under Sec. 7 of the
1. Presence of stockholders representing a RCC, each stockholder or member shall have the
majority of the outstanding capital stock of the right to nominate any director or trustee who
corporation or majority of the members, either possesses all of the qualifications and none of
in person or by proxy; the disqualifications set forth in this Code. (Sec.
24, RCC)
NOTE: Sec. 23 of the RCC also provides for
voting through remote communication or in Reportorial Requirement
absentia. When so authorized in the bylaws or by
a majority of the board of directors, Within 30 days after the election of directors,
trustees and officers of the corporation, the
The right to vote through such modes (remote secretary, or any other officer of the corporation,
communication or in absentia) may be shall submit to the Commission the names,
exercised in corporations vested with public nationality, shareholdings, and residence addresses
interest notwithstanding the absence of a of the directors, trustees and officers elected. (Sec.
provision in the bylaws of such corporations 25, RCC)
2023 GOLDEN NOTES
Q: In case where there are two (2) sets of A: Neither E nor F are directors of ABC Corporation.
persons claiming to be the Board of Directors, E automatically ceased to be a director upon the
which one is controlling? transfer of all his shares to F in the books of the
corporation. Every director must own at least one
A: It is the Board of Directors as reported to the SEC share of the capital stock of the corporation of which
through the filing of a general information sheet. he is a director, which share shall stand in his name
By the express mandate of the Corporation Code on the books of the corporation. Any director who
(Sec. 26) (now Sec. 25, RCC), all corporations duly ceases to be the owner of at least one share of the
organized pursuant thereto are required to submit capital stock of the corporation of which he is a
within the period therein stated (30 days) to the SEC director shall thereby cease to be a director. F’s
the names, nationalities and residences of the claims are without merit since he was not duly
directors, trustees and officers elected. Evidently, elected as a director at the stockholders’ meeting.
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the objective sought to be achieved by Sec. 26 is to Only the candidates receiving the highest number of
give the public information, under sanction of oath votes shall be declared elected.
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of responsible officers, of the nature of business,
financial condition and operational status of the Methods of Voting
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company together with information on its key
officers or managers so that those dealing with it 1. Straight voting – every stockholder may
and those who intend to do business with it may vote such number of shares for as many
know or have the means of knowing facts persons as there are directors to be elected.
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concerning the corporation’s financial resources
and business responsibility. (Premium Marble 2. Cumulative voting for one candidate – a
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Resources, Inc. v. CA, G.R. No. 96551, 04 Nov. 1996) stockholder is allowed to concentrate his
votes and give one candidate, as many votes
Q: At the annual meeting of ABC Corporation for as the number of directors to be elected
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the election of five directors as provided for in multiplied by the number of his shares shall
its articles of incorporation, A, B, C, D, E, F and G equal.
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were nominated. A, B, C, D and E received the
highest number of votes and were proclaimed 3. Cumulative voting by distribution – a
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elected. F received ten votes less than E. stockholder may cumulate his shares by
multiplying the number of his shares by the
Subsequently, E sold all his shares to F. In the number of directors to be elected and
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next Board of Directors’ meeting following the distribute the same among as many
transfer of the shares in the books of the candidates as he shall see fit. (Sec. 23, RCC)
corporation, both E and F appeared. E claimed
that notwithstanding the sale of his shares to F, EXAMPLE: A owns 100 shares of stock in ABC Corp.
he remained a director since the Corporation There are ten (10) directors to be elected. A has in
Code provides that directors “shall hold office his power to cast 1,000 votes.
for 1 year and until their successors are elected
and qualified.” On the other hand, F claimed that 1. Straight voting: A may give 100 votes for
since he would have been elected as a director each candidate.
had it not been for E’s nomination and election,
then he (F) should now be considered a director 2. Cumulative voting for one candidate: A
as he had acquired all the shares of E. Decide may give 1,000 votes to one preferred
with reasons. (1984 BAR) candidate.
3. Cumulative voting by distribution: A may

give 500 votes each to two candidates.
COMMERCIAL LAW
Cumulative Voting in Stock vs. Non-stock 3. The record date or dates for the
determination of stockholders or members
Members of nonstock corporations may cast as entitled to vote. (Sec. 25, RCC)
many votes as there are trustees to be elected but
may not cast more than one (1) vote for one (1) NOTE: Notwithstanding any provision of the AOI or
candidate, unless otherwise provided in the AOI or bylaws to the contrary, the shares of stock or
in the bylaws. membership represented at such meeting and
entitled to vote shall constitute a quorum for
Cumulative voting is mandatory in stock purposes of conducting an election under this
corporations to protect the rights of minority section.
stockholders. Through cumulative voting, the
minority stockholders are given an opportunity to Quorum Required in a Stock or Non-stock
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cumulate their shares to improve the chance of Corporation
getting a seat in the board of directors. (Divina,
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2020) Unless otherwise provided in this Code or in the
bylaws, a quorum shall consist of the stockholders
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Report in case of Non-Holding of Elections representing a majority of the outstanding capital
stock or a majority of the members in the case of
1. Within 30 days from the date of the nonstock corporations. (Sec. 51, RCC)
scheduled election. The report shall specify
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a new date for the election, which shall not For stock corporations, the quorum is based on
be later than 60 days from the scheduled the number of outstanding voting stocks while for
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date. (Sec. 25, RCC) non-stock corporations, only those who are actual,
living members with voting rights shall be counted in
2. Should a director, trustee or officer die, determining the existence of a quorum. To be clear,
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resign or in any manner cease to hold office, the basis in determining the presence of quorum in
the secretary, or the director, trustee or non-stock corporations is the numerical equivalent
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officer of the corporation, shall, within of all members who are entitled to vote, unless some
seven (7) days from knowledge thereof, other basis is provided by the By-Laws of the
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report in writing such fact to the corporation. The qualification "with voting rights"
Commission. simply recognizes the power of a non-stock
corporation to limit or deny the right to vote of any
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Summary Order of Commission of its members. (Mary Lim v. Moldex Land, Inc., G.R.
No. 206038, 25 Jan. 2017)
If:
1. No new date has been designated, or AOI as Basis in Determining Quorum
2. The rescheduled election is likewise not
held When the stock and transfer book is inaccurate and
deficient, it cannot be the sole basis of determining
The Commission, may, upon the application of the the shareholdings for purposes of quorum. The AOI
stockholder, member, director, or trustee, and after may be used as a basis in determining the
verification of the unjustified non-holding of the shareholdings.
election, summarily order that an election be held.
To base the computation of quorum solely on the
The Commission shall have the power to issue obviously deficient, if not inaccurate stock and
orders as may be appropriate, including orders: transfer book, and completely disregarding the
1. Directing the issuance of a notice stating issued and outstanding shares as indicated in the
the time and place of election; articles of incorporation would work injustice to the
2. The designated presiding officer; and owners and/or successors in interest of the said
2023 GOLDEN NOTES
shares. This case is one instance where resorting to NOTE: The RCC does not require that the
documents other than the stock and transfer books name of the director proposed to be
is necessary. The stock and transfer book of PMMSI removed be specified. Thus, it is enough to
cannot be used as the sole basis for determining the include in the agenda that there is such an
quorum as it does not reflect the totality of shares intention to remove a director.
which have been subscribed, more so when the
articles of incorporation show a significantly larger 3. The removal must be approved by
amount of shares issued and outstanding as stockholders representing at least 2/3 of
compared to that listed in the stock and transfer the OCS or by at least 2/3 of the members
book. (Lanuza, et al. v. CA, et al., G.R. No. 131394, 28 entitled to vote for non-stock corporation.
Mar. 2005)
4. The removal may be with or without just
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e) REMOVAL cause.
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Power to Remove Provided, that removal without cause may
not be used to deprive minority
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The power to remove belongs to the stockholders stockholders or members of the right of
representing at least 2/3 of the OCS of a stock representation to which they may be
corporation, or if a non-stock corporation, by a vote entitled under Sec. 23 of the RCC.
of at least 2/3 of the members entitled to vote. (Sec.
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5. The vacancy brought about by the removal
27, RCC)
of the director may be filled at the same
stockholders’ meeting where the removal
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GR: Removal may be with or without cause.
was effected as long as this fact is similarly
stated in the agenda and notice of the said
XPN: If the director was elected by the minority,
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meeting, or in a separate meeting called for
there must be cause for removal because the
that purpose. (Sec. 28, RCC)
minority may not be deprived of the right to
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representation to which they may be entitled under
NOTE: Only a majority of the outstanding capital
Sec. 27 of the Code. (Sec. 27, RCC)
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stock of the corporation must be present to have a
quorum on the election to be held to fill the
NOTE: The right of representation referred to is the
aforesaid vacancy. (Divina, 2020)
right to cumulative voting for one candidate under
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Sec. 23 of the Code.
Remedy if there is Refusal to Call a Meeting to
Remove Director
Requisites for Removal of Directors or Trustees
If there is:
The removal of a director or trustee by the
1. No secretary; or
stockholders or members is subject to the following
2. If the secretary, despite demand, fails or
requisites:
refuses to call the special meeting or to give
notice thereof.
1. There must be a previous notice of the
meeting to stockholders or members, and
The stockholder or member signing the demand
the procedures prescribed by the RCC, and
may call for the meeting by directly addressing the
bylaws must be followed.
stockholders or members. (Sec. 27, RCC)
2. The notice of the meeting must specify the
intention to propose the removal of a
director.
COMMERCIAL LAW
Power of the SEC not constitute a quorum for the purpose of
filling the vacancy;
The Commission shall, motu proprio or upon
verified complaint, and after due notice and hearing, d. If the vacancy may be filled by the
order the removal of a director or trustee elected remaining directors or trustees but the
despite the disqualification, or whose board Refers the matter to stockholders or
disqualification arose or is discovered subsequent members; or
to an election. The removal of a disqualified director
shall be without prejudice to other sanctions that e. Increase in the number of directors.
the Commission may impose on the board of
directors or trustees who, with knowledge of the 2. Vacancies filled up by members of the board -
disqualification, failed to remove such director or Any vacancy occurring in the board of directors
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trustee. (Sec. 27, RCC) or trustees other than by removal or by
expiration of term may be filled by the vote of at
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Q: Henry is a board director in XYZ Corporation. least a majority of the remaining directors or
For being a fiscalizer in the Board, the majority trustees, if still constituting a quorum. (Sec. 28,
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of the directors want him removed and his RCC)
shares be sold at auction, so he can no longer
participate even in the stockholder’s meetings. NOTE: The phrase “may be filled” in Sec 28 of the
Henry approaches you for advice on whether he RCC indicates that the filling of vacancies in the
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can be removed as board of director and board by the remaining directors constituting a
stockholder without cause. What is your advice? quorum is merely permissive. Corporations may
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Explain “amotion” and the procedure in choose how vacancies in their boards may be filled
removing a director. (2016 BAR) up, either by the remaining directors or trustees
constituting a quorum or by the stockholders or
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A: Henry cannot be removed by his fellow directors. members, unless a specific mode if provided in the
The power to remove belongs to the stockholders. bylaws.
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He can only be removed by the stockholders owning
at least 2/3 of the outstanding capital stock in a Term of Replacement Director
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meeting called for that purpose. The removal may
be with or without cause except that in this case, the A director elected to fill a vacancy shall serve the
removal must be with cause because it is intended unexpired term of the predecessor in office. (Sec. 28,
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to deprive the minority of the right of RCC)
representation.
Vacancy Caused by Resignation of Director in
Amotion is the premature ousting of a director or Hold-Over Position
officer from his post in the corporation. (UPLC
Commercial Law Suggested Answers) Q: Who should fill the vacancy due to the
resignation of a holdover director?
f) FILLING OF VACANCIES
A: In the case of Valle Verde Country Club, Inc., et al.
Ways of Filling up Vacancies vs. Africa (G.R. No. 151969, 04 Sept. 2009), the
Supreme Court ruled the resignation as a hold-over
1. Vacancies to be filled up by stockholders or director will not change the nature of the cause of
members: (E-R-O-R-I) the vacancy which is due to the expiration of
a. Expiration of term; director's term. The term of a hold-over director has
b. Removal; expired. The hold-over period is not part of his term.
c. Grounds Other than removal or expiration So, the cause of the vacancy is not resignation but
of term, where the remaining directors do the expiration of term. As such, the vacancy must be
2023 GOLDEN NOTES
filled by the stockholders in a regular or special g) COMPENSATION
meeting called for the purpose pursuant to Sec. 28
of the RCC. (Divina, 2021) GR: The directors or trustees shall not receive any
compensation in their capacity as such, except for
Creation of Emergency Board reasonable per diems. (Sec 29, RCC)
EMERGENCY BOARD XPN:

(Sec. 28, RCC) 1. The by-laws authorizes the said compensation;
When to Call for an Emergency Board or
When the vacancy prevents the remaining
directors from constituting a quorum and 2. The stockholders representing at least a
emergency action is required to prevent grave, majority of the outstanding capital stock or a
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substantial, and irreparable loss or damage to the majority of the members grant the directors or
corporation. trustees with compensation and approve the
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Who may Fill the Vacancy amount thereof at a regular or special meeting
It may be temporarily filled from among the (Divina, 2021)
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officers of the corporation.
Voting Requirement NOTE: This rule is founded upon a presumption that
He will be elected by a UNANIMOUS vote of the directors/trustees render service gratuitously, and
remaining directors or trustees. that the return upon their shares adequately
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Limitations and Cessation furnishes the motives for service, without
compensation. (Western Institute of Technology, Inc.,
It shall be limited to the emergency action
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necessary, and term shall cease within: et. al. v. Salas, et. al., G.R. No. 113032, 21 Aug. 1997)
Q: “A” is the President of ABC Corporation, a
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(a) Reasonable time from the termination of the
emergency action; or corporation vested with public interest while X
is a director and at the same time Vice Chairman
(b) Upon election of the replacement director or
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trustee, whichever comes earlier. of the Board with executive functions. The
Compensation Committee of the Board of
Reportorial Requirement
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Directors fixed their compensation package as
The corporation must notify the SEC within three President and Vice Chairman, respectively. The
(3) days from the creation of the emergency Board of Directors thereafter confirmed it.
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board, stating therein the reason for its creation. When their compensation package was reported
to the stockholders during the regular meeting,
Period of Filling Vacancies a stockholder representing minority interest
argues that the compensation is invalid and
WHEN VACANCY SHOULD BE FILLED irregular because it is not authorized in the by-
Term Expiration laws nor approved by the stockholders. Is he
No later than the day of such expiration at a correct?
meeting called for the purpose. (Sec. 28, RCC)
A: He is not correct. The Supreme Court held in
Removal
Western Institute of Technology, Inc., et al. v. Salas, et
May be on the same day the meeting authorizing al. (G.R. No. 113032, 21 Aug. 1997) that the above
the removal; provided this fact is stated in the proscription against the granting compensation to
agenda and notice of said meeting. (Sec. 28, RCC) the directors or trustees of a corporation is not a
sweeping rule. The said provision itself delimits the
Other Cases
scope of the prohibition to the compensation given
45 days from the time the vacancy arose. (Sec. 28,
to the directors for the services which were
RCC)
performed purely in their capacity as directors or
COMMERCIAL LAW
trustees. The members of the board may receive Requirement for Corporations Vested with
compensation, in addition to reasonable per diems, Public Interest
when they render services to the corporation in a
capacity other than as directors/trustees. Corporations vested with public interest shall
submit to their shareholders and the Commission,
In sum, there are, therefore, three (3) instances an annual report of the total compensation of each
when directors or trustees may receive of their directors or trustees. (Sec. 29, RCC)
compensation, to wit:
h) DISLOYALTY
a. The bylaws authorizes the said compensation;
Disloyalty of Directors
b. The stockholders representing at least a
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majority of the outstanding capital stock or a GR: The director must account for and refund to the
majority of the members grant the directors or office all such profits, which such director, by virtue
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trustees with compensation and approve the of such office;
amount thereof at a regular or special meeting;
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or 1. Acquires a business opportunity which
should belong to the corporation;
c. They render services in their capacity other 2. Thereby obtaining profits to the prejudice
than as directors or trustees, even though the of such corporation. (Sec. 33, RCC)
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payment of compensation is not authorized by
the bylaws or the stockholders. (Divina 2021) XPN: Unless the act has been ratified by a vote of the
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stockholders owning or representing at least 2/3 of
Limitation on the Amount of Compensation of the OCS. (Ibid.)
Directors or Trustees
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NOTE: This rule shall be applicable,
In no case shall the total yearly compensation of notwithstanding the fact that the director risked
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directors exceed 10% percent of the net income one’s own funds in the venture. (Ibid.)
before income tax of the corporation during the
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preceding year. (Sec. 29, RCC) Doctrine of Corporate Opportunity
NOTE: Unlike the OCC where the 10% limit applies Where a director, by virtue of his office, acquires for
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on the annual compensation of directors or trustees, himself a business opportunity which should belong
as such, the 10% percent limit under the RCC does to the corporation, thereby obtaining profits to the
not make any such qualifications. It should, prejudice of such corporation, is guilty of disloyalty
therefore, apply to all forms of compensation for and should, therefore, account to the latter for all
services rendered by the directors or trustees to the such profits by refunding the same, notwithstanding
corporation in whatever capacity. (Divina, 2021) that he risked his funds in the venture. (Sec. 33, RCC)
Prohibition of Directors and Trustees in A director shall refund to the corporation all the
Participating in the Determination of Per Diems profits he realizes on a business opportunity which:
or Compensation 1. The corporation is financially able to
undertake;
Directors or trustees shall not participate in the 2. From its nature, is in line with corporation’s
determination of their own per diems or business and is of practical advantage to it;
compensation. (Sec. 29, RCC) and
3. The corporation has an interest or a
reasonable expectancy. (Ibid.)
2023 GOLDEN NOTES
Q: Malyn, Schiera and Jaz are the directors of Sec. 30 vs. Sec. 33, RCC
Patio Investments, a close corporation formed
to run the Patio Cafe, an al fresco coffee shop in LIABILITY OF
Makati City. In 2000, Patio Cafe began DIRECTORS, DISLOYALTY OF A
experiencing financial reverses, consequently, TRUSTEES, OR DIRECTOR
some of the checks it issued to its beverage OFFICERS (Sec.33, RCC)
distributors and employees bounced. (Sec.30, RCC)
As to Application
In October 2003, Schiera informed Malyn that Applicable to directors, Applicable to directors
she found a location for a second cafe in Taguig trustees, and officers only.
City. Malyn objected because of the dire financial As to Coverage
condition of the corporation.
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Covers stock and non- Covers only stock
stock corporations corporations
Sometime in April 2004, Malyn learned about As to Ratification
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Fort Patio Cafe located in Taguig City and that its Transaction cannot be Transaction may be
development was undertaken by a new ratified. ratified.
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corporation known as Fort Patio, Inc., where
both Schiera and Jaz are directors. Malyn also i) BUSINESS JUDGMENT RULE
found that Schiera and Jaz, on behalf of Patio
Investments, had obtained a loan of P500,000, Questions of policy or management are left solely to
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from PBCom Bank, for the purpose of opening the honest decision of officers and directors of a
Fort Patio Cafe. This loan was secured by the corporation and the courts are without authority to
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assets of Patio Investments and personally substitute their judgment for the judgment of the
guaranteed by Schiera and Jaz. board of directors. The board is the business
manager of the corporation and so long as it acts in
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Malyn then filed a corporate derivative action good faith, its orders are not reviewable by the
before the RTC of Makati City against Schiera courts or the SEC. (Montelibano v. Bacolod-Murcia
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and Jaz, alleging that the two directors had Milling Co., G.R. No. L-15092, 18 May 1962; Phil. Stock
breached their fiduciary duties by Exchange, Inc. v. CA, G.R. No. 125469, 27 Oct. 1997)
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misappropriating money and assets of Patio
Investments in the operation of Fort Patio Cafe. Similarly, under the same business judgment rule,
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stockholders cannot interfere with the board in
Did Schiera and Jaz violate the principle of conducting the business affairs of the corporation.
corporate opportunity? Explain. (2005 BAR) They cannot, for instance, revoke resolutions of the
board or repudiate their acts on account of mere
A: YES. Schiera and Jaz violated the Doctrine of disagreement. If the stockholders are not satisfied
Corporate Opportunity because they used Patio with the way the board exercises its powers or
Investments to obtain a loan, mortgaged its assets manages the corporation, their remedies consist of
and used the proceeds of the loan to acquire a coffee replacing the board members upon expiration of
shop through a corporation they formed. (UPLC their term or vote for their removal under Sec. 27 of
Commercial Law Suggested Answers) the RCC or file a derivative suit on behalf of the
corporation to set aside the board’s wrongful acts
but not to supplant the board’s business judgment
for their own. (Divina, 2022)
Save for the authority granted to them by law and

the bylaws, stockholders cannot exercise corporate
powers and have no management rights. In the
absence of gross negligence or bad faith, the board
COMMERCIAL LAW
may not even be held liable for mistakes or errors in For third persons or parties outside the corporation
directing the affairs of the corporation. (Divina, like the SEC to interfere to the decrease of the capital
2020) stock without reasonable ground is a violation of the
"business judgment rule." (Metroplex Berhad v.
XPNs: The doctrine cannot be invoked: Sinophil Corp., G.R. No. 208281, 28 June 2021)
1. When the act is unconscionable and Consequences of Business Judgment Rule

oppressive as to amount to wanton
destruction to the rights of the minority; 1. Resolutions and transactions entered into by
(Ong v Tiu, G.R. No. 144476, 18 Apr. 2003) the Board within the powers of the corporation
cannot be reversed by the courts not even on
2. When there is bad faith or gross negligence the behest of the stockholders;
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by the directors; (Republic Communications
Inc. v. CA, G.R. No. 135074, 29 Jan. 1999) 2. Directors and officers acting within such
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business judgment cannot be held personally
3. To declare dividends when there is no liable for such acts;
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surplus profit or to declare dividends out of
re-appraisal surplus; (Divina, 2020) 3. If the cause of the losses is merely error in
business judgment, not amounting to bad faith
4. To pay compensation to directors, as the or negligence, directors and/or officers are not
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power is lodged with the stockholders; liable; (Filipinas Port Services v. Go, G.R. No.
(Ibid.) 161886, March 16, 2007 16 Mar. 2007)
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5. To support a request for a new stock and 4. The Board of Directors has the power to create
transfer book on the pretext that the positions not provided for in the corporation's
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original is lost (when in fact it is not) and by-laws since the board is the corporation’s
declare entries in the supposed lost stock governing body, clearly upholding the power of
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and transfer book as invalid. (Ibid., citing its board to exercise its prerogatives in
Provident International Resources v. Venus, managing the business affairs of the
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G.R. No. 167041, 17 June 2008) corporation; (Ibid.)
Interference of Third Parties, Including the SEC, 5. Directors and officers who purport to act for the
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in the Decrease of Capital Stock Without corporation, keep within the lawful scope of
Reasonable Ground Violates Business Judgment their authority and act in good faith, do not
Rule become liable, whether civilly or otherwise, for
the consequences of their acts, which are
The SEC only has the ministerial duty to approve the properly attributed to the corporation alone;
decrease of a corporation’s authorized capital stock. and (Benguet Electric Cooperative, Inc. v. NLRC,
After a corporation faithfully complies with the G.R. No. 89070, 18 May 1992)
requirements laid down in Sec. 38 (now Sec. 37,
RCC), the SEC has nothing more to do other than 6. The power to elect corporate officers was a
approve the same. Pursuant to Sec. 38 (now Sec. 37, discretionary power that the law exclusively
RCC), the scope of the SEC's determination of the vested in the Board of Directors and could not
legality of the decrease in authorized capital stock is be delegated to subordinate officers or agents.
confined only to the determination of whether the (Malting Industrial and Commercial
corporation submitted the requisite authentic Corporation, et al. v. Coros, G.R. No. 167802, 13
documents to support the diminution. Simply, the Oct. 2010)
SEC's function here is purely administrative in
nature.
2023 GOLDEN NOTES
Requirements for Application of Business j) SOLIDARY LIABILITIES FOR DAMAGES
Judgment Rule
Liability For Official Acts
1. Presence of a business decision including
decisions on policy management and GR: The officers of a corporation are not personally
administration; liable for their official acts.
2. The decision must be intra vires and must XPNs: The officers may be held liable if it is shown
comply with the procedural and that they exceeded their authority.
substantive requirements of law;
In the following instances, the directors/ trustees
3. Good faith; may be held personally liable for damages:
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4. Due care in making the decision; and 1. When they willfully and knowingly vote for or
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assent to patently unlawful acts of the
5. The director must not have personal corporation;
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interest or nor self-dealing or otherwise on
breach of the duty of loyalty. (Villanueva, 2. When they are guilty of gross negligence or bad
2018) faith in directing the affairs of the corporation;
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Q: PALI sought to offer its shares to the public in NOTE: Bad faith or negligence is a question of
order to raise funds for development of fact. Bad faith does not simply mean bad
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properties and pay its loans with several banks. judgment or negligence. It imparts a dishonest
To facilitate the trading of its shares, PALI purpose or some moral obliquity and conscious
applied for a listing in the Philippine Stock doing of wrong. It means breach of a known
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Exchange Inc. (PSE), a non-profit corporation. duty through some motive or interest or ill-will;
Subsequently, PSE received a letter from the it partakes of the nature of fraud. (Ford Phils.,
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Heirs of Marcos, requesting PSE to defer PALI’s Inc., et al. v. CA, G.R. No. 99039, 03 Feb. 1997)
registration, contending that certain properties
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of PALI are owned by Marcos. Consequently, PSE 3. When they acquire any personal or pecuniary
rejected PALI’s application. The SEC reversed interest in conflict with their duty as such
the ruling of the PSE. Is the SEC correct? directors or trustees; (Sec. 30, RCC)
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A: NO. In applying the business judgment rule, the 4. When they consent to the issuance of watered
SEC and the courts are barred from intruding into stocks or who, having knowledge thereof, does
business judgments of corporations, when the same not forthwith file with the corporate secretary
are made in good faith. The said rule precludes the his written objection thereto; (Sec, 64, RCC)
reversal of the decision of the PSE to deny PALI's
listing application, absent a showing of bad faith on 5. When they are made, by a specific provision of
the part of the PSE. law, to personally answer for their corporate
action; (Sec. 144, CC; Sec.13, P.D. 115; Uichico v.
Under the listing rules of the PSE, to which PALI had NLRC, G.R. No. 121434, 02 June 1997)
previously agreed to comply, the PSE retains the
discretion to accept or reject applications for listing. 6. When they agree to hold themselves personally
(PSE v. CA, G.R. No. 125469, 27 Oct. 1997) and solidarily liable with the corporation; or
(Tramat Mercantile, Inc. vs. CA, G.R. No. 111008,
07 Nov. 1994) or
COMMERCIAL LAW
7. When the corporate fiction is used to defeat it a distinct personality and treats it as such. A
public convenience, justify wrong, protect corporation, in the legal sense, is an individual with
fraud, or defend crime. (Carag v. NLRC, G.R. No. a personality that is distinct and separate from
147590, 02 Apr. 2007) other persons including its stockholders, officers,
directors, representatives, and other juridical
NOTE: When the officers of the corporation entities. (Lanuza, Jr. v. BF Corporation, G.R. No.
exceeded their authority, their actions are not 174938, 01 Oct. 2014)
binding upon the corporation unless ratified by the
corporation or is estopped from disclaiming them. Participation in Arbitration
(Reyes v. RCPI Credit Employees Union, G.R. No.
146535, 18 Aug. 2006) As a general rule, a corporation’s representative
who did not personally bind himself or herself to an
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Q: BF Corporation, in a collection complaint filed arbitration agreement cannot be forced to
against Shangri-La and its Board of Directors, participate in arbitration proceedings made
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alleged that Shangri-La induced BF Corporation pursuant to an agreement entered into by the
to continue with the construction of the corporation. However, there are instances when the
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buildings using its own funds and credit despite distinction between personalities of directors,
Shangri-La’s default. It claims that Shangri-La officers, and representatives, and of the
misrepresented that it had funds to pay for its corporation, are disregarded. This is known as
obligations with BF Corporation. The latter piercing the veil of corporate fiction.
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eventually completed the construction of the
buildings. Shangri-La took possession of the Hence, when the directors are impleaded in a case
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same while still owing BF Corporation an against a corporation, alleging malice or bad faith on
outstanding balance. their part in directing the affairs of the corporation,
complainants are effectively alleging that the
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Shangri-La’s BoD based their defense on the directors and the corporation are not acting as
separate personality given to juridical persons separate entities. They are alleging that the acts or
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vis-à-vis their directors, officers, stockholders, omissions by the corporation that violated their
and agents. Since they did not sign the rights are also the directors' acts or omissions. They
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arbitration agreement in any capacity, they are alleging that contracts executed by the
cannot be forced to submit to the jurisdiction of corporation are contracts executed by the directors.
the Arbitration Tribunal in accordance with the Complainants effectively pray that the corporate
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arbitration agreement. The Arbitral Tribunal veil be pierced because the cause of action between
rendered a decision, finding that BF Corporation the corporation and the directors is the same.
failed to prove the existence of circumstances
that render Shangri-La and the other directors In that case, complainants have no choice but to
solidarily liable. It ruled that Shangri-La’s Board institute only one proceeding against the parties.
of Directors is not liable for the contractual Under the Rules of Court, filing of multiple suits for
obligations of Shangri-La to BF Corporation. a single cause of action is prohibited. Institution of
more than one suit for the same cause of action
Are Shangri-La’s directors liable for the constitutes splitting the cause of action, which is a
contractual obligations of Shangri-La to BF ground for the dismissal of the others (Lanuza, Jr. v.
Corporation? BF Corporation, ibid.)
A: NO. Indeed, as petitioners point out, their NOTE: However, the aforementioned ruling does
personalities as directors of Shangri-La are separate not overturn Heirs of Augusto Salas Jr. v. Laperal
and distinct from Shangri-La. A corporation is an Realty Corporation, et al. (G.R. No. 135362, 13 Dec.
artificial entity created by fiction of law. This means 1999) wherein the court affirmed the basic
that while it is not a person, naturally, the law gives arbitration principle that only parties to an
2023 GOLDEN NOTES
arbitration agreement may be compelled to submit A: NO. Seva, et al. failed to show the existence of the
to arbitration. first requisite. They did not specifically allege in
their complaint that Rana and Burgos willfully and
Requisites for Holding Directors or Officers knowingly assented to petitioner’s patently
Personally Liable: unlawful act of forcing the respondents to sign the
dubious employment contracts in exchange for their
Before a director or officer of a corporation can be salaries. The respondents also failed to prove that
held personally liable for corporate obligations, the Rana and Burgos had been guilty of gross negligence
following requisites must concur: or bad faith in directing the affairs of the
corporation.
1. The complainant must allege in the complaint
that the director or officer assented to patently To hold an officer personally liable for the debts of
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unlawful acts of the corporation, or that the the corporation, and thus pierce the veil of
officer was guilty of gross negligence or bad corporate fiction, it is necessary to clearly and
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faith; and convincingly establish the bad faith or wrongdoing
of such officer, since bad faith is never presumed.
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2. The complainant must clearly and convincingly (FVR Skills and Services Exponents, Inc. [SKILLEX], et.
prove such unlawful acts, negligence, or bad Al. v. Seva, et al., G.R. No. 200857, 22 Oct. 2014)
faith. (Heirs of Fe Tan Uy v. International
Exchange Bank, G.R. No. 166282, G.R. No. 166283, Q: LMN Corporation hired X as Assistant Stage
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13 Feb. 2013) Manager under a four-month contract on board
a vessel. While on board, X started to feel back
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NOTE: The fact that the corporation ceased pains after he moved several boxes. As the pain
operations the day after the promulgation of the SC persisted, X was sent to an orthopedic doctor
resolution finding the corporation liable does not where he was initially assessed to have lumbar
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prove bad faith on the part of the incorporator of the disc disorder. The company-designated
corporation. (Polymer Rubber Corp. v. Ang physician issued a medical report declaring X
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Salamuding, G.R. No. 185160, 24 July 2013) partially and permanently disabled with Grade
8 Impediment. Unsatisfied, X consulted another
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Q: Rana and Burgos are the President and doctor who declared him as permanently and
General Manager of SKILLEX. The latter entered totally disabled. Thereafter, X informed LMN
into a service contract with Robinsons Land Corporation of the findings of his doctor and
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Corporation. Halfway through the service requested that his case be referred to a third
contract, Skillex asked the respondents- doctor. However, since LMN Corporation
employees Seva, et al. to execute individual ignored his request, X filed a complaint for
contracts which stipulated that their respective payment of total and permanent disability
employments shall end at the last day of the benefits. LMN Corporation contended that only
year. Skillex and Robinsons no longer extended those with Grade 1 disability assessment are
their contract of janitorial services. entitled to full disability compensation, thus X
Consequently, Skillex dismissed Seva, et al. as was not entitled to the benefits under POEA
they were project employees whose duration of Standard employment contract.
employment was dependent on the former's
service contract with Robinsons. Seva, et al. filed Can a corporate officer who entered a contract
a complaint for illegal dismissal with the NLRC. on behalf of a corporation be held solidarily
Should Rana and Burgos be held solidarily liable liable with the corporation?
with the corporation for respondents-
employees’ monetary claims against the
corporation?
COMMERCIAL LAW
A: YES. Generally, corporate directors, trustees, or and President of Genesis. Should Riza Moises be
officers who entered into contracts on behalf of the solidarily liable with Genesis?
corporation cannot be personally held liable for the
liabilities of the latter. However, their personal A: NO. As a rule, corporate directors and officers are
liability may validly attach when they are not liable for the illegal termination of a
specifically made by a particular provision of law. corporation’s employees. It is only when they acted
in bad faith or with malice that they became
Here, R.A. No. 8042 expressly provides for joint and solidarily liable with the corporation. Rivera, in this
solidary liability of corporate directors and officers case, has not produced proof to show that Moises
with the recruitment/placement agency for all acted in bad faith or with malice as regards the
money claims or damages that may be awarded to termination of his employment. Thus, she did not
OFWs. incur any personal liability. (Rivera v. Genesis
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Transport Service, Inc., G.R. No. 215568, 03 Aug.
Thus, the owner of LMN Corporation, is solidarily 2015)
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liable with the latter for X’s partial and permanent
disability benefits. (United Philippines Lines, Inc. v. Q: Jacob and Fernandez are STI officers, the
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Alkuino, Jr., G.R. No. 245960, 14 July 2021) former being the President and CEO and the
latter as the Senior VP. Ico was hired as Faculty
Liability of Director for Termination of Member by STI College Makati, Inc., a wholly-
Employees owned subsidiary of STI. Ico was subsequently
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promoted as Dean of STI College-Parañaque
Without any evidence of bad faith or malice, and, thereafter, as COO of STI-Makati. However,
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directors may not be held personally liable. Only after the merger between STI and STI College
when the termination is done with malice or in bad Makati (Inc.), Ico received a memorandum
faith on the part of the director may the director be cancelling her COO assignment, citing the
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held solidarily liable with the corporation. management’s decision to undertake an
(Equitable Banking Corporation vs. NLRC, G.R. No. "organizational restructuring" in line with the
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02467, 13 June 1997; Rolando DS Torres v. Rural merger, and further ordering Ico to turn over
Bank of San Juan, Inc., et al., G.R. No. 184520, 13 Mar. her work to one Victoria Luz, who shall function
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2013) as STI-Makati’s School Administrator.
Q: Rivera was employed by Genesis Transport Based on a report, it was recommended that an
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Service, Inc. (Genesis) as a bus conductor. He investigation committee be formed to
acknowledged in his Position Paper before the investigate Ico for grave abuse of authority,
Labor Arbiter that he was dismissed by Genesis falsification, gross dishonesty, maligning and
on account of a discrepancy in the amount he causing intrigues, and other charges. The LA
declared on bus ticket receipts. Genesis gave found Ico to have been illegally, constructively
him a Memorandum to explain within twenty- and in bad faith, dismissed by STI, Jacob and
four (24) hours why he should not be sanctioned Fernandez. On appeal, the NLRC reversed the
for reporting and remitting the amount of ruling of the LA. CA affirmed the ruling of the
P198.00 instead of the admittedly correct NLRC. Is Jacob, as the President and CEO of STI,
amount of P394 worth of bus ticket receipts. solidarily liable with STI?
Rivera responded that it was an honest mistake,
which he was unable to correct “because the bus A: NO. The Court fails to discern any bad faith or
encountered mechanical problems.” Despite negligence on the part of respondent Jacob. The
Rivera’s explanations, his employment was principal character that figures prominently in this
terminated through a written notice. Rivera case is Fernandez; he alone relentlessly caused
filed a complaint for illegal dismissal against petitioner’s hardships and suffering. He alone is
Genesis and Riza Moises, the General Manager guilty of persecuting petitioner. His superior, Jacob,
2023 GOLDEN NOTES
may have been, for the most part, clueless of what Liability for Attempting to Acquire Adverse
Fernandez was doing to petitioner. A corporation, Interest on Confidential Matters
as a juridical entity, may act only through its
directors, officers, and employees. Obligations When a director, trustee, or officer attempts to
incurred as a result of the directors’ and officers’ acquire or acquires, in violation of his duty, any
acts as corporate agents, are not their personal interest adverse to the corporation in respect of any
liability but the direct responsibility of the matter which has been reposed in him in
corporation they represent. As a rule, they are only confidence, as to which equity imposes a disability
solidarily liable with the corporation for the illegal upon him to deal in his own behalf, he shall be liable
termination of services of employees if they acted as a trustee for the corporation and must account
with malice or bad faith. (Girly Ico v. STI, Inc., et al., for the profits which otherwise would have accrued
G.R. No. 185100, 09 July 2014) to the corporation. (Sec. 30, RCC)
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Liability of Directors for Issuance of Watered NOTE: Private or secret profits obtained must be
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Stocks accounted for, even though the transaction on
which they are made is advantageous or is not
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A watered stock is a stock issued in exchange for harmful to the corporation, or even though the
cash, property, share, stock dividends, or services director/ trustee or officer acted without intent to
lesser than its par value or issued value (no par injure the corporation.
value) or for a consideration other than cash, valued
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in excess of its fair value. (Sec. 64, RCC) NOTE: The members of the board of directors who
approved the payment of the cash dividends despite
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A director or trustee who: the insolvency of the corporation and the
1. Consents to the issuance of stocks for a stockholders who received the payment should
consideration less than its par or issued make good the losses. (Steinberg v. Velasco, G.R. No.
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value; L-30460, 12 Mar. 1929)
2. Consents to the issuance of stocks for a
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consideration other than cash, valued in Q: International Air Transport Association
excess of its fair value; or (IATA) and Morning Star entered a Passenger
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3. Having knowledge of the insufficient Sales Agency Agreement such that the latter
consideration, does not file a written must report all air transport ticket sales to the
objection with corporate secretary former and account all payments received
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through the centralized system called Billing
Shall be liable to the corporation or its creditors, and Settlement Plan. IATA obtained a Credit
solidarily with the stockholder concerned for the Insurance policy from Pioneer to assure itself of
difference between the value received at the payments by accredited travel agents for tickets
issuance of the stock and the par or issued value of sales and monies due to the airline companies
the same. (Sec. 64, RCC) under the Billing and Settlement Plan.
NOTE: The prohibition to issue “watered stock” The policy was made known to Morning Star,
refers only to the original issue of stocks (primary through its President, Benny Wong, who was
issuance) but not to a subsequent transfer of such among those that declared itself liable to
stocks by the corporation (secondary market or indemnify Pioneer for any and all claims under
transaction). the policy. Morning Star had an accrued billing
of P49,021,641.80 and US$325,865.35 for the
See also discussion on Watered Stocks – page 133. period from 16 Dec. 2002 to 31 Dec. 2002. It
failed to remit these amounts through the
Billing and Settlement Plan.
COMMERCIAL LAW
IATA demanded from Pioneer the sums of k) PERSONAL LIABILITIES
P109,728,051.00 and US$457,834.14
representing Morning Star’s overdue account as Instances when Personal Liability may Attach to
of 30 Apr. 2003. Pioneer investigated, Directors, Trustees, or Officers of the
ascertained, and validated the claims, then paid Corporation:
IATA the amounts of P100,479,171.59 and
US$457.834.14. Consequently, Pioneer 1. Knowingly voting for or assenting to patently
demanded these amounts from Morning Star unlawful acts of the corporation;
through a letter. IATA executed a Release of
Claim and Subrogation Receipt in favor of 2. Gross negligence or bad faith in directing the
Pioneer. affairs of the corporation;
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Pioneer filed a Complaint for Collection of Sum 3. Acquiring any personal or pecuniary interest in
of Money and Damages against Morning Star and conflict with his duty as director or trustee or
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its shareholders and directors. Should the officer resulting in damage to the corporation;
shareholders and directors of Morning Star be
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jointly and severally liable with Morning Star? 4. He consents to the issuance of watered stocks
or who, having knowledge thereof, does not
A: NO. Under Sec. 31 of the Corporation Code (now forthwith file with the corporate secretary his
Sec. 30, RCC), Directors or trustees who willfully and written objection thereto;
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knowingly vote for or assent to patently unlawful
acts of the corporation or who are guilty of gross 5. He agrees to hold himself personally liable with
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negligence or bad faith in directing the affairs of the the corporation; and
corporation or acquire any personal or pecuniary
interest in conflict with their duty as such directors 6. He is made, by a specific provision of law, to
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or trustees shall be liable jointly and severally for all personally answer for the corporation’s action.
damages resulting therefrom suffered by the (Divina, 2021)
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corporation, its stockholders or members and other
persons. l) RESPONSIBILITY FOR CRIMES
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The mere fact that Morning Star has been incurring Responsibility for Crimes
huge losses and that it has no assets at the time it
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contracted large financial obligations to IATA, Where a law requires a corporation to do a
cannot be considered that its officers, Estelita Co particular act, failure of which on the part of the
Wong, Benny H. Wong, Arsenio Chua, Sonny Chua responsible officer to do so constitutes an offense,
and Wong Yan Tak, acted in bad faith or such the responsible officer is criminally liable, therefore.
circumstance would amount to fraud, warranting The reason is that a corporation can act through its
personal and solidary liability of its corporate officers and agents and where the business itself
officers. involves a violation of law all who participate in it
are liable. While the corporation may be fined for
Piercing the corporate veil in order to hold such criminal offense if the law so provides, only the
corporate officers personally liable for the responsible corporate officer can be imprisoned.
corporation’s debts requires that "the bad faith or (People v. Tan Boon Kong, G.R. No. L-35262, 15 Mar.
wrongdoing of the director must be established 1930)
clearly, and convincingly as bad faith is never
presumed. (Pioneer Insurance v. Morning Star Travel However, a director or officer can be held liable for
and Tours, G.R. No. 198436, 08 July 2015) a criminal offense only when there is a specific
provision of law making a particular officer liable
2023 GOLDEN NOTES
because being a corporate officer by itself is not 315 (1) (b) of the RPC, as provided by Sec. 13 of P.D.
enough to hold him criminally liable. 115.
Those with the power to prevent the illegal act can Although these pieces of evidence show that Choa
be made criminally liable. Thus, to be held signed the Trust Receipt Agreements, they do not
criminally liable for the acts of a corporation, there show that he signed them in his personal capacity.
must be showing that its officers, directors, and Without any evidence that respondent personally
shareholders actively participated in or had the bound himself to the debts of the company he
power to prevent the wrongful act. (Securities and represented, this Court cannot hold him civilly liable
Exchange Commission v. Price Richardson Corp., et under the Trust Receipt Agreements. (BDO Unibank,
al., G.R. No. 197032, 26 July 2017; as cited in Divina, Inc. v. Choa, G.R. No. 237553, 10 July 2019)
2021)
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m) SPECIAL FACT DOCTRINE
Liability of Officers Under Trust Receipts Law
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Special Fact Doctrine
The Trust Receipts Law (P.D. 115) recognizes the
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impossibility of imposing the penalty of The special fact doctrine states that where special
imprisonment on a corporation. Hence, if the circumstances or facts are present which make it
entrustee is a corporation, the law makes the inequitable for the director to withhold information
officers or employees or other persons responsible from the stockholder, the duty to disclose arises,
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for the offense liable to suffer the penalty of and concealment is fraud.
imprisonment. (Ong v. CA, G.R. No. 119858, 29 Apr.
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2003) This doctrine makes a director or officer liable when
he takes advantage of an acquired information by
Though the entrustee is a corporation, nevertheless, virtue of his office to the disadvantage of the
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the law specifically makes the officers, employees or corporation. (Divina, 2021)
other persons responsible for the offense, without
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prejudice to the civil liabilities of such corporation n) INSIDE INFORMATION
and or board of directors, officers, or other officials
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or employees responsible for the offense. The Inside Information
rationale is that such officers or employees are
vested with the authority and responsibility to Any material non-public information about the
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devise means necessary to ensure compliance with issuer of the securities (corporation) or the security
the law and, if they fail to do so, are held criminally obtained by being an insider, which includes:
accountable; thus, they have a responsible share in (I-D-Re-Go-L)
the violations of the law. (Ching v. the Secretary of
Justice, et al., G.R. No. 164317, 06 Feb. 2006) 1. The Issuer;
A trust receipt transaction imposes upon the 2. A Director or officer (or any person performing
entrustee the obligation to deliver to the entruster similar functions) of, or a person controlling the
the price of the sale, or if the merchandise is not issuer;
sold, to return the same to the entruster. There are
two obligations in a trust receipt transaction: the 3. A person whose Relationship or former
first, refers to money received under the obligation relationship to the issuer gives or gave him
involving the duty to turn it over to the owner of the access to material information about the issuer
merchandise sold, while the second refers to or the security that is not generally available to
merchandise received under the obligation to the public;
"return" it to the owner. A violation of any of these
undertakings constitutes estafa defined under Art.
COMMERCIAL LAW
4. A Government employee, director, or officer of NOTE: In case of corporations vested with
an exchange, clearing agency and/or self- public interest, material contracts are
regulatory organization who has access to approved by at least 2/3 of the entire
material information about an issuer or a membership of the board, with at least a
security that is not generally available to the majority of the independent directors voting
public; or to approve the material contract; and
5. A person who Learns such information by a 2. In case of officer: That in the case of an officer,
communication from any forgoing insiders (Sec. the contract with the officer has been
3.8, SRC) previously authorized by the board of directors.
(Sec. 31, par. 1, RCC)
Q: When may a director be held liable for
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obtaining insider information? NOTE: Sec. 31 of the RCC does not require that the
corporation suffers injury or damage as a result of
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A: A director may be held liable for obtaining insider the contract.
information if he trades securities based on such
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insider information. Trading on insider information Ratification of Contract with Director, or
amounts to an unfair manipulation of the free Trustee
market. (Divina, 2021)
A contract of the corporation with one or more of its
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o) CONTRACTS directors or trustees may be ratified by the vote of
the stockholders representing at least 2/3 of the
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(1) BY SELF-DEALING DIRECTORS WITH THE OCS or 2/3 of the members in a meeting called for
CORPORATION the purpose where any of the first three (3)
conditions is absent.
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A contract of the corporation with one or more of its
directors, trustees, officers, or their spouses and Provided: There is full disclosure of the adverse
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relatives within the fourth civil degree of interest of the directors or trustees involved is made
consanguinity or affinity is voidable, at the option of at the stockholders’ meeting called for the purpose;
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the corporation unless all the following conditions and the contract is fair and reasonable under the
are present: circumstances. (Sec. 31, par. 2, RCC)
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1. In case of a director or trustee: Q: Suppose that the by-laws of X Corporation, a
mining firm, provides that "The directors shall
a. That the presence of such director or be relieved from all liability for any contract
trustee in the board meeting in which the entered into by the corporation with any firm in
contract was approved was not necessary which the directors may be interested." Thus,
to constitute a quorum for such meeting; director A acquired claims which overlapped
with X's claims and were necessary for the
b. That the vote of such director or trustee development and operation of X's mining
was not necessary for the approval of the properties. Is the by-law provision valid? Why?
contract; (2001 BAR)
c. That the contract is fair and reasonable A: NO. It is in violation of Sec. 31 of the RCC.
under the circumstances;
Q: What happens if director “A” is able to
consummate his mining claims over and above
that of the corporation’s claims? (2001 BAR)
2023 GOLDEN NOTES
A: “A” should account for and refund to the 10. CAPITAL AFFAIRS
corporation all the profits which he realized from
the transaction. He grabbed the business
a) CERTIFICATE OF STOCK
opportunity from the corporation. (Sec. 33, RCC)
Definition
(2) BETWEEN CORPORATIONS WITH
INTERLOCKING DIRECTORS
A certificate of stock is the paper representative or
tangible evidence of the stock itself and of the
A contract between two or more corporations
various interests therein. The certificate is not stock
having interlocking directors shall not be
in the corporation but is merely evidence of the
invalidated on that ground alone. Provided that:
holder’s interest and status in the corporation, his
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ownership of the share represented thereby, but is
1. Contract is not fraudulent;
not in law the equivalent of such ownership. It
expresses the contract between the corporation and
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2. Contract is fair and reasonable under the
the stockholder, but it is not essential to the
circumstances; and
existence of a share in stock or the creation of the
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relation of shareholder to the corporation. (Tan v.
3. If the interest of the interlocking director in one
SEC, G.R. No. 95696, 03 Mar. 1992)
corporation or corporations is substantial and
the interest in the other corporation or
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CERTIFICATE OF
corporations is merely nominal, he shall be SHARE OF STOCK
STOCK
subject to the provisions of Sec. 32 insofar as the
Usage
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latter corporation or corporations are
Evidence of the
concerned. (Sec. 32, RCC);
holder’s ownership of
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Unit of interest in a the stock and of his
NOTE: Stockholdings exceeding 20% of the
corporation. right as a shareholder
outstanding capital stock shall be considered
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and of his extent
substantial for purposes of interlocking
specified therein.
directors.
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Characteristics
When a mortgagee bank foreclosed the mortgage on It is an incorporeal or It is concrete and
the real and personal property of the debtor and intangible property. tangible.
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thereafter assigned the properties to a corporation Issuance
it formed to manage the foreclosed assets, the It may be recognized
unpaid seller of the debtor cannot complain that the by the corporation It may be issued only if
assignment is invalid simply because the mortgagee even if the the subscription is
and the assignee have interlocking directors. There subscription is not fully paid.
is no bad faith on the part of DBP by its creation of fully paid.
Nonoc Mining, Maricalum and Island Cement as the
creation of these three corporations was necessary (1) NATURE OF THE CERTIFICATE
to manage and operate the assets acquired in the
foreclosure sale lest they deteriorate from non-use The certificate of stock itself once issued is a
and lose their value. (DBP v. CA, G.R. No. 126200, 16 continuing affirmation or representation that the
Aug. 2001) stock described therein is valid and genuine and is
at least prima facie evidence that it was legally
issued in the absence of evidence to the contrary.
However, this presumption may be rebutted.
(Bitong v. CA, G.R. No. 123553, 13 July 1998)
COMMERCIAL LAW
Transfer of Partially Paid Shares Alienation Despite Absence of Certificate of
Stock
The subscriber, as the owner of the shares, may
assign his right to the contract of subscription in A stockholder may alienate his shares even if there
favor of the assignee. Partially paid shares are not is no certificate of stock issued by the corporation.
covered yet by a stock certificate, and as such, there The absence of a certificate of stock does not
is no certificate which can be endorsed and preclude the stockholder from alienating or
delivered to the transferee as required by Sec. 62 of transferring his shares of stock.
the RCC.
Transfers Involving Fully Paid Subscriptions
The corporation may, however, refuse the transfer
of shares based on Sec. 62 of the RCC, which In case of a fully paid subscription, without the
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provides that the corporation may refuse the corporation having issued a certificate of stock, the
transfer if it holds unpaid claim over the shares. The transfer may be effected by the subscriber or
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term “unpaid claim” means unpaid subscription. stockholder executing a contract of sale or deed of
assignment covering the number of shares sold and
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Consent Required in the Sale of Unpaid Shares submitting said contract or deed to the corporate
secretary for recording.
a. If the subscription is fully paid, the
stockholder may sell or dispose of his shares In case of subscription not fully paid, the
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without having to secure the consent of the corporation may record such transfer, provided that
corporation. the transfer is approved by the board of directors
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and the transferee executes a verified assumption of
The corporation cannot require its consent for the obligation to pay the unpaid balance of the
transfer of the shares. It will be contrary to law and subscription.
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public policy. (Divina, 2020)
The SEC may require corporations whose securities
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To be valid, the restriction on transfer cannot be are traded in trading markets, and which can
more onerous than the option granted to a reasonably demonstrate their ability to do so, to
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stockholder to purchase the shares of a transferring issue their securities or shares of stock in
stockholder on reasonable terms and conditions, or uncertificated or in scripless form in accordance
simply, the right of first refusal. Requiring the with the rules imposed by SEC. (Sec. 62, RCC)
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consent of the corporation is certainly more
onerous than the right of first refusal. (ibid.) (2) UNCERTIFICATED SHARES
b. If the subscription is not fully paid, the The SEC may require corporations whose securities
consent of the corporation is necessary are traded in trading markets, and which can
before the subscriber may assign his right to reasonably demonstrate their ability to do so, to
the contract of subscription. issue their securities or shares of stock in
uncertificated or in scripless form in accordance
Assignment of shares with unpaid subscription with the rules imposed by SEC. (Sec. 62, RCC)
basically amounts to novation as there will be a
change of debtor from the subscriber to the
assignee. The obligation to pay the balance of the
subscription will be assumed by the assignee. To be
valid, novation requires consent of the creditor,
which in this case is the corporation. (ibid.)
2023 GOLDEN NOTES
(3) NEGOTIABILITY; REQUIREMENTS FOR 2. If NOT represented by a certificate (such as
VALID TRANSFER OF STOCKS when the certificate has not yet been issued or
where for some reason is not in the possession
Stock Certificate is NOT Negotiable of the stockholder): (De-Rec)
a. By means of Deed of assignment; and
Although a stock certificate is sometimes regarded b. Such is duly Recorded in the books of the
as quasi-negotiable, in the sense that it may be corporation. (Divina, 2020)
transferred by delivery, it is well-settled that the
instrument is non-negotiable, because the holder Effect of Non-Payment of Documentary Stamp
thereof takes it without prejudice to such rights or Tax
defenses as the registered owner or creditor may
have under the law, except insofar as such rights or No sale, exchange, transfer, or similar transaction
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defenses are subject to the limitations imposed by intended to convey ownership of, or title to any
the principles governing estoppel. (Republic v. share of stock shall be registered in the books of the
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Sandiganbayan, G.R. No. 107789 & 147214, 30 Apr. corporation unless the receipts of payment of the
2003) tax herein imposed is filed with and recorded by the
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stock transfer agent or secretary of the corporation.
Certificates of stock may be issued only to registered (Sec. 11, Revenue Regulations No. 6-2008)
owners of stock. The issuance of “bearer” stock
certificates is not allowed under the law. (SEC Ministerial Duty of Corporate Secretary to
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Opinion No. 05-02, 31 Jan. 2005) Register Transfer of Stocks
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Requirements for Valid Transfer of Stocks In transferring stock, the secretary of a corporation
acts in purely ministerial capacity and does not try
The following are the requirements for valid to decide the question of ownership. If a corporation
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transfer of stocks: refuses to make such transfer without good cause, it
may, in fact, even be compelled to do so by
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1. If represented by a certificate, the following mandamus. (Teng v. SEC, G.R. No. 184332, 17 Feb.,
must be strictly complied with: (D-En-R) 2016)
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a. Delivery of the certificate or
certificates; Remedies When Corporation Refuses to Record
Transfer
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b. Endorsed by the owner, his attorney-
in-fact, or any other person legally If the corporation wrongfully refuses to issue a
authorized to make the transfer; certificate of stock, the assignee or transferee of
shares of stock may: (Spec-Dam-Man)
c. No transfer, however, shall be valid,
except as between the parties, until the 1. File a suit for Specific performance of an
transfer is Recorded in the books of the express or implied contract;
corporation showing the names of the
parties to the transaction, the date of 2. File for an alternative relief by way of
the transfer, the number of the Damages where specific performance
certificate or certificates, and the cannot be granted; and
number of shares transferred. (Sec. 62,
RCC) 3. File a petition for Mandamus to compel
issuance of a certificate. (SEC-OGC Opinion
No. 21-06, Mar. 23, 2006, cited in Divina,
2020)
COMMERCIAL LAW
The fact that the corporate secretary asked for leave A: NO. A transfer of shares not registered in the
to register the transfer five years after the sale did books of the corporation is not valid as against
not make the transfer irregular. Since the law does subsequent attachment of the shares. All transfers
not prescribe a period for such kind of registration, of shares not so entered in the books of the
the action to enforce the right to have it done does corporation are invalid as to attaching or execution
not begin to toll until a demand for it had been made creditors of the assignors, as well as to the
and was refused. (Africa v. Sandiganbayan, G.R. Nos. corporation and to subsequent purchasers in good
17222, 11 Nov. 2013 citing Lee E. Won v. Wack Wack faith, and, indeed, as to all persons interested,
Golf & Country Club, Inc. G.R. No. L-10122, 30 Aug. except the parties to such transfers. Hence, the
1958) transfer of the subject certificate made by Dico to
Garcia was not valid as to the spouses Atinon, the
Q: Nemesio Garcia filed an action for injunction judgment creditors, as the same still stood in the
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against spouses Jose and Sally Atinon and name of Dico, the judgment debtor, at the time of the
Nicolas Jomouad, ex-officio sheriff. Said action levy on execution. (Nemesio Garcia v. Nicolas
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stemmed from an earlier case for collection of Jomouad, et al., G.R. No. 133969, 26 Jan. 2000)
sum of money, filed by the spouses Atinon
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against Jaime Dico. In that case, the trial court Q: Fil-Estate Golf and Development, Inc. (FEGDI)
rendered judgment ordering Dico to pay is a stock corporation whose primary business
spouses Atinon. After said judgment became is the development of golf courses. Fil-Estate
final and executory, the sheriff proceeded with Land, Inc. (FELI) is also a stock corporation, but
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its execution. In the course thereof, the is engaged in real estate development. FEGDI
Proprietary Ownership Certificate (POC) in the was the developer of the Forest Hills Golf and
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Cebu Country Club, which was in the name of Country Club (Forest Hills) and, in consideration
Dico, was levied on and scheduled for public for its financing support and construction
auction. efforts, was issued several shares of stock of
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Forest Hills.
Claiming ownership over the subject certificate,
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Garcia filed the action for injunction to enjoin FEGDI sold on installment, to RS Asuncion
the spouses Atinon from proceeding with the Construction Corporation (RSACC) one common
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auction. Garcia contends that the subject stock share of Forest Hills. Prior to the full payment of
of certificate, albeit in the name of Dico, cannot the purchase price, RSACC sold the share to
be levied upon the execution to satisfy his Vertex Sales and Trading, Inc. (Vertex). RSACC
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judgment debt because even prior to the advised FEGDI of the sale to Vertex and FEGDI, in
institution of the case for collection of sum of turn, instructed Forest Hills to recognize Vertex
money against him, spouses Atinon had as a shareholder. For this reason, Vertex
knowledge that Dico already conveyed back the enjoyed membership privileges in Forest Hills.
ownership of the subject certificate to Garcia
and that Dico executed a deed of transfer Despite Vertex’s full payment on Feb. 11, 1999,
covering the subject certificate in favor of the share remained in the name of FEGDI. As the
Garcia. demands to issue a certificate in its name went
unheeded, Vertex filed a Complaint for
Is a bona fide transfer of the shares of a Rescission with Damages and Attachment
corporation, not registered or noted in the against FEGDI, FELI and Forest Hills. It averred
books of the corporation, valid as against a that the petitioners defaulted in their obligation
subsequent lawful attachment of said shares, as sellers when they failed and refused to issue
regardless of whether the attaching creditor had the stock certificate covering the subject share
actual notice of said transfer or not? despite repeated demands. Only thereafter that
the stock certificates were delivered (on Jan. 23,
2002).
2023 GOLDEN NOTES
Is the delay in the issuance of the stock not be a party to the transaction, as may be inferred
certificate a substantial breach of the sale which from the terms of Sec. 63 (now Sec. 62 of the RCC)
entitles Vertex to the rescission thereof? of the Corporation Code. However, to bind the
corporation as well as third parties, it is necessary
A: YES. Sec. 63 (now Sec 62 of the RCC) provides, that the transfer is recorded in the books of the
among others, that shares of stock may be corporation. In the present case, the parties to the
transferred by delivery of the certificate or sale of the share were FEGDI as the seller and
certificates endorsed by the owner or his attorney- Vertex as the buyer (after it succeeded RSACC). As
in-fact or other person legally authorized to make party to the sale, FEGDI is the one who may appeal
the transfer. the ruling rescinding the sale.
In this case, Vertex fully paid the purchase price by The remedy of appeal is available to a party who
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11 Feb. 1999, but the stock certificate was only has a present interest in the subject matter of the
delivered on 23 Jan. 2002 after Vertex filed an action litigation and is aggrieved or prejudiced by the
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for rescission against FEGDI. judgment. A party, in turn, is deemed aggrieved or
prejudiced when his interest, recognized by law in
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Under these facts, considered in relation to the the subject matter of the lawsuit, is injuriously
governing law, FEGDI clearly failed to deliver the affected by the judgment, order or decree. The
stock certificates, representing the shares of stock rescission of the sale does not in any way prejudice
purchased by Vertex, within a reasonable time from Forest Hills in such a manner that its interest in the
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the point the shares should have been delivered. subject matter – the share of stock – is injuriously
This was a substantial breach of their contract that affected. (Forest Hills Golf & Country Club v. Vertex
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entitles Vertex the right to rescind the sale under Sales and Trading, Inc., G.R. No. 202205, 06 March
Art. 1191 of the Civil Code. It is not entirely correct to 2013)
say that a sale had already been consummated as
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Vertex already enjoyed the rights a shareholder can (4) ISSUANCE
exercise. The enjoyment of these rights cannot
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suffice where the law, by its express terms, requires Issuance of Certificate of Stock
a specific form to transfer ownership.
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No certificate of stock shall be issued to a subscriber
Mutual restitution is required in cases involving until the full amount of the subscription together
rescission under Art. 1191 of the Civil Code; such with interest and expenses (in case of delinquent
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restitution is necessary to bring back the parties to shares), if any is due, has been paid. (Sec. 63, RCC)
their original situation prior to the inception of the
contract. Accordingly, the amount paid to FEGDI by Requisites for Issuance of Stock Certificates for
reason of the sale should be returned to Vertex. (Fil- Fully Paid Shares
Estate Golf and Development, Inc. and Fil-Estate
Land, Inc. v. Vertex Sales and Trading, Inc., G.R. No. 1. Signed by the president or vice president
202079, 10 June 2013) 2. Countersigned by the secretary or assistant
secretary; and
Q: Considering the same facts, may Forest Hills 3. Sealed with the seal of the corporation
appeal the CA decision which ordered the 4. Issued in accordance with the bylaws. (Sec.
recission of the sale? 62, RCC)
A: NO. It was not a party to the sale even though the

subject of the sale was its share of stock. The
corporation whose shares of stock are the subject
of a transfer transaction (through sale, assignment,
donation, or any other mode of conveyance) need
COMMERCIAL LAW
Stock and Transfer Book records were contradicted. The effect of entries in
the books of the corporation which purport to be
Stock corporations must also keep a stock and regular records of the proceedings of its board of
transfer book, which shall contain: directors or stockholders can be destroyed by
testimony of a more conclusive character than mere
1. A record of all stocks in the names of the suspicion that there was an irregularity in the
stockholders alphabetically arranged; manner in which the books were kept.
2. The installments paid and unpaid on all The foregoing considerations are founded on the
stocks for which subscription has been basic principle that stock issued without authority
made, and the date of payment of any and in violation of law is void and confers no rights
installment; on the person to whom it is issued and subjects him
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to no liabilities. Where there is an inherent lack of
3. A statement of every alienation, sale or power in the corporation to issue the stock, neither
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transfer of stock made, the date thereof, by the corporation nor the person to whom the stock is
and to whom made; and issued is estopped to question its validity since an
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estoppel cannot operate to create stock which
4. Such other entries as the by-laws may under the law cannot have existence. (Bitong v. CA,
prescribe. (Sec. 73, RCC) G.R. No. 123553, 13 July 1998)
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Entries (5) STOCK AND TRANSFER BOOK
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It is the corporate secretary’s duty and obligation to A stock and transfer book is a record of all stocks in
register valid transfers of stocks and if said the names of the stockholders alphabetically
corporate officer refuses to comply, the transferor- arranged; the installments paid and unpaid on all
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stockholder may rightfully bring suit to compel stocks for which subscription has been made, and
performance. In other words, there are remedies the date of the payment of any installment; a
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within the law that petitioners could have availed of, statement of every alienation, sale or transfer of
instead of taking the law in their own hands, as the stock made, the date thereof, by and to whom made;
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cliche goes. (Torres, Jr. v. CA, G.R. No. 120138, 05 Sept. and such other entries as the bylaws may prescribe.
1997) (Sec. 73, RCC)
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Probative Value of Stock and Transfer Book Stock and Transfer Book is not a Conclusive
Evidence to Show the Outstanding Capital Stock
Similarly, books and records of a corporation which of the Corporation
include even the stock and transfer book are
generally admissible in evidence in favor of or A stock and transfer book is necessary as a measure
against the corporation and its members to prove of precaution, expediency, and convenience since it
the corporate acts, its financial status and other provides the only certain and accurate method of
matters including one’s status as a stockholder. establishing the various corporate acts and
They are ordinarily the best evidence of corporate transactions and of showing the ownership of stock
acts and proceedings. and like matters. However, a stock and transfer
book, like other corporate books and records, is not
However, the books and records of a corporation in any sense a public record, and thus is not
are not conclusive even against the corporation but exclusive evidence of the matters and things which
are prima facie evidence only. Parol evidence may ordinarily are or should be written therein. (Jesus v.
be admitted to supply omissions in the records, Court of Appeals, G.R. No. 131394, 28 Mar. 2005)
explain ambiguities, or show what transpired where
no records were kept, or in some cases where such
2023 GOLDEN NOTES
Corporate Secretary’s Duty in the Registration of 2. If the above-stated formalities have been
Transferred Stocks complied with but the corresponding taxes
for the transfer have not been paid; and
In transferring stock, the secretary of a corporation
acts in purely ministerial capacity and does not try 3. If the corporation holds any unpaid claim
to decide the question of ownership. (Rural Bank of on the shares. (Sec. 72, RCC; Divina, 2021)
Salinas, Inc. v. Court of Appeals, G.R. No. 96674, 26
June 1992.) (6) SITUS OF THE SHARES OF STOCKS
It is a ministerial duty of a corporation to register GR: The situs of shares of stock is the country where
the shares of stock which were assigned in the name the corporation is domiciled. (Wells Fargo Bank v.
of the assignees even if there is a pending action in CIR, G.R. No. L-46720, 28 June 1940)
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court questioning the validity of the assignment.
(Divina, 2021) The residence of the corporation is the place where
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the principal office of the corporation is located as
Petition for Mandamus to Compel the stated in its AOI even though the corporation has
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Registration of Transfer closed its office therein and relocated to another
place. (Hyatt Elevators and Escalators Corp. v.
Whenever a corporation refuses to transfer and Goldstar Elevator Phils., Inc., G.R. No. 161026, 24 Oct.
register stock, mandamus will lie to compel the 2005)
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officers of the corporation to transfer said stock in
the books of the corporation. b) WATERED STOCKS
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The duty of the corporation to transfer is a (1) DEFINITION
ministerial one and if it refuses to make such
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transaction without good cause, it may be A watered stock is a stock issued in exchange for
compelled to do so by mandamus. (Rural Bank of cash, property, share, stock dividends, or services
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Salinas, Inc. v. Court of Appeals, G.R. No. 96674, 26 lesser than its par value or issued value (no par
June 1992.) value) or for a consideration other than cash, valued
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in excess of its fair value. (Sec. 64, RCC)
Who may File the Petition for Mandamus
Watered Stocks include stocks:
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Transferees of shares of stock are real parties in
interest having a cause of action for mandamus to 1. Issued without consideration ;
compel the registration of the transfer and the
corresponding issuance of stock certificates. (Anday 2. Issued for a consideration other than cash,
v. Rural Bank of Cabadbaran, G.R. No. 188769, 03 the fair valuation of which is less than its
Aug. 2016) par or issued value;
Instances where the Corporation may Refuse to 3. Issued as stock dividend when there are no
Register the Transfer of the Shares in the Books sufficient retained earnings to justify it; and
of Corporation
4. Issued as fully paid when the corporation
1. If the formalities prescribed by law for the has received a lesser sum of money than its
transfer of shares, which are endorsement par or issued value.
of the stock certificate and delivery to the
transferee, are not complied with;
COMMERCIAL LAW
(2) LIABILITY OF DIRECTROS FOR WATERED Treasury Shares NOT Covered
STOCKS
Trust fund doctrine is not violated in case treasury
Liability of Directors for Watered Stocks shares are reacquired and subsequently re-issued
for a lesser consideration by the corporation since
Any director or officer of a corporation shall be this does not involve original issuance or primary
solidarily liable with stockholder concerned to the issuance of shares. The only limitation for the
corporation and its creditors for difference between reissuance of treasury shares is that their price must
the value received at the time of the issuance of the be reasonable.
stock and the par or issued value of the same, if:
Treasury shares are not original issuances. They are
1. He consents to the issuance of stocks for shares of stocks which have been issued and fully
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consideration less than its par or issued paid for, but subsequently reacquired by the issuing
value; corporation by purchase, redemption, donation, or
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through some other lawful means. (Sec. 9, RCC)
2. He consents to the issuance of stocks for a Since they do not lose their status as issued shares,
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consideration in any form other than cash, they cannot be treated as new issues when disposed
valued in excess of its fair value; or of or reissued.
3. Who, having knowledge thereof, does not Issuance of Watered Stocks Not Ratifiable
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forthwith express his objection in writing
and file the same with the corporate It is not merely ultra vires but is illegal per se as it is
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secretary. (Sec. 64, RCC) a violation of Sec. 61 of the RCC.
NOTE: The solidary liability of the directors c) PAYMENT OF BALANCE OF SUBSCRIPTION
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emanates from the fiduciary character of the
position of director or corporate officer. Balance of subscription should be paid:
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1. On the date specified in the subscription
(3) TRUST FUND DOCTRINE FOR LIABILITY FOR contract; or
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WATERED STOCKS 2. In the absence of stipulation, on the call or
demand by the board of directors. (Sec. 66,
Reason Behind Prohibition from Issuance of RCC)
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Watered Stock
NOTE: Demand is unnecessary to put the subscriber
The issuance of Watered Stocks violates the Trust in default when the due date is specified in the
Fund Doctrine. contract of subscription. This is based on Art. 1169
of the Civil Code states that demand is not needed for
It is an established doctrine that subscriptions to the the debtor to be in default when the law so declares.
capital stock of a corporation constitute a fund to (Divina, 2021)
which creditors have a right to look for satisfaction
of their claims, and that the assignee in insolvency Legal Effects When Balance of Subscription is
can maintain an action upon any unpaid stock Not Paid on the Due Date
subscription in order to realize assets for the
payment of its debts (Halley v. Printwell, G.R. No. Failure to pay on such date shall render the entire
157549, 30 May 2011) balance due and payable and shall make the
stockholder liable for interest at the legal rate on
such balance, unless a different interest rate is
provided in the subscription contract. The interest
shall be computed from the date specified, until full
2023 GOLDEN NOTES
payment of the subscription. If no payment is made shareholders.
within 30 days from the said date, all stocks covered
by the subscription shall thereupon become The Call of the Board of Directors is NOT always
delinquent and shall be subject to sale as hereinafter necessary to Collect Payment for Unpaid
provided, unless the board of directors orders Subscription
otherwise. (Sec. 66, RCC)
The necessity for calls depends upon the provisions
Subscriber’s Right as a Stockholder Despite of the contract of subscription. When no time is
Failure to Pay the Subscription fixed for payment, the subscription is payable only
upon call by the BOD which may be made at any time
Holders of subscribed shares not fully paid which the board may decide. (De Leon, supra)
are not delinquent shall have all the rights of a
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stockholder. (Sec. 71, RCC) However, a call is not necessary where:
1. The subscription contract specifies the date
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He is entitled to such right until his stocks become of payment; or
delinquent. Stocks only become delinquent if not 2. The corporation becomes insolvent
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paid within thirty (30) days from the due date. If the (Sundiang Sr. & Aquino, 2009)
stocks become delinquent, his only right available is 3. The subscriber becomes insolvent (De
to the dividends, where the cash dividends due on Leon, 2014)
the delinquent stock shall be applied against the
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unpaid balance on the subscription plus interest, (2) NOTICE REQUIREMENT
cost and expenses while the stock dividends shall be
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withheld until the full payment of the subscription Where call is necessary, notice must be given to the
(Divina, 2021). stockholder concerned. A call without notice to the
subscriber is practically no call at all.
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(1) CALL BY BOARD OF DIRECTORS
The notice is regarded as a condition precedent to
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Call for the Payment by the Board of Directors the right of recovery. In the absence of notice of call
for Unpaid Subscription for the payment of unpaid subscriptions, the same is
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not yet due and payable.
A call is made in a form of board resolution that
unpaid subscription to the capital stock are due and The right to notice of call, however, may be waived
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payable and the same or such percentage thereof by the subscriber. (De Leon and De Leon, Jr., 2010)
shall be collected, together with all accrued interest,
on a specified date and that if no payment is made d) SALE OF DELINQUENT SHARES
within 30 days from said date, all stocks covered by
said subscription shall thereupon become Registration of Transfer in Case of Sale
delinquent and shall be subject to public auction
sale. No transfer shall be valid, except as between the
parties, until the transfer is recorded in the books of
Requisites for a Valid Call the corporation showing the names of the parties to
the transaction, the date of the transfer, the number
SEC opined on July 21, 1976 that the following are of the certificate or certificates, and the number of
the requisites for a valid call: shares transferred.
1. It must be made in the manner prescribed No shares of stock against which the corporation
by law; holds any unpaid claim shall be transferable in the
2. It must be made by the BOD; and books of the corporation. (Sec. 62, RCC)
3. It must operate uniformly upon all the
COMMERCIAL LAW
(1) EFFECT OF DELINQUENCY Should there be no bidder at the public auction who
offers to pay the full amount of the balance on the
No delinquent stock shall be voted for, be entitled to subscription together with accrued interest, costs of
vote, or be represented at any stockholder’s advertisement, and expenses of sale, for the smallest
meeting, nor shall the holder thereof be entitled to number of shares or fraction of a share, the
any of the rights of a stockholder except the right to corporation may, subject to the provisions of this
dividends in accordance with the provisions of this Code, bid for the same, and the total amount due
Code, until and unless payment is made by the shall be credited as fully paid in the books of the
holder of such delinquent stock for the amount due corporation. Title to all the shares of stock covered
on the subscription with accrued interest, and the by the subscription shall be vested in the
costs and expenses of advertisement, if any. (Sec 70, corporation as treasury shares and may be disposed
RCC) of by said corporation in accordance with the
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provisions of this Code. (ibid.)
(2) CALL BY RESOLUTION OF THE BOARD OF
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DIRECTORS e) ALIENATION OF SHARES
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Procedure of the Sale of Delinquent Shares Perfection of Sale of Shares
The board of directors may, by resolution, order the Sale of share is perfected not upon the meeting of
sale of delinquent stock and shall specifically state the minds by the parties on the cause, consideration,
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the amount due on each subscription plus all and object of the sale but upon compliance with the
accrued interest, and the date, time and place of the formalities prescribed by the RCC. (Divina, 2021)
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sale which shall not be less than thirty (30) days nor
more than sixty (60) days from the date the stocks (1) ALLOWABLE RESTRICTIONS ON THE SALE
become delinquent; (Sec. 67, RCC) OF SHARES
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1.
Notice of the sale, with a copy of the resolution, shall Right of Corporation to Regulate Transfers of
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be sent to every delinquent stockholder either Stock
personally, by registered mail, or through other
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means provided in the bylaws. The same shall be Corporation can provide regulations to the
published once a week for two (2) consecutive sale/transfer of the shares of stockholders, but the
weeks in a newspaper of general circulation in the authority granted to a corporation to regulate the
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province or city where the principal office of the transfer of its stock does not empower it to restrict
corporation is located; (ibid.) the right of a stockholder to transfer his shares, but
2. merely authorizes the adoption of regulations as to
Delinquent stock shall be sold at a public auction to the formalities and procedure to be followed in
such bidder who shall offer to pay the full amount of effecting transfer. (Thomson v. CA, G.R. No. 116631,
the balance on the subscription together with 28 Oct. 1998)
accrued interest, costs of advertisement and
expenses of sale, for the smallest number of shares Requisites for Validity of Restriction
or fraction of a share; (ibid.)
3. The corporation may impose restrictions on the
The stock so purchased shall be transferred to such transfer of shares but subject to the following
purchaser in the books of the corporation and a requisites:
certificate for such stock shall be issued in the
purchaser’s favor. The remaining shares, if any, shall 1. Restrictions on the right to transfer shares must
be credited in favor of the delinquent stockholder appear in the AOI, in the bylaws, as well as in the
who shall likewise be entitled to the issuance of a certificate of stock; otherwise, the same shall
certificate of stock covering such shares; and (ibid.) not be binding on any purchaser in good faith.
2023 GOLDEN NOTES
2. Restrictions shall not be more onerous than f) CORPORATE BOOKS AND RECORDS
granting the existing stockholders or the
corporation the option to purchase the shares (1) RIGHT TO INSPECT CORPORATE RECORDS
of the transferring stockholder with such
reasonable terms, conditions or period stated. Right to Inspection
3. Upon the expiration of the said period, the 1. It requires all information about the
existing stockholders or the corporation fails to corporation to be preserved, and expanded
exercise the option to purchase, the the list of records required to be kept by the
transferring stockholder may sell their shares corporation at its principal office;
to any third person. (Sec. 97, RCC)
2. Inspecting/reproducing party is bound by
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While these restrictions appear in the chapter on confidentiality rules. However, a person
close corporations, there is no reason not to apply who is not a stockholder or member of
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the same to open or regular corporation. (Divina, record, a competitor, or who represents the
2020) interests of a competitor is prohibited to
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inspect/reproduce corporate records;
(2) REQUISITES OF A VALID TRANSFER
3. A stockholder who shall abuse the right to
See further discussion on page 129. inspect/reproduce shall be penalized
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under the provisions of the following laws:
Involuntary Dealings (a) Revised Corporation Code, (b)
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Intellectual Property Code of the Philippines,
It refers to such writ, order or process issued by a and (c) Data Privacy Act of 2012;
court of record affecting shares of stocks which by
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law should be registered to be effective, and also to 4. The SEC may require the presence of an
such instruments which are not the willful acts of independent transfer agent in case the
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the registered owner, and which may have been stock transfer corporation transfers or
executed even without his knowledge or against his trades stocks in secondary markets; and
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consent.
5. If the corporation denies or does not act on
Examples of Involuntary Dealings a demand for inspection and/or
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reproduction, the aggrieved party may
1. Attachment; report such denial or inaction to the SEC.
2. Sale on execution of judgment or sales for Within 5 days from the receipt of such
taxes; report, the SEC shall conduct a summary
3. Adverse claims; or investigation and issue an order directing
4. Foreclosure of mortgage of stocks. the inspection or reproduction of the
requested records. (Sec. 73, RCC)
Involuntary Dealings Must be Registered
It is the act of registration which creates a

constructive notice to the whole world of such
instrument or court writ or process and is the
operative act that conveys ownership. (Aquino,
2007)
COMMERCIAL LAW
(2) EFFECT OF REFUSAL TO INSPECT records. (Divina, 2021)
CORPORATE RECORDS
11. DISSOLUTION AND LIQUIDATION
Effect of Refusal
Dissolution
Any officer or agent of the corporation who shall
refuse to allow the inspection and/or reproduction
It is the extinguishment or cancellation of the
of records in accordance with the provisions of the
corporate franchise and the termination of its
RCC shall be liable to such director, trustee,
corporate existence for business purposes. (Divina,
stockholder, or member for damages, and in
2020)
addition, shall be guilty of an offense which shall be
punishable under Sec. 161 of the RCC. (Sec. 73, RCC)
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Liquidation
NOTE: If refusal was made pursuant to a resolution

