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DIVINA
on
COMMERCIAL LAW
A Comprehensive Guide
Volume II
NILO T. DIVINA
Published & Distributed by
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FOREWORD
Among the different fields of law, commercial law has perhaps the most practical
and utilitarian application in this day and age of incessant innovation,
interconnectedness, and technological breakthroughs. Indeed, we engage in a myriad
of commercial transactions on a daily basis, ranging from the more mundane activities
of booking public transport and having our basic commodities delivered through thirdparty couriers, to the more complex pursuits such as business mergers and
consolidations, and even corporate rehabilitation or liquidation. These matters and a
whole lot more are given stability and structure through the different facets of
commercial law, which, for its extensiveness and breadth, has become an indispensable
aspect of today’s society and its ever-evolving future. In a sense, commerce is the
lifeblood of a nation. As such, it is vital that our aptitude and understanding of
commercial law be continuously honed.
Emblematic of the subject, the commercial law qualities of practicality and utility
are likewise reflected in this new undertaking of Dean Nilo T. Divina, whose expertise
and experience in the field are i nsight fully showcased in this compendium of questions.
In particular, Dean Divina craftily weaves various topics and issues in the realm of
insurance, pre-need plans, transportation (including air transportation), partnerships,
and corporate law, into useful hypotheticals that are intelligibly answered in order to
convey the underlying essentials of each subject matter. In the same vein, fundamental
definitions and enumerations for each subject are included, providing the reader an
effective memory aid that is easy to follow. Truly, this book, with its clear, concise, and
simple presentation, but comprehensive scope, will surely serve as an important tool
not only for law practitioners and law students alike, but also to the layman who has a
legitimate desire to familiarize himself with the basic concepts as well as seemingly
intricate workings of commercial law.
I would like to congratulate Dean Divina for this momentous effort well done.
This comprehensive guide should be considered as an important resource in the field of
commercial law that is definitely worthy of praise and commendation.
16 April 2021
ESTELA M^Rl/kS-BERNABE
:reas-bernabe
Senior Associate Justice
Supreme Court of the Philippines
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FOREWORD
The motivational writer Paul j. Meyer once said:
“Productivity is never an accident It is always the result of
commitment to excellence, intelligent planning and focused
effort"
Never has this observation been as valid as when applied to the
intellectual fecundity of UST Law Dean Nilo T. Divina, noted law
practitioner and professor, a much sought after lecturer, respected
academician, and best-selling author of law books. Nary has a year
passed since the launch, against all pandemic odds, of his treatise on
Philippine Corporation Law, when again today he astounds the legal
community with a 2-volume 1,286 - page compendium on Philippine
commercial law.
The author examines, analyzes and deconstructs into understandable
concepts our laws on insurance, pre-need companies, transportation,
securities, banking, intellectual property, anti-money laundering,
investments, data privacy and competition. Most remarkable is that he
has conjoined all these separate pieces of legislation into just one
instrument for easy and convenient research and reference.
Generously spread all over it are annotations of provisions of
commercial law, pertinent jurisprudence, and insightful commentaries
reflective of the knowledge, wisdom and experience acquired by the
writer as a staunch disciple of the law. Without question, this work is
the result of the Dean's continuous pursuit of excellence most
especially in that ratified discipline of legal scholarship and pedagogy.
Commercial law has never been the cup of tea of a lot of law students,
which most probably accounts for their comparably low ratings on the
subject in bar examinations. In their law course, they plod through
what they perceive, rightly or wrongly, as endless arid landscapes of
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negotiable instruments, insurance, banking, securities, business
organizations, investments ... laws seemingly divested of the human
dimension, all too often absent the flesh and blood facets of, for
example, family law or criminal law.
But as in all Divina law books this work upends this perception. The
dissection of commercial laws is done through a different perspective
and methodology. Aimed at demystifying and decluttering the law, the
treatise is underpinned by an undefinable sense of reaching out to and
connecting with the humaneness of the reader. For the work in its
entirety is understandable: its language intelligent but simple and
clear, not at all opaque nor obsfuscatory which is oftentimes the
hallmark of the intellectually pretentious. In other words, it is shorn of
aoristicism and prolixity, as it adopts a style that is an honest-togoodness down-to-earth Q and A, all of which make for readability,
easier comprehension as well as sufficiently good, if not total, recall.
Entitled Divina on Commercial Law: A Comprehensive Guide and
described as an opus ex caritate, the book is a welcome offering to the
law academe and studentry, law practitioners, members of the bench,
and even to non-lawyers as well. It is for this reason that the Legal
Education Board is deeply indebted and grateful to Dean Nilo for his
continuing efforts in contributing to the enhancement of the quality of
legal education in the country.
Thus, we say: Mabuhay, Dean!
CCCQMlWob
/ ZENA1DA Nl ELEPANO
Commissioner and Officer-in-Charge
Legal Education Board
Manila, Philippines
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FOREWORD
Divina on Commercial Law: A Comprehensive Guide
Knowledge production is the lifeblood of any field or discipline. It nurtures academic
engagements by introducing new ideas and concepts as well as encourages a paradigm shift that
may be rendered trail-blazing and cutting edge. It is integral for every field of study to challenge
existing norms and codes in order for it to become up-to-date and relevant. The work dore by
scholars and academics is never-ending. They constantly review current literature to see the gaps
that require filling and in the process change the way people think and make them subscribe to a
novel idea. Commercial Law is a vast field that benefits further study and explication since it
covers various areas such as Insurance, Securities, Banking, Business Establishments, among
others. Years of excellent law practice, dynamic leadership, a voluminous contribution to law
literature that comes in the form of scholarly work and academic treatises, and a solid reputation
that extends beyond Philippine shores, Atty. Nilo Divina is a stalwart in the field of law, capable
of discoursing on this particular branch of law. Despite the growing number of business
organizations in the country, there are still many things that professionals can learn about the
dynamics and dimensions of Commercial Law. This is precisely the reason why there is a need
to gain an understanding of the many complexities of Commercial Law from an expert like Atty.
Nilo Divina.
Atty. Nilo Divina, one of the country's top lawyers, once again publishes an important volume
on commercial law. Divina's opus examines the subject point by point, which is counterpoised
with popular myths and misconceptions regarding commercial law, and analyzes it by providing
important cases as examples which highlight in his discussion binding agreements, standard
rules and rights, interpretations and misinterpretations, exceptions, exemptions and entitlements,
special interests and potential risks, benefits and liabilities, subtleties and severities. The book
"Divina on Commercial Law" provides an in-depth look into the many facets of commercial law
which will surely be the go-to reference book by students of law and law practitioners. The book
is organized in such a way that it facilitates easy reading. The flow of the author's language is
smooth; his grasp of the legal jargon, clear and precise. "Divina on Commercial Law" is a musthave for every law firm, law school, insurance company, and for anyone who wishes to further
understand the many intricacies of the laws governing business and commerce, as the author
immediately goes into the heart of the matter in a style that is akin to some of the best author­
barristers in the world. Indeed, Divina's new book is a major contribution to the field of law.
7^7
REV. HC RICHARD gZ\NG. O-P.
Rec/or
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FOREWORD
Let me start by proudly saying that among the law deans in various law schools, only Dean Nilo T. Divina
of the UST Faculty of Civil Law has produced bar topnotchers. In 2017, UST regained its past gZr/ as the
best law school in the country.
Dean Divina is not only an academician, but also a scholar, a bar topnotcher, a distinguished law
practitioner, a prolific writer, and an Ideal family man. Above all, he is a benefactor. His reasons for writing
this book is not only to lead his readers to the intricate realm of commercial law, but also to grant
scholarships, derived from its proceeds, to academically deserving students and to enable law students to
acquire it at a very reasonable price. When I asked him how he could write this two-volume work despite
the pandemic, Dean Divina laughingly answered, "Because I love students." This statement is a window
to his soul.
Unquestionably, this book is a treasury of knowledge Influenced not only by Dean Divina's brilliance of
mind, but also by his dose to 30 years of law practice and extensive work in the academe. It is said that
genuine knowledge originates directly from a wide range of experience.
Being a clear showcase of the author's ability to capture what is basic and vital in commercial law, the
book in its entirety is thoroughly interesting and instructive. Thus, through a Socratic Q and A style, it
presents a wonderful compact survey of the laws on Insurance, Pre-need Company, Transportation,
Business Organizations, Securities, General Banking, and many other fields of commercial law. It contains
annotations of cited laws usually intertwined with relevant Supreme Court Decisions. Not only that. Dean
Divina's discourse thereon gives the readers a glimpse of his mindset and a chance to appreaate and
assimilate its wisdom. Significantly, he evokes a web of legal and judicial issues, enough to send any
assiduous reader to his or her study.
As the title Indicates, this book is an excellent comprehensive guide to aspiring law students,
academicians, bar reviewers, practitioners, members of the judiciary, and even lay persons as they journey
on the winding road of commercial law. It is the answer to the continuing quest for knowledge of men
and women of law.
What makes this book impressive is its mode of educating its readers.
Preeminent for his legal craftsmanship, Dean Divina's Q and A are well written, indeed "as dear and ludd
as the fabled skies of Greece." Anyone who reads this book will readily grasp and remember what it
imparts. Truly, a must read.
The "Divina on Commercial Law" is a crowning masterpiece and a legacy of a great mind.
Justice Angelina Sandoval-Gutierrez (Ret.)
*
Vice Chairperson - Judicial Integrity Board, Supreme Court
Former Chair - MCLE Governing Board
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FOREWORD
“The field of commercial law serves as the backbone of a vibrant
economic environment. Practitioners in commercial law have to
be constantly abreast with the latest regulatory frameworks and
jurisprudence. Dean Nilo Divina’s book weaves basic principles,
hypothetical cases, and constructive views in a seamless narrative
of the vast area of commercial law. The set of materials discussed by
the author is useful for different readers, such as, law students, bar
reviewees and practitioners. Legal researchers would definitely find
more than enough leads in preparing pleadings and authoritative
opinions. There is an enticing incentive to exhaust the entire text
of this guidebook on account of the innovative pedagogical style
employed by the author to clarify concepts and apply these to
case facts. The author’s years of commercial law practice become
evident in his occasional comments on difficult questions of law.
This commendable piece of contribution to legal scholarship in
this country ranks among the invaluable roster of commercial law
materials to this date. I personally encourage Dean Nilo Divina to
further pursue his goal of selflessly sharing his knowledge in this
fast developing field of law. He has truly demonstrated his untiring
commitment to the bar.”
(Sgd.)
DEAN SEDFREY M. CANDELARIA
Officer-in-Charge, Mandatory Continuing Legal Education Board
Chief of Office, Research, Publication and Linkages,
Philippine Judicial Academy
Former President of Philippine Association of Law School
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FOREWORD
It has not even been a year, but I find myself with yet another Divina
manuscript on a subject matter he can talk about in his sleep. Divina on
Commercial Law - A Comprehensive Guide will hit the stands in the wake of
the bestselling Questions & Answers on the Revised Corporation Code.
Similar to its predecessor, this 2-volume compendium is responsive as
it is instructive. No other commercial law reviewer would include laws such
as Transportation Law, Personal Property Securities, Financial Rehabilitation
and Insolvency, Data Privacy and Philippine Competition, among others, all
in one line-up. The rationalized compilation of laws that are commercial in
nature and application will definitely facilitate cohesion in learning and
appreciation. With the limited text out there on the new laws, this
comprehensive guide will serve well as a beacon for the uninitiated and eager
to leam. It would be of note to point out that these are the only volumes
available that would provide a faithful compilation of all the laws covered by
the mercantile law scope of the current bar examinations.
But more than the novelty of the collection and the content is the
benevolence characteristic of the author that accompanies this latest addition
to our legal archives. This book is another testament to Dean Nilo’s
commitment to make legal education accessible to as many who wish to
embrace it. Making this book affordable is an exercise in compassion that
finds its very core in the heart of a healing world.
The legal academe is once again grateful to Dean Divina for this
outstanding effort to endow students and practitioners alike with this
excellent presentation of existing laws and recent initiatives that enriches our
commercial law framework.
Congratulations!
Chair
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prL DL ANENIAS
>on and President
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FOREWORD
Commercial Law as a study and practice has always been marked by
dynamism. The transformation our mercantile laws has undergone
over the years reflects the volatility of the relations they govern.
For no other field is as rapidly evolving and changing as commerce,
trade, and business.
Rightfully so, the universal clamor for a compact material that would
capture the nucleus of the expanding commercial law subjects has
long been overdue.
For good measure, Dean Nilo Divina’s treatise, DIVINA ON
COMMERCIAL LAW: A Comprehensive Guide, becomes a most
welcome addition to the growing literature of Commercial Law in
the Philippines. While reference materials on the subject have been
plenty, no other opus has better presented the course in a very
reader-friendly, question-and-answer format.
As Commercial Law has often been viewed by many to be very
“mechanical” and “off-putting” owing to its highly specialized nature,
the book departs from the verbose “legalese” that has intimidated
many law students in their study of the subject. Dean Nilo has found
a way to weather the technical tangles by presenting key doctrinal
pronouncements in a straight-forward and conversational manner.
This he does with uncompromising depth and thoroughness. This
book, thus, acutely accomplishes its aim to infuse readers with
synthesized doctrinal pronouncements and core knowledge that they
can easily connect with practical applications and scenarios.
I take special admiration of the book’s ability to weave the codal
provisions and jurisprudence with the author’s annotations and
commentaries. This addresses the common challenge students
face in approaching the subject—the ability to make the necessary
connections and formulate sound conclusions. Moreover, the
inclusion of recent BAR exam questions, with sections devoted
to defining key terms, rules, and concepts, makes this manual a
complete guide for the bar reviewee.
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Dean Divina has painted for us a detailed anatomy of the laws
governing our mercantile system. Comprehensive in scope, versatile
in form, and uncompromising in content, Divina on Commercial Law:
A Comprehensive Guide is an astute companion for law students,
bar examinees, and legal practitioners alike.
(Sgd.)
DEAN JOAN S. LARGO
Former President of Philippine Association of Law Schools
Assistant Vice President for Academic Affairs,
University of San Carlos
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FOREWORD
Divina on Commercial l^w is an all-encompassing guide to the subject matter that will
prove to be useful to undergraduates, bar reviewees and practitioners alike. I he text covers
a wide variety of subtopics covering the whole gamut of commercial law. The language is
straight to the point and coherent, allowing for a logical transition from one topic to the
next. Situational examples are used to illustrate the principles for a concretized
understanding of the concepts discussed in the text. In this light, the reviewer goes beyond
presenting mere facts.
However, what sets this reviewer apart from the others is its unique writing style: the
question-and-answer format simulates the essence of the test-taking experience, making
the hook an excellent supplementary material for bar reviewees. In the decades 1 have
spent conducting bar reviews, most of the materials I have come across relied solely on the
reviewees’ ability to question their own understanding of the information they absorb.
Divina on Commercial Law attends to that concern— the need to repeatedly question
oneself for the purpose of refining one's understanding of the subject. All in all, this brilliant
work is a thorough and well-constructed educational material that I would highly
recommend to anyone interested in developing their knowledge of commercial law.
ATTY. ALDEN FRANCIS^. GONZALES
President, Magnificus jfrfis Reviews and Seminars Inc.
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FOREWORD
The review center believes that the use of scientifically written books
will help bar candidates in their pursuit to successfully hurdle the
bar examinations.
Dean Divina’s latest published works — the two-volume Compendium
on Commercial Law - are epitomes of scientific learning. It contains
annotations of laws and decisions of the Supreme Court, which
are organized in accordance with the 2020/2021 Bar Examinations
Syllabus on Commercial Law. Engagingly, it is written in Q-and-A
format, for easy understanding and retention.
This Compendium on Commercial Law is a must-read for every bar
candidate. One can never go wrong with the 30 years of academic
and law practice of our legal luminary, Dean Nilo T. Divina.
(Sgd.)
ATTY. ARGEL JOSEPH T. CABATBAT
Review Director, Legal Edge Experts Review Center, Inc.
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CONTENTS
Forewords
Estela M. Perlas-Bernabe
Zenaida N. Elepano
Rev. Fr. Richard G. Ang, O.P
Justice Angelina Sandoval-Gutierrez
Dean Sedfrey M. Candelaria
Marisol DL Anenias..............................
Dean Joan S. Largo
Alden Francis C. Gonzales
Argel Joseph T. Cabatbat
iii
v
vii
ix
xi
xiii
XV
xvii
xix
V. SECURITIES REGULATION CODE
R.A. No. 8799
1
22
33
34
34
State Policy
Preferred Shares Issuance
Civil liability
Administrative sanctions
Criminal liability
VI. BANKING
The New Central Bank Act
State policies
Creation of the Bangko Sentral ng Pilipinas ....
Corporate powers
Operations of the Bangko Sentral ng Pilipinas
Authority to obtain data and information
Supervision and examination
Bank deposits and investments
Prohibitions
Examinations and fees
Monetary Board; powers and functions
xxi
80
80
81
82
S3
83
84
85
86
87
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How the Bmigko Sent nil ng Pilipinus handles banka
in distress
Conservatorship
Administrative sanctions on supervised entities
Rules on bank deposits and invest ments by directors,
officers. stockholders and their related interests
Supervision and regulation of bank operations
Law on Secrecy of Philippine Currency
Bank Deposits (R.A. No. 1405)
Purpose ........................................................................
Written permission of the depositor
Order of a competent court
Briber.- or dereliction of duty of public officials;
prosecution for unexplained wealth;
prosecution for violation of the Anti-Graft
and Corrupt Practices Act
Where the subject matter of litigation is the
money deposited
Violation of the anti-money laundering law
Authority of BIR
Garnishment of bank deposits
Unclaimed Balances law
Repeal or amendment of the law
General Banking Law (R.A. No. 8791)
Definition and classification of banks
Distinction of banks from quasi-banks and trust
entities
Bank powers and liabilities
Corporate Powers
Banking and incidental powers
Diligence required of banks in view of the fiduciary
nature of banking
Nature of bank funds and bank deposits
Grant of loans and security requirements
Ratio of net worth to total risk assets
Single borrower’s limit
Restrictions on bank exposure to directors,
officers, stockholders and their related
interest
Foreclosure of mortgage by banks
Floating interest rate and escalation clause
Penalties for violations
Fine, imprisonment
xxii
,
89
89
105
107
107
108
108
111
112
113
114
116
118
118
123
125
126
126
133
134
134
138
139
140
141
141
143
145
149
157
162
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SiiHpcniiion or removal of director or officer...
Dissolution of banka............................................ .
Anti-Money Laundering Law
.
(R.A. No. 9160, as amended)
Policy of the law............................................................
Covered institutions/persons and their obligations
Covered and suspicious transactions........................
Money laundering-how committed and unlawful
activities.......................................................
Functions of the AMLC...............................................
Application for a freeze order.....................................
Safe harbor provision...................................................
Forfeiture provisions.....................................................
Mutual assistance among states................................
Philippine Deposit Insurance Corporation.............
Basic Policy.....................................................................
Powers and functions of PDIC...................................
Concept of insured deposit..........................................
Liability to depositors..................................................
Deposit liabilities required to be insured
with PDIC...........................................
Commencement of liability................................
Deposit accounts not entitled to payment.....
Extent of liability 187
Determination of insured deposits and
calculation of liability......................
Mode of payment.................................................
Effect of payment of insured deposit/
preferred credit.................................
Failure of depositor to claim insured
deposits...............................................
Examination of banks and deposit accounts.
Splitting of deposits............................................
Prohibition against issuances of temporary
restraining order..............................
Concept of bank resolution.........................................
Role of PDIC in relation to banks in distress........
Truth in Lending Act (RA No. 3765)........................
162
162
163
163
163
166
168
173
175
180
181
182
183
183
184
184
185
186
187
187
188
191
191
192
192
193
194
195
197
199
VII. INTELLECTUAL PROPERTY CODE
202
Intellectual property rights in general................................
202
Intellectual property rights.........................................
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PitYeivnces among copyright. trademarks and
patents............................................................
Definition................................................................
Scope or object.......................................................
Term of protection.................................................
Modes of acquiring the various rights................
Patents............................................................................
Patentable invention......................................................
Non-patentable invention..............................................
Ownership of a patent...................................................
Right to a patent...................................................
First-to-file rule.....................................................
Invention created pursuant to a commission....
Right of Priority....................................................
Grounds for cancellation of a patent..........................
Remedy of the true and actual inventor....................
Rights conferred by a patent........................................
Limitations of patent rights.........................................
Patent infringement......................................................
Tests in patent infringement...............................
Civil and criminal action.....................................
Prescriptive period...............................................
Defenses in action for infringement...................
Licensing................................................................
Assignment and transmission of rights............
Trademarks.............................................................................
Definition of Marks, Collective Marks,
Trade Names.................................................
Acquisition of ownership of mark................................
Acquisition of ownership of trade name.................... .
Non-registrable marks..................................................
Immoral, deceptive, scandalous matter or
falsely suggesting a connection with
person, belief, institution or symbol.
Name, portrait, signature of living individual
Identical mark......................................................
Tests to determine confusing similarity
between marks....................................
Idem sonans..........................................................
Well-known marks................................................
Rights conferred by registration..................................
Trademark Infringement..............................................
Remedies.........................................................................
xxiv
206
206
207
208
208
210
212
217
218
218
220
220
221
222
223
224
225
231
233
235
238
238
240
247
247
247
250
253
253
255
256
256
257
267
273
285
289
291
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Registration of nmrku under the Madrid Protocol
......................................
Coverage
..............................
Rights conferred
Term of protection
Copyright.............................................................................................
.........
Basic Principles
Copyrightable Works
Rights of the copyright owner
Reproduction
Derivative right
First public distribution
Rental right
Right of public display
Right of public performance
Right of communication to the public
Rules on Ownership of Copyright
Limitations on Copyright
Private Performance of a work
Making of quotations
Information purposes
Under the direction and control of the government
Judicial proceedings or professional advice
Doctrine of fair use
Copyright Infringement
300
303
303
305
305
305
307
315
318
320
320
322
322
323
323
325
331
334
335
337
338
339
340
343
VIII. CREDIT TRANSACTIONS
Guaranty
Surety
Real Estate Mortgage Law
Personal Property Security Act (R.A. No. 11057)
357
368
372
378
IX. SPECIAL LAWS
Foreign Investment Act of 1991
R.A. No. 7042, as amended by RA. No. 8179
Policy of Law
A..............................
Definition of Terms
Registration of Investments of Non-Philippine
Nationals
Foreign Investments in Export Enterprises
Foreign Investments in Domestic Market Enterprises
Foreign Investment Negative List
XXV
403
408
430
430
431
432
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1
Financial Rehabilitation nnd Insolvency Act of 2010
R.A. No. 10142
Definition of Insolvency...............................................
Suspension of Payments..............................................
Rehabilitation..............................................................
Types...................................................................
Commencement order.........................................
Stay or Suspension Order..................................
Rehabilitation Receiver.......................................
Management Committee....................................
Rehabilitation Plan.............................................
Cram-down effect................................................
Liquidation..................................................
Types.................................................. .
Conversion of rehabilitation to liquidate
proceedings................................
Liquidation Order......................................
Rights of secured creditors.......................
Liquidator...................................................
Determination of claims............................
Liquidation of plan....................................
440
441
447
449
454
459
469
472
473
481
484
484
487
492
493
495
497
498
Data Privacy Act of 2012
R.A. No. 10173
500
Introduction.
Philippine Competition Act
530
RA No. 10667
Trust Receipts Law
P.D. No. 115
Definition/Concept of a Trust Receipt Transaction.......
Ownership of the Goods, Documents and Instruments
under a Trust Receipt.......................................
Entrustee is the owner of the goods........................
Entrustee cannot mortgage the goods under
trust receipt...............................................
Validity of the Security Interest as Against the
Creditors of the Entrustee/Innocent Purchaser
for Value............................................................
Payment/Delivery of Proceeds of Sale or Disposition
of Goods, Documents or Instrument...............
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565
565
565
567
568
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Return of Goods, Documents or Instruments in
Caso of Non-Salo.................................................. .
Liability for Lohh of Goods, Documents or
Instruments.....................................................................
Penal Sanctions if Offender is a Corporation....................
Criminal Liability of directors, officers and agents.
Directors and officers of the corporation not
civilly liable unless they assume personal
liability..........................................................
Remedies Available.................................................................
568
569
569
569
570
571
E-Commerce Law
(Electronic Commerce Act).............................................
576
Negotiable Instruments Law..........................................
Forms and Interpretation.....................................................
Requisites of negotiability.............................................
Kinds of negotiable instruments.................................
Completion and delivery.......................................................
Insertion of Date..............................................................
Incomplete and Undelivered Instruments.................
Complete but undelivered instruments.....................
Signature..................................................................................
Signing in Trade Name............. .................................
Signature of Agent........................................................
Indorsement by Minor or Corporation.....................
Forgery............................................................................
Consideration..........................................................................
Accommodation Party............................................................
Negotiation..............................................................................
Distinguished from Assignment................................
Modes of Negotiation...................................................
Kinds of Indorsements.................................................
Rights of the Holder..............................................................
Holder in Due Course..................................................
Defenses Against the Holder......................................
Liabilities of Parties..............................................................
Maker..............................................................................
Drawer............................................................................
Acceptor..........................................................................
Indorser...........................................................................
Warranties.....................................................................
Presentment for Payment....................................................
Necessity of Presentment for Payment...................
586
586
589
599
603
607
608
609
610
610
610
611
613
624
626
630
630
631
634
639
639
648
651
651
651
651
654
656
658
658
xxvii
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Parties to Whom Presentment for Payment
Should Be Made...
Dispensation with Presentment for Payment.
.
Dishonor by Nonpayment
Notice of Dishonor......................................................
.
Parties to be Notified
Parties Who May Give Notice of Dishonor ....
EtYect of Notice...................................................
Form of Notice.....................................................
Waiver
Dispensation with Notice
EtYect of Failure to Give Notice
Discharge of Negotiable Instrument
Discharge of Negotiable Instrument
Discharge of Parties Secondarily Liable
Right of Party Who Discharged Instrument..
Renunciation by Holder
Material Alteration
Concept
Effect of Material Alteration
Acceptance
Definition
Manner
Time for Acceptance
Rules Governing Acceptance
Presentment for Acceptance
Time/Place/Manner of Presentment
Effect of Failure to Make Presentment
Dishonor by Nonacceptance
Promissory Notes
Checks
Definition
Kinds
Presentment for Payment
660
660
661
663
663
663
664
665
665
665
667
668
668
671
671
671
672
672
673
675
675
677
678
678
679
679
680
681
682
683
683
684
688
Case Index
694
xxviii
I
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V. SECURITIES REGULATION CODE
(REPUBLIC ACT NO. 8799)
A. State Policy
1.
What are the ends sought to be achieved by the enactment of
the Securities Regulation Code (hereafter, SRC)?
The ends sought to be achieved by the enactment of the SRC are
embodied in the declaration of state policy under Section 2 thereof
which provides: “The State shall establish a socially conscious, free
market that regulates itself, encourage the widest participation of
ownership in enterprises, enhance the democratization of wealth,
promote the development of the capital market, protect investors,
ensure full and fair disclosure about securities, minimize if not totally
eliminate insider trading and other fraudulent or manipulative
devices and practices which create distortions in the free market.”
2.
What is the principal purpose of laws and regulations governing
securities in the Philippines?
The principal purpose of laws and regulations governing
securities in the Philippines is to protect the public against
nefarious practices of unscrupulous brokers and salesmen in selling
securities and the imposition of worthless ventures and the sale of
securities which have no basis at all. Hence, securities law provides
for a system of registration of securities, registration of brokers
and dealers of securities, prohibitions against manipulations and
practices detrimental to the investing public and measures for the
protection of investors.1
3.
Why is the Securities Regulation Code called a “truth in
securities law"?
The Securities Regulation Code is called a “truth in securities
law” because it requires the issuer to make full and fair disclosure of
‘BAR 1998.
1
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information about securities being sold or offered to be sold within
the Philippines and penalizes manipulative and fraudulent acts,
devices, and schemes.2
4.
What are the salient features of the SRC that are intended to
protect the investing public?
The following are the salient features of the SRC that are
intended to protect the investing public:
1.
Registration of securities prior to any public sale3
2.
Rejection and revocation of registration of securities4
3.
Regulation of pre-need plans6
4.
Protection of shareholder interests6
5.
Prohibitions on fraud, manipulations, and insider trading’
6.
Regulations of Securities Market Professional8
7.
Revocation, refusal, or suspension of registration of
brokers, dealers and salesmen, and associated persons”
8.
Restrictions on “over-the-counter” markets10
9.
Establishment of trust fund to compensate investors for
extraordinary losses or damage they may suffer11
10.
Self-regulation of associations of securities brokers,
dealers, and other securities related organizations12
11.
Registration of clearing agencies13
12.
Limitations on margin trading14
2BAR 2015.
3Section 8, SRC.
^Section 13, SRC.
5Section 16, SRC.
6Section 19, SRC.
’Sections 24, 25, 26, and 27, SRC.
“Section 28, SRC.
“Section 29, SRC.
‘“Section 32, SRC.
“Section 36.5, SRC.
“Section 39, SRC.
‘“Section 42, SRC.
“Section 49, SRC.
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V. HECURITIEH REGULATION CODE
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5.
3
13.
Civil liabilities from false statement in the registration10
14.
Civil liabilities from false statements or omissions in the
prospectus, communications, and reports10
15.
Protection against:
a.
Manipulation of security prices, manipulative and
deceptive devices”
b.
Fraud in pre-need plans and commodities futures
contracts18
c.
Fraudulent transactions10
d.
Insider’s trading20
What are securities?
“Securities” are shares, participation or interests in a
corporation or in a commercial enterprise or profit-making venture
and evidenced by a certificate, contract, instruments, whether
written or electronic in character. It includes:
(a)
Shares of stocks, bonds, debentures, notes, evidences of
indebtedness, asset-backed securities;
(b)
Investment contracts, certificates of interest or
participation in a profit-sharing agreement, certificate of
deposit for a future subscription;
(c)
Fractional undivided interests in oil, gas, or other mineral
rights;
(d)
Derivatives like option and warrants;
(e)
Certificates of assignments, certificates of participation,
trust certificates, voting trust certificates, or similar
instruments;
(0
Proprietary or nonproprietary membership certificates in
corporations; and
"“Section 56, SRC.
"“Section 57, SRC.
’’Section 59, SRC.
18Section 60, SRC.
I9Section 58, SRC.
’“Section 61, SRC.
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(g)
6.
Other instruments as may in the future be determined by
the Securities and Exchange Commission (SEC).21
What are shares of stock?
Shares of stock are forms of securities representing equity
ownership of a corporation, divided up into units which indicate
that the holder thereof has proportionate interest in the issuing
corporation.
7.
Cite examples of evidence of indebtedness, other than notes,
bonds, and debentures.
Other examples include commercial paper, also called CP,
which is a short-term debt instrument issued by companies to
raise funds generally for a time period up to one (1) year. They are
typically issued by large corporations to cover short-term receivables
and meet short-term financial obligations.
8.
Are checks considered securities?
Checks constitute mere substitutes for cash if so issued
in payment of obligations in the ordinary course of business
transactions. But when they are issued in exchange for a big number
of individual non-personalized loans solicited from the public, the
checks cease to be such. In such a circumstance, the checks assume
the character of evidence of indebtedness.22
9.
What is an asset-backed security?
An asset-backed security (ABS) is a security, whose income
payments and hence value is derived from and collateralized by a
specified pool of underlying assets. For instance, when consumers
take out loans, their debts become assets on the balance sheet of
the lender. The lender, in turn, can sell these assets to a trust or
“special purpose” vehicle which packages them into an ABS that
can be sold in the market. The “special purpose” vehicle buys it at
a discount and then sells to the public participations in the pool of
underlying assets. As the consumers pay their debts, payments are
proportionately distributed to the holders of the ABS.
2IBAR 1996.
“Gabionza v. CA, G.R. No. 161057, September 12, 2008.
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V. SECURITIES REGULATION CODE
(REPUBLIC ACT NO. 8799)
10.
5
What is an investment contract?
An investment contract is an investment of money in a contract,
transaction, or scheme with the expectation of profits primarily from
the efforts of another.23
11.
TRUE or FALSE. The Howey Test is relevant in cases wherein
a person invests money in a common enterprise and is led to
expect profits primarily from the efforts of others.
True. The Howey Test was established to determine whether
a transaction falls within the scope of an “investment contract.” It
requires a transaction, contract or scheme, whereby a person (1)
makes an investment of money, (2) in a common enterprise, (3) with
the expectation of profits, (4) to be derived solely from the efforts of
others. Although the proponents must establish all four elements,
the US Supreme Court stressed that the Howey Test “embodies a
flexible rather than a static principle.”
Our Securities Act appears to follow the flexible concept for
it defines an investment contract as a contract, transaction or
scheme (collectively “contract”) whereby a person invests his money
in a common enterprise and is led to expect profits not solely but
primarily from the efforts of others. Thus, to be a security subject
to regulation by the SEC, an investment contract in our jurisdiction
must be proved to be: (1) an investment of money, (2) in a common
enterprise, (3) with expectation of profits, (4) primarily from efforts
of others.24
12.
The business scheme of Power Homes Unlimited Corporation
(Power Homes) is that an investor will enroll under its program,
and the latter would be entitled to recruit other investors and
receive commissions from the investments of those directly
recruited by him. Is Power Homes engaged in the sale of
securities which must be registered?
Yes. A corporation allowing a principal investor to enroll in
its program by paying a certain amount, which in turn entitles
him to be paid a certain amount if the recruit was able to get a
23Power Homes Unlimited Corporation v. Securities and Exchange Commission
and Manero, G.R. No. 164182, February 26, 2008.
uId.
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minimum recruitment of four (4) investors, is engaged in the sale
or distribution of an investment, contract. It must be registered
with the SEC before its sale or offer for sale or distribution to the
public, otherwise, the SEC cannot protect the investing public from
fraudulent securities is founded on the premise that capital markets
depend on the investing public’s level of confidence in the system.26
13.
Prosperity.com, Inc. (PCI) sold computer software and hosted
websites without providing internet service. It devised a
scheme in which a buyer could acquire from it an internet
website with 15-MB capacity. At the same time, by referring
to PCI his own down-line buyers, a first-time buyer could earn
commissions, interest in real estate and insurance coverage.
Is PCI's scheme considered an investment contract which
requires registration?
No. The scheme does not satisfy the requisites of an investment
contract. First, PCI’s clients do not make investments within the
contemplation of Howey Test. The buyers of the website do no invest
money in PCI that it could use for running some website that would
generate profits for the investors.26 PCI appears to be engaged in
network marketing, a scheme adopted by companies for getting
people to buy their products outside the usual retail system where
products are bought from the store’s shelf and where the buyer can
become a down-fine seller, earning commissions from purchases
made by new buyers whom he refers to the person who sold the
product to him.2’
Second, the commissions, interest in real estate and insurance
coverage can hardly be regarded as profits from investment of money
under the Howey Test.21 These are incentives to down-line sellers to
bring in other customers,29 not an investment contract.
Lastly, PCI’s clients are not in expectation of profits as
contemplated under the Howey Test. Rather, it is PCI that expects
profit from the network marketing of its products.30
“7d. BAR 2010.
“Securities and Exchange Commission
164197, January 25, 2012.
2,M.
“W.
mId.
xId.
Prosperity Com, Inc., G.R. No.
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V. HECURITIE8 REGULATION CODE
(REPUBLIC ACT NO. 8799)
14.
7
CJH Development Corporation (CJHDC) is a real estate
developer, while CJH Suites Corporation (CJHSC) is a hotel
operator wholly-owned by the former. CJHDC entered into a
lease agreement with the Bases Conversion and Development
Authority (BCDA) for the development of a 247-hectare land
into a public tourism complex. Pursuant to the development
plan, CJHDC constructed two (2) condominium-hotels — "The
Manor" and "The Suites." Subject to CJHDC's leasehold rights,
the residential units in these condotels were offered for sale
to the general public by means of two (2) schemes: The first
is a straight purchase and sale contract where the buyer pays
the purchase price for the unit bought, either in lump sum or
on installment basis and, thereafter, enjoys the benefits of full
ownership, subject to payment of maintenance dues and utility
fees. The second scheme involves the sale of the unit with
an added option to avail of a "leaseback" or a "money-back"
arrangement. Under this added option, the buyer pays for
the unit bought and, subsequently, surrenders its possession
to the management of CJHDC or CJHSC. These corporations
would then create a pool of these units and, in turn, will offer
them for billeting under the management of the hotel operated
by the Camp John Hay Leisure, Inc. (CJHLJ). This arrangement
lasts for a period of fifteen (15) years with a renewal option
for the same period until 2046. The buyers who opt for the
"leaseback" arrangement will receive either a proportionate
share in 70% of the annual income derived from the hotel
operation of the pooled rooms or a guaranteed 8% return on
their investment. On the other hand, those who choose to avail
of the "money-back" arrangement are entitled to a return of
the purchase price they paid for the units by expiration of the
Lease Agreement in 2046. BCDA got wind of CJHDC's scheme
and questioned its legality with the Securities and Exchange
Commission (SEC), which issued a Cease and Desist Order
against CJHDC upon a finding that the latter was engaged
in the sale of securities without proper registration. CJHDC
appealed the SEC's order with the CA.
Is the sale of "The Manor" or "The Suites" units to the
general public under the "leaseback" or "money-back scheme"
a form of investment contract or sale of securities, and thus
must comply with the requirements of law?
Yes. The SEC arrived at a preliminary finding that CJHDC
is engaged in the business of selling securities without the proper
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DIVINA ON COMMERCIAL LAW:
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registration issued by the Commission. Based on this initial finding,
CJHDC’s act of selling unregistered securities would necessarily
operate as fraud on investors as it deceives the investing public
by making it appear that respondents have authority to deal with
such securities. Section 8.1 of the Securities Regulation Code
clearly states that securities shall not be sold or offered for sale or
distribution within the Philippines without a registration statement
duly filed with and approved by the SEC and that prior to such
sale, information on the securities, in such form and with such
substance as the SEC may prescribe, shall be made available to each
prospective buyer. The Court agrees with the SEC that the purpose
of this provision is to afford the public protection from investing in
worthless securities.31
15.
ASB Holdings Inc. (ASBHI) is a corporation engaged in
investing in real or personal properties. Its business scheme
consists of convincing investors to lend or deposit money with
the corporation, and, in return, they would receive checks from
ASBHI for the amount lent, invested, or deposited. The checks
were drawn against DBS Bank. The number of investors ASBHI
attracted was approximately 700. Is ASBHI’s business scheme
considered an investment contract?
Yes. Here, the checks were issued by ASB in lieu of the
securities enumerated under the Revised Securities Act in a clever
attempt, or so they thought, to take the case out of the purview of
the law, which requires prior license to sell or deal in securities and
registration thereof. The scheme was designed to circumvent the law.
Checks constitute mere substitutes for cash if so issued in payment
of obligations in the ordinary course of business transactions. But
when they are issued in exchange for a big number of individual
non-personalized loans solicited from the public, the checks ceased
to be such. In such a circumstance, the checks assume the character
of evidence of indebtedness. Moreover, it bears pointing out that the
definition of securities set forth in Section 2 of the Revised Securities
Act includes commercial papers evidencing indebtedness of any
person, financial or non-financial entity, irrespective of maturity,
issued, endorsed, sold, transferred, or in any manner conveyed to
another. A check is a commercial paper evidencing indebtedness of
any person, financial or non-financial entity. Since the checks in this
3ISEC v. CJH Development Corporation. G.R. No. 210316, November 28, 2016.
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V. 8ECURITIES REGULATION CODE
(REPUBLIC ACT NO. 8799;
9
case were generally rolled over to augment the creditors existing
investment with ASBHI, they most definitely take on the attributes
of traditional stocks/12
16.
Westmont Investment Corporation (Wincorp), a domestic
corporation organized and licensed to operate as an investment
house, offered to Ng Wee and to the public "sans recourse"
transactions with the following mechanics: A corporate
borrower that needs financial assistance or funding to run
its business or to serve as working capital is screened by
Wincorp. Once it qualifies as an accredited borrower, Wincorp
enters into a Credit Line Agreement for a specific amount with
a corporation, which the latter can draw upon in a series of
availments over a period of time. The agreement stipulates
that Wincorp shall extend a credit facility on "best effort"
basis and that every drawdown by the accredited borrower
shall be evidenced by a promissory note executed in favor of
Wincorp and/or the investor/s who has/have agreed to extend
the credit facility. Wincorp then scouts for investors willing
to provide the funds needed by the accredited borrower. The
investor is matched with the accredited borrower. An investor
who provides the fund is issued a Confirmation Advice which
indicates the amount of his investment, the due date, the
term, the yield, the maturity, and the name of the borrower.
Ng Wee, a valued client of Westmond Bank, was enticed to
place investments thereon under accounts in his name or in
those of his trustees. A summary of the said Confirmation
Advices reveals that Ng Wee invested the aggregate amount
of P213,290,410.36 in the "sans recourse" transactions through
his trustees.
Are the "sans recourse" transactions offered by Wincorp
securities investment contract that must registered with the
Securities and Exchange Commission (SEC)?
Yes. The factual milieu of the case at bar sufficiently satisfies
the Howey Test. The “sans recourse” transactions are, in actuality,
investment contracts wherein investors pool their resources to
meet the financial needs of a borrowing company First, Wincorp
offered what it purported to be “sans recourse” transactions wherein
the investment house would allegedly match investors with pre­
screened corporate borrowers in need of financial assistance. Second,
32Gabionza v. CA, G.R. No. 161057, September 12, 2008.
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DIVINA ON COMMERCIAL LAW:
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Ng Wee invested the aggregate amount, of 1’213,290,410.36 in the
"sans recourse" transactions through his trustees, as embodied in
the Confirmation Advices. Third, prior to being matched with a
corporate borrower, all the monies infused by the investors are pooled
in an account maintained by Wincorp. This ensures that there are
enough funds to meet large drawdowns bjr single borrowers. Fourth,
the investors were induced to invest by Wincorp with promises of
high yield. In Ng Wee’s case, his Confirmation Advices reveal that
his funds were supposed to earn 13.5% at their respective maturity
dates. Fifth. the profitability of the enterprise depended largely on
whether or not Wincorp, on best effort basis, would be able to match
the investors with their approved corporate borrowers.33 Thus,
Wincorp cannot hide behind its license to operate as an investment
house when it offered the “sans recourse” transactions to the public.
17.
What is a derivative?
Under the SRC Implementing Rules and Regulations, a
ierivative is defined as a financial instrument whose value changes
i response to changes in a specified interest rate, security price,
ommodity price, foreign exchange rate, index of prices or rates,
credit rating or credit index, or similar variable or underlying factor.
It is settled at a future date.
Simply put, it is a financial security with a value that is reliant
upon or derived from an underlying asset or group of assets.
18.
What are the kinds of options?
Call option - it is an option but not an obligation to buy
1.
securities at an agreed price on or before an agreed date.
2.
Put option - it is an option but not an obligation to sell
securities at an agreed price on or before an agreed date.
3.
19.
Straddle - combination of both put and call options.
What is a warrant?
It is a type of derivative that gives the holder the right, but
not the obligation, to subscribe or purchase new or existing shares
of stock in a company at a fixed price on or before a pre-agreed date.
’’Virata v. Ng Wee, G.R. Nos. 220926, 221058, 221109, 221135, and 221218,
July 5, 2017.
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V. SECURITIES REGULATION CODE
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20.
11
What is the distinction between warrant and option?
If warrants are exercised, the company will issue new stocks,
thereby causing dilution of existing stockholders. Exercising a call
option does not involve issuing new stock since a call option is a
derivative instrument on the existing shares of a company.
21.
What is a timeshare? Is it a security?
A timeshare, sometimes called vacation ownership, is a
property with a divided form of ownership or use rights. These
properties are typically resort condominium units, in which multiple
parties hold rights to use the property and each owner of the same
accommodation is allotted their period of time.
Timeshare is a form of certificate of membership and is,
therefore, considered a security.
22.
Is a corporation registered with the SEC authorized to sell
timeshares to the public?
No. Corporate registration is just one of several requirements
before it may deal with timeshares. Under Section 8 of B.P. Big. 178
or The Revised Securities Act, all securities required to be registered
shall be registered through the filing by the issuer or by any dealer
or underwriter interested in the sale thereof, with the SEC, of a
sworn registration statement with respect to such securities. Prior to
fulfillment of all the other requirements of Section 8, corporations are
absolutely proscribed under Section 4 from dealing with unregistered
timeshares, thus: “No securities, except of a class exempt under any
of the provisions of Section 5 hereof or unless sold in any transaction
exempt under any of the provisions of Section 6 hereof, shall be sold
or offered for sale or distribution to the public within the Philippines
unless such securities shall have been registered and permitted to
be sold as hereinafter provided.”34
23.
Philippine Palaces Realty (PPR) had been representing itself
as a registered broker of securities, duly authorized by the
Securities and Exchange Commission (SEC). On October 6,
1996, PPR sold to spouses Leon and Carina one (1) timeshare of
3lTimeshare Realty Corporation v. Cesar Lao, 544 SCRA 254 (2008). The same
provision was retained under the Securities Regulation Code.
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Palacio del Boracay for US$7,500.00. However, its Registration
Statement became effective only on February 11,1998, after the
SEC issued a resolution declaring that PPR was authorized to
sell securities, including timeshares.
On March 30,1998, Leon and Carina wrote PPR rescinding
their purchase agreement and demanding the refund of the
amount they paid, because the Palacio del Boracay timeshare
was sold to them by PPR without the requisite license or
authority from the SEC. PPR contended that the grant of
the SEC authority had the effect of ratifying the purchase
agreement (with Leon and Carina) of October 6,1996.
Is the contention of PPR correct? Explain.35
No. The contention of PPR is not correct. Timeshare certificates
are considered securities.36 Under Section 8 of the Securities
Regulation Code, no securities shall be sold or offered for sale or
distribution in the Philippines without a registration statement
inly filed and approved by the SEC. The permit to sell should be
issued before the actual sale or distribution of the securities. The
permit does not retroact to the date of the actual sale.
24.
X has the following plans:
a.
Organize the Tagaytay Country Club, Incorporated.
b.
Let the club buy a 1O-hectare land for P10 Million which
will be developed into a sports and health club complete
with an Olympic size swimming pool, tennis and pelota
courts, bowling lanes, pool rooms, etc.
Five (5) of the P10 Million needed to develop the club will
be raised thru the sale of certificates of membership.
d.
The certificate of membership shall give the purchaser
the right to use all club facilities, and shall be transferable.
It shall not, however, give the purchaser any right in the
income or assets of the club. The purchaser must also pay
monthly dues.
“BAR 2009.
“Timeshare Realty v. Lao, G.R. No. 158941, February 11, 2008.
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V. HECIJRITIES REGULATION CODE
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X wants to know whether the certificate of membership
is an investment contract and hence, a security within the
meaning of the Revised Securities Act. What is your opinion?
The certificate of membership, although not providing for a
right of income or right over club assets, gives, however, to the holder
thereof privileges on the use of club facilities, that are of value and
transferable. The certificate is thus a security within the meaning of
the Revised Securities Act.3’
Note that under the SRC, certificates of membership,
whether proprietary or non-proprietary are considered securities
independently of investment contracts.
25.
26.
What are the kinds of securities?
1.
Non-exempt securities - these are securities that cannot
be sold or distributed within the Philippines unless
registered with the SEC.
2.
Exempt securities
3.
Securities sold on exempt transaction
What is the rule regarding sale or distribution of securities
within the Philippines?
Securities shall not be sold or offered for sale or distribution
within the Philippines, without a registration statement duly
filed with and approved by the Commission. Prior to such sale,
information on the securities, in such form and with such substance
as the Commission may prescribe, shall be made available to each
prospective purchaser.38 “Registration statement” is the application
for the registration of securities required to be filed with the
Commission39
27.
"Securities" issued to the public are required by law to be
registered with —
a)
The Bangko Sentral ng Pilipinas;
b)
The Philippine Stock Exchange;
c)
The Securities and Exchange Commission;
37BAR 1982.
38Section 8.1, SRC.
39Section 3.12, SRC.
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28.
d)
The Securities and Exchange Commission and the
Philippine Stock Exchange.
c)
The Securities and Exchange Commission.10
ABC Corp, is engaged in the pawnshop business involving
cellphones, laptops, and other gadgets of value. In order to
expand its business and attract investors, it offered to any
person who invests at least P100.000.00 a "Promissory Note"
where it obligated itself to pay the holder a 50% return on
investment within one (1) month. Due to the attractive offer,
many individuals invested in the company but not one of them
was able to realize any profit after one (1) month.
Has ABC Corp, violated any law with its scheme? Explain."
Yes. ABC Corporation violated the provisions of the Securities
Regulation Code that prohibits sale of securities to the public, like
promissory notes, without a registration statement filed with and
approved by the Securities and Exchange Commission.
29.
Andante Realty, a marketing company that promotes and
facilitates sales of real property through leverage marketing,
solicits investors who are required to be a Business Center
Owner (BCO) by paying an enrollment fee of $250.00. The
BCO is then entitled to recruit two (2) other investors who
pay $250.00 each. The BCO receives $90.00 from the $250.00
paid by each of his recruits and is credited a certain amount
for payments made by investors through the initial efforts of
his Business Center. Once the accumulated amount reaches
$5,000.00, the same is used as down payment for the real
property chosen by the BCO.
a.
What procedure must be followed under the Securities
Regulation Code to authorize the sale or offer for sale or
distribution of an investment contract?42
Prior to the sale or offering for sale or distribution to
the public of an investment contract, the issuer must file a
registration statement with and obtain a permit to sell from
"BAK 2012.
"BAR 2016.
“BAR 2010.
j
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V. SECURITIES REGULATION CODE
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the Securities and Exchange Commission (SEC) in accordance
with Section 8 of the Securities and Regulation Code.
b.
What are the legal consequences of failure to follow this
procedure?11
The failure to follow this procedure shall give rise to
criminal, civil, and administrative liabilities. The penal
sanction, upon conviction, includes a fine P50,000.00 to
P5,000,000.00 and/or imprisonment of 7-12 years. It carries
also civil liabilities such that the purchaser can recover from
the seller (i) the consideration paid with interest thereon, less
the amount of any income received on the purchased securities,
upon the tender of such securities, or (ii) damages if the
purchaser no longer owns such securities. Furthermore, the
SEC may issue a cease and desist order to enjoin the sale of the
unregistered securities and impose administrative sanctions
against the issuer and its responsible directors, officers, and
agents.
30.
What are exempt securities?
These are securities that can be sold or distributed within the
Philippines without generally the requirement of registration under
the SRC. These are the following:
(a)
Any security issued or guaranteed by the Government of
the Philippines, or by any political subdivision or agency
thereof, or by any person controlled or supervised by, and
acting as an instrumentality of said Government.
(b)
Any security issued or guaranteed by the government
of any country with which the Philippines maintains
diplomatic relations, or by any state, province or political
subdivision thereof on the basis of reciprocity: Provided,
That the Commission may require compliance with the
form and content for disclosures the Commission may
prescribe.
(c)
Certificates issued by a receiver or by a trustee in
bankruptcy duly approved by the proper adjudicatory
body.
(d)
Any security or its derivatives the sale or transfer of
which, by law, is under the supervision and regulation
43BAR 2010.
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of the Office of the Insurance Commission, Housing
and Land Use Rule Regulatory Board, or the Bureau of
Internal Revenue.
31.
(e)
Any security issued by a bank except its own shares of
stock.
(0
Other securities as determined by SEC."
The SRC exempts from registration the securities issued by
banking or financial institutions mentioned in the law. Does
this exemption include reportorial requirements?
No. Nowhere does it state or even imply that a bank, as a listed
corporation, is exempt from complying with the reports required
by the assailed Revised Securities Act Implementing Rules. The
exemption from the registration requirement enjoyed by a bank
does not necessarily connote that it is exempted from reportorial
requirements. Having confined the exemption enjoyed by the bank
merely to the initial requirement of registration of securities for
public offering, and not to the subsequent filing of various periodic
eports, the SEC, as the regulatory agency, is able to exercise its
lower of supervision and control over corporations and over the
securities market as a whole. Otherwise, the objectives of the “Full
Material Disclosure” policy would be defeated since the bank and its
dealings would be totally beyond the reach of the Commission and
the investing public.45
32.
What are the transactions exempt from the requirement of
registration under the SRC?
(a)
At any judicial sale, or sale by an executor, administrator,
guardian, or receiver or trustee in insolvency or
bankruptcy.
(b)
By or for the account of a pledge holder, or mortgagee
or any of a pledge lien holder selling of offering for sale
or delivery in the ordinary course of business and not
for the purpose of avoiding the provision of the Code, to
liquidate a bona fide debt, a security pledged in good faith
as security for such debt.
"'Section 9, SRC; BAR 2009.
'5Union Bank of the Philippines v. Securities and Exchange Commission, G.R.
No. 138949, June 6, 2001.
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(C)
An isolated transaction in which any security is sold,
offered for sale, subscription or delivery by the owner
therefore, or by his representative for the owner’s account,
such sale or offer for sale or offer for sale, subscription
or delivery not being made in the course of repeated and
successive transaction of a like character by such owner,
or on his account by such representative and such owner
or representative not being the underwriter of such
security.
(d)
The distribution by a corporation actively engaged in the
business authorized by its articles of incorporation, of
securities to its stockholders or other security holders as
a stock dividend or other distribution out of surplus.
(e)
The sale of capital stock of a corporation to its own
stockholders exclusively, where no commission or other
remuneration is paid or given directly or indirectly in
connection with the sale of such capital stock.
(f)
The issuance of bonds or notes secured by mortgage upon
real estate or tangible personal property, when the entire
mortgage together with all the bonds or notes secured
thereby are sold to a single purchaser at a single sale.
(g)
The issue and delivery of any security in exchange for any
other security of the same issuer pursuant to a right of
conversion entitling the holder of the security surrendered
in exchange to make such conversion: Provided, That the
security so surrendered has been registered under the SRC
or was, when sold, exempt from the provision of the SRC,
and that the security issued and delivered in exchange,
if sold at the conversion price, would at the time of such
conversion fall within the class of securities entitled to
registration under the SRC. Upon such conversion, the
par value of the security surrendered in such exchange
shall be deemed the price at which the securities issued
and delivered in such exchange are sold.
(h)
Broker’s transaction, executed upon customer’s orders, on
any registered exchange or other trading market.
(i)
Subscriptions for shares of the capitals stocks of a
corporation prior to the incorporation thereof or in
pursuance of an increase in its authorized capital stocks
under the Corporation Code, when no expense is incurred,
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or no commission, compensation or remuneration is paid
or given in connection with the sale or disposition of
such securities, and only when the purpose for soliciting,
giving or taking of such subscription is to comply with
the requirements of such law as to the percentage of the
capital stock of a corporation which should be subscribed
before it can be registered and duly incorporated, or its
authorized, capital increase.
(j)
The exchange of securities by the issuer with the existing
security holders exclusively, where no commission or
other remuneration is paid or given directly or indirectly
for soliciting such exchange.
(k)
The sale of securities by an issuer to fewer than 20 persons
in the Philippines during any twelve (12)-month period.
0)
The sale of securities to any number of the following
qualified buyers:
(i)
Bank;
(ii)
Registered investment house;
(iii) Insurance company;
(iv) Pension fund or retirement plan maintained by
the Government of the Philippines or any political
subdivision thereof or manage by a bank or other
persons authorized by the Bangko Sentral to engage
in trust functions;
(v)
Investment company; or
(vi) Such other person as the Commission may rule
by determine as qualified buyers, on the basis of
such factors as financial sophistication, net worth,
knowledge, and experience in financial and business
matters, or amount of assets under management.46
33.
Able Corporation sold securities to 21 non-qualified buyers
during a 15-month period, without registering the securities
with the Securities and Exchange Commission. Did Able
Corporation violate the Securities Regulation Code? Explain.
4GSection 10.1, SRC.
I
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Yes. Under the SRC, securities shall not be sold or offered to
be sold to the public within the Philippines unless the securities
are registered with and approved by the Securities and Exchange
Commission. Public means 20 or more investors. The fact that the
securities were sold during a 15-month period is immaterial."
34.
TRUE or FALSE. The issuance by a corporation of previously
authorized but unissued capital stock to existing stockholders
is not automatically exempt from registration and requires an
application from exemption with the Securities and Exchange
Commission.
True. The interpretation that the issuance of previously
authorized but unissued capital stock would automatically
constitute an exempt transaction would establish an inflexible
rule of automatic exemption of issuances of additional, previously
authorized but unissued, capital stock. This construction would
disable the SEC from rendering protection to investors, in the public
interest, precisely when such protection may be most needed.48
Note that under Section 10.3 of the SRC, the application for
exemption for securities sold on exempt transactions, like issuance
of previously authorized but unissued capital stock to existing
stockholders, is done by filing a notice of exemption with the SEC
identifying the exemption relied upon in such form and at such time
as the SEC may prescribe and with such notice shall pay to the
SEC a fee equivalent to one tenth (1/10) of one percent (1% ) of the
maximum aggregate price or issued value of the securities.
35.
Securities issued by the Philippine government are "exempt
securities" and, therefore, need not be registered with the
Securities and Exchange Commission prior to their sale or
offering to the public in the Philippines. What is the rationale
behind this exemption?
The rationale for the exemption is that the public is amply
protected even without the registration of the securities to be issued
by the government.49
"BAR 2015.
48Nestle Philippines v. Court of Appeals & Securities and Exchange Commis­
sion, G.R. No. 86738, November 13, 1991.
49BAR 2015.
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36.
Assume that Greater Manila Telephone and Telegraph
Company, Incorporated has 10,000 employees. It has a policy
of encouraging stock ownership among its employees. Its
Board of Directors intends to sell P2 Million worth of common
stocks to either (a) its managerial employees only numbering
about 1,000 or (b) indiscriminately to all its 10,000 employees.
In case it decides to sell to its managerial employees only, does
it have to register its securities? How about if the intended sale
is to all employees?
Exempt transactions are those that do not require registration
either because the law itself exempts them therefrom or the SEC
finds that the enforcement of the registration requirement is not
necessary in the public interest and for the protection of investors by
reason of the amount involved or the limited character of the public
offering. The proposed sales stated in the problem do not strictly fall
under any of the transactions exempted from registration.60
r-
What is the distinction between exempt securities and
securities sold on exempt transactions?
Any person applying for an exemption shall file with the SEC
a notice identifying the exemption relied upon on such form and at
such time as the SEC by the rule may prescribe and with such notice
shall pay a fee equivalent to one-tenth (1/10) of one percent (1%) of
the maximum value aggregate price or issued value of the securities.
Exempt securities may be sold or distributed within the
Philippines, not subject to the foregoing requirement.
38.
Discuss the procedure for registration of securities.
All securities required to be registered under Section 8 of the
SRC shall be registered through the filing by the issuer in the main
office of the SEC of a sworn registration statement with the respect
to such securities, in such form and containing such information and
document as the SEC may prescribe. The registration statement
shall include any prospectus required or permitted to be delivered
under Subsections 8.2, 8.3, and 8.4.61
In promulgating rules governing the content of any registration
statement (including any prospectus made a part thereof or annex
thereto), the Commission may require the registration statement
“BAR 1989.
“Section 12, SRC.
V. SECURITIES REGULATION CODE
(REPUBLIC ACT NO. H7!>9)
21
to contain such information or documents as it may, by rule,
prescribe. It may dispense with any such requirements, or may
require additional information or documents, including written
information from an expert, depending on the necessity thereof or
their applicability to the class of securities sought to be registered.'2
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The information required for the registration of any kind, and
all securities, shall include, among others, the effect of the securities
issue on ownership, on the mix of ownership, especially foreign and
local ownership.63
The registration statement shall be signed by the issuer’s
executive officer, its principal operating officer, its principal
financial officer, its comptroller, its principal accounting officer,
its corporate secretary, or persons performing similar functions
accompanied by a duly verified resolution of the board of directors
of the issuer corporation. The written consent of the expert named
as having certified any part of the registration statement or any
document used in connection therewith shall also be filed. Where
the registration statement includes shares to be sold by selling
shareholders, a written certification by such selling shareholders as
to the accuracy of any part of the registration statement contributed
to by such selling shareholders shall be filed?1
(a)
Upon filing of the registration statement, the issuer shall
pay to the SEC a fee of not more than one-tenth (1/10) of
one per centum (1%) of the maximum aggregate price at
which such securities are proposed to be offered. The SEC
shall prescribe by the rule diminishing fees in inverse
proportion the value of the aggregate price of the offering.
(b)
Notice of the filing of the registration statement shall be
immediately published by the issuer, at its own expense,
in two (2) newspapers of general circulation in the
Philippines, once a week for two (2) consecutive weeks,
or in such other manner as the Commission by the rule
shall prescribe, reciting that a registration statement
for the sale of such securities has been filed, and that
aforesaid registration statement, as well as the papers
attached thereto are open to inspection at the Commission
during business hours, and copies thereof, photostatic or
“Section 12.2, SRC.
“Section 12.3, SRC.
“Section 12.4, SRC.
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otherwise, shall be furnished to interested parties at such
reasonable charge as the Commission may prescribe.56
Within 45 days after the date of filing of the registration
statement, or by such later date to which the issuer has consented,
the Commission shall declare the registration statement effective or
rejected, unless the applicant is allowed to amend the registration
statement as provided in Section 14 of the SRC. The Commission
shall enter an order declaring the registration statement to be
effective if it finds that the registration statement together with
all the other papers and documents attached thereto, is on its face
complete and that the requirements have been complied with.56
The SEC may impose such terms and conditions as may be
necessary or appropriate for the protection of the investors.
Upon effectivity of the registration statement, the issuer
shall state under oath in every prospectus that all registration
requirements have been met and that all information are true and
correct as represented by the issuer or the one making the statement.
Any untrue statement of fact or omission to state a material fact
required to be stated herein or necessary to make the statement
therein not misleading shall constitute fraud.57
Preferred Shares Issuance
issuer
Reject
45 days
R.S.
I approved L
R.S.
Permit to Sell [
prospectus
Correction
1. CEO
2. COO
3. CFO
4. Controller
5. Principal Accounting Officer
6. Corporate Secretary
7. Expert, if any
Listing
PSE
By way of illustration, let us assume that ABC plans to increase
its capital by offering preferred shares to the investing public.
“Section 12.5, SRC.
“Section 12.6, SRC.
‘’Section 12.7, SRC.
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23
ABC then engages the services of a reputable investment manager
to assist in the capital offering and to reach as many interested
investors as possible.
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1.
ABC is required to file a registration statement with the
SEC. It may include any prospectus made a part thereof
or as an annex thereto. The registration statement shall
be signed by ABC’s executive officer (CEO), its principal
operating officer (CFO), its principal financial officer
(CFO), its comptroller, its principal accounting officer,
its corporate secretary, or persons performing similar
functions accompanied by a duly verified resolution of
the board of directors of ABC Corporation. The written
consent of the expert named as having certified any part
of the registration statement or any document used in
connection therewith shall also be filed.
2.
The registration statement (and the prospectus which is
made part of it or as an annex thereto) shall include all
material information about the ABC Corporation, like
nature of business, share ownership mix, director and
management composition, operating performance, its
financial condition and corporate goals for the immediate
future, its plans on how to deploy the funds to be raised
and other relevant material information. It should also
include information on the type of securities that it
plans to issue. For instance, the registration statement
should indicate if the preferred shares will be voting or
non-voting, preferred as to dividends and/or assets upon
dissolution of the corporation, if they are preferred as to
dividends, will they be cumulative or non-cumulative,
participating or non-participating? What will be the
indicate yield or amount of dividends, when and often are
they payable? Will the preferred shares be redeemable? If
they are redeemable, what is the date of redemption and
what will be the effect of non-redemption? Will they be
convertible to shares?
In other words, the registration statement should
contain all material information about ABC Corporation,
as the issuer, and the type of securities that it plans to
issue in order to guide the decision of the investing public.
3.
After initial publication and payment of filing fees, the
SEC, within 45 days, may approve, reject or require the
amendments of the registration statement.
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4.
Prior to SEC approval of the registration statement,
ABC Corporation cannot consummate any subscription
agreement but may accept preliminary offers from the
investing public, through its investment manager.
5.
If the SEC finds that the registration statement is
completed and all requirements have been complied with
the, it shall issue the permit to sell.
6.
The preliminary offers for subscription may then be
finalized and funds credited to the account of ABC
Corporation.
7.
ABC may also list the preferred shares of stock with
the Philippine Stock Exchange (PSE) so that they can
be publicly traded. The fisting is, of course, subject to
compliance with PSE rules and regulations.
It should be noted that PSE is a marketplace
for selling listed securities. One does not sell to or buy
from the PSE. A buyer buys shares from a seller, or vice
versa, through the PSE accredited brokers using the PSE
trading facilities.
39.
What are the grounds for rejection of securities?
The Commission may reject a registration statement and refuse
registration of the security thereunder, or revoke the affectivity
of a registration statement and the registration of the security
thereunder after the due notice and hearing by issuing an order to
such effect, setting forth its finding in respect thereto, if it finds that:
(a)
The issuer:
(i)
Has been judicially declared insolvent;
(ii)
Has violated any of the provision of the Code, the
rules promulgate pursuant thereto, or any order of
the Commission of which the issuer has notice in
connection with the offering for which a registration
statement has been filed;
(iii) Has been or is engaged or is about to engage in
fraudulent transactions;
(iv) Has made any false or misleading representation
of material facts in any prospectus concerning the
issuer or its securities;
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(V)
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Has failed to comply with any requirements that
the Commission may impose as a condition for
registration of the security for which the registration
statement has been filed; or
(b)
The registration statement is on its face incomplete
or inaccurate in any material respect or includes any
untrue statements of a material fact required to be stated
therein or necessary to make the statement therein not
misleading; or
(C)
The issuer, any officer, director or controlling person
performing similar functions, or any under writer has been
convicted, by a competent judicial or administrative body,
upon plea of guilty, or otherwise, of an offense involving
moral turpitude and/or fraud or is enjoined or restrained
by the Commission or other competent or administrative
body for violations of securities, commodities, and other
related laws.
For the purposes of this subsection, the term “competent
judicial or administrative body” shall include a foreign court of
competent jurisdiction as provided for under Rules of Court.58
The SEC may compel the production of all the books and papers
of such issuer, and may administer oaths to, and examine the officers
of such the issuer or any other person connected therewith as to its
business and affairs.59
If any issuer shall refuse to permit an examination to be made
by the Commission, its refusal shall be ground for the refusal or
revocation of the registration of its securities.80
40.
What are the prohibited acts relating to manipulation of
security prices?
It shall be unlawful for any person acting for himself or through
a dealer or broker, directly or indirectly:
(a)
To create a false or misleading appearance of active
trading in any listed security traded in an Exchange of
any other trading market (hereafter referred to purposes
of this Chapter as “Exchange”):
68Section 13, SRC.
69Section 13.2, SRC.
“Section 13.3, SRC.
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(i)
By effecting any transaction in such security which
involves no change in the beneficial ownership
thereof:
(ii)
By entering an order or orders for the purchase
or sale of such security with the knowledge that a
simultaneous order or orders of substantially the
same size, time and price, for the sale or purchase of
any such security, has or will be entered by or for the
same or different parties; or
(iii) By performing similar act where there is no change
in beneficial ownership.
(b)
To affect, alone or with others, a securities or transactions
in securities that:
(i)
Raises their price to induce the purchase of a
security, whether of the same or a different class
of the same issuer or of controlling, controlled, or
commonly controlled company by others;
(ii)
Depresses their price to induce the sale of a security,
whether of the same or a different class, of the same
issuer or of a controlling, controlled, or commonly
controlled company by others; or
(iii) Creates active trading to induce such a purchase or
sale through manipulative devices such as marking
the close, painting the tape, squeezing the float,
hype and dump, boiler room operations and such
other similar devices.
(c)
To circulate or disseminate information that the price of
any security listed in an Exchange will or is likely to rise
or fall because of manipulative market operations of any
one or more persons conducted for the purpose of raising
or depressing the price of the security for the purpose of
inducing the purpose of sale of such security.
(d)
To make false or misleading statement with respect to any
material fact, which he knew or had reasonable ground
to believe was so false or misleading, for the purpose of
inducing the purchase or sale of any security listed or
traded in an Exchange.
(e)
To effect, either alone or others, any series of transactions
for the purchase and/or sale of any security traded in an
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•2.1
Exchange for the purpose of pegging, fixing or stabilizing
the price of such security; unless otherwise allowed by the
Code or by rules of the Commission/'1
No person shall use or employ, in connection with the purchase
or sale of any security any manipulative or deceptive device or
contrivance. Neither shall any short sale be effected nor any stop­
loss order be executed in connection with the purchase or sale of any
security except in accordance with such rules and regulations as the
Commission may prescribe as necessary or appropriate in the public
interest for the protection of investors.62
41.
A trading contract signed by the parties is a contract for the sale
of products for future delivery, in which either seller or buyer
may elect to make or demand delivery of goods agreed to be
bought and sold, but where no such delivery is actually made.
Is this contract illegal? What is the nature of the transaction
made by the parties?
No. The agreement is not illegal. As a contract in printed form
signed by the parties, the trading contract bears it complies with the
Rules and Regulations on Commodity Future Trading as prescribed
by the SEC. However, when the transaction which was carried out
to implement the written contract deviates from the true import
of the agreement as when no such delivery, actual or constructive,
of the commodity or goods is made, and final settlement is made
by payment receipt of only the difference in prices at the time of
delivery from that prevailing at the time the sale is made, the
dealings in futures become mere speculative contracts in which the
parties merely gamble on the rise or fall in prices.63 This gambling
or wagering on prices within a given time is not buying and selling
and is illegal as against public policy.
42.
Suppose "A" is the owner of several inactive securities. To
create an appearance of active trading for such securities, "A"
connives with "B" by which "A" will offer for sale some of his
securities and "B" will buy them at certain fixed price, with the
understanding that although there would be an apparent sale,
"A” will retain the beneficial ownership thereof.
“‘Section 24.1, SRC.
“Section 24.2, SRC.
“Onapal Philippines Commodities, Inc. v. Court of Appeals, G.R. No. 90707,
February 1, 1993.
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a)
Is the arrangement lawful?
No. the arrangement is not lawful. It is an artificial
manipulation of the price of securities. This is prohibited by the
Securities Regulation Code.
b)
If the sale materializes, what is it called?
If the sale materializes, it is called a wash sale or simulated
sale.64
43.
What is a wash sale?
A wash sale is the buying and selling of stocks without change
of beneficial ownership.
44.
Define the following terms:
a)
Marking the Close
b)
Painting the Tape
c)
Squeezing the Float
d)
Hype and Dump
e)
Improper Matched Orders
f)
Boiler Room Operations
g)
Scalping
h)
Daisy Chain
i)
Flipping
j)
Short Sale
k)
Stop-loss Order
a)
Marking the Close means buying and selling securities at
close market in an effort to alter the closing price of the
security.
b)
Painting the Tape means engaging in the series of
transactions that are reported publicly to give impression
of activity or price movement in a security.
c)
Squeezing the Float means taking advantage of a shortage
of securities in the market by controlling demand side
and exploiting market congestion during such shortages
to create artificial prices.
“BAR 2001.
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d)
Hype and Dump means engaging in buying activity at
increasingly higher prices and then selling the securities
in market at higher price.
e)
Improper Matched Orders means engaging in transac­
tions where both the buy and sell orders are entered at the
same time with the same price and quantity by different
but colluding parties.
f)
Boiler Room Operations ae well-organized operations
where in a room there would be well-trained salesmen
operating over several phones and using high-pressure
sales-talk to get investors to invest in securities offered.
g)
Scalping is a situation where a person, like an investment
advisor, purchases securities for his own account before
recommending that security then selling the share at
a profit upon a rise in the market price following the
recommendation.
h)
Daisy Chain is a pattern fictitious trading activity by
a group of persons who lure innocent people into the
scheme.
i)
Flipping is operated when one office buys a particular
stock for customers while another office simultaneously
recommends that its customers sell the stock, with the
stock being shifted from one office to another, and the firm
makes a profit and the brokers earn their commissions
j)
1.
By the circulation or dissemination of information
that the price of any security listed in the Exchange
will or is likely to rise or fall because of manipulative
market operations
2.
To make, regarding any security registered on an
exchange, any statement which is false or mislead­
ing with respect to any material fact, and which he
knew or had reasonable ground to believe is false or
misleading
3.
To effect series of transactions for the purpose of
pegging, fixing, or stabilizing the price of such se­
curity traded in an Exchange, unless otherwise al­
lowed by this Code or by the rules of the Commission
Short Sale is a contract for sale of shares of stock which
the seller does not own, or certificates which are not
within his control.
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k)
45.
Stop-loss Order is a direction by a customer to his broker
that if the commodity touches the price named, the broker
shall close the trade at the best available price.
What would be considered as unlawful acts in the sale of any
equity security?
It is unlawful for any beneficial owner, director, or officer,
directly or indirectly, to sell any equity security of such issuer if the
person selling the security or his principal does not own the security
sold, or
46.
a.
If owning the security, does not deliver it against such
sale within 20 days thereafter, or does not within five (5)
days after such sale deposit it in the mails.
b.
No person shall be deemed to have violated SRC if he
proves the exercise of good faith he was unable to make
such delivery within such time, or to do so would cause
inconvenience or expense.66
A complaint was filed with the SEC against Abacus Securities
Corporation, Sapphire Securities Inc., and several other
persons, including Jose Maximo Cuaycong III and Mark
Angelo Cuaycong. It was alleged that Jose Maximo engaged
in fraudulent and deceitful activities with the complicity of
Abacus, Saphire and the other defendants. The complainants
prayed that all defendants be held jointly and severally liable
for all damages. Meanwhile, the complainants and Jose Maximo
and Mark Angelo entered into a compromise agreement. Can
this compromise agreement absolve Jose Maximo and Mark
Angelo from the civil case?
No. The SRC punishes the persons primarily liable for
fraudulent transactions under Section 58 and their aiders or abettors
under Section 51.5, by making their liability for damages joint
and solidary. Thus, one cannot condone the liability of the person
primarily liable and proceed only against his aiders or abettors
because the liability of the latter is tied up with the former. Liability
attaches to the aider or abettor precisely because of the existence of
the liability of the person primarily liable.66
“Section 23.3, SRC.
“Benedicto-Munoz, G.R. No. 179121, November 9, 2015.
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31
Under the SRC, what is the Margin Trading Rule?
Under the Margin Trading Rule, no registered broker or
dealer, or member of an exchange shall extend credit on any security
an amount greater than whichever is higher of:
a)
Sixty-five percent (65%) of the current market price of the
security;
b)
One hundred percent (100%) of the lowest market price of
the security during the preceding 36 calendar months, but
not more than seventy-five percent (75%) of the current
market price.
The purpose of the Margin Trading Rule is to prevent excessive
use of credit for the purchase of securities. It is a counter to the
broker’s desire to generate more sales by encouraging clients to buy
securities on credit.67
48.
What is meant by ‘'Over-the-Counter Markets" as provided in
the Revised Securities Act?68
The term “Over-the-Counter Markets” refers to markets made
or created for the purchase and sale of securities other than on a
security exchange. The SEC may provide rules and regulations of
transactions therein, a violation of which renders the same or the
trading therein unlawful.69
49.
What is insider trading?
Insider trading is the buying or selling of a security by an
insider while in the possession of material non-public information.70
It shall be unlawful for an insider to sell or buy a security of
the issuer, while in possession of material information with respect
to the issuer or the security that is not generally available to the
public, unless:
a.
The insider proves that the information was not gained
from such relationship; or
b.
If the other party selling to or buying from the insider
is identified, the insider proves: (i) that he disclosed
information to the other party, or (ii) that he had reason
67BAR 2009.
“BAR 1982.
69BAR 1982.
70BAR 2015.
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to believe that other party otherwise is also in possession
of the information.71
50.
What are the elements of insider trading?
The elements of insider trading are as follows:
51.
1.
There is a buying or selling of securities,
2.
It was done by an insider as defined under Section 3.8 of
the SRC,
3.
While in possession of material non-public information,
and
4.
Said information pertains to the issuer OR its securities.
Is there a violation of the rule against insider trading if the
insider did not make any purchase or sale of security?
Generally, there can be no unlawful insider trading without the
purchase and/or sale of securities. Nevertheless, it shall be unlawful
for any insider to communicate material nonpublic information
about the issuer or the security to any person who, by virtue of the
communication, becomes an insider as defined in Subsection 3.8,
where the insider communicating the information knows or has
reason to believe that such person will likely buy or sell a security of
the issuer while in possession of such information.72
52.
Who is an insider?
“Insider” means (a) the issuer; (b) a director or officer (or any
person performing similar functions) of, or a person controlling the
issuer; (c) any person whose relationship or former relationship to
the issuer gives or gave him access to material information about the
issuer or the security that is not generally available to the public;
(d) a government employee, director, or officer of an exchange,
clearing agency and/or self-regulatory organization who has access
to material information about an issuer or a security that is not
generally available to the public; or (e) a person who learns such
information by a communication from any foregoing insiders.73
’'Section 27.1, SRC.
’’Section 27.3, SRC.
’’Section 3.8, SRC.
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53.
When is an information considered material non-public for the
purpose of insider trading?
For purpose of insider trading, the information is “material
non-public” if: (a) It has not been generally disclosed to the public
and would likely affect the market price of the security after being
disseminated to the public and the lapse of a reasonable time for
the market to absorb the information; or (b) would be considered
by a reasonable person important under the circumstances in
determining his course of action whether to buy, sell, or hold a
security.74
54.
What are the penalties for unlawful insider trading?
Unlawful insider trading renders
criminally, and administratively liable.
a.
the
violators
civilly,
Civil liability
Any insider who violates the rule against insider trading by
purchasing or selling a security while in possession of material
information not generally available to the public, shall be liable in
a suit brought by any investor who, contemporaneously with the
purchase or sale of securities that is the subject of the violation,
purchased or sold securities of the same class unless such insider, or
such person in the case of a tender offer, proves that such investor
knew the information or would have purchased or sold at the same
price regardless of disclosure of the information to him.76
An insider who violates the rule against insider trading by
communicating material non-public information, shall be jointly
and severally liable with, and to the same extent as, the insider, by­
reason of his purchase or sale of a security.76
All suits to recover damages pursuant shall be brought before
the Regional Trial Court, which shall have exclusive jurisdiction
to hear and decide such suits. The Court is hereby authorized to
award damages in an amount not exceeding triple the amount of the
transaction plus actual damages.
Exemplary damages may also be awarded in cases of bad faith,
fraud, malevolence, or wantonness in the violation of the SRC or the
rules and regulations promulgated thereunder.
’■'Section 27.2, SRC.
76Section 61, SRC.
76Section 61.2, SRC.
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The Court is also authorized to award attorney’s fees not
exceeding thirty per centum (30%) of the award.”
b.
Administrative sanctions
(i)
Suspension, or revocation of any registration for the
offering of securities;
(ii)
A fine of no less than Ten thousand pesos (PIO,000.00)
nor more than One million pesos (Pl,000,000.00)
plus not more than Two thousand pesos (P2,000.00)
for each day of continuing violation;
(iii) Disqualification from being an officer, member of
the Board of Directors, or person performing similar
functions, of an issuer required to file reports under
Section 17 of the SRC or any other act, rule, or
regulation administered by the Commission;
(iv)
Other penalties within the power of the Commission
to impose.
The imposition of the foregoing administrative sanctions shall
oe without prejudice to the filing of criminal charges against the
individuals responsible for the violation.78
c.
Criminal liability
The SRC provides that any person who violates these
prohibitions shall, upon conviction, suffer a fine of not less than
Fifty thousand pesos (P50,000.00) nor more than Five million pesos
(P5,000,000.00) or imprisonment of not less than seven (7) years nor
more than 21 years, o both in the discretion of the court.79
55.
Ms. OB was employed in MAS Investment Bank. WIC, a
medical drug company, retained the Bank to assess whether
it is desirable to make a tender offer for DOP Company, a drug
manufacturer. OB overheard in the course of her work the
plans of WIC. By herself and thru associates, she purchased
DOP stocks available at the stock exchange price at P20.00 per
share. When WIC's tender offer was announced, DOP stocks
jumped to P30.00 per share. Thus, OB earned a sizable profit.
’’Section 63, SRC.
’“Section 54.2, SRC.
’“Section 73, SRC.
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Is OB liable for breach and misuse of confidential or insider
information gained from her employment? Is she also liable for
damages to sellers or buyers with whom she traded? If so, what
is the measure of such damages? Explain briefly.
OB is an insider (as defined in Subsection 3.8[3] of the SRC)
since she is an employee of the Bank, the financial adviser of DOP,
and this relationship gives her access to material information
about the issuer (DOP) and the latter’s securities (shares), which
information is not generally available to the public. Accordingly,
OB is guilty of insider trading under Section 27 of the SRC, which
requires disclosure when trading in securities.
OB is also liable for damages to sellers or buyers with whom
she traded. Under Subsection 63.1 of the SRC, the damages awarded
could bean amount not exceeding triple the amount of the transaction
plus actual damages. Exemplary damages may also be awarded in
case of bad faith, fraud, malevolence, or wantonness in the violation
of the SRC or its implementing rules. The court is also authorized to
award attorney’s fees not exceeding 30% of the award.80
56.
Grand Gas Corporation, a publicly listed company, discovered
after extensive drilling, a rich deposit of natural gas along the
coast of Antique. For five (5) months, the company did not
disclose the discovery so that it could quietly and cheaply
acquire neighboring land and secure mining rights to the land.
Between the discovery and its disclosure of the information
to the SEC, all the directors and key officers of the company
bought shares in the company at very low prices. After the
disclosure, the price of the shares went up. The directors and
officers sold their shares at huge profits.
a)
What provision of the SRC did they violate, if any?
Explain.
They violated Section 27 of the SRC, on insider’s duty to
disclose when trading, to wit:
It shall be unlawful for an insider to sell or buy
securities of the issuer, while in possession of material
information with respect to the issuer or the security that
is not generally available to the public, unless:
“BAR 2004.
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1.
The insider proves that the information was
not gained from such relationship; or
2
If the other party selling to or buying from the
insider (or his agent) is identified, the insider
proves:
1.1. That he disclosed the information to the
other party, or
1.2. That he has reason to believe that the
other party otherwise is also in possession
of the information.
b)
Assuming that the employees of the establishment
handling the printing work of Grand Gas Corporation saw
the exploration reports which were mistakenly sent to
their establishment together with other materials to be
printed. They too brought shares in the company at low
prices and later sold them at huge profits. Will they be
liable for violation of the SRC? Why?
Yes, the employees of the establishment handling the
printing job of the corporation are also liable for violation of
the prohibition against insider trading. These employees fall
within the classification of an “insider” under Subsection
3.8(c) of the SRC, to wit: “a person whose relationship or
former relationship to the issuer gives or gave him access to
material information about the issuer or the security that is
not generally available to the public.”81
57.
X, who is the Executive VP of ABC Corporation, a listed
company, can be held liable or guilty of insider trading if, he
82
a)
Bought shares of ABC Corporation when it was planning
to acquire another company to improve its asset base,
the news of which increased the price of the shares in the
Stock Exchange.
81 BAE 2008.
“BAR 2012.
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37
b)
Bought shares of XYC Corporation, a sister company of
ABC Corporation when he learned that XYC Corporation
was about to also list its share in the Philippine Stock
Exchange.
c)
Bought shares of ZZZ Corporation when he learned that
ABC Corporation would acquire ZZZ Corporation.
d)
All of the above.
Are persons whose relationship or former relationship to
the issuer gives or gave them access to a fact of special
significance about the issuer or the security that is generally
not available, and one who learns of such fact from an insider
knowing that the person from whom he learns the fact is such
an insider included in the definition of "insiders"?
Yes. For a person to be liable for insider trading, the person
must be an “insider” included in this enumeration: (a) the issuer; (b)
a director or officer (or any person performing similar functions) of,
or a person controlling the issuer; (c) a person whose relationship or
former relationship to the issuer gives or gave him access to material
information about the issuer or the security that is not generally
available to the public; (d) A government employee, director, or
officer of an exchange, clearing agency and/or self-regulatory
organization who has access to material information about an issuer
or a security that is not generally available to the public; or (e) a
person who learns such information by a communication from any
forgoing insiders.83
Here, persons whose relationship or former relationship to
the issuer gives or gave them access to a fact of special significance
about the issuer or the security that is generally not available, and
one who learns of such fact from an insider knowing that the person
from whom he learns the fact are insiders included in the definition
of the SRC.
The phrase “fact of special significance” under the Revised
Securities Act is now referred to as “material information” under
the Securities Regulation Code.
“Section 3.8, SRC.
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What is an insider's duty?
Insiders have the duty to disclose or abstain, which means that
insiders are obligated to disclose material information to the other
party or abstain from trading the shares of his corporation.84
60.
You are a member of the legal staff of a law firm doing corporate
and securities work for Coco Products Inc., a company with
unique products derived from coconuts and whose shares
are traded in the Philippine Stock Exchange. A partner in the
law firm, Atty. Buenexito, to whom you report, is the Corporate
Secretary of Coco Products. You have long been investing in
Coco Products stocks even before you became a lawyer.
While working with Atty. Buenexito on another file, he
accidentally gave you the Coco products file containing the
company's planned corporate financial rehabilitation. While
you knew you had the wrong file, your curiosity prevailed and
you browsed through the file before returning it. Thus, you
learned that a petition for financial rehabilitation is imminent,
as the company could no longer meet its obligations as they
fall due.
Soon after, your mother is rushed to the hospital for an
emergency operation, and you have to raise money for her
hospital bills. An immediate option for you is to sell your Coco
Products shares. The sale would be very timely because the
price of the company's stocks is still high.
Would you sell the shares to raise the needed funds for
your mother's hospitalization? Take into account legal and
ethical considerations.
No, I would not sell the shares. Although, the sale of the shares
does not constitute insider trading under the SRC, it would be
unethical to sell the shares. Even if Atty. Buenixito, as corporate
secretary of Coco products, Inc. was an insider, the information
was not obtained regarding the planned corporate rehabilitation
by a communication from him. The file was just accidentally given.
However, Rule 1.01 of the Code of Professional Responsibility
provides, “A lawyer shall not engage in unlawful, dishonest,
“Securities and Exchange Commission v. Interport Resources Corporation, et
al., G.R. No. 135808, October 6, 2008.
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immoral or deceitful conduct.” A lawyer should not only refrain from
performing unlawful acts. He should also desist from engaging in
unfair deceitful conduct to conceal from the buyer of the shares the
planned corporate rehabilitation."6 Taking into these rules on ethics,
I will not sell the shares to raise the needed funds for my mother’s
hospitalization.
61.
Yenkell Cement Corporation (YCC) is a public corporation
whose shares are listed at the PSE. It is 60% owned by Yenkell
Holdings Corporation (YHC) and 20% by Yengco Exploration
Inc. (YEI). The remaining 20% is held by the public. YHC is a
private non-listed corporation which, in turn, is 60% owned by
Yatlas Mines Inc. (YMI), and 40% by Yacnotan Consolidated Inc.
(YCI). On August 8, 2008, the Board of Directors of YEI passed
a resolution approving the acquisition of 50% and 25% of the
shares held by YMI and YCI, respectively, in the authorized
capital stock of YHC.
Yolly, one of the staff members in the office of the Corporate
Secretary of YEI, was immediately asked to type the resolution
and file the disclosure with the PSE and the Securities and
Exchange Commission (SEC). Before doing that, she secretly
called her brother who works with a stock brokerage company,
to purchase, in the name of Yolly's husband, 5,000 shares in
YCC. After the acquisition was disclosed to the SEC and the
PSE, the market price of YCC increased by 50%.
Can Yolly be held liable for insider trading?86
Yolly cannot be held liable for insider trading. Insider trading
is the buying and selling of securities by an insider while in the
possession of a material non-public information. While Yolly is an
insider because she has access to material non-public information by
reason of her relationship with the issuer, she did not, however, buy
the shares. Despite this, Yolly is liable under the SRC for disclosing
the information to broker who will presumably buy the shares.
Under the SRC, it shall be unlawful for any insider to communicate
material nonpublic information about the issuer or the security to
any person who, by virtue of the communication, becomes an insider,
“BAR 2013.
“BAR 2018.
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where the insider communicating the information knows or has
reason to believe that such person will likely buy or sell a security of
the issuer while in possession of such information.
62.
Mr. P, the president of JKL, Inc. whose shares are listed in the
Philippine Stock Exchange, was notified that the corporation
has just been awarded a 5 Billion peso (P5,000,000,000.00)
construction contract by a reputable private company. Before
this information could be disclosed to the public, Mr. P called
his stockbroker to purchase 20,000 shares of JKL, Inc. He also
mentioned the transaction to his brother, Mr. B. Mr. B, who
was not involved at all in the business of JKL, Inc., also bought
50,000 shares of JKL, Inc. because of the tip disclosed to him
by Mr. P.
a.
Is the information disclosed by Mr. P to Mr. B considered
as material non-public information for purposes of insider
trading? Explain.87
Yes, the information that the corporation has just been
awarded a P5 Billion construction contract by a reputable
private company is material non-public information. It has
not been generally disclosed to the public and would likely
affect the market price of the security after being disseminated
to the public or would be considered by a reasonable person
important under the circumstances in determining his course
of action whether to buy, sell, or hold the security.88
b.
Should Mr. P and Mr. B be held liable for insider trading?
Explain.89
Mr. P is Hable for insider trading because he bought
shares of the company, thru his broker, while in the possession
of material non-public information.
Mr. B is also Hable for insider trading. Mr. B became an
insider after having received by communication a material
non-public information from Mr. P, who as President of JKL
is an actual insider.90 Mr. B is liable because he bought the
shares of JKL while in the possession of material non-public
information.
87BAR 2019.
“Section 27.2, SRC.
“BAR 2019.
“Sections 3.8 and 27, SRC.
=
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41
What is a "short swing" transaction? What are the rules on
short swing transaction?
A “short swing” transaction is one where a person makes a
combined buying and selling of securities within a period of six (6)
months.
For the purpose of preventing the unfair use of information
which may have been obtained by a person who is directly or
indirectly beneficial owner of more than ten percent (10%) of any
equity security, director, or officer by reason of his relationship to the
issuer, any profit realized by the latter from any purchase or sale, or
any sale or purchase, of any equity security of such issuer within any
period of less than six (6) months, unless such security was acquired
in good faith in connection with a debt previously contracted,
shall inure to and be recoverable by the issuer, irrespective of any
intention of holding the security purchased or of not repurchasing
the security sold for a period exceeding six (6) months.
A suit to recover such profit may be instituted before the
Regional Trial Court by the issuer, or by the owner of any security of
the issuer in the name and in behalf of the issuer if the issuer shall
fail or refuse to bring such suit within 60 days after request or shall
fail diligently to prosecute the same thereafter, but not such shall
be brought more than two (2) years after the date such profit was
realized.91
64.
A, B, and C are directors of XYZ Mining Corporation whose
shares of stock are listed in the Manila Stock Exchange. On
February 1,1984, A, B, and C each purchased thru a stockbroker
1,000 shares of XYZ Mining Corporation at the then market
price of P4.00 a share. On May 1,1984, B left for abroad for a
medical check-up and a vacation.
At the board meeting held on May 15,1984, at which B
was absent but which A and C attended, the directors were
apprised of an important discovery in an area covered by one
XYZ Mining Corporation’s mining leases. After the discovery
was duly publicized in the morning dailies, the market price of
XYZ Mining Co. started to rise. When it hit P8.00 per share on
May 28,1984, A sold all his 1,000 shares.
91Section 23.2, SRC.
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Upon his return to Manila in the middle of June, 1984, 8
sold 500 shares at P8.00 per share, just enough to cover the
cost of the 1,000 shares he acquired in February, believing that
the stock would continue to rise. The price, however, started to
drop.
On August 15,1984, when the price was P5.00 a share, C
sold 1,000 shares of XYZ Mining Co.
What are the rights of XYZ Mining Co. against A, B, and C?
Explain your answer.
For the purpose of preventing the unfair use of information
which may have been obtained by a director by reason of his
relationship to the issuer, any profit realized by him from any
purchase, of any equity security of such issuer within any period
of less than six (6) months shall inure to and be recoverable by the
issuer, irrespective of any intention of holding the security purchased
or of not repurchasing the security sold for a period exceeding six (6)
months. Suit to recover such profit may be instituted in any court
of competent jurisdiction of the issuer in the name and in behalf of
the issuer.
As the issuer, XYZ Mining Corporation can recover from B, a
director, the amount of P2,000.00, the profit realized by B from the
combined purchase and sale of the shares of the issuer within the
period of February 1, 1984 to the middle of June, 1984.
XYZ Mining Co. cannot recover from C, a director, since C sold
his shares after the lapse of six (6) months from February 1, 1984,
when he acquired the shares.
In the case of A and B, it is immaterial whether or not they
actually used inside information in buying and selling the stock. Any
profit they made during the six (6)-month period from the combined
purchase and sale within such period inures to the benefit of the
issuer, XYZ Mining Corporation.92
65.
What are the sale and purchase transactions excepted by the
rule on short swing transaction?
1.
Purchase and sale of security that was acquired in good
faith in connection with a debt previously contracted.
“BAR 1984.
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2.
66.
43
Purchase and sale, or sale and purchase of an equity
security not then or thereafter held by him and an
investment account, by a dealer in the ordinary course
of his business and incident to the establishment or
maintenance by him of a primary or secondary market,
otherwise than on an Exchange, for such security.M
Distinguish insider trading from short swing transaction.
1.
Insider trading is the buying or selling by an insider of
a security while in the possession of material non-public
information.
Short swing transaction is a one involving the combined
purchase and sale of security within a six (6)-month
period.
67.
2.
Insider trading covers both the actual and constructive
insiders, whereas short swing transaction only covers a
stockholder who is the beneficial owner of more than 10%
of the equity security of the issuer, director, and officer of
the issuer.
3.
Violation of insider trading rule renders the offender
liable to criminally, civilly, and administratively while in
a short swing transaction, the only legal consequence is
that the beneficial owner, director or officer should deliver
to the short swing profit to the issuer of the security.
What are the other prohibited transactions for such beneficial
owner, director, or officer of the issuer?
It shall be unlawful for any such beneficial owner, director, or
officer, directly or indirectly, to sell any equity security of such issuer
if the person selling the principal: (a) does not own the security sold:
or (b) if owning the security, does not deliver not deliver it against
such sale within 20 days thereafter, or does not within five (5) days
after such sale deposit in the mails or the unusual channels of
transportation; but no person shall be deemed to have violated this
subsection if he proves notwithstanding the exercise of good faith
he was unable to make such delivery in such time, or that to do so
would cause undue inconvenience or expense.94
“Section 23.4, SRC.
94Section 23.3, SRC.
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4-1
What is the tender offer rule under the SRC?
68.
Tender offer means a publicly announced intention by a
person acting alone or in concert with other persons to acquire the
outstanding equity securities of a public company or outstanding
equity securities of an associate or related company of such public
company which controls said public company.95
The tender offer rule applies to acquisition of shares of stock
in a public company and not any other kind of securities. Under
Rule 3.1.16 of the SRC Implementing Rules and Regulations, public
company means any corporation with a class of equity securities
listed on an Exchange, or with assets in excess of Fifty Million Pesos
(Php50.000,000.00) and has two hundred (200) or more holders each
holding at least one hundred (100) shares of a class of its equity
securities.
The Exchange being referred to is the Philippine Stock
Exchange.
Note, however, that under Section 19 of the SRC, companies
with assets of at least fifty million pesos (Php50,000,000.00) (not
more than Php50 million) and having 200 or more stockholders
owning at least one hundred shares each, are covered by the tender
offer rule.
In determining the threshold amount of assets for the purpose
of the tender offer rule application, the law should be deemed more
controlling than the implementing regulation.
Mandatory tender offers include:
a)
Any person or group of persons acting in concert, who
intend to acquire 15% of equity securities in a public
company in one or more transactions within a period of
12 months shall file a declaration to that effect with the
Commission.
b)
Any person or group of persons acting in concert, who
intends to acquire 35% of the outstanding voting shares
or such outstanding voting shares that is sufficient to
gain control of the board in a public company in one or
more transactions within a period of 12 months, shall
disclose such intention and contemporaneously make a
tender offer for the percentage sought to all holders of
such securities within the said period.
9iSection 19.1.8, SRC Implementing Rules and Regulations.
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Note that while Section 19 of the SRC sets the threshold
percentage of acquisition at 30% of the equity securities
of a public company over a period of 12 months, the SEC
increased it to 35% pursuant to its rule making authority.
If the tender offer is oversubscribed, the aggregate
amount of securities to be acquired at the close of such
tender offer shall be proportionately distributed across
selling shareholders with whom the acquirer may have
been in private negotiations and other shareholders. For
purposes of SRC Rule 19.2.2, the last sale that meets the
threshold shall not be consummated until the closing and
completion of the tender offer.
c)
Any person or group of persons acting in concert, who
intends to acquire 35% of the outstanding voting shares
or such outstanding voting shares that is sufficient to
gain control of the board in a public company through the
Exchange trading system shall not be required to make
a tender offer even if such person or group of persons
acting in concert acquire the remainder through a block
sale if, after acquisition through the Exchange trading
system, they fail to acquire their target of 35% or such
outstanding voting shares that is sufficient to gain control
of the board.
d)
Any person or group of persons acting in concert, who
intends to acquire 35% of the outstanding voting shares
or such outstanding voting shares that is sufficient to gain
control of the board in a public company directly from one
or more stockholders shall be required to make tender
offer for all the outstanding voting shares. The sale of
shares pursuant to the private transaction or block sale
shall not be completed prior to the closing and completion
of the tender offer.
e)
If any acquisition would result in ownership of over
50% of the total outstanding equity securities of a
public company, the acquirer shall be required to make
a tender offer for all the outstanding equity securities
to all remaining stockholders of the said company at
a price supported by a fairness opinion provided by an
independent financial advisor or equivalent third party.
The acquirer in such tender offer shall be required to
accept all securities tendered.
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PIVINA ON COMMERCIAL LAW:
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What is the rationale behind the tender offer rule?
A tender offer is meant to protect minority stockholders against
any scheme that dilutes the share value of their investments. It gives
them the chance to sell their shares for the same price and under
the same terms that a controlling stockholder sold his shares or for
a price supported by a fairness opinion provided by an independent
financial advisor or equivalent third party. The acquirer in such
tender offer shall be required to accept all securities tendered.
70.
C Corp, is the direct holder of 10% of the shareholdings in U
Corp., a nonlisted (not public) firm, which in turn owns 62% of
the shareholdings in H Corp., a publicly listed company. The
other principal stockholder in H Corp, is C Corp., which owns
18% of its shares. Meanwhile, the majority stocks in U Corp, are
owned by B Corp, and V Corp, at 22% and 30%, respectively. B
Corp, and V Corp, later sold their respective shares in U Corp,
to C Corp., thereby resulting in the increase of C Corp.'s interest
in U Corp., whether direct or indirect, to more than 50%.
Does the Tender Offer Rule apply in this case where there
has been an indirect acquisition of the shareholdings in H
Corp, by C Corp.? Discuss.96
Yes, the mandatory tender offer is still applicable even if the
acquisition, direct or indirect, is less than 35% when the purchase
would result in direct or indirect ownership of over 50% of the total
outstanding equity securities of a public company.97
71.
Yenkell Cement Corporation (YCC) is a public corporation
whose shares are listed at the PSE. It is 60% owned by Yenkell
Holdings Corporation (YHC) and 20% by Yengco Exploration
Inc. (YEI). The remaining 20% is held by the public. YHC is a
private non-listed corporation which, in turn, is 60% owned by
Yatlas Mines Inc. (YMI), and 40% by Yacnotan Consolidated Inc.
(YCI). On August 8,2008, the Board of Directors of YEI passed
a resolution approving the acquisition of 50% and 25% of the
shares held by YMI and YCI, respectively, in the authorized
capital stock of YHC.
“BAR 2016.
97Cemco Holdings v National Life Insurance Company of the Philippines, G.R.
No. 171815, August 7, 2007.
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Yolly, one of the staff members in the office of the Corporate
Secretary of YEI, was immediately asked to type the resolution
and file the disclosure with the PSE and the Securities and
Exchange Commission (SEC). Before doing that, she secretly
called her brother who works with a stock brokerage company,
to purchase, in the name of Yolly's husband, 5,000 shares in
YCC. After the acquisition was disclosed to the SEC and the
PSE, the market price of YCC increased by 50%.
In acquiring 75% of the total capital stock of YHC, should
YEI be required to do a mandatory tender offer?"
In acquiring 75% of the total capital stock of YHC, YEI should be
required to do a mandatory tender offer. By acquiring the combined
75% shareholdings of YMI and YCI in YCC, YEI effectively owns
45% of YCC. Add that to the 20% it directly owns in YCC, YEI now
owns and controls 65% of YCC. Once a person singly or in concert
with others acquires more than 50% of the voting stock of a public
company, the mandatory tender offer rule applies. The tender offer
rule covers not only direct acquisition but also indirect acquisition
or any type of acquisition. Whatever may be the method by which
control of a public company is obtained either through the direct
purchase of its stocks or through indirect means, the mandatory
tender offer rule applies."
72.
ABC Corp, is a company which shares are listed in the
Philippine Stock Exchange. In 2015, 25% of ABC Corp.’s
shareholdings were acquired by XYZ, Inc., while 40% of the
same were acquired by RST, Inc., both of which are non-Iisted
private corporations. Meanwhile, the remaining 35% of ABC
Corp.'s shareholdings are held by the public.
In 2018, or three (3) years after it acquired its 25% stake
in ABC Corp., XYZ Inc. sought to obtain an additional 12%
shareholding in ABC Corp, by purchasing some of the shares
owned by RST, Inc. therein. The new acquisition will not,
however, result in XYZ, Inc. gaining majority control of ABC
Corp.'s Board.
Is XYZ, Inc. required to conduct a tender offer? Explain.1”
"BAR 2018.
"Cemco Holdings v. National Life Insurance Company, 529 SCRA 2007.
l00BAR 2019.
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XYZ is not required to conduct a tender offer. While purchase
of equity securities covering 35% of the public company is subject
to mandatory tender offer, the equity securities should have been
acquired during a 12-month period (Rule 19.2 of the IRR of the
SRC). In this case, the additional 12% equity stake to bring XYZ’s
acquisition to 37% was acquired after three (3) years from the first
purchase transaction. It is when the acquisition would result in
ownership of over 50% of the total outstanding equity securities of a
public company, that the acquirer shall be required to make a tender
offer regardless of the time he acquired the shares that brought his
equity stake to over 50% of the public company.
73.
Union Cement Corporation (UCC), a publicly-listed company,
has two (2) principal stockholders namely: Union Cement
Holdings Corporation (UCHC), a non-listed company, with
shares amounting to 60.51%, and Cemco Holdings Inc. with
17.03%. In a disclosure letter, Bacnotan Consolidated Industries
(BCI) which owned majority of UCHC’s stocks informed the
Philippine Stock Exchange (PSE) that it and its subsidiary
Atlas Cement Corporation (ACC) had passed resolutions to
sell to Cemco BCIs stocks in UCHC equivalent to 21.31% and
ACC's stocks in UCHC equivalent to 29.69%. As a result of
Cemcos' acquisition of BCI and ACC's shares in UCHC, its total
beneficial ownership, direct and indirect, in UCC has increased
by 36% and amounted to at least 53%. Is Cemco's acquisition
subject to mandatory tender offer?
Yes. The coverage of the tender offer rule covers not only direct
acquisition but also indirect acquisition or any type of acquisition.
Whatever may be the method by which control of a public company is
obtained either through the direct purchase of its stocks or through
indirect means, the mandatory tender offer rule applies.101
Author’s note: For ease of reference, the various diagrams
below illustrate the application of the mandatory tender offer rule.
1.
ABC Corporation is a public company. As such, it is subject
to the rules on mandatory tender offer. Its stockholders
include Corporation 1, Corporation 2, Corporation 3
and Corporation 4 which own 35%, 18%, 17%, and 5%,
respectively, of ABC’s outstanding capital stock. The rest
101Cemco Holdings, Inc. v. National Life Insurance Company of the Philippines,
Inc., G.R. No. 171815, August 7, 2007; BAR 2010.
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V. SECURITIES REGULATION CODE
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of the shares of stock of ABC Corporation are owned by
the public.
If XYZ Corporation, alone or in concert with others,
acquires the shares of Corporation 1 in ABC Corporation,
XYZ is required to make a mandatory tender offer. It
should make a bid to buy the shares of the remaining
stockholders usually for a price and under the same
terms of conditions it acquired the shares of ABC. XYZ
may, however, bid for the shares offering another price
which is supported by a fairness opinion provided by an
independent financial advisor or equivalent third party.
The price is subject to the approval of the SEC.
If all the stockholders tendered their shares, XYZ is
not required to purchase all shares. It is only required
to buy 35%, the same percentage sought, which shall be
proportionately distributed across selfing shareholders.
2.
Let us assume that Corporation 1 only owns 33% of
ABC Corporation while the rest of the share ownership
percentage is the same as #1. XYZ Corporation is not
required to make a mandatory tender offer if it acquires
the shares of stock of Corporation 1 because it is below
the threshold limit of 35%. However, if thereafter,
XYZ acquires the 18% equity securities of Corporation
2, resulting in ownership of over 50% of the total
outstanding equity securities of ABC Corporation, XYZ
Corporation shall then be required to make a tender offer
for all the outstanding equity securities to all remaining
stockholders of the said company at a price supported by
a fairness opinion provided by an independent financial
advisor or equivalent third party. The acquirer in such
tender offer shall be required to accept all securities
tendered.
