Commercial Law

PHILIPPINE COPYRIGHT by THE ATENEO LAW SCHOOL & THE ATENEO CENTRAL BAR OPERATIONS 2020-2021 All Rights Reserved By the Authors This material is an intellectual creation of the Ateneo Central Bar Operations 2020-2021 and is officially published and distributed by the Ateneo Law School. Any unauthorized reprint or use of this material is prohibited. No part of this work may be reproduced or transmitted in any form or by any means, electronic or mechanical, including but not limited to photocopying, recording, or by any information storage or retrieval system without the express written consent of both the Ateneo Law School and the Ateneo Central Bar Operations 2020-2021. Furthermore, this material is confidential and shall be kept within those who received a copy directly from the Ateneo Law School and the Ateneo Central Bar Operations 2020-2021. By downloading, acquiring possession, and/or using this material, whether, by electronic or other means, the recipients agree to protect the confidentiality of the material, refraining from any action which may lead to possession, duplication, or use by third parties . Ad maiorem Dei gloriam. GRACE ANN Q. BAJO TIMOTHY JACOB J. PALAFOX 20 21 C H AI R PE R S O N S KATHLEEN KAE Z. ENDOZO ARISTEO RAPHAEL T. MARBELLA III MEG V. BUENSALIDO MARIE KAYLA C. GALIT 20 21 AD MI NI ST R A TI V E CO M MI T TE E HE A D S 20 21 A C AD E MI C C O M MI T TE E HE AD S CARLOS ROSAURO N. MANALO MA. CRISTINA ASUNCION 20 21 A C AD E MI C C O M MI T TE E U N D E R ST U D I E S ATTY. TAKAHIRO KENJIE C. AMAN DEAN JOSE MARIA G. HOFILENA ATTY. CHRISTINE JOY K. TAN ATTY. MARIA CECILIA G. NATIVIDAD ATTY. ROEL A. REFRAN ATTY. FERDINAND M. NEGRE ATTY. IVY D. PATDU ATTY. ELMORE O. CAPULE 20 21 C O M ME R CI AL LA W F A CU L TY A D V I SE R S CARLO ANTON J. DEL MUNDO ALIYAH ROSH DY TIMOTHY JACOB J. PALAFOX JONAH MAE M. SAMPANG DIANNE P. MULINGTAPANG ANNA YSABELLE A. VELUZ MARK JOSEL P. VIVIT MART AMIEL J. LAFORTEZA JIM MATTHEW O. HAM SIEGFRED G. PEREZ TALISA MARI D. DELA ROSA 20 21 C O M ME R CI AL LA W SU BJE CT HE A D S ISABELLE BEATRIZ DLS. GINEZ TERESA JOANNA C. ROSALES LESLIE ANNE M. CASTILLO RIVER M. GADDI LUIS TEODORO B. PASCUA JASMINE R. BRIONES JAYE MARIE C. MARTINEZ ANGELIE MARIE PINTOR IRISH MAE GARCIA AUBREYLAINE M. SALAZAR 20 21 C O M ME R CI AL LA W U ND E R S TU D I E S ROSEANNE REALUBIN KATRINA ANGELA D. LOYOLA MIKKO RINGIA ISABELLA SABIO ANA SAMANTHA ISABELA PARUNGAO MARIA ANTOINETTE C. DUQUE 20 21 C O M ME R CI AL LA W V OLU NTE E R S JONATHAN DF. TORRES GAEL PAULINE R. MORALES RIA ALEXANDRA D. CASTILLO NICOLE ANN C. PAGLICAWAN JULIANNE BEATRICE N. ROSARIO 20 21 C R E ATI V E S JOSEPH BILL P. QUINTOS SAMANTHA J. MAGAOAY FREEDOM JUSTIN B. HERNANDEZ STEFI MONIKA S. SUERO KATHLEEN C. ROMINA SERMAE ANGELA G. PASCUAL 20 21 TE C H NI CA L 2 02 1 FI N AN CE AINA RAE L. CORTEZ LUMINA ALINEA O. AQUINO ANNA MARIE GRACE M. ANTONIO MARY STEPHANIE CABRERA CRUZ CLARISSE MAE D. ZAPLAN CHRISTIAN GIO R. SENARLO MAEDEN M. BORCELANGO IMI LIZA B. ESPINA FRANCIS SABIN BELTRAN ANTHONY JEFFERSON Y. JULIO 20 21 S PE CI AL P R OJ E C TS 20 21 LO GI STI C S DONN MARIE ISABELLE BALINA ALISHA BEATRICE A. VERGARA PRISHA LEIGH D. CRUZ ALITHEA C. SORIANO AARON C. CHENG MELISSA GABRIELLE P. REMULLA GRACIELLA RACHEL D. ROBLES DANELLA DIANE D. DIMAPILIS REYNALDO M. REVECHE CZAREANA JOUSCH T. PARRA 20 21 M AR K E TI N G 20 21 PU BLI C R E L A TI ON S JUSTIN LUIGI V. HERNANDEZ 20 2 0 C HAI R P E R SO N YVES PETER CARLO D. MEDINA KATRINA ISABELLE G. PIMENTEL GENICA GALE F. LAHOZ THERESE ANNE C. ESPINOSA HAZEL VIANCA I. ORTEGA VINCE ZYRENCE T. BARLONGAY 20 2 0 AD MI NI S TR ATI V E CO M MI T TE E HE A D S 20 2 0 HO TE L C O M MI TTE E HE A D S EUNICE A. MALAYO FRANCES CHRISTINE P. SAYSON MEG V. BUENSALIDO MARIE KAYLA C. GALIT 20 2 0 A CAD E MI C CO M MI T TE E HE AD S 2 02 0 A CA D E M I C CO M MIT T E E U N D E R S T U DI E S DEAN JOSE MARIA G. HOFILENA ATTY. MARIA CECILIA G. NATIVIDAD ATTY. FERDINAND M. NEGRE ATTY. ELMORE O. CAPULE ATTY. TAKAHIRO KENJIE C. AMAN ATTY. CHRISTINE JOY K. TAN ATTY. ROEL A. REFRAN ATTY. IVY D. PATDU 20 2 0 CO M ME R CI AL LA W F A CU L TY A D V I SE R S JONAH MAE M. SAMPANG WENDELL A. LAXAMANA ELDEN ROCAMORA SERGIO LUIS M. MERCADO REYNALEIGH H. DE LOS REYES JUSTIN NICHOLAS T. SY EZEKIEL MANUEL B. GARCIA MARINELA ISABELLE M. CAPISTRANO JIM MATTHEW O. HAM BENIGNO P. ENCISO 20 2 0 CO M ME R CI AL LA W SU BJE CT HE A D S TIMOTHY JACOB J. PALAFOX DIANNE P. MULINGTAPANG TALISA MARI D. DELA ROSA ALIYAH ROSH DY SIEGFRED G. PEREZ MARK JOSEL P. VIVIT CARLO ANTON J. DEL MUNDO MART AMIEL J. LAFORTEZA ANNA YSABELLE A. VELUZ 20 2 0 CO M ME R CI AL LA W U ND E R S TU D I E S CHAVI LEVINE REYES MARIA ANTOINETTE C. DUQUE KATRINA ANGELA D. LOYOLA VICTORIA FAY V. CHANG MARIA ANGELICA TORIO HOSEA LEJIAN SALAZAR ALYSSA MARIE L. SIYCHA CARLO DEL MUNDO HOSEA L. SALAZAR SARA KARMINA D. AVILLON YIELA SANTIAGO MARLO CAPACITE JOHANN ANGELO C. BULATAO KEVIN B. GAMAD BRIAN PINEDA 20 2 0 CO M ME R CI AL LA W V OLU NTE E R S ATENEO CENTRAL COMMERCIAL LAW BAR OPERATIONS 2020/21 TABLE OF CONTENTS I. INSURANCE ......................................................................................................................................................... 2 A. CONCEPT OF INSURANCE ................................................................................................................................... 3 B. ELEMENTS OF AN INSURANCE CONTRACT .......................................................................................................... 3 C. CHARACTERISTICS AND NATURE OF INSURANCE CONTRACTS ............................................................................ 6 D. CLASSES OF INSURANCE ..................................................................................................................................... 7 E. VARIABLE CONTRACTS ....................................................................................................................................... 8 F. INSURABLE INTEREST ......................................................................................................................................... 8 1. IN LIFE/HEALTH ..................................................................................................................................................8 2. IN PROPERTY ......................................................................................................................................................9 3. DOUBLE INSURANCE AND OVER INSURANCE ...................................................................................................11 4. MULTIPLE OR SEVERAL INTERESTS ON SAME PROPERTY .................................................................................12 G. PERFECTION OF THE CONTRACT OF INSURANCE ............................................................................................... 13 1. OFFER AND ACCEPTANCE / CONSENSUALITY ...................................................................................................13 2. PREMIUM PAYMENT ........................................................................................................................................15 3. NON-DEFAULT OPTIONS IN LIFE INSURANCE ...................................................................................................16 4. REINSTATEMENT OF A LAPSED POLICY OF LIFE INSURANCE .............................................................................17 5. REFUND OF PREMIUMS ....................................................................................................................................17 H. RESCISSION OF INSURANCE CONTRACTS .......................................................................................................... 18 1. CONCEALMENT ................................................................................................................................................18 2. MISREPRESENTATION/OMISSIONS ..................................................................................................................20 3. BREACH OF WARRANTIES .................................................................................................................................21 I. CLAIMS SETTLEMENT AND SUBROGATION ........................................................................................................ 24 1. NOTICE AND PROOF OF LOSS ...........................................................................................................................24 2. GUIDELINES ON CLAIM SETTLEMENT ...............................................................................................................25 J. BUSINESS OF INSURANCE; REQUIREMENTS ....................................................................................................... 27 K. INSURANCE COMMISSIONER AND ITS POWERS ................................................................................................ 28 II. PRE-NEED ......................................................................................................................................................... 47 A. DEFINITION ...................................................................................................................................................... 47 1. PRE-NEED PLANS ..............................................................................................................................................47 2. PRE-NEED COMPANY .......................................................................................................................................47 B. REGISTRATION OF PRE-NEED PLANS ................................................................................................................. 