Liquidation is the process of settling the affairs of
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or order of the Board of Directors or Trustees, the
the corporation after its dissolution. The manner of
liability shall be imposed upon the directors or
liquidation or winding up may be provided for in the
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trustees who voted for the refusal. (Ibid.)
corporate bylaws and this would prevail unless it is
inconsistent with law. (Divina, 2020)
Penalty for Unjustified Refusal to Grant the
Right of Inspection
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Liquidations consists of:
1. collection of all that is due the corporation;
Unjustified failure or refusal by a corporation or
2. the settlement and adjustment of claims
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those responsible for keeping and maintaining
against it;
corporate records shall be punished with a fine
3. the payment of its debts; and
ranging from P10,000 to P200,000, at the discretion
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4. the distribution of the remaining assets, if
of the court. However, when the violation is
any among the stockholders thereof in
injurious or detrimental to the public, the penalty of
accordance with their contracts, or if there
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fine shall ranged from P20,000 to P400,000. (Sec.
be no special contract, on the basis of their
161, RCC)
respective interests. (Ibid.)
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Remedies of a Stockholder Denied of the Right to
a) MODES OF DISSOLUTION
Inspect Corporate Records
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The following are the modes of dissolution of the
If the corporation denies or does not act on a
corporation:
demand for inspection and/or reproduction, the
aggrieved party may:
1. Voluntary –
a. By a verified request for dissolution filed
1. Report such denial or inaction to the SEC.
with the SEC where no creditors are
Within five (5) days from the receipt of
affected; (Sec. 134, RCC)
such report, the SEC shall conduct a
summary investigation and issue an order
b. By a petition for dissolution filed with t
directing the inspection or reproduction of
SEC where creditors are affected; (Sec.
the requested records. (Sec. 73, RCC)
135, RCC)
2. File a criminal complaint for violation of his

c. By amending the AOI to shorten the
right of inspection; (Secs. 73 and 161, RCC)
corporate term; (Sec. 136, RCC)
and
d. Merger or consolidation; and
e. Affidavit of dissolution by a corporation
3. File a petition for inspection of corporate
2023 GOLDEN NOTES
sole. Q: Alabang Development Corporation (ADC),
developer of Alabang Hills Village, filed with the
2. Involuntary – RTC a complaint for injunction against Alabang
a. Non-use of corporate charter as provided Hills Village Association, Inc. (AHVAI) and its
under Sec. 21 of the RCC; president, Rafael Tinio, alleging that AHVAI
b. Continuous inoperation of a corporation started the construction of a multi-purpose hall
as provided under Sec. 21 of the RCC; and a swimming pool on one of the parcels of
c. Upon receipt of a lawful court order land still owned by ADC, without the latter’s
dissolving the corporation; consent and approval.
d. Upon finding by final judgment that the AHVAI claimed that ADC had no legal capacity to
corporation procured its incorporation sue since its existence as a registered corporate
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through fraud; and entity was revoked by the SEC on 26 May 2003.
Does the ADC have the capacity to file the
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e. Upon finding by final judgment that the complaint?
corporation:
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i. Was created for the purpose of A: NO. In the instant case, there is no dispute that
committing, concealing or aiding the ADC's corporate registration was revoked on 26
commission of securities violations, May 2003. Based on Sec. 122 (now Sec 139, RCC), it
smuggling, tax evasion, money had three years, or until May 26. 2006, to prosecute
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laundering, or graft and corrupt or defend any suit by or against it. The subject
practices; complaint, however, was filed only on Oct. 19, 2006,
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more than three years after such revocation.
ii. Committed or aided in the
commission of securities violations, In the present case, ADC filed its complaint not only
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smuggling, tax evasion, money after its corporate existence was terminated but
laundering, or graft and corrupt also beyond the three-year period allowed by [now]
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practices, and its stockholders knew Sec. 139 of the RCC. Thus, it is clear that at the time
of the same; and of the filing of the subject complaint ADC lacks the
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capacity to sue as a corporation. To allow ADC to
iii. Repeatedly and knowingly tolerated initiate the subject complaint and pursue it until
the commission of graft and corrupt final judgment, on the ground that such complaint
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practices or other fraudulent or illegal was filed for the sole purpose of liquidating its
acts by its directors, trustees, officers, assets, would be to circumvent the provisions of Sec.
or employees. (Sec. 138, RCC) 139 of the RCC. (Alabang Development Corp. v.
Alabang Hills Village Association and Rafael Tinio,
Effects of Dissolution of Corporation G.R. No. 187456, 02 June 2014)
1. Corporation ceases as a body corporate to (1) VOLUNTARY DISSOLUTION

continue the business for which it was
established. Dissolution Where No Creditors are Affected
2. The Corporation continues as a body 1. Dissolution is approved by majority vote of

corporate for 3 years only for the purpose the board of directors or trustees;
of prosecuting and defending suits by or
against it and enabling it to settle and close 2. A meeting of the Stockholders/Members
its affairs, dispose of, and convey its must be held upon the call of the directors
property, and distribute its assets (winding or trustees:
up or liquidation). (Sec. 139, RCC)
COMMERCIAL LAW
Notice of meeting must be given at least 20 days c. Favorable recommendation from the
prior to the said meeting. to each stockholder or appropriate regulatory agency, when
member either by registered mail or by necessary.
personal delivery or by any means authorized
under its bylaws whether or not entitled to vote No application for dissolution of banks,
at the meeting, in the manner provided in Sec. banking, and quasi-banking institutions,
50 of the RCC. preneed, insurance and trust companies,
NSSLAs, pawnshops, and other financial
a. Notice shall state that the purpose of the intermediaries shall be approved by the
meeting is to vote on the dissolution of the SEC unless accompanied by a favorable
corporation. recommendation of the appropriate
government agency.
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b. Notice of the time, place, and object of the
meeting shall be published once prior to the 6. Within 15 days from receipt of the verified
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date of the meeting in a newspaper request for dissolution, and in the absence
published in the place where the principal of any withdrawal within said period, the
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office of said corporation is located, or if no SEC shall approve the request and issue the
newspaper is published in such place, in a certificate of dissolution.
newspaper of general circulation in the
Philippines. NOTE: The dissolution shall take effect only upon
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the issuance by the SEC of a certificate of
3. A resolution must be adopted approving dissolution. (Sec. 134, RCC)
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the dissolution by the affirmative vote of
the stockholders owning at least majority Dissolution Where Creditors are Affected
of the outstanding capital stock or majority (A-PSIVECSO–CPUPOO-J)
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of the members in the meeting called for
the said purpose. 1. Approval of the stockholders representing
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at least 2/3 of the OCS or by at least 2/3 of
4. A verified request for dissolution shall be the members at a meeting of its
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filed with the SEC, stating: stockholders or members called for that
a. The reason for the dissolution purpose;
b. The form, manner, and time when the
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notices were given; 2. Filing of Petition for dissolution with SEC.
c. Names of the stockholders and The petition must be: (SiVeCS)
directors or members and trustees a. Signed by a majority of its board of
who approved the dissolution; directors or trustees;
d. The date, place, and time of the meeting
in which the vote was made; and b. Verified by its president or secretary
e. The details of publication. or one of its directors or trustees;
5. The Corporation shall submit the following c. Set forth all Claims and demands
to the SEC: against it;
a. A copy of the resolution authorizing the
dissolution, certified by the majority of d. State that dissolution was resolved
the BOD/BOT, and countersigned by upon by the affirmative vote of the
the secretary of the corporation; Stockholders representing at least 2/3
of the OCS or at least 2/3 of the
b. Proof of publication; and members at a meeting of its
2023 GOLDEN NOTES
stockholders or members called for 6. If no objection is sufficient and the material
that purpose ; allegations of the petition are true, it shall
render Judgment dissolving the
e. State: corporation and directing such disposition
i. the reason for the dissolution; of its assets as justice requires and may
ii. the form, manner, and time when appoint a receiver to collect such assets and
the notices were given; and pay the debts of the corporation.
iii. the date, place, and time of the
meeting in which the vote was NOTE: Dissolution takes effect upon the issuance of
made a certificate of dissolution by the SEC. (Sec. 135, RCC)
The corporation shall submit to the SEC the Procedure for Dissolution by Shortening
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following: (1) a copy of the resolution Corporate Term (A-S-A-F)
authorizing the dissolution, certified by a
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majority of the board of directors or trustees 1. Amending the AOI pursuant to Sec. 15: Sec. 15
and countersigned by the secretary of the of the RCC:
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corporation; and (2) a list of all its creditors. a. Approved by majority vote of the board of
directors or by vote or written assent of
3. If the petition is sufficient in form and majority of the trustees;
substance, the SEC shall, by an Order
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reciting the purpose of the petition, fix a b. Vote or written assent of the stockholders
deadline for filing objections to the petition representing at least 2/3 of the OCS or of
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which date shall not be less than 30 days the members;
nor more than 60 days after the entry of the
order; 2. The original and amended articles together
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shall contain all provisions required by law to
4. Before such date, Copy of the order shall be: be set out in the AOI. Amendments to the
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articles pertaining to the shortened term shall
a. Published at least once a week for three be indicated by underscoring the change or
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(3) consecutive weeks in a newspaper of changes made, and a copy thereof duly certified
general circulation published in the under oath by the corporate secretary and a
municipality or city where the principal majority of the directors or trustees, with a
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office of the corporation is situated, or if statement that the amendments have been duly
there be no such newspaper, then in a approved by the required vote of the
newspaper of general circulation in the stockholders or members, shall be submitted to
Philippines, and the SEC;
b. Posted for three (3) consecutive weeks 3. The amendments shall take effect upon their
in three (3) public places in such Approval by the SEC Commission or from the
municipality or city; date of filing with the said Commission if not
acted upon within six (6) months from the date
5. After expiration of the time to file of filing for a cause not attributable to the
objections and upon prior 5-day notice to corporation.
hear the objections, the SEC shall proceed
to hear the petition and try any issue made NOTE: In the case of expiration of corporate term,
by the Objections file; and dissolution shall automatically take effect on the day
following the last day of the corporate term stated
in the AOI, without the need for the issuance by the
SEC of a certificate of dissolution.
COMMERCIAL LAW
(2) INVOLUNTARY DISSOLUTION NOTE: To “formally organize” as used in reference
to corporations means:
Involuntary Dissolution
1. Election of officers,
A corporation may be dissolved by the SEC motu 2. Providing for the subscription and payment
proprio or upon filing of a verified complaint by any of the capital stock;
interested party. (Sec. 138, RCC) 3. Adoption of by-laws; and
4. Such other steps as are necessary to endow
Grounds (N-C-C-F-F) the legal entity with the capacity to transact
the legitimate business for which it was
a) Non-use of corporate charter as provided under created. (Benguet Consolidated Mining Co. v.
Sec. 21 of the RCC; Pineda, G.R. No. L-7231, 28 Mar. 1956)
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b) Continuous inoperation of a corporation as
provided under Sec. 21 of the RCC; Effects of Non-Use or Continuous Inoperation
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c) Upon receipt of a lawful Court order dissolving
the corporation; If a corporation does not formally organize and
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d) Upon finding by final judgment that the commence its business within five (5) years from
corporation procured its incorporation through the date of its incorporation, its certificate of
Fraud; and incorporation shall be deemed revoked as of the day
e) Upon finding by Final judgment that the following the end of the five-year period.
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corporation: (C-A-R)
If a corporation has commenced its business but
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1. Was Created for the purpose of committing, subsequently becomes inoperative for a period of at
concealing or aiding the commission of least five (5) consecutive years, the SEC may, after
securities violations, smuggling, tax due notice and hearing, place the corporation under
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evasion, money laundering, or graft and delinquent status.
corrupt practices;
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A delinquent corporation shall have a period of two
2. Committed or Aided in the commission of (2) years to resume operations and comply with all
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securities violations, smuggling, tax requirements that the Commission shall prescribe.
evasion, money laundering, or graft and Upon compliance by the corporation, the
corrupt practices, and its stockholders Commission shall issue an order lifting the
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knew; and delinquent status. Failure to comply with the
requirements and resume operations within the
3. Repeatedly and knowingly tolerated the period given by the Commission shall cause the
commission of graft and corrupt practices revocation of the corporation’s certificate of
or other fraudulent or illegal acts by its incorporation. (Sec. 21, RCC)
directors, trustees, officers, or employees.
(Ibid.) Receipt of a Lawful Court Order Dissolving the
Corporation
Non-Use of Charter or Continuous Inoperation
May involve or arise from quo warranto proceeding
If a corporation does not formally organize and involving a de facto corporation or a liquidation
commence its business within five (5) years from proceeding involving an insolvent debtor under the
the date of its incorporation, its certificate of Financial Rehabilitation and Insolvency Act.
incorporation shall be deemed revoked as of the day
following the end of the five-year period. (Sec. 21,
RCC)
2023 GOLDEN NOTES
Fraud Suits brought against Corporation within the
Three-Year Period but Remain Pending
May happen when the corporation misrepresented
its purpose of incorporation and/or the Pending actions against the corporation are not
incorporators use fictitious names extinguished. They may still be prosecuted against
the corporation even beyond said period.
Forfeiture in Favor of the National Government
The creditors of the corporation who were not paid
If the corporation is ordered dissolved by final within the 3-year period may follow the property of
judgment pursuant to the grounds mentioned in the corporation that may have passed to its
subparagraph (e) above, its assets, after payment of stockholders unless barred by prescription or
its liabilities, shall, upon petition of the SEC with the laches or disposition of said property in favor of a
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appropriate court, be forfeited in favor of the purchaser in good faith.
national government. Such forfeiture shall be
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without prejudice to the rights of innocent Right to Appeal Not Extinguished
stockholders and employees for services rendered,
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and to the application of other penalty or sanction Although the cancellation of a corporation's
under the RCC or other laws. (Sec. 138, RCC) certificate of registration puts an end to its juridical
personality, Sec. 122 of the Corporation Code (now
NOTE: The SEC shall give reasonable notice to, and Sec. 139 of the RCC), however provides that a
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coordinate with, the appropriate regulatory agency corporation whose corporate existence is
prior to the involuntary dissolution of companies terminated in any manner continues to be a body
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under their special regulatory jurisdiction. (Ibid.) corporate for three (3) years after its dissolution for
purposes of prosecuting and defending suits by and
b) METHODS OF LIQUIDATION against it and to enable it to settle and close its
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affairs. Moreover, the rights of a corporation, which
Methods of Liquidation is dissolved pending litigation, are accorded
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protection by law pursuant to Sec. 145 of the
1. By the corporation itself; (Sec. 139, RCC) Corporation Code (now Sec. 184 of the RCC)
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2. By the trustee appointed by the (Paramount Insurance Corp. v. A.C. Ordonez Corp.,
corporation; (Ibid.) G.R. No. 175109, 06 Aug. 2008)
3. By the Receiver appointed by SEC; (Sec.
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135, RCC) Liquidation NOT Necessary in Dissolution by
4. By the rehabilitation receiver or the Merger or Consolidation
liquidator appointed by the competent RTC
in cases involving insolvent debtor. (Sec. 25, In case of merger or consolidation, the surviving or
FRIA) the consolidated corporation shall thereupon and
thereafter possess all the rights, privileges,
Approval of the SEC is NOT Required for immunities and franchises of each of the constituent
Liquidation and Distribution corporations; and all property, real or personal, and
all receivables due on whatever account, including
The liquidation and distribution of the assets of a subscriptions to shares and other choses in action,
dissolved corporation is a matter of internal and all and every other interest of, or belonging to,
concern of the corporation and falls within the or due to each constituent corporation, shall be
power of the directors and stockholders or duly deemed transferred to and vested in such surviving
appointed liquidation trustee. (SEC Opinion, 23 July or consolidated corporation without further act or
1996) deed.
COMMERCIAL LAW
The separate existence of the constituent Any asset distributable to the creditor or
corporations shall cease, except that of the surviving stockholder or member who is unknown or cannot
or the consolidated corporation. (Sec. 79, RCC) be found shall be escheated in favor of the national
government. (Divina, 2020)
Distribution of Assets Prior to Dissolution
(1) BY THE CORPORATION ITSELF
GR: No corporation shall distribute any of its assets
or property except upon lawful dissolution and after Liquidation by the Corporation Itself
payment of all its debts and liabilities. (Sec. 139,
RCC) Every corporation whose charter expires pursuant
to its AOI, is annulled by forfeiture, or whose
XPNs: corporate existence is terminated in any other
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1. Decrease of capital stock; (Sec. 37, RCC) manner, shall nevertheless remain as a body
corporate for three (3) years after the effective date
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2. Redemption of redeemable shares; (Sec. 8, of dissolution, for the purpose of prosecuting and
RCC) defending suits by or against it and enabling it to
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settle and close its affairs, dispose of and convey its
3. Acquisition of own shares, provided that property, and distribute its assets, but not for the
the corporation has unrestricted retained purpose of continuing the business for which it was
earnings; (Sec. 41, RCC) established. The period of liquidation is three (3)
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years. (Sec. 139, RCC)
4. Declaration of dividends out of the
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unrestricted retained earnings; (Sec. 42, NOTE: A corporation’s board of directors is not
RCC) rendered functus officio by its dissolution. Since Sec.
122 (now Sec. 139 of the RCC) allows a corporation
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5. Purchase of shares of any stockholder to continue its existence for a limited purpose,
upon order of the SEC in case of deadlocks necessarily there must be a board that will continue
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in a close corporation; (Sec. 103, RCC) and acting for and on behalf of the dissolved corporation
for that purpose. In fact, Sec. 122 (now Sec. 139 of
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6. Withdrawal of a stockholder in a close the RCC) authorizes the dissolved corporation’s
corporation. (Sec. 104, RCC) board of directors to conduct its liquidation within
three years from its dissolution. Jurisprudence has
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Order of Distribution of Assets in Case of even recognized the board’s authority to act as
Liquidation trustee for persons in interest beyond the said
three-year period. Thus, the determination of which
The assets of the corporation shall be used to pay off group is the bona fide or rightful board of the
the claims of various creditors based on the law on dissolved corporation will still provide practical
concurrence and preference of credit. The residual relief to the parties involved. (Aguirre v. FQB+7 Inc.,
assets shall then be distributed to the holders of the G.R. No. 170770, 09 Jan. 2013)
preferred shares of stock, if any, then to the holders
of common shares based on their agreement, if any, (2) CONVEYANCE TO A TRUSTEE WITHIN A
otherwise, in proportion to their respective THREE-YEAR PERIOD
shareholdings in the corporation.
Liquidation by Conveyance to a Trustee Within a
NOTE: SEC approval is not required in the approval Three-Year Period
of the distribution or liquidation of the assets of the
dissolved corporation. This falls within the At any time during the three-year period for
authority of the directors and stockholders or the liquidation, said corporation is authorized and
duly appointed trustee or receiver. empowered to convey all of its property to trustees
2023 GOLDEN NOTES
for the benefit of its stockholders, members, matters of this nature, for working out a final
creditors, and other persons in interest. settlement of the corporate concerns. (Clemente v.
CA, G.R. No. 82407, 27 Mar. 1995)
From and after any such conveyance by the
corporation of its property in trust for the benefit of Suits Brought by Corporation Beyond Three-
its stockholders, members, creditors and others in Year Period Not Barred
interest, all interest which the corporation had in
the property terminates, the legal interest vests in The trustee of a dissolved corporation may
the trustees, and the beneficial interest in the commence a suit which can proceed to final
stockholders, members, creditors, or other persons judgment even beyond the three-year period of
in interest. (Sec. 139(2), RCC) liquidation. There is no reason can be conceived
why a suit already commenced by the corporation
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Meaning of Trustee itself during its existence, not by a mere trustee
who, by fiction, merely continues the legal
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The word “trustee” as used in the law must be personality of the dissolved corporation, should not
understood in its general concept which could be accorded similar treatment – to proceed to final
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include the counsel to whom the prosecution of the judgment and execution thereof.
suit filed by the corporation was entrusted. The
purpose in the transfer of the assets of the Indeed, the rights of a corporation (dissolved
corporation to a trustee upon its dissolution is more pending litigation) are accorded protection by law.
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for the protection of its creditors and stockholders. This is clear from Sec. 145 of the Corporation Code
The appointment of said counsel can be considered (now Sec. 184 of the RCC). The dissolution of UCC
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a substantial compliance. (Gelano v. CA, G.R. No. L- itself, or the expiration of its three-year liquidation
39050, 24 Feb. 1981) period, should not be a bar to the enforcement of its
rights as a corporation. One of these rights, to be
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Suits brought by Corporation within the Three- sure, includes the UCC’s right to seek from the court
Year Period but Remain Pending after Period the execution of a valid and final judgment in Civil
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Case No. 9165 – through its trustee/liquidator
A corporation may, during the three-year term, Encarnacion Gonzales Wong – for the benefit of its
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appoint a trustee or a receiver who may act beyond stockholders, creditors and any other person who
that period. The termination of the life of a juridical may have legal claims against it. To hold otherwise
entity does not by itself cause the extinction or would be to allow petitioners to unjustly enrich
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diminution of the rights and liabilities of such entity themselves at the expense of UCC. (Knecht v. United
nor those of its owners and creditors. If the three- Cigarette Corp., G.R. No. 139370, 04 July 2002)
year extended life has expired without a trustee or
receiver. having been expressly designated by the Q: The corporation, once dissolved, thereafter
corporation within that period, the board of continues to be a body corporate for three years
directors (or trustees) itself, following the rationale for purposes of prosecuting and defending suits
of the Supreme Court's decision in Gelano vs. CA (G.R. by and against it and of enabling it to settle and
No. L-39050, 24 Feb. 1981) may be permitted to so close its affairs, culminating in the final
continue as "trustees" by legal implication to disposition and distribution of its remaining
complete the corporate liquidation. Still in the assets. If the 3-year extended life expires
absence of a board of directors or trustees, those without a trustee or receiver being designated
having any pecuniary interest in the assets, by the corporation within that period and by
including not only the shareholders but likewise the that time (expiry of the 3-year extended term),
creditors of the corporation, acting for and in its the corporate liquidation is not yet over, how, if
behalf, might make proper representations with the at all, can a final settlement of the corporate
Securities and Exchange Commission, which has affairs be made? (1997 BAR)
primary and sufficiently broad jurisdiction in
COMMERCIAL LAW
A: The liquidation can continue with the winding up. company’s funds, will not justify the appointment of
The members of the BOD can continue with the a receiver for the corporation if appropriate relief
winding of the corporate affairs until final can otherwise be had. (Rev. Ao-As v. CA, G.R. No.
liquidation. They can act as trustees or receivers for 128464, 20 June 2006)
this purpose.
Under Sec. 135 of the RCC, the SEC shall proceed to
Where no receiver or trustee has been designated hear the petition (filed by a corporation where
after dissolution: creditors are affected) and try any issue raised in
1. The board of directors or trustees itself the objections filed; and if no such objection is
may be permitted to so continue as sufficient, and the material allegations of the
“trustees” by legal implication; petition are true, it shall render judgment dissolving
the corporation and directing such disposition of its
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2. In the absence of the BoD or BoT, those assets as justice requires and may appoint a receiver
having a pecuniary interest in the corporate to collect such assets and pay the debts of the
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assets, stockholders, or creditors, may corporation.
make a proper representations with SEC
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for working out a final settlement of the The receiver represents the SEC, as well as the
corporate concerns; (Clemente v. CA, G.R. stockholders and creditors. The receiver is not
No. 82407, 27 Mar. 1995) bound by the three-year liquidation period.
The appointment of a receiver operates to suspend
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3. The only surviving stockholder or director; the authority of a corporation and its directors and
(SEC Opinion No. 10-96, 29 Jan. 2010) or officers over its property and effects, such authority
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being reposed in the receiver. Thus, a corporate
4. The counsel who prosecuted and defended officer had no authority to condone a debt.
the interest of the corporation. (Reburiano
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v. CA, G.R. No. 102965, 21 Jan. 1999) In BPI v. Eduardo Hong (G.R. No. 161771, 15 Feb.
2012), the Supreme Court held, however, that while
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(3) BY MANAGEMENT COMMITTEE OR the SEC has jurisdiction to order the dissolution of a
REHABILITATION RECEIVER corporation, jurisdiction over the liquidation of the
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corporation now pertains to the appropriate
Liquidation by a Management Committee or regional trial courts. This is the correct procedure
Rehabilitation Receiver because the liquidation of a corporation requires
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the settlement of claims for and against the
In the case of a dissolution order where creditors corporation, which clearly falls under the
are affected, the SEC may appoint a receiver to take jurisdiction of the regular courts. The trial court is
charge of the liquidation of the corporation. (Sec. in the best position to convene all the creditors of
135, RCC) the corporation, ascertain their claims, and
determine their preferences.
Appointment of Receiver for Going Corporation
It should be noted that the power of the SEC to
The appointment of a receiver for a going appoint a receiver existed even under the OCC and
corporation is a last resort remedy and should not retained under the RCC despite the ruling in BPI v.
be employed when another remedy is Eduardo Hong. It is submitted that the receiver may
available. Relief by receivership is an extraordinary carry out the liquidation of the corporation if the
remedy and is never exercised if there is an creditors and the corporation are able to agree
adequate remedy at law or if the harm can be among themselves on how the creditors’ claims
prevented by an injunction or a restraining shall be satisfied. Otherwise, the RTC should carry
order. Bad judgment by directors, or even out the liquidation process. (Divina, 2020)
unauthorized use and misapplication of the
2023 GOLDEN NOTES
Prohibition Against Condonation Action Filed During the Lifetime of the
Corporation
The corporation, through its president cannot
condone penalties and charges after it had been The trustee (of a dissolved corporation) may
placed under receivership. The appointment of a commence a suit which can proceed to a final
receiver operates to suspend the authority of a judgment even beyond the three-year period of
corporation and of its directors and officers over its liquidation. The rights of a corporation that has
property and effects, such authority being reposed been dissolved pending litigation are accorded
in the receiver. (Yam v. CA, G.R. No. 104726, 11 Feb. protection by Sec. 145 of the OCC (now Sec. 184 of the
1999) RCC) which provides: “No right or remedy in favor
of or against any corporation, its stockholders,
(4) LIQUIDATION AFTER THREE YEARS members, directors, trustees, or officers, nor any
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liability incurred by any such corporation,
Except for banks, every corporation whose charter stockholders, members, directors, trustees, or
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expires pursuant to its articles of incorporation, is officers, shall be removed or impaired either by the
annulled by forfeiture, or whose corporate subsequent dissolution of said corporation.”
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existence is terminated in any other manner, shall
nevertheless remain as a body corporate for three A dissolved corporation may also maintain actions
(3) years after the effective date of dissolution, for in court for the protection of its rights including the
the purpose of prosecuting and defending suits by right to appeal from an adverse decision. (Divina,
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or against it and enabling it to settle and close its 2021)
affairs, dispose of and convey its property, and
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distribute its assets, but not for the purpose of Action Filed During the Three-Year Liquidation
continuing the business for which it was Period
established. (Sec. 139, RCC)
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The trustee appointed by the corporation may
Any matter entered into that is not for the purpose initiate during the three-year liquidation period,
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of liquidation will be a void transaction because of which may continue even beyond the said period. In
the non-existence of the corporate party. (Divina, Gelano v. Court of Appeals (G.R. No. L-39050, 24 Feb.
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2021) 1981), it was held that the lawyer handling the case
for the corporation is deemed a trustee with respect
NOTE: Sec. 139 of the RCC should not be construed to the case. In Clemente v. Court of Appeals (G.R. No.
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to prevent a corporation from pursuing activities 82407, 27 Mar. 1995), it was held that in the absence
which would complete the final liquidation of a of a trustee formally appointed, the Board of
dissolved corporation. Accordingly, it should be Directors shall be deemed the trustees of the
allowed to continue liquidating its remaining assets corporation to carry out the liquidation of the
in order to complete the process of dissolving the corporation. (Divina, 2021)
corporation. Likewise, it should be allowed to
distribute the proceeds from the said disposition to Action Filed More Than Three Years from the
its stockholders or creditors if any. A contrary Dissolution of the Corporation
interpretation would have unjust and absurd
results. (Divina, 2021) An action filed more than three years from the
dissolution of the corporation should be dismissed
since by that time the corporation lacks the capacity
to sue because it no longer possesses juridical
personality by reason of its dissolution. (Divina,
2021)
COMMERCIAL LAW
Cases where the corporation may still sue after its 7. Deadlocks in the board may be settled by the
dissolution and the lapsed of the three-year period SEC, on written petition by any stockholder.
are allowed because they have filed said action
while still in existence. In short, they already had 8. A stockholder may withdraw for any reason and
pending actions at the time of their corporation avail himself of his right of appraisal when the
existence was terminated. (Alabang Corporation corporation has sufficient assets in its books to
Development v. Alabang Hills Village Association and cover its debts and liabilities exclusive of capital
Rafael Tinio, G.R. No. 187456, 02 June 2014) stock. (Divina, 2020)
12. OTHER CORPORATIONS (2) VALIDITY OF RESTRICTIONS ON TRANSFER

OF SHARES
a) CLOSE CORPORATIONS
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Validity of Restrictions on Transfer of Shares
(1) CHARACTERISTICS
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Restrictions on the right to transfer shares must:
Characteristics of a Close Corporation
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1. Appear in:
The principal characteristics of close corporations a. The articles of incorporation;
are the following: b. In the by-laws; and
c. In the certificate of stock;
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1. The business of the corporation may be
managed by the stockholders of the corporation NOTE: Otherwise, the same shall not be binding
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rather than by a board of directors. on any purchaser in good faith.
2. If the corporation is classified as a close 2. Said restrictions shall not be more onerous than
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corporation, a board resolution authorizing the granting the existing stockholders or the
sale or mortgage of the corporate property is corporation the option to purchase the shares
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not necessary to bind the corporation for the of the transferring stockholder with such
action of its president. reasonable terms, conditions or period stated. If
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upon the expiration of said period, the existing
3. Quorum may be greater than a mere majority. stockholders or the corporation fails to exercise
the option to purchase, the transferring
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4. Transfers of stocks to others which would stockholder may sell their shares to any third
increase the number of stockholders to more person. (Sec. 97, RCC)
than the maximum are invalid.
NOTE: The above describes a Right of First Refusal.
5. Corporate actions may be binding even without
a formal board meeting, if the director had Effects of Issuance or Transfer of Stock in Breach
knowledge or ratified the informal action of the of Qualifying Conditions
others, unless after having knowledge thereof,
the director promptly files his written objection 1. If a stock of a close corporation is issued or
with the secretary of the corporation. transferred to any person who is not eligible
thereof under any provision of the AOI, and if
6. Pre-emptive right extends to all stocks issued, the certificate for such stock conspicuously
including re-issuance of treasury shares, shows the qualifications of the persons entitled
whether for money or for property or personal to be holders of record thereof, such person is
services, or in payment of corporate debts, conclusively presumed to have notice of the fact
unless the AOI provide otherwise. of the ineligibility to be a stockholder.
2023 GOLDEN NOTES
2. If the AOI of a close corporation states the Effects When Board Meeting is Unnecessary or
number of persons, not exceeding twenty (20), Improperly Held
who are entitled to be stockholders of record,
and if the certificate for such stock Unless the by-laws provide otherwise, any action
conspicuously states such number, and the taken by the directors of a close corporation without
issuance or transfer of stock to any person a meeting called properly and with due notice shall
would cause the stock to be held by more than nevertheless be deemed valid if:
such number of persons, the person to whom
such stock is issued or transferred is 1. Before or after such action is taken, written
conclusively presumed to have notice of this consent thereto is signed by all the
fact. directors;
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3. If a stock certificate of a close corporation 2. All the stockholders have actual or implied
conspicuously shows a restriction on transfer of knowledge of the action and make no
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the corporation’s stock and the transferee prompt objection in writing;
acquires the stock in violation of such
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restriction, the transferee is conclusively 3. The directors are accustomed to take
presumed to have notice of the fact that the informal action with the express or implied
stock was acquired in violation of the acquiescence of all the stockholders; or
restriction.
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4. All the directors have express or implied
4. Whenever a person to whom stock of a close knowledge of the action in question and
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corporation has been issued or transferred has, none of them makes a prompt objection in
or is conclusively presumed under this section writing. (Sec. 100, RCC)
to have notice of: (1) the person’s ineligibility to
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be a stockholder of the corporation, or (2) that NOTE: An action within the corporate powers taken
the transfer of stock would cause the stock of at a meeting held without proper call or notice, is
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the corporation to be held by more than the deemed ratified by a director who failed to attend,
number of persons permitted under its AOI; or unless after having knowledge thereof, the director
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(3) that the transfer violates a restriction on promptly files his written objection with the
transfer of stock, and the corporation may, at its secretary of the corporation. (Ibid.)
option, refuse to register the transfer in the
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name of the transferee. (3) PREEMPTIVE RIGHT
NOTE: The provisions under par. 4 shall not be Pre-Emptive Right in Close Corporations
applicable if the transfer of stock, though contrary
to par. 1-3, has been consented to by all the The preemptive right of stockholders in close
stockholders of the close corporation, or if the close corporations shall extend to all stock to be issued,
corporation has amended its AOI. including reissuance of treasury shares, whether for
money, property, or personal services, or in
NOTE: “Transfer” is not limited to a transfer for payment of corporate debts, unless the AOI provide
value. otherwise. (Sec. 101, RCC)
The provisions of Sec. 98 shall not impair any right

which the transferee may have to either rescind the
transfer or recover the stock under any express or
implied warranty. (Sec. 98, RCC)
COMMERCIAL LAW
(4) AMENDMENT OF ARTICLES OF stockholders, officers, or other persons
INCORPORATION party to the action;
Amendment of AOI 4. Requiring the purchase at their fair value

of shares of any stockholder, either by the
Any amendment to the AOI which seeks to delete or corporation regardless of the availability
remove any provision required by this Title or to of unrestricted retained earnings in its
reduce a quorum or voting requirement stated in books, or by the other stockholders;
said AOI shall require the affirmative vote of at least
two-thirds (2/3) of the OCS, whether with or 5. Appointing a provisional director;
without voting rights, or of such greater proportion 6. Dissolving the corporation; or
of shares as may be specifically provided in the AOI 7. Granting such other relief as the
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for amending, deleting or removing any of the circumstances may warrant. (Ibid.)
aforesaid provisions, at a meeting duly called for the
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purpose. (Sec. 102, RCC) Provisional Director
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Power to Arbitrate in case of a Deadlock A provisional director shall be an impartial person
who is neither a stockholder nor a creditor of the
Notwithstanding any contrary provision in the close corporation or any of its subsidiaries or affiliates,
corporation’s AOI, bylaws, or stockholders’ and whose further qualifications, if any, may be
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agreement, if the directors or stockholders are so determined by the Commission. (Ibid.)
divided on the management of the corporation’s
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business and affairs that the votes required for a A provisional director is not a receiver of the
corporate action cannot be obtained, with the corporation and does not have the title and powers
consequence that the business and affairs of the of a custodian or receiver. (Ibid.)
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corporation can no longer be conducted to the
advantage of the stockholders generally, the SEC, A provisional director shall have all the rights and
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upon written petition by any stockholder, shall have powers of a duly elected director, including the right
the power to arbitrate the dispute. (Sec. 103, RCC) to be notified of and to vote at meetings of directors
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until removed by order of the Commission or by all
Appropriate Orders of the SEC in case of the stockholders. (Ibid.)
Deadlocks
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Compensation of Provisional Director
In the exercise of its power to arbitrate in case of
deadlock, the SEC shall have authority to make The compensation of the provisional director shall
appropriate orders, such as: be determined by agreement between such director
and the corporation, subject to approval of the
1. Cancelling or altering any provision Commission, which may fix the compensation
contained in the AOI, bylaws, or any absent an agreement or in the event of
stockholder’s agreement; disagreement between the provisional director and
the corporation. (Ibid.)
2. Cancelling, altering, or enjoining a
resolution or act of the corporation or its
board of directors, stockholders, or
officers;
3. Directing or prohibiting any act of the

corporation or its board of directors,
2023 GOLDEN NOTES
b) NON-STOCK CORPORATIONS 6. The provisions of specific provisions of the RCC
to the contrary notwithstanding, nonstock, or
(1) DEFINITION special corporations may, through their AOI or
their bylaws, designate their governing boards
Non-Stock Corporation by any name other than as board of trustees;
and (Sec. 174, RCC)
One where no part of its income is distributable as
dividends to its members, trustees, or officers. Any 7. The bylaws may provide that the members of a
profit which it may obtain as an incident to its nonstock corporation may hold their regular or
operations shall whenever necessary or proper, be special meetings at any place even outside the
used in furtherance of the purpose or purposes for place where the principal office of the
which it was organized. (Sec. 86, RCC) corporation is located: Provided, That proper
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notice is sent to all members indicating the date,
Nonstock corporations may be formed or organized time and place of the meeting: Provided,
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for charitable, religious, educational, professional, further, That the place of meeting shall be
cultural, fraternal, literary, scientific, social, civic within Philippine territory; (Sec. 92, RCC)
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service, or similar purposes, like trade, industry,
agricultural and like chambers, or any combination
thereof, subject to the special provisions of Title XI
of the RCC governing particular classes of nonstock
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Characteristics of Non-Stock Corporation
1. It does not have capital stock divided into
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shares;
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2. No part of its income during its existence is
distributable as dividends to its members,
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trustees, or officers;
3. Any profit which it obtains incidental to its
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operations shall, whenever necessary or
proper, be used for the furtherance of the
purpose or purposes for which it was
organized, subject to the provisions of Title XII
of the RCC; (Sec. 86, RCC)
4. Membership in a nonstock corporation and all

rights arising therefrom are personal and non-
transferable, unless the AOI or the bylaws
otherwise provide. (Sec. 89, RCC)
5. The right of the members of any class or classes

to vote may be limited, broadened, or denied to
the extent specified in the AOI or the bylaws.
Unless so limited, broadened, or denied, each
member, regardless of class, shall be entitled to
one; (Sec. 88, RCC)
COMMERCIAL LAW
Stock Corporation vs. Non-stock Corporation
STOCK CORPORATION NON-STOCK CORPORATION

Existence of Capital Stock
No capital stock.
Has capital stock divided into shares. (Sec. 3, RCC)

Non-stock corporations only have contributions or
donations.
Purpose
Organized for profit. Not organized for profit.
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Distribution of Profit
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Profits are not distributed to members. Any profit
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Profits are distributed to the stockholders through earned by the non-stock corporation is used for the
dividends. (Sec. 3, RCC) furtherance of the purpose or purposes for which it
was organized. (Sec. 86, RCC)
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Number of Directors or Trustees
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May or may not be more than fifteen (15) (Sec. 91,
RCC)
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One (1) in the case of OPC, two to fifteen (2-15) in the XPNs:
case of Ordinary Stock Corporations. (Sec. 121, 13,
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RCC) Non-stock educational institutions – not be less than
five (5) nor more than fifteen (15): Provided, That the
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XPN: Banks (in case of merger or consolidation) number of trustees shall be in multiples of five (5).
which can have a maximum of 21 directors. (Sec. 106, RCC)
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Religious Societies – not less than five (5) nor more
than fifteen (15) (Sec. 114, RCC)
Term of Office of the Board of Directors / Trustees
Term of one year until their successors are elected Shall hold office for not more than three (3) years
and qualified, subject to the provisions of AOI and By- until their successors are elected and qualified. (Sec.
laws. (Sec. 22, RCC) 22 and 91, RCC)
Election of Officers
Unless otherwise provided in the AOI or the bylaws,

Officers are elected by the BOD . the members may directly elect officers of a nonstock
corporation. (Sec. 91, RCC)
2023 GOLDEN NOTES
Place of Meeting
The bylaws may provide that the members of a

Stockholders’ or members’ meetings, whether nonstock corporation may hold their regular or
regular or special, shall be held in the principal office special meetings at any place even outside the place
of the corporation as set forth in the AOI, or, if not where the principal office of the corporation is
practicable, in the city or municipality where the located: Provided, That proper notice is sent to all
principal office of the corporation is located. (Sec. 50, members indicating the date, time and place of the
RCC) meeting: Provided, further, That the place of meeting
shall be within Philippine territory. (Sec. 92, RCC)
Right to Vote
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Unless otherwise provided in the AOI or in the bylaws,
members of nonstock corporations may cast as many
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votes as there are trustees to be elected but may not
Stockholders can resort to cumulative voting. (Sec. 23, cast more than one (1) vote for one (1) candidate.
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RCC) (Sec. 23, RCC)
Only preferred and redeemable shares can be denied The right of the members of any class or classes to
the right to vote, but will still be entitled to vote in the vote may be limited, broadened, or denied to the
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8 instances provided in in Sec. 6. extent specified in the AOI or the bylaws. Unless so
limited, broadened, or denied, each member,
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regardless of class, shall be entitled to one (1) vote.
(Sec. 88, RCC)
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Transferability of Shares/ Membership
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Shares of stock so issued are personal property and
may be transferred by delivery of the certificate or
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certificates indorsed by the owner, his attorney in-
fact, or any other person legally authorized to make
the transfer. No transfer, however, shall be valid,
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Membership in a nonstock corporation and all rights
except as between the parties, until the transfer is
arising therefrom are personal and non-transferable,
recorded in the books of the corporation showing the
unless the AOI or the bylaws otherwise provide. (Sec.
names of the parties to the transaction, the date of the
89, RCC)
transfer, the number of the certificate or certificates,
and the number of shares transferred. No shares of
stock against which the corporation holds any unpaid
claim shall be transferable in the books of the
Right to Expel Members
Membership shall be terminated in the manner and

for the causes provided in the AOI or the bylaws.
Stockholders may be expelled only for grounds Termination of membership shall extinguish all rights
provided by law. of a member in the corporation or in its property,
unless otherwise provided in the AOI or the bylaws.
(Sec. 90, RCC)
COMMERCIAL LAW
Distribution of Assets in case of Dissolution

The assets of a nonstock corporation undergoing the
process of dissolution for reasons other than those set
forth in Sec. 139 of the RCC, shall be applied and
distributed as follows:
(a) All liabilities and obligations of the corporation

shall be paid, satisfied and discharged, or adequate
provision shall be made therefor;
(b) Assets held by the corporation upon a condition

requiring return, transfer or conveyance, and which
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condition occurs by reason of the dissolution, shall be
returned, transferred or conveyed in accordance with
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such requirements;
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(c) Assets received and held by the corporation
Assets of stock corporation shall be distributed in the
subject to limitations permitting their use only for
following order:
charitable, religious, benevolent, educational or
similar purposes, but not held upon a condition
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1. Payment of claims of creditors who are not
requiring return, transfer or conveyance by reason of
stockholders (based on preference of credit);
the dissolution, shall be transferred or conveyed to
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one (1) or more corporations, societies or
2. Payment of claims of stockholders as creditors;
organizations engaged in activities in the Philippines
substantially similar to those of the dissolving
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3. Residual balance is distributed proportionately
corporation according to a plan of distribution
to preferred shares, if any, then to common
adopted pursuant to the Chapter II, Title XI of the
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stock.
RCC,;
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(d) Assets other than those mentioned in the
preceding paragraphs, if any, shall be distributed in
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accordance with the provisions of the AOI or the
bylaws, to the extent that the AOI or the bylaws
determine the distributive rights of members, or any
class or classes of members, or provide for
distribution; and
(e) 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
pursuant to Chapter II, Title XI of the RCC. (Sec. 93,
RCC)
2023 GOLDEN NOTES
(2) TREATMENT OF PROFITS d) RELIGIOUS CORPORATIONS
Since profits of nonstock corporations cannot be Religious Corporations may be incorporated by one
distributed to the members, trustees, or officers, or more persons. Such corporations may be
such profits will form part of the income of the classified as corporations sole or religious societies.
The income can be used to invest in shares of stock, This corporations are governed by Chapter II, Title
bonds and other securities provided that such XIII of the RCC and by the general provisions on
investments is used in furtherance of the purpose nonstock corporations insofar as applicable. (Ibid.)
for which the nonstock corporation was organized.
(Divina, 2021) (1) CORPORATION SOLE
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c) EDUCATIONAL CORPORATIONS A corporation sole is one formed by the chief
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archbishop, bishop, priest, minster, rabbi, or other
Educational corporations are those organized for presiding elder of a religious denomination, sect or
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educational purposes, particularly the church. (Sec. 108, RCC)
establishment and maintenance of a school, college
or university. (Divina, 2021) It is formed for the purpose of administering and
managing, as trustee, the affairs, property and
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Organization of Educational Corporations temporalities of such religious denomination, sect
or church. (Divina, 2021 citing Sec. 108, RCC)
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Educational corporations may be organized as a
stock or nonstock corporation. These corporations Acquisition of Real Property if the presiding
are governed by the general provisions of the RCC bishop, priest, minister or rabbi is a foreigner
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and by special laws, such as R.A. No. 7798, otherwise
known as the Education Act of 1982, as amended. A corporation sole, regardless of the nationality of
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(Divina, 2021) the presiding bishop, priest, minster, rabbi or
presiding elder, may acquire real property in the
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Number and Term of Trustees Philippines. Provided that at least 60% of the
members of such religious denomination are
The number of trustees in educational institutions Filipino citizens and the real property is necessary
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organized as nonstock corporations shall not be less and convenient for the lawful use of the corporation.
than five nor more than 15; Provided, that the (Divina, 2021)
number of trustees shall be in multiples of five (5).
(Sec. 106, RCC) (2) RELIGIOUS SOCIETIES
Unless, otherwise provided in the articles of The following must be set forth in incorporating
incorporation or by laws, the board of trustees of religious societies:
incorporated schools, colleges, or other institutions
of learning shall so classify themselves that the term 1. That the religious society or religious
of office of one-fifth (1/5) of their number shall order, or diocese, synod, or district
expire every year. (Ibid.) organization is a religious organization of a
religious denomination, sect or church;
For institutions organized as stock corporations, the
number and term of directors shall be governed by 2. That at least 2/3 of its membership has
the provisions on stock corporation. (Ibid.) given written consent or has voted to
incorporate, at a duly convened meeting of
the body;
COMMERCIAL LAW
3. That the incorporation of the religious requirement. Thus, subject to the applicable
society or religious order, or diocese, constitutional and statutory restrictions on foreign
synod, or district organization is not participation in certain investment areas or
forbidden by competent authority or by the activities, a foreign natural person may organize an
Constitution, rules, regulations, or OPC. (Divina, 2021 citing Sec. 15, SEC MC No. 7)
discipline of the religious denomination,
sect or church of which it forms part; (1) EXCEPTED CORPORATIONS
4. That the religious society or religious The following are not allowed to incorporate as a
order, or diocese, synod, or district One Person Corporation: (B-P-T-I-P-Non)
organization desires to incorporate for the 1. Banks and quasi-banks;
administration of its affairs, properties and 2. Pre-need;
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estate; 3. Trust;
4. Insurance;
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5. The place within the Philippines where the 5. Public and publicly listed companies; and
principal office of the corporation is to be 6. Non-chartered GOCCs. (Sec. 116, RCC)
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established and located; and
NOTE: A natural person who is licensed to exercise
6. The names, nationalities, and residence a profession may not organize as a One Person
addresses of the trustees, not less than 5 Corporation for the purpose of exercising such
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nor more than 15, elected by the religious profession except as otherwise provided under
society or religious order, or the dioceses, special laws. (Ibid.)
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synod, or district organization to serve for
the first year or such other period as may Q: A single parent started a plant-based/vegan
be prescribed by the laws of the religious meal delivery service during the COVID-19
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society or religious order, or of the diocese, pandemic using only the resources available in
synod, or district organization. (Sec. 114, the kitchen and in a nearby market. After just six
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RCC) months, the single parent needed to expand by
hiring cooks, kitchen staff, and finance and
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Number and Term of trustees administrative personnel. A bank told the single
parent that it was ready to fund the small
The trustees of religious societies shall not be less business but the parent needed to be registered
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than five (5) nor more than fifteen (15). Note, with the proper government regulatory
however, that the term of these trustees can be one agencies.
(1) year or such other period as may be prescribed
by the laws of the religious society or religious Friends advised the single parent that
order, or of the diocese, synod, or district registering as a single proprietorship would
organization. (Sec. 114, RCC) make their personal assets vulnerable in case
the business takes a downturn. The single
e) ONE PERSON CORPORATIONS parent now comes to you for legal advice,
wanting to have the limited liability of a
A One Person Corporation (OPC) is a corporation corporation but is unwilling to take in partners
with a single stockholder: Provided, that only a in the business that would stiffly their culinary
natural person, trust, or an estate may form an OPC. creativity.
(Sec, 116, RCC)
Under the Revised Corporation Code, is it legally
In case of a natural person, the only requirement possible for the single parent to register as a
under the RCC is that he/she must be of legal age. corporation with only the single parent as
There is no provision on any nationality stockholder? Explain briefly. (2020-21 BAR)
2023 GOLDEN NOTES
A: The Revised Corporation Code eliminated the (4) CORPORATE NAME
minimum number of incorporators for corporations
(Sec. 10, RCC). It also allows natural persons, trust Display of Corporate Name
and estate to organize a corporation with a single
stockholder (Sec. 116, RCC). The law makes no A One Person Corporation shall indicate the letters
distinction as to the civil status of natural persons “OPC” either below or at the end of its corporate
who can organize a one person corporation. Thus, a name. (Sec. 120, RCC)
single parent may register as a corporation with
only himself/herself as stockholder. (5) CORPORATE STUCTURE AND OFFICERS
(2) CAPITAL STOCK REQUIREMENT Single Stockholder as Director, President
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Minimum Capital Stock NOT Required The single stockholder shall be the sole director and
president of the One Person Corporation. (Sec. 121,
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A One Person Corporation shall not be required to RCC)
have a minimum authorized capital stock except as
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otherwise provided by special law. (Sec. 117, RCC) Treasurer, Corporate Secretary, and Other
Further, no portion of the authorized capital is Officers
required to be paid at the time of the incorporation,
unless otherwise required by applicable laws or Within fifteen (15) days from the issuance of its
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regulations. (Divina, 2021) certificate of incorporation, the One Person
Corporation shall appoint a treasurer, corporate
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(3) ARTICLES OF INCORPORATION secretary, and other officers as it may deem
AND BY-LAWS necessary, and notify the Commission thereof
within five (5) days from appointment. (Sec. 122,
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Contents of the AOI RCC)
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A One Person Corporation shall file AOI in The single stockholder may not be appointed as
accordance with the requirements under Sec. 14 of corporate secretary. A single stockholder who is
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the RCC. It shall likewise substantially contain the likewise the self-appointed treasurer of the
following: corporation shall give a bond to the Commission in
such a sum as may be required. The bond shall be
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1. If the single stockholder is a trust or an estate, renewed every two (2) years or as often as may be
the name, nationality, and residence of the required.
trustee, administrator, executor, guardian,
conservator, custodian, or other person Provided, That, the said stockholder/treasurer shall
exercising fiduciary duties together with the undertake in writing to faithfully administer the
proof of such authority to act on behalf of the One Person Corporation’s funds to be received as
trust or estate; and treasurer, and to disburse and invest the same
according to the AOI as approved by the
2. Name, nationality, residence of the nominee Commission. (Ibid.)
and alternate nominee, and the extent,
coverage, and limitation of the authority. (Sec. (6) NOMINEE
118, RCC)
Nominee and Alternate Nominee
By-Laws
The single stockholder shall designate a nominee
The One Person Corporation is not required to and an alternate nominee who shall, in the event of
submit and file corporate bylaws. (Sec. 119, RCC) the single stockholder’s death or incapacity, take the
COMMERCIAL LAW
place of the single stockholder as director and shall purpose, the AOI need not be amended. (Sec. 126,
manage the corporation’s affairs. RCC)
The AOI shall state the names, residence addresses (7) LIABILITY
and contact details of the nominee and alternate
nominee, as well as the extent and limitations of Liability of Single Shareholder
their authority in managing the affairs of the One
Person Corporation. A sole shareholder claiming limited liability has the
burden of affirmatively showing that the
The written consent of the nominee and alternate corporation was adequately financed.
nominee shall be attached to the application for
incorporation. Such consent may be withdrawn in Where the single stockholder cannot prove that the
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writing any time before the death or incapacity of property of the One Person Corporation is
the single stockholder. (Sec. 124, RCC) independent of the stockholder’s personal property,
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the stockholder shall be jointly and severally liable
Term of Nominee and Alternate Nominee for the debts and other liabilities of the One Person
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Corporation.
1. When the incapacity of the single stockholder
is temporary – the nominee shall sit as director The principle of piercing the corporate veil applies
and manage the affairs of the One Person with equal force to One Person Corporations as with
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Corporation until the stockholder, by self- other corporations. (Sec. 130, RCC)
determination, regains the capacity to assume
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such duties. (8) CONVERSION OF CORPORATION TO ONE
PERSON CORPORATIONS AND VICE-VERSA
2. In case of death or permanent incapacity of
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the single stockholder – the nominee shall sit Conversion from an Ordinary Corporation to a
as director and manage the affairs of the One One Person Corporation
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Person Corporation until the legal heirs of the
single stockholder have been lawfully When a single stockholder acquires all the stocks of
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determined, and the heirs have designated one an ordinary stock corporation, the latter may apply
of them or have agreed that the estate shall be for conversion into a One Person Corporation,
the single stockholder of the One Person subject to the submission of such documents as the
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Corporation. Commission may require. If the application for
conversion is approved, the Commission shall issue
The alternate nominee shall sit as director and a certificate of filing of amended AOI reflecting the
manage the One Person Corporation in case of the conversion.
nominee’s inability, incapacity, death, or refusal to
discharge the functions as director and manager of The One Person Corporation converted from an
the corporation, and only for the same term and ordinary stock corporation shall succeed the latter
under the same conditions applicable to the and be legally responsible for all the latter’s
nominee. (Sec. 125, RCC) outstanding liabilities as of the date of conversion.
(Sec. 131, RCC)
Change of Nominee or Alternate Nominee
The single stockholder may, at any time, change its

nominee and alternate nominee by submitting to
the Commission the names of the new nominees and
their corresponding written consent. For this
2023 GOLDEN NOTES
Conversion from a One Person Corporation to an Jurisdiction over Foreign Corporation
Ordinary Stock Corporation
IF THE FOREIGN IF THE FOREIGN
A One Person Corporation may be converted into an CORPORATION IS CORPORATION IS
ordinary stock corporation after due notice to the THE PLAINTIFF THE DEFENDANT
Commission of such fact and of the circumstances
leading to the conversion, and after compliance with
all other requirements for stock corporations under
this Code and applicable rules. Such notice shall be
filed with the Commission within sixty (60) days
from the occurrence of the circumstances leading to
the conversion into an ordinary stock corporation.
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If all requirements have been complied with, the
Commission shall issue an amended certificate of
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incorporation reflecting the conversion. (Sec. 132, 1. GR: Voluntary
RCC) appearance of the
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corporation by
In case of death of the single stockholder, the interposing a
nominee or alternate nominee shall transfer the defense.
shares to the duly designated legal heir or estate 1. Voluntary
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within seven (7) days from receipt of either an appearance before XPN: A special
affidavit of heirship or self-adjudication executed by the local courts by appearance to file a
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a sole heir, or any other legal document declaring the filing of an motion to dismiss
the legal heirs of the single stockholder and notify action by a licensed based on lack of
the Commission of the transfer. Within sixty (60) corporation. jurisdiction.
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days from the transfer of the shares, the legal heirs
shall notify the Commission of their decision to 2. If the foreign 2. Service of summons
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either wind up and dissolve the One Person corporation is a co- to a foreign
Corporation or convert it into an ordinary stock plaintiff with a corporation which
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corporation. (Ibid.) domestic has transacted
corporation and business in the
The ordinary stock corporation converted from a
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latter later filed a Philippines whether
One Person Corporation shall succeed the latter and suit here in the licensed or
be legally responsible for all the latter’s outstanding Philippines. registered.
liabilities as of the date of conversion. (Ibid.)
3. Service of summons
f) FOREIGN CORPORATIONS to its resident agent
in an isolated
A foreign corporation is: transaction.
1. One formed, organized or existing under any

laws other than those of the Philippines; and
2. Whose laws allow Filipino citizens and
corporations to do business in its own country
or State. (Sec. 140, RCC)
NOTE: The second requirement refers to Principle

of Reciprocity
COMMERCIAL LAW
(1) BASES OF AUTHORITY OVER FOREIGN A: Under the Foreign Investment Act of 1991 (R.A.
CORPORATIONS No. 7402),the phrase “doing business” shall include
soliciting orders, service contracts, opening offices,
Bases of Jurisdiction whether called “liaison” offices or branches;
appointing representatives or distributors
The following are the two bases of authority domiciled in the Philippines or who in any calendar
(jurisdiction) over foreign corporations: year stay in the country for a period or periods
totaling 180 days or more; participating in the
1. A corporation may give actual consent to management, supervision or control of any
judicial jurisdiction manifested normally domestic business, firm, entity or corporation in the
by compliance with the State’s foreign Philippines; and any other act or acts that imply a
corporation qualification requirements continuity of commercial dealings or arrangements,
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(licensing requirements and other and contemplate to that extent the performance of
requisites to lawfully transact business in acts or works, or the exercise of some of the
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the Philippines); and functions normally incident to, and in progressive
prosecution of, commercial gain or of the purpose
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2. A corporation, even though not qualified and object of the business organization
(not licensed), by engaging in sufficient
activity (doing business) within the State, Provided, however, That the phrase “doing
established judicial jurisdiction over the business” shall not be deemed to include mere
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foreign corporation. (Foreign investment as a shareholder by a foreign entity in
Corporations: The Interrelation of domestic corporations duly registered to do
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Jurisdiction and Qualification, Indiana Law business, and/or the exercise of rights as such
Journal, Art. 4, Vol. 33, Issue 3, retrieved on investor; nor having a nominee director or officer to
29 Apr. 2013) represent its interests in such corporation; nor
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appointing a representative or distributor
(a) CONSENT domiciled in the Philippines which transacts
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business in its own name and for its own account.
Consent
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Q: When is a foreign corporation deemed doing
Through compliance with the Philippines’ legal business in the Philippines?
requirements to lawfully engage in business within
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the country’s territory, the foreign corporation A: The term “doing business” is not specifically
gives its actual consent to be subjected to the defined by the OCC and the RCC. There are certain
jurisdiction of the Philippines. (Ibid.) activities, however, which are deemed as doing
business under R.A. No. 7042, otherwise known as
Foreign Corporations shall have the right to transact the Foreign Investments Act of 1991 (“FIA”). Under
business in the Philippines after obtaining a license the FIA, doing business shall include:
for that purpose in accordance with the RCC and a
certificate of authority from the appropriate a. Soliciting orders;
government agency. (Sec. 140, RCC) b. Service contracts;
c. Opening offices, whether called “liaison” offices
(b) DOCTRINE OF “DOING BUSINESS” or branches;
Q: When is a foreign corporation deemed to be d. Appointing representatives or distributors

“doing business in the Philippines?” (1998, 2016 domiciled in the Philippines or who in any
BAR) calendar year stay in the country for a period or
periods totaling 180 days or more;
2023 GOLDEN NOTES
e. Participating in the management, supervision At one end of the scale are “passive” websites, which
or control of any domestic business, firm, entity, alone generally do not generate sufficient contacts
or corporation in the Philippines; and with a foreign state to establish personal
jurisdiction since they are only used to post
f. Any other act or acts that imply a continuity of information therein.
commercial dealings or arrangements and
contemplate to that extent the performance of At the other end of the scale are “active” websites,
acts or works, or the exercise of some of the which generate sufficient business over the internet
functions normally incident to, and in to establish personal jurisdiction.
progressive prosecution of, commercial gain or
of the purpose and object of the business “Interactive” websites fall in the center of the scale
organization. (Sec. 3 (d), R.A. No. 7042) since they are hybrid sites that contain elements of
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both passive and active websites, and courts
Twin Characterization Test determine whether to exercise personal jurisdiction
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over the interactive website owner on a case-by-
Under this test, a foreign corporation is considered case basis. (Divina, 2020)
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to be “doing business” in the Philippines when:
Q: What is the legal test for determining if an
a. The foreign corporation is maintaining or unlicensed foreign corporation is doing
continuing in the Philippines the body or business in the Philippines? (2002 BAR)
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substance of the business or enterprise for
which it was organized or whether it has A: The test is whether or not the unlicensed foreign
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substantially retired from it and turned it over corporation has performed an act or acts that imply
to another. a continuity of commercial dealings or
arrangements and contemplate to that extent the
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b. The foreign corporation is engaged in activities performance of acts or works, or the exercise of
which necessarily imply “continuity of some of the functions normally incident to, and in
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commercial dealings and arrangements, and progressive prosecution of, commercial gain or of
contemplates, to that extent, the performance the purpose and object of the business corporation.
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of acts or works or the exercise of some of the
functions normally incident to, and in (2) NECESSITY OF A LICENSE TO DO BUSINESS
progressive prosecution of, the purpose and
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object of its organization.” (Divina, 2020, citing It was never the intent of the legislature to bar court
Mentholatum Co. Inc. v. Mangaliman, G.R. No. L- access to a foreign corporation or entity which
47701, 27 June 1941) happens to obtain an isolated order for business in
the Philippines. Neither, did it intend to shield
Sliding Scale Test debtors from their legitimate liabilities or
obligations. But it cannot allow foreign corporations
Currently, most courts in the United States apply a or entities which conduct regular business any
Sliding Scale Test tailored to internet activities to access to courts without the fulfillment by such
determine the level or types of activities that will corporations of the necessary requisites to be
constitute “minimum contacts” for jurisdictional subjected to our government’s regulation and
purposes. authority. By securing a license, the foreign entity
would be giving assurance that it will abide by the
The Sliding Scale Test is based on the premise that decisions of our courts, even if adverse to it. By
“the likelihood that ‘personal jurisdiction’ can be securing a license, which is a legal requirement to
constitutionally exercised is directly proportionate lawfully engage in business in the Philippines, the
to the nature and quantity of commercial activity foreign entity would be giving assurance that it will
that an entity conducts over the internet.” abide by the decisions of our courts, even if adverse
COMMERCIAL LAW
to it. (Eriks PTE, Ltd. v. CA, G.R. 118843, 06 Feb. 1997) Effectivity of License
Q: MAGNA, a domestic corporation, entered an Upon issuance of the license, such foreign
agreement for professional services with corporation may commence to transact business in
ANDERSEN, a foreign corporation unlicensed to the Philippines and continue to do so for as long as
do business in the Philippines and engaged in it retains its authority to act as a corporation under
consultation and design services. MAGNA asked the laws of the country or State of its incorporation,
ANDERSEN to design its cement plant. After the unless such license is sooner surrendered, revoked,
contract was consummated, ANDERSEN sued suspended, or annulled in accordance with this
MAGNA for the unpaid balance under the Code or other special laws. (Sec. 143, RCC)
agreement. MAGNA filed a motion to dismiss,
arguing that ANDERSEN has no legal capacity to (a) RESIDENT AGENT
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sue because it was doing business in the
Philippines without the requisite license. Rule A resident agent may be either an individual
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on the motion. residing in the Philippines or a domestic
corporation lawfully transacting business in the
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A: The motion to dismiss should be denied. Philippines:
MAGNA is already estopped from challenging
ANDERSEN's legal capacity to sue. A party cannot 1. An individual resident agent must be of
take undue advantage by challenging the foreign good moral character and of sound
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corporation's personality or legal capacity to sue financial standing;
when the former already acknowledged the same by
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entering into a contract with the latter and derived 2. In case of a domestic corporation who will
benefits therefrom. (Magna Ready Mix Concrete act as a resident agent, it must likewise be
Corp. v. Andersen Bjornstad Kane Jacobs, Inc., G.R. No. of sound financial standing and must show
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196158, 20 Jan. 2021, J. Hernando) proof that it is in good standing as certified
by the Commission. (Sec 144, RCC)
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Corporation Engaged in Exporting Goods to the
Philippines NOT Required to Obtain License Purpose of Appointing Resident Agent
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To be doing or "transacting business in the The appointment of a resident agent is required for
Philippines" for purposes of Sec. 133 of the the purpose of accepting and receiving, on behalf of
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Corporation Code (now, Sec. 150, RCC), the foreign the foreign corporation:
corporation must actually transact business in the
Philippines, that is, perform specific business 1. Notice affecting the corporation pending
transactions within the Philippine territory on a the establishment of its local office; and
continuing basis in its own name and for its own 2. Summons and other legal processes in all
account. Actual transaction of business within the proceedings for or against the corporation.
Philippine territory is an essential requisite for the
Philippines to acquire jurisdiction over a foreign Effect of Service of Summons and Notices to the
corporation and thus require the foreign Resident Agent
corporation to secure a Philippine business license.
If a foreign corporation does not transact such kind Service upon such resident agent shall be admitted
of business in the Philippines, even if it exports its and held as valid as if served upon the duly
products to the Philippines, the Philippines has no authorized officers of the foreign corporation at its
jurisdiction to require such foreign corporation to home office. (Sec. 145, RCC)
secure a Philippine business license. (B. Van Zuiden
Bros., Ltd. v. GTVL Manufacturing Industries, Inc., G.R.
No. 147905, 28 May 2007)
2023 GOLDEN NOTES
Resident Agent Cannot Sign the Certificate of 2. A foreign corporation shall be without any
Non-Forum Shopping resident agent in the Philippines on whom any
summons or other legal processes may be
While a resident agent may be aware of actions filed served. (Sec. 145, RCC)
against his principal (a foreign corporation doing
business in the Philippines), such resident may not Effect of Service Made Upon SEC
be aware of actions initiated by its principal,
whether in the Philippines against a domestic Such service made upon the SEC shall have the same
corporation or private individual, or in the country force and effect as if made upon the duly authorized
where such corporation was organized and officers of the corporation at its home office. (Sec.
registered, against a Philippine registered 145, RCC)
corporation or a Filipino citizen. (Expert Travel &
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Tours Inc. vs. CA, G.R. No. 152392, 26 May 2005) Whenever such service shall be made upon the SEC,
the SEC must, within 10 days thereafter, transmit by
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Requirements for Replacement of Resident mail a copy of such summons or other legal process
Agent to the corporation at its home or principal office.
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The sending of such copy by the SEC shall be a
SEC requires the submission of: necessary part of and shall complete such service.
All expenses incurred by the Commission for such
1. A duly authenticated copy of board resolution service shall be paid in advance by the party at
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or a certification from the authorized officer of whose instance the service is made. (Ibid.)
the company formally revoking his
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appointment as a resident agent of the (3) PERSONALITY TO SUE
corporation; and
Personality to Sue
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2. Accompanied by a duly authenticated written
power of attorney designating the substitute or No foreign corporation transacting business in the
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the new resident agent. Philippines without a license, or its successors or
assigns, shall be permitted to maintain or intervene
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NOTE: The appointment of a resident agent of a in any action, suit or proceeding in any court or
foreign corporation is revocable at any time at the administrative agency of the Philippines; but such
instance of the corporation. (SEC Opinion, 4 Sept. corporation may be sued or proceeded against
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1990) before Philippine courts or administrative tribunals
on any valid cause of action recognized under
Duty of Resident Agent in Case of Change of Philippine laws. (Sec. 150, RCC)
Address
XPN: Under the rule on estoppel, a party is estopped
It shall be his or its duty to immediately notify in to challenge the personality of a foreign corporation
writing the SEC of the new address. (Sec. 145, RCC) to sue, even if it has no license, after having
acknowledged the same by entering to a contract
Instances When Service of Summons Or Other with it.
Legal Processes are Made Upon the SEC Instead
of a Resident Agent One who has dealt with a corporation of foreign
origin as a corporate entity is estopped to deny its
1. If a foreign corporation, previously granted a corporate existence. (Steel Case v. Design
license, ceases to transact business in the International Selections, Inc., G.R. No. 171995, 18 Apr.
Philippines. 2012)
COMMERCIAL LAW
Q: Is a foreign corporation which not licensed to Q: Does a foreign corporation not licensed to do
do business in the Philippines absolutely business in the Philippines have legal capacity
incapacitated from filing a suit in local courts? to sue under the provisions of the Alternative
Dispute Resolution Act of 2004?
A: NO. Only when that foreign corporation is
“transacting” or “doing business” in the country will A: We answer in the affirmative. Indeed, it is in the
a license be necessary before it can institute suits. It best interest of justice that in the enforcement of a
may, however, bring suits on isolated business foreign arbitral award, we deny availment by the
transactions, which is not prohibited under losing party of the rule that bars foreign
Philippine law. corporations not licensed to do business in the
Philippines from maintaining a suit in our courts.
Thus, a foreign insurance company may sue in
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Philippine courts upon the marine insurance When a party enters into a contract containing a
policies issued by it abroad to cover international- foreign arbitration clause and, as in this case, in fact
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bound cargoes shipped by a Philippine carrier, even submits itself to arbitration, it becomes bound by
if it has no license to do business in this country. It the contract, by the arbitration and by the result of
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is the act of engaging in business without the arbitration, conceding thereby the capacity of the
prescribed license and not the lack of license per se other party to enter into the contract, participate in
which bars a foreign corporation from access to our the arbitration and cause the implementation of the
courts. (Aboitiz Shipping Corp. v. Insurance Co. of NA, result. A foreign corporation, although not licensed
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G.R. No. 168402, 6 Aug. 2008) to do business in the Philippines, may seek
recognition and enforcement of the foreign arbitral
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The obtainment of a license prescribed by the award in accordance with the provisions of the
Corporation Code is not a condition precedent to the Alternative Dispute Resolution Act of 2004. (Tuna
maintenance of any kind of action in Philippine Processing Inc., v. Philippine Kingford Inc., G.R. No.
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courts by a foreign corporation. However, no 185582, 29 Feb. 2012)
foreign corporation shall be permitted to transact
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business in the Philippines, as this phrase is (4) SUABILITY OF FOREIGN CORPORATIONS
understood under the Corporation Code, unless it
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shall have the license required by law, and until it Suability of Foreign Corporations
complies with the law in transacting business here,
it shall not be permitted to maintain any suit in local A foreign corporation lawfully doing business in the
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courts. Philippines shall be bound by all laws, rules, and
regulations applicable to domestic corporations of
As thus interpreted, any foreign corporation not the same class, except those which provide for the
doing business in the Philippines may maintain an creation, formation, organization or dissolution of
action in our courts upon any cause of action, corporations or those which fix the relations,
provided that the subject matter and the defendant liabilities, responsibilities, or duties of stockholders,
are within the jurisdiction of the court. It is not the members, or officers of corporations to each other
absence of the prescribed license but "doing or to the corporation. (Sec. 146, RCC)
business" in the Philippines without such license
which debars the foreign corporation from access to A Foreign Corporation Doing Business in the
our courts. In other words, although a foreign Philippines Without License may be Sued in the
corporation is without license to transact business Country
in the Philippines, it does not follow that it has no
capacity to bring an action. Such license is not At this juncture it must be emphasized that a foreign
necessary if it is not engaged in business in the corporation doing business in the Philippines with
Philippines. (Columbia Pictures v. CA, G.R. No. or without license is subject to process and
110318, 28 Aug. 1996) jurisdiction of the local courts. If such corporation is
2023 GOLDEN NOTES
properly licensed, well and good. But it shall not be payments thereon. Consequently, for failure of
allowed, under any circumstances, to invoke its lack Global to pay its obligations under the
of license to impugn the jurisdiction of our courts. agreement despite demands, Surecomp filed a
(Marubeni Nedeland BV v. Tensuan, G.R. No. 61950, complaint for breach of contract with damages
28 Sept. 1990) before the RTC.
(5) INSTANCES WHEN UNLICENSED FOREIGN In its complaint, Surecomp alleged that it is a
CORPORATIONS MAY BE ALLOWED TO SUE foreign corporation not doing business in
(ISOLATED TRANSACTIONS) the Philippines and is suing on an isolated
transaction. Pursuant to the agreement, it
Isolated Transaction installed the System in ABC’s computers for a
consideration of US$298,000.00 as license fee.
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The execution of the policy is a single act, an isolated Global filed a motion to dismiss on the ground
transaction. This Court has not construed the term that Surecomp had no capacity to sue because it
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“isolated transaction” to literally mean “one” or a was doing business in the Philippines without a
mere single act. In Eriks Pte. Ltd. vs. CA, (G.R. No. license. Is Global estopped from questioning
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118843, 06 Feb. 1997) this Court held that: Surecomp’s capacity to sue?
…What is determinative of "doing business" is not A: YES, Global is estopped. A corporation has a legal
really the number or the quantity of the status only within the state or territory in which it
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transactions, but more importantly, the intention of was organized. For this reason, a corporation
an entity to continue the body of its business in the organized in another country has no personality to
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country. The number and quantity are merely file suits in the Philippines. In order to subject a
evidence of such intention. The phrase "isolated foreign corporation doing business in the country to
transaction" has a definite and fixed meaning, i.e. a the jurisdiction of our courts, it must acquire a
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transaction or series of transactions set apart from license from the Securities and Exchange
the common business of a foreign enterprise in the Commission and appoint an agent for service of
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sense that there is no intention to engage in a process. Without such license, it cannot institute a
progressive pursuit of the purpose and object of the suit in the Philippines.
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business organization. Whether a foreign
corporation is "doing business" does not necessarily The exception to this rule is the doctrine of estoppel.
depend upon the frequency of its transactions, but Global is estopped from challenging Surecomp's
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more upon the nature and character of the capacity to sue.
transactions.
A foreign corporation doing business in the
Q: Surecomp, a foreign corporation duly Philippines without license may sue in Philippine
organized and existing under the laws of the courts a Filipino citizen or a Philippine entity that
Netherlands, entered into a software license had contracted with and benefited from it. A party is
agreement with ABC, a domestic corporation, estopped from challenging the personality of a
for the use of its IMEX Software System (System) corporation after having acknowledged the same by
in the bank’s computer system for a period of entering into a contract with it. The principle is
twenty (20) years. ABC merged with Global applied to prevent a person contracting with a
Business Holdings, Inc. (Global), with Global as foreign corporation from later taking advantage of
the surviving corporation. its noncompliance with the statutes, chiefly in cases
where such person has received the benefits of the
When Global took over the operations of ABC, it contract. (Global Business Holdings, Inc., v. Surecomp
found the System unworkable for its operations Software, B.V., G.R. No. 173463, 13 Oct. 2010)
and informed Surecomp of its decision to
discontinue the agreement and to stop further
COMMERCIAL LAW
(6) GROUNDS FOR REVOCATION OF LICENSE 9. Any other ground as would render it unfit
to transact business in the Philippines. (Sec.
Grounds for Revocation of License 151, RCC)
Without prejudice to other grounds provided by Upon the revocation of the license to transact
special laws, the license of a foreign corporation to business in the Philippines, a certificate of
transact business in the Philippines may be revoked revocation shall be issued by the SEC. A copy thereof
or suspended by the SEC upon any of the following shall be furnished to the appropriate government
grounds: agency in the proper cases. The SEC shall also mail
to the corporation at its registered office in the
1. Failure to file its annual report or pay any Philippines a notice of such revocation accompanied
fees as required by the Code; by a copy of the certificate of revocation. (Sec. 152,
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RCC)
2. Failure to appoint and maintain a resident
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agent in the Philippines; Withdrawal of License
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3. Failure, after change of its resident agent or Subject to existing laws and regulations, a foreign
of his address, to submit to the Securities corporation licensed to transact business in the
and Exchange Commission a statement of Philippines may be allowed to withdraw from the
such change; Philippines by filing a petition for withdrawal of
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license. No certificate of withdrawal shall be issued
4. Failure to submit to the SEC an by the Commission unless all the following
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authenticated copy of any amendment to requirements are met:
its AOI or by-laws or of any articles of
merger or consolidation within the time 1. All claims which have accrued in the
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prescribed by the Corporation Code; Philippines have been paid, compromised,
or settled;
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5. A misrepresentation of any material matter
in any application, report, affidavit or other 2. All taxes, imposts, assessments, and
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document submitted by such corporation penalties, if any, lawfully due to the
pursuant to this Title; Philippine Government or any of its
agencies or political subdivisions have
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6. Failure to pay any and all taxes, imposts, been paid; and
assessments, or penalties, if any, lawfully
due to the Philippine Government or any of 3. The petition for withdrawal of license has
its agencies or political subdivisions; been published once a week for three (3)
consecutive weeks in a newspaper of
7. Transacting business in the Philippines general circulation in the Philippines. (Sec.
outside of the purpose or purposes for 152, RCC)
which such corporation is authorized
under its license;
8. Transacting business in the Philippines as

agent of or acting for and on behalf of any
foreign corporation or entity not duly
licensed to do business in the Philippines;
or
2023 GOLDEN NOTES
13. MERGER AND CONSOLIDATION Q: Where one corporation sells or otherwise

transfers all of its assets to another corporation,
a) CONCEPT is the latter liable for the debts and liabilities of
the transferor?
Merger vs. Consolidation
A: GR: NO.
MERGER CONSOLIDATION
Definition XPNs:
1. Where the purchaser expressly or
One where a impliedly agrees to assume such debts;
corporation absorbs One where a new
2. Where the transaction amounts to a
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another corporation corporation is created
and remains in and consolidating consolidation or merger of the
existence while others corporations are corporations;
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are dissolved. (Sec. 75, extinguished. (Ibid.)
RCC) 3. Where the purchasing corporation is
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merely a continuation of the selling
Consequent Dissolution of a Corporation/s corporation; and
4. Where the transaction is entered into
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All of the constituent All consolidated
fraudulently to escape liability for such
corporations involved corporations are
debts. (Nell Co. vs. Pacific Farms, Inc., G.R.
are dissolved except dissolved without
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No. L-20850, 29 Nov. 1965)
one. exception.
NOTE: The Nell Doctrine states the general rule
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Consequent Creation of a New Corporation that the transfer of all the assets of a corporation to
another shall not render the latter liable to the
No new corporation is A new corporation
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liabilities of the transferor. If any of the above-cited
created. emerges.
exceptions are present, then the transferee
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Acquisition of Assets, Liabilities, Capital Stock corporation shall assume the liabilities of the
transferor. (2017 BAR)
The surviving All assets, liabilities, Business-Enterprise Transfer
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corporation acquires and capital stock of all
all the assets, consolidated The transferee corporation’s interest goes beyond
liabilities, and capital corporations are the assets of the transferor’s assets and its desires
stock of all constituent transferred to the new to acquire the latter’s business enterprise, including
corporations. corporation. its goodwill.
NOTE: In both cases, there is no liquidation of the Sec. 40 (now Sec. 39, RCC) suitably reflects the
assets of the dissolved corporations, and the business-enterprise transfer under the exception of
surviving or consolidated corporation acquires all the Nell Doctrine because the purchasing or
their properties, rights and franchises and their transferee corporation necessarily continued the
stockholders usually become its stockholders. business of the selling or transferor corporation.
(Divina, 2021 citing John F. McLeod v. National Labor Given that the transferee corporation acquired not
Relations SEC First Division et al., G.R. No. 146667, 23 only the assets but also the business of the
Jan. 2007) transferor corporation, then the liabilities of the
latter are inevitably assigned to the former. Sec. 39
refers to the sale, lease, exchange or disposition of
all or substantially all of the corporation's assets,
COMMERCIAL LAW
including its goodwill. The sale under this provision b) CONSTITUENT CORPORATION vs.
does not contemplate an ordinary sale of all CONSOLIDATED CORPORATION
corporate assets; the transfer must be of such
degree that the transferor corporation is rendered CONSTITUENT CONSOLIDATED
incapable of continuing its business or its corporate CORPORATION CORPORATION
purpose. These are the parties to
a merger or
The purpose of the business-enterprise transfer is consolidation, all A new corporation that
to protect the creditors of the business by allowing constituent is formed by the union
them a remedy against the new owner of the assets corporations are of two (2) or more
and business enterprise. Otherwise, creditors dissolved or absorbed existing corporations
would be left “holding the bag,” because they may by the new (consolidation).
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not be able to recover from the transferor who has consolidated
“disappeared with the loot,” or against the enterprise. The surviving or
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transferee who can claim that he is a purchaser in consolidated
good faith and for value. Based on the foregoing, as In merger, all corporation assumes
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the exception of the Nell doctrine relates to the constituents, except automatically the
protection of the creditors of the transferor the surviving liabilities of the
corporation and does not depend on any deceit corporation are dissolved
committed by the transferee corporation, then dissolved. (Divina, corporations,
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fraud is certainly not an element of the business 2021 citing John F. regardless of whether
enterprise doctrine. Indeed, the transferee McLeod v. National the creditors have
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corporation may inherit the liabilities of the Labor Relations SEC consented or not to
transferor despite the lack of fraud due to the First Division et al., G.R. such merger or
continuity of the latter’s business. (Y-I Leisure No. 146667, 23 Jan. consolidation. (Ibid.)
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Philippines, Inc. v. Yu, G.R. No. 207161, 08 Sept. 2015) 2007)
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Q: E Co. sold its assets to M Inc. after complying
with the requirements of the Bulk Sales Law. c) PLAN OF MERGER OR CONSOLIDATION
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Subsequently, one of the creditors of E Co. tried
to collect the amount due it but found out that E Contents of a Plan of Merger or Consolidation
Co. has no more assets left. The creditors sued M
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Inc. on the theory that M Inc. is a mere alter ego The BOD/BOT of each corporation party to the
of E Co. Will the suit prosper? (1996 BAR) merger or consolidation shall approve a plan of
merger or consolidation which set forth the
A: NO. The suit will not prosper. The sale by E Co. of following:
its assets to M Inc. did not result in the transfer of
liabilities of the latter to, nor in the assumption 1. The names of the corporations proposing to
therefore by, the former. The facts given do not merge or consolidate, hereinafter referred
indicate that such transfer or assumption took place to as the constituent corporations;
or was stipulated upon by the parties in their
agreement. Furthermore, the sale by E Co. of its 2. The terms of the merger or consolidation
assets is a sale of its property. It does not involve the and the mode of carrying the same into
sale of the shares of stock of the corporation effect;
belonging to its stockholders. There is therefore no
merger or consolidation that took place. E Co. 3. A statement of the changes, if any, in the
continues to exist and remains liable to the creditor. AOI of the surviving corporation in case of
a merger; and, with respect to the
consolidated corporation in case of
2023 GOLDEN NOTES
consolidation, all the statements required NOTE: Such plan, together with any amendment,
to be set forth in the AOI for corporations shall be considered as the agreement of merger or
organized under the RCC; and consolidation.
4. Such other provisions with respect to the Appraisal Right is Available to a Dissenting
proposed merger or consolidation as are Stockholder to a Plan of Merger or Consolidation
deemed necessary or desirable. (Sec. 75,
RCC) Any dissenting stockholder in stock corporations
may exercise his appraisal right in accordance with
Approval of the Plan of Merger or Consolidation this Code: Provided, that if after the approval by the
stockholders of such plan, the BOD should decide to
The plan of merger or consolidation must be abandon the plan, the appraisal right shall be
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approved by: extinguished. (Sec. 76, RCC)
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1. Majority vote of each of the BOD/ BOT of d) ARTICLES OF MERGER OR CONSOLIDATION
the constituent corporations; and
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Articles of Merger or Consolidation
2. Submitted for approval by the stockholders
or members of each of such corporations at After the approval by the stockholders or members
separate corporate meetings duly called for as required by Sec. 76, articles of merger or articles
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the purpose. of consolidation shall be executed by each of the
constituent corporations, to be signed by the
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3. Notice of such meetings shall be given to all president or vice president and certified by the
stockholders or members of the respective secretary or assistant secretary of each corporation
corporations in the same manner as giving setting forth:
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notice of regular or special meetings under
Section 49 of the RCC The notice shall state a. The plan of the merger or the plan of
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the purpose of the meeting and include a consolidation;
copy or a summary of the plan of merger or
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consolidation. b. As to stock corporations, the number of
shares outstanding, or in the case of
4. The affirmative vote of the stockholders nonstock corporations, the number of
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representing at least 2/3 of the OCS of each members;
corporation in the case of stock
corporations or at least 2/3 of the members c. As to each corporation, the number of
in the case of non-stock corporations, shall shares or members voting for or against
be necessary for the approval of such plan. such plan, respectively;
(Sec. 76, RCC)
d. The carrying amounts and fair values of the
Amendment of a Plan of Merger or assets and liabilities of the respective
Consolidation companies as of the agreed cut-off date;
Any amendment may be made, provided such e. The method to be used in the merger or
amendment is approved by majority vote of the consolidation of accounts of the companies;
respective BOD/BOT of all the constituent
corporations and ratified by the affirmative vote of f. The provisional or pro-forma values, as
stockholders representing at least 2/3 of the OCS or merged or consolidated, using the
2/3 of the members of each of the constituent accounting method; and
COMMERCIAL LAW
g. Such other information as may be parcels of land owned by FISLAI were sold to
prescribed by the Commission. (Sec. 77, Willkom, the highest bidder.
RCC)
MSLAI filed a complaint for annulment of
The articles of merger or of consolidation, signed sheriff’s sale. Willkom, et al., averred that MSLAI
and certified as required by the RCC, shall be had no cause of action against them or the right
submitted to the SEC for its approval. (Sec. 78, RCC) to recover the subject properties because MSLAI
is a separate and distinct entity from FISLAI.
NOTE: In the case of merger or consolidation of They further contended that the “unofficial
banks or banking institutions, loan associations, merger” between FISLAI and DSLAI (now MSLAI)
trust companies, insurance companies, public did not take effect considering that the merging
utilities, educational institutions, and other special companies did not comply with the formalities
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corporations governed by special laws, the and procedure for merger or consolidation as
favorable recommendation of the appropriate prescribed by the Corporation Code of
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government agency shall first be obtained (Ibid.) the Philippines. Was the merger between FISLAI
and DSLAI (now MSLAI) valid and effective?
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When Hearing is Set
A: NO. The merger was not valid. Merger does not
If, upon investigation, the SEC has reason to believe become effective upon the mere agreement of the
that the proposed merger or consolidation is constituent corporations. Since a merger or
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contrary to or inconsistent with the provisions of consolidation involves fundamental changes in the
the RCC or existing laws, it shall set a hearing to give corporation, as well as in the rights of stockholders
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the corporations concerned the opportunity to be and creditors, there must be an express provision of
heard. Written notice of the date, time, and place of law authorizing them.
hearing shall be given to each constituent
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corporation at least two (2) weeks before said The merger shall only be effective upon the issuance
hearing. The SEC shall thereafter proceed as of a certificate of merger by the SEC, subject to its
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provided in the RCC. (Ibid.) prior determination that the merger is not
inconsistent with the Corporation Code or existing
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Effectivity laws.
If the SEC is satisfied that the merger or In this case, it is undisputed that the articles of
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consolidation of the corporations concerned is merger between FISLAI and DSLAI were not
consistent with the provisions of the RCC and registered with the SEC due to incomplete
existing laws, it shall issue a certificate approving documentation. Consequently, the SEC did not issue
the articles and plan of merger or of consolidation, the required certificate of merger. Even if it is true
at which time the merger or consolidation shall be that the Monetary Board of the Central Bank of
effective. (Ibid.) the Philippines recognized such merger, the fact
remains that no certificate was issued by the SEC.
Q: FISLAI and DSLAI entered into a merger, with Such merger is still incomplete without
DSLAI as the surviving corporation. The articles the certification.
of merger were not registered with the SEC due
to incomplete documentation. DSLAI changed its The issuance of the certificate of merger is crucial
corporate name to MSLAI. The business of because not only does it bear out SEC’s approval but
MSLAI, however, failed. Prior to the closure of it also marks the moment when the consequences of
MSLAI, Remedios Uy filed an action for a merger take place. By operation of law, upon the
collection of sum of money against FISLAI. The effectivity of the merger, the absorbed corporation
RTC ruled in favor of Uy and hence, six (6) ceases to exist but its rights and properties, as well
as liabilities, shall be taken and deemed transferred
2023 GOLDEN NOTES
to and vested in the surviving corporation. c. Every other interest of, belonging to, or due
(Mindanao Savings and Loan Association, Inc., et al., to each constituent corporation, shall be
v. Willkom, et al., G.R. No. 178618, 11 Oct. 2010) deemed transferred to and vested in such
surviving or consolidated corporation
De facto merger without further act or deed; and
A De facto merger means that a corporation called 5. The surviving or consolidated corporation
Acquiring Corporation acquired the assets and shall:
liabilities of another corporation in exchange for an a. Be responsible and liable for all the
equivalent value of the shares of stock of the liabilities and obligations of each of the
Acquiring Corporation making the other constituent corporations in the same
corporation a stockholder of the Acquiring manner as if such surviving or consolidated
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Corporation. (Bank of Commerce v. Radio Philippines corporation had itself incurred such
Network Inc., et al., G.R. No. 195615, 21 Apr. 2014) liabilities or obligations;
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e) EFFECTS b. Any pending claim, action or proceeding
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brought by or against any of such
1. The constituent corporations shall become a constituent corporations may be
single corporation which: prosecuted by or against the surviving or
consolidated corporation;
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a. In case of merger, shall be the surviving
corporation designated in the plan of c. The rights of creditors or liens upon the
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merger. property of any of such constituent
b. In case of consolidation, shall be the corporations shall not be impaired by such
consolidated corporation designated in the merger or consolidation. (Sec. 79, RCC)
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plan of consolidation;
Garnishment Upon the Surviving Corporation
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2. The separate existence of the constituent for the Liabilities of the Absorbed Corporation
corporations shall cease, except that of the
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surviving or the consolidated corporation; Citytrust was dissolved, no winding up of its affairs
or liquidation of assets, privileges, powers, and
3. The surviving or the consolidated corporation liabilities took place. As the surviving corporation,
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shall possess all the rights, privileges, BPI simply continued the combined businesses of
immunities, and powers and shall be subject to the two banks and absorbed all the rights,
all the duties and liabilities of a corporation privileges, assets, liabilities, and obligations of City
organized under the RCC; Trust, including the latter’s obligation over the
garnished deposits of the defendants.
4. The surviving or the consolidated corporation
shall thereupon and thereafter possess: Through the service of the writ of garnishment, the
a. All the rights, privileges, immunities, and garnishee becomes a “virtual party” to, or a “forced
franchises of each of the constituent intervenor” in the case and the trial court thereby
corporations; acquires jurisdiction to bind him to compliance with
all orders and processes of the trial court with a
b. All property, real or personal, and all view to the complete satisfaction of the judgment of
receivables due on whatever account, the court.
including subscriptions to shares and other
choses in action,
COMMERCIAL LAW
Citytrust, therefore, upon service of the notice of and to absorb them into its workforce where no
garnishment and its acknowledgment that it was in appropriate provision for the merged corporation's
possession of defendants’ deposit accounts became human resources component is made in the Merger
a “virtual party” to or “forced intervenor” in the civil Plan. (BPI v. BPI Employees Union – Davao Chapter,
case. As such, it became bound by the orders and G.R. No. 164301, 19 Oct. 2011)
processes issued by the trial court despite not
having been properly impleaded therein. Q: Associated Banking Corporation and Citizens
Consequently, by virtue of its merger with BPI, the Bank and Trust Company (CBTC) merged to
latter, as the surviving corporation, effectively form just one banking corporation known as
became the garnishee, thus the “virtual party” to the Associated Citizens Bank, the surviving
civil case. (BPI v. Lee, G.R. No. 190144, 01 Aug. 2012) bank. The Associated Citizens Bank changed its
corporate name to Associated Bank by virtue of
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Transfer of Employees the Amended Articles of Incorporation.
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Taking a second look on this point, we have come to Lorenzo Sarmiento executed in favor of CBTC a
agree with Justice Brion's view that it is more in promissory note. Upon maturity and despite
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keeping with the dictates of social justice and the repeated demands Sarmiento failed to pay the
State policy of according full protection to labor to amount due. Associated Bank filed a collection
deem employment contracts as automatically suit against Sarmiento. Sarmiento contends that
assumed by the surviving corporation in a merger, Associated Bank is not the proper party in
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even in the absence of an express stipulation in the interest because the promissory note was
articles of merger or the merger plan. In his executed in favor of Associated Citizens Bank.
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dissenting opinion, Justice Brion reasoned that:
The trial court ordered Sarmiento to pay. The
To my mind, due consideration of Sec. 80 of the CA, however, held that the Associated Bank had
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Corporation Code (now Sec. 79, RCC), the no cause of action against Lorenzo Sarmiento Jr.,
constitutionally declared policies on work, labor since the said bank was not privy to the
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and employment, and the specific FEBTC-BPI promissory note executed by Sarmiento in favor
situation -- i.e., a merger with complete "body and of Citizens Bank and Trust Company
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soul" transfer of all that FEBTC embodied and (CBTC). The court ruled that the earlier merger
possessed and where both participating banks were between the two banks could not have vested
willing (albeit by deed, not by their written Associated Bank with any interest arising from
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agreement) to provide for the affected human the promissory note executed in favor of
resources by recognizing continuity of employment CBTC after such merger.
-- should point this Court to a declaration that in a
complete merger situation where there is total May Associated Bank, the surviving corporation,
takeover by one corporation over another and there enforce the promissory note made by Sarmiento
is silence in the merger agreement on what the fate in favor of CBTC, the absorbed company, after
of the human resource complement shall be, the the merger agreement had been signed?
latter should not be left in legal limbo and should be
properly provided for, by compelling the surviving A: YES. Associated Bank may enforce the
entity to absorb these employees. This is what Sec. promissory note. Ordinarily, in the merger of two or
80 of the Corporation Code (now, Sec. 79, RCC) more existing corporations, one of the combining
commands, as the surviving corporation has the corporations survives and continues the combined
legal obligation to assume all the obligations and business, while the rest are dissolved and all their
liabilities of the merged constituent corporation. rights, properties and liabilities are acquired by the
surviving corporation. Although there is a
Hence, there is a need for the surviving corporation dissolution of the absorbed corporations, there is no
to take responsibility for the affected employees winding up of their affairs or liquidation of their
2023 GOLDEN NOTES
assets, because the surviving corporation
automatically acquires all their rights, privileges,
and powers, as well as their liabilities. All contracts
of the absorbed corporations, regardless of the date
of execution shall pertain to the surviving
corporation. (Associated Bank v. CA, G.R. No. 123793,
29 June 1998)
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COMMERCIAL LAW
Further, unlike non-stock corporations which are
II. BANKING LAWS organized for charitable, religious, educational,
professional, cultural fraternal, literary, scientific,
social, civic service, or similar purposes, like trade,
industry, agricultural and like chambers, or any
combination thereof, the BSP was created to
A. NEW CENTRAL BANK ACT provide policy directions in the areas of money,
(R.A. No. 7653, as amended by R.A. No. 11211) banking, and credit.
Neither can the BSP be considered a financial

1. STATE POLICIES institution owned or controlled by the National
Government, which is expressly included in the
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definition of a GOCC in Section 2(b) of RA7656.
The State shall maintain a central monetary
authority that shall function and operate as an
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When Sec. 1of R.A. No. 7653 is read in its entirety, it
independent and accountable body corporate in the
is clear that the phrase "while being a government-
discharge of its mandated responsibilities
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owned corporation" merely recognizes the fact that
concerning money, banking, and credit. In line with
the BSP is owned by the government, that its capital
this policy, and considering its unique functions and
is fully subscribed by the latter. Indeed, the central
responsibilities, the central monetary authority
point of Sec. 1 is to express the State policy to
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established, while being a government-owned
maintain an independent and accountable central
corporation, shall enjoy fiscal and administrative
monetary authority, not to provide for the BSP's
autonomy. (Sec. 1, R.A. No. 7653, otherwise known as
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legal status.
the New Central Bank Act)
As stated in the legislative records the BSP is owned
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Bangko Sentral ng Pilipinas (“BSP”) does not
by the government, but not quite government-
qualify as a Government-Owned or Controlled
owned or -controlled corporation as defined now by
Corporation (GOCC) as defined under the
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various law. (BSP v. COA, G.R. No. 210314, 12 October
Administrative Code and R.A. 7656.
2021, J. Hernando)
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First, the BSP is not organized as a stock
BSP as a Lender of Last Resort
corporation. Thus, while the BSP has capital under
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Section 2 of the BSP Charter, it does not have capital
The BSP is considered a lender of last resort because
stock or share capital. Further, its capital is not
it can lend to banks and similar institutions under
divided into shares of stocks. There are no
financial distress when they have no other means to
stockholders or voting shares. Hence, the BSP
raise funds. (Divina, 2021)
cannot be classified as a stock corporation.
NOTE: The general public cannot obtain loans from