The obligation exists regardless of the period XYZ
Corporation acquired the shares of Corporation 2, or
any shares of stock for that matter that, that resulted in
majority ownership of ABC Corporation.
3.
ABC Corporation, this time, is owned by Corporation 1
and Corporation 2 which hold 60% and 17%, respectively
while the rest of the shares of ABC Corporation are held
by the investing public. The stockholders of Corporation
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1 are <1. P and Corporation 2 which own 30%, 20% and
9*'o respectively. The rest are owned by the minority
shareholders.
If Corporation 2 acquires the 30% equity stake of J
and. simultaneously or thereafter, buys the 20% share
equity of Pin Corporation 1, Corporation 2 shall then be
required to make a tender offer to all the stockholders
of ABC Corporation. This is because after acquiring the
shares of P in Corporation 1, Corporation 2 ended up
acquiring, directly and indirectly, over 50% ownership
of ABC Corporation. It directly owns 17% and indirectly
owns 35.4% (59% of 60%) of ABC Corporation.
ABC
35%
CORP1
PUBLIC COMPANY
PUBLIC
18%
CORP 2
17%
CORP 3
ABC
2.
5%
CORP 4
PUBLIC COMPANY
33%
CORP1
PUBLIC
18%
17%
CORP 2
CORP 3
3.
ABC
60%
.CORP 1
17%
CORP 2
20%
P
9%
CORP 2
5%
CORP 4
PUBLIC COMPANY
PUBLIC
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V. HECURITIES REGULATION CODE
(REPUBLIC ACT NO. 8799)
74.
51
The purpose of the "Tender Offer” Rule is to -102
a.
Ensure an even playing field for all shareholders
of a company in terms of opportunity to sell their
shareholdings.
b.
Ensure that minority shareholders in a publicly listed
company are protected in the sense that they will equally
have the same opportunity as the majority shareholders
in terms of selling their shares.
c.
Ensure that the shareholders who would also want to sell
their shareholdings will have the opportunity for a better
price.
d.
All of the above.
d.
All of the above.
75. What are the exemptions from the tender offer requirement?
Unless the acquisition of equity securities is intended to
circumvent or defeat the objectives of the tender offer rules, the
mandatory tender offer requirement shall not apply to the following:
a)
Any purchase of securities from the unissued capital
stock; Provided, the acquisition will not result to a fifty
percent (50%) or more ownership of securities by the
purchaser or such percentage that is sufficient to gain
control of the board;
b)
Any purchase of securities from an increase in authorized
capital stock;
c)
Purchase in connection with foreclosure proceedings
involving a duly constituted pledge or security
arrangement where the acquisition is made by the debtor
or creditor;
d)
Purchases in connection with a privatization undertaken
by the government of the Philippines;
e)
Purchases in connection with corporate rehabilitation
under court supervision;
102BAR 2012.
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76.
f)
Purchases in the open market at the prevailing market
price; and
g^
Merger or consolidation.103
What is the violation for non-compliance with the tender offer
rule?
If equity securities of a public company are purchased at
threshold amounts provided for in Rule 19 of the SRC’s Implementing
Rules without complying with the tender offer requirements under
this Rule, the Commission may, upon complaint, nullify such
purchase and order the conduct of a tender offer, without prejudice
to the imposition of other sanctions under the SRC.104
77.
Where should a civil action for violation of the Securities and
Regulation Code (SRC) be filed, with the SEC or the RTC?
Civil suits falling under the SRC (like liability for selling
unregistered securities) are under the exclusive original jurisdiction
of the RTC and hence, need not be first filed before the SEC,
unlike criminal cases wherein the latter body exercises primary
jurisdiction.105
78.
Mr. and Mrs. Reyes invested their hard-earned savings in
securities issued by LEAD Bank. After discovering that the
securities sold to them were not registered with the Securities
and Exchange Commission (SEC) in violation of the Securities
Regulation Code (SRC), the spouses Reyes filed a complaint
for nullity of contract and for recovery of a sum of money with
the RTC. LEAD Bank moved to dismiss the case on the ground
that it is the SEC that has primary jurisdiction over actions
involving violations of the SRC. If you were the judge, how
would you rule on the motion to dismiss?106
The motion should be denied. Civil suits falling under the
SRC, like liability for selling unregistered securities, are under the
exclusive original jurisdiction of the RTC and hence, need not be
103Rule 19.3, SRC Implementing Rules and Regulations.
101Rule 19.13, SRC Implementing Rules and Regulations.
1<bPua v. Citibank, N.A., G.R. No. 180064, September 16, 2013.
106BAR 2015.
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first filed before the SEC unlike criminal cases, wherein the latter
body exercises primary jurisdiction."'7
79.
What damages may be awarded in case of sale of unregistered
securities or sale of securities based on false registration
statement?
The Court is authorized to award:
80.
a)
Damages in an amount not exceeding triple the amount of
the transaction plus actual damages.
b)
Exemplary damages in cases of bad faith, fraud,
malevolence, or wantonness in the violation of the SRC or
the rules and regulations promulgated thereunder.
c)
Award attorney’s fees not exceeding thirty per centum
(30%) of the award.108
What are the prescriptive periods for any actions that may be
filed under Section 56 or 57 of the SRC?
Under Section 62 of the SRC, no action shall be maintained
to enforce any liability created under Section 56 of the SRC (false
registration statement) and Section 57 (sale of unregistered
security and liabilities arising in connection with prospectus,
communication, and other reports) unless brought within two (2)
years after discovery of the untrue statement or omission or after
the violation upon which it is based, but not more than five (5) years
after the security was bona fide offered to the public or more than
five (5) years after the sale, respectively.
81.
Philippine Chromite, Inc., after registration of its securities,
sold PIO Million worth of common stocks to the public at P0.01
per share. In its registration statement, it alleged that it holds
a perfected mining claim on 100 hectares of chromite land in
Botolan, Zambales. X, a Botolan resident, bought P50,000.00
worth of stocks of the corporation from the stock exchange.
After its public offering, the value of the stock dropped to half
its price. X made some investigations and discovered that the
mining claims of the corporation had not been perfected at
the time of the issuance of its securities. The stock, however,
rallied and after two (2) years, commanded a price of one and
107Pua v. Citibank, G.R. No. 180064, September 16, 2013; Section 63, SRC.
'“Section 63, SRC.
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a half (U's) centavos per share. On its third year, the company
collapsed and its stocks became totally valueless. What is the
remedy of X?
The remedy of X for damages is lost by prescription. Any suit
therefore must be tiled within two (2) years after the discovery of the
facts constituting the cause of action (but not beyond five [5] years
after such cause of action accrued). Two (2) years having already
elapsed since the time that X had discovered the misrepresentation
in the registration statement of the corporation, the latter’s civil
liability has prescribed. X, however, is not prevented from invoking
SEC’s regulatory powers against the corporation.109
82.
In 2007, a criminal complaint was filed with the Securities
and Exchange Commission's Enforcement and Prosecution
Department (SEC-EPD) for violation of the Securities
Regulation Code (SRC) against Citibank N.A. (Citibank) and
its officials. The complainants alleged that in sometime in
2000, they induced into signing a subscription agreement for
the purchase of shares from Ceres II Finance Ltd. and Aeris
Finance II Ltd. The complainants learned that their investments
declined until their account was totally wiped out. It turned out
that the said shares were not duly registered securities, and
that said issuers were not duly-registered security issuers.
The SEC-EPD, however, terminated the investigation upon a
finding that the action had already prescribed. Is the SEC-EPD
correct?
No. Given the absence of a prescriptive period for the
enforcement of criminal liability in violations of the SRC, Act No.
3326, the law applicable to offenses under special laws, applies.
Under Section 73 of the SRC, violation of its provisions is punishable
by imprisonment of not less than seven (7) years nor more than 21
years. Applying Act No. 3326, criminal prosecution for violations
of SRC prescribes in 12 years. Based on the foregoing antecedents,
only seven (7) years lapsed since the respondents invested their
funds with the petitioners. Hence, the respondents’ complaint was
filed well within the 12-year prescriptive period provided by Section
1 of Act No. 3326.“°
’“Section 62, SRC.
’’“Citibank N.A. v. Tanco-Gabaldon, et al., G.R. No. 198444, September 4,
2013.
V. SECURITIES REGULATION CODE
(REPUBLIC ACT NO. 8799)
83.
55
A complaint was filed against Oudine Santos, an investment
consultant of Performance Investment Products Corporation
(PIPC) for violation of Section 28 of the Securities and
Regulation Code. The complainants were allegedly enticed to
invest with PIPC with a promise of higher income and lowerrisk investment program. It turned out that neither PIPC nor
its officers, employees, and agents were registered brokers/
dealers. Santos denied defrauding the complainants, claiming
she was a mere employee of, and subsequently independent
information provider for PIPC. Will the complaint against
Santos prosper?
Yes. The violation of Section 28 of the SRC has the following
elements: (a) engaging in the business of buying or selling securities
as a broker or dealer; or (b) acting as a salesman; or (c) acting as an
associated person of any broker or dealer unless registered as such
with the SEC. Thus, a person is liable for violating Section 28 of
the SRC where the person acting as a broker, dealer, or salesman,
is in the employ of a corporation which sold or offered for sale
unregistered securities in the Philippines.111
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84.
When may the SEC Exercise its power of investigation?
When it deems necessary to determine whether any person has
violated or is about to violate any provision of the SRC.112
85.
How does the SEC proceed in the prosecution of criminal
complaints/violations of the SRC and its Implementing Rules
and Regulations?
The Commission shall refer the criminal complaint to the
Department of Justice for preliminary investigation and prosecution
before the proper court.113
86.
Can the Securities and Exchange Commission (SEC) issue a
cease and desist order (CDO) without a formal charge?
Yes. To equally protect individuals and corporations from
baseless and improvident issuances, the authority of the SEC under
‘"Securities and Exchange Commission v. Santos, G.R. No. 195542, March
19, 2014.
"2Section 53, SRC.
"’Section 53.1, SRC.
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this rule is nonetheless with defined limits. A cease and desist order
may only be issued by the Commission after proper investigation or
verification, and upon showing that the acts sought to be restrained
could result in injury or fraud to the investing public.
In one case, the Court held that the Primasa educational plans
were not registered with the SEC. Thus, a continued sale by the
company would operate as fraud to its investors, and would cause
grave or irreparable injury or prejudice to the investing public,
grounds which could justify the issuance of a cease and desist order
under Section 64 of the SRC.114
87.
What are the different administrative sanctions that the
Commission may impose for violations of the SRC?
If. after due notice and hearing, the Commission finds that:
(a) There is a violation of the SRC, its rules, or its orders; (b) Any
registered broker or dealer, or associated person thereof has failed
reasonably to supervise, with a view to preventing violations, another
person subject to supervision who commits any such violation; (c)
Any registrant or other person has, in a registration statement
or in other reports, applications, accounts, records, or documents
required by law or rules to be filed with the Commission, made any
untrue statement of a material fact, or omitted to state any material
fact required to be stated their or necessary to make the statements
therein not misleading; or, in the case of an underwriter, has failed
to conduct an inquiry with reasonable diligence to insure that
a registration statement is accurate and complete in all material
respects; or (d) Any person has refused to permit any lawful
examinations into its affairs, it shall, in its discretion, and subject
only' to the limitations hereinafter prescribed, impose any or all of
the following sanctions as may be appropriate in light of the facts
and circumstances:
(i)
Suspension, or revocation of any registration for the
offering of securities;
(ii)
A fine of no less than Ten thousand pesos (P10,000.00)
nor more than One million pesos (Pl,000,000.00) plus not
more than Two thousand pesos (P2,000.00) for each day of
continuing violation;
114Primanila Plans, Inc. v. SEC, G.R. No. 193791, August 2, 2014.
V. SECURITIES REGULATION CODE
(REPUBLIC ACT NO. 8799)
57
(iii) In the case of a violation of Sections 19.2, 20, 24, 26, and
27, disqualification from being an officer, member of the
Board of Directors, or person performing similar functions,
of an issuer required to file reports under Section 17 of the
SRC or any other act, rule or regulation administered by
the Commission;
(iv)
In the case of a violation of Section 34, a fine of no more
than three (3) times the profit gained or loss avoided as
result of the purchase, sale, or communication proscribed
by such Section, and
(v)
Other penalties within the power of the Commission to
impose.116
The imposition of the foregoing administrative sanctions shall
be without prejudice to the filing of criminal charges against the
individuals responsible for the violation.116
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The Commission shall have the power to issue writs of execution
to enforce the provisions of Section 54.3 and to enforce payment of
the fees and other dues collectible under the SRC.11’
If offender is a corporation, partnership or association or other
juridical entity, the penalty shall be imposed upon such juridical
entity and upon the officers responsible for the violation.
If such officer is an alien, in addition to the penalties, shall be
deported without further proceedings after service of sentence.118
88.
What are the rules on proxy solicitation?
The rules on proxy solicitation are as follows:
1.
Proxies must be issued and proxy solicitation must be
made in accordance with rules and regulations issued by
the Commission;"9
2.
Proxies must be in writing, signed by the stockholder
or his duly authorized representative and file before the
scheduled meeting with the corporate secretary.120
"“Section 54.1, SRC.
"“Section 54.2, SRC.
"’Section 54.3, SRC.
"“Section 73, SRC.
"“Section 20, SRC.
'“Section 20.2, SRC.
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89.
3.
Unless otherwise provided in the proxy, it shall be valid
only for the meeting for which it is intended. No proxy
shall be valid only for the meting for which it is intended.
No proxy shall be valid and effective for a period longer
than five (5) years at one time.131
4.
No broker or dealer shall give any proxy, consent or
any authorization, in respect of any security carried
for the account of the customer, to a person other than
the customer, without written authorization of such
customer.132
5.
A broker or dealer who holds or acquire the proxy for
at least ten percent (10%) or such percentage as the
commission may prescribe of the outstanding share
of such issuer, shall submit a report identifying the
beneficial owner of 10 days after such acquisition, for
its own account or customer, to the issuer of security,
to the exchange where the security is traded and to the
Commission.123
6.
The person who intends to solicit from the pubic must file a
proxy statement with the SEC and pay the corresponding
fees.
Who has the power to investigate violations of SEC rules
on proxy solicitation or to set aside the action taken by the
corporate secretary relating to the validation of proxies?
The power of the SEC to investigate violations of its rules on
proxy solicitation is unquestioned when proxies are obtained to vote
on matters unrelated to intra-corporate controversies. However,
when proxies are solicited in relation to the election of corporate
directors, the resulting controversy, even if it ostensibly raised the
violation of the SEC rules on proxy solicitation, should be properly
seen as an election controversy within the original and exclusive
jurisdiction of the trial courts by virtue of Section 5.2 of the SRC
in relation to Section 5(c) of P.D. No. 902-A. If the validation of
proxies in this case relates to the determination of the existence of
““Section 20.3, SRC.
'“Section 20.4, SRC.
‘“Section 20.5, SRC.
V. SECURITIES REGULATION CODE
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r>9
a quorum for the election of directors, the SEC has no jurisdiction
over the dispute. It partakes of an election contest which is an intra­
corporate controversy cognizable by the RTC.124
In other words, if the corporate secretary accepts or rejects
proxies in violation of the law or the by-laws of the corporation on
matters that are not intra-corporate in nature, such as approval of
the various corporate acts required under the Revised Corporation
Code, the aggrieved party may file a petition with the SEC to nullify
the resolution of the Secretary. He may even pray for the issuance
of a cease and desist order against the use of the proxies when
warranted under the circumstances.126 However, if the proxies were
obtained on matters which are intra-corporate in nature, such as
the election and removal of directors and corporate officers and the
determination of quorum for the election of directors, the RTC has
jurisdiction to hear the disputes arising from validation of proxies.
In this regard, the validation of proxies will be considered an election
contest, falling under the Rules on Intra-Corporate Controversy.
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90.
What is an SEC Disclosure obligation?
An SEC Disclosure obligation require public companies to
disclose to the SEC and to the company shareholders financial
data on a regular basis as well as material information about the
company.
91.
What companies are subject to SEC disclosure rules?
Public companies, are subject to detailed disclosure regulations
about their financial condition, operating results, management
compensation, and other areas of their business.
Public companies, as previously stated, are those companies
whose shares are listed or publicly traded on an Exchange or even
though not listed, have assets equivalent to at least Php50 million,
and with 200 or more stockholders owning at least 100 shares of
stock each.
’“Securities and Exchange Commission v. Honorable Court of Appeals. Omico
Corporation, et al., G.R. No. 187702; Astra Securities Corporation v. Omico Corpora­
tion, et al., G.R. No. 189014, October 22, 2014 reiterating Government Service Insur­
ance System v. Court of Appeals, G.R. No. 183805, April 16, 2009.
125
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VI. BANKING
i.
What is a letter of credit?
A letter of credit is any arrangement, however named or
described, whereby a bank, acting upon the request of its client or on
its own behalf, agrees to pay another against stipulated documents,
provided that the terms of the credit are complied with?
2.
Explain the nature of a letter of credit as a financial device.2
A letter of credit is a financial device developed by merchants
as a convenient and relatively safe mode of dealing with the sale
of goods to satisfy the seemingly irreconcilable interest of the
seller, who refuses to part with his goods before he is paid, and a
buyer, who wants to have control of the goods before paying. To
break the impasse, the buyer may be required to contract a bank
to issue a letter of credit in favor of the seller so that, by virtue of
the letter of credit, the issuing bank engages to pay the seller upon
his presentation of documents required by the letter of credit. The
buyer and the seller agree on what documents are to be presented
for payment, but ordinarily they are documents of title evidencing or
attesting to the shipment of the goods to the buyer.
Once the credit is established, the seller ships the goods to the
buyer and in the process secures the required shipping documents or
documents of title, such as the bill of lading and commercial invoices
describing the goods shipped. To get paid, the seller executes a draft
and presents it together with the required documents to the issuing
bank. The issuing bank redeems the draft and pays cash to the seller
if it finds that the documents submitted by the seller conform with
what the letter of credit requires. The bank then obtains possession of
the documents upon paying the seller. The transaction is completed
when the buyer reimburses the issuing bank and acquires the
■Section 2, Uniform Customs and Practices for Documentary Credit.
2BAR 2012.
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documents entitling him to the goods. Under this arrangement, the
seller gets paid only if he delivers the documents of title over the
goods, while the buyer acquires said documents and control over the
goods only after reimbursing the bank.'1
In other words, through a letter of credit, the bank substitutes
its own promise to pay for one of its customers who in return promises
to pay the bank the amount of funds mentioned in the letter of
credit plus credit or commitment fees mutually agreed upon.4 The
mere opening of a letter of credit, however, does not involve specific
appropriation of a sum of money in favor of the beneficiary. To be
able to collect, it should tender the stipulated documents and comply
with the terms of the credit.6
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The foregoing transaction illustrates a commercial or
import letter of credit. A letter of credit, being a mere security
arrangement, cannot exist without a main or originating contract. If
the originating contract is a sale or importation of goods, the letter
of credit is referred to as an import or commercial letter of credit.
If both the buyer-applicant and the seller-beneficiary are situated
in the Philippines, the letter of credit is called a domestic letter of
credit.
However, letters of credit are also used in non-sale settings
where they serve to reduce the risk of nonperformance. Generally,
letters of credit in non-sale settings have come to be known as
standby letters of credit. Examples of non-sale transactions
that a standby letter of credit may secure are loan transactions,6
transactions requiring payment of fees,7 and the construction of a
power plant.8 The documents which are submitted to the issuing
bank to be entitled to payment are those showing that the debtor
or obligor defaulted or failed to perform his obligation under the
originating contract underlying the letter of credit.
3Bank of America
Court of Appeals, et al., G.R. No. 105395, December 10,
1993.
■■Prudential Bank v. Intermediate Appellate Court, et al., G.R. No. 74SS6,
December 8, 1992.
6Feati Bank & Trust Company v. Court of Appeals, et al., G.R. No. 94209, April
30, 1991.
6Insular Bank of Asia & America v. Intermediate Appellate Court, et at, G.R.
No. 74834, November 17, 1988.
’Metropolitan Waterworks and Sewerage Systems v. Hon. Reynaldo Daway, et
al., G.R. No. 160732, June 21, 2004.
®Transfield Philippines v. Luzon Hydro Corporation, et al., G.R. No. 146717,
May 19, 2006.
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What are the kinds of letter of credit?
3.
A letter of credit may be:
a.
Commercial or import letter of credit - It is one
where the main contract underlying the letter of credit
is a sale or importation. The issuing bank undertakes to
pay upon presentation of documents showing that the
beneficiary has taken the necessary steps to comply with
his obligation under the main contract underlying the
letter of credit.
b.
Standby letter of credit - It is one where the transaction
underlying the letter of credit is not a sale transaction.
The issuing bank undertakes to pay the beneficiary of
the letter of credit upon his presentation of the stipulated
documents showing that the debtor has defaulted in his
obligation under the main contract underlying the letter
of credit.
c.
Irrevocable - It is one which cannot, during its lifetime,
be cancelled or modified without the express permission
of the beneficiary. It was held that the issuance of a court
order releasing the proceeds of an irrevocable letter of
credit to the applicant, which was issued to pay for tobacco
purchased from the beneficiary of the letter of credit, was
an error as it violated the irrevocable nature of the letter
of credit. The proceeds are payable to the beneficiary, not
to the applicant.9
d.
Revocable - It is a letter of credit which may be changed
or cancelled by the issuing bank at any time and for any
reason even without the consent of the beneficiary.
e.
Confirmed — It is one where the letter of credit is
guaranteed by adding payment confirmation by the
advising bank or any third bank (confirming bank) on
behalf of the issuing bank. The confirming bank lends
credence to the letter of credit as if it is the one that
issued the letter of credit. Confirmation can be added only
to irrevocable and not to the revocable credits.
’Philippine Virginia Tobacco Administration v. De los Angeles, G.R. No.
L-27829, August 19, 1988.
1
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Is an irrevocable letter of credit synonymous with a confirmed
letter of credit?
An irrevocable letter of credit is not synonymous with a
confirmed letter of credit. In an irrevocable letter of credit, the
issuing bank may not, without the consent of the beneficiary and
the applicant, revoke its undertaking under the letter, whereas, in a
confirmed letter of credit, the correspondent bank gives an absolute
assurance to the beneficiary that it will undertake the issuing bank’s
obligation as its own according to the terms and conditions of the
credit.10
5.
What laws or rules govern a letter of credit?
A letter of credit is a commercial transaction. It is governed
by its own provisions, by the Code of Commerce, and by usages
and customs. The Code of Commerce provides that in the absence
of applicable laws governing commercial transactions, customs
and usages shall be made to apply. Consistent with the rulings in
several cases, usage and customs refer to the Uniform Customs and
Practices (UCP) for Documentary Credit, a codification of customs
and usages governing letter of credit prepared by the International
Chamber of Commerce. The Supreme Court has recognized the
validity and applicability of UCP in resolving issues and disputes
relating to letter of credit." The use of international custom in our
jurisdiction is justified by Article 2 of the Code of Commerce which
provides that acts of commerce are governed by, among others,
usages and customs generally observed. The UCP applies even if it
is not incorporated in the letter of credit.12
6.
Is a letter of credit a negotiable instrument?
A letter of credit is not a negotiable instrument because it
is does not have the elements of negotiability under Section 1
of the Negotiable Instruments Law. It is not payable to order or
bearer. The promise to pay by the issuer of the letter of credit is
not unconditional, as in fact, it is conditioned on the submission
of stipulated documents and compliance with the terms of credit.
10Feati Bank & Trust Company v. Court of Appeals, et al., G.R. No. 94209,
April 30, 1991.
"Hong Kong & Shanghai Banking Corporation v. National Steel Corporation,
G.R. No. 183486, February 24, 2016.
'2Ibid.; BAR 2015.
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Not being a negotiable instrument, a letter of credit does not enjoy
the presumption of consideration. However, the draft drawn in
connection with a letter of credit, if it is negotiable on its face, is a
negotiable instrument and as such, carries the presumption that it
has been issued for a valuable consideration. The draft may be used
to support the claim for reimbursement by the issuer of the letter
of credit against the importer-applicant of the letter of credit which
denied receipt of the loan and the shipped goods.13
7.
Is the issuer of the letter of credit liable as a guarantor or
surety?
While a letter of credit is a security arrangement, the bank that
issued the letter of credit is not liable as a guarantor or a surety.
In AZ11SS u. Daway, MWSS granted Maynilad, under a Concession
Agreement, a 20-year period to manage and operate the existing
MWSS water delivery and sewerage services in the West Zone
Service Area of Metro Manila, for which Maynilad undertook to
pay the corresponding concession fees on the dates agreed upon. To
secure the payment of concession fees and other obligations under
the Concessionaire Agreement, Maynilad procured a standby letter
of credit from a consortium of banks. Maynilad defaulted on its fees.
MWSS submitted a written notice to the issuing banks that in view
of the failure of Maynilad to perform its obligations, it was drawing
on the standby letter of credit. Prior to this, however, Maynilad filed
a petition for rehabilitation with the RTC of Quezon City. The RTC
found the Petition for Rehabilitation to be sufficient in form and
substance and issued a Stay Order staying enforcement of all claims,
whether for money or otherwise and whether such enforcement is by
court action or otherwise, against the petitioner, its guarantors and
sureties not solidarily liable with the petitioner. It was held thatthe
stay order issued by the rehabilitation court does not preclude
the beneficiary from collecting on the letter of credit because the
liability of the bank that issued the letter of credit is solidary with
the principal debtor, the same being a direct, primary and absolute
undertaking to pay the beneficiary upon presentation of the required
documents and is not conditioned on the prior exhaustion of the
debtor’s assets.H
13Charles Lee v. Court of Appeals, et al., G.R. No. 117913, February 1, 2002
■■'Metropolitan Waterworks and Sewerage Systems v. Hon. Reynaldo Daway,
et al., G.R. No. 160732, June 21, 2004.
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Also, while the surety is liable solidarily with the principal
debtor, the surety has no duty to indemnify the creditor until
the latter establishes the fact of the obligor’s non-performance.
The creditor may have to establish that fact in litigation. In the
standby letter of credit, the beneficiary avoids that litigation
burden and receives his money promptly upon presentation of the
required documents. In case the beneficiary’s presentation of those
documents is not rightful,the applicant may sue the beneficiary in
tort, in contract, or in breach of warranty, but it does not preclude
the beneficiary from collecting on the letter of credit16
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The settlement of a dispute between the parties is not a
prerequisite for the release of funds under the letter of credit.
Payment is simply based on presentation of documents. Otherwise,
there would be no practical and beneficial use for letter of credit in
commercial transactions.
A surety is only an accessory contract whereas a letter of credit
is an absolute undertaking to pay the money advanced or the amount
for which the credit is given. It is a primary obligation and not an
accessory contract. In one case involving a loan of the debtor secured
by a standby letter of credit, it was held that the payment made by
the debtor cannot be added in computing the issuing bank’s liability
under its own standby letter of credit. Payment made by the debtor
is in compliance with his own prestation under the loan agreement.
Although these payments could result in the reduction of the actual
amount which could be collected from the issuing bank, the latter’s
separate undertaking under the letter of credit remains. Although
the letter of credit is a security arrangement, it is not converted
thereby into a contract of guaranty.1C Of course, the issuing bank
may obtain reimbursement from the debtor, as applicant of the
letter of credit, any amount duly paid to the creditor, as beneficiary
of the letter of credit. In case of excess payment, the debtor may
recover it from the creditor to prevent unjust enrichment.
8.
Who are the parties to a letter of credit? What are their
respective rights and obligations?
The parties to a letter of credit and their respective rights and
obligations are as follows:
Luzon Hydro Corporation, et al., G.R. No. 146717,
‘“Transfield Philippines
May 19, 2006.
‘“Insular Bank of Asia & America v. Intermediate Appellate Court, et al., G.R.
No. 74834, November 17, 1988.
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a.
b.
Applicant
i.
The person who is either the importer or buyer in
a commercial letter of credit or the obligor/debtor
in a standby letter of credit. He procures the letter
of credit and agrees to pay the issuing bank the
charges therefor and to reimburse the issuing bank
the amount duly paid to the beneficiary under the
letter of credit.
ii.
He has no obligation to reimburse the issuing bank
if the latter pays without the stipulated documents
or if the documents received are different from those
stipulated in the letter of credit.
iii.
He has the right to have the marginal deposit
deducted from the principal obligation under the
letter of credit and to have the interest computed
only on the balance and not on the face value
thereof.17
The Issuing Bank
i.
It undertakes to pay the beneficiary upon the latter’s
submission of stipulated documents/compliance with
the credit despite any breach in the main contract
underlying the letter of credit.
ii.
After due payment, the issuing bank is entitled to
reimbursement as a matter of right. Reimbursement
includes debiting the bank account of the applicant, if
any, and applying the deposit against the obligation
of the applicant with the issuing bank.18
1'Ramon Abad v. Court of Appeals, G.R. No. L-42735, January 22, 1990. A
marginal deposit is a collateral security given by the applicant, and is supposed to be
returned to him upon his compliance with his secured obligation. Consequently, the
bank pays no interest on the marginal deposit, unlike ordinary bank deposit which
earns interest in the bank. Therefore, the Supreme Court ruled that it is only fair
then that the importer’s marginal deposit (if one was made, as in this case), should
be set off against his debt, for while the importer earns no interest on his marginal
deposit, the bank, apart from being able to use said deposit for its own purposes, also
earns interest on the money it loaned to the importer. It would be onerous to compute
interest and other charges on the face value of the letter of credit which the bank
issued, without first crediting or setting off the marginal deposit which the importer
paid to the bank.
’“Land Bank of the Philippines V. Monet Export and Manufacturing
Corporation, G.R. No. 161865, March 10, 2005.
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67
iii.
The failure of the beneficiary to present the draft to
the applicant does not affect the right of the issuing
bank to reimbursement. It is because the draft is
presented to the issuing bank and not the applicant.
More so, if the draft is payable at sight. Sight drafts
do not require presentment for acceptance.19
iv.
An issuing bank which paid the beneficiary of an
expired letter of credit can recover payment from
the applicant, which obtained the goods from the
beneficiary, to prevent unjust enrichment.20
The Beneficiary
i.
The beneficiary is the one entitled to payment from
the issuing bank after submission of stipulated
documents and compliance with the terms of the
credit.
ii.
He has a prestation to do under the main contract
but his failure to fulfill his obligation thereunder
does not negate his right to collect payment from
the issuing bank, as long as he is able to submit the
required documents and comply with the terms of the
credit, without prejudice to his liability against the
applicant under the law on contract and damages.
The number of parties, particularly in international trade
practice, may be increased depending on the need of the issuing
bank to engage a correspondent bank. The correspondent bank is
classified differently depending on the functions that it performs.
d.
The Advising/Notifying Bank
i.
The advising bank determines the apparent
authenticity of the letter of credit, notifies the
beneficiary of the opening of the letter of credit and
transmits the copy thereof to the beneficiary.21
ii.
It does not guarantee the genuineness or due
execution of the letter of credit. It is not liable for
19Prudential Bank v. Intermediate Appellate Court, et al., G.R. No. 74886,
December 8, 1992.
20Rodzssen v. Far East Bank & Trust Company, G.R. No. 109087, May 9, 2001.
2,Bank of America v. Court of Appeals, et al., G.R. No. 105395, December 10,
1993.
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damages even if the letter of credit turns out to be
spurious, provided the spurious character is not
apparent on the face of the instrument.
iii.
It has no obligation to pay the beneficiary unless it is
also the paying or confirming bank.
While it has no obligation to pay the beneficiary of the letter of
credit unless it is also the paying or confirming bank, the advising
bank, independently of its function as such bank, may buy the draft
of the beneficiary and becomes the holder of the instrument.22
9.
Yeti Export Corporation (YEC), thru its President, negotiated for
Yahoo Bank of Manila (YBM) to issue a letter of credit to course
the importation of electronic parts from China to be sold and
distributed to various electronic manufacturing companies in
Manila. YBM issued the letter of credit and forwarded it to its
correspondent bank, Yunan Bank (YB) of Beijing, to notify the
Chinese exporters to submit the bill of lading in the name of
YBM covering the goods to be exported to Manila and to pay
the Chinese exporters the purchase price upon verification of
the authenticity of the shipping documents.
The electronic parts arrived in the Port of Manila, and
YBM released them to the custody of YEC as an entrustee
under a trust receipt. When YEC unpacked the imported parts
in its warehouse, it found that they were not only of inferior
quality but also did not fit the descriptions contained in the bill
of lading. YEC refused to pay YBM the amount owed under the
trust receipt. YBM thereafter commenced the following:
Civil suit to hold YB liable for failure to ensure that the
electronic parts loaded for exportation in China corresponded
with those described in the bill of lading. Is there any merit in
the case against YB?23
There is no merit in the case against YB. YB only acted as an
advising bank whose only obligation after determining the apparent
authenticity of the letter of credit is to transmit a copy to the
beneficiary of the letter of credit. It has no obligation to ensure that
-Ibid.
23BAR2018.
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the goods loaded for exportation corresponded with those described
in the bill of lading. Even if it acted as a confirming or negotiating
bank, such kind of correspondent bank has no similar obligation.
The Paying Bank
f.
g.
i.
The paying bank is the agent of the issuing bank to
facilitate payment to the beneficiary. It may also buy
the draft of the beneficiary, if such draft is drawn on
the issuing bank or another designated bank not in
the city of the beneficiary.24
ii.
The paying bank can also be the advising bank.
The Confirming Bank
i.
The confirming bank lends credence to the letter of
credit issued by a lesser-known bank as if it were the
one that issued the letter of credit.
ii.
Its obligation is similar to the issuing bank. Thus, the
beneficiary may tender documents to the confirming
bank and collect payment.26
iii.
The confirming bank collects fees for such
engagement and obtains reimbursement from the
issuing bank.
The Negotiating Bank
i.
The negotiating bank becomes a party to the letter
of credit transaction after it buys the draft drawn by
the beneficiary and becomes the holder thereof.
ii.
As holder, it has the right to payment from the bank
primarily liable on the draft (either the issuing bank
or the confirming bank).26
iii.
If the party primarily liable on the letter of credit
(issuing bank or confirming bank) refuses to honor
the draft, the negotiating bank has the right to
proceed against the drawer thereof.27
24Charles Lee v. Court of Appeals, supra.
™Ibid.
™Ibid.
™Ibid.
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10.
What are the modes of payment to the beneficiary of a letter of
credit?
They are as follows:
11.
a.
The issuer may directly pay the beneficiary;
b.
The issuer may accept the draft of the beneficiary;
c.
The issuer may authorize another to pay or accept the
draft of the beneficiary; and
d.
Through negotiation by the beneficiary of the dr-aft
payable to his order.28
Does a correspondent bank automatically
obligation of a confirming bank?
assume the
In order to consider a correspondent bank as a confirming
bank, it must have assumed a direct obligation to the seller as if it
had issued the letter of credit itself. If the correspondent bank was
. confirming bank, then a categorical declaration should have been
tated in the letter of credit that the correspondent bank is to honor
all drafts drawn in conformity with the letter of credit.29
12.
What are the three (3) distinct relationships arising from a
letter of credit transaction?
A letter of credit transaction is a composite of at least three
(3) distinct but intertwined relationships being concretized in a
contract:
a.
One contract relationship links the party applying for the
letter of credit (the account party or buyer or importer)
and the party for whose benefit the letter of credit is
issued (the beneficiary or seller or exporter).
b.
A second contract relationship is between the account
party and the issuing bank. Under this contract,
(sometimes called the “Application and Agreement” or
the “Reimbursement Agreement”), the account party
^Section 2, Uniform Customs and Practices for Documentary Credit.
29Marphil Export Corporation v. Allied Banking Corporation, Substituted by
Philippine National Bank, Respondent, G.R. No. 187922, September 21, 2016.
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among other things, applies to the issuing bank for a
specified letter of credit and agrees to reimburse the bank
for amounts paid by that bank pursuant to the letter of
credit.
C.
The third contract relationship is established between the
issuing bank and the beneficiary, in order to support the
contract referred to in letter “a” and to pay monies to the
beneficiary.
Certain other parties may be added to the foregoing, but the
above three are the indispensable ones.30
It was held that the failure of the buyer to procure a letter
of credit did not prevent the consummation of the contract of sale
that the letter of credit would have secured. The contract of sale
is consummated by the meeting of the minds of the parties on the
cause, object and consideration of the sale. The seller is, therefore,
entitled damages if the buyer could not accept the delivery or if the
seller is forced to sell the object of the sale at a loss.31
13.
What is the Doctrine of Independence?32
The doctrine of independence provides that the rights and
obligations of the parties to a letter of credit are independent of the
right and obligations of the parties to the underlying transaction. The
legal relationships among: a) the issuing bank and the beneficiary;
b) the issuing bank and the applicant; and c) the beneficiary and the
applicant, while interrelated, are separate, distinct, and independent
of one another.
Thus, the beneficiary of the letter of credit, which is able to
comply with the documentary requirements under the letter of credit,
must be paid by the issuing or confirming bank, notwithstanding any
issue on the fulfilment or non-fulfilment of main contract underlying
the letter of credit transaction, say a contract of sale of goods where
the buyer is not satisfied with the quality and/or quantity of the
goods which the seller shipped or delivered.
“Reliance Commodities v. Daewoo Industrial Co., G.R. No. L-100831,
December 17, 1993.
3'Ibid.
“BAR 2010, 2012, 2016.
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In other words, in determining its obligation to pay the
beneficiary, the issuing bank is not required to ascertain whether
or not the beneficiary has performed his prestation under the main
contract. The issuing bank is liable to pay the beneficiary upon the
latter's submission of the stipulated documents and compliance with
the terms of the credit regardless of any breach of contract by the
beneficiary against the applicant of the letter of credit.
Conversely, since the breach of contract is only between the
parties in the underlying contract, it does not affect the right of the
issuing bank to obtain reimbursement from the applicant. Such
right is based on its own agreement with the latter.
14.
Cite jurisprudence where the Supreme Court applied the
doctrine of independence.
In one case, a buyer applied with BPI for an irrevocable
commercial letter of credit to cover the purchase of goods described
in the covering letter of credit application as “dyestuffs of various
•olors.” However, upon chemical test, the dyestuffs turned out to
ie colored chalks. It was held that BPI, as issuer of the letter of
credit, has no obligation to ensure that the goods shipped under the
covering letter of credit conform to the item appearing thereon. The
doctrine of independence negates any duty on the part of a bank to
verify' whether what has been described in letters of credits actually
tallies with what was loaded aboard the ship. In letter of credit
transactions, all parties concerned deal only with the documents
and not with the goods shipped to the buyer. Accordingly, BPI has
the right to obtain reimbursement from the applicant of the letter of
credit the value of the draft paid to the seller.33
In Land Bank v. Monet’s Export and Manufacturing
Corporation,34 it was held that when the Issuing Bank paid the
beneficiary because the latter presented all the stipulated shipping
documents and after payment, the Bank debited the account of
the applicant corresponding to the amount the Bank paid under
the letter of credit, the Bank is not liable for damages even if the
shipment did not conform to the specifications of the applicant.
“Bank of the Philippine Islands v. De Reny Fabric Industries, et al., G.R. No.
L-24821, October 16,1970.
^G.R. No. 161865, March 10, 2005.
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Under the doctrine of independence, the obligation of the issuing
bank to pay the beneficiary arises once the latter is able to submit
the stipulated documents under the letter of credit regardless of the
fulfillment or non-fulfillment of the contract supporting the letter of
credit. Once the issuing bank accordingly pays, it has the right to
obtain reimbursement from the applicant regardless of any breach
in the contract underlying the letter of credit. Thus, the Bank is not
liable if as a consequence of such lawful act of debiting the account of
the applicant, the latter lacked the funds to purchase raw materials
to meet the orders of various customers and orders were cancelled
resulting in lost profits.
The doctrine is likewise applicable to a standby letter of credit.
In one case, the Supreme Court ruled that in a standby letter of
credit issued to secure a loan obligation, any payment of the debtor
to the creditor should not be deducted from the total obligation of the
issuing bank to the beneficiary. The issuing bank, after payment of
the full amount, is entitled to full reimbursement from the debtor. But
the debtor may recover excess payment from the creditor to prevent
unjust enrichment.36 In another case, the Supreme Court held that
the issuer of a standby letter of credit may pay the beneficiary upon
its submission of a certification of default, the document required by
the letter of credit, despite of the fact that the issue of default is still
subject of arbitration.36
15.
Where is the doctrine of independence derived?
It is based on Article 17 of UCP which provides that an issuing
bank assumes no liability or responsibility “for the form, sufficiency,
accuracy, genuineness, falsification or legal effect of any documents,
or for the general and/or particular conditions stipulated in the
documents or superimposed thereon (xxx).” Thus, as long as the
proper documents are presented, the issuing bank has an obligation
to pay even if the buyer should later on refuse payment. It was
held that to allow the issuing bank to refuse to honor the letter of
credit simply because it could not collect first from the buyer is to
countenance a breach of the Independence Principle.37
“Insular Life, ibid.
36Transfield v. Luzon Hydro Corporation, supra.
37The Hongkong & Shanghai Banking Corporation, Limited v. National Steel
Corporation, el al., G.R. No. 183486, February 24, 2016.
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"B" entered into a contract with *'S" for the purchase of one
container of Johnny Walker whisky. Upon the instance of B,
ABC Bank issued a letter of credit in favor of S, undertaking
to pay the latter upon submission of the shipping documents
showing compliance with S' obligation under the contract of
sale. However, S caused the shipment of container containing
Emperador brandy but, through fraud, was able to submit
the shipping documents required by the letter of credit. As a
consequence, ABC Bank paid S.
Can ABC Bank obtain reimbursement from B, or may B
invoke the breach of contract on the part of S to validly refuse
payment?
ABC Bank may obtain reimbursement from B despite the
breach of contract on the part of S. Under the independence
principle, once the issuing bank pays the beneficiary of the letter
of credit upon the latter’s submission of the stipulated documents,
its right of reimbursement comes as a matter of right. Such right
cannot be impaired by the non-fulfillment of the obligation under
the main contract underlying the letter of credit.
17.
San Miguel Corporation (SMC, for brevity) entered into an
Exclusive Dealership Agreement with "B" giving the latter the
right to trade, deal, market or otherwise sell its various beer
products. B applied for a credit line with SMC, but one of the
requirements for the credit line was a letter of credit. Thus, B
applied for and was granted a letter of credit by PNB. Under
the credit agreement, the PNB has the obligation to release
the proceeds of B's credit line to SMC upon presentation
of the invoices and official receipts of B's purchases of
SMC beer products. B availed himself of his credit line with
PNB and started selling SMC's beer products. B eventually
defaulted in the payment of his obligation to SMC. Demands
to pay were unheeded. Thus, SMC filed a complaint for sum
of money against PNB and B. The Court rendered judgment
finding B solely liable and omitted by inadvertence to insert
in its decision the phrase "without prejudice to the decision
that will be made against PNB." PNB moved to terminate the
proceedings against it arguing that the court's decision finding
B solely liable to pay the entire amount sought to be recovered
by SMC, has settled the obligation of both B and PNB, and that
there is no longer any ground to hold PNB for trial and make
a separate judgment against it; otherwise, SMC will recover
twice for the same cause of action.
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Is PNB correct?
No. The obligation of 13 to pay under its agreement with SMC is
distinct and independent from the right of SMC to draw on the letter
of credit. Under the independence principle, the seller or beneficiary
is assured of prompt payment independent of any breach of the main
contract and precludes the issuing bank from determining whether
the main contract is actually fulfilled or not.38
In effect, based on the foregoing case, in a commercial letter of
credit, the beneficiary has two (2) options: either to collect payment
of the purchase price from the buyer, or to draw on the letter of credit
upon presentation of the stipulated documents. If the beneficiary
is fully paid by the buyer, it loses its right of recourse against the
issuer of the letter of credit. If the beneficiary draws on the letter
of credit, it can no longer collect from the buyer as it will result
in unjust enrichment. It is the issuing bank instead which has the
right to obtain reimbursement from the buyer, as applicant of the
letter of credit. Similarly, until the judgment against the buyer is
fully satisfied, the seller, as beneficiary of the letter of credit, can
still collect on the letter of credit.
18.
What is the Fraud Exception Principle?
The fraud exception principle is an exception to the doctrine
of independence. Under the fraud exception principle, there is
fraudulent abuse of the credit. The beneficiary may be enjoined from
collecting on the letter of credit if the following elements are present:
a) there is fraud on the part of the beneficiary; b) fraud must be in
relation to the independent purpose or character of the credit; c)
unless the beneficiary is restrained, the applicant shall suffer grave
and irreparable injury. For the fraud exception principle to serve as
an exception to the doctrine of independence, the fraud must not be
in relation to the performance of the main contract but in relation
to the independent purpose or character of the credit as when he
presents to the issuing or confirming bank spurious or fraudulent
documents that contain material facts that, to his knowledge, are
untrue.39
“Philippine National Bank v. San Miguel Corporation, G.R. No. 186063,
January 15, 2014.
39Transfield Luzon Hydro Corporation, ibid.
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For example, the seller-beneficiary that shipped goods to
the buyer-applicant which are different from the object of the
underlying contract of sale, may collect payment from the issuing
bank upon presentation of the stipulated documents. The fraud
the seller-beneficiary committed relates to the performance of his
obligation under the underlying contract. As discussed, he may
demand payment from the issuing bank based on the doctrine of
independence, but is liable for breach contract to the buyer. Suppose,
however, that no goods were shipped in favor of the buyer-applicant
but the seller-beneficiary falsified the bill of lading, the commercial
invoices and other documents required by the letter of credit. In this
case, the fraud exception applies.
19.
Transfield Philippines, Inc. ("Transfield") and Luzon Hydro
Corporation ("LHC") entered into a Turnkey Contract whereby
Transfield undertook to construct a hydro-electric power
station. To secure performance of Transfield's obligation,
it procured in favor of LHC two (2) standby letters of credit,
with Australia and New Zealand Banking Group Limited ("ANZ
Bank"), and with Security Bank Corporation ("SBC") as the
issuers.
Transfield sought various extensions of time to complete
the Project. The extensions were requested allegedly due to
several factors which prevented the completion of the Project
on target date, such as force majeure occasioned by typhoon,
barricades, and demonstrations. LHC denied the requests.
This gave rise to a series of legal actions between the parties.
The first of the actions was a Request for Arbitration
which LHC filed before the Construction Industry Arbitration
Commission (CIAC). This was followed by another Request for
Arbitration, this time filed by Transfield before the International
Chamber of Commerce (ICC). Because the Project was
not completed on time, LHC drew on the letter of credit by
submitting the certification of default required by the letter of
credit.
Was the drawdown on the letters of credit valid or should
the funds be returned to the applicant of the letter of credit,
considering that the issue of its default had not yet been
resolved with finality by the CIAC and/or the ICC?
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The drawdown is valid. The letters of credit are independent of
the main contract between the parties and as such, the issuers have
no responsibility to investigate the authenticity or accuracy of the
certificates or the declarant’s capacity or entitlement to so certify.
Owing to the nature and purpose of the standby letters of credit, the
issuers were left with little or no alternative but to honor the credit
upon presentation of the stipulated documents.
In this case, Transfield also invoked the fraud exception
principle. It averred that LHC’s call on the letters of credit is
wrongful because it fraudulently misrepresented to the banks that
there is already a breach in the Turnkey Contract knowing full
well that this is yet to be determined by the arbitral tribunals. It
asserted that the fraud exception exists when the beneficiary,
for the purpose of drawing on the credit, fraudulently presented
to the confirming bank, documents that contain, expressly or by
implication, material representations of fact that to his knowledge
are untrue. The Supreme Court ruled that to be able to declare the
call on the letter of credit wrongful or fraudulent, it is imperative to
resolve, among others, whether Transfield was in fact guilty of delay
in the performance of its obligation; but the Court is not called upon
to rule upon the issue of default, such issue having been submitted
by the parties to the jurisdiction of the arbitral tribunals pursuant
to the terms embodied in their agreement.10
It would have been different if Transfield and LHC previously
agreed that in case of resort to arbitration, the parties must wait for
the outcome therefor before LHC can collect on the letter of credit.
In such a case, the issuance of a certification of default, during the
pendency of the arbitration proceedings, would be premature and
fraudulent. Consequently, the fraud exception rule would have
applied and LHC, as beneficiary, may be enjoined from collecting on
the letter of credit.
20.
F Corp., a corporation engaged in the export of fertilizers,
entered into a sale of its products with Mr. P. In its relation,
Bank C, F Corp.'s bank, received an irrevocable letter of credit,
payable on sight, issued by Bank I for the account of its client,
Mr. P, in the amount of P1,000,000.00 to cover the purchase
price of the sale. In the letter of credit, Bank C was designated
as the confirming bank.
■*°Transfield, ibid.
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After being presented the required documents under the
letter of credit, Bank C issued in favor of F Corp, a cashier’s
check in the amount of PI,000,000.00.
Bank C then informed Bank I of the payment made
pursuant to the letter of credit. Thereafter, Bank C transmitted
the documents presented by F Corp, to Bank I and sought to be
reimbursed for the amount it paid to F Corp. .
Bank I, however, refused to reimburse Bank C for the
reason that it received an e-mail coming from Mr. P that the
latter will not make any payment to Bank I in relation to the
letter of credit because the products shipped to him by F Corp
were of substandard quality.
a.
Is Bank I's refusal to reimburse Bank C warranted?
Explain.
Bank Fs refusal to reimburse Bank C is warranted. Under the
doctrine of independence, as long as the stipulated documents are
presented, the issuing bank has the obligation to pay even if the
iuyer should later on refuse payment. The obligation to pay on the
part of the issuing bank does not depend on the fulfillment or non­
fulfillment of the main contract underlying the letter of credit but
simpty upon submission of the stipulated documents. To allow Bank
I to refuse to honor the Letter of Credit simply because it could not
collect first from Mr. P, the buyer, is to countenance a breach of the
Independence Principle.41
b.
Assuming that the documents submitted by F Corp,
were proven to be actually forged but were nonetheless
accepted by Bank C as sufficient, may Bank I refuse Bank
C's claim for reimbursement? Explain.42
Yes, Bank I may refuse Bank C’s claim for reimbursement
if the documents submitted by F Corp, were proven to be actually
forged but were nonetheless accepted by Bank C as sufficient.
Under the fraud exception principle, the beneficiary of the letter
of credit should not be entitled to payment if the following elements
4lThe Hongkong & Shanghai Banking Corporation, Limited v. National
Steel Corporation and Citytrust Banking Corporation (Now Bank of The Philippine
Islands), G.R. No. 183486, February 24, 2016.
42BAR 2019.
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are present: a) there is fraud on the part of the beneficiary; b) the
fraud constitutes fraudulent abuse of the independent purpose of
the letter of credit and not only fraud under the main agreement;
c) irreparable injury might follow if the beneficiary is paid. The
forged documents qualify as fraud sufficient to prevent payment to
F Corporation by Bank C and the right to reimbursement by Bank
C from Bank I.43
21.
What is the doctrine of strict compliance?
Under this doctrine, the documents that the beneficiary
should tender to the issuing bank or confirming bank must strictly
conform to the documents stipulated. The tender of documents by
the beneficiary (seller) must include all documents required by
the letter. Since a bank deals only with documents, it is not in a
position to determine whether or not the documents required by
the letter of credit are material or superfluous. If there is omission
or discrepancy, the issuing bank is not liable to pay. If the bank
pays despite the incompleteness or discrepancy of the documents,
it pays at its own risk and cannot obtain reimbursement from the
applicant.44
In one case, the letter of credit required the issuance from the
buyer that he has inspected the goods and found them to be of good
condition. The buyer had obtained delivery of the goods and even
sold them for a profit, but refused to issue the certification required
by the letter of credit. It was held that the unjustified refusal to
issue the certification does not obligate the bank to pay the seller­
beneficiary, following the doctrine of strict compliance. The remedy
of the seller, in this case, is not to collect from the issuer of the letter
of credit but to sue the buyer under the general law on contracts.45
22.
Distinguish a letter of credit from a trust receipt.
In a letter of credit transaction, the issuing bank will not
release the documents of title and goods to the importer-applicant
unless the latter has fully paid the bank. The bank, however, may
release possession of documents and/or the goods to the importer
but subject to the execution of a trust receipt, whereby the importer,
43Transfield Philippines v. Luzon Hydro Corporation, 443 SCRA 307.
44Feati Bank & Trust Company v. Court of Appeals, et al., G.R. No. 94209,
April 30, 1991.
4SZbid.
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now referred as the entrustee holds the released documents and
goods in trust for the issuing bank, now called, the ontruster.
While the trust receipt, may have been executed as a security
on the letter of credit, still the two documents involve different
undertakings and obligations. A letter of credit is an engagement
by a bank or other person made at the request of a customer that
the issuer will honor drafts or other demands for payment upon
compliance with the conditions specified in the credit. By contrast,
a trust receipt transaction is one where the entruster, who holds an
absolute title or security interests over certain goods, documents or
instruments, release the same to the entrustee, who executes a trust
receipt binding himself to hold the goods, documents or instruments
in trust for the entruster and to sell or otherwise dispose of the goods,
documents and instruments with the obligation to turn over to the
entruster the proceeds thereof to the extent of the amount owing to
the entruster, or as appears in the trust receipt, or return the goods,
documents or instruments themselves if they are unsold, or not
otherwise disposed of, in accordance with the terms and conditions
specified in the trust receipt.46
The other distinctions between the two transactions are as
follows:
A.
1.
There are two parties to a trust receipt, the entruster
and the entrustee, whereas there are basic parties to a
etter of credit, the applicant, the issuing bank and the
beneficiary;
2.
The failure of the applicant to pay the issuing bank
merely gives rise to civil liability whereas the failure of
the entrustee to deliver the proceeds of the sale of the
goods, or to return the goods to the entruster, in case of
non-sale, is considered a criminal offense.
The New Central Bank Act
a23.
State policies
What is the policy of the State regarding the creation of a
central monetary authority?
shall maintain a central monetary authority that
, ii 'io'6
nction and operate as an independent and accountable
s a
<6Bank of Commerce v. Teresita Serrano, G.R. No. 151895, February 16, 2005.
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body corporate in the discharge of its mandated responsibilities
concerning money, banking and credit. In line with this policy, and
considering its unique functions and responsibilities, the central
monetary authority established, while being a government-owned
corporation, shall enjoy fiscal and administrative autonomy.47
b.
24.
Creation of the Bangko Sentral ng Pilipinas
What is the Bangko Sentral ng Pilipinas ("BSP")?
It is a government-owned-and-controlled corporation which
the law has established to be the independent central monetary
authority of the country.48
25.
What are the responsibilities and primary objectives of the
Bangko Sentral ng Pilipinas?
The Bangko Sentral shall provide policy directions in the areas
of money, banking, and credit. It shall have supervision over the
operations of banks and exercise such regulatory and examination
powers over the quasi-banking operations of non-bank financial
institutions. As may be determined by the Monetary Board, it shall
likewise exercise regulatory and examination powers over money
service businesses, credit granting businesses, and payment system
operators. The Monetary Board is hereby empowered to authorize
entities or persons to engage in money service businesses.
The primary objective of the Bangko Sentral is to maintain
price stability conducive to a balanced and sustainable growth of
the economy and employment. It shall also promote and maintain
monetary stability and the convertibility of the peso.
The Bangko Sentral shall promote financial stability and closely
work with the National Government, including, but not limited to,
the Department of Finance, Securities and Exchange Commission,
the Insurance Commission, and the Philippine Deposit Insurance
Corporation.
The Bangko Sentral shall oversee the payment and settlement
systems in the Philippines, including critical financial market
infrastructures, in order to promote sound and prudent practices
consistent with the maintenance of financial stability.
47Section 1, R.A. No. 7653, otherwise known as the New Central Bank.
48Section 2, R.A. No. 7653, as amended by R.A. No. 11211.
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In the attainment of its objectives, the Bangko Sentral shall
promote broad and convenient access to high quality financial
services and consider the interest of the general public.'”
26.
Why is the Bangko Sentral ng Pilipinas considered a lender of
last resort?
Banks are considered the usual lenders to the public. The BSP
is considered the lender of last resort because it can lend to banks
and similar institutions under financial distress when they have no
other means to raise funds. The general public cannot obtain loans
from BSP.'”’
C.
27.
Corporate powers
What are the corporate powers of the BSP?
The BSP is authorized to adopt, alter, and use a corporate seal
which shall be judicially noticed; to enter into contracts; to lease
or own real and personal property; and to sell or otherwise dispose
of the same; to sue or be sued; and otherwise to do and perform
any and all things that may be necessary or proper to carry out the
purposes of the charter creating it.
It may acquire and hold such assets and incur liabilities in
connection with its operations authorized by law, or as are essential
to the proper conduct of such operations.
It may compromise, condone or release, in whole or in part,
any claim or settled liability to the BSP; regardless of the amount
involved, under such terms and conditions as may be prescribed by
the Monetary Board to protect the interests of the BSP.61
28.
Does the BSP have the power to prosecute for the violation of
banking laws?
BSP is a government corporation created principally to
administer the monetary and banking system of the Republic,
not a prosecution agency like the fiscal’s office. Being an artificial
person, it is limited to its statutory powers and the nearest power to
which prosecution of violators of banking laws may be attributed is
’’Section 3, ibid; BAR 1998.
“BAR 2015.
‘’Section 5. ibid.
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its power to sue and be sued. But this corporate power of litigation
evidently refers to civil cases only.
Mandamus will not lie to compel a prosecuting officer, like
the Secretary of Justice, to prosecute a case in court. Violations of
banking laws, however, constitute a public offense, the prosecution of
which is a matter of public interest and hence, anyone, even private
individuals, can denounce such violations before the prosecuting
authorities.62
29.
d.
Operations of the Bangko Sentral ng Pilipinas
i.
Authority to obtain data and information
State the extent of the authority of BSP to obtain data and
information in relation to the proper discharge of its functions
and responsibilities.
The Bangko Sentral shall have the authority to require
from any person or entity, including government offices and
instrumentalities, or government-owned-or-controlled corporations,
any data, for statistical and policy development purposes in
relation to the proper discharge of its functions and responsibilities:
Provided, that disaggregated data gathered are subject to prevailing
confidentiality laws. The Bangko Sentral through the Governor or in
his absence, a duly authorized representative shall have the power
to issue a subpoena for the production of the books and records
for the aforesaid purpose. Those who refuse the subpoena without
justifiable cause, or who refuse to supply the Bangko Sentral with
data required, shall be subject to punishment for contempt in
accordance with the provisions of the Rules of Court.
The authority of the Bangko Sentral to require data from banks
shall continue to be exercised pursuant to its supervisory powers set
under the law.
Data on individuals and firms, other than banks, gathered
by the Bangko Sentral shall not be made available to any person
or entity outside of the Bangko Sentral whether public or private
except under order of the court or under such conditions as may
be prescribed by the Monetary Board: Provided, however, that the
collective data on firms may be released to interested persons or
entities: Provided, finally, that in the case of data on banks, the
provisions of Section 27 of this Act shall apply.”
“Damaso Perez v. Monetary Board, et al., G.R. No. L-23307, June 30, 1967,
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ii.
30.
Supervision and examination
Discuss the supervision and examination authority of the BSP,
The BSP shall have supervision over, and conduct regular
or special examinations of banking institutions and quasi-banks,
including their subsidiaries and affiliates engaged in allied activities.
It shall have regulatory authority over, and conduct regular or
special examinations of, entities which are subject to its jurisdiction
under existing laws.
The department heads and the examiners of the super-vising
and'or examining departments of BSP are authorized to administer
oaths to any director, officer, or employee of any institution under
their respective supervision or subject to their examination, and to
compel the presentation of all books, documents, papers or records
necessary in their judgment to ascertain the facts relative to the
true condition of any institution as well as the books and records of
persons and entities relative to or in connection with the operations,
activities or transactions of the institution under examination,
subject to the provision of existing laws protecting or safeguarding
the secrecy or confidentiality of bank deposits as well as investments
of private persons, natural or juridical, in debt instruments issued
by the Government.63
31.
Does injunction lie against the authority of BSP to conduct
examination and supervision of covered entities?
No restraining order or injunction shall be issued by the court
enjoining the BSP from examining any institution subject to its
supervision or examination, unless there is convincing proof that
the action of the BSP is plainly arbitrary and made in bad faith
and the petitioner or plaintiff files with the clerk or judge of the
court in which the action is pending a bond executed in favor of the
BSP, in an amount to be fixed by the court. The provisions of Rule
58 of the New Rules of Court insofar as they are applicable and not
inconsistent herewith shall govern the issuance and dissolution of
the restraining order or injunction.6,1
•'■’Section 25, R.A. No. 7653, as amended.
MIbid.
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32.
85
What do BSP's supervisory and regulatory powers include?
The BSP’s supervisory and regulatory powers include: conduct
of examination to determine compliance with laws and regulations
if the circumstances so warrant as determined by the Monetary
Board; overseeing to ascertain that laws and regulations are
complied with; regular investigation which shall not be oftener than
once a year from the last date of examination to determine whether
an institution is conducting its business on a safe or sound basis;
and inquiring into the solvency and liquidity of the institution.
If any irregularity is discovered in the process, the MB may
impose appropriate sanctions, such as suspending the offender from
holding office or from being employed with the CB, or placing the
names of the offenders in a watchlist.55
It was held that the RTC has no jurisdiction to hear and decide
a suit that seeks to place a bank under receivership or under a
management committee. That authority is lodged with the BSP. The
court’s jurisdiction could only have been invoked after the Monetary
Board had taken action on the matter and only on the ground that
the action taken was in excess of jurisdiction or with such grave
abuse of discretion as to amount to lack or excess of jurisdiction.56
e.
33.
Bank deposits and investments
What are the requirements to be complied with if any director,
officer or stockholder contracts a loan or any form of financial
accommodation from his bank?
The loan or financial accommodation granted to the director,
officer or stockholder shall be subject to the following requirements:
a.
Approval requirement - the loan must be approved by at
least majority of the entire board, excluding the borrowing
director;
b.
Reportorial requirement - the loan must be reported to
BSP and entered into the books and records of the bank;
and,
55Romeo Busuego v. Court of Appeals, et al., G.R. No. 95326, March 11, 1999.
56Ana Maria Koruga v. Teodoro Arcenas, Jr., et al., G.R. No. 168332, June 19,
2009.
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C.
Unless (he loan is non-risk, the amount of the loan shall
not exceed the book value of his paid-up contribution and
the amount of his unencumbered deposit.
In addition to the foregoing requirements, any director, officer
or stockholder who. together with his related interest, contracts a
loan or any form of financial accommodation from: (1) his bank; or
(2) from a bank (a) which is a subsidiary of a bank holding company
of which both his bank and the lending bank are subsidiaries, or
(b) in which a controlling proportion of the shares is owned by the
same interest that owns a controlling proportion of the shares of his
bank, in excess of five percent (5%) of the capital and surplus of the
bank, or in the maximum amount permitted by law, whichever is
lower, shall be required by the lending bank to waive the secrecy of
his deposits of whatever nature in all banks in the Philippines. Any
information obtained from an examination of his deposits shall be
held strictly confidential and may be used by the examiners only in
connection with their supervisory and examination responsibility or
by the in an appropriate legal action it has initiated involving the
deposit account.67
f.
Prohibitions
34. What are the prohibited acts for the personnel of the BSP?
In addition to the prohibitions found in R.A. Nos. 3019 and
6713, personnel of the BSP are hereby prohibited from:
a.
Being an officer, director, lawyer or agent, employee,
consultant or stockholder, directly or indirectly, of any
institution subject to supervision or examination by the
BSP, except non-stock savings and loan associations and
provident funds organized exclusively for employees of
the BSP, and except as otherwise provided by law;
b.
Directly or indirectly requesting or receiving any gift,
present or pecuniary or material benefit for himself or
another, from any institution subject to supervision or
examination by the BSP;
c.
Revealing in any manner, except under orders of the
court, the Congress or any government office or agency
"Section 26, ibid.
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authorized by law, or under such conditions as may be
prescribed by the Monetary Board, information relating
to the condition or business of any institution. This
prohibition shall not be held to apply to the giving of
information to the Monetary Board or the Governor of the
BSP, or to any person authorized by either of them, in
writing, to receive such information; and
d.
Borrowing from any institution subject to supervision or
examination by the Bangko Sentral unless said borrowing
is transacted on an arm’s length basis, fully disclosed to
the Monetary Board, and shall be subject to such rules
and regulations as the Monetary Board may prescribe.
Note that prior to the amendments under R.A. No. 11211,
borrowings from any institution subject to supervision or examination
by the BSP are prohibited unless said borrowings are adequately
secured. Under the amendatory law, it is enough that the borrowing
is transacted on an arm’s length basis. The prohibition against the
personnel of the supervising and examining departments borrowing
from a bank under their supervision or examination was likewise
removed.
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35.
Examinations and fees
How often should the supervising and examining department
examine the operations of banks and quasi-banks?
The supervising and examining department head, personally
or by deputy, shall examine the operations of every bank and
quasi-bank, including their subsidiaries and affiliates engaged in
allied activities, and other entities which under the law are subject
to BSP supervision, in accordance with the guidelines set by the
Monetary Board taking into consideration sound and prudent
practices: Provided, that there shall be an interval of at least 12
months between regular examinations: Provided, further, that the
Monetary Board, by an affirmative vote of at least five (5) members,
may authorize a special examination if the circumstances warrant.
The institution concerned shall afford to the head of the
appropriate supervising and examining departments and to his
authorized deputies full opportunity to examine its books and
records, cash and assets and general condition and review its
systems and procedures at any time during business hours when
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requested to do so by the BSP: Provided, however, that none of the
reports and other papers relative to such examinations shall be
open to inspection by the public except insofar as such publicity is
incidental to the proceedings hereinafter authorized or is necessary
for the prosecution of violations in connection with the business of
such institutions.
Supervised institutions shall pay to the BSP, no later than
May 31 of each year, an annual supervision fee as may be prescribed
by the Monetary Board. In determining the amount of the annual
supervision fee, the Monetary Board shall consider the costs of
supervision.58
h.
36.
Monetary Board; powers and functions
What are the powers and functions of the Monetary Board?
The powers and functions of the BSP are exercised by the BSP
Monetary Board, composed of seven (7) members appointed by the
President of the Philippines for a term of six (6) years.
37.
Are transfers and acquisitions of voting shares in banks and
quasi-banks subject to BSP approval?
Transfers or acquisitions, or a series thereof, of at least ten
percent (10%) of the voting shares in banks or quasi-banks shall
require the prior approval of the BSP. The selling or conveying
stockholder shall submit such transfer or acquisition for approval by
the BSP within such period as may be prescribed by the Monetary
Board. In approving such transfers or acquisitions, regard shall
be given by the BSP to the fitness of the incoming stockholders
as may be indicated in their integrity, reputation and financial
capacity. Without BSP approval, no such transfer or acquisition
shall have legal effect nor shall the same be recognized in the books
of the institution or by any government agency, and the transferor­
stockholders shall remain accountable and responsible therefor.
Transfer of actual control or management of the institution to the
new stockholders or their representatives prior to BSP approval
shall make the transferor, the transferee and any person responsible
therefor liable under Sections 36 and 37 of the Central Bank Act.
Notwithstanding any provision of law to the contrary, the BSP
“Section 28, ibid.
VI. BANKING
VJ
may share with the Philippine Deposit Insurance Corporation any
information that the BSP may obtain pertaining to transfer or
acquisition of shares or series of transfers or acquisition of shares in
banks and quasi-banks.“
i.
How the Bangko Sentral ng Pilipinas handles
banks in distress
a.
38.
Conservatorship
What are the tools/remedies available to BSP to handle banks
in financial distress?
The BSP may either appoint a conservator, or a receiver, or
direct the closure and liquidation of the financially distressed bank.
39.
When may a bank be placed under conservatorship?
Whenever on the basis of the report of the appropriate
supervising and examining department, the Monetary Board finds
that a bank or quasi-bank is in a state of continuing inability or
unwillingness to maintain a condition of liquidity deemed adequate
to protect its depositors and creditors, the Monetary Board may
appoint a conservator to take charge of the assets, liabilities and
management of that institution, reorganize management, collect
all monies and debts due said institution, and exercise all powers
necessary to restore its viability. The conservator shall have the
power to overrule or revoke the actions of the previous management
and board of directors of the bank or non-bank financial intermediary
performing quasi-banking functions.60
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The conservator should be competent and knowledgeable in
bank operations and management. The conservatorship shall not
exceed one year.61
40.
Does the appointment of a conservator result in the closure
and liquidation of a bank?
A conservator, once appointed, merely takes over the
management of the bank and assumes exclusive powers to oversee
every aspect of the bank’s operations and affairs. However, the bank
69Section 25-A, R.A. No. 7653, as amended.
“Section 29, R.A. No. 7653.
“'Ibid.
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retains its juridical personality even if placed under conservatorship;
it is neither replaced nor substituted bj' the conservator.02
41.
May a conservator revoke a valid contract of the bank?
The vast and far-reaching powers of the conservator of a bank
must be related to the preservation of the assets of the bank, the
reorganization of the management thereof, and the restoration of its
viability. Such powers cannot extend to the post-facto repudiation
of perfected transactions, otherwise they would infringe against the
non-impairment clause of the Constitution. The law merely gives
the conservator power to revoke contracts that are, under existing
law. deemed to be defective. Hence, the conservator merely takes
the place of a bank’s board of directors, so what the board cannot do,
the conservator cannot do either.63
42. When may the Monetary Board of the BSP appoint a receiver?
Whenever, upon report of the head of the supervising or
examining department, the Monetary Board finds that a bank or
quasi-bank:
(a)
Has notified the Bangko Sentral or publicly announced a
unilateral closure, or has been dormant for at least sixty
(60) days or in any manner has suspended the payment
of its deposit/deposit substitute liabilities, or is unable
to pay its liabilities as they become due in the ordinary
course of business: Provided, that this shall not include
inability to pay caused by extraordinary demands induced
by financial panic in the banking community;
(b)
Has insufficient realizable assets, as determined by the
Bangko Sentral, to meet its liabilities; or
(c)
Cannot continue in business without involving probable
losses to its depositors or creditors; or
(d)
Has willfully violated a cease and desist order under
Section 37 of the Central Bank Act that has become final,
involving acts or transactions which amount to fraud or
“Central Bank of the Philippines v. Court of Appeals, G.R. No. 88353, May 8,
1992.
“First Philippine International Bank
January 24,1996.
Court of Appeals, G.R. No. 115849,
I
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a dissipation of the assets of the institution; in which
cases, the Monetary Board may summarily and without
need for prior hearing forbid the institution from doing
business in the Philippines and designate the Philippine
Deposit Insurance Corporation (PDIC) as receiver in the
case of banks and direct the PDIC to proceed with the
liquidation of the closed bank pursuant to this section
and the relevant provisions of R.A. No. 3591, as amended.
The Monetary Board shall notify in writing, through the
receiver, the board of directors of the closed bank of its
decision.64
Note that unilateral closure, dormancy for at least six (6)
months and suspension in the payment of deposit and deposit
substitute liabilities are new grounds under the amendatory law.
Note further that determination of the sufficiency of the
realizable assets is lodged with the BSP. BSP is not required to
consult with the bank or secure its approval, as previously required
under the old law, and held in the Banco Filipino case.65
The authority of the Monetary Board to summarily and without
need for prior hearing forbid the bank or quasi-bank from doing
business in the Philippines as provided above may also be exercised
over non-stock savings and loan associations, based on the same
applicable grounds. For quasi-banks and non-stock savings and loan
associations, any person of recognized competence in banking, credit
or finance may be designated by the Bangko Sentral as a receiver.66
43.
What is the nature of power of the receiver?
Section 30 of the New Central Bank Act expressly provides that
“[t]he receiver shall immediately gather and take charge of all the
assets and liabilities of the institution, administer the same for the
benefit of its creditors, and exercise the general powers of a receiver
under the Revised Rules of Court but shall not, with the exception
of administrative expenditures, pay or commit any act that will
involve the transfer or disposition of any asset of the institution.”
This means that a bank receiver only has powers of administration.
It cannot exercise acts of strict ownership. The properties of the
bank may be sold only to pay its debts.
“Section 30, ibid.
66 Supra.
“Section 30, ibid.
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44.
What are the legal effects when a bank is placed under
receivership?
a.
The appointment of a receiver operates to suspend the
authority of the bank and of its directors and officers over
its property and effects, such authority being reposed
in the receiver, and in this respect, the receivership is
equivalent to an injunction to restrain the bank officers
from intermeddling with the property of the bank in any
way. Since the bank officers were no longer authorized
to transact business in connection with the bank’s assets
and property, the exclusive option to purchase granted by
the President of the Bank is unenforceable against the
bank.67
b.
The bank shall be forbidden to do business. As such, it is
not Hable to pay interest on deposits. It is however liable
for obligations that accrued before the order forbidding it
to do business.68 It was also held that the period during
which the bank cannot do business due to insolvency
is not a fortuitous event, unless it is shown that the
government’s action to place a bank under receivership or
liquidation proceedings is tainted with arbitrariness, or
that the regulatory body has acted without jurisdiction.69
c.
A criminal case for violation of BP 22 against a bank
placed under receivership by the Monetary Board may be
dismissed for the demandability of the obligation to be
performed has been suspended. The filing of a petition for
assistance in liquidation by PDIC as receiver as a result
of the Monetary Board’s order for closure made it legally
impossible for the officer who signed the check to comply
with his obligation with the payee.70
67Abacus Real Estate Development v. Manila Banking Corporation, G.R. No.
162270, April 6, 2005.
“Overseas Bank of Manila v. Court of Appeals, et al., G.R. No. L-45866, April
19, 1989.
“Spouses Jaime and Matilde Poon v. Prime Savings Bank, represented by the
Philippine Deposit Insurance Corporation as Statutory Liquidator, G.R. No. 183794,
June 13, 2016.
,0Cu Small Business Guarantee and Finance Corporation, G.R. No. 211222,
August 7, 2017.
VI. BANKING
d.
45.
93
The receiver shall immediately gather and take charge of
all the assets and liabilities of the institution, administer
the same for the benefit of its creditors, and exercise the
general powers of a receiver under the Revised Rules of
Court.
Due to growing financial difficulties, Z Bank was unable to
finish construction of its 21-storey building on a prime lot
located in Makati City. Inevitably, the Bangko Sentral ordered
the closure of Z Bank and consequently placed it under
receivership. In a bid to save the bank’s property investment,
the President of Z Bank entered into a financing agreement
with a group of investors for the completion of the construction
of the 21-storey building in exchange for a 10-year lease and
the exclusive option to purchase the building.
A.
Is the act of the President valid? Why or why not?
B.
Will a suit to enforce the exclusive right of the investors to
purchase the property prosper? Reason briefly.
A.
No, the bank president’s act is not valid. He had no
authority to enter into the financing agreement. Z Bank
was ordered closed and placed under receivership. Control
over the properties of Z Bank passed to the receiver.
The appointment of a receiver operates to suspend the
authority of the bank and its officers over the bank’s
assets and properties, such authority being reposed in the
receiver. Since the bank officers were no longer authorized
to transact business in connection with the bank’s assets
and property, the exclusive option to pin-chase granted by
the President of the Bank is unenforceable against the
bank.
B.
Since the exclusive option to purchase granted to the
investors is unenforceable, the bank, therefore, cannot
be compelled to sell the property. Under Section 30 of
the R.A. No. 7653, New Central Bank Act, the properties
of Z Bank should be administered for the benefit of its
creditors. The property in question can be disposed of only
for the purpose of paying the debts of Z Bank.
Furthermore, in Abacus u. Manila Banking Corporation, the
Supreme Court ruled that the receiver or conservator appointed by
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BSP cannot perforin acts of dominion but only acts of administration.
The confirmation or ratification of an option to purchase real
property is an act of dominion.71
46.
Can a bank under a receivership can still grant new loans and
accept new deposits?
No, duringthe receivership, the bank is forbidden to do business.
Its assets and properties shall be gathered and administered by the
receiver for the benefit of the bank’s creditors. Granting new loans
and accepting new deposits would constitute doing business for the
bank in the ordinary course of business which is contrary to the
purpose and nature of a receivership proceeding.72
47.
Can a bank under receivership be rehabilitated?
Under Section 30 of R.A. No. 7653, the receiver has 90 days from
appointment to rehabilitate the bank. If it fails, it shall recommend
to BSP the bank’s closure and liquidation. If it succeeds, it shall
recommend to BSP the resumption of bank’s business.
However, R.A. No. 11211, which became effective on March 1,
2019, removed the authority of the receiver to rehabilitate the closed
bank. Upon its appointment for any of the statutory grounds, the
receiver must proceed with the liquidation of the closed bank.73
48.
Who is the statutory receiver for closed banks?
The PDIC under the charter that created it is considered the
receiver of closed banks.
49.
May a closed bank under receivership sue or be sued?
A closed bank under receivership can only sue or be sued
through its receiver, the PDIC. Hence, the petition filed by the peti­
tioner bank which has been placed under receivership is dismissible
if it did not join PDIC as a party to the case.74
’’BAR 2007
"Section 30. R.A. No. 7653; BAR 2009
"Section 30(d), R.A. No. 11211.
"Banco Filipino Savings and Mortgage Bank v. Bangko Sentral ng Pilipinas,
G.R. No. 200678, June 4, 2018.
■
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50.
95
May a court designate a conservator or appoint a receiver for a
financially distressed bank?
The designation of a conservator or the appointment of a
receiver for a financially distressed bank shall be vested exclusively
with the Monetary Board.76
51.
Is the designation of a conservator a precondition to the
appointment of a receiver?
No, the designation of a conservator is not a precondition to
the appointment of a receiver.76 The choice of remedies on the part of
the Monetary Board of the BSP depends on the nature of the bank’s
financial condition.
52.
Distinguish conservator from receiver.
A conservator is appointed if the bank is in a continuing state
of lack of liquidity adequate to protect the interest of the bank’s
creditors and depositors (meaning, its assets are more than liabilities
but are not in cash or readily convertible to cash), whereas a receiver
is generally appointed if the bank is insolvent.
A conservator takes charge of the assets, liabilities and
management of the bank in distress, whereas a receiver shall
immediately gather and take charge of all the assets and liabilities
of the institution, administer the same for the benefit of its creditors,
and exercise the general powers of the receiver under the Rules of
Court.
The bank is allowed to do business if it is only under
conservatorship but cannot do business if it is placed under
receivership.
A conservator has one (1) year from appointment to restore
the bank’s financial viability, whereas the receiver, upon its
appointment based on any of the statutory grounds, must proceed
with the liquidation of the closed bank.77
76Section 30, ibid.
76Section 30, ibid.
77BAR 2015 as revised to conform with Section 30, R.A. No. 7693, as amended
byR.A. No. 11211.
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53.
DIVINA ON COMMERCIAL LAW:
A COMPREHENSIVE GUIDE VOLUME II
What do you mean by the "close now hear later" doctrine?
It is the rule that allows BSP to order the closure of the bank
even without prior notice and hearing.”1 BSP may rely on the report
of the head of its supervising and examining department, or of the
conservator, if one is appointed.
Under R.A. No. 7653, the power of the Monetary Board (MB)
over banks, including rural banks, was increased and expanded.
The Court, in several cases, upheld the power of the MB to take over
banks without need for prior hearing. It is not necessary in as much
as the law entrusts to the MB the appreciation and determination
of whether any or all of the statutory grounds for the closure and
receivership of the erring bank are present. The MB, under R.A. No.
7653. has been invested with more power of closure and placement
of a bank under receivership for insolvency or illiquidity, or because
the bank’s continuance in business would probably result in the loss
to depositors or creditors.
The doctrine is founded on practical and legal considerations
to obviate unwarranted dissipation of the bank’s assets and as a
valid exercise of police power to protect the depositors, creditors,
stockholders, and the general public. Swift, adequate and
determined actions must be taken against financially distressed
and mismanaged banks by government agencies lest the public faith
in the banking system deteriorate to the prejudice of the national
economy.’9
54.
Is BSP required to conduct an audit of the bank before ordering
its closure?
It is not required to conduct a thorough audit of the bank
before ordering its closure. Under R.A. No. 7653, only a report of
the head of the supervising or examining department is necessary.
Needless to say, the decision of the MB and BSP, like any other
administrative body, must have something to support itself and its
findings of fact must be supported by substantial evidence. But it
’“Alfredo Vivas v. Monetary Board of the Bangko Sentral ng Pilipinas, et al.,
G.R. No. 191424, August 7, 2013.
’“Vivas v. Monetary Board of the Bangko Sentral ng Pilipinas, G.R. No.
191424, August 7, 2013.
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Vf. BANKING
97
is clear under R.A. No. 7653 that the basis need not arise from an
examination as required in the old law.""
It was likewise held that the bank is not entitled to a copy of
the report of examination that the Supervision and Examination
Department of BSP has prepared nor can the bank be validly entitled
to injunction to restrain BSP from adopting such report.”
The Supreme Court likewise ruled that the Monetary Board is
not required to make its own independent finding that the bank could
no longer be rehabilitated but may rely on the findings of the PDIC
as statutory receiver, in ordering the liquidation of a bank. Once
the receiver determines that rehabilitation is no longer feasible,
the Monetary Board is simply obligated to: (a) notify in writing the
bank>s board of directors of the same; and (b) direct the PDIC to
proceed with liquidation.82 This case should now be construed in
relation to R.A. No. 11211 which, as previously stated, removed the
option of rehabilitation once a bank is placed under receivership.
Nevertheless, it is submitted that a bank may still be
rehabilitated in the course of liquidation as when, for instance, the
assets and shares of the bank are sold to a buyer, which, in turn,
decided to rehabilitate the bank.
What is clear under R.A. No. 11211 is that the receiver does
not have the 90-day period under R.A. No. 7653 to rehabilitate the
bank. After its appointment, PDIC, as the statutory receiver, must
proceed to liquidation but there is nothing in the law that precludes
rehabilitation in the course of the liquidation.
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55.
What is the rationale of the "close now, hear later" doctrine?
The “close now, hear later” scheme is grounded on practical
and legal considerations to prevent unwarranted dissipation of the
bank’s assets and as a valid exercise of police power to protect the
depositors, creditors, stockholders, and the general public.83 It is
justified as a measure for the protection of the public interest. Swift
“Rural Bank of San Miguel v. Monetary Board, G.R. No. 1508S6, February
16, 2007.
“'Ibid.
82Apex Bancrights Holdings, Inc. v. Bangko Sentral ng Pilipinas, G.R. No.
214866, October 2, 2017.
“BSP Monetary Board v. Hon. Antonio-Valenzuela, G.R. No. 184778, October
2,2009.
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action is calk'd for on the part of the BSP when it finds that a bank
is in dire straits. Due process does not necessarily require a prior
hearing: a hearing or an opportunity to be heard may be subsequent
to the closure. One can just imagine the dire consequences of a
prior hearing: bank runs would be the order of the day, resulting in
panic and hysteria. Swift, adequate, and determined actions must
be taken against financially distressed and mismanaged banks by
government agencies lest the public faith in the banking system
deteriorate to the prejudice of the national economy.84
56.
Does injunction, as a remedy, lie against the authority of BSP
to appoint a conservator, or designate receiver, or direct the
closure of a financially distressed bank?
No. The authority of BSP to designate a conservator, or appoint
a receiver, or direct its closure, is a valid exercise of police power. The
order is final and executory and not subject to injunction. However,
such order is subject to judicial scrutiny. The authority may not be
exercised arbitrarily or unreasonably and could be set aside if it is
either capricious, discriminatory, whimsical, arbitrary, unjust, or is
tantamount to a denial of due process and equal protection clauses
of the Constitution.86 The order may be set aside through a petition
for certiorari if the action was taken in excess of jurisdiction or with
such grave abuse of discretion as to amount to lack or excess of
jurisdiction.86
In other words, the remedy of the bank is not prior to but after
issuance of the order by the BSP.
57.
What is the remedy available to the bank to set aside the order
of BSP designating a conservator, appointing a receiver, or
directing the closure and liquidation of the bank?
The remedy available to the bank is to file a petition for
certiorari with the Court of Appeals on the ground that the action
taken by BSP was in excess of jurisdiction or with such grave
abuse of discretion as to amount to lack or excess of jurisdiction.
“Alfredo Vivas, supra.
“Apex Bancrights Holdings, Inc.
Bangko Sentral ng Pilipinas, G.R. No.
214866, October 2, 2017.
'“‘Ibid. Sections 29 and 30, R.A. No. 7653.
i
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The petition for certiorari may only be filed by the stockholders of
record representing the majority of the capital stock within 10 days
from receipt by the board of directors of the institution of the order
directing receivership, closure/liquidation or conservatorship.87
There must be convincing proof, after hearing, that the
resolution of BSP is plainly arbitrary and made in bad faith.88
The Board of Directors of a bank may also question the validity
of the conservator’s (or receiver’s) fraudulent acts and abuses and
the arbitrary action of the Monetary Board but subject to the same
requisites above-mentioned.89
Note that appeal is not the remedy.
58.
Cite jurisprudence where the Supreme Court held that the
order of closure was arbitrary or made in bad faith.
a.
The arbitrariness and bad faith of Central Bank is evident
from the fact that it pressured the controlling stockholders
into relinquishing the management and control of a bank
to a supposed investor, which did not have any intention
of restoring the bank into its former sound financial
condition but whose interest was merely to recover its
deposits from the bank and thereafter allowing such
investor to mismanage the bank until the bank’s financial
deterioration and subsequent closure. Central Bank acted
whimsically and withdrew its commitment to support the
bank to the detriment of the latter.90
b.
When the closure was preceded by Central Bank making
express representations to the controlling stockholders
that it would support the Bank, and avoid its liquidation
if the stockholders would execute (a) the Voting Trust
Agreement turning over the management of the Bank to
the CB or its nominees, and (b) mortgage or assign their
properties to the Central Bank to cover the overdraft
“’Section 30, ibid.; Yuseco v. PDIC, as the statutory liquidator of the Unitrust
Development Bank, G.R. No. 217899, September 28, 2016.
““Central Bank v. Court of Appeals, supra.
ssIbid.
"Central Bank of the Philippines v. Court of Appeals, et al., G.R. No. L-50031,
July 27,1981.
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balance of the bank to which stockholders have complied
with.91
c.
59.
In case of premature conclusion that the bank is insolvent
as when the Central Bank unilaterally deducted valuation
reserves or allowance for probable losses for loans and
investments from the assets of the bank.92
Is the resolution of the BSP issued in the exercise of its
quasi-judicial functions like imposing sanctions for violations
of banking laws or regulations or appointing a receiver or
conservator or closing a bank subject to declaratory relief?
No. It is not. A resolution issued in the exercise of quasi-judicial
functions is not subject to declaratory relief.
Similarly, in one case, a bank deducted from the loan proceeds
of their borrowers certain amount of fees representing premiums
to guarantee payment of outstanding loans. The resolution of the
BSP directing a bank to refund to its borrowers said fees because
the scheme was in the nature of insurance activity cannot be the
subject of a petition for declaratory relief. The Supreme Court
explained that undoubtedly, the BSP Monetary Board is a quasijudicial agency exercising quasi-judicial powers or functions. It is
an independent central monetary authority and a body corporate
with fiscal and administrative autonomy, mandated to provide
policy directions in the areas of money, banking, and credit. It has
the power to issue subpoena, to sue for contempt those refusing to
obey the subpoena without justifiable reason, to administer oaths
and compel presentation of books, records and others, needed in its
examination, to impose fines and other sanctions and to issue cease
and desist order. Section 37 of R.A. No. 7653, in particular, explicitly
provides that the BSP Monetary Board shall exercise its discretion
in determining whether administrative sanctions should be imposed
on banks and quasi-banks, which necessarily implies that the BSP
Monetary Board must conduct some form of investigation or hearing
regarding the same.
91Emerito Ramos v. Central Bank of the Philippines, G.R. No. L-29352, October
4, 1971.
“Banco Filipino Savings Bank v. Central Bank, supra.
1
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101
The decision of the BSP Monetary Board cannot be a proper
subject matter for a petition for declaratory relief since it was issued
by the BSP Monetary Board in the exercise of its quasi-judicial
powers or functions. The authority of the petitioners to issue the
questioned MB Resolution emanated from its powers under Section
37 of R.A. No. 7653 and Section 66 of R.A. No. 8791 to impose, at its
discretion, administrative sanctions upon any bank for violation of
any banking law.93
60.
State the Rules on Liquidation.
a.
Once a bank is ordered closed by BSP for any of the
grounds allowed by law, liquidation of the bank follows.
PDIC, as the statutory receiver and/or liquidator of closed
banks, shall file a petition with the RTC for assistance in
liquidation.
b.
All disputed claims against the bank should be filed
before the liquidation proceeding. The judicial liquidation
is intended to prevent multiplicity of actions against the
insolvent bank. It is a pragmatic arrangement designed
to establish due process and orderliness in the liquidation
of the bank, to obviate the proliferation of litigations and
to avoid injustice and arbitrariness.94
c.
The claims against the bank shall be determined
and passed upon and then paid based on the rules on
concurrence and preference of credit. The residual assets
are then distributed to the stockholders.
d.
The liquidation of a bank may be carried out despite lack
of tax clearance unlike in a voluntary dissolution of a
corporation under the Corporation Code.95
The debts and liabilities of the bank under liquidation are
to be paid in accordance with the rules on concurrence and
preference of credit under the Civil Code. With reference
to the other real and personal property of the debtor,
sometimes referred to as “free property,” the taxes and
Philippine Veterans Bank, G.R. No.
93The Honorable Monetary Board
189571, January 21, 2015.
94Jerry Ong v. Court of Appeals, et al., G.R. No. 112830, February 1, 1996.
96Zn Re'. Petition for Assistance in the Liquidation of the Rural Bank of Bokod
(Benguet) v. Bureau of Internal Revenue, G.R. No. 158261, December 18, 2006.
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assessments due the National Government, other than
those in Articles 2241(1) and 2242(1) of the Civil Code,
such as the corporate income tax, will come only in ninth
place in the order of preference. If the BIR’s contention
that a tax clearance be secured first before the project of
distribution of the assets of a bank under liquidation may
be approved, then the tax liabilities will be given absolute
preference in all instances, including those that do not
fall under Articles 2241(1) and 2242(1) of the Civil Code.96
e.
The exclusive jurisdiction of the liquidation court pertains
only to the adjudication of claims against the bank.
It does not cover the reverse situation where it is the
bank which files a claim against another person or legal
entity. Thus, the liquidator should not file the petition for
issuance of a writ of possession for foreclosed property in
the liquidation court because such petition is not in the
nature of a disputed claim against the bank. It should
be filed in the city or municipality where the property is
situated.97
f.
The issuance of the cashier’s checks by a bank to the
petitioner created a debtor/creditor relationship between
them. This disputed claim should therefore be lodged in
the liquidation proceedings by the petitioner as creditor,
since the closure of the bank has rendered all claims
subsisting at that time moot which can best be threshed
out by the liquidation court and not the regular courts.
Bank deposits are not preferred credits except when the
deposits are covered by a cashier’s check purchased from
the bank when the bank officers knew or ought to have
known that the bank is insolvent.98
g-
Any final judgment against the bank which has been
ordered closed should be stayed as to execute the judgment
would unduly deplete the assets of the bank to the
prejudice of other creditors since after the Monetary Board
has declared that a bank is insolvent and has ordered it
“Philippine Deposit Insurance Corporation v. Bureau of Internal Revenue,
G.R. No. 172892, June 13,2013.
“’Domingo Manalo v. Court of Appeals, G.R. No. 141297, October 8, 2001.
““Leticia Miranda v. Philippine Deposit Insurance Corporation, et al., G.R. No.
169334, September 8, 2006.
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to cease operations, the Board becomes the trustee of its
assets for the equal benefit of all the creditors, including
depositors. The assets of the insolvent banking institution
are held in trust for the equal benefit of all creditors, and
after its insolvency, one cannot obtain an advantage or a
preference over another by an attachment, execution or
otherwise."
61.
Family Bank was placed under statutory receivership and
subsequently ordered liquidated by the Central Bank (CB)
due to fraud and irregularities in its lending operations which
rendered it insolvent. Judicial proceedings for liquidation were
thereafter commenced by the CB before the RTC. Family Bank
opposed the petition.
Shortly thereafter. Family Bank filed in the same court a
special civil action against the CB seeking to enjoin and dismiss
the liquidation proceeding on the ground of grave abuse of
discretion by the CB. The court was poised to: (1) restrain the
CB from closing Family Bank; and (2) authorize Family Bank to
withdraw money from its deposits during the pendency of the
case.
If you were the judge, would you issue such orders?
Why?
No. Once the bank is ordered closed by BSP and a petition for
assistance in liquidation is filed in court, the stockholders of the
closed bank cannot file a separate action to enjoin the liquidation
proceeding but should instead file a comment or opposition to the
petition for liquidation invoking therein as affirmative defenses the
bad faith on the part of BSP. This is necessary to prevent multiplicity
of suits or conflicting resolutions.100
The foregoing Bar examination question was based on the case
of Salud. v. Central Bank of the Philippines.101
In a recent case, however, the Supreme Court ruled that the
RTC, acting as a liquidation court, has no power to overrule the
"Spouses Lipana
Development Bank of Rizal, G.R. No. 73884, September
24,1987.
100BAR 1992.
101G.R. No. L-17620, August 19, 1986.
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findings of the Monetary Board. In fact, the liquidation court’s
authority is limited to adjudicating disputed claims against the
institution, assisting the enforcement of individual liabilities of the
stockholders, directors and officers and deciding on other issues to
implement the liquidation plan. The exclusivity of the Monetary
Board's power is highlighted by the absence of appeal from its
actions under Section 30 of R.A. No. 7653. The MB’s actions are
final and executory’ and can only be set aside by filing a petition
for certiorari within 10 days from receipt by the bank’s board of
directors of the MB’s order directing the receivership, liquidation,
or conservatorship.102
62. What is the legal tender power of notes and coins?
All notes and coins issued by the Bangko Sentral ng Pilipinas
shall be fully guaranteed by the government and shall be legal tender
for all debts, both public and private. However, with respect to coins,
they have legal tender power only for the following amounts:
a.
One peso coins and coins of higher peso value are legal
tender for obligations not exceeding Pl,000.00; and
b.
Twenty-five cents and coins of lower value are legal tender
for obligations not exceeding P100.00.
Notes, regardless of denomination, are legal tender for any
amount.
Coins which show signs of filing, clipping or perforation and
notes which have lost more than two-fifths (2/5) of their surface
or all of the signatures inscribed therein shall be withdrawn from
circulation and demonetized without compensation to the bearer.
63.
Can a creditor be compelled to accept payment all in
25-centavo Central Bank coins of a forty (P40.00) peso debt?
Explain briefly.
Coins are legal tender only up to certain amount. For
denominations from P1.00 and above, coins shall be legal tender up
to Pl,000.00. For denominations from 25 centavos and below, coins
shall be legal tender up to P1OO.OO.103
"“Yuseco v. PDIC, as the statutory liquidator of the Unitrust Development
Bank, G.R. No. 217899, September 28,2016.
'“BAR 1975.
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105
After many years of shopping in the Metro Manila area,
housewife HW has developed the sound habit of making cash
purchases only, none on credit. In one shopping trip to Mega
Mall, she got the shock of her shopping life for the first time, a
store's smart salesgirl refused to accept her coins in payment
for a purchase worth not more than P100. HW was paying P70
in 25-centavo coins and P25 in 10-centavo coins. Strange as
it may seem, the salesgirl told HW that her coins were not
"legal tender." Do you agree with the salesgirl in respect of her
understanding of "legal tender"? Explain.
No. The salesgirl’s understanding that coins are not legal
tender is not correct. Under a recent BSP circular, the legal tender
power of coins has been increased as follows: 25 centavo coins and
coins of lower value are legal tender up to P100.00, while one peso
coins and coins of higher value are legal tender for obligations not
exceeding Pl,000.00.10''
65.
Are notes and coins withdrawn from circulation still legal
tender?
Notes and coins called in for replacement shall remain legal
tender for a period of one (1) year from date of call. After this period,
they shall cease to be legal tender but during the following year
or such longer period as the Monetary Board may determine, they
may be exchanged at par. After expiration of this latter period, the
notes and coins which have not been exchanged shall cease to be the
liability of the Bangko Sentral ng Pilipinas.
j.
66.
Administrative sanctions on supervised entities
What are the administrative sanctions that the Monetary Board
may impose?
Without prejudice to the criminal sanctions against the
culpable persons provided in Sections 34, 35, and 36 of R.A. No.
7653, the Monetary Board may, at its discretion, impose upon
any bank, quasi-bank, including their subsidiaries and affiliates
engaged in allied activities, or other entity which under R.A. No.
7653 or special laws are subject to the Bangko Sentral supervision,
and/or their directors, officers or employees, for any willful violation
of its charter or by-laws; willful delay in the submission of reports
or publications thereof as required by law, rules and regulations;
1O’BAR 2000.
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any refusal to permit examination into the affairs of the institution;
any willful making ot a false or misleading statement to the Board
or the appropriate supervising and examining department or its
examiners: any willful tailure or refusal to comply with, or violation
of. any banking law or any order, instruction or regulation issued
by the Monetary Board, or any order, instruction or ruling by the
Governor: or any commission of irregularities, and/or conducting
business in an unsafe or unsound manner as may be determined
by the Monetary Board, the following administrative sanctions,
whenever applicable:
(a)
Fines in amounts as may be determined by the
Monetary Board to be appropriate, but in no case to
exceed Pl,000,000.00 for each transactional violation
or P100,000.00 per calendar day for violations of a
continuing nature, taking into consideration the attendant
circumstances, such as the nature and gravity of the
violation or irregularity and the size of the institution:
Provided, that in case profit is gained or loss is avoided
as a result of the violation, a fine no more than three
(3) times the profit gained or loss avoided may also be
imposed;
(b)
Suspension of rediscounting privileges or access to
Bangko Sentral credit facilities;
(c)
Suspension of lending or foreign exchange operations or
authority to accept new deposits or make new investments;
(d)
Suspension of interbank clearing privileges; and/or
(e)
Suspension or revocation of quasi-banking or other special
licenses.
Resignation or termination from office shall not exempt
such director, officer or employee from administrative or criminal
sanctions.
The Monetary Board may, whenever warranted by
circumstances, preventively suspend any director, officer or
employee of the institution pending an investigation: Provided, that
should the case be not finally decided by the Bangko Sentral within a
period of 120 days after the date of suspension, said director, officer
or employee shall be reinstated in his position: Provided, further,
that when the delay in the disposition of the case is due to the fault,
negligence or petition of the director or officer, the period of delay
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shall not be counted in computing the period of suspension herein
provided.
The above administrative sanctions need not be applied in the
order of their severity.
Whether or not there is an administrative proceeding, if the
institution and/or the directors, officers or employees concerned
continue with or otherwise persist in the commission of the indicated
practice or violation, the Monetary Board may issue an order
requiring the institution and/or the directors, officers or employees
concerned to cease and desist from the indicated practice or violation,
and may further order that immediate action be taken to correct
the conditions resulting from such practice or violation. The cease
and desist order shall be immediately effective upon service on the
respondents.
The respondents shall be afforded an opportunity to defend
their action in a hearing before the Monetary Board or any committee
chaired by any Monetary Board member created for the purpose,
upon request made by the respondents within five (5) days from
their receipt of the order. If no such hearing is requested within
said period, the order shall be final. If a hearing is conducted, all
issues shall be determined on the basis of records, after which the
Monetary Board may either reconsider or make final its order.
The Governor is hereby authorized, at his discretion, to
impose upon banks and quasi-banks, including their subsidiaries
and affiliates engaged in allied activities, and other entities which
under the Central Bank Act or special laws are subject to Bangko
Sentral supervision for any failure to comply with the requirements
of law, Monetary Board regulations and policies, and/or instructions
issued by the Monetary Board or by the Governor, fines not in excess
of P100,000.00 for each transactional violation or P30,000.00 per
calendar day for violations of a continuing nature, the imposition of
which shall be final and executory until reversed, modified or lifted
by the Monetary Board on appeal.105
k.
Rules on bank deposits and investments by
directors, officers, stockholders and their related
interests.100
1.
Supervision and regulation of bank operations.
’“Section 37, ibid.
'xInfra.
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67.
Why are banks required to maintain reserves against their
deposits and deposit substitutes? State one of three purposes
for these reserves.k’:
Any one of the following purposes for requiring banks to
maintain reserves against their deposits and deposit substitutes
will suffice:
a.
To control the volume of money arising from the credit
operations of the banking system;
b.
To provide the bank’s reserves which they can tap in case
of inadequate liquidity to service withdrawals of bank
deposits; and
c.
To help the Government to finance its operations.
B. Law on Secrecy of Philippine
Currency Bank Deposits (R.A. No. 1405)
1.
Purpose
68. What are the prohibited acts under R.A. No. 1405?
It shall be unlawful for any official or employee of a banking
institution to disclose or allow the examination or inquiry by any
person, government official, bureau, or office, other than those
excepted by law, any information concerning Philippine currency
bank deposits of whatever nature and kind, as well as investment in
government securities.108
69.
Who are covered by the prohibition?
Bank officials and employees. A non-bank official or employee
is not covered by the prohibition. 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 is not covered by the
prohibition.
70.
What are the items covered by the prohibition against
unauthorized disclosure under R.A. No. 1405?
a.
All Philippine currency bank deposits of whatever nature
with banks, including investment in bonds issued by the
107BAR 2010.
'“Sections 1 and 3 of R.A. No. 1405, otherwise known as the Law on Secrecy
of Bank Deposits.
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government of the Philippines, its political subdivisions
and instrumentalities.109
71.
b.
Trust funds and any sum of money invested in the bank
which the bank may use for loans and similar transactions
are now included in the term “deposits.”110
c.
Deposits are thus no longer limited to those governed by
the law on loans giving rise to creditor-debtor relationship.
Raymond invested his money in securities issued by the
Philippine government, through his bank. Subsequently, the
Bureau of Internal Revenue asked his bank to disclose his
investments. His bank refused the request for disclosure on
the ground that the investments are confidential under the
Secrecy of Bank Deposits Law (R.A. No. 1405, as amended). Is
the bank's refusal justified? Defend your answer.1"
It is justified. Under Secrecy of Bank Deposits Law, investment
in bonds issued by the Philippine government are also absolutely
confidential and may not be examined, inquired or looked into by any
person, government official, bureau or office save for the exceptions
provided by law. None of the exceptions apply in the present case.
72.
X, a government official, has a number of bank accounts in
T Bank containing millions of pesos. He also opened several
trust accounts in the same bank which specifically covered
the placement and/or investment of funds. X was later charged
with graft and corruption before the Sandiganbayan (SB) by the
Ombudsman. The Special Prosecutor filed a motion praying for
a court order authorizing it to look into the savings and trust
accounts of X in T Bank. X opposed the motion arguing that the
trust accounts are not "deposits'* under the Law on Secrecy of
Bank Deposits (R.A. No. 1405). Is the contention of X correct?
Explain.112
The contention of X is not correct. Deposits in the context of the
Secrecy of Philippine currency deposits include deposits of whatever
nature and kind. They include funds deposited in the bank giving
'"Section 2, R.A. No. 1405.
110Ejercito v. Sandiganbayan, G.R. No. 157294-95, November 30, 2006.
"'BAR 2015.
"2BAR 2016.
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rise to creditor-debtor relationship, ns well as funds invested in the
bank like trust accounts.11’
73.
In what cases may information on Philippine currency bank
deposits, as well as investment in government securities, be
disclosed, examined or looked into without violating the law?
a.
Written permission of the depositor;"4
b.
In case of impeachment;116
c.
In case of order of a competent court in any of the following
cases:
i.
In case of bribery or dereliction of duty of public
officials;116
ii.
Where the subject matter of litigation is the money
deposited;117
iii.
Prosecution for unexplained wealth (plunder is akin
to unexplained wealth);118
iv.
Prosecution for violation of the anti-graft and corrupt
practices act;
v.
In case of violation of the anti-money laundering
law; and,
vi.
Garnishment of bank deposits.
NB. Under R.A. No. 1405, the issuance of court order is limited
to bribery or dereliction of duty of public officials and where the
subject matter of litigation is the money deposited. The rest of the
enumeration is based on jurisprudence and the other laws.
d.
The BIR may inquire into the deposit and other related
information to determine the gross estate of the deceased
taxpayer for computation of estate tax;119
‘"Ejercito v. Sandiganbayan, G.R. No. 157294-95, November 30, 2006.
‘"Section 2, RA No. 1405.
"'-Ibid.
™Ibid.
"7Ibid.
118PNB v. Gancayco but see discussion on effects of the Marques v. Desierto
ruling, infra.
“’Section 6(F)(1) of the Tax Code, as amended.
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111
e.
The BIR may also inquire into bank deposits if there is an
offer of compromise of tax liability on account of financial
incapacity to pay his tax liability;'20
f.
Disclosure by the bank to the National Treasurer of
information concerning dormant deposits under the
Unclaimed Balances law;121
g-
PDIC and/or BSP may inquire into or examine deposit
accounts and all information related thereto in case there
is a finding of unsafe and unsound banking practice;122
h.
BSP may, the course of a periodic or special examination,
check the compliance of a covered institution with the
requirements of AMLA and its implementing rules and
regulations;123
i.
In case of amendment or repeal of the law.
Written permission of the depositor
74.
Debtor filed a petition for voluntary insolvency. The appointed
receiver filed a motion for the parties to enter into compromise
agreement. Two of the creditors of the insolvent debtor filed
a joint motion to approve agreement which contains their
authority to have access to the bank account of the insolvent
debtor. The court approved the joint motion.