47 C. LICENSING OF SALES COUNSELOR AND GENERAL AGENT .................................................................................. 48 D. DEFAULT AND TERMINATION .......................................................................................................................... 48 E. CLAIMS SETTLEMENT ........................................................................................................................................ 49 III. TRANSPORTATION LAW .................................................................................................................................. 52 A. COMMON CARRIERS ........................................................................................................................................ 53 1. DILIGENCE REQUIRED OF COMMON CARRIERS ................................................................................................54 2. LIABILITIES OF COMMON CARRIERS .................................................................................................................55 3. CLASSIFICATION OF TRANSPORT NETWORK VEHICLE SERVICES AND TRANSPORT NETWORK COMPANIES ....55 B. VIGILANCE OVER GOODS .................................................................................................................................. 55 i ATENEO CENTRAL BAR OPERATIONS 2020/21 COMMERCIAL LAW 1. EXEMPTING CAUSES .........................................................................................................................................55 2. CONTRIBUTORY NEGLIGENCE ..........................................................................................................................58 3. DURATION OF LIABILITY ...................................................................................................................................58 4. STIPULATION FOR LIMITATION OF LIABILITY ....................................................................................................58 5. LIABILITY FOR BAGGAGE OF PERSONS..............................................................................................................59 C. SAFETY OF PASSENGERS ................................................................................................................................... 60 1. VOID STIPULATIONS .........................................................................................................................................60 2. DURATION OF LIABILITY ...................................................................................................................................61 3. LIABILITY FOR ACTS OF OTHERS ........................................................................................................................61 4. LIABILITY FOR DELAYS IN THE COMMENCEMENT OF VOYAGE .........................................................................62 5. LIABILITY FOR DEFECTS IN EQUIPMENT AND FACILITIES ..................................................................................62 6. EXTENT OF LIABILITY FOR DAMAGES ................................................................................................................62 D. BILL OF LADING ................................................................................................................................................ 62 1. THREE-FOLD CHARACTER .................................................................................................................................62 2. DELIVERY OF GOODS ........................................................................................................................................63 3. PERIOD FOR FILING CLAIMS..............................................................................................................................63 4. PERIOD FOR FILING ACTIONS ...........................................................................................................................64 5. EFFECTS OF STIPULATIONS ...............................................................................................................................64 E. MARITIME COMMERCE .................................................................................................................................... 64 1. CHARTER PARTIES ............................................................................................................................................64 2. LIABILITY OF SHIPOWNERS AND SHIPPING AGENTS .........................................................................................65 3. ACCIDENTS AND DAMAGES IN MARITIME COMMERCE ...................................................................................66 4. CARRIAGE OF GOODS BY SEA ACT ....................................................................................................................68 F. PUBLIC SERVICE ACT ......................................................................................................................................... 70 1. DEFINITION OF PUBLIC UTILITY ........................................................................................................................70 2. NECESSITY FOR CERTIFICATE OF PUBLIC CONVENIENCE ..................................................................................70 3. FIXING OF RATE ................................................................................................................................................71 4. UNLAWFUL ARRANGEMENTS ..........................................................................................................................72 5. APPROVAL OF SALE, ENCUMBRANCE OR LEASE OF PROPERTY ........................................................................72 G. THE WARSAW CONVENTION ............................................................................................................................ 73 1. APPLICABILITY ..................................................................................................................................................73 2. LIMITATION OF LIABILITY .................................................................................................................................73 3. WILLFUL MISCONDUCT ....................................................................................................................................74 IV. BUSINESS ORGANIZATIONS ............................................................................................................................ 76 A. PARTNERSHIPS ................................................................................................................................................ 80 1. GENERAL PROVISIONS ......................................................................................................................................80 A. DEFINITION ................................................................................................................................................80 B. ELEMENTS .................................................................................................................................................80 C. CHARACTERISTICS .....................................................................................................................................80 D. RULES TO DETERMINE EXISTENCE ............................................................................................................80 E. PARTNERSHIP TERM ..................................................................................................................................81 F. PARTNERSHIP BY ESTOPPEL .......................................................................................................................82 G. PARTNERSHIP AS DISTINGUISHED FROM JOINT VENTURE .......................................................................82 H. PROFESSIONAL PARTNERSHIP...................................................................................................................83 I. MANAGEMENT ...........................................................................................................................................83 2. RIGHTS AND OBLIGATIONS OF PARTNERSHIP AND PARTNERS.........................................................................84 A. RIGHTS AND OBLIGATIONS OF THE PARTNERSHIP ...................................................................................84 B. OBLIGATIONS OF PARTNERS AMONG THEMSELVES .................................................................................85 C. OBLIGATIONS OF PARTNERS TO THIRD PERSONS .....................................................................................89 3. DISSOLUTION AND WINDING UP ......................................................................................................................90 ii ATENEO CENTRAL BAR OPERATIONS 2020/21 COMMERCIAL LAW A. CAUSES OF DISSOLUTION (ART. 1830) ......................................................................................................90 B. EFFECTS OF DISSOLUTION .........................................................................................................................91 C. RIGHTS OF PARTNERS UPON DISSOLUTION ..............................................................................................92 D. WHEN BUSINESS OF DISSOLVED PARTNERSHIP IS CONTINUED ...............................................................93 4. LIMITED PARTNERSHIP .....................................................................................................................................93 A. CHARACTERISTICS OF LIMITED PARTNERSHIP ..........................................................................................93 B. GENERAL PARTNERSHIP V. LIMITED PARTNERSHIP ..................................................................................94 C. REQUIREMENTS FOR FORMATION OF LIMITED PARTNERSHIP .................................................................94 D. CONSENT/RATIFICATION OF ALL LIMITED PARTNERS NEEDED ................................................................94 E. SPECIFIC RIGHTS OF LIMITED PARTNERS ...................................................................................................94 F. REQUISITES FOR RETURN OF CONTRIBUTION OF LIMITED PARTNER .......................................................94 G. LIABILITIES OF A LIMITED PARTNER ..........................................................................................................95 H. DISSOLUTION OF LIMITED PARTNERSHIP .................................................................................................95 I. AMENDMENT OF CERTIFICATE OF PARTNERSHIP ......................................................................................95 B. CORPORATION ................................................................................................................................................. 