Second, the BSP is not a non-stock corporation. It
BSP. (ibid.)
does not have members. Even assuming that the
government may be considered as the sole member
of the BSP, this will not make the BSP a non-stock 2. MONETARY BOARD AND ITS POWERS AND
corporation because the BSP Charter mandates it to FUNCTIONS
remit 50% of its net profits to the National Treasury,
in conflict with the provision that non-stock Monetary Board
corporations do not distribute any part of their
income to their members. It is the body through which the powers and
functions of the BSP are exercised. (Sec. 6, R.A. 7653)
2023 GOLDEN NOTES
II. BANKING LAWS
Composition of the Monetary Board Disqualifications
The Bangko Sentral Monetary Board is composed of In addition to the disqualifications imposed under
seven (7) members appointed by the President of R.A. No. 6713, a member of the Monetary Board is
the Philippines for a term of six (6) years. The seven disqualified from being a director, officer, employee,
(7) members are: consultant, lawyer, agent or stockholder, of any
bank, quasi-bank or any other institution which is
1. Governor of the Bangko Sentral – who subject to the supervision or examination by the
shall be the Chairman of the Monetary Bangko Sentral, in which case such member shall
Board. The Governor shall be head of the resign from, and divest himself of any and all
department and his appointment shall be interests in such institution before assumption of
subject to the confirmation of the office as member of the Monetary Board.
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Commission on Appointments (with a
deputy governor designated as his The members of the Monetary Board coming from
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alternate); the private sector shall not hold any other public
office or public employment during their tenure.
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2. Member of the Cabinet – designated by the
President of the Philippines (with an No person shall be a member of the Monetary Board
Undersecretary in his Department if he has been connected directly with any
designated as his alternate). And multilateral banking or financial institution or has a
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substantial interest in any private bank in the
3. Five (5) members who shall come from Philippines, within one (1) year prior to his
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the private sector – shall serve full-time. appointment; likewise, no member of the Monetary
(Sec. 6, R.A. No. 7653) Board shall be employed in any such institution
within two (2) years after the expiration of his term
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NOTE: Members first appointed under the except when he serves as an official representative
provisions of Sec. 6 (c), three (3) shall have a of the Philippine Government to such institution.
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term of six (6) years, and the other two (2), (Sec. 9, R.A. No. 7653)
three (3) years. (ibid.)
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Removal of Member of the Monetary Board
NOTE: No member of the Monetary Board may
be reappointed more than once. (ibid.) The President may remove any member of the
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Monetary Board for any of the following reasons;
Qualifications of a Member of the Monetary
Board 1. if the member is subsequently disqualified
under the provisions of Section 8 of R.A. No.
The members of the Monetary Board must be: 7653;
1. Natural-born citizen of the Philippines;
2. GR: At least thirty-five (35) years old; 2. if he is physically or mentally incapacitated
XPN: The Governor should at least be 40 that he cannot properly discharge his
years old; duties and responsibilities and such
3. of good moral character; incapacity has lasted for more than six (6)
4. of unquestionable integrity; months;
5. of known probity and patriotism; and
6. with recognized competence in social and 3. if the member is guilty of acts or operations
economic disciplines. (Sec. 8, R.A. No. 7653) which are of fraudulent or illegal character
or which are manifestly opposed to the
aims and interests of the Bangko Sentral; or
COMMERCIAL LAW
4. if the member no longer possesses the No. 11211)
qualifications specified in Section 8 of R.A.
No. 7653 (Sec. 10, R.A. No.7653) NOTE: In the event of a settlement or
compromise, indemnification shall be
Powers and Functions of the Monetary Board provided only in connection with such
(I-D-E-A-In) matters covered by the settlement as to
which the Bangko Sentral is advised by
In the exercise of its authority, the Monetary Board external counsel that the person to be
shall: indemnified did not commit willful
a. Issue rules and regulations it considers violation of this Act, performed in evident
necessary for the effective discharge of the bad faith or with gross negligence. (ibid.)
responsibilities and exercise of the power
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vested upon the Monetary Board and the NOTE: The costs and expenses incurred in
Bangko Sentral. defending the aforementioned action, suit
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or proceeding may be paid by the Bangko
NOTE: The rules and regulations issued Sentral in advance of the final disposition of
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shall be reported to the President and such action, suit or proceeding upon receipt
Congress within fifteen (15) days from the of an undertaking by or on behalf of the
date of their issuance; member, officer, or employee to repay the
amount advanced should it ultimately be
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b. Direct the management, operations, and determined by the Monetary Board that he
administration of the BSP, reorganize its is not entitled to be indemnified. (Ibid.)
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personnel, and issue such rules and
regulations as it may deem necessary or 3. THE BANGKO SENTRAL NG PILIPINAS AND
convenient for this purpose; BANKS IN DISTRESS
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c. Establish a human resource management
Illiquidity
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system;
This occurs when the bank cannot meet its current
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d. Adopt an annual budget for and authorize
liabilities. In a state of illiquidity, the bank is handled
each expenditures by the BSP as are in the
thru conservatorship. (Divina, 2021)
interest of the effective administration and
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operations of the BSP in accordance with
Liquidity
the applicable laws and regulations; and
It is the ability of an asset to be converted into cash.
e. Indemnify its members and other officials
An entity is liquid when it is able to pay its liabilities
of the Bangko Sentral, including personnel
when they fall due. (Divina, 2021)
of the departments performing supervision
and examination functions against all costs
Insolvency
and expenses reasonably incurred by such
persons in connection with any civil or
This occurs when the actual market value of the
criminal action, suit or proceedings to
assets is insufficient to pay its liabilities, not
which he may be, or is, made a party by
considering capital stock and surplus which are not
reason of the performance of his functions
liabilities for such purpose. An entity is insolvent
or duties, unless he is finally adjudged in
when it is unable to meet current and long-term
such action or proceeding to be liable for
obligations and has insufficient realizable assets.
willful violation of this Act, performed in
This is handled by receivership or closure.
evident bad faith or with gross negligence.
(Sec. 15, R.A. No. 7653 as amended by R.A.
2023 GOLDEN NOTES
II. BANKING LAWS
Insolvency also refers to the financial incapacity of NOTE: A conservator, once appointed, merely takes
the debtors to pay their liabilities as they fall due in over the management of the bank and assumes
the ordinary course of business or whenever their exclusive powers to oversee every aspect of the
liabilities are greater than their assets. (A.M. No. 12- bank’s operations and affairs. However, the bank
12-11-SC, Financial Rehabilitation Rules of retains its juridical personality even if placed under
Procedure) the conservatorship, it is neither replaced nor
subsisted by the conservator. (Central Bank of the
The duration of conservatorship shall not exceed Philippines v. Court of Appeals, G.R. No. 88353, 08
one (1) year. (NCBA, Sec. 29) May 1992)
Q: What are the tools/remedies available to BSP Powers of a Conservator (C-A-Re- B-E-AR)
to handle banks in financial distress?
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1. Collect all monies and debts due to the said
A; The BSP may either appoint a conservator, or a institution;
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receiver or direct the closure and liquidation of the
financially distressed bank. (Divina, 2021) 2. To take charge of the Assets, liabilities, and
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the management thereof;
a) CONSERVATORSHIP
3. Reorganize, the management thereof;
Conservator (2006 BAR)
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4. Such other powers as the monetary Board
In Conservatorship, the bank still has more assets deems necessary;
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than its liabilities, but its assets are not liquid or not
in cash thus it cannot pay its obligation when it falls 5. Exercise all powers necessary to restore its
due. The bank, not the BSP, pays for fees. viability, with the power to overrule or
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revoke the actions of the previous
Appointment of Conservator management and board of directors of the
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bank or quasi-bank; and
A Conservator is appointed whenever a Bank or a
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Quasi-Bank is: 6. To bring court actions to Assail or
1. Whenever the Monetary Board, on the Repudiate contracts entered into by the
basis of a report submitted by the bank. (First Philippine International Bank v.
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appropriate supervising or examining CA, G.R. No. 115849, 24 Jan. 1996)
department, finds that a bank or quasi-
bank is in a state of continuing inability; or Powers of a Conservator do not extend to the
Revocation of Valid and Perfected Contracts
2. Unwillingness to maintain a condition of
liquidity deemed adequate to protect the The powers of a conservator cannot extend to post
interest of depositors and creditors. (Sec. facto repudiation of valid and perfected
29, NCBA) transactions. Thus, the law merely gives the
conservator power to revoke contracts that are
NOTE: The designation of a conservator under deemed to be defective void, voidable,
Section 29 of the NCBA or appointment of a receiver unenforceable, or rescissible. The conservator
shall be vested exclusively with the Monetary merely takes the place of the bank’s Board of
Board. Furthermore, the designation of a Directors. (First Philippine International Bank v. CA,
conservator is not a precondition to the designation supra.)
of a receiver.
COMMERCIAL LAW
Termination of Conservatorship 7. Persisting in conducting its business in an
unsafe or unsound manner. (Sec. 56, GBL)
1. Conservatorship is terminated when the
Monetary Board is satisfied that the Close Now-Hear Later Doctrine
institution can operate on its own and the
conservatorship is no longer necessary; or The doctrine is founded on practical and legal
considerations to obviate unwarranted dissipation
2. When the Monetary Board, on the basis of of the bank’s assets and as a valid exercise of police
the report of the conservator or of its own power to protect the depositors, creditors,
findings, determine that the continuance in stockholders, and the general public. The law does
business of the institution would involve not contemplate prior notice and hearing before the
probable loss to its depositors or creditors, bank may be directed to stop operations and placed
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in which case, the provisions of Section 30 under receivership. (Central Bank of the Philippines
on Receivership and Liquidation shall v. CA, G.R. No. 76118 30 Mar. 1993)
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apply. (Section 29, NCBA)
Swift, adequate and determined actions must be
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b) CLOSURE taken against financially distressed and
mismanaged banks by government agencies lest the
Grounds for Closure of a Bank or a Quasi-bank public faith in the banking system deteriorate to the
(1997 BAR) prejudice of the national economy. (Vivas v. The
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Monetary Board of the Bangko Sentral ng Pilipinas,
1. Cash Flow test - Unable to pay its liabilities G.R. No. 191424, 07 Aug. 2013)
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as they become due in the ordinary course
of business. (Sec. 30 (a), NCBA) Under R.A. No. 7653, the power of the Monetary
Board (MB) over banks, including rural banks, was
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2. Balance sheet test – Insufficiency of increased and expanded. The Court, in several cases,
realizable assets to meet its liabilities. (Sec. upheld the power of the MB to take over banks
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30 (b), NCBA) without need for prior hearing. It is not necessary
inasmuch as the law entrusts to the MB the
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3. Inability to continue business without appreciation and determination of whether any or
involving probable losses to its depositors all of the statutory grounds for the closure and
and creditors. (Sec. 30 (c), NCBA) receivership of the erring bank are present. The MB,
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under R.A. No. 7653, has been invested with more
4. Willful violation of a cease-and-desist order power of closure and placement of a bank under
under Section 37 that has become final, receivership for insolvency or illiquidity, or because
involving acts or transactions which the bank’s continuance in business would probably
amount to fraud or a dissipation of the result in the loss to depositors or creditors. (Vivas v.
assets. (Sec. 30 (d), NCBA) The Monetary Board of the BSP, G.R. No. 191424, 07
Aug. 2013)
5. Notification to the BSP or public
announcement of a unilateral closure. (Sec. BSP may order the closure of the bank even without
30 (a), NCBA) prior hearing. BSP may rely on the report of either
the conservator, receiver or the head of the
6. Has been dormant for at least sixty (60) supervising and examining department. It is not
days or in any manner has suspended the required to conduct a thorough audit of the bank
payment of its deposit/deposit substitute. before ordering its closure. The "close now, hear
(Ibid.) later’’ doctrine justifies BSP in ordering bank
closures even without prior hearing. Thus,
injunction does not lie against BSP in the exercise of
2023 GOLDEN NOTES
II. BANKING LAWS
the power and function. A contrary rule may lead to Period of Assailing the Order of Closure
dissipation of assets and trigger bank run. Judicial
review comes only after action of the Monetary The petition for certiorari may only be filed within
Board if the same was attended with bad faith and ten (10) days from receipt by the Board of Directors
grave abuse of discretion. (BSP v. Valenzuela, G.R. of the order directing receivership, liquidation, or
No. 184778, 02 Oct. 2009) conservatorship. (ibid.)
The writ of preliminary injunction cannot prevent NOTE: No prior hearing is necessary in appointing a
the Monetary Board from taking action, by receiver and in closing the bank. It is enough that
preventing the submission of the ROEs and worse, subsequent judicial review is provided for. Indeed,
by preventing the Monetary Board from acting on to require such previous hearings would not only be
such ROEs. The “close now, hear later” doctrine has impractical but would tend to defeat the very
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already been justified as a measure for the purpose of the law. (Rural Bank of Lucena v. Arca,
protection of the public interest. Swift action is G.R. No. L-21146, 20 Sept. 1965)
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called for on the part of the BSP when it finds that a
bank is in dire straits. (ibid.) Q: Upon maturity of the time deposits, the bank
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failed to remit. Meanwhile, by reason of punitive
NOTE: The probability of bank runs may give rise to action taken by Central Bank, the bank has been
the right to invoke borrowing of emergency loans prevented from performing banking operations.
and advancements under Sec. 84 of NCBA. Is the bank still obligated to pay the time
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deposits despite the fact that its operations were
The Closure and Liquidation of a Bank, which is suspended by the Central Bank?
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considered an Exercise of Police Power may be
the Subject of Judicial Inquiry A: YES. The suspension of operations of a bank
cannot excuse non-compliance with the obligation
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The validity of such exercise of police power is to remit the time deposits of depositors that
subject to judicial inquiry and could be set aside if it matured before the bank’s closure. (Overseas Bank
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is either capricious, discriminatory, whimsical, of Manila v. CA, G.R. No. L-45866, 19 Apr. 1989)
arbitrary, unjust or a denial or due process and
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equal protection clause of the Constitution. (Central Bank is NOT Liable to Pay Interest Once Closed
Bank v. CA, G.R. No. L-50031-32, 27 July 1981)
The liability of a bank to pay interest on deposits
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Assailing the Order of Closure (Receivership or and all other obligations as of closure shall cease
Conservatorship) upon its closure by the Monetary Board without
prejudice to the first paragraph of Section 85 of
The order may be assailed by the stockholders Republic Act No. 7653 (the New Central Bank Act):
representing at least majority of the outstanding Provided, That the receiver shall have the authority,
capital stock. (Sec. 30, R.A. No. 7653, as amended by without need for approval of the liquidation court,
R.A. No. 11211) to assign, as payment to secured creditors, the bank
assets serving as collaterals to their respective loans
Through a petition for certiorari on the ground that up to the extent of the outstanding obligations,
the action taken by the BSP was in excess of including interest as of date of closure of the hank,
jurisdiction or with such grave abuse of discretion as validated by the receiver. (R.A. No. 3591, as
as to amount to lack or excess of jurisdiction. (ibid.) amended by R.A. No. 10846)
COMMERCIAL LAW
c) RECEIVERSHIP Such authority may also be exercised over non-
stock savings and loan associations. (ibid.)
Receiver (2006 BAR)
In case of banks, the receiver shall be the Philippine
A receiver is generally appointed if the bank is Deposit Insurance Corporation (PDIC). In case of
insolvent. The receiver immediately gathers and quasi-banks and non-stock savings and loan
takes charge of all the assets and liabilities of the associations, any person of recognized competence
institution, administer the same for the benefit of its in banking, credit or finance may be designated by
creditors, and exercise the general powers of the the BSP as receiver. (ibid.)
receiver under the Rules of Court. (Divina, 2021)
Duties of a Receiver
Appointment of a Receiver
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The enumeration of the duties of a receiver was
A receiver is appointed when the Monetary Board, deleted in Section 30 of the NCBA as amended by RA
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upon report of the head of the supervising or 11211.
examining department, finds that a bank or quasi-
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bank: NOTE: Sec. 30 of R.A. No. 7653, as amended by R.A.
No. 11211, removed the authority of the receiver to
1. Has notified the Bangko Sentral or publicly rehabilitate the closed bank within 90 days from
announced a unilateral closure, or has been appointment. Upon its appointment, for any of the
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dormant for at least 60 days or in any statutory grounds, the receiver must proceed with
manner has suspended the payment of its the liquidation of the closed bank. The Monetary
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deposit/deposit substitute liabilities, or is Board shall notify in writing, through the receiver,
unable to pay its liabilities as they become the Board of Directors of the closed Bank of its
due in the ordinary course of business: decision. (Sec. 30 (d), R.A. No. 11211)
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Provided, that this shall not include
inability to pay caused by extraordinary General Powers of a Receiver under the Rules of
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demands induced by financial panic in the Court
banking community;
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1. Bring and defend in his or her capacity as a
2. Has insufficient realizable assets, as receiver, actions in his or her own name;
determined by the BSP, to meet its
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liabilities (Balance Sheet Test); 2. Take and keep possession of the property
in controversy;
3. Unable to continue business without
involving probable losses to its depositors 3. Receive rents;
or creditors; and
4. Collect debts due to himself or herself as
4. Has willfully violated the cease-and-desist receiver or to the fund, property, estate,
order under Sec 37 of the NCBA that has person or corporation of which he or she is
become final, involving acts or transactions a receiver;
which amount to fraud or a dissipation of
the assets of the institution. (Sec. 30, NCBA) 5. Compound for and compromise debts
collected;
NOTE: The appointment of a receiver shall be
vested exclusively with the Monetary Board. The 6. Make transfers;
Monetary Board may summarily and without need
for prior hearing forbid the institution from doing 7. Pay outstanding debts;
business in the Philippines and designate a receiver.
2023 GOLDEN NOTES
II. BANKING LAWS
8. Divide money and other property that shall Development Center, Inc. v. Manila Banking Corp, G.R.
remain among the persons legally entitled No. 162270, 06 Apr. 2005)
to receive the same;
Clearly, the receiver appointed by the Central Bank
9. Do such acts respecting the property as the to take charge of the properties of Manila Bank only
court may authorize; and had authority to administer the same for the benefit
of its creditors. Granting or approving an "exclusive
10. Invest funds in his or her hands only by option to purchase" is not an act of administration,
order of the court upon the written consent but an act of strict ownership, involving, as it does,
of all the parties. (Sec. 6, Rule 59, ROC, as the disposition of property of the bank. Not being an
amended) act of administration, the so-called "approval" by
Atty. Renan Santos amounts to no approval at all, a
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Functions of the PDIC as a Receiver bank receiver not being authorized to do so on his
own. For sure, Congress itself has recognized that a
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PDIC, as a receiver, shall control, manage, and bank receiver only has powers of administration.
administer the affairs of the closed bank. Assets of (ibid.)
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the closed bank under receivership shall be deemed
in custodia legis in the hands of the receiver. (Divina, Moreover, in relation to Sec. 30 of the NCBA, the
2021) receiver cannot exercise acts of strict ownership.
The properties of the bank may be sold to pay its
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The Insolvency of a Bank and the Consequent debts. (Divina, 2021)
Appointment of a Receiver Restrict the Bank's
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Capacity to Act, especially in relation to its Nature of Order of Receivership
Property
While resolutions of the Monetary Board
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It has been said that where upon the insolvency of a forbidding a bank to do business on account of a
bank, a receiver therefor is appointed, the assets of condition of insolvency and appointing a receiver to
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the bank pass beyond its control into the possession take charge of the bank’s assets or determining
and control of the receiver whose duty is to whether the bank may be rehabilitated or should be
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administer the assets for the benefit of the creditors liquidated are by law “final and executory.”
of the bank. Thus, the appointment of a receiver However, they can be set aside by the court on one
operates to suspend the authority of the bank and of specific ground - if the action is plainly arbitrary and
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its directors and officers over its property and made in bad faith. Such contention can be asserted
effects, such authority being reposed in the receiver, as an affirmative defense or a counterclaim in the
and this respect, the receivership is equivalent to an proceeding for assistance in liquidation. (Salud v.
injunction to restrain the bank officers from Central Bank, G.R. No. L-17620, 19 Aug. 1986)
intermeddling with the property of the bank in any
way. (Villanueva v. CA, G.R. No. 114870, 26 May 1995) A bank under receivership can only sue or be sued
through its receiver, the PDIC. Thus, a petition filed
The Receiver is not Authorized to Transact on behalf of a bank under receivership that is
Business in Connection with the Bank’s Assets neither filed through nor authorized by the PDIC
and Property must be dismissed for want of jurisdiction.
A receiver can only perform acts of administration When a bank is ordered closed and placed under the
and not acts of dominion. The receiver cannot receivership of PDIC by the Monetary Board, PDIC is
approve an option to purchase real property. He has mandated to proceed with the takeover and
only the authority to administer the same for the liquidation of the closed bank. PDIC shall
benefit of the creditors. (Abacus Real Estate immediately gather and take charge of all the assets
and liabilities of the bank, administer the same for
COMMERCIAL LAW
the benefit of its creditors, and exercise the general As to their obligations
powers of a receiver under the Revised Rules of A receiver, upon his
A conservator has one
Court. In its capacity as the receiver of the closed appointment based on
(1) year from
bank, the PDIC is authorized to perform several any statutory grounds,
appointment to
functions in its behalf, including bringing suits to must proceed with the
restore the bank’s
enforce liabilities to or recoveries of the closed liquidation of the
financial viability
banks, hiring or retaining private counsels as may closed bank
be necessary, and exercising such other powers as (Divina, 2021)
are inherent and necessary for the effective
discharge of the duties of the corporation as a d) LIQUIDATION
receiver. (Banco Filipino Savings and Mortgage Bank
v. BSP, G.R. No. 200642, 26 April 2021, J. Hernando) Liquidation of a Bank
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Conservator vs. Receiver (2015 BAR) Acts of liquidation are those which constitute the
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conversion of the assets of the banking institution to
CONSERVATOR RECEIVER money or the sale, assignment, or disposition of the
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As to appointment same to creditors and other parties for the purpose
of paying debts of such institution. (Banco Filipino v.
He is appointed if the
Central Bank, G.R. No. 70054, 11 Dec. 1991)
bank is in a
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continuing state of
Liquidator of a Distressed Bank can Prosecute
lack of liquidity
and Defend Suits Against the Bank
adequate to protect
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He is generally
the interest of the
appointed of the bank Prosecution of suits, collection, and the foreclosure
bank’s creditors and
is insolvent of mortgages against debtors of the bank by the
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depositors (meaning,
liquidator are among the usual and ordinary
its assets are more
transactions pertaining to the administration of a
than liabilities but not
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bank. (Banco Filipino v. Central Bank, supra)
in cash or readily
convertible to cash)
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A Liquidator may Foreclose Mortgages Due to a
As to exercise of power Bank while the Issue of Receivership is Pending
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A receiver shall
A liquidator can foreclose mortgages for and on
immediately gather
behalf of the bank even if the issue on receivership
and take charge of all
and liquidation is still pending. (ibid.)
the assets and
A conservator takes
liabilities of the
charge of the assets, Q: An intra-corporate case was filed before RTC.
institution, administer
liabilities and On the other hand, another complaint was filed
the same for the
management of the before BSP to compel a bank to disclose its
benefit of its creditors,
bank in distress stockholdings invoking the supervisory power
and the exercise of
of the latter. Is there forum shopping?
general powers of the
receiver under the
A: NONE. The two proceedings are of different
ROC.
nature praying for different reliefs. The complaint
As to conduct of business filed with the BSP was an invocation of its
When a conservator is When a receiver is supervisory powers over banking operations which
appointed, the bank is appointed, the bank does not amount to a judicial proceeding. (Suan v.
allowed to do business cannot do business Gonzalez A.C. No. 6377, 12 Mar. 2007)
2023 GOLDEN NOTES
II. BANKING LAWS
Commencement of Liquidation Proceedings Bar reasonable diligence, it has been held that the
the Filing of a Separate Action or Petition to purchase is entitled to a preference in the assets of
Assail the Order of Closure the bank on its liquidation before the check is
paid.(Miranda v. PDIC, G.R. No. 169334, 08 Sept.
Once liquidation proceedings have been initiated, 2006)
the majority stockholders of the bank can no longer
file a separate action or petition to assail the order Rule of Promissory Estoppel
of closure. Instead, issues on validity of closure
should be raised as affirmative defenses in the The BSP may not thereafter renege on its
liquidation proceeding. This is necessary to prevent representation and liquidate the bank after majority
multiplicity of suits or conflicting resolutions. (Salud stockholders of the bank complied with the
v. Central Bank of the Philippines, G.R. No. 71630, 19 conditions and parted with value to the profit of CB,
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Aug. 1986) which thus acquired additional security for its own
advances, to the detriment of the bank’s
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Filing of the Claims against the Insolvent Bank stockholders, depositors and other creditors.
(Ramos v. Central Bank of the Philippines, G.R. No. L-
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GR: All claims against the insolvent bank should be 29352, 04 Oct. 1971)
filed in the liquidation proceeding. It is not
necessary that a claim be initially disputed in a court The doctrine of 'promissory estoppel' is by no
or agency before it is filed with the liquidation court. means new, although the name has been adopted
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(Ong v. CA, G.R. No. 112830, 1 Feb. 1996) only in comparatively recent years. Ac-cording to
that doctrine, an estoppel may arise from the
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XPN: Where it is the bank that files a claim against making of a promise, even though without
another person or legal entity, the claim should be consi-deration, if it was intended that the promise
filed in the regular courts. should be relied upon and in fact it was relied upon,
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and if a refusal to enforce it would be virtually to
Reason: It is intended to prevent multiplicity of sanction the perpetration of fraud or would result in
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actions against the insolvent bank. It is a pragmatic other injustice. (ibid.)
arrangement designed to establish due process and
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orderliness in the liquidation of the bank, to obviate A Final and Executory Judgment against an
the proliferation of litigations and to avoid injustice Insolvent Bank may be Stayed
and arbitrariness.
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After the Monetary Board has declared that a bank
Bank Deposits as a Rule are NOT Preferred is insolvent and has ordered it to cease operations,
Credits the Board becomes the trustee of its assets for the
equal benefit of all creditors, including depositors.
In the absence of fraud, the purchase of a cashier's One cannot obtain an advantage or preference over
check, like the purchase of a draft on a another by attachment, execution or otherwise. The
correspondent bank, creates the relation of creditor final judgment against the bank should be stayed as
and debtor, not that of principal and agent, with the to execute the judgment would unduly deplete the
result that the purchaser or holder thereof is not assets of the banks to the obvious prejudice of other
entitled to a preference over general creditors in the depositors and creditors. (Lipana v. Development
assets of the bank issuing the check when it fails Bank of Rizal, G.R. No. L-73884, 24 Sept. 1987)
before payment of the check.
Q: MATAH Bank suffered extreme financial
However, in a situation involving the element of losses for five years since 2009. The BSP,
fraud, where a cashier's check is purchased from a through the Monetary Board, placed MATAH
bank at a time when it is insolvent, as its officers Bank under the receivership of PDIC. After two
know or are bound to know by the exercise of (2) public sale attempts, PDIC informed BSP that
COMMERCIAL LAW
MATAH Bank can hardly be rehabilitated. BSP 1. DEFINITION AND CLASSIFICATION OF BANKS
ordered the PDIC to commence the liquidation
of the bank. However, the stockholders
Bank
representing the majority stock of MATAH Bank
filed a petition for certiorari before the CA
It refers to entities engaged in the lending of funds
challenging the order of the Monetary Board to
obtained in the form of deposits. (Sec. 3.1, GBL)
commence the liquidation proceedings. It
alleged that the Monetary Board must first
Elements for an Entity to be considered Doing
conduct its own independent factual
Business as a Bank
determination on the bank's viability before
ordering its liquidation. Is their contention
1. The entity is engaged in the lending of
correct?
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funds;
2. Funds obtained from the public, which shall
A: NO. Nothing in Section 30 of RA 7653 requires
mean 20 or more persons; and
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the BSP, through the Monetary Board, to make an
3. Funds are obtained in the form of deposits.
independent determination of whether a bank may
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still be rehabilitated or not. Once the receiver
NOTE: A transaction involving not a loan, but
determines that rehabilitation is no longer feasible,
purchase of receivables at a discount well within the
the Monetary Board is simply obligated to notify in
purview of investing, reinvesting, or trading in
writing the bank's board of directors of the same
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securities which an investment company is
and direct the PDIC to proceed with liquidation.
authorized to perform is not banking.
(Apex Bancrights Holdings v. BSP, G.R. No. 214866, 02
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Oct. 2017)
Extent of Ownership of Foreign Individuals and
Non-bank Corporations in a Bank
NOTE: Section 30 of NCBA, as amended, no longer
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refer to rehabilitation. Moreover, Section 12 of R.A.
GR: Foreign individuals may own or control up to
No. 3591 as amended by R.A. 10846 provides that
40% of the voting stock of a domestic bank. With
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banks closed by the Monetary Board shall no longer
this, foreigners may be elected directors of a
be rehabilitated.
domestic bank to the extent of their foreign equity.
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(Sec. 11, GBL)
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B. GENERAL BANKING LAW OF 2000 XPNs:
(R.A. No. 8791) 1. A universal bank can own up to 100% of the
equity in a thrift bank, a rural bank or a
financial allied enterprise (Sec. 25, GBL);
State Policy
2. A corporation whose shares are listed in
The State recognizes the vital role of banks in the stock exchange can own up to 60% of
providing an environment conducive to the the bank;
sustained development of the national economy and
the fiduciary nature of banking that requires high NOTE: This privilege can be exercised only once.
standards of integrity and performance. In
furtherance thereof, the State shall promote and 1. If the corporation is in existence for 10
maintain a stable and efficient banking and financial years it can own up to 60% of the bank; and
system that is globally competitive, dynamic, and
responsive to the demands of a developing NOTE: This privilege can be exercised only
economy. (Sec. 2, R.A. No. 8791, General Banking Law once.
of 2000 (GBL))
2023 GOLDEN NOTES
II. BANKING LAWS
2. Under Foreign Bank Liberalization Law 2. Commercial banks (KBs) - Ordinary banks
(R.A. No. 7721), the Monetary Board may governed by the GBL which have a lower
authorize foreign banks to operate in the capitalization requirement than UBs and
Philippines. can neither exercise the powers of an
investment house nor invest in non-allied
NOTE: However, foreigners are not allowed to be enterprises. In addition to the general
appointed as officers because the same will violate powers incident to corporations and those
the Anti-Dummy Law. Any foreigner is not allowed provided in other laws, a KB shall have the
to intervene in the management, operation, authority to exercise all such powers as
administration or control, whether as officer, may be necessary to carry on the business
employee or laborer therein of a corporation, which, of commercial banking.
the exercise or enjoyment of which is expressly
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reserved by the Constitution r the laws to citizens of 3. Thrift banks – These are banks primarily
the Philippines. (Sec. 2-A, C.A. 108) governed by the Thrift Banks Act (R.A. No.
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7906):
Ownership of Foreign Individuals in a Bank a. Savings and mortgage banks;
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b. Stock savings and loan
The percentage of foreign-owned voting stocks in a associations;
bank shall be determined by the citizenship of the c. Private development banks; and
individual stockholders in that bank. The d. Any banking corporation that may
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citizenship of the corporation which is a be organized for the purposes
stockholder in a bank shall follow the citizenship of stated in RA 7906.
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the controlling stockholders of the corporation,
irrespective of the place of incorporation. (Sec. 11, 4. Rural banks – These are banks primarily
GBL) governed by the Rural Banks Act of 1992
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(R.A. No. 7353) mandated to make needed
Classifications of Banks (2002, 2010 BAR) credit available and readily accessible in
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the rural areas on reasonable term.
1. Universal banks (UBs) - Primarily 5. Cooperative banks – These are banks
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governed by the GBL and have the highest primarily governed by the Cooperative
capitalization. A UB shall have the authority Code (R.A. No. 6938) and are organized by,
to exercise, in addition to the powers and the majority shares of which are owned and
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services authorized for a Commercial Bank controlled by, cooperatives primarily to
(KB) as enumerated in Sec. 29 of the GBL, provide financial and credit services to
and those provided by other laws, the cooperatives. The term Cooperative Bank
following: (a) the powers of an investment It shall include cooperative rural banks.
house (IH) as provided under existing laws;
(b) the power to invest in non-allied 6. Islamic banks – These are banks whose
enterprises; (c) the power to own up to one business dealings and activities are subject
hundred percent (100%) of the equity in a to the basic principles and rulings of Islamic
Thrift Bank (TB), a Rural Bank (RB), a Shari’ a within the purview of the declared
financial allied enterprise, or a non- policy under R.A. No. 6848, otherwise
financial allied enterprise; and (d) in case of known as the Charter of Al Amanah Islamic
publicly-listed UBs, the power to own up to Investment Bank of the Philippines.
100% of the voting stock of only one (1)
7. Other classification of banks as determined
other UB or KB.
by the Monetary Board of the BSP such as
the Digital Banks.
COMMERCIAL LAW
2. DISTINCTION OF BANKS FROM QUASI-BANKS A: NO. The tax treatment of pawnshops as non-bank
AND TRUST ENTITIES financial intermediaries is not without basis.
Financial intermediaries are defined as persons or
entities whose principal functions include the
Quasi-banks
lending, investing or placement of funds or
evidences of indebtedness or equity deposited with
These are entities engaged in the borrowing of
them, acquired by them, or otherwise coursed
funds through the issuance, endorsement, or
through them, either for their own account or for
assignment with recourse or acceptance of deposit
the account of others. It need not be elaborated that
substitutes for purposes of re-lending or purchasing
pawnshops are non-banks/not banking institutions.
of receivables and other obligations. (Sec. 4.6, GBL)
Moreover, the nature of their business activities
Unlike banks, quasi-banks do not accept deposits;
partakes that of a financial intermediary in that its
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and the funds obtained are not insured with the
principal function is lending.
PDIC.
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That pawnshops are to be treated as non-bank
Trust Entities
financial intermediaries is further bolstered by the
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fact that pawnshops are under the regulatory
These are entities authorized by the Monetary
supervision of the Bangko Sentral ng Pilipinas and
Board to engaged in trust business that act as a
covered by its Manual of Regulations for Non-Bank
trustee or administer any trust or hold property in
Financial Institutions. (First Planters Pawnshop, Inc.
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trust or on deposit for the use, benefit, or behalf of
v. CIR, G.R. No. 17413430 July 2008)
others. (Sec. 79, GBL)
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Deposit Substitutes
Financial Intermediaries
It is an alternative form of obtaining funds from the
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Persons or entities whose principal functions
public, other than deposits, through the issuance,
include the lending, investing, or placement of funds
endorsement, or acceptance of debt instruments,
on pieces of evidence of indebtedness or equity
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for the borrower's own account, for the purpose of
deposited with them, acquired by them or
relending or purchasing of receivables and other
otherwise coursed through them, either for their
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obligations. These instruments may include, but
own account or for the account of others. (First
need not be limited to, banker’s acceptances,
Planters Pawnship, Inc. v. CIR, G.R. No. 174134, 30 July
promissory notes, participations, certificates of
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208)
assignment and similar instruments with recourse,
and repurchase agreements. (Sec. 95, NCBA)
Pawnshops are Non-bank Financial
Intermediaries
Q: XYZ Corporation is engaged in lending funds
to small vendors in various public markets. To
Q: First Planters Pawnshop, Inc. (Pawnshop)
fund the lending, XYZ Corporation raised funds
contests the deficiency value-added and
through borrowings from friends and investors.
documentary stamp taxes imposed upon it by
Which statement is most accurate?
the Bureau of Internal Revenue (BIR) for the
a. XYZ Corporation is a bank.
year 2000. The core of petitioner’s argument is
b. XYZ Corporation is a quasi-bank.
that it is not a lending investor within the
c. XYZ Corporation is an Investment
purview of Sec. 108 (A) of the National Internal
Company.
Revenue Code (NIRC), as amended, and
d. XYZ Corporation is none of the above.
therefore not subject to value-added tax (VAT).
(2012 BAR)
Is Pawnshop’s contention correct?
A: b. XYZ Corporation is a quasi-bank
2023 GOLDEN NOTES
II. BANKING LAWS
3. NATURE OF BANK FUNDS AND BANK instruments designed to effect

DEPOSITS withdrawals of savings deposits
without requiring the depositors
concerned to present their
Nature of a Bank Deposit
passbooks and accomplishing the
necessary withdrawal slips, except
All kinds of bank deposits are loans. The bank can
for banks authorized by the
make use of the money deposited as its own. Said
Bangko Sentral to adopt the no
amount is not being held in trust for the depositor
passbook withdrawal system
nor is it being kept for safekeeping. (Tang Tiong Tick
(Manual of Regulations for Banks,
v. American Apothecaries, G.R. No. 43682, 31 Mar.
Sec. 211)
1938)
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NOTE: Under the rules, to be able
Deposit Function of Banks
to withdraw from the savings
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account deposit under the
The function of the bank to receive a thing, primarily
Philippine foreign currency
money, from depositors with the obligation of safely
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deposit system, two requisites
keeping it and returning the same.
must be presented to petitioner
bank by the person withdrawing
Kinds of Deposits between a Bank and its
an amount: (a) a duly filled-up
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Depositors
withdrawal slip, and (b) the
depositor's passbook. (BPI v. CA,
1. As debtor-creditor
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G.R. No. 112392, 29 Feb. 2000)
Bank deposits are governed by the law on loans. The

c. Negotiable order of withdrawal
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fiduciary nature of the bank-depositor relationship
account (NOWA) – Interest-
does not convert the contract between banks and
bearing deposit accounts that
depositors to a trust agreement. Thus, failure by the
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combine the payable on demand
bank to pay the depositor is failure to pay simple
feature of checks and investment
loan, and not a breach of trust. (Consolidated Bank
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feature of saving accounts.
and Trust Corporation v. Court of Appeals, G.R. No.
138569, 11 Sept. 2003)
d. Time deposit – an account with
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fixed term; payment of which
2. Special Kinds of Deposits
cannot be legally required within
such a specified number of days.
a. Demand deposits – all those
liabilities of banks which are
3. As trustee-trustor
denominated in the Philippine
currency and are subject to
Trust account – a savings account, established
payment in legal tender upon
under a trust agreement containing funds
demand by the presentation of
administered by the bank for the benefit of the
checks; (Sec. 58, NCBA)
trustor or another person or persons.
b. Savings deposits – the most

4. As agent-principal
common type of deposit and is
usually evidenced by a passbook.
a. Deposit of checks for collection
b. Deposit for specific purpose
Banks are prohibited from
c. Deposit for safekeeping
issuing/accepting withdrawal
slips or any other similar
COMMERCIAL LAW
Types of Deposit Accounts A: Partly YES. A joint account is one that is held
jointly by two or more natural persons, or by two or
1. Savings; more juridical persons or entities. The common
2. Current; and banking practice is that regardless of who puts the
3. Time. money into the account, each of the named account
holder has an undivided right to the entire balance,
Classification of Deposit Accounts and any of them may deposit and/or withdraw,
partially or wholly, the funds without the need or
1. Individual; or consent of the other, during their lifetime.
2. Joint: Nevertheless, as between the account holders, their
a. “And” account – the signature of both co- right against each other may depend on what they
depositors are required for withdrawals. have agreed upon, and the purpose for which the
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account was opened and how it will be operated.
b. “And/or” account – either one of the co-
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depositors may deposit and withdraw from In this case, the account opened by Evangeline and
the account without the knowledge consent Dominador was a joint “or” account for a specific
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and signature of the other. purpose of facilitating the transfer of needed funds
for Evangeline’s projects. Dominador may withdraw
NOTE: Joint accounts may be subject of a therefrom "if" there is a need to meet Evangeline's
survivorship agreement whereby the co-depositors financial obligations arising from said projects.
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agree to permit either of them to withdraw the Hence, while Dominador is a co-owner of the subject
whole deposit during their lifetime and transferring account as far as the bank is concerned — and may,
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the balance to the survivor upon the death of one of thus, validly deposit and/or withdraw funds
them. (Vitug v. CA, G.R. No. 82027, 29 Mar. 1990) without the consent of his co-depositor, Evangeline
— as between him and Evangeline, his authority to
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Q: Evangeline executed General and Special withdraw, as well as the amount to be withdrawn, is
Powers of Attorney constituting her brother circumscribed by the purpose for which the subject
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Dominador as her attorney-in-fact to purchase account was opened. Nonetheless, the initial
real property for her, and to manage or amount deposited by Dominador should be
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supervise her business affairs in the Philippines. deducted from the amount to be returned to
Thereafter, she (Evangeline) and Dominador Evangeline. (Dominador Apique V. Evangeline
opened a joint savings account with Equitable Fahnenstich, G.R. No. 205705, 05 Aug. 2015)
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PCI Bank. However, Dominador withdrew the
amount of P980,000.00 from the account and Banks Deposits v. Deposit Substitutes
deposited the money to his own savings account.
Evangeline then filed a complaint after her DEPOSIT
BANK DEPOSITS
demand for the return of the money withdrawn SUBSTITUTES
from the joint account remained unheeded. As to source
Evangeline claimed to be the sole owner of the These are alternative
money deposited. Dominador on his part forms of obtaining
asserted that he was authorized to withdraw funds from the public,
funds from the subject account to answer for the other than deposits,
expenses of Evangeline's projects, considering: through the issuance,
Obtained by the bank
(a) that it was a joint account, and (b) the endorsement, or
from the public
general and special powers of attorney executed acceptance of debt
by Evangeline in his favor. Is Evangeline entitled instruments for the
to the return of the amount of P980,000.00 own account of the
Dominador withdrew from their joint savings borrower. These
account? instruments include,
2023 GOLDEN NOTES
II. BANKING LAWS
but not limited to, Nature of Safety Deposit Box

bankers’ acceptance,
promissory notes, The contract for the use of a safety deposit box
participations, should be governed by the law on lease.
certificates of
assignment and similar Sec. 53 of the GBL is clear that with respect to
instruments with renting out of safety deposit boxes, the bank does
recourse, and not perform the service as depositary or as agent.
repurchase
agreements. 4. DILIGENCE REQUIRED OF BANKS
As to purpose
They are relent by such
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Nature of Banking Business and Responsibility
bank to its own of Banks
borrowers. Which
They are for relending
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gives rise to a creditor-
or purchasing of The banking system is an indispensable institution
debtor relationship in the modern world and plays a vital role in the
receivables and other
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between the bank as
obligations. economic life of every civilized nation. (Simex
debtor, and the
International (Manila) Inc. v. CA, G.R. No. 88013, 19
depositors as
Mar. 1990 as cited in the case of Land Bank of the
creditors.
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Philippines vs. Oñate, G.R. No. 192371, 15 Jan. 2014)
(Divina, 2021 citing BAR 2010)
In every case, the depositor expects the bank to
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Mandamus will not lie in the Enforcement of treat his account with the utmost fidelity, whether
Obligations concerning Deposit such account consists only of a few hundred pesos
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or of millions. The bank must record every single
Bank deposits are in the nature of irregular transaction accurately, down to the last centavo and
deposits. They are really loans because they earn as promptly as possible. This has to be done if the
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interest. All kinds of bank deposits, whether fixed, account is to reflect at any given time the amount of
savings, or current are to be treated as loans and are money the depositor can dispose of as he sees fit,
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to be covered by the law on loans. (Art. 1980, NCC; confident that the bank will deliver it as and to
Gullas v. PNB, G.R. No. L- 43191, 13 Nov. 1935) whomever he directs. (Ibid.)
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Current and savings deposits are loans to a bank As a business affected with public interest and
because it can use the same. Failure of the because of the nature of its functions, the bank is
respondent Bank to honor the time deposit is failure under obligations to treat the accounts of its
to pay its obligation as a debtor and not a breach of depositors with meticulous care, always having in
trust arising from a depository's failure to return mind the fiduciary nature of their relationship.
the subject matter of the deposit. The relationship (Ibid.)
being contractual in nature, mandamus is therefore
not an available remedy since mandamus does not Degree of Diligence Required of Banks in
lie to enforce the performance of contractual Handling Deposits
obligations. (Lucman v. Alimatar Malawi, G.R. No.
159794, 19 Dec. 2006, citing Guingona, Jr., et al. v. The The General Banking Law of 2000 requires of banks
City Fiscal of Manila, et al. G.R. No. 60033, 04 Apr. the highest standards of integrity and performance.
1984, citing Serrano v. Central Bank of the The banking business is impressed with public
Philippines, G.R. No. L-30511, 14 Feb. 1980) interest. Of paramount importance is the trust and
confidence of the public in general in the banking
industry. Consequently, the diligence required of
COMMERCIAL LAW
banks is more than that of a Roman pater familias or handling her accounts since she fails to inquire
a good father of a family. The highest degree of about its status. Is PS Bank correct?
diligence is expected. (PCI Bank v. Balmaceda, G.R.
No. 158143, 21 Sept. 2011) A: NO. Banking institutions are imbued with public
interest, and the trust and confidence of the public
The high standards are also necessary to ensure to them are of paramount importance. As such, they
public confidence in the banking system, for, are expected to exercise the highest degree of
according to Philippine National Bank v. Pike, the diligence, and high standards of integrity and
stability of banks largely depends on the confidence performance. By the nature of its functions, a bank
of the people in the honesty and efficiency of banks. is under obligation to treat the accounts of its
(Philippine National Bank v. Sps. Tajonera, G.R. No. depositors with meticulous care, always having in
195889, 24 Sept. 2014; Comsavings Bank v. Sps. mind the fiduciary nature of their relationship.
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Capistrano, G.R No. 170942, 28 Aug. 2013) Thus, the prime duty of a bank is to ascertain the
genuineness of the signature of the drawer or the
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But the same degree of diligence is not expected to depositor on the check being encashed, with
be exerted by banks in commercial transactions that reasonable business prudence.
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do not involve their fiduciary relationship with
depositors, such as sale and issuance of demand A bank is bound to know the signatures of its
draft or in acting as advising bank in a latter credit. customers; and if it pays a forged check, it must be
(Gregorio Reyes v. Court of Appeals, G.R. No. 118492, considered as making the payment out of its own
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15 Aug. 2001) funds, and cannot ordinarily charge the amount so
paid to the account of the depositor whose name
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Q: Maria Sakata opened a Savings and Current was forged. Being negligent in failing to detect the
account with PS Bank in 2002. A year after, she forgery, the bank bears the loss.
left for Japan to work and came home in 2006.
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When she updated her accounts, she found that Even assuming that her mother indeed presented
instead of P1,000,000, she only had a remaining the questioned checks while respondent was in
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balance of P391 in her Savings account and that Japan, she cannot be held negligent in entrusting the
there were deposit and withdrawal entries in same to her mother. (Philippine Savings Bank v.
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her passbook from 2003 to 2005. Sakata talked Maria Cecilia Sakata, G.R. No. 229450, 17 June 2020)
to the manager of PS Bank who instructed her to
write a letter of request for her current account Degree of Diligence Required of Banks with its
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statements. Afterwards, she found out that there other Dealings
were 25 checks debited from her account which
she claimed she did not issue nor signed. Also, The diligence more than that of a Roman pater
she stated that the serial numbers of the checks familias only applies in cases where banks act under
were never in her possession. Thus, she asked their fiduciary capacity, that is, as depositary of the
for the re-credit of the amount withdrawn to her deposits of their depositors. The same degree of
account which was not complied with by PS diligence is not expected to be exerted by banks in
Bank. commercial transactions. (Reyes v. CA, G.R. No.
118492. 15 Aug. 2001)
PS Bank claimed that the checks were validly
encashed since Sakata authorized her mother to Q: Poole-Blunden came across an advertisement
request and receive two additional checkbooks placed by Union Bank in the Manila Bulletin. The
bearing the serial numbers appearing on the ad was for the public auction of certain
checks. Also, even assuming that there was properties. One of these properties was a
forgery, the doctrine of shared responsibility condominium unit. The Unit was advertised to
should apply since Sakata was also negligent in have an area of 95 square meters. Thinking that
it was sufficient and spacious enough for his
2023 GOLDEN NOTES
II. BANKING LAWS
residential needs, Poole-Blunden decided to Indeed, the ascertainment of the status or condition
register for the sale and bid on the unit. Poole- of a property offered to it as security for a loan must
Blunden placed his bid and won the unit for be a standard and indispensable part of a bank's
₱2,650,000.00. In late 2003, Poole-Blunden operations. Whether it was unaware of the unit's
decided to construct two (2) additional actual interior area; or, knew of it, but wrongly
bedrooms in the Unit. Upon examining it, he thought that its area should include common spaces,
noticed apparent problems in its dimensions. He respondent's predicament demonstrates how it
took rough measurements of the Unit, which failed to exercise utmost diligence in investigating
indicated that its floor area was just about 70 the Unit offered as security before accepting it. This
square meters, not 95 square meters, as negligence is so inexcusable; it is tantamount to bad
advertised by UnionBank. Did respondent Union faith. (Poole-Blunden v. Union Bank, G.R. No. 205838,
Bank of the Philippines committ such a degree 29 Nov, 2017)
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of fraud as would entitle petitioner Joseph Harry
Walter Poole-Blunden to the voiding of the Effect when the Teller gave the Passbook to a
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Contract to Sell the condominium unit? Wrong Person
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A: YES. Banks are required to observe a high degree Banks must exercise a high degree of diligence in
of diligence in their affairs. This encompasses their ensuring that they return the passbook only to the
dealings concerning properties offered as security depositor or his authorized representative. For
for loans. A bank that wrongly advertises the area of failing to return the passbook to the authorized
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a property acquired through foreclosure because it representative of the depositor, the bank
failed to dutifully ascertain the property's presumptively failed to observe such high degree of
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specifications is grossly negligent as to practically diligence in safeguarding the passbook and
be in bad faith in offering that property to ensuring its return to the party authorized to
prospective buyers. Any sale made on this account receive the same.
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is voidable for causal fraud. In actions to void such
sales, banks cannot hide under the defense that a However, a bank’s liability may be mitigated by the
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sale was made on an as-is-where-is basis. As-is- depositor’s contributory negligence such as
where-is stipulations can only encompass physical allowing a withdrawal slip signed by authorized
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features that are readily perceptible by an ordinary signatories to fall into the hands of an impostor.
person possessing no specialized skills. (Consolidated Bank and Trust Corporation v. CA, G.R.
No, 138569, 11 Sept. 2003)
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The high degree of diligence required of banks
equally holds true in their dealing with mortgaged 5. PROHIBITED TRANSACTIONS BY BANK
real properties, and subsequently acquired through DIRECTORS AND OFFICERS
foreclosure, such as the Unit purchased by
petitioner. In the same way that banks are
No director, officer, employee, or agent of any bank
presumed to be familiar with the rules on land
shall:
registration, given that they are in the business of
a. Make false entries in any bank report or
extending loans secured by real estate mortgage,
statement or participate in any fraudulent
banks are also expected to exercise the highest
transaction, thereby affecting the financial
degree of diligence. This is especially true when
interest of, or causing damage to, the bank
investigating real properties offered as security,
or any person;
since they are aware that such property may be
passed on to an innocent purchaser in the event of
b. Without order of a court of competent
foreclosure.
jurisdiction, disclose to any unauthorized
person any information relative to the
funds or properties in the custody of the
COMMERCIAL LAW
bank belonging to private individuals, each successive increase shall be with the
corporations, or any other entity: Provided, written assent of the depositor."
That with respect to bank deposits, the
provisions of existing laws shall prevail; (1) X, a regular client of the bank, contends that
the "Escalation Clause" is unfair,
c. Accept gifts, fees, or commissions or any unconscionable and contrary to law, morals,
other form of remuneration in connection public policy and customs. Rule on the issue
with the approval of a loan or other credit and explain.
accommodation from said bank;
A: The “escalation clause” is valid because each
d. Overvalue or aid in overvaluing any successive increase shall be with the written assent
security for the purpose of influencing in of the depositor. This stipulation does not violate
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any way the actions of the bank or any the principle of mutuality of contracts. The
bank; or stipulation would have been void if the supposed
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consent is given prior to the increase in the interest
e. Outsource inherent banking functions. (Sec. rate.
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55, R.A. No. 8791)
(2) Suppose that the "Escalation Clause" instead
6. STIPULATION ON INTERESTS reads: "B Bank hereby reserves the right to
make reasonable increases in interest rates
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in accordance with bank policies as
Rules on Stipulation of Interests
approved by the Monetary Board; Provided,
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there shall be corresponding reasonable
Through Circular No. 799, the Monetary Board
decreases in interest rates as approved by
declared that effective July 1, 2013 the rate of
the Monetary Board." Would this be valid?
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interest for the loan or forbearance of any money,
Explain. (2016 BAR)
goods or credits and the rate allowed in judgments,
in the absence of an express contract as to such rate
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A: An escalation clause with a de-escalation clause
of interest, shall be 6% per annum. (Sec. 1, Circular
is valid, provided that the client’s consent is still
799, Series of 2013 amending Sec. 2 of Circular No.
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secured prior to any increase in interest rate;
905, Series of 1982)
otherwise, the escalation clause is void.
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This means that if the parties fail to state in writing
A Bank Forbidden by the Central Bank to Do
the interest payable on any of the transactions
Business is NOT Obligated to Pay Interest on
mentioned, or on account of a court judgment
Deposit
involving a related money claim, the imposable
interest is 6% every year.
A bank lends money, engages in international
transactions, acquires foreclosed mortgaged
Q: B Bank, a large universal bank, regularly
properties or their proceeds and generally engages
extends revolving credit lines to business
in other banking and financing activities in order
establishments under what it terms as socially
that it can derive income therefrom. Therefore,
responsible banking and private business
unless a bank can engage in those activities from
partnership relations. All loans that are
which it can derive income, it is inconceivable how
extended to clients have a common "Escalation
it can carry on as a depository obligated to pay
Clause," to wit: "B Bank hereby reserves its right
interest on money deposited with it. (Fidelity &
to make successive increases in interest rates in
Savings and Mortgage Bank v. Cenzon, G.R. No. L-
accordance with the bank's adopted policies as
46208, 05 Apr. 1990)
approved by the Monetary Board; Provided that
2023 GOLDEN NOTES
II. BANKING LAWS
Q: Manosa, a newspaper columnist, while
C. SECRECY OF BANK DEPOSITS making a deposit in a bank, overheard a pretty
(R.A. No. 1405, as amended, and R.A. No. 6426, as bank teller informing a co-employee that Gigi, a
amended) well-known public official, has just a few
hundred pesos in her bank account and that her
check will in all probability bounce. Manosa
wrote this information in his newspaper
1. PURPOSE column. Thus, Gigi filed a complaint with the City
Fiscal of Manila for unlawfully disclosing
The purposes of R.A. No. 1405 are: information about her bank account.
a. Encourage deposit in banking institutions;
and a. Will the said suit prosper? Explain your
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b. Discourage private hoarding so that banks answer.
may lend such funds and assist in the
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economic development of the country. (Sec. A: NO. The suit will not prosper. It is clear as
1, R.A. No. 1405) provided in section 3 of R.A. 1405 that it shall be
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unlawful for any official or employee of a banking
2. PROHIBITED ACTS institution to disclose to any person other than
those mentioned in the said law any information
concerning said deposits. Manosa, as a columnist, is
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The following are the prohibited acts in R.A. No.
not one of those persons contemplated under the
1405:
law. Furthermore, he merely overheard what
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appeared to be a vague remark of the bank teller
1. Examination/inquiry/looking into all deposits
therefore is not in a sense an inquiry or a disclosure.
of whatever nature with banks or banking
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institutions in the Philippines (including
b. Supposing that Gigi is charged with
investment in bonds issued by the Government
unlawfully acquiring wealth under R.A.
of the Philippines, its political subdivisions and
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1379 and that the fiscal issued a subpoena
its instrumentalities) by any person,
duces tecum for the records of the bank
government official, bureau, or office. (Sec. 2,
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account of Gigi. Can Gigi validly oppose the
R.A. No. 1405)
said issuance on the ground that the same
violated the law on secrecy of bank
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2. Disclosure by any official or employee of any
deposits? Explain your answer. (1990 BAR)
banking institution to any unauthorized person
of any information concerning said deposit.
A: NO. Gigi cannot oppose the said issuance because
(Sec. 3, R.A. No. 1405)
the law provides as an exception from the coverage
of R.A. 1405 that upon order of a competent court in
Acts not Covered by the Prohibition
cases of bribery or dereliction of duty of public
official, the examination of the deposits may be
Non-bank official or employee is not covered by the
allowed. (Sec. 2, R.A. No. 1405)
prohibition. Neither does the prohibition cover the
disclosure by a bank official or employee of
information about bank deposit in favor of a co-
employee in the course of the performance of his
duties.
COMMERCIAL LAW
3. DEPOSITS COVERED The money deposited under the trust agreement

(“Trust account”) is intended not merely to remain
with the bank but to be invested by it elsewhere. To
The following are the deposits covered:
hold that this type of account is not protected by R.A.
1405 would encourage private hoarding of funds
1. All deposits of whatever nature with banks or
that could otherwise be invested by banks in other
banking institutions found in the Philippines.
ventures, contrary to the policy behind the law.
2. Investments in bonds issued by the
(Ejercito v. Sandiganbayan, G.R. No. 157294-95, 30
Government. (Sec. 2, R.A. No. 1405)
Nov. 2006)
3. Trust accounts
NOTE: For purposes of the PDIC law, the term

Meaning of the Phrase "of whatever nature and
“deposit” does not include trust funds, and
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kind"
therefore, NOT covered by PDIC for deposit
insurance.
This refers to money whether deposited or invested.
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If the money deposited under an account may be
Confidentiality Granted by RA 1405 does NOT
used by banks for authorized loans to third persons,
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Extend to Letters of Credit and Trust Receipts
then such account, regardless of whether it creates
a creditor-debtor relationship between the
The confidentiality granted by the law does NOT
depositor and the bank, it falls under the category of
extend to other documents and records like L/C’s,
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accounts which the law precisely seeks to protect
TR’s, bank drafts and promissory notes. (Opinion of
for the purpose of boosting the economic
the Secretary of Justice No. 5, Series of 1982; Opinion
development of the country. (Ejercito v.
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of the Secretary of Justice No. 126, Series of 1989)
Sandiganbayan, G.R. No. 157294-95, 30 Nov. 2006)
4. EXCEPTIONS FROM COVERAGE
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Trust Funds Covered by the Term “Deposit”
Q: X, a government official, has a number of bank Instances where Examination or Disclosure of
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accounts in T Bank containing millions of pesos. Information about Deposits can be Allowed
He also opened several trust accounts in the (2004-2006,2000-2001,1997-1998, 1994-1995,
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same bank which specifically covered the 1990-1992 BAR) (W-I-C-S)
placement and/or investment of funds. X was
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later charged with graft and corruption before 1. Upon Written consent of the depositor;
the Sandiganbayan (SB) by the Ombudsman. The
Special Prosecutor filed a motion praying for a 2. In cases of Impeachment;
court order authorizing it to look into the
savings and trust accounts of X in T Bank. X 3. Upon order of Competent court in cases of
opposed the motion arguing that the trust bribery or dereliction of duty of public
accounts are not "deposits" under the Law on officials; and
Secrecy of Bank Deposits (R.A. No. 1405). Is the
contention of X correct? Explain. (2016 BAR) 4. In cases where the money deposited or
invested is the Subject matter of the
A: NO. The contention of X is not correct. Deposits litigation (Sec. 2, R.A. No. 1405)
in the context of the Secrecy of Bank Deposits Law
include deposits of whatever nature and kind. They
include funds deposited in the bank giving rise to
creditor-debtor relationship, as well as funds
invested in the bank like trust accounts.
2023 GOLDEN NOTES
II. BANKING LAWS
Other Instances c. Hijacking and other violations under
Republic Act No. 6235; destructive arson
1. Upon order of the Commissioner of Internal and murder, as defined under the Revised
Revenue (CIR) in respect of the bank deposits of Penal Code, as amended;
a decedent for the purpose of determining such
decedent’s gross estate. (Sec. 6(F)(1), NIRC) d. Felonies or offenses of a nature similar to
those mentioned in Sec. 3(i)(1), (2), and
2. Upon the order of the CIR in respect of bank (12) of the AMLA which are punishable
deposits of a taxpayer who has filed an under the penal laws of other countries;
application for compromise of his tax liability e. Terrorism and conspiracy to commit
by reason of financial incapacity to pay his tax terrorism as defined and penalized under
liability. (Sec. 6(F)(2), NIRC) Republic Act No. 9372; and
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3. The CIR is authorized to inquire into bank f. Financing of terrorism under Sec. 4 and
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deposits of a specific taxpayer upon request for offenses punishable under Secs. 5, 6, 7, and
tax information from a foreign tax authority 8 of R.A. No. 10168, otherwise known as the
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pursuant to an international convention or Terrorism Financing Prevention and
agreement on tax matters to which the Suppression Act of 2012. (Rule 11(B), 2016
Philippines is a party. (Sec.6(F)(3), NIRC in Revised IRR of R.A. No. 9160, as amended)
relation to R.A. No. 10021.)
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7. The PDIC and the BSP may examine deposit
4. In case of dormant accounts/deposits for at accounts and all information related to there in
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least 10 years under the Unclaimed Balances case there is a finding of unsafe or unsound
Act. (Sec. 2, Act No. 3936) banking practice. (Sec. 9 (2), R.A. No. 3591, as
amended)
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5. The Anti-Money Laundering Council (AMLC)
may inquire into any deposit or investment, 8. With court order, in cases of unexplained
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including related account, with any bank or wealth, which may include deposits of the
non-bank financial institution upon ex parte public official, his spouse, and unmarried
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application in case of violation of the R.A. No. children. (Sec. 8, R.A. No. 3019 in relation to PNB
9160 or the AMLA, when it has been established v. Gancayco, L-18343, 30 Sept. 1965)
that there is probable cause that the deposits or
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investments, including the related accounts, are 9. In cases filed by the Ombudsman and upon the
related to an unlawful activity or money latter’s authority to examine and have access to
laundering offense. (R.A. No. 9160, as amended, bank accounts and records provided there is a
Sec. 11) pending case before a court of competent
jurisdiction, the account is clearly identified,
6. The AMLC, without court order, if it determines inspection is limited to subject matter of
that a particular deposit or investment with any existing case, and bank personnel and account
banking institution is related to certain holder must be notified to be present. (Sec
predicate crimes: 15(8), R.A. No. 6770 in relation to Marquez v.
Desierto, G.R. No. 138569, 11 Sept. 2003)
a. Kidnapping for ransom under Art. 267 of
the Revised Penal Code; 10. In cases involving plunder (which is considered
analogous to bribery). The exception in the law
b. Secs. 4, 5, 6, 8, 9, 10, 11, 12, 13, 14, 15, and that is applicable in bribery also applies to
16 of R.A. No. 9165, otherwise known as the plunder. The overt or criminal acts as described
Comprehensive Dangerous Drugs Act of in Sec. 1(d) of R.A. No. 7080 would make the
2002; similarity between plunder and bribery even
COMMERCIAL LAW
more pronounced since bribery is essentially 15. In the course of a periodic or special
included among these criminal acts. (Ejercito v. examination, the BSP may inquire into or
Sandiganbayan, G.R. No. 157294-95, 30 Nov. examine bank accounts or investments,
2006) including customer identification, account
opening, and transaction documents, for the
11. When reporting covered or suspicious purpose of checking compliance by covered
transactions to the AMLC, covered persons and persons under its supervision or regulation
their officers and employees shall not be with the requirements of these rules, the AMLA,
deemed to have violated R.A. No. 1405, as as amended, and the Terrorism Financing
amended, Republic Act No. 6426, as amended, Prevention and Suppression Act (TFPSA), their
Republic Act No. 8791 and other similar laws. respective Revised Implementing Rules and
(Sec. 9, R.A. No. 9160, as amended) Regulations (RIRR), other Anti-Money
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Laundering Council (AMLC) and Bangko Sentral
12. The Court of Appeals, designated as a special issuances. The BSP may likewise conduct
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court, may issue an order authorizing law annual testing solely limited to the
enforcement officers to examine and gather determination of the existence and true identity
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information on the deposits, placements, trust of the owners of numbered and similar
accounts, assets and records in a bank or accounts. In the course of the periodic and
financial institution in connection with anti- special examination for purposes of complying
terrorism case. (Sec. 27, R.A. No. 9372) with the provisions of the AMLA, as amended,
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its RIRR, and this Part, the covered person, their
13. The Commission on Audit is authorized to officers and employees, and the BSP, shall not
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examine and audit government deposits be deemed to have violated the provisions of R.
pertaining to the revenue and receipts of, and A. No. 1405, as amended, R.A. No. 6426, as
expenditures or uses of funds and properties, amended, R.A. No. 8791 and other similar laws,
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owned or held in trust by, or pertaining to, the and Sec. 922 (Confidentiality provision) when
Government or any of its subdivisions, agencies disclosing information to BSP relative to
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or instrumentalities, including government- covered and suspicious transaction reports
owned and controlled corporations with filed with the AMLC. (MORB 901, as related to
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original charters. (See Art. IX-D, 1987 Circular No. 1022 dated 26 Nov. 2018 and 950
Constitution and P.D. No. 1445) dated 15 March 2017)
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14. The AMLC is authorized to investigate: (a) any NOTE: The Presidential Commission on Good
property or funds that are in any way related to Government (PCGG), in the conduct of its
financing of terrorism or acts of terrorism; (b) investigations to recover ill-gotten wealth
property or funds of any person or persons in accumulated by former President Ferdinand E.
relation to whom there is probable cause to Marcos, his immediate family, relatives,
believe that such person or persons are subordinates and close associates, may issue
committing or attempting or conspiring to subpoenas requiring the attendance and
commit, or participating in or facilitating the testimony of witnesses and/or the production
financing of terrorism or acts of terrorism as of books, papers, contracts, records, statement
defined herein. In relation thereto, AMLC is of accounts and other documents. (Sec. 3(e), E.O.
authorized to inquire into or examine deposits No. 1 [1986] in relation to Opinion of the
and investments with any banking institution Secretary of Justice, 24 Feb. 1987)
or non-bank financial institution and their
subsidiaries and affiliates without a court order.
(Sec. 10, R.A. No. 10168)
2023 GOLDEN NOTES
II. BANKING LAWS
Authorized Disclosures Inspection by the Ombudsman
Disclosures by authorized and responsible bank In order that the Ombudsman may inspect a bank
officials are allowed in the following instances: deposit: (P-I-L-A-Ho)
1. Reporting of unclaimed balances to the 1. There must be a case Pending in court;

Treasurer of the Philippines (Secs. 1 & 2, Act 2. The account must be clearly Identified;
No. 3936); 3. The inspection must be Limited to the
subject matter of the pending case;
2. Turn-over to the Commissioner of Internal 4. The inspection may cover only the Account
Revenue of the amount in bank accounts as identified; and
may be sufficient to satisfy the writ of 5. The bank personnel and the account
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garnishment issued to collect delinquent Holder must be notified to be present
taxes (Secs. 205 & 208, R.A. No. 8424); and during the inspection. (Marquez v. Desierto,
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G.R. No. 135882, 27 June 2001; Office of the
3. Submission of report, and turn-over to, the Ombudsman v. Ibay, G.R. No. 137538, 03
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court officer or executing sheriff of Sept. 2001)
garnished amounts pursuant to a writ of
garnishment in satisfaction of a judgment. Q: GP is a suspected jueteng lord who is rumored
(Sec. 9(c), Rule 39, Rules of Court; See China to be enjoying police and military protection.
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Banking Corporation v. Ortega, G.R. No. L- The envy of many drug lords who had not
34964, 31 Jan. 1973) escaped the dragnet of the law., GP was
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summoned to a hearing of the Committee on
NOTE: The prohibition against examination of or Racketeering and Other Syndicated Crimes of
inquiry into a bank deposit under R.A. No. 1405 does the House of Representatives, which was
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not preclude its being garnished to insure conducting congressional investigation-in aid of
satisfaction of a judgment. Indeed there is no real legislation on the involvement of police and
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inquiry in such a case, and if the existence of the military personnel, and possibly even of local
deposit is disclosed the disclosure is purely government officials, in the illegal activities of
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incidental to the execution process. It is hard to suspected gambling and drug lords. Subpoenaed
conceive that it was ever within the intention of to attend the investigation were officers of
Congress to enable debtors to evade payment of certain identified banks with a directive to them
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their just debts, even if ordered by the Court, to bring the records and documents of bank
through the expedient of converting their assets deposits of individuals mentioned in the
into cash and depositing the same in a bank. subpoenas, among them GP. GP and the banks
opposed the production of the bank records of
Q: The Bank Secrecy Law (R.A. No. 1405) deposits on the ground that no such inquiry is
prohibits disclosing any information about allowed under the Law on Secrecy of Bank
deposit records of an individual without court Deposits (R.A. No. 1405 as amended). Is the
order, except: (2012 BAR) opposition of GP and the banks valid? Explain.
(2010 BAR)
a. In an examination to determine gross
estate of a decedent. A: YES. The opposition is valid. GP is not a public
b. In an investigation for violation of official. The investigation does not involve one of
Anti-Graft and Corrupt Practices. the exceptions to the prohibition against the
c. In an investigation by the Ombudsman. disclosure of any information concerning bank
d. In an impeachment proceeding. deposits under the Law on Secrecy of Bank
Deposits. The Committee conducting the
A: C. In an investigation by the Ombudsman. investigation is not a competent court nor the
COMMERCIAL LAW
Ombudsman authorized under the law to require an injustice and for equitable grounds. The law
such disclosure. was enacted to encourage foreign currency
deposit and not to benefit a wrongdoer;
Foreign Currency Deposits (Salvacion v. Central Bank of the Philippines, G.R.
No. 94723, 21 Aug. 1997)
Foreign currency deposits are covered by R.A. 6426
otherwise known as the “Foreign Currency Deposits 3. Upon order of the Commissioner of Internal
Act of the Philippines”. Revenue in respect of the bank deposits of a
decedent for the purpose of determining such
Secrecy of Foreign Currency Deposits decedent’s gross estate; (Sec. 6(F)(1), NIRC)
GR: All foreign currency deposits are absolutely 4. Upon the order of the Commissioner of Internal
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confidential and cannot be examined, inquired, or Revenue in respect of bank deposits of a
looked into by any person, government official, taxpayer who has filed an application for
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bureau or office, whether judicial or administrative compromise of his tax liability by reason of
or legislative, or any other private or public entity. financial incapacity to pay his tax liability; (Sec.
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(Sec. 8, R.A. No. 6426) 6(F)(2), NIRC)
R.A. No. 6426 is a special law designed especially for 5. The Commissioner of Internal Revenue is
foreign currency deposits in the Philippines. R.A. No. authorized to inquire into bank deposits of a
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1405 which covers all bank deposits in the specific taxpayer upon request for tax
Philippines is the general law which does not nullify information from a foreign tax authority
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the special law on foreign currency deposits. pursuant to an international convention or
agreement on tax matters to which the
The surety which issued a bond to secure the Philippines is a party; (Sec.6(F)(3), NIRC in
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obligation of the principal debtor cannot inquire relation to R.A. 10021)
into the foreign currency deposits of the debtor
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even if its purpose is to determine whether or not 6. The Presidential Commission on Good
the loan proceeds were used for the purpose Government, in the conduct of its investigations
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specified in the surety agreement. The foreign to recover ill-gotten wealth accumulated by
currency deposits cannot be examined without the former President Ferdinand E. Marcos, his
written consent of the depositor. The subpoena immediate family, relatives, subordinates and
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issued by the bank should be quashed because close associates, may issue subpoenas requiring
foreign currency deposits are not subject to court the attendance and testimony of witnesses
order except for violation of the anti-money and/or the production of books, papers,
laundering law. (GSIS v. Court of Appeals, G.R. No. contracts, records, statement of accounts and
189206, 08 June 2011; Divina, 2014) other documents. (Sec. 3 (e), E.O. No. 1 (1986) in
relation to Opinion of the Secretary of Justice,
XPNs: February 24, 1987)
1. The depositor has given his written permission; 7. The Anti-Money Laundering Council (AMLC)
(Sec. 8, R.A. 6426) may inquire into any deposit or investment,
including related account, with any bank or
2. The exemption from court process of foreign non-bank financial institution upon ex parte
currency deposits under R.A. No. 6426 cannot application in case of violation of the R.A. No.
be invoked by a foreign transient who raped a 9160 or the AMLA, when it has been
minor, escaped and was held liable for damages established that there is probable cause that the
to the victim. The garnishment of his foreign deposits or investments, including the related
currency deposit should be allowed to prevent accounts, are related to an unlawful activity or
2023 GOLDEN NOTES
II. BANKING LAWS
money laundering offense. (Sec. 11, R.A. No. deemed to have violated Republic Act No. 1405,
9160, as amended) as amended, Republic Act No. 6426, as
amended, Republic Act No. 8791 and other
8. The AMLC, without court order, if it determines similar laws, (Sec. 9, R.A. No. 9160, as amended)
that a particular deposit or investment with any
banking institution is related to 11. The Commission on Audit is authorized to
certain predicate crimes (HK-MADS): examine and audit government deposits
pertaining to the revenue and receipts of, and
a) Kidnapping for ransom under Article 267 of expenditures or uses of funds and properties,
Act No. 3815, otherwise known as the owned or held in trust by, or pertaining to, the
Revised Penal Code, as amended; Government or any of its subdivisions, agencies
or instrumentalities, including government-
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b) Secs. 4, 5, 6, 8, 9, 10, 11, 12, 13, 14, 15, and owned and controlled corporations with
16 of R.A. No. 9165, otherwise known as the original charters. (See Art. IX-D, 1987
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Comprehensive Dangerous Drugs Act of Constitution and P.D. No. 1445)
2002;
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12. The AMLC is authorized to investigate: (a) any
c) Hijacking and other violations under property or funds that are in any way related to
Republic Act No. 6235; destructive arson financing of terrorism or acts of terrorism; (b)
and murder, as defined under the Revised property or funds of any person or persons in
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Penal Code, as amended; relation to whom there is probable cause to
believe that such person or persons are
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d) Felonies or offenses of a nature similar to committing or attempting or conspiring to
those mentioned in Section 3(i) (1), (2) and commit, or participating in or facilitating the
(12) of the AMLA which are punishable financing of terrorism or acts of terrorism as
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under the penal laws of other countries; defined herein. IN relation thereto, AMLC is
authorized to inquire into or examine deposits
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e) Terrorism and conspiracy to commit and investments with any banking institution
terrorism as defined and penalized under or non-bank financial institution and their
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Republic Act No. 9372; and subsidiaries and affiliates without a court order.
(Sec. 10, R.A. No. 10168)
f) Financing of terrorism under Section 4 and
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offenses punishable under Sections 5, 6, 7 13. In the course of a periodic or special
and 8 of Republic Act No. 10168, otherwise examination, the BSP may inquire into or
known as the Terrorism Financing examine bank accounts or investments,
Prevention and Suppression Act of 2012. including customer identification, account
(Rule 11(B), 2016 Revised Implementing opening, and transaction documents, for the
Rules and Regulations of Republic Act No. purpose of checking compliance by covered
9160, as amended) persons under its supervision or regulation
with the requirements of these rules, the AMLA,
9. The PDIC and the BSP may examine deposit as amended, and the Terrorism Financing
accounts and all information related to thereto Prevention and Suppression Act (TFPSA), their
in case there is a finding of unsafe or unsound respective Revised Implementing Rules and
banking practice. (Sec. 9, par. 8, R.A. No. 3591, as Regulations (RIRR), other Anti-Money
amended) Laundering Council (AMLC) and Bangko Sentral
issuances. The BSP may likewise conduct
10. When reporting covered or suspicious annual testing solely limited to the
transactions to the AMLC, covered persons and determination of the existence and true identity
their officers and employees shall not be of the owners of numbered and similar
COMMERCIAL LAW
accounts. In the course of the periodic and When Inquiry into Deposits are Allowed by
special examination for purposes of complying virtue of Distinctive Circumstances
with the provisions of the AMLA, as amended,
its RIRR, and this Part, the covered person, their A father who sued his daughter for illegally
officers and employees, and the BSP, shall not withdrawing funds from his foreign currency
be deemed to have violated the provisions of R. deposit and transferring to another bank in the
A. No. 1405, as amended, R.A. No. 6426, as name of her sister, can inquire into the deposit of the
amended, R.A. No. 8791 and other similar laws, sister, because the money deposited belongs to him.
and Sec. 922 (Confidentiality provision) when (China Banking Corp. v. CA, G.R. No. 140687, 18 Dec.
disclosing information to BSP relative to 2006)
covered and suspicious transaction reports
filed with the AMLC. (MORB 901, as related to NOTE: This is a pro hac vice ruling by the Supreme
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Circular No. 1022 dated 26 Nov. 2018 and 950 Court in view of the distinctive circumstances of the
dated 15 Mar. 2017) case.
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Q: Michael withdrew without authority funds of Q: A, an individual, secured a loan from XYZ
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the partnership in the amounts of P500,000 and Company. C, a surety company, issued a bond to
US$50,000 for services he claims rendered for secure the obligation. A has dollar deposits with
the benefit of the partnership. He deposited the ABC Bank. Can C inquire from ABC Bank about
P500,000 in his personal peso current account the foreign currency deposits of A to determine
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with Prosperity Bank and the US$50,000 in his whether or not the loan proceeds were used for
personal foreign currency savings account with the purpose specified in their surety
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Eastern Bank. The partnership instituted an agreement?
action in court against Michael, Prosperity, and
Eastern to compel Michael to return the subject A: NO. The surety company which issued the bond
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funds to the partnership and pending litigation cannot inquire into the foreign currency deposits. It
to order both banks to disallow any withdrawal cannot be examined without the consent of the
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from his accounts. At the initial hearing of the depositor except in certain situations like violation
case, the court ordered Prosperity to produce of anti-money laundering law. (GSIS v. CA, G.R. No.
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the records of Michael’s peso current account 189206, 08 June 2011)
and Eastern to produce the records of his
foreign currency savings account. Can the court
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5. GARNISHMENT OF DEPOSITS, INCLUDING
compel Prosperity and Eastern to disclose the FOREIGN DEPOSITS
bank deposits of Michael? Discuss fully. (1995
BAR)
Garnishment of a Bank Deposit does not Violate
the Law
A: YES, with respect to Michael’s peso current
account. Section 2 of RA 1405 allows the disclosure
The prohibition against examination or inquiry does
of bank deposits in case where the money deposited
not preclude its being garnished for satisfaction of
is the subject matter of litigation.
judgment. The disclosure is purely incidental to the
execution process and it was not the intention of the
With respect to his foreign currency savings
legislature to place bank deposits beyond the reach
account, the court compel the bank to disclose
of judgment creditor. (PCIB v. CA, G.R. No. 84526, 28
deposits of Michael, except upon written permission
Jan. 1991)
of the depositor.
2023 GOLDEN NOTES
II. BANKING LAWS
Garnishment of Foreign Currency Deposits
D. THE ANTI-MONEY LAUNDERING ACT
GR: Foreign currency deposits shall be exempt from (R.A. No. 9160, as amended by R.A. No. 9194,
attachment, garnishment, or any other order or 10167, 10365, 10927, and 11521)
process of any court, legislative body, government
agency or any administrative body whatsoever.
(Sec. 8, R.A. No. 6426)
1. POLICY
XPN: The exemption from garnishment of foreign
currency deposits under R.A. 6426 cannot be Policy of the Law (Sec. 2, R.A. No. 9160, as
invoked to escape liability for the damages to the amended)
victim. The garnishment of the transient foreigner’s
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foreign currency deposit should be allowed to 1. To protect and preserve the integrity and
prevent injustice and for equitable grounds. The law confidentiality of bank accounts and to ensure
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was enacted to encourage foreign currency deposit that the Philippines shall not be used as a
and not to benefit a wrongdoer. The application of money laundering site for the proceeds of any
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Sec. 8 of RA 6426 depends on the extent of its justice. unlawful activity;
The garnishment of a foreign currency deposit 2. To pursue the State’s foreign policy to extend
should be allowed to prevent injustice and for cooperation in transnational investigation and
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equitable grounds, otherwise, it would negate prosecutions of persons involved in money
Article 10 of the New Civil Code which provides that laundering activities wherever committed as
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“in case of doubt in the interpretation or application well as the implementation of targeted financial
of laws, it is presumed that the lawmaking body sanctions related to the financing of the
intended right and justice to prevail.” (Salvacion v. proliferation of weapons of mass destruction,
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Central Bank of the Philippines, G.R. 94723, 21 Aug. terrorism, and financing of terrorism, pursuant
1997) to the resolutions of the United Nations Security
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Council. (as amended by Sec. 1, R.A. No. 11521)
NOTE: Where the funds deposited in a joint foreign
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currency savings account belonged exclusively to 2. COVERED INSTITUTIONS AND THEIR
one of the depositors and were held in trust for him OBLIGATIONS
by the other depositor and the other depositor
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unilaterally closed the joint account and transferred
NOTE: Covered “Institutions” was changed to
the funds to her personal account, the latter cannot
Covered “Persons” under R.A. No. 10365. (Sec. 3(a),
invoke the exemption from court processes under
R.A. No. 9160, as amended)
RA 6426 because she is not the owner of the deposit
in the account. Consequently, the depositor who
Covered persons, natural or juridical, refer to:
owned the funds can have her enjoined from making
withdrawals from her personal account. (Van Twest
(M-I-S-S-M-S-B-C-C-R-O-P)
v. Court of Appeals, G.R. No. 106235, 10 Feb. 1994)
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);
COMMERCIAL LAW
2. Insurance companies, pre-need companies, and address for a company, a partnership or
all other persons supervised or regulated by the any other legal person or arrangement;
Insurance Commission (IC); and
3. iv. Acting as (or arranging for another

i. Securities dealers, brokers, salesmen, person to act as) a nominee shareholder
investment houses and other similar for another person; and
persons managing securities or
rendering services as investment 7. Persons, including lawyers, accountants, and
agent, advisor, or consultant; other professionals, who provide any of the
following services (Sec. 1, Rule 4, 2018
ii. Mutual funds, close-end investment Implementing Rules and Regulations of R.A. No.
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companies, common trust funds, and 9160, as amended):
other similar persons; i. Managing of client money, securities, or
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other assets;
iii. Other entities administering or
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otherwise dealing in currency, ii. Management of bank, savings, or
commodities or financial derivatives securities accounts;
based thereon, valuable objects, cash
substitutes and other similar monetary iii. Organization of contributions for the
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instruments or property supervised or creation, operation, or management of
regulated by the Securities and companies; and
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Exchange Commission (SEC);
iv. Creation, operation or management of
4. Jewelry dealers in precious Metals, who, as a juridical persons or arrangements, and
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business, trade in precious metals, for buying and selling business entities.
transactions in excess of one million pesos
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(P1,000,000.00); NOTE: Notwithstanding the foregoing, the term
‘covered persons’ shall exclude lawyers and
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5. Jewelry dealers in precious Stones, who, as a accountants acting as independent legal
business, trade in precious stones, for professionals in relation to information concerning
transactions in excess of one million pesos their clients or where disclosure of information
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(P1,000,000.00); would compromise client confidences or the
attorney-client relationship: Provided, That these
6. Company service providers which, as a lawyers and accountants are authorized to practice
business, provide any of the following services in the Philippines and shall continue to be subject to
to third parties: the provisions of their respective codes of conduct
i. Acting as a formation agent of juridical and/or professional responsibility or any of its
persons; amendments. (Sec. 1, R.A. No. 10365)
ii. Acting as (or arranging for another 8. Casinos, including internet and ship-based
person to act as) a director or corporate casinos, with respect to their casino cash
secretary of a company, a partner of a transactions related to the gaming operations;
partnership, or a similar position in (Sec. 3(a)(8), R.A. 9160, as amended by R.A. No.
relation to other juridical persons; 10927)
iii. Providing a registered office, business 9. Real estate developers and brokers; (as
address or accommodation, amended by Sec. 2, R.A. No. 11521)
correspondence or administrative
2023 GOLDEN NOTES
II. BANKING LAWS
10. Offshore gaming operators, as well as their For purposes of covered persons under Sec. 3(a)(8),
service providers, supervised, accredited, or the following terms are hereby defined as follows:
regulated by the Philippine Amusement and
Gaming Operation or any government agency. 1. Casino refers to a business authorized by
(as amended by Sec. 2, R.A. No. 11521) the appropriate government agency to
engage in gaming operations;
Q: Are lawyers and accountants considered as
covered persons? 2. Internet-based casinos shall refer to
casinos in which persons participate by the
A: YES. Lawyers and accountants are considered as use of remote communication facilities
Covered Persons under the definition under the such as, but not limited to, internet,
AMLA except if they act as an “Independent telephone, television, radio or any other
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Legal/Accounting Professional” in relation to kind of electronic or other technology for
information concerning their clients or where facilitating communication; and
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disclosure of information would compromise client
confidences or the attorney-client relationship: 3. Ship-based casino shall refer to casinos,
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Provided, That these lawyers and accountants are the operation of which is undertaken on
authorized to practice in the Philippines and shall board a vessel, ship, boat, or any other
continue to be subject to the provisions of their water-based craft wholly or partly
respective codes of conduct and/or professional intended for gambling;
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responsibility or any of its amendments. (Sec.1, R.A.
No. 10365) 4. Casino cash transaction refers to
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transactions involving the receipt of cash
NOTE: “Independent Legal/Accounting by a casino paid by or on behalf of a
Professional” refers to lawyers/accountants customer, or transactions involving the
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working in a private firm or as a sole practitioner payout of cash by a casino to a customer or
who, by way of business or occupation, provides to any person in his/her behalf; and
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purely legal or accounting services to their clients.
(Sec. 1, Rule 2, 2018 Implementing Rules and 5. Gaming operations refer to the activities
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Regulations of R.A. No. 9160, as amended) of the casino offering games of chance and
any variations thereof approved by the
Requisites for Exclusion appropriate government authorities. (as
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amended by Sec. 3, R.A. No. 10927)
1. They must be lawyers/accountants acting
as independent legal professionals in Obligations of Covered Persons
relation to information concerning their
clients or where disclosure or information a. Customer Identification - Covered persons
would compromise client confidences or shall:
the attorney-client relationship; a. Establish and record the true identity
of its clients based on official
2. Authorized to practice in the Philippines; documents;
and
b. Maintain a system of verifying the true
3. Continue to be subject to the provisions of identity of their clients; and
their respective codes of conduct and/or
professional responsibility or any of its c. In case of corporate clients, require a
amendments. (Sec. 1, R.A. No. 10365) system of verifying their legal existence
and organizational structure, as well as
the authority and identification of all
COMMERCIAL LAW
persons purporting to act on their subject to professional secrecy or legal
behalf. professional privilege. (Sec.7, R.A. No. 10365)
NOTE: The provisions of existing laws to the NOTE: Should a transaction be determined to
contrary notwithstanding, anonymous be both a covered transaction and a suspicious
accounts, accounts under fictitious names, and transaction, the covered person shall be
all other similar accounts shall be absolutely required to report the same as a suspicious
prohibited. Peso and foreign currency non- transaction. (Sec. 9, R.A. No. 9160, as amended
checking numbered accounts shall be allowed. by Sec. 7, R.A. No. 10365)
The BSP may conduct annual testing solely
limited to the determination of the existence 3. COVERED TRANSACTIONS
and true identity of the owners of such
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accounts. (Sec.9(a), R.A. No. 9160, as amended)
Covered Transactions (Sec. 3(b), R.A. 9160, as
amended)
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b. Record Keeping - All records of all transactions
of covered persons shall be maintained and
A transaction in cash or other equivalent monetary
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safely stored for five (5) years from the date of
instrument involving a total amount in excess of
transactions.
five hundred thousand pesos (P500,000.00) within
one (1) banking day.
XPN: If a case has been filed in court involving
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the account, records must be retained and
For casinos, a single casino cash transaction
safely kept beyond the five (5)-year period,
involving an amount in excess of five million pesos
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until it is officially confirmed by the AMLC
(P5,000,000.00) or its equivalent in any other
Secretariat that the case has been resolved,
currency.
decided or terminated with finality. (Sec. 3, Rule
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20, 2018 Implementing Rules and Regulations of
For real estate developers and brokers, a single cash
R.A. No. 9160, as amended):
transaction involving an amount in excess of seven
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million five hundred thousand pesos
NOTE: With respect to closed accounts, the
(P7,500,000.00) or its equivalent in any other
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records shall be preserved and safely stored for
currency. (as amended by Sec. 2, R.A. No. 11521)
at least five (5) years from the dates when they
were closed.
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Q: Lionair, Inc. sold helicopters as brand new
when in fact they were already used. Lionair’s
c. Reporting of Covered and Suspicious
president alleged that Lionair imported the
Transactions.
helicopters from the United States and sold
them to Arroyo, who, in turn, deposited partial
GR: Covered persons shall report to the AMLC
payment to Lionair’s account with the Union
all covered transactions and suspicious
Bank. The Office of the Special Prosecutor (OSP)
transactions within five (5) working days from
presented the Manager of the Union Bank
occurrence thereof.
Branch where the account was maintained to
verify the source of deposits. The manager
XPN: a) The AMLC prescribes a different period
suggested that the Bangko Sentral ng Pilipinas
not exceeding fifteen (15) working days.
or the AMLC may have reports on the
transaction. Thus, the Sandiganbayan, upon the
b) Lawyers and accountants acting as
OSP’s request, issued a subpoena duces tecum
independent legal professionals are not
and ad testificandum directing the Secretariat of
required to report covered and suspicious
the AMLC, to testify and to produce Lionair’s
transactions if the relevant information was
bank records. The AMLC moved to quash the
obtained in circumstances where they are
2023 GOLDEN NOTES
II. BANKING LAWS
subpoena, arguing that whatever information it client’s past transactions with the covered
has on Lionair’s bank account is confidential person;
under R.A. No. 9160. AMLC argues that the
prohibition under R.A. No. 9160 extends to it. It 6. The transaction is in any way related to an
claims that as a covered institution, it cannot be unlawful activity or offense under the Act
forced to disclose such prohibited information. that is about to be, is being or has been
committed; or
Is the AMLC’s argument tenable?
7. Any transaction that is similar or analogous
A: NO. According to the wording of R.A. No. 9160, to any of the foregoing. (Sec. 3(b.l), R.A. No.
the AMLC “is not one of the covered institutions 9160, as amended by R.A. No. 11521)
prohibited from disclosing information on covered
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and suspicious transactions,” and that the rationale 5. SAFE HARBOR PROVISION
for the prohibition does not extend to the AMLC.
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Unlike covered institutions, the AMLC is mandated
No administrative, criminal, or civil proceedings
to investigate and file a case against violators based
shall lie against any person for having made a
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on the information it obtains. Furthermore, the
covered transaction report (CTR) or a suspicious
prohibition and confidentiality cannot apply to the
transaction report (STR) in the regular performance
AMLC; otherwise, it would contravene its direct
of his duties and in good faith, whether or not such
mandate under Sec. 7 of R.A. No. 9160. (Republic of
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reporting results in any criminal prosecution under
the Philippines v. Sandiganbayan, G.R. Nos. 232724-
the AMLA or any other Philippine law. (Sec. 9(c), R.A.
27, 15 Feb. 2021)
No. 9160, as amended; Rule 9.3.e, IRR of R.A. No.
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9160)
4. SUSPICIOUS TRANSACTIONS When reporting covered or suspicious transactions
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to the Anti-Money Laundering Council (AMLC),
Suspicious transactions are transactions with covered persons and their officers and employees
covered persons, regardless of the amounts shall not be deemed to have violated:
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involved, where any of the following circumstances
exist: 1. The Law on Secrecy of Bank Deposits or
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1. There is no underlying legal or trade R.A. No. 1405, as amended;
obligation, purpose or economic 2. Foreign Currency Deposit Act of the
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justification; Philippines or R.A. No. 6426, as amended;
3. General Banking Law of 2000 or R.A. No.
2. The client is not properly identified; 8791; and
4. Other similar laws. (Sec. 9(c), R.A. No. 9160,
3. The amount involved is not commensurate as amended by Sec. 6, R.A. No. 9194)
with the business or financial capacity of
the client; Prohibited Communications
4. Taking into account all known Under Sec. 7 of R.A. No. 10365, when reporting
circumstances, it may be perceived that the covered or suspicious transactions to the AMLC,
client’s transaction is structured in order to covered persons and their employees or officers are
avoid being the subject of reporting prohibited from:
requirements under the Act;
1. Communicating, directly or indirectly, in any
5. Any circumstance relating to the manner or by any means, to any person or
transaction which is observed to deviate entity, the media, the fact that a covered or
from the profile of the client and/or the suspicious transaction has been reported or is
COMMERCIAL LAW
about to be reported, the contents of the report, e) Aids, abets, assists in or counsels the
or any other information in relation thereto; commission of the money laundering offenses
and referred to in paragraphs (a), (b) or (c) above;
and
NOTE: If the reporting is done by any person in
the regular performance of his duties in good f) Performs or fails to perform any act as a result
faith, no administrative, criminal, or civil of which he facilitates the offense of money
proceedings shall lie against said person, laundering referred to in paragraphs (a), (b) or
whether or not such reporting results in any (c) above.
criminal prosecution under this Act of any other
law (Safe Harbor Provision). Money laundering is also committed by any covered
person who, knowing that a covered or suspicious
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2. Publishing or airing in any manner or form by transaction is required under this Act to be reported
the mass media, electronic mail, or other similar to the AMLC, fails to do so. (Sec. 4, R.A. No. 9160, as
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devices. amended by Sec. 4, R.A. No. 10365)
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NOTE: In case of violation of these prohibitions, the Unlawful Activities or Predicated Crimes (Sec.
concerned officer and employee of the covered 3(i), R.A. 9160, as amended by R.A. No.10365 and
person and media shall be held criminally liable. R.A. No. 11521)
(Sec. 7, R.A. No. 10365)
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Unlawful activity refers to any act or omission or
6. MONEY LAUNDERING (HOW COMMITTED; series or combination thereof involving or having
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UNLAWFUL ACTIVITIES OR PREDICATE relation to the following:
CRIMES) 1. Kidnapping for ransom under Art. 267 of Act No.
3815, otherwise known as the Revised Penal
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Code, as amended;
Money Laundering; How committed
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2. Secs. 4, 5, 6, 8, 9, 10, 11, 12, 13, 14, 15, and 16 of
Money laundering is committed by any person
R.A. No. 9165, otherwise known as the
who, knowing that any monetary instrument or
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Comprehensive Dangerous Drugs Act of 2002;
property represents, involves, or relates to the
proceeds of any unlawful activity:
3. Sec. 3(B), (C), (E), (G), (H), and (I) of R.A. No.
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3019, as amended, otherwise known as the
a) Transacts said monetary instrument or
Anti-Graft and Corrupt Practices Act;
property;
4. Plunder under R.A. No. 7080, as amended;

b) Converts, transfers, disposes of, moves,
acquires, possesses, or uses said monetary
5. Robbery and extortion under Arts. 294, 295,
instrument or property;
296, 299, 300, 301, and 302 of the RPC, as
amended;
c) Conceals or disguises the true nature, source,
location, disposition, movement, or ownership
6. Jueteng and Masiao punished as illegal
of or rights with respect to said monetary
gambling under P.D. No. 1602;
instrument or property;
7. Piracy on the high seas under the RPC, as

d) Attempts or conspires to commit money
amended and P.D. No. 532;
laundering offenses referred to in paragraphs
(a), (b) or (c);
8. Qualified theft under Art. 310 of the RPC, as
amended;
2023 GOLDEN NOTES
II. BANKING LAWS
9. Swindling under Art. 315 and Other Forms of 21. Violations of Secs. 86 to 106 of Chapter VI, of
Swindling under Art. 316 of the RPC, as R.A. No. 8550, otherwise known as the
amended; Philippine Fisheries Code of 1998; (Ibid.)
10. Smuggling under R.A. Nos. 455 and 1937; 22. Violations of Secs. 101 to 107, and 110 of R.A.
No. 7942, otherwise known as the Philippine
11. Violations of R.A. No. 8792, otherwise known as Mining Act of 1995; (Ibid.)
the Electronic Commerce Act of 2000;
23. Violations of Sec. 27(c), (e), (f), (g), and (i), of
12. Hijacking and other violations under R.A. No. R.A. No. 9147, otherwise known as the Wildlife
6235; destructive arson and murder, as defined Resources Conservation and Protection Act;
under the RPC, as amended; (Ibid.)
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13. Terrorism and conspiracy to commit terrorism 24. Violation of Sec. 7(b) of R.A. No. 9072, otherwise
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as defined and penalized under Secs. 3 and 4 of known as the National Caves and Cave
R.A. No. 9372; (as amended by Sec. 2, R.A. No. Resources Management Protection Act; (Ibid.)
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10365)
25. Violation of R.A. No. 6539, otherwise known as
14. Financing of terrorism under Sec. 4 and offenses the Anti-Carnapping Act of 2002, as amended;
punishable under Secs. 5, 6, 7, and 8 of R.A. No. (Ibid.)
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10168, otherwise known as the Terrorism
Financing Prevention and Suppression Act of 26. Violations of Secs. 1, 3 and 5 of P.D. No. 1866, as
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2012; (Ibid.) amended, otherwise known as the decree
Codifying the Laws on Illegal/Unlawful
15. Bribery under Arts. 210, 211, and 211-A of the Possession, Manufacture, Dealing In,
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RPC, as amended, and Corruption of Public Acquisition or Disposition of Firearms,
Officers under Art. 212 of the RPC, as amended; Ammunition or Explosives; (Ibid.)
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(Ibid.)
27. Violation of P.D. No. 1612, otherwise known as
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16. Frauds and Illegal Exactions and Transactions the Anti-Fencing Law; (Ibid.)
under Arts. 213, 214, 215, and 216 of the RPC,
as amended; (Ibid.) 28. Violation of Sec. 6 of R.A. No. 8042, otherwise
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known as the Migrant Workers and Overseas
17. Malversation of Public Funds and Property Filipinos Act of 1995, as amended by Republic
under Arts. 217 and 222 of the RPC, as Act No. 10022; (Ibid.)
amended; (Ibid.)
29. Violation of R.A. No. 8293, otherwise known as
18. Forgeries and Counterfeiting under Arts. 163, the Intellectual Property Code of the
166, 167, 168, 169, and 176 of the RPC, as Philippines; (Ibid.)
amended; (Ibid.)
30. Violation of Sec. 4 of R.A. No. 9995, otherwise
19. Violations of Secs. 4 to 6 of R.A. No. 9208, known as the Anti-Photo and Video Voyeurism
otherwise known as the Anti-Trafficking in Act of 2009; (Ibid.)
Persons Act of 2003; (Ibid.)
31. Violation of Sec. 4 of R.A. No. 9775, otherwise
20. Violations of Secs. 78 to 79 of Chapter IV, of P.D. known as the Anti-Child Pornography Act of
No. 705, otherwise known as the Revised 2009; (Ibid.)
Forestry Code of the Philippines, as amended;
(Ibid.)
COMMERCIAL LAW
32. Violations of Secs. 5, 7, 8, 9, 10(c), (d), and (e), 7. ANTI-MONEY LAUNDERING COUNCIL AND
11, 12, and 14 of R.A. No. 7610, otherwise ITS FUNCTIONS
known as the Special Protection of Children
Against Abuse, Exploitation and Discrimination;
AMLC is the principal government agency tasked to
(Ibid.)
implement the anti-money laundering laws. It is
composed of the Governor of the Bangko Sentral ng
33. Fraudulent practices and other violations under
Pilipinas as Chairman, the Commissioner of the
R.A. No. 8799, otherwise known as the
Insurance Commission and the Chairman of the
Securities Regulation Code of 2000; (as
Securities and Exchange Commission, as members.
amended by Sec. 2, R.A. No. 11521)
(Sec. 7, R.A. No. 9160, as amended)
34. Violation of Sec. 19(a)(3) of R.A. No. 10697, The AMLC shall act unanimously in the discharge of
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otherwise known as the ‘Strategic Trade its functions as defined hereunder:
Management Act’, in relation to the
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proliferation of weapons of mass destruction 1. To require and receive covered transaction
and its financing pursuant to United Nations reports from covered institutions;
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Security Council Resolution Nos. 1718 of 2006
and 2231 of 2015; (Ibid.)
2. To issue orders addressed to the appropriate
35. Violations of Sec. 254 of Chapter II, Title X of the Supervising Authority or the covered
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National Internal Revenue Code of 1997, as institution to determine the true identity of the
amended, where the deficiency basic tax due in owner of any monetary instrument or property
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the final assessment is in excess of Twenty-five subject of a covered transaction report or
million pesos (P25,000,000.00) per taxable request for assistance from a foreign State, or
year, for each tax type covered and there has believed by the Council, on the basis of
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been finding of probable cause by the substantial evidence, to be, in whole or in part,
competent authority: Provided, further, that wherever located, representing, involving, or
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there must be a finding of fraud, willful related to, directly or indirectly, in any manner
misrepresentation or malicious intent on the or by any means, the proceeds of an unlawful
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part of the taxpayer: Provided, finally, that in no activity;
case shall the AMLC institute forfeiture
proceedings to recover monetary instruments,
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3. To institute civil forfeiture proceedings and all
property or proceeds representing, involving or other remedial proceedings through the Office
relating to a tax crime, if the same has already of the Solicitor General:
been recovered or collected by the Bureau of
Internal Revenue (BIR) in a separate 4. To cause the filing of complaints with the
proceeding; and (Ibid.) Department of Justice or the Ombudsman for
the prosecution of money laundering offenses;
36. Felonies or offenses of a similar nature that are
punishable under the penal laws of other 5. To investigate suspicious transactions and
countries. (Ibid.) covered transactions deemed suspicious after
determination by 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 instrumentalities used in or intended
for use in any unlawful activity as defined in Sec.
2023 GOLDEN NOTES
II. BANKING LAWS
3(i) hereof; 14. In the conduct of its investigation, the AMLC
shall apply for the issuance of subpoena ad
7. To implement such measures as may be testificandum and/or subpoena duces tecum
necessary and justified under the Act to with any competent court;
counteract money laundering;
15. To implement targeted financial sanctions in
8. To receive and take action in respect of, any relation to proliferation of weapons of mass
request from foreign states for assistance in destruction and its financing, including ex parte
their own anti-money laundering operations freeze, without delay, against all funds and
provided in the Act; other assets that are owned and controlled,
directly or indirectly, including funds and assets
9. To develop educational programs on the derived or generated therefrom, by individuals
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pernicious effects of money laundering, the or entities designated and listed under United
methods and techniques used in money Nations Security Council Resolution Nos. 1718
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laundering, the viable means of preventing of 2006 and 2231 of 2015 and their successor
money laundering and the effective ways of resolutions as well as any binding resolution of
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prosecuting and punishing offenders; the Security Council; and
10. To enlist the assistance of any branch, 16. To preserve, manage or dispose assets pursuant
department, bureau, office, agency or to a freeze order, asset preservation order, or
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instrumentality of the government, including judgment of forfeiture: Provided, however, That
government-owned-and-controlled pending their turnover to the national
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corporations, in undertaking any and all anti- government, all expenses incurred in relation to
money laundering operations, which may the duties herein mentioned shall be deducted
include the use of its personnel, facilities and from the amount to be turned over to the
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resources for the more resolute prevention, national government. (Sec. 7, R.A. No. 9160 as
detection and investigation of money amended)
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laundering offenses and prosecution of
offenders; 8. AUTHORITY TO INQUIRE INTO BANK
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DEPOSITS
11. To impose administrative sanctions for the
violation of laws, rules and regulations and
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Authority to Inquire into Bank Deposits (Sec. 11,
orders and resolutions issued pursuant thereto;
R.A. No. 9160, as amended)
12. To require the Land Registration Authority and