Was the approval by the court of the joint motion
sufficient to allow the creditors access to the bank account of
the insolvent debtor?
No, the Joint Motion to Approve Agreement executed by the
parties on waiver of confidentiality of the insolvent debtor’s deposits
does not bind the latter who was not a party and signatory to the
said agreement.124
‘“Section 6(F)(2), Tax Code, as amended.
l21Act No. 3936, as amended.
'“Section 8, R.A. No. 3591, as amended.
‘“Section 11, R.A. No. 9160, as amended.
124Dona Adela Export International, Inc. v. Trade and Investment Development
Corporation, G.R. No. 201931, February 11, 2015.
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Order of a competent court
75.
May the Senate Blue Ribbon Committee, in aid of legislation,
subpoena the bank deposit records of resource persons who
were called to shed light on matters under investigation by the
Committee?
No. the Senate Blue Ribbon Committee is not a competent
court. Investigation by the Committee or any committee of Congress,
for that matter, is not one of the exceptions to allow access to bank
deposit information.
76.
May a prosecutor who is conducting an investigation for estafa
and/or violation of BP 22 validly subpoena the bank deposit
records of the respondent as part of the clarificatory process
of the preliminary investigation?
No, because to fall within the exception, the subpoena must
>e issued by a competent court in the cases provided by law. The
rosecution office is not a court.
77.
Elizabeth, through her daughter Ruby, charged Norlina of
unauthorized deduction of her ABC Savings Account, as well
as for failure to post certain check deposits to the said account,
with the Office of Special Investigation of the Bangko Sentral
ng Pilipinas (OSI-BSP). During the investigation, Norlina filed
a Motion for Production of Documents praying that the she be
allowed to inspect and copy the Statement of Account of other
depositors with two others, claiming that resort to discovery
process is part of her right to due process and Ruby signed a
document allowing Norlina and ABC access to these deposit
accounts. The OSI-BSP denied the motion ruling that the
action is an administrative proceeding aimed at determining
respondent's liability, if any, for violation of banking laws and
that a deposit account may only be examined or looked into if
it is the subject matter of a pending litigation.
Did the OSI-BSP abuse its discretion in denying the
motion?
No, other than OSI-BSP is not a competent court, records show
t^le account holders or depositors of the two other banks are
t
different from the complainant. Perforce, the documents executed
y Ruby purportedly granting ABC access to the foregoing accounts
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do not equate to their permissions to allow access to their bank
account.126
78. The Bank Secrecy Law (R.A. No. 1405) prohibits disclosing
any information about deposit records of an individual without
court order except:126
a.
In an examination to determine gross estate of a
decedent.
b.
In an investigation for violation of Anti-Graft and Corrupt
Practices.
In an investigation by the Ombudsman.
C.
d.
In an impeachment proceeding.
a.
In an examination to determine gross estate of a decedent.
Bribery or dereliction, of duty of public officials: prosecution for
unexplained wealth; prosecution for violation of the Anti-Graft and
Corrupt Practices Act
79. TRUE or FALSE. Answer TRU E if the statement is true, or FALSE
if the statement is false. Explain your answer in not more than
two (2) sentences.
If the Ombudsman is convinced that there is a violation
of law after investigating a complaint alleging illicit bank
deposits of a public officer, the Ombudsman may order the
bank concerned to allow in camera inspection of bank records
and documents.127
False. In the case of Marquez v. Desierto,™ the Supreme Court
held that the Ombudsman can only examine bank deposit accounts
upon compliance with the following requisites:
a.
b.
c.
d.
There is a case pending before a court of competent
jurisdiction;
The account holder and the bank official must be informed
of the examination;
The account to be examined must be clearly identified;
and,
The examination must be limited to the account specified.
‘“Sibayan v. Alda, G.R. No. 233395, January 17, 2018.
126BAR 2012.
127BAR 2009.
128G.R. No. 135882, June 27, 2001.
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If there is no pending ease yet, but only an investigation by the
Ombudsman, any order for the examination of the bank account is
premature.
A’B. The ruling in Marquez v. Desierto effectively modified the
rulings in PNB r. Gancayco1” and Banco Filipino v. Purisima'30 that
Section 8 of the Anti-Graft Law is intended to amend Section 2 of
R.A. No. 1405 by providing additional exception to the rule against
the disclosure of bank deposits. In both cases, it was held while R.A.
No. 1405 provides that bank deposits are “absolutely confidential
... and [therefore] may not be examined, inquired or looked into,”
except in those cases enumerated therein, the Anti-Graft Law
directs in mandatory terms that bank deposits “shall be taken into
consideration in the enforcement of this section, notwithstanding
any provision of law to the contrary.” Cases of unexplained wealth
are similar to cases of bribery or dereliction of duty and no reason is
seen why these two classes of cases cannot be excepted from the rule
making bank deposits confidential.
In both PNB and Banco Filipino cases, it was held that the
pecial prosecutor (which is not a court) may have access to bank
deposit records of persons under investigation for violation of the
Anti-Graft and Unexplained Wealth laws. Pursuant to the ruling 1
in Marquez v. Desierto, it is not enough that there is a pending
criminal investigation; the Ombudsman must comply with the above
mentioned formalities.
Where the subject matter of litigation is the money deposited
80. What is the test to consider in determining whether or not the
subject matter of litigation is the money deposited?
The inquiry into bank deposits allowable under R.A. No. 1405
must be premised on the fact that the money deposited in the account
is itself the subject of the action.
Thus, where the information filed in court charged respondent
with qualified theft, the subject matter of litigation is the money
alleged to have been stolen by the respondent. Where the subject
matter of the testimonial and documentary evidence is not at all
12SG.R. No. L-18343, September 30,1965.
'“Banco Filipino Savings Bank v. Hon. Fidel Purisima, G.R. No. L-56429, May
28,1988.
1
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115
relevant to the case, the suppression of such testimony is valid,
otherwise, it constitutes an attempt by the prosecution at an
impermissible inquiry into a bank deposit account, the privacy
and confidentiality of which is protected by law.131 In this case,
the criminal information did not allege that the funds stolen were
deposited to the account subject of testimonial evidence. Similarly,
if the information alleges that the funds stolen are deposited in a
particular bank account, evidence on the funds of the respondent in
other bank accounts should not be permitted.
In one case, a wire transfer erroneously indicated US$ 1,000,000
when it was supposed to be for US$ 1,000 only. It was held that
Section 2 of R.A. No. 1405 allows the disclosure of bank deposits
in cases where the money deposited is the subject matter of the
litigation. Inasmuch as the civil case is aimed at recovering the
amount converted by the payees for their own benefit, necessarily,
an inquiry into the whereabouts of the illegally acquired amount
extends to whatever is concealed by being held or recorded in the
name of persons other than the one responsible for the illegal
acquisition.132
In another case, it was ruled that the examination of bank
books and records cannot be justified if the only issue is whether
the money paid and deposited to an account was the consideration
for the sale of treasury bills or whether it was money intended for
placement. Hence, whether the transaction is considered a sale or
money placement does not make the money the “subject matter of
litigation” within the meaning of Section2 of R.A. No. 1405 which
prohibits the disclosure or inquiry into bank deposits except “in
cases where the money deposited or invested is the subject matter
of litigation.”133
81.
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"D" issued a check drawn against ABC Bank payable to the
order of "P" for P1,000,000.00 who, in turn, deposited the check
in his account with XYZ Bank. XYZ sent the check for clearing
through the Philippine Clearing House Corporation (PCHC) but
XYZ's clearing staff committed a clearing discrepancy when
he erroneously under-encoded the charge slip to P1,000.00.
While XYZ credited the account of "P" for PI,000,000.00, it
only recovered P1,000.00 from ABC. After discovery of the
131BSB Group, Inc. v. Go, G.R. No. 168644, February 16, 2010.
132Mellon Bank v. Hon. Celso Magsino, el al., G.R. No, 71479, October 18,1990.
,330nate v. Abrogar, G.R. No. 107303, February 23,1995.
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under-encoding, XYZ notified ABC of the discrepancy, by
way of a charge slip of P999,000.00 for automatic debiting of
ABC's clearing account with PCHC. ABC refused to accept the
charge slip. XYZ filed a complaint against ABC with the PCHC
Arbitration Committee. It also filed with the court a petition for
the examination of the account of "D." Should the court grant
the petition?
The petition should be denied. It does not seek recovery of
the ven- money contained in the deposit. The subject matter of the
dispute may be the amount of P999,000.00 that XYZ seeks from ABC
as a result of the discrepancy; but it is not the P999,000.00 deposited
in the drawer’s account. By the terms of R.A. No. 1405, the “money
deposited itself should be the subject matter of the litigation.
That XYZ feels a need for such information in order to establish
its case against ABC does not, by itself, warrant the examination of
the bank deposits. The necessity of the inquiry, or the lack thereof, is
mmaterial since the case does not come under any of the exceptions
dlowed by the Bank Deposits Secrecy Act.134
Violation of the anti-money laundering law
82. What is the basis of the authority of the Anti-Money Laundering
Council to inquire into deposits or funds without committing a
violation of the law on secrecy of bank deposits?
ALMC’s authority is statutory. It is based on Section 11 of
the AMLA which provides that notwithstanding the provisions of
R.A. No. 1405 as amended, R.A. No. 6426 as amended, R.A. No.
8791, and other laws, the AMLC may inquire into or examine
bank deposits or investments, including related accounts, with any
banking institution or non-bank financial institution upon order
of a competent court when it has been established that there is a
probable cause that the deposits or investments, including related
accounts involved, are related to unlawful activity, as defined by
AMLA or a money laundering offense under the same law.136
Court of Appeals, G.R. No. 134699,
13,Union Bank of the Philippines
December 23,1999.
’“Section 11, R.A. No. 9160, as amended, otherwise known as the Anti-Money
Laundering Law.
VI. BANKING
117
Thus, AMLC may inquire into deposits, regardless of currency,
funds, other than deposits, investments, including related accounts
as long as there is a probable cause that the deposits or investments
are related to unlawful activity, as defined by AMLA or a money
laundering offense under the same law.
83. Does AMLC need a court order to be able to inquire into such
deposits, funds or investments?
Yes, AMLC needs to obtain a bank inquiry order from the
Court of Appeals. The application can be done ex-parte.'x However,
AMLC must establish probable cause that the deposits, funds or
investments relate to unlawful activity under AMLA and the Court
of Appeals, independently of AMLC, must make itself a finding that
such probable cause exists before the bank inquiry order may be
issued.137
Court order shall not be necessary in the following cases:
a.
Kidnapping for ransom under Article 267 of Act No. 3815
(RPC);
b.
Violations of Sections 4, 5, 6, 8, 9, 10, 12, 13, 14, 15, and
16 of R.A. No. 9165 (Comprehensive Dangerous Drugs
Act of 2002);
c.
Hijacking and other violations under R.A. No. 6235;
destructive arson and murder, as defined under the RPC,
as amended, including those perpetrated by terrorists
against non-combatant persons and similar targets;
d.
Felonies and offenses similar to the foregoing which are
punishable under the penal laws of other countries;
e.
Terrorism and conspiracy to commit terrorism as defined
under R.A. No. 9372, as amended.138
84. Through various acts of graft and bribery. Mayor Ycasiano
accumulated a large amount of wealth which he converted
into U.S. dollars and deposited in a Foreign Currency Deposit
Unit (FCDU) account with the Yuen Bank (YB). On a tip given
“Section 11, ibid.
137Subido Pagente Certez Mendoza and Binay Law Offices v. Court of Appeals,
G.R. No. 216914, December 6, 2016.
“Section 11, R.A. No. 9160, as amended.
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by the secretary of the mayor, the Anti-Money Laundering
Council (AMLC) sent an order to YB to confirm the amount of
U.S. dollars that Mayor Ycasiano had in his FCDU account. YB
claims that, under the Foreign Currency Deposit Act (R.A. No.
6426, as amended), a written permission from the depositor
is the only instance allowed for the examination of FCDU
accounts. YB alleges that AMLC on its own cannot order a
banking institution to reveal matters relating to bank accounts.
Is the legal position of YB, in requiring written permission
from the depositor, correct?139
Yes, the legal position of YB in requiring written permission
from the depositor is correct. The AMLC cannot order the bank to
inquire into the bank account of any depositor on mere suspicions
of acts of graft and bribery without his written consent or a bank
inquiry order issued by the competent court.
Authority ofBIR
85. When may the Bureau of Internal Revenue (BIR) inquire into
the deposits of a taxpayer?
The BIR may inquire into the deposit and other related
information to determine the gross estate of the deceased taxpayer
for computation of estate tax;140 and if there is an offer of compromise
of tax liability on account of the taxpayer’s financial incapacity.141
Apart from these, the BIR may not inquire into deposits without
violating the right of the taxpayer to secrecy of deposits under
existing laws.142
Garnishment of bank deposits
86.
May the bank disclose information about Philippine currency
bank deposits pursuant to a writ of garnishment?
The Bank may disclose information about Philippine currency
bank deposits pursuant to a writ of garnishment. The disclosure
in this case is only incidental to the execution process. There is
‘“BAR 2018.
““Section 6(F)(1), Tax Code, as amended.
“'Section 6(F)(2), Tax Code, as amended.
“2BAR 2004.
VI, BANKING
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nothing in the records of Congress that would show the intention
of legislature to place Philippine currency bank deposits beyond the
reach of judgment creditor.143
87.
Is the rule allowing garnishment of Philippine currency bank
deposit similar to foreign currency deposits?
No, the rule is different. Foreign currency deposits are exempt
from attachment, garnishment or any other order or process of any
court, legislative body, government agency or any administrative
body whatsoever.144
88. In what cases may foreign currency deposits be examined,
inquired or looked into?
As a general rule, all foreign currency deposits authorized
under R.A. No. 6426, as amended, are hereby declared as and
considered of an absolutely confidential nature and in no instance
shall foreign currency deposits be examined, inquired or looked into
by any person, government official, bureau, or office whether judicial
or administrative or legislative, or any other entity whether public
or private, except in the following cases:
a.
Written permission of the depositor.145
b.
The AMLC may inquire into or examine bank deposits
or investments, including related accounts, with any
banking institution or non-bank financial institution upon
order of a competent court when it has been established
that there is a probable cause that the deposits or
investments, including related accounts involved, are
related to unlawful activity, as defined by AMLA or a
money laundering offense under the same law.146
c.
The AMLC, either upon its own initiative or at the
request of the Anti-Terrorism Council, is authorized to
investigate: (a) any property or funds that are in any way
related to financing of terrorism or acts of terrorism; (b)
"’China Bank v. Ortega, G.R. No. L-34964, January 31,1973; PCIB v. Court of
Appeals, G.R. No. 84526, January 28, 1991.
"’Section 8, R.A. No. 6426, as amended.
"‘Section 8, ibid.
"‘Section 11, R.A. No. 9160, as amended, otherwise known as the Anti-Money
Laundering Law.
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property or funds of any person or persons in relation to
whom there is probable cause to believe that such person
or persons are committing or attempting or conspiring to
commit, or participating in or facilitating the financing of
terrorism or acts of terrorism as defined in the law.
For purposes of this section and notwithstanding the
provisions ofR.A. No. 1405, otherwise known as the “Law
on Secrecy of Bank Deposits”, as amended; R.A. No. 6426,
otherwise known as the “Foreign Currency Deposit Act of
the Philippines”, as amended; R.A. No. 8791, otherwise
known as “The General Banking Law of 2000” and other
laws, the AMLC is authorized to inquire into or examine
deposits and investments with any banking institution or
non-bank financial institution and their subsidiaries and
affiliates without a court order.147
d.
If the account holder is not the owner of foreign currency
account as when he holds the deposits in trust for
another.148
e.
If the person asking for the court relief is a co-owner of
the account.149 In one case, it was held that since Jose
Gotianuy is the named co-payee of Mary Margaret Dee
in the Citibank checks, which checks were deposited by
Mary Margaret Dee in China Bank, then, Jose Gotianuy
is likewise a depositor thereof. As the owner of the
funds unlawfully taken and which are indisputably now
deposited with China Bank, Jose Gotianuy has the right
to inquire into the said deposits. Jose Gotianuy’s request
for the assailed subpoena is tantamount to an express
permission of a depositor for the disclosure of the name
of the account holder. On that basis, no written consent
from Mary Margaret Dee is necessitated.
f.
If the foreign currency deposit is made by a transient or a
tourist as this is not the kind of deposit encouraged by the
FCDU law and given incentives and protection by said
laws because such depositor stays only for a few days in
“’Section 10, RA. No. 10168.
““Van Twest v. Hon. Salvador de Guzman, G.R. No. 106253, February 10,
1994.
“’China Bank v. Court of Appeals, G.R. No. 140687, December 18, 2006.
VI. BANKING
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the country and, therefore, will maintain his deposit in
the bank only for a short time."1" This is particularly true
if the transient committed a wrongdoing (e.g., rape of a
minor). The law is intended to encourage foreign currency
deposits to beef up the country’s international reserves. It
cannot be invoked for a purpose contrary to what the law
intended.
89.
May foreign currency deposits be inquired into when the funds
are the subject matter of litigation?
No, R.A. No. 6426 is a special law designed especially for
foreign currency deposits in the Philippines. R.A. No. 1405, which
covers all bank deposits in the Philippines, is the general law
which does not nullify the special law on foreign currency deposits.
Thus, it was held that the surety which issued a bond to secure the
obligation of the principal debtor cannot inquire into the foreign
currency deposits of the debtor even if its purpose is to determine
whether or not the loan proceeds were used for the purpose specified
in the surety agreement. The foreign currency deposits cannot be
examined without the consent of the depositor. The subpoena issued
by the bank should be quashed because foreign currency deposits
are not subject to court order except for violation of the anti-money
laundering law.161
In this case of GSIS u. Court of Appeals, the Supreme Court
held that there are only two permissible cases where foreign currency
deposits may be examined. As enumerated above, there are other
exceptions scattered in various cases. This case, however, may serve
as authority that foreign currency deposits cannot be examined in
case of impeachment. It should also be noted that R.A. No. 1405
lists impeachment as an exception to the rule against unauthorized
examination of bank deposits while R.A. No. 6426 does not.
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90.
Mayor J has two (2) bank accounts: (1) a Peso savings account
with Bank P, and (2) a U.S. Dollar savings account with Bank D.
In 2018, Mayor J’s former business partner, Mr. K, filed a
civil case for collection of sum of money against him.
160Karen Salvacion v. Central Bank of the Philippines, China Bank, et al., G.R.
No. 94723, August 21, 1997.
,61GSIS v. Court of Appeals, G.R. No. 189206, June 8, 2011.
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In the same year, a criminal case for Direct Bribery
under the Revised Penal Code was filed against Mayor J.
It was alleged in the information that in exchange for the
expeditious approval of various permits and licenses, Mayor
j received kickbacks, which amounts were deposited to his
bank accounts.
In the event Mayor J is held ultimately liable in the civil
case filed by Mr. K, may Mayor J’s bank accounts in Bank P and
Bank D be subject to garnishment? Explain.162
The peso savings account of Mayor J with Bank P may be
garnished. The prohibition against examination or inquiry into
bank deposits under R.A. No. 1405 is not a bar to the garnishment of
the deposit because the disclosure is only incidental to the execution
process and there is nothing in the records of Congress that would
indicate that Philippine currency bank deposits are beyond the
reach of judgment creditor.153
The dollar savings account with Bank D, however, cannot be
garnished. Except in case of written consent of depositor or in case of
court order for violation of the Anti-Money Laundering law, foreign
currency deposits are exempt from garnishment under R.A. No.
6426.15*
91.
First Bank received an order of garnishment over a client's
peso and dollar deposits in First Bank. Should First Bank
comply with that order? Explain.155
First Bank should comply with the order of garnishment over
a client’s peso deposits because as previously pointed out, there is
nothing in R.A. No. 1405 that places bank deposits beyond the reach
of judgment creditor. And the disclosure of information on bank
deposits pursuant to the writ of garnishment is only incidental to
the execution process.166
The dollar deposits, however, are exempt from garnishment or
court order under the Foreign Currency Act (R.A. No. 6426). Thus,
the bank should not comply with this part of the garnishment.
152BAR 2019.
‘“China Bank v. Ortega, G.R. No. L-34964, January 31. 1973.
161GSIS v. Court of Appeals, G.R. No. 189206, June 8, 2011.
'“BAR 2015.
’“PCIB v. Court of Appeals, 193 SCRA 452.
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VI. BANKING
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Unclaimed Balances law
92. What does the term "unclaimed balances" mean in the context
of the Unclaimed Balances Law?
“Unclaimed balances” shall include credits or deposits of
money, bullion, security or other evidence of indebtedness of
any kind, and interest thereon with banks, buildings and loan
associations, and trust corporations, as hereinafter defined, in
favor of any person known to be dead or who has not made further
deposits or withdrawals during the preceding ten years or more.
Such unclaimed balances, together with the increase and proceeds
thereof, shall be deposited with the Treasurer of the Philippines to
the credit of the Government of the Republic of the Philippines.15’
93. What are the obligations of banks, building and loan
associations and trust corporations under the Unclaimed
Balances law?
Within the month of January of every odd year, all banks,
building and loan associations, and trust corporations shall forward
to the Treasurer of the Philippines a statement, under oath, of their
respective managing officers, of all credits and deposits held by them
in favor of persons known to be dead, or who have not made further
deposits or withdrawals during the preceding 10 years or more,
arranged in alphabetical order according to the names of creditors
and depositors, and showing:
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(a)
The names and last known place of residence or post office
addresses of the persons in whose favor such unclaimed
balances stand;
(b)
The amount and the date of the outstanding unclaimed
balance and whether the same is in money or in security,
and if the latter, the nature of the same;
(c)
The date when the person in whose favor the unclaimed
balance stands died, if known, or the date when he made
his last deposit or withdrawal; and
(d)
The interest due on such unclaimed balance, if any, and
the amount thereof.
167Section 2, Act No. 3936, as amended.
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A copy of the above sworn statement shall be posted in a
conspicuous place in the premises of the bank, building and loan
association, or trust corporation concerned for at least 60 days from
the date of tiling thereof: Provided, that immediately before filing the
above sworn statement, the bank, building and loan association, and
trust corporation shall communicate with the person in whose favor
the unclaimed balance stands at his last known place of residence or
post office address.
It shall be the duty of the Treasurer of the Philippines to inform
the Solicitor General from time to time the existence of unclaimed
balances held by banks, building and loan associations, and trust
corporations.‘“
94. What happens to such unclaimed balances?
Whenever the Solicitor General shall be informed of such
■mclaimed balances, he shall commence an action or actions in the
ame of the People of the Republic of the Philippines in the Court
f First Instance of the province or city where the bank, building
and loan association or trust corporation is located, in which shall
be joined as parties the bank, building and loan association or trust
corporation and all such creditors or depositors. All or any of such
creditors or depositors or banks, building and loan association or
trust corporations may be included in one action.
Upon the trial, the court must hear all parties who have
appeared therein, and if it be determined that such unclaimed
balances in any defendant bank, building and loan association or
trust corporation are unclaimed as hereinbefore stated, then the
court shall render judgment in favor of the Government of the
Republic of the Philippines, declaring that said unclaimed balances
have escheated to the Government of the Republic of the Philippines
and commanding said bank, building and loan association or trust
corporation to forthwith deposit the same with the Treasurer of
the Philippines to credit of the Government of the Republic of the
Philippines to be used as the National Assembly169 may direct.160
‘“Section 2, ibid.
‘“Now, Congress of the Philippines.
'“Section 3, Act No. 3936, as amended.
VI. BANKING
125
95. What is the liability of the bank, building and loan association
or trust corporation for failure to file the sworn statement as
required by law?
If the president, cashier or managing officer of the bank,
building and loan association, or trust corporation neglects or refuses
to make and file the sworn statement required by this action, such
bank, building and loan association, or trust corporation shall pay
to the Government the sum of P500.00 a month for each month or
fraction thereof during which such default shall continue.161
96.
Istheofficer who reported to the National Treasurer information
about unclaimed balances, as required by law, liable for
violation of the law on secrecy of deposits?
No, disclosure to the Treasurer information on unclaimed
balances for the purpose of initiating escheat proceedings does not
violate R.A. No. 1405 or the law on secrecy of Philippine currency
deposits. Disclosure is a duty imposed by law.
It should be noted though that escheat is akin to garnishment.
And if foreign currency deposits cannot be garnished under R.A. No.
6426, as amended, then the same deposits cannot be likewise be
escheated.
Repeal or amendment of the law
97.
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The law (R.A. No. 6832) creating a Commission to Conduct
a Thorough Fact-Finding Investigation of the Failed Coup
d'Etat of December 1989, Recommended Measures to Prevent
The Occurrence of Similar Attempts at a Violent Seizure of
Power and for Other Purposes, provides that the Commission
may ask the Monetary Board to disclose information on and/
or grant authority to examine any bank deposits, trust or
investment funds, or banking transactions in the name of and/
or to grant authority to examine any bank deposits, trust or
investment funds, or banking transactions in the name of and/
or utilized by a person, natural or juridical, under investigation
by the Commission, in any bank or banking institution in the
Philippines, when the Commission has reasonable ground
to believe that said deposits, trust or investment funds,
161Section 4, ibid.
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or banking transactions have been used in support or in
furtherance of the objectives of the said coup d'etat.
Does not the above provision violate the Law on Secrecy
of Bank Deposits (R.A. No. 1405)? 162
The law on Secrecy of Bank Deposits is itself merely a statutory
enactment, and it may, therefore, be modified, or amended (such
as by providing further exceptions therefrom), or even repealed by
a subsequent law. The law did not amount to a contract between
the depositors and depositary banks within the meaning of the non­
impairment clause of the Constitution. Even if it did, the police
power of the State is superior to the non-impairment clause.163
98.
What is the penalty for violation of the laws on secrecy of
deposits?
Any violation of R.A. No. 1405 will subject the offender upon
conviction, to an imprisonment of not more than five (5) years or a
ine of not more than P20,000.00 or both, in the discretion of the
court.16*
On the other hand, any violation of R.A. No. 6426 or any
regulation duly promulgated by the Monetary Board pursuant
thereto shall subject the offender upon conviction to an imprisonment
of not less than one (1) year nor more than five (5) years or a fine of
not less than P5,000.00 nor more than P25.000.00, or both such fine
and imprisonment, at the discretion of the court.166
C. General Banking Law (R.A. No. 8791)
a.
99.
Definition and classification of banks
What is a bank?
A bank is an entity engaged in the lending of funds obtained
from the public in the form of deposits.166 It has three elements: a)
it is engaged in the lending of funds; b) the funds are obtained from
162BAR 1991.
‘“BAR 1991.
‘“Section 5, R.A. No. 1405.
‘“Section 10, R.A. No. 6426.
‘“Section 3.1, R.A. No. 8791, otherwise known as the General Banking Law
(GBL).
VI. BANKING
127
the public, which means, 20 or more lenders; and c) the funds are
obtained from the public in the form of deposits. Note that unlike
the old law, these activities need not be performed with habituality.
Thus, when a corporation loans out the money obtained from
almost 60,000 savings account deposits opened by the public with
the said corporation, it is clear that these transactions partake the
nature of banking, as defined by the law.167
However, transactions involving purchase of receivables at
a discount, well within the purview of investing, reinvesting or
trading in securities, which an investment company is authorized
to perform, does not constitute banking. Similarly, if the funds
supposedly lent have not been shown to have been obtained from
the public by way of deposits, it cannot be said that the investment
company was engaged in banking.168
100. Fatima Investment Corporation is engaged in the purchase
of accounts receivables or specifically, installment papers of
purchasers of cars and trucks. As a source of its funding, it sells
its bonds from time to time to the public. The proceeds of the
sale of its bonds are utilized by Fatima Investment Corporation
in its financing operations.
a.
Is Fatima Investment Corporation engaged in banking?
A bank is an entity engaged in the lending of funds obtained
from the public in the form of deposits. These elements are not
present in the transaction involving Fatima Investment Corporation.
Purchase of receivables, if it is without recourse, is not lending, and
bond issuance to obtain funds from the public is not a deposit taking
activity.169
b.
What is the effect if a corporation engages in illegal
banking?
The General Banking Act, as well as the Central Bank Act,
provides for civil and criminal liabilities, not only on the corporation,
167Republic of the Philippines v. Security Credit and Acceptance Corporation,
G.R. No. L-20583, January 23, 1967.
168Teodoro Banas v. Asia Pacific Finance Corporation, G.R. No. 128703,
October 18, 2000.
169BAR 1978; The act of ABC Investment Corporation amounts to quasi­
banking.
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but likewise on the officers and directors thereof in proper cases,
when a corporation engages in illegal banking. Furthermore, a quo
warranto proceeding may also be initiated to oust the corporation
from the exercise of banking powers and functions.170
101. What are the requirements for the grant of a banking license?
The requirements are as follows:
a.
The entity must be organized as a stock corporation. As a
stock corporation, it must have not less than five (5) but
more than 15 directors, two of whom shall be independent
directors.1’1 However, in case of merger or consolidation,
the bank may have up to 21 directors;172
b.
That its funds are obtained from the public, which shall
mean 20 or more persons; and
c.
That the minimum capital requirements prescribed
by the Monetary Board for each category of banks are
satisfied.173
The Securities and Exchange Commission shall not register
the articles of incorporation of any bank, or any amendment thereto,
unless accompanied by a certificate of authority issued by the
Monetary Board, under its seal. Such certificate shall not be issued
unless the Monetary Board is satisfied from the evidence submitted
to it that:
a.
All requirements of existing laws and regulations to
engage in the business for which the applicant is proposed
to be incorporated have been complied with;174
b.
The public interest and economic conditions, both general
and local, justify the authorization;176 and
c.
The amount of capital, the financing, organization,
direction and administration, as well as the integrity
’’"BAR 1988, 1978; Republic of the Philippines v. Security Credit and
Acceptance Corporation, ibid.
’’’Section 15, GBL.
‘“Section 17, GBL; BAR 2012.
‘“Section 8, GBL.
‘“Section 14.1, GBL.
‘“Section 14.2, GBL.
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VI. BANKING
129
and responsibility of the organizers and administrators
reasonably assure the safety of deposits and the public
interest.170
The Securities and Exchange Commission shall not register the
by-laws of any bank, or any amendment thereto, unless accompanied
by a certificate of authority from the Bangko Sentral.’77
102. May foreigners be elected directors of domestic bank?
Yes, foreigners may be elected directors of a domestic bank to
the extent of their actual foreign equity.
Foreign individuals and non-bank corporations may own or
control up to 40% of the voting stock of a domestic bank. This rule
shall apply to Filipinos and domestic non-bank corporations.178
The percentage of foreign-owned voting stocks in a bank shall
be determined by the citizenship of the individual stockholders in
that bank. The citizenship of the corporation which is a stockholder
in a bank shall follow the citizenship of the controlling stockholders
of the corporation, irrespective of the place of incorporation.
However, while the allowable foreign equity in domestic bank
is 40% of its voting stock, foreigners can be elected to the board
only in proportion to the bank’s actual foreign equity. Thus, if the
foreign-held stocks amount only to 30% of the bank’s foreign equity,
foreigners can only have three (3) seats in a 10-person board of
directors.
A foreign bank, allowed to operate under the foreign bank
liberalization law, can be wholly-owned by foreigners.’79
103. May foreigners be appointed officers of a domestic bank?
No, it will violate the Anti-Dummy law. Under such law, any
foreigner is not allowed to intervene in the management, operation,
administration or control, whether as an officer, employee or laborer
therein of a corporation which, having in its name or control, a right,
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’’’Section 14.3, GBL.
’’’Section 14, GBL.
’’’Section 11, GBL.
”’R.A. No. 10641.
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franchise, privilege, property or business, the exercise or enjoyment
of which is expressly reserved by the Constitution or the laws to
citizens of the Philippines.
104. What is the limit on the number of shares a person may own in
a domestic bank?
Foreign individuals and non-bank corporations may own or
control up to 40% of the voting stock of a domestic bank. This rule
shall apply to Filipinos and domestic non-bank corporations.181 Forty
percent (40%) is the aggregate limit for foreign-held stocks while
40% is an individual limit for Filipino natural persons and domestic
non-bank corporations.
The exceptions to the 40% share ownership limit Eire as follows:
a.
Foreign banks allowed to operate under the foreign bank
liberalization law through any of the following modes of
entry: i) acquiring, purchasing, or owning up to 100% of
the voting stock of an existing bank; ii) by investing in up
to 100% of the voting stock of a new banking subsidiary
incorporated under the laws of the Philippines; or (iii) by
establishing branches with full banking authority.182
b.
A universal bank can own up to 100% of the equity in a
thrift bank, a rural bank or a financial allied enterprise.
A publicly-listed universal or commercial bank may own up to
100% of the voting stock of only one other universal or commercial
bank.183
Note that the 100% ownership on voting stocks must be in
either bank only.181
105. What are the classifications of banks?
Banks shall be classified into:
a.
Universal banks;
b.
Commercial banks;
'“Section 2-A, Anti-Dummy Law. Commonwealth Act 108.
“'Section 11, GBL.
'“Section 2, R.A. No. 10641.
'“Section 25, GBL.
'“BAR 2012.
VI. BANKING
131
Thrift banks, composed of:
C.
i.
ii.
iii.
Savings and mortgage banks;
Stock savings and loan associations; and
Private development banks, as defined in the R.A.
No. 7906 (hereafter the “Thrift Banks Act').
d.
Rural banks, as defined in R.A. No. 7653 (hereafter the
“Rural Banks Act’)-,
e.
Cooperative banks, as defined in R.A. No. 6938 (hereafter
the “Cooperative Code’)-,
f.
Islamic banks as defined in R.A. No. 6848, otherwise
known as the "Charter of Al Amanah Islamic Investment
Bank of the Philippines”; and
g-
Other classifications of banks as determined by the
Monetary Board of the Bangko Sentral ng Pilipinas.185
106. Describe each type of bank.186
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A.
A universal bank is a commercial bank which has the
power of an investment house and the power to invest
in the equity of allied and non-allied enterprises.187 It is
otherwise known as an expanded commercial bank.
B.
A commercial bank is a bank that can:
a.
Accept drafts;
b.
Issue letters of credit;
c.
Discount and negotiate promissory notes, bills of
exchange, and other evidence of debt;
d.
Accept or create demand deposits;
e.
Receive other types of deposits, as well as deposit
substitutes;
f.
Buy and sell foreign exchange, as well as gold or
silver bullion;
g-
Acquire marketable bonds and other debts securities;
and
‘“Section 3.1, GBL.
‘“BAR 2010.
187Section 23, GBL.
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h.
Extend credit, subject to such rules promulgated by
the Monetary Board."*
Note that an entity authorized by the Bangko Sentral to
perforin universal or commercial banking functions shall likewise
have the authority to engage in quasi-banking functions.189
C.
A thrift bank is one established as a savings and
mortgage bank, a stock savings and loan association, or a
private development bank, for the purpose of:
a.
Accumulating the savings of depositors and investing
them together with capital loans secured by bonds,
mortgages in real estate and insured improvements
thereon, chattel mortgage, bonds and other forms
of security, or in loans for personal or household
finance, whether secured or unsecured, or in
financing for homebuilding and home development,
in readily marketable and debt securities, in
commercial papers and account receivables, drafts,
bill of exchange, acceptance or notes, arising out of
commercial transactions or in outlets determined by
the Monetary Board as necessary in the furtherance
of national economic objectives;
b.
Providing short-term working capital, medium
and long-term financing, to business engaged in
agriculture, services, industry and housing; and
c.
Providing diversified financial and allied services for
its chosen market and constituencies especially for
small and medium enterprises and individuals.100
D.
A rural bank is one established to provide credit facilities
to farmers and merchants or their cooperatives and, in
general, to the people of the rural communities.191
E.
A cooperative bank is a bank organized under the
Cooperative Code to provide financial and credit services
to cooperatives.
'““Section 29, GBL.
'““Section 6, GBL.
'“Section 3, R.A. No.7906.
'“‘Section 2, R.A. No.7353.
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133
VI. BANKING
107. Distinguish universal bank from commercial bank.
The distinctions are as follows:
The minimum capital requirement for a universal bank is
as follows:
P 3 billion
Head Office only
P 6 billion
Up to 10 branches
1.
11 to 100 branches
More than 100 branches
P 15 billion
P 20 billion
The minimum capital requirement for a commercial bank
is as follows:
P 2 billion
Head Office only
Up to 10 branches
P 4 billion
11 to 100 branches
More than 100 branches
P 10 billion
P 15 billion
2.
A universal bank may perform the functions of an
investment house, a commercial bank may not.
3.
A universal bank may invest in the equity of allied and
non-allied enterprises whereas a commercial bank may
only invest in the equity of allied enterprises.
b.
Distinction of banks from quasi-banks and trust
entities
108. Distinguish banks from quasi-banks and trust entities.
Quasi-banks shall refer to entities engaged in the borrowing
of funds through the issuance, endorsement or assignment with
recourse or acceptance of deposit substitutes as defined in Section 95
ofR.A. No. 7653 (hereafter the “New Central Bank Act”) for purposes
of re-lending or purchasing of receivables and other obligations.’92
Persons or entities found to be performing banking or quasi­
banking functions without authority from the Bangko Sentral shall
be subject to appropriate sanctions under the New Central Bank Act
and other applicable laws.193
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’“Section 4.6, GBL.
’“Section 6, GBL.
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A trust company is a legal entity that acts as fiduciary, agent or
trustee on behalf of a person or business for a trust. A trust company
is typically tasked with the administration, management and the
eventual transfer of assets to beneficiaries.
Note, however, that a bank may obtain a trust license and once
it is issued, the bank may act as trustee with power to administer
and manage assets for the trustor. The trust department of the
bank, while it is organizationally and operationally distinct from
the regular bank, has no separate legal personality from the bank.
c.
Bank powers and liabilities
i.
Corporate Powers
109. What are the powers of a bank?
In addition to the general powers incident to
corporations, a commercial bank has the following powers:
1.
2.
All such powers as may be necessary to carry on the
business of commercial banking such as:
a.
Accepting drafts and issuing letters of credit;
b.
Discounting and negotiating promissory notes,
drafts, bills of exchange, and other evidences of debt;
C.
Accepting or creating demand deposits;
d.
Receiving other types of deposits and deposit
substitutes;
e.
Buying and selling foreign exchange and gold or
silver bullion;
f.
Acquiring marketable bonds and other debt
securities; and extending credit, subject to such
rules as the Monetary Board may promulgate.184
It may invest in equities subject to the rules that the
Monetary Board may prescribe. To invest in equities
means to be a stockholder in a corporation. A commercial
bank, however, can only invest in the equity of allied
■’’Section 29, GBL.
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enterprises. It means that that it may own shares of stock
in a corporation only if the latter is engaged in a business
related to banking. Whether an enterprise is allied or not
to banking is determined by BSP.
3.
It has the power to purchase or acquire shares of its own
capital stock or accept its own shares as a security for a
loan but only when authorized by the Monetary Board.
Provided, that in every case the stock so purchased or
acquired shall, within six (6) months from the time of its
purchase or acquisition, be sold or disposed of at a public
or private sale.195
In Filipinos Mills v. Dayrit, the Supreme Court held
that a bank, as judgment creditor, may garnish shares
in satisfaction of a judgment debt.196 While this case was
decided based on the old General Banking Act which
allowed a bank to acquire its shares of stock in the course
of its operations, there is no rhyme or reason why a bank,
as a judgment creditor, should be precluded from effecting
a garnishment on the shares of stock of its stockholder to
satisfy a judgment debt. The shares, once acquired by the
bank, become treasury shares.
4.
A bank may acquire, hold or convey real property under
the following circumstances:
a.
When it is necessary for its own use or in the conduct
of its business;197
b.
Such as shall be mortgaged to it in good faith by way
of security for debts;
c.
Such as shall be conveyed to it in satisfaction of debts
previously contracted in the course of its dealings; or
d.
Such as it shall purchase at sales under judgments,
decrees, mortgages, or trust deeds held by it and
such as it shall purchase to secure debts due it.198
'“Section 10, GBL.
196G.R. No. 56620, December 10,1990.
197Section 51, GBL.
'“Section 52, GBL.
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110. What are the limitations on the power of a bank to invest in
equity?
a.
A universal bank can invest in the equity of allied and
non-allied enterprises whereas a commercial bank can
only invest in the equity of allied enterprises. Thus, a
commercial bank cannot acquire shares in a cement
manufacturing company while a universal bank can.199
b.
The equity investment of a universal bank, or of its wholly
or majority-owned subsidiaries, in a single non-allied
enterprise shall not exceed 35% of the total equity in that
enterprise nor shall it exceed 35% of the voting stock in
that enterprise.2™
c.
The total investment in equities of allied and non-allied
enterprises shall not exceed 50% of the net worth of the
bank.201
d.
The equity investment in any one enterprise, whether
allied or non-allied, shall not exceed 25% of the net worth
of the bank.
“Net worth” shall mean the total of the unimpaired paidin capital including paid-in surplus, retained earnings
and undivided profit, net of valuation reserves and other
adjustments as may be required by the Bangko Sentral.
e.
111.
The acquisition of such equity or equities is subject to the
prior approval of the Monetary Board.
What are the limitations on the power of a bank to acquire real
property?
a.
A domestic bank can only acquire real property in any of
the cases specified in Sections 51 and 52 of the General
Banking Law. Thus, it was held that a real property
cannot be conveyed to the bank in settlement of a civil
liability arising from a criminal offense. Civil liability
is not a debt. The debt which can be satisfied by dation
in payment is that which is incurred or contracted in
‘"BAR 2015.
““Section 27, GBL.
“'Section 24.1, GBL.
VI. BANKING
137
the course of the bank’s dealings, like loan and similar
transactions.202
b.
Any real property acquired or held under the circumstances
enumerated in Section 52 shall be disposed of by the bank
within a period of five (5) years or as may be prescribed
by the Monetary Board: Provided, however, that the bank
may, after said period, continue to hold the property for
its own use.203
C.
While a bank may acquire real estate as shall be necessary
for its own use in the conduct of its business, the total
investment in such real estate and improvements thereof
including bank equipment, shall not exceed 50% of the
bank’s combined capital accounts: Provided, further, that
the equity investment of a bank in another corporation
engaged primarily in real estate shall be considered as
part of the bank’s total investment in real estate, unless
otherwise provided by the Monetary Board.
d.
A foreign bank cannot own real property even though it is
allowed to operate under the Foreign Bank Liberalization
law. Such foreign bank, however, is allowed to bid and
take part in foreclosure sales of real property mortgaged
to it, as well as to avail itself of enforcement and other
proceedings, and accordingly take possession of the
mortgaged property, for a period not exceeding five (5)
years from actual possession. Provided, that in no event
shall title to the property be transferred to such foreign
bank. In case said bank is the winning bidder, it shall,
during the said five-year period, transfer its rights to
a qualified Philippine national, without prejudice to a
borrower’s rights under applicable laws. Should the bank
fail to transfer such property within the five-year period,
it shall be penalized one-half (1/2) of one percent (1%) per
annum at the price for which the property was foreclosed
until it is able to transfer the property to a qualified
Philippine national.204
“Register of Deeds of Manila
(1962).
“Section 52, GBL.
“Section 9, R.A. No. 10641.
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China Banking Corporation, 4 SCRA 1145
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ii.
Blinking and incidental powers
112. What are the services that banks may render?
In addition to the operations specifically authorized by the
General Banking Act, a bank may perform the following services:
a.
Receive in custody funds, documents and valuable
objects:2"5
Thus, it is not correct to say that funds received by the bank
are always treated as deposits and governed by creditor-debtor
relationship. Funds may be received by the bank for safekeeping.
Unlike deposits, funds held for safekeeping cannot be used or
mingled with other funds of the bank, without the consent of the
depositor.
b.
Act as financial agent and buy and sell, by order of and
for the account of their customers, shares, evidences of
indebtedness and all types of securities;206
Thus, the bank does not need a separate stock broker license to
be able to buy shares of stock on behalf of a client.
c.
Make collections and payments for the account of others
and perform such other services for their customers as
are not incompatible with banking business;“7
Thus, a bank may accept payment for utility bills.
d.
Upon prior approval of the Monetary Board, act as
managing agent, adviser, consultant or administrator of
investment management/advisory/consultancy accounts;208
and
Rent out safety deposit boxes.209
113. Is the above enumeration as to the services that the bank may
render exclusive?
No, the bank may render other services for its customers as
long as they are not incompatible with banking business. A bank,
“‘Section 53.1, R.A. No. 8791.
“‘Section 53.2, ibid.
“’Section 53.3, ibid.
““Section 53.4, ibid.
“’Section 53.5, ibid.
VI. BANKING
139
for instance, cannot sell sweepstakes or lotto tickets for the PCSO,
because it is not compatible with banking business.
114. How do you characterize the legal relationship between a
commercial bank and its safety deposit box client?210
A contract for the use of safety deposit box is a special kind of
deposit. The relationship between a commercial bank and its safety
deposit box client is that of a bailee and bailor, the bailment being
for hire and mutual benefit. As such, the bank has the obligation to
exercise the diligence of a good father of a family as such depositary.
The bank was held liable for the loss of the certificates of title in
the safety deposit box since the deposit box is located in the bank
premises and is under the absolute control of the bank.211
Note that in Sia v. Court of Appeals, the ruling of the Supreme
Court that a contract for the use of a safety deposit box is a special
kind of deposit was based on the provision of the old General
Banking Act.212 The old law stated that in renting out safety deposit
box, the bank shall act as depositary. Such description of function
was not incorporated in R.A. No. 8791. It is submitted that there
is now basis to hold that a contract for the use of a safety deposit
box should be governed by the law on lease. This means that the
obligation of the bank is to allow the renter possession of the safety
deposit box. It should not be burdened with the duty to safe keep
the items in the box because it is not supposed to know the contents
thereof in the first place.
115. Is a stipulation in the contract for the use of a safety deposit
box relieving the bank of liability in connection with the use
thereof valid?213
The stipulation relieving the bank of liability in connection
with the use of the safety deposit box is void as it is against law and
public policy.
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d.
Diligence required of banks in view of the fiduciary
nature of banking
210BAR 2010.
211Sia v. Court of Appeals, G.R. No. 102970, May 13,1993.
“Section 72, R.A. No. 337.
™Ibid.
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116. What is the kind of diligence required of banks?
The diligence required of banks is more than that of a good
father of a family where the fiduciary nature of their relationship
with their depositors is concerned. The highest degree of diligence
is based on the General Banking Law which requires of banks
the highest standards of integrity and performance. A banking
institution owes it to its clients to observe the high standards of
integrity and performance in all its transactions because its
business is imbued with public interest. The high standards are also
necessary to ensure public confidence in the banking system, for the
stability of banks largely depends on the confidence of the people in
the honesty and efficiency of banks.2H
It was held that the bank failed in its duty to exercise the
highest degree of diligence by prematurely foreclosing the mortgages
md unwarrantedly causing the foreclosure sale of the mortgaged
properties despite the mortgagor not being yet in default.216
But the same degree of diligence is not expected to be exerted by
banks in commercial transactions that do not involve their fiduciary
relationship with depositors, such as sale and issuance of demand
draft216 or in acting as advising bank in a letter of credit.
e.
Nature of bank funds and bank deposits
117. Describe the nature of bank funds and bank deposits.
Bank deposits are governed by the law on loans. A creditor and
debtor relationship is created between the Bank and its depositors.
The fiduciary nature of a bank-depositor relationship does not
convert the contract between the bank and its depositors from a
loan to trust agreement. Failure by the bank to pay the depositor is
failure to pay a simple loan and not a breach of trust.217
21<Philippine National Bank V. Spouses Eduardo and Ma. Rosario Tajonera,
G.R. No. 195889, September 24,2014; Comsavings Bank v. Sps. Capistrano, G.R. No.
170942, August 28, 2013.
’“Development Bank of the Philippines v. Guarina Agricultural and Realty
Development Corporation, G.R. No. 160758, January 15, 2014.
216Gregorio Reyes v. Court of Appeals, G.R. No. 118492, August 15, 2001.
217Consolidated Bank and Trust Corporation v. Court of Appeals, G.R. No.
138569.
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VI. BANKING
141
118. Differentiate "bank deposits" from "deposit substitutes."218
Bank deposits are funds obtained by a bank from the public
which are relent by such bank to its own borrowers. They are
governed by the law on loans. They give rise to creditor-debtor
relationship between the bank as debtor, and the depositors as
creditors.
Deposit substitutes are alternative forms of obtaining
funds from the public, other than deposits, through the issuance,
endorsement, or acceptance of debt instruments for the own account
of the borrower, for the purpose of relending or purchasing of
receivables and other obligations. These instruments may include,
but need not be limited to, bankers’ acceptances, promissory notes,
participations, certificates of assignment and similar instruments
with recourse, and repurchase agreements.219
f.
Grant of loans and security requirements
i.
Ratio of net worth to total risk assets
119. What is capital adequacy ratio?
Capital adequacy ratio, also known as the capital to riskweighted assets ratio, measures a bank’s financial strength by using
its capital and assets. It is used to protect depositors and promote
the stability and efficiency of the bank.
The Monetary Board shall prescribe the minimum ratio which
the net worth of a bank must bear to its total risk assets which may
include contingent accounts. Ten percent (10%) is the minimum
total adequacy ratio banks must comply with. It means that the risk
assets must not exceed 10 times the capital of the bank. Risk assets
are the loans and investments of the bank.
In case a bank does not comply with the prescribed minimum
ratio, the Monetary Board may limit or prohibit the distribution of
net profits by such bank and may require that part or all of the
net profits be used to increase the capital accounts of the bank;
restrict or prohibit the acquisition of major assets and the making
of new investments by the bank, with the exception of purchases of
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218BAR 2010.
219Section 95, R.A. No. 7653.
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readily marketable evidence of indebtedness of the Republic of the
Philippines and of the Bangko Sentral and any other evidence of
indebtedness or obligations the servicing and repayment of which
are fully guaranteed by the Republic of the Philippines, until the
minimum required capital ratio has been restored.
In case of a bank merger or consolidation, or when a bank
is under rehabilitation under a program approved by the Bangko
Sentral. the Monetary Board may temporarily relieve the surviving
bank, consolidated bank, or constituent bank or corporations under
rehabilitation from full compliance with the required capital ratio
under such conditions as it may prescribe.
120. What are the limitations on the power of the bank to grant
loans?
The limitations on the power of the bank to grant loans are as
follows:
a.
Except as the Monetary Board may otherwise prescribe
for reasons of national interest, the total amount of loans,
credit accommodations and guarantees as may be defined
by the Monetary Board that may be extended by a bank to
any person, partnership, association, corporation or other
entity shall at no time exceed 25% of the net worth of
such bank.220 This rule is known as the single borrower’s
limit.221
b.
Loans granted to directors, officers, stockholders and their
related interests must conform to certain procedural and
substantive requirements, otherwise, criminal sanctions
may be imposed. These requirements are known as
DOSRI rules and regulations.222
c.
Except as the Monetary Board may otherwise prescribe,
loans and other credit accommodations against real
estate shall not exceed 75% of the appraised value of the
respective real estate security, plus 60% of the appraised
value of the insured improvements, and such loans may be
^Section 35, GBL. While the law sets the SBL to 20% of the bank’s net worth,
the Monetary Board has increased the threshold limit to 25%.
“‘BAR 2015.
“Section 36, GBL.
VI. BANKING
143
made to the owner of the real estate or to his assignees223
whereas, loans and other credit accommodations on
security of chattels and intangible properties such as,
but not limited to, patents, trademarks, trade names,
and copyrights shall not exceed 75% of the appraised
value of the security, and such loans and other credit
accommodation may be made to the title-holder of the
chattels and intangible properties or his assignees.224
d.
A bank shall grant loans and other credit accommodations
only in amounts and for the periods of time essential for
the effective completion of the operations to be financed.
Such grant of loans and other credit accommodations shall
be consistent with safe and sound banking practices.225
e.
The amortization schedule of bank loans and other credit
accommodations shall be adapted to the nature of the
operations to be financed.
In case of loans and other credit accommodations with
maturities of more than five (5) years, provisions must be made for
periodic amortization payments, but such payments must be made
at least annually: Provided, however, that when the borrowed funds
are to be used for purposes which do not initially produce revenues
adequate for regular amortization payments therefrom, the bank
may permit the initial amortization payment to be deferred until
such time as said revenues are sufficient for such purpose, but in no
case shall the initial amortization date be later than five (5) years
from the date on which the loan or other credit accommodation is
granted.226
ii.
Single borrower’s limit
121. When may the single borrower's limit be increased?
The total amount of loans, credit accommodations and
guarantees prescribed in the preceding paragraph may be increased
by an additional 10% of the net worth of such bank provided the
additional liabilities of any borrower are adequately secured by
trust receipts, shipping documents, warehouse receipts or other
J9JC9B0M
“‘Section 37,
“‘Section 38,
“‘Section 39,
“‘Section 44,
GBL.
GBL.
GBL.
GBL.
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similar documents transferring or securing title covering readily
marketable, non-perishable goods which must be fully covered by
insurance.01
122. What liabilities, other than loans, credit accommodations and
guarantees, are included in the above prescribed ceiling?
a.
The direct liability of the maker or acceptor of paper
discounted with or sold to such bank and the liability of a
general endorser, drawer or guarantor who obtains a loan
or other credit accommodation from or discounts paper
with or sells papers to such bank;
b.
In the case of an individual who owns or controls a majority
interest in a corporation, partnership, association or any
other entity, the liabilities of said entities to such bank;
c.
In the case of a corporation, all liabilities to such bank
of all subsidiaries in which such corporation owns or
controls a majority interest; and
d.
In the case of a partnership, association or other entity,
the liabilities of the members thereof to such bank.228
123. What loans, other credit accommodations and guarantees are
excluded in the computation of single borrower's limit?
The following loans, credit accommodations and guarantees
are excluded in the computation of single borrower’s limit:
a.
b.
Those secured by obligations of the Bangko Sentral or of
the Philippine Government;
Those fully guaranteed by the government as to the
payment of principal and interest;
c.
Those covered by assignment of deposits maintained in
the lending bank and held in the Philippines;
d.
Loans, credit accommodations and acceptances under
letters of credit to the extent covered by margin deposits;
and
^Section 35,2, GBL.
-'“Section 35.3, GBL.
VI. BANKING
145
e.
Those which the Monetary Board may from time to time,
specify as non-risk items.22”
iii.
Restrictions on bank exposure to directors, officers,
stockholders and their related interest
124. What are the restrictions on a bank's exposure to directors,
officers, stockholders and their related interests?
No director or officer of any bank shall, directly or indirectly,
for himself or as the representative or agent of others, borrow from
such bank nor shall he become a guarantor, endorser or surety for
loans from such bank to others, or in any manner be an obligor or
incur any contractual liability to the bank except with the written
approval of the majority of all the directors of the bank, excluding
the director concerned: Provided, that such written approval
shall not be required for loans, other credit accommodations and
advances granted to officers under a fringe benefit plan approved by
the Bangko Sentral. The required approval shall be entered upon
the records of the bank and a copy of such entry shall be transmitted
forthwith to the appropriate supervising and examining department
of the Bangko Sentral.230
The outstanding loans, credit accommodations and guarantees
which a bank may extend to each of its stockholders, directors, or
officers and their related interests, shall be limited to an amount
equivalent to their respective unencumbered deposits and book value
of their paid-in capital contribution in the bank: Provided, however,
that loans, credit accommodations and guarantees secured by assets
considered as non-risk by the Monetary Board shall be excluded from
such limit: Provided, further, that loans, credit accommodations
and advances to officers in the form of fringe benefits granted in
accordance with rules as may be prescribed by the Monetary Board
shall not be subject to the individual limit.
The Monetary Board shall define the term “related interests.”
The limit on loans, credit accommodations and guarantees
prescribed herein shall not apply to loans, credit accommodations
and guarantees extended by a cooperative bank to its cooperative
shareholders.231
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“’Section 35.4, GBL.
“Section 36, GBL.
mIbid.
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The rule on DOSRI transaction covers loan obtained or
guaranteed by the director, officer, stockholder or their related
interest and not to loans both obtained and guaranteed by them.
The rule in fact covers any transaction where the DOSRI may incur
contractual obligations with their bank. Thus, it is not limited to loan
transactions. It may include the purchase by the DOSRI of a bank
property. In this case, though, only the approval and reportorial
requirements should be observed.
In other words, DOSRI transactions are subject to the following
rules/restrictions:
1.
The transactions must be approved by at least majority
of the entire board excluding the director concerned
(“approval requirement”);
2.
The required approval shall be entered upon the records
of the bank and copy of such entry shall be submitted to
the BSP (“reportorial requirement”); and
3.
Unless the loan is non-risk, the loan must not exceed the
book value of the paid- up shares of the borrowing DOSRI
and the amount of unencumbered deposits (“ceiling
requirement”).232
However, if there is no loan component to the transaction, as
when a director, officer or stockholder buys a property of the bank,
only the first two restrictions shall apply.
125. All senior officers of ABC Bank are entitled to obtain a housing
loan. X is an Executive Vice President for Operations of ABC
Bank. She obtained a housing loan with the ABC Bank. Which
statement is most accurate?233
a.
The housing loan of X requires a guarantor from somebody
who is not connected with the bank.
b.
The housing loan of X requires the approval of the Board
of Directors of the bank.
c.
The housing loan of X, being a benefit for employees, does
not require (a) but will require (b).
““Section 36, R.A. No. 8791.
““BAR 2012.
VI. BANKING
d.
147
The housing loan ofX, being a benefit for employees,
will not require (a) and (b).
126. How many criminal offenses are committed by the failure to
observe the approval, reporting and ceiling requirements?
DOSRI transactions are subject to approval, reportorial and
ceiling requirements. Approval requirement means that the DOSRI
transaction must be approved by at least majority of the directors
excluding the director concerned. Reportorial requirement means
that the transaction must be recorded in the books of the bank and
reported to BSP. Ceiling requirement means that the amount of the
loan shall not exceed the book value of the paid-in contribution and
the amount of unencumbered deposits. Three different offenses are
committed by those who fail to observe the board approval, reporting
and ceiling requirements.234
127. A criminal information alleged that spouses Enrico and Amalia
appeared to have an outstanding loan of P8 million with the
RBSM Bank, but had never applied for nor received such
loan; that it was HS, who was then president of RBSM, who
had ordered, facilitated, and received the proceeds of the
loan; and that the P8 million loan had never been authorized
by RBSM's Board of Directors and no report thereof had ever
been submitted to the Department of Rural Banks, Supervision
and Examination Sector of the BSP.
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HS moved to quash the information contending that
the commission of estafa is inherently incompatible with the
violation of DOSRI law, hence a person cannot be charged for
both offenses. He argued that a violation of DOSRI law requires
the offender to obtain a loan from his bank, without complying
with procedural, reportorial, or ceiling requirements. On the
other hand, estafa requires the offender to misappropriate or
convert something that he holds in trust, or on commission, or
for administration, or under any other obligation involving the
duty to return the same.
He theorized that the characterization of possession
is different in the two offenses. If HS acquired the loan as
“Go v. BSP, October 23, 2009.
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DOSRI, he owned the loaned money and therefore, cannot
misappropriate or convert it as contemplated in the offense
of estafa. Conversely, if he committed estafa, then he merely
held the money in trust for someone else and therefore, did not
acquire a loan in violation of DOSRI rules.
Discuss whether the loan transaction within the ambit of
the DOSRI law could also be the subject of estafa under Article
315(1)(b) of the Revised Penal Code.
The information filed against HS for estafa and violation of
DOSRI law do not negate each other.
The bank money which came to the possession of HS was
money held in trust or administration by him for the bank, in his
fiduciary capacity as the President of said bank. It is not accurate
to say that he became the owner of the P8 million because it was
‘he proceeds of a loan. That would have been correct if the bank
nowingly extended the loan to him. But that is not the case here,
hrough fraudulent device, he made it appear that other persons
cere the borrowers but he obtained the loan proceeds and converted
the same. Under these circumstances, it cannot be said that he
became the legal owner of the P8 million. Thus, he remained the
bank s fiduciary with respect to that money, which makes it capable
of misappropriation or conversion in his hands.
The prohibition under the DOSRI law is broad enough to
cover various modes of borrowing. It covers loans by a bank director
or officer flike herein HS) which are made either: (1) directly, (2)
indirectly, (3) for himself, (4) or as the representative or agent of
others. It applies even if the director or officer is a mere guarantor,
indorser or surety for someone else’s loan or is in any manner an
obligor for money borrowed from the bank or loaned by it. Directors,
officers, stockholders, and their related interests cannot be allowed
to interpose the fraudulent nature of the loan as a defense to escape
culpability for their circumvention of the law.234
128. What are the legal effects of non-compliance with the DOSRI
rules and regulations?
After due notice to the board of directors of the bank, the office
of any bank director or officer who violates the DOSRI rules and
235Soriano v. People of the Philippines, et al., G.R. No. 162336, February 1,
2010.
VI. BANKING
149
regulations may be declared vacant and the director or officer shall
be subject to the penal provisions of the New Central Bank Act.238
129. What is the nature of the loan that does not comply with the
rules on DOSRI and/or Single Borrower’s limit?
Loans, assuming that they were of a DOSRI nature or without
the benefit of the required approvals or in excess of the Single
Borrower’s Limit, would not be void for those reasons. Instead,
the banks or the officers responsible for the approval and grant of
DOSRI loan would be subject only to the sanctions under the law.237
In other words, the loan transaction is valid but without
prejudice to criminal prosecution against the erring DOSRI.
iv.
Foreclosure of mortgage by banks
130. What are the three different kinds of sale relating to the
property of the debtor/mortgagor?
There are three different kinds of sale under the law, namely:
an ordinary execution sale, a judicial foreclosure sale, and an
extrajudicial foreclosure sale. An ordinary execution sale is governed
by the pertinent provisions of Rule 39 of the Rules of Court. Rule
68 of the Rules of Court applies in case of judicial foreclosure. On
the other hand, Act No. 3135, as amended by Act No. 4118, known
as “An Act to Regulate the Sale of Property under Special Powers
Inserted in or Annexed to Real Estate Mortgages” applies in case of
extrajudicial foreclosure sale. A different set of law applies to each
class of sale mentioned.238
131. What is the right of redemption in relation to mortgage?
The right of redemption in relation to mortgage is the
prerogative of the mortgagor to reacquire the mortgaged property
after foreclosure sale conditioned on the payment of the redemption
price within the period set by law. This right exists only in case
of extra-judicial foreclosure of real estate mortgage under Act No.
3135, as amended.239
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“Ibid.
“’Republic v. Sandiganbayan, G.R. No. 166859, April 12, 2011.
“Quano v. Court of Appeals, 398 SCRA 405.
“Huerta Alba Resort v. Court of Appeals, 339 SCRA 534.
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There is no right of redemption in judicial foreclosure of real
estate mortgage. The only right available is equity of redemption,
which means the right of the mortgagor not to be divested of the
ownership of the real property by paying the mortgage debt, as fixed
by the court, within a period of not less than 90 nor more than 120
days from entry of judgment. It is only when there is default of such
payment that the property shall be sold at auction to satisfy the
judgment. Thereafter, there will be a judicial confirmation of the
sale. After confirmation of the sale, the purchaser shall be entitled
to possession of the property.210 Even after the lapse of the 90- to 120day period, the mortgagor can still exercise his equity of redemption
so long as there is no confirmation of the sale yet.
If the mortgagee, however, is a bank, the mortgagor, on top of
equit}' of redemption, has one (1) year to redeem the property within
one (1) year from registration of the order confirming the sale of the
real property.211 This is based on Section 3 of Rule 68 which provides
for a period of redemption when allowed by law. Section 47 of the
GBL, in turn, provides that in the event of foreclosure, whether
judicially or extrajudicially, of any mortgage on real estate which is
security for any loan or credit accommodation, the mortgagor has on
year to redeem the property.
132. How much is the redemption price if the mortgagee is a bank?
In the event of foreclosure of mortgage on real estate, the
mortgagor shall have the right to redeem the property by paying
the amount due under the mortgage deed, with interest thereon at
the rate specified in the mortgage, and all the costs and expenses
incurred by the bank from the sale and custody of said property less
any income derived therefrom.212
Accommodation mortgagors, however, may be allowed to
redeem their mortgaged property by paying only the winning bid
price thereof (plus interest thereon) at the public auction sale.213
210Section 2, Rule 68.
’“Section 3, Rule 68 in relation to Section 47, GBL.
’“Section 47, GBL.
2,3Belo v. Philippine National Bank, 353 SCRA 359.
a
VI. BANKING
151
133. State the rules on the period to exercise the right of redemption
of natural and juridical persons after the bank's foreclosure of
real estate mortgage on their properties.
The rules are as follows:
a.
Generally, the period of redemption is one (1) year from
registration of the certificate of foreclosure sale.
b.
However, the period to redeem real property is reduced
to three (3) months after foreclosure or the registration
of the certificate of foreclosure sale, whichever comes
earlier, if the following elements are present:
i.
The mortgagor is a juridical person;
ii.
The mode of foreclosure is extra-judicial, under Act
No. 3135, as amended; and,
iii.
The mortgagee is a bank.244
The redemption period may thus be terminated even the day
following the foreclosure sale if the sale is registered. Nevertheless,
if the sale is not registered, the period to redeem shall expire three
(3) months after foreclosure, ipso facto.
c.
The period to redeem real property after extra-judicial
foreclosure is one (1) year from date of the sale in the
following cases:
i.
The mortgagor is a natural person; and/or
ii.
The mortgagee is not a bank; and/or
iii.
The mode of foreclosure is judicial; provided that the
mortgagee is a bank.
The date of the sale has been construed to mean, however, the
date of registration of the sale.246 Therefore, unless the foreclosure
sale is registered in any of the foregoing cases, the period to redeem
shall not start to run.
d.
As previously stated, in judicial foreclosure of real estate
mortgage when the mortgagee is a bank, the applicable
244Section 47, GBL.
245Development Bank of the Phil. v. Gagarin, 565 SCRA 545; Heirs of Estelita
Burgos-Lipat v. Heirs of Eugenio Trinidad, et al., G.R. No. 185644, March 2, 2010.
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redemption period is one (1) year. This should be reckoned
not from the sale but from the issuance of the order
confirming the sale, given the requirement under Rule 68
for the confirmation of the sale.
134. ABC Corporation obtained a loan from XYZ Bank. The loan
is secured by real estate mortgage on the property of ABC
Corporation. The appraised value of the property is not
sufficient to secure the loan of ABC. Thus, its President, acting
as accommodation mortgagor, also mortgaged his house and
lot to fully secure the loan obligation of ABC. Unfortunately,
ABC Corporation experienced financial difficulties and failed to
settle the loan. XYZ Bank eventually foreclosed the mortgages
on the real estate of ABC and its President, in accordance
with Act No. 3135, as amended. Four (4) months after the
foreclosure sale, both ABC and its President want to redeem
their respective properties. Do ABC and its President have the
right of redemption?
ABC Corporation has lost its right to redeem the property
because its period of redemption has expired. Under Section 47
of the GBL, the period to redeem has been reduced to three (3)
months from date of foreclosure sale or registration of the certificate
of foreclosure sale, if the following elements are present: a) the
mortgagor is a juridical person; b) the mortgagee is a bank; and c)
the mode of foreclosure is extra-judicial. All elements are present in
this case.
However, the President of ABC Corporation may still redeem
the property. The GBL retained the one-year period to redeem the
property if the mortgagor is a natural person.
135. Grandwood Furniture & Woodwork (Grandwood) obtained a
loan from Metropolitan Bank and Trust Company (Metrobank).
The loan was secured by a real estate mortgage.
Metrobank later sold its rights and interests over the loan
and mortgage contract to Asia Recovery Corporation (ARC).
The loan was subsequently assigned to Cameron Granville
3 Asset Management (CGAM3). CGAM3 extrajudicially
foreclosed the real estate mortgage with White Marketing
Development (White Marketing) as the highest bidder. White
Marketing was informed that Grandwood wanted to redeem
the property.
VI. BANKING
153
What is the applicable redemption period?
The applicable redemption period is the reduced redemption
period under Section 47 of the GBL.
White Marketing stepped into the shoes of Metrobank by
virtue of the assignment of credit. A contracting party’s assignees,
although seemingly a third party to the transaction, remain bound
by the original party’s transaction under the relativity principle
because of the concept of subrogation, which inheres in assignment.
In an assignment of credit, the assignee acquires the power to
enforce it to the same extent as the assignor could have enforced
it against the debtor. Through the assignment of credit, the new
creditor is entitled to the rights and remedies available to the
previous creditor and includes accessory rights such as mortgage
and pledge. Consequently, ARC acquired all the rights, benefits
and obligations of Metrobank under its mortgage contract with
Grandwood. The same could be said for subsequent assignees or
successors-in-interest after ARC like White Marketing. And due
to the subrogation of White Marketing to the rights of Metrobank,
White Marketing is entitled to the shorter redemption period under
Section 47 of the General Banking Law.
136. Is Section 47 of the GBL (which provided for different
redemption periods for natural and juridical persons) not
violative of the equal protection clause under the Philippine
Constitution?
Section 47 of the GBL does not infringe on the equal protection
clause nor discriminate mortgagors/property owners who are
juridical persons. One class may be treated differently from another
where the groupings are based on reasonable and real distinctions.
The difference in the treatment of juridical persons and natural
persons was based on the nature of the properties foreclosed, whether
these are used as residence, for which the more liberal one-year
redemption period is retained, or used for industrial or commercial
purposes, in which case a shorter term is deemed necessary to
reduce the period of uncertainty in the ownership of property and
enable mortgagee-banks to dispose sooner of these acquired assets.
In this context, the amendment introduced by Section 47 embodied
one of such safe and sound practices aimed at ensuring the solvency
and liquidity of our banks. It cannot therefore be disputed that the
said provision amending the redemption period in Act No. 3135 was
based on a reasonable classification and germane to the purpose of
the law. This legitimate public interest pursued by the legislature
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further enfeebles petitioner's impairment of contract theory. The
right of redemption being statutory, it must be exercised in the
manner prescribed by the statute, and within the prescribed time
limit, to make it effective. Furthermore, as with other individual
rights to contract and to property, it has to give way to police power
exercised for public welfare.-’*6
137. May a bank engage in insurance business?
A bank shall not directly engage in insurance business as the
insurer.247 The bank may, however, issue a standby letter of credit
to secure performance of an obligation under the primary contract
which gave rise to the letter of credit.248
A bank may also organize a subsidiary to engage in insurance
business and cross-sell to its clients the insurance products of its
subsidiary.
138. What are the prohibited transactions under the General
Banking Law?
The following are the prohibited transactions under the
General Banking Law:
a.
No director, officer, employee, or agent of any bank
shall:249
i.
Make false entries in any bank report or statement
or participate in any fraudulent transaction, thereby
affecting the financial interest of, or causing damage
to, the bank or any person;
Banks are entities engaged in the lending of funds obtained
through deposits from the public and it is for this reason that
their viability depends largely on their ability to return those
deposits on demand. In this case, when the borrower is proven
to have committed fraud by altering and falsifying its financial
statements in order to obtain its credit facilities, the bank
has the right to annul any credit accommodation or loan, and
demand the immediate payment thereof.250
24GGolden Way Merchandising v. Equitable PCI Bank, G.R. No. 195540, March
13,2013.
247Section 54, GBL.
™Supra.
249Section 55.1, GBL.
250Banco de Oro-EPCI, Inc.
JAPRL Development Corporation, G.R. No.
179901, April 14, 2008.
1
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VI. BANKING
ii.
155
Without order of a court of competent jurisdiction,
disclose to any unauthorized person any information
relative to the funds or properties in the custody of the
bank belonging to private individuals, corporations,
or any other entity: Provided, that with respect to
bank deposits, the provisions of existing laws shall
prevail;
Funds received by the bank for safekeeping are not
deposits and as such, are not covered by R.A. No. 1405,“' but
they cannot be disclosed under the foregoing rule. Similarly,
monies and properties inside the safety deposit box cannot be
disclosed without the consent of the depositor.
Without the ruling in Ejercito v. Sandiganbayan.,252 trust
funds, not being deposits, would have been confidential under
this provision. But because the Supreme Court considered
trust funds as deposits, it is submitted that the cases where
deposits may be disclosed under R.A. No. 1405 now apply to
trust funds. Trust funds, even though considered deposits in
the context of R.A. No. 1405 are not insured with PDIC.253 .
iii.
Accept gifts, fees, or commissions or any other form
of remuneration in connection with the approval of a
loan or other credit accommodation from said bank;
iv.
Overvalue or aid in overvaluing any security for the
purpose of influencing in any way the actions of the
bank or any bank; or
v.
Outsource inherent banking functions.
This means that security, messengerial and utility
services may be outsourced because they are not
inherent banking functions.
b.
On the other hand, no borrower of a bank shall:254
i.
Fraudulently overvalue property offered as security
for a loan or other credit accommodation from the
bank;
a'Supra.
a2Supra.
wInfra.
“‘Section 55.2, GBL.
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ii.
Furnish false or make misrepresentation or
suppression of material facts for the purpose of
obtaining, renewing, or increasing a loan or other
credit accommodation or extending the period
thereof;
iii.
Attempt to defraud the said bank in the event
of a court action to recover a loan or other credit
accommodation; or
iv.
Offer any director, officer, employee or agent of a
bank any gift, fee, commission, or any other form
of compensation in order to influence such persons
into approving a loan or other credit accommodation
application.
Consistent with the provisions of R.A. No. 1405, otherwise
known as the Bank Secrecy Law, no bank shall employ casual or
non-regular personnel or too lengthy probationary personnel in the
conduct of its business involving bank deposits.265
No bank should conduct business in an unsafe and unsound
manner. In determining whether a particular act or omission, which
is not otherwise prohibited by any law, rule or regulation affecting
banks, quasi-banks, or trust entities, may be deemed as conducting
business in an unsafe or unsound manner for purposes of Section 56
of the General Banking Law, the Monetary Board shall consider any
of the following circumstances:256
a.
The act or omission has resulted or may result in material
loss or damage, or abnormal risk or danger to the safety,
stability, liquidity or solvency of the institution;
b.
The act or omission has resulted or may result in material
loss or damage or abnormal risk to the institution’s
depositors, creditors, investors, stockholders or to the
Bangko Sentral or to the public in general;
c.
The act or omission has caused any undue injury, or has
given any unwarranted benefits, advantage or preference
to the bank or any party in the discharge by the director
or officer of his duties and responsibilities through
manifest partiality, evident bad faith or gross inexcusable
negligence; or
“‘Section 55.4, GBL.
256Section 56, GBL.
VI. BANKING
d.
ir>7
The act or omission involves entering into any contract
or transaction manifestly and grossly disadvantageous to
the bank, quasi-bank or trust entity, whether or not the
director or officer profited or will profit thereby.
Whenever a bank, quasi-bank or trust entity persists in
conducting its business in an unsafe or unsound manner, the
Monetary Board may, without prejudice to the administrative
sanctions provided in Section 37 of the New Central Bank Act, take
action under Section 30 of the same Act and/or immediately exclude
the erring bank from clearing, the provisions of law to the contrary
notwithstanding.
v.
Floating interest rate and escalation clause
139. State the rules on payment of interest for loans or forbearance
of money, goods or credit (collectively, loan).
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a.
Interest is the cost of borrowing money. Interest is
generally a matter of agreement and therefore the parties
are free to stipulate the terms thereof.
b.
The Usury Law capped the interest that can be imposed
upon a loan. On March 17, 1980, the Usury Law was
amended by Presidential Decree (P.D.) No. 1684, giving
the Central Bank the authority to prescribe different
maximum rates of interest which may be imposed for
loans or renewal thereof.
c.
In the exercise of the authority granted to it, the
Monetary Board issued CB Circular No. 905, Series of
1982, which removed the ceilings on interest rates on
loans or forbearance of any money, goods or credits by
declaring that such rates are no longer subject to any
ceiling prescribed under or pursuant to the Usury Law,
as amended.
Under the current rules, therefore, the debtor and creditor
may enter into a contract providing for any amount of
interest.267
Note that CB Circular No. 905 did not repeal nor in
anyway amend the Usury Law but simply suspended the
latter’s effectivity.
“’PNB v. Court of Appeals, 238 SCRA 20.
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d.
Although there is no longer any cap on interest rates
that the parties may stipulate on, excessive, iniquitous,
unconscionable and exorbitant interest rates are still
not allowed, for these are deemed contrary to morals, if
not against law. Unconscionable interest rates are those
which will either enslave their borrowers or lead to a
hemorrhaging of their assets.
Even if knowingly and voluntarily assumed, unconscio­
nable interest rates are void ab initio for being “contrary
to morals, and the law.”
e.
There is no hard and fast rule in determining whether
the rate of interest is unconscionable. Each case must be
decided based its own peculiar circumstances. The rule of
thumb is reasonability.
In William C. Louh, Jr. and Irene L. Louh v. Bank of the
Philippine Islands,251 it was held that the finance charges of 3.35%
interest per month and 6% penalty per month were excessive.
In Leticia Medel v. Court of Appeals,259 the Supreme Court,
while conceding that the Usury Law was legally inexistent with
the issuance of CB Circular 905, and that interest could be charged
as lender and borrower may agree upon, nevertheless found the
stipulated interest iniquitous, unconscionable, and contrary to
morals. Thus, the court annulled a stipulated 5.5% per month or
66% per annum interest on a P500,000.00 loan and a 6% per month
or 72% per annum interest on a P60,000.00 loan, for being excessive,
iniquitous, unconscionable and exorbitant.
In Ching v. Niedao,™ the Supreme Court categorically ruled
that estoppel cannot give validity to an act that is prohibited by law
or one that is against public policy. Hence, even if the payment of
interest has been reduced in writing, a 6% monthly interest rate
on a loan is unconscionable, regardless of who between the parties
proposed the rate.261
““G.R. No. 225562, March 8, 2017.
“9G.R. No. 131622, November 27,1998.
“°G.R. No. 141181, April, 27,2007.
“'See also De la Paz v. L& J Development Co., G.R. No. 183360, September
8, 2014.
VI. BANKING
159
However, in Philippine Global Communications v. Vigil
Investments,2112 the Supreme Court considered security deposit and
rental payments as in the nature of forbearance of money and upheld
astipulation that late payments for back rentals would bear interest
of 3% per month (compounded every quarter) and an additional 3%
per month as penalty or surcharge. For the security deposit, since
there was no stipulation on the interest, the Court imposed the
legal interest rate of 12% per annum from the time of judicial or
extrajudicial demand of the rental fees until June 30, 2013, and 6%
per annum from July 1, 2013 until fully paid.
f.
If the stipulation is void, the courts may reduce equitably
liquidated damages, whether intended as an indemnity
or a penalty if they are iniquitous or unconscionable.
This should mean the legal rate of 6% interest per
annum, the default interest set by BSP if the parties
agreed on payment of interest but silent as to rate. The
unconscionable interest is set aside. But, a contract of
loan, nevertheless assumes that the parties agreed on an
interest rate. Thus, the legal rate should apply.
140. State the rules regarding an award of interest in the concept of
actual and compensatory damages.
In Lara’s Gifts & Decors, Inc. v. Midtown Industrial Sales, Inc.
(G.R. No. 225433, August 28, 2019), the Supreme Court en banc
clarified that the stipulated interest is the law between the parties,
and should be applied until full payment of the obligation. This is
in accordance with Article 2209 of the Civil Code which mandates
that when a debtor incurs a delay in obligations to pay a sum of
money, the indemnity for damages shall be the payment of the
interest agreed upon. Unless the stipulated interest is excessive
and unconscionable, there is no legal basis for the reduction of the
stipulated interest at any time until full payment of the principal
amount. The stipulated interest remains in force until the obligation
is satisfied. In the absence of stipulated interest, the prevailing legal
interest prescribed by the Bangko Sentral ng Pilipinas shall apply.
Thus, when the judgment of the court awarding a sum of money
becomes final and executory, the stipulated interest, provided the
same is not excessive and unconscionable, shall be applied until
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full payment of the obligation because that is the law between the
parties.
The Supreme Court thus modified the guidelines on the
imposition of interest in Eastern Shipping Lines, Inc. v. Court of
Appeals■ and Aocar t>. Callery Frames,as follows:
\\ ith regard to an award of interest in the concept of actual and
compensatory damages, the rate of interest, as well as the accrual
thereof, is imposed as follows:
a.
b.
When the obligation is breached, and it consists in the
payment of a sum of money, i.e., a loan or forbearance
of money, goods, credits or judgments, the interest due
shall be that which is stipulated by the parties in writing,
provided it is not excessive and unconscionable, which,
in the absence of a stipulated reckoning date, shall be
computed from default, i.e., from extrajudicial or judicial
demand in accordance with Article 1169 of the Civil
Code, UNTIL FULL PAYMENT, without compounding
any interest unless compounded interest is expressly
stipulated by the parties, by law or regulation. Interest
due on the principal amount accruing as of judicial
demand shall SEPARATELY earn legal interest at the
prevailing rate prescribed by the Bangko Sentral ng
Pilipinas, from the time of judicial demand UNTIL FULL
PAYMENT.
In the absence of stipulated interest, in a Ioan or
forbearance of money, goods, credits or judgments, the
rate of interest on the principal amount shall be the
prevailing legal interest prescribed by the Bangko Sentral
ng Pilipinas, which shall be computed from default, i.e.,
from extrajudicial or judicial demand in accordance with
Article 1169 of the Civil Code, UNTIL FULL PAYMENT,
without compounding any interest unless compounded
interest is expressly stipulated by law or regulation.
Interest due on the principal amount accruing as of
judicial demand shall SEPARATELY earn legal interest
at the prevailing rate prescribed by the Bangko Sentral
2MG.R. No. 97412, July 12,1994,
“1G.R. No. 189871, August 13, 2013.
L
VI. BANKING
161
ng Pilipinas, from the time of judicial demand UNTIL
FULL PAYMENT.
c.
When the obligation, not constituting a loan or
forbearance of money, goods, credits or judgments,
is breached, an interest on the amount of damages
awarded may be imposed in the discretion of the court at
the prevailing legal interest prescribed by the Bangko
Sentral ng Pilipinas, pursuant to Articles 2210 and
2011 of the Civil Code. No interest, however, shall be
adjudged on unliquidated claims or damages until the
demand can be established with reasonable certainty.
Accordingly, where the amount of the claim or damages
is established with reasonable certainty, the prevailing
legal interest shall begin to run from the time the claim
is made extrajudicially or judicially (Article 1169, Civil
Code) UNTIL FULL PAYMENT, but when such certainty
cannot be so reasonably established at the time the
demand is made, the interest shall begin to run only from
the date of the judgment of the trial court (at which time
the quantification of damages may be deemed to have
been reasonably ascertained) UNTIL FULL PAYMENT.
The actual base for the computation of the interest shall,
in any case, be on the principal amount finally adjudged,
without compounding any interest unless compounded
interest is expressly stipulated by law or regulation.
141. What is an escalation clause in a loan agreement? Is it a valid
stipulation?
An escalation clause refers to the stipulation allowing
increases in the interest rates agreed upon by the contracting
parties. Such stipulation shall be valid provide that there should be
a corresponding de-escalation clause that authorizes a reduction in
the interest rates corresponding to downward changes made by law
or by the Monetary Board. The escalation clause should specifically
provide: (1) that there can be an increase in interest rates if allowed
by law or by the Monetary Board; and (2) that there must be a
stipulation for the reduction of the stipulated interest rates in the
event that the applicable maximum rates of interest are reduced by
law or by the Monetary Board. The latter stipulation ensures the
mutuality of contracts.
The purpose of the law in mandating the inclusion of a deescalation clause is to prevent one-sidedness in favor of the lender
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which is considered repugnant to the principle of mutuality of
contracts. A de-escalation clause is an indispensable requisite to the
validity and enforceability of an escalation clause in the contract. In
other words, in the absence of a corresponding de-escalation clause,
the escalation clause shall be considered null and void.
However, the absence of a de-escalation clause in the loan
agreement would not invalidate the repricing of the interest rates, if
in actuality, the lender did reduce the interest on certain repricing
dates. Such actual reduction or downward adjustment by the
lender bank eliminated any one-sidedness of its contracts with the
borrower.-"*5
142. What interest rate should be imposed on a loan transaction
if the stipulated interest rate is judicially determined to be
excessive or unconscionable?
The legal rate of interest shall be applied if the stipulated
interest in a loan transaction is judicially determined to be excessive
br unconscionable. Under BSP Circular 799, dated July 1, 2013,
such legal rate of interest is 6% per annum.
g.
Penalties for violations
i.
Fine, imprisonment
ii.
Suspension or removal of director or officer
iii.
Dissolution of banks
143. What is the penalty for violation of any of the provisions of the
General Banking Law?
Unless otherwise provided by law, the violation of any of the
provisions of the General Banking Law shall be subject to Sections
34, 35, 36, and 37 of the New Central Bank Act.260
If the offender is a director, officer of a bank, quasi-bank or
trust entity, the Monetary Board may also suspend or remove such
director or officer. If the violation is committed by a corporation,
•‘“Villa Crista Monte Realty & Development Corp. v. Equitable PCI Bank, G.R.
No. 208336, November 21,2018.
2UiSee discussion on the Central Bank Act, supra.
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VI. BANKING
such corporation may be dissolved by quo warranto proceedings
instituted by the Solicitor General.2117
ANTI-MONEY
amended)
a.
LAUNDERING
LAW
(R.A.
No.
9160,
as
Policy of the law
144. What is the declared
laundering?
State policy regarding anti-money
It is the declared policy of the State to protect and preserve the
integrity and confidentiality of bank accounts and to ensure that
the Philippines shall not be used as a money laundering site for the
proceeds of any unlawful activity. Consistent with its foreign policy,
the State shall extend cooperation in transnational investigations
and prosecutions of persons involved in money laundering activities
wherever committed, as well as in the implementation of targeted
financial sanctions related to the financing of the proliferation of
weapons of mass destruction, terrorism, and financing of terrorism,
pursuant to the resolutions of the United Nations Security Council.268
b.
Covered institutions/persons and their obligations
145. Who are the covered institutions/persons under the Anti­
Money Laundering law?
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“Covered institutions” refer to:
(1)
Banks, non-banks, quasi-banks, trust entities, and all
other institutions and their subsidiaries and affiliates
supervised or regulated by the Bangko Sentral ng
Pilipinas (BSP);
(2)
Insurance companies and all other institutions supervised
or regulated by the Insurance Commission; and
(3)
(i) Securities dealers, brokers, salesmen, investment
houses and other similar entities managing securities
or rendering services as investment agent, advisor, or
consultant; (ii) mutual funds, closed-end investment
companies, common trust funds, pre-need companies and
other similar entities; (iii) foreign exchange corporations,
267Section 66, GBL.
26fiSection 2, R.A. No. 9160, as amended by R.A. No. 11521.
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money changers, money payment, remittance, and
transter companies and other similar entities; and (iv)
other entities administering or otherwise dealing in
currency, commodities or financial derivatives based
thereon, valuable objects, cash substitutes and other
similar monetary instruments or property supervised or
regulated by Securities and Exchange Commission.
(4)
Jewehj dealers in precious metals, who, as a business,
trade in precious metals, for transactions in excess of one
million pesos (Pl,000,000.00);
(5)
Jewelry dealers in precious stones, who, as a business,
trade in precious stones, for transactions in excess of one
million pesos (Pl,000,000.00);
(6)
Company service providers which, as a business, provide
any of the following services to third parties: (i) acting
as a formation agent of juridical persons; (ii) acting as
(or arranging for another person to act as) a director
or corporate secretary of a company, a partner of a
partnership, or a similar position in relation to other
juridical persons; (iii) providing a registered office,
business address or accommodation, correspondence or
administrative address for a company, a partnership or
any other legal person or arrangement; and (iv) acting
as (or arranging for another person to act as) a nominee
shareholder for another person; and
(7)
Persons who provide any of the following services:
(i)
managing of client money, securities or other assets;
(ii)
management of bank, savings or securities accounts;
(iii) organization of contributions for the creation,
operation or management of companies; and
(iv) creation, operation or management of juridical
persons or arrangements, and buying and selling
business entities.269
Notwithstanding the foregoing, the term ‘covered persons
shall exclude lawyers and accountants acting as independent legal
professionals in relation to information concerning their clients or
Section 3(a), R.A. No. 9160, as amended.
VI. BANKING
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where disclosure of information would compromise client confidences
or the attorney-client relationship: Provided, that these lawyers
and accountants are authorized to practice in the Philippines and
shall continue to be subject to the provisions of their respective
codes of conduct and/or professional responsibility or any of its
amendments.270
(8)
Casinos, including internet and ship-based casinos, with
respect to their casino cash transactions related to their
gaming operations;271
(9)
Real estate developers and brokers;
(10) Offshore gaming operators, as well as their: service
providers, supervised, accredited or regulated by
the Philippine Amusement and Gaming Corporation
(PAGCOR) or any government agency.272
146, What are the obligations of covered institutions/persons?
The obligations of covered institutions/persons under
AMLA are as follows:
a.
Customer identification
Covered institutions shall establish and record the true
identity of its clients based on official documents. They shall
maintain a system of verifying the true identity of their clients and,
in case of corporate clients, require a system of verifying their legal
existence and organizational structure, as well as the authority and
identification of all persons purporting to act on their behalf.
The provisions of existing laws to the contrary notwithstanding,
anonymous accounts, accounts under fictitious names, and all other
similar accounts shall be absolutely prohibited. Peso and foreign
currency non-checking numbered accounts shall be allowed.273
b.
Record keeping
All records of all transactions of covered institutions shall
be maintained and safely stored for five (5) years from the dates
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™Supra.
271Section 1(a)(8), R.A. No. 9160, as amended by R.A. No. 10927.
272Section 3(a), R.A. No. 9160, as further amended by R.A. No. 11521.
273Section 9(a), R.A. No. 9160.
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of transactions. With respect to closed accounts, the records on
customer identification, account files and business correspondence,
shall be preserved and safely stored for at least five (5) years from
the dates when they were closed.274
C.
Reporting of covered and suspicious transactions
Covered institutions shall report to the AMLC all covered
transactions within five (5) working days from occurrence thereof,
unless the Supendsing Authority concerned prescribes a longer
period not exceeding ten (10) working days.276
147.
Under the Anti-Money Laundering Law, a covered institution is
required to maintain a system of verifying the true identity of
their clients as well as persons purporting to act on behalf of
a.
those doing business with such clients.
b.
unknown principals.
c.
the covered institution.
d.
such clients.
148. The Anti-Money Laundering Law is a law that seeks to
prevent money laundering activities by providing for more
transparency in the Philippine Financial System, hence the
following institutions are covered by the law, except:276
a.
bank and any financial institutions;
b.
pawnshops;
casino operators;
d.
AU of the above.
NB Casino operators were made covered institution in July
2017 under R.A. No. 10927.
27'Section 9(b), ibid.
’’‘Section 9(c), ibid.
276BAR 2012.
VI. BANKING
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167
Covered and suspicious transactions
149. What is a Covered Transaction?
“Covered Transaction” is a transaction in cash or other
equivalent monetary instrument involving a total amount in excess
offive hundred thousand pesos (P500,000.00) within one (1) banking
day; for covered persons under Section 3(a)(8), a single casino cash
transaction involving an amount in excess of five million pesos
(P5,000,000.00) or its equivalent in any other currency.277
For covered persons under Section 3(a)(9),278 a single cash
transaction involving an amount in excess of seven million five
hundred thousand pesos (P7,500,000.00) or its equivalent in any
other currency.279
150. What are Suspicious Transactions?
“Suspicious transactions” are transactions with covered
persons, regardless of the amounts involved, where any of the
following circumstances exist:
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a.
There is no underlying legal or trade obligation, purpose
or economic justification;
b.
The client is not properly identified;
c.
The amount involved is not commensurate with the
business or financial capacity of the client;
d.
Taking into account all known circumstances, it may be
perceived that the client’s transaction is structured in
order to avoid being the subject of reporting requirements
under the Act;
e.
Any circumstance relating to the transaction which is
observed to deviate from the profile of the client and/or
the client’s past transactions with the covered person;
f.
The transaction is in any way related to an unlawful
activity or offense under the Act that is about to be, is
being or has been committed; or
^’Section 2 3 (b), R.A. No. 9160, as amended by R.A. No. 10927.
27“Real estate developers and brokers.
279Section 3(b), R.A. No. 9160, as amended further by R.A. No. 11521.
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g-
Any transaction that is similar or analogous to any of the
foregoing.2"
151. What is the distinction between a "covered transaction report"
and a "suspicious transaction report"?281
A covered transaction report involves transaction/s in cash or
other equivalent monetary instrument involving generally a total
amount in excess of P500,000.00 within one (1) banking day, while
suspicion transaction report involves transactions with covered
institutions regardless of the amounts involved made under any of
the suspicious circumstances enumerated by law.
d.
Money laundering-how committed and unlawful
activities
152. When is money laundering committed?
Money laundering is a crime whereby the proceeds of an
unlawful activity are transacted thereby making them appear to
have originated from legitimate sources. It is committed by the
following:
Money laundering is committed by any person who, knowing
that any monetary instrument or property represents, involves, or
relates to the proceeds of any unlawful activity:
a.
Transacts said monetary instrument or property;
b.
Converts, transfers, disposes of, moves, acquires,
possesses or uses said monetary instrument or property;
c.
Conceals or disguises the true nature, source, location,
disposition, movement or ownership of or rights with
respect to said monetary instrument or property;
d.
Attempts or conspires to commit money laundering
offenses referred to in paragraphs (a), (b) or (c);
e.
Aids, abets, assists in or counsels the commission of the
money laundering offenses referred to in paragraphs (a),
(b) or (c) above; and
“““Section 3(b.l), RA No. 9160, as amended by R.A. No. 11521.
“‘BAR 2015.
169
VI. BANKING
f.
Performs or fails to perform any act as a result of which
he facilitates the offense of money laundering referred to
in paragraphs (a), (b) or (c) above.
Money laundering is also committed by any covered person
who, knowing that a covered or suspicious transaction is required
under this Act to be reported to the Anti-Money Laundering Council
(AMLC), fails to do so.282
153. What are the predicate
Laundering law?
crimes
under the Anti-Money
Save for the omission to report covered and suspicious
transactions, a money laundering offense, by definition, assumes the
commission of an unlawful activity. For instance, kidnapping is an
unlawful activity. If the kidnapper deposits the ransom money with
a bank, another offense is committed—money laundering. There
is money laundering because the proceeds of the unlawful activity
were transacted to make it appear that they originated from lawful
sources. To constitute money laundering, however, the predicate
crime must be based on any of the unlawful activities enumerated
by law.
Unlawful activity, as defined by AMLA, refers to any act or
omission or series or combination thereof involving or having direct
relation to the following:
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1.
Kidnapping for ransom under Article 267 of Act No. 3815,
otherwise known as the Revised Penal Code, as amended;
2.
Sections 4, 5, 6, 8, 9, 10, 11, 12, 13, 14, 15, and 16 of
R.A. No. 9165, otherwise known as the Comprehensive
Dangerous Drugs Act of 2002;
3.
Section 3 paragraphs B, C, E, G, H and I of R.A. No. 3019,
as amended, otherwise known as the Anti-Graft and
Corrupt Practices Act;
4.
Plunder under R.A. No. 7080, as amended;
5.
Robbery and extortion under Articles 294, 295, 296, 299,
300, 301 and 302 of the Revised Penal Code, as amended;
“Section 4, R.A. No. 9160, as amended by R.A. No. 10365.
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6.
Jueteng and masiao punished as illegal gambling under
P.D. No. 1602;
7.
Piracy on the high seas under the Revised Penal Code, as
amended and P.D. No. 532;
8.
Qualified theft under Article 310 of the Revised Penal
Code, as amended;
9.
Swindling under Article 315 and Other Forms of Swindling
under Article 316 of the Revised Penal Code, as amended;
10.
Smuggling under R.A. Nos. 455 and 1937;
11. Violations of R.A. No. 8792, otherwise known as the
Electronic Commerce Act of 2000;
12. Hijacking and other violations under R.A. No. 6235;
destructive arson and murder, as defined under the
Revised Penal Code, as amended;
13. Terrorism and conspiracy to commit terrorism as defined
and penalized under Sections 3 and 4 of R.A. No. 9372;
14.
Financing of terrorism under Section 4 and offenses
punishable under Sections 5, 6, 7 and 8 of R.A. No. 10168,
otherwise known as the Terrorism Financing Prevention
and Suppression Act of 2012;
15.
Bribery under Articles 210, 211 and 211-A of the Revised
Penal Code, as amended, and Corruption of Public Officers
under Article 212 of the Revised Penal Code, as amended;
16.
Frauds and Illegal Exactions and Transactions under
Articles 213, 214, 215 and 216 of the Revised Penal Code,
as amended;
17.
Malversation of Public Funds and Property under Articles
217 and 222 of the Revised Penal Code, as amended;
18.
Forgeries and Counterfeiting under Articles 163,166,167,
168, 169 and 176 of the Revised Penal Code, as amended;
19.
Violations of Sections 4 to 6 of Republic Act No. 9208,
otherwise known as the Anti-Trafficking in Persons Act
of 2003;
20.
Violations of Sections 78 to 79 of Chapter IV, of P.D. No.
705, otherwise known as the Revised Forestry Code of the
Philippines, as amended;
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21.
Violations of Sections 86 to 106 of Chapter VI, of R.A. No.
8550, otherwise known as the Philippine Fisheries Code
of 1998;
22.
Violations of Sections 101 to 107, and 110 of R.A. No.
7942, otherwise known as the Philippine Mining Act of
1995;
23.
Violations of Section 27(c), (e), (f), (g) and (i), of R.A.
No. 9147, otherwise known as the Wildlife Resources
Conservation and Protection Act;
24.
Violation of Section 7(b) of R.A. No. 9072, otherwise known
as the National Caves and Cave Resources Management
Protection Act;
25.
Violation of R.A. No. 6539, otherwise known as the Anti­
Carnapping Act of 2002, as amended;
26.
Violations of Sections 1, 3 and 5 of P.D.
amended, otherwise known as the decree
Laws on Illegal/Unlawful Possession,
Dealing In, Acquisition or Disposition
Ammunition or Explosives;
27.
Violation of P.D. No. 1612, otherwise known as the Anti­
Fencing Law;
28.
Violation of Section 6 of R.A. No. 8042, otherwise known
as the Migrant Workers and Overseas Filipinos Act of
1995, as amended by R.A. No. 10022;
29.
Violation of R.A. No. 8293, otherwise known as the
Intellectual Property Code of the Philippines;
30.
Violation of Section 4 of R.A. No. 9995, otherwise known
as the Anti-Photo and Video Voyeurism Act of 2009;
31.
Violation of Section 4 of R.A. No. 9775, otherwise known
as the Anti-Child Pornography Act of 2009;
32.
Violations of Sections 5, 7, 8, 9, 10(c), (d) and (e), 11, 12
and 14 of R.A. No. 7610, otherwise known as the Special
Protection of Children Against Abuse, Exploitation and
Discrimination;
33.
Fraudulent practices and other violations under R.A.
No. 8799, otherwise known as ‘The Securities Regulation
Code of 2000’;
No. 1866, as
Codifying the
Manufacture,
of Firearms,
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34. Violation of Section 19 (a)(3) of R.A. No. 10697,
otherwise known as the ’Strategic Trade Management
Act’, in relation to the proliferation of weapons of mass
destruction and its financing pursuant to United Nations
Security Council Resolution Numbers 1718 of 2006 and
2231 of 2015";
35. Violations of Section 254 of Chapter II, Title X of the
National Internal Revenue Code of 1997, as amended,
where the deficiency basic tax due in the final assessment
is in excess of twenty-five million pesos (P25,000,000.00)
per taxable year, for each tax type covered and there
has been a finding of probable cause by the competent
authority: Provided, further, that there must be a finding
of fraud, willful misrepresentation or malicious intent on
the part of the taxpayer; Provided, finally, that in no case
shall the AMLC institute forfeiture proceedings to recover
monetary instruments, property or proceeds representing,
involving, or relating to a tax crime, if the same has
already been recovered or collected by the Bureau of
Internal Revenue (BIR) in a separate proceeding; and
36.
Felonies and offenses of a similar nature that are
punishable under the penal laws of other countries.283
154. Flora, a frequent traveler, found a purse concealed between
the cushions of a large sofa inside the VIP lounge in NAIA while
she was waiting for her flight to be called. Inside the purse was
a very valuable diamond-studded necklace. She decided not to
turn over the purse to the airport management, and instead to
keep it. On her return from her travels, she had a dependable
jeweler appraise the necklace, and the latter told her that the
necklace was easily worth at least P5,000,000.00 in the open
market. To test the appraisal, she pawned the necklace for
P2.000,000.00. She then deposited the entire amount in her
checking account with Metro Bank. Promptly, Metro Bank
reported the transaction to the Anti-Money Laundering Council
(AMLC).
11521.
-“Section 7(1), R.A. No. 9160, as amended by R.A. No. 10365 and R.A. No.
VI. HANKING
173
Given that her appropriation of the necklace was theft,
may Flora be successfully prosecuted for money laundering?
Explain briefly your answer.™
Flora may not be prosecuted for money laundering. Money
laundering is a crime whereby the proceeds of an unlawful activity
are transacted making it appear that they originated from legitimate
sources. One of the ways of committing money laundering is if a
person knows the cash relates to unlawful activity and transacts
it. Under the rules implementing the Anti-Money Laundering law,
however, only qualified theft (not simple theft) is considered an
unlawful activity. In the case presented, the theft committed by
Flora did not become qualified because it was not committed with
grave abuse of discretion.
e.
Functions of the AMLC
155. What is the principal government agency tasked to implement
the anti-money laundering laws?
The government body tasked to carry out the implementation
of the Anti-Money Laundering law is the Anti-Money Laundering
Council.
156. What are the functions of the AMLC?
The AMLC shall act unanimously in the discharge of its
functions as defined hereunder:
I
1.
To require and receive covered transaction reports from
covered institutions;
2.
To issue orders addressed to the appropriate Supervising
Authority or the covered institution to determine the
true identity of the owner of any monetary instrument
or property subject of a covered transaction report or
request for assistance from a foreign State, or believed
by the Council, on the basis of substantial evidence, to
be, in whole or in part, wherever located, representing,
involving, or related to, directly or indirectly, in any
manner or by any means, the proceeds of an unlawful
activity;
“•BAR 2017.
!
L
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DIVINA ON ('OMMEHI’IAL LAW:
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3.
To institute civil forfeiture proceedings and all other
remedial proceedings through the Office of the Solicitor
General:
4.
To cause the filing of complaints with the Department of
Justice or the Ombudsman for the prosecution of money
laundering offenses;
5.
To initiate investigations of covered transactions, money
laundering activities and other violations of the 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 Section 3(i) hereof;
7.
To implement such measures as may be necessary and
justified under the Act to counteract money laundering;
8.
To receive and take action in respect of, any request from
foreign states for assistance in their own anti-money
laundering operations provided in the Act;
9.
To develop educational programs on the pernicious effects
of money laundering, the methods and techniques used in
money laundering, the viable means of preventing money
laundering and the effective ways of prosecuting and
punishing offenders;
10.
To enlist the assistance of any branch, department,
bureau, office, agency or instrumentality of the
government, including government-owned-and-controlled
corporations, in undertaking any and all anti-money
laundering operations, which may include the use of its
personnel, facilities and resources for the more resolute
prevention, detection and investigation of money
laundering offenses and prosecution of offenders;
11. To impose administrative sanctions for the violation of
laws, rules and regulations and orders and resolutions
issued pursuant thereto;
12.
To require the Land Registration Authority and all its
Registries of Deeds to submit to the AMLC, reports on
all real estate transactions involving an amount in excess
of five hundred thousand pesos (P500,000.00) within 15
days from the date of registration of the transaction, in
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176
a form to be prescribed by the AMLC. The AMLC may
also require the Land Registration Authority and all its
Registries of Deeds to submit copies of relevant documents
of all real estate transactions;
13.
In the conduct of its investigation, the AMLC shall apply
for the issuance of a search and seizure order with any
competent court;
14.
In the conduct of its investigation, the AMLC shall apply
for the issuance of subpoena ad testificandum and/or
subpoena duces tecum with any competent court;
15.
To implement targeted financial sanctions in relation
to proliferation of weapons of mass destruction and
its financing, including ex parte freeze, without delay,
against all funds and other assets that are owned and
controlled, directly or indirectly, including funds and
assets derived or generated therefrom, by individuals
or entities designated and listed under United Nations
Security Council Resolution Numbers 1718 of 2006 and
2231 of 2015 and their successor resolutions as well as
any binding resolution of the Security Council; and
16.
To preserve, manage or dispose assets pursuant to a freeze
order, asset preservation order, or judgment of forfeiture:
Provided, however, That pending their turnover to the
national government, all expenses incurred in relation to
the duties herein mentioned shall be deducted from the
amount to be turned over to the national government.”285
f.
Application for a freeze order
157. Does the Anti-Money Laundering Council have the authority to
freeze deposits? Explain.285
No. The authority to freeze deposits is lodged with and based
upon the order of the Court of Appeals.287
Similarly, the bank does not have the unilateral right to freeze
the accounts of its clients on mere suspicion that the depositor does
not have a right over them.288
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“’Section 7, as amended.
’“BAR 2015.
“’Section 10, R.A. No. 9160, as amended.
“’Philippine Commercial Bank v. Balmaceda, September 12, 2011.
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However, a bank has the authority to temporarily freeze the
bank account of a deceased depositor under Section 97, R.A. No. 8424
or the Tax Reform Act of 1997. The second paragraph of Section 97
provides that, "If a bank has knowledge of the death of a person, who
maintained a bank deposit account alone, or jointly with another, it
shall not allow any withdrawal from the said deposit account.”