96 1. DEFINITION OF CORPORATION ........................................................................................................................96 2. CLASSES OF CORPORATIONS ............................................................................................................................97 3. NATIONALITY OF CORPORATIONS ..................................................................................................................100 4. CORPORATE JURIDICAL PERSONALITY............................................................................................................102 A. DOCTRINE OF SEPARATE JURIDICAL PERSONALITY .................................................................................103 B. DOCTRINE OF PIERCING THE VEIL OF CORPORATE FICTION ...................................................................106 5. CAPITAL STRUCTURE ......................................................................................................................................109 A. NUMBER AND QUALIFICATIONS OF INCORPORATORS ...........................................................................109 B. MINIMUM CAPITAL STOCK AND SUBSCRIPTION REQUIREMENTS ..........................................................110 C. CORPORATE TERM (SEC. 11) ...................................................................................................................110 D. CLASSES OF SHARES OF STOCK (SEC. 6) ..................................................................................................111 6. INCORPORATION AND ORGANIZATION .........................................................................................................112 A. PROMOTER..............................................................................................................................................112 B. SUBSCRIPTION CONTRACTS ....................................................................................................................113 C. PRE-INCORPORATION SUBSCRIPTION (SEC. 60) ......................................................................................113 D. CONSIDERATION FOR STOCKS (SEC. 61) .................................................................................................113 E. ARTICLES OF INCORPORATION ................................................................................................................114 F. CORPORATE NAME (SEC. 17) ...................................................................................................................115 G. REGISTRATION, INCORPORATION AND COMMENCEMENT OF CORPORATE EXISTENCE (SEC. 18) ........117 H. ELECTION OF DIRECTORS OR TRUSTEES (SEC. 23) ..................................................................................118 I. ADOPTION OF BY-LAWS ...........................................................................................................................118 J. EFFECTS OF NON-USE OF CORPORATE CHARTER (SEC. 21) .....................................................................120 7. CORPORATE POWERS .....................................................................................................................................121 A. GENERAL POWERS; THEORY OF GENERAL CAPACITY .............................................................................121 B. SPECIFIC POWERS: THEORY OF SPECIFIC CAPACITY ................................................................................121 C. POWER TO EXTEND OR SHORTEN CORPORATE TERM (SEC. 36) .............................................................121 D. POWER TO INCREASE OR DECREASE CAPITAL STOCK OR INCUR, CREATE, INCREASE BONDED INDEBTEDNESS (SEC. 37) .............................................................................................................................122 E. POWER TO DENY PRE-EMPTIVE RIGHTS (SEC. 38) ...................................................................................122 F. POWER TO SELL OR DISPOSE CORPORATE ASSETS (SEC. 39)...................................................................122 G. POWER TO ACQUIRE OWN SHARES (SEC. 40) .........................................................................................123 H. POWER TO INVEST CORPORATE FUNDS IN ANOTHER CORPORATION OR FOR NON-PRIMARY PURPOSE (SEC. 41).......................................................................................................................................................123 I. POWER TO DECLARE DIVIDENDS (SEC. 42) ...............................................................................................124 J. POWER TO ENTER INTO MANAGEMENT CONTRACT (SEC. 43) ................................................................124 K. LIMITATIONS ...........................................................................................................................................124 L. DOCTRINE OF INDIVIDUALITY OF SUBSCRIPTION ....................................................................................125 M. DOCTRINE OF EQUALITY OF SHARES ......................................................................................................125 iii ATENEO CENTRAL BAR OPERATIONS 2020/21 COMMERCIAL LAW N. TRUST FUND DOCTRINE ..........................................................................................................................125 O. HOW CORPORATE POWERS ARE EXERCISED ..........................................................................................126 8. STOCKHOLDERS AND MEMBERS ....................................................................................................................127 A. FUNDAMENTAL RIGHTS OF STOCKHOLDERS AND MEMBERS ................................................................127 B. PARTICIPATION IN MANAGEMENT .........................................................................................................127 C. PROPRIETARY RIGHTS ..............................................................................................................................129 D. REMEDIAL RIGHTS ...................................................................................................................................135 E. OBLIGATIONS OF A STOCKHOLDER .........................................................................................................135 F. MEETINGS ................................................................................................................................................135 9. BOARD OF DIRECTORS AND TRUSTEES ...........................................................................................................138 A. REPOSITORY OF CORPORATE POWERS ...................................................................................................138 B. TENURE, QUALIFICATIONS AND DISQUALIFICATIONS OF DIRECTORS ....................................................139 C. REQUIREMENT OF INDEPENDENT DIRECTORS (SEC. 22) .........................................................................140 D. ELECTIONS ...............................................................................................................................................140 E. REMOVAL (SEC. 27) .................................................................................................................................143 F. FILLING OF VACANCIES (SEC. 28) .............................................................................................................143 G. COMPENSATION (SEC. 30) ......................................................................................................................144 H. DISLOYALTY .............................................................................................................................................144 I. BUSINESS JUDGMENT RULE .....................................................................................................................145 J. SOLIDARY LIABILITIES FOR DAMAGES ......................................................................................................145 K. PERSONAL LIABILITIES .............................................................................................................................145 L. RESPONSIBILITY FOR CRIMES ...................................................................................................................146 M. SPECIAL FACT DOCTRINE ........................................................................................................................146 N. INSIDE INFORMATION .............................................................................................................................146 