The AMLC may inquire into or examine any
all its Registries of Deeds to submit to the AMLC,
particular deposit or investment, including related
reports on all real estate transactions involving
accounts, with any banking institution or non-bank
an amount in excess of five hundred thousand
financial institution provided:
pesos (P500,000.00) within 15 days from the
date of registration of the transaction, in a form
1. It is upon order of any competent court;
to be prescribed by the AMLC. The AMLC may
also require the Land Registration Authority
NOTE: Competent court under Sec. 11 of R.A.
and all its Registries of Deeds to submit copies
9160, as amended, refers to the Court of
of relevant documents of all real estate
Appeals (A.M. No. 21-03-05-CA)
transactions;
2. Based on an ex parte application; and

13. In the conduct of its investigation, the AMLC
shall apply for the issuance of a search and
seizure order with any competent court;
COMMERCIAL LAW
3. In cases of violations of this Act, when it has Cases where no Court Order shall be required in
been established that there is probable cause order for the AMLC to Inquire into Deposit,
that the deposits or investments, including Investment, or Related Accounts
related accounts involved, are related to an
unlawful activity or a money laundering No need of court order in cases of activities
offense. involving (KD-HAM-STF):
NOTE: The inquiry conducted by the AMLC is 1. Kidnapping;

not violative of The Law on Secrecy of Bank 2. Violation of Dangerous Drugs Act;
Deposits or R.A. No. 1405, as amended; Foreign 3. Hijacking;
Currency Deposit Act or R.A. No. 6426, as 4. Arson;
amended; General Banking Law or R.A. No. 5. Murder;
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8791; and other similar laws. (Sec. 2, R.A. No. 6. Felonies or offenses of a nature Similar to
10167) those mentioned in Sec. (i)(1), (2), and (12),
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which are punishable under the penal laws
The Court of Appeals shall act on the application to of other countries;
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inquire into or examine any deposit or investment 7. Terrorism and conspiracy to commit
with any banking institution or non-bank financial terrorism; and (as amended by Sec. 2, R.A.
institution within 24 hours from filing of the No. 10167)
application. (Ibid.) 8. Financing of terrorism. (Sec. 11, R.A. No.
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10168)
Related Accounts
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NOTE: In the above mentioned circumstances, the
Refers to accounts, the funds, and sources of which AMLC shall issue an ex parte order authorizing its
originated from and/or are materially linked to the Secretariat to inquire into or examine any particular
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monetary instrument(s) or property(ies) subject of deposit or investment account, including related
the freeze order(s). (Sec. 2, R.A. No. 10167) accounts, with any banking institution or non-bank
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financial institution and their subsidiaries and
Limitations on Examination affiliates when it has been established that probable
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cause exists that the deposits or investments
The authority to inquire into or examine the main involved, including related accounts, are in any way
account and the related accounts shall comply with related to any of the above-mentioned activities.
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the requirements of Sec. 2 and 3, Art. III of the 1987 (Sec. 2, Rule 11, 2018 Implementing Rules and
Constitution. (Sec. 2, R.A. No. 10167) Regulations of R.A. No. 9160, as amended)
Similarities of a Freeze Order under Sec. 10 and Q: From his first term in 2007, Congressman
a Bank Inquiry Order under Sec. 11 Abner has been endorsing his pork barrel
allocations to Twin Rivers in exchange for a
The freeze order under Sec. 10 and the bank inquiry commission of 40% of the face value of the
order under Sec. 11 are similar in that they are allocation. Twin Rivers is a non-governmental
extraordinary provisional reliefs which the AMLC organization whose supporting papers, after
may avail of to effectively combat and prosecute audit, were found by the Commission on Audit to
money laundering offenses. (Republic v. Eugenio, be fictitious. Other than to prepare and submit
G.R. No. 174629, 15 Feb. 2008) falsified papers to support the encashment of
the pork barrel checks, Twin Rivers does not
appear to have done anything on the endorsed
projects and Congressman Abner likewise does
not appear to have bothered to monitor the
progress of the projects he endorsed. The
2023 GOLDEN NOTES
II. BANKING LAWS
congressman converted most of the investments in various banks, including
commissions he generated into US dollars and Prosperous Bank, were related to money
deposited these in a foreign currency account laundering. Accordingly, the AMLC now
with Banco de Plata (BDP). Based on amply transmits to Prosperous Bank a formal demand
supported tips given by a congressman from to allow its agents to examine the banking
another political party, the Anti-Money transactions of Lorenzo, but Prosperous Bank
Laundering Council sent BDP an order: refuses the demand. Is Prosperous Bank's
refusal justified? Explain your answer. (2017
(1) to confirm Cong. Abner's deposits with the BAR)
bank and to provide details of these deposits;
and A: NO. While, as a general rule, the AMLC may
inquire into bank deposits only upon order of any
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(2) to hold all withdrawals and other competent court, there is no need for such court
transactions involving the congressman's bank order in cases of kidnapping, hijacking, violation of
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accounts. the Dangerous Drugs Act, arson, and murder. Given
that there is probable cause that Lorenzo is engaged
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As counsel for BDP, would you advise the bank in unlawful activities as a drug trafficker, the AMLC
to comply with the order? (2013 BAR) is authorized to inquire into his bank deposits with
Prosperous Bank.
A: NO. I shall advise Banco de Plata not to comply
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with the order of the AMLC. It cannot inquire into Q: Rudy is jobless but is reputed to be a jueteng
the deposits of Congressman Abner, regardless of operator. He has never been charged or
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currency, without a bank inquiry order from a convicted of any crime. He maintains several
competent court, because crimes involved are not bank accounts and has purchased 5 houses and
kidnapping for ransom, violations of the lots for his children from the Luansing Realty I
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Comprehensive Dangerous Drugs Act, hijacking and Inc. Since he does not have any visible job, the
other violations of R.A. No. 6235, destructive arson, company reported his purchases to the Anti-
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murder, and terrorism and conspiracy to commit Money Laundering Council (AMLC). Thereafter,
terrorism. AMLC charged him with violation of the Anti-
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Money Laundering Law. Upon request of the
The AMLC cannot order Banco de Plata to hold all AMLC, the bank disclosed to it Rudy's bank
withdrawals and other transactions involving the deposits amounting to P100 Million.
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accounts of Congressman Abner. It is the Court of Subsequently, he was charged in court for
Appeals which has the power to issue a freeze order violation of the Anti-Money Laundering Law.
over the accounts upon petition of the Anti-Money
Laundering Council. (Republic v. Cabrini Green Ross, a. Can Rudy move to dismiss the case on the
G.R. No. 154522, 05 May 2006) ground that he has no criminal record?
Q: Prosperous Bank is a domestic bank with A: NO. The contention of Rudy is not tenable
head office in Makati. It handles the banking because under AMLA, "money laundering “is
requirements of thousands of clients. The AMLC committed when the proceeds of an "unlawful
initiated a discreet investigation of the financial activity," like jueteng operations, are made to
transactions of Lorenzo, a suspected drug appear as having originated from legitimate
trafficker based in Naga City. The intelligence sources. Money laundering is separate from the
group of the AMLC, in coordination with the unlawful activity of being a jueteng operator and
counterpart group from the PDEA and the NBI, requires no previous conviction for the unlawful
gathered ample evidence establishing Lorenzo's activity. (Sec. 3, R.A. No. 9160, as amended)
unlawful drug activities. The AMLC had
probable cause that his deposits and
COMMERCIAL LAW
b. To raise funds for his defense, Rudy sold the to the suspected illegal activity. (Ligot v. Republic,
houses and lots to a friend. Can Luansing G.R. No. 176944, 06 Mar. 2013)
Realty, Inc. be compelled to transfer to the
buyer ownership of the houses and lots? Objective of a Freeze Order
A: YES. Rudy is still the owner of the house and lot The primary objective of a freeze order is to
in question and as such he may dispose the same as temporarily preserve monetary instruments or
he pleases. Absent any freeze order filed by the OSG property that are in any way related to an unlawful
on behalf of the AMLC, Rudy may dispose said activity or money laundering, by preventing the
properties and compel Luansing Realty to transfer owner from utilizing them during the duration of
to the buyer ownership of the properties sold. the freeze order. (Ligot v. Republic, supra)
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c. In disclosing Rudy's bank accounts to the When may a Freeze Order be Issued
AMLC, did the bank violate any law?
A
The Court of Appeals may issue a freeze order which
A: YES. Under the Anti-money Laundering Law, as shall be effective immediately, for a period of 20
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amended, the AMLC may inquire into bank accounts days:
upon order of any competent court based in an ex
parte application when it has been established that a. Upon a verified ex parte petition by the AMLC;
said accounts are related to an unlawful activity. In and
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the case at hand, the AMLC merely requested the b. After determination that probable cause exists
disclosure of said accounts without court order. The that any monetary instrument or property is in
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bank therefore violated the secrecy of bank account any way related to an unlawful activity.
of Rudy when it allowed the AMLC to look into said
accounts without court order. (Sec. 11, R.A. No. 9160 NOTE: No court shall issue a temporary restraining
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as amended by Sec. 2, R.A. No. 10167) order or a writ of injunction against any freeze
order, except the Supreme Court. (Sec.10, R.A. No.
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d. Supposing the titles of the houses and lots 9160 as amended by Sec. 4, R.A. No. 10927)
are in possession of the Luansing Realty Inc.,
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is it under obligation to deliver the titles to A freeze order is not dependent on a separate
Rudy? (2006 BAR) criminal charge, much less does it depend on a
conviction. (Ret. Lt. Gen. Jacinto Ligot v. Republic of
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A: YES. The properties are validly sold in favor of the Philippines, G.R No. 176944, 06 Mar. 2013)
Rudy and as such Luansing Realty is under the
obligation to deliver the titles to the buyer. This is There are only two requisites for the issuance of a
without prejudice to the application of freeze order freeze order: (1) the application ex-parte by the
by the OSG on behalf of the AMLC. AMLC, and (2) the determination of probable cause
by the CA. Probable cause refers to the sufficiency of
9. FREEZING OF MONETARY INSTRUMENT OR the relation between an unlawful activity and the
PROPERTY property or monetary instrument which is the focal
point of Sec. 10 of R.A. No. 9160, as amended.
(Yambao v. Republic of the Philippines, G.R. No.
Purpose of a Freeze Order
171054, 26 Jan. 2021)
To give the government the necessary time to

Summary Hearing
prepare its case and to file the appropriate charges
without having to worry about the possible
Within the 20-day period, the Court of Appeals shall
dissipation of the assets that are in any way related
conduct a summary hearing, with notice to the
parties, to determine whether or not to modify or
2023 GOLDEN NOTES
II. BANKING LAWS
lift the freeze order or extend its effectivity. (Sec. 10, a physical sense, but are examined on particular
R.A. No. 9160 as amended by Sec. 4, R.A. No. 10927) details such as the account holder’s record of
deposits and transactions. (Republic v. Eugenio, G.R.
Period of the Freeze Order No. 174629, 15 Feb. 2008)
The total period of the freeze order issued by the NOTE: The Eugenio ruling with regard to the
Court of Appeals shall not exceed six (6) months. distinction of a Freeze Order and Bank Inquiry
(Ibid.) Order is no longer applicable since the amendment
in R.A. No. 10167 as it explicitly states that the
NOTE: This is without prejudice to an asset proceedings in application for bank inquiry is ex
preservation order that the Regional Trial Court parte.
having jurisdiction over the appropriate anti-money
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laundering case or civil forfeiture case may issue on Q: The CA, upon the finding of probable cause
the same account depending upon the and through a Resolution dated 5 July 2005,
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circumstances of the case, where the Court of issued a Freeze Order against the subject
Appeals will remand the case and its records: monetary instruments of petitioners Ligot and
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Provided, That if there is no case filed against a Yambao. Thereafter, petitioner filed a Motion to
person whose account has been frozen within the Lift Freeze Order against the monetary
period determined by the Court of Appeals, not instruments and properties of Edgardo Yambao.
exceeding six (6) months, the freeze order shall be On 20 Sept. 2005, the CA issued a Resolution
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deemed ipso facto lifted: Provided, further, That this wherein the motion to lift the freeze order was
new rule shall not apply to pending cases in the denied and that the urgent motion for the
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courts. In any case, the court should act on the extension of effectivity of freeze order was
petition to freeze within twenty-four (24) hours granted. Meanwhile, A.M. No. 05-11-04-SC or the
from filing of the petition. (Ibid.) Rule of Procedure in Cases of Civil Forfeiture,
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Asset Preservation, and Freezing of Monetary
NOTE: If the application is filed a day before a no Instrument, Property, or Proceeds
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working day, the computation of the 24-hour period Representing, Involving, or Relating to an
shall exclude the nonworking days. (Ibid.) Unlawful Activity or Money Laundering Offense
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under R.A. No. 9160, as amended, took effect on
Freeze Order under Section 10 vs. Bank Inquiry 15 Dec. 2005. Asserting the applicability of the
Order under Sec. 11 said Rule, petitioner filed an Urgent Motion for
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Summary Hearing to Limit the Effectivity of
A freeze order under Section 10 on the one hand is Freeze Order and/or to Declare the Expiration
aimed at preserving monetary instruments or of the Freeze Order. On 4 Jan. 2006, the CA
property in any way deemed related to unlawful issued the challenged Resolution, denying all
activities as defined in Sec. 3(i) of the AMLA. The pending motions, including those of petitioner’s.
owner of such monetary instruments or property
would thus be inhibited from utilizing the same for Is the petitioner entitled to due process as
the duration of the freeze order. guaranteed by the Constitution and the New
Rules?
On the other hand, a bank inquiry order under
Section 11 does not necessitate any form of physical A: YES. The Court, in Ligot’s case, clarified that a
seizure of property of the account holder. What the freeze order cannot be issued for an indefinite
bank inquiry order authorizes is the examination of period. In fact, the continued extension of the freeze
the particular deposits or investments in banking order beyond the six-month period violated Ligot’s
institutions or non-bank financial institutions. The right to due process.
monetary instruments or property deposited with
such banks or financial institutions are not seized in
COMMERCIAL LAW
The silence of the law, however, does not in any way (1) right to substantive due process;
affect the Court’s own power under the Constitution
to ‘promulgate rules concerning the protection and
A: NO. Sec. 11 of the AMLA providing for ex-parte
enforcement of constitutional rights and procedure
application and inquiry by the AMLC into certain
in all courts.’ Pursuant to this power, the Court
bank deposits and investments does not violate
issued A.M. No. 05-11-04 SC, limiting the effectivity
substantive due process, there being no physical
of an extended freeze order to six months – to
seizure of property involved at that stage.
otherwise leave the grant of extension to the sole
discretion of the CA, which may extend a freeze A bank inquiry order under Sec. 11 does not
order indefinitely or to an unreasonable amount of necessitate any form of physical seizure of property
time – carries serious implications on an of the account holder. What the bank inquiry order
individual’s substantive right to due process.
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authorizes is the examination of the particular
(Yambao v. Republic, G.R. No. 171054, 26 Jan. 2021) deposits or investments in banking institutions or
non-bank financial institutions. The monetary
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Limitation of Freeze Order instruments or property deposited with such banks
or financial institutions are not seized in a physical
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The freeze order or asset preservation order issued sense but are examined on particular details such as
under this Act shall be limited only to the amount of the account holder's record of deposits and
cash or monetary instrument or value of property transactions.
that the court finds there is probable cause to be
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considered as proceeds of a predicate offense, and (2) right to procedural due process; or
the freeze order or asset preservation order shall
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not apply to amounts in the same account in excess A: NO. The AMLC functions solely as an
of the amount or value of the proceeds of the investigative body in the instances mentioned in
predicate offense. (Sec.10, R.A. No. 9160 as amended Rule 5.b.26. Thereafter, the next step is for the AMLC
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by Sec. 4, R.A. No. 10927) to file a Complaint with either the DOJ or the
Ombudsman pursuant to Rule 6b. Even in the case
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Q: SPCMB was most concerned with the article of Estrada v. Office of the Ombudsman, where the
published in the Manila Times on 25 February conflict arose at the preliminary investigation stage
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2015 which read: “The Anti-Money Laundering by the Ombudsman, we ruled that the
Council asked the Court of Appeals to allow the Ombudsman's denial of Senator Estrada's Request
Council to peek into the bank accounts of the
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to be furnished copies of the counter-affidavits of
Beenays, their corporations, and a law office his co-respondents did not violate Estrada's
where a family member was once a partner. Also constitutional right to due process where the sole
the bank accounts of the law office linked to the issue is the existence of probable cause for the
family, the SPCMB, where the Vice President's purpose of determining whether an information
daughter Abigail was a former partner. should be filed and does not prevent Estrada from
requesting a copy of the counter-affidavits of his co-
By 8 Mar. 2015, the Manila Times published respondents during the pre-trial or even during
another article reporting that the appellate trial.
court had issued a Resolution granting the ex-
parte application of the AMLC to examine the Plainly, the AMLC's investigation of money
bank accounts of SPCMB. SPCMB undertook this laundering offenses and its determination of
petition for certiorari and prohibition on the possible money laundering offenses, specifically its
following grounds that the Anti-Money inquiry into certain bank accounts allowed by court
Laundering Act is unconstitutional insofar as it order, does not transform it into an investigative
allows the examination of a bank account body exercising quasi-judicial powers. Hence, Sec.
without any notice to the affected party; Does it 11 of the AMLA, authorizing a bank inquiry court
violate the following:
2023 GOLDEN NOTES
II. BANKING LAWS
order, cannot be said to violate SPCMB's Penalties for Violation of R.A. No. 1405
constitutional right to due process.
1. Imprisonment of not more than five (5)
(3) right to privacy. years
2. Fine of not more than P20,000.00
A: NO. To ensure adherence to the general state 3. Both, in the discretion of the court (Sec. 5,
policy of preserving the absolutely confidential R.A. No. 1405)
nature of Philippine bank accounts:
Q: R.A. 6832 creating a Commission to conduct a
a. The AMLC is required to establish thorough fact-finding investigation of the failed
probable cause as basis for its ex-parte Coup d’etat of December 1989, recommended
application for bank inquiry order; measures to prevent the occurrence of similar
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attempts at a violent seizure of power and for
b. The CA, independent of the AMLC's other purposes, provides that the Commission
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demonstration of probable cause, itself may ask the Monetary Board to disclose
makes a finding of probable cause that information on and/or to grant authority to
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the deposits or investments are related to examine any bank deposits, trust or investment
an unlawful activity under Sec. 3(i) or a funds, or banking transactions in the name of
money laundering offense under Sec. 4 of and/or utilized by a persons, natural or
the AMLA; juridical, under investigation by the
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Commission, in any bank or banking institution
c. A bank inquiry court order ex-parte for in the Philippines, when the Commission has
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related accounts is preceded by a bank reasonable ground to believe that said deposits,
inquiry court order ex-parte for the trust or investment funds, or banking
principal account which court order ex- transactions have been used in support or in
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parte for related accounts is separately furtherance of the objectives of the said coup
based on probable cause that such related d’etat. Does the above provision violate the Law
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account is materially linked to the principal on Secrecy of Bank Deposits? (1991 BAR)
account inquired into; and
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A: The above provision does not violate R.A. 1405
d. The authority to inquire into or examine because the enactment of R.A. 6832 is a valid
the main or principal account and the exercise of police power. R.A. 1405 is in itself a
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related accounts shall comply with the statutory enactment which can be validly modified,
requirements of Secs. 2 and 3, Art. III, of amended or repealed by a subsequent law. The
the Constitution. Secrecy of Bank Deposits Act did not amount to a
contract between the depositors and depository
The foregoing demonstrates that the inquiry and banks within the meaning of the non-impairment
examination into the bank account are not clause of the Constitution. Even if it did, the police
undertaken whimsically and solely based on the power of the State is superior to the non-
investigative discretion of the AMLC. In particular, impairment clause.
the requirement of demonstration by the AMLC, and
determination by the CA, of probable cause
emphasizes the limits of such governmental action.
(Subido v. CA, G.R. No. 216914, 06 Dec. 2016)
COMMERCIAL LAW
NOTE: Every corporation, partnership, or
III. INSURANCE LAW association, duly authorized to transact
insurance business by the Insurance
Commission may be an insurer. (Sec. 6, IC)
Laws Governing Contracts of Insurance in the

2. Insured – is the person whose loss is the
Philippines
occasion for the payment of the insurance
proceeds by the insurer. (Divina, 2021)
1. Insurance Code (IC) (R.A. No. 10607, enacted on
23 July 2012, further amending P.D. No. 612);
NOTE: Anyone except a public enemy may be
2. New Civil Code (NCC); and
insured. (Sec. 7, IC)
3. Special Laws.
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3. Assured – the insured is also the assured when
the proceeds are payable to him. (Divina, 2021)
A
A. BASIC CONCEPTS
NOTE: In property insurance, the assured must
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have insurable interest over the property and
Contract of Insurance such insurable interest is covered by the
insurance policy. While in life insurance, the
It is an agreement whereby one undertakes for a insured may insure someone else’s life, and
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consideration to indemnify another against loss, designate himself as the beneficiary provided
damage or liability arising from an unknown or that he has insurable interest over the life of the
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contingent event. (Sec. 2(a), Insurance Code (IC)) person whom he insures. (Ibid.)
A contract of insurance, to be binding from the date 4. Beneficiary – third person designated by the
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of application, must have been a completed insured to receive the proceeds. (Ibid.)
contract. (Perez v. CA, G.R. No. 112329, 28 Jan. 2000)
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Contract of Suretyship as an Insurance Contract
Thus, it must have all the essential elements of a
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A contract of suretyship shall be deemed an
valid contract: (SM-Co-Me)
insurance contract only if made by a surety who or
1. Subject Matter in which the insured has an which, as such is doing an insurance business as
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defined by the Insurance Code. (Sec. 2 (a), R.A. No.
insurable interest;
10607)
2. Consideration, which is the premium paid “Doing an Insurance Business” or “Transacting
by the insured, for the insurer’s promise to an Insurance Business”
indemnify the former upon the happening
of the event or peril insured against; and The term “doing an insurance business” or
“transacting an insurance business” means:
3. Meeting of the minds of the parties. (Art. (I-S-R-A)
1318, NCC)
1. Making or proposing to make, as Insurer, any
Parties to a Contract of Insurance insurance contract;
1. Insurer – assumes the risk of loss and 2. Making or proposing to make, as Surety, any
undertakes for a consideration to indemnify the contract of suretyship as a vocation and not as
insured upon the happening of the designated merely incidental to any other legitimate
peril. (Divina, 2021) business or activity of the surety;
2023 GOLDEN NOTES
III. INSURANCE LAW
3. Doing any kind of business, including a dependents but only up to the extent of the
Reinsurance business, specifically recognized expenses actually incurred. This is consistent with
as constituting the doing of an insurance the principle of indemnity which proscribes the
business within the meaning of the Insurance insured from recovering greater than the loss.
Code (IC); (Mitsubishi Motors Philippines Salaried Employees
Union v. Mitsubishi Motors Phil. Corp, G.R. No.
4. Doing or proposing to do Any business in 175773, 17 June 2013)
substance equivalent to any of the foregoing in
a manner designed to evade the provisions of Insurance as an Uberrimae Fides contract (1993
the IC. BAR)
NOTE: In the application of the provisions of the IC, The contract of insurance is one of perfect good faith
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the fact that no profit is derived from the making of (uberrimae fidei) not for the insured alone, but
insurance contracts, agreements, or transactions or equally so for the insurer; in fact, it is more so for
A
that no separate or direct consideration is received the latter, since its dominant bargaining position
therefor, shall not be deemed conclusive to show carries with it stricter responsibility. (Qua Chee Gan
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that the making thereof does not constitute the v. Law Union and Rock Insurance, Co. Ltd., G.R. No. L-
doing or transacting of an insurance business. (Sec. 4611, 17 Dec. 1955)
2(b), IC)
It requires the parties to the contract to
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Principle of Indemnity communicate that which a party knows and ought
to communicate, that is, the duty to disclose in good
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Q: The parties’ CBA contains the following faith all facts material to the contract. This doctrine
provision, “The COMPANY shall obtain group is essential on account of the fact that the full
hospitalization insurance coverage or assume circumstances of the subject matter of insurance
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under a self-insurance basis hospitalization for are, as a rule, known to the insured only and the
the dependents of regular employees.” insurer, in deciding whether or not to accept a risk,
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Eventually, three members of Mitsubishi Motors must rely primarily upon the information supplied
Philippines Salaried Employees Union to him by the applicant. (Sundiang Sr. & Aquino,
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(MMPSEU) filed claims for reimbursement of 2014)
hospitalization expenses of their dependents. In
turn, Mitsubishi Motors Philippines Corporation Insurance as Contracts of Adhesion (Fine Print
A
(MMPC) paid only a portion of their Rule)
hospitalization insurance claims, not the full
amount. However, MMPSEU insists that MMPC is While generally stipulations in a contract come
also liable for the amounts covered under other about after deliberate drafting by the parties
insurance policies; otherwise, MMPC will thereto, there are certain contracts in which almost
unjustly profit from the premiums the all the provisions of which have been drafted only
employees contribute through monthly salary by one party, usually a corporation. Such contracts
deductions. Is MMPSEU’s contention, correct? are called contracts of adhesion because the only
participation of the other party is the signing of his
A: NO. Since the subject CBA provision is an signature or his 'adhesion' thereto. Insurance
insurance contract, the rights and obligations of the contracts fall into this category. (Sweet Lines, Inc. v.
parties must be determined in accordance with the Teves, G.R. No. L-37750, 19 May 1978)
general principles of insurance law. Being in the
nature of a non-life insurance contract and
essentially a contract of indemnity, the CBA
provision obligates MMPC to indemnify the covered
employees’ medical expenses incurred by their
COMMERCIAL LAW
Rules in the Construction or Interpretation of above is a risk-shifting device, but NOT a contract of
Insurance Contracts insurance which is a risk-distributing device. (De
Leon, 2006)
GR: If the terms of the contract clearly show the
intention of the parties, there shall be no room for Moral Hazard Phenomenon
interpretation.
Consequently, however, the existence of insurance
XPN: If there are ambiguities in the terms of an could have the perverse effect of increasing the
insurance contract, they have to be resolved in favor probability of loss. This is when the insured, having
of the insured and strictly against the insurer in mind the indemnification for loss or damage
because an insurance contract being a contract of caused by the happening of the event insured
adhesion, most of its terms is not a product of against, would have reduced incentive to take steps
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mutual negotiation between the parties as they are to protect himself or his property, subject of
prepared by the insurance company in final printed insurance. (Ibid.)
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forms. (De Leon, 2014)
Event or Peril Insured Against
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1. ELEMENTS OF AN INSURANCE CONTRACT
It is any contingent or unknown event, whether past
or future, which may damnify a person having an
Elements of an Insurance Contract (S-P-E-A-R)
insurable interest, or create a liability against him
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may be insured, subject to the provisions of Chapter
1. Scheme to distribute losses – Such assumption
I of the Insurance Code.
of risk is part of a general scheme to distribute
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actual losses among a large group or substantial
number of persons bearing a similar risk. 2. CHARACTERISTICS/NATURE OF INSURANCE
CONTRACTS
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2. Payment of premium – As consideration for
the insurer’s promise, the insured makes a Characteristics and Nature of Insurance
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ratable contribution called “premium” to a Contracts (Con3-Vol-A-Uni-Per)
general insurance fund.
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The following are the characteristics and nature of
3. Existence of insurable interest – The insured an insurance contract:
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possesses an interest of some kind, susceptible
of pecuniary estimation known as “insurable 1. Consensual
interest.”
It is perfected by the meeting of the minds of the
4. Assumption of risk – The insurer assumes that parties as to the object, cause, and consideration of
risk of loss for a consideration. the insurance contract. There should be acceptance
of the application for insurance.
5. Risk of loss – The insured is subject to a risk of
loss through the destruction or impairment of 2. Voluntary
that interest by the happening of the designated
peril. (Philippine Health Care Providers v. GR: The parties may incorporate such terms and
Commissioner of Internal Revenue, G.R. No. conditions as they may deem convenient: Provided
167330, 18 Sept. 2009) they do not contravene any provision of law and are
not opposed to public policy, law, morals, good
NOTE: The inherent uncertainty of events is customs, or public order.
normally described in terms of risk. A contract
possessing only the last three elements enumerated
2023 GOLDEN NOTES
III. INSURANCE LAW
XPNs: Insurance contracts that may be required by XPN: The principle is not applicable to life and
law such as: accident insurance where the result is death
because life is not capable of pecuniary estimation.
a. For motor vehicles;
b. As a condition to granting a license to conduct The only situation where the principle of indemnity
business or calling affecting the public safety is applicable to life insurance is when the interest of
or welfare; a person insured is capable of exact pecuniary
c. For employees; or measurement. (e.g., where a creditor insures the life
d. Social insurance for members of the GSIS and of his debtor to the extent of the latter’s debt)
for employees of the private sector covered by
the SSS. 7. Personal
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3. Aleatory It is personal between the insurer and insured. Each
party having in view the character, credit and
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The liability of the insurer depends upon some conduct of the other.
contingent event, the happening of an uncertain
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future event. Thus, it is not a contract of chance. In NOTE: Since insurance is a contract, such is
an insurance contract, each party takes a risk: considered a property in legal contemplation.
However, unlike property policies, life insurance
a. For the insurer – risk of having to pay the policies are generally assignable like any chose in
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indemnity if the contingent event happens. action. (De Leon, 2014)
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b. For the insured – risk of paying the premium 3. CLASSES OF INSURANCE
without receiving anything therefor if the
contingent event does not happen except
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a) MARINE
protection, which in itself is a valuable
consideration. (De Leon, 2014)
A marine insurance is an insurance against loss or
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damage to any kind of property or loss of life or
4. Unilateral
injury to person in connection with any and all risks
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or peril of navigation, transit, or transportation.
It imposes legal duties only on the insurer who
(Divina, 2021)
promises to indemnify the insured. It is executed as
A
to the insured after payment of the premium, and
It also covers marine protection and indemnity
executory on the part of the insurer in the sense that
insurance, meaning insurance against, or against
it is not executed until payment for a loss. (De Leon,
legal liability of the insured for loss, damage, or
2014)
expense incident to ownership, operation,
chartering, maintenance, use, repair, or
5. Conditional
construction of any vessel, craft, or instrumentality
in use of ocean or inland waterways, including
It is subject to conditions the principal one of which
liability of the insured for personal injury, illness, or
is the happening of the event insured against.
death or for loss of or damage to the property of
another person. (Ibid.)
6. Contract of Indemnity
b) FIRE
Recovery is commensurate with the amount of the
loss suffered.
Fire Insurance is a property insurance that covers
damage and losses caused by fire.
GR: The insurer promises to make good only the
loss of the insured.
COMMERCIAL LAW
It includes insurance against loss by fire, lightning, f) MICROINSURANCE
windstorm, tornado or earthquake and other allied
risks, when such risks are covered by extension to Microinsurance is an insurance intended to cover
fire insurance policies or under separate policies. low-income households or individuals that would
(Sec. 169, IC) allow them to recover indemnity for illness, injury,
or death.
c) CASUALTY
It is a financial product or service that meets the risk
Casualty Insurance is an insurance covering loss or protection needs of the poor where:
liability arising from accident or mishap, excluding a) The amount of contributions, premiums,
certain types of loos which by law or custom are fees or charges, computed on a daily basis,
considered as falling exclusively within the scope of does not exceed 7.5% of the current daily
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other types of insurance such as fire or marine. It minimum wage rate for nonagricultural
includes, but is not limited to employer's liability workers in Metro Manila; and
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insurance, motor vehicle liability insurance, plate
glass insurance, burglary and theft insurance, b) The maximum sum of guaranteed benefits
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personal accident and health insurance as written is not more than one thousand (1,000)
by non-life insurance companies, and other times of the current daily minimum wage
substantially similar kinds of insurance. (Sec. 176, rate for nonagricultural workers in Metro
IC) Manila. (Sec. 187, IC)
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d) SURETYSHIP g) COMPULSORY MOTOR VEHICLE LIABILITY
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INSURANCE
Suretyship is an agreement whereby a party called
the surety guarantees the performance by another Compulsory Motor Vehicle Liability Insurance
N
party called the principal or obliger of an obligation refers to a contract of insurance on passenger and
or undertaking in favor of a third party called the third-party liability for death or bodily injuries and
E
obligee. It includes official recognizances, damage to property arising from motor vehicle
stipulations, bonds, or undertakings issued by any accidents. (Sec. 386[f], IC)
T
company by virtue of and under the provisions of
Act No. 536, as amended by Act No. 2206. (Sec. 177, It provides compensation for the death or bodily
IC) injuries suffered by innocent third parties or
A
passengers as a result of a negligent operation and
e) LIFE use of motor vehicles. (GSIS v. Court of Appeals, G.R.
No. 101439, 21 June 1999)
Life Insurance is an insurance on human lives and
insurance appertaining thereto or connected Q: Pablo obtained a Compulsory Third Party
therewith. Liability (CTPL) insurance for his newly
acquired vehicle from Stronghold. The limit of
Every contract or undertaking for the payment of the CTPL insurance coverage is P100,000.00.
annuities including contracts for the payment of The policy also contained a schedule of
lump sums under a retirement program where a life indemnities.
insurance company manages or acts as a trustee for
such retirement program shall be considered a life Pablo also obtained an Excess Cover for Third
insurance contract for purposes of this Code. (Sec. Party Bodily and Death Liability from Malayan
181, IC) for the same vehicle, as indicated in the Private
Vehicle Policy. The amount of the excess
coverage is P200,000.00.
2023 GOLDEN NOTES
III. INSURANCE LAW
During the effectivity of the two policies, Pablo, h) COMPULSORY INSURANCE COVERAGE FOR
while driving the insured vehicle, sideswiped a AGENCY-HIRED WORKERS
six-year-old pedestrian who sustained bodily
injuries and was brought to the hospital for Compulsory insurance coverage for agency- hired
treatment. Pablo claimed that he incurred workers - is an insurance- mechanism made
hospital and medical expenses in the amount of available by the law to provide insurance protection
P100,318.08 for the treatment of the for our overseas Filipino workers (OFW).
pedestrian. As a result, he filed third party
liability claims for reimbursement with both 4. INSURABLE INTEREST
Stronghold and Malayan.
An insurable interest is that interest which a person

Stronghold computed its liability based on the
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is deemed to have in the subject matter insured,
schedule of indemnities provided in the CTPL
where he has a relation or connection with or
insurance policy, and arrived at the amount of
concern in it, such that the person will derive
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P29,000.00. The excess of P71,318.08 (out of the
pecuniary benefit or advantage from the
total amount of P100,318.08) was not covered
preservation of the subject matter insured and will
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or in excess of the limits in the schedule of
suffer pecuniary loss or damage from its
indemnities and should be shouldered by
destruction, termination, or injury by the happening
Malayan pursuant to the excess coverage.
of the event insured against. (Divina, 2021)
Malayan, however, would not agree to pay this
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excess.
NOTE: The existence of insurable interest is a
matter of public policy and is not susceptible to the
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What is the extent of liability of Stronghold
principle of estoppel. The existence of an insurable
pursuant to the insurance policy it issued?
interest gives a person the legal right to insure the
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subject matter of the policy of insurance. (Violeta.
A: Stronghold's liability with regard to injuries
Lalican v. Insular Life Assurance Co. Ltd., G.R. No.
provided in its policy's Schedule of Indemnities is
183526, 25 Aug. 2009)
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subject to the limits provided therein. Any excess
will not be for its account, and will be for the account
Mere Hope or Expectancy is NOT Insurable
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of the excess coverage provider—Malayan
A mere contingent or expectant interest in anything,

The limit of liability with regard to the items listed
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not founded on an actual right to the thing, nor upon
in the Schedule of Indemnities is the amount
any valid contract for it, is not insurable. (Sec. 16, IC)
provided therein; the limit of liability with regard to
other kinds of damages not listed in the same
When does a Person have Insurable Interest?
Schedule of Indemnities is the total amount of
insurance coverage. It then follows that the amounts
GR: A person is deemed to have an insurable
in excess of the limits of liability in the schedule for
interest in the subject matter insured when a person
items listed therein are not covered by the total
has a relation or connection with or concern in the
coverage. Such excess is already for the personal
subject matter, such that he will derive pecuniary
account of the insured or an excess coverage
benefit or advantage from its preservation and will
provider. (Malayan Insurance Co., Inc. v. Stronghold
suffer pecuniary loss from its destruction or injury
Insurance Co., Inc., G.R. No. 203060, 28 June 2021, J.
by the happening of the event insured against.
Hernando)
XPN: However, in some cases, expectation of benefit

from the continued life of that person need not
necessarily be of pecuniary nature to have an
insurable interest in the life of a person. (De Leon,
COMMERCIAL LAW
2010) interest in the
Insurable Interest in Life Insurance vs. Insurable insurance passes to the
Interest in Property Insurance (2002 BAR) person taking his
interest in the thing
LIFE PROPERTY insured. (Sec. 23, IC)
As to Extent
GR: Every person has 4. A transfer of interest
an unlimited insurable by one of several
interest in his own life. partners, joint owners,
or owners in common,
XPN: Where life Limited to the actual who are jointly
insurance is taken out value of the property. insured, to the others,
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by a creditor on the life does not avoid an
of the debtor, insurable insurance even though
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interest is limited to it has been agreed that
the amount of debt. the insurance shall
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As to When must Insurable Interest Exist cease upon an
GR: Must exist twice, alienation of the thing
i.e., both at the time the insured. (Sec. 24, IC)
policy takes effect and
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the time of loss but 5. Every stipulation in a
need not exist in the policy of insurance for
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period in between. the payment of loss
(Sec. 19, IC) whether the person
insured has or has not
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XPNs: any interest in the
1. A change in interest property insured, or
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in a thing insured, after that the policy shall be
the occurrence of an received as proof of
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injury which results in such interest, and
a loss, does not affect every policy executed
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Must exist at the time the right of the insured by way of gaming or
the policy takes effect to indemnity for the wagering, is void. (Sec.
and need not exist loss. (Sec. 21, IC) 25, IC)
thereafter. (Sec. 19, IC) As to the Beneficiary’s Interest
2. A change of interest GR: The beneficiary
in one or more several need not have
distinct things, insurable interest over
separately insured by the life of the insured if The beneficiary must
one policy, does not the insured himself have insurable interest
avoid the insurance as secured the policy. over the thing insured.
to the others. (Sec. 22,
IC) XPN: However, if the NOTE: Insurable
life insurance was interest is an
3. A change of interest, obtained by the indispensable
by will or succession, beneficiary, the latter requirement.
on the death of the must have insurable
insured, does not avoid interest over the life of
an insurance; and his the insured.
2023 GOLDEN NOTES
III. INSURANCE LAW
INSURABLE INTEREST IN LIFE/HEALTH ceases upon full payment. (Sundiang Sr. & Aquino,
2009)
Two (2) General Classes of Life Policies
Q: Does a person have insurable interest on the
1. Insurance upon one’s life – are those taken out life of his parents?
by the insured upon his own life for the benefit
of: (H-E-T) A: By express exclusion under Sec. 10(a) of the
Insurance Code, a person has no insurable interest
a. Himself; on the life of his parents and other ascendants
b. His Estate, in case it matures only at his unless he depends upon them for education and/or
death; or support. (par. b.) The rationale for their exclusion in
c. Third person who may be designated as par. (a) is that the parents are logically expected to
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beneficiary. predecease their children. (Divina, 2021)
A
The question of insurable interest is immaterial Q: On 03 July 1993, Delia Sotero (Sotero) took
where the policy is procured by the person whose out a life insurance policy from Ilocos Bankers
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life is insured. A person who insures his own life can Life Insurance Corporation (Ilocos Life)
designate any person as his beneficiary, whether or designating Cresencia Aban (Aban) her niece, as
not the beneficiary has an insurable interest in the her beneficiary. Ilocos Life issued Policy No. 747,
life of the insured subject to the limits under Art. with a face value of P100,000, in Sotero’s favor
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2012 in relation to Art. 739 of the New Civil Code. on 30 Aug. 1993, after the requisite medical
(De Leon, 2010) examination and payment of the premium.
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2. Insurance upon life of another – are those On 10 Apr. 1996, Sotero died. Aban filed a claim
taken out by the insured upon the life of for the insurance proceeds on 09 July 1996,
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another. Where a person names himself Ilocos Life conducted an investigation into the
beneficiary in a policy, he takes on the life of claim and came out with the following findings:
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another, he must have insurable interest in the 1. Sotero did not personally apply for
life of the latter. This class includes the insurance coverage, as she was illiterate.
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following: (SC-E-L-D) 2. Sotero was sickly since 1990.
a. His Spouse and of his Children. 3. Sotero did not have the financial capability
to pay the premium on the policy.
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b. Any person on whom he depends wholly or 4. Sotero did not sign the application for
in part for Education or support, or in insurance
whom he has a pecuniary interest. 5. Aban was the one who filed the insurance
application and designated herself as the
c. Of any person under a Legal obligation to beneficiary.
him for the payment of money, or
respecting property or services, of which For the above reasons and claiming fraud, Ilocos
death or illness might delay or prevent the Life denied Aban’s claim on 16 Apr. 1997, but
performance. refunded the premium paid on the policy. May
Sotero validly designate her niece as
d. Of any person upon whose life any estate or beneficiary? (2014 BAR)
interest vested in him Depends. (Sec. 10, IC)
A: YES. Sotero may validly designate her niece as
NOTE: In paragraph (a) of Sec. 10 of the Insurance beneficiary. The same is not prohibited under the
Code, mere relationship is sufficient while the rest Insurance Code or any other laws pertinent to the
(pars. b, c, and d) requires pecuniary interest. Thus, problem.
the interest of the creditor over the life of the debtor
COMMERCIAL LAW
Q: Carlo and Bianca met in the La Boracay Insurable Interest in Property may Consist of
festivities. Immediately, they fell in love with the Following (1991, 2019 BAR) (Ex-In-Ex)
each other and got married soon after. They
have been cohabiting blissfully as husband and 1. An Existing interest – The existing interest in
wife, but they did not have any offspring. As the the property may be legal or equitable title.
years passed by, Carlo decided to take out
insurance on Bianca’s life for P1 million with Examples of insurable interest arising from
him as sole beneficiary, given that he did not legal title:
have a steady source of income and he always a. Trustee, as in the case of the seller of
depended on Bianca both emotionally and property not yet delivered;
financially. b. Mortgagor of the property mortgaged; or
c. Lessor of the property leased. (De Leon,
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During the term of the insurance, Bianca died of supra)
what appeared to be a mysterious cause so that
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Carlo immediately requested for an autopsy to Examples of insurable interest arising from
be conducted. It was established that Bianca equitable title:
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was transgender all along – a fact unknown to a. Purchaser of property before delivery or
Carlo. Can Carlo claim the insurance benefit? before he has performed the conditions
(2014 BAR) of the sale;
b. Mortgagee of property mortgaged; or
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A: YES, Carlo can claim the insurance benefit. He c. Mortgagor, after foreclosure but before
had insurable interest on Bianca’s life under Sec. the expiration of the redemption period.
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10(b) of the Insurance Code as the problem states (De Leon, 2010)
that Carlo “always depended on Bianca both
emotionally and financially.” The insurable interest 2. An Inchoate interest founded on an existing
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upon the life of another under the aforesaid interest.
provision need not be based on kinship or legal
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obligation to give support. The fact that their Example: A stockholder has an inchoate interest
marriage may be void is irrelevant. (UPLC in the property of the corporation of which he is
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Commercial Law Suggested Answers) a stockholder, which is founded on an existing
interest arising from his ownership of shares in
INSURABLE INTEREST IN PROPERTY the corporation. (De Leon, 2014)
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Insurable Interest in Property (2019 BAR) 3. An Expectancy coupled with an existing interest
in that out of which the expectancy arises.
Insurable interest in property is every interest in
property, whether real or personal, or any relation NOTE: Existence of insurable interest is a matter of
thereto, or liability in respect thereof, of such nature public policy. Hence, the principle of estoppel
that a contemplated peril might indirectly damnify cannot be invoked. (Sundiang Sr. & Aquino, 2014)
the insured. It may consist of an existing interest, an
inchoate interest founded on an existing interest, or Q: Asgard and Milestone entered into a Toll
an expectancy coupled with an existing interest in Manufacturing Agreement (TMA) whereby
that out of which the expectancy arises. (Secs. 13 and Asgard undertook to perform toll-
14, IC) manufacturing of paper products for Milestone,
effective until Jan. 31, 2008. Sometime later,
Asgard needed additional capital to purchase
new equipment for its manufacturing plant. It
invited Milestone to invest in the company and
the latter accepted the invitation by
2023 GOLDEN NOTES
III. INSURANCE LAW
contributing installed equipment and infusing a insurance will be upheld, although he has no legal or
capital. equitable title.
In 2009, Milestone and Asgard took out an An insurable interest in property does not
Industrial All Risk Policy insurance from UCPB necessarily imply a property interest in, or a lien
Insurance to insure Asgard’s corrugating upon, or possession of, the subject matter of the
machine and equipment of every kind and insurance, and neither the title nor a beneficial
description in Novaliches, Quezon City. interest is requisite to the existence of such an
Afterwards, Milestone pulled out its stocks, interest. It is sufficient that the insured is so situated
machinery, and equipment from Asgard’s plant with reference to the property that he would be
in Novaliches for relocation to Milestone own liable to loss should it be injured or destroyed by the
premises in Laguna. In the course thereof, it peril against which it is insured. Anyone has an
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caused damage to several Asgard machinery insurable interest in property who derives a benefit
and equipment. Due to this, Asgard notified from its existence or would suffer loss from its
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UCPB about the loss and filed an insurance claim destruction. (UCPB General, Insurance Co. Inc. v.
under the Policy based on Malicious Damage Asgard Corrugated Box Manufacturing Corp., G.R. No.
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Endorsement provision. However, UCPB 244407, 26 Jan. 2021)
Insurance denied the claim explaining that the
Policy had no cross-liability cover, and the Measure of Insurable Interest in Property (2000
malicious damage was committed by Milestone, BAR)
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one of the named insured, and not committed by
a third party. Under Sec. 17, the measure of insurable interest in
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property is the extent to which the insured might be
Asgard filed a Complaint for Sum of Money with damnified by loss or injury thereof. Insurable
application for writ of preliminary attachment interest in property does not necessarily imply a
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and praying for actual damages against UCPB property interest in, or lien upon, or possession of,
Insurance. Does Milestone have insurable the subject matter of the insurance, and neither title
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interest over Asgard’s machine at the time of the nor a beneficial interest is requisite to the existence
loss or damage? thereof. It is sufficient that the insured is so situated
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with reference to the property that he would be
A: NO. Sec. 13 of the Insurance Code defines liable to loss should it be injured or destroyed by the
insurable interest as "every interest in property, peril against which it is insured. Anyone has an
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whether real or personal, or any relation thereto, or insurable interest in property who derives a benefit
liability in respect thereof, of such nature that a from its existence or would suffer loss from its
contemplated peril might directly damnify the destruction. (Gaisano Cagayan, Inc. v. Insurance
insured." Parenthetically, under Sec. 14 of the same Company of North America, G.R. No. 147839, 08 June
Code, an insurable interest in property may consist 2006)
in: (a) an existing interest, like that of an owner or
lienholder; (b) an inchoate interest founded on A Common Carrier or Depository’s Extent of
existing interest, like that of a stockholder in Insurable Interest in a Thing Held by Him
corporate property; or (c) an expectancy, coupled
with an existing interest in that out of which the A carrier or depositary has an insurable interest in
expectancy arises, like that of a shipper of goods in a thing held by him as such, to the extent of his
the profits he expects to make from the sale thereof. liability but not to exceed the value thereof, because
the loss of the thing by the carrier or depositary may
Where the interest of the insured in, or his relation cause liability against him to the extent of its value.
to, the property is such that he will be benefitted by (Sec 15., IC)
its continued existence or will suffer a direct
pecuniary loss by its destruction, his contract of
COMMERCIAL LAW
Change of Interest in Any Part of a Thing Insured 6. A transfer of interest by one of several partners,
Joint owners, or owners in common, who are
“Change of interest” contemplated by law is an jointly insured, to the others does NOT avoid an
absolute transfer of the insured’s entire interest in insurance even though it has been agreed that
the property insured to one not previously the insurance shall cease upon an alienation of
interested or insured. (Perez, 2006) the thing insured. (Sec. 24, IC)
GR: A change of interest in any part of a thing 7. When the policy is so Framed that it will inure
insured unaccompanied by a corresponding change to the benefit of whomsoever, during the
in interest in the insurance suspends the insurance continuance of the risk, may become the owner
to an equivalent extent, until the interest in the thing of the interest insured. (Sec. 57, IC)
and the interest in the insurance are vested in the
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same person. (Sec. 20; Sec. 58, IC) Instances where more than One Insurable
Interest may Exist in the Same Property
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XPNs: (P-L-A-D-S-Jo-F)
1. Trust – both trust or and trustee have insurable
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1. When there is a Prohibition against alienation interest over the property in trust;
or change of interest without the consent of the
insurer in which case the policy is not merely 2. Corporation – both the corporation and its
suspended but avoided. (Sundiang & Aquino, stockholders have insurable interest over the
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2014., citing Curtis v. Girard Fire and Marine Ins., assets;
11 SE 3, 190 Ga. 954)
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3. Partnership – both the firm and partners have
2. In Life, accident, and health insurance. (Sec. 20, insurable interest over its assets;
IC)
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4. Assignment – both the assignor and assignee
3. A change of interest in a thing insured, After the have insurable interest over the property
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occurrence of an injury which results in a loss assigned;
does NOT affect the right of the insured to
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indemnity for loss. (Sec. 21, IC) 5. Lease – the lessor, lessee and sub-lessees have
insurable interest over the property in lease;
NOTE: After the occurrence of the peril insured and
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against, the insured acquired a vested right over
the proceeds of the policy. 6. Mortgage – both the mortgagor and mortgagee
have insurable interest over the property
mortgaged.
4. A change of interest in one or more Distinct
things, separately insured by one policy does Insurable Interest of Mortgagor and Mortgagee
NOT avoid the insurance as to the others. (Sec. in case of a Mortgaged Property are NOT the
22, IC) Same (1999, 2010 BAR)
5. A change of interest by will or Succession, on Each has an insurable interest in the property
the death of the insured, does NOT avoid an mortgaged and this interest is separate and distinct
insurance; and his interest in the insurance from the other. Therefore, insurance taken by one in
passes to the person taking his interest in the his name only and in his favor alone does not inure
thing insured. (Sec. 23, IC) to the benefit of the other. The same is not open to
objection that there is double insurance. (RCBC v.
CA, G.R. Nos. 128833-34, 128866, 20 April 1998; Sec
8, IC)
2023 GOLDEN NOTES
III. INSURANCE LAW
Extent of Insurable Interest of Mortgagor and Q: To secure a loan of P10 million, Mario
Mortgagee (1999 BAR) mortgaged his building to Armando. In
accordance with the loan arrangements, Mario
1. Mortgagor – The mortgagor of property, as had the building insured with First Insurance
owner, has an insurable interest to the extent of Com for P10 million, designating Armando as
its value even though the mortgage debt equals the beneficiary. Armando also took an insurance
such value. on the building upon his own interest with
Second Insurance Company for P5 million.
2. Mortgagee – The mortgagee as such has an
insurable interest in the mortgaged property to The building was totally destroyed by fire, a
the extent of the debt secured; such interest peril insured against under both insurance
continues until the mortgage debt is policies. It was subsequently determined that
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extinguished. (Sundiang Sr. & Aquino, 2014) the fire had been intentionally started by Mario
and that in violation of the loan agreement, he
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NOTE: In case of an insurance taken by the had been storing inflammable materials in the
mortgagee alone and for his benefit, the mortgagee, building.
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after recovery from the insurer, is not allowed to
retain his claim against the mortgagor but it passes a. How much, if any, can Armando recover
by subrogation to the insurer to the extent of the from either or both insurance companies?
insurance money paid. (De Leon, 2010)
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A: Armando can receive P5 million from Second
Q: What are the effects if the mortgagee Insurance Company. As mortgagee, he had an
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procures separate insurance coverage without insurable interest in the building. Armando cannot
reference to the right of the mortgagor? collect anything from First Insurance Co., since the
latter is not liable for the loss of the building. First,
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A: The effects are as follows: it was due to a willful act of Mario, who committed
arson. Second, fire insurance policies contain a
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a. The mortgagee may collect from the insurer to warranty that the insured will not store hazardous
the extent of his credit. materials within the insured premises. Mario
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breached this warranty when he stored
b. The insurer, after payment to the mortgagee, is inflammable materials in the building. These two
subrogated to the rights of the latter against the factors exonerate First Insurance Co. from liability
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mortgagor and may collect the debt of the latter to Armando as mortgagee even though it was Mario
to the extent of the amount paid to the who committed them. (Sec. 8; Sec. 87, IC)
mortgagee. This principle applies only where
the policy obtained by the mortgagee covers his b. What happens to the P10 million debt of
interest alone. Mario to Armando? Explain. (2010 BAR)
c. The mortgagee-insured can no longer collect A: Since Armando would have collected P5 million
the mortgagor’s indebtedness after receiving from Second Insurance Company, this amount
full payment of the credit from the insurer since should be considered as partial payment of the loan.
the latter acquires the right to collect from the Armando can only collect the balance of P5 million.
mortgagor by virtue of the subrogation. Second Insurance Co. can recover from Mario the
However, if the mortgagee is not able to collect amount of P5 million it paid, because it became
the whole amount of the credit, he may still subrogated to the rights of Armando. (UPLC
collect the deficiency from the mortgagor. Commercial Law Suggested Answers)
(Divina, 2021)
COMMERCIAL LAW
5. DOUBLE INSURANCE AND OVERINSURANCE Nature of the Liability of the Several Insurers in
Double Insurance (2005 BAR)
Double Insurance (2005 BAR)

In double insurance, the insurers are considered as
co-insurers. Each one is bound to contribute ratably
Double insurance exists where the same person is
to the loss in proportion to the amount for which he
insured by several insurers separately, in respect to
is liable under his contract. This is known as the
the same subject and interest. (Sec. 95, IC)
“principle of contribution” or “contribution clause.”
(Sec. 96(e), IC)
Requisites of Double Insurance (S-T-R-I-P)
Q: X borrowed from CCC Bank. She mortgaged

1. Subject matter is the same;
her house and lot in favor of the bank. X insured
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2. Two (2) or more insurers insuring
her house. The bank also got the house insured.
separately;
3. Risk or peril insured against is the same;
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a. Is this double insurance? Explain your
4. Interest insured is the same; and
answer.
5. Person insured is the same.
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A: NO, there is no double insurance. Double
There is no double insurance even though two
insurance exists where the same person is insured
policies were both issued over the same subject
by several insurers separately with respect to the
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matter, and both covered the same peril insured
same subject and interest. (Sec. 93, IC)
against if the two policies were issued to two
different entities which have separate and distinct
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b. Is this legally valid? Explain your answer.
insurable interest over the said subject matter.
(Malayan Insurance Co. v. Philippine First Insurance
A: YES, X and CCC Bank can both insure the house as
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Co., G.R. No. 184300, 11 July 2012)
they have different insurable interest therein. X, the
borrower mortgagor, has an insurable interest in
GR: Not Prohibited.
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the house being the owner thereof while CCC Bank,
XPN: Other Insurance Clause.
the lender, also has an insurable interest in the
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house as mortgagee thereof. (UPLC Commercial Law
Double Insurance is NOT Prohibited by Law
Suggested Answers)
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It is not contrary to law and hence, in case of double
c. In case of damage, can X and CCC Bank
insurance, the insurers may still be made liable up
separately claim for the insurance
to the extent of the value of the thing insured but not
proceeds? (2013 BAR)
to exceed the amount of the policies issued.
A provision in the policy that prohibits double
A: YES. If X obtained an open policy then she could
insurance is valid. However, in the absence of such
claim an amount corresponding to the extent of the
prohibition, double insurance is allowed. (Perez,
damage based on the value of the house determined
2006)
as of the date the damage occurred, but not to
exceed the face value of the insurance policy;
Q: TRUE OR FALSE: The law on life insurance
however, if she obtained a valued policy then she
prohibits double insurance. (2017 BAR)
could claim an amount corresponding to the extent
of the damage based on the agreed upon valuation
A: FALSE. Double insurance only applies to
of the house.
property insurance.
As for CCC Bank, it could claim an amount

corresponding to the extent of the damage but not
to exceed the amount of the loan it extended to X or
2023 GOLDEN NOTES
III. INSURANCE LAW
so much thereof as may remain unpaid. (UPLC insurance contracts over the building are deemed
Commercial Law Suggested Answers) valid and enforceable.
Q: Terrazas de Pation Verde, a condominium Since Eastern insured the property up 50% of the
building, has a value of P50M. The owner total coverage, it is liable for only 50% of the total
insured the building against fire with three (3) actual loss. Eastern insurance Corp. is liable to the
insurance companies for the following amounts: extent of its coverage but may recover one-half of
1. Northern Insurance Corp. — P20M the total indemnity from the co-insurers in the
2. Southern Insurance Corp. — P30M proportion of 60% (Southern Insurance) – 40%
3. Eastern Insurance Corp. — P50M (Northern Insurance).
a. Is the owner's taking of insurance for the ALT. ANSWER: YES, the owner may legally claim
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building with three (3) insurers valid? the entire P50M from Eastern Insurance Corp. The
Discuss. Insurance Code provides that where the insured is
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over-insured by double insurance, the insured,
A: Taking out insurance covering the same unless the policy otherwise provides, may claim
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property, same insurable interest and same risk payment from the insurers in such order as he may
with three insurance companies is “double select, up to the amount for which the insurers are
insurance,” recognized under Sec. 93 of the severally liable under their respective contracts.
Insurance Code. However, in American Home Each insurer is bound, as between himself and the
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Assurance Co. v. Chua, G.R. No. 130421, 28 June 1999, other insurers, to contribute ratably to the loss in
the court referred to the common inclusion of the proportion to the amount for which he is liable
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“other insurance clause” in fire insurance policies, under his contract. (UPLC Commercial Law
requiring disclosure of co-insurance of the same Suggested Answers)
property with other insurers.
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c. Can the owner claim from Northern
ALT. ANSWER: The taking of insurance from the Insurance and Southern Insurance
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three (3) insurers is valid, there being no stipulation Corporation? (2008 BAR)
against obtaining additional insurance. It is a case of
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“double insurance.” Double insurance is valid. What A: If the owner has been paid in full by Eastern
is prohibited is for the insured to recover more than Insurance, he can no longer recover from any of
his interest or value of the property as this will Northern and Southern Insurance Corporations.
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violate the indemnity principle of an insurance Otherwise, the owner can recover P20M and P30M,
contract. (UPLC Commercial Law Suggested respectively. The owner can choose who he wants
Answers) to claim against to recover the full indemnity
provided that the claim will not exceed the face
b. The building was totally razed by fire. If the value of the insurer’s respective insurance policies.
owner decides to claim from Eastern (Divina, 2021)
Insurance Corp, only P50M, will the claim
prosper? Explain. Over Insurance
A: Insured can recover from Eastern Insurance There is over insurance whenever the insured
Corp. up to the extent of his loss. However, Eastern obtains a policy in an amount exceeding the value of
may refuse to pay if the policy contains an “other his insurable interest. (Perez, 2006)
insurance clause” stipulating that non-disclosure of
double insurance will avoid the policy (Geagonia v.
Country Bankers Insurance, G.R. No. 114427, 06 Feb.
1995). As there is no indication of a contractual
prohibition on double or other insurance, all
COMMERCIAL LAW
Double Insurance vs. Over Insurance 5. Each insurer and the other insurers, to
contribute ratably to the loss in proportion to
DOUBLE INSURANCE OVER INSURANCE the amount for which he is liable under his
As to the Amount of Insurance contract. (Sec. 96, IC)
There may be no over

Collateral Source Rule
insurance as when the When the amount of
sum total of the the insurance is
Under this rule, if an injured person receives
amounts of the policies beyond the value of
compensation for his injuries from a source wholly
issued does not exceed the insured’s
independent of the tortfeasor, the payment should
the insurable interest of insurable interest.
NOT be deducted from the damages which he would
the insured.
otherwise collect from the tortfeasor.
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As to the Number of Insurers
This applies in Life Insurance, but NOT in Property
There may be only
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Insurance. (Aquino, 2020)
one (1) insurer, with
There are two (2) or
whom the insured
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more insurers insuring Additional or Other Insurance Clause (2008
takes insurance
the same subject matter. BAR)
beyond the value of
his insurable interest.
A clause in the policy that provides that the policy
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shall be void if the insured procures additional
Rules when the Insured in a Policy Other than insurance without the consent of the insurer.
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Life is Over Insured by Double Insurance (Pioneer Insurance and Surety Corp v. Yap, G.R. No. L-
36232, 19 Dec. 1974)
1. The insured, unless the policy otherwise
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provides, may claim payment from the insurers The insurer may insert an “other insurance clause”
in such order as he may select, up to the amount to prevent the danger that the insured will over
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which the insurers are severally liable under insure his property and thus avert the possibility of
their respective contracts; perpetration of fraud. It is lawful and specifically
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allowed under Sec. 75 of the Insurance Code which
2. Where the policy under which the insured provides that “a policy may declare that a violation
claims is a valued policy, any sum received by or a specified provision thereof shall avoid it,
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him under any other policy shall be deducted otherwise the breach of an immaterial provision
from the value of the policy without regard to does not avoid it.”
the actual value of the subject matter insured;
Waiver of Violation
3. Where the policy under which the insured
When the insurer, with the knowledge of the
claims is an unvalued policy, any sum received
existence of other insurances, which the insurer
by him under any policy shall be deducted
deemed a violation of the contract, preferred to
against the full insurable value, for any sum
continue the policy, its action amounted to a waiver
received by him under any policy;
of annulment of the contract. (Perez, 2006 citing
Gonzales Lao v. Yek Tong Lin Fire & Marine Ins. Co.,
4. Where the insured receives any sum in excess
G.R. No. L-33131, 13 Dec. 1930)
of the valuation in the case of valued policies, or
of the insurable value in the case of unvalued
Q: Wyeth Philippines, Inc. (Wyeth) procured a
policies, he must hold such sum in trust for the
marine policy from Philippines First Insurance
insurers, according to their right of
Co., Inc. (PFIC) to secure its interest over its own
contribution among themselves; and
products while the same were being
2023 GOLDEN NOTES
III. INSURANCE LAW
transported or shipped in the Philippines. Q: X Corp. took out a Fire Policy Insurance from
Thereafter, Wyeth executed its annual contract Easter Insurance in the amount of
of carriage with Reputable Forwarder Services, P10,000,000.00. The properties insured were
Inc. (Reputable). the pieces of machinery and equipment, tools,
spare parts and accessories stored at Buildings
Under the contract, Reputable undertook to 1 and 2, PTA Compound, No. 26 Isidro Francisco
answer for all risks with respect to the goods Street, Malinta, Valenzuela, Metro Manila,
and shall be liable to Wyeth, for the loss, Manila.
destruction, or damage of the goods/products
due to any and all causes whatsoever, including He took another Fire Policy Insurance from
theft, robbery, flood, storm, earthquakes, Northern Insurance for P7,000,000.00, covering
lightning, and other force majeure while the the pieces of machinery and equipment, tools,
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goods/products are in transit and until actual spare parts, and accessories excluding mould,
delivery to the customers, salesmen, and and stocks of manufactured goods and/or goods
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dealers. The contract also required Reputable to still in process, raw materials and supplies
secure an insurance policy on Wyeth’s goods. found in the PTA Central Warehouse Compound,
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Thus, Reputable signed a Special Risk Insurance Building 1, No. 26 Isidro Francisco Street, Brgy.
Policy (SR Policy) with Malayan Insurance Co., Vicente Reales, Dalandan, Valenzuela, Metro
Inc., (Malayan) for the amount of P1,000,000.00. Manila.
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Is there is double insurance (as prohibited He took a third Fire Policy Insurance from
under Sec. 5 of the SR Policy between Malayan Southern Insurance covering the same
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and Reputable) so as to preclude PFIC from machinery and equipment located at Building 1,
claiming indemnity from Malayan? PTA Compound, No. 26 Francisco St., Malinta,
Valenzuela, Metro Manila.
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A: NO. The interest of Wyeth over the property
subject matter of both insurance contracts is A fire broke out in PTA Compound causing
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different and distinct from that of Reputable’s. The damages and loss on property. X Corp tried to
policy issued by PFIC was in consideration of the claim from the 3 insurance companies but the
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legal and/or equitable interest of Wyeth over its same were denied on the ground of violation of
own goods. On the other hand, what was issued by the policy condition (Policy Condition No. 3) on
Malayan to Reputable was over the latter’s non-disclosure of insurance policies already
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insurable interest over the safety of the goods, acquired or thereafter may be acquired
which may become the basis of the latter’s liability regarding the same properties, which ultimately
in case of loss or damage to the property and falls results in the avoidance of the insurance policy.
within the contemplation of Sec. 15 of the IC.
Therefore, even though the two concerned Are the insurance policies avoided?
insurance policies were issued over the same goods
and cover the same risk, there arises no double A. YES. Policy Condition No. 3 is clear that it
insurance since they were issued to two different obligates X Corp, as insured, to notify the insurer of
persons/entities having distinct insurable interests. any insurance effected to cover the insured items
Necessarily, over insurance by double insurance which involve any of its property or stocks in trade,
cannot likewise exist. (Malayan Insurance Co., Inc., v. goods in process and/or inventories and that non-
Philippine First Insurance Co., Inc. and Reputable disclosure by the insured of other insurance policies
Forwarder Services, Inc., G.R. No. 184300, 11 July obtained covering these items would result in the
2012) forfeiture of all the benefits under the policy. To be
regarded as a violation of Policy Condition No. 3, the
other existing but undisclosed policies must be
upon the same matter and with the same interest
COMMERCIAL LAW
and risk. The records of this case show that Francis recover from the Peninsula Insurance
petitioner obtained fire insurance policies from the Company? (2006 BAR)
3 insurance companies covering the same matter
and the same risk, i.e., the policies uniformly cover A: YES. As a general rule, no policy is binding unless
fire losses of petitioner’s machinery and equipment. the premiums thereof have been paid. However, one
of the exceptions is when there is an agreement
In American Home Assurance Company v. Chua, the allowing the insured to pay the premium in
Court held that where the insurance policy specifies installments and partial payment has been made at
as a condition the disclosure of existing co-insurers, the time of loss. In the case at hand, Francis already
non-disclosure thereof is a violation that entitles the paid two installments at the time of the loss and as
insurer to avoid the policy. This condition is such may recover on the policy (Makati Tuscany
common in fire insurance policies and is known as Condominium Corp. v. CA, G.R. No. 95546, 6 Nov.
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the “other insurance clause”. (Multi-ware 1992). Furthermore, the contention of the insurer
Manufacturing Corporation v. Cibeles Corporation, that the failure to pay premium resulted in the
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G.R. No. 230528, 01 Feb. 2021, J. Hernando) cancellation of the policy is not tenable since no
policy of insurance shall be cancelled except upon
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Absence of Notice of Existence of Other notice thereof to the insured. (Sec. 64, IC)
Insurance constitutes Fraud
Cancellation of Policy of Insurance by Reason of
When the insurance policy specifically requires that Over Insurance
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notice should be given by the insured of the
existence of other insurance policies upon the same Upon discovery of other insurance coverage that
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property, the lack or absence of such notice nullifies makes the total insurance in excess of the value of
the policy. Such failure to give notice of the existence the property insured, the insurer may cancel such
of other insurance on the same property when policy of insurance; provided there is prior notice
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required to do so constitutes deception and it could and such circumstance occurred after the effective
be inferred that had the insurer known that there date of the policy. (Ibid.)
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were many other insurance policies on the same
property, it could have hesitated or plainly desisted 6. NO FAULT, SUICIDE, AND INCONTESTABILITY
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from entering into such contract. (Perez, 2006) CLAUSE
No Policy of Insurance shall be Cancelled Except
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No Fault Indemnity Clause (1994 BAR)
upon Notice thereof to the Insured
It is a clause where the insurer is required to pay a

Q: The Peninsula Insurance Company offered to
third party injured or killed in an accident without
insure Francis' brand-new car against all risks
the necessity of proving fault or negligence on the
in the sum of P1 million for one year. The policy
part of the insured. There is a stipulated maximum
was issued with the premium fixed at
amount to be recovered.
P60,000.00 payable in 6 months. Francis only
paid the first two months installments. Despite
It is a clause that gives the victim (injured person or
demands, he failed to pay the subsequent
heirs of the deceased) an option to file a claim for
installments.
death or injury without the necessity of proving
fault or negligence of any kind to guarantee
Five months after the issuance of the policy, the
compensation or indemnity to injured persons in
vehicle was carnapped. Francis filed with the
motor vehicle accidents. (UPLC Commercial Law
insurance company a claim for its value.
Suggested Answers)
However, the company denied his claim on the
ground that he failed to pay the premium
resulting in the cancellation of the policy. Can
2023 GOLDEN NOTES
III. INSURANCE LAW
Rules under the “No Fault Indemnity Clause” only as to the excess. The first P15,000 shall be paid
without regard to the fault. (CMVLI, supra)
1. The total indemnity in respect of any one
person shall not exceed P15,000 for all motor Q: X is a passenger of a jeepney for hire being
vehicles. (Ins. Memo. Circ. No. 4-2006, otherwise driven by Y. The jeepney collided with another
known as the Compulsory Motor Vehicle License passenger jeepney being driven by Z who was
Insurance (CMVLI)) driving recklessly. As a result of the collision, X
suffered injuries. Both passenger jeepneys are
2. Proof of loss: covered by Comprehensive Motor Vehicular
a. Police report of accident Insurance Coverage. If X wants to claim under
b. Death certificate and evidence sufficient to the "no fault indemnity clause", his claim lie
establish proper payee against? (2012 BAR)
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c. Medical report and evidence of medical or
hospital disbursement. (Sec. 391(b)(3), IC) A: Against the insurer of the passenger jeepney
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driven by Y because X was his passenger. The
3. Claim may be made against one motor vehicle Insurance Code states that in the case of an occupant
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only. (Sec. 391(c), IC) of a vehicle, the claim shall lie against the insurer of
the vehicle in which the occupant is riding,
4. In case injury of an occupant of a vehicle, the mounting, or dismounting from. (UPLC Commercial
claim shall lie against the insurer of the vehicle Law Suggested Answers)
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in which the occupant is riding, mounting or
dismounting from. (Ibid.) Liability of the Insurer in case of Suicide
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5. In any other case (not an occupant), claim shall
The insurer shall be liable in case of suicide by the
lie against the insurer of the directly offending
insured if: (F-I-Sh)
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vehicle. (Ibid.)
1. The suicide is committed after the policy has
E
6. In all cases, the right of the party paying the
been in Force for a period of two (2) years from
claim to recover against the owner of the
the date of its issue or of its last reinstatement.
T
vehicle responsible for the accident shall be
maintained. (Ibid.)
2. The suicide is committed in the state of Insanity
regardless of the date of commission.
A
The claimant is not free to choose from which
insurer he will claim the "no fault indemnity," as the
3. The suicide is committed within a Shorter
law, by using the word "shall,” makes it mandatory
period as provided in the policy. (Sec. 183, IC)
that the claim be made against the insurer of the
vehicle in which the occupant is riding, mounting, or
NOTE: Any stipulation extending the 2-year period
dismounting from. That said vehicle might not be
is null and void.
the one that caused the accident is of no moment
since the law itself provides that the party paying
Q: Twenty-five months after a life insurance
may recover against the owner of the vehicle
policy had been issued, the insured committed
responsible for the accident. (Perla Compania de
suicide. Upon investigation, the insurance
Seguros, Inc. v. Ancheta, G.R. No. L-49599, 8 Aug.
company discovered that the insured had been
1988)
living with an undiagnosed Major Depressive
Disorder for the past year before the suicide.
This no-fault claim does NOT apply to property
Under the Diagnostic and Statistical Manual of
damage. If the total indemnity claim exceeds
Mental Disorders Fifth Edition (DSM-5), a
P15,000 and there is controversy in respect thereto,
guidebook used by many professionals to
the finding of fault may be availed of by the insurer
diagnose various mental health conditions,
COMMERCIAL LAW
Major Depressive Disorder is recognized as a Beverly, as beneficiary. One evening, Tan, while
mental disorder. playing with his handgun, suddenly stood in
front of his secretary and pointed the gun at her.
Would the beneficiaries of the insured's life Startled, she pushed the gun aside and said that
insurance policy still be entitled to receive its it may be loaded. Thus, Tan, to assure her that it
proceeds? Explain briefly. (2020-21 BAR) was not loaded, pointed it at his temple. The
next moment, there was an explosion and Tan
A: YES, the life insurance beneficiaries will be slumped to the floor lifeless.
entitled to the proceeds. The insured had no
concealment because he did not neglect to disclose Beverly then claimed the proceeds from Sun
his mental disorder, which he did not know. Insurance, but the latter rejected her claim on
the ground that the death of Tan was not
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In addition, the suicide happened 25 months after accidental. Beverly sued the insurer. Will
the policy was issued, hence, after the 2-year Beverly’s claim prosper? (1993, 1994 BAR)
A
incontestability period. The Insurance Company can
no longer rescind the contract for concealment. A: YES. Beverly can recover the proceeds of the
L
(Manila Bankers Life Insurance v. Aban, G.R. No. policy from the insurer. The death of the insured
175666, 29 July 2013; Tan v. CA, G.R. No. 48049, 29 was not due to suicide or willful exposure to
June 1989; and Sunlife Assurance v. Bacani, G.R. No. needless peril which are excepted risks. The
105135, 22 June 1995) insured’s act was purely an act of negligence which
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is covered by the policy and for which the insured
ALT. ANSWER: YES, the beneficiaries of the got the insurance for his protection. When he
E
insured's life insurance policy are entitled to its pointed the gun to his temple he did so because he
proceeds. Under the Insurance Code, the insurer in thought that it was safe for him to do so. There is
a life insurance contract shall be liable in case of none in the policy that would relieve the insurer of
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suicide when it is committed after the policy has liability for the death of the insured since the death
been in force for period of two years from date of was an accident. (Sun Insurance v. CA, G.R. Nos.
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issue or last reinstatement, unless the policy 79937-38, 13 Feb. 1989)
provides for a shorter period. If the suicide is
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committed in the state of insanity, it shall be Incontestability Clause (1991, 1994, 1996, 1998,
compensable regardless of the date of commission. 2012 BAR)
(Sec. 183, IC)
A
After the policy of life insurance made payable on
The insurer is not liable only if the suicide is an the death of the insured shall have been in force
excepted risk. during the lifetime of the insured for a period of two
(2) years from the date of its issue or its last
In this case, not only is the policy in force for a reinstatement, the insurer cannot prove that the
period of two years from the date of the commission policy is void ab initio (construed as voidable) or is
of suicide, the suicide was also committed in the rescindible by reason of the fraudulent concealment
state of insanity. There is likewise no showing that or misrepresentation of the insured or his agent.
suicide is an excepted risk. Thus, the insurer is (Sundiang Sr. & Aquino, 2014, citing Sec. 48, IC;
liable. (UPLC Commercial Law Suggested Answers) Florendo v. Philam Plans, G.R. No. 186983, 22 Feb.
2012)
Q: Sun Insurance Co. issued to Tan a life policy
having this provision: “the company shall not be Rationale: The “Incontestability Clause” under Sec.
liable in respect of ‘bodily injury’ consequent 48 of the Insurance Code regulates both the actions
upon the insured person who willfully exposes of the insurers and prospective takers of life
himself to needless peril except in an attempt to insurance. It gives insurers enough time to inquire
save human life." Tan designated his wife, whether the policy was obtained by fraud,
2023 GOLDEN NOTES
III. INSURANCE LAW
concealment, or misrepresentation; on the other 3. Sotero did not have the financial capability
hand, it forewarns scheming individuals that their to pay the premium on the policy.
attempts at insurance fraud would be timely 4. Sotero did not sign the application for
uncovered – thus deterring them from venturing insurance.
into such nefarious enterprise. (Manila Bankers Life 5. Aban was the one who filed the insurance
Insurance Corporation v. Cresencia Aban, G.R. No. application and designated herself as the
175666, 29 July 2013) beneficiary.
NOTE: The period of two (2) years may be For the above reasons and claiming fraud, Ilocos
shortened but it cannot be extended by stipulation. Life denied Aban’s claim on 16 Apr. 1997, but
refunded the premium paid on the policy. May
Requisites of the Incontestability Clause the incontestability period set in even in cases of
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fraud as alleged in this case? (2014 BAR)
1. The insurance is a life insurance policy payable
A: YES. The incontestability period applies even in
A
on the death of the insured.
cases of fraud. Sec. 48 regulates both the actions of
the insurers and prospective takers of the life
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NOTE: The clause is therefore NOT applicable
insurance. It gives insurers enough time to inquire
to annuity because the annuitant pays lump
whether the policy was obtained by fraud,
sum to the insurer and gets a certain amount
concealment, or misrepresentation; on the other
from the insurer every year until the
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hand, it forewarns scheming individuals that their
annuitant/insured dies.
attempts at insurance fraud would be timely
uncovered. Legitimate policy holders are absolutely
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2. The policy is in force for at least two (2) years
protected from unwarranted denial of their claims
from its date of issue as appearing in the policy
or delay in the collection of insurance proceeds
or of its last reinstatement.
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occasioned by allegations of fraud, concealment, or
misrepresentation by insurers, claims which may
NOTE: The two-year period is NOT reckoned
E
no longer be set up after the two-year period
from date of receipt but from issuance of the
expires.
policy or last reinstatement. (Divina, 2021)
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Sec. 48 prevents a situation where the insurer
Q: On 03 July 1993, Delia Sotero (Sotero) took
knowingly continues to accept annual premium
out a life insurance policy from Ilocos Bankers
A
payments, only to later on deny a claim on the policy
Life Insurance Corporation (Ilocos Life)
on specious claims of fraudulent concealment or
designating Cresencia Aban (Aban) her niece, as
misrepresentation. (Manila Bankers Life Insurance
her beneficiary. Ilocos Life issued Policy No.
Corp. v. Aban, supra)
747, with a face value of P100,000, in Sotero’s
favor on August 30, 1993, after the requisite
If the Insured Dies During the Two-year Period
medical examination and payment of the
premium.
The death of the insured within the two-year period
will render the right of the insurer to rescind
On April 10, 1996, Sotero died. Aban filed a claim
nugatory. (Sun Life of Canada v. Sibya III, G.R. No.
for the insurance proceeds on July 9, 1996,
211212, 8 June 2016)
Ilocos Life conducted an investigation into the
claim and came out with the following findings:
The clause CANNOT be invoked in the following
cases
1. Sotero did not personally apply for
insurance coverage, as she was illiterate.
1. Non-payment of premium;
2. Sotero was sickly since 1990.
COMMERCIAL LAW
2. Violation of the conditions of the policy make good on the policy, even though the policy was
relating to military or naval service in times obtained by fraud, concealment, or
of war; misrepresentation. (Sun Life of Canada v. Sibya III,
3. Property insurance; G.R. No. 211212, 8 June 2016)
4. Absence of insurable interest; CAVEAT: Based on Aban and Sibya cases, there are
5. When vicious fraud was employed in now two (2) incontestability clauses.
obtaining the policy, i.e. fraudulent
impersonation, scheme to murder insured; 1. Two (2) years had lapsed from issuance of the
6. The cause of the loss is an excepted risk; policy or last reinstatement.
7. The beneficiary feloniously kills the 2. The insured died within two (2) years from
insured; issuance of the policy.
8. The beneficiary failed to comply with
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conditions subsequent, i.e. failure to submit The second application, however, goes against the
notice of loss; and rationale of the incontestability clause. It precludes
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9. The claim is barred by extinctive the insurer from conducting investigation if the
prescription. insured committed concealment and/or
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misrepresentation, particularly if the insured died
Q: Sibya applied for life insurance with Sun Life. shortly after the issuance of the policy. It is
He indicated therein that he sought advice for submitted that this ruling should be re-assessed.
kidney problems. Sun Life approved the (Divina, 2021)
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application and issued an insurance policy.
Three months after, Sibya died as a result of a Q: In Jan. 2016, Mr. H was issued a life insurance
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gunshot wound. His beneficiary, Daisy, filed a policy by XYZ Insurance Co., wherein his wife,
claimant’s statement with Sun Life to seek death Mrs. W, was designated as the sole beneficiary.
benefits but was denied by the latter stating that Unbeknownst to XYZ Insurance Co., however,
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Sibya did not disclose his previous medical Mr. H had been previously diagnosed with colon
treatment at National Kidney Transplant cancer, the fact of which Mr. H had concealed
E
Institute. during the entire time his insurance policy was
being processed.
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According to Sun Life, the undisclosed fact was a
“renal failure” and a high-risk medical In Jan. 2019, Mr. H unfortunately committed
condition. On the other hand, Daisy averred that suicide. Due to her husband's death, Mrs. W, as
A
Sibya was in good faith since he authorized Sun beneficiary, filed a claim with XYZ Insurance Co.
Life to inquire into his medical history. The RTC to recover the proceeds of the late Mr. H's life
held that Sibya did not commit material insurance policy. However, XYZ Insurance Co.
concealment and misrepresentation when he resisted the claim, contending that:
applied for life insurance. Is the court correct?
1. The policy is void ab initio because Mr. H
A: YES. Sec. 48, as held in Manila Bankers Life fraudulently concealed or misrepresented
Insurance Corporation v. Aban, serves a noble his medical condition, i.e., his colon cancer;
purpose, as it regulates the actions of both the and
insurer and the insured. Under the provision, an 2. As an insurer in a life insurance policy, it
insurer is given two years – from the effectivity of a cannot be held liable in case of suicide.
life insurance contract and while the insured is alive
– to discover or prove that the policy is void ab initio Rule on each of XYZ Insurance Co. 's contentions.
or is rescindible by reason of the fraudulent (2019 BAR)
concealment or misrepresentation of the insured or
his agent. After the two-year period lapses, or when A: The first contention is not tenable. Under the
the insured dies within the period, the insurer must incontestability clause, after a policy of life
2023 GOLDEN NOTES
III. INSURANCE LAW
insurance made payable upon the death of the A: YES. Under Sec. 48 of the IC, after a policy of life
insured shall have been in force during the lifetime insurance made payable on the death of the insured
of the insured for a period of two years from the shall have been in force during the lifetime of the
issuance of the policy or last reinstatement, the insured for a period of two years from the date of its
insurer must make good on the policy even though issue or of its last reinstatement, the insurer cannot
the policy was obtained through fraud, concealment prove that the policy is void ab initio or is
or misrepresentation. (Sec. 48, IC; Manila Bankers v. rescindible by reason of the fraudulent concealment
Aban, G.R. No. 175666, 29 July 2013; Sun Life of or misrepresentation of the insured or his agent.
Canada v. Sibya, G.R. No. 211212, 08 June 2016) The reinstatement of the insured’s policy is to be
reckoned from the date when the application was
Even if Mr. H had concealed or misrepresented that processed and approved by the insurer. To reinstate
he was previously diagnosed with colon cancer, XYZ a policy means to restore the same to premium-
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can no longer rescind the policy since it has been in paying status after it has been permitted to lapse.
force already for three years. (The Insular Life Assurance Company, Ltd. v. Khu, G.R.
A
No. 195176, 18 Apr. 2016)
On the second contention, XYZ Insurance is
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liable despite the suicide of Mr. H. Under the Defenses that are NOT Barred by the
Insurance Code, the insurer is liable when suicide is Incontestability Clause (P-I-P-E-T-F-C)
committed after the policy has been in force for a
period of two years from the date of issue or its last 1. That the Premiums have not been paid;
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reinstatement (Sec. 180-A, IC). In this case, Mr. H (Secs. 77, 233(b), 236(b), IC)
committed suicide three years after issuance of the
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policy; thus, XYZ should be liable to the beneficiary 2. That the person taking the insurance lacked
of Mr. H. Insurable interest as required by law;
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Q. Felipe applied for the reinstatement of his life 3. That the cause of the death of the insured is
insurance policy. Insular Life advised Felipe that an That the beneficiary failed to furnish
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his application for reinstatement may only be Proof of death or to comply with any
considered if he agreed to certain conditions. condition imposed by the policy after the
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Felipe agreed and paid additional premium on loss has happened;
27 Dec. 1999, and as a result, the Letter of
Acceptance was given to him which indicated 4. Excepted risk;
A
that the reinstated policy will be effective on 22
June 1999. On 07 Jan. 2000, Insular Life issued 5. That the action was not brought within the
an Endorsement regarding the policy. Time specified; (Sundiang Sr. & Aquino,
2014)
On 22 Sept. 2001, Felipe died. Subsequently,
Felipe’s beneficiaries filed with Insular Life a 6. That the Fraud is of a particularly vicious
claim for benefit under the reinstated policy. type; or
This claim was denied. Instead, Insular Life
advised Felipe’s beneficiaries that it had 7. That the Conditions of the policy relating to
decided to rescind the reinstated policy on the military or naval service have been
grounds of concealment and misrepresentation violated; (Secs. 233(b), 234(b), IC)
by Felipe. However, the respondents contend
that policy cannot be rescinded as it is already
incontestable. Is Felipe’s reinstated life
insurance policy already incontestable at the
time of his death?
COMMERCIAL LAW
Basic Contents of a Policy (P3-A-I-R2)
1. Parties;
B. PERFECTION OF THE INSURANCE CONTRACT
2. Period during which the insurance is to
continue
3. Property or life insured;
Perfection of an Insurance Contract
4. Amount of insurance, except in open or
running policies;
The contract of insurance is perfected when the
5. Interest of the insured in the property if he
assent or consent is manifested by the meeting of
is not the absolute owner;
the offer and the acceptance upon the thing and the
6. Risk insured against; and
cause which are to constitute the contract. Mere
7. Rate of premium. (Sec. 51, IC)
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offer or proposal is not contemplated. (De Lim v. Sun
Life Assurance Co., G.R. No. L-15774, 29 Nov. 1920)
Rider
A
Policy of Insurance
An attachment to an insurance policy that modifies
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the conditions of the policy by expanding or
It is the written instrument in which the contract of
restricting its benefits or excluding certain
insurance is set forth. (Sec. 49, IC)
conditions from the coverage. (Black’s Law
Dictionary)
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It is the written document embodying the terms and
stipulations of the contract of insurance between
Riders are not binding on the insured unless the
the insured and insurer.
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descriptive title or name thereof is mentioned and
written on the blank spaces provided in the policy.
The policy is not necessary for the perfection of the
It should be countersigned by the insured or owner
N
contract. (Sundiang Sr. & Aquino, 2014)
unless he was the one who applied for the same.
(Sec. 50, IC)
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Types of Policy of Insurance
Cover Notes
T
(O-Va-R)
Persons who wish to be insured may get protection
1. Open – one in which the value of the thing
before the perfection of the insurance contract by
A
insured is not agreed upon, and the amount of
securing a cover note. The cover note issued by the
the insurance merely represents the insurer’s
insurer shall be deemed an insurance contract as
maximum liability. The value of such thing
contemplated under Sec. 1(1) of the Insurance Code
insured shall be ascertained at the time of the
subject to the following rules:
loss. (Sec. 60, IC)
1. The cover note shall be issued or renewed only
2. Valued – is one which expresses on its face an
upon prior approval of the Insurance
agreement that the thing insured shall be
Commission;
valued at a specific sum. (Sec. 61, IC)
2. The cover note shall be valid and binding for not
3. Running – one which contemplates successive
more than 60 days from the date of its issuance;
insurances, and which provides that the object
of the policy may be from time to time defined,
3. No separate premium (separate from the policy
especially as to the subjects of insurance, by
or main contract) is required for the cover note;
additional statements or indorsements. (Sec. 62,
IC)
4. The cover note may be canceled by either party
upon prior notice to the other of at least 7 days;
2023 GOLDEN NOTES
III. INSURANCE LAW
5. The policy should be issued within 60 days after Q: Jason is the proud owner of a newly-built
the issuance of the cover note; house worth P5 million. As a protection against
any possible loss or damage to his house, Jason
6. The 60-day period may be extended upon applied for a fire insurance policy thereon with
written approval of the Insurance Commission; Shure Insurance Corporation (Shure) on Oct. 11,
and 2016 and paid the premium in cash. It took the
company a week to approve Jason's application.
7. The written approval of the Insurance
Commission is dispensed with upon the On 18 Oct. 2016, Shure mailed the approved
certification of the president, vice-president, or policy to Jason which the latter received five (5)
general manager of the insurer that the risk days later. However, Jason's house had been
involved, the values of such risks and premium razed by fire which transpired a day before his
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therefor, have not as yet been determined or receipt of the approved policy. Jason filed a
established and the extension or renewal is not written claim with Shure under the insurance
A
contrary to or is not for the purpose of violating policy. Shure prays for the denial of the claim on
the Insurance Code or any rule. the ground that the theory of cognition applies
L
to contracts of insurance. Decide Jason's claim
Cognition Theory with reasons. (2016 BAR)
Mere submission of the application without the A: Jason’s claim should be denied. What governs
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corresponding approval of the policy does not result insurance contract is the cognition theory whereby
in the perfection of the contract of insurance. the insurance contract is perfected only from the
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time the applicant came to know of the acceptance
Insurance contracts through correspondence follow of the offer by the insurer. In this case, the loss
the “cognition theory” wherein an acceptance made occurred a day prior to Jason’s knowledge of the
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by letter shall not bind the person making the offer acceptance by Shure of Jason’s application. There
except from the time it came to his knowledge. being no perfected insurance contact, Jason is not
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(Enriquez v. Sun Life Assurance Co., G.R. No. L-15895, entitled to recover from Shure.
29 Nov. 1920)
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Offer in Property and Liability Insurance
Q: On 01 June 2011, X mailed to Y Insurance Co.
his application for life insurance. On July 21, It is the insured who makes an offer to the insurer,
A
2011, the insurance company accepted the who accepts the offer, rejects it, or makes a counter-
application and mailed, on the same day, its offer. The offer is usually accepted by an insurance
acceptance plus the cover note. It reached X's agent on behalf of the insurer. (De Leon, 2010)
residence on Aug. 11. On Aug. 4, 2011, X figured
in a car accident. He died a day later. May X's Offer in Life and Health Insurance
heirs recover on the insurance policy? (2011
BAR) It depends upon whether the insured pays the
premium at the time he applies for insurance.
A: NO. X had no knowledge of the insurer's
acceptance of his application before he died. What is 1. If he does not pay the premium, his application
being followed in insurance contracts is what is is considered an invitation to the insurer to
known as the “cognition theory”. Where the make an offer, which he must then accept
applicant died before he received notice of the before the contract goes into effect.
acceptance of his application for the insurance,
there is no perfected contract. (Perez v. CA, G.R. No. 2. If he pays the premium with his application,
112329, 28 Jan. 2000) his application will be considered an offer. (De
Leon, 2010)
COMMERCIAL LAW
Insurance Premium As to whether it is a debt or not
Assessment when
It is the amount of money a person pays for an properly levied is a
Premium is not a debt.
insurance policy, in consideration for the debt, unless otherwise
assumption by the insurance of the risk of loss as a expressly agreed.
result of the happening of the designated peril.
(Divina, 2021) “Cash and Carry” Rule (2003 BAR)
Payment of Premiums GR: No policy or contract of insurance issued by an

insurance company is valid and binding unless and
The burden is on an insured to keep a policy in force until the premium thereof has been paid. Any
by the payment of premiums, rather than on the
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agreement to the contrary is void.
insurer to exert every effort to prevent the insured
from allowing a policy to elapse through a failure to XPNs: (I-C-E G-A-P) (2007 BAR)
A
make premium payments. The continuance of the
insurer's obligation is conditional upon the A policy is valid and binding even when there is non-
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payment of premiums, so that no recovery can be payment of premium:
had upon a lapsed policy, the contractual relation
between the parties having ceased. (Philippine 1. When there is an agreement allowing the
Phoenix Surety & Insurance Company v. Woodworks, insured to pay the premium in Installments and
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Inc., G.R. No. L-25317, 6 Aug. 1979) partial payment has been made at the time of
loss. (Makati Tuscany Condominium Corp. v. CA,
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Acceptance of Premium G.R. No. 95546, 6 Nov. 1992)
Acceptance of premium within the stipulated period 2. When there is an agreement to grant the
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for payment thereof, including the agreed grace insured Credit extension for the payment of the
period, merely assures continued effectivity of the premium and loss occurs before the expiration
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insurance policy in accordance with its terms. of the credit term. (Art. 1306, NCC; UCPB General
(Stokes v. Malayan Insurance Co., Inc., G.R. No. L- Insurance v. Masagana Telemart, G.R. No.
T
34768, 24 Feb. 1984) 137172, 4 Apr. 2001)
Payment of the premium to agent of the insurance
A
3. When Estoppel bars the insurer to invoke non-
company is binding on it. (Malayan Insurance v. recovery on the policy.
Arnaldo, G.R. No. L-67835, 12 Oct. 1987, and Areola v.
CA, G.R. No. 95641, 22 Sept. 1994) 4. In case of life or industrial life policy whenever
the Grace period provision applies, or
NOTE: An insurance company which delivers a
whenever under the broker and agency
policy to an insurance broker, is deemed to have
agreements with duly licensed intermediaries,
authorized the latter to receive the payment of the
a ninety (90)-day credit extension is given. No
premium. (Sec. 306, IC)
credit extension to a duly licensed intermediary
should exceed ninety (90) days from date of
Premium vs. Assessment
issuance of the policy. (Sec. 77, IC)
PREMIUM ASSESSMENT
5. When there is Acknowledgment in a policy of a
As to their Purpose
receipt of premium, which the law declares to
Levied and paid to be conclusive evidence of payment, even if
Collected to meet actual
meet anticipated there is stipulation therein that it shall not be
losses.
losses. binding until the premium is actually paid. This
2023 GOLDEN NOTES
III. INSURANCE LAW
is without prejudice however to right of insurer (Gonzales v. Asia Life Ins. Co., G.R. No. L-5188, 29
to collect corresponding premium. (Sec. 77, IC) Oct. 1952)
2. Failure to pay was due to the Wrongful
6. When the Public interest so requires, as conduct of the insurer; or
determined by the Insurance Commissioner 3. The insurer has Waived his right to demand
payment.
Example: In compulsory motor vehicle
insurance, if the policy was issued without Fortuitous events will not prevent forfeiture of the
payment of premium by the vehicle owner, the policy when the premium remains unpaid. Hence,
insurer will still be held liable. To rule non-payment of premium by reason of a fortuitous
otherwise would prejudice the 3rd party victim. event is not an excuse.
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Non-payment of Premiums Non-payment of premiums occasioned by war
causes complete abrogation of the insurance. Hence,
A
Non-payment of the premium will not entitle the war does not excuse non-payment. (Constantino v.
insured to recover the premium from the insurer. Asia Life Insurance Company, G.R. No. L-1669-70, 31
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The continuance of the insurer’s obligation is Aug. 1950)
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 C. RIGHTS AND OBLIGATIONS OF PARTIES
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ceased. If the peril insured against had occurred, the
insurer would have had a valid defense against
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recovery under the policy.
Parties to the Contract of Insurance
Non-payment of the first premium prevents the 1. Insurer – party who assumes or accepts the risk
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contract from becoming binding notwithstanding of loss and undertakes for a consideration to
the acceptance of the application or the issuance of indemnify the insured on the happening of a
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the policy, unless waived. But nonpayment of the specified contingency or event.
balance of the premium due does not produce the
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cancellation of the contract. 2. Insured – person in whose favor the contract is
operative and who is indemnified against or is
With respect to subsequent premiums, non-
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to receive a certain sum upon the happening of
payment does not affect the validity of the contracts a specified contingency or event.
unless, by express stipulation, it is provided that the
policy shall in that event be suspended or shall NOTE: The insured is not always the person to
lapse. (De Leon, 2010) whom the proceeds are paid.
Non-payment of Premiums by reason of the NOTE: An insured may be considered a