The purpose of Section 97 is to ensure the payment of the estate
taxes due on the transfer of the decedent’s bank deposits before they
could be exhausted or withdrawn by his heirs or by any person who
may have access to the said deposits. For the authority under the
above-cited provision to take effect, the bank needs only two things:
(1) a person is maintaining a bank deposit account; and (2) the bank
has knowledge of the said person’s death. The authority applies with
equal force to joint accounts even to a joint “and/or” account as the
law did not make any distinction.289
It should be pointed out, however, that the TRAIN law has
amended Section 97 of the Tax Code to allow any withdrawal from
the deposit account of a deceased depositor but subject to a final
withholding tax of 6%. For this purpose, all withdrawal slips shall
contain a statement to the effect that all of the joint depositors are
still living at the time of withdrawal by any one of the joint depositors
and such statement shall be under oath by the said depositors.
158. Under what conditions may a freeze order be issued?
Upon a verified ex parte petition by the AMLC and after
determination that probable cause exists that any monetary
instrument or property is in any way related to an unlawful
activity as defined in Section 3(i) of the AMLA, the Court of
Appeals may issue a freeze order.
159. What is the period of effectivity of the freeze order?
The freeze order shall be effective immediately for a period
of 20 days. Within the 20-day period, the Court of Appeals shall
conduct a summary hearing, with notice to the parties, to determine
whether or not to modify or lift the freeze order, or extend its
■'‘■'Allied Banking Corporation v. Elizabeth Sia, G.R. No. 195341, August 28,
2019.
VI. BANKING
177
effectivity. The total period of the freeze order issued by the Court
of Appeals under this provision shall not exceed six (6) months.
This is without prejudice to an asset preservation order that the
Regional Trial Court having jurisdiction over the appropriate anti­
money laundering case or civil forfeiture case may issue on the same
account depending upon the circumstances of the case, where the
Court of Appeals will remand the case and its records: Provided,
that if there is no case filed against a person whose account has
been frozen within the period determined by the Court of Appeals,
not exceeding six (6) months, the freeze order shall be deemed ipso
facto lifted; Provided further, that this new rule shail not apply to
pending cases in the courts. In any case, the court should act on the
petition to freeze within 24 hours from filing of the petition. If the
application is filed a day before a non-working day, the computation
of the 24-hour period shall exclude the non-working days.
The freeze order or asset preservation order issued under
the law shall be limited only to the amount of cash or monetary
instrument or value of property that the court finds there is probable
cause to be considered as proceeds of a predicate offense and the
freeze order or asset preservation order shall not apply to amounts
in the same account in excess of the amount or value of the proceeds
of the predicate offense.290
WO. May the AMLC examine the bank accounts of the accused­
public officials even without seeking a prior court order?
Explain.291
The AMLC cannot examine the bank accounts of the accused­
public officials without seeking a prior court order. Under the Anti­
Money Laundering law, the AMLC needs to obtain a bank inquiry
order from the Court of Appeals to inquire into funds and deposits
if there is probable cause they relate to unlawful activity under
AMLA. Bank inquiry order is not necessary only if the predicate
crime is any of hijacking, kidnapping, terrorism, murder, arson and
violation of the Dangerous Drugs Law.292 Violation of the Anti-Graft
and Corrupt Practices Act does not fall within the exception.
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““Section 10, R.A. No. 9160, as amended by R.A. No. 10927.
“‘BAR 2019.
“‘Section 11, R.A. No. 9160, as amended.
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161. From his first term in 2007, Congressman Abner has been
endorsing his pork barrel allocations to Twin Rivers in exchange
for a commission of 40% of the face value of the allocation.
Twin Rivers is a non-governmental organization whose
supporting papers, after audit, were found by the Commission
on Audit to be fictitious. Other than to prepare and submit
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 congressman converted most of
the commissions he generated into US dollars, and deposited
these in a foreign currency account with Banco de Plata (BDP).
Based on amply-supported tips given by a congressman
from another political party, the Anti-Money Laundering
Council (AMLC) sent BDP an order: (1) to confirm Cong.
Abner’s deposits with the bank and to provide details of these
deposits; and (2) to hold all withdrawals and other transactions
involving the congressman's bank accounts.
As counsel for BDP, would you advise the bank to comply
with the order?233
I shall advise BDP not to comply with the order of the AMLC.
Without a bank inquiry order from a competent court, AMLC cannot
inquire bank deposits, regardless of currency, unless there is probable
cause that the predicate crime involved is hijacking, kidnapping for
ransom, violations of the Dangerous Drugs act, hijacking or other
violations of R.A. No. 6235, destructive arson, murder, or terrorism.
Further, the AMLC cannot order BDP to hold all withdrawals
and other transactions involving the accounts of Congressman
Abner. The power to issue freeze order is lodged with the Court of
Appeals which may issue it upon after AMLC establishes and the
Court of Appeals independently determines that the account relates
to unlawful activities under the AMLA.
162. Prosperous Bank is a domestic bank with head office in Makati.
It handles the banking requirements of thousands of clients.
The AMLC initiated a discreet investigation of the finan­
cial transactions of Lorenzo, a suspected drug trafficker based
“BAR 2013.
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179
in Naga City. The intelligence group of the AMLC, in coordina­
tion with the counterpart group from the PDEA and the NBI,
gathered ample evidence establishing Lorenzo's unlawful drug
activities. The AMLC had probable cause that his deposits and
investments in various banks, including Prosperous Bank,
were related to money laundering.
Accordingly, the AMLC now transmits to Prosperous
Bank a formal demand to allow its agents to examine the
banking transactions of Lorenzo, but Prosperous Bank refuses
the demand.
Is Prosperous
answer.294
Bank’s refusal justified? Explain your
Prospero’s refusal is not justified. Notwithstanding the
provisions of R.A. No. 1405, R.A. No. 6426 and R.A. No. 8791,
the AMLC may inquire into or examine any particular deposit or
investment with any bank or non-bank financial institution if there
is a probable cause that the deposits are related to unlawful activity
under the Anti-Money Laundering Law, as in this case. Bank inquiry
order from the court is not necessary since the predicate crime is a
violation of the Dangerous Drugs Law.295
163. Through various acts of graft and bribery, Mayor Ycasiano
accumulated a large amount of wealth which he converted
into U.S. dollars and deposited in a Foreign Currency Deposit
Unit (FCDU) account with the Yuen Bank (YB). On a tip given
by the secretary of the mayor, the Anti-Money Laundering
Council (AMLC) sent an order to YB to confirm the amount of
U.S. dollars that Mayor Ycasiano had in his FCDU account. YB
claims that, under the Foreign Currency Deposit Act (R.A. No.
6426, as amended), a written permission from the depositor
is the only instance allowed for the examination of FCDU
accounts. YB alleges that AMLC on its own cannot order a
banking institution to reveal matters relating to bank accounts.
Is the legal position of YB, in requiring written permission
from the depositor, correct?
Yes, the legal position of YB in requiring written permission
from the depositor is correct. The AMLC cannot order the bank to
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“'BAR 2017.
“'Section 11, R.A. No. 9160, as amended.
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inquire into the bank account of any depositor on mere suspicions
of acts of graft and bribery without his written consent or a bank
inquiry order issued by the competent court.
164. Is the authority of the AMLC to undertake an inquiry into
certain bank accounts or deposits arbitrary and as such,
unconstitutional?
Taking into account Section 11 of the AMLA, the Court found
nothing arbitrary in the allowance and authorization to AMLC
to undertake an inquiry into certain bank accounts or deposits.
Instead, the Court found that it provides safeguards before a bank
inquiry order is issued, ensuring adherence to the general state
policy of preserving the absolutely confidential nature of Philippine
bank accounts:
a.
The AMLC is required to establish probable cause as
basis for its ex-parte application for bank inquiry order;
b.
The CA, independent of the AMLC’s demonstration of
probable, cause, itself makes a finding of probable cause
that the deposits or investments are related to an unlawful
activity under Section 3(i) or a money laundering offense
under Section 4 of the AMLA;
c.
A bank inquiry court order ex-parte for related accounts
is preceded by a bank inquiry court order ex-parte for the
principal account which court order ex-parte for related
accounts is separately based on probable cause that
such related account is materially linked to the principal
account inquired into; and the authority to inquire into
or examine the main or principal account and the related
accounts shall comply with the requirements of Article
III, Sections 2 and 3 of the Constitution.290
g-
Safe harbor provision
165. What is the meaning of the safe harbor provision under AMLA?
No administrative, criminal, or civil proceedings shall lie
against any person for having made a covered transaction or
suspicious transaction report in the regular performance of his
duties and in good faith, whether or not such reporting results in
2MSubido Pagente Certeza Mendoza and Binay Law Offices
Appeals, G.R. No. 216914, En Banc, December 6, 2016.
The Court of
VI. BANKING
181
any criminal prosecution under the AMLA or any other Philippine
law?'
h.
Forfeiture provisions
166. Other than obtaining bank inquiry order and freeze orders,
what other remedy should the AMLC pursue if probable cause
exists that any monetary instrument or property is related to
an unlawful activity?
Upon determination by the AMLC that probable cause exists
that any monetary instrument or property is in any way related
to an unlawful activity as defined in Section 3(i) or a money
laundering offense under Section 4 hereof, the AMLC shall file with
the appropriate court through the Office of the Solicitor General, a
verified ex parte petition for forfeiture, and the Rules of Court on
Civil Forfeiture shall apply.
The forfeiture shall include those other monetary instrument
or property having an equivalent value to that of the monetary
instrument or property found to be related in any way to an unlawful
activity or a money laundering offense, when with due diligence,
the former cannot be located, or it has been substantially altered,
destroyed, diminished in value or otherwise rendered worthless by
any act or omission, or it has been concealed, removed, converted,
or otherwise transferred, or it is located outside the Philippines or
has been placed or brought outside the jurisdiction of the court, or it
has been commingled with other monetary instrument or property
belonging to either the offender himself or a third person or entity,
thereby rendering the same difficult to identify or be segregated for
purposes of forfeiture.298
The AMLC, if circumstances warrant, may initiate civil
forfeiture proceedings to preserve the assets and to protect it from
dissipation. No court shall issue a temporary restraining order or
a writ of injunction against the freeze order, except the Court of
Appeals or the Supreme Court.299
In the conduct of its investigation, the AMLC may also apply
for the issuance of search and seizure order with any competent
court.300
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“Section 9(c), R.A. No. 9160.
“Section 12, R.A. No. 9160, as amended.
“Section 10, R.A. No. 9160, as amended by R.A. No. 11521.
“Section 7(13), ibid.
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i.
Mutual assistance among states
167. May aforeign state and the AMLC request for mutual assistance
in the investigation or prosecution of a money laundering
offense?
Yes. a foreign state and the AMLC request for mutual
assistance in the investigation or prosecution of a money laundering
offense. The principles of mutuality and reciprocity shall, for this
purpose, be at all times recognized.
Thus, the AMLC and concerned foreign state may execute
a request for assistance from each other by: (1) tracking down,
freezing, restraining and seizing assets alleged to be proceeds of
any unlawful activity under the procedures laid down in the Act; (2)
giving information needed by the foreign State within the procedures
laid down in the Act; and (3) applying for an order of forfeiture of
any monetary instrument or property in the court: Provided, that
the court shall not issue such an order unless the application is
iccompanied by an authenticated copy of the order of a court in the
equesting State ordering the forfeiture of said monetary instrument
or property of a person who has been convicted of a money laundering
offense in the requesting State, and a certification or an affidavit of a
competent officer of the requesting State stating that the conviction
and the order of forfeiture are final and that no further appeal lies
in respect of either.301
168. What are the limitations on request for mutual assistance?
The AMLC may refuse to comply with any request for assistance
where the action sought by the request contravenes any provision of
the Constitution or the execution of a request is likely to prejudice
the national interest of the Philippines unless there is a treaty
between the Philippines and the requesting State relating to the
provision of assistance in relation to money laundering offenses.302
169. What are the requirements for Requests for Mutual Assistance
from Foreign States?
A request for mutual assistance from a foreign State must
(1) confirm that an investigation or prosecution is being conducted
“"Section 13(a), (b) and (c), R.A. No. 9160.
“Section 13(d), ibid.
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VI. BANKING
183
in respect of a money launderer named therein or that he has
been convicted of any money laundering offense; (2) state the
grounds on which any person is being investigated or prosecuted
for money laundering or the details of his conviction; (3) give
sufficient particulars as to the identity of said person; (4) give
particulars sufficient to identify any covered institution believed
to have any information, document, material or object which may
be of assistance to the investigation or prosecution; (5) ask from
the covered institution concerned any information, document,
material or object which may be of assistance to the investigation
or prosecution; (6) specify the manner in which and to whom said
information, document, material or object obtained pursuant to said
request, is to be produced; (7) give all the particulars necessary for
the issuance by the court in the requested State of the writs, orders
or processes needed by the requesting State; and (8) contain such
other information as may assist in the execution of the request.303
D. Philippine Deposit Insurance Corporation
1.
Basic Policy
170. What is the Philippine Deposit Insurance Corporation (PDIC)?
PDIC is a government instrumentality created in 1963 by
virtue of R.A. No. 3591 to insure deposits of all banks which are
entitled to the benefits of insurance. The latest amendments to R.A.
No. 3591 are contained in R.A. No. 10846 signed into law on May 23,
2016. R.A. No. 10846 empowered PDIC with stronger authority to
protect the depositing public and promote financial stability.304
171. What is the declared policy of the State in relation to insurance
deposit coverage?
It is the declared policy of the State to strengthen the mandatory
deposit insurance coverage system to generate, preserve, maintain
faith and confidence in the country’s banking system, and protect it
from illegal schemes and machinations.
Towards this end, the Government must extend all means
and mechanisms necessary for the Corporation to effectively fulfill
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“Section 13(e), ibid.
“PDIC Frequently Asked Questions, see website of PDIC.
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its vital task of promoting and safeguarding the interests of tho
depositing public by way of providing insurance coverage on bank
deposits and in helping develop a sound and stable banking system.™
172. What is PDIC’s overall mandate?
PDIC exists to provide deposit insurance coverage for the
depositing public to help promote public confidence and stability
in the economy. It ensures prompt payment of insured deposits,
exercises complementary supervision of banks, adopts responsive
resolution methods and applies efficient management of receivership
and liquidation functions.306
2.
Powers and functions of PDIC
173. What are the principal powers and functions of PDIC?
The principal powers and functions of PDIC are as follows:
a.
Deposit Insurer;
b.
Co-regulator of banks; and
c.
Receiver and liquidator of closed banks.307
174. Are all bank members of PDIC?
Membership of banks to PDIC is mandatory, hence all operating
banks are members of PDIC.
Insurance premium is paid by the banks, not by the depositors.
The bank is assessed one-fifth (1/5) of 1% per annum of the
assessment base of the bank.308
3.
Concept of insured deposit
175. What is an insured deposit?
The term “insured deposit” means the amount due to any bona
fide depositor for legitimate deposits in an insured bank (net of any
““Section 2, R.A. No. 3591.
mIbid.
mIbid.
™Ibid.
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VI. BANKING
185
loan obligation of the depositor to the insured bank)™ as of the date
of the closure but not to exceed P500,000.00.al°
4.
Liability to depositors
176. When does the liability of PDIC to depositors attach?
Upon the designation of the PDIC as receiver of a closed bank,
it shall serve a notice of closure to the highest-ranking officer of
the bank present in the bank premises, or in the absence of such
officer, post the notice of closure in the bank premises or on its main
entrance. The closure of the bank shall be deemed effective upon the
service of the notice of closure. Thereafter, the receiver shall take
over the bank and exercise the powers of the receiver as provided
under the PDIC charter.311
PDIC can only be liable if the insured bank actually receives
deposit and the bank is ordered closed by BSP.
It only covers risk of closure of banks as ordered by BSP. It
does not cover bank losses due to theft, fire, or closure by reason of
strike, existence of public disorder, revolution, or civil war.
In one case, an investor placed his funds in a money market
placement with a finance company. On maturity, the invested funds
cannot be paid owing to the insolvency of the finance company, but
the latter referred the investor to its bank-affiliate which thereafter
issued a certificate of deposit to the same investor. The deposit was
likewise not paid because the bank eventually closed. The investor
filed an insurance claim covering the supposed deposit. PDIC denied
it. The legality of the denial was thereafter assailed. The High Court
sustained the PDIC, ruling that the liability of PDIC is statutory. It
is based on the actual receipt by the bank of deposits not on a mere
certification on the existence of deposit.312
In another case, PDIC also denied the insurance claim when it
discovered that the money allegedly placed with the insured bank
’“While it is not included in the definition of insured deposit, it is understood
that any loan obligation of the depositor should be deducted from his total deposit,
given the provision of the Civil Code on legal set off where two persons are creditors
and debtors of each other.
’’“Section 5(j), R.A. No. 3591, as amended.
’■'Section 14(a), ibid.
’■’FDIC v. Court of Appeals, 283 SCRA 462.
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was actually credited to the personal account of the bank President
and the certificates of time deposit (CTD) were not duly issued by
the bank hut were mere replicas of unissued CTDs in the inventory
submitted by the bank with PDIC. The Supreme Court found no
grave abuse of discretion on the part of PDIC, holding that PDIC's
acts were consistent with law.313
a.
Deposit liabilities required to be insured with PDIC
177. What are the deposit liabilities required to be insured with
PDIC?
The term deposit means the unpaid balance of money or its
equivalent received by a bank in the usual course of business, and
for which it has given or is obliged to give credit to a commercial,
checking, savings, time or thrift account, evidenced by a passbook,
certificate of deposit, or other evidence of deposit issued in accordance
with Bangko Sentral ng Pilipinas rules and regulations and other
applicable laws, together with such other obligations of a bank,
which, consistent with banking usage and practices.
Any obligation of a bank which is payable at the office of the
bank located outside of the Philippines shall not be a deposit for any
of the purposes of the PDIC Charter or included as part of the total
deposits or of insured deposit: Provided, further, that subject to the
approval of the PDIC, any insured bank which is incorporated under
the laws of the Philippines which maintains a branch outside the
Philippines may elect to include for insurance its deposit obligations
payable only at such branch.314
Note that the change in the definition of deposit under R.A. No.
1405 does not apply for insurance coverage purposes. A trust fund is
not insured with PDIC.
Inter-branch deposits refer to funds of one branch deposited
in another branch and both branches are part of the same bank. As
such, they are excluded from a bank’s total liabilities and do not give
rise to insurable deposit liabilities.316
Philippine Deposit Insurance Corporation, G.R. No.
313Spouses Chugani
230037, March 19, 2018.
314Section 5(g), R.A. No. 3591, as amended by R.A. No. 10846.
316PDIC v. Citibank, G.R. No. 170290, April 11, 2012.
VI. BANKING
b.
187
Commencement of liability
178. When does
deposits?
PDIC
commence
determination
of insured
PDIC shall commence the determination of insured deposits
due the depositors of a closed bank upon its actual takeover of the
closed bank. The Corporation shall give notice to the depositors
of the closed bank of the insured deposits due them by whatever
means deemed appropriate by the Board of Directors: Provided, that
the Corporation shall publish the notice once a week for at least
three (3) consecutive weeks in a newspaper of general circulation
or, when appropriate, in a newspaper circulated in the community
or communities where the closed bank or its branches are located.”6
c.
Deposit accounts not entitled to payment
179. What are the deposit accounts not entitled to payment?
PDIC shall not pay deposit insurance for the following accounts
or transactions whether denominated, documented, recorded or
booked as deposit by the bank;
a.
Investment products such as bonds and securities, trust
accounts, and other similar instruments;
b.
Deposit accounts or transactions which are unfunded, or
that are fictitious or fraudulent;
c.
Deposit accounts or transactions constituting unsafe and
unsound banking practices as determined by PDIC, in
consultation with BSP, after due notice and hearing, and
publication of a cease and desist order issued by the PDIC
against such deposit accounts or transactions; and
d.
Deposits that are determined to be the proceeds of an
unlawful activity as defined under the Anti-Money
Laundering Law.317
d.
Extent of liability
“Section 21(a) Renumbered from Section 16(a) by R.A. No. 10846, June 11,
2016; As added by R.A. No. 9302, August 12, 2004.
’’’Section 5(g), R.A. No. 3591, as amended.
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180. X is a depositor of AAA Bank. She has three (3) deposit
accounts all under her name. One in a checking account, one in
a savings account, and another one in a time deposit account.
Each account has a balance of P250,000.00. AAA Bank became
insolvent. Philippine Deposit Insurance Corporation closed
the Bank. X therefore is unable to withdraw from all of the
accounts. She then filed her claims with the Philippine Deposit
Insurance Corporation. Which statement is most accurate?318
a.
X can claim a total of P500,000.00 for all the three (3)
accounts.
b.
X can only claim from one (1) account of P250,000.00.
c.
X can claim a total of P750,000.00 from all the three (3)
accounts.
d.
X cannot claim anything from any of the deposit accounts.
e.
Determination of insured deposits and calculation
of liability
181. State the rules on determination of insured deposits and
calculation of liability.
a.
Deduct any loan of the depositor from the deposit with the
insured bank to determine net insured deposit.
b.
In determining such amount due to any depositor,
there shall be added together all deposits in the bank
maintained in the same right and capacity for his or her
benefit either in his or her own name or in the name of
others.
c.
Insurance coverage is per depositor not per account. The
type of account is immaterial.
d.
Individually owned deposit account is insured separately
from joint accounts regardless of whether the conjunction
“and”, “or", “and/or” is issued. In determining such amount
due to the depositor, there shall be added together all
deposits in the bank maintained in the same right and
capacity for his benefit either in his own name or in the
name of others.
31"BAR 2012.
VI. HANKING
189
e.
If the account is held jointly by two or more natural
persons or two or more juridical entities, the maximum
insured deposit shall be divided into as many equal shares
as there are many individuals or juridical entities, unless
a different sharing is stipulated in the deposit document.
f.
If the account is held by a juridical person jointly with
a natural person, the maximum insured deposit shall be
presumed to belong entirely to the juridical person.
g.
The aggregate of the interests of each co-owner over
several joint accounts, whether owned by the same or
different combination of individuals, juridical persons or
entities shall likewise be subject to the maximum insured
deposit of P500,000.00.319
h.
For “in trust for account” (ITF account), like Juan in trust
for Maria, while the owner of the account is Juan, Maria,
the beneficiary is the one entitled to claim the insurance
deposit.
i.
Deposits in other banks are insured separately.
182. "A" has the following accounts with ABC Bank. The Bank was
subsequently closed by BSP for insolvency. How much can "A"
recover from PDIC?
P500.000
P500,000
P500.000 ||q Tfbwu jptaiJiKo'l
P500.000
1
Pl million — Loan
Insurance Coverage — P500.000
Uninsured Portion — P500.000 - Trust Fund
“A” may recover P500.000.00 from PDIC. While his total
deposits amount to Pl.5 million, Pl million of such deposits shall
be applied against his Pl million loan obligation. The P500,000.00
trust fund is not insured with PDIC. He may, however, file a claim
based on such trust fund in the liquidation proceeding.
I
I
I
K
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3,sSee Section 5(j), R.A. No. 3591, as amended.
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183. How much can "A" recover from PDIC if he has the following
joint accounts on top of his individual accounts?
P500.000 JI
P500.000 J
i
'
”
]
P5oo.ooo
P500.000
Insurance - P500,000
Coverage Individual Account
500,000 - | A and/or B
_________
500,000 - A and/or C
500,000 - | A and/or D
500,000
B
C
D
-
For Joint Account
P250.000
P250,000_____
P250,000
For the accounts he maintained with B,C, and D,“A” is
entitled to one-half (1/2) of the insured deposit or P250,000.00
;ach or P750,000.00. The joint accounts are insured separately
from A s individual accounts but the aggregate interest of A in the
various accounts is subject to the maximum insurance deposit of
P500,000.00.
Thus, he can recover P500,000.00 for his individual account
and P500,000.00 for his various joint accounts.
The P500,000.00 trust fund and P250,000.00 uninsured portion
for his share in the various joint accounts should be filed as a claim
in the liquidation proceeding.
184. How much can "A” recover if his joint accounts are maintained
with ABC and B as follows?
P500.000
"""j
P500.000
i
P500.000
j
P500.000
Insurance - P500,000
Coverage Individual Account
1,000,000- A and/or ABC
500,000 - A and/or B
500,000 A B -
ABC
P250.000
P250,000
VI. BANKING
191
For the joint account maintained with ABC, the maximum
insured deposit is presumed to belong to ABC Corporation, there
being no stipulation to the contrary. On the other hand, A is entitled
to one-half (1/2) of the insured deposit for the joint account he holds
with B.
Thus, in addition to the P500,000.00 he may collect from
PDIC for his individual account, he can also recover P250,000.00
corresponding to his interest in the joint account with B.
f.
Mode of payment
185. What is the mode of payment by PDIC?
Whenever an insured bank shall have been closed by the
Monetary Board of BSP, payment of the insured deposits shall be
made by PDIC as soon as possible either by 1) cash, or 2) making
available to each depositor a transferred deposit in another insured
bankin an amount equal to insured deposit of such depositor, subject
to submission of proof of claims.320
g-
Effect of payment of insured deposit/preferred
credit
186. What is the effect of payment of insured deposits?
PDIC, upon the payment of any depositor, shall be subrogated
to all the rights of the depositor against the closed bank to the extent
of such payment. Subrogation shall include the right on the part
of PDIC to receive the same dividends from the proceeds of the
assets of such closed bank and recoveries on account of stockholders’
equity as would have been payable to the depositor on a claim for the
insured deposits: Provided, that such depositor shall retain his or
her claim for any uninsured portion of his or her deposit, which legal
preference shall be the same as that of the subrogated claim of the
PDIC for its payment of insured deposits. All payments by the PDIC
of insured deposits in closed banks partake of the nature of public
funds, and as such, must be considered a preferred credit in the
order of preference under Article 2244(9) of the New Civil Code.3-1
’“Section 19, renumbered from Section 14, R.A. No. 3591, as amended by R.A.
No. 10846.
’’'Renumbered from Section 15 by R.A. No. 10846, June 11, 2016; as amended
byP.D. No. 1940, June 27, 1984; R.A. No. 7400, April 13,1992; R.A. No. 10846, June
11,2016.
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187. What is the effect of the failure by PDIC to settle the claim of
the insured depositor?
The failure to settle the claim within six (6) months from date
of tiling of the claim for insured deposit whether such failure was due
to grave abuse of discretion, gross negligence, bad faith, or malice
shall, upon conviction, subject the directors, officers or employees
of PDIC responsible for the delay, to imprisonment from six (6)
months to one (1) year; provided that the period shall not apply if the
validity of the claim requires the resolution of issues of facts and/or
law by PDIC or another office, subject further to the remedy of PDIC
to require final determination of a court of competent jurisdiction
if PDIC is not satisfied as to the viability of the claim for insured
deposit.322
h.
Failure of depositor to claim insured deposits
188. What is the effect of the failure of the depositor to file his
insurance claim with PDIC?
• u ^^ess otherwise waived by the Corporation, if the depositor
m t e c osed bank shall fail to claim his insured deposits with the
orporation within two (2) years from actual takeover of the closed
bank by the receiver, or does not enforce his claim filed with the
corporation within two (2) years after the two-year period to file a
c ai™ as mentioned hereinabove, all rights of the depositor -against
t e orporation with respect to the insured deposit shall be barred;
owever, all rights of the depositor against the closed bank and its
s areholders or the receivership estate to which the Corporation may
®ve become subrogated, shall thereupon revert to the depositor.
ereafter the Corporation shall be discharged from any liability on
the insured deposit.323
i.
Examination of banks and deposit accounts
189. Does PDIC have the power to examine banks and deposit
accounts?
PDIC may conduct examination of banks with prior approval
of the Monetary Board: Provided, that no examination can be
322Section 19, renumbered from Section 14 and amended by R.A. No. 10846,
June 11, 2016.
323Section 21(e) Renumbered from Section 16(e) by R.A. No. 10846, June 11,
2016; as amended by R.A. No. 9302, August 12, 2004.
VI. BANKING
193
conducted within 12 months from the last examination date:
Provided, however, that PDIC may, in coordination with the Bangko
Sentral, conduct a special examination as the Board of Directors, by
an affirmative vote of a majority of all of its members, if there is a
threatened or impending closure of a bank: Provided, further, that,
notwithstanding the provisions of R.A. No. 1405, as amended, R.A.
No. 6426, as amended, R.A. No. 8791, and other laws, the PDIC and/
or the Bangko Sentral, may inquire into or examine deposit accounts
and all information related thereto in case there is a finding of
unsafe or unsound banking practice: Provided, finally, that to avoid
overlapping of efforts, the examination shall maximize the efficient
use of the relevant reports, information, and findings of the Bangko
Sentral, which it shall make available to PDIC.324
j.
Splitting of deposits
190. What is splitting of deposits and its effect?
Splitting of deposits occurs whenever a deposit account with an
outstanding balance of more than the statutory maximum amount
of insured deposit maintained under the name of natural or juridical
persons is broken down and transferred into two or more accounts
in the name/s of natural or juridical persons or entities who have no
beneficial ownership on transferred deposits in their names within
120 days immediately preceding or during a bank-declared holiday
or immediately preceding a closure order by the BSP for the purpose
of availing of the maximum deposit insurance coverage. Such
splitting of deposit is punishable by imprisonment and/or fine.325
In one case, the Supreme Court even held that monies deposited
by individuals who benefitted from the unlawful splitting of deposits
are considered laundered funds.320
In cases wherein the transfer into two or more accounts occurred
before the 120-day period, the PDIC does not discount the possibility
that there may have been a transfer for valid consideration, but
in the absence of transfer documents found in the records of the
bank at the time of closure, the presumption arises that the source
“’Section 9(8), as amended by R.A. No. 9302, August 12, 2004; RA. No. 9576,
June 1,2009.
’“Section 26(f)(1)(e); BAR 2019.
Gidwani, G.R. No. 234616,
’“Philippine Deposit Insurance Corporation
June 20,2018.
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account remained with the transferor. Consequently, even if the
transfer into different accounts was not made within 120 days
immediately preceding bank closure, the grant of deposit insurance
to an account found to have originated from another deposit is not
automatic because the transferee still has to prove that the transfer
was for a valid consideration through documents kept in the custody
of the bank.
In this case, even assuming that a depositor donated the
amount contained in the subject savings account, not one document
evidencing the alleged donation is in the custody or possession of the
bank upon takeover by PDIC. Thus, the PDIC properly relied on the
records of the bank which showed that donor-depositor’s accounts
remained in his name and for his account. As such, it is subject to
the rule on maximum insurance deposit recovery.32’
k.
Prohibition against
restraining order
issuances
of
temporary
191. State the remedies of the depositor who is aggrieved by any
action taken by PDIC under its charter.
The actions of PDIC with respect to determination of insured
eposit accounts shall be final and executory and may not be set
aside or restrained by the court except on petition for certiorari
on the ground that the action was taken in excess of jurisdiction
or with grave abuse of discretion as to amount to lack or excess of
jurisdiction. The petition for certiorari may only be filed within 30
ays from notice of denial of claim for deposit insurance.328
The Regional Trial Court has no jurisdiction to nullify the
action of PDIC in denying insurance claim.328
192. What court may issue an injunction against PDIC for any action
on its part which is tainted with grave abuse of discretion?
No court, except the Court of Appeals, shall issue any temporary
restraining order, preliminary injunction or preliminary mandatory
32’Carlito Linsangan v. Philippine Deposit Insurance Corporation, G.R. No.
228807, February 11, 2019.
328So v. Philippine Deposit Insurance Corporation, G.R. No. 230020, March
19, 2018.
“’Spouses Chugani v. PDIC, ibid.
!
VI. BANKING
195
injunction against PDIC for any action on its part under the PDIC
charter.™
This prohibition shall apply in all cases, disputes or
controversies instituted by a private party, the insured bank, or any
shareholder of the insured bank.331
The Supreme Court may issue a restraining order or injunction
when the matter is of extreme urgency involving a constitutional
issue, such that unless a temporary restraining order is issued,
grave injustice and irreparable injury will arise. The party applying
for the issuance of a restraining order or injunction shall file a bond
in an amount to be fixed by the Supreme Court, which bond shall
accrue in favor of the Corporation if the court should finally decide
that the applicant was not entitled to the relief sought.332
Any restraining order or injunction issued in violation of the
above rule is void and of no force and effect and any judge who has
issued the same shall suffer the penalty of suspension of at least 60
days without pay.333
5.
Concept of bank resolution
193. What does resolution mean in the context of the PDIC
charter?
The term resolution refers to the actions undertaken by the
Corporation under Section 11 of the PDIC Charter to:
a.
Protect depositors, creditors and the Deposit Insurance
Fund (DIF);
b.
Safeguard the continuity of essential banking services or
maintain financial stability; and
c.
Prevent deterioration or dissipation of bank assets.™
“"Section 27, Renumbered from Section 22, R.A. No. 10846, June 11, 2016; As
added by R.A. No. 9302, August 12, 2004.
“'Section 27, as added by R.A. No. 9302, August 12, 2004.
mIbid.
mIbid.
“'Section 5(s), as added by R.A. No. 10846.
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194. What is the procedure for bank resolution?
The PDIC. in coordination with the Bangko Sentral ng
Pilipinas, may commence the resolution of a bank under
this section upon:
1.
a.
Failure of prompt corrective actions as declared by
the Monetary’ Board; or
b.
Request by a bank to be placed under resolution.
2.
The Corporation shall inform the bank of its eligibility for
entry into resolution.335
3.
W ithin a period of 180 days from a bank’s entry into
resolution, the Corporation, through the affirmative
vote of at least five (5) members of the PDIC Board,
shall determine whether the bank may be resolved
through the purchase of all its assets and assumption of
all its liabilities, or merger or consolidation with, or its
acquisition, by a qualified investor.
For this purpose, the PDIC may:
4.
i.
Determine a resolution package for the bank;
ii.
Identify and, with the approval of the Monetary
Board, pre-qualify possible acquirers or investors;
iii.
Authorize pre-qualified acquirers or investors to
conduct due diligence on the bank, for purposes of
determining the valuation of a bank through an
objective and thorough review and appraisal of its
assets and liabilities, and assessment of risks or
events that may affect its valuation; and
iv.
Conduct a bidding to determine the acquirer of the
bank.336
In determining the appropriate resolution method for a
bank, the PDIC shall consider the:
i.
Fair market value of the assets of the bank, its
franchise, as well as the amount of its liabilities;
ii.
Availability of a qualified investor;
“Section 11, ibid.
“Section 11(e), ibid.
VI. BANKING
iii.
Least cost to the DIF; and
iv.
Interest of the depositing public.337
197
XXXX
5.
Upon a determination by the Corporation that the blank
may not be resolved, the Monetary Board may act in
accordance with Section 30 of R.A. No. 7653 or the New
Central Bank Act.
6.
The foregoing provisions on bank resolution are without
prejudice to any action that the Monetary Board may
take under existing laws.
6.
Role of PDIC in relation to banks in distress
a)
Closure and takeover;338
b)
Conservatorship;
c)
Receivership.
195. State the functions of PDIC as a receiver.
The provisions of other laws, general or special, to the contrary
notwithstanding, whenever it shall be appropriate for the Monetary
Board of the Bangko Sentral ng Pilipinas to appoint a receiver of
any banking institution pursuant to existing laws, the Monetary
Board shall give prior notice and appoint PDIC as receiver.
PDIC, as receiver, shall control, manage and administer the
affairs of the closed bank. Effective immediately upon takeover as
receiver of such bank, the powers, functions and duties, as well as all
allowances, remunerations and perquisites of the directors, officers,
and stockholders of such bank are suspended, and the relevant
provisions of the Articles of Incorporation and By-laws of the closed
bank are likewise deemed suspended.
The assets of the closed bank under receivership shall be
deemed in custodia legis in the hands of the receiver. From the time
the closed bank is placed under such receivership, its assets shall
not be subject to attachment, garnishment, execution, levy or any
other court processes.
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“’Supra.
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In addition to the powers of a receiver pursuant to existing
laws, PD1C is empowered to:
1.
Bring suits to enforce liabilities to or recoveries of the
closed bank;
o
Appoint and hire persons or entities of recognized
competence in banking or finance as its deputies and
assistants, to perform such powers and functions of the
Corporation as receiver or liquidator of the closed bank;
3.
Suspend or terminate the employment of officers and
employees of the closed bank: Provided, that payment of
separation pay or benefits shall be made only after the
closed bank has been placed under liquidation pursuant
to the order of the Monetary Board under Section 30 of
R.A. No. 7653, and that such payment shall be made from
available funds of the bank after deducting reasonable
expenses for receivership and liquidation;
4.
Pay accrued utilities, rentals and salaries of personnel
of the closed bank, for a period not exceeding three (3)
months, from available funds of the closed bank;
5.
Collect loans and other claims of the closed bank, and
for the purpose, modify, compromise or restructure the
terms and conditions of such Ioans or claims as may be
deemed advantageous to the interest of the creditors and
claimants of the closed bank;
6.
Hire or retain private counsels as may be necessary;
7.
Borrow or obtain a loan, or mortgage, pledge or encumber
any asset of the closed bank, when necessary to preserve or
prevent dissipation of the assets, or to redeem foreclosed
assets of the closed bank, or to minimize losses to the
depositors and creditors;
8.
If the stipulated interest on deposits is unusually high
compared with the prevailing applicable interest rate, the
Corporation as receiver may exercise such powers which
may include a reduction of the interest rate to a reasonable
rate: Provided, that any modification or reduction shall
apply only to unpaid interest; and
VI. BANKING
9.
199
Exercise such other powers as are inherent and necessary
for the effective discharge of the duties of the Corporation
as a receiver/139
d)
Liquidation
196. What follows after the order of bank's closure by the BSP?
Whenever a bank is ordered closed by the Monetary Board,
PDIC shall be designated as receiver and it shall proceed with the
takeover and liquidation of the closed bank in accordance with this
Act. For this purpose, banks closed by the Monetary Board shall no
longer be rehabilitated.340
TRUTH IN LENDING ACT (R.A. NO. 3765)
197. What is the purpose of the Truth in Lending Act?
The purpose of the law is to complement the then Usury Law
and to protect the public from lack of awareness of the true cost
of credit by assuring a full disclosure of such cost with a view of
preventing the uninformed use of the credit to the detriment of the
national economy.
The creditors’ full disclosure enables debtors to fully appreciate
the true cost of their loan and properly evaluate their options in
arriving a business decisions before giving full consent to the
contract.341
This law, and other credit-related laws, such as Access Devices
Regulation Act (R.A. No. 8484), Consumer Act of the Philippines
(R.A. No. 7394), Lending Company Regulation Act of 2007 (R.A
No. 9474) and the Pawnshop Regulation Act (P.D. No. 114) require
disclosure of the true cost of the credit.
198. What is the obligation of creditors to person to whom credit is
extended?
To disclose to the borrower in writing prior to the consummation
of the transaction the following information: a) the cash price
“’Section 13, as added by R.A. No. 10846.
“’Section 12, as added by R.A. No. 10846.
“■United Coconut Planters Bank v. Spouses Beluso, G.R. No. 159912, August
17,2007.
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or delivered price of the property or service to be acquired; b) the
amounts, if any. to be credited as down payment and/or trade in; c)
the difference between the two items; d) the charges, individually
itemized, which are to be paid in connection with the transaction but
which are not incident to the extension of credit; e) the total amount
to be financed: f) the finance charges expressed in terms of pesos
and centavos; g) the percentage that the finance charges bear to the
total amount to be financed expressed as a simple annual rate on the
outstanding unpaid balance of the obligation.3'2
199. Cite example of charges that are deemed as finance charges.
Penalty charges, which are liquidated damages resulting from
a breach of contract, are considered as finance charges.343
Handling charges are also deemed as part of the finance
charges that must be disclosed under the law.3"
200. What are the covered and excluded transactions under the
law?
The law does not apply to transaction on cash basis but only
where there is a credit component. It is also applicable only to a
creditor as defined by law, that is, a person engaged in the business
of extending credit (including any person who as a regular business
practice make loans or sells or rents property or services on a time,
credit, or installment basis, either as principal or as agent) who
requires as an incident to the extension of credit, the payment of a
finance charge.345
Credit means any loan, mortgage, deed of trust, advance, or
discount; any conditional sales contract; any contract to sell, or sale
or contract of sale of property or services, either for present or future
delivery, under which part or all of the price is payable subsequent
to the making of such sale or contract; any rental-purchase contract;
any contract or arrangement for the hire, bailment, or leasing of
property; any option, demand, lien, pledge, or other claim against,
“■“Section 4, R.A. No. 3765.
3,3Barbasa v. Tuquero, G.R. No. 163898, December 23, 2008; Bank of the
Philippine Islands v. Spouses Yu, G.R. No. 184122, January 20, 2010.
“"Consolidated Bank and Trust Corporation v. Court of Appeals, G.R. No.
91494, July 14,1995.
“'“Section 3(4), R.A No. 3765.
VI. BANKING
201
or for the delivery of, property or money; any purchase, or other
acquisition of, or any credit upon the security of, any obligation of
claim arising out of any of the foregoing; and any transaction or
series of transactions having a similar purpose or effect.”8
201. What are the legal effects of non-compliance with the obligation
to disclose credit charges?
Even if prior disclosure is not made pursuant to the law, the
contract or the transaction is not rendered void or unenforceable.”’
The creditor can still compel the debtor to perform the principal
obligation and the debtor is obliged to comply with the agreement,
less undisclosed charges.”8 In other words, charges not properly
disclosed need not be paid and if paid, can be recovered. This is,
however, without prejudice to the applicable criminal, civil, and
administrative penalties that may be imposed against the erring
creditor.
The offender is liable to pay a penalty for an amount equal
to twice the finance charge required by such creditor but not to
exceed P2,000.00 on any credit transaction. The action to recover
the penalty should be brought within one (1) year from the date of
the occurrence of the violation.
In case of willful violation of the law, the offender shall be Hable
to pay a fine or imprisonment or both at the option of the court.119
II
I
■
I
i
’“’Section 3, R.A. No. 3765.
’’’Section 6, R.A. No. 3765; Development Bank of the Philippines v. Arcilia,
Jr., G.R. No. 161397, June 30, 2005.
’’“New Sampaguita Builders Construction V. Philippine National Bank, G.R.
No. 148743, July 30, 2004.
’’’Section 6, R.A. No. 3765.
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VII. INTELLECTUAL PROPERTY CODE
A. Intellectual property rights in general
a.
1.
Intellectual property rights
What are intellectual property rights?
Intellectual property rights (IPR) are rights given to persons
O' er creation of their minds. It has two (2) categories:
2.
a.
Industrial property which includes inventions (patents),
trademarks, industrial design, and geographic indications
of source; and,
b.
Copyright and related rights. Copyright includes literary
and artistic works. Rights related to copyright include
those of performing artists in their performances,
producers of phonograms in their recordings, and those of
broadcasters in their radio and television programs.1
What are the kinds of intellectual property rights under the
Intellectual Property Code of the Philippines ("IPC")?
Under the IPC,2 the term Intellectual Property Rights under
the Intellectual Property Code consist of:
a.
Copyright and related rights - Exist over original and
derivative intellectual creations in the literary and
artistic domain protected from the moment of creation.3
b.
Trademark and service marks—Any visible sign capable of
distinguishing the goods (trademark) or services (service
mark) of an enterprise and shall include a stamped or
marked container of goods.4
’Gepty: Intellectual Property Compendium citing WIPO, p. 25, 2019 edition.
2Section 4.1, R.A. No. 8293, or the Intellectual Property Code of the Philippines.
Section 172, R.A. No. 8293.
‘Section 121.1, R.A. No. 8293.
202
VII. INTELLECTUAL PROPERTY CODE
C.
203
Geographic indications - Indications which identify a good
as originating from a given territory, a region or locality
where a given quality, reputation or other characteristic
of the good is essentially attributable to its geographic
indication.6
Examples: Bordeaux (for wine), Grasse (for perfume) and
Tuscany (for olive oil).
d.
Industrial designs — Any composition of line or colors or
any three-dimensional form, whether or not associated
with lines or colors; provided that such composition or
form gives a special appearance to and can serve as a
pattern for an industrial product or handicraft.6
e.
Patents — Any technical solution of a problem with any
field of human activity which is new, involves an inventive
step and is industrially applicable.7
f.
Lay out designs — Synonymous with topography, and
it means the three-dimensional disposition, however
expressed, of the elements, at least one of which is an
active element and of some or all of the interconnections
of an integrated circuit, or such a three-dimensional
disposition prepared for an integrated circuit intended for
manufacture.8
g.
Integrated circuit — A product, in its final form or an
intermediate form, in which the elements are integrally
formed in and/or on a piece of material and which is
intended to perform an electronic function.9
h.
Protection of undisclosed information - Means protection
of information lawfully held from being disclosed to,
acquired by, or used by others without their consent in a
manner contrary to honest commercial practices so long
as such information: i) is secret in the sense that it is not,
as a body or in the precise configuration and assembly
of its components, generally known among or readily
'Article 22, TRIPS Agreement.
'Section 112, R.A. No. 8293.
’Section 21, R.A. No. 8293.
'Section 112.3, R.A. No. 8293, as amended by R.A. No. 9150; Section 112.3,
IPC.
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accessible to persons within the circles that normally
deal with the kind of information in question; ii) has
commercial value because it is a secret; and iii) has been
subject to reasonable steps under the circumstances, by
the person lawfully in control of the information, to keep
it secret.10
3.
Describe intellectual property as a right.
Intellectual Property right is statutory in nature. The rights
conferred on Intellectual Property must be provided by law and can
only be enjoyed on the terms specified by statute.
It is also an incorporeal right which exists separate and distinct
from the material object to which it is attached. Thus, ownership in
one does not necessarily vest ownership in the other. The transfer
of assignment of the Intellectual Property will not constitute a
conveyance of the thing it covers, nor would a conveyance of the
latter imply the transfer of the Intellectual Property Right.11
It is a private right, and as such, when it comes to enforcement
there is a need from the rights holder or the owner of the Intellectual
Property to participate or cooperate in any and all investigations
and prosecutions involving violations of Intellectual Property Rights
for purposes of establishing ownership of intellectual property and
determining the lack of consent or authority in the commission of
any act that is deemed an infringement.12
The right is also not absolute. It is subject to certain limitations
and exceptions as may be provided by law depending on the kind of
Intellectual Property Rights involved.13
4.
Is hoarding or collection of empty bottles so that they can be
withdrawn from circulation and thus impede the circulation of
the bottled products a violation of IPR under the IPC?
It is not a violation of the IPC. While it is contrary to good
faith, hoarding does not constitute an act within the contemplation
of the IPC. It does not relate to any patent, trademark, trade name,
'“Article 39, TRIPS Agreement, as cited in Gepty: Intellectual Property Law
Compendium, ibid., p. 26.
"Distilleria Washington, Inc. v. Court of Appeals, G.R. No. 120961, October
17, 1996, cited in Gepty, ibid., p. 16.
12Gepty, ibid., p 16.
13Gepty, ibid., p. 17.
VII. INTELLECTUAL PROPERTY CODE
205
or service mark that may have been invaded, intruded into, or used
without proper authority from the registered owner of the bottles.
Neither does it amount to unfair competition or pertain to mean
fraudulently “passing off’ products or services as those of another
or undertaking any representation or misrepresentation that would
confuse or tend to confuse the goods of one with those of another, or
vice versa.
In this light, hoarding for purposes of destruction is closer to
what another law [R.A. No. 623] covers. The latter makes it unlawful
for any person, without the written consent of the manufacturer,
bottler, or seller who has successfully registered the marks of
ownership in accordance with Section 1 of the said law, to fill such
bottles, boxes, kegs, barrels, or other similar containers so marked
or stamped, for the purpose of sale, or to sell, dispose of, buy, or
traffic in, or wantonly destroy the same, whether filled or not, or to
use the same for drinking vessels or glasses or for any other purpose
than that registered by the manufacturer, bottler or seller.14
5.
Are trade secrets protected under the 1PC?
The IPC protects trade secrets in the sense that the law
covers protection of undisclosed information. In Air Philippines v.
Pennswell,16 the Supreme Court ruled that trade and industrial
secrets (pursuant to the IPC and other related laws) are exempted
from compulsory disclosure.
In this case, Pennswell, a corporation engaged in the business of
manufacturing and selling industrial chemicals, solvents and special
lubricants, filed an action for collection against Air Philippines. In
its Answer, Air Philippines contended that its refusal to pay was
due to the fraud that Pennswell committed on its previous sale of
certain items which were accordingly misrepresented as belonging
to a new line, but were in truth and in fact, identical with products
Air Philippines had previously purchased from Pennswell, and that
the latter merely altered the names and labels of such goods. During
the pendency of the trial, Air Philippines filed a motion to compel
Pennswell to give a detailed list of the ingredients and chemical
components of its products for comparison. The RTC initially
"Coca Cola Bottlers Philippines, Inc. Naga Plant v. Quintin Gomez, G.R. No.
154491, November 14, 2008; BAR 2016.
“G.R. No. 172835, December 13, 2007.
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granted the motion but reconsidered itself. The Court of Appeals
affirmed the RTC. The Supreme Court eventually held that a trade
secret is defined as a plan or process, tool, mechanism or compound
known only to its owner and those of his employees to whom it is
necessary to confide it. The definition also extends to a secret formula
or process not patented, but known only to certain individuals
using it in compounding some article of trade having a commercial
value. A trade secret may consist of any formula, pattern, device,
or compilation of information that: (1) is used in one’s business;
and (2) gives the employer an opportunity to obtain an advantage
over competitors who do not possess the information. Generally, a
trade secret is a process or device intended for continuous use in
the operation of the business, for example, a machine or formula,
but can be a price list or catalogue or specialized customer list. It
is indubitable that trade secrets constitute proprietary rights.
The inventor, discoverer, or possessor of a trade secret or similar
innovation has rights therein which may be treated as property, and
ordinarily an injunction will be granted to prevent the disclosure of
the trade secret by one who obtained the information “in confidence”
or through a “confidential relationship.”
The chemical composition, formulation, and ingredients
of Pennswell’s special lubricants are trade secrets within the
contemplation of the law. In the creation of its lubricants,
Pennswell expended efforts, skills, research, and resources. What
it had achieved by virtue of its investments may not be wrested on
the mere pretext that it is necessary for Air Philippines defense
against a collection for a sum of money. To compel its disclosure is to
cripple its business, and to place it at an undue disadvantage. If the
chemical composition of its lubricants is opened to public scrutiny,
it will stand to lose the backbone on which its business is founded.
b.
6.
Differences among copyright, trademarks and
patents
Distinguish trademark, trade name, patent and copyright from
one another.
a.
Definition
A trademark is any visible sign capable of distinguishing the
goods (trademark) or services (service mark) of an enterprise and
shall include a stamped or marked container of goods.16 In relation
■'Section 121.1, IPC; Section 121.1, IPC, as amended.
VII. INTELLECTUAL PROPERTY CODE
207
thereto, a trade name means the name or designation identifying or
distinguishing an enterprise.”
A patent is an exclusive right granted to an inventor over an
invention or a utility model or industrial design to sell, use, and
make the same for commerce and industry.
The Supreme Court defined copyright as an intangible,
incorporeal right granted by statute to the author or originator
of certain literary or artistic productions, whereby he or she is
invested, for a specific period, with the sole and exclusive privilege
of multiplying copies of the same and publishing and selling them.18
The rights granted by copyright are, however, not limited to
multiplying copies of the literary or artistic work, publishing, and
selling, but also include any form of communication to the public,
as well as right of attribution, right to carry out derivative work,
and other moral rights. Copyright is likewise not confined to literary
and artistic work but also extend to scientific and scholarly works
similar to those works enumerated in Section 172.1 of the IPC.
Copyright should therefore be defined then as an incorporeal
and intangible property granted by law to the originator or creator of
certain literary, artistic, scientific and scholarly works whereby he
or she is invested for a specific period of time a collection of economic
and moral rights on the terms specified by statute.
b.
Scope or object
Trademark attaches to goods or services of an enterprise and
stamped or marked containers.
Copyright is confined to literary, artistic and scientific works
which are original intellectual creations in the literary and artistic
domain protected from the moment of their creation. On the other
hand, patentable inventions refer to any technical solution of a
problem in any field of human activity which is new, involves an
inventive step and is industrially applicable.
’’Section 121.3, IPC, as amended.
l8Kensonic v. Uni-Line Multi Resources, Inc., supra and Fernando Juan v.
Roberto Juan, G.R. No. 221372, August 23, 2017 both citing Black's Law Dictionary,
Centennial Edition. 6th ed. West Group, St. Paul Minnesota, USA, 1990, p. 336.
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C.
Term of protection
A patent is valid for 20 years from filing of the application for
the grant of patent. Copyright is generally valid for 50 years.”
For trademarks, a certificate of registration shall remain in
force for 10 years, provided, that the registrant shall file a declaration
of actual use and evidence to that effect, or shall show valid reasons
based on the existence of obstacles to such use, within one (1) year
from the fifth anniversary of the date of the registration of the mark.
Otherwise, the mark shall be removed from the Register by the
Office.20
d.
Modes of acquiring the various rights
Trademark is acquired solely through registration in accordance
with the provisions of the Intellectual Property Code (“IPC ).21
Patent is likewise acquired through application with, and grant by,
foe IPO. Copyright is acquired from the moment of ci’eation.
7.
Are trademark, copyright and patent interchangeable?
Trademark, copyright and patents are different intellectual
property rights thatcannot be interchanged with another. These three
are completely distinct and separate from one another
an t e protection afforded by one cannot be used interchangeably
to cover items or works that exclusively pertain to the others.22 Thus,
e upreme Court ruled that the name and container of a beauty
cream product are proper subjects of a trademark inasmuch as the
same alls squarely within its definition. In order to be entitled to
exc usively use the same in the sale of the beauty cream product,
e user must sufficiently prove that she registered or used it before
any ody else did. The owner’s copyright and patent registration of
e name and container would not guarantee her the right to the
’’Section 54, IPC, as amended.
“Section 145, IPC, as amended.
21In Zuneca Pharmaceutical v. Natrapharm, G.R. No. 211850, September 8,
2020, the Supreme Court, in an en banc decision, abandoned its previous ru ings t at
registration does not confer ownership of the trademark and that the first user in
good faith defeats the right of the first filer in good faith; and ruled that trademark is
acquired through registration and not prior use.
“Elidad Kho v. Court of Appeals, G.R. No. 115758, March 19, 2002.
VII. INTELLECTUAL PROPERTY CODE
209
exclusive use of the same for the reason that they are not appropriate
subjects of the said intellectual rights.23
In another case, eye leaf bushing is a useful article but it
has no artistic value. Even though it was covered by a certificate
of registration of copyright coupled with notice of deposit with
the National Library, no copyright is obtained. There can be no
copyright infringement despite sale by another of the same product.
The owner should have obtained instead a patent for utility model.24
It was also held that light boxes which utilize specially printed
posters sandwiched between plastic sheets and illuminated with
backlights are not literary or artistic pieces with could be copyrighted.
What is copyrightable is the pictorial or drawing contained in the
light boxes. The light boxes would have been appropriate for patent,
but because copyright and not patent was obtained, then, the first
manufacturer of the light box could not sue another manufacturer
for patent infringement.26
8,
Roberto has been using the name and mark "Lavandera Ko"
in his laundry business since 1994. He has a certificate of
copyright over said name and mark. Overtheyears, his business
expanded with numerous franchise outlets in the Philippines.
Roberto then formed a corporation to handle the said business.
He called it Laundromatic Corporation (Laundromatic) and it
was incorporated in 1997, while "Lavandera Ko" was registered
as a business name in 1998 with the Department of Trade and
Industry (DTI). Later on, Roberto discovered that his brother,
Fernando, was able to register the name and mark "Lavandera
Ko" with the Intellectual Property Office (IPO) in 2010, the
registration of which was filed in 1995. He also discovered that
Fernando had been selling Roberto's franchises. Thus, Roberto
filed a petition for injunction, unfair competition, infringement
of copyright, cancellation of trademark and name before the
RTC. The RTC dismissed the action, finding that neither party
was the originator of the subject mark. The judge ruled that the
mark was created by a certain Santiago Suarez in 1942 in his
musical composition "Lavandera Ko.” Is the RTC correct?
“Kho, supra.
24Jessie G. Ching v. William Salinas, Sr., et al., G.R. No. 161295, June 29,2005.
“Pearl & Dean Phil. v. Shoemart, Inc., G.R. No. 148222, August 15, 2003.
Section 109, IPC, as amended.
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No. The RTC’s riding is erroneous as it confused trade or
business name with copyright. “Lavandera Ko,” the mark in question
in this case is being used as a trade name or specifically, a service
name since the business in which it pertains involves the rendering
of laundry services. As such, the basic contention of the parties is
who between them has the better right to use “Lavandera Ko” as a
service name, given that the law guarantees the protection of trade
names and business names prior to or even without registration,
against any unlawful act committed by third parties. A cause of
action arises when the subsequent use of any third party of such
trade name or business name would likely mislead the public as
such act is considered unlawful. Hence, the RTC erred in denying
the parties the proper determination as to who has the ultimate
right to use the said trade name by ruling that neither of them has
the right or a cause of action since ‘Lavandera Ko” is protected by
i copyright. The case was remanded to the RTC to determine who
letween Roberto and Fernando has a better right over “Lavandera
Co.”«
9.
Can an article of commerce serve as a trademark and at the
same time enjoy patent and copyright protection? Explain and
give an example.
A stamped or marked container of goods can be registered as
a trademark. An original ornamental design or model for articles
of manufacture can be copyrighted if the design can be separated
from the utilitarian aspect of the product. An ornamental design
cannot be patented, because aesthetic creations cannot be patented.
However, it can be registered as an industrial design. Thus, a
container of goods which has an original ornamental design on it
can be registered as a trademark, copyrighted, and registered as an
industrial design.27
B. Patents
10.
What is a patent?
It is an exclusive right granted to an inventor over an invention
or a utility model or industrial design to sell, use, and make the
same for commerce and industry.
“Fernando Juan v. Roberto Juan, G.R. No. 221372, August 23, 2017.
2,BAR 2010.
VII. INTELLECTUAL PROPERTY CODE
II.
211
What are the various types of patents?
The following are the types of Patents: a) patentable inventions;
b) industrial designs; and c) utility models.
12.
What is the purpose of the patent law?
The Patent law has a three-fold purpose: first, it seeks to foster
and reward invention; second, it promotes disclosure of inventions
to stimulate further innovation and to permit the public to practice
the invention once the patent expires; and third, the stringent
requirements for patent protection seek to ensure that ideas in
the public domain remain there for the free use of the public and
it is only after an exhaustive examination by the patent office that
patent is issued.28
13.
What is a utility model?
It is any model of implements or tools or any industrial product,
or of part of the same which is of practical utility by reason of its form,
configuration or composition. An invention qualifies for registration
as a utility model if it is new and industrially applicable. The same
rules on patentable inventions apply to registration of utility model
except the requirement of inventive step. A utility model cannot be
renewed. It can only be registered for a period of seven (7) years
after date of the filing of the application, without any possibility of
renewal.28
The law expressly acknowledges that any new model of
implements or tools of any industrial product even if not possessed
of the quality of invention but which is of practical utility is entitled
to a patent for utility model.30
14.
Cite examples of a utility model.
a.
Being plain automotive spare parts that must conform
to the original structural design of the components
they seek to replace, the Leaf Spring Eye Bushing and
Vehicle Bearing Cushion are not ornamental; they lack
the decorative quality or value that must characterize
“Pearl & Dean (Phil.) Inc. v. Shoemart, Inc., G.R. No. 148222, August 15,
2003.
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“Section 109, IPC, as amended.
’"Roberto Del Rosario v. Court of Appeals and Janito Corporation.
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authentic works of applied art nnd in actuality, they
are utility models, useful articles, albeit with no artistic
design or value.31
15.
b.
Audio equipment or commonly known as the sing along
system or karaoke.32
a.
Patentable invention
What may be patented?
Any technical solution of a problem in any field of human
activity which is new, involves an inventive step and is industrially
applicable shall be patentable. It may be, or may relate to, a product,
or process, or an improvement of any of the foregoing.33
16.
Cite examples of recently patented inventions.
The drone, the iPhone, locomotion assisting device, 3D printer,
retinal prosthesis (or bionic eye), global position system, CRISPR
ene Editing, brain implant, peer-to-peer information exchange for
mobile communication (or Bluetooth), self-driving car, apparatus
or utilizing solar radiant energy (or solar panel), third generation
wireless mobile communications, and virtual reality generator.34
17.
Cite an example of patent involving improvement of a process.
In Aguas u. De Leon,35 the Supreme Court ruled that an
improvement of the old process of mosaic tile making is patentable.
In this case, De Leon had been granted and issued a patent for his
invention of certain new and useful improvements in the process
of making mosaic precast tiles. He filed a complaint for patent
infringement against Aguas who claimed in his answer that the
patent of De Leon was secured through misrepresentation as the
latter’s invention is neither inventive nor new and hence, not
patentable. It was ruled that the patent of De Leon was legally issued.
His process is an improvement of the old process of tile-making. The
tiles produced from De Leon’s process are suitable for construction
31Jessie Ching v. William Salinas, et al., G.R. No. 161295, June 29, 2005.
32Rosario v. Court of Appeals, supra.
“Section 21, IPC, as amended.
“15 Patents that changed the world: Jay Bennett, April 27, 2018.
“G.R. No. L-32160, January 30,1982.
VII. INTELLECTUAL PROPERTY CODE
213
and ornamentation, which previously had not been achieved by tiles
made out of the old process of tile-making. De Leon’s invention has
therefore brought about a new and useful kind of tile. The old type
of tiles was usually intended for floors although there is nothing to
prevent one from using them for walling purposes. These tiles are
neither artistic nor ornamental. They are heavy and massive. The
improvement is indeed inventive and goes beyond the exercise of
mechanical skill. De Leon has improved the old method of making
tiles and precast articles which were not satisfactory because of
an intolerable number of breakages, especially if deep engravings
are made on the tile. He has overcome the problem of producing
decorative tiles with deep engraving, but with sufficient durability.
The Court also found Aguas liable for patent infringement.
18.
What are the requisites for the patentability of an invention?
The requisites are derived from the definition of a patentable
invention itself. They are: a) novelty or newness; b) an inventive
step; and c) industrial applicability.
19.
Define novelty as an element of patentability.
It is best defined in the negative: an invention shall not be
considered new if it forms part of a prior art. Prior art, on the other
hand, shall consist of:
a.
Everything which has been made available to the public
anywhere in the world, before the filing date or the priority
date of the application claiming the invention; and,
b.
The whole contents of a published application for a
patent, utility model, or industrial design registration,
filed or effective in the Philippines, with a filing or priority
date that is earlier than the filing or priority date of the
application.36
Thus, if the inventor makes his invention available to the public
but without obtaining a patent, he cannot restrain others from using
his invention. The use of the invention does not constitute patent
infringement. The rule is, no patent no protection. Neither can
anyone, however, from the public apply for and obtain a patent over
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same invention because the application for patent will no longer
satisfy the element of novelty.
It was held that a utility model shall not be considered “new"
if before the application for a patent it has been publicly known
or publicly used in this country or has been described in a printed
publication or publications circulated within the country, or if it is
substantially similar to any other utility model so known, used or
described within the country.37
It has been repeatedly held that an invention must possess the
essential elements of novelty, originality, and precedence; and for
the patentee to be entitled to protection, the invention must be new
to the world. When it was established by evidence that the powder
puffs identical with that of petitioner’s patents existed and were
publicly known and used as early as 1963 long before petitioner was
issued the patent in question, then the presumption of correctness
and validity of the patent should be set aside.38
20.
What is the doctrine of prejudicial disclosure?
Under the doctrine of non-prejudicial disclosure, the disclosure
of information contained in the application during the 12 months
preceding the filing date or priority date of the application shall
not prejudice the applicant on the ground of lack of novelty if such
disclosure was made by the inventor himself.39
21.
Yosha was able to put together a mechanical water pump in his
garage consisting of suction systems capable of drawing water
from the earth using less human effort than what was then
required by existing models. The water pump system provides
for a new system which has the elements of novelty and
inventive steps. Yosha, while preparing to have his invention
registered with the IPO, had several models of his new system
fabricated and sold in his province.
Is Yosha's invention no longer patentable by virtue of the
fact that he had sold several models to the public before the
formal application for registration of patent was filed with the
IPO?40
3'Angelita Manzano v. Court of Appeals, G.R. No. 113388, September 5,1997.
“Rosario Maguan v. Court of Appeals, G.R. L-45101, November 28, 1986.
"Section 25, IPC, as amended.
40BAR 2018.
VII. INTELLECTUAL PROPERTY CODE
215
Yosha's invention is still patentable despite the fact he had
sold several models to the public before the formal application for
registration of the patent was filed with the IPO. It is true that
an invention shall not be considered new if it forms part of a prior
art and that prior art shall consist of everything which has been
made available to the public anywhere in the world, before the filing
date or the priority date of the application claiming the invention.
This, however, presupposes that the one who has made available
the patentable invention to the public is a person other than the
applicant for patent.
Under the doctrine of non-prejudical disclosure, the disclosure
of information contained in the application during the 12 months
preceding the filing date or priority date of the application shall
not prejudice the applicant on the ground of lack of novelty if such
disclosure was made by the inventor himself.41
22. What is "inventive step" as an element of patentability?
An invention involves an inventive step if, having regard to
prior art, it is not obvious to a person skilled in the art at the time
of the filing date or priority date of the application claiming the
invention.42
Only prior art made available to the public before the filing
date or priority date is considered in assessing inventive step. Thus,
subsequent development in technologies or invention cannot be used
to discard the element of inventive step.
The phrase “skilled in the art” means the criterion is only
limited to a person with an average level of skill in the concerned
field. It excludes the best expert available.43
In the case of drugs and medicines, there is no inventive step
if the invention results from the mere discovery of a new form or
new property of a known substance which does not result in the
enhancement of the known efficacy of that substance, or the mere
discovery of any new property or new use for a known substance, or
the mere use of a known process unless such known process results
in a new product that employs at least one new reactant.44
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‘'Section 25, IPC, as amended.
“Section 26.1, IPC, as amended.
"Gepty, ibid., p. 258.
“Section 26.2, IPC, as amended.
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X Pharmaceuticals, Inc. has been manufacturing the antibiotic
ointment Marvelopis, which is covered by a patent expiring in
the year 2020. In January 2019, the company filed an application
for a new patent for Disilopis, which although constituting
the same substance as Marvelopis, is no longer treated as an
antibiotic but is targeted and marketed for a new use, i.e., skin
whitening.
Should X Pharmaceuticals, Inc.'s patent application for
Disilopis be granted? Explain.46
No, the patent application for Disilopis should not be granted.
The use of the existing patent although for a different purpose will
not satisfy the elements of novelty and inventive step.
Moreover, under Section 22 of the Intellectual Property Code,
as amended, discoveries, scientific theories and mathematical
methods, and in the case of drugs and medicines, the mere discovery
»f a new form or new property of a known substance which does not
esult in the enhancement of the known efficacy of that substance,
r the mere discovery of any new property or new use for a known
substance, or the mere use of a known process unless such known
process results in a new product that employs at least one new
reactant, are non-patentable inventions.
24.
What is industrial applicability as an element of patentability?
An invention that can be produced and used in any industry
shall be industrially applicable.46
25.
Cezar works in a car manufacturing company owned by Joab.
Cezar is quite innovative and loves to tinker with things. With
the materials and parts of the car, he was able to invent a
gas-saving device that will enable cars to consume less gas.
Francis, a co-worker, saw how Cezar created the device and
likewise came up with a similar gadget, also using scrap
materials and spare parts of the company. Thereafter, Francis
filed an application for registration of his device with the
Bureau of Patents. Eighteen (18) months later, Cezar filed his
application for the registration of his device with the Bureau of
Patents. Is the gas-saving device patentable? Explain.
45BAR 2019.
46Section 27, IPC, as amended.
VII. INTELLECTUAL PROPERTY CODE
217
Yes, it is patentable because it is new, it involves an inventive
step, and it is industrially applicable.47
b.
Non-patentable invention
26. What are the non-patentable inventions?
These are inventions that are excluded from patent protection,
to wit:
Discoveries, scientific theories and mathematical
a.
methods, and in the case of drugs and medicines, the
mere discovery of a new form or new property of a known
substance which does not result in the enhancement of the
known efficacy of that substance, or the mere discovery
of any new property or new use for a known substance,
or the mere use of a known process unless such known
process results in a new product that employs at least one
new reactant;
Schemes, rules and methods of performing mental acts,
b.
playing games or doing business, and programs for
computers;
Methods for treatment of the human or animal body by
c.
surgery or therapy and diagnostic methods practiced on
the human or animal body;
Plant varieties or animal breeds or essentially biological
d.
process for the production of plants or animals;
Aesthetic creations; and
e.
f.
27.
Anything which is contrary to public order or morality.48
Supposing Albert Einstein were alive today and he filed with
the Intellectual Property Office (IPO) an application for patent
for his theory of relativity expressed in the formula E = me2.
The IPO disapproved Einstein's application on the ground that
his theory of relativity is not patentable. Is the IPO's action
correct?
Yes. The IPO’s action is correct because the theory of relativity
is not patentable. Under Section 22.1 of the IPC, “discoveries,
scientific theories and mathematical methods” are non-patentable.49
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’’Section 22, IPC, as amended.
’’BAR 2006.
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X invented a method of improving the tenderness of meat by
injecting an enzyme solution into the live animal shortly before
a slaughter. Is the invention patentable?
No. A process or improvement of process that is related to
any field of human activity, having an inventive activity and is
industrially applicable may be patented. While the elements of
novelty and inventive step are present, the element of industrial
applicability is lacking. To be patentable, the processes must be
directed to making or improving a commercial or industrial product.50
29.
X invented a bogus coin detector which can be used exclusively
on self-operating gambling devices otherwise known as onearmed bandits. Can X apply for a patent? Reasons.
No. X may not apply for a patent since the gambling device
referred to in the problem is itself prohibited and against public
order. But if the machine is used in legalized gambling, such device
can be patented.51
30.
C.
Ownership of a patent
i.
Right to a patent
Who has a right to a patent?
The right to a patent belongs to the inventor, his heirs,
or assigns. When two (2) or more persons have jointly made an
invention, the right to a patent shall belong to them jointly.52
31.
Che-che invented a device that can convert rainwater to
automobile fuel. She asked Macon, a lawyer, to assist in
getting her invention patented. Macon suggested that they
form a corporation with other friends and have the corporation
apply for a patent, 80% of the shares of stock thereof to be
subscribed by Che-che and 5% by Macon. The corporation was
formed and the patent application was filed. However, Che-che
died three (3) months later of a heart attack.
“BAR 1989.
5IBAR 1989.
“Section 28, IPC, as amended.
VII. INTELLECTUAL PROPERTY CODE
219
Franco, the estranged husband of Che-che, contested
the application of the corporation and filed his own patent
application as the sole surviving heir of Che-che. Decide the
issue with reasons.
The estranged husband can successfully contest the application.
There is really no assignment here but subscription to shares of
stock of the corporation with the patent as the consideration. Patent
can only be issued to the inventor, heirs or assigns. There being
no assignment in accordance with the provisions of the IPC, the
husband, as heir, is entitled to the patent.
32. What happens if the inventor never secured a patent on a
patentable product but a copyright was secured instead?
In one case, a corporation was engaged in the manufacture of
advertising display units simply referred to as light boxes. These
units utilize specially printed posters sandwiched between plastic
sheets and illumined by back lights. The manufacturer was able to
secure a certificate of copyright registration over these illuminated
display units. On the issue of whether there is a patent infringement
if another person manufactures the same light boxes, it was held that
(assuming these fight boxes are patentable)when an inventor never
secured a patent for the fight boxes, it therefore acquired no patent
rights which could have protected its invention. The ultimate goal
of a patent system is to bring new designs and technologies into the
public through disclosure; hence, ideas, once disclosed to the public
without protection of a valid patent, are subject to appropriation
without significant restraint.63
And so, in that case, the Court ruled that the copyright
protection extended only to the technical drawings and not to the
light box itself as the latter does not fall under the category of
“prints, pictorial illustrations, advertising copies, labels, tags and
box wraps.” The light box was not a literary or artistic piece which
could be copyrighted under the copyright law; and no less clearly,
neither could the lack of statutory authority to make the light box
copyrightable be remedied by the simplistic act of entitling the
copyright certificate issued by the National Library as “Advertising
Display Units.”
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“Pearl & Dean (Phil.) v. Shoemart, Inc., G.R. No. 148222, August 15, 2003.
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ii.
33.
First-to-file rule
What is the "First to File Rule" under the law on patent?
If two (2) or more persons have made the invention separately
and independently of each other, the right to the patent shall belong
to the person who filed an application for such invention, or where
two or more applications are filed for the same invention, it shall
belong to the applicant who has the earliest filing date or, the
earliest priority date.54
iii.
34.
Invention created pursuant to a commission
Who owns inventions created pursuant to a commission but
not under an employer-employee relationship?
The person who commissions the work shall own the patent,
unless otherwise provided in the contract.56
This is different from copyright where the work is owned by the
one who commissioned it but the copyright belongs to the author or
creator.
35.
How about those inventions created by an employee?
In case the employee made the invention in the course of his
employment contract, the patent shall belong to: a) the employee,
if the inventive activity is not a part of his regular duties even if the
employee uses the time, facilities and materials of the employer; b)
the employer, if the invention is the result of the performance of
his regularly-assigned duties, unless there is an agreement, express
or implied, to the contrary.60
36.
Cezar works in a car manufacturing company owned by Joab.
Cezar is quite innovative and loves to tinker with things. With
the materials and parts of the car, he was able to invent a
gas-saving device that will enable cars to consume less gas.
Francis, a co-worker, saw how Cezar created the device and
“Section 29, IPC, as amended.
55Section 30.1, IPC, as amended.
“Section 30.2, IPC, as amended.
VII. INTELLECTUAL PROPERTY CODE
221
likewise came up with a similar gadget, also using scrap
materials and spare parts of the company. Thereafter, Francis
filed an application for registration of his device with the Bureau
of Patents. Eighteen months later, Cezar filed his application
for the registration of his device with the Bureau of Patents.
Assuming that it is patentable, who is entitled to the patent?
What, if any, is the remedy of the losing party?57
Francis is entitled to the Patent, because he had the earlier
filing date under the “First to File Rule.”68 The remedy of Cezar is to
file a petition in court for the cancellation of the patent of Francis on
the ground that he is the true and actual inventor, and ask for his
substitution as patentee.59
37.
Supposing in the same question above, Joab got wind of the
inventions of his employees and also laid claim to the patents,
asserting that Cezar and Francis were using his materials and
company time in making the devices, will his claim prevail over
those of his employees? Explain.
No. The claim of Joab will not prevail over those ofhis employees,
even if they used his materials and company time in making the gas­
saving device. The invention of the gas-saving device is not part of
their regular duties as employees of a car manufacturing company.60
iv.
Right of Priority
38. What is the "Right of Priority"?
An application for patent filed by any person who has previously
applied for the same invention in another country which by treaty,
convention or law affords similar privileges to Filipino citizens,
shall be considered as filed as of the date of the filing of the foreign
application; provided, that: a) the local application expressly claims
priority; b) it is filed within 12 months from the date of the earliest
foreign application was filed; and c) certified copy of the foreign
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"BAR 2005.
“Section 29, IPC, as amended.
“Sections 67 and 68, IPC, as amended.
“Section 30.2, IPC, as amended.
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application together with an English translation is filed within six
(6) months from the date of filing in the Philippines.61
A patent applicant with the right of priority is given preference
in the grant of a patent when there are two or more applicants for the
same invention. Since both the United States and the Philippines are
signatories to the Paris Convention for the Protection of Industrial
Property, an applicant who has filed a patent application in the
United States may have a right of priority over the same invention
in a patent application in the Philippines. However, this right of
priority does not immediately entitle a patent applicant the grant of
a patent. A right of priority is not equivalent to a patent. Otherwise,
a patent holder of any member-state of the Paris Convention need
not apply for patents in other countries where it wishes to exercise
its patent. It was, therefore, inaccurate for petitioner to argue
that its prior patent application in the United States removed the
invention from the public domain in the Philippines. It should have
complied with the other requirements of the actual grant of the
patent. In this case, the applicant for patent was declared abandoned
by’ the Intellectual Property Office for failure to comply with strict
procedural rules. The right of priority of the patent applicant was
therefore lost.62
d.
39.
Grounds for cancellation of a patent
What are the grounds for cancellation of patents?
The following are the grounds for the cancellation of a patent,
a) the invention is not new or patentable; b) 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 c) the
patent is contrary to public order or morality,63 or granted when the
product or the process is non-patentable.
Once cancelled, the rights conferred by the patent shall
terminate.
That the patent is granted not in favor of the true and actual
inventor is not a ground for cancellation of patent.
61Section 31, IPC, as amended.
“E.I. Dupont De Nemours and Co. v. Director Emma C. Francisco, et al., G.R.
No. 174379, August 31, 2016.
“Section 61.1, IPC.
VII. INTELLECTUAL PROPERTY CODE
e.
223
Remedy of the true and actual inventor
40. What are the remedies of a person declared by final court order
as having the right to the patent?
If a person referred to in Section 29 [First to File Rule] other
than the applicant, is declared by final court order or decision
as having the right to the patent, such person may, within three
(3) months after the decision has become final: a) prosecute the
application as his own application in place of the applicant; b) file a
new patent application in respect of the same invention; c) request
that the application be refused; or d) seek cancellation of the patent,
if one has already been issued.64
41. What are the remedies of the true and actual inventor deprived
of the patent?
If a person, who was deprived of the patent without his consent
or through fraud, is declared by final court order or decision to be the
true and actual inventor, the court shall order for his substitution
as patentee, or at the option of the true inventor, cancel the patent,
and award actual and other damages in his favor if warranted by
the circumstances.65
Even the true and actual inventor, who is not a patent holder,
cannot file an action for patent infringement. Such remedy is
available only to the patentee or his successors-in-interest.“
The remedy available to the inventor who is not issued the
patent is not to file a petition for cancellation of patent with the IPO
but institute the appropriate court action to be declared the patentee
and only after he has obtained judgment that he can ask the IPO to
cancel the patent of the holder. If the inventor was deprived of patent
through fraud or without his consent, he can ask for the cancellation
of patent of the holder upon finality of the favorable court decision;
whereas, if the patent is issued not to the first filer but no fraud
attended the patent issuance, the inventor must wait for three (3)
“Section 67, IPC.
“Section 68, IPC, as amended.
Court of Appeals and Floro International
“Creser Precision Systems, Inc.
Group, G.R. No. 118708, February 2, 1998.
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months from finality of the favorable court decision before he can
seek for the cancellation of patent.
42.
"I" has invented a certain device, which when attached to
the engine of a motor vehicle would cut the consumption of
gasoline by 50%. Without securing a patent therefor, he started
manufacturing the gadget in large quantities and promoted
its sales. An ingenious "J” bought one gadget, dismantled
and studied it, and in due time was himself manufacturing an
identical device. Before offering it for sale, "J" secured a patent
for his device which he called "Gasopid" "I" learns of the patent
and desires to secure his own patent but fearing that he might
be sued for infringement of patents, seeks your legal advice.
How can you help him? Explain briefly.67
T, being the first, true and actual inventor, may file an action
in court to be declared as the one entitled to the patent and upon
finality of the favorable judgment, ask the IPO to have the patent
granted to “J” cancelled and T be issued the patent. I may also
ask for actual and other damages as may be warranted under the
circumstances.
f.
43.
Rights conferred by a patent
What are the rights conferred by a patent?
A patent shall confer on its owner the following exclusive rights:
a) where the subject matter of a patent is a product, to restrain,
prohibit and prevent any unauthorized person or entity from making,
using, offering for sale, selling or importing that product; b) where
the subject matter of a patent is a process, to restrain, prevent or
prohibit any unauthorized person or entity from using the process,
and from manufacturing, dealing in, using, selling or offering for
sale, or importing any product obtained directly or indirectly from
such process.68
Patent owners shall also have the right to assign, or transfer
by succession the patent, and to conclude licensing contracts for the
same.69
G,BAR 1981.
“Section 71.1, IPC, as amended.
“Section 71.2 IPC, as amended.
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44. What is the term of patent?
The term of a patent shall be 20 years from the filing date of
the application. The term is not subject to extension.
45. What is the significance of the term of patent?
A patentee shall have the exclusive right to make, use and sell
the patented machine, article or product, and to use the patented
process for the purpose of industry or commerce, throughout the
territory of the Philippines for the term of the patent; and such
making, using, or selling by any person without the authorization of
the patentee constitutes infringement of the patent.70 The patentee’s
exclusive rights exist only during the term of the patent, hence, after
the cut-off date, the exclusive rights no longer exist.71
g-
Limitations of patent rights
46. What are the limitations to patent rights?
The owner of a patent has no right to prevent third parties
from performing without his authorization the acts of making,
using, offering to sell, selling and importing the patented product or
process in the following circumstances:72
a.
Using a patented product which has been put on the
market in the Philippines by the owner of the product, or
with his express consent, insofar as such use is performed
after that product has been so put on the said market:
provided, that, with regard to drugs and medicines,
the limitation on patent rights shall apply after a drug
or medicine has been introduced in the Philippines or
anywhere else in the world by the patent owner, or by
any party authorized to use the invention: provided,
further, that the right to import the drugs and medicines
contemplated in this section shall be available to any
government agency or any private third party.73
’“Roberto del Rosario v. Court of Appeals, G.R. No. 115106, March 15,1996.
’'Philippine Pharmawealth, Inc. v. Pfizer, Inc., G.R. No. 167715, November
17,2010.
’’Section 72, IPC, as amended
’“Section 72.1, IPC, as amended.
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b.
Where the act. is done privately and on a non-commercial
scale or for a non-commercial purpose: Provided, that it
does not significantly prejudice the economic interests of
the owner of the patent;”
c.
Where the act consists of making or using exclusively for
experimental use of the invention for scientific purposes
or educational purposes and such other activities directly
related to such scientific or educational experimental
use;’5
d.
In the case of drugs and medicines, where the act includes
testing, using, making or selling the invention including
any data related thereto, solely for purposes reasonably
related to the development and submission of information
and issuance of approvals by government regulatory
agencies required under any law of the Philippines or
of another country that regulates the manufacture,
construction, use or sale of any product: Provided, That,
in order to protect the data submitted by the original
patent holder from unfair commercial use provided in
Article 39.3 of the Agreement on Trade-Related Aspects
of Intellectual Property Rights (TRIPS Agreement),
the Intellectual Property Office, in consultation with
the appropriate government agencies, shall issue the
appropriate rules and regulations necessary therein not
later than 120 days after the enactment of this law;76
e.
Where the act consists of the preparation for individual
cases, in a pharmacy or by a medical professional, of a
medicine in accordance with a medical prescription or
acts concerning the medicine so prepared;77 and
f.
Where the invention is used in any ship, vessel, aircraft,
or land vehicle of any other country entering the territory
of the Philippines temporarily or accidentally: provided,
’’Section 72.2, IPC, as amended.
’‘Section 72.3, IPC, as amended.
’‘Section 72.4, IPC, as amended.
’’Section 72.5, IPC, as amended.
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that such invention is used exclusively for the needs of
the ship, vessel, aircraft, or land vehicle and not used
for the manufacturing of anything to be sold within the
Philippines.78
g-
Any prior user, who, in good faith, was using the invention
or has undertaken serious preparations to use the
invention in his enterprise or business, before the filing
date or priority date of the application on which a patent
is granted, shall have the right to continue the use thereof
as envisaged in such preparations within the territory
where the patent produces its effect.79
h.
A government agency or third person authorized by the
Government may exploit the invention even without
agreement of the patent owner where:80
i.
The public interest, in particular, national security,
nutrition, health or the development of other sectors,
as determined by the appropriate agency of the
government, so requires;81 or
ii.
Mere determination of an appropriate government
agency on the existence of a ground based on public
interest would suffice for the exploitation of the
invention.82 This is different from the situation
of national emergency or extreme urgency where
the determination is made by the President of the
Philippines.83
iii.
A judicial or administrative body has determined
that the manner of exploitation, by the owner of the
patent or his licensee, is anti-competitive;84 or
’’Section 72.6, IPC, as amended.
’’Section 73.1, IPC, as amended.
“Section 74, IPC, as amended.
•'Section 74.1(a), IPC, as amended.
“Gepty, ibid., p. 303.
“Section 74.2(g), IPC, as amended.
“Section 74.1(b), IPC, as amended.
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iv.
In the case of drugs and medicines, there is a national
emergency or other circumstance of extreme urgency
requiring the use of the invention;"’ or
In the case of drugs and medicines, there is a public
non-commercial use of the patent by the patentee,
without satisfactory reason.86
47.
Yosha was able to put together a mechanical water pump in his
garage consisting of suction systems capable of drawing water
from the earth using less human effort than what was then
required by existing models. The water pump system provides
for a new system which has the elements of novelty and
inventive steps. Yosha, while preparing to have his invention
registered with the IPO, had several models of his new system
fabricated and sold in his province.
If Yosha is able to properly register his patent with the
IPO, can he prevent anyone who has possession of the earlier
models from using them?87
Yosha can no longer prevent anyone who has possession of the
earlier models from using them even if Yosha is able to properly
register the patent with the IPO. One of the limitations of patent
rights is the use of the patented product which has been put on the
market in the Philippines by the owner of the product insofar as
such use is performed after the product has been so put on the said
market.88
48.
Under what conditions can the government, or third person
authorized by the government, exploit the invention?
The use by the Government, or third person authorized by the
Government shall be subject, mutatis mutandis, to the conditions
“Section 74.1(c), IPC, as amended.
“Section 74.1(d), IPC, as amended.
“’BAR 2018.
“Section 72, IPC.
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specified in Sections 95 to 97H9 and 100 to 1O290 of the IPC.01 In
particular —
89Section 95. Requirement to Obtain a License on Reasonable Commercial
Terms. 95.1. The license will only be granted after the petitioner has macle efforts
to obtain authorization from the patent owner on reasonable commercial terms and
conditions but such efforts have not been successful within a reasonable period of
time.
95.2. The requirement under Subsection 95.1 shall not apply in any of the fol­
lowing cases:
(a) Where the petition for compulsory license seeks to remedy a practice deter­
mined after judicial or administrative process to be anti-competitive;
(b) In situations of national emergency or other circumstances of extreme ur­
gency;
(c) In cases of public non-commercial use; and
(d) In cases where the demand for the patented drugs and medicines in the
Philippines is not being met to an adequate extent and on reasonable terms, as deter­
mined by the Secretary of the Department of Health.
95.3. In situations of national emergency or other circumstances of extreme
urgency, the right holder shall be notified as soon as reasonably practicable.
95.4. In the case of public non-commercial use, where the government or con­
tractor, without making a patent search, knows or has demonstrable grounds to
know that a valid patent is or will be used by or for the government, the right holder
shall be informed promptly, (n)
95.5. Where the demand for the patented drugs and medicines in the Philip­
pines is not being met to an adequate extent and on reasonable terms, as determined
by the Secretary of the Department of Health, the right holder shall be informed
promptly.
Section 96. Compulsory Licensing of Patents Involving Semi-Conductor Tech­
nology. In the case of compulsory licensing of patents involving semi-conductor tech­
nology, the license may only be granted in case of public non-commercial use or to
remedy a practice determined after judicial or administrative process to be anti-com­
petitive. (n)
Section 97. Compulsory License Based on Interdependence of Patents. If the
invention protected by a patent, hereafter referred to as the “second patent,” within
the country cannot be worked without infringing another patent, hereafter referred
to as the “first patent,” granted on a prior application or benefiting from an earlier
priority, a compulsory license may be granted to the owner of the second patent to the
extent necessary for the working of his invention, subject to the following conditions:
97.1. The invention claimed in the second patent involves an important
technical advance of considerable economic significance in relation to the first patent;
97.2. The owner of the first patent shall be entitled to a cross-license on
reasonable terms to use the invention claimed in the second patent;
97.3. The use authorized in respect of the first patent shall be non-assignable
except with the assignment of the second patent; and
97.4. The terms and conditions of SECTION s 95, 96 and 98 to 100 of this Act.
(Section 34-C, R.A. No. 165a)
“Section 100. Terms and Conditions of Compulsory License. The basic terms
and conditions including the rate of royalties of a compulsopr license shall be fixed by
the Director of Legal Affairs subject to the following conditions:
100.1. The scope and duration of such license shall be limited to the purpose
for which it was authorized;
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1.
The scope and duration of the such use shall be limited to
the purpose for which it was authorized;92
2.
Such use should be non-exclusive;93
3.
The right holder shall be informed promptly whenever
any of the foregoing circumstances occurs;94
100.2. The license shall be non-exclusive;
100.3. The license shall be non-assignable, except with that part of the
enterprise or business with which the invention is being exploited;
100.4. Use of the subject matter of the license shall be devoted predominantly
for the supply of the Philippine market: Provided, That this limitation shall not apply
where the grant of the license is based on the ground that the patentee’s manner of
exploiting the patent is determined by judicial or administrative process, to be anti­
competitive.
100.5. The license may be terminated upon proper showing that circumstances
which led to its grant have ceased to exist and are unlikely to recur: Provided, That
adequate protection shall be afforded to the legitimate interest of the licensee; and
100.6. The patentee shall be paid adequate remuneration taking into account
the economic value of the grant or authorization, except that in cases where the
license was granted to remedy a practice which was determined after judicial or
administrative process, to be anti-competitive, the need to correct the anti-competitive
practice may be taken into account in fixing the amount of remuneration. (Section 35B, R.A. No. 165a)
Section 101. Amendment, Cancellation, Surrender of Compulsory License.
101.1. Upon the request of the patentee or the licensee, the Director of Legal Affairs
may amend the decision granting the compulsory license, upon proper showing of
new facts or circumstances justifying such amendment.
101.2. Upon the request of the patentee, the said Director may cancel the
compulsory license:
(a) If the ground for the grant of the compulsory license no longer exists and
is unlikely to recur;
(b) If the licensee has neither begun to supply the domestic market nor made
serious preparation therefor;
(c) If the licensee has not complied with the prescribed terms of the license;
101.3. The licensee may surrender the license by a written declaration
submitted to the Office.
101.4. The said Director shall cause the amendment, surrender, or cancellation
in the Register, notify the patentee, and/or the licensee, and cause notice thereof to be
published in the IPO Gazette. (Section 35-D, R.A. No. 165a)
Section 102. Licensee’s Exemption from Liability. Any person who works a
patented product, substance and/or process under a license granted under this
Chapter, shall be free from any liability for infringement: Provided, however, That
in the case of voluntary licensing, no collusion with the licensor is proven. This is
without prejudice to the right of the rightful owner of the patent to recover from the
licensor whatever he may have received as royalties under the license. (Section 35-E,
RA. No. 165a)
91Section 74, IPC, as amended.
92Section 74.2(d), IPC, as amended.
93Section 74.2(e), IPC, as amended.
91Section 74.2(b), IPC, as amended.
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4.
The right holder shall be paid adequate remuneration in
the circumstances of each case, taking into account the
economic value of the authorization."1'
h.
Patent infringement
49. What constitutes civil action for patent infringement?
Intellectual property infringement basically means performing
any act in violation of the rights granted by law to the owner or
holder of the intellectual property right.
The making, using, offering for sale, selling, or importing a
patented product or a product obtained directly or indirectly from
a patented process, or the use of a patented process without the
authorization of the patentee constitutes patent infringement:
provided, that, this shall not apply to instances covered by Sections
72.1 and 72.4 (Limitations of Patent Rights); Section 74 (Use of
Invention by Government); Section 93.6 (Compulsory Licensing);
and Section 93-A (Procedures on Issuance of a Special Compulsory
License under the TRIPS Agreement) of the IPC.96
There can be no infringement of a patent until a patent has
been issued, since whatever right one has to the invention covered
by the patent arises alone from the grant of patent. An inventor has
no common law right to a monopoly of his invention. He has the right
to make use of and vend his invention, but if he voluntarily discloses
it, such as by offering it for sale, the world is free to copy and use
it with impunity. A patent, however, gives the inventor the right
to exclude all others. To be able to effectively and legally preclude
others from copying and profiting from the invention, a patent is a
primordial requirement. No patent, no protection.97
50. When will importation of the patented product not amount to
patent infringement?
Generally, importation of the patented product without the
patentee’s authorization amounts to infringement. However, with
regard to drugs and medicines, the law allows importation by the
“Section 74.2(f), IPC, as amended.
“Section 76.1, IPC, as amended.
"Creser Precision Systems, Inc. v. Court of Appeals, G.R, No. 118708,
February 2,1998; Pearl & Dean (Phil.) Incorporated v. Shoemart Incorporated, G.R.
No. 148222, August 15, 2003.
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government or any private third party once the drug or medicine
has been introduced in the Philippines or anywhere else in the world
by the patent owner, or by any party authorized to use the invention
in the Philippines.”
51,
Who may file an action for patent infringement?
Any patentee, or anyone possessing any right, title or interest
in and to the patented invention, whose rights have been infringed,
may bring an action for patent infringement before a court of
competent jurisdiction."
Only the patent holder can file an action for infringement. The
inventor, who was not issued the patent, cannot file such action nor
even apply for injunction to enjoin the use or making or sale of the
patented product.100
The Supreme Court further ruled that the phrase “anyone
possessing any right, title or interest in and to the patented
invention, whose rights have been infringed” may bring an action
for infringement does not refer to the inventor not issued the patent
but to the patentee’s successors-in-interest and assignee.101
The remedy of the inventor but who was deprived of the patent
is to file an action in court that he be declared the patentee and not
to file an action for infringement.102
52.
Who has the burden of proof in an action for infringement?
The burden of proof to substantiate a charge of infringement
is with the plaintiff. But where the plaintiff introduces the patent
in evidence, and the same is in due form, there is created a prima
facie presumption of its correctness and validity. The decision
of the Director of Patent (now, of the IPO) in granting the patent
is presumed to be correct. The burden of going forward with the
evidence (burden of evidence) then shifts to the defendant to
overcome by competent evidence this legal presumption.103
"Section 72.1, IPC, as amended.
"Section 76, IPC, as amended.
‘“Creser, supra.
’“‘Creser, supra.
>02Supra.
'"Rosario Maguan v. Court of Appeals, G.R. No. L-45101, November 28,1986.
1
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53.
233
Tests in patent infringement
What are the tests to determine infringement of patent?
The tests to determine infringement of patent are: a) literal
infringement; and b) the doctrine of equivalents.
54.
How is the literal infringement test used vis-a-vis the doctrine
of equivalents?
In using literal infringement as a test, resort must be had, in
the first instance, to the words of the claim. If accused matter clearly
falls within the claim, infringement is made out and that is the end
of it. The Court must juxtapose the claims of the patent and the
accused product within the context of the claims and specifications
to determine whether there is exact identity of all material elements.
Under the doctrine of equivalents, infringement also occurs when a
device appropriates a prior invention by incorporating its innovative
concept and albeit with some modifications and change, performs
substantially the same function in substantially the same way to
achieve substantially the same result. It requires satisfaction of the
function-means-and-result test.10,1
Applying both tests, the Supreme Court held in one case that
viewed from any perspective or angle, the floating power tiller of
petitioner is identical and similar to that of the turtle power tiller
of defendant in form, configuration, design and appearance. In
operation, the floating power tiller operates also in similar manner
as the turtle power tiller. The patent issued by the Patent Office
referred to a “farm implement but more particularly to a turtle hand
tractor having a vacuumatic housing float on which the engine drive
is held in place, the operating handle, the harrow housing with
its operating handle and the paddy wheel protective covering.” It
appears from the foregoing observation of the trial court that these
claims of the patent and the features of the patented utility model
were copied by petitioner. The Supreme Court is compelled to arrive
at no other conclusion but that there was infringement.105
In applying this test in another case, the Supreme Court ruled
that while both compounds have the effect of neutralizing parasites
101Pascua Godines v. Court of Appeals and SV-Agro Enterprises, Inc., G.R. No.
97343, September 13, 1993; BAR 2015.
105Godines, supra.
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in animals, identity of result does not amount to infringement of
patent unless the accused product operates in substantially the same
way or by substantially the same means as the patented compound,
even though it performs the same function and achieves the same
result. In other words, the principle or mode of operation must be
the same or substantially the same. The doctrine of equivalents thus
requires satisfaction of the function-means-and result test. In the
case at bar. apart from the fact the Albendozole is an anthelmintic
agent like methyl5propylthio-2-benzimidazole carbamate, nothing is
more asserted regarding the method or means by which Albendozole
weeds out parasites in animals, thus giving no information on
whether that method is substantially the same as the manner by
which the accused’s compound works.106
In Del Rosario v. Court of Appeals,107 a case involving patent
for utility model covering an audio equipment, commonly known as
the sing along system or karaoke, the Supreme Court, in ruling that
there was patent infringement under the doctrine of equivalents,
observed: (a) both are used by a singer to sing a amplify his voice;
(b) both are used to sing with a minus-one or multiplex tapes, or
that both are used to play minus-one or standard cassette tapes for
singing or for listening to; (c) both are used to sing a minus-one tape
and multiplex tape and to record the singing and the accompaniment;
(d) both are used to sing with live accompaniment; (d) both are used
to sing with live accompaniment and to record the same; (e) both are
used to enhance the voice of the singer using echo effect, treble, bass
and other controls; (g) both are equipped with cassette tape decks
which are installed with one being used for playback and the other,
for recording the singer and the accompaniment, and both may also
be used to record a speaker’s voice or instrumental playing, like
the guitar and other instruments; (h) both are encased in box-like
cabinets; and (i) both can be used with one or more microphones.
Clearly, therefore, both models involve substantially the
same modes of operation and produce substantially the same if not
identical results when used.
55.
What’s the rationale of the doctrine of equivalents?
The reason for the doctrine of equivalents is that to permit the
imitation of a patented invention which does not copy any literal
laiSmith Kline Beckman Corporation V. Court of Appeals, G.R. No. 126627,
August 14, 2003.
mSupra.
VII. INTELLECTUAL PROPERTY CODE
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detail would be to convert the protection of the patent grant into a
hollow and useless thing. Such imitation would leave room for, and
indeed encourage, the unscrupulous copyist to make unimportant
and insubstantial changes and substitutions in the patent which,
though adding nothing, would be enough to take the copied matter
outside the claim, and hence outside the reach of the law.108
ii.
Civil and criminal action
56. What are the remedies of the patent owner in case of patent
infringement?
The remedies of the patentee in case of patent infringement
are as follows:
a.
Civil action
Any patentee, or anyone possessing any right, title or interest
in and to the patented invention, whose rights have been infringed,
may bring a civil action before a court of competent jurisdiction, to
recover from the infringer such damages sustained thereby, plus
attorney’s fees and other expenses of litigation, and to secure an
injunction for the protection of his rights.'"9
If the damages are inadequate or cannot be readily ascertained
with reasonable certainty, the court may award by way of damages
a sum equivalent to reasonable royalty."0
The court may, according to the circumstances of the case,
award damages in a sum above the amount found as actual damages
sustained: provided, that the award does not exceed three (3) times
the amount of such actual damages.'"
Anyone who actively induces the infringement of a patent or
provides the infringer with a component of a patented product or
of a product produced because of a patented process knowing it
to be especially adopted for infringing the patented invention and
not suitable for substantial non-infringing use shall be liable as a
contributory infringer and shall be jointly and severally liable with
the infringer."2
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'“’Godines, supra.
■“Section 76.2, IPC, as amended.
■‘“Section 76.3, ibid.
'“Section 76.4, ibid.
■“Section 76.6, IPC, as amended.
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b.
Criminal action
If infringement is repeated by the infringer or by anyone in
connivance with him after finality of the judgment of the court
against the infringer, the offender shall, without prejudice to the
institution of a civil action for damages, be criminally liable."3
Unlike trademark and copyright infringement, the first act of
patent infringement does not give rise to criminal liability. A person
can only be held criminally liable if he repeats the commission of
the same infringing acts after finality of the court judgment (in
a civil action for infringement) against him. The repeated acts of
infringement will then give rise to both criminal and civil liabilities.
c.
Provisional remedies
The patent holder may secure a preliminary injunction to
restrain acts of infringement during the pendency of the action for
patent infringement?"
Relevantly, under the 2020 Rules of Procedure for Intellectual
Property Cases, at any time after the filing of the complaint, a motion
for the disposal and/or destruction of the seized infringing goods, or
materials and implements predominantly used in the infringement,
may be filed by the right-holder before the court?16
There is destruction when the infringing goods are completely
destroyed and are put beyond further use. There is disposal when
the infringing goods are effectively prohibited from re-entry into
the channels of commerce but may be reused for some other lawful
purpose.116
The court may, in its discretion, order that the infringing goods,
materials and implements predominantly used in the infringement
be disposed of outside the channels of commerce or destroyed,
without compensation.11’
Generally, unless restrained by the Supreme Court or the
Court of Appeals, any order issued by the court in cases involving
intellectual property rights is immediately executory except, among
"“Section 84.IPC, as amended.
‘"Section 76.2, IPC, as amended.
'"Rule 20, Section 1.
mIbid.
"’Section 76.5, ibid.
VII. INTELLECTUAL PROPERTY CODE
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others, an order of destruction where a motion for reconsideration
is filed.118
57.
Nestor Dionisio invented a space age revolutionary mini
room air-conditioner and was able to secure the registration
patent and issuance of patent certificate for said invention
by the Philippines' Patent Office. He immediately went into
commercial production and sale of his invention. Later, Carlos
Asistio, who used to be Nestor's plant manager, organized his
own company, and engaged in the manufacture of exactly the
same mini-room air-conditioners for his own outfit and which
he sold for his own benefit.
As counsel of Dionisio, what legal steps would you take to
protect his rights and interests? Discuss.1,9
As counsel for Dionisio, I will take the following legal steps:
Within four (4) years from the commission of acts of infringement, I
will bring a civil action for infringement of patent before the proper
court to recover from the infringer damages sustained by reason of
the infringement. The amount of damages is based on the profits
which he would have made without the infringement and if the
same cannot be determined, reasonable royalty. If the circumstances
warrant, I will also ask for other damages but not to exceed three
times (3x) the amount of actual damages.
In the same civil action, I will also pray for attorney’s fees, costs
of suit and the issuance of writ of preliminary injunction to restrain
further acts of infringement during the pendency of the case. An
order to seize and impound tools, equipment and paraphernalia
used in connection with the infringement may also be prayed for.
If after a final judgment is rendered by the Court against the
infringer, he repeated the infringement, I will again institute a civil
action for damages with the same above stated provisional remedies,
as well as criminal action for the repetition of infringement.
After finality of the court judgment, the preliminary
injunction shall be converted into a final injunction and the seized
tools, equipment and paraphernalia used to commit the acts of
infringement may be destroyed and declared outside the channels
of commerce.
118Rule 1, Section 4 of the 2020 Rules of Procedure for Intellectual Property
Cases.
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If the infringer commits the same acts of infringement, I will
file criminal and civil actions for the repeated acts of infringement,
iii.
58.
Prescriptive period
What is the prescriptive period of a patent infringement suit?
No damages can be recovered for acts of infringement
committed more than four (4) years before the institution of the
action for infringement.120
The IPC, as amended, provides: Damages cannot be recovered
for acts of infringement committed before the infringer had known,
or had reasonable grounds to know of the patent. It is presumed that
the infringer had known of the patent if on the patented product,
or on the container or package in which the article is supplied to
the public, or on the advertising material relating to the patented
product or process, are placed the words “Philippine Patent” with
the number of the patent.121
iv.
59.
Defenses in action for infringement
What are the defenses that can be asserted in a patent
infringement suit?122
The following are defenses that can be asserted in a patent
infringement suit:
a.
The patent or any claim thereof is invalid;
b.
Any of the grounds on which petition for cancellation can
be brought;
c.
The patent is not new or patentable;123
d.
Specification of the invention does not comply with the
law;
e.
The patent was issued not to the true and actual inventor,
or the plaintiff did not derive his rights from the true and
actual inventor; and
f.
Prescription.
l20Section 79, IPC, as amended.
‘“‘Section 80, IPC, as amended.
‘“BAR 1993.
"“Section 81 in relation to Section 161, IPC, as amended.
VII. INTELLECTUAL PROPERTY CODE
239
In one case, when a patent is sought to be enforced, the
questions of invention, novelty or prior use, and each of them, are
open to judicial examination; in cases of infringement of patent no
preliminary injunction will be granted unless the patent is valid and
infringed beyond question and the record conclusively proves the
defense is sham. In other words, the competent court has jurisdiction
to declare a patent invalid. Upon certification that the judgment has
become final, it is the ministerial duty of the Patent Office (now the
IPO) to execute the judgment.124
In fact, under the IPC, in an action for infringement, if the
court shall find the patent or any claim to be invalid, it shall cancel
the same, and the Director of Legal Affairs upon receipt of the final
judgment of cancellation by the court, shall record that fact in the
register of the Office and shall publish a notice to that effect in the
IPO Gazette.126
60.
In an action for infringement of patent, the alleged infringer
defended himself by stating (1) that the patent issued by
the Patent Office was not really an invention which was
patentable; (2) that he had no intent to infringe so that there
was no actionable case for infringement; and (3) that there was
no exact duplication of the patentee’s existing patent but only
a minor improvement.
With those defenses, would you exempt the alleged
violator from liability? Why?120
I would not exempt the alleged violator from liability for the
following reasons:
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a.