O. CONTRACTS.............................................................................................................................................146 P. EXECUTIVE AND OTHER SPECIAL COMMITTEES ......................................................................................147 Q. MEETINGS ...............................................................................................................................................147 10. CAPITAL AFFAIRS ..........................................................................................................................................150 A. CERTIFICATE OF STOCK ...........................................................................................................................150 B. WATERED STOCK (DILUTED STOCK) ........................................................................................................152 C. PAYMENT OF BALANCE OF SUBSCRIPTION .............................................................................................153 D. SALE OF DELINQUENT SHARES ................................................................................................................154 E. ALIENATION OF SHARES ..........................................................................................................................155 F. CORPORATE BOOKS AND RECORDS.........................................................................................................156 11. DISSOLUTION AND LIQUIDATION .................................................................................................................157 A. MODES OF DISSOLUTION: .......................................................................................................................157 B. METHODS OF LIQUIDATION ....................................................................................................................161 12. OTHER CORPORATIONS................................................................................................................................162 A. CLOSE CORPORATIONS ...........................................................................................................................162 B. NON-STOCK CORPORATIONS .................................................................................................................165 C. EDUCATIONAL CORPORATIONS ..............................................................................................................168 D. RELIGIOUS CORPORATIONS ....................................................................................................................169 E. ONE PERSON CORPORATIONS .................................................................................................................170 F. FOREIGN CORPORATIONS .......................................................................................................................173 13. MERGER AND CONSOLIDATION ...................................................................................................................178 A. DEFINITION AND CONCEPT .....................................................................................................................178 B. CONSTITUENT AND CONSOLIDATED CORPORATIONS ............................................................................179 C. PLAN OF MERGER OR CONSOLIDATION (SEC. 75) ...................................................................................180 D. ARTICLES OF MERGER OR CONSOLIDATION (SEC. 78) ............................................................................180 E. PROCEDURE OF CONSOLIDATION OR MERGER .......................................................................................180 F. EFFECTIVITY OF MERGER OR CONSOLIDATION .......................................................................................181 G. LIMITATIONS OF MERGER AND CONSOLIDATION ..................................................................................181 H. EFFECTS OF MERGER OR CONSOLIDATION .............................................................................................182 iv ATENEO CENTRAL BAR OPERATIONS 2020/21 COMMERCIAL LAW 14. INVESTIGATIONS, OFFENSES, AND PENALTIES .............................................................................................182 A. AUTHORITY OF COMMISSIONER .............................................................................................................182 B. SANCTIONS FOR VIOLATIONS ..................................................................................................................183 C. AUTHORITY OF THE SECURITIES AND EXCHANGE COMMISSION (JURISDICTION) ..................................184 V. SECURITIES .................................................................................................................................................... 189 A. STATE POLICY ................................................................................................................................................. 189 B. DEFINTION OFSECURITIES .............................................................................................................................. 189 C. KINDS OF SECURITIES ..................................................................................................................................... 190 1. EXEMPT SECURITIES .......................................................................................................................................191 2. EXEMPT TRANSACTIONS ................................................................................................................................191 3. NON-EXEMPT TRANSACTIONS .......................................................................................................................193 D. POWERS AND FUNCTIONS OF THE SECURITIES AND EXCHANGE COMMISSION ............................................... 193 E. PROCEDURE FOR REGISTRATION OF SECURITIES............................................................................................. 194 F. PROHIBITIONS ON FRAUD, MANIPULATION, AND INSIDER TRADING .............................................................. 199 1. MANIPULATION OF SECURITY PRICES ............................................................................................................199 2. SHORT SALES ..................................................................................................................................................199 3. OPTION TRADING ...........................................................................................................................................200 4. FRAUDULENT TRANSACTIONS ........................................................................................................................200 G. PROTECTION OF INVESTORS .......................................................................................................................... 201 1. TENDER OFFER RULE ......................................................................................................................................201 2. RULES ON PROXY SOLICITATION ....................................................................................................................202 3. DISCLOSURE RULE ..........................................................................................................................................202 VI. BANKING ...................................................................................................................................................... 205 A. THE NEW CENTRAL BANK ACT ........................................................................................................................ 206 1. STATE POLICIES ..............................................................................................................................................206 2. CREATION OF THE BANGKO SENTRAL NG PILIPINAS (BSP) .............................................................................206 3. RESPONSIBILITY AND PRIMARY OBJECTIVE ....................................................................................................206 4. CORPORATE POWERS .....................................................................................................................................207 5. OPERATIONS OF THE BANGKO SENTRAL NG PILIPINAS ..................................................................................207 A. AUTHORITY TO OBTAIN DATA AND INFORMATION ................................................................................207 B. SUPERVISION AND EXAMINATION ..........................................................................................................207 C. AUTHORITY TO APPROVE TRANSFER OF SHARES ....................................................................................208 D. PROHIBITIONS .........................................................................................................................................208 E. EXAMINATION AND FEES.........................................................................................................................209 6. MONETARY BOARD, POWERS AND FUNCTIONS.............................................................................................209 7. HOW THE BANGKO SENTRAL NG PILIPINAS HANDLES BANKS IN DISTRESS ....................................................211 A. CONSERVATORSHIP .................................................................................................................................211 B. CLOSURE ..................................................................................................................................................212 C. RECEIVERSHIP ..........................................................................................................................................212 D. LIQUIDATION ...........................................................................................................................................213 8. ADMINISTRATIVE SANCTIONS ON SUPERVISED ENTITIES ..............................................................................214 9. SUPERVISION AND REGULATION OF BANK OPERATIONS ...............................................................................215 A. LOANS AND OTHER CREDIT ACCOMMODATIONS ...................................................................................215 B. SELECTIVE REGULATION ..........................................................................................................................216 B. LAWS ON SECRECY OF BANK DEPOSITS ........................................................................................................... 