Circumstances or Conduct of the Insurer policyholder under the Insurance Code. The
Insurance Commission defines a policyholder as
GR: Non-payment of premiums does not merely the named owner of the insurance policy who
suspend but put an end to an insurance contract may be the insured or assured in life or nonlife
since the time of the payment is peculiarly of the insurance policy or a beneficiary as may be
essence of the contract. (De Leon, 2010) applicable. (Aquino, 2018)
XPNs: (I-W-W)
1. The insurer has become Insolvent and has

suspended business, or has refused without
justification a valid tender of premiums;
COMMERCIAL LAW
Assured or Beneficiary Q: Philippine Health Care Providers, Inc. is
engaged in operating a prepaid group practice
An Assured/Beneficiary is a person designated by health care delivery system or a health
the terms of the policy to receive the proceeds of the maintenance organization (HMO) to take care of
insurance. He may be the insured or a third party in the sick and disabled persons enrolled in the
the contract for whose benefit the policy is issued health care plan. Individuals enrolled in its
and to whom the loss is payable. health care programs pay an annual
membership fee and are entitled to various
1. INSURER medical services provided by its duly licensed
physicians, specialists and other professional
Every corporation, partnership, or association duly technical staff participating in the group
authorized to transact insurance business as practice health delivery system at a hospital or
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elsewhere provided in the Insurance Code, may be clinic operated or accredited by it. Is Philippine
an insurer. (Sec. 6, IC) Health Care Providers, Inc. an insurance
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company or HMO?
The term “insurer” no longer includes “individuals”
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under R.A. No. 10607. Hence, an individual natural A: HMOs are not insurance businesses. One test that
person is no longer allowed to be an insurer. The they have applied is whether the assumption of risk
term, however, includes the following: and indemnification of loss (which are elements of
an insurance business) are the principal object and
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1. Professional reinsurer – any person, purpose of the organization or whether they are
partnership, association or corporation that merely incidental to its business. If these are the
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transacts solely and exclusively reinsurance principal objectives, the business is that of
business in the Philippines. insurance. But if they are merely incidental and
service is the principal purpose, then the business is
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2. Mutual Insurance Companies – The law also not insurance.
provides for the procedure for mutualization of
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domestic stock life insurance companies. A new Philippine Health Care Providers appears to provide
provision on RA 10607 is on demutualization or insurance-type benefits to its members (with
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conversion of mutual insurance companies into respect to its curative medical services), but these
stock corporations. (Sec. 280, IC) are incidental to the principal activity of providing
them medical care. The “insurance-like" aspect of
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3. Cooperatives – are now expressly included in Philippine Health Care Providers’ business is
the term “insurer” or “insurance company.” miniscule compared to its noninsurance activities.
However, the cooperative must: (Su-C-A) Therefore, since it substantially provides health
care services rather than insurance services, it
a. Have Sufficient capital and assets required cannot be considered as being in the insurance
under the Insurance Code and the pertinent business. (Philippine Health Care Providers Inc., v.
regulations issued by the Commission. (Sec. CIR, G.R. No. 167330, 18 Sept. 2009)
192, IC)
Rights and Obligations of the Parties in an
b. Have a Certificate of Authority to operate Insurance Contract
issued by the Commission which should be
renewed every year. (Sec. 193, IC; Sundiang The rights and obligations of the parties must be
Sr. & Aquino, 2014) determined by the terms of their contract, taking
into consideration its purpose and always in
(See also definition of “doing an insurance accordance with the general principles of insurance
business” or “transacting an insurance business” law. (Aquino, 2018)
– page 216)
2023 GOLDEN NOTES
III. INSURANCE LAW
Each party to a contract of insurance is bound to Notwithstanding the foregoing, in the event the
know all the general causes which are open to his insured does not change the beneficiary during his
inquiry, equally with that of the other, and which lifetime, the designation shall be deemed
may affect the political or material perils irrevocable. (Sec. 11, IC)
contemplated; and all general usages of trade. (Sec.
32, IC) 3. BENEFICIARY
Right to Information of Material Facts Limitations in the Appointment of Beneficiary
The right to information of material facts may be Any person who is forbidden from receiving any
waived, either by the terms of insurance or by donation under Art. 739 cannot be named
neglect to make inquiry as to such facts, where they
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beneficiary of a life insurance policy by the person
are distinctly implied in other facts of which who cannot make any donation to him, according to
information is communicated. (Sec. 33, IC) said article. (Art. 2012, NCC)
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2. INSURED Persons Prohibited from being Designated as
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Beneficiaries (1998 BAR)
Rights of Policyholders (F-A-IL-O-IBEO-R-C-ES-
SC-A) Under the Art. 739 in relation to Art. 2012 of the
NCC, the following are prohibited designation of
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1. Right to a Financially sound and viable beneficiaries:
insurance company;
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2. Right to Access insurance companies’ 1. Those made between persons who were guilty
official financial information; of adultery or concubinage at the time of
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3. Right to be Informed of the License status donation.
of insurance companies, intermediaries,
and soliciting agents; NOTE: The guilt of the donor and donee may be
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4. Right to be Offered a duly approved proved by preponderance of evidence in the
insurance product; same civil action.
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5. Right to be Informed of the Benefits,
Exclusions, and Other provisions under the 2. Those made between persons found guilty of
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policy; the same criminal offense, in consideration
6. Right to Receive the policy; thereof.
7. Right to Confidentiality of information;
8. Right to Efficient Service from insurance 3. Those made to a public officer or his wife,
companies, intermediaries, and soliciting descendants or ascendants by reason of his
agents; office.
9. Right to prompt and fair Settlement of
Claims; and The designation of the above-enumerated persons
10. Right to seek Assistance from the Insurance is void but the policy is binding. The estate will get
Commission. (Aquino, 2018) the proceeds. (Sundiang Sr. & Aquino, 2009)
Insured’s Right to Change Designated Any person who is forbidden from receiving any
Beneficiaries donation under Art. 739 cannot be named
beneficiary of a life insurance policy by the person
The insured shall have the right to change the who cannot make any donation to him, according to
beneficiary he designated in the policy, unless he said article. (Art. 2012, NCC)
has expressly waived this right in said policy.
COMMERCIAL LAW
Rationale for Prohibition XPNs: (I-U-D)
1. Insanity of the beneficiary at the time he
A beneficiary in a life insurance policy is no different killed the insured;
from a donee. Both are recipients of pure 2. The insured’s death was Unintentionally
beneficence. So long as marriage remains the caused (e.g., thru accident); and
threshold of family laws, reason and morality 3. The beneficiary acted in self-Defense.
dictate that the impediments imposed upon
married couple should likewise be imposed upon Q: Juan de la Cruz was issued Policy No. 8888 of
extra-marital relationship. If legitimate relationship the Midland Life Insurance Co. on a whole life
is circumscribed by these legal disabilities, with plan for P20,000 on 19 Aug. 1989. Juan is
more reason should an illicit relationship be married to Cynthia with whom he has three
restricted by these disabilities. (Insular Life v. legitimate children. He, however, designated
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Ebrado, G.R. No. L-44059, 28 Oct. 1977) Purita, his common-law wife, as the revocable
beneficiary. Juan referred to Purita in his
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Change of Beneficiary application and policy as the legal wife. Three
(3) years later, Juan died. Purita filed her claim
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GR: The insured shall have the right to change the for the proceeds of the policy as the designated
beneficiary he designated in the policy. beneficiary therein. The widow, Cynthia, also
filed a claim as the legal wife. To whom should
XPN: If the insured expressly waived this right in the proceeds of the insurance policy be
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the said policy. awarded? (1998, 2012 BAR)
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Notwithstanding the foregoing, in the event the A: The estate is entitled to claim for the proceeds of
insured does not change the beneficiary during his the insurance policy. As a general rule, the insured
lifetime, the designation shall be deemed may designate anyone he wishes to be his/her
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irrevocable. (Sec. 11, IC) beneficiary. However, Art. 2012 of the Civil Code,
which applies suppletorily to the Insurance Code,
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NOTE: Under Art. 64 of the Family Code, the provides that any person who is forbidden from
innocent spouse is allowed to revoke the receiving any donation under Art. 739 cannot be
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designation of the other spouse as irrevocable named beneficiary of a life insurance policy by the
beneficiary upon the finality of a decree of legal person who cannot make any donation to him,
separation. according to said article. Art. 739 specifically bars
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the donations as between persons who were guilty
Beneficiary Willfully brought about the Death of of adultery or concubinage.
the Insured (2008 BAR)
Since Purita is a common-law wife of Juan, she falls
GR: The interest of a beneficiary in a life insurance squarely into this category; therefore, she is
policy shall be forfeited when the beneficiary is the disqualified to receive insurance proceeds and
principal, accomplice, or accessory in willfully when this happens, the estate of the deceased is the
bringing about the death of the insured. In such a one entitled to the proceeds. (Insular Life v. Ebrado,
case, the share forfeited shall pass on to the other supra)
beneficiaries, unless otherwise disqualified. In the
absence of other beneficiaries, the proceeds shall be Q: Loreto designated Eva, his common-law wife,
paid in accordance with the policy contract. If the and illegitimate children as beneficiaries in his
policy contract is silent, the proceeds shall be paid life insurance policies. Loreto was killed and
to the estate of the insured. (Sec. 12, IC) Eva was the prime suspect in his death. The
legitimate wife and children of Loreto asked for
the insurance proceeds contending that
illegitimate family is disqualified from being
2023 GOLDEN NOTES
III. INSURANCE LAW
beneficiaries and that the insurance benefits 5. The insured cannot take the cash surrender
must redound to the benefit of the estate of value assign or even borrow on said policy
Loreto. Will the claim of the legitimate family without the consent of the beneficiary.
prosper?
Effects of Revocable Designation of a Beneficiary
A: NO. The insurance proceeds shall be applied
exclusively to the proper interest of the person in The insured may change the beneficiary during his
whose name or for whose benefit it is made unless lifetime, add a beneficiary or exclude a beneficiary
otherwise specified in the policy. in case of joint designation of beneficiaries.
While the share of Eva must be forfeited, the The same rule applies in case the policy is silent on
designation of the illegitimate children as the nature of the designation, for in such case, the
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beneficiaries remains valid. There is no proscription designation is deemed to be revocable. (Sec. 11, IC;
in naming illegitimate children as beneficiaries. It is Divina, 2021)
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only in cases where the insured has not designated
any beneficiary or when the designated beneficiary Q: Shortly after Yin and Yang were wed, they
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is disqualified by law to receive the proceeds, that each took out separate life insurance policies on
the policy proceeds shall redound to the benefit of their lives, and mutually designated one another
the estate of the insured. Thus, the proceeds of the as sole beneficiary. Both life insurance policies
policy must be awarded to the illegitimate children, provided for a double indemnity clause, the cost
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to the exclusion of the legitimate family. (Heirs of for which was added to the premium rate.
Loreto Maramag v. Maramag, G.R. No. 181132, 05 During the last 10 years of their marriage, the
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June 2009) spouses had faithfully paid for the annual
premiums over the life policies from both their
Effects of Irrevocable Designation of a salaries.
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Beneficiary (2005 BAR)
Unfortunately, Yin fell in love with his
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1. The insured cannot assign the policy without officemate, Yessel, and they carried on an affair.
the written consent of the beneficiary if the After two years, their relationship bore them a
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designation of the beneficiary is irrevocable. daughter named Yinsel. Without the knowledge
The irrevocable beneficiary has a vested right. of Yang, Yin changed the designation of the
(2005 BAR; Sundiang Sr. & Aquino, 2014) beneficiary to an "irrevocable designation" of
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Yinsel and Yessel jointly. When Yang learned of
2. The beneficiary designated in a life insurance the affair, she was so despondent that, having
contract cannot be changed without the written chanced upon Yin and Yessel on a date, she
consent of the beneficiary. (Gercio v. Sun Life rammed them down with the car she was
Assurance of Canada, G.R. No. 23703, 28 Sept. driving, resulting in Yin's death and Yessel's
1925) complete loss of mobilization. Yang was sued for
parricide, and while the case was pending, she
3. A new beneficiary cannot be added to the filed a claim on the proceeds of the life insurance
irrevocably designated beneficiary without the of Yin as irrevocable beneficiary, or at least his
latter’s written consent for this would in effect legal heir, and opposed the claims on behalf of
reduce the latter’s vested rights. (Go v. Redfern, Yessel and her daughter Yinsel.
G.R. No. L-47705, 25 Apr. 1941)
Yang claimed that her designation as
4. The irrevocably designated beneficiary may beneficiary in Yin's life insurance policy was
obtain a policy loan to the extent stated in the irrevocable, in the nature of one "coupled with
schedule of values attached to the policy. interest," since it was made in accordance with
(Gercio v. Sun Life Assurance of Canada, supra) their mutual agreement to designate one
COMMERCIAL LAW
another as sole beneficiary in their respective injury or loss, the aggrieved party shall be entitled
life policies. Is Yang correct in saying that her to recover the deficiency from the person causing
designation as beneficiary was irrevocable? the loss or injury. (Art. 2207, NCC)
(2018 BAR)
The insurer, after paying the amount covered by the
A: NO. Yang is not correct. The insured shall have policy, steps into the shoes of the insured, availing
the right to change the beneficiary he designated in himself the latter’s rights that exist against the
the policy, unless he has expressly waived this right wrongdoer at the time of the loss. (De Leon, 2014).
in the policy. There is nothing in the life insurance
policy taken by Yang which indicated that the Payment by the Insurer to the Assured Operates
designation of Yin is irrevocable. As such, it is as an Equitable Assignment
deemed to be revocable.
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Payment by the insurer to the assured operates as
Effect of Death of Insured an equitable assignment to the insurer of all
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remedies, which the assured may have against the
The right must be exercised specifically in the third party whose negligence or wrongful act
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manner provided in the policy or contract. However, caused the loss.
the insured’s power to extinguish the beneficiary’s
interest ceases at his death, and cannot be exercised The right of subrogation is not dependent upon, nor
by his personal representatives or assignees. The does it grow out of any privity of contract or upon
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beneficiary’s designation shall be deemed written assignment of claim. It accrues simply upon
irrevocable. (De Leon, 2014) payment of the insurance claim by the insurer. (Pan
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Malayan Insurance Corporation v. CA, G.R. No. 81026,
Where Right to Change is Waived 03 Apr. 1990)
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If the right to change the beneficiary is expressly Effects of Legal Subrogation under Art. 2207 of
waived in the policy, then the insured has no power the NCC
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to make such change without the consent of the
beneficiary. (De Leon, 2014) Legal subrogation produces the same effects as of
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assignment and no new obligation is created
The insured does not even retain the power to between the subrogee and debtor.
destroy the contract by refusing to pay premiums
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for the beneficiary can protect his interest by paying The effect of legal subrogation is to transfer to the
the premiums for the reason that the fulfillment of new creditor the credit and all the rights and actions
an obligation may be made by a third person even that could have been exercised by the former
against the will of the debtor and if he has an creditor either against the debtor or against third
interest in the fulfillment of the obligation, even persons, be they guarantors or mortgagors.
against the will of the creditor. (Art. 1236, NCC)
Simply stated, except only for the change in the
Insurer’s Right of Subrogation person of the creditor, the obligation subsists in all
respects as before the novation. However, unlike
If the plaintiff's property has been insured, and he assignment, legal subrogation, to produce effects,
has received indemnity from the insurance does not need to be agreed upon by the subrogee
company for the injury or loss arising out of the and subrogor. (Henson Jr. v. UCPB General Insurance
wrong or breach of contract complained of, the Co., Inc., G.R. No. 223134, 14 Aug. 2019)
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
2023 GOLDEN NOTES
III. INSURANCE LAW
Reasons behind the Right of Subrogation Henson v. UCPB General Insurance Co., Inc. became
final on Aug. 14, 2019.
1. To make the person who caused the loss
legally responsible for it; and Guidelines to the Application of the Henson
2. To prevent the insured from having double Ruling regarding the prescriptive period of
recovery from the wrongdoer and insurer. filing claims
(De Leon, 2014)
The Henson Ruling will only apply prospectively.
Right of Subrogation Applicable Only to
Property Insurance First Guideline: For actions of such nature that have
already been filed and are currently pending before
The value of human life is incapable of pecuniary the courts at the time of the finality of this Decision,
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estimation. In addition, Art. 2207 of the NCC refers the rules on prescription prevailing at the time the
only to property. (De Leon, 2014) action is filed would apply.
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XPNs to the Right of Subrogation: 1. For cases that were filed by the subrogee-
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insurer prior to the applicability of the Vector
1. If the insured, by his own act, releases the ruling (i.e., before Aug. 15, 2013), the
wrongdoer from liability; prescriptive period is four (4) years from the
time the tort is committed against the insured
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2. Where the insurer pays the assured the by the wrongdoer.
value of the lost goods without notifying
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the carrier who has in good faith settled the 2. For cases that were filed by the subrogee-
assured’s claim for loss; and insurer during the applicability of the Vector
ruling (i.e., from Vector's finality on Aug. 15,
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3. Where the insurer pays the assured for a 2013 up until the finality of this Decision on
loss which is not a risk covered by the Aug. 14, 2019), the prescriptive period is ten
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policy, thereby effecting “voluntary (10) years from the time of payment by the
payment”. (Pan Malayan Insurance insurer to the insured, which gave rise to an
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Corporation v. CA, supra) obligation created by law.
Prescriptive Period in cases where the Insurer is Second Guideline: For actions of such nature that
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Subrogated to the Rights of the Insured against have not yet been filed at the time of the finality of
the Wrongdoer this Decision:
Following the principles of subrogation, the insurer 1. For cases where the tort was committed and the
inherits only the remaining period within which the consequent loss/injury against the insured
insured may file an action against the wrongdoer. occurred prior to the finality of this Decision
(Aug. 14, 2019), the subrogee-insurer is given
The ruling in Henson v. UCPB General Insurance Co., an additional four (4) years from the time of the
Inc. (G.R. No. 223134, 14 Aug. 2019) abandoned the finality of this Decision to file the action against
ruling in the case of Vector Shipping v. American the wrongdoer; but the total period to file such
Home Assurance Company (G.R. No. 159213, 03 July, case shall not exceed ten (10) years from the
2013) with regard the prescriptive period in cases time the insurer is subrogated to the rights of
where the insurer is subrogated to the rights of the the insured.
insured against the wrongdoer.
2. For cases where the tort was committed and the
NOTE: Vector Shipping v. American Home Assurance consequent loss/injury against the insured
Company became final on Aug. 15, 2013 while occurred only upon or after the finality of this
COMMERCIAL LAW
Decision, the prescriptive period is four (4)
years from the time the tort is committed
against the insured by the wrongdoer. The D. RESCISSION OF INSURANCE CONTRACTS
Vector doctrine would hold no application.
(Henson Jr. v. UCPB General Insurance Co., Inc.,
G.R. No. 223134, 14 Aug. 2019)
Instances wherein a Contract of Insurance may
be Rescinded (1991, 1994, 1996, 1998 BAR)
Right to the Recovery of the Proceeds of the
Insurance
(Co-M-B)
The named beneficiary is the person designated by

1. Concealment
the terms of the policy as the one to receive the
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2. Misrepresentation/ omission
proceeds of the insurance. (Aquino, 2018)
3. Breach of warranties
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Prescriptive Period for Filing of a Complaint for
Instances wherein a Contract of Insurance may
the Recovery of the Proceeds of the Insurance
be Canceled by the Insurer
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(N-C-D-P-Discovery of Fra-M-E-W-O-R)
The Insurance Code does not provide for a
prescriptive period for the filing of a complaint for
1. Nonpayment of premium;
the recovery of the proceeds of the insurance.
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However, the parties may stipulate a prescriptive
2. Conviction of a crime arising out of acts
period in the policy subject to the limitation under
increasing the hazard insured against;
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Sec. 63 of the IC which states that “a condition,
stipulation, or agreement in any policy of insurance,
3. A Determination by the Commissioner that the
limiting the time for commencing an action
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continuation of the policy would violate or
thereunder to a period of less than one (1) year from
would place the insurer in violation of the
the time when the cause accrues, is void. (Aquino,
Insurance Code;
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2018)
4. Physical changes in the property insured which
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Final Rejection of the Claim
result in the property becoming uninsurable;
The prescriptive period for the insured’s action for
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5. Discovery of Fraud or Material
indemnity should be reckoned from the final
misrepresentation;
rejection of the claim. The final rejection simply
means denial by the insurer of the claims of the
6. Discovery of other insurance coverage that
insured and not the rejection or denial by the
makes the total insurance in Excess of the value
insurer of the insured’s motion or request for
of the property insured; or
reconsideration. The rejection referred to should be
construed as the rejection in the first instance.
7. Discovery of Willful or Omissions or Reckless
(Alpha Plus International Enterprises Corp. v.
acts increasing the hazard insured against. (Sec.
Philippine Charter Insurance Corp, G.R. No. 203756,
64, IC)
10 Feb. 2021, J. Hernando)
No policy of insurance other than life shall be

canceled by the insurer except upon prior notice
thereof to the insured, and no notice of cancellation
shall be effective unless it is based on the
occurrence, after the effective date of the policy, of
2023 GOLDEN NOTES
III. INSURANCE LAW
one or more of the abovementioned instances. (Sec. Test of Materiality (2000 BAR)
64, Ibid)
It is determined not by the event, but solely by the
Notice of Cancellation of the Contract probable and reasonable influence of the facts upon
the party to whom the communication is due, in
All notices of cancellation shall be in writing, mailed forming his estimate of the disadvantages of the
or delivered to the named insured at the address proposed contract, or in making his inquiries. (Sec.
shown in the policy, or to his broker provided the 31, IC)
broker is authorized in writing by the policy owner
NOTE: As long as the facts concealed are material,
to receive the notice of cancellation on his behalf,
concealment, whether intentional or not, entitles
and shall state:
the injured party to rescind. (Sec. 27, IC)
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1. Which of the grounds set forth in Sec. 64 is
Facts not conveyed to the insurer raises
relied upon; and
presumption that the failure of the insured to
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2. That, upon written request of the named
communicate must have been intentional rather
insured, the insurer will furnish the facts on
than inadvertent. Good faith is not a defense
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which the cancellation is based. (Sec. 65, IC)
because of the Uberrimae Fidei Doctrine.
1. CONCEALMENT Rules on Concealment
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Concealment is a neglect to communicate that which 1. If there is concealment under Sec. 27, the
a party knows and ought to communicate. (Sec. 26, remedy of the insurer is rescission since
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IC) concealment vitiates the contract of insurance;
(1996 BAR)
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Under Sec. 27 of the IC, “a concealment entitles the
injured party to rescind a contract of insurance.” 2. The party claiming the existence of
Moreover, under Sec. 168 of the IC, the insurer is
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concealment must prove that there was
entitled to rescind the insurance contract in case of knowledge of the fact concealed on the part of
an alteration in the use or condition of the thing
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the party charged with concealment.;
insured. (Malayan Insurance Company v. PAP Co.,
G.R. No. 200784, 7 Aug. 2013, in Divina 2014) 3. Good faith is NOT a defense in concealment.
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Concealment, whether intentional or
Requisites (Ne-D-NoW-NoM-Ma) unintentional entitles the injured party to
rescind the contract of insurance; (Sec. 27, IC)
1. A party knows a fact which he Neglects to
communicate or disclose to the other party; 4. The matter concealed need not be the cause of
2. Such party concealing is Duty bound to loss; (Sec. 31, IC) and
disclose such fact to the other;
3. Such party concealing makes No Warranty 5. To be guilty of concealment, a party must have
as to the fact concealed; knowledge of the fact concealed at the time of
4. The other party has No Means of the effectivity of the policy.
ascertaining the fact concealed; and
5. The fact must be Material. Q: Should the fact/s concealed be the proximate
cause of the loss in order to constitute
concealment?
COMMERCIAL LAW
A: NO, the facts concealed need not be the Yate was previously diagnosed by a private
proximate cause of the loss in order to constitute physician of having breast cancer which she did
concealment. Materiality is to be determined not by not disclose to the insurer in her application,
the event, but solely by the probable and reasonable nor to the insurer's accredited physician
influence of the facts upon the party to whom the because by then, she was told that she was
communication is due, in forming his estimate of the already cancer-free after undergoing surgery
disadvantages of the proposed contract, or in which removed both her breasts. She was later
making his inquiries. The test is whether the diagnosed with psychotic tendency that
matters concealed would have definitely affected graduated into extreme despondency.
the insurer’s action on the application of the
insured, either by approving it with the She was found dead hanging in her closet 36
corresponding adjustment for a higher premium or months after the issuance of the policy. The
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rejecting the same. (Sunlife Assurance Company of police authorities declared it to be a case of
Canada v. CA, G.R. No. 105135, 22 June 1995; Divina, suicide. The policy did not include suicide as an
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2021) excepted risk.
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When Concealment Produces the Effect of a. Can the insurer raise the issue of failure to
Avoiding the Policy disclose that she had cancer as a cause for
denying the claim of the beneficiaries?
Concealment should take place at the time the
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contract is entered into and not afterwards in order A: The insurer cannot raise the issue of
that the policy may be avoided. The duty of concealment, because only material facts known to
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disclosure ends with the completion of the contract. the insured at the time of the issuance of the policy
Waiver of medical examination in a non-medical should be disclosed to the insurer (Sec. 28, IC). Yate’s
insurance contract renders even more material the previous cancer diagnosis is no longer a material
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information required of the applicant concerning fact at the time she procured the policy.
previous condition of health and diseases suffered,
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for such information necessarily constitutes an b. Are the beneficiaries entitled to receive the
important factor which the insurer takes into proceeds of the life insurance
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consideration in deciding whether to issue the notwithstanding the fact that the cause of
policy or not. Failure to communicate information death was suicide? (2018 BAR)
acquired after the effectivity of the policy will not be
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a ground to rescind the contract. A: YES. The beneficiaries are entitled to receive the
proceeds. The rule is that the insurer in life
NOTE: The reason for this rule is that if concealment insurance is liable in case of suicide only when it is
should take place after the contract is entered into, committed after the policy has been in force for a
the information concealed is no longer material as it period of two years from the date of issue or last
will no longer influence the other party to enter into reinstatement. The rule, however, admits of an
such contract. exception so that when suicide is committed in the
state of insanity, it shall be compensable regardless
Q: On June 21, 2008, Yate took out a life of the date of commission. (Sec. 183, IC)
insurance policy on her life in the amount of P10
million and named her husband Vandy and In the facts given, Yate was diagnosed with
daughter as joint irrevocable beneficiaries. psychotic tendency that graduated into extreme
Before the policy was issued and the premiums despondency; thus, even though Yate committed
were paid, Yate underwent a medical checkup suicide 36 months from issuance of the policy, the
with a physician accredited by the insurer, and insurer is liable.
the only result found was that she was suffering
from high blood pressure.
2023 GOLDEN NOTES
III. INSURANCE LAW
Concealment in Marine Insurance insured, except if he is not the owner of the
property insured. (Sec. 34, IC)
Rules on concealment are stricter in marine
insurance since the insurer would have to depend XPN: In answer to inquiries of the other. (Sec. 30, IC)
almost entirely on the matters communicated by the
insured. Thus, in addition to material facts, each NOTE: Neither party is bound to communicate, even
party must disclose all the information he possesses upon inquiry, information of his own judgment,
which are material or the information of the belief because such would add nothing to the appraisal of
or expectation of a third person, in reference to a the application. (Sec. 35, IC)
material fact. But concealment in a marine
insurance in any of the following matters Matters that Must be Disclosed Even in the
enumerated under Sec. 112 of the IC does not vitiate Absence of Inquiry (Mat-No-No)
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the entire contract, but merely exonerates the
insurer from a loss resulting from the risk 1. Those Material to the contract;
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concealed. 2. Those which the other has No means of
ascertaining; and
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Test in Ascertaining the Existence of 3. Those as to which the party with the duty
Concealment to communicate makes No warranty.
If the applicant is aware of the existence of some NOTE: Matters relating to the health of the insured
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circumstances which he knows would probably are material and relevant to the approval of the
influence the insurer in acting upon his application, issuance of the life insurance policy as these
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good faith requires him to disclose that definitely affect the insurer’s action to the
circumstance, though unasked. application. It is well-settled that the insured need
not die of the disease he had failed to disclose to the
N
Matters that Need NOT be Disclosed
insurer, as it is sufficient that his non-disclosure
misled the insurer in forming his estimates of the
E
GR: The parties are not bound to communicate
risks of the proposed insurance policy or in making
information of the following matters:
inquiries. (Sunlife Assurance Co. of Canada v. CA,
T
(O-W-K-E-R-I)
supra)
1. Those which, in the exercise of ordinary
care, the other Ought to know and of which,
Information as to the nature of interest need not be
A
the former has no reason to suppose him
disclosed except in property insurance if the
ignorant;
insured is not the owner. If somebody is insuring
properties of which he is not the owner, he must
2. Those of which the other Waives
disclose why he has insurable interest that would
communication;
entitle him to ensure it, and the extent thereof. (Secs.
34 and 51(e), IC)
3. Those which the other Knows;
Q: X insured his life for P20 million. X plays golf
4. Those which prove or tend to prove the
and regularly exercises, hence is considered in
Existence of a risk excluded by a warranty,
good health. He did not know, however, that his
and which are not otherwise material;
frequent headache is really caused by his being
hypertensive. In his application form for a life
5. Those which Relate to a risk excepted from
insurance for himself, he did not put a check to
the policy and which are not otherwise
the question if he is suffering from
material; and
hypertension, believing that because of his
active lifestyle, being hypertensive is a remote
6. The nature or amount of the Interest of one
possibility. While playing golf one day, X
COMMERCIAL LAW
collapsed at the fairway and was declared dead approved. (Great Pacific Life Assurance Company v.
on arrival at the hospital. His death certificate CA, G.R. No. L-31845, 30 Apr. 1979)
stated that X suffered a massive heart attack.
Q: Benny applied for life insurance for P1.5
a. Will the beneficiary of X be entitled to the million. The insurance company approved his
proceeds of the life insurance under the application and issued an insurance policy
circumstances, despite the non-disclosure effective 06 Nov. 2008. Benny named his
that he is hypertensive at the time of children as his beneficiaries. On 06 Apr. 2010,
application? Benny died of hepatoma, a liver ailment.
A: NO, the beneficiary of X is not entitled to the

The insurance company denied the children's
proceeds of the life insurance. The hypertension of
claim for the proceeds of the insurance policy on
W
X is a material fact that should have been disclosed
the ground that Benny failed to disclose in his
to the insurer. The concealment of such material
application two previous consultations with his
fact entitles the insurer to rescind the insurance
A
doctors for diabetes and hypertension, and that
policy.
he had been diagnosed to be suffering from
L
hepatoma. The insurance company also
b. If X died in an accident instead of a heart
rescinded the policy and refunded the
attack, would the fact of X's failure to
premiums paid. Was the insurance company
disclose that he is hypertensive be
correct? (2013 BAR)
O
considered as material information? (2016
BAR)
A: YES. The insurance company correctly rescinded
E
the policy because of concealment. Benny did not
A: It is still a material information. It is settled that
disclose that he was suffering from diabetes,
the insured cannot recover even though the
hypertension, and hepatoma. The concealment is
N
material fact not disclosed is not the cause of the
material because these are serious ailments. Also,
loss. (UPLC Commercial Law Suggested Answers)
Benny died less than two years from the date of the
E
issuance of the policy, hence rescission is still
Q: Ngo Hing filed an application with the Great
possible. (Sec. 26; Sec. 48, IC)
T
Pacific Life Assurance Company (Pacific Life) for
a twenty-year endowment policy on the life of
Right to Information of Material Facts May be
his one-year-old daughter Helen Go. Ngo Hing
Waived
A
supplied the essential data and filed the
application to Mondragon, the branch manager.
1. Expressly by the terms of the contract; or
After some time, Helen Go died of influenza with
2. Impliedly by the failure to make an inquiry as to
complication of bronchopneumonia.
such facts, where they are distinctly implied in
Thereupon, Ngo Hing sought the payment of the
other facts from which information is
proceeds of the insurance, but having failed in
communicated. (Sec. 33, IC)
his effort, he filed the action for the recovery of
the same. Did Ngo Hing conceal the state of
Q: Kwong Nam applied for a 20-year endowment
health and physical condition of Helen Go, which
insurance on his life with his wife, Ng Gan Zee as
rendered void the binding receipt?
beneficiary. On the same date, Asian Crusader,
upon receipt of the required premium from the
A: YES. Ngo Hing intentionally concealed the state
insured, approved the application and issued
of health of his daughter Helen Go. He was fully
the corresponding policy. Kwong Nam died of
aware that his child was a typical mongoloid child
cancer of the liver with metastasis. All
upon filling out the application form. It is evident
premiums had been paid at the time of his death.
that he withheld a fact material to the risk to be
assumed by the insurance company had the plan be
2023 GOLDEN NOTES
III. INSURANCE LAW
Ng Gan Zee presented a claim for payment of the Instances whereby Concealment Made by an
face value of the policy. Asian Crusader Life Agent Procuring the Insurance Binds the
Assurance denied the claim on the ground that Principal
the answers given by the insured to the
questions in his application for life insurance 1. Where it was the duty of the agent to acquire
were untrue, claiming Kwong Nam's and communicate information of the facts in
misrepresentation when he answered "No" to question; or
the question appearing in the application for life
insurance. Also, it was alleged that Kwong Nam 2. Where it was possible for the agent, in the
was examined in connection with his exercise of reasonable diligence to have made
application for life insurance, but he gave the such communication before the making of the
medical examiner false and misleading insurance contract.
W
information as to his ailment and previous
operation by saying that it was associated with NOTE: Failure on the part of the insured to disclose
A
ulcer of the stomach. Asian Crusader contended such facts known to his agent, or wholly due to the
that he was operated on for peptic ulcer 2 years fault of the agent, will avoid the policy, despite the
L
before the policy was applied for and that he good faith of the insured.
never disclosed such an operation. Was there
concealment? 2. MISREPRESENTATION OR OMISSIONS
O
A: NO, concealment exists where the assured has Omission
knowledge of fact material to the risk, and honesty,
E
good faith, and fair dealing require that he should The failure to communicate information on matters
communicate it to the assurer, but he designedly
proving or tending to prove the falsity of warranty.
and intentionally withholds the same. In the
N
In case of omission, the aggrieved party may rescind
absence of evidence that the insured had sufficient the contract of insurance.
medical knowledge as to enable him to distinguish
E
peptic ulcer and a tumor, his statement that said Misrepresentation
tumor was associated with ulcer of the stomach,
T
should be construed as an expression made in good It occurs when the facts fail to correspond with its
faith of his belief as to the nature of his ailment and assertions or stipulations. Misrepresentation is an
operation. (Ng Gan Zee v. Asian Crusader Life affirmative defense. To avoid liability, the insurer
A
Assurance Corporation, G.R. No. L-30685, 30 May has the duty to establish such a defense by
1983 cited in Divina, 2021) satisfactory and convincing evidence. (Sec. 44, IC; Ng
Gan Zee v. Asian Crusader Life Assurance Corp.,
Indeed, such statement must be presumed to have supra)
been made by him without knowledge of its
incorrectness and without any deliberate intent on NOTE: In the absence of evidence that the insured
his part to mislead Asian Crusader. While it may be has sufficient medical knowledge to enable him to
conceded that, from the viewpoint of a medical distinguish between “peptic ulcer” and “tumor”, the
expert, the information communicated was statement of deceased that said tumor was
imperfect, the same was nevertheless sufficient to “associated with ulcer of the stomach” should be
have induced Asian Crusader to make further considered an expression in good faith. Fraudulent
inquiries about the ailment and operation of the intent of insured must be established to entitle
insured. insurer to rescind the insurance contract.
Misrepresentation, as a defense of the insurer to
avoid liability, is an affirmative defense which must
be proved. The duty to establish such a defense by
satisfactory and convincing evidence rests upon the
COMMERCIAL LAW
defendant. (Ng Gan Zee v. Asian Crusader Life Concealment vs. Misrepresentation
Assurance Corp., G.R. No. L- 30685, 30 May 1983)
CONCEALMENT MISREPRESENTATION
Requisites of Misrepresentation (U-K-Ma) As to their Definition
The insured makes
1. The insured stated a fact which is Untrue; The insured withholds erroneous statements
the information of of facts with the intent
2. Such fact was stated with Knowledge that it is material facts from of inducing the insurer
untrue and with intent to deceive or which he the insurer. to enter into the
states positively as true without knowing it to insurance contract.
be true and which has a tendency to mislead; As to Kind of Act
and
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Concealment is a
negative act, meaning
3. Such fact in either case is Material to the risk. Misrepresentation is a
the neglect to
A
positive act as the
communicate
A representation cannot qualify an express insured volunteers such
information as to
fact.
L
provision in a contract of insurance, but it may material facts known
qualify an implied warranty. (Sec. 40, IC) to the insured.
As to When Made
Test of Materiality Concealment usually Misrepresentation may
O
occurs prior to the be made at the time of,
It is to be determined not by the event, but solely by making of the or prior, to the issuance
E
the probable and reasonable influence of the facts insurance contract. of the insurance policy.
upon the party to whom the representation is made, As to Necessity of Proof of Fraudulent Intent
in forming his estimates of the disadvantages of the
N
Not necessary in Necessary in case of
proposed contract or in making his inquiries. (Sec. rescission due to rescission due to
46, IC) concealment misrepresentation
E
NOTE: While there are distinctions between the
Effects of Misrepresentation two, concealment has the same effect as
T
misrepresentation in terms of entitling the insurer
1. It renders the insurance contract voidable at to rescind the insurance policy. (Divina, 2021)
the option of the insurer, although the policy is
A
not thereby rendered void ab initio. The injured Application of Concealment and
party entitled to rescind from the time when the
Misrepresentation in case of Loss or Death
representation becomes false; and
GR: If the concealment or misrepresentation is
2. When the insurer accepted the payment of discovered before loss or death, the insurer can
premium with the knowledge of the ground for cancel the policy. If the discovery is after loss or
rescission, there is waiver of right of rescission. death, the insurer can refuse to pay.
XPN: The incontestability clause under Sec. 48(2) of

the IC.
Q: Alvarez applied for and was granted a

housing loan by Union Bank. The said loan was
secured by a promissory note, a real estate
mortgage over the lot, and a mortgage
redemption insurance taken on the life of
2023 GOLDEN NOTES
III. INSURANCE LAW
Alvarez with Union Bank as beneficiary. Later 3. BREACH OF WARRANTIES
Alvarez passed away.
Warranties (1993 BAR)

Union Bank filed with Insular Life a death claim
under Alvarez's name. However, Insular Life
Statements or promises by the insured set forth in
denied the claim after determining that Alvarez
the policy itself or incorporated in it by proper
was not eligible for coverage as he was
reference, the untruth or non-fulfillment of which in
supposedly more than 60 years old at the time of
any respect, and without reference to whether the
his loan's approval. It asserts that Alvarez's
insurer was in fact prejudiced by such untruth or
concealment of his age, whether intentional or
non-fulfillment render the policy voidable by the
unintentional, entitles it to rescind the
insurer.
insurance contract. It claims that proof of
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fraudulent intent is not necessary for the
Purpose of Warranties
insurer to rescind the contract on account of
A
concealment. Is Insular Life correct?
To eliminate potentially increasing moral or
physical hazards which may either be due to the acts
L
A: NO. Sec. 44 of the IC states, "A representation is
of the insured or to the change of the condition of
to be deemed false when the facts fail to correspond
the property.
with its assertions or stipulations." In relation to
this, Sec. 45 of the Insurance code provides that, if a
O
Basis of Warranties
representation is false in a material point, whether
affirmative or promissory, the injured party is
The insurer took into consideration the condition of
E
entitled to rescind the contract from the time when
the property at the time of effectivity of the policy.
the representation becomes false.
N
Effects of Breach of Warranty
The rescission under Sec. 45 remains subject to the
basic precept of fraud having to be proven by clear
1. Material
E
and convincing evidence. Fraud is never presumed
and fraudulent misrepresentation as a defense of
GR: Violation of material warranty or of material
T
the insurer to avoid liability must be established by
provision of a policy will entitle the other party to
convincing evidence. Consistent with the
rescind the contract.
requirement of clear and convincing evidence, it
A
was Insular Life's burden to establish the merits of
XPN: (with regard to “promissory” warranties)
its own case. (The Insular Assurance Co. v. Heirs of
Alvarez, G.R. No. 207526, 03 Oct. 2018)
a. Loss occurs before the time of performance
of the warranty;
Remedy of the Injured Party in case of
b. The performance becomes unlawful at the
Misrepresentation
place of the contract; or
c. Performance becomes impossible. (Sec. 73,
If there is misrepresentation, the injured party is
IC)
entitled to rescind from the time when the
representation becomes false.
2. Immaterial
GR: It will not avoid the policy.
XPN: When the policy expressly provides, or

declares that a violation thereof will avoid it.
COMMERCIAL LAW
For instance, an “Other Insurance Clause” which is a
condition in the policy requiring the insured to
inform the insurer of any other insurance coverage
of the property. A violation of the clause by the
insured will not constitute a breach unless there is
an additional provision stating that the violation
thereof will avoid the policy. (Sec. 75, IC)
Effect of a Breach of Warranty without Fraud
The policy is avoided only from the time of breach
W
and the insured is entitled:
1. To the return of the premium paid at a pro rata
A
from the time of breach or if it occurs after the
inception of the contract; or
L
2. To all premiums if it is broken during the
inception of the contract.
O
Effect of Breach of Warranty with Fraud
E
1. Policy is avoided ab initio and never became
binding.
N
2. Insured is not entitled to the return of the
E
premium.
A T
2023 GOLDEN NOTES
IV. TRANSPORTATION LAW
students in the rear, including Aaron, out of the
IV. TRANSPORTATION LAW van. Aaron landed on the path of the train, which
dragged his body and severed his head,
instantaneously killing him.
The Zarates commenced an action for damages

A. COMMON CARRIERS against Alfaro, the Pereñas, PNR, and Alano. The
Zarates’ claim against the Pereñas was based on
breach of the contract of carriage and based on
Definition quasi-delict under Art. 2176 of the Civil Code
against PNR.
A common carrier is a person, corporation, firm, or
W
association engaged in the business of carrying or The Pereñas argued that they exercised the
transporting passengers or goods or both, by land, diligence of a good father of a family in the
A
water, or air for compensation, offering its services selection and supervision of Alfaro by making
to the public. (Art. 1732, NCC) sure that Alfaro had been issued a driver’s
L
license and had not been involved in any
Requisites for an Entity to be Classified as a vehicular accident prior to the collision. Is the
Common Carrier (1996, 1997, 2000, 2002 BAR) operation of a school bus service considered as
(PeCoFA-B-LAW-F-P) a private carrier?
O
1. Must be a Person, Corporation, Firm, or A: NO. The Pereñas, as the operators of a school bus
E
Association; service, were:
2. Engaged in the Business of carrying or
transporting passengers or goods or both; 1. Engaged in transporting passengers
N
3. The carriage or transport must either be by generally as a business, not just as a casual
Land, Water or Air; occupation;
E
4. The service is for a Fee; and
5. The service is offered to the Public. (Art. 2. Undertaking to carry passengers over
T
1732, NCC) established roads by the method by which
the business was conducted; and
NOTE: A pipeline operator who carries oil and other
A
petroleum products through pipes or pipelines is a 3. Transporting students for a fee.
common carrier. The law does not distinguish as to
the means by which transportation is carried out, as Despite catering to a limited clientèle, the Pereñas
long as it is by land, water, or air. Neither does the operated as a common carrier because they held
law require that transportation be through a motor themselves out as a ready transportation
vehicle. (First Phil. Industrial Corp. v. CA, G.R. No. indiscriminately to the students of a particular
125948, 29 Dec. 1998) school living within or near where they operated
the service and for a fee. (Sps. Pereña v. Sps. Zarate,
Q: The Pereñas were engaged in the business of G.R. No. 157917, 29 Aug. 2012)
transporting students from their respective
residences in Parañaque City to Don Bosco in
Pasong Tamo, Makati City and back. They
employed Alfaro as driver of the van. The
Zarates contracted the Pereñas to transport
their son, Aaron, to and from Don Bosco.
However, a train hit the rear end of the van
driven by Alfaro, and the impact threw nine (9)
COMMERCIAL LAW
Test for Determining whether One is a Common 5. The Civil Code makes no distinction as to the
Carrier (1996 BAR) means of transporting, as long as it is by land,
water or air. (First Philippine Industrial
The true test for a common carrier is not the Corporation v. CA, G.R. No. 125948, 29 Dec. 1998)
quantity or extent of the business actually
transacted, or the number and character of the 6. The Civil Code does not provide that the
conveyances used in the activity, but whether the transportation should be by motor vehicle.
undertaking is a part of the activity engaged in by (Ibid.)
the carrier that he has held out to the general public
as his business or occupation. The question must be 7. A person or entity may be a common carrier
determined by the character of the business actually even if he has no fixed and publicly known
carried on by the carrier, not by any secret intention route, maintains no terminals, and issues no
W
or mental reservation it may entertain or assert tickets. (Asia Lighterage and Shipping, Inc. v. CA,
when charged with the duties and obligations that G.R. No. 147246, 19 Aug. 2003)
A
the law imposes. (Sps. Pereña v. Sps. Zarate, supra
ibid) 8. A person or entity need not be engaged in the
L
business of public transportation for the
The concept of common carriers contemplated provisions of the Civil Code on common carriers
under Art. 1732 of the NCC and the fact that the said to apply to them. (Fabre, Jr. v. CA, G.R. No.
concept corresponds to the concept of “public 111127, 26 July 1996)
O
service” under the Public Service Act results in the
application of the following rules or principles: 9. The carrier can also be a common carrier even
E
if the operator does not own the vehicle or
1. Art. 1732 makes no distinction between one vessel that he or she operates. (Cebu Salvage
whose principal business activity is the Corp. v. Philippine Home Assurance Corp., G.R.
N
carrying of persons or goods or both, and one No. 150403, 25 Jan. 2007; Aquino and Hernando,
who does such carrying only as an ancillary 2016)
E
activity. (De Guzman v. CA, G.R. No. L-47822, 22
Dec. 1988) Q: Alejandro Camaling is engaged in buying
T
copra, charcoal, firewood, and used bottles and
2. Art. 1732 also carefully avoids making any in reselling them in Cebu City. He uses two (2)
distinction between a person or enterprise big Isuzu trucks for the purpose; however, he
A
offering transportation service on a regular or has no certificate of public convenience or
scheduled basis and one offering such service franchise to do business as a common carrier.
on an occasional, episodic, or unscheduled On the return trips to Alegria, he loads his trucks
basis. (Ibid.) with various merchandise of other merchants in
Alegria and in the two neighboring
3. Art. 1732 does not distinguish between a municipalities. He charges them freight rates
carrier offering its services to the “general much lower than the regular rates. In one of the
public,” and one who offers services or solicits return trips, one cargo truck was loaded with
its business only from a narrow segment of the several boxes of sardines, owned by Pedro
general population. (Ibid.) Rabor. While passing the zigzag road between
Carcar and Barili, the truck was hijacked by
4. A person or entity is a common carrier and has three (3) armed men who took all the boxes of
the obligations of the common carrier under the sardines and kidnapped the driver and his
Civil Code even if he did not secure a Certificate helper, releasing them only two (2) days later.
of Public Convenience. (Ibid.) Rabor sought to recover from Alejandro the
value of the sardines. The latter argued that he
is not a common carrier. If you were the judge,
2023 GOLDEN NOTES
would you sustain the contention of Alejandro? general population. (C.V. Gaspar Salvage &
(1991 BAR) Lighterage Corporation v. LG Insurance Company
Ltd., G.R. Nos. 206892 & 207035, 03 Feb. 2021)
A: NO. If I were the judge, I would rule that
Alejandro is a common carrier. A person who offers Private Carrier
his services to carry passengers or goods for a fee is
a common carrier, regardless of whether he has a A private carrier is one who, without making the
certificate of public convenience or not, whether it activity a vocation, or without holding himself or
is his main business or is incidental to such itself out to the public as ready to act for all who may
business, whether it is scheduled or unscheduled desire his or its services, undertakes, by special
service, and whether he offers his services to the agreement in a particular instance only, to transport
general public or to a limited few. (De Guzman v. CA, goods or persons from one place to another either
W
G.R. No. L-47822, 22 Dec. 1988) gratuitously or for hire. (Sps. Pereña v. Sps. Zarate,
supra) A carrier which does not qualify under the
A
Q: Maria shipped 3,000 bags of Australian requisites of a common carrier is deemed a private
delicacies to Pauline in the Philippines. Such carrier. (National Steel Corporation v. CA, G.R. No.
L
goods were insured with PH Insurance. Pauline 112287, 12 Dec. 1997)
then hired B Brokerage as its customs broker.
When the goods arrived at the Port of Manila, Common Carrier vs. Private Carrier (2002
the same was loaded into the barge owned by BAR)
O
AVL Shipping’s barge, called ANYA-I. When the
barge traversed Pasig River, the goods got wet as COMMON CARRIER PRIVATE CARRIER
E
it was found that the barge had a hole, thereby To whom the carrier caters its services
allowing river water to flow inside the same. Carriage is generally
This resulted to the goods being wet which now undertaken by special
N
Undertakes to carry
became inedible. Pauline asserted her agreement and it does
passengers or goods
insurance claim with PH Insurance, to which the not hold itself out to
E
for the public.
latter paid. PH Insurance now filed a claim carry goods for the
against B Brokerage and AVL Shipping. AVL general public.
T
Shipping contends that its barge, ANYA-I cannot Governing laws
be considered as a common carrier. Is ANYA-I a Civil Code Provisions
common carrier?
A
on Common Carriers,
Public Service Act, and
A: YES. ANYA-I is a common carrier. Art. 1732 of the Civil Code provisions
other Special laws
NCC defines common carriers as “persons, on ordinary contracts
relating to
corporations, firms, or associations engaged in the transportation
business of carrying or transporting passengers or (CICOCA-PSA-SPEC)
goods or both, by land, water, or air, for Degree of Diligence required
compensation, offering their services to the public”. Ordinary diligence or
Art. 1732 does not make any distinction between Extraordinary
diligence of a good
one whose principal business activity is the carrying diligence
father of a family
of persons or goods or both, and one who does the Presumption of Negligence
carrying only as an ancillary activity; between a 1. If the goods are lost,
person or enterprise offering transportation service destroyed or
on a regular or scheduled basis, and one offering the deteriorated; or No presumption as to
service on an occasional, episodic or unscheduled negligence.
basis; and a carrier offering its services to the 2. In case of death of or
general public, and one who offers services or injuries to passengers.
solicits business only from a narrow segment of the
COMMERCIAL LAW
Whether subject to regulation or not A: YES, common carriers are liable to injuries to
NOT subject to passengers even if the carriers observed ordinary
Subject to regulation
regulation by a diligence and care because the obligation imposed
by a regulatory agency
regulatory agency upon them by law is to exercise extraordinary
Exemption from liability diligence. Common carriers are bound to carry the
A common carrier passengers safely as far as human care and foresight
cannot stipulate that it can provide, using the utmost diligence of very
is exempt from liability A private carrier may cautious persons with a due regard for all the
for negligence of its validly enter into a circumstances.
agents or employees. stipulation exempting
Such stipulation is void it from liability. Exercise of Extraordinary Diligence in the
Carriage of Goods and Transport of Passengers
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as it is against public
policy.
CARRIAGE OF TRANSPORT OF
A
GOODS PASSENGERS
1. DILIGENCE REQUIRED OF COMMON
CARRIERS Commencement
L
From the moment the
From the time the
person who purchases
The diligence required of common carriers is goods are
the ticket from the
extraordinary diligence. (Art. 1733, NCC) unconditionally placed
carrier presents
O
in the possession of
himself at the proper
Extraordinary diligence is that extreme measure of and received by the
place and in a proper
care and caution which persons of unusual
E
carrier for
manner to be
prudence and circumspection use for securing and transportation.
transported.
preserving their own property or rights. The law
Duration
N
requires common carriers to render service with
1. Continues until the
the greatest skill and utmost foresight.
goods are delivered,
E
(Loadmasters Customs Services, Inc. v. Glodel
actually or
Brokerage Corp., G.R. No. 179446, 10 Jan. 2011)
constructively, by the
T
carrier to the
Reasons for the Requirement of Extraordinary
consignee or to the
Diligence
A
person who has a right
to receive them, and
1. Because of the nature of the business of
even when they are
common carrier which is public service;
temporarily unloaded Continues until the
and
or stored in transit. passenger has been
landed at the port of
2. For public policy consideration - the
XPN: The shipper or destination and has
common carriers are supposed to serve the
owner had made use of left the vessel owner’s
public interest and therefore, they have to
the right or stoppage in dock or premises.
exercise extraordinary diligence. (Martin,
transit.
1989)
2. Continues even
Q: Are common carriers liable for injuries to
during the time the
passengers even if they have observed ordinary
goods are stored in a
diligence and care? Explain. (2015 BAR)
warehouse of the
carrier at the place of
destination until the
consignee has been
2023 GOLDEN NOTES
advised of the arrival of the horn of the train and so his car was hit by
of the goods and has the train. As a result of the accident, X suffered
been given a some injuries and his car was totally destroyed
reasonable as a result of the impact. Is PNR liable? (2012
opportunity thereafter BAR)
to remove them or
otherwise dispose of A: NO. PNR is not liable because X should have
them. known that he was crossing a place designated as
crossing for train, and therefore should have been
The requirement to observe extraordinary diligence more careful.
begins with the actual delivery of the goods for
transportation, and not merely with the formal Causes of Action for Failure to Observe Diligence
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execution of a receipt or bill of lading; the issuance Required
of a bill of lading is not necessary to complete
A
delivery and acceptance by the carrier. (Compañia BASIS OF CAUSE OF
Maritima v. Insurance Co. of North America, G.R. No. PERSON WHO HAS ACTION AGAINST
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L-18965, 30 Oct. 1964) CAUSE OF ACTION THE COMMON
CARRIER
Q: In cases where the cargoes are damaged when Tort
Third person who
it is being unloaded from the vessel, is the vessel (Extra-contractual
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suffered damages
owner relieved of its responsibility to observe negligence)
extraordinary diligence from the moment the Breach of the contract
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Shipper of the
cargoes were delivered to the arrastre of carriage
damaged goods
operator? (Culpa contractual)
Heir/s of the
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A: NO. Under the Civil Code, other pertinent laws deceased passengers
Breach of the contract
and jurisprudence, the extraordinary responsibility or the passenger
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of carriage
of common carriers lasts until the time the goods himself for the
(Culpa contractual)
are actually or constructively delivered by the injuries sustained by
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carrier to the consignee or the person who has the him
right to receive. There is actual delivery in contracts
A
for the transport of goods when possession has Causes of Action of the Injured Passenger or his
been turned over to the consignee or to his duly Heirs, if the Passenger Dies
authorized agent and a reasonable time is given him
to remove the goods. In this case, since the BASIS OF CAUSE OF
discharging of the containers had not yet been AGAINST WHOM
ACTION
completed at the time the damage occurred, there Culpa criminal
was still no delivery, actual or constructive, of the
cargoes. (Westwind Shipping Corp. v. UCPB General If the driver is
Insurance Co., G.R. No. 200289, 25 Nov. 2013) convicted and it turns
out that he is insolvent,
Q: X, while driving his Toyota Altis, tried to cross Against the negligent
the heirs/passengers
the railway tract of PNR along Blumentritt driver
may run after the
Avenida Ext., Manila. The train, as it approached employer of the driver,
Blumentritt Avenida Ext., applied its horn as a pursuant to the
warning to all the vehicles that might be employer’s subsidiary
crossing the railway tract, but there was really liability under Art. 103,
nobody manning the crossing. X was listening to
his lpod Touch, hence, he did not hear the sound
COMMERCIAL LAW
in relation to Arts. 100 You are part of the team that the victims hired to
and 102 of the RPC. handle the case for them as a group. In your case
Against the carrier conference, the following questions came up:
and driver operating Tort
the other vehicle a. Explain the causes of action legally possible
Culpa contractual; under the given facts against the airline and
Direct and primary the pilots; who will you specifically implead
in these causes of action?
The liability of the
common carrier and A: A complaint for breach of contract of carriage can
his driver as well as be filed against Fil-Asia Air for failure to carry the
Against the common
the operator of the passengers safely as far as human care and foresight
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carrier at fault
other vehicle and his can provide, using the utmost diligence of a very
driver is joint and cautious person, with a due regard for all the
A
several. (J. circumstances. (Art. 1755, NCC)
Dimaampao, citing Tiu
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v. Arriesgado, G.R. No. A complaint based on a quasi-delict can be filed
138060, 01 Sept. 2004) against the pilots because of their fault and
negligence. (Art. 2176, NCC) Fil-Asia Air can be
Q: Fil-Asia Air Flight 916 was on a scheduled included for negligence in the selection and
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passenger flight from Manila when it crashed as supervision of the pilots. (Art. 2180, NCC)
it landed at the Cagayan de Oro airport. The pilot
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miscalculated the plane's approach and A third cause of action may be a criminal
undershot the runway. Ten passengers died at prosecution for the reckless imprudence resulting
the crash scene. in homicide against two pilots. The airline will be
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subsidiary liable for the civil liability, only after the
One of them managed to leave the plane but was pilots are convicted and found to be insolvent.
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run over by an ambulance coming to the rescue.
Another was an airline employee who hitched a b. How will you handle the cases of the
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free ride to Cagayan de Oro and who was not in passenger run over by the ambulance and
the passenger manifest. the airline employee allowed to hitch a free
ride to Cagayan de Oro? (2013 BAR)
A
The Civil Aeronautics Authority investigation
showed that the co-pilot who had control of the A: It is the driver of the ambulance and his employer
plane's landing had less than the required flying who should be held liable for damages because a
and landing time experience, and should not passenger was run over. This is in accordance with
have been in control of the plane at the time. He Arts. 2176 and 2180 of the NCC. There could also be
was allowed to fly as a co-pilot because of the a criminal prosecution for reckless imprudence
scarcity of pilots - Philippine pilots have been resulting in homicide against the ambulance driver
recruited by foreign airlines under vastly and his consequent civil liability.
improved flying terms and wages so that newer
and less trained pilots are being locally Since the airline employee was being transported
deployed. The main pilot, on the other hand, had gratuitously, Fil-Asia Air was not required to
a very high level of blood alcohol at the time of exercise extraordinary diligence for his safety and
the crash. only ordinary care. (Lara v. Valencia, G.R. No. L-9907,
30 June 1958)
2023 GOLDEN NOTES
2. LIABILITIES OF COMMON CARRIERS only be done if the weight of the shipment at the
port of origin and its subsequent weight at the port
Presumption of Negligence in the Carriage of of arrival have been proven by a preponderance of
Goods (1997, 2001, 2008 BAR) evidence, and it can be seen that the former weight
is considerably greater than the latter weight, taking
GR: There is a presumption of negligence if the into consideration the exceptions provided in Art.
goods are lost, destroyed, or deteriorated. 1734 of the Civil Code. (Asian Terminals, Inc. v. Simon
Enterprises, Inc., G.R. No. 177116, 27 Feb. 2013)
XPNs: (Di-Ca-W-A-C-O-A-ED)
Q: Peter hailed a taxicab owned and operated by
1. Natural Disaster or Calamity which is the Jimmy Cheng and driven by Hermie Cortez. On
proximate cause of the loss (flood, storm, the way to Malate, the taxicab collided with a
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earthquake, lightning); passenger jeepney, as a result of which Peter’s
2. Acts of public enemy in War, whether left leg was fractured. Peter sued Jimmy for
A
international or civil; damages, based on contract of carriage, and
3. Act or omission of the shipper or the owner of Peter won. Jimmy wanted to challenge the
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the goods; decision before the SC on the ground that the
4. Character of the goods or defects in the packing trial court erred in not making an express
or container; finding as to whether or not Jimmy was
5. Order or Act of competent public authority (Art. responsible for the collision and, hence, civilly
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1734, NCC); or liable to Peter. He went to see you for advice.
6. Exercise of Extraordinary Diligence. (Art. 1735, What will you tell him? Explain. (1990 BAR)
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NCC)
A: I will advise Jimmy to desist from challenging the
Presumption of Negligence in the decision. The action of Peter being based on culpa
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Transportation of Passengers (1990, 1994 BAR) contractual, the carrier’s negligence is presumed
upon the breach of contract. The burden of proof
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In case of death of or injuries to passengers, instead would lie on Jimmy to establish that despite
common carriers are presumed to have been at fault an exercise of utmost diligence, the collision could
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or to have acted negligently. (Art. 1756, NCC) not have been avoided.
However, such presumption may be refuted by
Q: In a court case involving claims for damages
A
proving observance of extraordinary diligence as
prescribed by Art. 1733 of the NCC. arising from death and injury of bus
passengers, counsel for the bus operator filed a
Q: Is it important that the plaintiff still prove demurrer to evidence arguing that the
that the subject shipment suffered actual complaint should be dismissed because the
shortage before the burden is shifted to the plaintiffs did not submit any evidence that the
defendant common carrier to prove that it operator or its employees were negligent. If
exercised extraordinary diligence? you were the judge, would you dismiss the
complaint? (1997 BAR)
A: YES. Though it is true that common carriers are
presumed to have been at fault or to have acted A: NO. In the carriage of passengers, the failure of
negligently if the goods transported by them are the common carrier to bring the passengers safely
lost, destroyed, or deteriorated, and that the to their destination immediately raises the
common carrier must prove that it exercised presumption that such failure is attributable to the
extraordinary diligence in order to overcome the carrier’s fault or negligence, the plaintiff need not
presumption, the plaintiff must still, before the adduce proof of specific acts of negligence
burden is shifted to the defendant, prove that the committed by the carrier. It is for the carrier to
subject shipment suffered actual shortage. This can rebut such presumption. (UPLC Commercial Law
COMMERCIAL LAW
Suggested Answers) Jurisprudence holds that a common carrier is
presumed to have been negligent if it fails to prove
Presumption of Negligence that it exercised extraordinary vigilance over the
goods it transported. When the goods shipped are
The court need not make an express finding of fault either lost or arrived in damaged condition, a
or negligence of common carriers, the law imposes presumption arises against the carrier of its failure
liability upon common carriers, as long as it shown to observe that diligence, and there need not be an
that: (Con-Lo-D-I-D) express finding of negligence to hold it liable. To
overcome the presumption of negligence, the
1. There exists a Contract between the common carrier must establish by adequate proof
passenger or the shipper and the common that it exercised extraordinary diligence over the
carrier; and goods. It must do more than merely show that some
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other party could be responsible for the damage.
2. That the Loss, Deterioration, Injury or (Unitrans International Forwarders, Inc. v. Insurance
A
Death took place during the existence of the Company of North America, G.R. No. 203865, 13 Mar.
contract. (Air France v. Gillego, G.R. No. 2019)
L
165266, 15 Dec. 2010)
Effect of Acquittal
Q: SEACOL, a foreign company, received
shipment of musical instruments from The acquittal of the employee of the common carrier
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Melbourne, Australia for delivery at the port of in the criminal case is immaterial to the case for
Manila. Upon arriving in Manila, the shipment breach of contract. (Heirs of Ochoa v. G&S Transport
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was received by Unitrans Inc., which delivered Corp., G.R. No. 170071, 09 Mar. 2011)
the same to the consignee, where it was found
that said instruments were damaged and could Q: Vivian Martin was booked by PAL, which
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no longer be used. After paying the consignee, acted as ticketing agent of Far East Airlines, for
ICNA filed a complaint to recover from the a round trip flight on the latter’s aircraft, from
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marine insurance coverage on the imported Manila–Hong Kong-Manila. The ticket was cut by
instruments against SEACOL doing business in an employee of PAL. The ticket showed that
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the Philippines through its local ship agent Vivian was scheduled to leave Manila at
Unitrans Inc. Unitrans Inc. denied liability 5:30p.m. Vivian arrived at NAIA an hour before
alleging that it is not a ship agent of SEACOL but the time scheduled in her ticket, but was told her
A
was only engaged by the consignee as customs flight had left at 12:10 p.m. It turned out that the
broker for the subject shipment with the limited ticket was inadvertently cut and wrongly
obligation to pay fees in the BOC and to worded. PAL employees nevertheless scheduled
transport and deliver the said shipment to the her to fly two hours later aboard their plane. She
consignee’s premises in good condition. agreed and arrived in Hong Kong safely. The
aircraft used by Far East Airlines had an engine
Is Unitrans Inc.’s contention tenable? trouble, and did not make it to HK but returned
to Manila. Vivian sued both PAL and Far East.
A: NO. Emphasis must be placed on the fact that Could either or both airlines be held liable to
Unitrans itself admitted that in handling the subject Vivian? Why? (2003 BAR)
shipment and making sure that it was delivered to
the consignee’s premises in good condition as the A: Only Far East Airline is liable. The instant
delivery/forwarding agent, Unitrans was acting as a petition was based on breach of contract of carriage;
freight forwarding entity and an accredited non- therefore, Vivian can only sue Far East Airlines
vessel operating common carrier. alone, and not PAL, since the latter was not a party
to the contract. However, this is not to say that PAL
is relieved from any liability due to any of its
2023 GOLDEN NOTES
negligent acts. In China Air Lines, Ltd. v. CA, while 2. Act of the public enemy in war, whether
not exactly in point, however, illustrates the international or civil, provided:
principle which governs this particular situation. In
a. Act was the proximate and only cause; and
that case, the carrier (PAL), acting as an agent of
another carrier, was also liable for its own negligent b. Carrier exercised due diligence to prevent
acts or omission in the performance of its duties. Far or minimize loss before, during, and after
East Airlines may also file a third-party complaint the act. (Ibid.)
against PAL for the purpose of determining who was
primarily at fault between them. It is but logical, fair,
and equitable to allow Far East Airlines to sue PAL 3. Act or omission of the shipper or owner of the
for indemnification, if it is proven that the latter’s goods, provided:
negligence was the proximate cause of Vivian’s
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a. If proximate and only cause – exempting
unfortunate experience, instead of totally absolving
PAL from any liability. (British Airways v. CA, G.R. No. b. If contributory negligence – mitigating. (Art.
A
121824, 29 Jan. 1998) 1741, NCC)
4. The Character of the goods or the faulty nature
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of the packing or of the containers; provided,
B. VIGILANCE OVER GOODS carrier exercised due diligence to forestall or
prevent loss. (Art 1742, NCC)
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1. EXEMPTING CAUSES NOTE: If the fact of improper packing is known
to the carrier or its servants, or apparent upon
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Presumption on the Loss, Destruction, or ordinary observation, but it accepts the goods
Deterioration of Goods notwithstanding such condition, it is not
N
relieved from responsibility for loss or injury
GR: The common carrier is presumed to have been resulting therefrom. (Southern Lines Inc., v. CA,
E
at fault or to have acted negligently when the goods G.R. No. L-16629, 31 Jan. 1962)
transported are lost, destroyed, or deteriorated.
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(Art. 1735, NCC) 5. Order or act of competent authority; provided,
the authority is with power to issue the order.
XPNs: When the same is due to any of the following (Art. 1743, NCC)
A
causes only: (F-A2–C-O)
NOTE: There must be an order or act of
1. Fortuitous events (flood, storm, earthquake, competent public authority through which the
lightning, or other natural disaster or calamity). goods are seized or destroyed. (Art. 1734, NCC)
Provided, the following conditions are present:
If the officer acts without legal process or
a. Natural disaster was the proximate and
authority, the common carrier will be held
only cause;
liable. (Ganzon v. CA, G.R. No. L-48757, 30 May
b. Carrier exercised due diligence to prevent 1988)
or minimize loss before, during, and after
the occurrence of the natural disaster; and In all cases other than those enumerated above,
there is presumption of negligence even if there is
c. The common carrier has not negligently an agreement limiting the liability of the common
incurred delay in transporting the goods. carrier in the vigilance over the goods.
(Art. 1739-1740, NCC)
COMMERCIAL LAW
Common Carrier’s Liability for the Acts of grave or irresistible threat, violence, or force.
Strangers or Criminals (Bascos v. CA, G.R. No. 101089, 07 Apr. 1993)
GR: A common carrier is liable even for acts of When an airline company was not authorized to
strangers like thieves or robbers. search passengers for firearms, the loss of the
jewelry and cash of a passenger because of an
XPN: Where such thieves or robbers acted "with armed robbery committed by other passengers is a
grave or irresistible threat, violence or force." The force majeure, for which the airline company is not
common carrier is not liable for the value of the liable. (Quisumbing, Sr. v. CA, G.R. No L-50076, 14
undelivered merchandise which was lost because of Sept. 1990)
an event that is beyond his control. (De Guzman v.
CA, supra) Other Invalid Defenses (Ba-W-E-D)
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Q: M. Dizon Trucking entered into a hauling Barratry – The ship owner cannot escape liability
A
contract with Fairgoods Co. whereby the former to third persons if the cause of damage is barratry.
bound itself to haul the latter’s 2000 sacks of It is an act committed by the master or crew of the
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soya bean meal from Manila Port Area to ship for some unlawful or fraudulent purpose,
Calamba, Laguna. To carry out faithfully its contrary to their duty to the owner;
obligation, Dizon subcontracted with Enrico
Reyes the delivery of 400 sacks of the soya bean Worms and Rats – Whenever the ship is damaged
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meal. Aside from the driver, three male by worms resulting in damage to the cargo, the
employees of Reyes rode on the truck with the carrier cannot cite the same as an excuse. The same
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cargo. While the truck was on its way to Laguna, is true with respect to damage of the cargo by rats
two strangers suddenly stopped the truck and whether the cargo was directly damaged by the rats
hijacked the cargo. Investigation by the police or by the water let in through holes gnawed by rats
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disclosed that one of the hijackers was armed in the ship or her fixtures;
with a bladed weapon while the other was
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unarmed. For failure to deliver the 400 sacks, Explosion – Damage to cargo from explosion of
Fairgoods sued Dizon for damages. Dizon in turn another cargo is not ordinarily attributable to peril
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set up a third-party complaint against Reyes of the sea or accidents of navigation particularly
which the latter registered on the ground that where it occurs after the vessel has ended its voyage
the loss was due to force majeure. Did the and is finally moored to unload; and
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hijacking constitute force majeure to exculpate
Reyes from any liability? (1995 BAR) Water Damage – Damage by seawater is not a valid
excuse where the water gains entrance through a
A: NO. The hijacking in this case cannot be port that had been left open or insufficiently
considered as force majeure. Only one of the two fastened on sailing. (Aquino and Hernando, 2016)
hijackers was armed with a bladed weapon. As
against four male employees of Reyes, two (2) Rules regarding the Time of Delivery of Goods
hijackers, with only one of them being armed with a and Delay
bladed weapon, cannot be considered force
majeure. In De Guzman v. Court of Appeals, the 1. If there is an agreement as to time of delivery
Supreme Court held that hijacking, not being – delivery must be within the time stipulated in
included in Art. 1734, must be dealt with under Art. the contract or bill of lading.; and
1735 and thus, the common carrier is presumed to
have been at fault or negligent. To exculpate the 2. If there is no agreement – delivery must be
carrier from liability arising from hijacking, he must within a reasonable time. (Saludo, Jr. v. CA, G.R.
prove that the robbers or the hijackers acted with No. 95536, 23 Mar. 1992)
2023 GOLDEN NOTES
Delay in the Delivery of Goods Although the delivery of the suitcase of a passenger
was delayed by eleven days, an airline company
The carrier shall be liable for damages immediately cannot be held liable for moral damages, exemplary
and proximately resulting from such neglect of duty. damages, and attorney’s fees, where the airline
(Ibid; Art. 1170, NCC) company was not guilty of bad faith and exerted
efforts in tracing the suitcase. (Philippine Air Lines v.
Effects of Delay of Delivery of Goods Miano, G.R. No. 106664, 08 Mar. 1995)
In the absence of a special contract, a carrier is not Due Diligence to Prevent or Lessen Loss
an insurer against delay in the transportation of
goods. The effects of delay are as follows: To free the common carrier from liability in case of
(J-Ex-Un-ED-N) flood, storm or other natural disaster or an act of a
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public enemy:
1. If the common carrier, without Just cause,
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delays the transportation of the goods or 1. The common carrier must exercise due
changes the stipulated or usual route, the diligence to prevent or minimize loss before,
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contract limiting the common carrier’s liability during, and after the occurrence; and
cannot be availed of in case of the loss,
destruction, or deterioration of the goods. ; (Art. 2. The natural disaster or the act of the public
1747, NCC) enemy is the proximate and only cause of the
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loss. (Art. 1739, NCC)
NOTE: An agreement limiting the common
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carrier’s liability for delay on account of strikes NOTE: If the common carrier negligently incurs
or riots is valid. (Art. 1748, NCC) delay in transporting the goods, a natural disaster
shall not free such carrier from responsibility.
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2. Excusable delay in carriage merely suspends
and generally does not terminate the contract of Loss due to Character of the Goods or the Faulty
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carriage; Nature of its Containers
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3. The carrier shall be made liable when vessel or If the loss, destruction, or deterioration of the goods
vehicle is Unreasonably delayed; was caused by the character of the goods, or the
faulty nature of the packing or the containers, the
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4. Carrier remains duty bound to exercise common carrier must exercise due diligence to
Extraordinary Diligence; and forestall or lessen the loss. (Art. 1742, NCC)
5. Natural disaster shall not free the carrier from Q: Because of spillage of the rice during the trip
responsibility. (Dimaampao & Dumlao- from Davao to Manila due to the bad condition of
Escalante, 2014) the sacks, there was a shortage in the rice
delivered by the Provident Lines Inc. to the
However, where the delay in the transportation of consignee XYZ Import and Export Corporation.
the remains of a deceased person was due to the The carrier accepted the shipment, knowing
fault of the mortuary service, who erroneously that the sacks had holes, and some had broken
switched the casket with that of another deceased strings. When sued, Provident Lines, Inc. alleged
person, the airline company cannot be held liable that the loss was caused by the spillage of the
for damages because of the delay. (Saludo, Jr. v. CA, rice on account of the defective condition of the
supra) sacks, at the time it received the shipment, and
therefore, it cannot be held liable. Decide. Give
reasons. (1978 BAR)
COMMERCIAL LAW
A: The maritime carrier is liable. Where the fact of XPN: If the fire is caused by lightning or by other
improper packing is known to the carrier or its natural disaster or calamity. (Eastern Shipping Lines,
servants, or apparent upon ordinary observations, Inc. v. IAC, G.R. No. L-69044, 29 May 1987)
but the carrier accepts the goods notwithstanding
such conditions, it is not relieved of liability for loss NOTE: In case that the goods have already been
or injury resulting therefrom. (Southern Lines, Inc. v. deposited in the warehouse of the Bureau of
CA, supra) Customs and the goods were then destroyed by fire,
the carrier is not anymore liable. (Servando v.
Requisites of a Fortuitous Event (F-Ev-Un-I) Philippine Steam Navigation Co., G.R. No. L-36481-2,
23 Oct. 1982)
1. The common carrier must be Free from any
participation in or aggravation of the injury to Typhoon as a Fortuitous Event
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the creditor;
GR: If all the elements of a natural disaster or
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2. The Event must be such as to render it calamity concur and there was no contributory
impossible for the common carrier to fulfill his negligence or delay, the occurrence of a typhoon is
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obligation in a normal manner; a fortuitous event. This holds true especially if the
vessel was seaworthy at the time it undertook that
3. The event must be Unforeseen or unavoidable; fateful voyage and that it was confirmed with the
and Coast Guard that the weather condition would
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permit safe travel of the vessel to its destination.
4. The cause of the breach of obligation must be (The Philippine American General Insurance Co. Inc.
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Independent of the will of the common carrier. v. MGG Marine Services, Inc., G.R. No. 135645, 08 Mar.
(Real v. Belo, G.R. No. 146224, 26 Jan. 2007) 2002)
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A Mechanical Defect is not a Fortuitous Event The loss of cargoes due to the sinking of a seaworthy
tugboat which was suddenly tossed by waves of
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Mechanical defects in the carrier are NOT extraordinary height is due to a force majeure.
considered a caso fortuito that exempts the carrier (PhilAm Gen. v. PKS Shipping Company, G.R. No.
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from responsibility. (Sweet Lines, Inc. v. CA, G.R. No. 149038, 09 Apr. 2003)
L-46340, 28 Apr. 1983)
XPN: If a vessel sank due to a typhoon, and there
A
Tire blowout of a jeep is not a fortuitous event was failure to ascertain the direction of the storm
where there exists a specific act of negligence by the and the weather condition of the path they would be
carrier consisting of the fact that the jeepney was traversing, it constitutes lack of foresight and
overloaded and speeding at the time of the incident. minimum vigilance over its cargoes taking into
(Juntilla v. Fontanar, G.R. No. L-45637, 31 May 1985) account the surrounding circumstances of the case.
Thus, the common carrier will still be liable. (Arada
Defective brakes cannot be considered fortuitous in v. CA, G.R. No. 98243, 01 July 1992)
character. (Vergara v. CA, G.R. No. 77679, 30 Sept.
1987) Where a vessel encountered stormy weather and
the coils of wire it was transporting became rusty
Fire is not Considered a Natural Disaster because rain entered the hatch of the vessel, the
damage was not due to a fortuitous event, because
GR: Fire arises almost invariably from some act of heavy rains are foreseeable, and rain would not
man or by human means. It does not fall within the have entered the hatch if it was closed properly.
category of an act of God. (Eastern Shipping Lines, Inc. v. CA, G.R. No. 97412, 12
July 1994)
2023 GOLDEN NOTES
Q: On a clear weather, M/V Sundo, carrying A: BBC is liable for damages to the cargoes lost by
insured cargo, left the port of Manila bound for Mauricio. A natural disaster would relieve liability if
Cebu. While at sea, the vessel encountered a it is the proximate and only cause of the damage.
strong typhoon forcing the captain to steer the The carrier itself, in this case, had been negligent.
vessel to the nearest island where it stayed for The presumption of negligence in culpa contractual
seven days. The vessel ran out of provisions for is not overcome by invoking the defense that there
its passengers. Consequently, the vessel has been engine trouble, for such defense does not
proceeded to Leyte to replenish its supplies. preclude it having been due to the fault of the
Assuming that the cargo was damaged because common carrier. The fact that an extensive repair
of such deviation, who between the insurance work was necessary which, in fact, took 2 days to
company and the owner of the cargo bears the complete, somehow justifies an impression that the
loss? Explain. (2005 BAR) engine trouble could have been detected, if not
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already known, well before the actual breakdown.
A: The insurance company is liable. It is an instance
A
of a valid deviation because the strong typhoon is a 2. CONTRIBUTORY NEGLIGENCE
fortuitous event over which neither the master nor
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the owner has any control. Deviation is likewise
Contributory negligence is the failure of a person
proper in order to avoid a peril. Common carriers
who has been exposed to injury by the fault or
are responsible for the loss, destruction,
negligence of another, to use such degree of care for
deterioration of the goods unless the same is due to
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his safety and protection an ordinarily prudent man
any of the causes provided by law – which includes,
would use under the circumstances. (Martin, 1989,
among others, is when there is flood, storm,
citing Rakes v. Atlantic Gulf Co., G.R. No. 1719, 23 Jan.
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earthquake, lightning, or other natural disaster or
1907)
calamities. Moreover, even in cases where a natural
disaster is the proximate and only cause of the loss,
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NOTE: Contributory negligence on the part of the
a common carrier is still required to exercise due
passenger does not justify the common carrier’s
diligence to prevent or minimize loss before, during
exemption from liability. (Martin, 1989)
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and after the occurrence of the natural disaster, for
it to be exempt from liability under the law for the
Q: Nelson owned and controlled the Sonnel
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loss of the goods. Such deviation is just proper in its
Construction Company. Acting for the company,
exercise of extraordinary diligence. (The Philippine
Nelson contracted the construction of a building.
American General Insurance Co., Inc. v. MGC Marine
A
Without first installing a protective net atop the
Services, Inc. supra)
sidewalks adjoining the construction site, the
company proceeded with the construction
Q: Philip Mauricio shipped a box of cigarettes to
work. One day, a heavy piece of lumber fell from
a dealer in Naga City through Bicol Bus Company
the building. It smashed a taxicab which at that
(BBC). When the bus reached Lucena City, the
time had gone off-road and onto the sidewalk in
bus developed engine trouble. The driver
order to avoid the traffic. The taxicab
brought the bus to a repair shop in Lucena
passengers died as a result.
where he was informed by the mechanic that an
extensive repair was necessary, which would
a. If you were the counsel for Sonnel
take at least 2 days. While the bus was in the
Construction, how would you defend your
repair shop, Typhoon Coring lashed Quezon
client? What would be your theory?
Province. The cargoes inside the bus, including
Mauricio’s cigarettes, got wet and were totally
A: I shall raise the affirmative defense of
spoiled. Mauricio sued BBC for damage to his
contributory negligence. The proximate cause of
cargoes. Decide. (1987 BAR)
death is the violation of the taxi driver of traffic rules
and regulations when it drove off-road to avoid
COMMERCIAL LAW
heavy traffic. The lumber that fell from the building diligence. (Greenstar Express Inc. v. Universal Robina
was only the immediate cause of death of the Co., G.R. No. 205090, 17 Oct. 2016)
victims. Further, Sonnel Construction, exercised due
diligence in the selection and supervision of its The Doctrine of “Last Clear Chance” cannot
employees. apply if the: (Co-In2)
b. Could the heirs hold the taxicab owner and 1. Negligence of the plaintiff is Concurrent with
driver liable? Explain. (2008 BAR) that of the defendant (in pari delicto);
A: YES. Both taxicab owner and driver may be held 2. Party charged is required to act
liable based on breach of contract of carriage and Instantaneously;
negligence in the selection and supervision of
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employees for quasi-delict. The driver can be held 3. Injury cannot be avoided despite the
criminally liable for reckless imprudence resulting application at all times of all the means to avoid
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to homicide and for damages under quasi-delict as the injury (after the peril is or should have been
provided in Art. 2176 of the Civil Code while the discovered), at least in all instances where the
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employer may be held liable under Art. 2180 of the previous negligence of the party charged cannot
same Code— an employer may be held solidarily be said to have contributed to the injury at all.
liable for the negligent act of his employee acting (O'Mally v. Eagan, 77 ALR 582)
within the scope of their assigned task. Hence, in
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this case, the taxicab owner is exempted from NOTE: The last clear chance doctrine of the
liability while the taxicab driver is liable solely and common law was imported into our jurisdiction by
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personally for criminal prosecution. Picart v. Smith but it is a matter for debate whether,
or to what extent, it has found its way into the Civil
Rule if there is Contributory Negligence on the Code of the Philippines. The historical function of
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part of the Shipper that doctrine in the common law was to mitigate the
harshness of another common law doctrine or
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If the shipper or owner merely contributed to the rule—that of contributory negligence.
loss, destruction, or deterioration of the goods, the
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proximate cause thereof being the negligence of the 3. DURATION OF LIABILITY
common carrier, the latter shall be liable for
damages, which however, shall be equitably
A
Duration of Liability
reduced. (Art. 1741, NCC)
The New Civil Code is explicit when it comes to the
The Doctrine of Last Clear Chance provides that duration of extraordinary responsibility with
where both parties are negligent but the negligent respect to goods. Such responsibility lasts from the
act of one is appreciably later in point of time than time the goods are unconditionally placed in the
that of the other, or where it is impossible to possession of and received by the carrier for
determine whose fault or negligence brought about transportation. Until the same are delivered,
the occurrence of the incident, the one who had the actually or constructively, by the carrier to the
last clear opportunity to avoid the impending harm
consignee, or to the person who has a right to
but failed to do so, is chargeable with the receive them. (Art. 1736, NCC)
consequences arising therefrom.
The carrier’s responsibility terminates in any of the
Stated differently, the rule is that the antecedent
following cases: (D-T-AR)
negligence of a person does not preclude recovery
of damages caused by the supervening negligence of 1. When the goods are Delivered actually or
the latter, who had the last fair chance to prevent
constructively by the carrier to the consignee or
the impending harm by the exercise of due
2023 GOLDEN NOTES
to the person who has a right to receive them CA, G.R. No. 95536, 23 Mar. 1992, citing 13 Am. Jur.
(Art. 1736, NCC); 2d, Carriers, 763-764)
2. When the goods are Temporarily unloaded or Party to whom Delivery should be Made
stored in transit by reason of the exercise of the
shipper or owner of his right of stoppage in It must be delivered, actually or constructively, to
transit; or (Art. 1737, NCC) the consignee or to the person who has a right to
receive them. (Art. 1736, NCC)
3. When the consignee has been Advised of the
arrival of the goods at the place of destination Delivery of the cargo to the customs authorities is
and has had Reasonable opportunity to remove not delivery to the consignee, or to the person who
them or dispose of them from the warehouse of has a right to receive them. (Lu Do & Lu Ym Corp. v.
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the carrier at the place of destination. (Art. Binamira, G.R. No. L-9840, 22 Apr. 1957)
1738, NCC)
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Constructive Delivery
Delivery of Goods to Common Carrier
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There is constructive delivery when delivery is
The goods are deemed delivered to the carrier when effected not by actually transferring the possession
the goods are ready for and have been placed in the of thing to the vendee (in this case, the other party,
exclusive possession, custody and control of the either the carrier or the consignee) but by legal
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carrier for the purpose of their immediate formalities or by symbolic tradition. (Pineda, 2010)
transportation and the carrier has accepted them.
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When the carrier has thus accepted such delivery, NOTE: Delivery of the cargo to the customs
the liability of the carrier commences. (Saludo, Jr. v. authorities is not delivery of the cargo to the
CA, supra, citing 13 Am. Jur. 2d, Carriers, 763-764) consignee, or to the person who has a right to
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receive them", contemplated in Art. 1736, because in
Party to whom Delivery should be Made such case the goods are still in the hands of the
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Government and the owner cannot exercise
It must be delivered, actually or constructively, to dominion over them. However, the parties may
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the consignee or to the person who has a right to agree to limit the liability of the carrier considering
receive them. (Art. 1736, NCC) that the goods have still to go through the inspection
of the customs authorities before they are actually
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Delivery of the cargo to the customs authorities is turned over to the consignee. It is a situation where
not delivery to the consignee, or to the person who the carrier losses control of the goods because of a
has a right to receive them. (Lu Do & Lu Ym Corp. v. custom regulation and it is unfair that it be made
Binamira, G.R. No. L-9840, 22 Apr. 1957) responsible for what may happen during the
interregnum. This stipulation is not contrary to
a) ACTUAL OR CONSTRUCTIVE LIABILITY morals or public policy. (Lu Do & Lu Ym Corp. v.
Binamira, supra)
Delivery of Goods to Common Carrier
Misdelivery by a carrier who was chosen by the
The goods are deemed delivered to the carrier when buyer
the goods are ready for and have been placed in the
exclusive possession, custody and control of the Misdelivery of the goods is attributable to the
carrier for the purpose of their immediate carrier and not to the seller. And, since the carrier
transportation and the carrier has accepted them. was chosen and authorized to make the delivery by
When the carrier has thus accepted such delivery, the buyer itself, the seller cannot be held
the liability of the carrier commences. (Saludo, Jr. v. responsible for such misdelivery. (Smith Bell & Co.
COMMERCIAL LAW
[Phils.] Inc. v. Gimenez, G.R. No. L-17617, 29 June Obligation required of the Common Carrier in
1963) case of Stoppage in Transitu
b) TEMPORARY UNLOADING OR STORAGE When notice of stoppage in transitu is given by the

seller to the carrier, he must redeliver the goods to,
Right of Stoppage in Transitu or according to the directions of, the seller. The
expenses of such delivery must be borne by the
It is the right exercised by the seller by stopping the seller. (Art. 1532, NCC)
delivery of the goods, in case of insolvency of the
buyer or consignee, when such goods are already in NOTE: If the seller instructs to deliver it somewhere
transit. (Art. 1530, NCC) else, a new contract of carriage is formed and the
carrier must be paid accordingly.
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The seller may exercise this right either:
4. STIPULATION FOR LIMITATION OF LIABILITY
A
1. By obtaining actual possession of the goods; or
2. By giving notice of his claim to the carrier or
Valid Stipulations that a Common Carrier of
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other bailee in whose possession the goods are.
Goods may Indicate in a Contract in order to
Escape Liability
NOTE: Notice may be given either to the person
in actual possession of the goods or to his
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1. A stipulation limiting the liability of the
principal. In the latter case, the notice, to be
common carrier for the loss, destruction, or
effectual, must be given at such time and under
deterioration of the goods to a degree less than
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such circumstances that the principal, by the
extraordinary diligence, provided it be:
exercise of reasonable diligence, may prevent a
delivery to the buyer. (Art. 1532, NCC)
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a. In writing, signed by the shipper or
owner;
GR: The common carrier’s duty to observe
b. Supported by a valuable consideration
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extraordinary diligence in the vigilance over the
other than the service rendered by the
goods remains in full force and effect even when
common carrier; and
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they are temporarily unloaded or stored in transit.
c. Reasonable, just, and not contrary to
public policy.
XPN: When the shipper or owner has made use of
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the right of stoppage in transitu. (Art. 1737, NCC)
XPN: The contract limiting the common
carrier's liability cannot be availed of in case of
The diligence required is merely ordinary diligence
loss, destruction, or deterioration of the goods,
because of the following:
if the common carrier, without just cause: (D-C)
1. It is holding the goods in the capacity of an