A patent once issued by the Patent Office raises a
presumption that the article is patentable. The validity
of the patent and the question over the inventiveness,
novelty and usefulness of the product are matters which
are better determined by the Patent Office. There is
a presumption that the Philippine Patent Office has
correctly determined the patentability of the model and
such action must not be interfered with in the absence of
'“Rosario Maguan v. Court of Appeals, G.R. L-45101, November 28,1986.
'“Section 82, IPC, as amended.
'“BAR 1992.
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240
competent evidence to the contrary.127 A mere statement
or allegation is not enough to destroy that presumption;
61.
b.
An intention to infringe is not necessary nor an element
in a case for infringement of a patent;
c.
There is no need of exact duplication of the patentee’s
existing patent such as when the improvement made by
another is merely minor. Under the doctrine of equivalents,
infringement is committed if the accused product
introduced only minor innovations or improvement but
performs the same function in the same way to accomplish
the same result. Exact duplication of the patentee’s
existing patent is not necessary for infringement to lie.
v.
Licensing
What are the kinds of licensing agreements?
a.
Voluntary Licensing
b.
Compulsory Licensing
62. What is voluntary license in patent?
A voluntary license is an authorization given by the patent
holder to another person allowing him to produce the patented
article. The license usually fixes the amount of royalties, sets quality
requirements and defines the markets in which the licensee can sell
the product.
The licensee shall be entitled to exploit the subject matter of
the technology transfer arrangement during the whole term of the
technology transfer arrangement.128
To encourage the transfer and dissemination of technology,
prevent or control practices and conditions that may in particular
cases constitute an abuse of intellectual property rights having an
adverse effect on competition and trade, all technology transfer
arrangements shall comply with the provisions of voluntary licensing
under the IPC.129
|
12,Manzano v. Court of Appeals, G.R. No. 113388, September 5, 1997.
I28Section 90, IPC, as amended.
129Section 85, IPC, as amended.
-
241
VII. INTELLECTUAL PROPERTY CODE
63.
Enumerate three (3) stipulations that are
technology transfer agreements.1 “
prohibited
in
The following stipulations are prohibited in technology transfer
agreements:
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a.
Those which impose upon the licensee the obligation to
acquire from a specific source capital goods, intermediate
products, raw materials, and other technologies, or
of permanently employing personnel indicated by the
licensor;
b.
Those pursuant to which the licensor reserves the right to
fix the sale or resale prices of the products manufactured
on the basis of the license; and,
c.
Those that contain restrictions regarding the volume and
structure of production.
Other prohibited clauses are as follows:131
a.
Those that prohibit the use of competitive technologies in
a non-exclusive technology transfer agreement;
b.
Those that establish a full or partial purchase option in
favor of the licensor;
c.
Those that obligate the licensee to transfer for free to
the licensor the inventions or improvements that may be
obtained through the use of the licensed technology;
d.
Those that require payment of royalties to the owners of
patents for patents which are not used;
e.
Those that prohibit the licensee to export the licensed
product unless justified for the protection of the legitimate
interest of the licensor such as exports to countries where
exclusive licenses to manufacture and/or distribute the
licensed product(s) have already been granted;
f.
Those which restrict the use ofthe technology supplied after
the expiration of the technology transfer arrangement,
except in cases of early termination of the technology
transfer arrangement due to reason(s) attributable to the
licensee;
1MBAR 2010.
131Section 87.4 to 87.15, IPC, as amended.
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DIVINA ON COMMERCIAL LAW:
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E-
Those which require payments for patents and other
industrial property rights after their expiration,
termination arrangement;
h.
Those which require that the technology recipient shall
not contest the validity of any of the patents of the
technology’ supplier;
i.
Those which restrict the research and development
activities of the licensee designed to absorb and adapt the
transferred technology to local conditions or to initiate
research and development programs in connection with
new products, processes or equipment;
j.
Those which prevent the licensee from adapting the
imported technology to local conditions, or introducing
innovation to it, as long as it does not impair the quality
standards prescribed by the licensor;
k.
Those which exempt the licensor for liability for non­
fulfillment of his responsibilities under the technology
transfer arrangement and/or liability arising from third
party suits brought about by the use of the licensed
product or the licensed technology; and
1.
Other clauses with equivalent effects.
What contractual stipulations are required in all technology
transfer agreements?
The following stipulations are required in all technology
transfer agreements:
a.
The laws of the Philippines shall govern its interpretation
and in the event of litigation, the venue shall be the proper
court in the place where the licensee has its principal
place of business;
b.
Continued access to improvements in techniques and
processes related to the technology shall be made available
during the period of the technology transfer arrangement;
c.
In case it shall provide for arbitration, the Procedure of
Arbitration of the Arbitration Law of the Philippines or
the Arbitration Rules of the International Chamber of
Commerce (ICC) shall apply and the venue of arbitration
shall be the Philippines or any neutral country;
VII. INTELLECTUAL PROPERTY CODE
d.
243
The Philippine taxes on all payments relating to the
technology transfer agreement shall be borne by the
licensor. 132
65. What is compulsory licensing?
Compulsory licensing is when the government allows another
person to produce the patented product or process without the
consent of the patent owner or plans to use the patented invention
itself.
66. What are the grounds for compulsory licensing of a patent?
The Director General of the Intellectual Property Office may
grant a license to exploit a patented invention, even without the
agreement of the patent owner, in favor of any person who has shown
his capability to exploit the invention, under any of the following
circumstances:133
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a.
National emergency or other circumstances of extreme
urgency;134
b.
Where the public interest, in particular, national security,
nutrition, health or the development of other vital sectors
of the national economy as determined by the appropriate
agency of the Government, so requires;135 or
c.
Where a judicial or administrative body has determined
that the manner of exploitation by the owner of the patent
or his licensee is anti-competitive;136 or
d.
In case of public non-commercial use of the patent by the
patentee, without satisfactory reason;'37
e.
If the patented invention is not being worked in the
Philippines on a commercial scale, although capable of
being worked, without satisfactory reason: provided, that
■“Section 88, IPC, as amended; BAK 2010.
'“Section 93, IPC, as amended.
■’■Section 93.1, ibid.
'“Section 93.2, ibid.
'“Section 93.3, ibid.
'“Section 93.4, ibid.
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the importation of the patented article shall constitute
working or using the patent;'"" and
f.
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.'39
A compulsory license shall also be available for the manufacture
and export of drugs and medicines to any country having insufficient
or no manufacturing capacity in the pharmaceutical sector to address
public health problems: provided, that, a compulsory license has
been granted by such country or such country has, by notification or
otherwise, allowed importation into its jurisdiction of the patented
drugs and medicines from the Philippines in compliance with the
TRIPS Agreement.140
67.
Super Biology Corporation (Super Biology) invented and
patented a miracle medicine for the cure of AIDS. Being the
sole manufacturer, Super Biology sold the medicine at an
exorbitant price. Because of the sudden prevalence of AIDS
cases in Metro Manila and other urban areas, the Department
of Health (DOH) asked Super Biology for a license to produce
and sell the AIDS medicine to the public at a substantially
lower price. Super Biology, citing the huge costs and expenses
incurred for research and development, refused. Assuming you
are asked your opinion as the legal consultant of DOH, discuss
how you will resolve the matter.
DOH may file a petition for compulsory license with the
Director of Legal Affairs of the Intellectual Property Office to exploit
the patented medicine even without the agreement of the patent
owner on the ground of public interest, in particular, health.141 Once
granted, the DOH may then produce and sell the AIDS medicines
for a cheaper price subject to payment of reasonable royalties to
Super Biology.142
‘"“Section 93.5; Sections 34, 34-A, 34-B, R.A. No. 165a, ibid.
‘“Section 93.6, ibid.
'“Section 93-A.2, ibid.
"'Section 193, R.A. No. 8293, as amended.
‘“BAR 2017.
VII. INTELLECTUAL PROPERTY CODE
245
68. What is the period to file a petition for compulsory license?
A compulsory license may not be applied for before the
expiration of a period of four (4) years from the date of filing of the
application or three (3) years from the date of the patent whichever
period expires last.1'13
Compulsory license may be applied for at any time after the
grant of the patent in the following cases:144
a.
Where the public interest, in particular, national security,
nutrition, health or the development of other vital sectors
of the national economy as determined by the appropriate
agency of the Government, so requires; or
b.
Where a judicial or administrative body has determined
that the manner of exploitation by the owner of the patent
or his licensee is anti-competitive; or
c.
In case of public non-commercial use of the patent by the
patentee, without satisfactory reason; and,
d.
If the invention protected by a patent, hereafter referred
to as the “second patent,” within the country cannot be
worked without infringing another patent, hereafter
referred to as the “first patent,” granted on a prior
application or benefiting from an earlier priority, a
compulsory license may be granted to the owner of the
second patent to the extent necessary for the working of
his invention.
69. What are the terms and conditions of compulsory license?
The basic terms and conditions including the rate of royalties
of a compulsory license shall be fixed by the Director of Legal Affairs
subject to the following conditions:
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a.
The scope and duration of such license shall be limited to
the purpose for which it was authorized;
b.
The license shall be non-exclusive;
‘“Section 94, IPC, as amended.
“‘Section 94.2, IPC, as amended.
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C.
The license shall be non-assignable, except with that part
of the enterprise or business with which the invention is
being exploited;
d.
Use of the subject matter of the license shall be devoted
predominantly for the supply of the Philippine market:
provided, that this limitation shall not apply where
the grant of the license is based on the ground that the
patentee’s manner of exploiting the patent is determined
by judicial or administrative process, to be anti­
r
competitive;
e.
The license may be terminated upon proper showing
that circumstances which led to its grant have ceased to
exist and are unlikely to recur: provided, that adequate
protection shall be afforded to the legitimate interest of
the licensee; and
f.
The patentee shall be paid adequate remuneration
taking into account the economic value of the grant or
authorization, except that in cases where the license was
granted to remedy a practice which was determined after
judicial or administrative process, to be anti-competitive,
the need to correct the anti-competitive practice may be
taken into account in fixing the amount of remuneration.1”
Relevantly, in Price v. United Laboratories,146 the Supreme
Court held that a compulsory license may be granted over the entire
patented invention for there is no law requiring that the license be
limited to a specific embodiment of the invention or to a particular
claim.
70.
Does compulsory licensing amount to deprivation of the
property right of the patent holder without due process of law?
There is no deprivation of property without due process of law
because the compulsory license acknowledges the patentee as the
owner of the patent and he will be paid reasonable royalties for the
exploitation of his invention by the licensee.147
■‘‘Sections 100,100.1 to Section 100.6, IPC, as amended.
,,6Barry John Price V. United Laboratories, G.R. No. 82542, September 29,
1988.
1,1Ibid.
VII. INTELLECTUAL PROPERTY CODE
vi.
247
Assignment and transmission of rights
71. How are rights, title or interest in and to patents and invention
assigned?
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.'*’
72. What are the formalities prescribed by the IPC for the
assignment of rights over a patent?
The law prescribes the following formalities for the assignment
of rights over a patent and the invention to which the patent relates:
a.
The assignment must be in writing, acknowledged before
a notary public or other officer authorized to administer
oath or perform notarial acts, and certified under the
hand and official seal of the notary or such other officer.'*9
b.
The IPO shall record assignments, licenses and other
instruments relating to the transmission of any right, title
or interest in and to inventions, and patents or application
for patents or inventions to which they relate.160
c.
Such instruments shall be void as against any subsequent
purchaser or mortgagee for valuable consideration and
without notice, unless, it is so recorded in the Office,
within three (3) months from the date of said instrument,
or prior to the subsequent purchase or mortgage.161
C. Trademarks
a.
Definition of Marks, Collective Marks, Trade Names
73. What is a trademark?
A “trademark” is any word, name, symbol, emblem, sign
or device or any combination thereof adopted and used by a
manufacturer or merchant to identify his goods and distinguish
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'“Section
‘“Section
'“Section
“'Section
104, IPC, as amended.
105, IPC, as amended.
106.1, ibid.
106.2, ibid.
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them from those manufactured, sold or dealt in by others; it is any
visible sign capable of distinguishing goods.162
74.
What is a collective mark?
"Collective Mark” means any visible sign designated as such
in the application for registration and capable of distinguishing the
origin or any other common characteristic, including the quality of
goods or services of different enterprises which use the sign under
the control of the registered owner of the collective mark.163
75.
Differentiate a trademark from a service mark.
“Mark” means any visible sign capable of distinguishing the
goods (trademark) or services (service mark) of an enterprise and
shall include a stamped or marked container of goods.164 Thus, the
name and container of a beauty cream product and LPG cylinder
tank bearing a stamp or mark are proper subjects of a trademark.
76.
What is a trade name?
A trade name means the name or designation identifying or
distinguishing an enterprise.165
A name or designation may not be used as a trade name if by
its nature or the use to which such name or designation may he
put, it is contrary to public order or morals and if, in particular, it
is liable to deceive trade circles or the public as to the nature of the
enterprise identified by that name.166
In one case, it was ruled that while “San Francisco” is just
a proper name referring to the famous city in California and that
“coffee” is simply a generic term, the respondent in that case has
acquired an exclusive right to the use of the trade name “SAN
FRANCISCO COFFEE & ROASTERY, INC.” since the registration
of the business name with the Department of Trade and Industry.
Thus, respondent’s use of its trade name from then on must be free
from any infringement by similarity.167
‘“Pribhdas J. Marpuri v. Court of Appeals, G.R. No. 114508, November 19,
1999.
‘“Section 121.2, IPC, as amended.
'“Section 121.1, IPC, as amended
‘“Section 121.3, IPC, as amended.
‘“Section 165.1, IPC, as amended.
167Coffee Partners v. San Francisco Coffee and Roastery, Inc., G.R. No. 169504,
March 3, 2010.
VII. INTELLECTUAL PROPERTY CODE
77.
249
Is registration with the IPO a prerequisite in an infringement
suit of a trade name?
No. A trade name previously used in trade or commerce
in the Philippines need not be registered with the IPO before an
infringement suit may be filed by its owner against the owner of an
infringing trademark. The IPC eliminated such requirement.158
78. What is the objective of the law in protecting trademarks?
The purpose of the law in protecting trademarks has a two­
fold objective; to protect the owner of his property and to protect the
public from being deceived by reason of a misleading claim.169
Trademarks have several functions: they indicate the origin
or ownership of the articles or services in which they are used;
they guarantee that the articles or services comes up to a certain
standard of quality; and they advertise the articles and services
they symbolize.160
79. What are the territorial limits of a trademark?
Trademarks acknowledge no territorial boundaries of states or
nations, but extend to every market where the trader’s goods have
become known and identified by his use of the mark.161
80. Does the owner of a trademark have a right of property to
prevent others from manufacturing, producing, or selling the
same article to which it is attached?
No. The owner of a trademark has no right of property to
prevent others from manufacturing, producing or selling the same
article to which it is attached. In other words, the trademark
confers no exclusive rights in the goods to which the mark has been
applied.162 The owner of the trademark can have it registered with
'“Coffee Partners v. San Francisco Coffee and Roastery, Inc., G.R. No. 169504,
March 3, 2010.
'“63 C.J. Section 5; BAR 1982.
'“Zuneca Pharmaceutical v. Natrapharm, Inc., G.R. No. 211850, September
8,2020.
16163 C.J. Section 12; BAR 1982.
IK63 J.C. Section 12.
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the IPO and after registration, preclude others from adopting the
same trademark for same and similar goods.163
b.
81.
Acquisition of ownership of mark
How is trademark acquired?
The rights in a mark shall be acquired through registration
made validly in accordance with the provisions of the law. The
applicant or the registrant shall file a declaration of actual use
of the mark with evidence to that effect, within three (3) years
from the filing date of the application. Otherwise, the application
shall be refused or the mark shall be removed from the Register
by the Director unless non-use is caused by circumstances arising
independently of the will of the trademark owner. Lack of funds
shall not excuse non-use of a mark.164
In Zuneca Pharmaceutical v. Natrapharm, Inc.,'65 the Supreme
Court abandoned its previous rulings166 that registration does not
confer ownership of the trademark and that the first user in good
faith defeats the right of the first filer in good faith. Instead, it was
held that trademarks are acquired solely through registration.
In this case, the two competing marks involved were
“ZYNAPS” and “ZYNAPSE.” They were admitted by both parties to
be confusingly similar with each other. “ZYNAPS” (without an E)
is owned by Zuneca. It is a drug for the treatment of seizures like
epilepsy. On the other hand, Natrapharm owns “ZYNAPSE” (with
an E), which is also a medicine, but for stroke.
Zuneca never registered its trademark “ZYNAPS” with the
Intellectual Property (IP) Office, but it has been using it since 2004.
Meanwhile, Natrapharm has registered its trademark “ZYNAPSE”
on September 24, 2007.
163BAR 1982.
16iSection 152.1, IPC, as amended.
™Ibid.
166These are the cases of: Mattel, Inc. v. Emma Francisco, etal., G.R. No. 166886,
July 30, 2008; E.Y. Industrial Sales v. Shien Dar Electricity and Machinery Co., G.R.
No. 184850, October 20, 2010; Berris Agricultural Co., Inc v. Norvy Abyadang, G.R.
No. 183404, October 13, 2010; Birkenstock Orthopaedia GMBH v. Philippine Shoe
Expo Marketing Corporation, G.R. No. 194307, November 20, 2013; Ecole de Cuisine
Manille v. Renaud Cointreau, G.R. No. 185830, June 5, 2013.
VII. INTELLECTUAL PROPERTY CODE
251
With that, Natrapharm sued Zuneca for trademark
infringement for using a confusingly similar trademark in the same
field of drugs or medicine. Zuneca counter-sued and alleged that
Natrapharm was the one in bad faith since it (Natrapharm) knows
Zuneca’s usage of “ZYNAPS” as a mark since 2004 considering that
they both presented their products in the same pharmaceutical
convention years prior.
The trial court found Zuneca liable for trademark infringement,
essentially saying that Natrapharm was the first one to register
the trademark in good faith. The trial court found no bad faith on
the part of Natrapharm either since Zuneca failed to prove that
Natrapharm actually knew the existence of Zuneca’s “ZYNAPS.”
The Court of Appeals affirmed this decision.
The Supreme Court partly affirmed the lower courts’ decision.
It definitively ruled that the only mode of acquiring ownership of a
trademark is through registration (and not use). According to the
Supreme Court: “(i) the language of the IP Code provisions clearly
conveys the rule that ownership of a mark is acquired through
registration; (ii) the intention of the lawmakers was to abandon
the rule that ownership of a mark is acquired through use; and
(iii) the rule on ownership used in Berris and E. Y. Industrial Sales,
Inc. [cases] is inconsistent with the IP Code regime of acquiring
ownership though registration.”
Indeed, Section 122 of the IP Code states “[t]he rights in a mark
shall be acquired through registration made validly in accordance
with, the provisions of this law. ”
In short, the Supreme Court held that Natrapharm’s
“ZYNAPSE” must prevail over Zuneca’s “ZYNAPS” since the former
was first registered. The Supreme Court, however, absolved Zuneca
from being liable for trademark infringement because it found
Zuneca to be a prior user in good faith. Accordingly, the IP Code
contemplates that a prior user in good faith may continue to use
its mark even after the registration of the mark by the first to file
registrant in good faith.
82. Did the Supreme Court abandon the first-to-file rule?
By ruling that trademark is acquired solely through
registration, the Supreme Court did not, nevertheless, abandon the
first the file rule. While it is the fact of registration which confers
ownership of the mark and enables the owner thereof to exercise
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the rights expressed in the IP Code, the first to file rule nevertheless
prioritizes the first filer of the trademark application and operates
to prevent any subsequent applicant from registering the mark.1,1
83.
Is the registrant still required to declare actual use of the
trademark?
Yes, the applicant or registrant must declare actual use of the
trademark. The applicant or the registrant shall file a declaration
of actual use of the mark with evidence to that effect within three
(3) years from the filing date of the application. Otherwise, the
application shall be refused or the mark shall be removed from the
Register by the Director.108
In Mattel v. Francisco,169 it was held that an admission in a
pleading (Comment and Memorandum) that the party has not filed
declaration of actual use within three (3) years from application
may be construed as an abandonment or withdrawal of any right or
interest in his trademark.
The registrant is also required to file a declaration of actual
use and evidence to that effect within one (1) year from the fifth
anniversary of the date of the registration of the mark.170
The Supreme Court, however, held that while the registrant
should declare actual use, this does not imply that actual use is
the recognized mode of acquisition of ownership. Rather, it must be
understood as provision requiring actual use of the mark in order for
the registered owner of a mark to maintain his ownership.171
84.
What is the significance of the certificate of registration of a
trademark?
A certificate of registration of a mark shall be prima facie
evidence of the validity of the registration, the registrant’s ownership
of the mark, and of the registrant’s exclusive right to use the same
in connection with the goods or services and those that are related
thereto specified in the certificate.172
lo'Zuneca Pharmaceuticals, supra.
’“Section 124.2, IPC, as amended.
169G.R. No. 166886, July 30, 2008.
1'"Section 145, IPC, as amended.
’’’Zuneca Pharmaceuticals, supra.
172Section 138, IPC, as amended.
VII. INTELLECTUAL PROPERTY CODE
253
The rule on the prima facie validity of a certificate of registration
is merely meant to recognize the instances when such certificate is
not reflective of ownership such as when the registration was done
contrary to the IP Code.173
C.
Acquisition of ownership of trade name
Trade name is acquired by use.
Notwithstanding any laws or regulations providing for any
obligation to register trade names, such names shall be protected,
even prior to or without registration, against any unlawful act
committed by third parties.174 In particular, any subsequent use of
the trade name by a third party, whether as a trade name or a mark
or collective mark, or any such use of a similar trade name or mark,
likely to mislead the public, shall be deemed unlawful.176
The remedies provided for infringement of trademark in shall
apply mutatis mutandis in case of trade name infringement.176
d.
Non-registrable marks
85. What are the so-called "unregistrable marks"?
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A mark cannot be registered if it:
a.
Consists of immoral, deceptive or scandalous matter,
or matter which may disparage or falsely suggest a
connection with persons, living or dead, institutions,
beliefs, or national symbols, or bring them into contempt
or disrepute;
b.
Consists of the flag or coat of arms or other insignia of the
Philippines or any of its political subdivisions, or of any
foreign nation, or any simulation thereof;
c.
Consists of a name, portrait or signature identifying a
particular living individual except by his written consent,
or the name, signature, or portrait of a deceased President
of the Philippines, during the life of his widow, if any,
except by written consent of the widow;
l73Zuneca Pharmaceuticals, supra.
174Section 165.2, (a) IPC, as amended.
176Section 165.2 (b), IPC, as amended.
l76Section 165.3, IPC, as amended.
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d.
Is identical with a registered mark belonging to a different
proprietor or a mark with an earlier filing or priority date,
in respect of:
i.
The same goods or services; or
ii.
Closely related goods or services, or
iii.
If it nearly resembles such a mark as to be likely to
deceive or cause confusion (confusing similarity);
e.
Is identical with, or confusingly similar to, or constitutes
a translation of a mark which is considered by the
competent authority of the Philippines to be well-known
internationally and in the Philippines, whether or not it
is registered here, as being already the mark of a person
other than the applicant for registration, and used for
identical or similar goods or services: provided, that in
determining whether a mark is well-known, account
shall be taken of the knowledge of the relevant sector of
the public, rather than of the public at large, including
knowledge in the Philippines which has been obtained as
a result of the promotion of the mark;
f.
Is identical with, or confusingly similar to, or constitutes a
translation of a mark considered well-known in accordance
with the preceding paragraph, which is registered in the
Philippines with respect to goods or services which are
not similar to those with respect to which registration
is applied for: provided, that use of the mark in relation
to those goods or services would indicate a connection
between those goods or services, and the owner of the
registered mark: provided, further, that the interests of
the owner of the registered mark are likely to be damaged
by such use;
S-
Is likely to mislead the public, particularly as to the
nature, quality, characteristics or geographical origin of
the goods or services;
h.
Consists exclusively of signs that are generic for the goods
or services that they seek to identify;
L
Consists exclusively of signs or of indications that have
become customary or usual to designate the goods
or services in everyday language or in bona fide and
established trade practice;
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j.
Consists exclusively of signs or of indications that may
serve in trade to designate the kind, quality, quantity,
intended purpose, value, geographical origin, time or
production of the goods or rendering of the services, or
other characteristics of the goods or services;
k.
Consists of shapes that may be necessitated by technical
factors or by the nature of the goods themselves or factors
that affect their intrinsic value;
1.
Consists of color alone, unless defined by a given form; or
m.
Is contrary to public order or morality.1”
Immoral, deceptive, scandalous matter or falsely suggesting a
connection with person, belief, institution or symbol
86. Fredco Manufacturing Corporation (Fredco), filed a Petition
for Cancellation of Registration No. 56561 before the Bureau
of Legal Affairs of the Intellectual Property Office (IPO)
against President and Fellows of Harvard College (Harvard
University), a corporation organized and existing under the
laws of Massachusetts, United States of America.
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Fredco alleged that Registration No. 56561 was issued
to Harvard University for the mark "Harvard Veritas Shield
Symbol” for decals, tote bags, serving trays, sweatshirts,
t-shirts, hats and flying discs under Classes 16, 18, 21, 25
and 28 of the Nice International Classification of Goods and
Services. Fredco alleged that the mark "Harvard" for t-shirts,
polo shirts, sandos, briefs, jackets and slacks was first used
in the Philippines by New York Garments Manufacturing &
Export Co., Inc. (New York Garments), Fredco's predecessor­
in-interest.
Harvard University, on the other hand, alleged that it is
the lawful owner of the name and mark "Harvard" in numerous
countries worldwide, including the Philippines.
Fredco made use of the mark "Harvard" for jeans coupled
with a claim that it originated in Cambridge. Was Fredco's
registration of such mark valid?
’’’Section 123.1, IPC, as amended.
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No. Fredco’s registration of the mark “Harvard” should not
have been allowed because the law prohibits the registration of
a mark "which may disparage or falsely suggest a connection
with persons, living or dead, institutions, beliefs. Fredco’s use of
the mark “Harvard,” coupled with its claimed origin in Cambridge,
Massachusetts, obviously suggests a false connection with Harvard
University. On this ground alone, Fredco’s registration of the mark
"Harvard” should have been disallowed.
Moreover, the Philippines and the United States of America
are both signatories to the Paris Convention for the Protection of
Intellectual Property.”8 The Philippines is obligated to assure
nationals of countries of the Paris Convention that they are afforded
an effective protection against violation of their intellectual property
rights in the Philippines in the same way that their own countries
are obligated to accord similar protection to Philippine nationals.
Thus, under Philippine law, a trade name of a national of a State
that is a party to the Paris Convention, whether or not the trade
name forms part of a trademark, is protected “without the obligation
of filing or registration.””9
Name, portrait, signature of living individual
87.
Can the name of spouses of deceased Presidents be registered
as a trademark?
Yes. What the law prohibits is the registration of marks that
consist of a name, portrait or signature identifying a particular living
individual except by his written consent, or the name, signature, or
portrait of a deceased President of the Philippines, during the life of
his widow, if any, except by written consent of the widow.180
Identical mark
88.
What is the first to file rule in trademarks?
The first to file rule in trademarks means that the filing of the
application for registration of trademark in good faith precludes
registration of the same trademark for the same goods or services or
closely related goods and services.
’’’Paris Convention.
1,9Fredco Manufacturing Corporation
College, G.R. No. 185917, June 1,2011.
'“Section 123.1(c), IPC, as amended.
President and Fellows of Harvard
VII. INTELLECTUAL PROPERTY CODE
257
89. Under the first to file rule in trademarks, a mark that nearly
resembles a previously registered mark, such that it is likely
to deceive or cause confusion, cannot be registered. How may
confusion arise?
There are two types of confusion arising from the use of similar
or colorable imitation marks, namely confusion of goods (product
confusion) and confusion of business (source of origin confusion).
Thus, while there is confusion of goods when the products are
competing, confusion of business exists when the products are non­
competing but related enough to produce confusion of affiliation.
Thus, while there is confusion of goods when the products are
competing, confusion of business exists when the products are non­
competing but related enough to produce confusion of affiliation.'81
In one case,182 the Supreme Court held that confusion of
business or source may also include confusion of reputation. Thus:
“similarity in the general appearance of respondent’s trademark and
that of petitioner would evidently create a likelihood of confusion
among the purchasing public. But even assuming, arguendo, that
the trademark sought to be registered by respondent is distinctively
dissimilar from those of the petitioner, the likelihood of confusion
would still subsist, not on the purchaser’s perception of the goods
but on the origins thereof. By appropriating the word “CONVERSE,”
respondent’s products are likely to be mistaken as having been
produced by petitioner. The risk of damage is not limited to a possible
confusion of goods but also includes confusion of reputation if
the public could reasonably assume that the goods of the parties
originated from the same source.”
Tests to determine confusing similarity between marks
90. What are the tests in determining likelihood of confusion?
Likelihood of confusion is the gravamen of the' offense of
trademark infringement. In determining likelihood of confusion,
jurisprudence has developed two tests, the dominancy test and the
'“'McDonald’s Corporation v. L.C. Big Mak Burger, Inc., G.R. No. 143993,
August 18,2004.
'““Converse Rubber Corporation v. Universal Rubber Products, Inc., G.R. No.
1-27906, January 8, 1987.
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holistic test. As to what test should be applied depends entirely
on the set of facts availing in each case. That is the reason why in
trademark cases, jurisprudential precedents should be applied only
to a case if they are specifically in point. In determining likelihood
of confusion, jurisprudence has developed two tests, the dominancy
test and the holistic test.
91.
What is the dominancy test?
The test of dominancy focuses on the similarity of the prevalent
features of the competing trademarks which might cause confusion or
deception. It is explicitly incorporated into law under Section 155.1
of the IPC which defines infringement as the “colorable imitation
of a registered mark or the same container or a dominant feature
thereof.” Under the dominancy test, if the competing trademark
contains the main or essential or dominant features of another, and
confusion and deception is likely to result, infringement takes place.
As the Supreme Court asserted time and again, actual confusion
is not required. Duplication or imitation is not necessary; nor is
it necessary that the infringing label should suggest an effort to
imitate. Similarity in size, form and color, while relevant, is not
conclusive. Only likelihood of confusion on the part of the buying
public is necessary so as to render two marks confusingly similar so
as to deny the registration of the junior mark.183
92.
What is the holistic test?
The Holistic Test entails a consideration of the entirety of the
marks as applied to the products, including labels and packaging,
in determining confusing similarity. The scrutinizing eye of the
observer must focus not only on the predominant words but also on
the other features appearing in both labels so that a conclusion may
be drawn as to whether one is confusingly similar to the other.181
93.
Cite jurisprudence where the Supreme Court applied the
dominancy test.
Yes. The Supreme Court applied the dominancy test in the
following cases:
le8UFC Philippines, Inc. (Now Merged with Nutri-Asia, Inc., with Nutri-Asia,
Inc. as the Surviving Entity) v. Fiesta Barrio Manufacturing Corporation, G.R. No.
198889, January 20, 2016; BAR 1996.
1&1Dermaline, Inc. v. Myra Pharmaceuticals, G.R. No. 190065, August 1,2010.
VII. INTELLECTUAL PROPERTY CODE
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a.
“Philippine Planters Cordial Peanuts” brand as opposed
to “Planters Cocktail Peanuts”, confusingly similar with
respect to their dominant word “Planters.”185
b.
The Sunshine Tomato catsup label was a colorable
imitation of the Del Monte trademark due to prominent
similarities in their general design although there
are some differences. It is not difficult to see that the
Sunshine label is a colorable imitation of the Del Monte
trademark; the predominant colors used in the Del Monte
label are green and red-orange, the same with Sunshine;
the word “catsup” in both bottles is printed in white and
the style of the print/letter is the same; and although the
logo of Sunshine is not a tomato, the figure nevertheless
approximates that of a tomato.186
c.
“Universal Converse and Device” and “Converse Chuck
Taylor” and “All Star Device” where Converse was held to
be the dominant word.187
d.
CFC’s FLAVOR MASTER and Nestle’s MASTER ROAST
and MASTER BLEND188 where the word “Master” was
held to be the dominant feature of the competing marks.
e.
Gold Toe v. Gold Top.189
It was held that a resort to either the Dominancy Test
or the Holistic Test shows that colorable imitation
exists between respondent’s “Gold Toe” and petitioner’s
“Gold Top.” A glance at petitioner’s mark shows that
it definitely has a lot of similarities and in fact looks
like a combination of the trademark and devices that
respondent has already registered; namely, “Gold Toe,”
the representation of a sock with a magnifying glass, the
“Gold Toe” representation and “linenized.”
’“Philippine Nut Industry v. Standard Brands, G.R. No. L-23035, July 31,
1975.
Court of
’“Del Monte Corporation and Philippine Packing Corporation
Appeals, G.R. No. L-78325, January 25, 1990.
mSupra.
188Societe Des Produits Nestle, S.A. and Nestle Philippines v. Court of Appeals,
G.R. No. 112012, April 4, 2001, 356 SCRA 207 (2001).
'“Amigo Manufacturing, Inc. v. Cluett Peabody Co., Inc., G.R. No. 139300,
March 14, 2001.
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f.
"Big Milk" mark for hamburger of LC Big Mak Burger, Inc.
is confusingly similar with the registered “Big Mac” mark
for the same food product of McDonald’s Corporation.191
Applying the dominancy test, the Court finds that
respondents’ use of the “Big Mak” mark results in
likelihood of confusion. First, “Big Mak” sounds exactly
the same as "Big Mac.” Second, the first word in “Big
Mak" is exactly' the same as the first word in “Big Mac.”
Third, the first two letters in “Mak” are the same as the
first two letters in “Mac.” Fourth, the last letter in “Mak”
while a “k” sounds the same as “c” when the word “Mak”
is pronounced. Fifth, in Filipino, the letter “k” replaces “c”
in spelling, thus “Caloocan” is spelled “Kalookan.”
The Court also noted that respondents have adopted in
“Big Mak” not only the dominant but also almost all the
features of “Big Mac.” Applied to the same food product
of hamburgers, with both marks aurally and visually the
same, it will likely result in confusion in the public.
g-
“MCDONALD’S” and “MACJOY”.191
Applying the dominancy test, the Court finds that
herein petitioner’s “MCDONALD’S” and respondent's
“MACJOY’ marks are confusingly similar with each
other such that an ordinary purchaser can conclude an
association or relation between the marks.
To begin with, both marks use the corporate “M” design
logo and the prefixes “Me” and/or “Mac” as dominant
features. The first letter “M” in both marks puts emphasis
on the prefixes “Me” and/or “Mac” by the similar way in
which they are depicted i.e., in an arch-like, capitalized
and stylized manner. For sure, it is the prefix “Me,” an
abbreviation of “Mac,” which visually and aurally catches
the attention of the consuming public. Verily, the word
“MACJOY’ attracts attention the same way as did
“McDonalds,” “MacFries,” “McSpaghetti,” “McDo,” “Big
Mac” and the rest of the MCDONALD’S marks which all
use the prefixes Me and/or Mac.
'“McDonalds’ Corporation v. L.C. Big Mak Burger, G.R. No. 143993, August
18, 2004.
""McDonald’s Corporation v. MacJoy Fastfood Corporation, G.R. No. 166115,
February 2, 2007.
VII. INTELLECTUAL PROPERTY CODE
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Besides and most importantly, both trademarks are used
in the sale of fastfood products.
h.
Pcynogenol v. PCO-GENOLS.102
Both the word[s] PYCNOGENOL and PCO-GENOLS have
the same suffix “GENOL” which on evidence, appears to be
merely descriptive and furnish no indication of the origin
of the article and hence, open for trademark registration
by the plaintiff thru combination with another word or
phrase such as PYCNOGENOL, Furthermore, although
the letters “Y” between P and C, “N” between O and C
and “S” after L are missing in the [petitioner’s] mark
PCO-GENOLS, nevertheless, when the two words are
pronounced, the sound effects are confusingly similar
not to mention that they are both described by their
manufacturers as a food supplement and thus, identified
as such by their public consumers.
i.
Dermaline and Dermalin.103
Dermaline’s insistence that its applied trademark
“DERMALINE, INC.” had differences “too striking
to be mistaken” from Myra’s “DERMALIN’ cannot
be sustained. While it is true that the two marks are
presented differently — Dermaline’s mark is written
with the first “DERMALINE” in script going diagonally
upwards from left to right, with an upper case “D”
followed by the rest of the letters in lower case, and the
portion “DERMALINE, INC.” is written in upper case
letters, below and smaller than the long-hand portion;
while Myra’s mark “DERMALIN’ is written in an
upright font, with a capital “D” and followed by lower
case letters — the likelihood of confusion is still apparent.
This is because they are almost spelled in the same way,
except for Dermaline’s mark which ends with the letter
“E,” and they are pronounced practically in the same
manner in three (3) syllables, with the ending letter “E”
in Dermaline’s mark pronounced silently. Thus, when an
ordinary purchaser, for example, hears an advertisement
192Prosource International v. Horphag Research, G.R. No. 180073, November
25,2009.
193Dermaline, Inc. v. Myra Pharmaceuticals, G.R. No. 190065, August 1, 2010.
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of Dermaline’s applied trademark over the radio, chances
are he will associate it with Myra’s registered mark.
j.
"NANNY’ is confusingly similar to “NAN.”19J
Applying the dominancy test in the present case, the
Court finds that “NANNY’ is confusingly similar to
"NAN.” “NAN” is the prevalent feature of Nestle’s line
of infant powdered milk products. It is written in bold
letters and used in all products. The line consists of PRENAN, NAN-H.A., NAN-1, and NAN-2. Clearly, “NANNY
contains the prevalent feature “NAN.” The first three
letters of “NANNY’ are exactly the same as the letters of
“NAN.” When “NAN” and “NANNY’ are pronounced, the
aural effect is confusingly similar.
k.
Comparing Berris’ mark D-10 80 WP with Abyadang’s
mark NS D-10 PLUS, as appearing on their respective
packages, one cannot but notice that both have a common
component which is D-10. Admittedly, D-10 is the
dominant feature of the mark.195
1.
The use of the stylized “S” in Strong Rubber shoes infringes
on the mark already registered by Sketchers. While it is
undisputed that Sketcher’s stylized “S” is with an oval
design and the other party did not use the oval design, the
dominant feature of the trademark is the stylized “S” as it
is the one that catches the eye of the purchaser.196
m.
OK Hotdog Inasal Cheese Hotdog Flavor Mark for curl
snack product is a colorable imitation of the Mang Inasal
mark for marinated chicken.19’
It is undisputed that the OK Hotdog Inasal mark
copied and adopted as one of its dominant features the
“INASAL” element of the Mang Inasal mark. Given that
the “INASAL”element is, at the same time, the dominant
191Societe Des Produits Nestle, SA v. Dy, G.R. No. 172276, August 8, 2010.
195Berris Agricultural Co., Inc. v. Norvy Abyadang, G.R. No. 183404, October
13,2010.
196Sketchers USA Inc. v. Inter Pacific Industrial Trading, G.R. No. 164321,
March 23, 2011; BAR 2014.
197Mang Inasal Philippines, Inc. v. IFP Manufacturing Corporation, G.R No.
221717, June 19, 2017.
VII. INTELLECTUAL PROPERTY CODE
263
and most distinctive feature of the Mang Inasal mark,
the said elements incorporation in the OK Hotdog Inasal
mark, thus, has the potential to project the deceptive and
false impression that the latter mark is somehow linked
or associated with the former mark.
n.
PHILIPS v. PHILITES for fluorescent bulb, incandescent
light, starter and ballast.'98
Applying both the dominancy and holistic test, the
Supreme Court ruled that the consuming public does not
have the luxury of time to ruminate the phonetic sounds
of the trademarks, to find out which one has a short or
long vowel sound. At bottom, the letters “PHILI” visually
catch the attention of the consuming public and the use
of respondent’s trademark will likely deceive or cause
confusion. Most importantly, both trademarks are used
in the sale of the same goods, which are light bulbs. A
comparison between petitioner’s registered trademark
“PHILIPS” as used in the wrapper or packaging of its
light bulbs and that of respondent’s applied for trademark
“PHILITE” as depicted in the container or actual wrapper/
packaging of the latter’s light bulbs will readily show that
there is a strong similitude and likeness between the two
trademarks that will likely cause deception or confusion to
the purchasing public. The fact that the parties’ wrapper
or packaging reflects negligible differences considering the
use of a slightly different font and hue of the yellow is of
no moment because taken in their entirety, respondent’s
trademark “PHILITES” will likely cause confusion or
deception to the ordinary purchaser with a modicum of
intelligence.
0.
The word “Metro” for magazine publication.199
It was held that “the dominant feature of the applicant
mark is the word “METRO” which is identical, both
visually and aurally, to the cited marks already registered
198Dy v. Koninklijke Philips Electronics, N.V., G.R. No. 186088, March 22,
2017.
199ABS-CBN v. Director of the Bureau of Trademarks, G.R. No. 217916, June
20,2018.
L
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with the IPO. Even if the second cited mark owned by
Metro International contains an accompanying device,
and the third cited mark contains the terms “Philippine
Daily Inquirer", (sic) the dominant feature of the subject
and cited marks is still clearly the word “Metro”, (sic)
spelled and pronounced in exactly the same way. The
identity between the marks would indubitably result in
confusion of origin as well as goods.”
P-
“CITY CASH WITH GOLDEN LION’S HEAD” for Bank
ATM service and “CITI” marks for various banking
services.2®
The Supreme Court said that applying the dominancy test,
the prevalent feature of CITYSTATE SAVING’S BANK’S
mark, the golden lion’s head device, is not present at all
in any of CITIGROUP’S marks. The only similar feature
between respondent’s mark and petitioner’s collection of
marks is the word “CITY” in the former, and the “CITI”
prefix found in the latter. The Court concluded that this
similarity alone is not enough to create a likelihood of
confusion.
94.
Cite jurisprudence where the Supreme Court applied the
holistic test.
a.
When it comes to pants/jeans, the Supreme Court has
consistently applied the holistic test. Thus, it was held
that the trademark “Stylistic Mr. Lee” for maong pants
cannot be deemed confusingly similar with the trademark
“Lee.” The test of fraudulent simulation is to be found in
the likelihood of the deception of some persons in some
measure acquainted with an established design and
desirous of purchasing the commodity with which that
design has been associated. When the casual buyer is
predisposed to be more cautious in his purchase, as in this
case where the products concerned are not inexpensive,
the likelihood of confusion is absent. Further, maong pants
and jeans are not inexpensive and as the casual buyer
is predisposed to be more cautious and discriminating in
“‘’Citigroup, Inc.
2018.
Citystate Savings Bank, Inc., G.R. No. 205409, June 13,
VII. INTELLECTUAL PROPERTY CODE
265
and would prefer to mull over his/her purchase, confusion
and deception is less likely.201
b.
The Court also ruled that the jeans trademarks of Levi’s
Philippines and Diaz’s “made-to-order” ones must be
considered as a whole in determining the likelihood of
confusion between them. The consuming public could
easily discern if the jeans were original or fake or were
manufactured by other brands of jeans. Confusion and
deception were remote since maong jeans are expensive
and the casual buyer is predisposed to be more cautious
and discriminating in and would prefer to mull over his
purchase. Further, Diaz used the trademark “LS JEANS
TAILORING” for the jeans he produced and sold. His
trademark was visually and aurally different from the
trademark “LEVI STRAUSS & CO” appearing on the
patch of original jeans. Diaz also aptly noted that the
design used by LEVIS was an image of two horses but
the evidence will show that there was no such design
in the seized jeans, instead, what is shown is a ‘buffalo
design.”202
C.
The trademarks FRUIT OF THE LOOM and FRUIT
FOR EVE, for hang tags do not resemble each other as
to confuse or deceive an ordinary purchaser, who must
be thought of as having, and credited with, at least
a modicum of intelligence to be able to see the obvious
differences between the two trademarks in question.203
d.
Based on the distinct visual and aural differences
between LOLANE and ORLANE, there is no confusing
similarity between the two marks. The suffix LANE is not
the dominant feature of petitioner’s mark. Neither can it
be considered as the dominant feature of ORLANE which
would make the two marks confusingly similar. First, an
examination of the appearance of the marks would show
that there are noticeable differences in the way they are
“'Emerald Garment Manufacturing Corporation v. Court of Appeals, G.R. No.
100098, December 29, 1995.
“2Diaz v. People of the Philippines and Levi Strauss (Phil.), G.R. No. 180677,
February 18, 2013.
203Fruit of the Loom, Inc. v. Court of Appeals, G.R. No. L-32747, November 29,
1984.
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written or printed. There are visual differences between
LOLANE and ORLANE since the mark ORLANE is in
plain block upper case letters while the mark LOLANE
was rendered in stylized word with the second letter “L”
and the letter “A" co-joined. Second, as to the aural aspect
of the marks, LOLANE and ORLANE do not sound alike.
Appeals to the ear in pronouncing ORLANE and LOLANE
are dissimilar. The first syllables of each mark, i.e., OR
and LO do not sound alike, while the proper pronunciation
of the last syllable LANE — “LEYN” for LOLANE and
“LAN” for ORLANE, being of French origin, also differ.2"
e.
Although the perceived offending word “MARK’ is itself
prominent in petitioner’s trademarks “MARK VII”
and “MARK TEN,” the entire marking system should
be considered as a whole and not dissected, because a
discerning eye would focus not only on the predominant
word but also on the other features appearing in the
labels; only then would such discerning observer draw his
conclusion whether one mark would be confusingly similar
to the other and whether or not sufficient differences
existed between the marks.205
It should be noted that the Supreme Court has often
applied the dominancy test when it comes to “inexpensive
and common” household items bought off the shelf by
“undiscerningly rash” purchasers. As such, if the ordinary
purchaser is “undiscerningly rash”, then he would not
have the time nor the inclination to make a keen and
perceptive examination of the physical discrepancies
in the trademarks of the products in order to exercise
his choice.200 When it comes to products that require
discernment or mulling things over, like jeans, the
Supreme Court has applied the holistic test. The Philip
Morris case is a rare exception.
f.
There are distinct visual and aural differences between
Great White Shark’s Greg Norman Logo and Caralde’s
Shark and Logo Mark. There being no confusing
2<MSeri Somboonsakdikul v. Orlane S.A., G.R. No. 188996, February 1, 2017.
““Philip Morris, Inc. v. Fortune Tobacco Corporation, G.R. No. 158589, June
27, 2006.
““Societe Des Produits Nestle v. Court of Appeals, April 4, 2001, supra.
VII. INTELLECTUAL PROPERTY CODE
267
similarity between the subject marks, the matter of Great
White Shark’s mark has gained recognition becomes
necessary.207
Idem sonans
95. What is the idem sonans rule in trademark?
The rule on idem sonans is also a test to resolve the confusing
similarity of trademarks. A mark with a different spelling but is
similar in sound with a registered trademark when read may be
ruled as being confusingly similar with the said registered mark.
96. Is there a clear-cut rule in the use of both dominancy and
holistic tests?
None. There is no objective test for determining whether the
confusion is likely. Likelihood of confusion must be determined
according to the particular circumstances of each case.208 In the
history of trademark cases in the Philippines, there are no hard
and fast rules in ascertaining whether one trademark is confusingly
similar to or is a colorable imitation of another. While Section 155.1
of the IPC explicitly refers to the dominancy test in determining
trademark infringement, still, each case must be decided on its own
merits. In fact, in certain cases, the Supreme Court applied both
dominancy and holistic tests to determine likelihood of confusion.209
The ultimate question in cases of trademark infringement is “whether
the use of the marks involved would be likely to cause confusion
or mistakes in the mind of the public or deceive purchasers”,
regardless of whether the dominancy or the holistic test is applied.
The universal test has been said to be whether the public is likely
to be deceived.
2O7Great White Shark Enterprises v. Caralde, G.R. No. 192294, November 21,
2012.
““CITIGROUP v. Citystate, supra.
““Berris Agricultural Co., Inc. v. Norvy Abyadang, G.R. No. 183404, October
13,2010 involving the trademark D-10 80 WP and NS D-10 PLUS for fungicide; Amigo
Manufacturing, Inc. v. Cluett Peabody Co., Inc., G.R. No. 139300, March 14, 2001
involving the trademark Gold Toe and Gold Top for socks; Prosource International,
Inc. v. Horphag Research Management SA, G.R. No. 180073, November 25, 2009
involving the trademarks PYCNOGENOL and PCO-GENOLS for food supplement;
Coffee Partners v. San Francisco Coffee and Roastery, Inc., G.R. No. 169504, March 3,
2010 involving the trademarks SAN FRANCISCO COFFEE and SAN FRANCISCO
COFFEE & ROASTERY for coffee products.
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In another case, the Court also prevented the registration of
a trademark based on similarity of sound, explaining that both the
words PYCNOGENOL and PCO-GENOLS have the same suffix
"GENOL" which appears to be merely descriptive and furnish no
indication of the origin of the article and hence, open for trademark
registration by the plaintiff thru combination with another word or
phrase such as PYCNOGENOL. Although there were dissimilarities
in the trademark due to the type of letters used as well as the size,
color, and design employed on their individual packages/bottles, still
the close relationship of the competing products’ name in sounds as
they were pronounced, clearly indicates that purchasers could be
misled into believing that they are the same and/or originates from
a common source and manufacturer.210
Similarly, the Court also used the aural effect of a trademark
when it ruled that ‘NANNY1 is confusingly similar to ‘NAN,’ the
prevalent feature of Nestle’s fine of infant powdered milk products
which is written in bold letters and used in all products. The first
three letters of‘NANNY1 are exactly the same as the letters of‘NAN’
and when ‘NAN’ and ‘NANNY1 are pronounced, the aural effect is
confusingly similar.211
97.
What is the scope of protection afforded to registered
trademark owners?
The scope of protection afforded to registered trademark owners
is not limited to protection from infringers with identical goods. It
also extends to protection from infringers with related goods, and
to market areas that are the normal expansion of business of the
registered trademark owners.
This means that the registered trademark owner may use his
mark on the same or similar products, in different segments of the
market, and at different price levels depending on variations of the
products for specific segments of the market. The Supreme Court has
recognized that the registered trademark owner enjoys protection in
product and market areas that are the normal potential expansion
of his business.2'2
210Prosource International, Inc. v. Horphag Research Management SA, G.R.
No. 180073, November 25, 2009.
211Societe Des Produits Nestle, S.A. v. Dy, Jr., G.R. No. 172276, August 8, 2010.
212Sketchers USA, Inc. v. Inter Pacific Industrial Trading, G.R. No. 164321,
March 23, 2011; Societe Des Produits Nestle, SA v. Dy, G.R. No. 172276, August 8,
2010.
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In Societe Des Produits Nestle, S.A. u Martin Dy, Jr.,m the
Supreme Court held that while there are differences between NAN
and NANNY, (1) NAN is intended for infants while NANNY is
intended for children past their infancy and for adults; and (2) NAN
is more expensive than NANNY, the registered owner of the “NAN”
mark, Nestle should be free to use its mark on similar products, in
different segments of the market, and at different price levels.
The same principle was applied in Sketchers, U.S.A., Inc. v.
Inter Pacific Industrial Trading Corporation.2" The use of the
stylized “S” by the manufacturer of its Strong rubber shoes infringes
on the mark of Sketchers. It is no defense that the Strong rubber
shoes are cheaper and cater to different market segments. Sketchers
should be free to expand its product offering in different segments
of the market.
In a relevant case, it was held that “PAPA BOY& DEVICE”
is confusingly similar with the previously registered mark “PAPA”
even though they refer to different products, PAPA BOY is for
lechon sauce while PAPA is for catsup. The Supreme Court stated
that since petitioner’s product, catsup, is also a household product
found on the same grocery aisle, in similar packaging, the public
could think that petitioner had expanded its product mix to include
lechon sauce, and that the “PAPA BOY’ lechon sauce is now part of
the “PAPA” family of sauces. Thus, if allowed registration, confusion
of business may set in, and petitioner’s hard-earned goodwill may be
associated to the newer product introduced by respondent.215
In Mang Inasal Philippines v. IFP Manufacturing Corpora­
tion,2'6 the Supreme Court ruled that the mark “Ok Hotdog Inasal
Cheese Flavor” for curl snack product is confusingly similar with the
mark “Mang Inasal” for marinated chicken. The Supreme Court also
conclude that average buyer who comes across the curls marketed
under the OK Hotdog Inasal mark is likely to be confused as to the
true source of such curls. To our mind, it is not unlikely that such
buyer would be led into the assumption that the curls are of petitioner
and that the latter has ventured into snack manufacturing or, if
mSupra.
2"Supra.
2ISUFC Philippines, Inc. (Now Merged with Nutri-Asia, Inc., with Nutri-Asia,
Inc. as the Surviving Entity) v. Fiesta Barrio Manufacturing Corporation, G.R. No.
198889, January 20, 2016.
1,6 Supra.
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not. that the petitioner has supplied the flavorings for respondent’s
product. Either way, the reputation of petitioner would be taken
advantage of and placed at the mercy of respondent.217
98.
What is the doctrine of unrelated goods?
One who has adopted, used and registered a trademark on his
goods cannot prevent the adoption, use and registration of the same
trademark by others on unrelated articles of a different kind.
99.
What is the basis of the doctrine?
The certificate of registration entitles the registrant to use the
trademark only for the goods specified in the certificate or goods
related thereto. Therefore, the registrant cannot preclude others
from adopting and registering the trademark for totally unrelated
goods.
It was also held that the prohibition under Section 123 of the
Intellectual Property Code extends to goods that are related to the
registered goods, not to goods that the registrant may produce in
the future. To allow the expansion of coverage is to prevent future
registrants of goods from securing a trademark on the basis of
mere possibilities and conjectures that may or may not occur at all.
Surely, the right to a trademark should not be made to depend on
mere possibilities and conjectures.218
100. Cite jurisprudence where the Supreme Court applied the
doctrine of unrelated goods.
a.
The registered owner of the trademark “Brut” for toilet
articles cannot oppose the registration of the trademark
“Brute” for briefs, since the two products are unrelated,
even if the former has a pending application for the
registration. A purchaser who is out in the market for
the purposes of buying Brute brief would definitely be not
mistaken or misled into buying BRUT after shave lotion
or deodorant.219
21,Mang Inasal Philippines, Inc. v. IFP Manufacturing Corporation, G.R. No.
221717, June 19, 2017.
2iaKenaonic, Inc. v. Uni-Line Multi Resources, Inc., G.R. Nos. 211820-21 and
211834-35, June 6, 2018.
219Faberge, Inc. v. Intermediate Appellate Court, 215 SCRA 316 (1992); BAR
1994.
VII. INTELLECTUAL PROPERTY CODE
271
b.
The owner of the registered trademark “Hickok” for its
diverse articles of men’s wear such as wallets, belts and
men’s briefs which are all manufactured here in the
Philippines by a licensee Quality House, Inc. but are so
labeled as to give the misimpression that the said goods
are of foreign (stateside) manufacture cannot preclude
the registration of the same trademark exclusively for
shoes.220
c.
There is no infringement when the trademark “CANON”
is used for paints, chemical products, toner and dyestuff
while it is used by another for footwear (sandals).221
d.
The trademark registration of LOTUS for soy sauce was
granted and upheld, although the trademark LOTUS
is already registered in favor of another for its product,
edible oil.222
e.
The GALLO trademark registration certificates in the
Philippines and in other countries expressly state that
they cover wines only, without any evidence or indication
that registrant Gallo Winery expanded or intended to
expand its business to cigarettes. Thus, Gallo Winery,
as registered owner of the trademark GALLO, cannot
prevent the registration of the trademark GALLO for
tobacco products.223
f;
Kolin Electronics, the registered owner of the mark “Kolin”,
for goods falling under Class 9 of the Nice Classification,
such as amplifier, booster, converter, voltage regulator
and similar electronic products, can not preclude the
adoption, use and registration of the trademark “Kolin”
on a combination of goods, including colored televisions,
refrigerators, window-type and split-type air conditioners,
electric fans and water dispensers with Taiwan Kolin
even though they belong to the same Class 9, because they
are unrelated products. The Supreme Court held that
whether or not the products covered by the trademark
““Hickok Manufacturing, Co., Inc. v. Court of Appeals, G.R. No. L-44707,
August 31, 1982.
“'Canon Kabushiki Kaisha
Court of Appeals, G.R, No. 120900, July 20,
2004.
“Acoje Mining Co., Inc. v. Director of Patents, 38 SCRA 480; BAR 1978.
“’Mighty Corporation v. E.& J Gallo Winery, G.R. No. 154342, July 14, 2004.
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sought to be registered by Taiwan Kolin, on the one
hand, and those covered by the prior issued certificate of
registration in favor of Kolin Electronics, on the other, fall
under the same categories in the NCL is not the sole and
decisive factor in determining a possible violation of Kolin
Electronics’ intellectual property right should Taiwan
Koiin’s application be granted. It is hornbook doctrine
that emphasis should be on the similarity of the products
involved and not on the arbitrary classification or general
description of their properties or characteristics.
Reiterating the doctrine in Mighty Corporation v. E & J Gallo
Winery,224 the Supreme Court ruled that the goods should be tested
against several factors before arriving at a sound conclusion on the
question of relatedness. Among these are: (a) the business (and
its location) to which the goods belong; (b) the class of product to
which the goods belong; (c) the product’s quality, quantity, or size,
including the nature of the package, wrapper or container; (d)
the nature and cost of the articles; (e) the descriptive properties,
physical attributes or essential characteristics with reference to
their form, composition, texture or quality; (f) the purpose of the
goods; (g) whether the article is bought for immediate consumption,
that is, day-to-day household items; (h) the fields of manufacture;
(i) the conditions under which the article is usually purchased; and
(j) the channels of trade through which the goods flow, how they are
distributed, marketed, displayed and sold.
The Supreme Court then gave credence to the arguments of
Taiwan Kohn that —
•
Taiwan Koiin’s goods are classified as home appliances
as opposed to Kohn Electronics’ goods which are power
supply and audio equipment accessories;
•
Taiwan Kohn’s television sets and DVD players perform
a distinct function and purpose from Kolin Electronics’
power supply and audio equipment; and
•
Taiwan Kohn sells and distributes its various home
appliance products on wholesale and to accredited
dealers, whereas Kohn Electronics’ goods are sold and
flow through electrical and hardware stores.226
22<G.R. No. 154342, July 14, 2004.
226Taiwan Kolin Corporation, LTD. v. Kolin Electronics Co., Inc., G.R. No.
209843, March 15, 2015.
VII. INTELLECTUAL PROPERTY CODE
g.
273
Television sets, stereo components, DVD and VCD players
as against voltage regulators, portable generators, switch
breakers and fuses because the latter’s registration only
covered electronic audio-video products, not electrical
home appliances. The two classifications of goods are
unrelated. For one, the first pertained to goods which
belong to the information technology and audiovisual
equipment subclass while the latter pertained to the
apparatus and devices for controlling the distribution of
electricity sub-class. Also, the goods of the first registrant
were final products but the latter’s products were spare
parts.226
Author’s note. When does one apply the doctrine of unrelated
goods and doctrine of normal or potential expansion of business? For
sure, jurisprudence which applied the doctrine of unrelated goods
could have been arguably ruled as falling under the opposite doctrine
of normal expansion of business, and vice-versa. For academic
discussion, your answer to any such bar question will depend on the
similarity of facts to the foregoing jurisprudence.
Well-known marks
101. What is a well-known mark?
A well-known mark is a mark which is considered by
the competent authority of the Philippines to be well-known
internationally and in the Philippines, whether or not it is registered
here, as being already the mark of a person other than the applicant
for registration.
If the well-known mark is registered in the Philippines,
any mark identical with, confusingly similar to, or constitutes a
translation of such well-known mark, cannot be used for identical
goods or services or be registered in the Philippines with respect to
goods or services which are not similar to those with respect to which
registration is applied for: provided, that use of the mark in relation
to those goods or services would indicate a connection between those
goods or services, and the owner of the registered mark: provided
further, that the interests of the owner of the registered mark are
likely to be damaged by such use.227
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226Kensonic, supra.
“’Section 123.1(e), IPC.
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If the well-known mark is not registered in the Philippines, the
scope of protection only extends to marks used for identical goods or
services."'8
102. What are the remedies of the owner of a well-known mark that
is not registered in the Philippines?
Without prejudice to other remedies under the law, the owner
of the well-known mark may:
a.
Oppose the application for registration of a mark which
is identical with or confusingly similar or constitutes a
translation of such well-known mark;
b.
Petition for cancellation of the registration, if one has
been granted; and,
c.
Unfair competition if the goods are being passed off by
another as the goods of the owner of the well-known mark.
103. Is the knowledge of the general public of the mark taken into
account in determining whether it is a well-known mark?
No, in determining whether a mark is well-known, account shall
be taken of the knowledge of the relevant sector of the public, rather
than of the public at large, including knowledge in the Philippines
which has been obtained as a result of the promotion of the mark.
The power to determine whether a trademark is well-known
lies in the “competent authority of the country of registration or use.”
This competent authority would be either the registering authority
if it has the power to decide this, or the courts of the country in
question if the issue comes before a court.229
104. What is the role of the Paris Convention on the protection of
trademarks?
Under the IPC and the Paris Convention, any foreign national
or juridical person has the legal capacity to sue for the protection of
its trademarks, albeit he or it is not doing business in the Philippines.
^Supra.
229Sehwani Incorporated v. In-N-Out Burger, Inc., G.R. No. 171053, October
15, 2007; Fredco Manufacturing Corporation v. President and Fellows of Harvard
College, G.R. No. 185917, June 1, 2011.
VII. INTELLECTUAL PROPERTY CODE
275
Article 6 of the Paris Convention which governs the protection of
well-known trademarks, is a self-executing provision and does
not require legislative enactment to give it effect in the member
country. It may be applied directly by the tribunals and officials of
each member country by the mere publication or proclamation of
the Convention, after its ratification according to the public law of
each state and the order for its execution. The essential requirement
under this Article is that the trademark to be protected must be
“well-known” in the country where protection is sought.230
Applying this principle in one case, the Court ruled that in
upholding the right of the petitioner to maintain a suit for unfair
competition or infringement of trademarks of a foreign corporation
before the Philippine courts, the duties and rights of foreign states
under the Paris Convention for the Protection of Industrial Property
to which the Philippines and France Eire parties are upheld.231
105. Does the protection afforded by the Paris Convention extend to
trade names?
Yes. The Philippines is obligated to assure nationals of
countries of the Paris Convention that they are afforded an effective
protection against violation of their intellectual property rights
in the Philippines in the same way that their own countries are
obligated to accord similar protection to Philippine nationals. Thus,
under Philippine law, a trade name of a national of a State that is a
party to the Paris Convention, whether or not the trade name forms
part of a trademark, is protected “without the obligation of filing or
registration.”232
This ruling is reiterated by the Court in a later case, explaining
that under the Paris Convention to which the Philippines is a
signatory, a trade name of a national of a State that is a party to
the Paris Convention, whether or not the trade name forms part
of a trademark, is protected without the obligation of fifing or
registration.233
“Sehwani Incorporated v. In-N-Out Burger. Inc., 536 SCRA 227 (2007).
2,lMelbarose R. Sasot and Allandale R. Sasot v. People of the Philippines, G.R.
No. 143193, June 29, 2005.
232Fredco Manufacturing Corporation v. President and Fellows of Harvard
CoDege, G.R. No. 185917, June 1, 2011.
233Ecole De Cuisine Manille (Cordon Bleu of the Philippines), Inc. v. Renaud
Cointreau & Cie and Le Cordon Bleu Inti, B.V., G.R. No. 185830, June 5, 2013.
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106. Cite examples of cases involving well-known marks.
a.
The word "Barbizon” cannot be registered as a trademark
for ladies’ underwear, since it is an internationally wellknown trademark for lingerie.234
b.
In the case of Sehwani v. In-N-Out Burger, the Supreme
Court held that “In-N-Out Burger” is a well-known mark,
given its registration in various countries around the
world and comprehensive advertisements. As such, the
mark is entitled to protection even though there is no
actual use of such mark in the Philippines.235
c.
“Harvard” is the trade name of the world-famous Harvard
University, and it is also a trademark of Harvard
University. Under the Paris Convention, Harvard
University is entitled to protection in the Philippines
of its trade name “Harvard” even without registration
of such trade name in the Philippines. This means that
no educational entity in the Philippines can use the
trade name “Harvard” without the consent of Harvard
University. “Harvard” is a well-known name and mark
not only in the United States but also internationally,
including the Philippines. It is internationally known as
one of the leading educational institutions in the world.
As such, even before Harvard University applied for
registration of the mark “Harvard” in the Philippines, the
mark was already protected under the Paris Convention.“
It should be noted though in that in the case of Fredco, the
“Harvard” mark was not for the use of an educational institution
but for t-shirts, polo shirts, sandos, briefs, jackets and slacks. Fredco
filed a petition for cancellation of the mark “Harvard” against the
President and Fellows of Harvard College alleging that the mark
Harvard for said merchandise was first used in the Philippines by
the New York Garments, Fredco’s predecessor-in-interest.
The Supreme Court, as previously pointed out, ruled that it was
a mistake to register in favor of Fredco’s predecessor-in-interest the
trademark “Harvard” for slacks and similar merchandise because it
suggested a connection with Harvard University.
^Pribhdas J. Mirpuri
Court of Appeals, G.R. No. 114508, November 19,
1999.
a5Ibid.
^Fredco Manufacturing Corporateion v. President and Fellows of Harvard
College, G.R. No. 185917, June 1, 2011.
VII. INTELLECTUAL PROPERTY CODE
277
It is interesting to note that in one case, the Supreme Court did
not consider “GALLO” a “well-known” mark within the contemplation
and protection of the Paris Convention.2'”
107. What is the theory of dilution?
Trademark dilution is the lessening of the capacity of a famous
mark to identify and distinguish goods or services, regardless of the
presence or absence of competition between the owner of the famous
mark and other parties; or likelihood of confusion, mistake or
deception. Subject to the principles of equity, the owner of a famous
mark is entitled to injunction against another person’s commercial
use in commerce of a mark or trade name, if such use begins after
the mark has become famous and causes dilution of the distinctive
quality of the mark. This is intended to protect famous marks from
subsequent uses that blur distinctiveness of the mark or tarnish
or disparage it. Applying this theory, it was held that Dockers and
Design has not acquired a strong degree of distinctiveness yet to be
able to get an injunction against the use of the trademark Paddocks
and Design.238
108. What are generic marks?
Generic marks are those which constitute “the common
descriptive name of an article or substance,” or comprise the “genus
of which the particular product is a species,” or are “commonly used
as the name or description of a kind of goods,” or “imply reference
to every member of a genus and the exclusion of individuating
characters,” or “refer to the basic nature of the wares or services
provided rather than to the more idiosyncratic characteristics of a
particular product,” and are not legally protectable.239
109. Is generic mark prohibited?
Section 123(h) of the Intellectual Property Code prohibits the
registration of a trademark that consists exclusively of signs that are
“’Mighty Corporation and La Campana Fabrica De Tabaco, Inc. v. E. & J.
Gallo Winery and the Andresons Group, Inc., G.R. No. 154342, July 14, 2004.
“Levi Strauss & Co v. Clinton Apparelle, G.R. No. 138900, September 20,
2005.
“Societe Des Produits Nestle v. Court of Appeals, April 4, 2001 citing Federal
Unfair Competition: Lanham Act s 43 (a), p. 3-22.1; See De La Salle Montessori
International of Malolos v. De La Salle Brothers, el al., G.R. No. 205548, February
U018.
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generic for the goods or services that they seek to identify. It is clear
from the law itself, therefore, that what is prohibited is not having
a generic mark but having such generic mark being identifiable to
the good or service. In one case, it was held that although SAKURA
refers to the Japanese flowering cherry and is, therefore, of a generic
nature, the manufacturer’s DVD or VCD players and other products
could not be identified with cherry blossoms. Hence, the mark can
be appropriated.-’10
110. What is a descriptive mark?
A term is descriptive and therefore invalid as a trademark if,
as understood in its normal and natural sense, it “forthwith conveys
the characteristics, functions, qualities or ingredients of a product
to one who has never seen it and does not know what it is,” or “if it
forthwith conveys an immediate idea of the ingredients, qualities or
characteristics of the goods,” or if it clearly denotes what goods or
services are provided in such a way that the consumer does not have
to exercise powers of perception or imagination.241
Under the IPC, these are marks that consist exclusively of
signs or of indications that may serve in trade to designate the kind,
quality, quantity, intended purpose, value, geographical origin,
time or production of the goods or rendering of the services, or other
characteristics of the goods or services.242
Under the IPC, descriptive marks are those that consist
exclusively of signs or of indications that may serve in trade to
designate the kind, quality, quantity, intended purpose, value,
geographical origin, time or production of the goods or rendering of
the services, or other characteristics of the goods or services.213
111.
Are the following terms generic or descriptive and as such,
non-registrable?
a)
Lyceum (for school)
The word “Lyceum” generally refers to a school or an institution
of learning. While the Latin word “lyceum” has been incorporated
210Kensonic, Inc. v. Uni-Line Multi-Resources, Inc., G.R. Nos. 211820-21 and
211834-35, June 6, 2018.
21,Societe Des Produits Nestle, ibid.
212Section 123.1(j), IPC, as amended.
“Section 123.l(j), IPC, as amended.
VII. INTELLECTUAL PROPERTY CODE
279
into the English language, the word is also found in Spanish (liceo)
and in French (lycee). “Lyceum” is in fact as generic in character
as the word “university.” Since “Lyceum” or “Liceo” denotes a
school or institution of learning, it is not unnatural to use this
word to designate an entity which is organized and operating as an
educational institution.214
b)
Master (for coffee)
The word MASTER is neither generic nor descriptive and
as such, it cannot be invalidated as a trademark. It is instead a
suggestive term brought about by the advertising scheme of Nestle.
Suggestive terms are those which, in the phraseology of one court,
require “imagination, thought and perception to reach a conclusion
as to the nature of the goods.” Such terms, “which subtly connote
something about the product,” are eligible for protection in the
absence of secondary meaning. While suggestive marks are capable
of shedding “some light” upon certain characteristics of the goods
or services in dispute, they nevertheless involve “an element of
incongruity,” “figurativeness,” or “imaginative effort on the part of
the observer.”
This is evident from the advertising scheme adopted by Nestle
in promoting its coffee products. In this case, Nestle has, over time,
promoted its products as “coffee perfection worthy of masters.”245
c)
Marlboro (for cigarette)
The trademark “Marlboro” is not only valid for being neither
generic nor descriptive, but because it is also owned exclusively
by PMPI as evidenced by the certificate of registration issued by
the IPO. It was held that the counterfeit cigarettes seized from
petitioner’s possession were intended to confuse and deceive the
public as to the origin of the cigarettes intended to be sold, as they
not only bore PMPI’s mark, but they were also packaged almost
exactly as PMPI’s products.246
d)
Papa (for catsup)
It is not a generic mark. The Merriam-Webster dictionary
defines “Papa” simply as “a person’s father.” True, a person’s father
2,,Lyceum of the Philippines v. Court of Appeals, G.R. No. 101897, March 5,
1993.
2,5Societe Des Produits Nestle, S.A. v. Court of Appeals and CFC Corporation,
G.R. No. 112012, April 4, 2001.
2,80ng v. People of the Philippines, G.R. No. 169440, November 23, 2011.
L
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has no logical connection with catsup products, and that precisely
makes "PAPA" as an arbitrary mark capable of being registered, as
it is distinctive, coming from a family name that started the brand
several decades ago. What was registered was not the word “Papa”
as defined in the dictionary, but the word “Papa” as the last name
of the original owner of the brand. In fact, being part of several
of petitioner's marks, there is no question that the IPO has found
"PAPA" to be a registrable mark.24’
e)
La Salle (for educational institution)
The word salle only means “room” in French. The word la,
on the other hand, is a definite article (“the”) used to modify salle.
Thus, since salle is nothing more than a room, the use of the tennis
actually suggestive.
A suggestive mark is therefore a word, picture, or other symbol
that suggests, but does not directly describe something about the
goods or services in connection with which it is used as a mark and
gives a hint as to the quality or nature of the product. Suggestive
trademarks therefore can be distinctive and are registrable.
The appropriation of the term “la salle" to associate the words
with the lofty ideals of education and learning is in fact suggestive
because roughly translated, the words only mean “the room.” Thus,
the room could be anything—a room in a house, a room in a building,
or a room in an office.
In fact, the appropriation by the De La Salle Brothers is fanciful,
whimsical and arbitrary because there is no inherent connection
between the words la salle and education, and it is through their
painstaking efforts that the term has become associated with one
of the top educational institutions in the country. Even assuming
arguendo that la salle means “classroom” in French, imagination
is required in order to associate the term with an educational
institution and its particular brand of service. The phrase “De La
Salle” is not merely a generic term. De La Salle Brothers’ use of the
phrase being suggestive and may properly be regarded as fanciful,
arbitrary and whimsical, it is entitled to legal protection.248
Fiesta Barrio Manufacturing Corporation, G.R. No.
Z4’UFC Philippines
198889, January 20, 2016.
z4BDe La Salle Montessori, supra.
VII. INTELLECTUAL PROPERTY CODE
f)
281
San Francisco Coffee (for coffee products)
In one case, the petitioner’s argument that “San Francisco” is
just a proper name referring to the famous city in California and
that “coffee” is simply a generic term was held by the Court to be
untenable. The respondent has acquired an exclusive right to the
use of the trade name “SAN FRANCISCO COFFEE & ROASTERY,
INC.” since the registration of the business name with the DTI in
1995. Thus, respondent’s use of its trade name from then on must
be free from any infringement by similarity. Of course, this does not
mean that the respondent has exclusive use of the geographic word
“San Francisco” or the generic word “coffee.” Geographic or generic
words are not, per se, subject to exclusive appropriation. It is only
the combination of the words “SAN FRANCISCO COFFEE,” which
is respondent’s trade name in its coffee business, that is protected
against infringement on matters related to the coffee business to
avoid confusing or deceiving the public.219
g)
COFFEE-MATE (for coffee)
112. Puregold filed an application for the registration of the
trademark "COFFEE MATCH" for use on coffee, tea, cocoa,
sugar, artificial coffee, flour and preparations made from
cereals, bread, pastry and confectionery, and honey. However,
Nestle opposed the same alleging that it is the exclusive owner
of the "COFFEE-MATE" trademark and that there is confusing
similarity between its "COFFEE-MATE" trademark and
Puregold's "COFFEE MATCH" application. Nestle alleged that
"COFFEE-MATE" has been declared an internationally wellknown mark and Puregold’s use of "COFFEE MATCH" would
indicate a connection with the goods covered in Nestle's
"COFFEE-MATE" mark because of its distinct similarity. Is there
confusing similarity between COFFEE MATCH and COFFEE­
MATE?
No. The word “COFFEE” is the common dominant feature
between Nestle’s mark “COFFEE-MATE” and Puregold’s mark
“COFFEE MATCH.” However, following the IPC’s prohibition
of registration of generic marks, the word “COFFEE” cannot
be exclusively appropriated by either Nestle or Puregold since
it is generic or descriptive of the goods they seek to identify.
The distinctive features of both marks are sufficient to warn the
219Coffee Partners, Inc. v. San Francisco Coffee and Roastery, G.R. No. 169504,
March 3,2010.
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purchasing public which are Nestle’s products and which are
Puregold's products. While both “-MATE” and “MATCH” contain
the same first three letters, the last two letters in Puregold’s mark,
“C” and “H,” rendered a visual and aural character that made it
easily distinguishable from Nestle’s mark. Also, the distinctiveness
of Puregold's mark with two separate words with capital letters “C"
and “M" made it distinguishable from Nestle’s mark which is one
word with a hyphenated small letter “-m” in its mark. In addition,
there is a phonetic difference in pronunciation between Nestle’s
“-MATE” and Puregold’s “MATCH.” As a result, the eyes and ears
of the consumer would not mistake Nestle’s product for Puregold's
product. Hence, likelihood of confusion between Nestle’s product
and Puregold’s product does not exist.250
h)
PALE PILSEN (for beer)
The words pale pilsen as part of Asia Brewery’s (ABI) trademark
does not constitute an infringement of San Miguel Corporation’s
(SMC)trademark: SAN MIGUEL PALE PILSEN, for “pale pilsen”
are generic words descriptive of the color (“pale”), of a type of beer
(“pilsen”), which is a light bohemian beer with a strong hops flavor
that originated in the City of Pilsen in Czechoslovakia and became
famous in the Middle Ages. Moreover, ABI’s use of the steinie bottle,
similar but not identical to the SAN MIGUEL PALE PILSEN bottle,
is not unlawful as SMC did not invent but merely borrowed the
steinie bottle from abroad and it has not claimed neither patent nor
trademark protection for that bottle shape and design.251
Author’s note: In the case of Coffee Partners, the Supreme Court
held that while generic and descriptive terms are not registrable,
a combination of such terms to refer to a product is registrable.
Yet, the Supreme Court ruled differently in the Puregold and Asia
Breuiery/San Miguel Corporation cases. Indeed, there is no hard and
fast rule in trademark cases.
i)
Sakura (for cherry flowers)
Sakura is the generic term for Japanese cherry blossom flowers
and as such, cannot be registered as a trademark for flowers but it
can be registered as a trademark for electronic appliances.252
Puregold Price Club, Inc., G.R. No.
250Societe Des Produits, Nestle, S.A.
217194, September 6, 2017.
251 Asia Brewery, Inc. v. Court of Appeals and San Miguel Corporation, G.R.
No. 103543, July 5, 1993.
^Sakura, supra.
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113. What are genericidal marks?
These are marks that consist exclusively of signs or of
indications that have become customary or usual to designate the
goods or services in everyday language or in bona fide and established
trade practice.253
114. What is a descriptively misleading mark?
It is a mark that is likely to mislead the public, particularly as
to the nature, quality, characteristics or geographical origin of the
goods or services.264
115. In 1988, the FDA approved the labels submitted by Turbo
Corporation for its new drug brand name, "Axilon." Turbo is
now applying with the Bureau of Patents, Trademarks and
Technology Transfer for the registration of said brand name.
It was subsequently confirmed that "Accilonne" is a generic
term for a class of anti-fungal drugs and is used as such by
the medical professional and the pharmaceutical industry, and
that it is used as generic chemical name in various scientific
and professional publications. A competing drug manufacturer
asks you to contest the registration of the brand name "Axilon"
by Turbo. What will be your advice?
The application for registration by Turbo Corporation may be
contested. The Trademark Law would not allow the registration
of a trademark which, when applied to or used in connection with
his products, is merely descriptive or deceptively mis-descriptive of
them. Confusion can result from the use of “Axilon” as the generic
product itself.255
116. What is the doctrine of secondary meaning?
Under the doctrine of secondary meaning, a word or phrase
originally incapable of exclusive appropriation with reference to
an article in the market, because it is geographical or otherwise
descriptive, might nevertheless have been used so long and so
exclusively by one producer with reference to his article that, in
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^Section 123. l(i), IPC, as amended.
“'Section 123.1(g), IPC, as amended.
“BAR 1990.
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the trade and to that branch of the purchasing public, the word or
phrase has come to mean that the article was his produce.250
Thus, a generic or descriptive term which has acquired a
secondary meaning may be appropriated and registered as a
trademark. For instance, Ang Tibay is a descriptive mark. It means
durable in English. But, Ang Tibay had been used so long and the
public had associated the mark with the manufacturer of combat
shoes. Thus, it was held that the descriptive mark can be registered
as trademark for shoes.
However, in another case, the Court considered “Lyceum” as a
generic name but the number alone of institutions using “Lyceum” as
part of their school name suggests strongly that the use of the word
"Lyceum” has not been attended with exclusivity for applicability of
the doctrine of secondary meaning.257
117.
What is the basis of the doctrine of secondary meaning?
Section 123.2 of the IPC. It provides that nothing shall prevent
the registration of a device (such as color, shape, signs, generic
marks) which has become distinctive in relation to the goods for
which registration is requested as a result of the use that have been
made of it in commerce in the Philippines. The Office may accept as
prima facie evidence that the mark has become distinctive, as used
in connection with the applicant’s goods or services in commerce,
proof of substantially exclusive and continuous use thereof by the
applicant in commerce in the Philippines for five (5) years before the
date on which the claim of distinctiveness is made.
118. St. Francis Development Corporation (SFDC), a domestic
corporation engaged in the real estate business and the
developer of St. Francis Square Commercial Center in Ortigas
Center, filed complaint for trademark infringement against
Shang Properties Realty Corporation (Shang) before the
IPO - Bureau of Legal Affairs due to Shang’s use and filing of
applications for the registration of the marks "THE ST. FRANCIS
TOWER" and "THE ST. FRANCIS SHANGRILA PLACE" for use
relative to Shang’s business, particularly the construction of
2SGAna Ang v. Toribio Teodoro, 74 Phil. 56, as cited in Lyceum of the Philippines
v. Court of Appeals, 219 SCRA 610 (1993).
“’Lyceum of the Philippines v. Court of Appeals, 219 SCRA 610 (1993).
VII. INTELLECTUAL PROPERTY CODE
285
permanent buildings or structures for residential and office
purposes.
SFDC alleged that (1) it used "ST. FRANCIS" to identify
numerous property development projects in Ortigas Center;
and (2) as a use of its continuous projects in Ortigas Center
and real estate business, it has gained substantial goodwill
with the public that consumers and traders closely identify the
mark with its property development projects.
On the other hand, Shang contended that the mark with
its property cannot be exclusively owned by SFDC since the
mark is geographically descriptive of the goods or services for
which it is intended to be used.
Has SFDC acquired a secondary meaning and, thereby,
an exclusive right to the ST. FRANCIS mark?
While it is true that SFDC had been using the mark “ST.
FRANCIS” since 1992, its use thereof has been merely confined to its
realty projects within the Ortigas Center. As its use of the mark is
clearly limited to a certain locality, it cannot be said that there was
substantial commercial use of the same recognized all throughout
the country. Neither is there any showing of a mental recognition
in buyers’ and potential buyers’ minds that products connected with
the mark “ST. FRANCIS” are associated with the same source —
that is, the enterprise of SFDC. Thus, absent any showing that there
exists a clear goods/service-association between the realty projects
located in the aforesaid area and SFDC as the developer thereof, the
latter cannot be said to have acquired a secondary meaning as to its
use of the “ST. FRANCIS” mark.258
e.
Rights conferred by registration
119. What rights are conferred by the registration of trademark?
Except in cases of importation of drugs and medicines which
has been introduced in the Philippines or anywhere else in the world
by the patent owner, or by any party authorized to use the invention
and of off-patent drugs and medicines, the owner of a registered
mark shall have the exclusive right to prevent all third parties
258Shang Properties Realty Corporation
tion, G.R. No. 190706, July 21, 2014.
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not having the owner's consent from using in the course of trade
identical or similar signs or containers for goods or services which
are identical or similar to those in respect of which the trademark is
registered, where such use would result in a likelihood of confusion.
In case of the use of an identical sign for identical goods or services,
a likelihood of confusion shall be presumed.
There shall be no infringement of trademarks or trade names
of imported or sold patented drugs and medicines allowed under the
IPC, as well as imported or sold off-patent drugs and medicines:
provided, hat, said drugs and medicines bear the registered marks
that have not been tampered, unlawfully modified, or infringed
upon.259
120. When do these rights terminate?
The rights conferred by trademark registration end upon
cancellation of the certificate of registration by the IPO in the cases
allowed by law.
121. When may the IPO cancel the certificate of trademark
registration?
The certificate of registration may be cancelled in the following
cases:
a.
Failure to file declaration of actual use within one (1) year
from the fifth anniversary of the trademark registration;260
b.
Failure to file declaration of actual use within three
(3) years from filing of the application for trademark
registration;261
A petition to cancel a registration of a mark may also be
filed with the Bureau of Legal Affairs of the IPO by any
person who believes that he is or will be damaged by the
registration of a mark under the IPC as follows:
i.
Within five (5) years from the date of the registration
of the mark;
ii.
At any time, if the registered mark becomes
the generic name for the goods or services, or a
“’Section 147, in relation to Section 72.1, IPC, as amended.
““Supra.
“'Supra.
I
VII. INTELLECTUAL PROPERTY CODE
287
portion thereof, for which it is registered, or has
been abandoned, or its registration was obtained
fraudulently or contrary to the provisions of the IPC,
or if the registered mark is being used by, or with the
permission of, the registrant so as to misrepresent
the source of the goods or services on or in connection
with which the mark is used.
C.
At any time, if the registered owner of the mark without
legitimate reason fails to use the mark within the
Philippines, or to cause it to be used in the Philippines by
virtue of a license during an uninterrupted period of three
(3) years or longer.262
122. In 2005, W Hotels, Inc., a multinational corporation engaged in
the hospitality business, applied for and was able to register
its trademark "W" with the Intellectual Property Office of the
Philippines (IPO) in connection with its hotelsfound in different
parts of the world.
In 2009, a Filipino corporation, RST Corp., filed before the
IPO a Petition for cancellation of W Hotels, Inc.'s "W" trademark
on the ground of non-use, claiming that W Hotels, Inc. failed to
use its mark in the Philippines because it is not operating any
hotel in the country which bears the "W" trademark.
In its defense, W Hotels, Inc. maintained that it has
used its "W" trademark in the Philippine commerce, pointing
out that while it did not have any hotel establishment in
the Philippines, it should still be considered as conducting
its business herein because its hotel reservation services,
albeit for its hotels abroad, are made accessible to Philippine
residents through its interactive websites prominently
displaying the "W" trademark. W Hotels, Inc also presented
proof of actual booking transactions made by the Philippine
residents through such websites.
Is W Hotels, Inc.'s defense against the petition for
cancellation of trademark tenable? Explain.263
The defense of W Hotel is tenable. Having a hotel establishment
in the Philippines with the trademark W is not the only way to
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^Section 151.1, IPC.
!S3BAR 2019.
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prove actual use of the trademark. In one case, the Supreme Court
ruled that the use of the mark on an interactive website sufficiently
showing an intent towards realizing a within-State commercial
activity or interaction is considered actual use to keep the trademark
registration in force. That W Hotel was able to present proof of
actual booking transactions made by the Philippine residents
though such website proves that the use of its “W” mark through its
interactive website is intended to produce a discernible commercial
effect or activity within the Philippines, or at the very least, seeks
to establish commercial interaction with local consumers. This is
enough to keep it trademark registration in force.264
In the WLand Holdings case, Starwood filed before the IPO an
application for registration of the trademark “W” for use in its hotel
business which was eventually granted. However, W Land applied
for the registration of its own “W” mark which thereby prompted
Starwood to oppose the same. The BLA ruled that W Land’s “W"
mark is confusingly similar with Starwood’s mark, which had an
earlier filing date. Unperturbed, on May 29, 2009, W Land filed
a Petition for Cancellation of Starwood’s mark for non-use under
Section 151.1 of the Intellectual Property Code of the Philippines,
claiming that Starwood has failed to use its mark in the Philippines
because it has no hotel or establishment in the Philippines rendering
the services covered by its registration.
In ruling against the cancellation of Starwood’s “W” mark, the
Supreme Court held:
“Use” as contemplated by law is genuine use - that is, a
bona fide kind of use tending towards a commercial transaction
in the ordinary course of trade. Since the internet creates a
borderless marketplace, it must be shown that the owner has
actually transacted, or at the very least, intentionally targeted
customers of a particular jurisdiction in order to be considered
as having used the trademark in the ordinary course of his
trade in that country. A showing of an actual commercial link
to the country is therefore imperative. The use of the mark
on an interactive website, for instance, may be said to target
local customers when they contain specific details regarding
or pertaining to the target State, sufficiently showing an
intent towards realizing a within-State commercial activity or
26,W Land Holdings, Inc. v. Starwood Hotels and Resorts Worldwide, Inc., G.R.
No. 222366, December 4, 2017.
VII. INTELLECTUAL PROPERTY CODE
289
interaction. These details may constitute a local contact phone
number, specific reference being available to local customers,
a specific local webpage, whether domestic language and
currency is used on the website, and/or whether domestic
payment methods are accepted.
In this case, Starwood has proven that it owns Philippine
registered domain names, provides a phone number for
Philippine consumers, the prices for its hotel accommodations
and/or services can be converted into the local currency or the
Philippine Peso, among others. Taken together, these facts and
circumstances show that Starwood’s use of its “W” mark through
its interactive website is intended to produce a discernable
commercial effect or activity within the Philippines, or at the
very least, seeks to establish commercial interaction with local
consumers. Accordingly, Starwood’s use of the “W” mark in its
reservation services through its website constitutes use of the
mark sufficient to keep its registration in force.
Finally, it deserves pointing out that Starwood submitted
in 2008 its DAU with evidence of use which the IPO, through
its Director of Trademarks and later by the IPO DG in the
January 10, 2014 Decision, had accepted and recognized as
valid. The Court finds no reason to disturb this recognition.265
f.
Trademark Infringement
123. What is and when is there trademark infringement?
Any person who shall, without the consent of the owner of the
registered mark:266
1.
Use in commerce any reproduction, counterfeit, copy,
or colorable imitation of a registered mark or the same
container or a dominant feature thereof in connection
with the sale, offering for sale, distribution, advertising
of any goods or services including other preparatory steps
necessary to carry out the sale of any goods or services
on or in connection with which such use is likely to cause
confusion, or to cause mistake, or to deceive;267 or
2MW Land Holdings, Inc. v. Starwood Hotels and Resorts Worldwide, Inc., G.R.
No. 222366, December 4, 2017, Second Division, Perlas-Bernabe, J.
“’'Section 155, IPC, as amended.
“’Section 155.1, ibid.
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2.
Reproduce, counterfeit, copy or colorably imitate a
registered mark or a dominant feature thereof and
apply such reproduction, counterfeit, copy or colorable
imitation to labels, signs, prints, packages, wrappers,
receptacles or advertisements intended to be used in
commerce upon or in connection with the sale, offering
for sale, distribution, or advertising of goods or services
on or in connection with which such use is likely to cause
confusion, or to cause mistake, or to deceive, shall be
liable in a civil action for infringement by the registrant
for the remedies hereinafter set forth: provided, that
the infringement takes place at the moment any of the
acts stated in Subsection 155.1 or this subsection are
committed regardless of whether there is actual sale of
goods or services using the infringing material.268
124. What are the elements of trademark infringement?
There are five (5) elements, to wit:
a.
The trademark being infringed is registered in the
Intellectual Property Office;
b.
The trademark is reproduced, counterfeited, copied, or
colorably imitated by the infringer;
c.
The infringing mark is used in connection with the sale,
offering for sale, or advertising of any goods, business or
services; or the infringing mark is applied to labels, signs,
prints, packages, wrappers, receptacles or advertisements
intended to be used upon or in connection with such goods,
business or services;
d.
The use or application of the infringing mark is likely to
cause confusion or mistake or to deceive purchasers or
others as to the goods or services themselves or as to the
source or origin of such goods or services or the identity of
such business; and
e.
The use or application of the infringing mark is without
the consent of the trademark owner or the assignee
thereof.269
26BSection 155.2, ibid.
269Diaz v. People of the Philippines and Levi Strauss (Phil.), G.R. No. 180677,
February 18, 2013.
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291
In the case of Pearl & Dean,™ it was held that assuming
arguendo that “Poster Ads” could validly qualify as a trademark,
the failure of Pearl & Dean to secure a trademark registration for
specific use on the light boxes meant that there could not have been
any trademark infringement since registration was an essential
element thereof.271
g-
Remedies
125. What are the rights of the trademark owner?
a.
He may use the trademark in trade and commerce.
If he is the first user, he cannot be sued for trademark
infringement even though the trademark is registered by
the first filer.
b.
He may register the trademark.
c.
He may sue for infringement in case of unauthorized
use of his registered mark in connection with the sale of
the same goods or similar goods which is likely to cause
confusion to the public.
126. What are the remedies of the owner of the registered trademark
if his rights to the trademark are infringed?
He may file a civil action for trademark infringement to recover
damages from any person who infringes his rights, and the measure
of the damages suffered shall be either the reasonable profit which
the complaining party would have made, had the defendant not
infringed his rights, or the profit which the defendant actually made
out of the infringement, or in the event such measure of damages
cannot be readily ascertained with reasonable certainty, then the
court may award as damages a reasonable percentage based upon
the amount of gross sales of the defendant or the value of the services
in connection with which the mark or trade name was used in the
infringement of the rights of the complaining party.272
In cases where actual intent to mislead the public or to defraud
the complainant is shown, in the discretion of the court, the damages
may be doubled.273
™Supra.
^'Pearl & Dean (Phil.), Inc.
Shoemart, Inc., G.R. No. 148222, August 15,
2003.
^Section 156.1, IPC, as amended.
^Section 156.3, IPC, as amended.
..
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He may also recover attorney's fees and the costs of suit.
The civil action for trademark infringement may include an
application with the court for the issuance of an order to impound
during the pendency of the action, sales invoices and other documents
evidencing sales274 and to grant a preliminary injunction to restrain
acts of infringement while the action is pending.276
He may also ask the court to issue an order that goods found
to be infringing be, without compensation of any sort, disposed of
outside the channels of commerce in such a manner as to avoid any
harm caused to the right holder, or destroyed; and all labels, signs,
prints, packages, wrappers, receptacles and advertisements in the
possession of the defendant, bearing the registered mark or trade
name or any reproduction, counterfeit, copy or colorable imitation
thereof, all plates, molds, matrices and other means of making the
same, shall be delivered up and destroyed.276
He may also file a criminal action for trademark infringement.
127. Is the issuance of an order granting provisional reliefs to the
complainant in a trademark infringement suit immediately
executory?
Under the 2020 Revised Rules of Procedure for Intellectual
Property Rights Cases,277 unless restrained by the Supreme Court
or the Court of Appeals, as the case may be, any order issued by
the court under said Rules is immediately executory, except in the
following:
a.
Order of destruction where a motion for reconsideration
is filed; and
b.
Order of release of seized goods where a search warrant is
quashed.
128. What rules govern the issuance of a search and seizure order
in cases of trademark or trade name infringement?
Court Administrative Matter A.M. No. 02-1-06-SC (TheRuleon
Search and Seizure in Civil Actions for Infringement of Intellectual
274Section 156.2, IPC, as amended.
z76Section 156.4, IPC, aa amended.
2,6Section 157.1., IPC, as amended.
277A.M. No. 10-3-10-SC.
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293
Property Rights) governs the issuance of a writ of search and seizure
in a civil action for infringement filed by an intellectual property
right owner against the supposed infringer of his trademark or
name.
The Rules on the Issuance of the Search and Seizure in Civil
Actions for Infringement of Intellectual Property Rights are not
applicable in a case where the search warrants were applied in
anticipation of criminal actions for violation of intellectual property
rights under R.A. No. 8293. Rule 126 of the Revised Rules of Court
would apply and a warrant shall be validly issued upon finding the
existence of probable cause.278
129. What is the remedy of the owner of the goods in case of
wrongful and illegal seizure of goods and materials?
The owner may recover damages. The claim for damages
should be filed with the same court that issued the writ of search
and seizure. However, if the goods were seized pursuant to a search
and seizure warrant under the Rules on Criminal Procedure, in
anticipation of a criminal offense, the owner has the right to seek
damages, if the circumstances warranted, by a separate civil action
for the wrong inflicted on them by an improperly obtained or enforced
search warrant. The proceeding under Rule 126, a limited criminal
one, does not provide for the filing of counterclaims for damages
against those who may have improperly sought the issuance of the
search warrant.279
130. What are the other remedies available the owner of the
registered mark to protect his rights to the trademark?
He may oppose any other application for registration of the
same trademark, or a dominant feature thereof, for the same goods
and services or good and services related thereto.
In case of issuance of a certificate of trademark registration in
favor of another, he may file a petition for cancellation of trademark
with the IPO.
2"Century Chinese Medicine Co., et al. v. People of the Philippines, G.R. No.
188526, November 11, 2013.
2,8Del Rosario, et al. v. Doanto, Jr., et al., G.R. No. 180595, March 4, 2010.
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131.
Does the application for administrative cancellation of a
registered trademark preclude the registrant from filing an
action for trademark infringement?
The application for administrative cancellation of a registered
trademark does not preclude the first registrant from filing an action
for trademark infringement. Such application cannot per se have
the effect of restraining or preventing the courts from the exercise
of their lawfully conferred jurisdiction. A contrary rule would
unduly expand the doctrine of primary jurisdiction which, simply
expressed, would merely behoove regular courts, in controversies
involving specialized disputes, to defer to the findings of resolutions
of administrative tribunals on certain technical matters.280
However, if the IPO cancels the registered trademark and
such resolution has attained finality, the action for trademark
infringement will have no more legal stand on. The cancellation of
registration of a trademark has the effect of depriving the registrant
of protection from infringement from the moment the judgment or
order of cancellation has become final.281
The first trademark registrant may however file an action
for trademark infringement independently of any application for
the administrative cancellation of the trademark of the second
registrant.
132. May the defendant in an action for trademark infringement file
a petition for administrative cancellation of the registrant's
trademark?
No, his remedy is to file an answer and invoke as a defense
that the plaintiff is not entitled to the trademark registration. This
is consistent with Section 151.2 of the IPC that the court or the
administrative agency vested with jurisdiction to hear and adjudicate
any action to enforce the rights to a registered mark shall likewise
exercise jurisdiction to determine whether the registration of said
mark may be cancelled in accordance with the Act. The filing of a
suit to enforce the registered mark with the proper court or agency
^Conrad and Company v. Court of Appeals, G.R. No. 115115, July 10, 1995;
Shangri-La International Hotel Management v. Court of Appeals, G.R. No. 111580,
June 21, 2001.
■“'Superior Commercial Enterprises, Inc. v. Kunnan Enterprises Ltd. and
Sports Concept & Distributor, Inc., G.R. No. 169974, April 20, 2010.
VII. INTELLECTUAL PROPERTY CODE
295
shall exclude any other court or agency from assuming jurisdiction
over a subsequently filed petition to cancel the same mark. On the
other hand, the earlier filing of petition to cancel the mark with the
Bureau of Legal Affairs shall not constitute a prejudicial question
that must be resolved before an action to enforce the rights to same
registered mark may be decided.
133. What are the limitations to an action for infringement?
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a.
The owner shall not be entitled to recover profits or
damages unless the acts were committed with knowledge
that such imitation is likely to cause confusion. Knowledge
is presumed when the registrant gives notice that his
mark is registered by displaying with the mark the word
“registered mark” or the letter “R” with a circle. Note that
good faith is not a defense in a criminal suit for trademark
infringement;
b.
The registered mark shall have no effect against any
person who, in good faith before filing or priority date,
was using the mark for the purpose of his business;
c.
Where the infringer who is engaged solely in the business
of printing the mark or other infringing materials for
others is an innocent infringer, the owner of the right
infringed shall only be entitled to injunction against
future printing;
d.
Where the infringement is part of a paid advertisement
in a newspaper or magazine or similar periodical or in an
electronic communication, the remedy of the owner of the
right infringed as against the publishers or distributor
shall be limited to injunction against the presentation of
such advertising matter in future issues of such papers.
Such injunctive relief is not available where restraining
the dissemination would delay the delivery of such issue
or transmission of such electronic communication, if
customarily conduced in accordance with sound business
practice.282
h.
Unfair Competition
“Section 159, IPC, as amended.
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134. Define unfair competition.
Unfair competition has been defined as the passing off (or
palming off) or attempting to pass off upon the public of the goods
or business of one person as the goods or business of another with
the end and probable effect of deceiving the public. Passing off (or
palming off) takes place where the defendant, by imitative devices
on the general appearance of the goods, misleads prospective
purchasers into buying his merchandise under the impression that
they are buying that of his competitors. Thus, the defendant gives
his goods the general appearance of the goods of his competitor with
the intention of deceiving the public that the goods are those of his
competitor.283
135. When is a person liable for unfair competition?
Any person who shall employ deception or any other means
contrary to good faith by which he shall pass off the goods
manufactured by him or in which he deals, or his business, or
services for those of the one having established such goodwill, or
who shall commit any acts calculated to produce said result, shall
be guilty of unfair competition, and shall be subject to an action
therefor.284
In particular, and without in any way limiting the scope of
protection against unfair competition, the following shall be deemed
guilty of unfair competition:
a.
Any person, who is selling his goods and gives them the
general appearance of goods of another manufacturer
or dealer, either as to the goods themselves or in the
wrapping of the packages in which they are contained,
or the devices or words thereon, or in any other feature
of their appearance, which would be likely to influence
purchasers to believe that the goods offered are those
of a manufacturer or dealer, other than the actual
manufacturer or dealer, or who otherwise clothes the
goods with such appearance as shall deceive the public
and defraud another of his legitimate trade, or any
subsequent vendor of such goods or any agent of any
vendor engaged in selling such goods with a like purpose;
2S3Republic Gas Corporation v. Patron Corporation, G.R. No. 194062, June 17,
2013; BAR 2019.
'^Section 168.2, IPC, as amended.
VII. INTELLECTUAL PROPERTY CODE
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b.
Any person who by any artifice, or device, or who employs
any other means calculated to induce the false belief that
such person is offering the services of another who has
identified such services in the mind of the public; or
C.
Any person who shall make any false statement in the
course of trade or who shall commit any other act contrary
to good faith of a nature calculated to discredit the goods,
business or services of another.286
It was held that unfair competition is a transitory or continuing
offense. Search warrant may be applied for in any court where any
element of the alleged offense was committed.286
136. St. Francis Development Corporation (SFDC), a domestic
corporation engaged in the real estate business and the
developer of St. Francis Square Commercial Center in Ortigas
Center, filed complaint for unfair competition against Shang
Properties Realty Corporation (Shang) before the IPO - Bureau
of Legal Affairs due to Shang's use and filing of applications
for the registration of the marks "THE ST. FRANCIS TOWER"
and "THE ST. FRANCIS SHANGRILA PLACE" for use relative to
Shang's business, particularly the construction of permanent
buildings or structures for residential and office purposes.
Is Shang Properties guilty of unfair competition?
Shang Properties is not guilty of unfair competition in using
the marks ‘THE ST. FRANCIS TOWERS” and THE ST. FRANCIS
SHANGRI-LA PLACE.” The “true test” of unfair competition has
thus been “whether the acts of the defendant have the intent of
deceiving or are calculated to deceive the ordinary buyer making
his purchases under the ordinary conditions of the particular trade
to which the controversy relates.” It is therefore essential to prove
the existence of fraud, or the intent to deceive, actual or probable,
determined through a judicious scrutiny of the factual circumstances
attendant to a particular case. Here, the element of fraud is wanting;
hence, there can be no unfair competition.287
’“Section 168.3, IPC, as amended.
Supergreen, Inc., 518 SCRA 750
’“Sony Computer Entertainment, Inc.
(2007).
St. Francis Development
28,Shang Properties Realty Corporation
Corporation, G.R. No. 190706, July 21, 2014.
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137. X, a dealer of low-grade oil, to save on expenses, uses the
containers of different companies. Before marketing to the
public his low-grade oil, X totally obliterates and erases the
brands or marks stenciled on the containers. Y brings an action
against X for unfair competition upon its discovery that its
containers have been used by X for his low-grade oil. Is there
unfair competition? State briefly your reasons.
There is no unfair competition. Unfair competition is passing
off of one's goods as those of another and requires fraudulent intent
on the part of the user. These elements are not present in the
problem.288
138. Distinguish trademark infringement from unfair competition.
There are four basic distinctions, as follows:
a.
Infringement of trademark is the unauthorized use of a
trademark whereas unfair competition is the passing off
one’s goods as those of another;
b.
In infringement of trademark, fraudulent intent in
unnecessary, whereas in unfair competition fraudulent
intent is essential;289
In infringement of trademark, prior registration of the
trademark is a prerequisite to the action whereas in
unfair competition, registration is not necessary;290
d.
There is no trademark infringement if the registered
trademark is used for totally unrelated to the goods
specified in the certificate of trademark registration but
there can be unfair competition even if two products are
not related if there is passing off of one’s product as that
of another manufacturer.
139. Does the act of refilling empty LPG gas cylinder tank bearing
a registered trademark amount to infringement or unfair
competition or BOTH?
The act of refilling empty LPG gas cylinder tank bearing a
registered trademark amounts to both trademark infringement and
unfair competition.
288BAR 1988.
“’BAR 2014.
“°Del Monte Corporation
1996; BAR 2015.
Court of Appeals, 181 SCRA 410 (1990); BAR
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The mere unauthorized use of a container bearing a registered
trademark in connection with the sale, distribution or advertising
of goods or services which is likely to cause confusion, mistake or
deception among the buyers or consumers can be considered as
trademark infringement. The petitioners in this case actually
committed trademark infringement when they refilled, without the
respondents’ consent, the LPG containers bearing the registered
marks of the respondents.
There is likewise unfair competition. Petitioners’ acts will
inevitably confuse the consuming public, since they have no way
of knowing that the gas contained in the LPG tanks bearing
respondents’ marks is in reality not the latter’s LPG product after
the same had been illegally refilled. The public will then be led to
believe that petitioners are authorized refillers and distributors
of respondents’ LPG products, considering that they are accepting
empty containers of respondents and refilling them for resale.
Unfair competition has been defined as the passing off (or
palming off) or attempting to pass off upon the public of the goods
or business of one person as the goods or business of another with
the end and probable effect of deceiving the public. Passing off (or
palming off) takes place where the defendant, by imitative devices
on the general appearance of the goods, misleads prospective
purchasers into buying his merchandise under the impression that
they are buying that of his competitors. Thus, the defendant gives
his goods the general appearance of the goods of his competitor with
the intention of deceiving the public that the goods are those of his
competitor.