217 1. PURPOSE ........................................................................................................................................................217 2. PROHIBITED ACTS ...........................................................................................................................................217 v ATENEO CENTRAL BAR OPERATIONS 2020/21 COMMERCIAL LAW 3. DEPOSITS COVERED........................................................................................................................................218 4. EXCEPTIONS ...................................................................................................................................................218 5. GARNISHMENT OF DEPOSITS, INCLUDING FOREIGN DEPOSITS .....................................................................221 6. PENALTIES FOR VIOLATION ............................................................................................................................221 C. GENERAL BANKING ACT ................................................................................................................................. 222 1. DEFINITION AND CLASSIFICATION OF BANKS .................................................................................................222 2. DISTINCTION OF BANKS FROM QUASI-BANKS AND TRUST ENTITIES ..............................................................223 3. BANK POWERS AND LIABILITIES .....................................................................................................................224 A. CORPORATE POWERS ..............................................................................................................................224 B. BANKING AND INCIDENTAL POWERS ......................................................................................................224 4. DILIGENCE REQUIRED OF BANKS IN VIEW OF FIDUCIARY NATURE OF BANKING ............................................225 5. NATURE OF BANK FUNDS AND BANK DEPOSITS .............................................................................................225 6. GRANT OF LOANS AND SECURITY REQUIREMENTS ........................................................................................226 A. RATIO OF NET WORTH TO TOTAL RISK ASSETS .......................................................................................226 B. SINGLE BORROWER’S LIMIT (SBL) ...........................................................................................................226 C. RESTRICTIONS ON BANK EXPOSURE TO DIRECTORS, OFFICERS, STOCKHOLDERS, AND THEIR RELATED INTERESTS....................................................................................................................................................227 D. PROHIBITED ACTS OF BORROWERS ........................................................................................................228 E. FLOATING INTEREST RATES AND ESCALATION CLAUSES .........................................................................228 7. PENALTIES FOR VIOLATIONS ..........................................................................................................................229 A. FINE, IMPRISONMENT .............................................................................................................................229 B. SUSPENSION OR REMOVAL OF DIRECTOR OR OFFICER ..........................................................................229 C. DISSOLUTION OF BANK ...........................................................................................................................229 D. PHILIPPINE DEPOSIT INSURANCE CORPORATION ACT .................................................................................... 230 1. BASIC POLICY ..................................................................................................................................................230 2. POWERS AND FUNCTIONS OF THE PHILIPPINE DEPOSIT INSURANCE CORPORATION; PROHIBITIONS ..........230 3. CONCEPT OF INSURED DEPOSITS ...................................................................................................................231 4. LIABILITY TO DEPOSITORS ..............................................................................................................................231 A. DEPOSIT LIABILITIES REQUIRED TO BE INSURED WITH PHILIPPINE DEPOSIT INSURANCE CORPORATION .....................................................................................................................................................................231 B. COMMENCEMENT OF LIABILITY ..............................................................................................................231 C. DEPOSIT ACCOUNTS NOT ENTITLED TO PAYMENT .................................................................................231 D. EXTENT OF LIABILITY ...............................................................................................................................231 E. DETERMINATION OF INSURED DEPOSITS ................................................................................................231 F. CALCULATION OF LIABILITY .....................................................................................................................232 5. CONCEPT OF BANK RESOLUTION ...................................................................................................................233 6. ROLE OF THE PHILIPPINE DEPOSIT INSURANCE CORPORATION IN RELATION TO BANKS IN DISTRESS ...........234 A. CLOSURE AND TAKEOVER .......................................................................................................................234 B. CONSERVATORSHIP .................................................................................................................................234 C. RECEIVERSHIP ..........................................................................................................................................234 D. LIQUIDATION ...........................................................................................................................................235 VII. INTELLECTUAL PROPERTY ............................................................................................................................ 239 A. INTELLECTUAL PROPERTY RIGHTS IN GENERAL ............................................................................................... 240 1. INTELLECTUAL PROPERTY RIGHTS ..................................................................................................................240 2. DIFFERENCES BETWEEN COPYRIGHT, TRADEMARKS, AND PATENTS .............................................................240 3. TECHNOLOGY TRANSFER ARRANGEMENT .....................................................................................................241 B. PATENTS ........................................................................................................................................................ 241 1. PATENTABLE INVENTION ...............................................................................................................................241 A. NOVELTY..................................................................................................................................................241 B. INVENTIVE STEP.......................................................................................................................................241 vi ATENEO CENTRAL BAR OPERATIONS 2020/21 COMMERCIAL LAW C. INDUSTRIAL APPLICABILITY .....................................................................................................................242 2. NON-PATENTABLE INVENTIONS .....................................................................................................................242 3. OWNERSHIP OF A PATENT..............................................................................................................................243 4. GROUNDS FOR CANCELLATION OF A PATENT ................................................................................................243 5. REMEDY OF THE TRUE AND ACTUAL INVENTOR .............................................................................................243 6. RIGHTS CONFERRED BY A PATENT ..................................................................................................................244 7. LIMITATIONS OF PATENT RIGHTS ...................................................................................................................244 A. PRIOR USER .............................................................................................................................................245 B. USE BY THE GOVERNMENT .....................................................................................................................245 8. PATENT INFRINGEMENT.................................................................................................................................245 A. TESTS IN PATENT INFRINGEMENT ...........................................................................................................245 B. CIVIL AND CRIMINAL ACTION ..................................................................................................................246 C. PRESCRIPTIVE PERIOD .............................................................................................................................247 D. DEFENSES IN ACTION FOR INFRINGEMENT ............................................................................................247 9. LICENSING ......................................................................................................................................................247 A. VOLUNTARY LICENSING ..........................................................................................................................247 B. COMPULSORY LICENSING ........................................................................................................................249 10. ASSIGNMENT AND TRANSMISSION OF RIGHTS ............................................................................................250 C. TRADEMARKS ................................................................................................................................................ 