1. Delays the transportation of the goods;
ordinary bailee or warehouseman and not as a
or
carrier.; and
2. Changes the stipulated or usual route.
(Art. 1747, NCC)
2. There is a change of contract from a contract of
carriage to a contract of deposit. (Art. 1737,
Even if there is an agreement limiting the
NCC)
liability of the common carrier in the vigilance
over the goods, the common carrier is still
disputably presumed to have been negligent in
case of its loss, destruction or deterioration.
(Art. 1752, NCC)
2023 GOLDEN NOTES
2. An agreement limiting the common carrier's prudence in the vigilance over the
liability for delay on account of strikes or riots. movables transported;
(Art. 1748, NCC)
6. That the common carrier will not be liable
3. A stipulation that the common carrier's liability for any Loss, destruction, or deterioration
is limited to the value of the goods appearing in of the goods;
the bill of lading unless the shipper or owner
declares a greater value. (Art. 1749, NCC; 1998, 7. That the common carrier shall not be
2002 BAR) responsible for the acts or omissions of his
or its Employees; and
4. A contract fixing the sum that may be recovered
by the owner or shipper for the loss, 8. That the common carrier is not responsible
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destruction, or deterioration of the goods. (Art. for the loss, destruction, or deterioration of
1750, NCC) goods on account of the Defective condition
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of the car, vehicle, ship, airplane or other
Annulment of a Stipulation Limiting the equipment used in the contract of carriage.
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Common Carrier’s Liability by the Shipper or (Art. 1745, NCC)
Owner
Q: Discuss whether the following stipulations in
A stipulation limiting the common carrier’s liability a contract of carriage of a common carrier are
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may be annulled by the shipper or owner if the valid:
common carrier refused to carry the goods unless
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the shipper or owner agreed to such stipulation. a. A stipulation limiting the sum that may be
(Art. 1746, NCC) recovered by the shipper or owner to 90%
of the value of the goods in case of loss due
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a) VOID STIPULATIONS to theft.
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Void Stipulations in a Contract of Carriage of A: Invalid. Art. 1745 of the Civil Code provides that a
Goods (C-R2-U-E-L-E-D) stipulation which dispenses or diminishes the
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common carrier’s liability for acts committed by
1. That the common carrier need not observe thieves or robbers who do not act with grave and
any diligence in the Custody of the goods; irresistible force, threat or violence is unreasonable,
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unjust, and contrary to public policy.
2. That the goods are transported at the Risk
of the owner or shipper; b. A stipulation that in the event of loss,
destruction, or deterioration of goods on
3. That the common carrier’s liability for acts account of the defective condition of the
committed by thieves, or of Robbers who vehicle used in the contract of carriage, the
do not act with grave or irresistible threat, carrier’s liability is limited to the value of
violence or force, is dispensed with or the goods appearing in the bill of lading
diminished; unless the shipper or owner declares a
higher value. (2002 BAR)
4. Any similar stipulation that is
Unreasonable, unjust and contrary to A: Valid. Art. 1749 provides that a stipulation
public policy; limiting the carrier’s liability to the value of the
goods appearing in the bill of lading unless the
5. That the common carrier shall Exercise a shipper or owner declares a higher value, is binding.
degree of diligence less than that of a good
father of a family, or a man of ordinary
COMMERCIAL LAW
Liability of the Common Carrier as regards the XPN: When a passenger is carried gratuitously, a
Acts of Employees may not be Limited by stipulation limiting the common carrier’s liability
Stipulation for negligence is valid. (Art. 1758, NCC)
The common carrier’s responsibility cannot be NOTE: The passenger must be carried gratuitously.
eliminated or limited by stipulation, by the posting If it is only a reduction of fare, then any limitation of
of notices, by statements on the tickets or otherwise. the common carrier’s liability is not justified. (2001,
(Art. 1760, NCC) 2009 BAR)
Rationale: The basis of the carrier's liability for XPN to the XPN: Notwithstanding the exception,
assaults on passengers committed by its drivers common carriers will be liable nevertheless for
rests on the principle that it is the carrier's implied willful acts or gross negligence.
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duty to transport the passengers safely. As between
the carrier and the passenger, the former must bear b) LIMITATION OF LIABILITY TO FIXED
A
the risk of wrongful acts or negligence of the AMOUNT
carrier's employees against passengers, since it, and
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not the passengers, has power to select and remove Limitation of Liability to Fixed Amount
them. (Maranan v. Perez, G.R. No. L-22272, 26 June
1967) A contract fixing the sum that may be recovered for
the loss, destruction, and deterioration of goods is
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Q: The AAA Bus Company picks up passengers binding provided that it is:
along EDSA. X, the conductor, while on board the
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bus, drew his gun and randomly shot the 1. Just and reasonable under the circumstances;
passengers inside. As a result, Y, a passenger, and
was shot and died instantly. Is AAA Bus 2. Has been fairly and freely agreed upon. (Art.
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Company liable? (2012 BAR) 1750, NCC)
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A: YES. The bus company is liable because common The liability of a common carrier may, by contract,
carriers are liable for the negligence or willful act of be limited to a fixed amount, but the agreement
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its employees even though they acted beyond the must be in writing and signed by the shipper or
scope of their responsibility. owner of the goods, besides the other requirements
of the law. (Shewaram v. PAL, G.R. No. L-20099, 07
A
NOTE: Willful acts of the employees include theft. It July 1966)
should be pointed out that the Code of Commerce
expressly provides that the captain shall be civilly c) LIMITATION OF LIABILITY IN ABSENCE OF
liable to the naviero and the latter to third persons DECLARATION OF GREATER VALUE
for all thefts committed by the crew, reserving the
right of action against the guilty party. (Aquino and Limitation of Liability in the Absence of
Hernando, 2016) Declaration of Greater Value
Stipulations limiting the liability of common GR: The liability of the common carrier shall not
carrier in case of Injury or Death: exceed the stipulation in a contract of carriage, even
if the loss or damage results from the carrier’s
GR: The responsibility of a common carrier for the negligence. (Eastern and Australian Steamship Co., v.
safety of passengers cannot be dispensed with or Great American Insurance Co., G.R. No. L-37604, 23
lessened by stipulation, by posting of notices, by Oct. 1981)
statements on tickets, or otherwise. (Art. 1757, NCC)
2023 GOLDEN NOTES
XPN: Common carrier’s liability may be extended But when the goods being shipped are packed in
beyond the specified amount mentioned if the cartons placed in containers supplied by the carrier
shipper or owner of the goods: and the number of cartons is disclosed in the
shipping documents, it is the number of cartons and
1. Declares a greater value; and not of the containers that should be used in
2. Pays corresponding freight. (Art. 1749, NCC) computing the liability of the carrier for the loss of
the goods, as it is the cartons that constitute the
The liability of an airline company for lost baggage packages. (Eastern Shipping Lines, Inc. v. IAC, G.R. No.
is limited to the amount stated in the ticket unless L-69044, 29 May 1987)
the passenger declared a higher valuation and paid
additional fare. (Pan American World Airways, Inc. v. 5. LIABILITY FOR BAGGAGE OF PASSENGERS
IAC, G.R. No. 70462, 11 Aug. 1988)
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Liability for Baggage of Passengers
Q: X took a plane from Manila bound for Davao
A
via Cebu where there was a change of planes. X
Baggage is any personal property carried by the
arrived in Davao safely but to his dismay, his two
passenger, either check-in or hand-carry. (Sec. 2.1,
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suitcases were left behind in Cebu. The airline
Air Passenger Bill of Rights)
company assured X that the suitcases would
come in the next flight, but they never did. X
a) CHECKED-IN BAGGAGE
claimed P2,000.00 for the loss of both suitcases,
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but the airline was willing to pay only P500.00
Checked-in Baggage
because the airline ticket stipulated that unless
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a higher value was declared, any claim for loss
The provisions of Arts. 1733 to 1753 of the NCC shall
cannot exceed P250 for each piece of luggage. X
apply. (Art. 1754, NCC)
reasoned out that he did not sign the stipulation
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and in fact had not even read it. X did not declare
An airline company is liable for moral damages
a greater value despite the fact that the clerk had
where it left behind the luggage of a passenger, and
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called the attention to the stipulation in the
its employees did not assist the passenger in
ticket. (1998 BAR)
locating his luggage but instead treated him
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boorishly. (Pan American World Airways, Inc. v. IAC,
A: X is bound by the stipulation written in the ticket
G.R. No. 68988, 21 June 1990)
because he consented to the terms and conditions
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thereof from the moment he availed the services of
In one case, the Court held that the cause of the loss
the carrier. The fact that he did not sign the ticket
was the negligence of the carrier in not ensuring
and he was not able to declare the true value of his
that the doors of the baggage compartment of the
luggage is not a valid claim in order for the carrier
bus were securely fastened. (Sarkies Tours
to pay for the value of the lost luggage. As a general
Philippines, Inc. v. CA, G.R. No. 108897, 02 Oct. 1997)
rule, the liability of the common carrier shall not
exceed the stipulation in a contract of carriage even
b) HAND-CARRIED BAGGAGE
if the loss or damage results from the carrier’s
negligence However, it is subject to an exception
Baggage in Possession of Passengers
provided under Art. 1749 of the NCC, as when the
shipper or owner of the goods declares a greater
The rules in Arts. 1998 and 2000 to 2003 of the NCC
value and pays corresponding freight. X, therefore,
concerning the responsibility of hotel-keepers for
is only entitled to P500 for the two pieces of luggage
necessary deposit shall be applicable.
lost. (Eastern and Australian Steamship Co. v. Great
American Insurance Co., supra)
COMMERCIAL LAW
1. The common carrier shall be responsible for alighted at Guagua, Pampanga. Is Victory Liner
shipper’s baggage as depositaries, provided liable to Pasahero? Explain. (1987 BAR)
that:
a. notice was given to them, or to their A: YES. The responsibility of common carriers in the
employees, of the effects brought by case of loss or damage to hand-carried baggage is
the guests; and governed by the rule on necessary deposits. The
common carrier is thus liable for the loss of the
b. on the part of the shipper, they take the personal property caused by its employees or by
precautions which said common strangers. In this case, the passenger told the driver
carriers or their substitutes advised that he had valuable item placed beside the driver’s
relative to the care and vigilance of seat. If the driver exercised due diligence, he could
their effects. (Art. 1998, NCC) have prevented the loss of the bag.
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2. The responsibility shall include the loss of, or
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injury to the personal property of the shipper C. SAFETY OF PASSENGERS
caused by the employees of the common carrier
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as well as strangers; but not that which may
proceed from any force majeure. (Art. 2000,
A common carrier is bound to carry the passengers
NCC)
safely as far as human care and foresight can
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provide, using the utmost diligence of very cautious
3. The act of a thief or robber, who has entered the
persons, with a due regard for all the circumstances.
carrier, is not deemed force majeure, unless it is
(Art. 1755, NCC)
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done with the use of arms or through an
irresistible force. (Art. 2001, NCC)
Who are NOT Considered Passengers (W-A-M-U)
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4. The common carrier is not liable for
1. One who has boarded a Wrong vehicle, has been
compensation if the loss is due to the acts of the
properly informed of such fact, and on alighting,
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shipper, his family, or servants, or if the loss
is injured by the carrier;
arises from the character of the things brought
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into the carrier. (Art. 2002, NCC)
2. Invited guests and Accommodation passengers;
5. The common carrier cannot free himself from
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3. One who attempts to board a Moving vehicle,
responsibility by posting notices to the effect
although he has a ticket, unless the attempt be
that he is not liable for the articles brought by
with the knowledge and consent of the carrier;
the passenger. Any stipulation between the
and
common carrier and the shipper whereby the
responsibility of the former as set forth Arts.
4. One who remains on a carrier for an
1998 to 2001 is suppressed or diminished shall
Unreasonable length of time after he has been
be void. (Art. 2003, NCC)
afforded every safe opportunity to alight.
Q: Pasahero, a paying passenger, boarded a

The carrier is thus NOT obliged to exercise
Victory Liner bus bound for Olongapo. He chose extraordinary diligence but only ordinary diligence
a seat at the front near the bus driver. Pasahero
in these instances.
told the bus driver that he had valuable items in
his bag which was placed near his feet. Since he
had not slept for 24 hours, he requested the
driver to keep an eye on the bag should he doze
off during the trip. While Pasahero was asleep,
another passenger took the bag away and
2023 GOLDEN NOTES
Assumption of Risk on the Part of Passengers the weight of authority that the owner or operator
of an automobile owes the duty to an invited
Passengers must take such risks incident to the guest to exercise reasonable care in its operation,
mode of travel. The passenger must observe the and not unreasonably to expose him to danger and
diligence of a good father of a family to avoid injury injury by increasing the hazard of travel. (Arts. 1755
to himself. (Art. 1761, NCC) and 1756, NCC,; Lara v. Valencia, G.R. No. L-9907, 30
June 1958)
Carriers are not insurers of any and all risks to
passengers and goods. It merely undertakes to 1. VOID STIPULATIONS
perform certain duties to the public as the law
imposes and holds itself liable for any breach
Stipulations Considered Void in a Contract of
thereof. (Pilapil v. CA, G.R. No. 52159, 22 Dec. 1989)
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Carriage for Passengers
Q: Wisconsin Transportation Co., Inc. (WTC)

1. Stipulation where the responsibility of the
A
owned and operated an inter-island deluxe bus
common carrier for the safety of its passengers
service plying the Manila-Batangas-Mindoro
is dispensed with or lessened by stipulation, by
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route. Three friends, namely: Aurelio, Jerome
the posting of notices, by statements on the
and Florencio rode on the same WTC bus from
ticket, or otherwise; and
Manila bound for Mindoro. Aurelio purchased a
ticket for himself. Jerome, being a boyhood
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2. Stipulation limiting the liability for willful acts
friend of the bus driver, was allowed a free ride
or gross negligence.
by agreeing to sit during the trip on a stool
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placed in the aisle. Florencio, already penniless
Stipulations Limiting the Liability of Common
after spending all his money on beer the night
Carrier in case of Injury or Death
before, just stole a ride in the bus by hiding in
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the on-board toilet of the bus. During the trip,
GR: The responsibility of a common carrier for the
the bus collided with another bus coming from
safety of passengers cannot be dispensed with or
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the opposite direction. The three friends all
lessened by stipulation, by posting of notices, by
suffered serious physical injuries. What are
statements on tickets, or otherwise. (Art. 1757, NCC)
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WTC's liabilities, if any, in favor of Aurelio,
Jerome and Florencio? Explain your answer.
XPN: When a passenger is carried gratuitously, a
(2017 BAR)
A
stipulation limiting the common carrier’s liability
for negligence is valid. (Art. 1758, NCC)
A: As a common carrier, WTC is liable to Aurelio for
breach of contract of carriage, the latter being a
NOTE: The passenger must be carried gratuitously.
passenger who purchased a ticket for himself. WTC
If it is only a reduction of fare, then any limitation of
is also liable to Jerome for breach of contract of
the common carrier’s liability is not justified. (2001,
carriage because he was a passenger although he
2009 BAR)
was being transported gratuitously. However, WTC
has no liability in favor of Florencio for breach of
XPN to the XPN: Notwithstanding the exception,
contract of carriage. A stowaway like Florencio, who
common carriers will be liable nevertheless for
secures passage by fraud, is not considered as a
willful acts or gross negligence. (Ibid.)
passenger.
Q: A and his classmates took a bus from UP to

NOTE: As accommodation passengers or invited
Quiapo. On the way, another Quiapo-bound bus
guests, defendant as owner and driver of the pick-
tried to overtake them. A and his classmates
up owes to them merely the duty to exercise
dared the bus driver to run faster and race with
reasonable care so that they may be transported
the other bus. The driver took their dare, to the
safely to their destination. The rule is established by
COMMERCIAL LAW
delight of A and his friends who cheered for him. However, there is no obligation on the part of a
On rounding the curve, the bus driver failed to street railway company to stop its cars to let on
slow down and the bus turns turtle, resulting in intending passengers at other points than those
the death of A and injuries to the other appointed for stoppage. (Del Prado v. Manila Electric
passengers. The bus carried the following sign: Co., G.R. No. L-29462, 7 Mar. 1929)
“Do not talk to driver while bus is on motion,
otherwise the company will not assume liability Q: City Railways, Inc. (CRI) provides train
for any accident.” Explain the extent of the service, for a fee, to commuters from Manila to
liability, if any, of the bus company, giving the Calamba, Laguna. Commuters are required to
legal provisions and principles involved. purchase tickets and then proceed to designated
loading and unloading facilities to board the
A: The bus company is liable for damages to A’s train. Ricardo Santos purchased the ticket for
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heirs and to all the injured passengers. Under the Calamba and entered the station. While waiting,
Civil Code, a common carrier is duty bound to he had an altercation with the security guard of
A
exercise extraordinary diligence in carrying its CRI leading to a fistfight. Ricardo Santos fell on
passengers. This liability cannot be eliminated or the railway just as a train was entering the
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limited by stipulation or by posting notices. (Divina, station. Ricardo Santos was run over by the
2021) train. He died. CRI contented that the mishap
occurred before Ricardo Santos boarded the
2. DURATION OF LIABILITY train and that it was not guilty of negligence.
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Decide. (2008 BAR)
Duration of Liability
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A: The contention of CRI must fail. The duty of a
Observance of extraordinary diligence in common carrier to provide safety to its passengers
transportation of goods commences from the is not only during the course of the trip but for so
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moment the person who purchases the ticket from long as the passengers are within its premises and
the carrier presents himself at the proper place and where they ought to be in pursuance to the contract
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in a proper manner to be transported and continues of carriage. Furthermore, the common carrier will
until the passenger has been landed at the port of still be liable even though its employees acted
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destination and has left the vessel owner’s dock or beyond the scope of their work. (LRTA v. Navidad,
premises. (Divina, 2022) supra)
A
Waiting for Carrier or Boarding of Carrier Q: P, a salesgirl in a flower shop at the Ayala
Station of the MRT bought two (2) tokens or
A proper person whom the carrier would be bound tickets, one for her ride to work and another for
to accept who enters upon the carrier’s premises her ride home. She got to her flower shop where
such as a station, ticket office, or waiting room, with she usually worked. While P was attending to
the intention of becoming a passenger, will her duties at the flower shop, two (2) crews of
ordinarily be viewed as assuming the status of a the MRT got into a fight near the flower shop,
passenger. (LRTA v. Navidad, G.R. No. 145804, 06 Feb. causing injuries to P in the process. Can P sue the
2003, citing 10 Am. Jur. 30) MRT for contractual breach as she was within
the MRT premises where she would shortly take
Trains her ride home? (2011 BAR)
The carrier is supposed to exercise extraordinary A: NO. P had no intention to board an MRT train
diligence although the passenger is still waiting for coach when the incident occurred.
a coach on the platform of the train station. (LRTA v.
Navidad, ibid)
2023 GOLDEN NOTES
Carriage by Sea are doing so. Santiago, by stepping and standing on
the platform of the bus is already considered as a
The duty of the carrier commences as soon as a passenger and is entitled to all the rights and
person with bona fide intention of taking passage protection pertaining to a contract of carriage.
places himself in the care of the carrier or its (Dangwa Transportation Co., Inc. v. CA, Ibid)
employees and is accepted as passenger. (Aquino
and Hernando, 2016, citing 80 C.J.S. 1085) When a Signal of Intention to Board not
Necessary
Land Transportation
When the bus is not in motion, there is no necessity
The act of the driver in stopping their conveyances for a person who wants to ride the same to signal his
is a continuous offer to riders (Continuing Offer intention to board. A public utility bus, once it stops,
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Rule). The passenger is deemed to be accepting the is in effect making a continuous offer to bus riders.
offer if he is already attempting to board the Hence, it becomes the duty of the driver and the
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conveyances and the contract of carriage is conductor, every time the bus stops, to do no act
perfected from that point. that would have the effect of increasing the peril to
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a passenger while he was attempting to board the
It is the duty of common carriers of passengers, same. The premature acceleration of the bus in this
including common carriers by railroad train, case was a breach of such duty.
streetcar, or motorbus, to stop their conveyances a
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reasonable length of time in order to afford A person, by stepping and standing on the platform
passengers an opportunity to board and enter, and of the bus, is already considered a passenger and is
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they are liable for injuries suffered by boarding entitled all the rights and protection pertaining to
passengers resulting from the sudden starting up or such a contractual relation. Hence, it has been held
jerking of their conveyances while they are doing so. that the duty which the carrier owes to its patrons
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(Dangwa Transportation Co., Inc. vs. v. CA, G.R. No. extends to persons boarding cars as well as to those
95582, 07 Oct. 1991) alighting therefrom. (Dangwa Transportation Co.,
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Inc. v. CA, supra)
Q: A bus of GL Transit on its way to Davao
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stopped to enable a passenger to alight. At that Liability for Death or Injury to Passengers upon
moment, Santiago who had been waiting for a Arrival at Destination
ride, boarded the bus. However, the bus driver
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failed to notice Santiago who was still standing Once created, the relationship will not ordinarily
on the bus platform and stepped on the terminate until the passenger has, after reaching his
accelerator. Because of the sudden motion, destination, safely alighted from the carrier's
Santiago slipped and fell down suffering serious conveyance or had a reasonable opportunity to
injuries. Is GL Transit liable? (1996 BAR) leave the carrier's premises. All persons who
remain on the premises a reasonable time after
A: YES. Santiago may hold GL Transit liable for leaving the conveyance are to be deemed
breach of contract of carriage. It was the duty of the passengers, and what is a reasonable time or a
driver, when he stopped the bus, to do no act that reasonable delay within this rule is to be
would have the effect of increasing the peril to a determined from all the circumstances, and
passenger such as Santiago while he was attempting includes a reasonable time to see after his baggage
to board the same. When a bus is not in motion there and prepare for his departure. (La Mallorca v. CA,
is no necessity for a person who wants to ride the G.R. No. L-20761, 27 July 1966)
same to signal his intention to board. A public utility
bus, once it stops, is in effect making a continuous Carrier-passenger relationship continues until the
offer to bus riders. It is the duty of common carriers passenger has been landed at the port of destination
of passengers to stop their conveyances while they and has left the vessel-owner’s premises. The
COMMERCIAL LAW
victim’s presence in a vessel after one (1) hour from that said driver is acting within the scope of his
his disembarkation is not enough in order to authority and observing the existing rules and
absolve the carrier from liability in his death. regulations required of him by management.
(Aboitiz Shipping Corporation v. CA, G.R. No. 84458, (Aquino and Hernando, 2016)
06 Nov. 1989)
Q: At around 8:45 in the morning, A, after having
Q: Robert De Alban and his family rode a bus alighted from a passenger bus in front of
owned by Joeben Bus Company. Upon reaching Robinsons Galleria along the north-bound lane
their desired destination, they alighted from the of EDSA, was hit and run over by a bus driven by
bus, but Robert returned to get their baggage. B, who was then employed by C Transport
However, his youngest daughter followed him Company. A was immediately rushed to the
without his knowledge. When he stepped into hospital where she was pronounced dead on
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the bus again, the bus accelerated that resulting arrival. By reason of the quasi-delict, who
to Robert’s daughter death. The bus ran over should be held liable for the death of A? B, the
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her. Is the bus company liable? bus driver, C Transport Company, or both?
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A: YES. The relation of carrier and passenger does A: Both B and C Transport Company should be held
not cease at the moment the passenger alights from solidarily liable as joint tortfeasors. Under Art. 2180
the carrier’s vehicle at a place selected by the carrier of the NCC, employers are liable for the damages
at the point of destination but continues until the caused by their employees acting within the scope
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passenger has had a reasonable time or reasonable of their assigned tasks. Once negligence on the part
opportunity to leave the carrier’s premises. (La of the employee is established, a presumption
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Mallorca v. CA, supra) instantly arises that the employer was remiss in the
selection and/or supervision of the negligent
3. LIABILITY FOR ACTS OF OTHERS employee. It is incumbent upon the employer to
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rebut this presumption by presenting adequate and
convincing proof that it exercised the care and
a) EMPLOYEES
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diligence of a good father of a family in the selection
and supervision of its employees. Failing to do this,
Common Carriers are Liable for the Acts of their
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a common carrier cannot avoid liability for the
Employees
quasi-delict committed by its negligent employee.
The responsibility of two or more persons who are
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Common carriers are liable for the death of or
liable for a quasi-delict is solidary. (R Transport
injuries to passengers through the negligence or
Corp. v. Yu, G.R. No. 174161, 18 Feb. 2015)
willful acts of the former’s employees, although
such employees may have acted beyond the scope of
b) OTHER PASSENGERS AND STRANGERS
their authority or in violation of the orders of the
common carriers. The liability of the common
Extent of Liability of Common Carriers for Acts
carriers does not cease upon proof that they
of Co-Passengers or Strangers (1997, 2005 BAR)
exercised all the diligence of a good father of a
family in the selection and supervision of their
A common carrier is responsible for injuries
employees. (Art. 1759, NCC)
suffered by a passenger on account of the willful
acts or negligence of other passengers or of
NOTE: By express provision of Art. 1759, it is no
strangers, if the carrier’s employees through the
defense that the employee acted beyond the scope
exercise of the diligence of a good father of a family
of his authority because the riding public is not
could have prevented or stopped the act or
expected to inquire from time to time before they
omission. (Art. 1763, NCC)
board the carrier whether or not the driver or any
other employee is authorized to drive the vehicle or
2023 GOLDEN NOTES
Q: P rode a Sentinel Liner bus going to Baguio confined and treated. Marites wants to sue the
from Manila. At a stop-over in Tarlac, the bus bus company for damages and seeks your advice
driver, the conductor, and the passengers whether she can legally hold the bus company
disembarked for lunch. P decided, however, to liable. What will you advise her? (1994 BAR)
remain in the bus, the door of which was not
locked. At this point, V, a vendor, sneaked into A: I will advise Marites that she cannot legally hold
the bus and offered P some refreshments. When the bus company liable if the stone throwing was
P rudely declined, V attacked him, resulting in P entirely unforeseeable and the carrier exercised
suffering from bruises and contusions. Does he utmost diligence. However, I will also inform her
have cause to sue Sentinel Liner? (2011 BAR) that the burden is on the carrier to prove such
exercise of due diligence. If she decides to file a case
A: YES, since the carrier's crew did nothing to in court, all that she will prove is that she was a
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protect the passenger P who remained in the bus passenger and she was injured while on board the
during the stop-over. (UPLC Commercial Law bus. (Pilapil v. CA, G.R. No. 52159, 22 Dec. 1989)
A
Suggested Answers)
The Registered Owner of the Vehicle may be
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Q: In a jeepney, Angela, a passenger, was injured held Liable for Damages Suffered by a Third
because of the flammable material brought by Person in the Course of the Operation of the
Antonette, another passenger. Antonette denied Vehicle
her baggage to be inspected invoking her right
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to privacy. The registered owner of a public service vehicle is
responsible for damages that may arise from
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a. Should the jeepney operator be held liable consequences incident to its operation or that may
for damages? be caused to any of the passengers therein. (Gelisan
A: NO. The operator is not liable for damages. In v. Alday, G.R. No. L-30212, 30 Sept. 1987)
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overland transportation, the common carrier is not
bound nor empowered to make an examination on Liability for Delayed Voyage
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the contents of packages or bags, particularly those
hand carried by passengers. (Nocum v. Laguna Delayed voyage refers to a voyage involving:
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Tayabas Bus Company, G.R. No. L-23733, 31 Oct.
1969) 1. Late departure of the ship from its port of
origin; or
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b. If it were an airline company involved,
would your answer be the same? (1992 2. Late arrival to its port of destination for a
BAR) period of time not exceeding twenty-four (24)
hours from the Certificate of Public
A: NO. The common carrier should be made liable. Convenience (CPA)-authorized time of
In case of air carriers, it is unlawful to carry departure or arrival of the ship. (Sec. III,
flammable materials in passenger aircrafts, and Maritime Industry Authority Circular No. 2018-
airline companies may open and investigate 07)
suspicious packages and cargoes pursuant to R.A.
No. 6235. Rights of Passengers in case of Delayed Voyages
Q: Marites, a paying bus passenger, was hit In case of delay of the voyage attributable to the
above her left eye by a stone hurled at the bus by operator, a passenger shall have the following
an unidentified bystander as the bus was rights:
speeding through the National Highway. The bus
owner’s personnel lost no time in bringing
Marites to the provincial hospital where she was
COMMERCIAL LAW
1. Right to Information 4. Right to Compensation
The operator shall, within thirty (30) minutes As an alternative to providing accommodation
from receipt of information or from knowledge or whenever the provision of the same is not
that the voyage shall be delayed, but not later practicable, the operator may offer the
than one (1) hour before the CPC-authorized passengers corresponding compensation:
departure schedule, inform the passengers of
the delay and the cause thereof, as well as of the a. In an amount equivalent to the
new departure or expected arrival time. prevailing market price of a decent and
clean accommodation in the
NOTE: The information shall be made by public immediate or adjacent locality of the
announcement through the Public ship’s point of departure;
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Announcement System, written and/or
published notice, or through SMS, electronic or b. Subject to the same limitation of a
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any other available means. maximum of three (3) nights per
passenger. (Sec. V, Maritime Industry
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2. Right to Refund or Revalidation Authority Circular No. 2018-07)
Should the delay be for more than three (3)
hours, the passenger shall be offered by the 5. Right to Remain on Board
operator the option to request a refund of the
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ticket price or for the revalidation of the ticket. In case the departure of the vessel is delayed,
the passengers have a right to remain on board
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3. Right to Amenities and to be furnished with food for the account of
The operator shall provide, free of charge, the the vessel, unless the delay is due to an
passengers waiting for their re-scheduled trip accidental cause or to force majeure. (Art. 698,
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with the following: Code of Commerce [COC])
a. Snacks or refreshments, or meals
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during mealtime; 6. Right to Return
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b. Free access to first aid/relief medicine, If the delay should exceed ten (10) days, the
if necessary; passengers who request it shall be entitled to
the return of the passage. (Art. 698, COC)
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c. Free access to communication facilities
or services, if necessary; 7. Right to Damages
d. Free, decent, and clean accommodation If the delay were due exclusively to the captain
that must be located near or accessible or agent, the passengers may furthermore
from the port; and demand indemnity for losses and damages.
(Art. 698, COC)
e. Free transportation to and from the
port and place of accommodation,
should the delay require a waiting time
of more than eight (8) but not
exceeding 24 hours.
NOTE: The passengers shall be entitled to these

amenities for as long as may be required by the
period for which they have to wait for their next
scheduled voyage.
2023 GOLDEN NOTES
4. EXTENT OF LIABILITY FOR DAMAGES Rationale of the Carrier’s Liability
The rationale is the fact that the passenger has

Extent of Damages in case of Death or Injury of
neither choice nor control over the carrier in the
Passengers
selection and use of the equipment and appliances
in use by the carrier. Having no privity whatever
A common carrier that is in breach of its contract of
with the manufacturer or vendor of the defective
carriage for the death of a passenger is liable to pay:
equipment, the passenger has no remedy against
him, while the carrier usually has. (Ibid)
1. Indemnity for death;
2. Indemnity for loss of earning capacity; and
No person shall be responsible for a fortuitous event
3. Moral damages. (Victory Liner, Inc. v. Rosalito
which could not be foreseen, or which, though
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Gammad, G.R. No. 159636, 25 Nov. 2004)
foreseen, was inevitable. (Art. 1174, NCC)
Factors to Determine the Reasonableness of
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Damages Awarded
D. THE MONTREAL CONVENTION OF 1999
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The following are the factors to be considered in
determining the reasonableness of the damages
awarded:
Montreal Convention
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1. Life expectancy (considering the health of the
victim, and mortality table which is deemed On 10 Aug. 2015, the Philippine Senate ratified the
conclusive) and loss of earning capacity; Convention for the Unification of Certain Rules for
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2. Pecuniary loss, loss of support and service; and International Carriage by Air, Montreal, on 28 May
3. Moral and mental sufferings. (Divina, 2021) 1999.
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Liability for Defects in Equipment and Facilities Warsaw Convention
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The carrier, while not an insurer of the safety of his The Warsaw Convention for Unification of Certain
Rules Relating to International Carriage by Air (WC)
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passengers, should nevertheless be held to answer
for the flaws of his equipment if such flaws were at provides for rules applicable to international
all discoverable. transportation by air. The Philippines is one of the
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signatories to the Warsaw Convention. (Santos III v.
The preponderance of authority is in favor of the Northwest Orient Airlines, G.R. No. 101538, 23 June,
doctrine that a passenger is entitled to recover 1992)
damages from a carrier for an injury resulting from
a defect in an appliance purchased from a One of the purposes of the Montreal Convention
manufacturer, whenever it appears that the defect (MC) was to harmonize and consolidate the Warsaw
would have been discovered by the carrier if it had Convention and related instruments. (Preamble,
exercised the degree of care which under the MC)
circumstances was incumbent upon it, with regard
to inspection and application of the necessary tests. 1. APPLICABILITY
The manufacturer is considered in law the agent or

Applicability of the Montreal Convention
servant of the carrier, as far as regards the work of
constructing the appliance. According to this theory,
The Montreal Convention applies to all
the good repute of the manufacturer will not relieve
international carriage of persons, baggage or cargo
the carrier from liability. (Necesito v. Paras, G.R. No.
performed by aircraft for reward. It applies equally
L-10605, 30 June 1958)
COMMERCIAL LAW
to gratuitous carriage by aircraft performed by an c. Calling for it to be delivered at the place of
air transport undertaking. (Art. 1(1), MC) destination or in the course of the journey
to a person other than the consignee
International Carriage originally designated; or by
International carriage means any carriage in which, d. Requiring it to be returned to the airport of
according to the agreement between the parties, the departure. (Art. 12, MC)
place of departure and the place of destination,
whether or not there be a break in the carriage or a The consignor must not exercise this right of
transshipment, are situated either: disposition in such a way as to prejudice the carrier
or other consignors and must reimburse any
1. Within the territories of two States Parties; or expenses occasioned by the exercise of this right.
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2. Within the territory of a single State Party if (Ibid.)
there is an agreed stopping place within the
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territory of another State, even if that State is If it is impossible to carry out the instructions of the
not a State Party. consignor, the carrier must so inform the consignor
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forthwith. (Ibid.)
Carriage between two points within the territory of
a single State Party without an agreed stopping If the carrier carries out the instructions of the
place within the territory of another State is not consignor for the disposition of the cargo without
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international carriage for the purposes of the requiring the production of the part of the air
Montreal Convention. (Art. 1(2), MC) waybill or the cargo receipt delivered to the latter,
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the carrier will be liable, without prejudice to its
Q: How is carriage performed by several right of recovery from the consignor, for any
successive air carriers treated under the damage which may be caused thereby to any person
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Montreal Convention? who is lawfully in possession of that part of the air
waybill or the cargo receipt. (Ibid.)
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A: Carriage to be performed by several successive
carriers is deemed, for the purposes of this The right conferred on the consignor ceases at the
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Convention, to be one undivided carriage if it has moment when that of the consignee begins in
been regarded by the parties as a single operation, accordance with the Convention’s provisions on
whether it had been agreed upon under the form of delivery of the cargo. Nevertheless, if the consignee
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a single contract or of a series of contracts, and it declines to accept the cargo, or cannot be
does not lose its international character merely communicated with, the consignor resumes its right
because one contract or a series of contracts is to be of disposition. (Ibid.)
performed entirely within the territory of the same
State. (Art. 1(3), MC) Where the supervisor of the consignee signed the
delivery receipt for the goods shipped, the
Right of Disposition of Cargo consignee cannot sue the shipping company for
non-delivery of the goods. (National Trucking and
Subject to its liability to carry out all its obligations Forwarding Corp. v. Lorenzo Shipping Corp., G.R. No.
under the contract of carriage, the consignor has the 153563, 07 Feb. 2005)
right to dispose of the cargo by:
a. Withdrawing it at the airport of departure
or destination; or by
b. Stopping it in the course of the journey on

any landing; or by
2023 GOLDEN NOTES
2. EXTENT OF LIABILITY OF AIR CARRIER carrier is liable if the damage resulted from its fault
or that of its servants or agents. (Ibid.)
Liability under the Montreal Convention

If the carrier admits the loss of the checked baggage,
or if the checked baggage has not arrived at the
The carrier is liable for damage under the following
expiration of twenty-one days after the date on
instances:
which it ought to have arrived, the passenger is
a. Death or Injury to Passengers; and
entitled to enforce against the carrier the rights
b. Destruction, loss, damage, or delay in
which flow from the contract of carriage. (Art. 17(3),
carrying baggage.
MC)
a) DEATH OR INJURY OF PASSENGER

Unless otherwise specified in the Montreal
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Convention, the term “baggage” means both
Death or Bodily Injury of Passenger
baggage and unchecked baggage. (Art. 17(4), MC)
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Damage sustained in case of death or bodily injury
Damage to Cargo
of a passenger upon condition only that the accident
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which caused the death or injury took place on Damage sustained in the event of the destruction or
board the aircraft or in the course of any of the loss of, or damage to, cargo upon condition only that
operations of embarking or disembarking. (Art. the event which caused the damage so sustained
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17(1), MC) took place during the carriage by air. (Art. 18(1),
MC)
Requisites (DB-A-BED)
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NOTE: The carrier is not liable if and to the extent it
1. A passenger Died or sustained Bodily proves that the destruction, or loss of, or damage to,
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injury; the cargo resulted from one or more of the
2. The same was due to an Accident; and following:
3. Which took place on Board the aircraft or in
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a. Inherent defect, quality or vice of that
the course of Embarkation or cargo;
Disembarkation.
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b. Defective packing of that cargo performed
by a person other than the carrier or its
b) LOST OR DELAYED BAGGAGE servants or agents;
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c. An act of war or an armed conflict; or
Destruction, Loss or Damage to Checked and d. An act of public authority carried out in
Unchecked Baggage connection with the entry, exit or transit of
the cargo. (Art. 18(2), MC)
Damage sustained in case of destruction or loss of,
or of damage to, checked baggage upon condition For purposes of Art. 18(1) of MC, carriage by air
only that the event which caused the destruction, comprises the period during which the cargo is in
loss or damage took place on board the aircraft or the charge of the carrier. (Art. 18(3), MC)
during any period within which the checked
baggage was in the charge of the carrier. (Art. 17(2), The period of the carriage by air does not extend to
MC) any carriage by land, by sea or by inland waterway
performed outside an airport. If, however, such
NOTE: The carrier is not liable if and to the extent carriage takes place in the performance of a contract
that the damage resulted from the inherent defect, for carriage by air, for the purpose of loading,
quality or vice of the baggage. In the case of delivery or transshipment, any damage is
unchecked baggage, including personal items, the presumed, subject to proof to the contrary, to have
been the result of an event which took place during
COMMERCIAL LAW
the carriage by air. If a carrier, without the consent writing to the plaintiff within a period of six months
of the consignor, substitutes carriage by another from the date of the occurrence causing the damage,
mode of transport for the whole or part of a carriage or before the commencement of the action, if that is
intended by the agreement between the parties to later. (Ibid.)
be carriage by air, such carriage by another mode of
transport is deemed to be within the period of Venue for Actions under Montreal Convention
carriage by air. (Art. 18(4), MC)
An action for damages must be brought, at the
Damage Occasioned by Delay in the Carriage of option of the plaintiff, in the territory of one of the
Passengers, Baggage or Cargo States Parties, either before the court of:
(Do-Pri-C-Des)
The carrier shall not be liable for damage
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occasioned by delay if it proves that it and its 1. The Domicile of the carrier;
servants and agents took all measures that could 2. The carrier’s Principal place of business;
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reasonably be required to avoid the damage or that 3. Where the carrier has a place of business
it was impossible for it or them to take such through which the Contract has been made;
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measures. (Art. 19, MC) 4. Before the court at the place of Destination.
(Art. 33(1), MC)
When Limits Not Applicable
In respect of damage resulting from the death or
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The provisions concerning the limitation of liability injury of a passenger, an action may be brought
in cases of death or bodily injury of a passenger and before:
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delay in carriage of persons shall not apply if it is
proved that the damage resulted from: 1. One of the aforementioned courts; or
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1. An act or omission of the carrier, its 2. In the territory of a State Party in which at
servants or agents; the time of the accident, the passenger has
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2. Done with intent to cause damage or his or her principal and permanent
recklessly; and residence and to or from which the carrier
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3. With knowledge that damage would operates services for the carriage of
probably result; and passengers by air. (Art. 33(2), MC)
4. In the case of such act or omission of a
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servant or agent, it is also proved that such NOTE: The carrier operates services either
servant or agent was acting within the on its own aircraft, or on another carrier’s
scope of its employment. (Art. 22, MC) aircraft pursuant to a commercial
agreement, and in which that carrier
Court Not Prevented from Awarding Costs, conducts its business of carriage of
Expenses passengers by air from premises leased or
owned by the carrier itself or by another
The limitations of liability shall not prevent the carrier with which it has a commercial
court from awarding, in accordance with its own agreement. (Ibid.)
law, in addition, the whole or part of the court costs
and of the other expenses of the litigation incurred NOTE: Questions of procedure shall be
by the plaintiff, including interest. governed by the law of the court seized of
the case.
The foregoing provision shall not apply if the
amount of the damages awarded, excluding court
costs and other expenses of the litigation, does not
exceed the sum which the carrier has offered in
2023 GOLDEN NOTES
Exoneration from Liabilities
If the carrier proves that the damage was caused or

contributed to by the negligence or other wrongful
act or omission of the person claiming
compensation, or the person from whom he or she
derives his or her rights, the carrier shall be wholly
or partly exonerated from its liability to the
claimant to the extent that such negligence or
wrongful act or omission caused or contributed to
the damage.
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When by reason of death or injury of a passenger
compensation is claimed by a person other than the
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passenger, the carrier shall likewise be wholly or
partly exonerated from its liability to the extent that
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it proves that the damage was caused or contributed
to by the negligence or other wrongful act or
omission of that passenger. (Art. 20, MC)
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NOTE: This exoneration provision applies to all
liability provisions in the Montreal Convention.
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(Ibid.)
Death of Person Liable
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In the case of the death of the person liable, an
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action for damages lies in accordance with the terms
of this Convention against those legally
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representing his or her estate. (Art. 32, MC)
Arbitration
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The parties to the contract of carriage for cargo may
stipulate that any dispute relating to the liability of
the carrier under this Convention shall be settled by
arbitration. Such agreement shall be in writing.
(Art. 34(1), MC)
COMMERCIAL LAW
Ownership and other real rights over property are
V. INTELLECTUAL PROPERTY CODE acquired and transmitted by law, by donation, by
(R.A. No. 8293) testate and intestate succession, and in
consequence of certain contracts, by tradition.
They may also be acquired by means of
prescription. (Art. 712, New Civil Code (NCC))
NOTE: Exclude Implementing Rules and
Regulations
Ownership may be exercised over things or rights.
(Art. 427, NCC)
Intellectual Property
Intellectual Property shall include the rights
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relating to: A. PATENTS
1. Literary, artistic, and scientific works;
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2. Performances of performing artists, Definition
phonograms, and broadcasts;
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3. Inventions in all fields of human endeavor; A patent is an exclusive right granted to an investor
4. Scientific discoveries; over an invention or a utility model or industrial
5. Industrial designs; design to sell, use, and make the same for commerce
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6. Trademarks, service marks, and and industry. (Divina, 2021)
commercial names and designations;
7. Protection against unfair competition; and General Principles
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8. All other rights resulting from intellectual
activity in the industrial, scientific, literary The right granted to an inventor by a State, or by a
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or artistic fields. (Art. 2(viii), Convention regional office acting for several States, which
Establishing the World Intellectual Property allows the inventor to exclude anyone else from
Organization, as amended) commercially exploiting his invention for a limited
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period, generally 20 years. (Understanding
Intellectual Property Rights Industrial Property, WIPO, 2016)
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The term “intellectual property rights” consists of: The primary purpose of the patent system is not the
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reward of the individual but the advancement of the
a. Copyright and Related Rights; arts and sciences. The function of a patent is to add
b. Trademarks and Service Marks; to the sum of useful knowledge and one of the
c. Geographic Indications; purposes of the patent system is to encourage
d. Industrial Designs; dissemination of information concerning
e. Patents; discoveries and inventions. (Manzano v. CA, G.R. No.
f. Layout-Designs (Topographies) of 113388, 05 Sept. 1997)
Integrated Circuits; and
g. Protection of Undisclosed Information. Three-fold Purpose of Patent Law:
(Sec. 4.1., IPC)
1. To foster and reward invention;
Intellectual Property as Property
2. To promote disclosures of inventions to
Ownership is acquired by occupation and by stimulate further innovation and to permit the
intellectual creation. public to practice the invention once the patent
expires; and
2023 GOLDEN NOTES
V. INTELLECTUAL PROPERTY CODE
3. To ensure that ideas in the public domain The assignment must be: (W-A-C)
remain there for the free use of the public. 1. In Writing;
(Pearl & Dean (Phil.), Inc. v. Shoemart, Inc., G.R.
No. 148222, 15 Aug. 2003) 2. Acknowledged before a notary public or
other officer authorized to administer oath
Types of Patents or perform notarial acts; and
1. Patentable Invention – any technical solution 3. Certified under the hand and official seal of
of a problem in any field of human activity the notary or such other officer. (Sec. 105,
which is new, involves an inventive step and is IPC)
industrially applicable. It may be, or may relate
to, a product or process, or an improvement of
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1. PATENTABLE INVENTIONS
any of the foregoing. (Sec. 21, IPC)
What may be Patented
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2. Utility Model – an invention qualifies for
registration as a utility model if it is new and
Any technical solution of a problem in any field of
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industrially applicable. (Sec. 109, IPC)
human activity which is: (N-I-I)
3. Industrial Design – any composition of lines or

1. New;
colors or any three-dimensional form, whether
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2. Involves an Inventive step; and
or not associated with lines or colors, provided
3. Is Industrially applicable.
that such composition or form gives a special
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appearance to and can serve as pattern for an
NOTE: It may be, or may relate to, a product or
industrial product or handicraft and must be
process or an improvement of any of the foregoing.
new or ornamental. (Secs. 112 and 113, IPC)
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(Sec. 21, IPC)
Generally, an industrial design is the

Improvement
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ornamental or aesthetic aspect of a useful
article. (Amador, 2007)
An enhancement or modification of any of the
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foregoing subject to patentability criteria.
An industrial design is not considered new if it
differs from prior designs only in minor
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For example, an improvement in the tile-making
respects that can be mistaken as such prior
process is indeed inventive and goes beyond the
designs by an ordinary observe. (WIPO, 2004)
exercise of mechanical skill. The applicant has
introduced a new kind of tile for a new purpose. He
Right to a Patent
has improved the old method of making tiles and
pre-cast articles which were not satisfactory
The right to a patent belongs to the inventor, his
because of an intolerable number of breakages,
heirs, or assigns. When two (2) or more persons
especially if deep engravings are made on the tile.
have jointly made an invention, the right to a patent
He has overcome the problem of producing
shall belong to them jointly. (Sec. 28, IPC)
decorative tiles with deep engraving, but with
sufficient durability. (Aguas v. De Leon, G.R. No. L-
Assignment of Patent Rights
32160, 30 Jan. 1982)
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.
103.2, IPC)
COMMERCIAL LAW
Three Elements for Patentability the application shall be supplemented by a deposit
of such material with an international depository
1. Novelty; institution. (Sec. 35.1, IPC)
2. Inventive Step; and
3. Industrially Applicable. Doctrine of Non-Prejudicial Disclosure
a) NOVELTY The right to patent arises from application date. If

the inventor voluntarily discloses his creation, such
An invention shall not be considered new if it forms as by offering it for sale, the world is free to copy and
part of a prior art. (Sec. 23, IPC) use it with impunity. Ideas, once disclosed to the
public without the protection of a valid patent, are
NOTE: The burden of proving want of novelty of an subject to appropriation without significant
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invention is on the person who avers it and the restraint. (Pearl & Dean (Phil.), Inc. v. Shoemart, Inc.,
burden is a heavy one which is met only by clear and supra)
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satisfactory proof which overcomes every
reasonable doubt. (Manzano v. CA, G.R. No. 113388, GR: When a work has already been made available
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05 Sept. 1997) to the public, it shall be non-patentable for absence
of novelty.
Prior Art
XPN: The disclosure of information contained in the
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1. Everything which has been made available to application during the twelve (12) months
the public anywhere in the world, before the preceding the filing date or the priority date of the
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filing date or the priority date of the application application shall not prejudice the applicant on the
claiming the invention; and ground of lack of novelty if such disclosure was
made by:
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2. The whole contents of an earlier published
Philippine application or application with a. The inventor;
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earlier priority date of a different inventor. (Sec.
24, IPC) b. A patent officer and the information was
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contained (a) in another publication filed by the
Public Disclosure inventor and should not have been disclosed by
the office, or (b) in an application filed, without
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The ultimate goal of a patent system is to bring new the knowledge or consent of the inventor, by a
designs and technologies into the public through third party who obtained the information
disclosure; hence ideas, once disclosed to the public directly or indirectly from the inventor; or
without protection of a valid patent, are subject to
appropriation without significant restraint. (Pearl & c. A third party who obtained the information
Dean (Phil.), v. Shoemart Inc., G.R. No. 148222, 15 directly or indirectly from the inventor. (Sec. 25,
Aug. 2003) IPC)
The application shall disclose the invention in a If the disclosure was made by the designer in the
manner sufficiently clear and complete for it to be case of industrial design, the period is six (6)
carried out by a person skilled in the art. Where the months. In other words, the application must be
application concerns a microbiological process or filed within six (6) months after disclosure for it to
the product thereof and involves the use of a micro- be non-prejudicial.
organism which cannot be sufficiently disclosed in
the application in such a way as to enable the
invention to be carried out by a person skilled in the
art, and such material is not available to the public,
2023 GOLDEN NOTES
Q: Yosha was able to put together a mechanical a. A new form or new property of a known
water pump in his garage consisting of suction substance which does not result in the
systems capable of drawing water from the enhancement of the known efficacy of that
earth using less human effort than what was substance; or
then required by existing models. The water
pump system provides for a new system which b. The mere discovery of any new property or
has the elements of novelty and inventive steps. new use for a known substance; or
Yosha, while preparing to have his invention
registered with the IPO, had several models of c. The mere use of a known process unless
his new system fabricated and sold in his such known process results in a new
province. product that employs at least one new
reactant. (Sec. 26.2, IPC)
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Is Yosha's invention no longer patentable by
virtue of the fact that he had sold several models Test of Non-Obviousness
A
to the public before the formal application for
registration of patent was filed with the IPO? A patent may not be obtained though the invention
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(2018 BAR) is not identically disclosed or described, if the
differences between the subject matter sought to be
A: Yosha’s invention is still patentable. It is true that patented and the prior art are such that the subject
an invention shall not be considered new if it forms matter as a whole would have been obvious at the
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part of a prior art and that prior art shall consist of time the invention was made to a person having
everything which has been made available to the ordinary skill in the art to which said subject matter
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public anywhere in the world, before the filing date pertains. Patentability shall not be negatived by the
or the priority date of the application claiming the manner in which the invention was made. (Graham
invention. This, however, presupposes that the one v. John Deere Co., 383 U.S. 1, 21 Feb. 1966)
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who has made available the patentable invention to
the public is a person other than the applicant for c) INDUSTRIAL APPLICABILITY
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patent. (UPLC Suggested Answers; Divina, 2021)
An invention that can be produced and used in any
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Under the doctrine of non-prejudicial disclosure, industry meets the industrial application
the disclosure of information contained in the requirement of patent registrability. This means an
application during the 12 months preceding the invention is not merely theoretical, but also has a
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filing date or priority date of the application shall practical purpose. If the invention is a product, it
not prejudice the applicant on the ground of lack of should be able to produce a product and if the
novelty if such disclosure was made by the inventor invention is a process, it should be able to lay out a
himself. (Sec. 25, IPC) process. (WIPO, IP Handbook 2nd Ed., 2004)
b) INVENTIVE STEP Cezar works in a car manufacturing company

owned by Joab. Cezar is quite innovative and
GR: An invention involves an inventive step if, loves to tinker with things. With the materials
having regard to prior art, it is not obvious to a and parts of the car, he was able to invent a gas-
person skilled in the art at the time of the filing date saving device that will enable cars to consume
or priority date of the application claiming the less gas. Francis, a co-worker, saw how Cezar
invention. (Sec. 26.1, IPC) created the device and likewise, came up with a
similar gadget, also using scrap materials and
XPN: In the case of drugs and medicine, there is no spare parts of the company. Thereafter, Francis
inventive step if the invention results from the mere filed an application for registration of his device
discovery of: with the Bureau of Patents. Eighteen months
later, Cezar filed his application for the
COMMERCIAL LAW
registration of his device with the Bureau of
Patents.
Is the gas-saving device patentable? Explain.
A: YES, it is patentable because it is new, it involves

an inventive step, and it is industrially applicable.
(Divina, 2021)
A W
O L
N E
T E
A
2023 GOLDEN NOTES
Invention vs. Utility Model vs. Industrial Design
INVENTION UTILITY MODEL INDUSTRIAL DESIGN

Elements
-New
-New
-Inventive Step -New or Ornamental
-Industrial Applicability
-Industrial Applicability
Term of Protection
Five (5) years from the date of filing

Twenty (20) years from the date of Seven (7) years from the date of
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with 2 five-year term renewals
filing with payment of annuities. filing without renewal. (Sec. 109.3,
upon payment of fees. (Sec. 118.2,
No renewal. (Sec. 54, IPC) IPC)
IPC)
A
Grounds for Cancellation
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1. Invention is not new or
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patentable;
1. The invention does not qualify
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2. Patent does not disclose the
for registration as a utility
invention in a manner
model;
sufficiently clear and complete
1. The subject matter of the
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for it to be carried out by any
2. The description and the claims industrial design is not
person skilled in the art;
do not comply with the registrable;
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prescribed requirements;
3. The patent is contrary to
2. The subject matter is not new;
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public order or morality (Sec.
3. Any drawing which is or
61.1, IPC);
necessary for the
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understanding of the 3. The subject matter of the
4. The patent is found invalid in
invention has not been industrial design extends
an action for infringement
furnished; or beyond the content of the
(Sec. 82, IPC); or
application as originally filed.
4. The owner of the utility model (Sec. 120, IPC)
5. The patent includes matters
registration is not the inventor
outside the scope of the
or his successor in title. (Sec.
disclosure contained in the
109.4, IPC)
application. (Sec. 1, Rule 3,
Regulations on Inter Partes
Proceeding)
COMMERCIAL LAW
2. NON-PATENTABLE INVENTIONS Q: Dr. Nobel discovered a new method of

treating Alzheimer’s involving a special method
Definition of diagnosing the disease, treating it with a new
medicine that has been discovered after long
An invention may not be patentable because it does experimentation and field testing, and novel
not comply with the elements of patentability, or it mental isometric exercises. He comes to you for
falls under non-patentable inventions enumerated advice on how he can have his discoveries
under Sec. 23 of the IPC. (Salao, 2018) protected. Can he legally protect his new
method of diagnosis, the new medicine, and the
Non-Patentable Inventions new method of treatment? If no, why? If yes,
how? (2010 BAR)
The following are non-patentable inventions:
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(Tr-A-P-S-A-D2) A: Dr. Nobel can be protected by a patent for the
new medicine as it falls within the scope of Sec. 21
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1. Methods for Treatment of the human or animal of the Intellectual Property Code. (R.A. No. 8293, as
body by surgery or therapy and diagnostic amended). However, no protection can be legally
methods practiced on the human or animal
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extended to him for the method of diagnosis and
body. This provision shall not apply to products method of treatment which are expressly non-
and composition for use in any of these patentable. (Sec. 22, IPC)
methods;
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Patentability of Computer Programs
2. Aesthetic creations;
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GR: Computer programs are not patentable but are
3. Plant varieties or animal breeds or essentially copyrightable.
biological process for the production of plants
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or animals. This provision shall not apply to XPN: They can be patentable if they are part of a
micro-organisms and non-biological and process. (e.g., business process with a step involving
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microbiological processes; the use of a computer program)
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4. Schemes, rules and methods of performing Q: Supposing Albert Einstein were alive today
mental acts, playing games or doing business, and he filed with the Intellectual Property Office
and programs for computers; (IPO) an application for patent for his theory of
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relativity expressed in the formula E=mc2. The
5. Anything which is contrary to public order or IPO disapproved Einstein’s application on the
morality; ground that his theory of relativity is not
patentable. Is the IPO’s action correct? (2006
6. In the case of Drugs and medicines, mere BAR)
discovery of a new form or new property of a
known substance which does not result in the A: YES. The IPO is correct because under the
enhancement of the efficacy of that substance Intellectual Property Code, discoveries, scientific
or the new use for a known substance, or the theories, and mathematical methods are classified
mere use of a known process unless such to be as “non-patentable inventions”. Einstein’s
known process results in a new product that theory of relativity falls within the category of being
employs at least one new reactant; and a non-patentable “scientific theory”. (UPLC
Commercial Law Suggested Answers)
7. Discoveries, scientific theories and
mathematical methods. (Sec. 22, IPC)
2023 GOLDEN NOTES
Q: X invented a bogus coin detector which can be NOTE: Registration is valid for 10 years without
used exclusively on self-operating gambling renewal counted from date of commencement
devices otherwise known as one-armed bandits. of protection. (Sec. 118.5, IPC)
Can X apply for a patent?
3. OWNERSHIP OF A PATENT
A: NO. The law provides that any invention that is
contrary to public order or morality may not be
a) RIGHT OF A PATENT
extended patent protection. The bogus coin
detector appears to be a device used to cheat in
Persons Entitled to a Patent
gambling. Therefore, it may not be patented. (UPLC
Commercial Law Suggested Answers)
1. Inventor, his heirs, or assigns;
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Q: Can an article of commerce serve as
2. Joint invention – jointly by the inventors; (Sec.
trademark and at the same time enjoy patent
28, IPC)
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and copyright protection? Explain and give an
example. (2010 BAR)
3. Two or more persons invented separately and
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independently of each other – to the person
A: A stamped or marked container of goods can be
who filed an application; or
registered as trademark. (Sec. 113, IPC) An original
ornamental design or model for articles of
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4. Two or more applications are filed – the
manufacturer can be copyrighted. (Sec. 172.1, IPC)
applicant who has the earliest filing date or, the
An ornamental design cannot be patented, because
earliest priority date. (Sec. 29, IPC)
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aesthetic creations cannot be patented. (Sec. 22, IPC)
However, it can be registered as an industrial
b) FIRST-TO-FILE RULE
design. (Sec. 113.1, 172.1, IPC) Thus, a container of
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goods which has an original ornamental design can
First-to-File Rule
be registered as trademark, can be copyrighted, and
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can be registered as an industrial design.
1. If two (2) or more persons have made the
invention separately and independently of each
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Other Kinds of Intellectual Property Rights
other, the right to the patent shall belong to the
person who filed an application for such
1. Integrated Circuit – A product, in its final form,
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invention; or
or an intermediate form, in which the elements,
at least one of which is an active element and
2. Where two or more applications are filed for the
some or all of the interconnections are
same invention, to the applicant which has the
integrally formed in and or on a piece of
earliest filing date. (Sec. 29, IPC)
material, and in which is intended to perform an
electronic function; (Sec. 112(2), IPC) and
c) INVENTIONS CREATED PURSUANT TO A
COMMISSION
2. Layout Design/Topography – The three-
dimensional disposition, however expressed, of
Inventions Pursuant to a Commission
the elements, at least one of which is an active
element, and of some or all of the
The person who commissions the work shall own
interconnections of an integrated circuit, or
the patent, unless otherwise provided in the
such a three-dimensional disposition prepared
contract. (Sec. 30.1, IPC)
for an integrated circuit intended for
manufacture. (Sec. 112 (3), IPC)
COMMERCIAL LAW
Inventions Pursuant to Employment Three (3) Main Areas of Activity in the Grant of
Invention Patent
In case the employee made the invention in the
course of his employment contract, the patent shall 1. Examination as to form or formality
belong to: examination;
2. Classification, search and first publication; and
1. The employee, if the inventive activity is not a 3. Examination as to substance or substantive
part of his regular duties even if the employee examination.
uses the time, facilities, and materials of the
employer; Steps in the Registration of a Patent
(F-A-Fo-Cla-P-S-G-P-I)
2. The employer, if the inventive activity is the
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result of the performance of his regularly The procedure for the grant of patent may be
assigned duties, unless there is an agreement, summarized as follows:
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express or implied, to the contrary. (Sec. 30.2, 1. Filing of the application;
IPC) 2. Accordance of the filing date;
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3. Formality examination;
d) RIGHT OF PRIORITY 4. Classification and Search;
5. Publication of application;
Priority Date 6. Substantive examination;
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7. Grant of Patent;
An application for patent filed by any person who 8. Publication upon grant; and
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has previously applied for the same invention in 9. Issuance of certificate. (Salao, 2019)
another country which by treaty, convention, or law
affords similar privileges to Filipino citizens, shall Manner of Making Disclosure
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be considered as filed as of the date of filing the
foreign application. (Sec. 31, IPC) The application shall disclose the invention in a
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manner sufficiently clear and complete for it to be
Filing date is accorded only when all the carried out by a person skilled in the art. (Sec. 35,
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requirements provided under Sec. 40 are present. IPC)
Priority Date comes into play when there is an
application for patent for the same invention that Claims
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was filed in another country. (Salao, 2012)
The application for patent shall contain one (1) or
Conditions in Availing of Priority Date more claims which shall define the matter for which
protection is sought. Each claim shall be clear and
1. The local application expressly claims priority; concise and shall be supported by the description.
2. It is filed within 12 months from the date the (Sec. 36.1, IPC)
earliest foreign application was filed; and
3. A certified copy of the foreign application Abstract
together with an English translation is filed
within six (6) months from the date of filing in A concise summary of the disclosure of the
the Philippines. (Sec. 31, IPC) invention as contained in the description, claims,
and merely serves as technical information. (Sec. 37,
IPC)
The purpose of requiring a definite and accurate

description of the process is to apprise the public of
what the patentee claims as his invention, to inform
2023 GOLDEN NOTES
the Courts as to what they are called upon to specifications be full, definite, and specific. To be
construe, and to convey to competing entitled to the filing date of the patent application,
manufacturers and dealers information of exactly an invention disclosed in a previously filed
what they are bound to avoid. (Boothe v. Director of application must be described within the instant
Patents, G.R. No. L-24919, 28 Jan. 1980) application in such a manner as to enable one skilled
in the art to use the same for a legally adequate
Unity of Invention utility. (Boothe v. Director of Patents, supra)
The application shall relate to one invention only or Rights Conferred by a Patent Application After
to a group of inventions forming a single general Publication
inventive concept. (Sec. 38.1, IPC)
The applicant shall have all the rights of a patentee
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If several independent inventions which do not against any person who, without his authorization,
form a single general inventive concept are claimed exercised any of the rights conferred under Sec. 71
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in one application, the application must be in relation to the invention claimed in the published
restricted to a single invention. (Sec. 38.2, IPC) patent application, as if a patent had been granted
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for that invention, provided that the said person
Divisional Applications had:
Divisional applications come into play when two or 1. Actual knowledge that the invention that he
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more inventions are claimed in a single application was using was the subject matter of a published
but are of such a nature that a single patent may not application; or
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be issued for them. The applicant is thus required to
“divide”, that is, to limit the claims to whichever 2. Received written notice that the invention was
invention he may elect, whereas those inventions the subject matter of a published application
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not elected may be made the subject of separate being identified in the said notice by its serial
applications which are called “divisional number.
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applications.” (Smith Kline Beckman Corp. v. CA, G.R.
No. 126627, 14 Aug. 2003) The action may not be filed until after the grant of a
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patent on the published application and within four
Q: Leonard and Marvin applied for Letters (4) years from the commission of the acts
Patent claiming the right of priority granted to complained of. (Sec. 46, IPC)
A
foreign applicants. Receipt of petitioners’
application was acknowledged by respondent Effectivity of a Patent
Director on 06 Mar. 1954. Their Application for
Letters Patent in the US for the same invention A patent shall take effect on the date of the
indicated that the application in the US was filed publication of the grant of the patent in the IPO
on 16 Mar. 1953. They were advised that the Gazette. (Sec. 50.3, IPC)
"specification" they had submitted was
"incomplete" and that responsive action should
be filed with them four months from date of
mailing, which was 05 Aug. 1959. On 03 July
1962, petitioners submitted two complete
copies of the Specification. The Director of
Patents held that petitioners' application may
not be treated as filed. Is the director correct?
A: YES. It is imperative that the application be
complete in order that it may be accepted. It is
essential to the validity of Letters Patent that the
COMMERCIAL LAW
4. GROUNDS FOR CANCELLATION OF A PATENT Remedies of the True and Actual Inventor
(1993, 2005 BAR)
Grounds for Cancellation

If a person, who was deprived of the patent without
his consent or through fraud is declared by final
Any interested party may petition to cancel any
court order or decision to be the true and actual
patent or any claim or parts of a claim any of the
inventor, the court shall order for his substitution as
following grounds:
patentee, or at the option of the true inventor, cancel
the patent, and award actual damages in his favor if
1. Invention is not new or patentable;
warranted by the circumstances. (Sec. 68, IPC)
2. Patent does not disclose the invention in a

In the two circumstances aforementioned, the court
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manner sufficiently clear and complete for it to
shall furnish the Office a copy of the order or
be carried out by any person skilled in the art;
decision which shall be published in the IPO Gazette
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within three (3) months from the date such order or
3. The patent is contrary to public order or
decision became final and executor and shall be
morality; (Sec. 61.1, IPC)
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recorded in the register of the Office. (Sec. 69, IPC)
4. The patent is found invalid in an action for
Time to File Action in Court
infringement; (Sec. 82, IPC) or
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The actions indicated in Secs. 67 and 68 shall be filed
5. The patent includes matters outside the scope
within one (1) year from the date of publication
of the disclosure contained in the application.
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made in accordance with Secs. 44 and 51,
(Sec. 1, Rule 3, Regulations on Inter Partes
respectively. (Sec. 70, IPC)
Proceeding)
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Q: Cezar works in a car manufacturing company
NOTE: If the ground for cancellation relates to some
owned by Joab. Cezar is quite innovative and
of the claims or parts of the claim only, cancellation
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loves to tinker with things. With the materials
may be effected to such extent only. (Sec. 61.2, IPC)
and parts of the car, he was able to invent a gas-
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saving device that will enable cars to consume
5. REMEDY OF THE TRUE AND ACTUAL less gas. Francis, a co-worker, saw how Cezar
INVENTOR created the device and likewise, came up with a
A
similar gadget, also using scrap materials and
Remedies of Persons with a Right to a Patent spare parts of the company. Thereafter, Francis
filed an application for registration of his device
If a person other than the applicant is declared by with the Bureau of Patents. Eighteen months
final court order or decision as having the right to a later, Cezar filed his application for the
patent, he may within 3 months after such decision registration of his device with the Bureau of
has become final: Patents.
1. Prosecute the application as his own; Assuming that it is patentable, who is entitled to
2. File a new patent application; the patent? What, if any, is the remedy of the
3. Request the application to be refused; or losing party? (2005 BAR)
4. Seek cancellation of the patent. (Sec. 67.1,
IPC) A: Cezar is entitled to the patent because he is
the true and actual inventor. While it is true that
Francis was the first to file the application for
registration of patent, the same will not work in his
favor because he was in bad faith. However,
2023 GOLDEN NOTES
considering that under the IPC, it adopts the first to 7. LIMITATIONS OF PATENT RIGHTS
file rule, Cezar will have to take action against
Francis within one (1) year from the date of Limitations of Patent Rights
publication. If he is declared by final court order or
decision as having the right to a patent, he may The owner of a patent has no right to prevent third
within 3 months after such decision has become parties from making, using, offering for sale, selling,
final: a) prosecute the application as his own or importing a patented product in the following
application in place of the applicant; b) file a new circumstances:
patent application in respect of the same invention;
c) request the application to be refused; or d) seek a. Using a patented product after it has been put
cancellation of the patent, if one has already been on the market in the Philippines by the owner
issued. (UPLC Commercial Law Suggested Answers) of the product, or with his express consent.
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6. RIGHTS CONFERRED BY A PATENT In case of drugs or medicines, the said limitation
A
applies after a drug or medicine has been
Rights Conferred by a Patent introduced in the Philippines or anywhere else
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in the world by the patent owner, or by any
1. In case of a Product – Right to restrain, party authorized to use the invention. This
prohibit and prevent any unauthorized person allows parallel importation for drugs and
or entity from making, using, offering for sale, medicines.
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selling, or importing the product. ;
The right to import the drugs and medicines
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2. In case of Process – Right to restrain prohibit shall be available to any government agency or
and prevent any unauthorized person or entity any private third party; (Sec. 72.1, IPC)
from manufacturing, dealing in, using, offering
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for sale, selling, or importing any product b. Where the act is done privately and on a non-
obtained directly or indirectly from such commercial scale or for a non-commercial
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process. ; and (Sec. 71.1, IPC) purpose: Provided that it does not significantly
prejudice the economic interest of the owner of
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3. Right to assign the patent, to transfer by the patent.; (Sec. 72.2, IPC)
succession, and to conclude licensing
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contracts. (Sec. 71.2, IPC) c. Exclusively for experimental use of the
invention for scientific purposes or educational
NOTE: The rights conferred by a patent application purposes; (Sec. 72.3, IPC)
take effect after publication in the IPO Gazette. (Sec.
46, IPC) d. In the case of drugs and medicines, where the
act includes testing, using, making, or selling the
Term or Duration of a Patentable Invention invention including any data related thereto,
solely for purposes reasonably related to the
It shall be twenty (20) years from the filing date of development and submission of information
the application. (Sec. 54, IPC) and issuance of approvals by government
regulatory agencies required under any law of
NOTE: The patentee’s exclusive rights exist only the Philippines or of another country that
during the term of the patent, hence, after the cut- regulates the manufacture, construction, use or
off date, the exclusive rights no longer exist. sale of any product.
(Philippine Pharmawealth, Inc. v. Pfizer, Inc., G.R. No.
167715, 17 Nov. 2010) The data submitted by the original patent
holder may be protected from unfair
COMMERCIAL LAW
commercial use provided in Art. 39.3 of the Q: X invented a device which, through the use of
TRIPS Agreement; (Sec. 72.4, IPC) noise, can recharge a cellphone battery. He
applied for and was granted a patent on his
e. Where the act consists of the preparation for device, effective within the Philippines. As it
individual cases, in a pharmacy or by a medical turns out, a year before the grant of X's patent, Y,
professional, of a medicine in accordance with a also an inventor, invented a similar device
medical prescription; and (Sec. 72.5, IPC) which he used in his cellphone business in
Manila. But X files an injunctive suit against Y to
f. Where the invention is used in any ship, vessel, stop him from using the device on the ground of
aircraft, or land vehicle of any other country patent infringement. Will the suit prosper?
entering the territory of the Philippines (2011 BAR)
temporarily or accidentally. Provided, that such
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invention is used exclusively for the needs of A: NO, since Y is a prior user in good faith. (UPLC
the ship, vessel, aircraft, or land vehicle and not Commercial Law Suggested Answers)
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used for the manufacturing of anything to be
sold within the Philippines. (Sec. 72.6, IPC) b) USE BY GOVERNMENT
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a) PRIOR USER Use by the Government
Prior User A Government agency or third person authorized by
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the Government may exploit the invention even
Any prior user, who, in good faith was using the without agreement of the patent owner where:
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invention or has undertaken serious preparations (PI-JA-Na-No-D)
to use the invention in his enterprise or business,
before the filing date or priority date of the a. The Public Interest, in particular, national
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application in which a patent is granted, shall have security, nutrition, health, or the development
the right to continue the use thereof as envisaged in of other sectors, as determined by the
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such preparations within the territory where the appropriate agency of the government, so
patent produces its effects. (Sec. 73.1, IPC) requires;
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To protect the patent owner, however, the prior b. A Judicial or Administrative body has
user may only transfer or assign the right if it is determined that the manner of exploitation, by
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transferred or assigned together with his enterprise the owner of the patent or his licensee, is anti-
or business, or with that part of his enterprise or competitive;
business in which is the use or preparation for use
have been made. (Sec. 73.2, IPC) c. In the case of drugs and medicines, there is a
National emergency or other circumstance of
In other words, the prior user cannot assign the extreme urgency requiring the use of the
right to use the patented product or process without invention;
giving up entirely his enterprise. (Salao, 2019)
d. In the case of drugs and medicines, there is a
Prior use in good faith is generally considered as a public Non-commercial use of the patent by the
defense against patent infringement. This defense patentee, without satisfactory reason; or
permits a person to continue their use of an
invention even if that invention is subsequently e. In the case of drugs and medicines, the Demand
patented by another. (Gepty, 2019) for the patented article in the Philippines is not
being met to an adequate extent and on
reasonable terms, as determined by the
2023 GOLDEN NOTES
Secretary of the Department of Health. (Sec. 74, Reverse Reciprocity of Foreign Law
IPC)
Any condition, restriction, limitation, diminution,
Unless otherwise provided herein, the use by the requirement, penalty, or any similar burden
Government, or third person authorized by the imposed by the law of a foreign country on a
Government shall be subject, where applicable, to Philippine national seeking protection of
the following provisions: intellectual property rights in that country, shall
reciprocally be enforceable upon nationals of said
1. In situations of national emergency or other country, within Philippine jurisdiction. (Sec. 231,
circumstances of extreme urgency, the right IPC)
holder shall be notified as soon as reasonably
practicable; Doctrine of Exhaustion
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2. In the case of public non-commercial use of the Also known as the Doctrine of First Sale, it provides
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patent by the patentee, without satisfactory that the patent holder has control of the first sale of
reason, the right holder shall be informed his invention. He has the opportunity to receive the
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promptly; full consideration for his invention from his sale.
Hence, he exhausts his rights in the future control of
Provided, that, the Government or third person his invention.
authorized by the Government, without making
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a patent search, knows or has demonstrable It espouses that the patentee who has already sold
ground to know that a valid patent is or will be his invention and has received all the royalty and
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used by or for the Government. consideration for the same will be deemed to have
released the invention from his monopoly. The
3. If the demand for the patented article in the invention thus becomes open to the use of the
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Philippines is not being met to an adequate purchaser without further restriction. (Adams v.
extent and on reasonable terms as determined Burke, 84 U.S. 17, 1873)
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by the Secretary of Health, the right holder shall
be informed promptly; GR: Patent rights are exhausted by first sale in the
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Philippines (Domestic exhaustion).
4. The scope and duration of such use shall be
limited to the purpose for which it was XPN: On drugs and medicines: first sale in any
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authorized; jurisdiction exhausts the rights of the owner thereof
(International exhaustion). (R.A. No. 9502)
5. Such use shall be non-exclusive;
8. PATENT INFRINGEMENT
6. The right holder shall be paid adequate
remuneration in the circumstances of each case, Civil Infringement
taking into account the economic value of the
authorization; and GR: The making, using, offering for sale, selling, or
importing a patented product or a product obtained
7. The existence of national emergency or other directly or indirectly from a patented process, or the
circumstances of extreme urgency, in the case use of a patented process without the authorization
of drugs and medicines shall be subject to the of the patentee constitutes patent infringement.
determination of the President of the (Sec. 76.1, IPC)
Philippines for the purpose of determining the
need for such use or other exploitation, which
shall be immediately executory. (Sec. 74.2, IPC)
COMMERCIAL LAW
XPNs: patented process without the authorization of the
a. Using a patented product which has been put on patentee will also be held liable for patent
the market in the Philippines by the owner of infringement. (Gepty, 2019)
the product, or with his express consent, insofar
as such use is performed after that product has Criminal Infringement
been so put on the said market. (Sec. 72.1, IPC)
If infringement is repeated by the infringer or by
b. In the case of drugs and medicines, where the anyone in connivance with him after finality of the
act includes testing, using, making or selling the judgment of the court against the infringer, the
invention including any data related thereto, offenders shall, without prejudice to the institution
solely for purposes reasonably related to the of a civil action for damages, be criminally liable.
development and submission of information (Sec. 84, IPC)
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and issuance of approvals by government
regulatory agencies required under any law of Remedies of a Patent Owner
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the Philippines or of another country that
regulates the manufacture, construction, use or 1. Civil action for infringement – The owner may
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sale of any product; (Ibid.) bring a civil action with the appropriate
c. Compulsory licensing; (Sec. 76.1, IPC,) Regional Trial Court to recover from infringer
the damages sustained by the former, plus
d. Use of Invention by Government; (Ibid.) and attorney’s fees and other litigation expenses,
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and to secure an injunction for the protection of
e. Procedures on Issuance of a Special his rights. (Sec 76.2, IPC)
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Compulsory License under the TRIPS
Agreement for patented drugs and medicines. Limitations:
(Ibid.)
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a. No damages can be recovered for acts of
Contributory Infringement infringement committed more than four
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(4) years before the filing of the action for
Anyone who actively induces the infringement of a infringement. (Sec. 79, IPC)
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patent or provides the infringer with a component
of a patented product or of a product produced b. Damages cannot be recovered for acts of
because of a patented process knowing it to be infringement committed before the
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especially adopted for infringing the patented infringer had known or had reasonable
invention and not suitable for substantial non- grounds to know of the patent. (Sec. 80, IPC)
infringing use shall be liable as a contributory
infringer and shall be jointly and severally liable c. If the damages are inadequate or cannot be
with the infringer. (Sec. 76.6, IPC) reasonably ascertained with reasonable
certainty, the court may award by way of
To succeed on a claim of inducement, patentee must damages a sum equivalent to reasonable
show, first, that there has been direct infringement, royalty. (Sec 76.3, IPC)
and second, that the alleged infringer knowingly
induced infringement and possessed of specific d. The court may, according to the
intent to encourage another’s infringement. circumstances of the case, award damages
(Amador, 2007) in a sum above the amount found as actual
damages sustained: Provided, That the
In patent infringement, one who induced someone award does not exceed three (3) times the
to make, use, offer for sale, sell, or import a patented amount of such actual damages. (Sec. 76.4,
product or a product obtained directly or indirectly IPC)
from a patented process, or facilitated the use of a
2023 GOLDEN NOTES
If the infringement is a continuing activity, the channels of commerce of destroyed, without
aggrieved patent holder retains his cause of action compensation. (Sec.76.5, IPC)
for damages and injunction but may not claim
damages beyond 4 years counted back from the 5. Provisional measures - Any patentee, or
institution of the action. (Amador, 2007) anyone possessing any right, title, or interest in
and to the patented invention, whose rights
A civil action for infringement of a patent may be have been infringed, may bring a civil action
filed despite the pendency of a petition in the IPO before a court of competent jurisdiction, to
for cancellation of the patent. (Luchan v. Honrado, recover from the infringer such damages
CA-G.R. No. 04706-SP, 06 July 1976) sustained thereby, plus attorney’s fees and
other expenses of litigation, and to secure an
2. Criminal action for repetition of infringement injunction for the protection of his rights. (Sec.
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– If the infringement is repeated by the 76.2, IPC)
infringer or by anyone in connivance with him
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after finality of the judgment of the court Exclusive right to monopolize the subject
against the infringer, the infringer offender matter of the patent exists only within the term
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shall be criminally liable and upon conviction, of the patent. Upon the expiration of the term,
shall suffer imprisonment of not less than six there is no more basis for the issuance of a
(6) months but not more than three (3) years restraining order or injunction. (Phil.
and/or a fine not less than P100,000.00 but not Pharmawealth, Inc. v. Pfizer, Inc., G.R. No.
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more than P300,000.00. (Sec. 84, IPC) 167715, 17 Nov. 2010)
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Limitation: The criminal action prescribes Jurisdiction
three (3) years from the commission of the
crime. (Ibid.) An action for infringement of patent falls within the
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jurisdiction of the regular courts rather than the
NOTE: Infringement entails only civil liability in the Intellectual Property Office. (Amancor, Inc. v. Salas,
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first instance, but it becomes a criminal offense CA-G.R. No. 06049-SP, 10 Oct. 1985)
when it is repeated by the infringer after finality of
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the judgment of the court against the infringer. Persons who can File an Action for Infringement
(Amador, 2007)
1. The patentee or his successors-in-interest may
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3. Administrative remedy – Where the number of file an action for infringement. (Creser Precision
damages claimed is not less than P200,000.00, Systems, Inc. v. CA, G.R. No. 118708, 02 Feb. 1998)
the patentee may choose to file an
administrative action against the infringer with A person or entity who has not been granted
the Bureau of Legal Affairs (BLA). The BLA can letters patent over an invention and has not
issue injunctions and order direct infringer to acquired any light or title thereto either as
pay patentee damages. However, unlike regular assignee or as licensee, has no cause of action
courts, the BLA may not issue search and for infringement because the right to maintain
seizure warrants or warrants of arrest. (Sec. an infringement suit depends on the existence
10.2(a), IPC) of the patent. (Ibid.)
4. Disposal or Destruction of Infringing GR: A licensee may NOT maintain a suit for
material – The court may, in its discretion, infringement. Only the patentees, his heirs,
order that the infringing goods, materials and assignee, grantee, or personal representatives
implements predominantly used in the may bring an action for infringement.
infringement be disposed of outside the
COMMERCIAL LAW
XPN: If the licensing agreement provides that There is infringement of patent under this test if one
the licensee may bring an action for makes, uses or sells an item that contains all
infringement or if he was authorized to do so by elements of the patent claim. The test is satisfied in
the patentee through a special power of either of the following:
attorney.
a. Exactness rule: The item being sold, made,
2. Any foreign national or juridical entity who or used conforms exactly to the patent
meets the requirements of Sec. 3 and not claim of another; or
engaged in business in the Philippines, to which
a patent has been granted or assigned, whether b. Additional rule: One makes, uses, or sells
or not it is licensed to do business in the an item that has all the elements of the
Philippines. (Sec. 77, IPC) patent claim of another plus other
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elements. (Aquino, 2019)
A patent holder cannot enforce his rights if he has
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committed inequitable conduct in the prosecution In using literal infringement, resort must be had, in
of his patent application. (Amador, 2007) the first instance, to the words of the claim. If
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accused matter clearly falls within the claim,
Burden of Proof in an Action for Infringement infringement is made out and that is the end of it. To
determine whether the particular item falls within
The burden of proof to substantiate a charge of the literal meaning of the patent claims, the Court
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infringement is with the plaintiff. Where the must juxtapose the claims of the patent and the
plaintiff introduces the patent in evidence, and the accused product within the overall context of the
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same is due in form, there is created a prima facie claims and specifications, to determine whether
presumption of correctness and validity. The there is exactly identity of all material elements.
decision of the IPO in granting the patent is (Godines v. CA, G.R. No. 97343, 13 Sept. 1993)
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presumed to be correct. The burden of going
forward with the evidence then shifts to the A patent may be infringed where the essential or
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defendant to overcome by competent evidence this substantial features of the patented invention are
legal presumption. (Maguan v. Court of Appeals, G.R. taken or appropriated, or the device, machine or
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No. L-45101, 28 Nov. 1986) other subject matter to infringe is substantially
identical with the patented invention. In order to
a) TESTS IN PATENT INFRINGEMENT infringe a patent, a machine or device must perform
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the same function, or accomplish the same result by
Two Tests in Determining Patent Infringement identical or substantially identical means and the
principle or mode of operation must be
The following are the two tests in determining substantially the same. (Del Rosario v. CA, G.R. No.
patent infringement: 115106, 15 Mar. 1996)
1. Literal Infringement; and (2) DOCTRINE OF EQUIVALENTS

2. Doctrine of Equivalents.
Doctrine of Equivalents (2015 BAR)
(1) LITERAL INFRINGEMENT
Due account shall be taken of elements which are
Literal Infringement equivalent to the elements expressed in the claims,
so that a claim shall be considered to cover not only
The extent of protection conferred by the patent all the elements expressed therein, but also
shall be determined by the claims, which are to be equivalents. (Sec. 75, IPC)
interpreted in the light of description and drawings.
(Sec. 75, IPC)
2023 GOLDEN NOTES
According to the Doctrine of Equivalents, an Q: Does the use of a patented process by a third
infringement also occurs when a device person constitute an infringement when the
appropriates a prior invention by incorporating its alleged infringer has substituted, in lieu of some
innovative concept and, despite some modification unessential part of the patented process, a well-
and change, performs substantially the same known mechanical equivalent?
function in substantially the same way to achieve
substantially the same result. (Godines v. CA, supra) A: YES. Under the Doctrine of Mechanical
Equivalents, the patentee is protected from
The Doctrine of Equivalents thus requires colorable invasions of his patent under the guise of
satisfaction of the function-means-and-result test, substitution of some part of his invention by some
the patentee having the burden to show that all well-known mechanical equivalent. It is an
three components of such equivalency test are met. infringement of the patent if the substitute performs
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(Smith Kline Beckman Co. v. CA, G.R. No. 126627, 14 the same function and was well known at the date of
Aug. 2003) the patent as a proper substitute for the omitted
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ingredient. (Gsell v. Yap-Jue, supra)
Meaning of “Equivalent Device”
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Doctrine of File Wrapper Estoppel or
An Equivalent Device is such as a mechanic of Prosecution History Estoppel
ordinary skill in construction of similar machinery,
having the forms, specifications, and machine Prosecution History Estoppel applies when an
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before him, could substitute in the place of the applicant during a patent prosecution narrows a
mechanism described without the exercise of the claim to avoid the prior art, or otherwise to address
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inventive faculty. (Gsell v. Yap-Jue, G.R. No. L-4720, specific concern that arguably would have rendered
19 Jan. 1909, citing Burden v. Corning) the claimed subject matter unpatentable. In these
instances, estoppel bars the applicant from later
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Steps in Determining the Presence of invoking the doctrine of equivalents. (Funa, 2012)
Infringement:
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The doctrine precludes a patentee from obtaining
1. Determine if there is literal infringement. If under the doctrine of equivalents coverage of
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there is, defendant is liable; and subject matter that has been relinquished during
2. If there is no literal infringement, then the the process of its patent application. (Pharmacia &
doctrine of equivalents should be applied. Upjohn Co. v. Mylan Pharm., Inc., 170 F. 3d1373, 1376,
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(Funa, 2017) 31 Mar. 1998)
Process Patent Infringement b) DEFENSES IN ACTION FOR INFRINGEMENT
If the subject matter of a patent is a process for Defenses in Action for Infringement
obtaining a product, any identical product shall be
presumed to have been obtained through the use of 1. Invalidity of the patent; (Sec. 81, IPC);
the patented process if the product is new or there 2. Any of the grounds for cancellation of patents:
is substantial likelihood that the identical product a. That what is claimed as the invention is not
was made by the process and the owner of the new or patentable;
patent has been unable despite reasonable efforts,
to determine the process actually used. (Sec. 78, IPC) b. That the patent does not disclose the
invention in a manner sufficiently clear and
complete for it to be carried out by any
person skilled in the art; or
COMMERCIAL LAW
c. That the patent is contrary to public order Effect of Invalid Patent
or morality; (Sec. 61, IPC) and
In an action for infringement, if the court shall find
3. Prescription. (Sec. 84, IPC) the patent or any claim to be invalid, it shall cancel
the same, and the Director of Legal Affairs upon
Q: In an action for infringement of patent, the receipt of the final judgement of cancellation by the
alleged infringer defended himself by stating 1) court, shall record that fact in the registrar of the
that the patent issued by the Patent Office was Office and shall publish a notice to that effect in the
not really an invention which was patentable; 2) IPO Gazette. (Sec. 82, IPC)
that he had no intent to infringe so that there
was no actionable case for infringement; and 3) 9. LICENSING
that there was no exact duplication of the
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patentee’s existing patent but only a minor
Modes of Obtaining License to Exploit Patent Rights
improvement. With those defenses, would you
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exempt the alleged violator from liability? Why?
1. Voluntary licensing; and (Sec. 85, IPC)
(1992 BAR)
2. Compulsory licensing. (Sec. 93, IPC)
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A: I would not exempt the alleged violator from
liability for the following reasons: a) VOLUNTARY
a. A patent once issued by the Patent Office raises
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The grant by the patent owner to a third person of
a presumption that the article is patentable. The
the right to exploit a patented invention.
validity of the patent and the question over the
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inventiveness, novelty and usefulness of the
Voluntary licensing encourages the transfer and
product are matters which are better
dissemination of technology, prevent or control
determined by the Patent Office. There is a
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practices and conditions that may in particular
presumption that the Philippine Patent Office
cases constitute an abuse of intellectual property
has correctly determined the patentability of
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rights having an adverse effect on competition and
the model and such action must not be
trade. (Sec. 85, IPC)
interfered with in the absence of competent
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evidence to the contrary. A mere statement or
Rights of a Licensor and Licensee in Voluntary
allegation is not enough to destroy that
Licensing
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presumption;
In the absence of any provision to the contrary in
b. An intention to infringe is not necessary nor an
the technology transfer arrangement, the grant of a
element in a case for infringement of a patent;
license shall not prevent the licensor from granting
further licenses to third person nor from exploiting
c. There is no need of exact duplication of the
the subject matter of the technology transfer
patentee’s existing patent such as when the
arrangement himself. (Sec. 89, IPC)
improvement made by another is merely minor.
Under the doctrine of equivalents, infringement
Licensee shall be entitled to exploit the subject
is committed if the accused product introduced
matter of the technology transfer arrangement
only minor innovations or improvement but
during the whole term of the technology transfer
performs the same function in the same way to
arrangement. (Sec. 90, IPC)
accomplish the same result. Exact duplication of
the patentee’s existing patent is not necessary
for infringement to lie. (Divina, 2021)
2023 GOLDEN NOTES
Prohibited Clauses 10. Those which require payments for patents
and other industrial property rights after
1. Those which impose upon the licensee the their expiration, termination arrangement;
obligation to acquire from a specific source
capital goods, intermediate products, raw 11. Those which require that the technology
materials, and other technologies, or of recipient shall not contest the validity of
permanently employing personnel any of the patents of the technology
indicated by the licensor; supplier;
2. Those pursuant to which the licensor 12. Those which restrict the research and
reserves the right to fix the sale or resale development activities of the licensee
prices of the products manufactured on the designed to absorb and adapt the
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basis of the license; transferred technology to local conditions
or to initiate research and development
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3. Those that contain restrictions regarding programs in connection with new products,
the volume and structure of production; processes or equipment;
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4. Those that prohibit the use of competitive 13. Those which prevent the licensee from
technologies in a non-exclusive technology adapting the imported technology to local
transfer agreement; conditions, or introducing innovation to it,
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as long as it does not impair the quality
5. Those that establish a full or partial standards prescribed by the licensor;
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purchase option in favor of the licensor;
14. Those which exempt the licensor for
6. Those that obligate the licensee to transfer liability for non-fulfillment of his
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for free to the licensor the inventions or responsibilities under the technology
improvements that may be obtained transfer arrangement and/or liability
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through the use of the licensed technology; arising from third party suits brought about
by the use of the licensed product or the
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7. Those that require payment of royalties to licensed technology; and
the owners of patents for patents which are
not used; 15. Other clauses with equivalent effects. (Sec.
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87, IPC)
8. Those that prohibit the licensee to export
the licensed product unless justified for the Exception on Prohibited Clauses
protection of the legitimate interest of the
licensor such as exports to countries where In exceptional or meritorious cases where
exclusive licenses to manufacture and/or substantial benefits will accrue to the economy,
distribute the licensed product(s) have such as high technology content, increase in foreign
already been granted; exchange earnings, employment generation,
regional dispersal of industries and/or substitution
9. Those which restrict the use of the with or use of local raw materials, or in the case of
technology supplied after the expiration of Board of Investments, registered companies with
the technology transfer arrangement, pioneer status, exemption from any of the above
except in cases of early termination of the requirements may be allowed by the
technology transfer arrangement due to Documentation, Information and Technology
reason(s) attributable to the licensee; Transfer Bureau after evaluation thereof on a case
by case basis. (Sec. 91, IPC)
COMMERCIAL LAW
Mandatory Provisions b) COMPULSORY
1. The laws of the Philippines shall govern the Compulsory Licensing

interpretation of the same and in the event
of litigation; the venue shall be the proper A process by which the government will allow the
court in the place where the licensee has its exploitation of the patented invention based on
principal office; valid and justifiable grounds. (Gepty, 2019)
2. Continued access to improvements in Grounds for Compulsory Licensing

techniques and processes related to the
technology shall be made available during The Director General of the IPO may grant a license
the period of the technology transfer to exploit a patented invention, even without the
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arrangement; agreement of the patent owner, in favor of any
person who has shown his capability to exploit the
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3. In the event the technology transfer invention, under any of the following
arrangement shall provide for arbitration, circumstances:
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the Procedure of Arbitration of the
Arbitration Law of the Philippines or the 1. National emergency or other
Arbitration Rules of the United Nations circumstances of extreme urgency;
Commission on International Trade Law
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(UNCITRAL) or the Rules of Conciliation 2. Where the public interest, in particular,
and Arbitration of the International national security, nutrition, health or the
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Chamber of Commerce (ICC) shall apply development of other vital sectors of the
and the venue of arbitration shall be the national economy as determined by the
Philippines or any neutral country; and appropriate agency of the Government, so
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requires;
4. Philippine taxes on all payments relating to
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the technology transfer arrangement shall 3. Where a judicial or administrative body has
be borne by the licensor. (Sec. 88, IPC) determined that the manner of exploitation
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by the owner of the patent or his licensee is
Effect of Non-conformance with the Prohibited anti- competitive;
Clauses and Mandatory Provisions
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4. In case of public non-commercial use of the
GR: Non-conformance shall automatically render patent by the patentee, without satisfactory
the technology transfer arrangement reason;
unenforceable.
5. If the patented invention is not being
XPN: Unless said technology transfer arrangement worked in the Philippines on a commercial
is approved and registered with the Documentation, scale, although capable of being worked,
Information and Technology Transfer Bureau under without satisfactory reason: Provided, that
the provisions of Sec. 91 on exceptional cases. (Sec. the importation of the patented article shall
92, IPC) constitute working or using the patent; or
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)
2023 GOLDEN NOTES
NOTE: On certain grounds such as public interest, The right to grant a special compulsory license
anti-competitive conduct, and failure to meet under this section shall not limit or prejudice the
demand of patented drugs and medicines, there has rights, obligations and flexibilities provided under
to be a prior determination of the appropriate the TRIPS Agreement and under Philippine laws,
government agency, court or tribunal, or the particularly Secs. 72.1 and 74 of the IPC, as amended.
Secretary of Health, as the case may be. (Gepty, It is also without prejudice to the extent to which
2019) drugs and medicines produced under a compulsory
license can be exported as allowed in the TRIPS
Procedure on Issuance of a Special Compulsory Agreement and applicable laws. (Sec. 93-A, IPC)
License under the TRIPS Agreement
Requirement to Obtain Authorization from the
The Director General of the IPO, upon the written Patent Owner on Reasonable Commercial Terms
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recommendation of the Secretary of the and Conditions
Department of Health, shall, upon filing of a petition,
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grant a special compulsory license for the GR: The license will only be granted after the
importation of patented drugs and medicines. The petitioner has made efforts to obtain authorization
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special compulsory license for the importation from the patent owner on reasonable commercial
contemplated under this provision shall be an terms and conditions but such efforts have not been
additional special alternative procedure to ensure successful within a reasonable period of time. (Sec.
access to quality affordable medicines and shall be 95.1, IPC)
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primarily for domestic consumption: Provided, that
adequate remuneration shall be paid to the patent XPNs:
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owner either by the exporting or importing country. 1. Where the petition for compulsory license
The compulsory license shall also contain a seeks to remedy a practice determined
provision directing the grantee the license to after judicial or administrative process to
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exercise reasonable measures to prevent the re- be anti- competitive;
exportation of the products imported under this
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provision. 2. In situations of national emergency or
other circumstances of extreme urgency;
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The grant of a special compulsory license shall be
immediately executory. 3. In cases of public non-commercial use; and
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No court, except the Supreme Court of the 4. In cases where the demand for the patented
Philippines, shall issue any temporary restraining drugs and medicines in the Philippines is
order or preliminary injunction or such other not being met to an adequate extent and on
provisional remedies that will prevent the grant of reasonable terms, as determined by the
the special compulsory license. Secretary of the Department of Health. (Sec.
95.2, IPC)
A compulsory license shall also be available for the
manufacture and export of drugs and medicines to Compulsory License based on Interdependence
any country having insufficient or no manufacturing of Patents
capacity in the pharmaceutical sector to address
public health problems: Provided, That, a If the invention protected by a patent, hereafter
compulsory license has been granted by such referred to as the "second patent," within the
country or such country has, by notification or country cannot be worked without infringing
otherwise, allowed importation into its jurisdiction another patent, hereafter referred to as the "first
of the patented drugs and medicines from the patent," granted on a prior application or benefiting
Philippines in compliance with the TRIPS from an earlier priority, a compulsory license may
Agreement. be granted to the owner of the second patent to the
COMMERCIAL LAW
extent necessary for the working of his invention,
subject to the following conditions: 5. The license may be terminated upon
proper showing that circumstances which
1. The invention claimed in the second patent led to its grant have ceased to exist and are
involves an important technical advance of unlikely to recur: Provided, That adequate
considerable economic significance in protection shall be afforded to the
relation to the first patent; legitimate interest of the licensee; and
2. The owner of the first patent shall be 6. The patentee shall be paid adequate
entitled to a cross-license on reasonable remuneration taking into account the
terms to use the invention claimed in the economic value of the grant or
second patent; authorization, except that in cases where
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the license was granted to remedy a
3. The use authorized in respect of the first practice which was determined after
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patent shall be non-assignable except with judicial or administrative process, to be
the assignment of the second patent; and anti-competitive, the need to correct the
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anti-competitive practice may be taken into
4. The terms and conditions of Secs. 95, 96 and account in fixing the amount of
98 to 100 of IP Code. (Sec. 97, IPC) remuneration. (Sec. 100, IPC)
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Compulsory Licensing of Patents Involving Amendment of Compulsory License
Semi-Conductor Technology
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Upon the request of the patentee or the licensee, the
The license may only be granted in case of public Director of Legal Affairs may amend the decision
non-commercial use or to remedy a practice granting the compulsory license, upon proper
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determined after judicial or administrative process showing of new facts or circumstances justifying
to be anti-competitive. (Sec. 96, IPC) such amendment. (Sec. 101.1, IPC)
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Terms and Conditions of Compulsory License Cancellation of Compulsory License
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1. The scope and duration of such license shall Upon the request of the patentee, the Director may
be limited to the purpose for which it was cancel the compulsory license:
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authorized;
1. If the ground for the grant of the
2. The license shall be non-exclusive; compulsory license no longer exists and is
unlikely to recur;
3. The license shall be non-assignable, except
with that part of the enterprise or business 2. If the licensee has neither begun to supply
with which the invention is being exploited; the domestic market nor made serious
preparation therefor;
4. Use of the subject matter of the license shall
be devoted predominantly for the supply of 3. If the licensee has not complied with the
the Philippine market: Provided that this prescribed terms of the license. (Sec. 101.2,
limitation shall not apply where the grant IPC)
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.
2023 GOLDEN NOTES
Surrender of Compulsory License Assignment of Inventions
The licensee may surrender the license by a written An assignment may be of the entire right, title or
declaration submitted to the Intellectual Property interest in and to the patent and the invention
Office. covered thereby, or of an undivided share of the
entire patent and invention, in which event the
The Director shall cause the amendment, surrender, parties become joint owners thereof. An assignment
or cancellation in the Register, notify the patentee, may be limited to a specified territory. (Sec. 104,
and/or the licensee, and cause notice thereof to be IPC)
published in the IPO Gazette. (Sec. 101.3 and 101.4,
IPC) Form of Assignment
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Licensee’s Exemption from Liability The assignment must be in writing, acknowledged
before a notary public or other officer authorized to
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Any person who works a patented product, administer oath or perform notarial acts, and
substance and/or process under a license granted certified under the hand and official seal of the
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under this Chapter, shall be free from any liability notary or such other officer. (Sec. 105, IPC)
for infringement: Provided however, that in the case
of voluntary licensing, no collusion with the licensor Effect of an Assignment of a Patent
is proven. This is without prejudice to the right of
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the rightful owner of the patent to recover from the The assignment works as an estoppel by deed,
licensor whatever he may have received as royalties preventing the assignor from denying the novelty
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under the license. (Sec. 102, IPC) and utility of the patented invention when sued by
the assignee for infringement.
10. ASSIGNMENT AND TRANSMISSION OF
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RIGHTS Effect if the Assignment was not recorded in the
IPO
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Patents or applications for patents and invention to
which they relate, shall be protected in the same A deed of assignment affecting title shall be void as
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way as the rights of other property under the Civil against any subsequent purchaser or mortgagee for
Code. valuable consideration and without notice unless, it
is so recorded in the Office, within three (3) months
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Inventions and any right, title or interest in and to from the date of said instrument, or prior to the
patents and inventions covered thereby, may be subsequent purchase or mortgage. However, even
assigned or transmitted by inheritance or bequest without recording, the instruments are binding
or may be the subject of a license contract. (Sec. 103, upon the parties.
IPC)
Manner of Effecting Transfer of Rights
1. By inheritance or bequest; or
2. License contract
COMMERCIAL LAW
3. Guarantee Function - guarantee that the
B. TRADEMARKS product to which it is affixed comes up to a
certain standard of quality;
4. Advertisement Function – the more widely