In the present case, respondents pertinently observed that by
refilling and selling LPG cylinders bearing their registered marks,
petitioners are selling goods by giving them the general appearance
of goods of another manufacturer. Obviously, the mere use of those
LPG cylinders bearing the trademarks “GASUL” and “SHELLANE”
will give the LPGs sold by REGASCO the general appearance of the
products of the petitioners.291
In another case, it has been established that the parties
conspired in the sale/distribution of counterfeit Greenstone products
to the public, which were even packaged in bottles identical to
’’’Republic Gas Corporation v. Petron Corporation, G.R. No. 194062, June 17,
2013.
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that of the original, thereby giving rise to the presumption of
fraudulent intent. Although there is unfair competition, there can
be no trademark infringement considering that the registration
of the trademark "Greenstone” - essential as it is in a trademark
infringement case - was not proven to have existed during the time
the acts complained of were committed.292
Note that in another case, the sale of counterfeit Fundador
products had been held to constitute trademark infringement.283
140. Is an action for cancellation of trademark a prejudicial
question in a criminal action for unfair competition?
It is not. An action for the cancellation of trademark is a remedy
available to a person who believes that he is or will be damaged by
the registration of a mark. On the other hand, the criminal actions for
unfair competition involved the determination of whether or not the
respondent had given his goods the general appearance of the goods
of the petitioner, with the intent to deceive the public or defraud
the petitioner as his competitor. In the suit for the cancellation of
trademark, the issue of lawful registration should necessarily be
determined, but registration is not a consideration necessary in
unfair competition. Indeed, unfair competition is committed if the
effect of the act is to pass off to the public the goods of one man as
the goods of another; it is independent of registration. One may be
declared an unfair competitor even if his competing trademark is
registered.294
h.
Registration of marks under the Madrid Protocol
141. What is the Madrid Protocol?
It is a treaty that allows natural or juridical persons of
member countries to file international registrations through their
respective trademark offices (as office of origin) designating other
member countries to be covered by the international registration.
The Madrid System for the International Registration of Marks
(Madrid System), which is the centralized system providing a onezwRoberto Co v. Keng Huan, Jerry Yeung and Emma Yeung, G.R. No. 212705,
September 10, 2014.
a3Juno Batistis v. People of the Philippines, G.R. No. 181571, December 16,
2009.
zs’Caterpillar, Inc. v. Manolo P. Samson, G.R. No. 205972 and G.R. No. 164352,
November 9, 2016.
VIL INTELLECTUAL PROPERTY CODE
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stop solution for registering and managing marks worldwide, allows
the trademark owner to file one application in one language, and
to pay one set of fees to protect his mark in the territories of up to
97 member-states. The Madrid System is governed by the Madrid
Agreement, concluded in 1891, and the Madrid Protocol, concluded
in 1989.
The Madrid Protocol, which was adopted in order to remove
the challenges deterring some countries from acceding to the
Madrid. Agreement, has two objectives, namely: (1) to facilitate
securing protection for marks; and (2) to make the management of
the registered marks easier in different countries.295
142. The Intellectual Property Office of the Philippines (IPOPHL)
recommended to the Department of Foreign Affairs (DFA) that
the Philippines should accede to the Madrid Protocol. After its
own review, the DFA endorsed to the President the country's
accession to the Madrid Protocol. Conformably with its
express authority under Section 9 of Executive Order No. 459
(Providing for the Guidelines in the Negotiation of International
Agreements and its Ratification) dated November 25,1997, the
DFA determined that the Madrid Protocol was an executive
agreement. President Benigno C. Aquino III ratified the Madrid
Protocol through an instrument of accession. The Madrid
Protocol entered into force in the Philippines on July 25,2012.
The Intellectual Property Association of the Philippines
(IPAP) filed a special civil action for certiorari and prohibition
to challenge the validity of the President's accession to the
Madrid Protocol without the concurrence of the Senate.
Furthermore, the IPAP argued that the implementation of
the Madrid Protocol, specifically the processing of foreign
trademark applications, conflicts with the IP Code considering
that Article 2 of the Madrid Protocol means that foreign
trademark applicants may file their applications through the
International Bureau or the WIPO, and their applications will
be automatically granted trademark protection without the
need for designating their resident agents in the country.
Was the President's ratification of the Madrid Protocol
valid and constitutional?
I
“Intellectual Property Association of the Philippines v. Hon. Paquito Ochoa,
In His capacity as Executive Secretary, et al., G.R. No. 204605, July 19,2016.
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The President's ratification was valid and constitutional
because the Madrid Protocol, being an executive agreement as
determined by the Department of Foreign Affairs, does not require
the concurrence of the Senate.-’91'
143. Is the Madrid Protocol in conflict with the IPC?
There is no conflict between the Madrid Protocol and the IP
Code.
The IPAP also rests its challenge on the supposed conflict
between the Madrid Protocol and the IP Code, contending that the
Madrid Protocol does away with the requirement of a resident agent
under Section 125 of the IP Code; and that the Madrid Protocol is
unconstitutional for being in conflict with the local law, which it
cannot modify.
The IPAP’s contentions stand on a faulty premise. The method
of registration through the IPOPHL, as laid down by the IP Code,
is distinct and separate from the method of registration through the
WIPO, as set in the Madrid Protocol. Comparing the two methods of
registration despite their being governed by two separate systems of
registration is thus misplaced
In arguing that the Madrid Protocol conflicts with Section 125 of
the IP Code, the IPAP highlights the importance of the requirement
for the designation of a resident agent. It underscores that the
requirement is intended to ensure that non-resident entities seeking
protection or privileges under Philippine Intellectual Property
Laws will be subjected to the country’s jurisdiction. It submits that
without such resident agent, there will be a need to resort to costly,
time consuming and cumbersome extraterritorial service of writs
and processes.
The IPAP misapprehends the procedure for examination under
the Madrid Protocol. The difficulty, which the IPAP illustrates,
is minimal, if not altogether inexistent. The IPOPHL actually
requires the designation of the resident agent when it refuses the
registration of a mark. Local representation is further required in
the submission of the Declaration of Actual Use, as well as in the
submission of the license contract. The Madrid Protocol accords
with the intent and spirit of the IP Code, particularly on the subject
of the registration of trademarks. The Madrid Protocol does not
2XSupra.
VII. INTELLECTUAL PROPERTY CODE
303
amend or modify the IP Code on the acquisition of trademark rights
considering that the applications under the Madrid Protocol are still
examined according to the relevant national law. In that regard, the
IPOPHL will only grant protection to a mark that meets the local
registration requirements.297
1.
Coverage
144. Who may use the Madrid
registration of trademarks?
System for the international
An application for international registration (international
application) may be filed only by a natural person or legal entity
having a connection through establishment, domicile or nationality
with a Contracting Party to the Madrid Agreement or the Protocol.
A mark may be the subject of an international application
only if it has already been registered with the trademark office of
the Contracting Party with which the applicant has the necessary
connections (referred to as the office of origin). However, where all
the designations are effected under the Protocol (see below), the
international application may be based simply on an application
for registration filed with the office of origin. An international
application must be presented to the International Bureau of WIPO
through the intermediary of the office of origin.298
2.
Rights conferred
145. What are the rights conferred upon international registration
of trademark under the Madrid Protocol?
From the date of the international registration (or, in the
case of a Contracting Party designated subsequently, from the
date of that designation), the protection of the mark in each of the
designated Contracting Parties is the same as if the mark had been
the subject of an application for registration filed directly with the
Office of that Contracting Party. If no provisional refusal is notified
to the International Bureau within the relevant time limit, or if any
such refusal is subsequently withdrawn, the protection of the mark
in each designated Contracting Party is the same as if it had been
registered by the Office of that Contracting Party.
2'J1Ibid.
“•Summary of the Madrid Agreement Concerning the International
Registration of Marks (1891) and the Protocol Relating to that Agreement (1989) as
prepared by the WIPO.
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An international registration is therefore equivalent to a
bundle of national registrations. Although it is a single registration,
protection may be refused by some of the designated Contracting
Parties, or the protection may be limited or renounced with respect
to only some of the designated Contracting Parties. Likewise an
international registration may be transferred to a new owner with
respect to only some of the designated Contracting Parties. An
international registration may also be invalidated (for example, for
non-use) with respect to one or more of the designated Contracting
Parties. Moreover, any action for infringement of an international
registration must be brought separately in each of the Contracting
Parties concerned.
146. What are the requirements for registration under the Madrid
Protocol?
An application for international registration must designate
one or more Contracting Parties in which protection is sought.
Further designations can be effected subsequently. A Contracting
Party may be designated only if it is party to the same treaty as
the Contracting Party whose office is the office of origin. The latter
cannot itself be designated in the international application.
The designation of a given Contracting Party is made either
under the Agreement or the Protocol, depending on which treaty is
common to the Contracting Parties concerned. If both Contracting
Parties are party to the Agreement and the Protocol, the designation
will be governed by the Protocol.
International applications can be filed in English, French
or Spanish, irrespective of which treaty or treaties govern the
application, unless the office of origin restricts that choice to one or
two of these languages.
Once the International Bureau receives an international
application, it carries out an examination for compliance with the
requirements of the Protocol and its Regulations. This examination
is restricted to formalities, including the classification and
comprehensibility of the list of goods and/or services. If there are no
irregularities in the application, the International Bureau records
the mark in the International Register, publishes the international
registration in the WIPO Gazette of International Marks and
notifies it to each designated Contracting Party. Any matter of
substance, such as whether the mark qualifies for protection or
whether it is in conflict with a mark registered previously in a
VII. INTELLECTUAL PROPERTY CODE
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particular Contracting Party, is determined by that Contracting
Partyts trademark office under the applicable domestic legislation.
The office of each designated Contracting Party shall issue a
statement of grant of protection under the pertinent Regulations.
However, when designated Contracting Parties examine
the international registration for compliance with their domestic
legislation, and if some substantive provisions are not complied
with, they have the right to refuse protection in their territory.
Any such refusal, including an indication of the grounds on which
it is based, must be communicated to the International Bureau,
normally within 12 months from the date of notification. However,
a Contracting Party to the Protocol may declare that, when it is
designated under the Protocol, this time Emit is extended to 18
months. That Contracting Party may also declare that a refusal
based on an opposition may be communicated to the International
Bureau even after the 18-month time Emit.299
3.
Term of protection
147. What is the term of protection of international registration
under the Madrid Protocol?
An international registration is effective for 10 years. It may be
renewed for further periods of 10 years on payment of the prescribed
fees.300
D. Copyright
1.
Basic Principles
148. What is a copyright?
It is an intangible, incorporeal right granted by statute to
the author or originator of certain literary or artistic productions,
whereby he or she is invested, for a specific period, with the sole and
exclusive privilege of multiplying copies of the same and pubhshing
and selling them.301
mSupra.
mIbid.
“‘Kensonic v. Uni-Line Multi Resources, Inc., supra and Fernando Juan v.
Roberto Juan, G.R. No. 221372, August 23, 2017 both citing Black’s Law Dictionary,
Centennial Edition. 6th ed. West Group, St. Paul Minnesota, USA, 1990, p. 336.
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The rights granted by copyright are, however, not limited to
multiplying copies of the literary or artistic work, publishing and
selling but also include any form of communication to the public,
as well as right of attribution, right to carry out derivative work
and other moral rights. Copyright is likewise not confined to literary
and artistic work but also extend to scientific and scholarly works
similar to those works enumerated in Section 172.1 of the IPC.
As previously mentioned, copyright should be defined then
as an incorporeal and intangible property granted by law to the
originator or creator of certain literary, artistic, scientific and
scholarly works whereby he or she is invested for a specific period of
time a collection of economic and moral rights on the terms specified
by statute.
149. What are the characteristics of a copyright?
a.
It is granted to the creator or originator of the copyrightable
work. But being a right, copyright can be assigned;
b.
The object is original intellectual creation in the literary,
artistic and scientific domains;
c.
It is not indefinite. The economic and moral rights are
exclusive to the creator or originator of the work during
the term specified by law, except for the moral right of
attribution which is in perpetuity.
d.
Being a statutory grant, the rights derived from such
grant may only be obtained and enjoyed with respect to
the works and on the terms and conditions, specified in
the statute. The “works” must fall within the statutory
enumeration or description.
For example, eye bushing is a useful article but it has no artistic
value. Even though it was covered by a certificate of registration and
there was notice of deposit with the National Library, no copyright is
obtained. There can be no infringement of copyright likewise despite
sale by others of such article.302 Other examples of items were there
is no copyright:
a.
Light boxes. They are not in the nature of pictorials or
drawings. Light boxes—units which utilize specially
“Jessie G. Ching v. William M. Salinas, Sr., et al., G.R. No. 161295, June 29,
2005.
-
VII. INTELLECTUAL PROPERTY CODE
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printed posters sandwiched between plastic sheets and
illuminated with backlights—are not literary or artistic
pieces which could be copyrighted under the copyright
law;303
b.
Medical creams and the name and container of a beauty
cream product;30*
c.
There is no copyright on goods because they are not
intellectual creations. They should be covered by
trademark instead.305
2.
Copyrightable Works
150. When is the starting point of protection of a Copyright?
Works are protected by the sole fact of their creation,
irrespective of their mode or form of expression, as well as of their
content, quality and purpose.306
151. What are the classifications of protected works?
There are two:
Original and literary works; and
a.
b.
Derivative works.
152. What are considered original literary and artistic works?
Literary and artistic works are original intellectual creations
in the literary and artistic domain protected from the moment of
their creation and shall include in particular:
a.
Books, pamphlets, articles and other writings;
b.
Periodicals and newspapers;
c.
Lectures, sermons, addresses, dissertations prepared for
oral delivery, whether or not reduced in writing or other
material form;307
“Pearl & Dean Phil. v. Shoemart, 409 SCRA 231 (2003).
“Elidad C. Kho, doing business under the name and style of KEC Cosmetics
Laboratory v. Court of Appeals, Summerville General Merchandising and Company,
andAngTiam Chay, G.R. No. 115758, March 19, 2002.
“Manly Sportwear Manufacturing, Inc. v. Dadodette Enterprises and/or
Hermes Sports Center, G.R. No. 165306, September 20, 2005.
“Section 172.2, IPC, as amended.
“BAR 2011.
!
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d.
e.
f.
g-
h.
i.
Letters:
Dramatic or dramatico-musical compositions; choreo­
graphic works or entertainment in dumb shows;
Musical compositions, with or without words;
Works of drawing, painting, architecture, sculpture,
engraving, lithography or other works of art; models or
designs for works of art;
Original ornamental designs or models for articles of
manufacture, whether or not registrable as an industrial
design, and other works of applied art;
Illustrations, maps, plans, sketches, charts and threedimensional works relative to geography, topography,
architecture or science;
j.
Drawings or plastic works of a scientific or technical
character;
k.
Photographic works including works produced by a
process analogous to photography; lantern slides;
Audiovisual works and cinematographic works and works
produced by a process analogous to cinematography or
any process for making audio-visual recordings;
1.
m.
n.
o.
Pictorial illustrations and advertisements;
Computer programs; and
Other literary, scholarly, scientific, and artistic works.308
153. Diana and Piolo are famous personalities in show business
who kept their love affair secret. They use a special instant
messaging service which allows them to see one another's
typing on their own screen as each letter key is pressed.
When Greg, the controller of the service facility, found out
their identities, he kept a copy of all the messages Diana and
Piolo sent each other and published them. Is Greg liable for
copyright infringement? Reason briefly.
Yes, Greg is liable for copyright infringement. Under the
law, text messages are not expressly enumerated as among the
copyrightable works. In the context of the problem, however, these
messages are akin to letters or may at least fall under “other literary,
“’Section 172.1, IPC, as amended.
VII. INTELLECTUAL PROPERTY CODE
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artistic, scientific and scholarly works.” They are therefore protected
from the moment of creation. ™ The publication of the messages
without the consent of their writers constitutes infringement of
copyright.310
154. Is the name "Charlie Brown" and its pictorial representation
copyrightable?
Yes, as provided for under Section 172.1 of the IPC. Since
copyright was obtained thereon, the owner can prevent its use as
trademark by somebody else.3”
155. Is a hatch door, which is defined as a small door, small gate or
an opening that resembles a window equipped with an escape
for use in case of fire or emergency, copyrightable?
Hatch door is not copyrightable. It is by nature, functional
and utilitarian serving as egress access during emergency. It is not
primarily an artistic creation but rather an object of utility designed
to have aesthetic appeal. It is intrinsically a useful article, which, as
a whole, is not eligible for copyright.
Thus, the first fabricator of the hatch door cannot sue for
copyright infringement all other fabricators of the same article.
What is copyrightable is the drawing or the sketch of the hatch door
itself. Reproduction of the drawing or sketch without the consent of
the creator constitutes copyright infringement.312
There is also no copyright infringement even if the hatch door
is fabricated based on the copyrighted drawing or- sketch. Unlike
a patent, a copyright gives no exclusive right to the art disclosed;
protection is given only to the expression of the idea not the idea
itself.”3
156. Isa useful article copyrightable?
A “useful article” defined as an article “having an intrinsic
utilitarian function that is not merely to portray the appearance
’“’Section 172.1, IPC, as amended; Columbia Pictures, Inc. v. Court of Appeals,
261 SCRA 144 (1996).
’’“BAR 2007.
’’’United Features v. Munsingwear Creation, 179 SCRA 260 (1989).
”2Sison Olano, et al. v. Lim Eng Co., G.R. No. 195835, March 14, 2016.
™Ibid.
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of the article or to convey information” is excluded from copyright
eligibility.
The only instance when a useful article may be the subject of
copyright protection is when it incorporates a design element that
is physically or conceptually separable from the underlying product.
This means that the utilitarian article can function without the
design element. In such an instance, the design element is eligible
for copyright protection.
The design of a useful article shall be considered a pictorial,
graphic, or sculptural work only if, and only to the extent that,
such design incorporates pictorial, graphic, or sculptural features
that can be identified separately from, and are capable of existing
independently of, the utilitarian aspects of the article.
A belt, being an object utility with the function of preventing
one’s pants from falling down, is in itself not copyrightable. However,
an ornately designed belt buckle which is irrelevant to or did not
enhance the belt’s function hence, conceptually separable from the
belt, is eligible for copyright. It is copyrightable as a sculptural work
with independent aesthetic value, and not as an integral element of
the belt’s functionality.
A table lamp is not copyrightable because it is a functional
object intended for the purpose of providing illumination in a room.
The general shape of a table lamp is likewise not copyrightable
because it contributes to the lamp’s ability to illuminate the reaches
of a room. But, a lamp base in the form of a statue of male and
female dancing figures made of semi vitreous china is copyrightable
as a work of art because it is unrelated to the lamp’s utilitarian
function as a device used to combat darkness.314
Based on this test, hatch doors may become copyrightable if
they bear design elements that are physically and conceptually
separable, independent and distinguishable from the hatch door
itself.
157. TRUE or FALSE. The Denicola Test in intellectual property law
states that if design elements of an article reflect a merger of
aesthetic and functional considerations, the artistic aspects of
the work cannot be conceptually separable from the utilitarian
aspects; thus, the article cannot be copyrighted.
3uIbid.
VII. INTELLECTUAL PROPERTY CODE
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True. Applying the Denicola Test in Brandir International, Inc.
v. Cascade Pacific Lumber Co.,™ the United State Court of Appeals
for the Second Circuit held that if there is any aesthetic element
which can be separated from the utilitarian elements, then the
aesthetic element may be copyrighted.316
158. What are derivative works?
The following are considered derivative works and shall also be
protected by copyright:
a.
Dramatizations, translations, adaptations, abridgments,
arrangements, and other alterations of literary or artistic
works; and
b.
Collections of literary, scholarly or artistic works, and
compilations of data and other materials which are
original by reason of the selection or coordination or
arrangement of their contents.317
159. What is the treatment over derivative works?
They shall be protected as new works: provided however, that
such new work shall not affect the force of any subsisting copyright
upon the original works employed or any part thereof, or be construed
to imply any right to such use of the original works, or to secure or
extend copyright in such original works.318
One of the economic rights of the author is to carry out,
prevent or authorize derivative work.319 Thus, no one carry out a
work derived from the original work except the author or without
his authorization.
160. Does a publisher have a right over the published edition of the
copyrighted work?
Yes. In addition to the right to publish granted by the author,
his heirs, or assigns, the publisher shall have a copyright consisting
merely of the right of reproduction of the typographical arrangement
of the published edition of the work.320
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“834 F.2d 1142, 1988 Copr.L.Dec. p. 26.
“BAR 2009.
“Section 173.1, IPC, as amended.
“Section 173.2, IPC, as amended.
“Section 177, IPC, as amended.
“Section 174, IPC, as amended.
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Typographical arrangement covers the layout, composition,
style and general appearance of a page of a published work.321 In other
words, the visual appearance of the printed page is independently
copyrightable from the contents of the published work.
161. What are considered as unprotected subject matter or noncopyrightable work?
a.
Idea, procedure, system, method or operation, concept,
principle, discovery or mere data as such, even if they are
expressed, explained, illustrated or embodied in a work;
b.
News of the day and other miscellaneous facts having the
character of mere items of press information;
c.
Any official text of a legislative, administrative or legal
nature, as well as any official translation thereof;322
d.
Any work of the Government of the Philippines. However,
prior approval of the government agency or office wherein
the work is created shall be necessary for exploitation of
such work for profit. Such agency or office may, among
other things, impose as a condition the payment of
royalties;
e.
Statutes, rules and regulations, and speeches, lectures,
sermons, addresses, and dissertations, pronounced, read
or rendered in courts of justice, before administrative
agencies, in deliberative assemblies and in meetings of
public character.323
However, the author of speeches, lectures, sermons, addresses,
and dissertations of these works shall have the exclusive right of
making a collection of his works.324
a.
Idea, procedure, system, method or operation, concept,
principle, discovery or mere data as such, even if they
are expressed, explained, illustrated or embodied in such
work.
321Gepty, ibid., p. 155 citing Carol Tullo, Controller, HMSO Queen’s Printer,
Guidance-Copyright in Typographical Arrangement.
322Section 175, IPC, as amended.
“'‘Section 176.1, IPC, as amended.
324Section 176.2, IPC, as amended.
VII. INTELLECTUAL PROPERTY CODE
313
The format or mechanics of a television show is not included
in the list of protected works in Section 2 of P.D. No. 49, which is
substantially the same as Section 172 of the Intellectual Property
Code (R.A. No. 8293). The subject of copyright refers to finished
works and not to concepts. For this reason, the protection afforded
by the law cannot be extended to cover format or mechanics of a
television show. The audio-visual recording of the show, however, is
copyrightable.325
While an idea is not copyrightable, the expression of an idea
is protected by copyright. Thus, there can be a copyright of a book
which expounded on a new accounting system the author had
developed but the system itself is not copyrightable.
162. An amateur astronomer, stumbled upon what appeared to be
massive volcanic eruption in Jupiter while peering at the planet
through his telescope. The following week, X, without notes,
presented a lecture on his findings before the Association of
Astronomers of the Philippines. To his dismay, he later read
an article in a science journal written by Y, a professional
astronomer, repeating exactly what X discovered without any
attribution to him. Has Y infringed on X's copyright, if any?326
a.
No, since X did not reduce his lecture in writing or other
material form;
b.
Yes, since the lecture is considered X’s original work;
c.
No, since no protection extends to any discovery,
even if expressed, explained, illustrated, or embo­
died in a work;
d.
Yes, since Y7s article failed to make any attribution to X.
163. X came up with a new way of presenting a telephone directory
in a mobile phone, which he dubbed as the "iTel" and which
uses lesser time for locating names and telephone numbers.
May X have his "iTel" copyrighted in his name?327
a.
No. because it is a mere system or method;
’“Francisco Joaquin, Jr. v. Franklin Drilon, et al., G.R. No. 108946, January
28,1999.
“BAR 2011.
“BAR 2011.
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b.
Yes. because it is an original creation;
C.
Yes, because it entailed the application of X’s intellect;
d.
No. because it did not entail any application of X’s
intellect.
b.
News of the day
164. Overseas Filipino worker Angelo dela Cruz was kidnapped by
Iraqi militants and as a condition for his release, a demand
was made for the withdrawal of Filipino troops in Iraq. After
negotiations, he was released by his captors and was scheduled
to return to the country. Occasioned by said homecoming and
the public interest it generated, both GM A Network, Inc. and
ABS-CBN made their respective broadcasts and coverage of
the live event.
ABS-CBN conducted live audio-video coverage of and
broadcasted the event. ABS-CBN allowed Reuters Television
Service (Reuters) to air the footages it had taken earlier under
a special embargo agreement.
ABS-CBN alleged that under the special embargo
agreement, no other Philippine subscriber of Reuters would be
allowed to use ABS-CBN footage without the latter's consent.
GMA-7 subscribes to Reuters. It received a live video feed
of the coverage of Angelo dela Cruz's arrival from Reuters.
GMA-7 immediately carried the live newsfeed in its
program "Flash Report," together with its live broadcast.
Allegedly, GMA-7 did not receive any notice or was not aware
that Reuters was airing footages of ABS-CBN.
ABS-CBN filed the Complaint for copyright infringement
under Sections 177and 211 of the Intellectual Property Code
against Felipe Gozon and other officers of GMA 7.
Is the news footage of ABS CBN copyrightable?
The event itself is not copyrightable because that is the
newsworthy event. However, any footage created from the event
itself is an intellectual creation which is copyrightable. While news
of the day and other miscellaneous facts having the character
of “mere items of press information” are considered unprotected
subject matter, the Code does not state that expression of the news
VII. INTELLECTUAL PROPERTY CODE
315
of the day, particularly when it underwent a creative process, is not
entitled to protection.328
Stated otherwise, copyright protection does not extend to news
“events” or the facts or ideas which are the subject of news reports.
But it is equally well-settled that copyright protection does extend to
the reports themselves, as distinguished from the substance of the
information contained in the reports. Copyright protects the manner
of expression of news reports, “the particular form or collocation of
words in which the writer has communicated it.”329
3.
Rights of the copyright owner
165. What is the scope of protection of a copyright?
It is immediate. The aforementioned literary and artistic works
are protected from the moment of their creation. Works are protected
by the sole fact of their creation, irrespective of their mode or form of
expression, as well as of their content, quality and purpose.330
Ownership of copyrighted material is shown by proof of
originality and copyrightability.331
166. What then is the effect of registration and deposit with the
National Library?
The certificates of registration and deposit issued by the
National Library serve merely as a notice of recording and
registration of the work but do not confer any right or title upon the
registered copyright owner or automatically put his work under the
protective mantle of the copyright law; it is not a conclusive proof of
copyright ownership. Hence, it was held that when there is sufficient
proof that the copyrighted products are not original creations but
are readily available in the market under various brands, as in one
case, validity and originality will not be presumed.332
’“ABS-CBN Corporation v. Felipe Gozon, el al., G.R. No. 195956, March 11,
2015.
’“Ibid.
““Section 172.1, IPC, as amended.
“'Sison Olano, ibid.
““Manly Sportwear Manufacturing, Inc. v. Dadodette Enterprises and/or
Hermes Sports Center, G.R. No. 165306, September 20, 2005.
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It was held that the Intellectual Property Code does not require
registration of the work to fully recover in an infringement suit.333
A copyright certificate nevertheless creates a presumption of
the validity and ownership of the copyright and as such, is useful in
support of the claim of infringement. This presumption, however, is
rebuttable and it cannot be sustained where other evidence in the
record casts doubt on the question of ownership.331
Moreover, the presumption of validity to a certificate of
copyright registration merely orders the burden of proof. The
applicant should not ordinarily be forced, in the first instance,
to prove all the multiple facts that underline the validity of the
copyright unless the respondent, effectively challenging them, shifts
the burden of doing so to the applicant.335
167. Rudy is a fine arts student in a university. He stays in a boarding
house with Bernie as his roommate. During his free time,
Rudy would paint and leave his finished works lying around
the boarding house. One day, Rudy saw one of his works, an
abstract painting entitled Manila Traffic Jamon display at the
university cafeteria. The cafeteria operator said he purchased
the painting from Bernie who represented himself as its painter
and owner. Rudy and the cafeteria operator immediately
confronted Bernie. While admitting that he did not do the
painting, Bernie claimed ownership of its copyright since he
had already registered it in his name with the National Library
as provided in the Intellectual Property Code. Who owns the
copyright to the painting? Explain.
Rudy owns the copyright to the painting because he was the
one who actually created it. His rights existed from the moment
of its creation. The registration of the painting by Bernie with the
National Library did not confer copyright upon him. The registration
is merely for the purpose of completing the records of the National
Library and creating a presumption of ownership and validity of the
copyright.336
333ABS-CBN v. Gozon, March 11, 2015.
331Sison Olano, ibid.
^Supra.
336BAR 2013.
V1L INTELLECTUAL PROPERTY CODE
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168. Juan Xavier wrote and published a story similar to an
unpublished copyrighted story of Manoling Santiago. It was,
however, conclusively proven that Juan Xavier was not aware
that the story of Manoling Santiago was protected by copyright.
Manoling Santiago sued Juan Xavier for infringement of
copyright. Is Juan Xavier liable?
Yes. Juan is liable for infringement of copyright. It is not
necessary that Juan is aware that the story of Manoling was
protected by copyright. The work of Manoling is protected from the
time of its creation.337
169. What rights are derived from a Copyright?
There are two classifications of rights derived from a copyright:
a.
Economic rights; and
b.
Moral rights.
170. What are economic rights?
Copyright or economic rights shall consist of the exclusive right
to carry out, authorize or prevent the following acts:338
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a.
Reproduction of the work or substantial portion of the
work;
b.
Dramatization, translation, adaptation, abridgment,
arrangement or other transformation of the work;
c.
The first public distribution of the original and each copy
of the work by sale or other forms of transfer of ownership;
d.
Rental of the original or a copy of an (i) audiovisual, or (ii)
cinematographic work, (iii) a work embodied in a sound
recording, (iv) a computer program, (v) a compilation of
data and other materials, or (vi) a musical work in graphic
form, irrespective of the ownership of the original or the
copy which is the subject of the rental;
e.
Public display of the original or a copy of the work;
f.
Public performance of the work; and
&
Other communication to the public of the work.
337BAR 1998.
““Section 177, IPC, as amended.
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Reproduction
171. What is the test of substantiality?
To constitute infringement, it is not necessary that the whole
or even a large portion of the work shall have been copied. If so much
is taken that the value of the original is sensibly diminished, or the
labors of the original author are substantially and to an injurious
extent appropriated by another, that is sufficient in point of law
to constitute piracy. In cases of infringement, copying alone is not
what is prohibited. The copying must produce an injurious effect.3”
172. What are the instances when reproduction of the work is
legally permissible?
a.
Quotations from a published work if they are compatible
with fair use and only to the extent justified for the
purpose, including quotations from newspaper articles
and periodicals in the form of press summaries: provided,
that the source and the name of the author, if appearing
on the work, are mentioned;340
b.
The reproduction or communication to the public by mass
media of (i) articles on current political, social, economic,
scientific or religious topics; (ii) lectures, addresses and
other works of the same nature, which are delivered in
public if such use is for information purposes and has
not been expressly reserved: provided, that the source is
clearly indicated;341
c.
The reproduction and communication to the public of
literary, scientific or artistic works as part of reports of
current events by means of photography, cinematography
or broadcasting to the extent necessary for the purpose;311
d.
The private reproduction of a published work in a single
copy, where the reproduction is made by a natural
person exclusively for research and private study, shall
be permitted, without the authorization of the owner of
’’’Pacita, et al. ■ Felicidad Robles and Goodwill Trading Co., Inc., G.R. No.
131522, July 19, 1999.
^“Section 184.1(b), IPC, as amended.
’"Section 184.1(C), as amended.
’"Section 184.1(D), as amended.
I
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copyright in the work. The permission granted under this
section shall not extend to the reproduction of:"’
iii.
A work of architecture in the form of building or
other construction;
An entire book, or a substantial part thereof, or of
a musical work in graphic form by reprographic
means;
A compilation of data and other materials;
iv.
A computer program.
i.
ii.
e.
Any library or archive whose activities are not for profit
may, without the authorization of the author of copyright
owner, make a single copy of the work by reprographic
reproduction:344
i.
Where the work by reason of its fragile character or
rarity cannot be lent to users in its original form;
ii.
Where the works are isolated articles contained in
composite works or brief portions of other published
works and the reproduction is necessary to supply
them, when this is considered expedient, to persons
requesting their loan for purposes of research or
study instead of lending the volumes or booklets
which contain them; and
iii. Where the making of such a copy is in order to
preserve and, if necessary in the event that it is lost,
destroyed or rendered unusable, replace a copy, or
to replace, in the permanent collection of another
similar library or archive, a copy which has been
lost, destroyed or rendered unusable and copies are
not available with the publisher.
f.
Every library which, by law, is entitled to receive copies of
a printed work, shall be entitled, when special reasons so
require, to reproduce a copy of a published work which is
considered necessary for the collection of the library but
which is out of stock.346
“Section 187, IPC, as amended.
’"Section 188, IPC, as amended.
“Section 13, P.D. No. 49a.
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g-
The reproduction in one (1) 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
computer program: provided, that the copy or adaptation
is necessary for:340
The use of the computer program in conjunction
i.
with a computer for the purpose, and to the extent,
for which the computer program has been obtained;
and
Archival purposes, and, for the replacement of the
ii.
lawfully owned copy of the computer program in the
event that the lawfully obtained copy of the computer
program is lost, destroyed or rendered unusable.
Derivative right
173. How many works are protected if the author, or another person
with the consent of the author, makes a transformation of the
original work?
There are two works protected and covered by copyright, the
original and the derivative work. However, if the transformation of
the original work was done after the term of the copyright, then,
only one copyright subsists—that of the derivative work.
174. Who can carry out derivative work on the original work of the
author?
The author has the exclusive privilege to carry out derivative
work of his original work. During the term of the copyright, the
author may authorize person to carry out the derivative work.
First public distribution
175. What is the first sale doctrine?
The first sale doctrine provides that an individual who
knowingly purchases a copy of a copyrighted work from the copyright
holder receives the right to sell, display or otherwise dispose of that
particular copy, notwithstanding the interests of the copyright
owner.
31cSection 189, IPC, as amended.
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VII. INTELLECTUAL PROPERTY CODE
321
The copyright holder’s right to control the distribution of his
work goes away after the “first sale” of the work. The “First Sale
Doctrine” is codified in U.S. copyright law at 17 U.S.C. Section 109.
The doctrine is mirrored in our own copyright laws.
This principle is also called the “exhaustion” principle. It also
applies to patent.
176. KK is from Bangkok, Thailand. She studies medicine in the
Pontifical University of Santo Tomas (UST). She learned
that the same foreign books prescribed in UST are 40-50%
cheaper in Bangkok. So she ordered 50 copies of each book
for herself and her classmates and sold the books at 20% less
than the price in the Philippines. XX, the exclusive licensed
publisher of the books in the Philippines, sued KK for copyright
infringement. Decide.
KK did not commit copyright infringement. Under the “first
sale” doctrine, the economic rights of the author relevant to the
question extend only to the first public distribution of each original
copy. After the first sale of the original copies, the owner may use
and re-sell the same. Hence, there is no infringement by KK since
the said doctrine permitted resale without the publisher’s further
permission.347
177. What is the right of Droite de Suite?
Droite de Suite means right to follow. This means that in every
sale or lease of an original work of painting or sculpture or of the
original manuscript of a writer or composer, subsequent to the first
disposition thereof by the author, the author or his heirs shall have
an inalienable right to participate in the gross proceeds of the sale or
lease to the extent of five percent (5%). This right shall exist during
the lifetime of the author and for 50 years after his death.
178. May the purchaser of a copyrighted book reproduce it or create
a derivative work out of it?
No, the purchaser may only distribute the work, without
incurring liability, but cannot reproduce or carry out derivative
"’BAR 2014; Kirtsaeng v. John Wiley & Sons, Inc., 568 U.S 319, 213 WL
1104736 (U.S Mar. 19, 2013), cited in Gepty, ibid., p. 179.
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work out of it. The rights of reproduction and transformation are
distinct from the right of first public distribution.
Renta! right
179. May the buyerorassigneeofan audiovisual or cinematographic
work, work embodied in a sound recording, a computer
program, or musical work lease or rent such work without the
consent of its creator following the first sale doctrine?
No, the above-enumerated works cannot be rented out to others
without the consent of the copyright holder. The right of rental is a
distinct economic right which is not covered by the first sale doctrine.
However, works not covered by the foregoing enumeration, like
books, may be leased out for profit by the buyer, without the consent
of the copyright owner.
Right of public display
180. Raphael is an internationally well-known and award-winning
painter. Alvaro is the President of world-wide organization
devoted to works of charity and the spread of the norms of
hope, fortitude, and serenity in the face of a global pandemic
that has brought desolation to humanity. Alvaro's mother
Maricor is the Chairperson. Alvaro commissioned Raphael to
do a painting with a theme of inspiring mankind to be filled
with faith and hope amid difficulties. After eight (8) months,
he finished the work of art. Despite the painstaking effort that
went with it, he is not proud of his opus. He showed it to his
friends, Javier, Gabriel and Michael who were all in tremendous
awe and considered it a magnum opus-comparable to, if not
better than, the works of the Masters.
May Alvaro organize an open for all exhibit to display the
great work of Raphael?
Under Section 178.4 of the IPC, as amended, the person who
commissioned the work shall have ownership of the work but the
copyright thereto pertains to the creator unless there is stipulation
to the contrary. Therefore, while Alvaro owns the painting, the
copyright belongs to Raphael. The right to display is one of the
economic rights of the creator. Thus, unless Raphael allows it,
Alvaro cannot publicly display the painting of Raphael.
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VII. INTELLECTUAL PROPERTY CODE
323
If Raphael did not transfer the copyright to Alvaro,
may Alvaro organize an exhibit among his close friends and
display the painting of Raphael?
Yes, Alvaro may display the painting to his close friends. What
is prohibited is the public display of the copyrighted work.
A public display is generally accepted to mean a display at a
place open to the public or where a substantial number of persons
outside of a normal circle of family or its social acquaintances are
gathered.348
flig/it of public performance
181. What is public performance?
“Public performance”, in the case of a work other than an
audiovisual work, is the recitation, playing, dancing, acting or
otherwise performing the work, either directly or by means of any
device or process; in the case of an audiovisual work, the showing of
its images in sequence and the making of the sounds accompanying
it audible; and, in the case of a sound recording, making the
recorded sounds audible at a place or at places where persons
outside the normal circle of a family and that family’s closest social
acquaintances are or can be present, irrespective of whether they
are or can be present at the same place and at the same time, or at
different places and/or at different times, and where the performance
can be perceived without the need for communication within the
meaning of Subsection 171.3 of the Intellectual Property Code.349
Right of communication to the public
182. What does communication to the public, as an economic right,
mean?
“Communication to the public” or “communicate to the public”
means the making of a work available to the public by wire or
wireless means in such a way that members of the public may access
these works from a place and time individually chosen by them.350
318Gepty, ibid., p.181 citing Nimmer on Copyright and Amador, Copyright
under the Intellectual Property Code.
“Section 171.6, IPC, as amended.
“Section 171.3, IPC, as amended.
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183. What are the so-called moral rights of a copyright holder?
The author of a work shall, independently of the economic
rights or the grant of an assignment or license with respect to such
right, have the following moral rights:361
a.
To require that the authorship of the works be attributed
to him. in particular, the right that his name, as far
as practicable, be indicated in a prominent way on the
copies, and in connection with the public use of his work;
(“Right of attribution”)
b.
To make any alterations of his work prior to, or to withhold
it from publication;
c.
To object to any distortion, mutilation or other modification
of, or other derogatory action in relation to, his work which
would be prejudicial to his honor or reputation; (“Right of
integrity”) and
d.
To restrain the use of his name with respect to any work
not of his own creation or in a distorted version of his
work.352 (“Right against false attribution”)
184. SJ, a computer genius, commissioned Wl, former managing
editor of the largest publishing company in the world, to write
SJ's autobiography. SJ, preoccupied by his overwhelming
ambition to grow his company to be able to offer technological
products that will benefit mankind, did not get to spend much
time with his children. His intention in having the autobiography
is for his children to get to know the real SJ—his virtues and
frailties. Wl accepted the engagement on one condition—it will
be a no holds barred account of SJ's life. SJ agreed. But after
the finishing the book, Wl is not happy with it and refuse to
publish it.
May SJ compel Wl to publish the book?
The copyright to the book belongs to Wl unless otherwise
stipulated. Therefore, it is within his moral rights to withhold the
book from publication.
Also, an author cannot be compelled to perform his contract to
create a work or for the publication of his work already in existence.
“‘Section 193, IPC, as amended.
““Section 34, P.D. No. 49; BAR 1995.
VII. INTELLECTUAL PROPERTY CODE
325
However, he may be held liable for damages for breach of such
contract.3*3
185. May the moral rights to a copyright be waived?
An author may waive his rights by a written instrument, but
no such waiver shall be valid where its effect is to permit another:364
a)
To use the name of the author, or the title of his work, or
otherwise to make use of his reputation with respect to
any version or adaptation of his work which, because of
alterations therein, would substantially tend to injure the
literary or artistic reputation of another author;356 or
b)
To use the name of the author with respect to a work he
did not create.356
Also, when an author contributes to a collective work, his right
to have his contribution attributed to him is deemed waived unless
he expressly reserves it.367
186. What is the term of moral right?
All moral rights shall be coterminous with the economic rights
of the author or creator of the work except the right of attribution,
which is in perpetuity.358
4.
Rules on Ownership of Copyright
187. What rules govern copyright ownership?
Copyright ownership shall be governed by the following
rules:
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a.
In the case of original literary and artistic works, copyright
shall belong to the author of the work;369
b.
In the case of works of joint authorship, the co-authors
shall be the original owners of the copyright and in the
absence of agreement, their rights shall be governed by
’“Section 194, IPC, as amended.
35'Section 195, IPC, as amended.
“’Section 195.1, ibid.
“Section 195.2, ibid.
“’Section 196, IPC, as amended.
“’Section 198.1 as amended by R.A. No. 10372.
“’Section 178.1, IPC, as amended.
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the rules on co-ownership. If, however, a work of joint
authorship consists of parts that can be used separately
and the author of each part can be identified, the author
of each part shall be the original owner of the copyright in
the part that he has created;”0
c.
d.
e.
f.
In the case of work created by an author during and in the
course of his employment, the copyright shall belong to:
i.
The employee, if the creation of the object of
copyright is not a part of his regular duties even if
the employee uses the time, facilities and materials
of the employer.
ii.
The employer, if the work is the result of the
performance of his regularly-assigned duties, unless
there is an agreement, express or implied, to the
contrary.361
In the case of a work commissioned by a person other than
an employer of the author, and who pays for it, and the
work is made in pursuance of the commission, the person
who so commissioned the work shall have ownership of
the work, but the copyright thereto shall remain with
the creator, unless there is a written stipulation to the
contrary;”2
In the case of audiovisual work, the copyright shall
belong to the producer, the author of the scenario, the
composer of the music, the film director, and the author
of the work so adapted. However, subject to contrary
or other stipulations among the creators, the producer
shall exercise the copyright to an extent required for the
exhibition of the work in any manner, except for the right
to collect performing license fees for the performance of
musical compositions, with or without words, which are
incorporated into the work;363
In respect of letters, the copyright shall belong to the
writer subject to the provisions of Article 723 of the Civil
Code.364 The publishers shall be deemed to represent the
““Section
“'Section
“"Section
“’Section
“‘Section
178.2, ibid.
178.3, ibid.
178.4, ibid.
178.5, ibid.
178.6, ibid.
VII. INTELLECTUAL PROPERTY CODE
327
authors of articles and other writings published without
the names of the authors or under pseudonyms, unless
the contrary appears, or the pseudonyms or adopted
name leaves no doubt as to the author’s identity, or if the
author of the anonymous works discloses his identity.366
188. Eloise, an accomplished writer, was hired by Petong to write
a bimonthly newspaper column for Diario de Manila, a newlyestablished newspaper of which Petong was the editor-inchief. Eloise was to be paid P1,000 for each column that was
published. In the course of two (2) months, Eloise submitted
three (3) columns which, after some slight editing, were
printed in the newspaper. However, Diario de Manila proved
unprofitable and closed only after two (2) months. Due to the
minimal amounts involved, Eloise chose not to pursue any
claim for payment from the newspaper, which was owned by
New Media Enterprises:
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a.
Does Eloise have to secure authorization from New Media
Enterprises to be able to publish her Diario de Manila
columns in her own anthology? Explain fully.
b.
Assume that New Media Enterprises plans to publish
Eloise's columns in its own anthology entitled, "The
Best of Diario de Manila" Eloise wants to prevent the
publication of her columns in that anthology since she
was never paid by the newspaper. Name one irrefutable
legal argument Eloise could cite to enjoin New Media
Enterprises from including her columns in its anthology.
Answer:
a.
Eloise does not have to secure the authorization of New
Media, because as the author, she owns the copyright to
her columns.
b.
Eloise could invoke that under the IPC, as the owner of
the copyright to the columns, she can either “authorize
or prevent” reproduction of the work, including the
public distribution of the original and each of the work
‘by sale or other forms of transfer of ownership”. While
the anthology as a derivative work is protected as a new
work, it does not affect the force of the copyright of Eloise
upon her columns and does not imply any right to New
’“Section 179, IPC, as amended.
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Media to use the columns without the consent of Eloise.
(Bar 2008)
189. While vacationing in Boracay, Valentino surreptitiously took
photographs of his girlfriend Monaliza in her skimpy bikini.
Two (2) weeks later, her photograph appeared in the Internet
and in a national celebrity magazine. Monaliza found out
that Valentino had sold the photograph to the magazine and,
adding insult to injury, uploaded them to his personal blog
on the Internet. Monaliza filed a complaint against Valentino
for damages based on, among other grounds, violation of
her intellectual property rights: a. Does she have any cause
of action? Explain; b. Valentino's friend Francesco stole the
photographs and duplicated them and sold them to a magazine
publication. Valentino sued Francesco for infringement and
damages. Does Valentino have any cause of action? Explain,
c. Does Monaliza have any cause of action against Franceso?
Explain.
a.
No. Monaliza cannot sue Valentino for violation of her
intellectual property rights, because she was not the one
who took the pictures. She may sue Valentino instead for
violation of her right to privacy. He surreptitiously took
photographs of her and then sold the photographs to a
magazine and uploaded them to his personal blog in the
Internet.
b.
No. Valentino cannot sue Francesco for infringement,
because he has already sold the photographs to a
magazine.
c.
Yes. Monaliza can also sue Francesco for violation of her
right to privacy.366
190. T, an associate attorney in XYZ Law Office, wrote a newspaper
publisher a letter disputing a columnist's claim about an
incident in the attorney's family. T used the law firm's letterhead
and its computer in preparing the letter. T also requested the
firm's messenger to deliver the letter to the publisher. Who
owns the copyright to the letter?367
366BAR 2010.
“’BAR 2011.
VII. INTELLECTUAL PROPERTY CODE
329
a.
T, since he is the original creator of the contents of
the letter;
b.
Both T and the publisher, one wrote the letter to the other
who has possession of it;
c.
The law office since it was an employee and he wrote it on
the firm’s letterhead;
d.
The publisher to whom the letter was sent.
191. BR and CT are noted artists whose paintings are highly prized
by collectors. Dr. DL commissioned them to paint a mural at
the main lobby of his new hospital for children. Both agreed to
collaborate on the project for a total fee of two million pesos
to be equally divided between them. It was also agreed that
Dr. DL had to provide all the materials for the painting and pay
for the wages of technicians and laborers needed for the work
on the project. Assume that the project is completed and both
BR and CT are fully paid the amount of P2M as artists' fee by
DL. Under the law on Intellectual Property, who will own the
mural? Who will own the copyright in the mural? Why? Explain.
Under Section 178.4 of the IPC, as amended, in case of
commissioned work, the creator (in the absence of a written
stipulation to the contrary) owns the copyright, but the work itself
belongs to the person who commissioned its creation. Accordingly,
the mural belongs to DL. However, BR and CT own the copyright,
since there is no stipulation to the contrary.368
192. The widow of a former President commissioned Matalino
to write a biography of her late husband for a fee. Upon
completion of the work, the widow paid Matalino the agreed
price. The biography was copyrighted. The widow, however,
changed her mind upon reading the book and decided not to
have it published. Can the President's widow sell the property
without the consent of Matalino? Explain.
The President’s widow can sell the property without the
consent of Matalino. The widow was the owner of the work that was
done by Matalino pursuant to their agreement.369
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’“BAR 1995 and 2004.
“’BAR 1986.
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Can the President's widow transfer the copyright without the
consent of Matalino?
Under the law. in case of commissioned work, the work
belongs to the one who commissioned it but the copyright belongs
to the author, unless otherwise stipulated. Thus, unless otherwise
stipulated, the President’s widow cannot transfer the copyright
since it belongs to the author.
193. What is the general term of copyright protection?
Subject to the other rules below, the copyright of both original
and derivative works shall be protected during the life of the author
and for 50 years after his death. This rule also applies to posthumous
works.370
194. How about in cases of joint authorship?
In case of works of joint authorship, the economic rights shall
be protected during the life of the last surviving author and for 50
years after his death.371
195. If today a person is granted a copyright for a book, for how long
will the copyright be valid? If said person uses a pseudonym,
how would this affect the length of the copyright?
A copyright endures during the lifetime of the creator and for
50 years after his death. In case he uses a pseudonym, the copyright
shall last until the end of 50 years following the date of the first
publication of the work, unless the author is identified, in which
case, the copyright subsists during his lifetime and for 50 years after
his death.372
196. Are there other kinds of works with
protection?
different terms of
Yes. In case of works of applied art, the protection shall be for
a period of 25 years from the date of making.373
37oSection 213.1, IPC, as amended.
371Section 213.2, IPC, as amended.
372BAR 1975.
373Section 213.4, IPC, as amended.
VII. INTELLECTUAL PROPERTY CODE
331
In case of photographic works, the protection shall be for 50
years from publication of the work and, if unpublished, 50 years
from the making.374
In case of audio-visual works including those produced by
process analogous to photography or any process for making audio­
visual recordings, the term shall be 50 years from date of publication
and, if unpublished, from the date of making.376
The rights granted to performers and producers of sound
recordings under this law shall expire:
a.
For performances not incorporated in recordings, 50 years
from the end of the year in which the performance took
place; and
b.
For sound or image and sound recordings and for
performances incorporated therein, 50 years from the end
of the year in which the recording took place.376
For example, Juan dela Cruz composed a song. He asked Pedro
to sing the musical composition. Because of his excellent rendition
of the song, it became a hit. Juan has a copyright to the musical
composition. It subsists during his lifetime and 50years after his
death. Pedro has the copyright to his performance. This is an
example of a neighboring right to copyright. It has a term of 50 years
following the end of the year in which the performance took place.
In case of broadcasts, the term shall be 20 years from the date
the broadcast took place. The extended term shall be applied only to
old works with subsisting protection under the prior law.
197. Is there a special rule on the calculation of the term?
Yes. The term of protection subsequent to the death of the
author provided in the above rules shall run from the date of his
death or of publication, but such terms shall always be deemed to
begin on the first day of January of the year following the event
which gave rise to them.377
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5.
Limitations on Copyright
374Section
^Section
^Section
^’Section
213.5, IPC, as amended.
213.6, IPC, as amended.
215, IPC, as amended.
214, IPC, as amended.
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198. What are the limitations on copyright?
Notwithstanding the provisions of Chapter V of the IPC, the
following acts shall not constitute infringement of copyright:™
a.
The recitation or performance of a work, once it has been
lawfully made accessible to the public, (i) if done privately
and free of charge or (ii) if made strictly for a charitable or
religious institution or society;
Example: Students singing popular songs to entertain a
professor celebrating his birthday.
b.
The making of quotations from a published work if they
are compatible with fair use and only to the extent justified
for the purpose, including quotations from newspaper
articles and periodicals in the form of press summaries:
provided, that the source and the name of the author, if
appearing on the work, are mentioned;
Example: Lifting an insignificant portion of a book and
incorporating it in another book, with proper attribution.
c.
The reproduction or communication to the public by mass
media of (i) articles on current political, social, economic,
scientific or religious topic, (ii) lectures, addresses and
other works of the same nature, which are delivered in
public if such use is for information purposes and has
not been expressly reserved: provided, that the source is
clearly indicated;
Example: News story printing a substantial part of the
speech of a public official.
d.
The reproduction and communication to the public of
literary, scientific or artistic works as part of reports of
current events by means of photography, cinematography
or broadcasting to the extent necessary for the purpose;
Example: Taking a photo of paintings in art gallery
exhibit as part of report of current events.
e.
The inclusion of a work in a publication, broadcast, or
other communication to the public, sound recording
or film, if such inclusion is made by way of illustration
for teaching purposes and is compatible with fair use:
■’’“Section 184.1, IPC, as amended.
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VII. INTELLECTUAL PROPERTY CODE
f.
g-
h.
333
provided, that the source and of the name of the author, if
appearing in the work, are mentioned;
Example: Slides presentation of comparative works of
architecture as illustration for teaching purposes of the
different types of architecture throughout the decades.
The recording made in schools, universities, or educational
institutions of a work included in a broadcast for the use
of such schools, universities or educational institutions;
provided, that such recording must be deleted within
a reasonable period after they were first broadcast:
provided, further, that such recording may not be made
from audiovisual works which are part of the general
cinema repertoire of feature films except for brief excerpts
of the work;
Example: The recording made in a university of UAAP
basketball games for the viewing of the university
students.
The making of ephemeral recordings by a broadcasting
organization by means of its own facilities and for use in
its own broadcast;
Example: The recording by a broadcasting organization of
current events as part of a newscast.
The use made of a work by or under the direction or
control of the Government, by the National Library or by
educational, scientific or professional institutions where
such use is in the public interest and is compatible with
fair use;
Example: The application of the must-carry rule of
the National Telecommunications Commission which
obligates cable provides to carry the signals and shows
of free TV stations to afford the public wider viewing
options.
i.
The public performance or the communication to the public
of a work, in a place where no admission fee is charged in
respect of such public performance or communication, by
a club or institution for charitable or educational purpose
only, whose aim is not profit making, subject to such other
limitations as may be provided in the Regulations;
Example: Poetry reading competition among students
where no admission fee is charged in respect of such
public performance.
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j-
Public display of the original or a copy of the work not
made by means of a film, slide, television image or
otherwise on screen or by means of any other device
or process: provided, that either the work has been
published, or, that the original or the copy displayed has
been sold, given away or otherwise transferred to another
person by the author or his successor in title;
Example: Public display of a painting after its purchase
from the owner.
k.
Any use made of a work for the purpose of any judicial
proceedings or for the giving of professional advice by a
legal practitioner.
Example: Copying portions of a book for inclusion in a
pleadings to be filed with the court or in an opinion to be
given to a client.
1.
The reproduction or distribution of published articles
or materials in a specialized format exclusively for the
use of the blind, visually- and reading-impaired persons:
Provided, That such copies and distribution shall be made
on a nonprofit basis and shall indicate the copyright
owner and the date of the original publication; and,”9
Example: The non-commercial reproduction of books
under the Braille system for the use of the blind.
m.
In case of fair use of the copyrighted work.380
Private Performance of a work
199. The Filipino Society of Composers (FCT) is a non-profit
association of authors, composers and publishers. Said
association is the owner of certain musical compositions
among which are the songs entitled: "Dahil Sa lyo," "Sapagkat
Ikaw Ay Akin," "Sapagkat Kami Ay Tao Lamang" and "The
Nearness Of You."
BT is the operator of a restaurant known as "Alex Soda
Foundation and Restaurant" where a combo with professional
singers, hired to play and sing musical compositions to
entertain and amuse customers therein, were playing and
_________
’’’Section 184, IPC, as amended.
’“Section 185, IPC, as amended.
VII. INTELLECTUAL PROPERTY CODE
335
singing the above-mentioned compositions without any
license or permission from FCT to play or sing the same. It is
admitted that the patrons of the restaurant in question pay
only for the food and drinks and apparently not for listening to
the music.
Was the playing and singing of the musical compositions
of FCT inside the establishment of BT constitute a public
performance for profit within the meaning and contemplation
of the Copyright Law?
The music provided is for the purpose of entertaining and
amusing the customers in order to make the establishment more
attractive and desirable. It will be noted that for the playing and
singing the musical compositions involved, the combo was paid as
independent contractors. It is therefore obvious that the expenses
entailed thereby are added to the overhead of the restaurant which
are either eventually charged in the price of the food and drinks
or to the overall total of additional income produced by the bigger
volume of business which the entertainment was programmed to
attract. Consequently, it is beyond question that the playing and
singing of the combo in BT’s restaurant constituted performance for
profit contemplated by the Copyright Law.381
Incidentally, in a similar case, it was ruled that “(t)he
Performance in a restaurant or hotel dining room, by persons
employed by the proprietor, of a copyrighted musical composition,
for the entertainment of patrons, without charge for admission to
hear it, infringes the exclusive right of the owner of the copyright.”382
Making of Quotations
200. What are the criteria to be observed such that making
quotation from a published work does not amount to copyright
infringement?
The criteria are as follows:
a)
It is compatible with fair use;
b)
The extent of the use is justifiable for the purpose
intended; and,
“‘Filipino Society of Composers v Benjamin Tan, G.R. No. L-36402, Second
Division, March 16, 1987.
x2Ibid.
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c)
The source and author of the work are mentioned
201, Johnny Cruz is a staunch conservative and a loyal member
of the Republican Party. He is pro-life, believes in the second
amendment that protects the right to keep and bear arms and
advocates former POTUS Trump’s basic philosophy—America
First. He wrote an 88-page thought-provoking article about the
second impeachment of Trump. Echoing many legal scholars,
he argued that the impeachment is unconstitutional because
the impeachment process only applies to a sitting President;
the objective of impeachment is to remove an incumbent
President and since Trump has left the POTUS office, the
impeachment has no legal leg to stand on. He concluded
that the impeachment is nothing but a hoax and part of the
continuing prosecution of Trump by the left and the media
mob.
Pearly Ivory is an avid fan of the Democratic Party. She
believes in all its liberal ideas and progressive policies. Anti­
abortion for her is really not against life but simply means
pro-choice. She gushes with admiration on the prominent
Democrats—Bill Clinton, Barack Obama, and the like. She
wrote a critique on the work of Johnny Cruz which literally
copied 90% of Johnny's article but made the proper attribution.
Ten percent (10%) of the article is in support of her conclusion
that Trump is a threat to society and democracy and should be
permanently barred from seeking elective office.383
Is Pearly Ivory liable for copyright infringement?
Yes, Pearly Ivory is liable for copyright infringement. Making
quotations from a published work is permissible. However, to
constitute as a valid limitation on copyright, the quotation must
be compatible with fair use. One of the factors to be considered in
determining whether the use made of a work in any particular case
is fair use is the amount and substantiality of the portion used in
relation to the copyrighted work as a whole. Copying 90% of the
work, even though with proper attribution, is not compatible with
fair use.
383Patterned after a 1989 Bar Exams but based on contemporary news as of
the date of writing.
VII. INTELLECTUAL PROPERTY CODE
337
202. Does the lifting of a portion of a book by another author
constitute copyright infringement?
The lifting of substantial portions of a book by the author
constitutes infringement of the copyright of the authors of the first
book. If so much is taken that the value of the original works is
substantially diminished, there is an infringement of copyright and
to an injurious extent, the work is appropriated.™
In cases of infringement, copying alone is not what is
prohibited. The copying must produce an injurious effect. In the
Habana case, the Supreme Court held that the injury consists in
that the second author lifted from the first author’s book materials
that were the result of the latter’s research work and compilation
and misrepresented them as her own. The infringer circulated the
book for commercial use and did not acknowledge the first author as
her source.385
It should be noted that in the Habana case, the number of pages
copied did not even account for more than 50% of the book. It seems
that had the second author made the proper author attribution,
there would have been no infringement.
Information purposes
203. Cite example of "addresses and other works of the same
nature” which can be reproduced to the public by mass media
without infringement.
In Rappier, Inc. v. Andres Bautista,366 it was held that
presidential and vice presidential debates fall under “addresses and
other works of the same nature.” Thus, the copyright conditions for
the debates are: (1) the reproduction or communication to the public
by mass media of the debates is for information purposes; (2) the
debates have not been expressly reserved by the copyright holders);
and (3) the source is clearly indicated.
The Supreme Court allowed the debates to be shown or live
streamed unaltered on Rappier’s and other websites subject to the
foregoing copyright conditions.
™Pacita Habana, et al. v. Felicidad Robles and Goodwill Trading Co., Inc.,
G.R. No. 131522, July 19, 1999.
^Supra.
186G.R. No. 222702, April 5, 2016.
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Under the direction and control of the government
204. What do you understand by the must-carry rule?
The must-carry rule is a regulation of the National
Telecommunications Commission which obligates cable TV networks
to carry the signals of local TV stations and show in full the freelocal TV programs.
The improved broadcast signals offered by a cable TV may
infringe or encroach upon the audience or viewer market of the freesignal TV. This is so because the latter’s signal may not reach the
remote areas or reach them with poor signal quality. To foreclose
this possibility and protect the free-TV market (audience market),
the must-carry rule was adopted to level the playing field. This, in
turn, benefits the public who would have a wide-range of choices of
programs or broadcast to watch. This also benefits the free-TV signal
as their broadcasts are carried under cable TV’s much-improved
broadcast signals thus expanding their viewer’s share.387
Hence, it was ruled that the carriage by cable TV providers of
ABS-CBbTs signals and the showing in full of the local TV programs
do not constitute copyright infringement.388 This is based on
Sectionl84.1 (h) of the IPC, as amended, the use made of a work by
or under the direction or control of the Government, by the National
Library or by educational, scientific or professional institutions
where such use is in the public interest and is compatible with fair
use will not constitute copyright infringement.
It was further held that while the Memorandum Circular of
the NTC on the must-carry rule refers to cable television, it should
be understood as to include direct-to-home via satellite TV (DTK)
which provides essentially the same services.
In GMA Network v. Central CATV,339 the Supreme Court
further ruled that under the must-carry rule, the cable TV networks
are required to carry and show in full the free-local TVs programs,
including advertisements, without alteration or deletion. The act of
showing advertisements does not constitute an infringement of the
“television and broadcast markets” under Section 2 of E.O. No. 205.
3B7GMA Network, Inc. v. Central CATV, Inc., G.R. No. 176694, July 18, 2014.
388ABS-CBN Broadcasting Corporation v. Philippine Multi-Media System,
Inc., G.R. Nos. 175769-70, January 19, 2009.
3ft9GMA Network, supra.
VII. INTELLECTUAL PROPERTY CODE
339
205. Is carrying the signals of the local TV station as form of re­
broadcasting?
No, the cable TV provider is not the origin nor does it claim
to be the origin of the programs broadcasted by the ABS-CBN; the
former did not make and transmit on its own but merely carried the
existing signals of the latter and when the cable provider subscribers
new ABS-CBN’s programs in Channels 2 and 23, they know that
the origin thereof was the latter.390
Judicial proceedings or professional advice
206. May a person have photocopies of some pages of the book of
Professor Rosario made without violating the copyright law?
No, the private reproduction of a published work in a single copy,
where the reproduction is made by a natural person exclusively for
research and private study, is permitted, without the authorization
of the owner of the copyright in the work does not apply to a book.
Reproduction of a book is covered by a separate provision. If the
pages copied amount to a substantial portion, there is infringement
of copyright.
207. In a written legal opinion for a client on the difference
between apprenticeship and learnership, Liza quoted without
permission a labor law expert's comment appearing in his book
entitled "Annotations on the Labor Code." Can the labor law
expert hold Liza liable for infringement of copyright for quoting
a portion of his book without his permission?
No. The labor law expert cannot hold Liza liable for infringement
of copyright. Under Section 184. l(k) of the IPC, as amended, “Any
use made of a work for the purpose of any judicial proceeding or
for giving of professional advice by a legal practitioner” shall not
constitute infringement of a copyright.391 The use made of a work for
the purpose of giving professional advice is a limitation on copyright
and does not require the consent of the author.
3S0ABS-CBN Broadcasting Corporation
Ine.,G.R. Nos. 175769-70, January 19, 2009.
“'BAR 2006.
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208. May Liza be held criminally liable if she did not attribute the
portion of the work she quoted in her opinion to the labor law
author?
The law does not require attribution when it comes to the use of
the work for judicial proceeding or giving professional advice and as
such. Liza cannot be sued for copyright infringement despite lack of
attribution. However, Liza may be held liable for plagiarism which
is broader in scope than copyright. To plagiarize means to steal and
pass off the ideas or words of another as one’s own. It is basically a
literary theft.392
a.
Doctrine of fair use
209. What is fair use?
Fair use is “a privilege to use the copyrighted material in a
reasonable manner without the consent of the copyright owner or as
copying the theme or ideas rather than their expression.”393 Fair use
is an exception to the copyright owner>s monopoly of the use of the
work to avoid stifling “the very creativity which that law is designed
to foster”.393
Under this doctrine, the fair use of a copyrighted work for: (1)
criticism and comment; (2) news reporting; (3) teaching, including
multiple copies for classroom use; and (4) scholarship, research, and
similar purposes is not an infringement of copyright.
210. What are the factors to be considered in determining fair use?
Determining fair use requires application of the four-factor
test. Section 185 of the Intellectual Property Code lists four (4)
factors to determine if there was fair use of a copyrighted work:
392Webster’s online dictionary.
393ABS CBN case citing Habana v. Robles, 369 Phil. 764 (1999) [Per J. Pardo,
First Division], citing 18 AM JUR2D §109, in turn citing Toksvig v. Bruce Pub. Co.,
(CA7Wis) 181 F2d 664 [1950]; Bradbury v. Columbia Broadcasting System, Inc.,
(CA9 Cal) 287 F2d 478, cert den 368 US 801, 7 L ed 2d 15, 82 S Ct 19 [1961]; Shipman
v. R.K.O. Radio Pictures, Inc., (CA2 NY) 100 F2d 533 [1938].
393ABS CBN case citing Matthew D. Bunker, TRANSFORMING THE NEWS:
COPYRIGHT AND FAIR USE IN NEWS-RELATED CONTEXTS, 52 J. COPYRIGHT
SOCY U.S.A. 309, 311 (2004-2005), citing Iowa St. Univ. Research Found., Inc. v.
Am. Broad. Cos., 621 F.2d 57, 60 (2d Cir. 1980). The four factors are similarly codified
under the United States Copyright Act of 1976, Section 107.
VII. INTELLECTUAL PROPERTY CODE
341
a.
The purpose and character of the use, including whether
such use is of a commercial nature or is for non-profit
educational purposes;
b.
The nature of the copyrighted work;
c.
The amount and substantiality of the portion used in
relation to the copyrighted work as a whole; and
d.
The effect of the use upon the potential market for or
value of the copyrighted work.
First, the purpose and character of the use of the copyrighted
material must fall under those listed in Section 185, thus: “criticism,
comment, news reporting, teaching including multiple copies
for classroom use, scholarship, research, and similar purposes.”
The purpose and character requirement is important in view of
copyright’s goal to promote creativity and encourage creation of
works. Hence, commercial use of the copyrighted work can be
weighed against fair use.
The “transformative test” is generally used in reviewing the
purpose and character of the usage of the copyrighted work. The
court must look into whether the copy of the work adds “new
expression, meaning or message” to transform it into something
else. “Meta-use” can also occur without necessarily transforming the
copyrighted work used.
Second, the nature of the copyrighted work is significant in
deciding whether its use was fair. If the nature of the work is more
factual than creative, then fair use will be weighed in favor of the
user.
Third, the amount and substantiality of the portion used is
important to determine whether usage falls under fair use. An exact
reproduction of a copyrighted work, compared to a small portion of
it, can result in the conclusion that its use is not fan’. There may also
be cases where, though the entirety of the copyrighted work is used
without consent, its purpose determines that the usage is still fair.
For example, a parody using a substantial amount of copyrighted
work may be permissible as fair use as opposed to a copy of a work
produced purely for economic gain.
Lastly, the effect of the use on the copyrighted work’s market
is also weighed for or against the user. If this court finds that the
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use had or will have a negative impact on the copyrighted work's
market, then the use is deemed unfair.™5
Interestingly, in the ABS-CBN case, the respondents from
GMA-7 invoked as of one of their defenses the doctrine of fair use
since footage was only aired for five (5) seconds. It was held that
whether the alleged five-second footage may be considered fair use
is a matter of defense as the case involves determination of probable
cause at the preliminary investigation stage only.
GMA-7’s rebroadcast of ABS-CBN’s news footage without
the latter’s consent is not an issue. The mere act of rebroadcasting
without authority from the owner of the broadcast gives rise to
the probability that a crime was committed under the Intellectual
Property Code.
The fair use of a copyrighted work for (i) criticism and comment;
(ii) news reporting; (iii) teaching, including limited number of
copies for classroom use; and (iv) scholarship, research, and similar
purposes is not an infringement of copyright.
Decompilation, which is understood here to be the reproduction
of the code and translation of the forms of a computer program to
achieve the interoperability of an independently created computer
program with other programs may also constitute fair use to the
extent that such decompilation is done for the purpose of obtaining
the information necessary to achieve such interoperability.396
211. Virtucio was a composer of llocano songs who has been quite
popular in the llocos Region. Pascuala is a professor of music
in a local university with special focus on indigenous music.
When she heard the musical works of Virtucio, she purchased
a CD of his works. She copied the CD and sent the second copy
to her Music class with instructions for the class to listen to
the CD and analyze the works of Virtucio. Did Pascuala thereby
infringe Virtucio's copyright? Explain your answer.
Pascuala did not infringe on the rights of Virtucio. The fair
use of a copyrighted work for criticism, comment, news reporting,
teaching including limited number of copies for classroom use,
scholarship, research and similar purposes is not an infringement
395ABS-CBN, ibid.
396Section 185.1, IPC, as amended.
VII. INTELLECTUAL PROPERTY CODE
343
of copyright.3” In this case, Pascuala’s reproduction of the limited
number of CDs was for classroom use and educational purposes thus
negating copyright infringement.398
212. KLM Printers, Inc. operated a mall outlet located at the ground
floor of university building in Quezon City. It possessed soft
copies of certain textbooks on file, and would print "bookalikes" of these textbooks (or in other words, reproduced
the entire textbooks) upon order and for a fee. It would even
display samples of such "book-alikes" in its stall for sale to the
public.
Upon learning of KLM Printers, Inc.'s activities, the
authors of the textbooks filed a suit against it for copyright
infringement. In its defense, KLM Printers, Inc. invoked the
doctrine or fair use, contending that the "book-alikes" are
being used for educational purposes by those who avail of
them.
a.
What is the doctrine of fair use?
Under this doctrine, the fair use of a copyrighted work for
(1) criticism, comment, (2) news reporting, (3) teaching including
multiple copies for classroom use, (4) scholarship, research, and
similar purposes is not an infringement of copyright.
b.
Is KLM Printers, Inc.'s invocation of the doctrine of fair use
proper in this case? Explain.
No, the invocation is improper. In determining whether the use
made of a work in any particular case is fair use, the factors to be
considered shall include: a) the purpose and character of the use,
including whether such use is of a commercial nature or is for non­
profit educational purposes; b) The nature of the copyrighted work;
c) the amount and substantiality of the portion used in relation to
the copyrighted work as a whole; and d) the effect of the use upon
the potential market for or value of the copyrighted work.399
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6.
Copyright Infringement
“’Section 185, IPC, as amended.
“BAR 2017.
“Section 185.1, IPC, as amended.
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213. What is copyright infringement?
Infringement of a copyright is a trespass on a private domain
owned and occupied by the owner of the copyright, and, therefore,
protected by law, and infringement of copyright, or piracy, which
is a synonymous term in this connection, consists in the doing by
any person, without the consent of the owner of the copyright, of
anything the sole right to do which is conferred by statute on the
owner of the copyright.400
The gravamen of copyright infringement is not merely the
unauthorized “manufacturing” of intellectual works but rather the
unauthorized performance of any of the rights exclusively granted
to the copyright owner. Hence, any person who performs any of such
acts without obtaining the copyright owner’s prior consent renders
himself civilly and criminally liable for copyright infringement.
It was held that the copying of the genuine Microsoft software to
produce computer system hard disk or read-only memory (CDROMs) containing fake Microsoft software and their distribution
are illegal even if the copier or distributor is a Microsoft licensee."1
Absolute similarity of the purported pirated works to the
copyrighted works is not required. The essence of a copyright
infringement is the similarity or at least substantial similarity of
the purported pirated works to the copyrighted work.402
214. When is copyright infringement committed?
Copyright infringement is committed by any person who shall
use original literary or artistic works, or derivative works, without
the copyright owner’s consent in such a manner as to violate the
foregoing economic and moral rights of the author.
A person infringes a right protected under the IPC when one:
a.
Directly commits an infringement;
b.
Benefits from the infringing activity of another person
who commits an infringement if the person benefiting
has been given notice of the infringing activity and has
400ABS-CBN, supra.
401NBI-Microsoft Corporation v. Judy Hwang, et al., G.R. No. 147043, June 21,
2005.
402Francisco G. Joaquin, Jr., and BJ Productions, Inc. v. Honorable Franklin
Drilon, et al., G.R. No. 108946, January 28, 1999.
r
VII. INTELLECTUAL PROPERTY CODE
345
the right and ability to control the activities of the other
person;
C.
With knowledge of infringing activity, induces, causes
or materially contributes to the infringing conduct of
another.403
215. May the author or creator of the work sue for copyright
infringement if he fails to deposit a copy of his work to the
National Library (or the IPO as deputized by the National
Library)?
Yes, he may sue for copyright infringement notwithstanding
the lack of deposit and registration with the National Library.
Artistic and Literary works are now protected by its mere creation
under the new Copyright Law.
Under P.D, No. 49, failure to comply with registration and
deposit does not deprive the copyright owner of the right to sue
for infringement but merely limits the remedies available to him
because the copyright for a work is granted from the moment of
creation. This means that the author whose work was infringed can
only secure an injunction against infringement but cannot sue for
damages.404
However, under the IPC, the copyright owner may not only
obtain an injunction but may also ask for damages and exercise
other remedies provided by the law even though his work is not
deposited and registered with the IPO.
216. What are the elements of copyright infringement?
For a claim of copyright infringement to prevail, the evidence
on record must demonstrate:
a.
Ownership of a validly copyrighted material by the
complainant; and
b.
Infringement of the copyright by the respondent.405
‘“Section 216, IPC, as amended.
“'Columbia Pictures, Inc., el al. v. Court of Appeals, G.R. No. 110318, August
28,1996.
"“Ching v. Salinas, Sr., 500 Phil. 628, 639 (2005).
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217. May corporate
infringement?
officers
be
held
liable
for
copyright
Section 217 of the Intellectual Property Code states that “any
person" may be found guilty of infringement. It also imposes the
penalty of both imprisonment and fine.
It has been ruled that corporate officers and/or agents may be
held individually liable for a crime committed under the Intellectual
Property Code:106
The existence of the corporate entity does not shield from
prosecution the corporate agent who knowingly and intentionally
caused the corporation to commit a crime. A corporate officer cannot
protect himself behind a corporation where he is the actual, present
and efficient actor.107 However, the criminal liability of a corporation's
officers or employees stems from their active participation in the
commission of the wrongful act.
The principle applies whether or not the crime requires the
consciousness of wrongdoing. It applies to those corporate agents
who themselves commit the crime and to those, who, by virtue of their
managerial positions or other similar relation to the corporation,
could be deemed responsible for its commission, if by virtue of their
relationship to the corporation, they had the power to prevent the
act.
An accused’s participation in criminal acts involving violations
of intellectual property rights is the subject of allegation and proof.
The showing that the accused did the acts or contributed in a
meaningful way in the commission of the infringements is certainly
different from the argument of lack of intent or good faith. Active
participation requires a showing of overt physical acts or intention
to commit such acts. Intent or good faith, on the other hand, are
inferences from acts proven to have been or not been committed.
It was held in the ABS-CBN case that the Department of
Justice committed grave abuse of discretion when it resolved to file
the Information against certain respondents despite lack of proof of
their actual participation in the alleged crime.
“Republic Gas Corporation v. Petron Corporation, G.R. No. 194062, June 17,
2013, cited in ABS-CBN case.
,tnSupra.
VII. INTELLECTUAL PROPERTY CODE
347
218. In an action for damages on account of an infringement of a
copyright, the defendant (the alleged pirate) raised the defense
that he was unaware that what he had copied was a copyright
material. Would this defense be valid?
No. An intention to pirate is not an element of infringement.
Infringement under the Intellectual Property Code is malum
prohibitum. The Intellectual Property Code is a special law.
Copyright is a statutory creation: Malice or criminal intent is
completely immaterial. Hence, an honest intention is no defense to
an action for infringement.408
A copy of a piracy is an infringement of the original, and it is no
defense that the pirate, in such cases, did not know whether or not
he was infringing any copyright; he at least knew that what he was
copying was not his, and he copied at his peril.
Thus, unless clearly provided in the law, offenses involving
infringement of copyright protections should be considered malum
prohibitum. It is the act of infringement, not the intent, which
causes the damage. To require or assume the need to prove intent
defeats the purpose of intellectual property protection.
Nevertheless, proof beyond reasonable doubt is still the
standard for criminal prosecutions under the Intellectual Property
Code.409
In one case, however, the Supreme Court found no grave
abuse of discretion on the part of the Department of Justice when it
dismissed the complaint against the respondent who had possession
of a product after purchase from legitimate sources but which turned
out to be a counterfeit, without the knowledge of the purchaser/
possessor.410
219. What are the remedies of the copyright owner against an
infringer?
The copyright owner may exercise the following remedies in
case of infringement:
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a.
He may file a civil action for copyright infringement to
obtain any or all of the following reliefs:
“BAR 1988 and 1997.
“ABS-CBN supra, citing Habana v. Robles.
410Sanrio Company Ltd. v. Lim, G.R. No. 168662, February 19,2008.
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i.
Damages. The court can order the defendant to pay
to the copyright proprietor or his assigns or heirs
such actual damages, including legal costs and
other expenses, as he may have incurred due to the
infringement as well as the profits the infringer may
have made due to such infringement, and in proving
profits the plaintiff shall be required to prove sales
only and the defendant shall be required to prove
every element of cost which he claims, or, in lieu of
actual damages and profits, such damages which to
the court shall appear to be just and shall not be
regarded as penalty.411
The amount of damages to be awarded shall be doubled against
any person who:
(i)
Circumvents effective technological measures; or
(ii)
Having reasonable grounds to know that it will induce,
enable, facilitate or conceal the infringement, remove
or alter any electronic rights management information
from a copy of a work, sound recording, or fixation of
a performance, or distribute, import for distribution,
broadcast, or communicate to the public works or copies
of works without authority, knowing that electronic rights
management information has been removed or altered
without authority.412
‘Technological measure’ means any technology, device or
component that, in the normal course of its operation, restricts
acts in respect of a work, performance or sound recording, which
are not authorized by the authors, performers or producers of
sound recordings concerned or permitted by law.413
‘Rights management information’ means information
which identifies the work, sound recording or performance;
the author of the work, producer of the sound recording or
performer of the performance; the owner of any right in the
work, sound recording or performance; or information about
the terms and conditions of the use of the work, sound recording
"■Section 216.1(b), IPC, as amended.
412Section 216.1(b), IPC, as amended.
"3Section 171.12, IPC, as amended.
r
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VII. INTELLECTUAL PROPERTY CODE
349
or performance; and any number or code that represent such
information, when any of these items is attached to a copy of
the work, sound recording or fixation of performance or appears
in conjunction with the communication to the public of a work,
sound recording or performance.111
Moral and exemplary damages may likewise be awarded
as court may deem proper, wise and equitable.116
However, no damages may be recovered after the lapse of
four years from the time the cause of action arose.1'6
ii.
Preliminary injunction. The court may also order
the defendant to desist from committing any
infringement and/or to prevent the entry into
the channels of commerce of imported goods that
involve an infringement, immediately after customs
clearance of such goods.117
iii.
Search and seizure order. This may include the
seizure and impounding of sales invoices and
other documents evidencing sales, all articles and
their packaging alleged to infringe a copyright and
implements for making them which may serve as
evidence in court proceedings in accordance with the
rules on search and seizure involving violations of
intellectual property rights issued by the Supreme
Court.118
iv.
Order of Destruction. The court can also order the
destruction without any compensation all infringing
copies or devices, as well as all plates, molds, or
other means for making such infringing copies as
the court may order.119
The destruction of infringing copies of the work
may be ordered even in the event of acquittal in a
criminal case.120
‘■‘Section 171.13, IPC, as amended.
‘■’Section 216.1(e), IPC, as amended.
‘‘"Section 226, IPC, as amended.
‘■’Section 216.1(a), as amended.
‘■“Section 216.2, and 216.1(c), IPC, as amended.
‘■“Section 216.1(d), IPC, as amended.
‘“Section 216.1, IPC, as amended.
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350
The order of destruction is however not executory if
defendant files a motion for reconsideration.421
The foregoing remedies shall not preclude an
independent suit for relief by the injured party by
way of damages, injunction, accounts or otherwise.121
V.
He may also file a criminal action for copyright
infringement.423
Thecopyright owner may elect, at any time before final judgment
is rendered, to recover instead of actual damages and profits, an
award of statutory damages for all infringements involved in an
action in a sum equivalent to the filing fee of the infringement action
but not less than fifty thousand pesos (P50,000.00). In awarding
statutory damages, the court may consider the following factors:
(1)
The nature and purpose of the infringing act;
(2)
The flagrancy of the infringement;
(3)
Whether the defendant acted in bad faith;
(4)
The need for deterrence;
(5)
Any loss that the plaintiff has suffered or is likely to suffer
by reason of the infringement; and
(6)
Any benefit shown to have accrued to the defendant by
reason of the infringement.
In case the infringer was not aware and had no reason to
believe that his acts constitute an infringement of copyright, the
court in its discretion may reduce the award of statutory damages to
a sum of not more than P10,000.00.424
The amount of damages to be awarded shall be doubled against
any person who circumvents effective technological measures and/
or alters or removes electronic rights management information.421
220. Jose Santos has written many poems, some of which have been
published in Panorama Magazine but never registered with the
Copyright Office. Among his published works was the poem
4212020 Rules, supra.
4z2Section 216.2, IPC, as amended.
423Section 217.1, IPC, as amended.
™Supra.
’“Section 216.1, IPC
VII. INTELLECTUAL PROPERTY CODE
351
entitled “In a Rose Garden." About a year from its publication,
Jose was surprised to hear over the radio a song whose lyrics
were copied from his poem. It appears that music sheets of
the song have been published and sold under the name of the
composer, without any acknowledgment in favor of Jose. Jose
wants to know what his rights are and whether he can secure
an injunction against the composer and/or the publisher,
perhaps with damages. How will you advise him? Explain.
I would tell Santos that he has a right to file an injunction
proceeding to restrain the composer and/or his publisher from
further committing any act of infringement of his copyright. Under
the present law, copyright is acquired from the moment of creation
of the work. Registration and deposit of the work are no longer
necessary for its acquisition. The moment Santos wrote his poem, he
acquired the right to restrain any infringement on his copyright, as
well as the right to have the infringing copies and devices impounded.
He may recover actual damages, including legal costs and other
expenses, as he may have incurred due to the infringement as well
as the profits the infringer may have made due to such infringement,
and in proving profits the plaintiff shall be required to prove sales
only and the defendant shall be required to prove every element of
cost which he claims, or, in lieu of actual damages and profits, such
damages which to the court shall appear to be just and shall not be
regarded as penalty.
He may also recover moral and exemplary damages, which the
court may deem proper, wise and equitable.426
221. What are the defenses available against an action for copyright
infringement?
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The defenses are as follows:
a.
b.
The work is not copyrightable;
C.
The use of the work falls within the limitations on
copyright;
d.
e.
The plaintiff/complainant is not the owner of the copyright;
The term of the copyright has expired;
Non-participation in the commission of the infringing
activities;
,!6BAR 1981 but answered under the IPC.
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f.
If the basis of the complaint is the benefit derived from
the infringing activity, lack of notice thereof and/or did
not have the ability to control the infringement;
gh.
Prescription; and
Lack of evidence to support the allegations of the
complaint.
222. Is there copyright infringement in the following cases?’”
a.
Sale of illicit copies of software programs.
Yes. The mere sale of illicit copies of software programs is
enough by itself to show the existence of probable cause for copyright
infringement.428
b.
Importation of DVDs and CDs of music, movies, and
foreign books into the Philippines by an individual for
personal purpose.
There is no infringement as long as the foregoing items are not
pirated and the number of copies is compatible with fair use. The
economic rights of the author do not include the right to prevent
importation or exportation of the copyrighted work. R.A. No.
10372 removed the limitation on the number of copies that may be
imported into the Philippines by an individual but this should not
mean without any limit.
c.
Public display of a painting after its purchase from the
artist.
Yes, this is one of the limitations on copyright.429
d.
Reproduction of the entire copy of a thesis by a person
other than the author.
There is no infringement provided that the reproduction is only
for a single copy, made by a natural person exclusively for research
and private study.430
427The assumption is that the copyright owner did not give his consent to any
of the acts enumerated.
428Microsoft Corporation v. Manansala, G.R. No. 166391, October 21, 2015.
429Section 184. l(j), IPC, as amended.
430Section 187, IPC, as amended.
VII. INTELLECTUAL PROPERTY CODE
e.
353
Use of layout or appearance of book without the consent
of the author.
There is no infringement as long as the use is with the
permission of the publisher. The copyright to the layout belongs to
the publisher and not to the author.431
f.
Use of an ornamental design embossed in a coffee mug
as a design for T-shirt.
There is infringement. The design can be detached from the
usefulness of the product and as such, it is copyrightable under the
Denicola test.
9-
Removing restrictions on what and how apps content can
be stored and used or "jail breaking’!
Circumvention of technological measure does not amount to
copyright infringement but is only an aggravating circumstance
which may cause the imposition of the maximum penalty or doubling
the award of damages.432
h.
Receipt of rentals by the owner of a mall or lessor of
an establishment where the lessee commits acts of
infringement.
The owner of the mall or lessor of the establishment is Hable
for infringement if he has been given notice of infringing activity but
did not stop the infringement. Benefiting from infringing activity is
a form of copyright infringement.433
i.
The composer of a song assigned his right to the
composition. Fifty years after the composer's death, the
assignee changed the tempo from ballad to rock and
claimed to be the owner of the musical composition.
By claiming to be the owner of the original composition, the
assignee violated the moral right of attribution of the original
composer and therefore infringed copyright. The right of attribution
of an author shall last during his lifetime and in perpetuity after his
death.434
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“'Section 174, IPC, as amended.
“"Based on Section 216.1, IPC, as amended.
“Section 216, IPC, as amended.
“Section 198, IPC, as amended.
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j-
Purchase of a book and then selling it for a price higher
than cost of acquisition.
There is no infringement of copyright. The first sale doctrine
provides that an individual who knowingly purchases a copy of a
copyrighted work from the copyright holder receives the right to sell,
display or otherwise dispose of that particular copy, notwithstanding
the interests of the copyright owner. The copyright holder’s right to
control the distribution of his work goes away after the “first sale”
of the work.
k.
The buyer of a copyrighted book reproduced it in its
entirety and shared it with his classmate for their private
study.
There is infringement of copyright. The person who photocopied
the book violated the economic right of reproduction of the work of
the copyright owner. The law excludes books from the right granted
by law to an individual allowing a single-copy-private-reproduction
of a published work.435
I.
Commercial reproduction of published articles in a
specialized format for the use of the blind, visually and
reading-impaired persons indicating the copyright owner
and date of publication.
There is copyright infringement. The reproduction of published
articles in a specialized format for the use of the blind, visually and
reading-impaired persons is a limitation on copyright only if the
distribution of the copies is done on a non-profit basis.438
m.
Cover song or new performance or recording of a
contemporary or previously recorded, commercially
released song or popular song by someone other than
the original artist without modification on the lyrics and
melody, then uploading it on the YouTube.
There is no infringement of copyright because cover song
assumes that the song, as a copyrightable work, has been lawfully
made accessible to the public, provided that the singer, (other than
the original artist), did not receive any royalty from YouTube or did
not gain any profit for the cover song.437
’“Section 187.1, IPC, as amended.
’“Section 184.1(1), IPC, as amended.
’37Based on Section 184.1(a), IPC, as amended.
VII. INTELLECTUAL PROPERTY CODE
n.
356
CD burning.
To “burn” a CD simply means to copy or write information into
a compact disc. There is copyright infringement because distributing
a copy of the copyrighted material (like the music CD) can only be
done with the permission of the copyright holder.
o.
Reprinting by a private library of a book that has gone out
of stock.
There is copyright infringement because only a library allowed
by law to receive copies of a printed work is entitled to reproduce
copy of a published work which is necessary for the collection of
the library but which out of stock.-138 A private library has no such
privilege.
P-
Legislative bill pirated by another congressman and
introduced as his own.
There is no copyright infringement. Copyright does not subsist
on works of government.-139 A legislative bill is a work of government.
q-
Reproduction of a collection of classical books on
literature (those which have been published more than 50
years after death of the authors) by someone other than
the person who made the compilation and arrangement.
There is copyright infringement. While the classical books have
become public dominion in view of the expiration of the term of the
copyright, the collection of the classical books, as a derivative work,
is independently copyrighted from the original works by reason of
the selection or coordination or arrangement of its contents.410
r.
Reproducing back-up copies or adaptation of a licensed
computer program for archival purposes.
There is copyright infringement. The law only allows
reproduction of one (1) back-up copy of a computer program for
archival purposes■1■1, except when reproduction of more than one
adaptation is allowed by the terms of the license agreement with
the copyright owner.
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“Section 188.2, IPC, as amended.
“’Based on Section 176, IPC, as amended.
“’Based on Section 173.1(b), IPC, as amended.
“'Based on Section 189.1(b), IPC, as amended.
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S.
Rebroadcast of a radio program after 25 years from the
date the broadcast took place without the consent of the
broadcasting organization which owns the copyright.
No copyright infringement. The term of broadcast is only 20
years from the date the broadcast took place.442
t.
Reproduction of the photograph by the owner without
the consent of the person, subject of the photograph.
No copyright infringement. The photographer, not the subject,
has the copyright to the photograph and as such, enjoys the economic
right of reproduction.
u.
X's painting of Madonna and Child was used by her
mother to print some personalized gift wrapper. As
part of her mother's efforts to raise funds for Bantay
Bata, the mother of X sold the wrapper to friends. Y,
an entrepreneur, liked the painting in the wrapper and
made many copies and sold the same through National
Bookstore.
There is infringement because artistic works are protected
from the moment of creation.
442Section 215.2, IPC, as amended.
VIII. CREDIT TRANSACTIONS
I. Guaranty
1.
What is a contract of guaranty?
It is a contract whereby a person, called the guarantor, binds
himself to the creditor to fulfill the obligation of the principal
debtor in case the latter should fail to do so. A guaranty may be
conventional, legal or judicial, gratuitous, or by onerous title. It may
also be constituted, not only in favor of the principal debtor, but also
in favor of the other guarantor, with the latter’s consent, or without
his knowledge, or even over his objection.1
2.
What are the characteristics of a contract of guaranty?
Characteristics of a contract of guaranty:
Nominate
a.
Consensual — the contract is between the creditor and the
b.
guarantor.
Generally, it is gratuitous. Exception: when there is a
c.
stipulation to the contrary.
d.
Accessory — it cannot exist without a valid principal
obligation.
Can be given as security for future debts
e.
Governed by the Statute of Frauds - it must be in writing
f.
to be enforceable.2
3.
Can a married woman guarantee an obligation?
Yes. A married woman may guarantee an obligation without
the husband’s consent, but shall not thereby bind the conjugal
partnership, except in cases provided by law.3
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‘Articles. 2047, 2051, Civil Code.
“Articles 2047, 2048, 2052, 2053, 1403(2)(b), Civil Code.
3 Article 2049, Civil Code.
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What is the scope of the obligation of a guarantor?
A guarantor may bind himself for less, but not for more than
the principal debtor, both as regards the amount and the onerous
nature of the conditions. Should he have bound himself for more, his
obligations shall be reduced to the limits of that of the debtor.4
5.
What is the extent of a contract of guaranty?
A guaranty is not presumed; it must be express and cannot
extend to more than what is stipulated therein. If it be simple or
indefinite, it shall comprise not only the principal obligation, but
also alt its accessories, including the judicial costs, provided with
respehcto the latter, that the guarantor shall only be Hable for those
costs incurred after he has been judicially required to pay.6
6.
Who may act as a guarantor?
A person who possesses integrity, capacity to bind himself, and
sufficient property to answer for the obligation which he guarantees.'
What is the benefit of excussion?
The guarantor cannot be compelled to pay the creditor unless
the latter has exhausted all the property of the debtor, and has
resorted to all the legal remedies against the debtor.7
8.
What are the conditions for the exercise of the benefit of
excussion?
The conditions for the exercise of the benefit of excussion are
as follows:
(1) The case does not fall
under any of the instances
enumerated in Article
2059
Excussion shall not take place:
•
If the guarantor
renounced it;
has
expressly
• If he has bound himself solidarily with
the debtor;
■ In case of insolvency of the debtor;
4Article 2054, Civil Code.
'Article 2055, Civil Code.
'Article 2056, Civil Code.
’Article 2058, Civil Code.
VIII. CREDIT TRANSACTIONS
(2) The guarantor complies
with Article 2060
359
•
When he has absconded, or cannot be
sued within the Philippines unless he
has left a manager or representative;
"
If it may be presumed that an execution
on the property of the principal debtor
would not result in the satisfaction of
the obligation.
He must set it up against the creditor
upon the latter’s demand for payment
from him, and point out to the creditor
available property of the debtor within
Philippine territory, sufficient ttecover
the amount of the debt.
v'/*
------------- - --------- k---9.
What happens if the creditor is negligent in exhausting the
property pointed out by the guarantor?
The creditor who is negligent in exhausting the property
pointed out shall suffer the loss, to the extent of said property, for
the insolvency of the debtor resulting from such negligence.9
10.
In the event that the benefit of excussion is available, how
should the creditor proceed?
The creditor shall ask the court to notify the guarantor of the
action. The guarantor may appear so that he may, if he so desire, set
up such defenses as are granted him by law.10
11.
What is the effect, if any, of a compromise between the creditor
and principal debtor? What about a compromise between the
guarantor and creditor?
A compromise between the creditor and the principal debtor
benefits the guarantor but does not prejudice him. That which is
entered into between the guarantor and the creditor benefits but
does not prejudice the principal debtor.11
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“Articles 2059, 2060, Civil Code.
“Article 2061, Civil Code.
’“Article 2062, Civil Code.
“Article 2063, Civil Code.
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Is there a sub-guarantor's right to excussion?
Yes. The guarantor of a guarantor shall enjoy the benefit of
excussion, both with respect to the guarantor and to the principal
debtor.12
13.
What is the benefit of division?
Should there be several guarantors of only one debtor and
for the same debt, the obligation to answer for the same is divided
among all. The creditor cannot claim from the guarantors except the
shares which they are respectively bound to pay, unless solidarity
has been expressly stipulated. The benefit of division against the co­
guarantors ceases in the same cases and for the same reasons as the
benefit of excussion against the principal debtor.13
14.
What right does a guarantor who pays for a debtor acquire
against the latter?
The guarantor who pays for a debtor must be indemnified by
the latter. The indemnity comprises: (i) the total amount of the debt;
(ii) the legal interests thereon from the time the payment was made
known to the debtor, even though it did not earn interest for the
creditor; (iii) the expenses incurred by the guarantor after having
notified the debtor that payment had been demanded of him; (iv)
damages, if they are due.
Note, however, that if the debt was for a period and the guarantor
paid it before it became due, he cannot demand reimbursement of
the debtor until the expiration of the period unless the payment has
been ratified by the debtor.1'
15.
Does the guarantor who pays for a debtor acquire a right to
subrogation?
Yes. The guarantor who pays is subrogated by virtue thereof
to all the rights which the creditor had against the debtor. If the
guarantor has compromised with the creditor, he cannot demand of
the debtor more than what he has really paid.16
‘“Article 2064, Civil Code.
‘’Article 2065, Civil Code.
■'Articles 2066, 2069, Civil Code.
‘“Article 2067, Civil Code.
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16.
361
What happens if the guarantor pays without notifying the
debtor?
If the guarantor should pay without notifying the debtor, the
latter may enforce against him all the defenses which he could have
set up against the creditor at the time the payment was made.
Also, if the guarantor has paid without notifying the debtor, and
the latter not being aware of the payment, repeats the payment,
the former has no remedy whatever against the debtor, but only
against the creditor. Nevertheless, in case of a gratuitous guaranty,
if the guarantor was prevented by a fortuitous event from advising
the debtor of the payment, and the creditor becomes insolvent, the
debtor shall reimburse the guarantor for the amount paid.16
17.
What are the instances when the guarantor, even before having
paid, may proceed against the principal debtor?
The guarantor, even before having paid, may proceed against
the principal debtor:
a.
when he is sued for the payment;
b.
in case of insolvency of the principal debtor;
c.
when the debtor has bound himself to relieve him from
the guaranty within a specified period, and this period
has expired;
d.
when the debt has become demandable, by reason of the
expiration of the period for payment;
e.
after the lapse of 10 years, when the principal obligation
has no fixed period for its maturity, unless it be of such
nature that it cannot be extinguished except within a
period longer than 10 years;
f.
if there are reasonable grounds to fear that the principal
debtor intends to abscond;
g.
if the principal debtor is in imminent danger of becoming
insolvent.
In all these cases, the action of the guarantor is to obtain
release from the Guaranty, or to demand a security that shall protect
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16Articles 2068, 2070, Civil Code.
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him from any proceedings by the creditor and from the danger of
insolvency of the debtor.”
18.
In case the payment has been made in virtue of a judicial
demand, or when the principal debtor or one of the guarantors
is insolvent, what are the effects of guaranty as between co­
guarantors?
In case the payment has been made in virtue of a judicial
demand, or when the principal debtor or one of the guarantors is
insolvent, the effects of Guaranty as between co-guarantors are as
follows:
a.
When there are two (2) or more guarantors of the same
debtor and for the same debt, the one who has paid
may demand of each of the others the share which is
proportionally owing from him.
To illustrate:
Gl, G2, and G3 are D’s guarantors of a P30 Million loan obtained
from C. If D becomes insolvent, guarantors Gl, G2, and G3 loses
the benefit of division as far as C is concerned. C may demand
payment of the entire P30 Million from any of the guarantors.
[Arts. 2065, par.2, 2059(3), Civil Code]
If Gl pays the entire loan of P30 Million, she can later demand
from G2 and G3 PIO Million each.
b.
If any of the guarantors should be insolvent, his share
shall be borne by the others, including the payer, in the
same proportion.
To illustrate:
Using our previous example, if G2 is insolvent, her share shall be
borne by Gl and G3 proportionately. Thus, Gl can demand P15
Million from G3.
c.
A sub-guarantor, in case of the insolvency of the guarantor
for whom he bound himself, is responsible to the co­
guarantors in the same terms as the guarantor.
’’Article 2071, Civil Code.
VIII. CREDIT TRANSACTIONS
363
To illustrate:
Using our previous example, if SG is the guarantor of G3, and
G3 becomes insolvent, SG is liable to G1 for PIO Million, or P15
Million if G2 is also insolvent.
d.
19,
The co-guarantors may set up against the one who paid,
the same defenses which would have pertained to the
principal debtor against the creditor, and which are not
purely personal to the debtor.18
What are the causes for extinguishment of Guaranty?
Causes for extinguishment of guaranty:
a.
Principal obligation is extinguished;
b.
Same causes as all other obligations;’9
c.
If creditor voluntarily accepts immovable or other
properties in payment of the debt (even if he should
afterwards lose the same through eviction or conveyance
of property);
d.
Release in favor of one of the guarantors, without consent
of the others, benefits all to the extent of the share of the
guarantor to whom it has been granted;
e.
Extension granted to the debtor by the creditor without
the consent of guarantor; or
f.
When by some act of the creditor, the guarantors even
though they are solidarily Hable cannot be subrogated to
the rights, mortgages, and preferences of the former.20
’’Articles 2073-2075, Civil Code.
’’Article 1231, Civil Code. Obligations are extinguished:
(1) By payment or performance;
(2) By the loss of the thing due;
(3) By the condonation or remission of the debt;
(4) By the confusion or merger of the rights of creditor and debtor;
(5) By compensation;
(6) By novation.
Other causes of extinguishment of obligations, such as annulment, rescission,
fulfillment of a resolutory condition, and prescription, are governed elsewhere in this
Code.
“Articles 2076-2081, Civil Code.
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What is a bond?
A bond, when required by law, is commonly understood to
mean an undertaking that is sufficiently secured, and not cash or
currency. Whenever surety bonds are submitted, they are subject
to any objections as to their sufficiency or as to the solvency of the
bondsman.21
21.
What is a bondsman?
A bondsman is a surety offered in virtue of a provision of law
or a judicial order. He must have the qualifications required of a
guarantor under Article 2056 of the Civil Code and special laws (like
the Rules of Court).22
22.
Is a judicial bondsman and sub-surety entitled to excussion?
No. A judicial bondsman cannot demand the exhaustion of the
property of the principal debtor. Likewise, a sub-surety in the same
case, cannot demand the exhaustion of the property of the debtor or
of the surety.23
23.
Chabs Inc. issued a guaranty in favor of DSD, which among
others, provides that should DSD default on its obligations to X
Co., Chabs Inc. shall be liable to pay P5,000,000.00 pesos and
for any interest and expenses relating to the default of DSD.
During the term of the contract, DSD defaulted and X Co.
came after Chabs Inc. as the guarantor to collect the damages
totaling to P7,000,000.00 pesos including all the interests and
expenses.
Chabs, Inc. responded that they should not be made
to pay more than the fixed amount written in their guaranty
agreement. X Co. countered that the guaranty agreement
provided for liability for interest and expenses.
Who is correct? Decide.
X Co. is correct. It can collect from Chabs Inc. the entire
amount notwithstanding the fixed amount written on the guaranty
21Comm. of Customs v. Alikpala, G.R. No. L-32542, November 26, 1970.
“Article 2082, Civil Code.
“Article 2084, Civil Code.
VIII. CREDIT TRANSACTIONS
365
agreement. The limit of Chabs Inc.’s liabilities must be determined
from the suretyship agreement it had signed. It is undoubtedly true
that the law looks upon the contract of suretyship with a jealous
eye, and the rule is settled that the obligation of the surety cannot
be extended by implication beyond its specified limits. To the extent,
and in the manner, and under the circumstances pointed out in
his obligation, he is bound, and no farther. The law is clear that
a guarantor may bind himself for less, but not for more than the
principal debtor, both as regards the amount and the onerous nature
of the conditions. However, in this case, the agreement provides for
liability for interest and expenses, then Chabs Inc. is bound by this
agreement and should be liable for the entire P7,000,000.00.24
24.
BSB obtained a 10-year credit facility from XYZ Bank in the
amount of PI Billion. ABC Guaranty Inc. issued a guaranty to
secure the obligations of BSB. In year five (5), the loan released
to BSB increased to P1.5 Billion. Can the guaranty issued by
ABC Guaranty Inc. sufficiently secure the obligations of BSB
currently amounting to P1.5 Billion already?
Yes. A guaranty may be given to secure future debts. The
Supreme Court in the case Atok Finance Corp. v. Court of Appeals,
et al.,15 stated, “It is clear to us that the Rizal Commercial Banking
Corporation26 and the NARIC11 cases rejected the distinction which
the Court of Appeals in the case at bar sought to make with respect
to Article 2053, that is, that the ‘future debts’ referred to in that
Article relate to ‘debts already existing at the time of the constitution
of the agreement but the amount [of which] is unknown,’ and not to
debts not yet incurred and existing at that time. Of course, a surety
is not bound under any particular principal obligation until that
principal obligation is born. But there is no theoretical or doctrinal
difficulty inherent in saying that the suretyship agreement itself is
valid and binding even before the principal obligation intended to be
secured thereby is born, any more that there would be in saying that
obligations which are subject to a condition precedent are valid and
binding before the occurrence of the condition precedent.”
21Dino & Uy v. Court of Appeals and Metropolitan Bank & Trust Company,
G.R. No. 89775, November 26, 1992.
“G.R. No. 80078, May 18, 1993.
2«115SCRA 777.
27103 Phil. 1131.
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25.
What is the extent of the "right to indemnification" of the
guarantor against the principal debtor?
As a rule, a guarantor who pays for a debtor should be
indemnified by the latter and would be legally subrogated to the
rights which the creditor has against the debtor. However, a person
who makes payment without the knowledge or against the will of the
debtor has the right to recover only insofar as the payment has been
beneficial to the debtor. If the obligation was subject to defenses on
the part of the debtor, the same defenses which could have been set
up against the creditor can be set up against the paying guarantor.2*
26.
In 2011, Veterans Bank granted a five (5)-year 10 million-peso
loan with XYZ, Inc. To secure payment, ABC Corp, executed a
Guarantee Agreement agreeing to guarantee payment of XYZ
Inc.'s entire loan obligation.
The Guarantee Agreement, however, states that ABC
Corp, waives its right of excussion under Article 2058 of the
Civil Code and that, consequently. Veterans Bank can claim
under the Guarantee Agreement directly against ABC Corp,
without having to exhaust all the properties of XYZ, Inc. and
without need of any prior recourse against XYZ, Inc.
In 2013, a huge storm destroyed XYZ, Inc.'s facilities
indefinitely halting its business operations.
In 2014, XYZ Inc. filed a Petition for Voluntary Rehabilitation
under the Financial Rehabilitation and Insolvency Act of 2010
("FRIA") before the RTC which, acting as a Rehabilitation
Court, issued a Stay Order in favor of XYZ Inc.
In 2015, Veterans Bank demanded payment of the entire
loan from ABC Corp. Invoking the RTC's Stay Order, ABC Corp,
denied Veterans Bank's claim. Veterans Bank filed a collection
suit against ABC Corp, before the RTC.