251 1. DEFINITIONS OF MARKS, COLLECTIVE MARKS, AND TRADE NAMES ..............................................................251 2. ACQUISITION OF OWNERSHIP OF A MARK .....................................................................................................251 3. ACQUISITION OF OWNERSHIP OF TRADE NAME ............................................................................................252 4. NON-REGISTRABLE MARKS ............................................................................................................................253 5. PRIOR USE OF MARK AS REQUIREMENT .........................................................................................................253 6. TESTS TO DETERMINE CONFUSING SIMILARITY BETWEEN MARKS ................................................................254 7. WELL-KNOWN MARKS....................................................................................................................................254 8. RIGHTS CONFERRED BY REGISTRATION..........................................................................................................256 9. USE BY THIRD PARTIES OF NAMES, ETC. SIMILAR TO REGISTERED MARK ......................................................256 10. INFRINGEMENT AND REMEDIES...................................................................................................................256 A. TRADEMARK INFRINGEMENT..................................................................................................................256 B. DAMAGES ................................................................................................................................................258 C. DAMAGES; REQUIREMENT OF NOTICE ...................................................................................................258 D. PENALTIES ...............................................................................................................................................258 11. UNFAIR COMPETITION .................................................................................................................................258 12. REGISTRATION OF MARKS UNDER THE MADRID PROTOCOL .......................................................................259 A. COVERAGE ...............................................................................................................................................259 B. RIGHTS CONFERRED ................................................................................................................................259 C. REQUIREMENTS FOR REGISTRATION ......................................................................................................260 D. TERM OF PROTECTION ............................................................................................................................260 D. COPYRIGHT .................................................................................................................................................... 261 1. BASIC PRINCIPLES ...........................................................................................................................................261 2. COPYRIGHTABLE WORKS................................................................................................................................261 A. ORIGINAL LITERARY OR ARTISTIC WORKS ...............................................................................................261 B. DERIVATIVE WORKS ................................................................................................................................262 3. NON-COPYRIGHTABLE WORKS .......................................................................................................................262 4. RIGHTS OF COPYRIGHT OWNER .....................................................................................................................263 5. RULES ON OWNERSHIP OF COPYRIGHT ..........................................................................................................264 6. LIMITATIONS ON COPYRIGHT .........................................................................................................................265 A. FAIR USE ..................................................................................................................................................265 7. COPYRIGHT INFRINGEMENT ..........................................................................................................................266 A. REMEDIES ................................................................................................................................................267 B. CRIMINAL PENALTIES ..............................................................................................................................267 vii ATENEO CENTRAL BAR OPERATIONS 2020/21 COMMERCIAL LAW VIII. SPECIAL LAWS............................................................................................................................................. 270 A. SECURED TRANSACTIONS .............................................................................................................................. 271 1. PERSONAL PROPERTY SECURITIES ACT...........................................................................................................271 A. DEFINITIONS AND SCOPE ........................................................................................................................271 B. ASSET-SPECIFIC RULES .............................................................................................................................272 C. PERFECTION OF SECURITY INTERESTS .....................................................................................................273 D. REGISTRATION ........................................................................................................................................274 E. PRIORITY OF SECURITY INTERESTS ..........................................................................................................278 F. TANGIBLE ASSETS; INTANGIBLE ASSETS ..................................................................................................278 G. ENFORCEMENT OF SECURITY INTERESTS ................................................................................................279 H. PRIOR INTEREST AND THE TRANSITIONAL PERIOD .................................................................................282 2. REAL ESTATE MORTGAGE LAW ......................................................................................................................283 A. DEFINITION AND CHARACTERISTICS .......................................................................................................283 B. ESSENTIAL REQUISITES ............................................................................................................................292 3. GUARANTY .....................................................................................................................................................297 A. NATURE AND EXTENT OF GUARANTY .....................................................................................................297 B. EFFECTS OF GUARANTY ...........................................................................................................................306 C. EXTINGUISHMENT OF GUARANTY...........................................................................................................306 D. LEGAL AND JUDICIAL BONDS ..................................................................................................................308 4. SURETY ...........................................................................................................................................................309 A. CONCEPT .................................................................................................................................................309 B. FORM OF SURETY ....................................................................................................................................309 C. OBLIGATIONS SECURED ...........................................................................................................................309 D. SURETY DISTINGUISHED FROM STANDBY LETTER OF CREDIT ................................................................309 E. SURETY DISTINGUISHED FROM GUARANTY ............................................................................................310 F. SURETY DISTINGUISHED FROM JOINT AND SOLIDARY OBLIGATIONS .....................................................310 5. LETTERS OF CREDIT.........................................................................................................................................311 A. DEFINITION AND PURPOSE .....................................................................................................................311 B. KINDS OF LETTERS OF CREDIT .................................................................................................................313 C. RULE OF STRICT COMPLIANCE ................................................................................................................315 D. INDEPENDENCE PRINCIPLE .....................................................................................................................316 B. TRUTH IN LENDING ACT .................................................................................................................................. 