1. MARKS vs. COLLECTIVE MARKS advertised the product is, the more readily may
vs. TRADE NAMES courts concede that it has become distinctive of
its proprietor’s goods. (Amador, 2017)
Mark
Marks which may be Registered
Any visible sign capable of distinguishing the goods
(trademark) or services (service mark) of an Any word, name, symbol, emblem, device, figure,
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enterprise and shall include a stamped or marked sign, phrase, or any combination thereof except
container of goods. (Sec. 121.1, IPC) those enumerated under Sec. 123 of the IPC.
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Trademark Obligations under the Paris Convention
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It is any distinctive word, name, symbol, emblem, In view of the obligations under the Paris
sign or device or any combination thereof, adopted Convention, the Philippines is obligated to assure
and used by a manufacturer or merchant on his nationals of the signatory-countries that they are
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goods to identify and distinguish them from those afforded an effective protection against violation of
manufactured, sold or dealt by others. (Dermaline, their intellectual property rights in the Philippines
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Inc. v. Myra Pharmaceuticals, Inc., G.R. No. 190065, 26 in the same way that their own countries are
Aug. 2010) obligated to accord similar protection to Philippine
nationals. Thus, under Philippine law, a trade name
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Purpose of Trademark of a national of a State that is a party to the Paris
Convention, whether or not the trade name forms
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1. To indicate origin or ownership of the part of a trademark, is protected without the
articles to which they are attached; obligation of filing or registration. Thus, the
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2. To guarantee that those articles come up to applicant for registration of trademark is not the
a certain standard of quality; and lawful owner thereof and is not entitled to
registration if the trademark has been in prior use
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3. To advertise the articles they symbolized.
(Mirpuri v. CA, G.R. No. 114508, 19 Nov. by a national of a country which is a signatory to the
1999) Paris Convention. (Divina, 2021; Ecole De Cuisine
Manille, Inc. v. Renaud Cointreau & Cie and Le
Functions of Trademark Condron Bleu Int’l B.V., G.R. No. 185830, 05 June
2013)
1. Economic Function - serve as essential means
of distinguishing the products of one In order to register a trademark, one must be the
manufacturer or dealers from those of others; owner thereof and must have actually used the
mark in commerce in the Philippines for 2 months
2. Source-Indicating Function - indicate the prior to the application for registration. (Sec. 2, R.A.
source or origin of the goods on which it is used. No. 166) Under the same law, it is clear that actual
Its immediate object is to distinguish the goods use in commerce is also the test of ownership, but
of one manufacturer from those of his the provision went further by saying that the mark
competitors through the association of goods must not have been so appropriated by another.
thus marked with a particular producer; Thus, one may be an owner of a mark due to its
actual use but may not yet have the right to register
such ownership here due to the owner’s failure to
2023 GOLDEN NOTES
use the same in the Philippines for 2 months prior 3. He uses or permits its use in a manner
to registration. liable to deceive trade circles or the public
as to the origin or any other common
In any case, the present law on trademarks, R.A. No. characteristics of the goods or services
8293, otherwise known as the Intellectual Property concerned. (Sec. 167.3, IPC)
Code of the Philippines, as amended, has already
dispensed with the requirement of prior actual use The registration of a collective mark, or an
at the time of registration. Thus, there is more application therefore shall not be the subject of a
reason to allow the registration of the subject mark license contract.
under the name of Cointreau as its true and lawful
owner. (Ibid.) Transliteration vs. Translation of Mark
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Collective Mark TRANSLATION OF
TRANSLITERATION
MARK
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Any visible sign designated as such in the Definition
application for registration and capable of
An act, process, or
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distinguishing the origin or any other common
instances of
characteristic, including the quality of goods or An act, process, or
representing or
services of different enterprises which use the sign instance of translating
spelling of words,
under the control of the registered owner of the as rendering from one
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letters, or characters of
collective mark. (Sec. 121.2, IPC) language or
one language in the
representational
letters and characters
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A "collective mark" or “collective trade-name" is a system into another.
of another language or
mark or tradename used by the members of a
alphabet.
cooperative, an association or other collective group
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or organization. (Sec. 40, RA. No. 166)
Trade Name
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Contents of an Application for Registration of a
Collective Mark Name or designation identifying or distinguishing
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an enterprise. (Sec. 121.3, IPC)
1. The application shall designate the mark as
a collective mark; and
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Any individual name or surname, firm name, device
2. Accompanied by a copy of the agreement, if or word used by manufacturers, industrialists,
any, governing the use of the collective merchants, and others to identify their businesses,
mark. (Sec. 167.2, IPC) vocations, or occupants. (Converse Rubber Corp. v.
Universal Rubber Products Inc., G.R. No. L-27906, 08
Grounds for the Cancellation of Collective Marks Jan. 1987)
The Court shall cancel the registration of a collective A trade name need not be registered with the IPO
mark if the person requesting the cancellation before an infringement suit may be filed by its
proves that: owner against the owner of an infringing
trademark. All that is required is that the trade
1. Only the registered owner uses the mark; name is previously used in trade or commerce in the
Philippines. (Coffee Partners Inc. v. San Francisco
2. He uses or permits its use in contravention Coffee and Roastery, Inc., G.R. No. 169504, 03 Mar.
of the agreements referred to in Subsection 2010)
166.2; and
COMMERCIAL LAW
Limitations on Use of Trade Name or Business 2. ACQUISITION OF OWNERHSIP OF MARK
Name
The right to register a trademark should be based

A person may NOT:
on ownership. When the applicant is not the owner
of the trademark being applied for, he has no right
1. Use a name if the word is generic; (Lyceum
to apply for the registration of the same. Under the
of the Philippines v. CA, G.R. No. 101897, 05
Trademark Law, only the owner of the trademark,
Mar. 1993)
trade name or service mark used to distinguish his
goods, business or service from the goods, business
2. Use any name indicating geographical
or service of others is entitled to register the same.
locations; (Ang Si Heng v. Wellington
An exclusive distributor does not acquire any
Department Store, Inc., G.R. No. L-4531, 10
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proprietary interest in the principal's trademark
Jan. 1953)
and cannot register it in his own name unless it has
been validly assigned to him. (Superior Commercial
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3. Use any name or designation contrary to
Enterprises, Inc. v. Kunnan Enterprises, G.R. No.
public order or morals;
169974, 20 Apr. 2010)
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4. Use a name if it is liable to deceive trade
Trademark is acquired solely through registration.
circles or the public as to the nature of the
For marks that are first used and/or registered after
enterprise identified by that name; (Sec.
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the effectivity of the IP Code, ownership is no longer
165.1, IPC)
dependent on the fact of prior use in light of the
adoption of the first-to-file rule and the rule that
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5. Subsequent use of the trade name by a third
ownership is acquired through registration. (Zuneca
party, whether as a trade name or a mark
Pharmaceutical v. Natrapharm, Inc., G.R. No. 211850,
or collective mark, or any such use of a
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08 Sept. 2020)
similar trade name or mark, likely to
mislead the public, shall be deemed
Rights Over a Trademark Conferred by
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unlawful; (Sec. 165.2(b), IPC)
Registration
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6. Copy or simulate the name of any domestic
The rights in a mark shall be acquired through
product (for imported products);
registration made validly in accordance with the
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provisions of the IP Code. (Sec. 122, IPC) The filing
7. Copy or simulate a mark registered in
date of application is the operative act to acquire
accordance with the provisions of IPC (for
trademark rights.
imported products); and
Q: KPII filed a trademark application for kolin

8. Use mark or trade name calculated to
mark under class 9 covering “Television sets
induce the public to believe that the article
and DVD players.” KECI opposed KPII’s
is manufactured in the Philippines, or that
trademark application based on the fact that it
it is manufactured in any foreign country or
is the registered owner of the KOLIN mark and
locality other than the country or locality
the registration of KPII’s kolin mark will cause
where it is in fact manufactured.
confusion among consumers. KPII asserted that
KECI’s ownership over the mark is limited only
NOTE: Change in the ownership of a trade name is
in connection with the goods specified in KECI’s
made with the transfer of the enterprise or part
certificate of registration and those related
thereof identified by that name. (Sec. 165.4, IPC)
thereto. KPII insisted that the “Television sets
and DVD players” are not related to the goods
2023 GOLDEN NOTES
covered by KECI’s registered mark. Should KECI, having been issued Certificate of Registration,
KPII’s trademark application be granted? is the registered owner of the "KOLIN" mark under
Class 35, specifically for "the business of
A: NO. KECI was already declared owner of the manufacturing, importing, assembling, or selling
KOLIN mark under the Trademark Law. Section 236 electronic equipment or apparatus." This certificate
of the Intellectual Property Code states that nothing of registration vests KECI the exclusive right to use
in the IP Code – which includes registrations made the "KOLIN" mark in relation to the services covered
pursuant thereto – shall adversely affect the rights by the registration. Unless and until the said
of the enforcement of marks acquired in good faith registration of KECI is nullified or cancelled through
prior to the effective date of said law. Furthermore, the proper proceeding, the rights emanating from
Section 122 of the same code provides that the the said registration should be respected.
rights in a mark shall be acquired through
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registration made validly in accordance with the Having been granted the right to exclusively use the
provisions of the IP Code. "KOLIN" mark for the business of manufacturing,
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importing, assembling, or selling electronic
By granting KPII’s trademark application, KPII equipment or apparatus, KECI's application for
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would acquire exclusive rights over the stylized registration of its domain name containing the
version of KOLIN (“kolin”) for a range of "KOLIN" mark for the same goods and services
good/services falling within the normal potential as its Class 35 registration for "KOLIN" is merely
expansion of its business. This will effectively an exercise of its right under its Class 35
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amount to a curtailment of KECI’s right to freely use registration. The use of a registered mark
and enforce the KOLIN word mark, or any stylized representing the owners’ goods or services by
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version thereof, for its own range of goods/services, means of an interactive website may constitute
especially against KPII, regardless of the existence proof of actual use that is sufficient to maintain the
of actual confusion. Based on Section 122 vis-à-vis registration of the same. The mark displayed over
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Section 236 of the Intellectual Property Code, KPII’s the website no less serves its functions of indicating
trademark application for kolin cannot be given the goods or services' origin and symbolizing the
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due course. (Kolin Electronics Co, Inc. v. Kolin owner's goodwill than a mark displayed in the
Philippines International, Inc, G.R. No. 228165, 9 Feb. physical market. Therefore, there is no less
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2021) premium to recognize actual use of marks through
websites than their actual use through traditional
Q: Does KECI have the right to register and use means. (Kolin Electronics v. Taiwan Kolin, supra, J.
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the mark “www.kolin.ph” consistent with its Hernando)
exclusive right to use the “KOLIN” mark in
relation to the goods /services covered by Class Prior Use of Mark as a Requirement
35.
Actual prior use in commerce in the Philippines has
A: YES. KECI has the right to register and use the been abolished as a condition for the registration of
mark “www.kolin.ph”. trademark.
Moreover, it is settled that a certificate of Q: S Development Corporation sued Shangrila

registration of a mark is prima facie evidence of the Corporation for using the “S” logo and the trade
validity of the registration, the registrant's name “Shangrila.” The former claims that it was
ownership of the mark, and of the registrant's the first to register the logo and the trade name
exclusive right to use the same in connection with in the Philippines and that it had been using the
the goods or services and those that are related same in its restaurant business.
thereto specified in the certificate.
COMMERCIAL LAW
Shangrila Corporation counters that it is an Q: Natrapharm Corp. is selling citicoline under
affiliate of an international organization which the trademark ZYNAPSE that is used for treating
has been using such logo and trade name stroke and registered it with the IPO. In 2007, It
“Shangrila” for over 20 years. filed a complaint against Zuneca for injunction
and trademark infringement. Zuneca is selling a
However, Shangrila Corporation registered the drug called carbamezipine under the brand
trade name and logo in the Philippines only name ZYNAPS that is used to control seizure
after the suit was filed. disorders. Natrapharm claimed that the term
ZYNAPSE was registered in IPO upon
a. Which of the two corporations has a better researching that there is no product using the
right to use the logo and the trade name? same. On the other hand, Zuneca alleged that it
Explain. has been using the term ZYNAPS since 2004 and
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already secured a certificate of product listing
A: S Corporation. Rights in a trademark are from BFAD. Also, it claimed that it was
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acquired through valid registration. (Sec. 122, IPC) impossible for Natrapharm not to have known
S Development Corporation has a better right to use the existence of ZYNAPS before registration of
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the logo and the tradename, since the protective ZYNAPSE since Natrapharm promoted its
benefits of the law are conferred by the fact of products in the same publication where ZYNAPS
registration and not by use. Although Shangrila was advertised. RTC ruled in favor of
Corporation's parent had used the tradename and Natrapharm stating that it is the first filer in
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logo long before, the protection of the laws will be good faith thus, it may prevent others. Is the
for S Development Corporation because it was the court correct?
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first entity to register the intellectual properties.
(UPLC Commercial Law Suggested Answers) A: YES. Under the IP Code, ownership of a mark is
acquired through registration. Subparagraph (d) of
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b. How does the international affiliation of the provision of the Trademark Law was amended
Shangrila Corporation affect the outcome of in the IP Code to, among others, remove the phrase
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the dispute? Explain. (2005 BAR) ''previously used in the Philippines by another and
not abandoned." Under the Trademark Law, as
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A: Shangrila’s international affiliation shall amended, the first user of the mark had the right to
result in a decision favorable to it. The Paris file a cancellation case against an identical or
Convention mandates that protection should be confusingly mark registered in good faith by
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afforded to internationally known marks as another person. However, with the omission in
signatory to the Paris Convention, without regard as the IP Code provision of the phrase "previously
to whether the foreign corporation is registered, used in the Philippines by another and not
licensed, or doing business in the Philippines. abandoned," said right of the first user is no
Shangrila’s separate personalities from their longer available. In effect, based on the language of
mother corporation cannot be an obstacle in the the provisions of the IP Code, even if the mark was
enforcement of their rights as part of the Kuok previously used and not abandoned by another
Group of Companies and as official repository, person, a good faith applicant may still register the
manager and operator of the subject mark and logo. same and thus become the owner thereof, and the
Besides, R.A. No. 166 did not require the party prior user cannot ask for the cancellation of the
seeking relief to be the owner of the mark but "any latter's registration. If the lawmakers had wanted to
person who believes that he is or will be damaged retain the regime of acquiring ownership through
by the registration of a mark or trade name". use, this phrase should have been retained in order
(Shangri-la International Hotel Management, LTD., to avoid conflicts in ownership. The removal of such
et.al v. Developers Group of Companies, Inc. G.R. No. a right unequivocally shows the intent of the
159938, 31 March 2006) lawmakers to abandon the regime of ownership
under the Trademark Law, as amended. (Zuneca
2023 GOLDEN NOTES
Pharmaceutical v. Natrapharm Inc, G.R. No. 211850, The use of a registered mark representing the
08 Sept. 2020) owner's goods or services by means of an
interactive website may constitute proof of actual
Rights Conferred to the Owner of a Registered use that is sufficient to maintain the registration of
Mark the same (W Land Holdings, Inc., v. Starwood Hotels
and Resorts Worldwide, Inc., G.R. No. 222366, 04 Dec.
The owner of a registered mark shall have the 2017)
exclusive right to:
It must be emphasized, however, that the mere
1. Use the mark for one’s own goods or exhibition of goods or services over the internet,
services; and without more, is not enough to constitute actual use.
To reiterate, the "use" contemplated by law is
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2. Prevent third parties from using, without genuine use – that is, a bona fide kind of use tending
his consent, signs or containers which are towards a commercial transaction in the ordinary
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identical or similar to the registered course of trade. Since the internet creates a
trademark where such use would result in borderless marketplace, it must be shown that the
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a likelihood of confusion. owner has actually transacted, or at the very least,
intentionally targeted customers of a particular
In case of the use of an identical sign for identical jurisdiction in order to be considered as having used
goods or services, a likelihood of confusion shall be the trademark in the ordinary course of his trade in
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presumed. (Secs. 147 and 147.1, IPC) that country. A showing of an actual commercial link
to the country is therefore imperative. (W Land
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Trademark owner enjoys protection in product and Holdings, Inc., v. Starwood Hotels and Resorts
market areas that are the normal potential Worldwide, Inc., supra.)
expansion of his business. (Dermaline Inc.. v. Myra
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Pharmaceuticals, Inc., GR No. 190065, 16 Aug. 2010) Evidence of Actual Use
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Doctrine of Secondary Meaning The following shall be accepted as proof of actual
use of the mark:
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Secondary meaning means that a word or phrase 1. downloaded pages from the website clearly
originally incapable of exclusive appropriation with showing that the goods are being sold or the
reference to an article in the market (because it is services are being rendered or made available
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geographically or otherwise descriptive) might in the Philippines;
nevertheless have been used for so long and so
exclusively by one producer with reference to his 2. photographs (including digital photographs
article that, in the trade and to that branch of the printed on ordinary paper) of the following:
purchasing public, the word or phrase has come to a. labels or packaging bearing the mark
mean that the article was his property. (Pearl & as actually used on the goods;
Dean, Inc. v. Shoemart, Inc., G.R. No. 148222, 15 Aug. b. the stamped or marked container of
2003) goods; or
c. signages bearing the mark on the
Concept of Actual Use facade or any area in the
establishment/s where the mark is
The actual use of the mark representing the goods displayed.
or services introduced and transacted in commerce
over a period of time creates that goodwill which 3. brochures or advertising materials showing
the law seeks to protect. the actual use of the mark on the goods being
sold or services being rendered in the
Philippines;
COMMERCIAL LAW
4. receipts or invoices of sale of the goods or 2. A use which does not alter its distinctive
services rendered or other similar evidence of character though the use is different from
use, showing that the goods are placed on the the form in which it is registered; (Sec.
market or the services are available in the 152.2, IPC)
Philippines;
3. Use of mark in connection with one or more
5. copies of contracts for services showing the of the goods/services belonging to the class
use of the mark; or in which the mark is registered shall
prevent its cancellation or removal in
6. such other evidence of similar nature that the respect of all other goods or services of the
Director may determine as acceptable. (Sec. same class.; (Sec. 152.3, IPC)
210, IPOPHL MC NO. 2023-001)
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4. Use of a mark by a company related to the
Admission of non-compliance with the requirement applicant/registrant; (Sec. 152.4, IPC)
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of filing a Declaration of Actual Use is tantamount to
a judicial admission of abandonment of trademark. 5. Use of a mark by a person controlled by the
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(Mattel, Inc. v. Francisco, G.R. No. 166886, 30 July registrant. (Sec. 152.4, IPC)
2008)
Duration or Effectivity of Trademark
NOTE: Failure to file a Declaration of Actual Use Registration
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(DAU) within the required period results in the
automatic cancellation of registration of a The trademark registration remains in force for 10
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trademark. In turn, such failure is tantamount to the years, subject to indefinite renewals of 10 years
abandonment or withdrawal of any right or interest each.
the registrant has over his trademark. (Birkenstock
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Orthopaedie GMBH and Co. KG v. Philippine Shoe The registrant is required to file a declaration of
Expo Marketing Corporation, G.R. No. 194307, 20 actual use and evidence to that effect, or show valid
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Nov. 2013) reasons based on the existence of obstacles to such
use, within one (1) year from the fifth anniversary
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Periods to File Declaration of Actual Use of the date of the registration of the mark.
Otherwise, the mark shall be removed from the
1. Three (3) years from the filing date of the Register by the IPO. (Secs. 145 and 146, IPC)
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application;
2. One (1) year from the 5th anniversary of the Application for Registration of a Mark by a
date of registration of the mark; Foreign National
3. Within one year from date of renewal; and
4. Within one year from the 5th anniversary of An application for registration of a mark filed in the
each renewal. (Sec. 204, IPOPHL MC NO. 2023- Philippines by a foreign national of a country with
001) whom the Philippines extends reciprocity rights,
and who previously duly filed an application for
Instances when Non-Use of a Mark is Excused registration of the same mark in one of those
countries, shall be considered as filed as of the day
1. If caused by circumstances arising the application was first filed in the foreign country.
independently of the will of the owner; (Sec. (Sec. 131.1, IPC)
152.1, IPC)
However, the owner of a well-known mark in the
NOTE: Lack of funds shall not excuse non- Philippines that is identical with, or confusingly
use of a mark. (Sec. 152.1, IPC) similar to, or constitutes a translation of a mark,
although not registered, may oppose the application
2023 GOLDEN NOTES
of a mark of foreign origin, or petition the Zuneca Pharmaceutical v. Natrapharm, Inc., G.R. No.
cancellation of its registration or sue for unfair 211850, 08 Sept. 2020)
competition. (Sec. 131.3, IPC)
Q: E.Y. Industrial is a domestic corporation
Q: Birkenstock, applied for various trademark engaged in the production, distribution and sale
registrations before the IPO. However, of air compressors and other industrial tools
registration proceedings of the subject and equipment. Shen Dar is a Taiwan-based
applications were suspended in view of an foreign corporation engaged in the manufacture
existing registration of the mark "BIRKENSTOCK of air compressors. Both companies claimed to
AND DEVICE" in the name of STIIC, predecessor- have the right to register the trademark
in-interest of PSEMC. Birkenstock filed a "VESPA" for air compressors.
cancellation case on the ground that it is the
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lawful and rightful owner of the Birkenstock On 09 June 1997, Shen Dar filed Trademark
marks. However, STIIC/PSEMC’s registration Application with the IPO for the mark "VESPA,
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expired, thereby resulting in the cancellation of Chinese Characters and Device" for use on air
such mark. Accordingly, the cancellation case compressors and welding machines. On 28 July
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was dismissed for being moot and academic. 1999, EYIS filed Trademark Application also for
the mark "VESPA," for use on air compressors.
The aforesaid cancellation paved the way for the
publication of the subject applications in the IPO On 21 June 2004, Shen Dar filed a Petition for
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e-Gazette. In response, STIIC/PSEMC filed three Cancellation of EYIS’ COR. Shen Dar primarily
(3) separate Inter Partes Cases. The BLA-IPO argued that the issuance of the COR in favor of
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sustained STIIC/PSEMC’s opposition. IPO EYIS violated Sec. 123.1(d), (e), and (f) of R.A. No.
Director General reversed and set aside the 8293, otherwise known as the Intellectual
ruling of the BLA. The CA reversed and set aside Property Code (IP Code), having first filed an
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the ruling of the IPO Director General and application for the mark.
reinstated that of the BLA.
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Who is the true owner of the mark?
Should registration of the subject marks be
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allowed in favor of Birkenstock? A: E.Y. Industrial is the true owner of the mark.
Under the Intellectual Property Code, the
A: YES. It is not the application or registration of a registration of a mark is prevented with the filing of
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trademark that vests ownership thereof, but it is the an earlier application for registration. This must
ownership of a trademark that confers the right to not, however, be interpreted to mean that
register the same. A trademark is an industrial ownership should be based upon an earlier filing
property over which its owner is entitled to date. Notably, the Court has ruled that the prior and
property rights which cannot be appropriated by continuous use of a mark may even overcome the
unscrupulous entities that, in one way or another, presumptive ownership of the registrant and be
happen to register such trademark ahead of its true held as the owner of the mark. Registration, without
and lawful owner. The presumption of ownership more, does not confer upon the registrant an
accorded to a registrant must then necessarily yield absolute right to the registered mark. The certificate
to superior evidence of actual and real ownership of of registration is merely a prima facie proof that the
a trademark. (Divina, 2014; Birkenstock Orthopaedie registrant is the owner of the registered mark or
GMBH and Co. KG v. Philippine Shoe Expo Marketing trade name. Evidence of prior and continuous use of
Corporation, G.R. No. 194307, 20 Nov. 2013) the mark or trade name by another can overcome
the presumptive ownership of the registrant and
NOTE: The rights in a mark shall be acquired may very well entitle the former to be declared
through registration made validly in accordance owner in an appropriate case.
with the provisions of the IP Code. (Sec. 122, IPC;
COMMERCIAL LAW
E.Y. Industrial’s prior adoption and continuous use Ownership of a trade name may be acquired not
of the mark "VESPA" on air compressors is necessarily by registration but by adoption and use
bolstered by numerous documentary evidence. The in trade or commerce. As between actual use of a
use by E.Y. Industrial in the concept of owner is mark without registration, and registration of the
shown by commercial documents, sales invoices mark without actual use thereof, the former prevails
unambiguously describing the goods as "VESPA" air over the latter. For a rule widely accepted and firmly
compressors. E.Y. Industrial have sold the air entrenched is that actual use in commerce or
compressors bearing the "VESPA" to various business is a prerequisite to the acquisition of the
locations in the Philippines, as far as Mindanao and right of ownership. (Shangri-La International Hotel
the Visayas since the early 1990s. Management, Ltd. v. Developers Group of Companies,
Inc., G.R. No. 159938, 31 Mar. 2006)
As such, E.Y. Industrial must be considered as the
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prior and continuous user of the mark "VESPA" and The two concepts of corporate name or business
its true owner and is entitled to the registration of name and trademark or service mark are not
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the mark in its name. (E.Y. Industrial Sales v. Shen mutually exclusive. It is common, indeed likely, that
Dar Electricity and Machinery Co., Ltd., G.R. No. the name of a corporation or business is also a trade
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184850, 20 Oct. 2010) name, trademark, or service mark. (Shangri-La
International Hotel Management, Ltd. v. Developers
Who May File Opposition to Trademark Group of Companies, Inc., supra)
Registration; Grounds
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A trade name of a national of a State that is a party
Any person who believes that he would be damaged to the Paris Convention, whether or not the trade
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by the registration of a mark may, upon payment of name forms part of a trademark, is protected
the required fee and within thirty (30) days after the “without the obligation of prior filing or
publication referred to in Subsection 133.2, file with registration.” (Fredco Manufacturing Corporation v.
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the Office an opposition to the application. (Sec. 134, President and Fellows of Harvard College (Harvard
IPC) University), G.R. No. 185917, 01 June 2011; Art. 8,
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Paris Convention for the Protection of Industrial
3. ACQUISITION OF OWNERSHIP OF TRADE Property)
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NAME
A trade name need not be registered with the IPO
before an infringement suit may be filed by its
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Acquisition of Trade Names
owner against the owner of an infringing
A name or designation may not be used as a trade trademark. All that is required is that the trade
name if by its nature or the use to which such name name is previously used in trade or commerce in the
or designation may be put, it is contrary to public Philippines. A corporation has the exclusive right to
order or morals and if, in particular, it is liable to use its name. The right proceeds from the theory
deceive trade circles or the public as to the nature of that it is a fraud on the corporation which has
the enterprise identified by that name. (Sec. 165.1, acquired a right to that name and perhaps carried
IPC) on its business thereunder, that another should
attempt to use the same name, or the same name
In particular, any subsequent use of the trade name with a slight variation in such a way as to induce
by a third party, whether as a trade name or a mark persons to deal with it in the belief that they are
or collective mark, or any such use of a similar trade dealing with the corporation which has given a
name or mark, likely to mislead the public, shall be reputation to the name. (Coffee Partners, Inc. v. San
deemed unlawful. (Sec. 165.2(b), IPC) Francisco Coffee & Roastery, Inc., G.R. No. 169504, 03
Mar. 2010)
2023 GOLDEN NOTES
Effect of Registration 5. Is identical with an internationally well-known
mark, Whether or not it is registered here, used
The rights in a mark shall be acquired through for identical or similar goods or services
registration made validly in accordance with the Provided, that in determining whether a mark
provisions of the IPC. (Sec. 122, IPC) is well-known, account shall be taken of;
Certificate of Registration 6. Is identical with an internationally well-known

mark which is Registered in the Philippines
A certificate of registration of a mark shall be prima with respect to non-similar goods or services.
facie evidence of the validity of the registration, the Provided, that the interests of the owner of the
registrant's ownership of the mark, and of the registered mark are likely to be damaged by
registrant's exclusive right to use the same in such use;
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connection with the goods or services and those
that are related thereto specified in the certificate. 7. Is likely to Mislead the public as to the nature,
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(Sec. 138, IPC) quality, characteristics or geographical origin
of the goods or services;
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4. NON-REGISTRABLE MARKS
8. Consists exclusively of signs that are Generic
for the goods or services that they seek to
Non-Registrable Marks (Im-F-L-E-W-Re-Mi-G-
identify;
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Cu-De-S-Co-Con)
9. Consists exclusively of signs or of indications

1. Consists of Immoral, deceptive, or scandalous
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that have become Customary or usual to
matter or falsely suggest a connection with
designate the goods or services in everyday
persons, institutions, beliefs, or national
language or in bona fide and established trade
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symbols;
practice.
2. Consists of the Flag or coat of arms or other
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10. Consists exclusively of signs or indications that
insignia of the Philippines or any of its political
may serve in trade to Designate the kind,
subdivisions, or of any foreign nation;
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quality, quantity, intended purpose, value,
geographical origin, time or production of the
3. Consists of a name, portrait or signature
goods or rendering of the services, or other
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identifying a particular Living individual
characteristics of the goods or services;
except by his written consent, or the name,
signature, or portrait of a deceased President
11. Consists of Shapes that may be necessitated by
of the Philippines, during the life of his widow
technical factors or by the nature of the goods
except by written consent of the widow;
themselves or factors that affect their intrinsic
value;
4. Identical with a registered mark belonging to a
different proprietor or a mark with an Earlier
12. Consists of Color alone, unless defined by a
filing or priority date, in respect of:
given form; or
a. The same goods or services;

13. Is Contrary to public order or morality (Sec.
b. Closely related goods or services; or
123, IPC)
c. If it nearly resembles such a mark as to
be likely to deceive or cause confusion;
COMMERCIAL LAW
Q: Laberge, Inc., manufactures and markets A: YES. Petitioner’s argument that “San Francisco”
after-shave lotion, shaving cream, and is just a proper name referring to the famous city in
deodorants using the trademark “PRUT”, which California and that “coffee” is simply a generic term,
is registered with the Intellectual Property is untenable. Respondent has acquired an exclusive
Office. Laberge does not manufacture briefs and right to the use of the trade name “SAN FRANCISCO
underwear and these items are not specified in COFFEE & ROASTERY, INC.” since the registration of
the certificate of registration. JG who the business name with the DTI in 1995. Thus,
manufactures briefs and underwear, wants to respondent’s use of its trade name from then on
know whether, under our laws, he can use and must be free from any infringement by similarity. Of
register the trademark “PRUTE” for his course, this does not mean that respondent has
merchandise. Can JG register the trademark? exclusive use of the geographic word “San
Francisco” or the generic word “coffee.” Geographic
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A: YES. The trademark registered in the name of or generic words are not, per se, subject to exclusive
Laberge, Inc. covers only after-shave lotion, shaving appropriation. It is only the combination of the
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cream, deodorant, talcum powder and toilet soap. It words “SAN FRANCISCO COFFEE,” which is
does not cover briefs and underwear. The limit of respondent’s trade name in its coffee business, that
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the trademark is stated in the certificate issued to is protected against infringement on matters
Laberge Inc. It does not include briefs and related to the coffee business to avoid confusing or
underwear which are different products protected deceiving the public. (Divina, 2014; Coffee Partners,
by Laberge’s trademark. JG can register the Inc. v. San Francisco Coffee and Roastery, Inc., G.R. No.
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trademark “PRUTE” to cover its briefs and 169504, 03 Mar. 2010)
underwear. (Faberge Inc. v. IAC, G.R. No. 71189, 04
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Nov. 1992) Q: Is there an infringement of trademark when
two similar goods use the same words, ‘PALE
Q: CPI was registered with the SEC in January PILSEN’?
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2001. It has a franchise agreement with Coffee
Partners Ltd. (CPL) for a non-exclusive right to A: NONE, because “pale pilsen” are generic words
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operate coffee shops in the Philippines using descriptive of the color (pale) and of a type of beer
trademarks designed by CPL such as SAN (pilsen), which is a light bohemian beer with strong
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FRANCISCO COFFEE. hops flavor that originated in the City of Pilsen in
Czechoslovakia. Pilsen is a primarily geographically
SFCRI was registered with the SEC in May 1995. descriptive word, hence, non-registrable and not
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It registered the business name SAN FRANCISCO appropriable by any beer manufacturer. (Asia
COFFEE & ROASTERY, INC. with the DTI in June Brewery, Inc. v. CA, G.R. No. 103543, 05 July 1993)
1995.
5. TEST TO DETERMINE CONFUSING
In June 2001, SFCRI discovered that CPI was SIMILARITY BETWEEN MARKS
about to open a coffee shop under the name SAN
FRANCISCO COFFEE in Libis, Quezon City. SFCRI Similarity between Marks
sent a letter to CPI demanding that the latter
stop using the name SAN FRANCISCO COFFEE. The likelihood of confusion is a relative concept; to
Does CPI ‘s use of the trademark SAN FRANCISCO be determined only according to the particular and
COFFEE constitutes infringement of SFCRI ‘s sometimes peculiar circumstances of each case. In
trade name SAN FRANCISCO COFFEE & trademark cases, even more than in any other
ROASTERY, INC., even if the trade name is not litigation, precedent must be studied in light of the
registered with the Intellectual Property Office facts of the particular case. The wisdom of the
(IPO)? likelihood of confusion test lies in its recognition
that each trademark infringement case presents its
own unique set of facts. (Societe Des Produits Nestle,
2023 GOLDEN NOTES
S.A. and Nestle Philippines, Inc. v. CA and CFC cannot apply to KPII case because it was not a
Corporation, G.R. No. 112012, 04 Apr. 2001) party to the said case and the ownership case is
not res judicata to the KPII case. The IPO – BLA
Two (2) Types of Confusion rejected KPII claim because it will cause
confusion to the products offered by KECI and
1. Confusion of goods (product confusion) – KPII. Whether or not Kolin Philippines
where the ordinarily prudent purchaser would International Inc., should be allowed to register
be induced to purchase one product in the its mark?
belief that he was purchasing the other; and
A: NO. To summarize the above discussion: (1)
2. Confusion of business (source or origin there is resemblance between KECI's and KPII's
confusion) – where, although the goods of the marks; (2) the goods covered by KECI's are related
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parties are different, the product, the mark of to the goods covered by KPII's ; (3) there is
which registration is applied for by one party, evidence of actual confusion between the two
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is such as might reasonably be assumed to marks; (4) the goods covered by KPII's fall within
originate with the registrant of an earlier the normal potential expansion of business of KECI;
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product, and the public would then be (5) sophistication of buyers is not enough to
deceived either into that belief or into the eliminate confusion; (6) KPII's adoption of KECI's
belief that there is some connection between coined and fanciful mark would greatly contribute
the two parties, though inexistent. (Mang to likelihood of confusion; and (7) KPII applied for
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Inasal Philippines, Inc. v. IFP Manufacturing in bad faith. Thus, KPII's application for should be
Corporation, G.R. No. 221717, 19 June 2017) denied because it would cause likelihood of
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confusion and KECI's rights would be damaged.
a) DOMINANCY TEST
Further, KECI was already declared as the owner of
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Definition the mark under Trademark Law. The existence of
likelihood of confusion is already considered as
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The test of dominancy focuses on the similarity of damage that would be sufficient to sustain the
the prevalent features of the competing opposition and rejection of KPII's trademark
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trademarks which might cause confusion or application. The Court is likewise cognizant that,
deception. (Divina, 2021) by granting this registration, KPII would acquire
exclusive rights over the stylized version of KOLIN
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If the competing trademark contains the main or for a range of goods/services, 172 i.e., covered
essential or dominant features of another, and goods, related goods/services, goods/services
confusion and deception is likely to result, falling within the normal potential expansion of
infringement takes place. (UFC Philippines, Inc. v. KPII's business. Owing to the peculiar
Fiesta Barrio Manufacturing Corp., G.R. No. 198889, circumstances of this case, this will effectively
20 Jan. 2016) amount to a curtailment of KECI's right to freely
use and enforce the KOLIN word mark, or any
Q: Kolin Philippine International (KPII), an stylized version thereof, for its own range of
affiliate of TKC, filed Trademark Application goods/services, especially against KPII, regardless
No. 4-2006-010021 for the mark under Class 9 of the existence of actual confusion. (Kolin
covering “television and DVD players. Kolin Electronics v. Kolin Philippines, G.R. No. 228165, 09
Electronics Co., Inc (KECI) filed an opposition Feb. 2021)
against KPII’s trademark Application for the
reason that it is the registered owner of the NOTE: The use of the Holistic Test in determining
mark and that the registration of KPII will the resemblance of marks has been abandoned.
cause confusion among customers. KPII argued (Ibid.)
that the promulgation of KECI ownership
COMMERCIAL LAW
Holistic Test, Abandoned before the letter "S" at the end, with only the
second and fourth letters re-arranged. Simply put,
Q: Petitioner Levi Strauss & Co. is a foreign respondents' “LIVE’S” mark is but a mere anagram
corporation and owner of the word mark of petitioner's "LEVI'S" marks. It would not be
"LEVI'S". It filed before the IPO a petition for farfetched to imagine that a buyer, when
cancellation of the trademark “LIVE’S” on the confronted with such striking similarity would be
ground that it is confusingly similar with led to confuse one over the other. Thus, by simply
petitioner's "LEVI'S" mark. Both marks cover applying the Dominancy Test, it can already be
the same goods under Class 25 of the Nice concluded that there is a likelihood of confusion
Classification. Respondent Guevarra alleged between petitioner's "LEVI'S" marks and
that its mark is not confusingly similar with respondents' “LIVE’S” mark. (Levi Strauss & Co. v.
petitioner's "LEVI'S" mark, claiming that the Sevilla, G.R. No. 219744, 01 Mar. 2021)
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probability of confusion arising from the
alleged similarity of the marks is negligible due 6. WELL-KNOWN MARKS
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to the attention given by the purchasers to the
goods they are purchasing; and that there are Well-known Marks
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sufficient differences in the price, hand tags,
and other markings of the products. Should the A well-known mark is a mark which is considered
Petition for Cancellation be granted? by the competent authority of the Philippines to be
well-known internationally and in the Philippines,
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A: YES. The Holistic Test in determining trademark whether or not it is registered here, as being already
resemblance has been abandoned. The Dominancy the mark of a person other than the applicant for
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Test must be used in determining the existence of registration. (Divina, 2021; Sec. 123.1(e), IPC)
confusing similarity between the "LEVI'S" and
“LIVE’S” marks. This test relies not only on the Scope of Protection of the Paris Convention
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visual but also on the aural and connotative
comparisons and overall impressions between the The scope of protection initially afforded by the
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two trademarks. The dominant feature of Paris Convention has been expanded via a
petitioner's "LEVI'S" marks is the word "LEVI'S" nonbinding recommendation that a well-known
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composed of five (5) letters, namely "L", "E", "V", mark should be protected in a country even if the
"I", and "S" with an apostrophe separating the mark is neither registered nor used in that country.
fourth and fifth letters. Notably, for petitioner's (Sehwani, Incorporated v. In-N-Out Burger, Inc., G.R.
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stylized marks, the letter "E" is in lowercase format No. 171053, 15 Oct. 2007)
with the rest in uppercase format. On the other
hand, the dominant feature of respondents' Internationally Well-known Mark
“LIVE’S” stylized mark is the word "LIVE'S" also
composed of the same five (5) letters; and its only 1. Considered by the competent authority of the
difference with petitioner's marks is that the Philippines to be “well-known” internationally
positioning of the letters "E" and "I" are and in the Philippines as the mark of a person
interchanged. Furthermore, respondents' mark other than the applicant or registrant;
also depicts the letter "E" in lowercase format with
the rest in uppercase format. 2. Need not be used or registered in the
Philippines; and
From the foregoing, it is thus readily apparent that
although petitioner's and respondents' marks are 3. Need not be known by the public at large but
neither spelled identically nor pronounced in the only by relevant sector of the public. (Sec.
same way, nor possess the same meaning, they 123.1(e), IPC)
both begin with the same letter and are in the
possessive form as denoted by the apostrophe
2023 GOLDEN NOTES
NOTE: If the well-known mark is registered in the Factors to be considered in Determining Well-
Philippines, any mark identical with, confusingly Is Known Marks
identical with, or confusingly similar to, or
constitutes a translation of a mark considered well- 1. Duration, extent, and geographical area of any
known in accordance with the preceding paragraph, use of the mark; in particular, the duration,
which is registered in the Philippines with respect extent and geographical area of any promotion
to goods or services which are not similar to those of the mark, including advertising or publicity
with respect to which registration is applied for: and the presentation, at fairs or exhibitions, of
Provided, That use of the mark in relation to those the goods and/or services to which the mark
goods or services would indicate a connection applies;
between those goods or services, and the owner of
the registered mark: Provided further, That the 2. Market share, in the Philippines and in other
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interests of the owner of the registered mark are countries, of the goods and/or services to which
likely to be damaged by such use. (Sec. 123.1(i), IPC; the mark applies;
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Divina, 2022)
3. Degree of the inherent or acquired distinction
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Rules regarding Internationally Well-Known of the mark;
Marks
4. Quality image or reputation acquired by the
A mark cannot be registered if it is identical with, or mark;
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confusingly similar to, or constitutes a translation of
a mark which is considered by the competent 5. Extent to which the mark has been registered in
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authority of the Philippines to be well-known the world;
internationally and in the Philippines, whether or
not it is registered here, as being already the mark 6. Exclusivity of registration attained by the mark
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of a person other than the applicant for registration in the world;
and used for identical or similar goods or services.
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Provided. that in determining whether a mark is 7. Extent to which the mark has been used in the
well-known, account shall be taken of the world;
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knowledge of the relevant sector of the public,
rather than of the public at large, including 8. Exclusivity of use attained by the mark in the
knowledge in the Philippines which has been world;
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obtained as a result of the promotion of the mark.
A mark cannot be registered if it is identical with, or 9. Commercial value attributed to the mark in the
confusingly similar to, or constitutes a translation of world;
a mark considered well-known in accordance with
the preceding paragraph, which is registered in the 10. Record of successful protection of the rights in
Philippines with respect to goods or services which the mark;
are NOT similar to those with respect to which
registration is applied for: Provided, That use of the 11. Outcome of litigations dealing with the issue of
mark in relation to those goods or services would whether the mark is a well-known mark; and
indicate a connection between those goods or
services, and the owner of the registered mark: 12. Presence or absence of identical or similar
Provided further, That the interests of the owner of marks validly registered for or used on identical
the registered mark are likely to be damaged by or similar goods or services and owned by
such use. (Sec. 123 (f), IPC) persons other than the person claiming that his
mark is a well-known mark.
COMMERCIAL LAW
NOTE: The mark must be well-known both that "a mark which is considered by the competent
internationally and in the Philippines. authority of the Philippines to be well-known
internationally and in the Philippines, whether or
NOTE: Account shall be taken of the knowledge of not it is registered here," cannot be registered by
the relevant sector of the public, rather than of the another in the Philippines. Sec. 123.1(e) does not
public at large, including knowledge in the require that the well-known mark be used in
Philippines which has been obtained as a result of commerce in the Philippines but only that it be well-
the promotion of the mark. known in the Philippines.
In Fredco Manufacturing Corp. v. President and Division of Application

Fellows of Harvard College, (G.R. No. 185917, 01 June
2011) Fredco Manufacturing Corp. (Fredco) filed Any application referring to several goods or
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before the IPO a Petition for Cancellation of services, hereafter referred to as the "initial
Registration issued to Harvard University for the application," may be divided by the applicant into
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mark “Harvard Veritas Shield Symbol”. Fredco two (2) or more applications, hereafter referred to
claims that as early as 1982 the mark was already as the "divisional applications," by distributing
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used in the Philippines by its predecessor-in- among the latter the goods or services referred to in
interest. Harvard University, on the other hand, the initial application. The divisional applications
claimed that the name and mark “Harvard” was shall preserve the filing date of the initial
adopted in 1639 as the name of Harvard College of application or the benefit of the right of priority.
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Cambridge, Massachusetts, USA. The mark had been (Sec. 129, IPC)
used in commerce since 1872 and was registered in
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more than 50 countries. Priority Right
The Supreme Court ruled that "Harvard" is the trade An application for registration of a mark filed in the
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name of the world-famous Harvard University, and Philippines by a person referred to Sec. 3 of the IPC,
it is also a trademark of Harvard University. Under and who previously duly filed an application for
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Art. 8 of the Paris Convention, as well as Sec. 37 of R.A. registration of the same mark in one of those
No. 166, Harvard University is entitled to protection countries, shall be considered as filed as of the day
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in the Philippines of its trade name "Harvard" even the application was first filed in the foreign country.
without registration of such trade name in the No registration of a mark shall be granted until such
Philippines. This means that no educational entity mark has been registered in the country of origin of
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in the Philippines can use the trade name "Harvard" the applicant. (Sec. 131, IPC)
without the consent of Harvard University.
Likewise, no entity in the Philippines can claim, The owner of a mark seeking priority right is not
expressly or impliedly through the use of the name entitled to sue for acts committed prior to the date
and mark "Harvard," that its products or services on which his mark was registered in the Philippines:
are authorized, approved, or licensed by, or sourced except in the case of an owner of a well-known mark
from, Harvard University without the latter's where he can oppose its registration or petition the
consent. cancellation of its registration or sue for unfair
competition, without prejudice to availing himself
To be protected under the two directives of the of other remedies provided for under the law. (Ibid.)
Ministry of Trade, an internationally well-known
mark need not be registered or used in the
Philippines. All that is required is that the mark is
well-known internationally and in the Philippines
for identical or similar goods, whether or not the
mark is registered or used in the Philippines. Sec.
123.1(e) of R.A. No. 8293 now categorically states
2023 GOLDEN NOTES
When the Well-Known Mark is Used on Trademark owners enjoy protection in product and
Unrelated Goods market areas that are the normal potential
expansion of his business. (Dermaline Inc. v. Myra
A junior user of a well-known mark on goods or
Pharmaceuticals, Inc.., GR No. 190065, 16 Aug. 2010)
services which are not similar to the goods or
services, and are therefore unrelated, to those
Limitations
specified in the certificate of registration of the well-
known mark is precluded from using the same on
Except in cases of importation of drugs and
the entirely unrelated goods or services, subject to
medicines allowed under Sec. 72.1 of the IPC and of
the following requisites, to wit:
off- patent drugs and medicines, the owner of a
registered mark shall have the exclusive right to
1. The mark is well-known internationally and in
prevent all third parties not having the owner’s
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the Philippines;
consent from using in the course of trade identical
or similar signs or containers for goods or services
2. The well-known mark must be registered.
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which are identical or similar to those in respect of
which the trademark is registered where such use
3. The use of the well-known mark on the entirely
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would result in a likelihood of confusion. In case of
unrelated goods or services would result to the
the use of an identical sign for identical goods or
likelihood of confusion of origin or business or
services, a likelihood of confusion shall be
some business connection or relationship
presumed.
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between the registrant and the user of the
mark; and
There shall be no infringement of trademarks or
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trade names of imported or sold patented drugs and
4. The interests of the owner of the well-known
medicines allowed under Sec. 72.1 of the IPC, as well
mark are likely to be damaged. (246
as imported or sold off-patent drugs and medicines;
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Corporation, doing business under the name and
Provided, That said drugs and medicines bear the
style of Rolex Music Lounge v. Hon. Reynaldo B.
registered marks that have not been tampered,
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Daway, in his capacity as Presiding Judge of RTC
unlawfully modified, or infringed upon, under Sec.
Br. 90, Quezon City, G.R. No. 157216, 20 Nov.
155 of the IPC. (Sec. 147, IPC, as amended by R.A. No.
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2003)
9502)
7. RIGHTS CONFERRED BY REGISTRATION When the Rights Terminate
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Rights Conferred to the Owner of a Registered The rights conferred by trademark registration end
Mark upon cancellation of the certificate of registration by
the IPO in the cases allowed by law. (Divina, 2021)
The owner of a registered mark shall have the
exclusive right to: Certificate of Registration Prima Facie Evidence
of Validity
1. Use the mark for one’s own goods or services;
2. Prevent third parties from using, without his A certificate of registration of a mark shall be prima
consent, signs or containers which are identical facie evidence of the validity of the registration, the
or similar to the registered trademark where registrant’s ownership of the mark, and of the
such use would result in a likelihood of registrant’s exclusive right to use the same in
confusion. connection with the goods or services and those
that are related thereto specified in the certificate.
In case of the use of an identical sign for identical (Sec. 138, IPC)
goods or services, a likelihood of confusion shall be
presumed. (Secs. 147 and 147.1, IPC)
COMMERCIAL LAW
Issuance and Publication of Certificate of Renewal of Registration
Registration
A certificate of registration may be renewed for
The certificate of registration shall be issued when periods of ten (10) years at its expiration. Each
the period for filing the opposition has expired, or request for renewal of registration must be made
when the Director of Legal Affairs shall have denied within 6 months before the expiration of the
the opposition, and upon payment of the required registration or within 6 months after such
fee. (Sec. 136, IPC) expiration on payment of the additional fee
prescribed. (Sec. 146, IPC)
The registered mark shall be published, in the form
and within the period fixed by the Regulations. 8. CANCELLATION OF REGISTRATION
Marks registered at the Office may be inspected free
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of charge and any person may obtain copies thereof A trademark registration may be cancelled by any
at his own expense. This provision shall also be person who believes that he will be damaged by the
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applicable to transactions recorded in respect of registration of the mark:
any registered mark. (Sec. 138, IPC) 1. Within five (5) years from the date of the
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registration of the mark; or
Duration of a Certificate of Trademark
Registration 2. At any time;
a. If the registered mark becomes the generic
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A certificate of registration shall remain in force for name for the goods or services, or a portion
ten (10) years, provided that the registrant shall file thereof, for which it is registered;
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a declaration of actual use and evidence to that
effect or shall show valid reasons based on the b. If the mark has been abandoned;
existence of obstacles to such use, as prescribed by
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the Regulations, within one (1) year from the fifth c. If its registration was obtained fraudulently
anniversary of the date of the registration of the or contrary to the provisions of the IPC;
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mark. Otherwise, the mark shall be removed from
the Register by the Office. (Sec. 145, IPC) d. If the registered mark is being used by, or
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with the permission of, the registrant so as
Effect of Failure to file Declaration of Actual Use to misrepresent the source of the goods or
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services on or in connection with which the
The applicant or the registrant shall file a mark is used; or
declaration of actual use (DAU) of the mark with
evidence to that effect, as prescribed by the e. Non-use of the mark within the Philippines,
Regulations within three (3) years from the filing without legitimate reason, for an
date of the application. Otherwise, the application uninterrupted period of 3 years. (Sec. 151,
shall be refused, or the mark shall be removed from IPC)
the Register by the Director. (Sec. 124.2, IPC)
NOTE: If in a petition for cancellation of a
A fifth anniversary use is also required. This is done trademark, it was established that the petitioner
by filing a declaration of actual use and evidence to was not its owner, prior registration can be
that effect within one year from the fifth cancelled without need of filing a separate petition.
anniversary of the registration. The form and (E.Y. Industrial Sales, Inc. v. Shen Dar Electricity and
evidence of use required are similar to the third Machinery Co. Ltd., G.R. No. 184850, 20 Oct. 2010)
year DAU. Failure to submit the fifth anniversary
use and evidence to that effect shall merit the
cancellation of the mark. (Sec. 145, IPC)
2023 GOLDEN NOTES
Q: ABC Appliances Corporation (ABC) is a Corp. opposed Q’s registration on the ground
domestic corporation engaged in the production that it had been using the logo since 2000 and
and sale of televisions and other appliances. YYY the logo it had been using was a registered
Engineers, a Taiwanese company, is the copyright from the artist that it had
manufacturer of televisions and other commissioned to create such logo. The artist
appliances from whom ABC actually purchases then assigned such copyrighted logo in its favor.
appliances. From 2000, when ABC started doing Despite such opposition, the Certificate of
business with YYY, it has been using the mark Registration was issued in favor of Q Corp. Alice
"TTubes" in the Philippines for the television Corp then decides to file a petition for
units that were bought from YYY. In 2015, YYY cancellation of the certificate of registration.
filed a trademark application for "TTubes." This was granted by the BLA-IPO on the ground
Later, ABC also filed its application. Both claim of that was substantial evidence to prove Alice
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the right over the trademark "TTubes" for Corp’s prior use of mark due to its actual use in
television products. YYY relies on the principle commerce since 1996 and that the competing
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of "first to file" while ABC involves the "doctrine logos are identical and the same in all aspects. Is
of prior use. the BLA-IPO correct in cancelling the Certificate
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of Registration issued in favor of Q Corp?
a. Does the fact that YYY filed its application
ahead of ABC mean that YYY has the prior A: YES. Pursuant to the case of Zuneca v.
right over the trademark? Explain briefly. Natrapharm, trademark can be acquired only
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through registration and not through prior use.
A: NO. Since YYY is not the owner of the trademark, However, when a certificate of registration is
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it has no right to apply for registration. Registration already issued in favor of a person, it is only
of trademark, by itself, is not a mode of acquiring considered as prima facie evidence of the ownership
ownership. It is the ownership of a trademark that of such trademark. The same can be rebutted. While
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confers the right to register the same. (Birkenstock registration vests ownership over a mark, bad faith
Orthopedia GMBH and Co. v. Philippines Shoe Expo may still be a ground for the cancellation of
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Marketing Corp., G.R. No. 194307, 20 Nov. 2013) trademark registrations. In cancelling petitioner's
certificate of registration, the BLA-IPO concluded
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b. Does the prior registration also mean a that petitioner copied respondent's mark. It
conclusive assumption that YYY Engineers is compared the two and found that petitioner's mark
in fact the owner of the trademark is identical with respondent's. It noted that the word
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“TTubes?” Briefly explain your answer. "Mr. Gulaman" in both of their marks are "exactly
(2016 BAR) the same in all aspects" This conclusion was
bolstered by its finding that in petitioner's
A: NO. Registration merely creates a prima facie Declaration of Actual Use, she submitted
presumption of validity of the registration of the photographs of a packaging showing respondent's
registrant’s ownership of the trademark and the "Mr. Gulaman" and its logo design. (Medina v. Global
exclusive right to the use thereof. The presumption Quest Ventures, G.R. No. 213815, 08 Feb. 2021)
of ownership accorded to a registrant is rebuttable
and must yield to evidence to the contrary. (Zuneca Use of Indications by Third Parties for Purposes
Pharmaceutical v. Natrapharm, Inc., G.R. No. 211850, other than those for which the Mark is Used
08 Sept. 2020)
Registration of the mark shall not confer on the
Q: Alice Corp had been using the trademark “Mr. registered owner the right to preclude third parties
Gulaman” for gulaman powder jelly mix. It from using bona fide their names, addresses,
registered the same in 2006, but it found out pseudonyms, geographical name, or exact
that there was a pending registration for the indications concerning the kind, quality, quantity,
same trademark filed on 2005 by Q Corp. Alice destination, value, place of origin, or time of
COMMERCIAL LAW
production or of supply, of their goods or services: Less Stringent Standard of Likelihood of
Provided, That such use is confined to the purposes Confusion
of mere identification or information and cannot
mislead the public as to the source of the goods or Failure to present proof of actual confusion does not
services. (Sec. 148, IPC) negate their claim of trademark infringement.
Trademark infringement requires the less stringent
NOTE: The IPC deems unlawful any subsequent use standard of “likelihood of confusion” only. While
of the trade name by a third party, whether as a proof of actual confusion is the best evidence of
trade name or mark or collective mark, or any such infringement, its absence is inconsequential.
use of a similar trade name or mark, likely to (McDonalds Corporation v. L. C. Big Mak Burger, Inc.,
mislead the public. (Sec. 165.2(b), IPC) G.R. No. 143993, 18 Aug. 2004)
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9. TRADEMARK INFRINGEMENT Elements of Trademark Infringement
(Re-Re-Use-Co-Co)
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Infringement is the use, without consent of the
trademark owner, of any "reproduction, counterfeit, 1. The trademark being infringed is Registered in
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copy or colorable imitation of any registered mark the Intellectual Property Office;
or tradename in connection with the sale, offering
for sale, or advertising of any goods, business or 2. The trademark is Reproduced, counterfeited,
services on or in connection with which such use is copied, or colorably imitated by the infringer;
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likely to cause confusion or mistake or to deceive
purchasers or others as to the source or origin of 3. The infringing mark is Used in connection with
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such goods or services, or identity of such business; the sale, offering for sale, or advertising of any
or reproduce, counterfeit, copy or colorably imitate goods, business, or services; or the infringing
any such mark or tradename and apply such mark is applied to labels, signs, prints,
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reproduction, counterfeit, copy or colorable packages, wrappers, receptacles or
limitation to labels, signs, prints, packages, advertisements intended to be used upon or in
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wrappers, receptacles or advertisements intended connection with such goods, business or
to be used upon or in connection with such goods, services;
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business or services." (Esso Standard Eastern, Inc. v.
CA, G.R. No. L-29971, 31 Aug. 1982) 4. The use or application of the infringing mark is
likely to cause Confusion or mistake or to
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A crucial issue in any trademark infringement case deceive purchasers or others as to the goods or
is the likelihood of confusion, mistake, or deceit as services themselves or as to the source or origin
to the identity, source or origin of the goods or of such goods or services or the identity of such
identity of the business as a consequence of using a business; and
certain mark. Likelihood of confusion is admittedly
a relative term, to be determined rigidly according 5. The use or application of the infringing mark is
to the particular (and sometimes peculiar) without the Consent of the trademark owner or
circumstances of each case. Thus, in trademark the assignee thereof. (Divina, 2021; Diaz v.
cases, more than in other kinds of litigation, People, G.R. No. 180677, 18 Feb. 2013)
precedents must be studied in the light of each
particular case. (Mighty Corporation v. E. & J. Gallo Q: ELARS Lechon was established and marketed
Winery, G.R. No. 154342, 14 July 2004) in 1970 by Sps. Lontoc. In 1989, the Sps. Lontoc
incorporated their food business. Elarfoods was
granted a Certificate of Registration by the
Securities and Exchange Commission. Since
then, the Sps. Lontoc actively managed and used
Elarfoods as its business name and marketed its
2023 GOLDEN NOTES
roasted pig products as “ELARS LECHON ON A Counterfeit Goods vs. Colorable Imitation
BAMBOO TRAY,” popularly known by the public
as “Elar’s Lechon.” However, without Elarfoods’ COUNTERFEIT COLORABLE
knowledge and permission, Emzee sold and GOODS IMITATION
distributed roasted pigs using the marks “ELARZ Definition
LECHON” “ELAR LECHON” “PIG DEVICE” and “ON
Any goods, including
A BAMBOO TRAY” making it appear that Emzee
packaging, bearing
was a branch or franchisee of Elarfoods. Emzee’s Such a close or
without authorization
officers and incorporators were former ingenious imitation as
a trademark which is
Elarfoods employees. Is Emzee guilty of to be calculated to
identical to the
trademark infringement and unfair deceive ordinary
trademark validly
competition? purchasers, or such
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registered in respect of
resemblance of the
such goods, or which
A: YES. Applying the dominancy test to the case at infringing mark to the
cannot be
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bar, it is very obvious that the Emzee's marks original as to deceive
distinguished in its
"ELARZ LECHON” and "ELAR LECHON” bear an an ordinary purchaser
essential aspects from
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indubitable likeness with Elarfoods' "ELARS giving such attention
such a trademark, and
LECHON." As can easily be seen, both marks use the as a purchaser usually
which thereby
essential and dominant word "ELAR". The only gives, and to cause him
infringes the rights of
difference between the Emzee's mark from that of to purchase the one
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the owner of the
Elarfoods' are the last letters Z and S, respectively. supposing it to be the
trademark in question
However, the letters Z and S sound similar when other. (Emerald v. CA,
under the law of the
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pronounced. Thus, both marks are not only visually G.R. No. 100098, 29
country of importation.
similar, but are phonetically and aurally similar as Dec. 1995)
(Art. 51, footnote 14(a),
well. To top it all off, both marks are used in selling
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TRIPS Agreement)
lechon products. Verily, there exists a high
likelihood that the consumers may conclude an
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association or relation between the products. Unauthorized Use of Container Bearing a
Likewise, the uncanny resemblance between the Registered Trademark
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marks may even lead purchasers to believe that
Emzee and Elarfoods are the same entity. In fine, The mere unauthorized use of a container bearing a
Emzee's use of marks similar to those of the registered trademark in connection with the sale,
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Elarfoods' constitutes a violation of the latter's distribution or advertising of goods or services
intellectual property rights. (Emzee Foods, Inc. v. which is likely to cause confusion, mistake or
Elarfoods, Inc., G.R. No. 220558, 17 Feb. 2021) deception among the buyers or consumers can be
considered as trademark infringement. (Republic
Gas Corporation v. Petron Corporation, G.R. No.
194062, 17 June 2013)
Remedies of the Owner of the Trademark

Against Infringers
1. Civil – filed with the Regional Trial Courts. The

owner of the registered mark may ask the court
to issue a preliminary injunction to quickly
prevent infringer from causing damage to his
business. Furthermore, the court will require
infringer to pay damages to the owner of the
mark provided defendant is shown to have had
COMMERCIAL LAW
notice of the registration of the mark (which is Jurisdiction Over Violations of Intellectual
presumed if a letter R within a circle is Property Rights
appended) and stop him permanently from
using the mark. It is properly lodged with the Regional Trial Court
even if the penalty therefore is imprisonment of less
2. Criminal – the owner of the trademark may ask than six years, or from 2 to 5 years and a fine
the court to issue a search warrant and in ranging from P50,000 to P200,000.
appropriate cases, remedies available shall also
include the seizure, forfeiture, and destruction R.A. No. 8293 and R.A. No. 166 are special laws
of the infringing goods and of any materials and conferring jurisdiction over violations of
implements the predominant use of which has intellectual property rights to the Regional Trial
been in the commission of the offense. Court. They should therefore prevail over R.A. No.
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7691, which is a general law. (Samson v. Daway, G.R.
3. Administrative – same as in patent No. 160054-55, 21 July 2004)
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infringement cases. If the amount of damages
claimed is not less than P200,000.00, the Q: K-9 Corporation, a foreign corporation
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registrant may choose to seek redress against alleging itself to be the registered owner of
the infringer by filing an administrative action trademark “K-9” and logo “K”, filed an Inter
against the infringer with the Bureau of Legal Partes case with the Intellectual Property Office
Affairs. against Kanin Corporation for the cancellation
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of the latter’s mark “K-9” and logo “K.” During
Ascertainment of the Amount of Damages in a the pendency of the case before the IPO, Kanin
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Civil Action for Infringement Corporation brought suit against K-9
Corporation before the RTC for infringement
The owner of a trademark which has been infringed and damages. Could the action before the RTC
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is entitled to actual damages: prosper? Why? (2003 BAR)
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1. The reasonable profit which the A: YES. The action before the RTC can prosper.
complaining party would have made, had According to Section 151.2 of the IPC, the filing of a
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the defendant not infringed his said rights; suit to enforce the registered mark with the proper
or court or agency shall exclude any other court or
agency from assuming jurisdiction over a
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2. The profit which the defendant actually subsequently filed petition to cancel the same
made out of infringement; or mark. On the other hand, the earlier filing of
petition to cancel the mark with the Bureau of Legal
3. The court may award as damages a Affairs shall not constitute a prejudicial question
reasonable percentage based upon the that must be resolved before an action to enforce
amount of gross sales of the defendant or the rights to same registered mark may be decided.
the value of the services in connection with The issues raised before the different the IPO and
which the mark or trade name was issued. the RTC are different. The issue raised before the
IPO is whether or not the cancellation of the
In cases where actual intent to mislead the public or subsequent trademark is proper because of the
to defraud the complainant is shown, in the prior ownership of the disputed mark by K-9. While
discretion of the court, the damages may be the issue raised before the RTC pertains to
doubled. (Sec, 156.3, IPC) infringement. Furthermore, an action for
infringement or unfair competition, as well as the
remedy of injunction and relief for damages, is
explicitly and unquestionably within the
competence and jurisdiction of ordinary courts.
2023 GOLDEN NOTES
(Shangri-la International Hotel Management, Ltd., v. Limitations on the Actions for Infringement
CA, G.R. No. 111580, 21 June 2001)
1. Right of prior user – a registered mark shall be
Venue in Filing Actions for Infringement without effect against any person who, in good
faith, before filing or priority date, was using the
A.M. 02-1-06-SC (The Rule on Search and Seizure in mark for purposes of his business; (Sec. 159.1,
Civil Actions for Infringement of Intellectual Property IPC)
Rights) governs the issuance of a writ of search and
seizure in a civil action for infringement filed by an 2. Relief against publisher – injunction is limited
intellectual property right owner against the to the future printing against an innocent
supposed infringer of his trademark or name. infringer who is engaged solely in the business
Under this rule, the claim for damages should be of printing the mark; (Sec. 159.2, IPC) and
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filed with the same court that issued the writ of
search and seizure. 3. Relief against newspaper – injunction against
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the presentation of advertising matter in future
However, Philip Morris, the manufacturer of issues of the newspaper, magazine or in
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Marlboro cigarettes did not go by this route. Philip electronic communications in case the
Morris did not file a civil action for infringement of infringement complained of is contained in or is
its trademark against the Del Rosarios before the part of paid advertisement in such materials.
RTC of Angeles City. Instead, Philip Morris sought (Sec. 159.3, IPC)
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assistance from the NBI for the apprehension and
criminal prosecution of those reportedly Requirement of Notice
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appropriating its trademark and selling fake
Marlboro cigarettes. In turn, the NBI instituted a The owner of the registered mark shall not be
police action that included applying for a search and entitled to recover profits or damages unless the
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seizure warrant under Sec. 3, 4, 5 and 6 of Rule 126 acts have been committed with knowledge that such
of the Rules of Criminal Procedure (not under the imitation is likely to cause confusion, or to cause
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provisions of A.M. 02-1-06-SC) against the Del mistake, or to deceive.
Rosarios upon the belief that they were storing and
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selling fake Marlboro cigarettes in violation of the Knowledge is presumed in the following instances:
penal provisions of the intellectual property law.
1. The registrant gives notice that his mark is
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The proceeding under Rule 126, a limited criminal registered by displaying with the mark the
one, does not provide for the filing of counterclaims words “Registered Mark” or the letter R
for damages against those who may have within a circle; or
improperly sought the issuance of the search
warrant. Consequently, the Del Rosarios had the 2. The defendant had otherwise actual notice
right to seek damages, if the circumstances of the registration. (Sec. 158, IPC)
warranted, by separate civil action for the wrong
inflicted on them by an improperly obtained or
enforced search warrant. (Divina, 2014; Del Rosario,
et al. v. Donato, Jr. et al., G.R. No. 180595, 05 Mar.
2010)
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10. UNFAIR COMPETITION NOTE: There can be unfair competition and

infringement at the same time.
Definition
Q: In what way is an infringement of a trademark
similar to that which pertains to unfair
Employing deception or any other means contrary
competition? (2003 BAR)
to good faith by which a person passes off his goods
or business or services for those of one who has
A: The similarity lies in both their ability to disrupt
already established goodwill, or who shall commit
fair competition amongst business enterprises and
any acts calculated to produce said result. (Sec.
other businesses. They can also create confusion,
168.2, IPC)
mistake, and deception as to the minds of the
consumers with regard to the source or identity of
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It is the passing off (or palming off) or attempting to
their products or services due to its similarity in
pass off upon the public of the goods or business of
appearance or packaging.
one person as the goods or business of another with
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the end and probable effect of deceiving the public.
Unfair Competition Violates Property Rights
Passing off (or palming off) takes place where the
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defendant, by imitative devices on the general
A person who has identified in the mind of the
appearance of the goods, misleads prospective
public the goods he manufactures or deals in, his
purchasers into buying his merchandise under the
business or services from those of others, whether
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impression that they are buying that of his
or not a registered mark is employed, has a property
competitors. Thus, the defendant gives his goods the
right in the goodwill of the said goods, business or
general appearance of the goods of his competitor
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services so identified, which will be protected in the
with the intention of deceiving the public that the
same manner as other property rights. (Sec. 168.1,
goods are those of his competitor. (Republic Gas
IPC)
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Corporation v. Petron Corporation, supra)
Persons Guilty of Unfair Competition

Infringement of Trademark vs. Unfair
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Competition (2015 BAR)
1. Any person, who is selling his goods and gives
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them the general appearance of goods of
INFRINGEMENT OF UNFAIR
another manufacturer or dealer, either as to the
TRADEMARK COMPETITION
goods themselves or in the wrapping of the
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Definition
packages in which they are contained, or the
The passing off of one’s
Unauthorized use of a devices or words thereon, or in any other
goods as those of
trademark. feature of their appearance, which would be
another.
likely to influence purchasers to believe that the
Requirement of Fraudulent Intent goods offered are those of a manufacturer or
Fraudulent intent is Fraudulent intent is dealer, other than the actual manufacturer or
unnecessary. essential. dealer, or who otherwise clothes the goods with
Requirement of Prior Registration such appearance as shall deceive the public and
GR: Prior registration defraud another of his legitimate trade, or any
of the trademark is a subsequent vendor of such goods or any agent
Registration is not
prerequisite to the of any vendor engaged in selling such goods
necessary. (Del Monte
action. with a like purpose;
Corp. v. CA, G.R. No. L-
78325, 23 Jan. 1990)
XPN: Well-known 2. Any person who by any artifice, or device, or
marks. who employs any other means calculated to
induce the false belief that such person is
offering the services of another who has
2023 GOLDEN NOTES
identified such services in the mind of the A: YES. The essential elements of an action for
public; or unfair competition are: (1) confusing similarity in
the general appearance of the goods, and (2) intent
3. Any person who shall make any false statement to deceive the public and defraud a competitor. The
in the course of trade or who shall commit any confusing similarity may or may not result from
other act contrary to good faith of a nature similarity in the marks but may result from other
calculated to discredit the goods, business or external factors in the packaging or presentation of
services of another. (Sec. 168.3, IPC) the goods. Likelihood of confusion of goods or
business is a relative concept, to be determined only
Essential Elements of an Action for Unfair according to peculiar circumstances of each case.
Competition The element of intent to deceive and to defraud may
be inferred from the similarity of the appearance of
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1. Confusing similarity in the general the goods as offered for sale to the public.
appearance of the goods; and
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2. Intent to deceive the public and defraud a While petitioners indicated in their product the
competitor. manufacturer's name, the same does not change the
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fact that it is confusingly similar to respondent's
The confusing similarity may or may not result from product in the eyes of the public. In this case, the
similarity in the marks but may result from other similarities far outweigh the differences. The
external factors in the packaging or presentation of general appearance of petitioners' product is
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the goods. The intent to deceive and defraud may be confusingly similar to respondent." (Kho v.
inferred from the similarity of the appearance of the Summerville General Merchandising & Co., Inc., G.R.
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goods as offered for sale to the public. (McDonalds No 213400, 04 Aug. 2021, J. Hernando)
Corporation v. L. C. Big Mak Burger, Inc., supra)
Q: The NBI found that SG Inc. is engaged in the
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The Element of Passing-off reproduction and distribution of counterfeit
"playstation games" and thus applied with the
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In order to prove a case of unfair competition, it is Manila RTC warrants to search respondent's
sufficient to show that such deception will be the premises in Cavite. RTC granted such warrants
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natural and probable effect of defendant’s acts. and thus, the NBI served the search warrants on
(Superior Enterprises, Inc. v. Kunnan Enterprises Ltd., the subject premises. SG Inc. questioned the
supra.) validity of the warrants due to wrong venue
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since the RTC of Manila had no jurisdiction to
Q: Petitioners Elidad and Violeta were charged issue a search warrant enforceable in Cavite. Is
with Unfair Competition by respondent the contention of SG Inc., correct?
Summerville. Petitioners' product which is a
medicated facial cream sold to the public is A: NO. Unfair competition is a transitory or
contained in the same pink oval-shaped continuing offense under Sec. 168 of the IPC. As such,
container which had the mark "Chin Chun Su," as petitioner may apply for a search warrant in any
that of respondent. Petitioners' product and that court where any element of the alleged offense was
solely distributed by respondent are similar in committed, including any of the courts within Metro
the following respects "1. Both are medicated Manila and may be validly enforced in Cavite. (Sony
facial creams; 2. Both are contained in pink, Computer Entertainment Inc. v. Supergreen Inc. G.R.
oval-shaped containers; and 3. Both contain the No. 161823, 22 Mar. 2007)
trademark "Chin Chun Su". Is there probable
cause to charge petitioners with unfair NOTE: Section Sec. 2, Rule 10 of the Rules of
competition? Procedure on IP Cases (A.M. No. 10-3-10 SC, as
amended October 6, 2020 16 Nov. 2020) provides
that Special Commercial Courts in Quezon City,
COMMERCIAL LAW
Manila, Makati, Pasig, Baguio City, Iloilo City, Cebu “CDO” and FIESTA bears house mark
City, Cagayan de Oro City, and Davao City shall have “PUREFOODS” rendering confusion impossible.
authority to act on applications for the issuance of Further, Foodsphere claimed that San Miguel
search warrants involving violations of the does not have the monopoly to the term FIESTA
Intellectual Property Code IPC, which search since there are other products in the
warrants shall be enforceable nationwide. Within supermarket using the same term. Was there
their respective territorial jurisdictions, the Special unfair competition?
Commercial Courts in the judicial regions where the
violation of intellectual property rights occurred A: YES. The Court has held that unfair competition
shall have concurrent jurisdiction to issue search consists of the passing off (or palming off) or
warrants. attempting to pass off upon the public of the goods
or business of one person as the goods or business
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The "true test" of unfair competition has thus been of another with the end and probable effect of
"whether the acts of the defendant have the intent deceiving the public. Passing off (or palming off)
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of deceiving or are calculated to deceive the takes place where the defendant, by imitative
ordinary buyer making his purchases under the devices on the general appearance of the goods,
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ordinary conditions of the particular trade to which misleads prospective purchasers into buying his
the controversy relates." It is therefore essential to merchandise under the impression that they are
prove the existence of fraud, or the intent to deceive, buying that of his competitors. In other words, the
actual or probable, determined through a judicious defendant gives his goods the general appearance of
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scrutiny of the factual circumstances attendant to a the goods of his competitor with the intention of
particular case. (Shang Properties Realty deceiving the public that the goods are those of his
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Corporation (formerly The Shang Grand Tower competitor. The "true test," therefore, of unfair
Corporation) and Shang Properties, Inc. (formerly competition has thus been "whether the acts of the
EDSA Properties Holdings, Inc.) v. St. Francis defendant have the intent of deceiving or are
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Development Corporation, G.R. No. 190706, 21 July calculated to deceive the ordinary buyer making his
2014) purchases under the ordinary conditions of the
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particular trade to which the controversy relates."
Q: San Miguel started selling its FIESTA ham in
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1980. In 2006, it filed for trademark Thus, the essential elements of an action for unfair
infringement and unfair competition against competition are: (1) confusing similarity in the
Foodsphere for selling its PISTA ham. San Miguel general appearance of the goods; and (2) intent to
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alleged that there is confusing similarity in the deceive the public and defraud a competitor. The
general appearance of the goods and that confusing similarity may or may not result from
Foodsphere intended to deceive the public. similarity in the marks but may result from other
According to San Miguel, both products have a external factors in the packaging or presentation of
picture of a partly sliced ham served on a plate the goods. The intent to deceive and defraud may be
of fruits and both FIESTA and PISTA were inferred from the similarity of the appearance of the
printed in white bold stylized font. Further, the goods as offered for sale to the public. Actual
packaging for both consists of box-typed paper fraudulent intent need not be shown. (San Miguel
bags made of cardboard materials with cut-out Pure Foods Company, Inc. v. Foodsphere, G.R. No.
holes on the middle top portion for use as 217781, 20 June 2018)
handles and predominantly red in color with a
background design of Christmas balls, stars,
snowflakes, and ornate scrolls. On the other
hand, Foodsphere claimed that the marks were
not confusingly similar and visually and aurally
distinct from each other. This is because PISTA
is always in conjunction with its house mark
2023 GOLDEN NOTES
Applicability of Rules on the Issuance of the Q: MS Brewery Corporation (MS) is a
Search and Seizure Order in Civil Actions for manufacturer and distributor of the popular
Infringement beer "MS Lite." It faces stiff competition from BA
Brewery Corporation (BA) whose sales of its
The Rules on the Issuance of the Search and Seizure own beer product, "BA Lighter," has soared to
in Civil Actions for Infringement of Intellectual new heights. Meanwhile, sales of the "MS Lite"
Property Rights are not applicable in this case as the decreased considerably. The distribution and
search warrants were not applied based thereon, marketing personnel of MS later discovered that
but in anticipation of criminal actions for violation BA has stored thousands of empty bottles of "MS
of intellectual property rights under R.A. No. 8293. It Lite" manufactured by MS in one of its
was established that respondent had asked the NBI warehouses. MS filed a suit for unfair
for assistance to conduct investigation and search competition against BA before the RTC. Finding
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warrant implementation for possible apprehension a connection between the dwindling sales of MS
of several drugstore owners selling imitation or and the increased sales of BA, the RTC ruled that
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counterfeit TOP GEL T.G. & DEVICE OF A LEAF BA resorted to acts of unfair competition to the
papaya whitening soap. What is applicable is Rule detriment of MS. Is the RTC correct? Explain.
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126 of the Rules of Criminal Procedure. A core (2016 BAR)
requisite before a warrant shall validly issue is the
existence of probable cause. The pendency of a A: NO. The RTC is not correct. Hoarding, or the act
similar action for infringement of trademark and of accumulating empty bottles to impede circulation
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unfair competition against the very person who of the bottled product, does not amount to unfair
applied for search warrant does not bar the competition. BA did not fraudulently “pass off” its
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issuance of the warrant if it is based on probable product as that of MS Lite. There was no
cause. (Divina, 2014; Century Chinese Medicine Co., representation or misrepresentation on the part of
et.al. v. People, G.R. No. 188526, 11 Nov. 2013) BA that would confuse or tend to confuse its goods
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with those of MS Lite. (Coca Cola Bottlers Philippines
Ordinary Purchaser v. Gomez, G.R. No. 154491, 14 Nov. 2008)
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An ordinary purchaser is one accustomed to buy, Actions, and Damages and Injunction for
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and therefore to some extent familiar with, the Infringement
goods in question. The test of fraudulent simulation
is not found in the deception, or the possibility of The owner of a registered mark may recover
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deception, of the person who knows nothing about damages from any person who infringes his rights,
the design which has been counterfeited, and who and the measure of the damages suffered shall be
must be indifferent between that and the other. The either the reasonable profit which the complaining
simulation, in order to be objectionable, must be party would have made, had the defendant not
such as appears likely to mislead the ordinary infringed his rights, or the profit which the
intelligent buyer who has a need to supply and is defendant actually made out of the infringement, or
familiar with the article that he seeks to purchase. in the event such measure of damages cannot be
(Emerald Garment Manufacturing Corporation v. CA, readily ascertained with reasonable certainty, then
G.R. No. 100098, 29 Dec. 1995) 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. (Sec. 156.1, IPC)
COMMERCIAL LAW
Functional components of useful articles, no matter
C. COPYRIGHT how artistically designed, have generally been
denied copyright protection unless they are
separable from the useful article A useful article
may be copyrightable only if and only to the extent
A right over literary and artistic works which are
that such design incorporates pictorial, graphic, and
original intellectual creations in the literary and
sculptural features that can be identified separately
artistic domain protected from the moment of
from and are capable of existing independently of
creation.
the utilitarian aspects of the article. (Ching v. Salinas,
ibid)
Duration of the Author’s Copyright
Requirement of Originality
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Copyright shall last during the lifetime of the author
and 50 years after his death. (Sec. 213.1, IPC)
Originality means that it must have been created by
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the author’s own skill, labor, and judgment without
Copyright protection is not absolute. (ABS-CBN
directly copying or evasively imitating the work of
Corporation v. Gozon, G.R. No. 195956, 11 Mar. 2015)
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another.; and (Ching Kian Chuan v. CA, G.R. No.
There is no absolute protection unlike the
130360, 15 Aug. 2001)
protection in tangible properties where one can do
anything so long as you will not violate the rights of
NOTE: Minimal degree of creativity suffices.
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others. In the case of copyright, there is a limitation
on the term of protection.
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Elements of Originality
1. BASIC PRINCIPLES
(Sec. 172.2, 175, and 181 of the IPC) 1. Independently created by the author; and
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2. Possesses some minimal degree of creativity.
Definition
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Time when Copyright Vests
It is an intangible, incorporeal right granted by
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statute to the author or originator of certain literary Principle of Automatic Protection – Works are
or artistic productions, whereby he or she is protected from the moment of their creation,
invested, for a specific period, with the sole and irrespective of their mode or form of expression, as
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exclusive privilege of multiplying copies of the same well as of their content, quality, and purpose (Sec.
and publishing and selling them. (Black’s Law 172.2, IPC).
Dictionary, 1990)
The certificates of registration and deposit issued by
Copyright, in the strict sense of the term, is purely a the National Library and the Supreme Court Library
statutory right. Being a mere statutory grant, the serve merely as a notice of recording and
rights are limited to what the statute confers. It may registration of the work but do not confer any right
be obtained and enjoyed only with respect to the or title upon the registered copyright owner or
subjects and by the persons, and on terms and automatically put his work under the protective
conditions specified in the statute. Accordingly, it mantle of the copyright law. It is not a conclusive
can only cover the works falling within the statutory proof of copyright ownership. As it is, non-
enumeration or description. Only the expression of registration and deposit of the work within the
an idea is protected by copyright, not the idea itself. prescribed period only makes the copyright owner
(Pearl & Dean Inc. v. Shoemart, Inc., G.R. No. 148222, liable to pay a fine. (Manly Sportswear
15 Aug. 2003; Joaquin, Jr. v. Drilon, G.R. No. 108946, Manufacturing Inc. v. Dadodette Enterprises and/or
28 Jan. 1999; Ching v. Salinas, G.R. No. 161295, 29 Hermes Sports Center, G.R. No. 165306, 20 Sept. 2005)
June 2005)
2023 GOLDEN NOTES
NOTE: Under PD 49, registration of copyright is 8. Works relative to Geography, topography,
necessary to avoid the penalty for non-compliance architecture, or science;
of the deposit requirement and to recover damages 9. Works of Applied art;
in an infringement suit. While under R.A. No. 8293, 10. Works of a Scientific or technical character;
the purpose of registration/deposit is limited to 11. Photographic works;
avoiding fine. However, under RA 8293 as amended 12. Audiovisual works and cinematographic works;
by R.A. No. 10372, non-registration/deposit of 13. Pictorial illustrations and advertisements;
copies of the work will not result in the imposition 14. Computer programs; and
of the fine nor forfeiture of the right to recover 15. Other literary, scholarly, scientific, and artistic
damages. works. (Sec. 172.1, IPC)
Copyright as Distinct from Material Object b) DERIVATIVE WORKS
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GR: The copyright is distinct from the property in Derivative Works
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the material object subject to it. Consequently, the
transfer or assignment of the copyright shall not 1. Dramatizations, translations, adaptations,
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itself constitute a transfer of the material object. Nor abridgements, arrangements, and other
shall a transfer or assignment of the sole copy or of alterations of literary or artistic works; and
one or several copies of the work imply transfer or
assignment of the copyright. (Sec. 181, IPC) 2. Collections of literary, scholarly, or artistic
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works and compilations of data and other
XPN: Work of Architecture - Copyright in a work of materials which are original by reason of the
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architecture shall include the right to control the selection or coordination or arrangement of
erection of any building which reproduces the their contents. (Sec. 173.1, IPC)
whole or a substantial part of the work either in its
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original form or in any form recognizably derived NOTE: Derivative works shall be protected as new
from the original: Provided, That the copyright in works, provided that such new work shall not affect
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any such work shall not include the right to control the force of any subsisting copyright upon the
the reconstruction or rehabilitation in the same original works employed or any part thereof or be
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style as the original of a building to which that construed to imply any right to such use of the
copyright relates. (Sec. 186, IPC) original works, or to secure or extend copyright in
such original works. (Sec. 173.2, IPC)
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2. COPYRIGHTABLE WORKS
Q: P&D was granted a copyright on the technical
a) ORIGINAL WORKS drawings of light boxes as "advertising display
units". SMI, however, manufactured similar or
Original works include in particular the following identical to the light box illustrated in the
literary and artistic works: technical drawings copyrighted by P&D for
(Bo-L2-D-M-Wa-P-G-A-S-P-A-P-C-O) leasing out to different advertisers. Was this an
infringement of P&D’s copyright over the
1. Books, pamphlets, articles, and other writings; technical drawings?
2. Lectures, sermons, addresses, dissertations
prepared for oral delivery, whether or not A: NO. P&D’s copyright protection extended only to
reduced in writing or other material form; the technical drawings and not to the light box itself.
3. Letters; The light box was not a literary or artistic piece
4. Dramatic, choreographic works; which could be copyrighted under the copyright
5. Musical compositions; law. If SMI reprinted P&D’s technical drawings for
6. Works of Art; sale to the public without license from P&D, then no
7. Periodicals and Newspapers; doubt they would have been guilty of copyright
COMMERCIAL LAW
infringement. Only the expression of an idea is 4. Any work of the Government of the Philippines;
protected by copyright, not the idea itself. If what
P&D sought was exclusivity over the light boxes, it GR: Conditions imposed prior the approval of
should have instead procured a patent over the light the government agency or office wherein the
boxes itself. (Pearl and Dean Inc. v. Shoemart Inc., work is created shall be necessary for
supra) exploitation of such work for profit. Such
agency or office, may, among other things,
Q: Juan Xavier wrote and published a story impose as condition the payment of royalties.
similar to an unpublished copyrighted story of
Manoling Santiago. It was, however, XPN: No prior approval or conditions shall be
conclusively proven that Juan Xavier was not required for the use of any purpose of statutes,
aware that the story of Manoling Santiago was rules and regulations, and speeches, lectures,
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protected by copyright. Manoling Santiago sued sermons, addresses, and dissertations,
Juan Xavier for infringement of copyright. Is pronounced, read, or rendered in courts of
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Juan Xavier liable? (1998 BAR) justice, before administration agencies, in
deliberative assemblies and in meetings of
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A: YES. Juan Xavier is liable for infringement of public character. (Sec. 176, IPC)
copyright. It is not necessary that Juan Xavier is
aware that the story of Manoling Santiago was 5. Statutes, rules and regulations, and speeches
protected by copyright. The work of Manoling made in courts of justice, administrative
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Santiago is protected from the time of its creation. agencies and in meetings of public character.
(Sec.176.1, IPC)
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There will still be originality sufficient to warrant
copyright protection if “the author, through his skill NOTE: The author of the works mentioned shall
and effort, has contributed a distinguishable have the exclusive right of making a collection
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variation from the older works.” In such a case, of of his works. (Sec. 176.2, IPC)
course, only those parts which are new are
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protected by the new copyright. Hence, in such a 6. TV programs, format of TV programs; and
case, there is no case of infringement. Juan Xavier is (Joaquin v. Drilon, G.R. No. 108946, 28 Jan. 1999)
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no less an “author” because others have preceded
him. (Habana v. Robles, G.R. No. 131522, 19 July 7. Systems of bookkeeping.
1999)
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Q: X, an amateur astronomer, stumbled upon
3. NON-COPYRIGHTABLE WORKS what appeared to be a massive volcanic
eruption in Jupiter while peering at the planet
Non-Copyrightable Works through his telescope. The following week, X,
without notes, presented a lecture on his
1. Idea, procedure, system, method or operation, findings before the Association of Astronomers
concept, principle, discovery, or mere data as of the Philippines. To his dismay, he later read
such, even if they are expressed, explained, an article in a science journal written by Y, a
illustrated or embodied in a work; professional astronomer, repeating exactly
what X discovered without any attribution to
2. News of the day and other items of press him. Has Y infringed on X's copyright, if any?
information; (2011 BAR)
3. Any official text of a legislative, administrative, A: NO, because no protection extends to any
or legal nature, as well as any official translation discovery, even if expressed, explained, illustrated,
thereof; (Sec. 175, IPC) or embodied in a work. (Sec. 175, IPC)
2023 GOLDEN NOTES
Q: Rural is a certified public utility providing A: YES. The arrival of Angelo dela Cruz is not
telephone service to several communities in copyrightable because that is the newsworthy
Manila. It obtains data for the directory from event. However, any footage created from the event
subscribers, who must provide their names and itself, in this case the arrival of Angelo dela Cruz, are
addresses to obtain telephone service. Feist intellectual creations which are copyrightable. The
Publications, Inc., is a publishing company that IPC does not state that expression of the news of the
specializes in area-wide telephone directories day, particularly when it underwent a creative
covering a much larger geographic range than process, is not entitled to protection. News coverage
directories such as Rural's. Feist extracted the in television involves framing shots, using images,
listings it needed from Rurals’s directory graphics, and sound effects. It involves creative
without its consent. Are directories process and originality. Television news footage is
copyrightable? an expression of the news. Thus, being an
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expression, it is considered copyrightable under the
A: NO. Directories are not copyrightable and law. (ABS-CBN Corp. v. Gozon, supra)
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therefore the use of them does not constitute
infringement. The IPC mandates originality as a An Object of Utility is not Copyrightable
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prerequisite for copyright protection. This
requirement necessitates independent creation A copyrightable work refers to literary and artistic
plus a modicum of creativity. Since facts do not owe works defined as original intellectual creations in
their origin to an act of authorship, they are not the literary and artistic domain. A hatch door, by its
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original, and thus are not copyrightable. A nature is an object of utility. It is defined as a small
compilation is not copyrightable per se, but is door, small gate or an opening that resembles a
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copyrightable only if its facts have been "selected, window equipped with an escape for use in case of
coordinated, or arranged in such a way that the fire or emergency. It is thus by nature, functional
resulting work as a whole constitutes an original and utilitarian serving as egress access during
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work of authorship." Nonetheless, a compilation emergency. It is not primarily an artistic creation
that is copyrightable receives only limited but rather an object of utility designed to have
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protection, for the copyright does not extend to facts aesthetic appeal. It is intrinsically a useful article,
contained in the compilation. (Feist Publications, Inc. which, as a whole, is not eligible for copyright.
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v. Rural Telephone Service Co., 499 U.S. 340, 27 Mar.
1991) The only instance when a useful article may be the
subject of copyright protection is when it
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Q: ABS-CBN conducted a live audio-video incorporates a design element that is physically or
coverage of and broadcasted the arrival of conceptually separable from the underlying
Angelo dela Cruz at the Ninoy Aquino product. This means that the utilitarian article can
International Airport (NAIA) and the function without the design element. In such an
subsequent press conference. ABS-CBN allowed instance, the design element is eligible for copyright
Reuters Television Service (Reuters) to air the protection. (Olaño, et al. v. Lim Eng Co, G.R. No.
footages it had taken earlier under a special 195835, 14 Mar. 2016)
embargo agreement. It received a live video feed
of the coverage of Angelo dela Cruz’s arrival
from Reuters. GMA-7 immediately carried the
live news feed in its program "Flash Report,"
together with its live broadcast. ABS-CBN filed
the Complaint for copyright infringement. Are
news footages considered copyrightable under
the law?
COMMERCIAL LAW
4. RIGHTS CONFERRED BY A COPYRIGHT In every sale or lease of an original work of

painting or sculpture or of the original
manuscript of a writer or composer,
Rights of Copyright Owners (1995 BAR)
subsequent to the first disposition thereof by
the author, the author or his heirs shall have an
1. Economic rights – The right to carry out,
inalienable right to participate in the gross
authorize or prevent the following acts:
proceeds of the sale or lease to the extent of five
(Re-Ca- F-Re-P2-O)
percent (5%). (Sec. 200, IPC)
a. Reproduction of the work or substantial