Decide.
The Stay Order issued by the Rehabilitation Court does not
preclude the RTC from hearing and deciding Veterans Bank's
complaint.
“Philippine Export and Foreign Loan Guarantee Corporation v. V.P. Eusebio
Construction, Inc., el al., G.R. No. 140047, July 13, 2004.
F
VIII. CREDIT TRANSACTIONS
367
The Stay Order relied upon by ABC Corp, merely ordered the
staying and suspension of enforcement of all claims and proceedings
against XYZ, Inc. and not against other persons or entities solidarity
liable with the debtor. Section 18(c) of the FRIA explicitly states
that a stay order shall not apply “to the enforcement of claims
against sureties and other persons solidarity liable with the debtor,
and third party or accommodation mortgagors as well as issuers
of letters of credit, x x x”. In addition, under Rule 4, Section 6 of
A.M. No. 00-8-10-SC or the Interim Rules of Procedure on Corporate
Rehabilitation, a stay order has the effect of staying enforcement
only with respect to claims made against the debtor, its guarantors
and persons not solidarity liable with the debtor:
Section 6. Stay Order. - If the court finds the petition to be
sufficient in form and substance, it shall, not later than five (5)
working days from the filing of the petition, issue an order: (a)
appointing a rehabilitation receiver and fixing his bond; (b) staying
enforcement of all claims, whether for money or otherwise and
whether such enforcement is by court action or otherwise, against
the debtor, its guarantors and persons not solidarity Hable with the
debtor x x x.
The Guarantee Agreement, however, shows that ABC, Corp,
waived its right of excussion under Article 2058 of the Civil Code. In
effect, the nature of the guarantee obligation assumed by ABC, Corp,
under the Guarantee Agreement was transformed into a suretyship
thus solidarity binding itself with XYZ, Inc.
Under a normal contract of guarantee, the guarantor binds
himself to the creditor to fulfill the obligation of the principal debtor
in case the latter should fail to do so. The guarantor who pays for
a debtor, in turn, must be indemnified by the latter. However, the
guarantor cannot be compelled to pay the creditor unless the latter
has exhausted all the property of the debtor and resorted to all the
legal remedies against the debtor. This is what is otherwise known
as the benefit of excussion. Conversely, if this benefit of excussion
is waived, the guarantor can be directly compelled by the creditor
to pay the entire debt even without the exhaustion of the debtor’s
properties.
In other words, a guarantor who engages to directly shoulder
the debt of the debtor, waiving the benefit of excussion and the
requirement of prior presentment, demand, protest, or notice of
any kind, undoubtedly makes himself/herself solidarity Hable to the
creditor.
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Veterans Bank can thus claim under the Guarantee Agreement
DIRECTLY against ABC, Corp, without having to exhaust all the
properties of XYZ, Inc. and without need of any prior recourse
against XYZ, Inc.89
II. Surety
27.
What is the concept and nature of suretyship?
If a person binds himself solidarily with the principal debtor,
the contract is called a Suretyship.30
A Contract of Suretyship is an agreement whereby a party,
called the surety, guarantees the performance by another party,
called the principal or obligor, of an obligation or undertaking in
favor of another party, called the obligee. Although the Contract of
a Surety is secondary only to a valid principal obligation, the surety
becomes liable for the debt or duty of another although it possesses
no direct or personal interest over the obligations nor does it receive
any benefit therefrom. The surety’s obligation is not an original and
direct one for the performance of his own act, but merely accessory or
collateral to the obligation contracted by the principal. Nevertheless,
although the contract of a surety is in essence secondary only to a
valid principal obligation, his liability to the creditor or promisee
of the principal is said to be direct, primary, and absolute; in other
words, he is directly and equally bound with the principal.31
28.
is there a required form for a contract of suretyship?
Yes. A contract of suretyship is a special promise to answer for
the debt, default, or miscarriage of another; hence, pursuant to the
Statute of Frauds, it must in writing and subscribed by the party
charged or by the latter’s duly authorized agent. Otherwise, it would
be unenforceable.32
29.
Distinguish surety from guaranty.
By a guaranty a person, called the guarantor, binds himself to
the creditor to fulfill the obligation of the principal debtor in case
29Trade and Investment Development Corporation of the Philippines also
known as Philippine Export-Import Credit Agency v. Philippine Veterans Bank, G.R.
No. 233850, July 1, 2019.
30Article 2084, Civil Code.
31Lim v. Security Bank Corporation, G.R. No. 188539, March 12, 2014.
“Article 1403(2)(b), Civil Code.
VIII. CREDIT TRANSACTIONS
369
the latter fails to do so. On the other hand, if a person himself is
solidarity liable with the principal debtor, the contract is called a
suretyship.
Guaranty
____________ Surety
Guarantor is secondarily liable.
Surety is primarily liable.
Insurer of solvency of debtor
Insurer of the debt
(a guarantor agrees that the credi­
tor, after proceeding against the
principal, may proceed against
the guarantor if the principal is
unable to pay)
(a surety promises to pay the prin­
cipal’s debt if the principal will
not pay)
s
30. Distinguish surety from solidary co-debtor.
A suretyship requires a principal debtor to whom the surety
is solidarity bound by way of an ancillary obligation of segregate
identity from the obligation between the principal debtor and the
creditor. Further, solidarity signifies that the creditor can compel
any one of the joint and several debtors or the surety alone to
answer for the entirety of the principal debt. The difference lies with
regard the right to seek reimbursement for the sums paid out to the
creditor.34
Surety
_______ Solidary co-debtor
not a party to the obligation;
and does not benefit from the
transaction between the creditor
and the solidary debtors
a party to the obligation
entitled to obtain indemnification
for the entire amount
right for reimbursement is subject
to deductions pertaining to his
share or at times even pertaining
to his proportionate share in the
portion that should have been paid
by an insolvent solidary debtor
“Article 2047, Civil Code; Gateway Electronics
Asian Bank, G.R. No.
172041, December 18, 2008.
31Articles 2047,1217, Civil Code; Escano, el al. v. Ortigas, Jr., G.R. No. 151953,
June 29, 2007.
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31.
Distinguish an "accommodation surety" from a "compensated
surety"
The Supreme Court has clarified on the distinction between
an accommodation surety and a compensated surety and the
reasons for treating them differently:
The law has authorized the formation of corporations for the
purpos^ of conducting surety business, and the corporate surety
differieignificantly from the individual private surety. First, unlike
the private surety, the corporate surety signs for cash and not
for friendship. The private surety is regarded as someone doing a
rather foolish act for praiseworthy motives; the corporate surety, to
the contrary, is in business to make a profit and charges a premium
depending upon the amount of guaranty and the risk involved.
Second, the corporate surety, like an insurance company, prepares
the instrument, which is a type of contract of adhesion whereas the
private surety usually does not prepare the note or bond which he
signs. Third, the obligation of the private surety often is assumed
simply on the basis of the debtor’s representations and without
legal advice, while the corporate surety does not bind itself until
a full investigation has been made. For these reasons, the courts
distinguish between the individual gratuitous surety and the
vocational corporate surety. In the case of the corporate surety, the
rule afcstrictissimi juris is not applicable, and courts apply the rules
of interpretation of appertaining to contracts of insurance.
Consequently, the rule of strict construction of the surety
contract is commonly applied to an accommodation surety but is not
extended to favor a compensated corporate surety.
The rationale of this doctrine is reasonable; an accommodation
surety acts without motive of pecuniary gain and, hence, should be
protected against unjust pecuniary impoverishment by imposing
on the principal duties akin to those of a fiduciary. This cannot
be said of a compensated corporate surety which is a business
association organized for the purpose of assuming classified risks
in large numbers, for profit and on an impersonal basis, through
the me’dium of standardized written contractual forms drawn by
its oye^representatives with the primary aim of protecting its own
interns.35
“Erma Industries, Inc.
December 6, 2017.
A
Security Bank Corporation, G.R. No. 191274,
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371
32. Does a change in the terms of the principal contract
automatically cancel the surety contract?
The liabilities of an insurer under the surety bond are not
extinguished when the modifications in the principal contract do not
substantially or materially alter the principal’s obligations.
A suretyship consists of two (2) different contracts: (1) the surety
contract and (2) the principal contract which it guarantees. Since
the insurer’s liability is strictly based only on the terms stated in
the surety contract in relation to the principal contract, any. Change
in the principal contract, which materially alters the principal’s
obligations would, in effect, constitute an implied novation of the
surety contract.
A surety is released from its obligation when there is a material
alteration of the contract in connection with which the bond is given,
such as a change which imposes a new obligation on the promising
party, or which takes away some obligation already imposed, or
one which changes the legal effect of the original contract and not
merely its form. A surety, however, is not released by a change in
the contract which does not have the effect of making its obligation
more onerous.36
33. Can a surety agreement secure an obligation in the absence of
a written contract evidencing the principal obligation?
Yes. Section 175 of P.D. No. 612 (Insurance Code, as amended)
defined suretyship as an agreement where a party called the surety
guarantees the performance by another party called the principal
or obligor of an obligation or undertaking in favor of a third person
called the obligee.
Under Section 176 of the Insurance Code, the nature and
extent of a surety’s liability are as follows:
SEC. 176. The liability of the surety or sureties shall
be joint and several with the obligor and shall be limited
to the amount of the bond. It is determined strictly by
the terms of the contract of suretyship in relation
to the principal contract between the obligor and
the obligee.37
■
_________
“People’s Trans-East Asia Insurance Corporation, a.k.a. People’s General In­
surance Corporation v. Doctors of New Millennium Holdings, Inc., G.R. No. 172404,
August 13, 2014.
37Emphasis supplied.
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Thus, the surety’s liability is joint and several with the obligor,
limited to the amount of the bond, and determined strictly by the
terms of the contract of suretyship in relation to the principal
contract between the obligor and the obligee.
Article 1356 of the Civil Code provides that contracts shall
be obligatory in whatever form they may have been entered into,
provided all the essential requisites for their validity are present.
Thus, an oral agreement which has all the essential requisites for
validity may be guaranteed by a surety contract. To rule otherwise
contravenes the clear import of Article 1356 of the Civil Code.39
34.
Can a surety become liable to pay the legal interest thereby
making its liability more than the amount of its issued bonds?
Yes. As early as Tagawa v. Aldanese and Union Guarantee
Co. and reiterated in Plaridel Surety & Insurance Co., Inc. v. P.L.
Galang Machinery Co., Inc., and more recently, in Republic v. Court
of Appeals and R & B Surety and Insurance Company, Inc., the
Supreme Court has sustained the principle that if a surety upon
demand fails to pay, he can be held liable for interest, even if in thus
paying, its liability becomes more than the principal obligation. The
increased liability is not because of the contract but because of the
default and the necessity of judicial collection.
A surety’s liability under the suretyship contract is different
from its liability under the law. There is no question that a surety
should not be made to pay more than its assumed obligation under
the surety bonds. However, a surety’s liability for the payment of
interest is not by reason of the suretyship agreement itself but
because of the delay in the payment of its obligation under the said
agreement.39
III. Real Estate Mortgage Law
35.
What is a Real Estate Mortgage ("REM")?
A REM is a contract whereby the debtor secures to the creditor
the fulfillment of the principal obligation, specially subjecting to
The Solid Guaranty, Inc., G.R. No. 226731,
“Cellpage International Corp.
June 17, 2020.
“Commonwealth Insurance v. Court of Appeals, G.R. No. 130886, January
29, 2004.
VIII. CREDIT TRANSACTIONS
373
such security immovable property or real rights over immovable
property, in case the principal obligation is not fulfilled at the time
stipulated.40
36. What are the characteristics of a REM?
Characteristics of REM:
37.
a.
it is a real right;
b.
it is an accessory contract;
C.
it is indivisible [each and every parcel under mortgage
answers for the totality of the debt];
d.
it is inseparable [a mortgage directly and immediately
subjects the property upon which it is imposed, whoever
the possessor may be, to the fulfillment of the obligation
for whose security it was constituted; the mortgage
adheres to the property, regardless of who its owner may
subsequently be]; and
e.
the object of the contract is immovable property or
alienable real rights over immovable property.41
Can a valid REM be constituted on the building erected on the
land belonging to another?
Yes. The Supreme Court has ruled that the inclusion of
“building” as separate and distinct from the land in the enumeration
in Article 415 of the Civil Code can only mean that a building is by
itself an immovable property. Thus, while it is true that a mortgage
of land necessarily includes, in the absence of stipulation of the
improvements thereon, buildings, still a building by itself may be
mortgaged apart from the land on which it has been built. Such a
mortgage would still be a real estate mortgage for the building would
still be considered immovable property even if dealt with separately
and apart from the land. In the same manner, possessory rights over
said properties before title is vested on the grantee, may be validly
transferred or conveyed as in a deed of mortgage?2
<012 Manreaa 467.
Mallorca, 128 SCRA 747;
“Articles 2089, 2124, 2126, Civil Code; PNB
McCullough v. Veloso, 46 Phil. 1.
“Prudential Bank v. Panis, 153 SCRA 390 citing Lopez v. Orosa, Jr., et a!.,
G.R. No. L-10817-18, February 28,1958; Leung Yee v. Strong Machinery Co., 37 Phil.
644, and Vda. de Bautista v. Marcos, 3 SCRA 438 (1961).
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38.
Explain the "inseparable" characteristic of a real estate
mortgage.
It is a real right, following the property, such that in subsequent
transfers by the mortgagor, the transferee must respect the
mortgage. A registered mortgage lien is considered inseparable
from the property inasmuch as it is a right in rem. The mortgage
creates a real right or a lien which, after being recorded, follows the
chattel wherever it goes. The mortgage on the property may still be
foreclosed despite the transfer.43
39.
Is a stipulation forbidding the owner from alienating the
mortgaged immovable valid?
No. A stipulation forbidding the owner from alienating the
mortgaged immovable is void.44
40.
Can mortgage credit be alienated or assigned?
Yes. The mortgage credit may be alienated or assigned to a
third person, in whole or in part, with the formalities required by
law."
41.
What are the requisites for a valid constitution of a REM?
The following requisites are essential for the constitution of a
REM:
1.
It is constituted to secure the fulfillment of a principal
obligation;
2.
The mortgagor must be the absolute owner of the real
estate mortgaged;
3.
The mortgagor has the free disposal of the property, and
in the absence thereof, that he is legally authorized for
the purpose.
Third persons who are not parties to the principal obligation
may secure the latter mortgaging their own property.48
I
“Article 2126, Civil Code; PNB v. RBL Enterprises, Inc., G.R. No. 149569, May
28, 2004.
"Article 2130, Civil Code.
"Article 2128, Civil Code.
"Article 2085, Civil Code
VIII. CREDIT TRANSACTIONS
375
In relation thereto, Article 2125 of the Civil Code further
provides:
In addition to the requisites stated in Article 2085, it is
indispensable, in order that a mortgage may be validly constituted,
that the document in which it appears be recorded in the Registry
of Property. If the instrument is not recorded, the mortgage is
nevertheless binding between the parties.47
Thus, as between the parties to a mortgage, the non-registration
of a REM deed is immaterial to its validity. Recording in the Registry
of Property is only necessary in order to bind third persons.43
42.
Is a REM valid if the deed evidencing the same was notarized
without authority and compliance with the prescribed form
under Section 112 of P.D. No. 1529 (Property Registration
Decree).
The defective notarization of a REM agreement merely strips
it of its public character and reduces it to a private document.
Although Article 1358 of the New Civil Code requires that the
form of a contract transmitting or extinguishing real rights over
immovable property should be in a public document, the failure to
observe such required form does not render the transaction invalid.
The necessity of a public document for the said contracts is only
for convenience; it is not essential for its validity or enforceability.
When there is a defect in the notarization of a document, the clear
and convincing evidentiary standard originally attached to a dulynotarized document is dispensed with, and the measure to test the
validity of such document is preponderance of evidence.49
43.
What are the remedies available to the mortgagee in case of
non-payment of the loan secured by the real estate mortgage
or violation of the terms and conditions of the loan agreement?
The mortgagee may either file an action for specific performance
to compel payment of the loan or he may foreclose the mortgagee,
extra-judicially, in accordance with Act No. 3135, as amended (An
Act to Regulate the Sale of Property under Special Powers Inserted
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“Articles 2124, 2125, Civil Code.
“Coca-Cola Bottlers v. Soriano, G.R. No. 211232, April 11, 2018.
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in or Annexed to Real Estate Mortgages) or judicially, either Rule 68
of the Rules of Court.
44.
What is the effect of the filing of an action for specific
performance on the right of the mortgagee to foreclose the
real estate mortgage?
The mere filing of action for specific performance to collect the
loan is tantamount to a waiver or abandonment of the mortgage
lien. Thus, should the mortgagee obtain adverse judgment in the
collection case, he can no longer foreclose the real estate mortgage.
Should the mortgagee opt to foreclose the mortgage, he may
still file an action for collection to enforce payment of the deficiency
if the sale proceeds realized during the foreclosure are not sufficient
to satisfy the loan secured by the real estate mortgage.
The mortgagee, however, is not entitled to recover deficiency
if the person who constituted the mortgage is an accommodation
mortgagor. The accommodation mortgagor is liable only up the
extent of the value of the property, unless otherwise stipulated or
when he acted also as a surety.50
45.
To secure a loan, the Sps. Santos mortgaged their property
covered by TCT No. 1234 to Standard Bank. The Sps. Santos
defaulted in their loan payments causing Standard Bank to
extrajudicially foreclose on the mortgage with ABC Corp,
getting the highest bid. For failure to redeem the property
during the redemption period, TCT No. 1234 was cancelled and
a new title was issued in favor of ABC Corp. The Sps. Santos
leased the subject property to others and collected rentals
thereon. ABC Corp, filed before the RTC a petition for the
issuance of a writ of possession.
The RTC issued two (2) Orders: the first, issued the writ of
possession; the second, ordered the Sps. Santos to deliver to
ABC Corp, and/or deposit with the Court the monthly rentals
of the subject property covering the period after expiration of
the redemption up to the time they surrender the possession
thereof to ABC Corp.
Can back rentals be awarded in an ex parte application
for writ of possession under Act No. 3135, as amended?
“Corodan v. China Bank Corporation, G.R. No. 210542, February 24, 2016.
VIII. CREDIT TRANSACTIONS
377
Yes. When the redemption period expired, ABC Corp, became
the owner of the subject property and was, from then on, entitled
to the fruits thereof. The Sps. Santos ceased to be the owners of
the subject property, and had no right to the same as well as to its
fruits. Under Section 32, Rule 39 of the Rules of Court, on Execution,
Satisfaction, and Effect of Judgments, all rents, earnings, and
income derived from the property pending redemption shall belong
to the judgment obligor, but only until the expiration of his period
of redemption.
After the redemption period expired without the Sps. Santos
redeeming the subject property, ABC Corp, became the absolute
owner thereof, and the Sps. Santos lost all their rights thereto,
including the right to lease out the same and collect rentals on said
lease. The Sps. Santos simply hold the amounts collected in trust
-with the obligation to return the same to their rightful owners.61
46. Does the mortgagor lose ownership of the mortgaged property
after extra-judicial foreclosure of the real estate mortgage
under Act No. 3135, as amended?
The mortgagor does not lose ownership of the mortgaged
property after foreclosure because he has redemption right under
the law. It is only when he fails to redeem the real estate mortgage
within the period prescribed by law that the mortgagee may
consolidate title to the property, resulting in the mortgagor’s loss of
ownership thereof.
As a consequence, the mortgagor may sell the property or
constitute a second mortgage thereon, but subject to the preferred
rights and lien of the mortgagee.
47.
Is the validity of a mortgage contract that was constituted to
secure a loan obligation affected by the validity of the loan
contract?
Yes. The validity of accessory contracts mainly flows from the
validity of the principal contracts. A real estate mortgage is in the
nature of an accessory contract; thus, its validity depends on the
validity of the loan contract.62
6lSps. Teves v. Integrated Credit and Corporate Services, Inc., G.R. No.
216714, April 4, 2018.
62Luntao v. BAP Credit Guaranty Corporation, G.R. No. 204412, September
20,2017.
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48.
What is a blanket mortgage or dragnet clause in a real estate
mortgage contract?
It is the stipulation extending the coverage of a mortgage to
advances or loans other than those already obtained or specified in
the contract.63
Thus, if a mortgagor obtains a loan for Pl Million secured
by a real estate mortgage which contains a dragnet clause, loans
incurred subsequent to the execution of the mortgage agreement are
covered by the mortgage even though no amendment to the existing
mortgage contract or a fresh mortgage agreement is signed by the
parties when the future loans are actually obtained.
49.
A Real Estate Mortgage Agreement provides:
"That, for and in consideration of certain loans, and other
credit accommodations obtained from the Mortgagee, and to
secure the payment of the same and those that may hereafter
be obtained, a real estate mortgage is hereby constituted on
the real property, more particularly described under TCT No.
123456, registered in the name of Juan dela Cruz."
Does the Real Estate Mortgage Agreement secure past
obligations?
Although a blanket mortgage or a dragnet clause is generally
recognized as valid, these other obligations, past or future, secured
by the real estate contract must be specifically described within the
terms of the mortgage contract. It is clear that the agreement does
not cover obligations incurred prior to the execution of the mortgage
instrument.61
IV. Personal Property Security Act (R.A. No. 11057)
50.
Define the following terms:
a.
b.
c.
d.
Commodity contract
Competing claimant
Consumer goods
Control agreement
“Panacan Lumber Co. v. Solidbank Corporation, G.R. No. 226272, September
16, 2020.
61Panacan Lumber Co., ibid.
VIII. CREDIT TRANSACTIONS
e.
f.
gh.
i.
jk.
Default
Deposit-taking institution
Equipment
Future property
Grantor
Intangible asset
l.
m.
n.
Intermediary
Intermediated securities
Lien
Non-intermediated securities
o.
Notice
P-
Proceeds
Purchase money security interest
Registry
Secured creditor
Security interest55
qs.
t.
379
Commodity contract - refers to a commodity futures
contract, an option on a commodity futures contract, a commodity
option, or another contract if the contract or option is: (i) traded on
or subject to the rules of a board of trade that has been designated
as a contract market for such a contract; or (ii) traded on a foreign
commodity board of trade, exchange, or market, and is carried on
the books of a commodity intermediary for a commodity customer.
Competing claimant - refers to a creditor of a grantor
or other person with rights in an encumbered asset that may be
in competition with the rights of a secured creditor in the same
encumbered asset.
Consumer goods - refer to goods that are used or acquired for
use primarily for personal, family, or household purposes.
Control agreement - an agreement in writing between
the grantor and the secured creditor which perfects the security
interests over an intangible asset.
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“Section 3. R.A. No. 11057; Section 1.05, IRR.
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i.
With respect to intermediated securities, the control
agreement is among the issuer or the intermediary, the
grantor and the secured creditor, according to which the
issuer or the intermediary agrees to follow instructions
from the secured creditor with respect to the security,
without further consent from the grantor.
ii.
With respect to rights to a deposit account, the control
agreement is among the deposit-taking institution, the
grantor, and the secured creditor, according to which the
deposit-taking institution agrees to follow instructions
from the secured creditor with respect to the payment
of funds credited to the deposit account without further
consent from the grantor.
iii.
With respect to commodity contracts, the control
agreement is among the grantor, secured creditor,
and intermediary, according to which the commodity
intermediary will apply any value distributed on account
of the commodity contract as directed by the secured
creditor without further consent by the commodity
customer or grantor.
Default - the failure of a debtor to pay or otherwise perform
a secured obligation, and any other event that constitutes default
under the terms of an agreement between the grantor and the
secured creditor.
Deposit-taking institution - refers to a bank under R.A.
No. 8791 or the General Banking Law, a nonstock savings and loan
association as defined under R.A. No. 8367 or the Revised Nonstock
Savings and Loan Association Act of 1997, or a cooperative as defined
under R.A. No. 9520 or the Philippine Cooperative Code.
Equipment - means a tangible asset other than inventory or
consumer goods, or livestock, that is primarily used or intended to
be used by the grantor in the operation of its business.
Future property - refers to any movable property which does
not exist or which the grantor does not have rights in or the power to
encumber at the time the security agreement is concluded.
Grantor - refers to (i) the person who grants a security
interest in collateral to secure its own obligation or that of another
person; (ii) a buyer or other transferee of a collateral that acquires
VIII. CREDIT TRANSACTIONS
381
its right subject to a security interest; (iii) a transferor in an outright
transfer of an accounts receivable; or (iv) a lessee of goods.
Intangible asset - means any movable property other than
a tangible asset including, but not limited to, investment property,
deposit accounts, commodity contracts and receivables.
Intermediary - refers to a person, including but not limited
to, a bank, trust entity, depositary, broker, or central securities
depositary, that in the ordinary course of business or regular activity
maintains an account for such securities or assets, for another
person, and is acting in that capacity.
Intermediated securities — means securities credited to a
securities account and rights in securities resulting from the credit
of securities to a securities account.
Lien - refers to a qualified right or a proprietary interest,
which may be exercised over the property of another.
Non-intermediated securities - means securities other
than intermediated securities.
Notice - refers to a statement of information that is registered
in the Registry relating to a security interest or lien. This includes
initial notice, amendment notice, and termination notice.
Proceeds - any property received upon sale, lease or other
disposition of collateral, or whatever is collected on or distributed
with respect to collateral, claims arising out of the loss or damage
to the collateral, as well as a right to insurance payment or other
compensation for loss or damage of the collateral.
Purchase money security interest - refers to a security
interest in goods taken by the seller to secure the price or by a
person who gives value to enable the grantor to acquire the goods to
the extent that the credit is used for that purpose.
Registry - refers to the centralized and nationwide electronic
registry established in the Land Registration Authority (“LRA”)
where notice of a security interest and a Hen in personal property
may be registered.
Secured creditor - refers to a person that has a security
interest. For purposes of registration and priority, it includes a buyer
of an account receivable and a lessor of goods under an operating
lease for not less than one (1) year.
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Security interest - refers to a property right in collateral that
secures payment or other performance of an obligation, regardless of
whether the parties have denominated it as a security interest, and
regardless of the type of asset, the status of the grantor or secured
creditor, or the nature of the secured obligation; including the right
of a buyer of accounts receivable and a lessor under an operating
lease for not less than one (1) year.
51.
What is the scope of application of Personal Property Security
Act ("PPSA")?
The PPSA applies to all transactions of any form that secure
an obligation with personal property, whether it is a tangible or an
intangible asset, except interests in aircraft subject to R.A. No. 9497
or the Civil Aviation Authority Act of 2008, and interests in ships
subject to P.D. No. 1521 or the Ship Mortgage Decree of 1978.“
52.
Is there a prescribed form of a security agreement?
Yes. A security agreement must be contained in a written
(including electronic) contract signed by the parties. It must identify
the collateral and the secured obligation. It may consist of one (1)
or more writings that, taken together, establish the intent of the
parties to create a security interest.67
53.
What constitutes a sufficient description of collateral?
A description of collateral shall be considered sufficient, whether
it is specific or general, if it reasonably identifies the collateral. A
description such as “all personal property,” “all equipment,” “all
inventory,” or “all personal property within a generic category” of
the grantor shall be sufficient.68
54.
Can a security agreement provide for the creation of a security
interest in future property?
Yes. A security agreement may provide for the creation of a
security interest in future property or after-acquired assets, but the
security interest in that property is created only when the grantor
“Section 4, R.A. No. 11057.
fi7Section 6, R.A. No. 11057.
“Section 7, R.A. No. 11057.
VIII. CREDIT TRANSACTIONS
383
acquires rights in it or the power to encumber it. It may provide
that a security interest in a tangible asset that is transformed into
a product extends to the product, but such interest shall be limited
to the value of the encumbered asset immediately before it became
part of the product. A security agreement may also provide that a
security interest in a tangible asset extends to its replacement, but
such interest shall be limited to the value of the encumbered asset
immediately before it was replaced.09
55. What is the extent of security interests over right to proceeds
and commingled funds?
A security interest in personal property shall extend to its
identifiable or traceable proceeds. Where proceeds in the form of
funds credited to a deposit account or money are commingled with
other funds or money: (i) the security interest shall extend to the
commingled money or funds, notwithstanding that the proceeds
have ceased to be identifiable to the extent they remain traceable;
(ii) the security interest in the commingled funds or money shall
be limited to the amount of the proceeds immediately before they
were commingled; and (iii) if at any time after the commingling,
the balance credited to the deposit account or the amount of the
commingled money is less than the amount of the proceeds
immediately before they were commingled, the security interest
against the commingled funds or money shall be limited to the lowest
amount of the commingled funds or money between the time when
the proceeds were commingled and the time the security interest in
the proceeds is claimed.00
56. What is the extent of security interest over tangible assets
commingled in a mass?
A security interest in a tangible asset that is commingled in
a mass extends to the mass, but such interest shall be limited to
the same proportion of the mass as the quantity of the encumbered
asset bore to the quantity of the entire mass immediately after the
commingling.01
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•’Section 3.05, IRR of R.A. No. 11057.
“Section 3.06, IRR of R.A. No. 11057.
•'Section 3.07, IRR of R.A. No. 11057.
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57.
Can a security agreement provide for security interest in
accounts receivables?
Yes. A security agreement may provide for security interest in
accounts receivable arising from: (i) a contract for the supply or lease
of goods or services other than financial services; (ii) a construction
contract or contract for the sale or lease of real property; and (iii) a
contract for the sale, lease, or license of intellectual property.62
58.
Can there be a stipulation limiting the grantor's right to create
a security interest in accounts receivables?
No. Any stipulation limiting the grantor’s right to create a
security interest shall be void. A security interest in an account
receivable shall be effective notwithstanding any agreement
between the grantor and the account debtor or any secured creditor
limiting in any way the grantor’s right to create a security interest.63
59.
Will the creation of a security interest in a receivable affectthe
rights and obligations of the debtor of the receivable?
No. The creation of a security interest in a receivable does
not, without the consent of the debtor of the receivable, affect its
rights and obligations, including the payment terms contained
in the contract giving rise to the receivable. However, a payment
instruction may change the person, address, or account to which the
debtor of the receivable is required to make payment.61
60.
When and how can a security interest be perfected?
A security interest shall be perfected when it has been created
and the secured creditor has taken one of the following actions: (i)
registration of a notice with the Registry; (ii) possession, whether
actual or constructive, of the collateral either by the secured
creditor or a depositary acting for the secured creditor; or (iii)
control [conclusion of a control agreement] of investment property
and deposit account. A security interest in any tangible asset may
be perfected by registration or possession, while a security interest
in investment property and deposit account may be perfected by
registration or conclusion of a control agreement.06
“Section 3.08(d), IRR of R.A. No. 11057.
“Section 3.08, IRR of R.A. No. 11057.
“Section 3.09, IRR of R.A. No. 11057.
“Sections 11, 12, and 13, R.A. No. 11057.
VIII. CREDIT TRANSACTIONS
61.
385
Who are the parties to, and what are the form and contents of
a Control Agreement?
A Control Agreement shall:
Parties
_____ Form/Contents______
Intermediated
Securities
Executed in writing by
the issuer or the inter­
mediary, the grantor
and the secured creditor
Stipulate that the issuer or
the intermediary agrees to
follow instructions from the
secured creditor with respect
to the security, without fur­
ther consent from the grantor
Deposit
Account
writing
Executed
in
deposit­
the
among
taking institution, the
grantor and the secured
creditor
Stipulate that the deposit­
taking institution agrees to
follow instructions from the
secured creditor with respect
to the payment of funds cre­
dited to the deposit account
without further consent from
the grantor
Commodity
Contracts
Executed
writing
in
among the grantor, se­
cured creditor and inter­
mediary
Stipulate that the commodity
intermediary will apply any
value distributed on account
of the commodity contract as
directed by the secured credi­
tor without further consent
by the commodity customer
or grantor
es
62.
For purposes of registration of security interest, what
constitutes as a sufficient notice?
An initial notice of security interest is deemed sufficient if: (i)
it identifies the grantor by an identification number; (ii) it identifies
the secured creditor or an agent of the secured creditor by name;
(iii) it provides an address for the grantor and secured creditor or
its agent; (iv) it describes the collateral; and (v) the prescribed fee
has been tendered, or an arrangement has been made for payment
of fees by other means.
If the grantor is a natural person, that grantor shall be identified
through the name appearing in any of the grantor’s governmentissued identification. If the grantor is a juridical person, that grantor
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“Section 4.07, IRR of R.A. No. 11057.
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shall be identified through its name in the most recently registered
articles of incorporation, or in an agreement constituting the legal
person.67
63.
Can the notice be registered even before a security agreement
is concluded?
Yes. A notice may be registered before a security agreement
is concluded. Once a security agreement is concluded, the date of
registration of the notice shall be reckoned from the date the notice
was registered.68
64. When does the notice take effect?
A notice shall be effective at the time it is discoverable on the
records of the Registry, and shall remain effective for the duration
of the term indicated in the notice unless a continuation notice is
registered before the term lapses. The period of effectiveness of a
notice may be continued by registering an amendment notice that
identifies the initial notice by its registration number. Continuation
of notice may be registered only within six (6) months before the
expiration of the effective period of the notice.69
65.
Can a registered notice be amended?
Yes. A notice may be amended by the registration of an
amendment notice that identifies the initial notice by its registration
number and provides new information. The amendment notice may
be filed: (i) by the secured creditor alone, if the changes to the security
interest can be effected with the sole consent of the secured creditor;
or (ii) by the grantor, if the changes to the security interest requires
the grantor’s consent. If the amendment notice adds collateral that
is not proceeds, it must be authorized by the grantor in writing. If
the amendment notice adds a grantor, it must be authorized by the
added grantor in writing. Such amendment notices shall be effective
as to the added collateral or grantor from the date of its registration
and shall be effective only as to each secured creditor who authorizes
it. If a secured creditor assigns a perfected security interest, an
amendment notice may be registered to reflect the assignment.70
’’Section 28(a), R.A. No. 11057; Section 5.05(a), IRR.
“Section 28(d), R.A. No. 11057.
“Sections 30 and 33, R.A. No. 11057.
’’Sections 32, R.A. No. 11057; Section 5.08, IRR.
VIII. CREDIT TRANSACTIONS
387
66. When can the grantor demand amendment or termination of
notice?
A grantor may give a written demand to the secured creditor
to amend or terminate the effectiveness of the notice if: (i) all the
obligations under the security agreement to which the registration
relates have been performed and there is no commitment to make
future advances; (ii) the secured creditor has agreed to release part of
the collateral described in the notice; (iii) the collateral described in
the notice includes an item or kind of property that is not a collateral
under a security agreement between the secured creditor and the
grantor; (iv) no security agreement exists between the parties; or (v)
the security interest is extinguished in accordance with law.”
67. Can the effectiveness of a notice be terminated?
Yes. The effectiveness of a notice may be terminated by
registering a termination notice that identifies the initial notice by
its registration number and each secured creditor who authorizes
the registration of the termination notice. The notice is terminated
from the date and time when the information in the notice is no
longer accessible to searchers of the public registry record.72
68. What are the rules with respect to priority of security interest?
The priority of security interests and hens in the same collateral
shall be determined according to the time of registration of a notice
or perfection by other means, without regard to the order of creation
of the security interests and liens or to the mode of perfection, except
as provided below:
Priority Rules for Intangible Assets (Investment property and
deposit accounts)
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a)
A security interest in a deposit account with respect
to which the secured creditor is the deposit-taking
institution or the intermediary shall have priority over
a competing security interest perfected by any method.
’'Section 39, R.A. No. 11057.
’’Section 34, R.A. No. 11057; Section 5.11, IRR.
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b)
A security interest in a deposit account or investment
property that is perfected by a control agreement shall
have priority over a competing security interest except
a security interest of the deposit-taking institution or
the intermediary.
c)
The order of priority among competing security interests
in a deposit account or investment property that were
perfected by the conclusion of control agreements shall
be determined on the basis of the time of conclusion of
the control agreements.
d)
Any rights to set-off that the deposit-taking institution
may have against a grantor’s right to payment of funds
credited to a deposit account shall have priority over a
security interest in the deposit account.
e)
A security interest in electronic non-intermediated
securities perfected by a notation of the security
interests in the books maintained for that purpose by or
on behalf of the issuer shall have priority over a security
interest in the same securities perfected by any other
method.
f)
A security interest in electronic securities not held with
an intermediary perfected by the conclusion of a control
agreement shall have priority over a security interest in
the same securities perfected by registration of a notice
in the Registry.
g)
A security interest in electronic securities held with
an intermediary and perfected by the conclusion of a
control agreement shall have priority over a security
interest in the same securities perfected by any other
method.
h)
The order of priority among competing security interests
in electronic securities not held with an intermediary
perfected by the conclusion of control agreements is
determined on the basis of the time of conclusion of the
control agreements.
r
VIII. CREDIT TRANSACTIONS
389
Priority Rules for Tangible Assets Embodied in Instruments
a)
A security interest in a security certificate perfected
by the secured creditor’s possession of the certificate
shall have priority over a competing security interest
perfected by registration of a notice in the Registry.
b)
A security interest in an instrument or negotiable
document that is perfected by possession of the
instrument or the negotiable document shall have
priority over a security interest in the instrument or
negotiable document that is perfected by registration of
a notice in the Registry.
c)
A perfected security interest in livestock securing an
obligation incurred to enable the grantor to obtain food
or medicine for the livestock shall have priority over
any other security interest in the livestock, except for
a perfected purchase money security interest in the
livestock, if the secured creditor providing credit for
food or medicine gives written notification to the holder
of the conflicting perfected security interest in the same
livestock before the grantor receives possession of the
food or medicine.
Priority and Right of Retention
a)
A person who provides services or materials with respect
to the goods, in the ordinary course of business, and
retains possession of the goods shall have priority over
a perfected security interest in the goods until payment
thereof.
Priority Rules on Purchase Money Security Interest
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a)
A purchase money security interest in equipment
and its proceeds shall have priority over a conflicting
security interest, if a notice relating to the purchase
money security interest is registered within three (3)
business days after the grantor receives possession of
the equipment.
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b)
A purchase money security interest in consumer goods
that is perfected by registration of notice not later
than three (3) business days after the grantor obtains
possession of the consumer goods shall have priority
over a conflicting security interest.
c)
A purchase money security interest in inventory,
intellectual property, or livestock shall have priority
over a conflicting perfected security interest in the same
inventory, intellectual property, or livestock if:
d)
(i)
The purchase money security interest is
perfected when the grantor receives possession
of the inventory or livestock, or acquires rights to
intellectual property; and
(ii)
Before the grantor receives possession of the
inventory or livestock, or acquires rights in
intellectual property, the purchase money secured
creditor gives written notification to the holder of
the conflicting perfected security interest in the
same types of inventory, livestock, or intellectual
property. The notification sent to the holder of the
conflicting security interest may cover multiple
transactions between the purchase money secured
creditor and the grantor without the need to
identify each transaction.
The purchase money security interest in equipment or
consumer goods perfected timely in accordance with
subsections (a) and (b), shall have priority over the
rights of a buyer, lessee, or lien holder which arise
between delivery of the equipment or consumer goods to
the grantor and the time the notice is registered.’3
69. How can the secured creditor enforce its security interest?
The secured creditor may enforce its security interest whether
through a judicial process or through an extrajudicial process,
including the sale of the secured assets through either a public or
private disposition.
"Sections 17-24, R.A. No. 11057; Sections 6.01-6.05, IRR.
VIH. CREDIT TRANSACTIONS
391
Expedited Repossession of the Collateral
With Judicial Process
Without Judicial Process
■ The secured creditor may take
possession of the collateral
without judicial process if the
security agreement so stipulates,
provided, that possession can be
taken without a breach of the
peace.
If, upon default, the secured
creditor cannot take possession
of collateral without breach of
the peace, the secured creditor
may proceed as follows:
■
[Breach of the peace shall
include: entering the private
residence of the grantor without
permission, resorting to physical
violence or intimidation, or
being accompanied by a law
enforcement officer when taking
possession or confronting the
grantor]
■ If the collateral is a fixture, the
secured creditor, if it has priority
over all owners and mortgagees,
may remove the fixture from •
the real property to which it is
affixed without judicial process.
The secured creditor
shall
exercise due care in removing
the fixture.
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The secured creditor shall be
entitled to an expedited hearing
upon application for an order
granting the secured creditor
possession of the collateral.
Such application shall include
a statement by the secured
creditor, under oath, verifying
the existence of the security
agreement attached to the
application and identifying at
least one (1) event of default by
the debtor under the security
agreement;
The secured creditor shall
provide the debtor, grantor, and,
if the collateral is a fixture, any
real estate mortgagee, a copy
of the application, including
all supporting documents and
evidence for the order granting
the secured creditor possession
of the collateral; and
■ The secured creditor is entitled
to an order granting possession
of the collateral upon the court
finding that a default has
occurred under the security
agreement and that the secured
creditor has a right to take
possession of the collateral. The
court may direct the grantor to
take such action as the court
deems necessary and appropriate
so that the secured creditor may
take possession of the collateral.’4
’'Sections 7.01-7.03, IRRof R.A. No. 11057.
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70.
Can a higher-ranking secured creditor take over enforcement?
Yes. Even if another secured creditor or a lien holder has
commenced enforcement, a secured creditor whose security interest
has priority over that of the enforcing secured creditor or lien holder
shall be entitled to take over the enforcement process. This right
may be invoked at any time before the collateral is sold or otherwise
disposed of, or retained by the secured creditor or until the conclusion
of an agreement by the secured creditor for that purpose.75
71.
What are the rules on recovery in special cases (such as
security interest in Accounts Receivable, Negotiable document,
Deposit Account)?
Upon default, the secured creditor may, without judicial
process:
a.
Accounts Receivable. Instruct the account debtor of an
accounts receivable to make payment to the secured
creditor, and apply such payment to the satisfaction of the
obligation secured by the security interest after deducting
the secured creditor’s reasonable collection expenses. On
request of the account debtor, the secured creditor shall
provide evidence of its security interest to the account
debtor when it delivers the instruction to the account
debtor;
b.
Negotiable document. In a negotiable document where
the security interest is perfected by possession, proceed
as to the negotiable document or goods covered by the
negotiable document;
c.
Deposit account.
In a deposit account maintained by the secured creditor, apply
the balance of the deposit account to the obligation secured by the
deposit account; and
In other cases of a security interest in a deposit account perfected
by a control agreement, instruct the deposit-taking institution to pay
the balance of the deposit account to the secured creditor’s account
by providing: (i) a copy of the security agreement that creates or
,5Section 46, R.A. No. 11057; Section 7.04, IRR.
VIII. CREDIT TRANSACTIONS
393
provides for a security interest; and (ii) the secured party’s affidavit
stating that a default has occurred, and that the secured party is
entitled to enforce the security interest non-judicially.7'
72.
Does the secured creditor have a right to sell or dispose of the
collateral?
Yes. After default, a secured creditor may sell or otherwise
dispose of the collateral, publicly or privately, in its present condition
or following any commercially reasonable preparation or processing.
A disposition is commercially reasonable if the secured creditor
disposes of the collateral in conformity with commercial practices
among dealers in that type of property.77
73.
What are the notification requirements prior to disposition of
the collateral?
Not later than ten (10) days before disposition of the collateral,
the secured creditor shall notify: (i) the grantor; (ii) any other secured
creditor or lien holder who, five (5) days before the date notification
is sent to the grantor, held a security interest or lien in the collateral
that was perfected by registration; and (iii) any other person from
whom the secured creditor received notification of a claim of an
interest in the collateral if the notification was received before the
secured creditor gave notification of the proposed disposition to the
grantor.
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a.
The grantor may, after default, waive the right to be
notified.
b.
A notification of disposition is sufficient if it identifies the
grantor and the secured creditor; describes the collateral;
states the method of intended disposition; and states the
time and place of a public disposition or the time after
which other disposition is to be made.
C.
The secured creditor shall notify the persons entitled
to notification via registered mail, private courier,
electronically, or through any means where receipt of the
notice can be established by a disinterested third party.
’'Section 48, R.A. No. 11057; Section 7.05, IRR.
’’Sections 49 and 50, R.A. No. 11057; Sections 7.06 and 7.07, IRR.
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394
d.
74.
The requirement to send a notification shall not apply if
the collateral is perishable or threatens to decline speedily
in value or is of a type customarily sold on a recognized
market.”
What are the guidelines on private or public disposition?
The secured creditor may dispose of the collateral through sale
open to participation by the general public. Moreover, the secured
creditor may buy the collateral at any public disposition, or at a
private disposition but only if the collateral is of a kind that is
customarily sold on a recognized market or the subject of widely
distributed standard price quotations.
Judicial disposition
Extra-judicial disposition
• The secured creditor may, sub­
ject to the guidelines below, se­
lect the method, manner, time,
place, and other aspects of the
sale or other disposition, lease or
license, including whether to sell
or otherwise dispose of, lease or
license encumbered assets indi­
vidually, in groups or altogether,
provided, that the disposition
is undertaken in good faith and
satisfies the commercial reason­
ableness requirement.
■
Judicial dispositions shall be
governed by rules promulgated
by the Supreme Court.
■
If a method of disposition of
collateral has been approved in
any legal proceeding, whether
judicial or administrative, it
is conclusively commercially
reasonable.
■ The secured creditor shall, no
later than ten (10) days before
the extra-judicial disposition of
the collateral, cause the posting
with the Registry of a notice
that sufficiently describes the
collateral to be sold and specifies
the method, manner, time, place,
and other details of the sale. The
Registry shall ensure that all
such notices posted are publicly
accessible and searchable.
[In adherence with the com­
mercial reasonableness require­
ment, the secured creditor may
78 Section 51, R.A. No. 11057; Section 7.08, IRR.
VIII. CREDIT TRANSACTIONS
also cause the advertisement
of the disposition through any
other means or medium as the
secured creditor may deem as
suitable, to maximize awareness
of the sale among dealers in the
type of property to which the
collateral belongs.]
• All collateral shall be disposed
through auction. Below are the
indicators that must be taken
into account in determining
whether the sale satisfies the
good faith and commercial rea­
sonableness requirement:
(i) that the person or entity who
presides over the auction is
an experienced dealer in the
type of property sold;
(ii) that the participating bid­
ders do not engage in collu­
sive practices that prevent
free and open competition;
(iii) that the records of the pro­
ceedings, including the iden­
tities and respective sub­
missions of the bidders, are
documented in writing and
subsequently
maintained;
and
(iv) that the highest bidder is
duly awarded the collateral.
• The winning bidder must fully
pay the bid price at the conclusion
of the auction. Otherwise, the
collateral may be awarded to the
next highest bidder.
• Any government agency that
regularly undertakes public auc­
tions in the course of its regular
activities may be engaged by any
secured creditor to preside over
public auctions over securitized
movable collateral, through rules
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and regulations that must be
submitted to the Department
of Finance for prior approval.
entities
Private
such
as
industry
auction
houses,
groups of secured creditors,
or organizations of recognized
dealers of specific movables
may likewise adopt rules and
regulations for the conduct of
public auctions, subject to the
approval of the Department of
Finance. Any public auction
of movable collateral conducted
by any government agency or
private entity under rules duly
approved by the Department of
Finance shall be conclusively
presumed to be commercially
reasonable.
T9
75.
How will the proceeds from the sale be applied?
The proceeds of disposition shall be applied in the following
order:
i.
the reasonable expenses of taking, holding, preparing
for disposition, and disposing of the collateral, including
reasonable attorney’s fees and legal expenses incurred by
the secured creditor;
ii.
the satisfaction of the obligation secured by the security
interest of the enforcing secured creditor; and
iii.
the satisfaction of obligations secured by any subordinate
security interest or lien in the collateral if a written
demand and proof of the interest are received before
distribution of the proceeds is completed.
a.
The secured creditor shall account to the grantor for any
surplus, and, unless otherwise agreed, the debtor is liable
for any deficiency.
’“Section 7.09, IRR of R.A. No. 11057.
VIII. CREDIT TRANSACTIONS
397
b.
The reasonable expenses of holding the collateral shall
include all expenses incurred by the secured creditor
in the preservation and care of the collateral in his
possession with the diligence of a good father of a family.
c.
The secured creditor shall be liable to the grantor for the
value of the loss and deterioration that may be suffered
due to his failure to preserve and care for the collateral.81
76, Is there a right of redemption?
Yes. Any person who is entitled to receive a notification of
disposition3' is entitled to redeem the collateral by paying or
otherwise performing the secured obligation in full, including the
reasonable cost of enforcement.
The right of redemption may be exercised, unless: (i) the person
entitled to redeem has, after the default, waived in writing the right
to redeem; (ii) the collateral is sold or otherwise disposed of, acquired,
or collected by the secured creditor, or when an agreement with
those effects on the collateral is concluded by the secured creditor;
or (iii) the secured creditor has retained the collateral.82
77.
Can the secured creditor retain the collateral?
Yes. After default, the secured creditor may propose to the
debtor and grantor to take all or part of the collateral in total or
partial satisfaction of the secured obligation, and shall send a
proposal to:
a.
the debtor and the grantor;
b.
any other secured creditor or lien holder who, five (5) days
before the proposal is sent to the debtor and the grantor,
perfected its security interest or lien by registration; and
“Section 52, R.A. No. 11057; Section 7.11, IRR.
•‘(1) The grantor;
(2) Any other secured creditor or lien holder who, five (5) days before the date
notification is sent to the grantor, held a security interest or lien in the collateral that
was perfected by registration; and
(3) Any other person from whom the secured creditor received notification of a
claim of an interest in the collateral if the notification was received before the secured
creditor gave notification of the proposed disposition to the grantor.
“Section 45, R.A. No. 11057; Section 7.10, IRR.
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C.
any other person with an interest in the collateral who
has given a written notification to the secured creditor
before the proposal is sent to the debtor and the grantor.
The secured creditor may retain the collateral in the case of;
78.
a.
A proposal for the acquisition of the collateral in full
satisfaction of the secured obligation, unless the secured
creditor receives an objection in writing from any person
entitled to receive such a proposal within 20 days after
the proposal is sent to that person; or
b.
A proposal for the acquisition of the collateral in partial
satisfaction of the secured obligation, only if the secured
creditor receives the affirmative consent of each addressee
of the proposal in writing within 20 days after the proposal
is sent to that person.83
What are the rules on security interest created or provided for
by an agreement or other transaction that was made or entered
into before the effectivity of the PPSA and that had not been
terminated before the effectivity of the PPSA (Prior Interest)?
a.
A prior interest that was perfected under any law that
existed or in force before the effectivity of the PPSA
(‘Prior Law") continues to be deemed perfected under the
PPSA until the earlier of: (i) the time the prior interest
would cease to be perfected under prior law; and (ii) the
beginning of full implementation of the PPSA.
b.
The priority of a prior interest as against the rights of
a competing claimant is determined by the prior law if:
(i) the security interest and the rights of all competing
claimant arose before the effectivity of the PPSA; and (ii)
the priority status of these rights has not changed since
the effectivity of the PPSA. For this purpose, the priority
status of a prior interest has changed only if:
i.
It was perfected when the PPSA took effect, but
ceased to be perfected; or
^Section 54, R.A. No. 11057; Section 7.13, IRR.
r
VIII. CREDIT TRANSACTIONS
ii.
c.
399
It was not perfected under prior law when the PPSA
took effect, and was only perfected under the PPSA.
The enforcement of all existing security interests during
the transitional period™ shall be governed by the PPSA.M
Concurrence and Preference of Credit
79.
How are credits classified in the context of the laws on
concurrence and preference of credit?
The credits are classified into three (3) general categories,
namely, “(a) special preferred credits listed in Articles 2241 and
2242, (b) ordinary preferred credits listed in Article 2244[,] and (c)
common credits under Article 2245.”
The special preferred credits enumerated in Articles 2241 (with
respect to movable property) and 2242 (with respect to immovable
property) are considered as mortgages or pledges of real or personal
property, or liens within the purview of Act No. 1956. These
credits, which enjoy preference with respect to a specific movable or
immovable property, exclude all others to the extent of the value of
the property. If there are two (2) or more Hens on the same specific
property, the lienholders divide the value of the property involved
pro rata, after the taxes on the same property are fully paid.
“Credits which are specially preferred because they constitute
liens (tax or non-tax) in turn, take precedence over ordinary
preferred credits so far as concerns the property to which the Hens
have attached. The specially preferred credits must be discharged
first out of the proceeds of the property to which they relate, before
ordinary preferred creditors may lay claim to any part of such
proceeds.”
“In contrast with Articles 2241 and 2242, Article 2244 creates
no liens on determinate property which follow such property. What
Article 2244 creates are simply rights in favor of certain creditors to
have the cash and other assets of the insolvent applied in a certain
sequence or order of priority.”
“The transitional period shall begin on February 9, 2019, which is the date of
effectivity of the PPSA.
“Sections 8.01-8.04, IRR of R.A. No. 11057.
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It was held that concurrence and preference of credits can only
be ascertained in the context of a general liquidation proceeding
that is in rem, such as an insolvency proceeding, where properties
of the debtor are inventoried and liquidated and the claims of all
the creditors may be bindingly adjudicated. The application of this
order of priorities established under the Civil Code in insolvency
proceedings assures that priority of claims is respected and credits
belonging to the same class are equitably treated.86
80.
During the pendency of the civil case with the RTC of Pasig
City, Fil-Agro was placed under the receivership of the PDIC
pursuant to Resolution No. 1486 of the Monetary Board of the
BSP. Thereafter, the RTC of Malolos City was constituted as the
liquidation court tasked to adjudicate disputed claims against
Fil-Agro and assist the PDIC in undertaking its liquidation.
Antonio, however, insists that his claim against Fil-Agro is not
a disputed claim within the purview of Section 30 of R.A. No.
7653 because ownership of the mortgaged property has not
yet vested on Fil-Agro. He maintains that the Court’s ruling in
Vda. de Ballesteros cannot be applied here where foreclosure
of the subject properties was not made by the insolvent bank.
Decide.
Jurisprudentially, it has long been resolved that “disputed
claims” covers all claims whether they be against the assets of
the insolvent bank, for specific performance, breach of contract,
damages, or whatever. The term is defined in an all-encompassing
and broad manner so as to include any cause of action against the
insolvent bank, regardless of its nature or character, irrespective
of whether the relief sought would directly affect the property of
the bank under liquidation. In fact, Section 30(2) of R.A. No. 7653
authorizes the receiver to defend any action against the insolvent
bank.
Section 30 of R.A. No. 7653 reads:
SEC. 30. Proceedings in Receivership and
Liquidation. - Whenever, upon report of the head of the
supervising or examining department, the Monetary
Board finds that a bank or quasi-bank:
“Metrobank v. Naguiat, G.R. No. 178407, March 18, 2015.
VIII. CREDIT TRANSACTIONS
a.
is unable to pay its liabilities as they become due
in the ordinary course of business: Provided, that
this shall not include inability to pay caused by
extraordinary demands induced by financial panic
in the banking community;
b.
has insufficient realizable assets, as determined by
the Bangko Sentral, to meet its liabilities; or
c.
cannot continue in business without involving
probable losses to its depositors or creditors; or
d.
has willfully violated a cease and desist order under
Section 37 that has become final, involving acts or
transactions which amount to fraud or a dissipation
of the assets of the institution, in which cases,
the Monetary Board may summarily and without
need for prior hearing forbid the institution from
doing business in the Philippines and designate
the Philippine Deposit Insurance Corporation as
receiver of the banking institution.
401
For a quasi-bank, any person of recognized
competence in banking or finance may be designated as
receiver.
XXX
The above legal provision recognizes the exclusive jurisdiction
of the liquidation court to adjudicate disputed claims against the
closed bank, assist in the enforcement of individual liabilities of the
stockholders, directors, and officers, and decide on all other issues as
may be material to implement the distribution plan adopted by the
PDIC for general application to all closed banks. Simply put, if there
is a judicial liquidation of an insolvent bank, all claims against the
bank should be filed in the liquidation proceeding. This holds true
regardless of whether or not the claim is initially disputed in a court
or agency before it is filed with the liquidation court.87
”Fil-Agro Rural Bank, Inc. v. Villasenor, Jr., G.R. Nos. 226761 and 226889,
July 28,2020.
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81.
If a bank which has been ordered closed by the Bangko
Sentral ng Pilipinas (Bangko Sentral) and is placed under the
receivership of the Philippine Deposit Insurance Corporation,
how can a secured creditor enforce its claim on the basis of the
preference and concurrence of credit under the law?
As a consequence of the receivership, the closed bank may
sue and be sued only through its receiver, the Philippine Deposit
Insurance Corporation. Any action filed by the closed bank without
its receiver may be dismissed.88
“Banco Filipino Savings and Mortgage Bank
G.R. No. 200678, June 4, 2018.
Bangko Sentral ng Pilipinas,
IX. SPECIAL LAWS
1. FOREIGN INVESTMENT ACT OF 1991
REPUBLIC ACT NO. 7042, AS AMENDED BY
REPUBLIC ACT NO. 8179
A. Policy of Law
1.
What is the state policy for the enactment of the Foreign
Investment Act of 1991?
It is the policy of the State to attract, promote, and welcome
productive investments from foreign individuals, partnerships,
including their political
governments,
and
corporations,
subdivisions, in activities which significantly contribute to national
industrialization and socio-economic development to the extent that
foreign investment is allowed in such activity by the Constitution
and relevant laws. Foreign investments shall be encouraged in
enterprises that significantly expand livelihood and employment
opportunities for Filipinos; enhance economic value of farm products;
promote the welfare of Filipino consumers; expand the scope, quality,
and volume of exports and their access to foreign markets; and/or
transfer relevant technologies in agriculture, industry, and support
services. Foreign investments shall be welcome as a supplement to
Filipino capital and technology in those enterprises serving mainly
the domestic market.
As a general rule, there are no restrictions on extent of
foreign ownership of export enterprises. In domestic market
enterprises, foreigners can invest as much as 100% equity except
in areas included in the negative fist. Foreign owned firms catering
mainly to the domestic market shall be encouraged to undertake
measures that will gradually increase Filipino participation in their
businesses by taking in Filipino partners, electing Filipinos to the
board of directors, implementing transfer of technology to Filipinos,
generating more employment for the economy and enhancing skills
of Filipino workers.1
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2.
Who qualifies as Philippine nationals?
The term Philippine national shall mean:
a.
b.
a citizen of the Philippines; or
a domestic partnership or association wholly owned by
citizens of the Philippines; or
c.
a corporation organized under the laws of the Philippines
of which at least sixty percent (60%) of the capital stock
outstanding and entitled to vote is owned and held by
citizens of the Philippines; or
d.
a corporation organized abroad and registered as doing
business in the Philippines under the Corporation Code
of which one hundred percent (100%) of the capital stock
outstanding and entitled to vote is wholly owned by
Filipinos; or
e.
a trustee of funds for pension or other employee retirement
or separation benefits, where the trustee is a Philippine
national and at least sixty percent (60%) of the fund will
accrue to the benefit of Philippine nationals.
Provided, That where a corporation and its non-Filipino
stockholders own stocks in a Securities and Exchange Commission
(SEC) registered enterprise, at least sixty percent (60%) of the capital
stock outstanding and entitled to vote of each of both corporations
must be owned and held by citizens of the Philippines and at least
sixty percent (60%) of the members of the Board of Directors, in
order that the corporation shall be considered a Philippine national.1
3.
Can a foreign
National?
corporation
be
considered
a
Philippine
The term "Philippine National" is defined under Section 3 of
the R.A. No. 7042, as amended by R.A. No. 8179, to wit:
“Philippine national shall mean a citizen of the
Philippines or a domestic partnership or association
wholly owned by the citizens of the Philippines; or a
corporation organized under the laws of the Philippines
of which at least sixty percent (60%) of the capital stock
2Amen<iing the Foreign Investment Act of 1991 (R.A. No. 7042), R.A. No. 8179,
March 28,1996.
405
IX. SPECIAL LAWS
1. FOREIGN INVESTMENT ACT OF 1991
REPUBLIC ACT NO. 7042, AS AMENDED BY REPUBLIC ACT NO. 8179
outstanding and entitled to vote is owned and held by
citizens of the Philippines; or a corporation organized
abroad and registered as doing business in the Philippines
under the Corporation Code of which 100% of the capital
stock outstanding and entitled to vote is wholly owned by
Filipinos or a trustee of funds for pension or other employee
retirement or separation benefits, where the trustee is a
Philippine national and at least sixty percent (60%) of the
fund will accrue to the benefits of the Philippine nationals
,.(Emphasis supplied)
Under the foregoing provisions, two (2) conditions have to be
met before a foreign corporation can be considered a "Philippine
National":
4.
a.
One hundred percent (100%) of the capital stock
outstanding and entitled to vote is wholly owned by
Filipinos; and
b.
The corporation should be registered as doing business in
the Philippines under the Corporation Code.3
For public utility corporations, the equity ownership of
Philippine citizens or Philippine nationals must not go lower
than 60%, thereby imposing 40% foreign equity limitation. How
should the compliance with the required Filipino ownership of
a corporation be determined?
Compliance with the required Filipino ownership of a
corporation shall be determined on the basis of outstanding capital
stock whether fully paid or not, but only such stocks which are
generally entitled to vote are considered.
For stocks to be deemed owned and held by Philippine citizens
or Philippine nationals, mere legal title is not enough to meet the
required Filipino ownership. Full beneficial ownership of the stocks,
coupled with appropriate voting rights is essential. Thus, stocks, the
voting rights of which have been assigned or transferred to aliens,
cannot be considered held by Philippine citizens or Philippine
nationals.4
3Suarez and Reyes Law Offices, SEC-OGC Opinion No. 05-07, April 26, 2007.
^Amendments to the Implementing Rules and Regulations of R.A. No. 7042,
IRRof R.A. No. 7042.
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What are the tests to
corporation?
determine
the
nationality of a
There are two (2) acknowledged tests in determining the
nationality of a corporation: the control test and the grandfather
rule. Paragraph 7 of DOJ Opinion No. 020, Series of 2005, adopting
the 1967 SEC Rules which implemented the requirement of the
Constitution and other laws pertaining to the controlling interests
in enterprises engaged in the exploitation of natural resources
owned by Filipino citizens, provides:
Shares belonging to corporations or partnerships at least
609'0 of the capital of which is owned by Filipino citizens shall be
considered as of Philippine nationality, but if the percentage of
Filipino ownership in the corporation or partnership is less than
60%, only the number of shares corresponding to such percentage
shall be counted as of Philippine nationality. Thus, if 100,000 shares
are registered in the name of a corporation or partnership at least
60% of the capital stock or capital, respectively, of which belong to
Filipino citizens, all of the shares shall be recorded as owned by
Filipinos. But if less than 60%, or say, 50% of the capital stock or
capital of the corporation or partnership, respectively, belongs to
Filipino citizens, only 50,000 shares shall be counted as owned by
Filipinos and the other 50,000 shall be recorded as belonging to
aliens.
The first part of paragraph 7, DOJ Opinion No. 020, stating
“shares belonging to corporations or partnerships at least 60% of
the capital of which is owned by Filipino citizens shall be considered
as of Philippine nationality,” pertains to the control test or the
liberal rule. On the other hand, the second part of the DOJ Opinion
which provides, “if the percentage of the Filipino ownership in
the corporation or partnership is less than 60%, only the number
of shares corresponding to such percentage shall be counted as
Philippine nationality,” pertains to the stricter, more stringent
grandfather rule.5
6.
What is the prevailing mode of determining the nationality of a
corporation?
The “control test” is still the prevailing mode of determining
whether or not a corporation is a Filipino corporation. When in the
5Narra Nickel Mining & Development Corp. v. Redmont Consolidated Mines
Corp., G.R. No. 195580, April 21, 2014.
IX. SPECIAL LAWS
407
1. FOREIGN INVESTMENT ACT OF 1991
REPUBLIC ACT NO. 7042, AS AMENDED BY REPUBLIC ACT NO. 8179
mind of the Court there is doubt, based on the attendant facts and
circumstances of the case, in the 60-40 Filipino-equity ownership in
the corporation, then it may apply the “grandfather rule.”6
7.
Cite instances where grandfather rule should supplement the
control test to determine the nationality of the corporation.
Department of Justice Opinion No. 165, Series of 1984,
identified the following “significant indicators” or badges of “dummy
status”:
a.
That the foreign investor provides practically all the
funds for the joint investment undertaken by Filipino
businessmen and their foreign partner.
b.
That the foreign investors undertake to provide practically
all the technological support for the joint venture.
c.
That the foreign investors, while being minority stock­
holders, manage the company and prepare all economic
viability studies.
In instances where methods are employed to disable Filipinos
from exercising control and reaping the economic benefits of an
enterprise, the ostensible control vested by ownership of 60% of a
corporation’s capital may be pierced. Then, the Grandfather Rule
allows for a further, more exacting examination of who actually
controls and benefits from holding such capital.7
8.
When can a corporation own a public land in the Philippines?
Under R.A. No. 7042, particularly in Section 3 thereof, a
corporation organized under the laws of the Philippines of which
at least 60% of the capital stock outstanding and entitled to vote
is owned and held by citizens of the Philippines, is considered a
Philippine national. As such, the corporation may acquire disposable
lands in the Philippines.8
'Supra.
''Ibid.
8Unchuan v. Lozada, G.R. No. 172671, April 16, 2009.
I
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408
B. Definition of Terms
9.
Define "foreign investment'!
The term “foreign investment” shall mean an equity investment
made by a non-Philippine national in the form of foreign exchange
and/or other assets actually transferred to the Philippines and duly
registered with the Central Bank which shall assess and appraise
the value of such assets other than foreign exchange.9
10.
When can an entity be deemed “doing business" in the
Philippines?
“Doing business” shall include:
11.
a.
soliciting orders, service contracts,
whether Raison offices or branches;
b.
appointing representatives or distributors, operating
under full control of the foreign corporation, domiciled in
the Philippines or who in any calendar year stay in the
country for a period or periods totaling 180 days or more;
c.
participating in the management, supervision, or control
of any domestic business, firm, entity, or corporation in
the Philippines; and
d.
any other act or acts that imply a continuity of commercial
dealings or arrangements, and contemplate to that extent
the performance of acts or works, or the exercise of some
of the functions normally incident to and in progressive
prosecution of commercial gain or of the purpose and
object of the business organization.10
opening offices,
When can an entity not be deemed "doing business" in the
Philippines?
The following acts shall not be deemed “doing business” in the
Philippines:
a.
Mere investment as a shareholder by a foreign entity in
domestic corporations duly registered to do business, and/
or the exercise of rights as such investor;
’Section 3(c), R.A. No. 7042.
“Section 3(d), R.A. No. 7042.
409
IX. SPECIAL LAWS
1. FOREIGN INVESTMENT ACT OF 1991
REPUBLIC ACT NO. 7042, AS AMENDED BY REPUBLIC ACT NO. 8179
b.
Having a nominee director or officer to represent its
interest in such corporation;
c.
Appointing a representative or distributor domiciled
in the Philippines which transacts business in the
representative’s or distributor’s own name and account;
d.
The publication of a general advertisement through any
print or broadcast media;
e.
Maintaining a stock of goods in the Philippines solely
for the purpose of having the same processed by another
entity in the Philippines;
f.
Consignment by a foreign entity of equipment with a
local company to be used in the processing of products for
export;
gh.
Collecting information in the Philippines; and
Performing services auxiliary to an existing isolated
contract of sale which are not on a continuing basis,
such as installing in the Philippines machinery it has
manufactured or exported to the Philippines, servicing
the same, training domestic workers to operate it, and
similar incidental services.11
12. What are the two (2) general tests to determine whether a
foreign corporation is considered as "doing business" in the
Philippines?
I
a.
Substance test — The true test for doing business,
however, seems to be whether the foreign corporation
is continuing the body of the business or enterprise for
which it was organized or whether it has substantially
retired from it and turned it over to another.
b.
Continuity test — The term doing business implies a
continuity of commercial dealings and arrangements, and
contemplates, to that extent, the performance of acts or
works or the exercise of some of the functions normally
incident to, and in the progressive prosecution of, the
purpose and object of its organization.12
"Implementing Rules and Regulations of R.A. No. 7042, (IRR of R-A. No.
7042), July 9,1996.
l2Mentholatum Co., Inc. v. Mangaliman, G.R. No. 47701, June 27,1941.
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13.
When can a foreign corporation sue before Philippine courts?
The principles regarding the right of a foreign corporation to
bring suit in Philippine courts may thus be condensed in four (4)
statements:
14.
a.
if a foreign corporation does business in the Philippines
without a license, it cannot sue before the Philippine
courts;
b.
if a foreign corporation is not doing business in the
Philippines, it needs no license to sue before Philippine
courts on an isolated transaction or on a cause of action
entirely independent of any business transaction;
c.
if a foreign corporation does business in the Philippines
without a Ecense, a Philippine citizen or entity which
has contracted with said corporation may be estopped
from chaUenging the foreign corporation’s corporate
personality in a suit brought before Philippine courts; and
d.
if a foreign corporation does business in the Philippines
with the required hcense, it can sue before Philippine
courts on any transaction.13
Air Canada is a foreign corporation organized and existing
under the laws of Canada. It was granted an authority to
operate as an offline carrier by the Civil Aeronautics Board. As
an off-line carrier, Air Canada does not have flights originating
from or coming to the Philippines and does not operate any
airplane in the Philippines. Air Canada engaged the services
of Aerotel Ltd., Corp. (Aerotel) as its general sales agent in the
Philippines. Aerotel sells Air Canada's passage documents in
the Philippines.
Air Canada was subsequently subjected to regular
corporate income tax. The BIR reasoned that a foreign
corporation engaged in business in the Philippines is
classified as a resident foreign corporation under the Tax
Code. Thus, considering that Air Canada is doing business
in the Philippines through Aerotel, it should be subject to the
13Agilent Technologies Singapore v. Integrated Silicon Technology Phil. Corp.,
G.R. No. 154618, April 14, 2004.
IX. SPECIAL LAWS
411
1. FOREIGN INVESTMENT ACT OF 1991
REPUBLIC ACT NO. 7042, AS AMENDED BY REPUBLIC ACT NO. 8179
regular corporate income tax applicable for resident foreign
corporation.
Is the BIR correct in classifying Air Canada as a resident
foreign corporation for taxation purposes?
Yes, the BIR is correct considering that Air Canada is
doing business in the Philippines. R.A. No. 7042 or the Foreign
Investments Act of 1991 provides guidance with its definition of
“doing business” with regard to foreign corporations. Section 3(d) of
the law enumerates the activities that constitute doing business, to
wit:
the phrase “doing business” shall include soliciting
d.
orders, service contracts, opening offices, whether called
“liaison” offices or branches; appointing representatives
or distributors domiciled in the Philippines or who in
any calendar year stay in the country for a period or
periods totalling one hundred eighty (180) days or more;
participating in the management, supervision or control
of any domestic business, firm, entity or corporation in
the Philippines; and any other act or acts that imply a
continuity of commercial dealings or arrangements,
and contemplate to that extent the performance of
acts or works, or the exercise of some of the functions
normally incident to, and in progressive prosecution
of, commercial gain or of the purpose and object of the
business organization: Provided, however, That the
phrase “doing business” shall not be deemed to include
mere investment as a shareholder by a foreign entity
in domestic corporations duly registered to do business,
and/or the exercise of rights as such investor; nor having
a nominee director or officer to represent its interests
in such corporation; nor appointing a representative or
distributor domiciled in the Philippines which transacts
business in its own name and for its own account.
While Section 3(d) above states that “appointing a
representative or distributor domiciled in the Philippines which
transacts business in its own name and for its own account” is
not considered as “doing business,” the Implementing Rules and
Regulations of R.A. No. 7042 clarifies that “doing business” includes
“appointing representatives or distributors, operating under full
control of the foreign corporation, domiciled in the Philippines or
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who in any calendar year stay in the country for a period or periods
totaling one hundred eighty (180) days or more.”
An offline carrier is “any foreign air carrier not certificated by
the Civil Aeronautics Board, but who maintains office or who has
designated or appointed agents or employees in the Philippines, who
sells or offers for sale any air transportation in behalf of said foreign
air carrier and/or others, or negotiate for, or holds itself out by
solicitation, advertisement, or otherwise sells, provides, furnishes,
contracts, or arranges for such transportation.”
Aerotel performs acts or works or exercises functions that
are incidental and beneficial to the purpose of Air Canada’s
business. The activities of Aerotel bring direct receipts or profits to
Air Canada. Aerotel does not solicit orders alone and for its own
account. Aerotel cannot enter into any contract on behalf of Air
Canada without the express written consent of the latter, and it
must perform its functions according to the standards required by
Air Canada. Through Aerotel, Air Canada is able to engage in an
economic activity in the Philippines.14
15.
By virtue of a Petroleum Consortium Agreement, a foreign
corporation will hold a minority and non-controlling interest
in an unincorporated joint venture with a Philippine entity.
Instead of shares of stock, the member foreign corporation of
a petroleum consortium would hold a participating percentage
interest, which pertains to the percentage that a member of the
consortium will contribute to the joint venture for exploration,
drilling, and production costs. Such percentage interest is also
the share that the consortium member would be participating
in profits from petroleum production. If the member foreign
corporation will not be the operator of the consortium, can
it be exempt from obtaining a license to do business in the
Philippines?
The foreign corporation needs to obtain a license to do business
in the Philippines under the Foreign Investment Act of 1991 (“FIA”)
notwithstanding the fact that it holds a minority and non-controlling
interest in the consortium.
“Air Canada v. Commissioner of Internal Revenue, G.R. No. 169507, January
11, 2016.
r
IX. SPECIAL LAWS
413
1. FOREIGN INVESTMENT ACT OF 1991
REPUBLIC ACT NO. 7042, AS AMENDED BY REPUBLIC ACT NO. 8179
The subject foreign corporation will invest in a consortium or
joint venture which is a form of partnership. For a foreign corporation
to be exempted from obtaining a license to do business in the
Philippines, it must prove that it merely invested as a shareholder
in a domestic corporation.
It is settled that exemptions from the general rule are strictly
construed against those invoking the exemption. Considering that the
exemption from the doing business rule pertains only to investment
in a corporation, investment in any other business organization,
firm, or entity (e.g., partnership) would not automatically constitute
an exemption. In this connection, “participating in the management,
supervision or control of any domestic business, firm, entity or
corporation in the Philippines” is considered doing business.
Consequently, following the strict interpretation rule, the only
automatically exempt “management, supervision or control” is that
of a corporation (i.e., “having a nominee director or office to represent
its interests in such corporation”) and not of any other entity, such
as a partnership.
The differing treatment of investment in a corporation and
investment in a partnership is based on a substantial distinction
between the said two forms of organization. In a corporate setting, the
stockholders, save in specified rare instances when their concurrence
is necessary, do not manage the affairs of the corporation, a function
which belongs to the Board of Directors/Trustees. In contrast, all the
partners in a partnership have an equal right in the management
of the business, each of them being considered as agent who could
bind the partnership, except when the manner of management has
been set in the Articles of Partnership or in the case of a limited
partnership. Thus, investment in a partnership does not necessarily
mean exemption from doing business since being a partner generally
entails management, supervision, or control of the partnership.
Investment in a partnership will only be akin to an investment
in a corporation that is exempt from doing business rule only when
the foreign corporation is exclusively a limited partner and takes no
part in the management and control of the business operation of the
limited partnership.16
15Doing Business; Foreign Corporation Investing in a Consortium, SEC-OGC
Opinion No. 01-14, February 21, 2014.
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16.
Sony Computer Entertainment Hong Kong ("SCEH)" is a
company organized and existing under the laws of Hong
Kong and operates Sony Entertainment Network ("SEN") in
Singapore, Indonesia, Taiwan, Malaysia, Thailand, and Hong
Kong. SEN is an online platform that offers various content
and services such as an online community and an online
gaming system, which requires a SEN account in order to
participate. Since SEN is an internet-based system, persons
in the Philippines can create a SEN account to participate in
the online community and to purchase content from and/or
use SEN’S services even if the SCEH does not have a physical
presence in the Philippines. A SEN account holder can buy
content and services from SEN only by using funds from an
associated SEN online wallet, which can be funded by using
a credit or debit card or a prepaid card where available. SEN
employees are located in Hong Kong while SEN'S servers are
based in the United States.
Considering the foregoing, can SCEH be considered as
not doing in business in the Philippines, and thus, will not
be required to obtain a license to do business as a foreign
corporation?
SCEH is deemed is considered doing business in the Philippines,
and thus, required to obtain a license to do business from the SEC.
The activities SCEH proposes to undertake shall be
considered as “doing business” in the Philippines since the twin
characterization test is satisfied in this case. First, the following
activities indicate that SCEH will be continuing the body or
substance of the business of SCEH for which it was organized in the
Philippines, to wit: (i) funding of the SEN online wallet; (ii) offering
and selfing SEN services; (iii) accepting online payments for using
SEN in any currency, including Philippine currency; (iv) marketing
or advertising; and (v) hiring independent contractors for marketing
or advertising of its products and the selling of prepaid cards in
relation to its online gaming services.
Second, the above-mentioned enumerated activities are
transactions consummated within the Philippines although they are
done in a virtual plane.
Currently, most courts in the United States apply a Sliding
Scale Test tailored to internet activities to determine the level
or types of activities that will constitute “minimum contacts" for
IX. SPECIAL LAWS
415
1. FOREIGN INVESTMENT ACT OF 1991
REPUBLIC ACT NO. 7042, AS AMENDED BY REPUBLIC ACT NO. 8179
jurisdictional purposes. This Sliding Scale Test is based on the
premise that “the likelihood that ‘personal jurisdiction’ can be
constitutionally exercised is directly proportionate to the nature
and quantity of commercial activity that an entity conducts over
the internet.” At one end of the scale are “passive” websites, which
alone generally do not generate sufficient contacts with a foreign
state to establish personal jurisdiction since they are only used to
post information therein. At the other end of the scale are “active”
websites, which generate sufficient business over the internet to
establish personal jurisdiction. “Interactive” websites fall in the
center of the scale since they are hybrid sites that contain elements
of both passive and active websites, and courts determine whether
to exercise personal jurisdiction over the interactive website owner
on a case-by-case basis.
Applying the Sliding Scale Test, the SCEH has “minimum
contacts” with the Philippines. The SEN online platform cannot
be considered as a “passive website” considering that there will be
sufficient contacts with the SEN account users in the Philippines
and such platform is not used to merely post information. In which
case, the SEN online platform should be considered as an “active
website” which, as above-stated, generates sufficient contacts and
business over the internet since it offers for sale and is engaged
in the selling of the SEN content and services to SEN account
holders in the Philippines, and, in the process, allows the funding
of the SEN online wallet by the SEN account holder who is located
in the Philippines. Clearly, there exists in this case sufficient
“minimum contacts” between the foreign corporation SCEH and the
Philippines.16
17.
A foreign corporation is doing business in the Philippines but
it only obtained from the SEC a license to transact business as
a representative office and not a branch office. The Certificate
issued by the SEC specified the purpose/s of the representative
office, that is "to deal directly with the clients/customers of
the applicant company in undertaking activities such as but
not limited to information dissemination and promotion of the
company's products as well as quality control of the products."
16Re: Foreign Corporation; Doing Business; Online Gaming, SEC-OGC Opinion
No. 03-17, April 4, 2017.
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May the foreign corporation with a representative office
maintain any suit in the Philippines against its competitor for
not complying with the laws and rules governing the goods
that the competitor is selling and other causes of action that it
may have against that competitor?
It does not matter for purposes of determining whether a
foreign corporation may sue or be sued before Philippine courts,
if such corporation is “doing business” in the Philippines through
a "branch office” or a “representative office.” Whether a foreign
corporation is doing business in the Philippines through a branch
or representative office would only determine the extent allowed by
law as to what such foreign corporation can do in the Philippines.
Instead, the determinative factor for purposes of determining
whether a foreign corporation can sue or be sued before Philippine
courts is whether the foreign corporation is doing business in the
Philippines and if it is licensed to do so.
Thus, the foreign corporation that is registered with the SEC
and is doing business in the Philippines as a representative office
may bring and defend suits before Philippine courts and other
government agencies in order to protect its rights and interests.”
18.
Genibrain Co., Ltd. ("Genibrain") is a foreign corporation duly
organized and validly existing by virtue of and under the laws of
Korea. As a holder of licenses to offer various interactive games
accessible through the internet, it publishes several games
online, making them available and accessible to interested
players anywhere in the world, including the Philippines. In
pursuit of its business, Genibrain plans to set up game servers
in the Philippines, which shall be physically located in and
connected to the internet through the facilities provided by a
value-added service provider such as ePLDT Inc. ("ePLDT"),
a company engaged in providing IT infrastructure solutions
to entities by providing, among others, co-location spaces,
manpower to manage the data centers, and other technical
services for the effective operations and proper functioning of
servers. In effect, Genibrain does not intend to maintain a fixed
place where it can conduct business through representatives
and agents.
’’Capacity to Sue or Be Sued by a Foreign Corporation, SEC-OGC Opinion No.
02-13, April 5, 2013.
L
IX. SPECIAL LAWS
417
1. FOREIGN INVESTMENT ACT OF 1991
REPUBLIC ACT NO. 7042, AS AMENDED BY REPUBLIC ACT NO. 8179
Does the setting up of these servers constitute "doing
business" in the Philippines, thereby requiring Genibrain to
obtain a license?
In Mentholatum Co., Inc. v. Anacleto Mangaliman, the Supreme
Court laid down the jurisprudential test of what constitutes “doing
business” in the Philippines for foreign corporations known as the
"Twin Characterization Test.” Under this test, a foreign corporation
is considered to be “doing business” in the Philippines when:
a.
The foreign corporation is maintaining or continuing in
the Philippines “the body or substance of the business
or enterprise for which it was organized or whether it
has substantially retired from it and turned it over to
another.”
b.
The foreign corporation is engaged in activities which
necessarily imply “a continuity of commercial dealings
and arrangements, and contemplates, to that extent, the
performance of acts or works or the exercise of some of
the functions normally incidental to, and in progressive
prosecution of, the purpose and object of its organization.”
Anent the first requisite, the setting up of game servers in the
Philippines by Genibrain may be considered as “maintaining or
continuing” in the Philippines the body or substance of the business
or enterprise. From understanding how game servers work, it can
be deduced that setting up servers is necessary and indispensable
in the pursuit of the business of which Genibrain is engaged in.
Thus, it may be deemed as the “body or substance” of the business,
as contemplated in the first requisite. Although the setting up of
servers does not involve the physical acts or transactions beyond
the mere leasing of a specific portion of space in the Philippines
to accommodate these servers, these servers shall act as memory
storage where the e-game software and related data are stored. In
effect, Genibrain will use the servers to store various data relative to
the games that it will advertise online, making it a vital component
of Genibrain’s online business.
With regard to the second requisite, one must not only consider
the mere act of setting up servers but also its continued presence
in the Philippines. In reality, these servers will be in continuous
operation while being physically present in the Philippines. Thus,
the continued presence of these servers in the Philippines may be
construed to mean that Genibrain is “engaged in activities which
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necessarily imply a continuity of commercial dealings.” While there
are no physical activities because the transactions appear to be
processed and consummated in a virtual plane, the physical presence
of these servers in the Philippines is essential in the perfection of
these online transactions.
Although the act of setting up servers does not per se constitute
"doing business” in the Philippines, its continuous presence and
operation, however, may be construed as “doing business” in the
Philippines. More so, the purchase of games online is clearly a
commercial transaction which constitutes “doing business” in the
Philippines creating earnings and direct profits for the foreign
corporation, especially if the particular games are accessed using
the game servers located in the Philippines. These commercial
transactions will not be possible without the continued presence
and operation of these servers. Thus, pursuant to Section 123 of the
Old Corporation Code (now Section 140 of the Revised Corporation
Code), it is imperative that Genibrain must first obtain a license
before setting up servers in the Philippines.18
19.
Steelcase, Inc. (Steelcase) is a foreign corporation engaged
in the manufacture of office furniture with dealers worldwide.
Design International Selections, Inc. (DISI) is a domestic
corporation engaged in the furniture business, including the
distribution of furniture. Steelcase and DISI orally entered into
a dealership agreement whereby Steelcase granted DISI the
right to market, sell, distribute, install, and service its products
to end-user customers within the Philippines. The business
relationship continued smoothly until it was terminated
sometime in January 1999 after the agreement was breached
with neither party admitting any fault.
Steelcase filed a complaint for sum of money against DISI
alleging, among others, that DISI had an unpaid account of
US$600,000.00. In its Answer, DISI alleged that the complaint
failed to contain the required allegations on Steelcase's
capacity to sue in the Philippines despite the fact that it
(Steelcase) was doing business in the Philippines without the
required license to do so.
’’Setting Up of Servers in the Philippines by a Foreign Corporation, SEC-OGC
Opinion No. 22-10, June 22, 2010.
'
IX. SPECIAL LAWS
419
1. FOREIGN INVESTMENT ACT OF 1991
REPUBLIC ACT NO. 7042, AS AMENDED BY REPUBLIC ACT NO. 8179
Steelcase countered that it was not doing business in
the Philippines when it entered into a dealership agreement
with DISI where the latter, acting as the former’s appointed
local distributor, transacted business in its own name and for
its own account. Specifically, Steelcase contends that it was
DISI that sold Steelcase's furniture directly to the end-users
or customers who, in turn, directly paid DISI for the furniture
they bought. Steelcase further claims that DISI, as a non­
exclusive dealer in the Philippines, had the right to market, sell,
distribute, and service Steelcase products in its own name and
for its own account.
Does Steelcase have the capacity to sue DISI?
An unlicensed foreign corporation not doing business in the
Philippine has the legal capacity to sue before the local courts.
The appointment of a distributor in the Philippines is not
sufficient to constitute “doing business” unless it is under the full
control of the foreign corporation. On the other hand, if the distributor
is an independent entity which buys and distributes products, other
than those of the foreign corporation, for its own name and its own
account, the latter cannot be considered to be doing business in the
Philippines. It should be kept in mind that the determination of
whether a foreign corporation is doing business in the Philippines
must be judged in light of the attendant circumstances.
Here, DISI was not a mere conduit through which Steelcase
conducted its business in the country. DISI was an independent
contractor, distributing various products of Steelcase and of other
companies, acting in its own name and for its own account. As a
result, Steelcase cannot be considered to be doing business in the
Philippines by its act of appointing a distributor as it falls under one
of the exceptions under R.A. No. 7042.19
20.
Does a foreign company which merely imports molasses
from a Philippine exporter be considered as engaged in doing
business in the Philippines?
A foreign company that merely imports goods from a Philippine
exporter, without opening an office or appointing an agent in the
Philippines, is not doing business in the Philippines.20
Design International Selections, Inc., G.R. No. 171995,
19Steelcase, Inc.
April 18, 2012.
“Cargill, Inc. v. Intra Strata Assurance Corp., G.R. No. 163266, March 15,
2010.
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21.
Antonio D. Todaro (Todaro) filed a complaint for sum of money
and damages with preliminary attachment against Pioneer
International, Ltd. (PIL), Pioneer Concrete Philippines, Inc.
(PCPI), and Pioneer Philippines Holdings, Inc. (PPHI). Todaro
alleged that PIL is a corporation duly organized under Australian
laws, while PCPI and PPHI are corporations duly organized
under Philippine laws. PIL is engaged in the ready-mix and
concrete aggregates business and has established a presence
worldwide. PIL established PPHI as the holding company of
the stocks of its operating company in the Philippines, PCPI.
According to Todaro, PIL contacted him and asked if he
could join it in establishing a pre-mixed concrete plant and in
overseeing its operations in the Philippines. Todaro confirmed
his availability and expressed interest in joining PIL. For not
fulfilling the contractual obligation to employ Todaro on a
permanent basis in PIL's Philippine office, Todaro initiated the
present case.
Among others, PIL alleges that no personal judgment
could be rendered by the trial court against PIL because PIL is
a foreign corporation not doing business in the Philippines. PIL
insists that its sole act of "transacting" or "doing business" in
the Philippines consisted of its investment in PPHI.
Is the contention of PIL proper?
Under Philippine law, PIL’s mere investment in PPHI does not
constitute “doing business.” However, based on the allegations in
Todaro’s complaint, PIL was doing business in the Philippines when
it negotiated Todaro’s employment with PPHI. Section 3(d) of R.A.
No. 7042, the Foreign Investments Act of 1991, states:
The phrase “doing business” shall include soliciting
orders, service contracts, opening offices, whether called “liaison”
offices or branches; appointing representatives or distributors
domiciled in the Philippines or who in any calendar year stay in the
country for a period or periods totaling one hundred eighty [180]
days or more; participating in the management, supervision or
control of any domestic business, firm, entity or corporation in the
Philippines; and any other act or acts that imply a continuity
of commercial dealings or arrangements and contemplate
to that extent the performance of acts or works, or the
IX. SPECIAL LAWS
421
1. FOREIGN INVESTMENT ACT OF 1991
REPUBLIC ACT NO. 7042, AS AMENDED BY REPUBLIC ACT NO. 8179
exercise of some of the functions normally incident to, and
in progressive prosecution of commercial gain or of the
purpose and object of the business organization: Provided,
however, That the phrase “doing business” shall not be deemed to
include mere investment as a shareholder by a foreign entity in
domestic corporations duly registered to do business, and/or the
exercise of rights as such investor; nor having a nominee director or
officer to represent its interests in such corporation; nor appointing
a representative or distributor domiciled in the Philippines which
transacts business in its own name and for its own account;
(Emphases added)
PIL’s alleged acts in actively negotiating to employ Todaro
to run its pre-mixed concrete operations in the Philippines are not
mere acts of a passive investor in a domestic corporation. Such
are managerial and operational acts in directing and establishing
commercial operations in the Philippines.21
22. ZUIDEN is a corporation incorporated under the laws of Hong
Kong engaged in the importation and exportation of several
products, including lace products. On several occasions,
GTVL, a Philippine corporation, purchased lace products
from ZUIDEN. The agreement for these purchases, as per the
instructions of GTVL, was that ZUIDEN delivers the products
purchased by GTVL, to a certain Hong Kong corporation,
known as Kenzar Ltd. (KENZAR), and the products will then
considered as sold upon receipt by KENZAR of the goods
purchased by GTVL. KENZAR had the obligation to deliver
the products to the Philippines and/or to follow whatever
instructions GTVL had on the matter.
Insofar as ZUIDEN is concerned, upon delivery of
the goods to KENZAR in Hong Kong, the transaction was
concluded; and GTVL became obligated to pay the agreed
purchase price.
For refusal of GTVL to pay the agreed purchase price
for several deliveries ordered by it and delivered by ZUIDEN,
ZUIDEN filed a complaint for sum of money before Philippine
courts. GTVL filed a Motion to Dismiss on the ground that
21Pioneer International, Ltd. v. Guadiz, Jr., G.R. No. 156848, October 11,2007.
£
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ZUIDEN has no legal capacity to sue since it is doing business
in the Philippines without securing the required license.
Should the Motion to Dismiss be granted?
The Motion to Dismiss should be denied.
The series of transactions between ZUIDEN and GTVL cannot
be classified as “doing business” in the Philippines under Section 3(d)
of R.A. No. 7042. An essential condition to be considered as “doing
business” in the Philippines is the actual performance of specific
commercial acts within the territory of the Philippines for the plain
reason that the Philippines has no jurisdiction over commercial
acts performed in foreign territories. Here, there is no showing that
ZUIDEN performed within the Philippine territory the specific acts
of doing business mentioned in Section 3(d) of R.A. No. 7042. While
ZUIDEN and GTVL entered into a series of transactions implying a
continuity of commercial dealings, the perfection and consummation
of these transactions were done outside the Philippines.
To be doing or “transacting business in the Philippines” for
purposes of Section 133 of the Revised Corporation Code, the foreign
corporation must actually transact business in the Philippines, that
is, perform specific business transactions within the Philippine
territory on a continuing basis in its own name and for its own account.
Actual transaction of business within the Philippine territory is an
essential requisite for the Philippines to acquire jurisdiction over
a foreign corporation and thus require the foreign corporation to
secure a Philippine business license. If a foreign corporation does not
transact such kind of business in the Philippines, even if it exports
its products to the Philippines, the Philippines has no jurisdiction
to require such foreign corporation to secure a Philippine business
license.22
23.
Agilent Technologies Singapore (Pte.), Ltd. ("Agilent") is
a foreign corporation, while Integrated Silicon Technology
Philippines Corporation ("Integrated Silicon") is a private
domestic corporation engaged in the business of manu­
facturing and assembling electronics components. Agilent
and Integrated Silicon entered into a Value Added Assembly
22B. Van Zuiden Bros., Ltd. v. GTVL Manufacturing Industries, Inc., G.R. No.
147905, May 28, 2007.
IX. SPECIAL LAWS
423
1. FOREIGN INVESTMENT ACT OF 1991
REPUBLIC ACT NO. 7042, AS AMENDED BY REPUBLIC ACT NO. 8179
Services Agreement ("VAASA”). Under the terms of the
VAASA, Integrated Silicon was to locally manufacture and
assemble fiber optics for export to Agilent. Agilent, for its part,
was to consign raw materials to Integrated Silicon; transport
machinery to the plant of Integrated Silicon; and pay Integrated
Silicon the purchase price of the finished products.
Under the provisions of the VAASA, can Agilent be
considered as doing business in the Philippines?
By and large, to constitute “doing business,” the activity to be
undertaken in the Philippines is one that is for profit-making.
By the clear terms of the VAASA, Agilent’s activities in the
Philippines were confined to (1) maintaining a stock of goods in
the Philippines solely for the purpose of having the same processed
by Integrated Silicon; and (2) consignment of equipment with
Integrated Silicon to be used in the processing of products for export.
As such, the Supreme Court has held that, based on the evidence
presented thus far, Agilent cannot be deemed to be “doing business”
in the Philippines.23
24. Asian Development Bank (ADB) agreed to extend to
Marcopper Mining Corporation (Marcopper) a loan to finance
the latter's mining project at Sta. Cruz, Marinduque. To secure
the loan, Marcopper executed in favor of ADB a "Deed of Real
Estate and Chattel Mortgage" covering substantially all of its
(Marcopper's) properties and assets in Marinduque.
When Marcopper defaulted in the payment of its loan
obligation, MR Holdings, Ltd., (MR Holdings) assumed
Marcopper's obligation to ADB. Consequently, in an
"Assignment Agreement," ADB assigned to MR Holdings
all its rights, interests, and obligations under the principal
and complementary loan agreements. Marcopper likewise
executed a "Deed of Assignment" in favor of MR Holdings. In
the meantime. Solidbank Corporation (Solidbank) obtained a
Partial Judgment against Marcopper from the RTC in Civil Case
No. 96-80083.
Having learned of the scheduled auction sale, MR
Holdings filed an "Affidavit of Third-Party Claim" asserting its
“Agilent Technologies Singapore v. Integrated Silicon Technology Phil. Corp.,
G.R. No. 154618, April 14, 2004.
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ownership over all Marcopper's mining properties, equipment,
and facilities by virtue of the "Deed of Assignment." Upon
the denial of its "Affidavit of Third-Party Claim" by the RTC
Manila, MR Holdings commenced with the RTC Marinduque,
a complaint for reivindication of properties, etc., with prayer
for preliminary injunction and temporary restraining order
against Solidbank, Marcopper, and the sheriffs assigned in
implementing the writ of execution. The trial court denied MR
Holdings' application for a writ of preliminary injunction on
the ground that MR Holdings has no legal capacity to sue, it
being a foreign corporation doing business in the Philippines
without license. Unsatisfied, MR Holdings elevated the matter
to the Court of Appeals on a Petition for Certiorari, Prohibition,
and Mandamus. The Court of Appeals affirmed the ruling of
the trial court that MR Holdings has no legal capacity to sue in
the Philippine courts because it is a foreign corporation doing
business here without license.
Is the Court of Appeals correct in its ruling?
No. A foreign corporation, which becomes the assignee of
mining properties, facilities, and equipment, cannot be automatically
considered as doing business, nor presumed to have the intention of
engaging in mining business. The MR Holdings was engaged only
in isolated acts or transactions. Single or isolated acts, contracts,
or transactions of foreign corporations are not regarded as a doing
or carrying on of business. Typical examples are the making of a
single contract, sale, sale with the taking of a note and mortgage in
the state to secure payment therefor, purchase, or note, or the mere
commission of a tort. In the said instances, there is no purpose to do
any other business within the country.
In the case at bar, the Court of Appeals categorized as “doing
business” MR Holdings’ participation under the “Assignment
Agreement” and the “Deed of Assignment.” This is simply untenable.
The expression “doing business” should not be given such a strict
and literal construction as to make it apply to any corporate
dealing whatever. At this early stage and with MR Holdings’ acts
or transactions limited to the assignment contracts, it cannot be
said that it had performed acts intended to continue the business
for which it was organized. It may not be amiss to point out that
the purpose or business for which MR Holdings was organized is
not discernible in the records. No effort was exerted by the Court of
IX. SPECIAL LAWS
425
1. FOREIGN INVESTMENT ACT OF 1991
REPUBLIC ACT NO. 7042, AS AMENDED BY REPUBLIC ACT NO. 8179
Appeals to establish the nexus between MR Holdings' business and
the acts supposed to constitute "doing business." Thus, whether the
assignment contracts were incidental to MR Holdings business or
were continuation thereof is beyond determination. The Supreme
Court did apply the case cited by the Court of Appeals, Far East
Int’l Import and Export Corp, v. Nankai Kosyo Co., Ltd., which held
that a single act may still constitute “doing business” if “it is not
merely incidental or casual, but is of such character as distinctly to
indicate a purpose on the part of the foreign corporation to do other
business in the state.” In said case, there was an express admission
from an official of the foreign corporation that he was sent to the
Philippines to look into the operation of mines, thereby revealing
the foreign corporation’s desire to continue engaging in business
here. But in the case at bar, there is no evidence of similar desire
or intent. Unarguably, MR Holdings may, as the Court of Appeals
suggested, decide to operate Marcopper’s mining business, but, of
course, at this stage, that is a mere speculation. Or it may decide
to sell the credit secured by the mining properties to an offshore
investor, in which case the acts will still be isolated transactions. To
see through the present facts an intention on the part of MR Holdings
to start a series of business transaction is to rest on assumptions or
probabilities falling short of actual proof. Courts should never base
its judgments on a state of facts so inadequately developed that it
cannot be determined where inference ends and conjecture begins.2*
25.
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XYZ Inc. is a foreign corporation engaged in the manufacture
and sale of elements used in sealing pumps, valves, and pipes
for industrial purposes, valves and control equipment used for
industrial fluid control and PVC pipes and fittings for industrial
use. Its products were sold 16 times over a five (5)-month period
to the same Filipino buyer. Further, it granted and extended 90day credit terms to the Filipino buyer for every purchase made.
XYZ Inc. filed an action for collection of sum of money
against the Filipino buyer but the trial court dismissed the
case for lack of capacity to sue of XYZ Inc. considering that it
does not have license to do business in the Philippines. XYZ
Inc. insists that the series of sales made to the Filipino buyer
would still constitute isolated transactions despite the number
2,MR Holdings, Ltd. v. Bajar, G.R. No. 138104, April 11, 2002.
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of invoices covering several separate and distinct items sold
and shipped over a span of four (4) to five (5) months.
Is the contention of the XYZ Inc. proper?
No. XYZ Inc. is not correct.
More than the sheer number of transactions entered into, a
clear and unmistakable intention on the part of XYZ Inc. to continue
the body of its business in the Philippines is more than apparent. As
alleged in its complaint, it is engaged in the manufacture and sale
of elements used in sealing pumps, valves, and pipes for industrial
purposes, valves and control equipment used for industrial fluid
control and PVC pipes and fittings for industrial use. Thus, the sale
by XYZ Inc. of the items covered by the receipts, which are part
and parcel of its main product line, was actually carried out in the
progressive prosecution of commercial gain and the pursuit of the
purpose and object of its business, pure and simple. Further, its
grant and extension of 90-day credit terms to the Filipino buyer for
every’ purchase made, unarguably shows an intention to continue
transacting with the Filipino buyer, since in the usual course of
commercial transactions, credit is extended only to customers in
good standing or to those on whom there is an intention to maintain
long-term relationship.
Equally important is the absence of any fact or circumstance
which might tend even remotely to negate such intention to continue
the progressive prosecution of XYZ Inc.’s business activities in this
country. Had the Filipino buyer not turned out to be a bad risk,
in all likelihood XYZ Inc. would have indefinitely continued its
commercial transactions with him, and not surprisingly, in ever
increasing volumes.
Thus, the series of transactions in question could not have
been isolated or casual transactions. What is determinative of
“doing business” is not really the number or the quantity of the
transactions, but more importantly, the intention of an entity to
continue the body of its business in the country. The number and
quantity are merely evidence of such intention. The phrase “isolated
transaction” has a definite and fixed meaning, i.e., a transaction
or series of transactions set apart from the common business of a
foreign enterprise in the sense that there is no intention to engage
in a progressive pursuit of the purpose and object of the business
organization. Whether a foreign corporation is “doing business” does
not necessarily depend upon the frequency of its transactions, but
more upon the nature and character of the transactions.
VAI
IX. SPECIAL LAWS
1. FOREIGN INVESTMENT ACT OF 1991
REPUBLIC ACT NO. 7042, AS AMENDED BY REPUBLIC ACT NO. 8179
Given the facts of this case, XYZ Inc.’s business dealings
cannot fit the category of “isolated transactions” considering XYZ
Inc.’s intention to continue and pursue the corpus of its business in
the country.26
26. Columbia Pictures, Inc. (Columbia), thru counsel, lodged a
formal complaint with the National Bureau of Investigation
(NBI) for violation of P.D. No. 49, as amended, and sought its
assistance in their anti-film piracy drive. Agents of the NBI
and private researchers made discreet surveillance on various
video establishments in Metro Manila including Sunshine
Home Video Inc. (Sunshine). The search warrant was served to
Sunshine and/or their representatives and in the course of the
search of the premises indicated in the search warrant, the NBI
Agents found and seized various video tapes of duly copyrighted
motion pictures/films owned or exclusively distributed by
private complainants, and machines, equipment, television
sets, paraphernalia, materials, and accessories, all of which
were included in the receipt for properties accomplished by
the raiding team.
Sunshine filed a Motion to Lift the Order of the Search
Warrant which was granted by the court.
Sunshine challenged Columbia's legal standing in
Philippine courts, they being foreign corporations not licensed
to do business in the Philippines. In so challenging Columbia's
personality to sue. Sunshine pointed to the fact that it is the
copyright owner or owner of exclusive rights of distribution
in the Philippines of copyrighted motion pictures or films,
and also to the appointment of Atty. Rico V. Domingo as their
attorney-at-fact, as being constitutive of "doing business in
the Philippines."
Is Columbia deemed doing business in the Philippines?
The true tests seem to be whether the foreign corporation
is continuing the body or substance of the business or enterprise
for which it was organized or whether it has substantially retired
from it and turned it over to another. It is generally recognized
that a foreign corporation is “doing,” “transacting,” “engaging in,”
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or carrying on “business” in the State when, and ordinarily only
when, it has entered the State by its agent and is there engaged in
carrying on and transacting through them some substantial part
of its ordinary or customary business, usually continuous in the
sense that it may be distinguished from merely casual, sporadic,
or occasional transactions and isolated acts. The Corporation Code
does not itself define or categorize what acts constitute doing or
transacting business in the Philippines. Jurisprudence has, however,
held that the term implies a continuity of commercial dealings and
arrangements, and contemplates, to that extent, the performance
of acts or works or the exercise of some of the functions normally
incident to or in progressive prosecution of the purpose and subject
of its organization.
The fact that Columbia is admittedly copyright owners or
owners of exclusive distribution rights in the Philippines motion
pictures or films does not convert such ownership into an indicium
of doing business which would require them to obtain a license
before they can sue upon a cause of action in local courts. Neither
is the appointment of Atty. Rico V. Domingo as attorney-in-fact of
Columbia, tantamount to doing business in the Philippines. The
exercise of one’s legal and property rights and taking steps for the
vigilant protection of said rights, particularly the appointment of
an attorney-in-fact, cannot be deemed to be doing business in the
Philippines.26
27.
Define "export enterprise"
The term “export enterprise” shall mean an enterprise wherein
a manufacturer, processor, or service (including tourism) enterprise
exports 60% or more of its output, or wherein a trader purchases
product domestically and exports 60% or more of such purchases.”
28.
Define "domestic market enterprise'!
The term “domestic market enterprise” shall mean an
enterprise which products goods for sale, or renders services to the
domestic market entirely or if exporting a portion of its output fails
to consistency export at least 60% thereof.28
“Columbia Pictures, Inc. v. Court of Appeals, G.R. No. 110318, August 28,
1996.
27Section 3(e), R.A. No. 7042.
“Section 3(f), R.A. No. 7042.
r
IX. SPECIAL LAWS
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1. FOREIGN INVESTMENT ACT OF 1991
REPUBLIC ACT NO. 7042, AS AMENDED BY REPUBLIC ACT NO. 8179
29. A Philippine Corporation is fully owned by a foreign company.
It has for its primary purpose: "To own shares of stock of
companies registered outside the Philippines; provided
that, the corporation shall neither produce goods nor render
services for the domestic market.”
Can the Philippine Corporation be considered a
domestic market enterprise subject to the minimum paidup capital requirement of the Philippine Peso equivalent of
USD200,000.00?
The Implementing Rules and Regulations of the Foreign
Investments Act of 1991, Section l(k) provides that “Domestic
market enterprise” shall mean an enterprise which produces goods
for sale, or renders service, or otherwise engages in any business in
the Philippines.
Under E.O. No. 584,29 domestic market enterprises, with paidin equity capital of less than the equivalent of USD200,000.00, are
restricted to a maximum of 40% foreign equity.