317 1. PURPOSE ........................................................................................................................................................317 2.OBLIGATION OF CREDITORS TO PERSON TO WHOM CREDIT IS EXTENDED .....................................................317 3. COVERED AND EXCLUDED TRANSACTIONS ....................................................................................................318 4. CONSEQUENCES OF NON-COMPLIANCE WITH OBLIGATION .........................................................................318 C. ANTI-MONEY LAUNDERING ACT ..................................................................................................................... 319 1. POLICY ............................................................................................................................................................319 2. COVERED INSTITUTIONS AND OBLIGATIONS .................................................................................................319 3. COVERED AND SUSPICIOUS TRANSACTIONS ..................................................................................................321 4. MONEY LAUNDERING; HOW COMMITTED; UNLAWFUL PRACTICES OR PREDICATE CRIMES .........................322 5. ANTI-MONEY LAUNDERING COUNCIL; FUNCTIONS .......................................................................................323 6. SAFE HARBOR PROVISION ..............................................................................................................................324 7. APPLICATION FOR FREEZE ORDERS ................................................................................................................324 8. AUTHORITY TO INQUIRE INTO BANK DEPOSITS ..............................................................................................326 D. FOREIGN INVESTMENTS ACT .......................................................................................................................... 329 1. POLICY OF THE LAW........................................................................................................................................329 2. DEFINITION OF TERMS ...................................................................................................................................329 A. FOREIGN INVESTMENT ............................................................................................................................329 B. DOING BUSINESS IN THE PHILIPPINES .....................................................................................................333 C. EXPORT ENTERPRISE ...............................................................................................................................335 viii ATENEO CENTRAL BAR OPERATIONS 2020/21 COMMERCIAL LAW D. DOMESTIC MARKET ENTERPRISE ............................................................................................................335 3. REGISTRATION OF INVESTMENTS OF NON-PHILIPPINE NATIONALS ..............................................................336 4. FOREIGN INVESTMENTS IN EXPORT ENTERPRISES .........................................................................................337 5. FOREIGN INVESTMENTS IN DOMESTIC MARKET ENTERPRISES ......................................................................337 6. FOREIGN INVESTMENT NEGATIVE LIST ..........................................................................................................338 E. INSOLVENCY LAWS ......................................................................................................................................... 339 1. CONCURRENCE AND PREFERENCE OF CREDITS ..............................................................................................339 A. MEANING OF CONCURRENCE AND PREFERENCE ...................................................................................339 B. EXEMPT PROPERTIES ...............................................................................................................................339 C. CLASSIFICATION OF CREDITS ...................................................................................................................340 D. ORDER OF PREFERENCE OF CREDITS.......................................................................................................341 2. FINANCIAL REHABILITATION AND INSOLVENCY ACT OF 2010 ........................................................................342 A. DEFINITION OF INSOLVENCY ...................................................................................................................343 B. SUSPENSION OF PAYMENTS ....................................................................................................................343 C. REHABILITATION ......................................................................................................................................345 D. LIQUIDATION ...........................................................................................................................................358 F. DATA PRIVACY ACT OF 2012 ........................................................................................................................... 367 1. DEFINITIONS AND SCOPE ...............................................................................................................................367 2. EXTRATERRITORIAL APPLICATION ..................................................................................................................370 3. PROCESSING OF PERSONAL INFORMATION ...................................................................................................371 A. GENERAL PRINCIPLES ..............................................................................................................................371 B. SENSITIVE AND PRIVILEGED INFORMATION ...........................................................................................372 C. SUBCONTRACTING ..................................................................................................................................373 D. RULE ON PRIVILEGED COMMUNICATION ...............................................................................................373 4. RIGHTS OF THE DATA SUBJECT; EXCEPTIONS/NON-APPLICABILITY................................................................373 5. DUTIES AND RESPONSIBILITIES OF PERSONAL INFORMATION CONTROLLER.................................................375 5 PILLARS OF COMPLIANCE OF THE NATIONAL PRIVACY COMMISSION .............................................................377 G. PHILIPPINE COMPETITION ACT ....................................................................................................................... 378 1. DEFINITION AND SCOPE OF APPLICATION ......................................................................................................378 2. POWERS AND FUNCTIONS OF THE PHILIPPINE COMPETITION COMMISSION ................................................379 3. JURISDICTION AND ENFORCEMENT ...............................................................................................................380 4. DETERMINING THE RELEVANT MARKET .........................................................................................................382 5. DETERMINING CONTROL OR DOMINANCE OF MARKET .................................................................................383 6. PROHIBITED ACTS ...........................................................................................................................................384 A. PROHIBITED MERGERS AND ACQUISITIONS ...........................................................................................384 B. ANTI-COMPETITIVE AGREEMENTS ..........................................................................................................387 C. ABUSE OF DOMINANT POSITION ............................................................................................................389 7. FORBEARANCE BY THE PCC ............................................................................................................................393 ix INSURANCE Commercial Law ATENEO CENTRAL COMMERCIAL LAW BAR OPERATIONS 2020/21 I. INSURANCE TOPIC OUTLINE UNDER THE SYLLABUS I. INSURANCE A. CONCEPT OF INSURANCE I. CLAIMS SETTLEMENT AND SUBROGATION 1. Notice and proof of loss 2. Guidelines on Claim Settlement a. Unfair claims settlement; sanctions b. Prescription of action c. Subrogation B. ELEMENTS OF AN INSURANCE CONTRACT J. BUSINESS OF REQUIREMENTS INSURANCE; C. CHARACTERISTICS