Rights which are not Covered under a Droit de
portion thereof;
suite
b. Carry-out derivative work (dramatization,
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translation, adaptation, abridgement,
1. Prints;
arrangement, or other transformation of
2. Etchings;
the work) ;
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3. Engravings;
c. First distribution of the original and each
4. Works of applied art; or
copy of the work by sale or other forms of
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5. Similar works wherein the author
transfer of ownership;
primarily derives gain from the proceeds of
d. Rental right;
reproductions. (Sec. 201, IPC)
e. Public display;
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f. Public performance;
Q: ABC is the owner of certain musical
g. Other communications to the public.
compositions among which are the songs
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entitled: "Dahil Sa Iyo", "Sapagkat Ikaw Ay
NOTE: Assignment of rights must be in writing
Akin," "Sapagkat Kami Ay Tao Lamang" and "The
to be valid.
Nearness Of You.” Soda Fountain Restaurant
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hired a combo with professional singers to play
2. Moral rights – For reasons of professionalism
and sing musical compositions to entertain and
and propriety, the author has the right:
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amuse customers. They performed the above-
a. To require that the authorship of the works
mentioned compositions without any license or
be attributed to him (attribution right);
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permission from ABC to play or sing the same.
Accordingly, ABC demanded from Soda Fountain
b. To make any alterations of his work prior
payment of the necessary license fee for the
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to, or to withhold it from publication;
playing and singing of aforesaid compositions,
but the demand was ignored. ABC filed an
c. To preserve integrity of work, object to any
infringement case against Soda Fountain. Does
distortion, mutilation or other modification
the playing and singing of musical compositions
which would be prejudicial to his honor or
inside an establishment constitute public
reputation; and
performance for profit?
d. To restrain the use of his name with respect

A: YES. The patrons of the Soda Fountain pay only
to any work not of his own creation or in a
for the food and drinks and apparently not for
distorted version of his work. (Sec. 193, IPC)
listening to the music, but the music provided is for
the purpose of entertaining and amusing the
3. Droit de suite or “art proceeds right” is the
customers in order to make the establishment more
artist’s resale right, which requires that a
attractive and desirable. For the playing and singing
percentage of the resale price of an artistic
the musical compositions involved, the combo was
work is paid to the author. The right is
paid as independent contractors by Soda Fountain.
exercisable even after the author’s death,
provided the work is still in copyright.
2023 GOLDEN NOTES
It is therefore obvious that the expenses entailed Exceptions to Moral Rights
thereby are added to the overhead of the restaurant
which are either eventually charged in the price of 1. Absent any special contract at the time creator
the food and drinks or to the overall total of licenses/permits another to use his work, the
additional income produced by the bigger volume of following are deemed not to contravene
business which the entertainment was creator’s moral rights, provided they are done
programmed to attract. Consequently, it is beyond in accordance with reasonable customary
question that the playing and singing of the combo standards or requisites of the medium:
in Soda Fountain Restaurant constituted
performance for profit. (Filipino Society of a. Editing;
Composers, Authors, Publishers, Inc. (FILSCAP) v. Tan, b. Arranging;
G.R., No. L-36402, 16 Mar. 1987) c. Adaptation;
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d. Dramatization; or
Performance of a Contract e. Mechanical and electric reproduction.
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An author cannot be compelled to perform his 2. Complete destruction of work unconditionally
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contract to create a work or for the publication of transferred by creators. (Sec. 197, IPC)
his work already in existence. However, he may be
held liable for damages for breach of such contract. Waiver of Moral Rights
(Sec. 194, IPC)
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GR: Moral rights can be waived in writing, expressly
Nature of Moral Rights so stating such waiver.
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These are personal rights independent from the XPN: Even in writing, no such waiver shall be valid
economic rights. Being a personal right, it can only where its effects are to permit another to:
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be given to a natural person. Hence, even if he has 1. Use the name of the author, title of his work,
licensed or assigned his economic rights, he or his reputation with respect to any
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continues to enjoy the above-mentioned moral version/adaptation of his work, which
rights. (Amador, 2007) because of alterations, substantially tend to
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injure literary/artistic reputation of
Term of Moral Rights another author; or
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The rights of an author shall last during the lifetime 2. Use the name of the author in a work that
of the author and in perpetuity after his death while he did not create. (Sec. 195, IPC)
the rights under Sections 193.2, 193.3, and 193.4
shall be coterminous with the economic rights, the Neighboring Rights
moral rights shall not be assignable or subject to
license. The person or persons to be charged with 1. Performer’s Rights
the posthumous enforcement of these rights shall be 2. Producers of Sound Recordings
named in a written instrument which shall be filed 3. Broadcasting Organizations
with the National Library. In default of such person
or persons, such enforcement shall devolve upon
either the author’s heirs, and in default of the heirs,
the Director of the National Library. (Sec. 198, IPC,
as amended by Sec. 17 of R.A. No. 10372 )
COMMERCIAL LAW
Performer’s Rights Moral Rights of Performers
Performers shall enjoy the following exclusive The performer, shall, as regards his live aural
rights: performances or performances fixed in sound
recordings, have the right to claim to be identified
1. As regards their performances, the right of as the performer of his performances, except where
authorizing the: the omission is dictated by the manner of the use of
a. Broadcasting and other communication to the performance, and to object to any distortion,
the public of their performance; and mutilation or other modification of his
b. Fixation of their unfixed performance. performances that would be prejudicial to his
reputation. (Sec. 204, IPC)
2. Right of authorizing the direct or indirect
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reproduction of their performances fixed in Additional Remuneration for Subsequent
sound recordings or audiovisual works or Communications or Broadcasts
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fixations in any manner or form;
The performer shall be entitled to an additional
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3. Right of authorizing the first public distribution remuneration equivalent to at least 5% of the
of the original and copies of their performance original compensation he received for the first
fixed in sound recordings or audiovisual works communication or broadcast in every
or fixations through sale or rental of other communication to the public or broadcast of a
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forms of transfer of ownership; performance subsequent to the first communication
or broadcast, unless otherwise provided in the
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4. Right of authorizing the commercial rental to contract. (Sec. 206, IPC)
the public of the original and copies of their
performances fixed in sound recordings or Producers of Sound Recordings
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audiovisual works or fixations, even after
distribution of them by, or pursuant to the Producers of sound recordings shall have exclusive
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authorization by the performer; and right to authorize the:
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5. Right of authorizing the making available to the 1. Direct or indirect reproduction of their sound
public of their performances fixed in sound recordings, in any manner or form; the placing
recordings or audiovisual works or fixations, by of these reproductions in the market and the
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wire or wireless means, in such a way that right of rental or lending;
members of the public may access them from a
place and time individually chosen by them. 2. First public distribution of the original and
(Sec. 203, IPC, as amended by Sec. 18 of R.A. No. copies of their sound recordings through sale or
10372) rental or other forms of transferring
ownership;
Loss of Performer’s Rights
3. Commercial rental to the public of the original
Once the performer has authorized the and copies of their sound recordings, even after
broadcasting or fixation of his performance, his distribution by them by or pursuant to
performer’s rights provided for in Sec. 203 shall authorization by the producer; and
have no further application.
4. Making available to the public of their sound
Fair use and limitations to copyrights shall apply recordings in such a way that members of the
mutatis mutandis to performers. (Sec. 205, IPC) public may access the sound recording from a
place and at a time individually chosen or
selected by them, as well as other
2023 GOLDEN NOTES
transmissions of a sound recording with like for by mass media and afforded television programs
effect. (Sec. 208, IPC, as amended by Sec. 20 of to attain a well-informed, well-versed and culturally
R.A. No. 10372) refined citizenry and enhance their socio-economic
growth. (ABS-CBN Broadcasting Corp. v. Philippine
Broadcasting Organization’s Rights Multimedia System, supra)
Broadcasting organizations shall enjoy the This rule mandates that the local television (TV)
exclusive right to carry out, authorize or prevent broadcast signals of an authorized TV broadcast
any of the following acts: station, such as the GMA Network, Inc., should be
1. Rebroadcasting of their broadcasts; carried in full by the cable antenna television
(CATV) operator, without alteration or deletion. In
2. Recording in any manner, including the this case, the Central CATV, Inc. was found not to
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making of films or the use of video tape, of have violated the must-carry rule when it solicited
their broadcasts for the purpose of and showed advertisements in its cable television
A
communication to the public of television (CATV) system. Such solicitation and showing of
broadcasts of the same; and advertisements did not constitute an infringement
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of the “television and broadcast markets” under Sec.
3. Use of such records for fresh transmissions 2 of E.O. 205. (GMA Network, Inc. v. Central CATV, Inc.,
or for fresh recording. (Sec. 211, IPC) G.R No. 176694, 18 July 2014)
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Broadcasting NOTE: The provisions of IPC shall also apply to
works, performers, producers of sound recordings
E
It is the transmission by wireless means for the and broadcasting organizations that are to be
public reception of sounds or of images or of protected by virtue of and in accordance with any
representations thereof; such transmission by international convention or other international
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satellite is also broadcasting where the means for agreement to which the Philippines is a party. (Sec.
decrypting are provided to the public by the 221.2 and 224.2, IPC)
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broadcasting organization or with its consent. (ABS-
CBN Broadcasting Corp. v. Philippine Multimedia Applicability of Rights
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System, Inc., G.R. Nos. 175769-70, 19 Jan. 2009)
The provisions of Chapter VIII shall apply mutatis
Rebroadcasting mutandis to the rights of performers, producers of
A
sound recordings and broadcasting organizations,
It is the simultaneous broadcasting by one as an exception to infringement and allowing the
broadcasting organization of the broadcast of following:
another broadcasting organization. While the Rome
Convention gives broadcasting organizations the 1. Exclusive use of a natural person for own
right to authorize or prohibit the rebroadcasting of personal purposes;
its broadcast, however, this protection does not 2. Short excerpts for reporting current
extend to cable retransmission. (Ibid.) events;
3. Sole use for the purpose of teaching or for
Must-Carry Rule scientific research;
4. Fair use of the broadcast. (Sec. 212, IPC, as
It is limitation on copyright which obligates amended by Sec. 21 of R.A. No. 10372)
operators to carry the signals of local channels
within their respective systems. This is to give the
people wider access to more sources of news,
information, education, sports event and
entertainment programs other than those provided
COMMERCIAL LAW
Term of Protection i. Take place in the Philippines;
1. For performances not incorporated in ii. Are incorporated in sound

recordings, 50 years from the end of the year in recordings that are protected under
which the performance took place; IPC; or
2. For sound or image and sound recordings and iii. Which has not been fixed in sound
for performances incorporated therein, 50 recording but are carried by
years from the end of the year in which the broadcast qualifying for protection
recording took place; under the IPC. (Sec. 222, IPC)
3. In case of broadcasts, the term shall be 20 years 3. Of sound recordings
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from the date the broadcast took place. The
extended term shall be applied only to old a. Sound recordings the producers of which
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works with subsisting protection under the are nationals of the Philippines; and
prior law. (Sec. 215, IPC) b. Sound recordings that were first published
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in the Philippines. (Sec. 223, IPC)
Persons to whom the Rights are Granted
(Copyrightable Works applicable) 4. For broadcasts
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1. For works a. Broadcasts of broadcasting organizations
the headquarters of which are situated in
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a. Works of authors who are nationals of, or the Philippines; and
have their habitual residence in, the
Philippines; b. Broadcasts transmitted from transmitters
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situated in the Philippines. (Sec. 224, IPC)
b. Audio-visual works the producer of which
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has his headquarters or habitual residence 5. OWNERSHIP OF A COPYRIGHT
in the Philippines;
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Presumption of Authorship
c. Works of architecture erected in the
Philippines or other artistic works
A
The natural person whose name is indicated on a
incorporated in a building or other work in the usual manner as the author shall, in the
structure located in the Philippines; absence of proof to the contrary, presumed to be the
author of the work. This is applicable even if the
d. Works first published in the Philippines; name is a pseudonym, where the pseudonym leaves
and no doubt as to identity of the author. (Sec. 219.1, IPC)
e. Works first published in another country The person or body corporate, whose name appears
but also published in the Philippines within on the audio-visual work in the usual manner shall,
thirty days, irrespective of the nationality in the absence of proof to the contrary, be presumed
or residence of the authors. (Sec. 221.1, IPC) to be the maker of said work. (Sec. 219.2, IPC)
2. For performers
a. Performers who are nationals of the

Philippines;
b. Performers who are not nationals of the
Philippines but whose performances:
2023 GOLDEN NOTES
Rules on Ownership of Copyright In the Course of Employment
The employee, if not a part of his regular duties
OWNER OF COPYRIGHT even if the employee uses the time, facilities and
Original Literary and Artistic Works materials of the employer.
Author of the work. (Sec. 178.1, IPC)
Joint Authorship The employer, if the work is the result of the
Co-authors – in case of works of joint authorship; performance of his regularly-assigned duties,
in the absence of agreement, their rights shall be unless there is an agreement, express or implied,
governed by the rules on co-ownership. to the contrary. (Sec. 178.3, IPC)
Letters
NOTE: If work of joint authorship consists of
In respect of letters, the copyright shall belong to
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parts that can be used separately, then the author
the writer subject to the provisions of Art. 723 of
of each part shall be the original owner of the
the Civil Code. (Sec. 178.6, IPC)
copyright in the part that he has created. (Sec.
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178.2, IPC)
Letters and other private communications in
Audiovisual Work
writing are owned by the person to whom they
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GR: Producer, the author of the scenario, the are addressed and delivered, but they cannot be
composer of the music, the film director, and the published or disseminated without the consent of
author of the work so adapted. the writer or his heirs. However, the court may
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authorize their publication or dissemination if
XPN: Unless otherwise provided in an the public good or the interest of justice so
agreement, the producers shall exercise the
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requires. (Art. 723, NCC)
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 Collective Work vs. Joint Work
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performance of musical compositions, with or
without words, which are incorporated into the COLLECTIVE WORK JOINT WORK
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work. (Sec. 178.5, IPC) Integration of Elements
Anonymous and Pseudonymous Works Elements remain
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Separate elements are
unintegrated and
The publishers shall be deemed to represent the merged.
disparate.
authors of articles and other writings published
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without the names of the authors or under Intention of the Authors
pseudonyms, unless the contrary appears, or the Work created by two or
pseudonyms or adopted name leaves no doubt as more persons at the
to the author's identity, or if the author of the initiative and under the Work prepared by two
anonymous works discloses his identity. (Sec. direction of another or more authors with
179, IPC) with the understanding the intention that
that it will be disclosed their contributions be
Commissioned Work
by the latter under his merged into
The person who commissioned the work shall own name and that of inseparable or
own the work but the copyright thereto shall the contributions of independent parts of
remain with the creator, unless there is a written natural persons will not the unitary whole.
stipulation to the contrary. (Sec. 178.4, IPC) be identified. (Sec.
Collective Works 171.2, IPC)
When an author contributes to a collective work, Right of the Authors
his right to have his contribution attributed to Each author shall enjoy Joint authors shall be
him is deemed waived unless he expressly copyright to his own co-owners. Co-
reserves it. (Sec. 196, IPC) contribution ownership shall apply.
COMMERCIAL LAW
Persons to whom the Work will be Attributed cafeteria. The cafeteria operator said he
purchased the painting from Bernie who
The work will be
represented himself as its painter and owner.
attributed to the person
Joint authors shall be
under whose initiative
both entitled to the Rudy and the cafeteria operator immediately
and direction it was
acknowledgment as confronted Bernie. While admitting that he did
created unless the
authors of the work. not do the painting, Bernie claimed ownership
contributor expressly
of its copyright since he had already registered
reserves his right.
it in his name with the National Library as
provided in the Intellectual Property Code.
Q: T, an associate attorney in XYZ Law Office,
wrote a newspaper publisher a letter disputing Who owns the copyright to the painting?
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a columnist’s claim about an incident in the Explain. (2013 BAR)
attorney’s family. T used the law firm’s
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letterhead and its computer in preparing the A: Rudy owns the copyright to the painting because
letter. T also requested the firm’s messenger to he was one who actually created it. His rights
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deliver the letter to the publisher. Who owns the existed from the moment of its creation. The
copyright to the letter? (2011 BAR) registration of the painting by Bernie with the
National Library did not confer copyright upon him.
A: T, since he is the original creator of the contents The registration is merely for the purpose of
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of the letter. completing the records of the National Library.
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Q: Solid Investment House commissioned Mon Q: BR and CT are noted artists whose paintings
Blanco and his son Steve, both noted artists, to are highly prized by collectors. Dr. DL
paint a mural for the Main Lobby of the new commissioned them to paint a mural at the main
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building of Solid for a contract price of P2M. lobby of his new hospital for children. Both
(1995 BAR) agreed to collaborate on the project for a total
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fee of 2 million pesos to be equally divided
a. Who owns the mural? Explain. between them. It was also agreed that Dr. DL had
T
to provide all the materials for the painting and
A: The mural is owned by Solid. It commissioned the pay for the wages of technicians and laborers
work and paid Mon and Steve Blanco P2M for the needed for the work on the project.
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mural.
Assume that the project is completed and both
b. Who owns the copyright of the mural? BR and CT are fully paid the amount of P2M as
Explain. artists' fee by DL. Under the law on intellectual
property, who will own the mural? Who will own
A: Even though Solid owns the mural, the copyright the copyright in the mural? Why? Explain. (2004
of the mural is jointly owned by Mon and Steve, BAR)
unless there is a written stipulation to the contrary.
(Sec. 178.4, IPC) A: DL owns the mural, while both BR and CT jointly
own the copyright thereto. This is so because the
Q: Rudy is a fine arts student in a university. He mural was commissioned by DL and a consideration
stays in a boarding house with Bernie as his was paid to BR and CT in exchange thereof.
roommate. During his free time, Rudy would According to Sec. 178.4 of the IPC, when the work is
paint and leave his finished works lying around commissioned by a person other than an employer
the boarding house. One day, Rudy saw one of of the author, the owner of the work shall be the one
his works—an abstract painting entitled Manila who commissioned the work, but the copyright of
Traffic Jam—on display at the university the work shall be owned by the person who is
2023 GOLDEN NOTES
responsible for its creation, unless there is a written source and of the name of the author, if
stipulation to the contrary. appearing in the work, are mentioned;
6. LIMITATIONS ON COPYRIGHT 6. Recording made in educational institutions of a

work included in a broadcast for the use of such
educational institutions, provided that such
General Limitations on Copyright
recording must be deleted within a reasonable
period after they were first broadcast;
The following acts shall not constitute infringement
of copyright:
7. Making of ephemeral recordings by a
broadcasting organization by means of its own
1. Recitation or performance of a work, once it has
facilities and for use in its own broadcast;
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been lawfully made accessible to the public, if
done privately and free of charge or if made
8. Use made of a work by or under the direction or
strictly for a charitable or religious institution
A
control of the government, by the National
or society;
Library or by educational, scientific, or
L
professional institutions where such use is in
2. Making of quotations from a published work if
the public interest and is compatible with fair
they are compatible with fair use and only to the
use;
extent justified for the purpose, including
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quotations from newspaper articles and
9. Public performance or the communication to
periodicals in the form of press summaries:
the public of a work, in a place where no
Provided, That the source and the name of the
E
admission fee is charged in respect of such
author, if appearing on the work, are
public performance or communication, by a
mentioned;
club or institution for charitable or educational
N
purpose only, whose aim is not profit making,
3. Reproduction or Communication to the public
subject to such other limitations as may be
by mass media of articles on current political,
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provided in the Regulations;
social, economic, scientific, or religious topic,
lectures, addresses and other works of the same
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10. Public display of the original or a copy of the
nature, which are delivered in public if such use
work not made by means of a film, slide,
is for information purposes and has not been
television image or otherwise on screen or by
A
expressly reserved: Provided, That the source is
means of any other device or process (e.g.
clearly indicated;
Public display using posters mounted on walls
and display boards), Provided, That either the
4. Reproduction and communication to the public
work has been published, or, that original or the
of literary, scientific, or artistic works as Part of
copy displayed has been sold, given away or
reports of current events (e.g. music played or
otherwise transferred to another person by the
tunes on the occasion of a sporting event and
author or his successor in title;
such tunes were picked up during a new
coverage of the event) by means of
11. Any use made of a work for the purpose of any
photography, cinematography or broadcasting
judicial proceedings or for the giving of
to the extent necessary for the purpose;
professional advice by a legal practitioner;
5. Inclusion of a work in a publication, broadcast,

12. Reproduction or distribution of published
or other communication to the public, sound
articles or materials in a specialized format
recording or film, if such inclusion is made by
exclusively for the use of the blind, visually- and
way of illustration for teaching purposes and is
reading-impaired persons: Provided, that such
compatible with fair use: Provided, That the
copies and distribution shall be made on a
COMMERCIAL LAW
nonprofit basis and shall indicate the copyright computer program, provided, the copy or
owner and the date of the original publication. adaptation is necessary for:
(Sec. 184, IPC, as amended by R.A. No. 10372) a. The use of the computer program in
conjunction with a computer for the
Other Limitations on Copyright purpose, and to the extent, for which the
computer program has been obtained; and
1. Copyright in a work of architecture shall
include the right to control the erection of any b. Archival purposes, and, for the replacement
building which reproduces the whole or a of the lawfully owned copy of the computer
substantial part of the work either in its original program in the event that the lawfully
form or in any form recognizably derived from obtained copy of the computer program is
the original, provided, that the copyright in any lost, destroyed, or rendered unusable. (Sec.
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such work shall not include the right to control 189, IPC)
the reconstruction or rehabilitation in the same
A
style as the original of a building to which that Q: In a written legal opinion for a client on the
copyright relates. (Sec. 186, IPC) difference between apprenticeship and
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learnership, Liza quoted without permission a
2. The private reproduction of a published work in labor law expert’s comment appearing in his
a single copy, where the reproduction is made book entitled “Annotations on the Labor Code.”
by a natural person exclusively for research Can the labor law expert hold Liza liable for
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and private study, shall be permitted, without infringement of copyright for quoting a portion
the authorization of the owner of copyright in of his book without his permission?
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the work but shall not extend to the
reproduction of: A: NO. Liza cannot be held liable for infringement of
copyright. Any use made of a work for the purpose
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a. A work of architecture in the form of of judicial proceedings or for giving of professional
building or other construction; advice by a legal proceedings or for giving of
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professional advice by a legal practitioner shall not
b. An entire book, or a substantial part constitute infringement of copyright. (Sec. 184(k),
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thereof, or of a musical work in graphic IPC)
form by reprographic means;
Q: May a person have photocopies of some pages
A
c. A compilation of data and other materials; of the book of Professor Rosario made without
violating the copyright law?
d. A computer program except as provided in
Sec. 189; and A: YES. The private reproduction of a published
work in a single copy, where the reproduction is
e. Any work in cases where reproduction made by a natural person exclusively for research
would unreasonably conflict with a normal and private study, shall be permitted, without the
exploitation of the work or would authorization of the owner of copyright in the work.
otherwise unreasonably prejudice the This rule contemplates that reproduction of the
legitimate interests of the author. (Sec. 187, book shall not extend to an entire book or a
IPC) substantial part thereof. (Secs. 187.1 to 187.2[b],
IPC)
3. The reproduction in one back-up copy or
adaptation of a computer program shall be
permitted, without the authorization of the
author of, or other owner of copyright in, a
computer program, by the lawful owner of that
2023 GOLDEN NOTES
Term of Protection of Copyright 7. DOCTRINE OF FAIR USE
TERM OF PROTECTION
The fair use of a copyrighted work for criticism,
Original and Derivative Works, as well as
comment, news reporting, teaching including
Posthumous works
limited number of copies for classroom use,
During the life of the author and for fifty (50) scholarship, research, and similar purposes is not an
years after his death. (Sec. 213.1, IPC) infringement of copyright. (Sec. 185, IPC, as amended
Works of joint authorship by Sec. 12 of R.A. No. 10372)
Economic rights shall be protected during the life
of the last surviving author and for fifty (50) “Fair use” permits a secondary use that “serves the
years after his death. (Sec. 213.2, IPC) copyright objective of stimulating productive
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Published Anonymous or Pseudonymous thought and public instruction without excessively
Works diminishing the incentives for creativity.”
Fifty (50) years from the date on which the work
A
was first lawfully published. Decompilation may be considered Fair Use
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If the author's identity is revealed or is no longer Decompilation, which is the reproduction of the
in doubt before the 50-year period, the code and translation of the forms of the computer
provisions on original and derivative works, as program to achieve the inter-operability of an
well as works of joint authorship, shall apply.
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independently created computer program with
(Sec. 213.3, IPC) other programs, may also constitute fair use under
Unpublished Anonymous or Pseudonymous the criteria established by Sec. 185, to the extent that
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Works such decompilation is done for the purpose of
Fifty (50) years counted from the making of the obtaining the information necessary to achieve such
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work. (Sec. 213.3, IPC) interoperability. (ibid)
Work of Applied Art
Twenty-five (25) years from the time of the Factors to be considered in determining Fair Use
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making. (Sec. 213.4, IPC) (P-A-N-E)
Photographic works
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Fifty (50) years from publication of the work and, 1. Purpose and character of the use, including
if unpublished, fifty (50) years from the making. whether such use is of a commercial nature or
A
(Sec. 213.5, IPC) is for non-profit educational purpose;
Audio-visual works
Fifty (50) years from date of publication and, if 2. Amount and substantiality of the portion used
unpublished, from the date of making. (Sec. 213.6, in relation to the copyrighted work as a whole;
IPC)
3. Nature of the copyrighted work; and
The term of protection subsequent to the death of
the author shall run from the date of his death or of 4. Effect of the use upon the potential market for
publication, but such terms shall always be deemed or value of the copyrighted work.
to begin on the first day of January of the year
following the event which gave rise to them. (Sec. NOTE: The fact that a work is unpublished shall not
214, IPC) by itself bar a finding of fair use if such finding is
made upon consideration of all the above factors
(Sec. 182.2, IPC). If you copy to the extent that you
reduce the marketability of the book, it is no longer
fair use.
COMMERCIAL LAW
Q: KLM Printers, Inc. operated a small outlet Published Works
located at the ground floor of a university
building in Quezon City. It possessed soft copies Works which, with the consent of the authors, are
of certain textbooks on file and would print made available to the public by wire or wireless
“book-alikes” of these textbooks (or in other means in such a way that members of the public may
words, reproduced the entire textbooks) upon access these works from a place and time
order and for a fee. It would even display individually chosen by them: Provided, that
samples of such “book-alikes” in its stall for sale availability of such copies has been such, as to
to the public. satisfy the reasonable requirement of the public,
having regard to the nature of the work. (Sec. 171.7,
Upon learning of KLM Printers, Inc.’s activities, IPC)
the authors of the textbooks filed a suit against
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it for copyright infringement. In its defense, KLM Reprographic Reproduction by Libraries
Printers, Inc. invoked the doctrine of fair use,
A
contending that the “book-alikes” are being Any library or archive whose activities are not for
used for educational purposes by those who profit may, without the authorization of the author
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avail of them. or copyright owner, make a limited number of
copies of the work, as may be necessary for such
Is KLM Printers, Inc.’s invocation of the doctrine institutions to fulfill their mandate, by reprographic
of fair use proper in this case? Explain. (2019 reproduction:
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BAR) a. Where the work by reason of its fragile
character or rarity cannot be lent to user in its
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A: NO. In determining whether the use made of a original form;
work in any particular case is fair use, the factors to
be considered shall include: b. Where the works are isolated articles contained
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a. The purpose and character of the use, in composite works or brief portions of other
including whether such use is of a published works and the reproduction is
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commercial nature or is for non-profit necessary to supply them, when this is
educational purposes; considered expedient, to persons requesting
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their loan for purposes of research or study
b. The nature of the copyrighted work; instead of lending the volumes or booklets
which contain them; and
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c. The amount and substantiality of the
portion used in relation to the copyrighted c. Where the making of such limited copies is in
work as a whole; and order to preserve and, if necessary, in the event
that it is lost, destroyed or rendered unusable,
d. The effect of the use upon the potential replace a copy, or to replace, in the permanent
market for or value of the copyrighted collection of another similar library or archive,
work. (Sec. 185.1, IPC) a copy which has been lost, destroyed or
rendered unusable and copies are not available
Based on these factors, the invocation of the with the publisher.
doctrine of fair use is not proper. The reproduction
of the copies is commercial in nature, where the But it shall not be permissible to produce a volume
entire book is reproduced thereby violating the of a work published in several volumes or to
economic right of the author and the offer to the produce missing tomes or pages of magazines or
public of copies of the book has an injurious effect similar works, unless the volume, tome or part is out
upon the potential market or value of the of stock. (Sec. 188, IPC, as amended by Sec. 13 of R.A.
copyrighted work. No. 10372)
2023 GOLDEN NOTES
Public Performance vs. Communication to the The Filing of the Assignment or License of
Public of a Performance Copyright is not a Mandatory Requirement
COMMUNICATION TO Sec. 182 uses the permissive word “may” in

PUBLIC
THE PUBLIC OF A reference to the filing of the deed of assignment or
PERFORMANCE
PERFORMANCE transfer of copyright, this filing should not be
Definition understood as mandatory for validity and
The transmission to enforceability. The filing is entirely optional for the
Performance at a place the public, by any parties and may be useful only for evidentiary and
or at places where medium, otherwise notification purposes. (Amador, 2007)
persons outside the than by broadcasting,
normal circle of a of sounds of a Limitation regarding Submission of a Literary,
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family and that family’s performance or the Photographic, or Artistic Work to a Newspaper,
closest social representations of Magazine or Periodical for Publication
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acquaintances are or sounds fixed in a sound
can be present. recording. (Sec. 202.9, Unless a greater right is expressly granted, such
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IPC) submission shall constitute only a license to make a
Mode of Access single publication.
The communication
can be accessed If two or more persons jointly own a copyright or
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through wired or any part thereof, neither of the owners shall be
It is performed at a entitled to grant licenses without the prior written
wireless means at a
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specific time and place. consent of the other owner or owners. (Sec. 180.3,
time and place
(e.g. The Pacquiao- IPC)
convenient to the
Clottey Match in Dallas
viewer (e.g. The
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Texas Stadium) Q: In a written legal opinion for a client on the
Pacquiao-Clottey
Match watched via difference between apprenticeship and
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YouTube) learnership, Liza quoted without permission a
labor law expert's comment appearing in his
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Transfer or Assignment of Copyright book entitled "Annotations on the Labor Code."
Can the labor law expert hold Liza liable for
infringement of copyright for quoting a portion
A
The copyright may be assigned or licensed in whole
or in part. Within the scope of the assignment or of his book without his permission? (2006 BAR)
license, the assignee or licensee is entitled to all the
rights and remedies which the assignor or licensor A: NO. One of the limitations on copyright is the
had with respect to the copyright. (Sec. 180.1, IPC) making of quotations from a published work if they
are compatible with fair use, provided that the
Requisites for a Transfer of Copyright to Take source and the name of the author, if appearing on
Effect the work, are mentioned. The legal opinion made by
Liza is consistent with fair use since the quoted part
1. If inter vivos, there must be a written indication is merely used to explain a concept of law for the
of such intention; and benefit of the client and not to defeat the rights of
2. Filed in National Library upon payment of the author over his copyright. (Sec. 184.1(b), IPC)
prescribed fees. (Sec. 180.2 and 182, IPC)
COMMERCIAL LAW
8. COPYRIGHT INFRINGEMENT Q: Diana and Piolo are famous personalities in

showbusiness who kept their love affair secret.
They use a special instant messaging service
It is the doing by any person, without the consent of
which allows them to see one another’s typing
the owner of the copyright, of anything the sole right
on their own screen as each letter key is pressed.
to do which is conferred by statute on the owner of
When Greg, the controller of the service facility,
the copyright. The act of lifting from another’s book
found out their identities, he kept a copy of all
substantial portions of discussions and examples
the messages Diana and Piolo sent each other
and the failure to acknowledge the same is an
and published them. Is Greg liable for copyright
infringement of copyright. (Habana v. Robles, G.R.
infringement? Reason briefly. (2007 BAR)
No. 131522, 19 July 1999)
A: YES. The messages which Diana and Pablo sent
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Copying alone is not what is prohibited. The copying
each other fall under the category of letters as
must produce an “injurious effect”. A copy of a
provided in Sec. 172.1.d 172.1(d) which provides
piracy is an infringement of the original, and it is no
A
that literary and artistic works, hereinafter referred
defense that the pirate, in such cases, did not know
to as “works,” are original intellectual creations in
whether or not he was infringing any copyright; he
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the literary and artistic domain protected from the
at least knew that what he was copying was not his,
moment of their creation and shall include in
and he copied at his peril. (Ibid.)
particular, among others, letters. Infringement of
such consist in the doing by any person, without the
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The gravamen of copyright infringement is not
consent of the owner of the copyright, of anything
merely the unauthorized "manufacturing" of
the sole right to do which is conferred by statute on
intellectual works but rather the unauthorized
E
the owner of the copyright. Reproduction and first
performance of any of the rights exclusively granted
public distribution of the work are economic rights
to the copyright owner. Hence, any person who
of the authors of the work. Such cannot be done by
N
performs any of such acts under without obtaining
the person not the author of the work.
the copyright owner’s prior consent renders himself
civilly and criminally liable for copyright
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In this instance, Greg is not the owner of the
infringement. (NBI-Microsoft Corp. v. Hwang, G.R.
messages. He merely copied it without the consent
No. 147043, 21 June 2005)
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of the authors thereof and subsequently published
the same in violation of the latter’s economic rights.
Infringement
A
Q: The Victoria Hotel chain reproduces
A person infringes a right protected under this Act
videotapes, distributes the copies thereof to its
when one:
hotels and makes them available to hotel guests
for viewing in the hotel guest rooms. It charges a
1. Directly commits an infringement;
separate nominal fee for the use of the videotape
player. (1994 BAR)
2. Benefits from the infringing activity of another
person who commits an infringement if the
a. Can the Victoria Hotel be enjoined for
person benefiting has been given notice of the
infringing copyrights and held liable for
infringing activity and has the right and ability
damages?
to control the activities of the other person; or
A: YES. Victoria Hotel may be held liable for

3. With knowledge of infringing activity, induces,
infringing copyrights of the said videotapes because
causes, or materially contributes to the
the reproduction and distribution thereof are not
infringing conduct of another. (Sec. 216, IPC, as
merely for private viewing. Instead, it was used as a
amended by Sec. 22 of R.A. No. 10372)
means to gain extra profit by making it as an extra
amenity for its hotel services. However, if such
2023 GOLDEN NOTES
performances contained in the videotapes became there is no infringement by KK since the said
available to the public even prior to its registration, doctrine permitted importation and resale without
then there is no copyright infringement because the the publisher’s further permission.
videotapes are already considered as public
property. Substantial Reproduction
b. Would it make any difference if Victoria It is not necessarily required that the entire
Hotel does not charge any fee for the use of copyrighted work, or even a large portion of it, be
the videotape? copied. If so much is taken that the value of the
original work is substantially diminished, there is an
A: NO. Notwithstanding the non-charging of fee for infringement of copyright and to an injurious extent,
the use of the videotapes, Victoria Hotel still uses the the work is appropriated. It is no defense that the
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videotapes for business purposes, serving as an pirate did not know whether or not he was
attraction to prospective and current guests, unless infringing any copyright; he at least knew that what
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the performances in the videotapes had been long he was copying was not his, and he copied at his
before available to the public prior to registration; peril. In cases of infringement, copying alone is not
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hence, it is already public property. (FILSCAP v. Tan, what is prohibited. The copying must produce an
supra) “injurious effect”. (Habana v. Robles, supra)
Q: In an action for damages on account of an How Copying is Demonstrated
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infringement of a copyright, the defendant (the
alleged pirate) raised the defense that he was Copying is demonstrated by:
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unaware that what he had copied was a
copyright material. Would this defense be valid? 1. Direct evidence; or
(1997 BAR) 2. Circumstantial evidence of access and
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substantial inquiry or the most common test.
A: NO. In copyright infringement, intent is (Amador, 2007).
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irrelevant. A person may consciously or
unconsciously copy or infringe a copyrighted Q: May a person have photocopies of some pages
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material and still be held liable for such act. of the book of Professor Rosario made without
violating the copyright law? (1998 BAR)
Q: KK is from Bangkok, Thailand. She studies
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medicine in the Pontifical University of Santo A: YES, a person may photocopy some of pages of
Tomas (UST). She learned that the same foreign Professor Rosario’s book for as long as it is not for
books prescribed in UST are 40-50% cheaper in public use or distribution, and it does not copy the
Bangkok. So she ordered 50 copies of each book substantial text or “heart” of the book. It is
for herself and her classmates and sold the considered as fair use of the copyrighted work.
books at 20% less than the price in the
Philippines. XX, the exclusive licensed Plagiarism
publisher of the books in the Philippines, sued
KK for copyright infringement. Decide. (2014 Plagiarism means the theft of another person’s
BAR) language, thoughts, or ideas. To plagiarize is to take
(ideas, writings, etc.) from (another) and pass them
A: KK did not commit copyright infringement. off as one’s own. The passing off of the work of
Under the “first sale” doctrine, the owner of a another as one’s own is thus an indispensable
particular copy or phonorecord lawfully made is element of plagiarism.
entitled, without the authority of the copyright
owner, to sell or otherwise dispose of the
possession of that copy or phonorecord. Hence,
COMMERCIAL LAW
Plagiarism presupposes intent and a deliberate, Expression
conscious effort to steal another’s work and pass it
Plagiarism may exist
off as one’s own. (In the matter of the charges of The copying must refer
even if none of the
plagiarism against Associate Justice Mariano C. Del to an expression of an
same words are used
Castillo, A.M. No. 10-7-17-SC, 15 Oct. 2010) idea.
to express an idea.
Copyright Infringement vs. Plagiarism

Remedies in case of Copyright Infringement
COPYRIGHT (I2-D2-M-S)
PLAGIARISM
INFRINGEMENT
Definition 1. Injunction;
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The unauthorized use 2. Impounding during the pendency of the action
of copyrighted sales invoices and other documents evidencing
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material in a manner sales;
that violates one of the The use of another’s 3. Actual Damages, including legal costs and other
copyright owner’s information, language,
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expenses, as he may have incurred due to the
exclusive rights, such or writing, when done infringement as well as the profits the infringer
as the right to without proper may have made due to such infringement;
reproduce or perform acknowledgment of
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the copyrighted work, the original source. 4. Destruction without any compensation all
or to make derivative infringing copies;
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works that build upon
it. 5. Moral and Exemplary damages (Sec. 216.1, IPC);
or
Coverage
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Copyright 6. Seizure and impounding of any article, which
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infringement is a very may serve as evidence in the court proceedings.
broad term that (Sec. 216.2, IPC)
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describes a variety of
acts, such as the Plagiarism is specific The copyright owner may elect, at any time before
duplication of a work, as it refers only to final judgment is rendered, to recover instead of
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rewriting a piece, using someone else’s actual damages and profits, an award of statutory
performing a written work without proper damages for all infringements involved in an action
work or doing anything acknowledgment. in a sum equivalent to the filing fee of the
that is normally infringement action but not less than Fifty thousand
considered to be the pesos (P50,000.00). (Sec. 216.1, IPC, as amended by
exclusive right of the Sec. 22 of R.A. No. 10372)
copyright holder.
Factors to be considered by the Court in
Public Document Awarding Statutory Damages
Public documents can
There is no copyright
be plagiarized so long 1. Nature and purpose of the infringing act;
infringement on public
as it is not 2. Flagrancy of the infringement;
documents.
acknowledged. 3. Whether the defendant acted in bad faith;
4. Need for deterrence;
Manner of Copying
5. Any loss that the plaintiff has suffered or is
The copying must be The copying need not
likely to suffer by reason of the infringement;
substantial. be substantial.
and
2023 GOLDEN NOTES
6. Any benefit shown to have accrued to the Criminal Penalties in case of Copyright
defendant by reason of the infringement. (ibid) Infringement
Double Damages 1. Imprisonment of one (1) year to three (3) years

plus a fine ranging from Fifty thousand pesos
The amount of damages to be awarded shall be (P50,000) to One hundred fifty thousand pesos
doubled against any person who: (P150,000) for the first offense.;
1. Circumvents effective technological measures; 2. Imprisonment of three (3) years and one (1)
or day to six (6) years plus a fine ranging from One
hundred fifty thousand pesos to Five hundred
2. Having reasonable grounds to know that it will thousand (P500,000) for the second offense.;
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induce, enable, facilitate or conceal the
infringement, remove or alter any electronic 3. Imprisonment of six (6) years and one day to
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rights management information from a copy of nine (9) years plus a fine ranging from Five
a work, sound recording, or fixation of a hundred thousand pesos (P500,000) to
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performance, or distribute, import for P1,500,000 for the third offense. ; and
distribution, broadcast, or communicate to the
public works or copies of works without 4. In all cases, subsidiary imprisonment in cases of
authority, knowing that electronic rights insolvency. (Sec. 217, IPC)
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management information has been removed or
altered without authority. (ibid.) Determination of Penalty
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Technological Measure The court shall consider the value of the infringing
materials that the defendant has produced or
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It is any technology, device, or component that, in manufactured and the damage that the copyright
the normal course of its operation, restricts acts in owner has suffered by reason of the infringement:
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respect of a work, performance or sound recording, Provided, that the respective maximum penalty
which are not authorized by the authors, stated in Sec. 217.1. (a), (b) and (c) herein for the
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performers or producers of sound recordings first, second, third and subsequent offense, shall be
concerned or permitted by law. (Sec. 171.12, IPC, as imposed when the infringement is committed by:
amended by Sec. 6 of R.A. No. 10372) 1. Circumvention of effective technological
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measures;
Rights Management Information
2. Removal or alteration of any electronic rights
It is information which identifies the work, sound management information from a copy of a
recording or performance; the author of the work, work, sound recording, or fixation of a
producer of the sound recording or performer of the performance, by a person, knowingly and
performance; the owner of any right in the work, without authority; or
sound recording or performance; or information
about the terms and conditions of the use of the 3. Distribution, importation for distribution,
work, sound recording or performance; and any broadcast, or communication to the public of
number or code that represent such information, works or copies of works, by a person without
when any of these items is attached to a copy of the authority, knowing that electronic rights
work, sound recording or fixation of performance or management information has been removed or
appears in conjunction with the communication to altered without authority. (Sec. 217.2, IPC, as
the public of a work, sound recording or amended by Sec. 23 of R.A. No. 10372)
performance. (Sec. 171.13, IPC, as amended by Sec. 6
of R.A. No. 10372)
COMMERCIAL LAW
Affidavit Evidence the power and ability to control the person
committing the infringement. (Ibid.)
It is an affidavit made before the notary public in
actions for infringement, reciting the facts required Liability of Mall Owners for the Infringement
to be stated under Sec. 216.1 of the IPC. Activities of their Tenants
As a prima facie proof, the affidavit shifts the burden Mall owners are not automatically penalized for the
of proof to the defendant, to prove the ownership of infringing acts of their tenants. When a mall owner
the copyrighted work. or lessor finds out about an infringement activity, he
or she must give notice to the tenant, then he or she
Q: Due to the amendment of the IPC under R.A. will be afforded time to act upon this knowledge.
No. 10372 APPROVED ON 28 FEB. 2013, deleting The law requires that one must have both proven
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the provision entitling importation in the knowledge of the infringement, and the ability to
Philippines of up to three (3) copies of control the activities of the infringing person, to be
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copyrighted works in a personal baggage, can held liable. The mall owner must also have
one still be allowed to import books, DVDs, and benefitted from the infringement. (Ibid.)
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CDs from abroad?
Other Beneficial Provisions brought by R.A. No.
A: YES. In fact, the amendments to the IPC have 10372
removed the original limitation of three copies
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when bringing legitimately acquired copies of 1. Grant of enforcement powers to Intellectual
copyrighted material into the country. Only the Property Office of the Philippines (IPOPHL)
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importation of pirated or infringed material is (Sec. 2)
illegal. As long as they were legally purchased, you
can bring as many copies you want, subject to The law grants visitorial powers to IPOPHL and
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Customs regulations. (FAQs on the amendments to allows it to undertake enforcement functions with
the Intellectual Property Code of the Philippines, the support of concerned agencies such as PNP, NBI,
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officialgazette.gov.ph, 08 Mar 2013) BOC, OMB and LGUs. IPOPHL itself will not be
conducting raids or seizures but will be
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Reproduction of Copyrighted Material for coordinating with the said agencies. However, as IP
Personal Purposes is not Punishable by R. A. No. rights remain to be private rights, there must be a
10372 complaint from the IP right owner. So, if an author
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sees pirated copies of his book in a certain store, he
Infringement in this context refers to the economic may notify IPOPHL. IPOPHL can now initiate
rights of the copyright owner. Transferring music together with any of the said agencies to address the
from a lawfully acquired CD into a computer, then problem.
downloading it to a portable device for personal use,
is not infringement. But if, multiple copies of the CD 2. Establishment of the Bureau of Copyright and
were reproduced for sale, then infringement occurs. other related rights (Secs. 1 and 3)
(Ibid.)
At present there is no entity performing the more
Possession of a Music File Procured through an substantial function of policy formulation,
Infringing Activity is a Violation of the Law rulemaking, adjudication, research and education,
which is envisioned to be handled by the Bureau of
The possession of a music file procured through an Copyright. Although a Copyright Division exists in
infringing activity is a violation of the law only if it the National Library, the function of such office is
can be proven that the person benefitting from the merely to accept deposits of copyrighted works. The
music file has knowledge of the infringement, and Copyright Bureau is dedicated to serving the needs
of the copyright-based industries and stakeholders
2023 GOLDEN NOTES
could give more focus and rally more resources and 5. Fair use for the blind, visually- and reading-
support for the creative industry, which is very impaired (Sec. 11)
important for protection of works by Filipinos both
here and abroad. This provision would give a special fair use
exemption for the non-commercial reproduction of
3. Accreditation of collective management works for use by visually impaired persons. Before
organizations or CMOs (Sec. 10) this amendment, hundreds of thousands of blind
Filipinos could not buy Braille works at cheap prices
CMOs are organizations that enforce the copyright because copyright protection operates. Now with
of the copyright holders. Through this mandate, this amendment, blind and visually impaired
IPOPHL will be able to monitor and promote good Filipinos can have easier access to copyrighted
corporate governance among CMOs, benefitting not works in Braille.
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only the rights holders themselves but also the
users of copyrighted works. Members of the 6. Formulation of IP Policies within universities
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Philippine Retailers Association (PRA), mall and colleges (Sec. 27)
owners, restaurants, and other heavy users of music
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in their establishments will greatly benefit from this This will ensure that the rights of the academic
provision, as they are ensured that only legitimate community (professors, researchers, students) over
collecting agencies can collect royalties from them their literary, scholarly, and artistic works are
on behalf of copyright owners. clearly delineated and respected. With an IP Policy
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in existence, these sectors within the academe will
4. Clarification of the concept of copyright have a clear delineation of their respective rights
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infringement, including secondary liability and benefits, thus, avoiding disputes and costly
(Secs. 22 and 23) litigation within their ranks which would be
detrimental to education, research, and
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The provisions on copyright infringement have development.
been refined to include contributory infringement
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(secondary liability), circumvention of
technological measures and rights management
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information as aggravating circumstances, and the
option to collect statutory damages instead of actual
damages. However, under Sec. 22 of the
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amendments, to be secondarily liable, a landlord or
mall must: (1) benefit from the infringing activity;
(2) must have been given notice of the infringing
activity and a grace period to act on the same; and
(3) has the right and ability to control the activities
of the person who is doing the infringement. The
complainant has the burden of proof to provide
evidence that all 3 elements are present. If a
landlord or mall owner is not aware of the
infringement, he cannot be liable for infringement,
even if he benefits from it (from rental payments) or
has control over the premises.
COMMERCIAL LAW
Objectives of the Law
VI. ELECTRONIC COMMERCE ACT
(R.A. No. 8792) The Act aims to:
1. Facilitate domestic and international dealings,

transactions, arrangements agreements,
Policy of the Law contracts and exchanges and storage of
information through the utilization of
The law is a recognition by the State of: electronic, optical, and similar medium, mode,
1. The vital role of information and instrumentality and technology to recognize
communications technology (ICT) in nation- the authenticity and reliability of electronic
building; documents related to such activities; and
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2. The need to create an information-friendly 2. Promote the universal use of electronic
environment which supports and ensures the transaction in the government and general
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availability, diversity and affordability of ICT public. (Sec. 3, R.A. No. 8792)
products and services;
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Sphere of Application
3. The primary responsibility of the private sector
in contributing investments and services in This Act shall apply to any kind of data message and
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telecommunications and information electronic document used in the context of
technology; commercial and non-commercial activities to
include domestic and international dealings,
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4. The need to develop, with appropriate training transactions, arrangements, agreements, contracts
programs and institutional policy changes, and exchanges and storage of information. (Sec. 4,
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human resources for the information R.A. No. 8792)
technology age, a labor force skilled in the use
of ICT and a population capable of operating
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and utilizing electronic appliances and A. LEGAL RECOGNITION OF ELECTRONIC DATA
computers;
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MESSAGES, DOCUMENTS, AND SIGNATURES
5. Its obligation to facilitate the transfer and
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promotion of technology and to ensure network
Legal Recognition of Electronic Data Messages
security, connectivity, and neutrality of
technology for the national benefit; and
Information shall not be denied legal effect, validity,
or enforceability solely on the grounds that it is in
6. The need to marshal, organize and deploy
the data message purporting to give rise to such
national information infrastructures,
legal effect, or that it is merely referred to in that
comprising in both telecommunications
electronic data message. (Sec. 6, R.A. No. 8792)
network and strategic information services,
including their interconnection to the global
Electronic Data Messages
information networks. (Sec. 2, R.A. No. 8792)
This refers to information generated, sent, received,

or stored by electronic, optical, or similar means.
(Sec. 5(c), R.A. No. 8792)
2023 GOLDEN NOTES
Legal Recognition of Electronic Documents circumstances, including any relevant
agreement;
Electronic documents shall have the legal effect,
validity, or enforceability as any other document or c. It is necessary for the party sought to be bound,
legal writing. (Sec. 7, R.A. No. 8792) in or order to proceed further with the
transaction, to have executed or provided the
Electronic Document electronic signature; and
d. The other party is authorized and enabled to
This refers to information or the representation of verify the electronic signature and to make the
information, data, figures, symbols, or other mode decision to proceed with the transaction
of written expression, described or however authenticated by the same. (Sec. 8, R.A. No.
represented, by which a right is established, or an 8792)
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obligation extinguished, or by which a fact may be
proved and affirmed, which is received, recorded, Electronic Signature
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transmitted, stored, processed, retrieved, or
produced electronically. (Sec. 5(f), R.A. No. 8792) This refers to any distinctive mark, characteristic
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and/or sound in electronic form, representing the
This includes digitally signed documents and any identity of a person, and attached to or logically
print-out or output, readable by sight or other associated with the electronic data message or
means, which accurately reflects the electronic data electronic document or any methodology or
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message or electronic document. (Sec. 1(h), Rule 2, procedures employed or adopted by a person and
A.M. No. 01-7-01-SC or the Rules on Electronic executed or adopted by such person with the
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Evidence) intention of authenticating or approving an
electronic data message or electronic document.
NOTE: Under the Rules on Electronic Evidence, the (Sec. 5(e), R.A. No. 8792)
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term “electronic document” may be used
interchangeably with “electronic data message”. NOTE: For the purposes of the Rules on Electronic
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(Divina, 2021; Sec. 1(h), Rules on Electronic Evidence, an electronic signature includes digital
Evidence) signature. (Sec. 1(j), Rule 2, Rules on Electronic
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Evidence)
Legal Recognition of Electronic Signatures
Digital Signature
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An electronic signature on the electronic document
shall be equivalent to the signature of a person on a This refers to an electronic signature consisting of a
written document if that signature is proved by transformation of an electronic document or an
showing that a prescribed procedure, not alterable electronic data message using an asymmetric or
by the parties interested in the electronic document, public cryptosystem, such that a person has the
existed under which: initial untransformed electronic document and the
signer’s public key can accurately determine the
a. A method is used to identify the party sought to following:
be bound and to indicate said party’s access to
i. Whether the transformation was created using
the electronic document necessary for his
the private key that corresponds to the
consent or approval through the electronic
signer’s public key; and
signature;
ii. Whether the initial electronic document had

b. Said method is reliable and appropriate for the
been altered after the transformation was
purpose for which the electronic document was
made. (Sec. 1(e), Rule 2, Rule on Electronic
generated or communicated, in the light of all
Evidence)
COMMERCIAL LAW
B. PRESUMPTION RELATING TO ELECTRONIC C. ADMISSIBILITY AND EVIDENTIAL WEIGHT OF

SIGNATURES ELECTRONIC DATA MESSAGE OR ELECTRONIC
DOCUMENT
In any proceedings involving an electronic

signature, it shall be presumed that: Admissibility in Evidence of Electronic Data
Message or Electronic Document
a) The electronic signature is the signature of
the person to whom it correlates; and In any legal proceedings, nothing in the application
of the rules on evidence shall deny the admissibility
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b) The electronic signature was affixed by that of an electronic data message or electronic
person with the intention of signing or document in evidence:
approving the electronic document unless
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the person relying on the electronically a) On the sole ground that it is in electronic
signed electronic document knows or has form; or
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notice of defects in or unreliability of the
signature or reliance on the electronic b) On the ground that it is not in the standard
signature is not reasonable under the written form, and the electronic data
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circumstances. (Sec. 9, R.A. No. 8792) message or electronic document meeting
and complying with the requirements
NOTE: Under the Rules on Electronic Evidence, upon under Secs. 6 or 7 of the Act shall be the best
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the authentication of an electronic signature, the evidence of the agreement and transaction
disputable presumptions are: contained therein. (Sec. 12, R.A. No. 8792)
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a) The electronic signature is that of the NOTE: Under the Rules on Electronic Evidence, an
person to whom it correlates; electronic document is admissible in evidence if it
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complies with the rules on admissibility prescribed
b) The electronic signature was affixed by that by the Rules of Court and related laws and is
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person with the intention of authenticating authenticated in the manner prescribed by these
or approving the electronic document to Rules. (Sec. 2, Rule 3, Rules on Electronic Evidence)
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which it is related or to indicate such
person's consent to the transaction Evidential Weight of Electronic Data Message or
embodied therein; and Electronic Document
c) The methods or processes utilized to affix In assessing the evidential weight of an electronic
or verify the electronic signature operated data message or electronic document, the reliability
without error or fault. (Sec. 3, Rule 6, Rules of the manner in which it was generated, stored or
on Electronic Evidence) communicated, the reliability of the manner in
which its originator was identified, and other
relevant factors shall be given due regard.
NOTE: Under the Rules on Electronic Evidence, the

following are the factors for assessing evidentiary
weight:
2023 GOLDEN NOTES
a) The reliability of the manner or method in required under existing laws for the formation of
which it was generated, stored, or contracts is expressed, demonstrated and proved by
communicated, including but not limited to means of electronic data messages or electronic
input and output procedures, controls, documents. (Ibid.)
tests and checks for accuracy and reliability
of the electronic data message or XPN: When the parties otherwise agree.
document, in the light of all the
circumstances as well as any relevant Electronic Transactions made through
agreement; Networking among Banks
b) The reliability of the manner in which its Electronic transactions made through networking
originator was identified; among banks, or linkages thereof with other entities
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or networks, and vice versa, shall be deemed
c) The integrity of the information and consummated upon the actual dispensing of cash or
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communication system in which it is the debit of one account and the corresponding
recorded or stored, including but not credit to another. (Sec. 16(2), R.A. No. 8792)
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limited to the hardware and computer
programs or software used as well as NOTE: The obligation of one bank, entity, or person
programming errors; similarly situated to another arising therefrom shall
be considered absolute and shall not be subjected to
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d) The familiarity of the witness or the person the process of preference of credits. (Ibid.)
who made the entry with the
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communication and information system; Choice of Security Methods
e) The nature and quality of the information Subject to applicable laws and/or rules and
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which went into the communication and guidelines promulgated by the Department of Trade
information system upon which the and Industry (DTI) with other appropriate
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electronic data message or electronic government agencies, the parties to any electronic
document was based; or transaction shall be free to determine the type of
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level of electronic data message and electronic
f) Other factors which the court may consider document security needed, and to select and use or
as affecting the accuracy or integrity of the implement appropriate technological methods that
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electronic document or electronic data will suit their needs. (Sec. 24, R.A. No. 8792)
message. (Sec. 1, Rule 7, Rule on Electronic
Evidence)
D. OBLIGATION OF CONFIDENTIALITY
Formation and Validity of Electronic Contracts
GR: An offer, the acceptance of an offer and such

Except for the purposes authorized under this Act,
other elements required under existing laws for the
any person who obtained access to any electronic
formation of contracts may be expressed in,
key, electronic data message or electronic
demonstrated and proved by means of electronic
document, book, register, correspondence,
data messages or electronic documents. (Sec. 16(1),
information, or other material pursuant to any
R.A. No. 8792)
powers conferred under this Act, shall not convey
to, or share the same with any other person. (Sec. 32,
NOTE: No contract shall be denied validity or
R.A. No. 8792)
enforceability on the sole ground that it is in the
form of an electronic data message or electronic
document, or that any or all of the elements
COMMERCIAL LAW
e. transfer relevant technologies in
VII. FOREIGN INVESTMENTS ACT agriculture, industry and support
(R.A. No. 7042, as amended by R.A. No. 11647) services.
3. Foreign investments shall be welcome as a

supplement to Filipino capital and
technology in those enterprises serving
A. POLICY OF THE LAW mainly the domestic market.
(Sec. 1, R.A. No. 11647)
4. The State shall promote accountability and
integrity in public office, as well as the
State Policy of the Law promotion and administration of efficient
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public service to entice foreign
1. Recognizing that increased capital and investments.
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technology benefits the Philippines and
that global and regional economies affect 5. Foreign investments shall be conducted
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the Philippine economy, it is the policy of based on the principles of transparency,
the State to attract, promote and welcome reciprocity, equity, and economic
productive investments from foreign cooperation. (Sec. 1, R.A. No. 7042 as
individuals, partnerships, corporations, amended by R.A. No. 11647)
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and governments, including their political
subdivisions, in activities which
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significantly contribute to sustainable, B. DEFINITION OF TERMS
inclusive, resilient, and innovative (Sec. 2, R.A. No. 11647)
economic growth, productivity, global
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competitiveness, employment creation,
technological advancement, and
Significant Terms
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countrywide development to the extent
that foreign investment is allowed in such
The term “investment" shall mean equity
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activity by the Constitution and relevant
participation in any enterprise, organized or
laws, and consistent with the protection of
existing under the laws of the Philippines and duly
national security.
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recorded in the enterprise's stock and transfer
book, or any equivalent registry of ownership. (Sec.
2. Foreign investments shall be encouraged in
3[b], R.A. No. 7042 as amended by R.A. No. 11647)
enterprises that significantly:
a. expand livelihood and employment
The term “practice of profession" shall mean an
opportunities for Filipinos;
activity or undertaking rendered and performed by
a registered and duly licensed professional or
b. enhance economic value of agricultural
holder of a special temporary permit as defined in
products;
the scope of practice of a professional regulatory
law. (Sec. 3(h), R.A. No. 7042 as amended by R.A. No.
c. promote the welfare of Filipino
11647)
consumers;
The term “pipeline transaction" shall mean the

d. expand the scope, quality and volume
sector which includes transport of goods or
of exports and their access to foreign
materials through a pipeline such as crude, refined,
markets; and/or
petroleum, natural gas, biofuels, and other
2023 GOLDEN NOTES
VII. FOREIGN INVESTMENTS ACT
chemically stable substance. (Sec. 3(i), R.A. No. 7042 Instances that are considered as “NOT Doing or
as amended by R.A. No. 11647) Transacting Business” in the Philippines for
Foreign Corporations
1. FOREIGN INVESTMENT
1. Mere investment as a shareholder in
Definition domestic corporations duly registered to
do business and/or the exercise of rights as
The term “foreign investment” shall mean an equity such investor;
investment made by non-Philippine national in the
form of foreign exchange and/or other assets 2. Having a nominee director or officer to
actually transferred to the Philippines and duly represent its interest in the corporation;
registered with the Bangko Sentral ng Pilipinas. (Sec.
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3[c], R.A. No. 7042 as amended by R.A. No. 11647) 3. Appointing a representative or distributor
domiciled in the Philippines which
A
2. DOING BUSINESS transacts business in its own name and for
its own account;
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When Foreign Corporations are considered
“Doing Business” 4. Publication of a general advertisement
through any print or broadcast media;
Foreign corporations are considered “doing or
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transacting business” in the Philippines if they are: 5. Maintaining a stock of goods in the
Philippines solely for the purpose of having
E
1. Soliciting orders, service contracts, and the same processed by another entity in the
opening offices whether called “liaison” Philippines;
offices or branches;
N
6. Consignment by the foreign corporation of
2. Appointing representatives or distributors equipment with a local company to be used
E
domiciled in the Philippines or who in any in the processing of products for export;
calendar year stay for a period or periods
T
totaling one hundred eighty (180) days or 7. Collecting information in the Philippines;
more; and
A
3. Participating in the management, 8. Performing services auxiliary to an existing
supervision or control of any domestic isolated contract of sale which are not on a
business, firm, entity, or corporation in the continuing basis. (Sec. 1(f), IRR of R.A. No.
Philippines; or 7042, as amended by R.A No. 8179)
4. Doing any other act or acts that imply a NOTE: Most of these activities do not bring any
continuity of commercial dealings or direct receipts or profits to the foreign corporation,
arrangements, and contemplate to that consistent with the ruling of this Court in National
extent the performance of acts or works or Sugar Trading Corp. v. CA that activities within
the exercise of some functions normally Philippine jurisdiction that do not create earnings
incident to and in progressive prosecution or profits to the foreign corporation do not
of, the purpose and object of its constitute doing business in the Philippines. To
organization. (Sec. 3(d), R.A. No. 7042) constitute "doing business," the activity undertaken
in the Philippines should involve profit-making.
Besides, under Sec. 3(d) of R.A. No. 7042, "soliciting
purchases" has been deleted from the enumeration
of acts or activities which constitute "doing
COMMERCIAL LAW
business." (Cargill v. Intra Strata Assurance Corp., Philippines which transacts business in its own
G.R. No. 168266, 15 Mar. 2010) name and for its own account.
Q: Petitioner Cargill, Inc. is a corporation Since respondent is relying on Sec. 133 of the
organized and existing under the laws of the Corporation Code to bar petitioner from maintaining
State of Delaware, United States of America. an action in Philippine courts, respondent bears the
Petitioner and Northern Mindanao Corporation burden of proving that petitioner’s business
(NMC) executed a contract dated 16 Aug. 1989 activities in the Philippines were not just casual or
whereby NMC agreed to sell to petitioner 20,000 occasional, but so systematic and regular as to
to 24,000 metric tons of molasses, to be manifest continuity and permanence of activity to
delivered from 1 Jan. to 30 June 1990 at the price constitute doing business in the Philippines. (Cargill
of $44 per metric ton. NMC was only able to v. Intra Strata Assurance Corp., ibid)
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deliver 219.551 metric tons of molasses out of
the agreed 10,500 metric tons. Thus, petitioner Isolated Transaction
A
sent demand letters to respondent claiming
payment under the performance and surety What is determinative of doing business is not really
L
bonds. When respondent refused to pay, the number or the quantity of the transactions, but
petitioner filed on 12 Apr. 1991 a complaint for more importantly, the intention of an entity to
sum of money against NMC and respondent. continue the body of its business in the country. The
Respondent claims petitioner is barred from number and quantity are merely evidence of such
O
filing said suit for the lack of the requisite intention. The phrase isolated transaction has a
license under Sec. 133 of the Corporation Code. Is definite and fixed meaning, i.e. a transaction or
E
petitioner doing or transacting business in the series of transactions set apart from the common
Philippines so as to bar him from filing said suit? business of a foreign enterprise in the sense that
there is no intention to engage in a progressive
N
A: NO. The phrase "doing business" shall include pursuit of the purpose and object of the business
"soliciting orders, service contracts, opening offices, organization. Whether a foreign corporation is
E
whether called ‘liaison’ offices or branches; doing business does not necessarily depend upon
appointing representatives or distributors the frequency of its transactions, but more upon the
T
domiciled in the Philippines or who in any calendar nature and character of the transactions. (Eriks PTE.
year stay in the country for a period or periods LTD. v. CA, G.R. No. 118843, 06 Feb. 1997)
totaling 180 days or more; participating in the
A
management, supervision or control of any Q: A foreign company has a distributor in the
domestic business, firm, entity or corporation in the Philippines. The latter acts in his own name and
Philippines; and any other act or acts that imply a account. Will this distributorship be considered
continuity of commercial dealings or arrangements, as doing business by the foreign company in the
and contemplate to that extent the performance of Philippines? (2015 BAR)
acts or works, or the exercise of some of the
functions normally incident to, and in progressive A: The appointment of a distributor in the
prosecution of, commercial gain or of the purpose Philippines is not sufficient to constitute “doing
and object of the business organization: Provided, business” unless it is under the full control of the
however, That the phrase ‘doing business’ shall not foreign corporation. If the distributor is an
be deemed to include mere investment as a independent entity doing business which buys and
shareholder by a foreign entity in domestic distributes products, other than those of the foreign
corporations duly registered to do business, and/or corporation, for its own name and its own account,
the exercise of rights as such investor; nor having a the latter cannot be considered as doing business in
nominee director or officer to represent its interests the Philippines. (Steelcase, Inc. v. Design
in such corporation; nor appointing a International Selections, Inc., GR No. 171995, 18 Apr.
representative or distributor domiciled in the 2012)
2023 GOLDEN NOTES
3. EXPORT ENTERPRISE 4. DOMESTIC MARKET ENTERPRISE
Definition Definition
It is an enterprise wherein a manufacturer, It is an enterprise which produces goods for sale, or

processor or service (including tourism) enterprise renders services to the domestic market entirely or
exports sixty percent (60%) or more of its output, if exporting a portion of its output fails to
or wherein a trader purchases products consistently export at least 60% thereof. (Sec. 3(e),
domestically and exports sixty percent (60%) or R.A. No. 7042)
more of such purchases. (Sec. 3(e), R.A. No. 7042)
Profit-Making Transaction
An exporter in one country may export its products
W
to many foreign importing countries without To constitute "doing business," the activity
performing in the importing countries specific undertaken in the Philippines should involve profit-
A
commercial acts that would constitute doing making. Besides, under Sec. 3(d) of R.A. No. 7042,
business in the importing countries. The mere act of "soliciting purchases" has been deleted from the
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exporting from one’s own country, without doing enumeration of acts or activities which constitute
any specific commercial act within the territory of "doing business."
the importing country, cannot be deemed as doing
business in the importing country. The importing NOTE: Other factors which support the finding that
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country does not require jurisdiction over the petitioner is not doing business in the Philippines
foreign exporter who has not yet performed any are: (1) petitioner does not have an office in the
E
specific commercial act within the territory of the Philippines; (2) petitioner imports products from
importing country. Without jurisdiction over the the Philippines through its non-exclusive local
foreign exporter, the importing country cannot broker, whose authority to act on behalf of
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compel the foreign exporter to secure a license to do petitioner is limited to soliciting purchases of
business in the importing country. products from suppliers engaged in the sugar trade
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in the Philippines; and (3) the local broker is an
Otherwise, Philippine exporters, by the mere act independent contractor and not an agent of
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alone of exporting their products, could be petitioner. (Cargill v. Intra Strata Assurance Corp.,
considered by the importing countries to be doing supra)
A
business in those countries. This will require
Philippine exporters to secure a business license in
every foreign country where they usually export
their products, even if they do not perform any
specific commercial act within the territory of such
importing countries. Such a legal concept will have
deleterious effect not only on Philippine exports,
but also on global trade. (B. Van Zuiden Bros., Ltd. v.
GTVL Manufacturing Industries, Inc., G.R. No. 147905,
28 May 2007)
COMMERCIAL LAW
Availment of Incentives under the Omnibus
C. REGISTRATION OF INVESTMENT OF Investments Code
NON-PHILIPPINE NATIONALS
(Sec. 6, R.A. No. 11647) Any enterprise seeking to avail of incentives under
the Omnibus Investments Code of 1987 must apply
for registration with the BOI, which shall process
such application for registration in accordance with
Philippine National
the criteria for evaluation prescribed in said Code.
(ibid)
A Philippine national under this law shall mean;
a. A citizen of the Philippines;
Intention to Engage in the Same Line of Business
by a Non-Philippine National
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b. A domestic partnership or association
wholly owned by the citizens of the
A non-Philippine national intending to engage in the
Philippines;
A
same line of business as an existing joint venture, in
which he or his majority shareholder is a substantial
c. A corporation organized under the law of
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partner, must disclose the fact and the names and
the Philippines of which at least 60% of the
addresses of the partners in the existing joint
capital stock outstanding and entitled to
venture enterprise, particularly the Filipino
vote is owned and held by citizens of the
partners therein, can reasonably prove they are
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Philippines; or
capable to make the investment needed for the
domestic market activities to be undertaken by the
d. A corporation organized abroad and
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competing applicant. (ibid)
registered as doing business in the
Philippines under the Corporation Code of
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which one hundred percent (100%) of the
capital stock outstanding and entitled to D. FOREIGN INVESTMENTS IN EXPORT
vote is wholly owned by Filipinos. (Sec. ENTERPRISES
E
3(a), R.A. No. 8179 amending R.A. No. 7042) (Sec. 7, R.A. No. 11647)
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Registration of Investments of Non-Philippine
Nationals Foreign Investment in Export Enterprises
A
Without need of prior approval, a non-Philippine 1. Foreign investment in export enterprise
national, may, upon registration with the SEC or the whose products and services do not fall
DTI, do business as defined in Sec. 3(d) of this Act or within Lists A and B of the Foreign
invest in a domestic enterprise up to one hundred Investment Negative List provided under
percent (100%) of its capital, unless participation of Section 8 hereof is allowed up to 100%
non-Philippine nationals in the enterprise is ownership.
prohibited or limited to a smaller percentage by
existing law and/or under the provisions of this Act. 2. Export enterprise which are non-Philippine
(Sec. 5, R.A No. 7042 as amended by Sec. 6 of R.A. No. nationals shall register with BOI and
11647) submit the reports that may be required to
ensure continuing compliance of the export
NOTE: The SEC or the DTI shall not impose any enterprise with its export requirement. BOI
limitations on the extent of foreign ownership in an shall advise SEC or STI, as the case may be,
enterprise additional to those provided in this Act. of any export enterprise that fails to meet
(ibid) the export ration requirement. The SEC or
DTI shall thereupon order the non-
2023 GOLDEN NOTES
complying export enterprise to reduce its
sales to the domestic market to not more F. FOREIGN INVESTMENT NEGATIVE LIST
than forty percent (40%) of its total (Sec. 8, R.A. No. 11647)
production. Failure to comply with such
SEC or DTI order, without justifiable
reason, shall subject the enterprise to
Foreign Investment Negative List
cancellation of SEC or DTI registration,
and/or the penalties provided. The Foreign Investment Negative List shall have
two (2) component lists: A and B:
3. Export enterprise shall register and comply
with the export requirements in 1. List A shall enumerate the areas of
accordance with Title XIII of the National activities reserved to Philippine nationals
W
Internal Revenue Code (NIRC), as amended, by mandate of the Constitution and specific
for purpose of availing any tax incentive or laws.
A
benefit.
2. List B shall contain the areas of activities
and enterprises regulated pursuant to law:
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E. FOREIGN INVESTMENTS IN DOMESTIC
a. which are defense-related activities,
MARKET ENTERPRISES
requiring prior clearance and authorization
(Sec. 7, R.A. No. 7042)
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from Department of National Defense
(DND) to engage in such activity, such as
E
the manufacture, repair, storage and/or
Foreign Investments in Domestic Market distribution of rearms, ammunition, lethal
Enterprises weapons, military ordinance, explosives,
N
pyrotechnics and similar materials, unless
Non-Philippine nationals may own up to 100% of such manufacturing or repair activity is
domestic market enterprises unless foreign
E
specially authorized by the Secretary of
ownership therein is prohibited or limited by: National Defense; or (as amended by RA No
1. the Constitution and/or existing law; or
T
11647)
2. the Foreign Investment Negative List.
b. which have implications on public health
A
A domestic market enterprise may change its status and morals, such as the manufacture and
to export enterprise if over a three (3)–year period distribution of dangerous drugs, all forms
it consistently exports in each year thereof sixty of gambling, nightclubs, bars, beer houses,
percent (60%) or more of its output. dance halls, sauna and steam bathhouses
and massage clinics.
Except as otherwise provided under Republic Act

No. 8762, otherwise known as the Retail Trade
Liberalization Act of 2000 and other relevant laws,
micro and small domestic market enterprises with
paid-in equity capital less than the equivalent of
Two Hundred Thousand US Dollars
(US$200,000.00) are reserved to Philippine
nationals.
COMMERCIAL LAW
A minimum paid-in capital of One Hundred
Thousand US Dollars (US$100,000.00) shall be
allowed to non-Philippine nationals, if:
1. they involve advanced technology as

determined by the Department of Science
and Technology (DOST), or
2. they are endorsed as startup or startup

enablers by the lead host agencies pursuant
to RA No. 11337, otherwise known as the
Innovative Startup Act; or
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3. a majority of their direct employees are
Filipinos, but in no case shall the number of
A
Filipino employees be less than fifteen (15).
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Registered foreign enterprises employing foreign
nationals and enjoying fiscal incentives shall
implement an understudy or skills development
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program to ensure the transfer of technology or
skills to Filipinos. Compliance with this requirement
shall be regularly monitored by the DOLE.
N E
T E
A
2023 GOLDEN NOTES
VIII. PUBLIC SERVICE ACT
VIII. PUBLIC SERVICE ACT C. PUBLIC SERVICE AS PUBLIC UTILITY

(C.A. 146, as amended by R.A. No. 11659) (Sec. 4, R.A. No. 11659)
Jurisdiction and Supervision of the Commission

A. CRITICAL INFRASTRUCTURE
(Sec. 2(e), R.A. No. 11659) The Commission shall have jurisdiction and
supervision over all public services, including public
utilities, and their franchise, equipment, and other
properties. (Sec. 4, R.A. No. 11659)
Critical Infrastructure
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NOTE: Public services, including public utilities,
It refers to any public service which owns, uses or
owned or operated by government entities or
A
operates systems and assets, whether physical or
GOCCs shall be regulated by the Commission in the
virtual, so vital to the Republic of the Philippines
same way as privately-owned public services.
L
that the incapacity or destruction of such systems or
assets would have a detrimental impact on national
Nothing in this act shall be interpreted to diminish,
security, including telecommunications and other
limit, or restrict the authority of Congress from
such vital services as may be declared by the
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granting franchises to public services. (ibid)
President. (Sec. 2(e), R.A. No. 11659)
Public Service
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B. FOREIGN STATE-OWNED ENTERPRISE It includes every person that now or hereafter may
(Sec. 2(g), R.A. No. 11659) own, operate, manage, or control in the Philippines,
N
for hire or compensation, with general or limited
clientele, whether permanent, occasional or
E
Foreign State-Owned Enterprise accidental, and done for general business purposes,
any common carrier, railroad, street railway,
T
It refers to an entity which a foreign State: traction railway, sub-way motor vehicle, either for
a. Directly or indirectly owns more than fifty freight or passenger, or both with or without fixed
A
percent (50%) of the capital taking into route and whether may be its classification, freight
account both the voting rights and or carrier service of any class, express service,
steamboat or steamship line, pontines, ferries, and
beneficial ownership;
water craft, engaged in the transportation of
passengers or freight or both, shipyard, marine
b. Controls, through ownership interests, the
railways, marine repair shop, wharf or dock, ice
exercise of more than fifty percent (50%) of
plant, ice-refrigeration plant, canal, irrigation
the voting rights; or
system, gas, electric light, heat and power water
supply and power, petroleum, sewerage system,
c. Holds the power to appoint a majority of
wire or wireless communications system, wire or
members of the board of directors or any
wireless broadcasting stations and other similar
other equivalent management body. Sec.
public services. (Sec. 13(b) of C.A. 146 as amended by
2(g), R.A. No. 11659)
C.A. 454 and R.A. No. 2677)
COMMERCIAL LAW
Person 4. The commodity or service is obligated to
provide adequate service to the public on
It includes every individual, co-partnership, joint- demand. (ibid)
stock company, or corporation, whether domestic
or foreign, their lessees, trustees, or receivers, as NOTE: A public service which is not classified as a
well as any municipality, province, city, GOCC, or public utility under this Act shall be considered a
agency of the government, and whatever other business affected with public interest for purposes
persons or entities that may own or possess or of Secs. 17 and 18 of Art. XII of the Constitution.
operate public services. (ibid)
Public Utility D. UNLAWFUL ACTS
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(Sec. 9, R.A. No. 11659)
It refers to a public service that operates, manages
or controls for public use any of the following:
A
(1) Distribution of Electricity;
Unlawful Acts
(2) Transmission of Electricity;
L
(3) Petroleum and Petroleum Products
It shall be unlawful for any public service:
Pipeline Transmission Systems;
(a) To provide or maintain any service that is
(4) Water Pipeline Distribution Systems and
unsafe, improper, or inadequate, or
Wastewater Pipeline Systems, including
O
withhold or refuse any service which can
sewerage pipeline systems;
reasonably be demanded and furnished, as
(5) Seaports; and
found and determined by the Commission
E
(6) Public Utility Vehicles
in a final order which shall be conclusive
and shall take effect in accordance with this
All concessionaires, joint ventures and other similar
N
Act, upon appeal or otherwise;
entities that wholly operate, manage or control for
public use the sectors enumerated are public
(b) To make or give, directly or indirectly, by
E
utilities. (Sec. 4, R.A. No. 11659)
itself or through its agents, attorneys or
brokers or any of them, discounts or
T
Classification of a Public Utility as
rebates on authorized rates, or grant credit
Recommended by the President
for the payment of freight charges, or any
A
undue or unreasonable preference or
The President, upon recommendation of the NEDA,
advantage to any person or corporation or
may recommend to Congress the classification of a
to any locality or to any particular
public service as a public utility on the basis of the
description of traffic or service, or subject
following criteria:
any particular person or corporation or
locality or any particular description of
1. The person or juridical entity regularly
traffic to any prejudice or disadvantage in
supplies and transmits and distributes to
any respect whatsoever, to adopt, maintain,
the public through a network a commodity
or enforce any regulation, practice or
or service of public consequence;
measurement which shall be found or
determined by the Commission to be
2. The commodity or service is a natural
unjust, unreasonable, unduly preferential
monopoly that needs to be regulated when
or unjustly discriminatory, in a final order
the common good so requires.
which shall be conclusive and shall take
effect in accordance with the provisions of
3. The commodity or service is necessary for
this Act, upon appeal or otherwise;
the maintenance of life and occupation of
the public; and
2023 GOLDEN NOTES
VIII. PUBLIC SERVICE ACT
(c) To refuse or neglect, when requested by the results in the grant of control, whether direct or
Postmaster General or his authorized indirect, to a foreigner or a foreign corporation.
representative, to carry public mail on the
regular trips of any public land NOTE: The Philippine Competition Commission
transportation service maintained or (PCC) may be consulted on matters relating to
operated by any such public service, upon mergers and acquisitions.
such terms and conditions and for a
consideration in such amounts as may be The NEDA shall be the agency that would
agreed upon between the Postmaster promulgate rules and regulations to implement this
General and the public service carrier or provision. (Sec. 23, R.A. No. 11659)
fixed by the Commission in the absence of
an agreement between the Postmaster
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General and the carrier. F. INVESTMENTS BY AN ENTITY CONTROLLED
BY OR ACTING ON BEHALF OF THE FOREIGN
A
In case the Postmaster General and the GOVERNMENT, OR FOREIGN STATE-OWNED
public service carrier are unable to agree ENTERPRISES
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on the amount of the compensation to be (Sec. 24, R.A. No. 11659)
paid for the carriage of the mail, the
Postmaster General shall forthwith request
the Commission to fix a just and reasonable
O
Investments by an Entity Controlled by or Acting
compensation for such carriage and the
on behalf of the Foreign Government
same shall be promptly fixed by the
E
Commission in accordance with Sec. 16 of
An entity controlled by or acting on behalf of the
this Act; and
foreign government or foreign state-owned
N
enterprises shall be prohibited from owning capital
(d) To refuse or neglect, when requested by the
in any public service classified as public utility or
Administrative Agency to urgently use,
critical infrastructure.
E
deliver or render the public service for the
purpose of avoiding further loss on human,
NOTE: The prohibition shall apply only to
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material, economic, or environment during
investments made after the effectivity of this Act.
a state of calamity. (Sec. 9, R.A. No. 11659)
A
The foreign State-owned enterprises which own
capital prior to the effectivity of this law are
E. POWERS OF THE PRESIDENT TO SUSPEND OR prohibited from investing in additional capital upon
PROHIBIT TRANSACTION OR INVESTMENT effectivity of this Act.
(Sec. 23, R.A. No. 11659)
Notwithstanding the immediately preceding clause,
the sovereign wealth funds and independent
Powers of the President to Suspend or Prohibit pension funds of each state may collectively own up
Transaction or Investment to thirty percent (30%) of the capital of such public
services.
The President, after review, evaluation and
recommendation of the relevant government Non-disclosure
department or Administrative Agency, may, within
sixty (60) days from the receipt of such In the interest of national security, an entity
recommendation, suspend or prohibit any controlled by or acting on behalf of the foreign
proposed merger or acquisition transaction, or any government or foreign-owned enterprises shall not
investment in a public service that effectively make any data or information disclosure, nor
COMMERCIAL LAW
extend assistance, support or cooperation to any DOLE, upon consultation with relevant government
foreign government, instrumentalities, or agents. agencies and industry experts. (Sec. 25, R.A. No.
11659)
The NEDA shall be the agency that would
promulgate rules and regulations to implement this
provision. (Sec. 24, R.A. No. 11659)
G. RECIPROCITY CLAUSE
(Sec. 25, R.A. No. 11659)
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Reciprocity Clause
A
Foreign nationals shall not be allowed to own more
than 50% of the capital of entities engaged in the
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operation and management of critical
infrastructure unless the country of such foreign
national accords reciprocity to Philippine Nationals
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as may be provided by foreign law, treaty or
international agreement. Reciprocity may be
satisfied by according rights of similar value in other
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economic sectors.
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Employment of a Foreign National
Unless otherwise provided by law, or by any
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international agreement, a public service shall
employ a foreign national only after the
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determination of non-availability of a Philippine
National who is competent, able and willing to
A
perform the services for which the foreign national
is desired.
Any foreign national seeking admission to the

Philippines for employment purposes and any
public service which desires to engage a foreign
national for employment in the Philippines must
obtain an employment permit pursuant to P.D. 442,
otherwise known as the Labor Code as amended.
Public services employing foreign nationals issued

employment permits in industries to be determined
by the DOLE shall implement an understudy/skills
development program to ensure the transfer of
technology/skills to Filipinos, whether next-in-rank
or otherwise, with the potential of succeeding the
foreign national in the same establishment by the
2023 GOLDEN NOTES

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A W

Address: Academics Committee

Released in the Philippines, 2023.

ACADEMIC YEAR 2022-2023

T E JUSTINE RENEE GERVACIO

ATTY. AL CONRAD B. ESPALDON

RON-SOPHIA NICOLE C. ANTONIO CRIMINAL LAW

DIANNE MICAH ANGELA D. YUMANG REMEDIAL LAW

PAULA ANDREA F. PEÑAFLOR COVER DESIGN ARTIST

FACULTY OF CIVIL LAW

JUDGE PHILIP A. AGUINALDO

LENY G. GADIANA, R.G.C.

OUR DEEPEST APPRECIATION TO OUR

Dean Amado L. Dimayuga Atty. Marian Joanne K. Co-Pua

Atty. Fe T. Becina-Macalino Atty. Janna Mae B. Tecson

Atty. Mercy Jane B. Paras- Atty. Maria Zarah R. Villanueva-

Atty. Ronel U. Buenaventura Atty. Mary Ann L. Reyes

Atty. Anna Katrina T. Singcol Atty. Darwin R. Bawar

3. Nominate – It has a special name or

4. Consensual – Perfected by mere consent,

Typical Incidents of Partnership

7. On dissolution, the partnership is not b) RULES TO DETERMINE EXISTENCE

e. As the Consideration for the sale of a

Burden of Proving the Existence of a

1. Expressly – There is a definite period; or

Power In a professional partnership, it is the individual

2. If he acts in bad a) RIGHTS AND OBLIGATIONS OF THE

It is to be noted that the industrial partner is Requisites (Re-No-I)

2. Right on the distribution of profits and losses; Partners’ Inspection Rights

5. Right to formal account as to partnership Action for Accounting

XPN: However, in special and unusual situations

1. Distribution of profits: 1. Right to the partnership and to

Property Rights of a Partner

1. Right in specific partnership property;

1. Rights withheld from the assignee: The following are obligations of

b. Knowledge of the partner acting in the

partner, in making the 3. DISSOLUTION AND WINDING UP

Conveyance does not

4. LIMITED PARTNERSHIP FORMATION AND AMENDMENT OF LIMITED

It is one formed by two or more persons having as

NOTE: Among the contents of the Certificate of

3. One or more limited partners contribute to

Instances when a General Partner Needs

3. Confesses judgment against partnership;

Requisites for Return of Contribution of a 1. To the partnership

Thus, a corporation engaged in mining cannot

ADVANTAGES DISADVANTAGES PARTNERSHIP CORPORATION

As to Management 2. CLASSES OF CORPORATIONS

a. Closed Corporation ‐ one whose AOI

c. One-Person Corporation – a corporation

Who are Considered as Philippine Nationals

Under R.A. No. 7042 (Foreign Investments Act of

1. Corporations organized under Philippine laws

NOTE: "Corporate layering" is admittedly allowed 4. CORPORATE JURIDICAL ENTITY

Q: Following the decision of the Court in the case

A: NO, there was no showing that Arcega, as RECOVERY OF DAMAGES

NO PAR VALUE SHARES PREFERRED SHARES

Stock which entitles

6. INCORPORATION AND ORGANIZATION a prior complete organization before a corporation

It is a contract for the acquisition of unissued stock

GR: Promoters are personally liable on their

c) PRE-INCORPORATION SUBSCRIPTION 3. Labor or services actually rendered to the

Kinds of Subscription 4. Prior corporate obligations or

e) ARTICLES OF INCORPORATION 6. Number of directors, which shall not be