The dominant character of a holding company is the ownership
of securities by which it is possible to control or substantially
influence the policies and management of one or more operating
companies in a particular field of enterprise.
The fact that the proposed Philippine-registered holding
company will own shares of stock of foreign-registered corporations
only, does not exclude it from being a domestic market enterprise
since it still engages in business in the Philippines.
In view of the foregoing, a 100% foreign-owned Philippineregistered corporation, whose sole purpose is to own shares of stock
of companies registered outside the Philippines, and shall neither
produce goods nor render services for the domestic market, is still
deemed as a domestic market enterprise as defined under R.A. No.
7402, and is subject to the minimum paid-up capital requirement of
the equivalent of USD200,000.00.30
“Replaced By E.O. No. 65 (Promulgating The Eleventh Regular Foreign In­
vestment Negative List).
“Exemption of 100% Foreign Owned Holding Company from Minimum PaidUp Capital Requirement, SEC-OGC Opinion No. 30-09, November 23, 2009.
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C. Registration of Investments
of Non-Philippine Nationals
30.
To what regulatory bodies should foreign investments be
registered?
Under Section 5 of the FIA, as amended, a non-Philippine
national, not otherwise disqualified by law, and upon registration
with the SEC, or with the Department of Trade and Industry
(“DTI”) in the case of single proprietorships, is allowed to do
business or invest in a domestic enterprise up to 100% of its capital,
unless participation of non-Philippine nationals in the enterprise is
prohibited or limited under the Foreign Investments Negative List.
In this regard, Section 3(c) of the same law, defines “foreign
investment” as equity investment made by a non-Philippine
national in the form of foreign exchange and/or other assets actually
transferred to the Philippines and duly registered with the Bangko
Sentral ng Pilipinas (“BSP”) which shall assess and appraise the
value of such assets other than foreign exchange.
Foreign investments registered with the BSP are entitled to
full repatriation of capital and remittance of dividends/profits using
foreign exchange sourced/purchased from authorized agent banks
and/or their subsidiary/affiliate foreign exchange corporations. All
applications for registration of foreign direct investments shall
be filed with the BSP within one (1) year from the date of inward
remittance/actual transfer of assets to the Philippines.31
D. Foreign Investments
in Export Enterprises
31.
Is 100% foreign investment in export enterprises allowed under
the FIA?
Foreign equity participation in export enterprises shall be
allowed up to 100% provided that the products and services of such
enterprises do not fall within Lists A and B of the Foreign Investment
Negative List.32
31Section 36, Chapter II, Part Two of the BSP’s FX Manual, as amended.
“Section 6, R.A. No. 7042.
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REPUBLIC ACT NO. 7042, AS AMENDED BY REPUBLIC ACT NO. 8179
E. Foreign Investments in
Domestic Market Enterprises
32. Can Non-Philippine Nationals Invest in Domestic Enterprises?
As a general rule, there are no restrictions on extent of foreign
ownership of export enterprises. In domestic market enterprises,
foreigners can invest as much as 100% equity except in areas
included in the Foreign Investment Negative List.
Consistent with this declared policy, foreign or non-Philippine
national investors are allowed to invest in domestic enterprises
except when foreign ownership is either prohibited or limited by
law. Section 7 of the Foreign Investment Act of 1991 (“FIA”), as
amended,33 expressly provides:
Sec. 7. Foreign Investments in Domestic Market
Enterprises. — Non-Philippine nationals may own up
to one hundred percent (100%) of domestic market
enterprises unless foreign ownership therein is prohibited
or limited by the Constitution and existing law or the
Foreign Investment Negative List under Section 8 hereof.
This Foreign Investment Negative List basically provides for
two (2) component lists: (a) List A - which enumerates the areas
of activities reserved to Philippine nationals by mandate of the
Constitution and specific laws; and (b) List B - which contains
the areas of activities and enterprises regulated pursuant to law
for reasons of security, defense, risk to health and morals, and
protection to small and medium-scale enterprises.31
Non-Philippine nationals are allowed to engage in small or
medium-scale domestic enterprises provided that their paid in
capital is at least two hundred thousand US dollars (USD200,000.00).
However, when the enterprises involve advance technology as
determined by the Department of Science and Technology, or
’’The FIA was amended in 1996 by R.A. No. 8179 to further liberalize foreign
investments in the Philippines.
3,R.A. No. 8179 deleted List C provided under the FIA which contains
investment areas already adequately served by existing enterprises and in which
foreign investments need not be encouraged further. Deletion of this list is expected
to open further the market to foreign investments and keep existing firms efficient
and responsive to the needs of consumers.
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employ at least 50 direct employees, in which case a minimum paidin capital of USD100,000.00 would be sufficient.35
F. Foreign Investment Negative List
33.
What is the "Foreign Investments Negative List"?
The “Foreign Investments Negative List” or “Negative
List” refers to the list of areas of economic activity whose foreign
ownership is limited to a maximum of 40% of the equity capital of
the enterprises engaged therein.36
This Foreign Investment Negative List is divided into two (2)
component lists: (a) List A - which enumerates the areas of activities
reserved to Philippine nationals by mandate of the Constitution and
specific laws; and (b) List B - which contains the areas of activities
and enterprises regulated pursuant to law for reasons of security,
defense, risk to health and morals, and protection to small and
medium-scale enterprises.
The latest Negative List is the “Eleventh Foreign Investment
Negative List” promulgated under E.O. No. 65 which was issued
on October 29, 2018. List A and List B of the Eleventh Foreign
Investment Negative List provides:
List A: Foreign Ownership is Limited by Mandate of the
Constitution and Specific Laws
No Foreign Equity
a.
Mass media, except recording (Article XVI, Section 11 of
the 1987 Constitution; Presidential Memorandum dated
May 5,1994) and internet business. (DO J Opinion No. 40,
S. 1998)
b.
Practice of professions (Article XII, Section 14 of the
Constitution, Section 1 of R.A. No. 5181, Section 7[j] of
R.A. No. 8981), including Radiologic and x-ray technology
(R.A. No. 7431), Criminology (R.A. No. 6506), Law
(Article VIII, Section 5 of the Constitution; Rule 138,
“Section 8 of the FIA, as amended by R.A. No. 8179.
“Section 3(g), R.A. No. 7042.
433
JX. SPECIAL LAWS
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REPUBLIC ACT NO. 7042, AS AMENDED BY REPUBLIC ACT NO. 8179
Section 2 of the Rules of Court of the Philippines), and
Marine deck officers and marine engine officers (R.A. No.
10635), subject to the Annex on Professions indicating the
professions where (a) foreigners are allowed to practice
in the Philippines subject to reciprocity; and (b) where
corporate practice is allowed. Foreigners may teach at
higher education levels (R.A. No. 8292), provided the
subject being taught is not a professional subject (i.e.,
included in a government board or bar examination).
C.
Retail trade enterprises with paid-up capital of less than
US$2,500,000.00 (Section 5 of R.A. No. 8762)
d.
Cooperatives (Chapter III, Article 26 of R.A. No. 6938, as
amended by Chapter II, Article 10 of R.A. No. 9520)
e.
Organization and operation of private detective,
watchmen or security guards agencies. (Section 4 of R.A.
No. 5487)
f.
Small-scale mining. (Section 3 of R.A. No. 7076)
g-
Utilization of marine resources in archipelagic waters,
territorial sea and exclusive economic zone as well as
small-scale utilization of natural resources in rivers,
lakes, bays, and lagoons. (Article. XII, Section 2 of the
Constitution)
h.
Ownership, operation, and management of cockpits
(Section 5 of P.D. No. 449)
i.
Manufacture, repair, stockpiling, and/or distribution of
nuclear weapons. (Article II, Section 8 of the Constitution)
)•
Manufacture, repair, stockpiling, and/or distribution
of biological, chemical, and radiological weapons and
anti-personnel mines, (various treaties to which the
Philippines is a signatory and conventions supported by
the Philippines)
k.
Manufacture of firecrackers and other pyrotechnic
devices. (Section 5 of R.A. No. 7183)
Up to Twenty-Five Percent (25%) Foreign Equity
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a.
Private recruitment, whether for local or overseas
employment (Article 27 of P.D. No. 442)
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DIVINA ON COMMERCIAL LAW:
A COMPREHENSIVE GUIDE VOLUME II
•134
b.
Contracts for the construction of defense-related
structures (Section 1 of Commonwealth Act No. 541)
Up to Thirty Percent (30%) Foreign Equity
a.
Advertising (Article XVI, Section 11 of the Constitution)
Up to Forty Percent (40%) Foreign Equity
a.
Subject to applicable regulatory frameworks, contracts
for the construction and repair of locally-funded public
works (Section 1 of C.A. No. 541, Letter of Instruction No.
630), except:
i.
Infrastructure/development projects covered in R.A
No. 7718; and
ii.
Projects which are foreign-funded or assisted and
required to undergo international competitive
bidding (Sec. 21[a] of R.A. No. 7718)
b.
Exploration, development, and utilization of natural
resources (Article XII, Section 2 of the Constitution)
c.
Ownership of private lands (Article XII, Section 7 of the
Constitution; Section 22 of C.A. No. 141; Section 4 of R.A
No. 9182)
d.
Operation of public utilities (Article XII, Section 11 of the
Constitution; Section 16 of C.A. No. 146; Section 2[a] of
R.A. No. 7718), except power generation and the supply
of electricity to the contestable market (Section 6 and
Section 29, respectively, of R.A. No. 9136) and such other
like businesses or services not covered by the definition of
public utilities.
e.
Educational institutions other than those established
by religious groups and mission boards, for foreign
diplomatic personnel and their dependents, and other
foreign temporary residents (Article XIV, Section 4 of
the Constitution), or for short-term high-level skills
development that do not form part of the formal education
system as defined in Section 20 of B.P. No. 232 (1982).
f.
Culture, production, milling, processing, trading except
retailing, of rice and corn and acquiring, by barter,
IX. SPECIAL LAWS
435
1. FOREIGN INVESTMENT ACT OF 1991
REPUBLIC ACT NO. 7042, AS AMENDED BY REPUBLIC ACT NO. 8179
purchase or otherwise, rice and corn and the by-products
thereof. (Section 5 of P.D. No. 194)
g-
Contracts for the supply of materials, goods and com­
modities to government-owned or controlled corporation,
company, agency or municipal corporation. (Sec. 1 of RA
No. 5183)
h.
Operation of deep sea commercial fishing vessels. (Sec. 27
of RA No. 8550, as amended by RA No. 10654)
i.
Ownership of condominium units. (Sec. 5 of RA No. 4726)
j.
Private radio communications network (Art. XII, Sec. 11
of the Constitution, NTC Memorandum Circular No. 108-91)
List B: Foreign Ownership is Limited by Reasons of
Security, Defense, Risk to Health and Morals, and
Protection of Small and Medium Scale Enterprises
Up to Forty Percent (40%) Foreign Equity
a.
I
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Manufacture, repair, storage, and/or distribution of
products and/or ingredients requiring Philippine National
Police (PNP) clearance:
i.
Firearms (handguns to shotguns), parts of firearms
and ammunition therefor, instruments or imple­
ments used or intended to be used in the manufac­
ture of firearms;
ii.
Gunpowder;
iii.
Dynamite;
iv.
Blasting supplies;
v.
Ingredients used in making explosives:
1)
Chlorates of potassium and sodium;
2)
Nitrates of ammonium, potassium, sodium
barium, copper (11), lead (11), calcium, and
cuprite;
3)
Nitric acid;
4)
Nitrocellulose;
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DIVINA ON COMMERCIAL LAW:
A COMPREHENSIVE GUIDE VOLUME II
■136
5)
Perchlorates of ammonium, potassium, and
sodium;
6)
Dinitrocellulose;
7)
Glycerol;
8)
Amorphous phosphorus;
9)
Hydrogen peroxide;
10)
Strontium nitrate powder;
11) Toluene; and
vi.
Telescopic sights, sniper scope, and other similar
devices.
However, the manufacture or repair of these items may be
authorized by the Chief of the PNP to non-Philippine nationals;
Provided that a substantial percentage of output, as determined
by the said agency, is exported. Provided further that the extent
of foreign equity ownership allowed shall be specified in the said
authority/clearance. (R.A. No. 7042 as amended by R.A. No. 8179)
b.
Manufacture, repair, storage, and/or distribution of
products requiring Department of National Defense
(DND) clearance:
i.
Guns and ammunition for warfare;
ii.
Military ordinance and parts thereof (e.g., torpedoes,
depth charges, bombs, grenades, missiles);
iii.
Gunnery, bombing, and fire control systems and
components;
iv.
Guided missiles/missile systems and components;
v.
Tactical aircraft (fixed and rotary-winged), parts
and components thereof;
vi.
Space vehicles and component systems;
vii.
Combat vessels (air, land, and naval) and auxiliaries;
viii. Weapons repair and maintenance equipment;
ix.
Military communications equipment;
x.
Night vision equipment;
IX. SPECIAL LAWS
m
1. FOREIGN INVESTMENT ACT OF 1991
REPUBLIC ACT NO. 7042, AS AMENDED BY REPUBLIC ACT NO. 8179
xi.
Stimulated coherent radiation devices, components,
and accessories;
xii.
Armament training devices; and
xiii. Others as may be determined by the Secretary of the
DND.
However, the manufacture or repair of these items may be
authorized by the Secretary of National Defense to non-Philippine
nationals; Provided, that a substantial percentage of output, as
determined by the said agency, is exported. Provided, further, that
the extent of foreign equity ownership allowed shall be specified in
the said authority/clearance. (R.A. No. 7042 as amended by R.A. No.
8179)
c.
Manufacture and distribution of dangerous drugs (R.A.
No. 7042 as amended by R.A. No. 8179)
d.
Sauna and steam bathhouses, massage climes and other
like activities regulated by law because of risks posed to
public health and morals, except wellness centers (R.A.
No. 7042 as amended by R.A. No. 8179)
e.
All forms of gambling (R.A. No. 7042 as amended by R.A.
No. 8179) except those covered by investment agreements
with PAGCOR (R.A. No. 1869, as amended by R.A. No.
9487)
f.
Domestic market enterprises with paid-in equity capital
of less than the equivalent of US$200,000.00 (R.A. No.
7042, as amended by R.A. No. 8179)
g-
Domestic market enterprises which involve advanced
technology or employ at least 50 direct employees with
paid-in equity capital of less than the equivalent of
US$100,000.00. (R.A. No. 7042, as amended by R.A. No.
8179)
34. What are the highlights of the 11th Negative List?
The 11th Negative List allows full foreign participation in five
(5) investment areas or activities and up to 40% foreign participation
in three (3) sectors.
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DIVINA ON COMMERCIAL LAW:
A COMPREHENSIVE GUIDE VOLUME II
438
The following table summarizes the changes introduced by the
11th Negative List in the following investment areas:
Investment Area
__________ Foreign Participation
10,h Negative List
Internet Business, which 0%
refers to internet access
proriders that merely
serve as carriers for
transmitting messages,
rather than being the
creator of the message/
information.
Teaching at higher edu­ 0%
cation levels provided
that the subject being
taught is a not a profes­
sional subject (t.e., in­
cluded in a government
board examination or bar
examination).
Training Centers en­ Up to 40%
in
gaged
short-term
high-level skills deve­
lopment that do not form
part of the formal educa­
tional system.
adjustment
Insurance
companies, lending com­
panies, financing com­
panies, and investment
houses.
Wellness centers
•
Up to 40% for ad­
justment
compa­
nies
•
Up to 49% for lend­
ing companies
•
Up to 60% for fi­
nancing companies
and
investment
houses
Up to 40%
Contracts for the con­ Up to 25%
struction and repair of
locally-funded
public
works, except:
11th Negative List
100%
Carved out as an ex­
ception to mass me­
dia, which is strictly
restricted to Filipino
nationals.
100%
Carved out as an ex­
ception to practice of
professions, which is
strictly restricted to
Filipino nationals.
Up to 100%
Carved out as an ex­
ception to educational
institutions,
which
are still restricted
only up to 40% foreign
equity.__________
Up to 100%
Up to 100%
Up to 40%
IX. SPECIAL LAWS
439
1. FOREIGN INVESTMENT ACT OF 1991
REPUBLIC ACT NO. 7042, AS AMENDED BY REPUBLIC ACT NO. 8179
a. Infrastructure/development projects cove­
red in R.A. No. 7718
b. Projects which are
foreign funded or as­
sisted and required to
undergo international
competitive bidding.
Private radio communi­
cations network.
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Up to 20%
Up to 40%
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2. FINANCIAL REHABILITATION AND
INSOLVENCY ACT OF 2010
(R.A. NO. 10142) (“FRIA”)
1.
What are the remedies available to or against an insolvent
debtor under FRIA?
An individual insolvent debtor may file a petition for suspension
of payments and/or may also file, or be the subject of, petition for
liquidation.
A juridical insolvent debtor may file, or be the subject of,
a petition for rehabilitation or liquidation. A juridical insolvent
debtor refers to, unless specifically excluded by a provision under
FRIA, a sole proprietorship duly registered with the Department of
Trade and Industry (“DTI”), a partnership duly registered with the
Securities and Exchange Commission (“SEC”), a corporation duly
organized and existing under Philippine laws.1
An individual debtor refers to a natural person who is a
resident and citizen of the Philippines who has become insolvent as
defined under FRIA.2
a.
2.
Definition of Insolvency
What does insolvent mean to describe a debtor under FRIA?
Insolvent shall refer to the financial condition of a debtor that
is generally unable to pay its or his liabilities as they fall due in the
ordinary course of business or has liabilities that are greater than
its or his assets.3
Technical insolvency means that the debtor has more assets
than liabilities but generally unable to pay its or his liabilities as
they fall due. Actual insolvency means that the debtor’s assets are
less than liabilities.
'Section 4(k).
"Section m(o).
"Section 4(p), R.A. No. 10142.
440
2. FINANCIAL REHABILITATION AND
INSOLVENCY ACT OF 2010
(R.A. NO. 10142) (“FRIA")
441
Prior to FRIA, only a technically insolvent debtor may file a
petition for rehabilitation. An actually insolvent debtor could not file
a petition for rehabilitation but should file a petition for insolvency,
instead.
FRIA covers both technical and actual insolvency. An
actually insolvent debtor may file a petition for rehabilitation and
the court will give it due course if the court believes that there is
substantial likelihood that the debtor may be rehabilitated through
a viable Rehabilitation Plan.4 Otherwise, the court may convert the
rehabilitation proceedings into one of liquidation.5
In one case,6 the Supreme Court ruled that a corporation left
without assets could not file a petition for rehabilitation, and the
fact that there are pending actions to nullify the foreclosure of its
assets does not change such conclusion. Given the expanded concept
of insolvency under FRIA, it appears that such debtor without assets
can now file a petition for rehabilitation under FRIA.
The term debtor does not include banks, insurance companies,
pre-need companies, and national and local government agencies
or units. The rehabilitation of distressed banks and insurance
companies are governed by other special laws.7
Government financial institutions other than banks and
government-owned or -controlled corporations are covered by FRIA
unless their specific charter provides otherwise.8
b.
3.
Suspension of Payments
Who may file a petition for suspension of payments?
An individual debtor who, possessing sufficient property to
cover all his debts but foreseeing the impossibility of meeting them
when they respectively fall due, may file a verified petition that
'See Philippine Bank of Communications v. Basic Polyprinters and Packaging
Corporation, G.R. No. 187581, October 20, 2014 where the Supreme Court stated that
a debtor whose assets are less than liabilities may file a petition for rehabilitation
under FRIA. The petition for rehabilitation, however, was dismissed.
‘Section 92.
‘New Frontier Sugar Corporation
Regional Trial Court, Branch 39, Iloilo
City, G.R. No. 165001, January 31, 2007.
’R.A. No. 7653, as amended; (The New Central Bank Act) P.D. No. 612, as
amended (Insurance Code of the Philippines) and R.A. No. 9829 (Pre-need Code of
the Philippines).
•Section 5.
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442
DIVINA ON COMMERCIAL LAW:
A COMPREHENSIVE GUIDE VOLUME II
he be declared in the state of suspension of payments by the court
of the province or city in which he has resided for six (6) months
prior to the filing of his petition. He shall attach to his petition, as a
minimum: (a) a schedule of debts and liabilities; (b) an inventory of
assess; and (c) a proposed agreement with his creditors.9
Suspension of payments, as a remedy under FRIA, is not
available to a juridical insolvent debtor. For juridical insolvent
debtors, suspension of payments is part of the commencement
order which the court may issue through the filing of a petition for
rehabilitation.
4.
What order will the court issue if it finds the petition for
suspension of payments to be sufficient in form and
substance?
If the court finds the petition sufficient in form and substance,
it shall, within five (5) working days from the filing of the petition,
issue an Order:
a.
calling a meeting of all the creditors named in the schedule
of debts and liabilities at such time not less than 15 days
nor more than 40 days from the date of such Order and
designating the date, time and place of the meeting;
b.
directing such creditors to prepare and present written
evidence of their claims before the scheduled creditors’
meeting;
c.
directing the publication of the said order in a newspaper
of general circulation published in the province or city
in which the petition is filed once a week for two (2)
consecutive weeks, with the first publication to be made
within seven (7) days from the time of the issuance of the
Order;
d.
directing the clerk of court to cause the sending of a copy
of the Order by registered mail, postage prepaid, to all
creditors named in the schedule of debts and liabilities;
e.
forbidding the individual debtor from selling, transferring,
encumbering or disposing in any manner of his property,
9Section 94.
2. FINANCIAL REHABILITATION AND
INSOLVENCY ACT OF 2010
(R.A. NO. 10142) (“FRIA”)
443
except those used in the ordinary operations of commerce,
or of industry in which the petitioning individual debtor
is engaged, so long as the proceedings relative to the
suspension of payments are pending;
5.
f.
prohibiting the individual debtor from making any
payment outside of the necessary or legitimate expenses
of his business or industry, so long as the proceedings
relative to the suspension of payments are pending; and
g-
appointing a commissioner to preside over the creditors’
meeting.10
May the court suspend any pending execution against the
debtor who filed the petition?
Upon motion filed by the individual debtor, the court may issue
an order suspending any pending execution against the individual
debtor: provided, that properties held as security by secured creditors
shall not be the subject of such suspension order. The suspension
order shall lapse when three (3) months shall have passed without
the proposed agreement being accepted by the creditors or as soon
as such agreement is denied.11
6.
What is the effect of the filing of the petition for suspension of
payments?
No creditor shall sue or institute proceedings to collect his
claim from the debtor from the time of the filing of the petition
for suspension of payments and for as long as proceedings remain
pending except: (a) those creditors having claims for personal labor,
maintenance, expense of last illness and funeral of the wife or
children of the debtor incurred in the 60 days immediately prior to
the filing of the petition; and (b) secured creditors.12
In other words, the mere filing of a petition for suspension of
payments suspends the enforcement of claims against the individual
debtor except the excluded claims above-mentioned.
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‘“Section 95.
“Section 96.
12Section 96.
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444
7.
DIVINA ON COMMERCIAL LAW:
A COMPREHENSIVE GUIDE VOLUME II
What are the conditions for the approval of the petition for
suspension of payments?
The presence of creditors holding claims amounting to at least
three-fifths (3/5) of the liabilities shall be necessary for holding a
meeting. The commissioner appointed by the court shall preside
over the meeting and the clerk of court shall act as the secretary
thereof, subject to the following rules:
a.
The clerk shall record the creditors present and amount
of their respective claims;
b.
The commissioner shall examine the written evidence of
the claims. If the creditors present hold at least threefifths (3/5) of the liabilities of the individual debtor, the
commissioner shall declare the meeting open for business;
c.
The creditors and individual debtor shall discuss the
propositions in the proposed agreement and put them to
a vote;
d.
To form a majority, it is necessary:
e.
i.
that two-thirds (2/3) of the creditors voting unite
upon the same proposition; and
ii.
that the claims represented by said majority vote
amount to at least three-fifths (3/5) of the total
liabilities of the debtor mentioned in the petition;
and
After the result of the voting has been announced, all
protests made against the majority vote shall be drawn
up, and the commissioner and the individual debtor
together with all creditors taking part in the voting shall
sign the affirmed propositions.
No creditor who incurred his credit within 90 days prior
to the filing of the petition shall be entitled to vote.13
8.
What is the double majority rule in petition for suspension of
payments?
It means that the proposed agreement for suspension of
payments should be approved by 2/3 of number of creditors and such
number of creditors must represent at least 3/5 of total liabilities.
Otherwise, the court should deny the petition.
“Section 97.
2. FINANCIAL REHABILITATION AND
INSOLVENCY ACT OF 2010
(R.A. NO. 10142) ("FRIA”)
9.
445
ABC Corporation has outstanding money obligations to six (6)
creditors, namely A, B, C, D, E, and F, in the aggregate amount
of P250 million. The amount due to A, B, and C collectively is
P150 million. In the creditors meeting, the three (3) agreed to
the petition but not the remaining creditors. Should the court
approve the petition for suspension of payments?
No, the petition cannot be approved by the court because while
A, B, and C are representing at least 3/5 of total liabilities, they do
not represent at least 2/3 of total number of creditors.
10.
What are the effects of the approval of the proposed Suspension
of Payments agreement?
If the decision of the majority of the creditors to approve the
proposed agreement or any amendment thereof made during the
creditors’ meeting is upheld by the court, or when no opposition or
objection to said decision has been presented, the court shall order
that the agreement be carried out and all parties bound thereby to
comply with its terms.
The court may also issue all orders which may be necessary
or proper to enforce the agreement on motion of any affected party.
The Order confirming the approval of the proposed agreement on
any amendment thereof made during the creditors’ meeting shall be
binding upon all creditors whose claims are included in the schedule
of debts and liabilities submitted by the individual debtor and who
were properly summoned, but not upon: (a) those creditors having
claims for personal labor, maintenance, expenses of last illness
and funeral of the wife or children of the debtor incurred in the 60
days immediately prior to the filing of the petition, and (b) secured
creditors who failed to attend the meeting o[r] refrained from voting
therein.14
11.
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What claims are not covered by the filing of the petition for
suspension of payments and/or the court order approving the
petition for suspension of payments?
a.
Those whose claims are not included in the schedule of
debts and liabilities submitted by the individual debtor to
the court;
HSection 101.
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DIVINA ON COMMERCIAL LAW:
A COMPREHENSIVE GUIDE VOLUME II
446
12.
b.
Those creditors having claims for personal labor,
maintenance, expenses of last illness and funeral of the
wife or children of the debtor incurred in the 60 days
immediately prior to the filing of the petition; and,
C.
Secured creditors, (like mortgagee of real property and
holders of security interest on personal property)
When is the proposed agreement deemed rejected?
The proposed agreement shall be deemed rejected if the number
of creditors required for holding a meeting do not attend thereat, or
if the two (2) majorities mentioned in Section 97 hereof are not in
favor thereof. In such instances, the proceeding shall be terminated
without recourse and the parties concerned shall be at liberty to
enforce the rights which may correspond to them.16
13.
When may the creditors enforce their claims against the debtor
who filed the petition for suspension of payment?
The creditors may enforce their claims against the debtor in
the following cases:
14.
a.
If the proposed agreement is rejected for lack of quorum
or failure to obtain the approval of the double majorities
required by law.
b.
If the individual debtor fails, wholly or in part, to perform
the agreement decided upon at the meeting of the
creditors, all the rights which the creditors had against
the individual debtor before the agreement shall revest
in them.16 In this particular case, the individual debtor
may be made subject to the insolvency proceedings in the
manner established by FRIA.
c.
If their claims are those not covered by the rules on
suspension of payments.
Hortencio owned a modest grocery business in Laguna.
Because of the economic downturn, he incurred huge financial
liabilities. He remained afloat only because of the properties
16Section 99.
16Section 102.
2. FINANCIAL REHABILITATION AND
INSOLVENCY ACT OF 2010
(R.A. NO. 10142) (“FRIA'’)
447
inherited from his parents who had both come from landed
families in Laguna. His main creditor was Puresilver Company
(Puresilver), the principal supplier of the merchandise sold
in his store. To secure his credit with Puresilver, he executed
a real estate mortgage with a dragnet clause involving his
family's assets worth several millions of pesos.
Nonetheless, Hortencio, while generally in the black,
now faces a situation where he is unable to pay his liabilities as
they fall due in the ordinary course of business. What will you
advise him to do to resolve his dire financial condition? Explain
your answer.
If Hortencio is doing business as a registered sole proprietorship,
he can file a petition for rehabilitation. Under the FRIA, a sole
proprietorship can now file a petition for rehabilitation. The remedy
may be availed of in case of actual or technical insolvency. In the
petition, he can pray for the issuance of a commencement order
which includes a stay order. The stay order, once issued, has the
effect of enjoining the enforcement of claims against Hortencio.
If Hortencio is not registered as a sole proprietorship, he can
file a petition for suspension of payments in the city or province in
which he has resided for six (6) months prior to the filing of the
petition, a remedy available for an individual debtor who has more
assets than liabilities but foresees the impossibility of paying his
debts when they respectively fall due.17
C.
15.
Rehabilitation
What is rehabilitation in the context of FRIA?
Rehabilitation shall refer to the restoration of the debtor to a
condition of successful operation and solvency, if it is shown that its
continuance of operation is economically feasible and its creditors
can recover by way of the present value of payments projected in
the plan, more if the debtor continues as a going concern than if it is
immediately liquidated.18
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■’Section 94 of FRIA.
■’Section 4(gg).
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DIVINA ON COMMERCIAL LAW:
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■148
16.
What is the objective of rehabilitation?
Corporate rehabilitation contemplates a continuance of
corporate life and activities in an effort to restore and reinstate
the corporation to its former position of successful operation and
solvency, the purpose being to enable the company to gain a new
lease on life and allow its creditors to be paid their claims out of
its earnings. Thus, the basic issues in rehabilitation proceedings
concern the viability and desirability of continuing the business
operations of the distressed corporation, all with a view of effectively
restoring it to a state of solvency or to its former healthy financial
condition through the adoption of a Rehabilitation Plan.10
The purpose of rehabilitation proceedings is to enable the
company to gain a new lease on life and thereby allow creditors to
be paid their claims from its earnings.20
Rehabilitation assumes that the corporation has been
operational but for some reasons like economic crisis or
mismanagement had become distressed or insolvent. The petition
for rehabilitation should be denied if the debtor had not been in the
position of successful operation and solvency prior to the filing of
the petition. Thus, while the debtor had indeed commenced business
through the preparatory act of opening a credit line with the bank
to finance the construction of a new hospital building for its future
operations, but the debtor corporation itself admitted that it has
not formally operated nor earned any income since its incorporation,
this simply means that there exists no viable business concern to be
restored and the petition for rehabilitation should be dismissed.21
17.
How may the objective of restoring the debtor to its/his former
state of successful operations be attained?
The objective of restoring the debtor to its/his former state
of successful operation and solvency may be attained through the
following:
a.
Adoption of an economically feasible Rehabilitation Plan;
’’Philippine Asset Growth Two, Inc. and Planters Development Bank v.
Fastech Synergy Philippines, Inc., el al., G.R. No. 206528, June 28, 2016.
“Philippine Bank of Communications v. Basic Polyprinters and Packaging
Corporation, G.R. No. 187581, October 20, 2014.
21BPI Family Savings Bank v. St Michael Medical Center, G.R. No. 205469,
March 25, 2015.
2. FINANCIAL REHABILITATION AND
INSOLVENCY ACT OF 2010
(R.A. NO. 10142) ("FRIA")
18.
449
b.
During the pendency of the rehabilitation, the enforcement
of claims against the debtor are generally suspended - to
give time to the debtor and the Rehabilitation Receiver to
rehabilitate the debtor undistracted by court suits;
C.
The Rehabilitation Plan is binding on the debtor and all
creditors affected by the proceedings even to those who
did not take part or opposed the Rehabilitation Plan
under the cram down effect of the Rehabilitation Plan;
and
d.
National and local taxes are likewise waived until
approval of the Rehabilitation Plan or termination of the
rehabilitation proceedings.
i.
Types
What are the types of rehabilitation proceedings?
The types of rehabilitation proceedings are as follows:
a.
19.
Court-supervised rehabilitation
i.
Voluntary
ii.
Involuntary
b.
Pre-negotiated rehabilitation
c.
Out-of-court or informal restructuring agreement or
Rehabilitation Plan
Who may initiate voluntary rehabilitation proceedings?
When approved by the owner in case of a sole proprietorship,
or by a majority of the partners in case of a partnership, or, in case
of a corporation, by a majority vote of the board of directors or
trustees and authorized by the vote of the stockholders representing
at least two-thirds (2/3) of the outstanding capital stock, or in case
of non-stock corporation, by the vote of at least two-thirds (2/3) of
the members, in a stockholder’s or member’s meeting duly called for
the purpose, an insolvent debtor may initiate voluntary proceedings
under the FRIA by filing a petition for rehabilitation with the court
and on the grounds hereinafter specifically provided. The petition
shall be verified to establish the insolvency of the debtor and the
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viability of its rehabilitation, and include, whether as an attachment
or as part of the body of the petition, as a minimum, the following:
a.
Identification of the debtor, its principal activities and its
addresses;
b.
Statement of the fact of and the cause of the debtor’s
insolvency or inability to pay its obligations as they
become due;
C.
The specific relief sought pursuant to FRIA;
d.
The grounds upon which the petition is based;
e.
Other information that may be required under this Act
depending on the form of relief requested;
f.
Schedule of the debtor’s debts and liabilities including a
list of creditors with their addresses, amounts of claims
and collaterals, or securities, if any;
g-
An inventory of all its assets including receivables and
claims against third parties;
h.
A Rehabilitation Plan;
i.
The names of at least three (3) nominees to the position of
Rehabilitation Receiver; and
j.
Other documents required to be filed with the petition
pursuant to the Act and the rules of procedure as may be
promulgated by the Supreme Court.
A group of debtors may jointly file a petition for rehabilitation
under FRIA when one or more of its members foresee the impossibility
of meeting debts when they respectively fall due, and the financial
distress would likely adversely affect the financial condition and/or
operations of the other members of the group and/or the participation
of the other members of the group is essential under the terms and
conditions of the proposed Rehabilitation Plan.22
20.
Under what conditions may involuntary rehabilitation
proceedings be initiated against an insolvent juridical debtor?
Any creditor or group of creditors with a claim of, or the
aggregate of whose claims is, at least Pl,000,000.00 or at least 25%
of the subscribed capital stock or partners’ contributions, whichever
“Section 12.
2. FINANCIAL REHABILITATION AND
INSOLVENCY ACT OF 2010
(R.A. NO. 10142) (“FRIA”)
451
is higher, may initiate involuntary proceedings against the debtor
by filing a petition for rehabilitation with the court if:
a.
there is no genuine issue of fact or law on the claim/s of the
petitioner/s, and that the due and demandable payments
thereon have not been made for at least 60 days or that
the debtor has failed generally to meet its liabilities as
they fall due; or
b.
a creditor, other than the petitioner/s, has initiated
foreclosure proceedings against the debtor that will
prevent the debtor from paying its debts as they become
due or will render it insolvent.23
The creditor/s’ petition for rehabilitation shall be verified
to establish the substantial likelihood that the debtor may be
rehabilitated, and include:
a.
identification of the debtor, its principal activities and its
address;
b.
the circumstances sufficient to support a petition to
initiate involuntary rehabilitation proceedings under
Section 13 of FRIA; .
C.
the specific relief sought under FRIA;
d.
a Rehabilitation Plan;
e.
the names of at least three (3) nominees to the position of
Rehabilitation Receiver;
f.
other information that may be required under this Act
depending on the form of relief requested; and
g-
other documents required to be filed with the petition
pursuant to FRIA and the rules of procedure as may be
promulgated by the Supreme Court.24
21. When may creditor/s commence involuntary proceedings?
Any creditor or group of creditors with a claim of, or the
aggregate of whose claims is, at least Pl,000,000.00 or at least 25%
of the subscribed capital stock or partners’ contributions, whichever
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“Section 14.
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is higher, may initiate involuntary proceedings against the debtor
by filing a petition for rehabilitation with the court if: (a) there is
no genuine issue of fact on law on the claim/s of the petitioner/s,
and that the due and demandable payments thereon have not been
made for at least 60 days or that the debtor has failed generally to
meet its liabilities as they fall due; or (b) a creditor, other than the
petitioner/s, has initiated foreclosure proceedings against the debtor
that will prevent the debtor from paying its debts as they become
due or will render it insolvent.
22.
Under what conditions may the Rehabilitation Court approve a
pre-negotiated Rehabilitation Plan?
An insolvent debtor, by itself or jointly with any of its creditors,
may file a verified petition with the court for the approval of a pre­
negotiated Rehabilitation Plan which has been endorsed or approved
by creditors holding at least two-thirds (2/3) of the total liabilities
of the debtor, including secured creditors holding more than 50%
of the total secured claims of the debtor and unsecured creditors
holding more than 50% of the total unsecured claims of the debtor.
The petition shall include, as a minimum:
23.
a.
a schedule of the debtor’s debts and liabilities;
b.
an inventory of the debtor’s assets;
C.
the pre-negotiated Rehabilitation Plan, including
the names of at least three (3) qualified nominees for
Rehabilitation Receiver; and
d.
a summary of disputed claims against the debtor and
a report on the provisioning of funds to account for
appropriate payments should any such claims be ruled
valid or their amounts adjusted.26
What is the effect of the approval of the pre-negotiated
Rehabilitation Plan?
The approval of a pre-negotiated Rehabilitation Plan shall
have the same legal effect as confirmation of a Rehabilitation Plan
in a voluntary rehabilitation proceedings.26
“Section 76.
“Section 82.
2. FINANCIAL REHABILITATION AND
INSOLVENCY ACT OF 2010
(R.A. NO. 10142) (“FRIA”)
463
24. What are the requirements for an Out-of-Court or Informal
restructuring agreement or Rehabilitation Plan?
a.
The debtor must agree to the out-of-court or informal
restructuring/workout agreement or Rehabilitation Plan;
b.
It must be approved by creditors representing at least
67% of the secured obligations of the debtor;
c.
It must be approved by creditors representing at least
75% of the unsecured obligations of the debtor; and
d.
It must be approved by creditors holding at least 85% of
the total liabilities, secured and unsecured, of the debtor.27
It means that among the secured and unsecured creditors
and total number of creditors, there is a threshold percentage of
liabilities. The approval is based on the amount of liabilities and not
based on number of creditors.
25. What is a standstill agreement?
It is an agreement by the debtor and the creditors providing
for a standstill period pending negotiation and finalization of the
out-of-court or informal restructuring agreement which is effective
and enforceable not only against the contracting parties but also
against other creditors. Provided, that such agreement is approved
by creditors representing more than 50% of the total liabilities of
the debtor; notice thereof is published in a newspaper of general
circulation in the Philippines once a week for two consecutive
weeks; and the standstill period does not exceed 120 days from the
date of effectivity. The notice must invite creditors to participate
in the negotiation for out-of-court rehabilitation or restructuring
agreement and notify them that said agreement will be binding on
all creditors if the required majority votes are met.28
26. What is the effect of duly approved informal or restructuring/
workout agreement or Rehabilitation Plan?
A restructuring/workout agreement or Rehabilitation Plan
that is approved pursuant to an informal workout framework
referred to above shall have the same legal effect as confirmation
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“Section 85.
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of a Rehabilitation Plan in a court-supervised rehabilitation
proceedings. The notice of the Rehabilitation Plan or restructuring
agreement or Plan shall be published once a week for at least three
(3) consecutive weeks in a newspaper of general circulation in the
Philippines. The Rehabilitation Plan or restructuring agreement
shall take effect upon the lapse of 15 days from the date of the last
publication of the notice thereof.'-9
ii.
27.
Commencement order
What is a Commencement Order?
It is the order that commences the rehabilitation proceedings
which is issued by the Rehabilitation Court after it finds the petition
for rehabilitation as sufficient in form and substance.
The rehabilitation proceedings shall be deemed to have
commenced from the date of filing of the petition, which is also
termed the commencement date.30
The commencement order shall:
a.
identify the debtor, its principal business or activity/ies
and its principal place of business;
b.
summarize the ground/s for initiating the proceedings;
c.
state the relief sought under FRIA and any requirement
or procedure particular to the relief sought;
d.
state the legal effects of the Commencement Order,
including those mentioned in Section 17 hereof;
e.
declare that the debtor is under rehabilitation;
f.
direct the publication of the Commencement Order in a
newspaper of general circulation in the Philippines once
a week for at least two (2) consecutive weeks, with the
first publication to be made within seven (7) days from
the time of its issuance;
g-
if the petitioner is the debtor, direct the service by
personal delivery of a copy of the petition on each creditor
2sSection 86.
“Allied Banking Corporation v. In the Matter of the Petition to Have Steel
Corporation of the Philippines Placed under Corporate Rehabilitation, G.R. No.
191939, March 14, 2018,
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holding at least ten percent (10%) of the total liabilities of
the debtor as determined from the schedule attached to
the petition within five (5) days; if the petitioner/s is/are
creditor/s, direct the service by personal delivery of a copy
of the petition on the debtor within five (5) days;
h.
appoint a Rehabilitation Receiver who may or may not
be from among the nominees of the petitioner/s, and who
shall exercise such powers and duties defined in FRIA as
well as the procedural rules that the Supreme Court will
promulgate;
i.
summarize the requirements and deadlines for creditors
to establish their claims against the debtor and direct all
creditors to file their claims with the court at least five (5)
days before the initial hearing;
j.
direct the Bureau of Internal Revenue (“BIR”) to file
and serve on the debtor its comment on or opposition to
the petition or its claim/s against the debtor under such
procedures as the Supreme Court may hereafter provide;
k.
prohibit the debtor’s suppliers of goods or services from
withholding the supply of goods and services in the
ordinary course of business for as long as the debtor
makes payments for the services or goods supplied after
the issuance of the Commencement Order;
1.
authorize the payment of administrative expenses as they
become due;
m.
set the case for initial hearing, which shall not be more
than 40 days from the date of filing of the petition for
the purpose of determining whether there is substantial
likelihood for the debtor to be rehabilitated;
n.
make available copies of the petition and Rehabilitation
Plan for examination and copying by any interested party;
o.
indicate the location or locations at which documents
regarding the debtor and the proceedings under FRIA
may be reviewed and copied;
P-
state that any creditor or debtor, who is not the petitioner,
may submit the name or nominate any other qualified
person to the position of Rehabilitation Receiver at least
five (5) days before the initial hearing;
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q28.
include a Stay or Suspension Order.31
Should the Commencement Order be served to the creditors
of the insolvent debtor to bind them to the rehabilitation
proceedings?
No. jurisdiction over all persons affected by the rehabilitation
proceedings shall be considered as acquired upon publication of the
notice of the commencement of the proceedings in any newspaper of
general circulation in the Philippines in the manner prescribed by
the rules of procedure promulgated by the Supreme Court.32
29.
What are the effects of a Commencement Order?
Unless otherwise provided for by law, the court’s issuance of a
Commencement Order shall, in addition to the effects of a Stay or
Suspension Order:
a.
vest the Rehabilitation Receiver with all the powers
and functions provided for in FRIA, such as the right
to review and obtain all records to which the debtor’s
management and directors have access, including bank
accounts of whatever nature of the debtor, subject to the
approval by the court of the performance bond filed by the
Rehabilitation Receiver;
b.
prohibit, or otherwise serve as the legal basis for rendering
null and void the results of any extrajudicial activity or
process to seize property, sell encumbered property, or
otherwise attempt to collect on or enforce a claim against
the debtor after the commencement date unless otherwise
allowed in FRIA, subject to the provisions of Section 50
hereof;
c.
serve as the legal basis for rendering null and void any
set-off after the commencement date of any debt owed to
the debtor by any of the debtor’s creditors;
d.
serve as the legal basis for rendering null and void the
perfection of any lien against the debtor’s property after
the commencement date; and
e.
consolidate the resolution of all legal proceedings by and
against the debtor to the court: Provided, however, that
31Section 16.
“Section 3.
r
2. FINANCIAL REHABILITATION AND
INSOLVENCY ACT OF 2010
(R.A. NO. 10142) (“FRIA”)
457
the court may allow the continuation of cases in other
courts where the debtor had initiated the suit.
Attempts to seek legal or other recourse against the debtor
outside these proceedings shall be sufficient to support a finding of
indirect contempt of court.33
Similarly, upon issuance of the Commencement Order,
and until the approval of the Rehabilitation Plan or dismissal of
the petition, whichever is earlier, the imposition of all taxes and
fees, including penalties, interests and charges thereof, due to the
national government or to LGUs shall be considered waived, in
furtherance of the objectives of rehabilitation.34
30. What is the effectivity and duration of the Commencement
Order?
Unless lifted by the court, the Commencement Order shall
be effective for the duration of the rehabilitation proceedings for
as long as there is a substantial likelihood that the debtor will be
successfully rehabilitated.36
The effects of such commencement order shall retroact to the
date that the petition was filed, and renders void any attempt to
collect on or enforce a claim against the debtor or to set off any debt
by the debtor’s creditors, after the commencement date.36
It was held, however, that the retroactive effect of a
Commencement Order only applies to petitions filed after the
effectivity of FRIA. Section 146 of the FRIA, which makes it
applicable to “all further proceedings in insolvency, suspension of
payments and rehabilitation cases x x x except to the extent that
in the opinion of the court their application would not be feasible or
would work injustice,” still presupposes a prospective application.
Thus, the rule that a third-party or accommodation mortgage may
be enjoined if the mortgaged property is needed to rehabilitate the
debtor only applies to mortgage foreclosed during the effectivity of
FRIA.3’
“Section 17.
“Section 19.
“Section 21.
“Allied Banking Corporation v. In the Matter of the Petition to Have Steel
Corporation of the Philippines Placed under Corporate Rehabilitation, ibid.; Section
1(d), FRIA.
AsiaTrust Bank, et al., G.R. No. 180036,
“Situs Dev. Corporation, et al.
January 16, 2013.
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31.
Is court hearing required prior to the issuance of a Stay
Order?
The Interim Rules do not require a hearing before the issuance
of a Stay Order. What it requires is an initial hearing before it can
give due course to or dismiss a petition. Nevertheless, while the
Interim Rules do not require the holding of a hearing before the
issuance of a Stay Order, neither does it prohibit the holding of one.
Thus, the trial court has ample discretion to call a hearing when it
is not confident that the allegations in the petition are sufficient in
form and substance, for so long as this hearing is held within the
five (5)-day period from the filing of the petition — the period within
which a Stay Order may issue as provided in the Interim Rules.35
32.
On February 20,2021, ABC, an insolvent debtor, filed a petition
for rehabilitation. On February 22, 2021, upon learning of
ABC's filing of the petition, XYZ Bank, of the creditors of ABC,
declared the loan of ABC with XYZ due and demandable based
on the terms of the relevant loan agreement. Right after such
declaration, XYZ applied the bank deposit of ABC with the Bank
against ABC's outstanding loan obligation. On February 24,
2021, the court found the petition for rehabilitation sufficient
in form and substance, consequently, issued on the same day
a commencement order. The commencement order, among
others, appointed a Rehabilitation Receiver and included a
stay order which enjoined the enforcement of claims against
ABC. Upon learning of the set-off, the Rehabilitation Receiver
demanded that the set-off should be set-aside arguing that XYZ
cannot collect the loan because of the stay order. XYZ Bank,
in turn, countered that there is no more claim when the stay
order was issued because such claim had been extinguished
on February 22, 2021 and legal set-off took effect by operation
of law.
Should the set-off be nullified?
Yes, the set-off should be nullified. This is because while the
Commencement Order was issued two (2) days after the set-off
of deposit, it retroacted to the date of the filing of the petition for
3“Pryce Corporation v. China Banking Corporation, G.R. No. 172302, February
18, 2014. Although this was decided under the Interim Rules on Corporate Rehabili­
tation, the same principle may be applied under FRIA.
2. FINANCIAL REHABILITATION AND
INSOLVENCY ACT OF 2010
(R.A. NO. 10142) ("FRIA")
459
rehabilitation on February 20, 2021. Thus, the set-off in between
should set aside.
iii.
Stay or Suspension Order
33. What are the effects of a Stay or Suspension Order?
The Stay or Suspension Order shall:
a.
b.
c.
d.
suspend all actions or proceedings, in court or otherwise,
for the enforcement of claims against the debtor;
suspend all actions to enforce any judgment, attachment
or other provisional remedies against the debtor;
prohibit the debtor from selling, encumbering, transferring
or disposing in any manner any of its properties except in
the ordinary course of business; and
prohibit the debtor from making any payment of its
liabilities outstanding as of the commencement date
except as may be provided herein.39
34. What is the rationale of a Stay Order?
A Stay Order is a recognition that all assets of a corporation
under rehabilitation are held in trust for the equal benefit of all
creditors under the doctrine of “equality is equity.” As all the
creditors, secured or unsecured, ought to stand on equal footing, not
any one of them should be paid ahead of others. No creditor should
obtain an advantage or preference over another by the expediency
of foreclosure, attachment, execution or otherwise.40 Furthermore,
the stay order will enable the Rehabilitation Receiver to effectively
exercise its or his powers free from judicial or extrajudicial
interference that might unduly hinder or prevent the “rescue” of
the distressed company, rather than to waste its/his time, effort
and resources in defending claims against the corporation. This is
precisely the reason for suspending all pending claims against the
corporation under receivership. This is also called the “pari passu
principle.”41
Under FRIA, a Stay Order is included in the Commencement
Order.
’’Section 16.
"Negros Navigation Company v. Court of Appeals, G.R. Nos. 163156 and
166845, December 10, 2008, reiterated in Abrera v. Hon. Barza, supra.
41BAR 2006; 2008.
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35.
What claims are suspended by the Stay Order?
Claim shall refer to all claims or demands of whatever nature
or character against the debtor or its property, whether for money or
otherwise, liquidated or unliquidated, fixed or contingent, matured
or unmatured, disputed or undisputed, including, but not limited to:
(1) all claims of the government, whether national or local, including
taxes, tariffs and customs duties; and (2) claims against directors and
officers of the debtor arising from acts done in the discharge of their
functions falling within the scope of their authority: Provided, that,
this inclusion does not prohibit the creditors or third parties from
filing cases against the directors and officers acting in their personal
capacities.4*
36.
PA Assurance (PA) was incorporated in 1980 to engage in
the sale of pre-need educational plans. It sold open-ended
educational plans which guaranteed the payment of tuition
and other fees to planholders irrespective of the cost at the
time of availment. It also engaged in the sale of fixed value
plans which guaranteed the payment of a pre-determined
amount to planholders. In 1982, PA was among the country's
top corporations. However, it subsequently suffered financial
difficulties.
On September 8, 2005, PA filed a Petition for Corporate
Rehabilitation before the RTC of Makati City. On October 17,
2005, 10 plan holders filed an Opposition and Motion to Exclude
Planholders from Stay Order on the ground that planholders are not
creditors as they (planholders) have a trust relationship with PA.
Are the planholders correct?
No. The planholders are not correct. On November 21, 2000,
the Court approved the Interim Rules of Procedure on Corporate
Rehabilitation of 2000 (Interim Rules), which took effect on
December 15, 2000. The Interim Rules apply to petitions for
rehabilitation filed by corporations, partnerships, and associations
pursuant to P.D. No. 902-A, as amended. Under the Interim Rules,
“claim” shall include “all claims or demands of whatever nature or
character against the debtor or its property, whether for money or
otherwise.” “Creditor” shall mean “any holder of a claim.” Hence,
the claim of the planholders from PA is included in the definition of
“claims” under the Interim Rules.43
42Section 4(c).
43BAR 2014.
2. FINANCIAL REHABILITATION AND
INSOLVENCY ACT OF 2010
(R.A. NO. 10142) ("FRIA")
461
37. Cite examples of claims that were enjoined as a result of the
issuance of a Stay Order.
a.
The claim of a passenger against an airline company for
missing luggage is a money claim or a financial demand
that the law requires to be suspended upon issuance of a
Stay Order.44
b.
Unpaid security services.46
C.
Claim under a pre-need educational plan.46
d.
Claims against the distressed corporation whether for
damages founded on a breach of contract of carriage,
collection suits or any other claims of a pecuniary nature.47
e.
Labor claims of employees48 except when filed with the
NLRC, which is a quasi-judicial agency, which upon
determination by the court, is capable of resolving
the claim more quickly, fairly and efficiently than the
court: Provided, that any final and executory judgment
of such agency shall be referred to the court and shall be
treated as a non-disputed claim;49
f.
Loan secured by mortgages.
38, Does the suspension of actions and/or claims cover only cases
pending in court?
No, the suspension of all actions and/or claims against a
corporation under rehabilitation does not only cover cases which are
pending in court. The automatic suspension of an action for claims
embraces all phases of the suit, that is, the entire proceedings of an
action or suit and not just the payment of the claims.“ This Supreme
Court ruling should now be qualified to exclude appeals pending
with the Supreme Court as of commencement date.”
“Philippine Airlines v. Court of Appeals, 389 SCRA 589.
“Veterans Philippine Scout Security Agency, Inc. v. First Dominion Prime
Holdings, Inc., G.R. No. 190907, August 23, 2012.
“Abrera v. Hon. Romeo Barza, G.R. No. 171881, September 11,2009.
"Molina v. Pacific Plans, G.R. No. 165476, August 15, 2011.
“Rubberworld v. NLRC, 336 SCRA 433.
“Section 18(b).
“Ibid.
’’Section 18(a).
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The return of the car subject of the writ of replevin is correct
notwithstanding the pendency of the rehabilitation proceedings.
This is the necessary consequence of the dismissal of the replevin
case for failure to prosecute without prejudice. Upon the dismissal
of the replevin case, the writ of seizure, which is merely ancillary in
nature, became functus officio and should have been lifted. There
was no adjudication on the merits, which means that there was no
determination of the issue who has the better right to possess the
subject car. Returning the seized vehicle is not an enforcement of a
claim against the distressed corporation which must be suspended
by virtue of the Stay Order issued by the Rehabilitation Court. The
issue in a replevin case is who has a better right of possession.
So long as the respondent is not interposing a MONETABY
CLAIM, respondent’s prayer for the return of the car subject of the
replevin suit is not in any way violative of the Rules on Corporate
Rehabilitation.52
Rehabilitation proceedings are summary and non-adversarial
in nature, and do not contemplate adjudication of claims that must
be threshed out in ordinary court proceedings.
The jurisdiction of the Rehabilitation Court is over claims
against the debtor that is under rehabilitation, not over claims by
the debtor against its own debtors or against third parties.
The corporation under rehabilitation must file a separate
action against its debtors/insurers to recover whatever claim it may
have against them.53
39.
ABC Bank extra-judicially foreclosed the real estate mortgage
on the property of XYZ Corporation for non-payment of the loan
secured by the mortgage. The certificate of sale was thereafter
issued. Thereafter, XYZ filed a petition for rehabilitation and
obtained a Stay Order. Will the Stay Order have the effect of
suspending the consolidation of title to the property after
expiration of the redemption period?
Since the foreclosure of the mortgage and the issuance of the
certificate of sale in favor of the mortgagee were done prior to the
“Advent Capital and Medical Corporation v. Young, G.R. No. 183018, August
3, 2011.
“Steel Corporation v. Mapfre Insular Insurance Corporation, G.R. No. 201199,
October 16, 2013.
2. FINANCIAL REHABILITATION AND
INSOLVENCY ACT OF 2010
(R.A. NO. 10142) (“FRIA”)
463
appointment of a Rehabilitation Receiver and the issuance of the
Stay Order, all the actions taken with respect to the foreclosed
mortgage property which were subsequent to the issuance of the
Stay Order were not affected by the Stay Order. Thus, after the
redemption period expired without the mortgagor redeeming the
foreclosed property, the mortgagee becomes the absolute owner of
the property and it was within its right to ask for the consolidation of
title and the issuance of new title in its favor. The writ of possession
procured by the mortgagee despite the subsequent issuance of a stay
order in the rehabilitation proceedings instituted is also vahd.54
However, if the foreclosure of the mortgage or attachment of the
property of the debtor or any enforcement of claim is done between
the filing of the petition and the issuance of the commencement
order, such action on the part of the creditors will be set aside, in
view of the retroactive effect of the commencement order.55
40. Does the issuance of the Commencement Order and the Stay
Order diminish or impair the security or lien of a secured
creditor?
The issuance of the Commencement Order and the Suspension
or Stay Order, and any other provision of this Act, shall not be
deemed in any way to diminish or impair the security or lien of a
secured creditor, or the value of his Hen or security, except that his
right to enforce said security or lien may be suspended during the
term of the Stay Order.56
The court, upon motion or recommendation of the Rehabilitation
Receiver, may allow a secured creditor to enforce his security or hen,
or foreclose upon property of the debtor securing his/its claim, if the
said property is not necessary for the rehabilitation of the debtor.
The secured creditor and/or the other lien holders shall be admitted
to the rehabilitation proceedings only for the balance of his claim,
if any.57
“Equitable PCI Bank v. DNG Realty and Development Corporation. 627
SCRA 125; reiterated in Town and Country Enterprises, Inc. v. Quisumbing, G.R.
No. 173610, October 1, 2012.
“Supra.
“Section 18(b).
“Section 60.
1
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41.
Are the effects of the commencement order and the stay
order on the suspension of rights to foreclose or otherwise
pursue legal remedies applicable to government financial
institutions?
Yes, notwithstanding the provisions in their charters or other
laws to the contrary.48
42.
What cases/instances
Suspension Order?
are
not
covered
by the Stay or
The Stay or Suspension Order shall not apply:
a.
to cases already pending appeal in the Supreme Court
as of commencement date: Provided, that any final and
executory judgment arising from such appeal shall be
referred to the court for appropriate action;69
b.
subject to the discretion of the court, to cases pending or
filed at a specialized court or quasi-judicial agency which,
upon determination by the court, is capable of resolving
the claim more quickly, fairly and efficiently than the
court: Provided, that any final and executory judgment
of such court or agency shall be referred to the court and
shall be treated as a non-disputed claim;“
c.
to the enforcement of claims against sureties and other
persons solidarily liable with the debtor, and third party
or accommodation mortgagors as well as issuers of
letters of credit, unless the property subject of the third
party or accommodation mortgage is necessary for the
rehabilitation of the debtor as determined by the court
upon recommendation by the Rehabilitation Receiver;61
It was held that the issuance of a stay order did not prevent
a Regional Trial Court from acquiring jurisdiction over a
guarantor who has waived the benefit of excussion.62
58Section 20.
“Section 18(a).
“Section 18(b).
61Section 18(c).
“Trade and Investment Development Corporation v. Philippine Veterans
Bank, G.R. No. 233850, July 1, 2019.
2. FINANCIAL REHABILITATION AND
INSOLVENCY ACT OF 2010
(R.A. NO. 10142) (“FR1A")
465
d.
to any form of action of customers or clients of a securities
market participant to recover or otherwise claim moneys
and securities entrusted to the latter in the ordinary
course of the latter’s business as well as any action of
such securities market participant or the appropriate
regulatory agency or self-regulatory organization to pay
or settle such claims or liabilities;63
e.
to the actions of a licensed broker or dealer to sell pledged
securities of a debtor pursuant to a securities pledge
or margin agreement for the settlement of securities
transactions in accordance with the provisions of the
Securities Regulation Code and its implementing rules
and regulations;131
f.
the clearing and settlement of financial transactions
through the facilities of a clearing agency or similar
entities duly authorized, registered and/or recognized
by the appropriate regulatory agency like the Bangko
Sentral ng Pilipinas (BSP) and the SEC as well as any
form of actions of such agencies or entities to reimburse
themselves for any transactions settled for the debtor;66
and
g-
any criminal action against the individual debtor or
owner, partner, director or officer of a debtor shall not be
affected by any proceeding commenced under FRIA.K
It was held that the suspension of claims in corporate
rehabilitation does not extend to criminal actions against
the distressed corporations or its directors and officers.
It would be absurd for one who has engaged in criminal
conduct to escape punishment simply because the
corporation of which he is director or officer filed a petition
for rehabilitation. The prosecution of the officers of the
corporation has no bearing on the pending rehabilitation
of the corporation.67
“Section 18(d).
“Section 18(e).
“Section 18(f).
“Section 18(g).
“Panlilio v. Regional Trial Court, Branch 51, City of Manila, G.R. No. 17384G,
February 2, 2011.
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The stay order shall likewise not cover the payment of
administrative expenses as they become due.™
Similarly, the property' of the surety cannot be taken into
custody b.v the Rehabilitation Receiver.69
43.
ABC Company filed a Petition for Rehabilitation with the Court.
An Order was issued by the Court, (1) staying enforcement of all
claims, whether money or otherwise against ABC Company, its
guarantors and sureties not solidarily liable with the company;
and (2) prohibiting ABC Company from making payments of its
liabilities, outstanding as of the date of the filing of the Petition.
XYC Company is a holder of an irrevocable Standby Letter
of Credit which was previously procured by ABC Company
in favor of XYC Company to secure performance of certain
obligations. In the light of the Order issued by the Court, can
XYC Company still be able to draw on their irrevocable Standby
Letter of Credit when due? Explain your answer.
Yes, as an exception to a Stay or Suspension Order included
in a Commencement Order issued pursuant to the FRIA”. Under
Section 18(c) of FRIA, a Stay or Suspension Order shall not apply
“to the enforcement of claims against sureties and other persons
solidarily liable with the debtor, and third party or accommodation
mortgagors as well as issuers of letters of credit x x x.” Similarly,
assuming that it has not been superseded by the FRIA, Section 7(b) of
the Supreme Court Rules of Procedure on Corporate Rehabilitation
provides that a stay order shall not cover claims against letters of
credit and similar security arrangements issued by a third party to
secure the payment of the debtor’s obligations.
44.
What are the administrative expenses not covered by the Stay
Order?
Administrative expenses shall refer to those reasonable and
necessary expenses:
a.
incurred or arising from the filing of a petition under the
provisions of FRIA;
“Section 16(1).
“MWSS v. Hon. Daway, 432 SCRA 559.
2. FINANCIAL REHABILITATION AND
INSOLVENCY ACT OF 2010
(R.A. NO. 10142) (“FRIA”)
45.
467
b.
arising from, or in connection with, the conduct of the
proceedings under FRIA, including those incurred for the
rehabilitation or liquidation of the debtor;
C.
incurred in the ordinary course of business of the debtor
after the commencement date;
d.
for the payment of new obligations obtained after the
commencement date to finance the rehabilitation of the
debtor;
e.
incurred for the fees of the Rehabilitation Receiver or
liquidator and of the professionals engaged by them; and
f.
that are otherwise authorized or mandated under this Act
or such other expenses as may be allowed by the Supreme
Court in its rules.70
Debtor Corporation and its principal stockholders filed with
the Regional Trial Court a petition for rehabilitation. The
objective was for the RTC to take control of the corporation
and all its assets and liabilities, earnings and operations and
rehabilitating the company for the benefit of investors and
creditors.
Generally, the unsecured creditors had manifested will­
ingness to cooperate with Debtor Corporation. The secured
creditors, however, expressed serious objections and reserva­
tions.
First Bank had already initiated judicial foreclosure
proceedings on the mortgage constituted on the factory of
Debtor Corporation.
Second Bank had already initiated foreclosure proceed­
ings on a third-party mortgage constituted on certain assets
of the principal stockholders.
Third Bank had already filed a suit against the principal
stockholders who had held themselves liable jointly and
severally for the loans of Debtor Corporation with said Bank.
After examining the petition, the Rehabilitation Court
directed the appointment of a Rehabilitation Receiver and
I
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issued a Commencement Order which included a Stay Order.
The Stay Order directed the suspension of all actions and
claims against the Debtor Corporation as well as against the
principal stockholders.
a.
Discuss the validity of the RTC order of suspension.
b.
Discuss the effects of the RTC order of suspension on the
judicial foreclosure proceedings initiated by First Bank.
c.
Would the order of suspension have any legal effect on
the foreclosure proceedings initiated by Second Bank?
Explain.
d.
Would the order of suspension have any effect on the suit
filed by Third Bank? Explain.
e.
What measures may the receiver take to preserve the
assets of Debtor Corporation?
Answers:
a.
The RTC Order of Suspension of Payments is valid with
respect to the debtor corporation, but not with respect
to the principal stockholders. Group filing of petition for
rehabilitation is allowed only if the debtors refer to: (1)
corporations that are financially related to one another
as parent corporations, subsidiaries or affiliates; (2)
partnerships that are owned more than 50% by the same
person; and (3) single proprietorships that are owned by
the same person.”
b.
The RTC Order of Suspension of Payments suspended
the judicial proceedings initiated by First Bank. Under
the principle of equality is equity, all creditors, secured or
unsecured, stand in equal footing. Thus, the Suspension
Order applies to secured creditors and to the action to
enforce the security against the corporation regardless of
the stage thereof.
c.
Under Section 18 of FRIA, the Suspension Order shall not
apply to the enforcement of claims against sureties and
other persons solidarily liable with the debtor, and third
’’Section 4(n).
2. FINANCIAL REHABILITATION AND
INSOLVENCY ACT OF 2010
(R.A. NO. 10142) (“FRIA”)
469
party or accommodation mortgagors as well as issuers of
letter of credit, unless the property subject of the third
party or accommodation mortgage is necessary for the
rehabilitation of the debtor as determined by the court
upon the recommendation of the Rehabilitation Receiver.
Whether or not the suspension order then will stay the
foreclosure of the Second Bank will depend on whether the
mortgaged properties are needed for the rehabilitation of
the Debtor Corporation.
d.
For the same reason as in (c), the Order of Suspension
of Payments does not cover the suit filed by Third Bank
against the principal stockholders.
e.
To preserve the assets of the Debtor Corporation, the
receiver may take custody of, and control over, all the
existing assets and property of the corporation; evaluate
existing assets and liabilities, earnings and operations of
the corporation; and determine the best way to salvage
and protect the interest of the investors and creditors.72
46. Is the issuance of a Stay Order (as part of the Commencement
Order) appealable?
No, the effectivity period of a Stay Order is only “from the date
of its issuance until dismissal of the petition or termination of the
rehabilitation proceedings.” It is not a final disposition of the case. It
is an interlocutory order defined as one that «does not finally dispose
of the case, and does not end the Court’s task of adjudicating the
parties’ contentions and determining then- rights and liabilities as
regards each other, but obviously indicates that other things remain
to be done by the Court.”73
As such, the order is not appealable.
iv.
Rehabilitation Receiver
47. Who is a Rehabilitation Receiver?
Rehabilitation Receiver shall refer to the person or persons,
natural or juridical, appointed as such by the court pursuant to the
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721999 Bar Exam but modified and answered based on FRIA.
,3Pryce Corporation, supra.
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provisions of FRIA and which shall be entrusted with such powers
and duties as set forth in the law.74
Who may serve as a Rehabilitation Receiver?
48.
Any qualified natural or juridical person may serve as a
Rehabilitation Receiver: Provided, that if the Rehabilitation
Receiver is a juridical entity, it must designate a natural person/s
who possess/es all the qualifications and none of the disqualifications
as its representative, it being understood that the juridical entity
and the representative/s are solidarity liable for all obligations and
responsibilities of the Rehabilitation Receiver.76
49.
What are the powers, duties and responsibilities of the
Rehabilitation Receiver?
The Rehabilitation Receiver shall be deemed an officer of
the court with the principal duty of preserving and maximizing
the value of the assets of the debtor during the rehabilitation
proceedings, determining the viability of the rehabilitation of the
debtor, preparing and recommending a Rehabilitation Plan to the
court, and implementing the approved Rehabilitation Plan. To
this end, and without limiting the generality of the foregoing, the
Rehabilitation Receiver shall have the following powers, duties and
responsibilities:
a.
To verify the accuracy of the factual allegations in the
petition and its annexes;
b.
To verify and correct, if necessary, the inventory of all of
the assets of the debtor, and their valuation;
c.
To verify and correct, if necessary, the schedule of debts
and liabilities of the debtor;
d.
To evaluate the validity, genuineness and true amount of
all the claims against the debtor;
e.
To take possession, custody and control, and to presene
the value of all the property of the debtor;
f.
To sue and recover, with the approval of the court, all
amounts owed to, and all properties pertaining to the
debtor;
’’Section 4(hh).
’^Section 28.
2. FINANCIAL REHABILITATION AND
INSOLVENCY ACT OF 2010
(R.A. NO. 10142) (“FRIA”)
471
g-
To have access to all information necessary, proper or
relevant to the operations and business of the debtor and
for its rehabilitation;
h.
To sue and recover, with the approval of the court, all
property or money of the debtor paid, transferred or
disbursed in fraud of the debtor or its creditors, or which
constitute undue preference of creditor/s;
i.
To monitor the operations and the business of the debtor
to ensure that no payments or transfers of property are
made other than in the ordinary course of business;
j.
With the court’s approval, to engage the services of or to
employ persons or entities to assist him in the discharge
of his functions;
k.
To determine the manner by which the debtor may be
best rehabilitated, to review, revise and/or recommend
action on the Rehabilitation Plan and submit the same or
a new one to the court for approval;
1.
To implement the Rehabilitation Plan as approved by the
court, if so provided under the Rehabilitation Plan;
m.
To assume and exercise the powers of management of
the debtor, if directed by the court pursuant to Section 36
hereof;
n.
To exercise such other powers as may, from time to time,
be conferred upon him by the court; and
o.
To submit a status report on the rehabilitation proceed­
ings every quarter or as may be required by the court
motu proprio, or upon motion of any creditor, or as may
be provided, in the Rehabilitation Plan.
Unless appointed by the court, pursuant to Section 36 hereof,
the Rehabilitation Receiver shall not take over the management
and control of the debtor but may recommend the appointment of
a management committee over the debtor in the cases provided by
law.’6
■
’'Section 31.
i
i
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50.
Is the court bound by the report of the Rehabilitation
Receiver?
No. The determination of the validity and the approval of the
rehabilitation plan is not the responsibility of the Rehabilitation
Receiver, but remains the function of the court. The Rehabilitation
Receiver’s duty prior to the court’s approval of the plan is to study
the best way to rehabilitate the debtor, and to ensure that the
value of the debtor’s properties is reasonably maintained; and after
approval, to implement the Rehabilitation Plan. Notwithstanding
the credentials of the court-appointed Rehabilitation Receiver, the
duty to determine the feasibility of the rehabilitation of the debtor
rests with the court. While the court may consider the receiver’s
report favorably recommending the debtor’s rehabilitation, it is not
bound thereby if, in its judgment, the debtor’s rehabilitation is not
feasible.”
Management Committee
51.
When may the court appoint a Management Committee?
Upon motion of any interested party, the court may appoint a
Management Committee that will undertake the management of the
debtor, upon clear and convincing evidence of any of the following
circumstances:
52.
a.
Actual or imminent danger of dissipation, loss, wastage
or destruction of the debtor’s assets or other properties;
b.
Paralyzation of the business operations of the debtor; or
c.
Gross mismanagement of the debtor, or fraud or other
wrongful conduct on the part of, or gross or willful
violation of FRIA by, existing management of the debtor
or the owner, partner, director, officer or representative/s
in management of the debtor.’8
What is the role of the Management Committee?
When appointed pursuant to the foregoing section, the
management committee shall take the place of the management
’’Philippine Asset Growth Two, Inc. and Planters Development Bank v.
Fastech Synergy Philippines, Inc., et al., G.R. No. 206528, June 28, 2016.
’“Section 36.
2. FINANCIAL REHABILITATION AND
INSOLVENCY ACT OF 2010
(R.A. NO. 10142) (“FRIA”)
473
and the governing body of the debtor and assume their rights and
responsibilities.
The specific powers and duties of the management committee,
whose members shall be considered as officers of the court, shall be
prescribed by the procedural rules.79
53,
Does the act of the corporation in waiving its option to lease a
property without receiving any consideration therefor resulting
in lost income constitute a valid ground for the appointment of
a Receiver or a Management Committee?
Applicants for the appointment of a Receiver or Management
Committee need to establish the confluence of these two requisites.
This is because appointed Receivers and Management Committees
will immediately take over the management of the corporation and
will have the management powers specified in law. This may have a
negative effect on the operations and affairs of the corporation with
third parties, as persons who are more familiar with its operations
are necessarily dislodged from their positions in favor of appointees
who are strangers to the corporation’s operations and affairs.
The act of the corporation in waiving its option to lease a
property without receiving any consideration therefor resulting in
lost income in the form of goodwill money and rental payments is
enough to constitute loss or dissipation of assets.
YYao an
ivuoyvnuviiv, however, icinuu
oiiv/vv that
an
uiLdb there
LliULC was
iv show
failed to
Respondent,
imminent danger of paralysis of the corporation’s business
operations. He, therefore, failed to show at least one of the requisites
for appointment of a Receiver or Management Committee.80
vi.
54.
Rehabilitation Plan
What is a Rehabilitation Plan?
Rehabilitation Plan shall refer to a plan by which the financial
well-being and viability of an insolvent debtor can be restored
using various means including, but not limited to, debt forgiveness,
debt rescheduling, reorganization or quasi-reorganization, dacion
m pago, debt-equity conversion and sale of the business (or parts
79Section 37.
“Alfredo Villamor, Jr. v. John Umale, G.R. Nos. 172834 and 172881, September
24,2014.
!
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of it) as a going concern, or setting-up of new business entity as
prescribed in Section 62 of FRIA, or other similar arrangements as
may be approved by the court or creditors.81
55.
What are the contents of a Rehabilitation Plan?
The Rehabilitation Plan shall, as a minimum:
a.
specify the underlying assumptions, the financial goals
and the procedures proposed to accomplish such goals;
b.
compare the amounts expected to be received by the
creditors under the Rehabilitation Plan with those that
they' will receive if liquidation ensues within the next 120
days;
c.
contain information sufficient to give the various classes
of creditors a reasonable basis for determining whether
supporting the Plan is in their financial interest when
compared to the immediate liquidation of the debtor,
including any reduction of principal interest and penalties
payable to the creditors;
d.
establish classes of voting creditors;
e.
establish subclasses of voting creditors if prior approval
has been granted by the court;
f.
indicate how the insolvent debtor will be rehabilitated
including, but not limited to, debt forgiveness, debt
rescheduling, reorganization or quasi-reorganization,
dacion en pago, debt-equity conversion and sale of the
business (or parts of it) as a going concern, or setting-up
of a new business entity or other similar arrangements as
may be necessary to restore the financial well-being and
viability of the insolvent debtor;
g-
specify the treatment of each class or subclass described
in subsections (d) and (e);
h.
provide for equal treatment of all claims within the same
class or subclass, unless a particular creditor voluntarily
agrees to less favorable treatment;
“‘Section 4(ii).
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2. FINANCIAL REHABILITATION AND
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475
i.
ensure that the payments made under the plan follow
the priority established under the provisions of the Civil
Code on concurrence and preference of credits and other
applicable laws;
j-
maintain the security interest of secured creditors and
preserve the liquidation value of the security unless such
has been waived or modified voluntarily;
k.
disclose all payments to creditors for pre-commencement
debts made during the proceedings and the justifications
thereof;
1.
describe the disputed claims and the provisioning of funds
to account for appropriate payments should the claim be
ruled valid or its amount adjusted;
m.
identify the debtor’s role in the implementation of the
Plan;
n.
state any rehabilitation covenants of the debtor, the
breach of which shall be considered a material breach of
the Plan;
o.
identify those responsible for the future management
of the debtor and the supervision and implementation
of the Plan, their affiliation with the debtor and their
remuneration;
P-
address the treatment of claims arising after the
confirmation of the Rehabilitation Plan;
q-
require the debtor and its counter-parties to adhere to
the terms of all contracts that the debtor has chosen to
confirm;
r.
arrange for the payment of all outstanding administrative
expenses as a condition to the Plan’s approval unless such
condition has been waived in writing by the creditors
concerned;
s.
arrange for the payment of all outstanding taxes and
assessments, or an adjusted amount pursuant to a
compromise settlement with the BIR or other applicable
tax authorities;
t.
include a certified copy of a certificate of tax clearance or
evidence of a compromise settlement with the BIR;
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DIVINA ON COMMERCIAL LAW:
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U.
include a valid and binding resolution of a meeting of
the debtor’s stockholders to increase the shares by the
required amount in cases where the Plan contemplates
an additional issuance of shares by the debtor;
V.
state the compensation and status, if any, of the
Rehabilitation Receiver after the approval of the Plan;
and
w.
contain provisions for conciliation and/or mediation
as a prerequisite to court assistance or intervention in
the event of any disagreement in the interpretation or
implementation of the Rehabilitation Plan.82
What are the characteristics of an economically feasible
Rehabilitation Plan?
In the case of Viva Shipping Lines, Inc. v. Keppel Philippines
Mining, Inc., the Court took note of the characteristics of an
economically feasible Rehabilitation Plan.
a.
The debtor has assets that can generate more cash if used
in its daily operations than if sold.
b.
Liquidity issues can be addressed by a practicable
business plan that will generate enough cash to sustain
daily operations.
c.
The debtor has a definite source of financing for the proper
and full implementation of a Rehabilitation Plan that is
anchored on realistic assumptions and goals.
The Court upheld the dismissal of petitioner’s Rehabilitation
Plan because its assets are non-performing; its vessels were no
longer serviceable which reduces the probability that rehabilitation
may restore and reinstate petitioner to its former position of
successful operation and solvency; and, the plan of selling properties
of petitioner’s sister company to generate cash flow cannot be a basis
for the approval of the Rehabilitation Plan because the plan still
requires the conformity from the sister company and even if the two
companies have the same directorship and ownership, they are still
two separate juridical entities.88
“Section 62.
“Viva Shipping Lines, Inc. v. Keppel Philippines Mining, Inc., G.R. No. 177382,
February 17,2016.
2. FINANCIAL REHABILITATION AND
INSOLVENCY ACT OF 2010
(R.A. NO. 10142) ("FRIA")
The Court also enumerated
Rehabilitation Plan that is infeasible:
57.
the
characteristics
477
of a
a.
the absence of a sound and workable business plan;
b.
baseless and unexplained assumptions, targets and goals;
c.
speculative capital infusion or complete lack thereof for
the execution of the business plan;
d.
cash flow cannot sustain daily operations; and
e.
negative net worth and the assets are near full depreciation
or fully depreciated.84
What does liquidation analysis, as an integral part of the
Rehabilitation, mean?
It means that the Rehabilitation Plan should contain any
analysis showing that given the various stakeholders of the insolvent
debtor-shareholders, creditors, the state, it is better to rehabilitate
the debtor than to carry out its liquidation and that the present
value recovery is better if the debtor continues as a going concern
than if the debtor is to go under liquidation within 120 days from
filing of the petition.
Present value recovery acknowledges that, in order to pave way
for rehabilitation, the creditor will not be paid by the debtor when
the credit falls due. The court may order a Suspension of Payments
to set a Rehabilitation Plan in motion; in the meantime, the creditor
remains unpaid. By the time the creditor is paid, the financial and •
economic conditions will have been changed. Money paid in the past
has a different value in the future. It is unfair if the creditor merely
receives the face value of the debt. Present value of the credit takes
into account the interest that the amount of money would have
earned if the creditor were paid on time.86
58.
What does material financial commitment mean as a condition
for the approval of the Rehabilitation Plan?
The failure of the Rehabilitation Plan to state any material
financial commitment to support rehabilitation, as well as to include
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a liquidation analysis, translates to the conclusion that the RTC’s
stated considerations for approval, are actually unsubstantiated,
and hence, insufficient to decree the debtor’s rehabilitation.
A material financial commitment gauges the resolve,
determination, earnestness and good faith of the distressed
corporation in financing the proposed Rehabilitation Plan. The
commitment may include the voluntary undertakings of the
stockholders or the would-be investors of the debtor indicating their
readiness, willingness and ability to contribute funds or property to
guarantee the continued successful operation of the debtor during
the period of rehabilitation. As case law intimates, nothing short
of legally binding investment commitment/s from third parties is
required to qualify as a material financial commitment.86
The following cases are illustrative.
a.
The Rehabilitation Plan should be denied if the debtor
avers that it will not require the infusion of additional
capital but only proposes to have all accrued penalties,
charges and interest waived and reduced interest rate
prospectively applied to all its obligations without any
concrete plan to build on debtor’s beleaguered financial
position through substantial investment. Anathema
to the true purpose of rehabilitation, a distressed
corporation cannot be restored to its former position
of successful operation and regain solvency by the sole
strategy of delaying payments/waiving accrued interests
and penalties at the expense of the creditors.87
b.
The Rehabilitation Plan should be dismissed if the only
proposed source of revenue the plan suggests is the
capital which would come from the company’s potential
investors, which negotiations are merely pending.88
c.
A commitment to add working capital appeared to be
doubtful considering that the insurance claim from
“BPI Family Savings Bank v. St. Michael Medical Center, Inc., G.R. No. 205469,
March 25, 2015.
87Philippine Asset Growth Two v. Fastech Synergy Philippines, G.R. No. 206528,
June 28,2016.
“BPI Family Savings Bank v. St. Michael Medical Center, G.R. No. 205469,
March 25, 2015.
2. FINANCIAL REHABILITATION AND
INSOLVENCY ACT OF 2010
(R.A. NO, 10142) (“FRIA”)
479
which said working capital would be sourced had already
been written-off and a claim that has been written-off is
considered a bad debt or a worthless asset, and cannot be
deemed a material financial commitment for purposes of
rehabilitation.89
59,
d.
A proposal to enter into the dacion. en. pago to create a
source of “fresh capital” is also not feasible because the
object thereof would not be its own property but one
belonging to its affiliate, a corporation also undergoing
rehabilitation.80
e.
At Rehabilitation Plan which is heavily, if not completely
predicated on speculative business proposals as well as
the contingent entry of the potential foreign investor lacks
the requirement of material financial commitment.91
What are the effects of the confirmation by the court of the
Rehabilitation Plan?
The confirmation of the Rehabilitation Plan by the court shall
result in the following:
a.
The Rehabilitation Plan and its provisions shall be
binding upon the debtor and all persons who may be
affected by it, including the creditors, whether or not such
persons have participated in the proceedings or opposed
the Rehabilitation Plan or whether or not their claims
have been scheduled;
b.
The debtor shall comply with the provisions of the
Rehabilitation Plan and shall take all actions necessary
to carry out the Plan;
c.
Payments shall be made to the creditors in accordance
with the provisions of the Rehabilitation Plan;
d.
Contracts and other arrangements between the debtor
and its creditors shall be interpreted as continuing to
“Philippine Bank of Communication v. Basic Polyprinters, supra.
"Ibid.
’'Metropolitan Bank and Trust Co. v. Fortuna Paper Mill & Packaging Corpo­
ration, G.R. No. 190800, November 7, 2018
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apply to the extent that they do not conflict with the
provisions of the Rehabilitation Plan;
e.
Any compromises on amounts or rescheduling of timing
of payments by the debtor shall be binding on creditors
regardless of whether or not the Plan is successfully
implemented; and
f.
Claims arising after approval of the Plan that are
otherwise not treated by the Plan are not subject to any
Suspension Order.
The Order confirming the Plan shall comply with Rule 36 of
the Rules of Court: Provided, however, that the court may maintain
jurisdiction over the case in order to resolve claims against the
debtor that remain contested and allegations that the debtor has
breached the Plan.92
60.
When may the rehabilitation proceedings be terminated?
The rehabilitation proceedings under Chapter II shall,
upon motion by any stakeholder or the rehabilitation receiver,
be terminated by order of the court either declaring a successful
implementation of the Rehabilitation Plan or a failure of
rehabilitation.
There is failure of rehabilitation in the following cases:
a.
Dismissal of the petition by the court;
b.
The debtor fails to submit a Rehabilitation Plan;
c.
Under the Rehabilitation Plan submitted by the debtor,
there is no substantial likelihood that the debtor can be
rehabilitated within a reasonable period;
d.
The Rehabilitation Plan or its amendment is approved by
the court but in the implementation thereof, the debtor
fails to perform its obligations thereunder, or there is a
failure to realize the objectives, targets or goals set forth
therein, including the timelines and conditions for the
settlement of the obligations due to the creditors and
other claimants;
“Section 69.
r
2. FINANCIAL REHABILITATION AND
INSOLVENCY ACT OF 2010
(R.A. NO. 10142) (“FRIA")
61.
481
e.
The commission of fraud in securing the approval of the
Rehabilitation Plan or its amendment; and
f.
Other analogous circumstances as may be defined by the
rules of procedure.93
What are the results of the termination of the rehabilitation
proceedings?
Termination of the proceedings shall result in the following:
a.
The discharge of the Rehabilitation Receiver, subject to
his submission of a final accounting; and
b.
The lifting of the Stay Order and any other court order
holding in abeyance any action for the enforcement of a
claim against the debtor.
Provided, however, that if the termination of proceedings is due
to failure of rehabilitation or dismissal of the petition for reasons
other than technical grounds, the proceedings shall be immediately
converted to liquidation.94
vii. Cram-down effect
62. What is the Cram-down clause of a Rehabilitation Plan?
This means that a Rehabilitation Plan may be approved
by the Court even over the opposition of the creditors holding a
majority of the corporation’s total liabilities if there is a showing
that rehabilitation is feasible and the opposition of the creditors is
manifestly unreasonable. Also known as the “cram-down” clause, this
provision, which is currently incorporated in the FRIA, is necessary
to curb the majority creditors’ natural tendency to dictate their own
terms and conditions to the rehabilitation, absent due regard to
the greater long-term benefit of all stakeholders. Otherwise stated,
it forces the creditors to accept the terms and conditions of the
Rehabilitation Plan, preferring long-term viability over immediate
but incomplete recovery.96
“Section 74.
“Section 75.
“Bank of the Philippine Islands v. Sarabia Manor Hotel Corporation, G.R.
No. 175844, July 29, 2013.
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63.
Sarabia is a corporation engaged in the business of owning,
leasing, managing and/or operating hotels. It obtained loans
from Far East Bank and Trust Company (FEBTC) in order to
finance the construction of a five (5)-storey hotel building (New
Building) for the purpose of expanding its hotel business. The
foregoing debts were secured by real estate mortgages over
several parcels of land owned by Sarabia and a comprehensive
surety agreement signed by its stockholders. By virtue of a
merger. Bank of the Philippine Islands (BPI) assumed all of
FEBTC's rights against Sarabia.
Largely because of the delayed completion of the New
Building, Sarabia incurred various cash flow problems.
Thus, despite the fact that it had more assets than liabilities
at that time, it, nevertheless, filed a Petition] for corporate
rehabilitation.
After hearing, the RTC rendered judgment approving
the Rehabilitation Plan which was affirmed by the Court of
Appeals. BPI filed the petition with the Supreme Court. BPI
mainly argues that the approved Rehabilitation Plan did not
give due regard to its interests as a secured creditor in view
of the imposition of a fixed interest rate of 6.75% p.a. and the
extended loan repayment period.
May the Rehabilitation Plan be approved and implemented
despite the objection of BPI?
Yes, based on the Rehabilitation Receiver’s report, Sarabia
has the financial capability to undergo rehabilitation; it has the
ability to have sustainable profits over a long period of time and the
interests of its creditors are well-protected. Therefore, based on the
above-stated reasons, the Court finds Sarabia’s rehabilitation to be
feasible.
While the Rehabilitation Court shall consider certain incidents
in determining whether the opposition is manifestly unreasonable,
BPI neither proposes Sarabia’s liquidation over its rehabilitation
nor questions the controlling interest of Sarabia’s shareholders or
owners. Il only takes exception to: (a) the imposition of the fixed
interest rate of 6.75% p.a. as recommended by the Receiver and as
approved by the courts a quo, proposing that the original escalating
interest rates of 7%, 8%, 10%, 12%, and 14%, over 17 years be
r
2. FINANCIAL REHABILITATION AND
INSOLVENCY ACT OF 2010
(R.A. NO. 10142) ("FKIA”)
483
applied instead. It must be pointed out that oppositions which push
for high interest rates are generally frowned upon in rehabilitation
proceedings given that the inherent purpose of a rehabilitation is
to find ways and means to minimize the expenses of the distressed
corporation during the rehabilitation period. It is the objective of
a rehabilitation proceeding to provide the best possible framework
for the corporation to gradually regain or achieve a sustainable
operating form. Hence, if a creditor, whose interests remain wellpreserved under the existing Rehabilitation Plan, still declines
to accept interests pegged at reasonable rates during the period
of rehabilitation, and, in turn, proposes rates which are largely
counter-productive to the rehabilitation, then it may be said that
the creditor’s opposition is manifestly unreasonable.
In this case, the Court finds BPI’s opposition on the approved
interest rate to be manifestly unreasonable considering that: (a)
the 6.75% p.a. interest rate already constitutes a reasonable rate of
interest which is concordant with Sarabia’s projected rehabilitation;
and (b) on the contrary, BPI’s proposed escalating interest rates
remain hinged on the theoretical assumption of future fluctuations
in the market, this notwithstanding the fact that its interests as a
secured creditor remain well-preserved.
In another case, the Court upheld a Rehabilitation Plan,
including those terms which its creditors had found objectionable,
namely, the 50% “haircut” reduction of the principal obligations and
the condonation of accrued interests and penalty charges. There
is nothing unreasonable or onerous about the 50% reduction of
the principal amount when, as found by the court a quo, a Special
Purpose Vehicle (SPV) acquired the credits of the debtor from its
creditors at deep discounts of as much as 85%. Meaning, the debtor’s
creditors accepted only 15% of their credit’s value. Stated otherwise,
if the debtor’s creditors are in a position to accept 15% of their
credit’s value, with more reason that they should be able to accept
50% thereof as full settlement by their debtor.96
While the voice and participation of the creditors is crucial in
the determination of the viability of the Rehabilitation Plan, as they
“Puerto Azul Land v. Pacific Wide Realty Development Corporation, G.R. No.
184000, September 17, 2014.
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stand to benefit or suffer in the implementation thereof, the interest
of all stakeholders is the ultimate and prime consideration.9’
d.
64.
Liquidation
What is the objective of liquidation of juridical debtors?
To resolve and adjust competing claims and property rights of
the creditors and the debtor, maximize asset recovery of the debtor
and equitably distribute the debtor’s properties to the creditors
based on the rules on concurrence and preference of credit.
65.
What is the objective of voluntary liquidation of an individual
debtor?
The objective is to be discharged from his obligations and to
start afresh.
i.
66.
Types
What are the types of liquidation proceedings?
Liquidation proceedings may be voluntary or involuntary.
Voluntary liquidation is initiated by the insolvent debtor
whereas involuntary liquidation is commenced by the creditor/s of
the insolvent debtor.
67.
Distinguish voluntary from involuntary liquidation of individual
debtors.
In voluntary liquidation, it is the debtor himself who files the
petition for insolvency, while in involuntary liquidation, a creditor
or group of creditors are the ones who file the petition for liquidation
against the insolvent debtor.
In voluntary liquidation, the filing of the petition is by itself
the act of insolvency whereas in involuntary liquidation filed by
creditor/s against the individual, the latter must have committed an
act of insolvency.
’’Marilyn Victorio-Aquino v. Pacific Plans, Inc. and Mamerto A. Marcelo, Jr.
(Court-Appointed Rehabilitation Receiver of Pacific Plans, Inc.), G.R. No. 193108,
December 10, 2014.
A
2. FINANCIAL REHABILITATION AND
INSOLVENCY ACT OF 2010
(R.A. NO. 10142) ("FRIA”)
485
The required amount of debt for the debtor to file the petition
for voluntary liquidation should exceed P500,000 whereas in
involuntary liquidation, the creditor/s claims should be at least
P500,000.
68. Distinguish
Payments.
Petition for Liquidation from Suspension of
The distinctions are as follows:
In Liquidation, the liabilities of the debtor are more than his
assets, while in Suspension of Payments, assets of the debtor are
more than his liabilities but that the debtor foresees the impossibility
of paying his debts as they fall due.
In Liquidation, the assets of the debtor are to be converted into
cash for distribution among his creditors, while in Suspension of
Payments, the debtor is only asking for time within which to convert
his frozen assets into liquid cash with which to pay his obligations
when the latter fall due.
There is discharge in Voluntary Liquidation of individual
debtor but there is no discharge in Suspension of Payments.
The court order in Petition for Suspension of Payments does
not include secured creditors whereas in Petition for Liquidation,
foreclosure proceedings shall not be allowed for a period of 180 days
from issuance of the Liquidation Order.
69. Under what conditions may an insolvent juridical debtor file a
petition for Voluntary Liquidation?
A juridical insolvent debtor may apply for liquidation by
filing a Petition for Liquidation with the court. The petition shall
be verified, shall establish the insolvency of the debtor and shall
contain, whether as an attachment or as part of the body of the
petition:
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a.
a schedule of the debtor’s debts and liabilities including
a list of creditors with their addresses, amounts of claims
and collaterals, or securities, if any;
b.
an inventory of all its assets including receivables and
claims against third parties; and
c.
the names of at least three (3) nominees to the position of
liquidator.
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•186
At any time during the pendency of court-supervised or pre­
negotiated rehabilitation proceedings, the debtor may also initiate
liquidation proceedings by filing a motion in the same court
where the rehabilitation proceedings are pending to convert the
rehabilitation proceedings into liquidation proceedings. The motion
shall be verified, shall contain or set forth the same matters required
in the preceding paragraph, and state that the debtor is seeking
immediate dissolution and termination of its corporate existence.
If the petition or the motion, as the case may be, is sufficient
in form and substance, the court shall issue a Liquidation Order.®
70.
Under what conditions may the creditors of a juridical insolvent
debtor file a Petition for Involuntary Liquidation?
Three (3) or more creditors the aggregate of whose claims is at
least either Pl,000,000.00 or at least 25% of the subscribed capital
stock or partner’s contributions of the debtor, whichever is higher,
may apply for and seek the liquidation of an insolvent debtor by
filing a petition for liquidation of the debtor with the court. The
petition shall show that:
a.
there is no genuine issue of fact or law on the claim/s of the
petitioner/s, and that the due and demandable payments
thereon have not been made for at least 180 days or that
the debtor has failed generally to meet its liabilities as
they fall due; and
b.
there is no substantial likelihood that the debtor may be
rehabilitated.
At any time during the pendency of or after a Rehabilitation
Court supervised or pre-negotiated rehabilitation proceedings, three
(3) or more creditors whose claims is at least either Pl,000,000.00
or at least 25% of the subscribed capital or partner’s contributions
of the debtor, whichever is higher, may also initiate liquidation
proceedings by filing a motion in the same court where the
rehabilitation proceedings are pending to convert the rehabilitation
proceedings into liquidation proceedings. The motion shall be
verified, shall contain or set forth the same matters required in the
preceding paragraph, and state that the movants are seeking the
immediate liquidation of the debtor.
“Section 90.
2. FINANCIAL REHABILITATION AND
INSOLVENCY ACT OF 2010
(R.A. NO. 10142) ("FRIA”)
487
If the petition or motion is sufficient in form and substance, the
court shall issue an Order:
a.
directing the publication of the petition or motion in a
newspaper of general circulation once a week for two (2)
consecutive weeks; and
b.
directing the debtor and all creditors who are not the
petitioners to file their comment on the petition or motion
within 15 days from the date of last publication.
If, after considering the comments filed, the court determines
that the petition or motion is meritorious, it shall issue the
Liquidation Order."
71.
Is the issuance of an order, declaring a petitioner in a Voluntary
liquidation proceeding insolvent, mandatory upon the court?
Assuming that the petition was in due form and substance and
that the assets of the petitioner are less than his liabilities, the court
must adjudicate the insolvency.100
ii.
Conversion of rehabilitation to liquidate proceed­
ings
72. When may the court convert Rehabilitation proceedings to
Liquidation proceedings?
During the pendency of court-supervised or pre-negotiated
rehabilitation proceedings, the court may order the conversion of
rehabilitation proceedings to liquidation proceedings pursuant
to: (a) Section 25(c) of the Act; or (b) Section 72 of the Act; or (c)
Section 75 of the Act; or (d) Section 90 of the Act; or at any other
time upon the recommendation of the Rehabilitation Receiver that
the rehabilitation of the debtor is not feasible. Thereupon, the court
shall issue the Liquidation Order.101
Specifically, the court may convert the rehabilitation proceed­
ings to liquidation proceedings in the following cases:
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a.
Within ten (10) days from receipt of the report of the
Rehabilitation Receiver, the court may convert the
"Section 91.
100BAR 1991.
I01Section 92.
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proceedings into one for the liquidation of the debtor upon
a finding that:
i.
the debtor is insolvent; and
ii.
there is no substantial likelihood for the debtor to
be successfully rehabilitated as determined in accor­
dance with the rules promulgated by the Supreme
Court.102
b.
If no Rehabilitation Plan is confirmed within a maximum
period of one year from date of filing of the petition,
the proceedings may, upon motion or motu propria, be
converted into one for the liquidation of the debtor.'03
c.
Termination of proceedings due to failure of rehabilitation
or dismissal of the petition for reasons other than technical
grounds, in which case the rehabilitation proceedings
shall be immediately converted to liquidation.'04
d.
At any time during the pendency of court-supervised or
pre-negotiated rehabilitation proceedings, the debtor may
also initiate liquidation proceedings by filing a motion in
the same court where the rehabilitation proceedings are
pending to convert the rehabilitation proceedings into
liquidation proceedings. The motion shall be verified,
shall contain or set forth the same matters required in the
preceding paragraph, and state that the debtor is seeking
immediate dissolution and termination of its corporate
existence.
If the petition or the motion, as the case may be, is
sufficient in form and substance, the court shall issue a
Liquidation Order.
e.
A any other time upon the recommendation of the
Rehabilitation Receiver that the rehabilitation of the
debtor is not feasible.
It was held that the remedy of rehabilitation should
be denied to corporations whose insolvency appears to
be irreversible and whose sole purpose is to delay the
'“Section 25.
'“Section 72.
""Section 75.
2. FINANCIAL REHABILITATION AND
INSOLVENCY ACT OF 2010
(R.A. NO. 10142) (“FRIA")
489
enforcement of any of the rights of the creditors, which
is rendered obvious by: (a) the absence of a sound and
workable business plan; (b) baseless and unexplained
assumptions, targets, and goals; and (c) speculative
capital infusion or complete lack thereof for the execution
of the business plan.106
73.
When may an individual debtor file a petition for Voluntary
Liquidation?
An individual debtor whose properties are not sufficient to
cover his liabilities, and owing debts exceeding P500,000.00, may
apply to be discharged from his debts and liabilities by filing a
verified petition with the court of the province or city in which he
has resided for six (6) months prior to the filing of such petition. He
shall attach to his petition a schedule of debts and liabilities and
an inventory of assets. The filing of such petition shall be an act of
insolvency.106
If the court finds the petition sufficient in form and substance,
it shall, within five (5) working days, issue the Liquidation Order.11"
74.
A debtor who has been adjudged insolvent is given his
discharge by the court after his properties have been applied
to his debts. A year later, with those debts still not fully paid,
he wins in the sweepstakes and comes into a large fortune. His
creditors sue him for the balance.
Would the suit prosper? Reasons.
The suit will not prosper on debts that are properly discharged
in insolvency. Those that are not discharged, assuming that a
discharge can be obtained, include:
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a.
Taxes and assessments due the government, national or
local;
b.
Obligation arising from embezzlement or fraud;
c.
Obligations of any person liable to the insolvent debtor for
the same debt;
■“Philippine Asset Growth Two v. Fastech Synergy, supra.
‘“Section 103.
‘“’Section 104.
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DIVINA ON COMMERCIAL LAW:
A COMPREHENSIVE GUIDE VOLUME II
d.
Alimony or claim for support;
e.
In general, debts that are not provable against the estate
of the insolvent or not listed in the schedule submitted by
the insolvent debtor.108
When may a creditor or group of creditors file a Petition for
Liquidation?
Any creditor or group of creditors with a claim of, or with
claims aggregating, at least P500,000.00 may file a verified petition
for liquidation with the court of the province or city in which the
individual debtor resides.
The following shall be considered acts of insolvency, and the
Petition for Liquidation shafi set forth or allege at least one of such
acts:
a.
That such person is about to depart or has departed from
the Republic of the Philippines, with intent to defraud his
creditors;
b.
That being absent from the Republic of the Philippines,
with intent to defraud his creditors, he remains absent;
c.
That he conceals himself to avoid the service of legal
process for the purpose of hindering or delaying the
liquidation or of defrauding his creditors;
d.
That he conceals, or is removing, any of his property to
avoid its being attached or taken on legal process;
e.
That he has suffered his property to remain under
attachment or legal process for three (3) days for the
purpose of hindering or delaying the liquidation or of
defrauding his creditors;
f.
That he has confessed or offered to allow judgment in favor
of any creditor or claimant for the purpose of hindering or
delaying the liquidation or of defrauding any creditor or
claimant;
g-
That he has willfully suffered judgment to be taken
against him by default for the purpose of hindering or
delaying the liquidation or of defrauding his creditors;
108BAR 1988.
2. FINANCIAL REHABILITATION AND
INSOLVENCY ACT OF 2010
(R.A. NO. 10142) (“FRlA’j
491
h.
That he has suffered or procured his property to be taken
on legal process with intent to give a preference to one
or more of his creditors and thereby hinder or delay the
liquidation or defraud any one of his creditors;
i.
That he has made any assignment, gift, sale, conveyance
or transfer of his estate, property, rights or credits with
intent to hinder or delay the liquidation or defraud his
creditors;
]•
That he has, in contemplation of insolvency, made any
payment, gift, grant, sale, conveyance or transfer of his
estate, property, rights or credits;
k.
That being a merchant or tradesman, he has generally
defaulted in the payment of his current obligations for a
period of 30 days;
1.
That for a period of 30 days, he has failed, after demand,
to pay any moneys deposited with him or received by him
in a fiduciary capacity; and
m.
That an execution having been issued against him on
final judgment for money, he shall have been found to be
without sufficient property subject to execution to satisfy
the judgment.109
76. "X" owner of a general merchandise store, departed from
the Philippines with intent to defraud her creditors and has
remained absent from the country. While she has liabilities
totaling P100,000, her assets, however, are worth P120,000.
May "X" be declared an insolvent? Reason.
Yes, X may be declared insolvent. Under FRIA, although the
debtor has more than sufficient property to pay all his creditors, yet
if she would commit any act of insolvency, she should be declared
insolvent through a petition for involuntary liquidation. One of the
acts of insolvency out of the 13 enumerated by the Insolvency Law,
is: that being absent from the Philippines, with intent to defraud
his/her creditors, he/she remains absent.
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'“Section 105.
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77.
Juan opened a coffee shop using money borrowed from
financial institutions. After three (3) months, Juan left for the
USA with the intent of defrauding his creditors. While his
liabilities are PI.2 M, his assets, however are worth P1.5 M. May
Juan be declared insolvent?
No. Juan may not be declared insolvent if he was the one who
filed the Petition for Liquidation because his assets worth Pl.5 M
are more than his liabilities worth Pl.2 M. However, his creditors
may file a petition for involuntary liquidation since he committed an
act of insolvency.110
iii.
78.
Liquidation Order
What are the contents of a Liquidation Order?
The Liquidation Order shall:
a.
declare the debtor insolvent;
b.
order the liquidation of the debtor and, in the case of a
juridical debtor, declare it as dissolved;
c.
order the sheriff to take possession and control of all the
property of the debtor, except those that may be exempt
from execution;
d.
order the publication of the petition or motion in a
newspaper of general circulation once a week for two (2)
consecutive weeks;
e.
direct payments of any claims and conveyance of any
property due the debtor to the liquidator;
f.
prohibit payments by the debtor and the transfer of any
property by the debtor;
g-
direct all creditors to file their claims with the liquidator
within the period set by the rules of procedure;
h.
authorize the payment of administrative expenses as they
become due;
i.
state that the debtor and creditors who are not petitioner/s
may submit the names of other nominees to the position
of liquidator; and
““BAR 1998.
2. FINANCIAL REHABILITATION AND
INSOLVENCY ACT OF 2010
(R.A. NO. 10142) (“FRIA”)
j.
493
set the case for hearing for the election and appointment
of the liquidator, which date shall not be less than 30
days nor more than 45 days from the date of the last
publication.111
79. What are the effects of the issuance of the Liquidation Order?
Upon the issuance of the Liquidation Order:
a.
the juridical debtor shall be deemed dissolved and its
corporate or juridical existence terminated;
b.
legal title to and control of all the assets of the debtor,
except those that may be exempt from execution, shall be
deemed vested in the liquidator or, pending his election or
appointment, with the court;
c.
all contracts of the debtor shall be deemed terminated and/
or breached, unless the liquidator, within 90 days from
the date of his assumption of office, declares otherwise
and the contracting party agrees;
d.
no separate action for the collection of an unsecured claim
shall be allowed. Such actions already pending will be
transferred to the Liquidator for him to accept and settle
or contest. If the liquidator contests or disputes the claim,
the court shall allow, hear and resolve such contest except
when the case is already on appeal. In such a case, the suit
may proceed to judgment, and any final and executory
judgment therein for a claim against the debtor shall be
filed and allowed in court; and
e.
no foreclosure proceeding shall be allowed for a period of
180 days.112
iv.
Rights of secured creditors
60. Does a Liquidation Order affect the right of a secured creditor?
The Liquidation Order shall not affect the right of a secured
creditor to enforce his lien in accordance with the applicable contract
or law. A secured creditor may:
■
i
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“■Section 112.
‘“Section 113.
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a.
waive his rights under the security or lien, prove his
claim in the liquidation proceedings and share in the
distribution of the assets of the debtor; or
b.
maintain his rights under his security or lien.
If the secured creditor maintains his rights under the security
or lien:
a.
the value of the property may be fixed in a manner agreed
upon by the creditor and the liquidator. When the value of
the property is less than the claim it secures, the liquidator
may convey the property to the secured creditor and the
latter will be admitted in the liquidation proceedings as
a creditor for the balance; if its va