AND NATURE OF INSURANCE CONTRACTS K. INSURANCE COMMISSIONER AND ITS POWER D. CLASSES 1. Marine 2. Fire 3. Casualty 4. Suretyship 5. Life 6. Microinsurance 7. Compulsory motor vehicle liability insurance 8. Compulsory insurance coverage for agency-hired workers E. VARIABLE CONTRACTS F. INSURABLE INTEREST 1. In life/health 2. In property 3. Double insurance and over insurance 4. Multiple or several interests on same property G. PERFECTION OF THE CONTRACT OF INSURANCE 1. Offer and acceptance / consensuality a. Delay in acceptance b. Delivery of the policy 2. Premium payment 3. Non-default options in life insurance 4. Reinstatement of a lapsed policy of life insurance 5. Refund of premiums H. RESCISSION OF INSURANCE CONTRACTS 1. Concealment 2. Misrepresentation/omissions 3. Breach of warranties Page 2 of 393 ATENEO CENTRAL BAR OPERATIONS 2020/21 A. CONCEPT OF INSURANCE Governing Laws 1. P.D. No. 612, as amended by R.A. No. 10607 (hereinafter Insurance Code); 2. Special Laws, such as R.A. No. 1161 (Social Security Act) 3. Civil Code, for matters not expressly provided for in #1 and #2 Contract of Insurance 1. An agreement; 2. Whereby one undertakes for a consideration; 3. To indemnify another against loss, damage or liability 4. Arising from an unknown or contingent event. (Insurance Code, Sec. 2[a]). Note: A contingent event is one that is not certain to take place. An unknown past event is one which had already happened, but one is unaware if it happened or not. A past event may be a designated event only in cases where it has happened already but the parties do not know about it, e.g., prior loss of a ship at sea (applicable only to marine insurance). (De Leon, The Insurance Code of the Philippines Annotated [2014]) Consideration Required in Insurance An insurance business consists in undertaking, for a consideration, to indemnify another against loss, damage or liability arising from an unknown or contingent event. The fact that no profit is derived from the making of insurance contracts, agreements or transactions or that no separate or direct consideration is received therefor, shall not be deemed conclusive to show that the making thereof does not constitute the doing or transacting of an insurance business. (Insurance Code, Sec. 2[b]) Doing or Transacting an Insurance Business 1. Making or proposing to make, as insurer any insurance contract; Making, or proposing to make, as surety, any contract of suretyship as a vocation and COMMERCIAL LAW not as merely incidental to any other legitimate business or activity of the surety; 2. Doing any kind of business including a reinsurance business, specifically recognized as constituting the doing of an insurance business within the meaning of this Code; 3. Doing or proposing to do any business in substance equivalent to any of the foregoing in a manner designed to evade the provisions of this Code. (Insurance Code, Sec. 2[b]) Contract of Suretyship A contract of suretyship is also considered an insurance contract, if made by a surety who is doing insurance business. (P.D. No. 612, as amended by R.A. No. 10607 [hereinafter Insurance Code], Sec. 2[a]). Suretyship is an agreement whereby a party called the “surety” guarantees the performance by another party called the “principal obligor” of an obligation or undertaking in favor of a third party called the “obligee.” It includes official recognizances, stipulations, bonds or undertakings issued by any company by virtue of and under the provisions of Act No. 536, as amended by Act No. 2206. (Insurance Code, Sec. 177) Protection and Indemnity Club – Doing Insurance Business A protection and indemnity club is an association composed of shipowners generally formed for the specific purpose of providing insurance cover against third-party liabilities of its members. It is a mutual insurance association. (Steamship Mutual v. Sulpicio Lines, G.R. No. 196072, 2017) B. ELEMENTS OF AN INSURANCE CONTRACT REQUISITES Requisites of Ordinary Contracts: a. Consent b. Subject-matter c. Cause Page 3 of 393 ATENEO CENTRAL BAR OPERATIONS 2020/21 Additional Requisites for Insurance Contract: (IRADP) a. The insured must possess an interest of some kind susceptible of pecuniary estimation, known as insurable interest; b. The insured is subject to a risk of loss through the destruction or impairment of that interest by the happening of designated perils; c. The insurer assumes the risk of loss; d. Such assumption is part of a general scheme to distribute actual losses among a large group of persons bearing somewhat similar risks; e. As consideration for the insurer’s promise, the insured makes a ratable contribution called premium, to a general insurance fund. COMMERCIAL LAW Contracts for Personal Service Distinguished from Contracts of Insurance Contracts a law firm enters into with clients whereby in consideration of periodical payments, the law firm promises to represent such clients in all suits for or against them are not insurance contracts but are contracts for personal services; A contract by which a corporation, in consideration of a stipulated amount, agrees at its own expense to defend a physician against all suits for damages for malpractice is one of insurance, and the corporation will be deemed as engaged in the business of insurance since the purpose of the contract is to indemnify against loss and damage. (Philippine Health Care Providers v. CIR, G.R. No. 167330, 2009) PARTIES TO AN INSURANCE CONTRACT Note: The presence of these five elements are what separate Insurance from other contracts, and which makes Insurance a “risk-distributing device” (De Leon, The Insurance Code Annotated, 2014) Risk-distributing device A contract of insurance is primarily a riskdistributing device, a mechanism by which all members of a group exposed to a particular risk contribute premiums to an insurer. From these contributory funds are paid whatever losses occur due to exposure to the peril insured against. Test to Determine Whether a Contract is an Insurance Contract It depends on the nature of the promise, the act required to be performed, and the exact nature of the agreement in the light of the occurrence, contingency or circumstances under which the performance becomes requisite. It is not by what it is called (White Gold Marine Services v. Pioneer Insurance, G.R. No. 154514, 2005) Principal Objects and Purpose Test Whether the assumption of risk and indemnification of loss (which are elements of an insurance business) are the principal object and purpose of the organization or whether they are merely incidental to its business. If these are the principal objectives, the business is that of insurance. But if they are merely incidental and service is the principal purpose, then the business is not insurance. (Philippine Health Care Providers v. CIR, G.R. No. 167330, 2009) a. Insurer The party who assumes or accepts the risk of loss and undertakes for a consideration to indemnify the insured or to pay him a certain sum on the happening of a specified contingency or event; An insurer may be: 1. A foreign or domestic company or corporation; or 2. A partnership or an association Insurance Corporations The term insurer or insurance company shall include all partnerships, associations, cooperatives or corporations, including government-owned or -controlled corporations or entities, engaged as principals in the insurance business, excepting mutual benefit associations. Unless the context otherwise requires, the term shall also include professional reinsurers defined in Section 288. Domestic company shall include companies formed, organized or existing under the laws of the Philippines. Foreign company when used without limitation shall include companies formed, organized, or existing under any laws other than those of the Philippines. (Insurance Code, Sec. 190) An Insurance Corporation must have: 1. Sufficient Capital and assets required under the Insurance Code and pertinent regulations issued by the Commission; and 2. A Certificate of Authority to operate issued by the Insurance Commission Page 4 of 393 ATENEO CENTRAL COMMERCIAL LAW BAR OPERATIONS 2020/21 which should be renewable every 3 years. (New Insurance Code, Sec. 193) b. Insured The person in whose favor the contract is operative and who is indemnified against or is to receive a sum upon the happening of a specified event. Requisites in Order that a Person May Be Insured Under a Contract of Insurance: (CIP) (Insurance Code, Sec. 3) 1. He must be competent to enter into a contract; 2. He must possess an insurable interest in the subject of the insurance; and 3. He must not be a public enemy (citizen or subject of a country with whom the Philippines is at war) (Insurance Code, Sec. 7) Effect of War on Existing Insurance Contracts 1. Property Insurance An insurance policy ceases to become valid and enforceable as soon as the insured becomes a public enemy. However, premium paid by the insured (public enemy) shall be returned by the insurer (Filipinas Compania de Seguros v. Christern Huenefield & Co., G.R. No. L-2294, 1951) 2. Life Insurance The contract is abrogated but the insured is entitled to the case or reserve value of the policy (if any), which is the excess of the premiums paid over the actual risk carried during the years when the policy had been in force (Constantino v. Asia Life Insurance, G.R. No. L-1669, 1950) Note: Where the loss occurs after the end of the war, the contract is not revived. Rule on Married Persons The consent of the spouse is not necessary for the validity of an insurance policy taken out by a married person on his or her life or that or his or her children (Insurance Code, Sec. 3, ¶ 2) or that of her husband (Insurance Code, Sec. 10) Note: There are only two parties to a contract of insurance, the insured and the insurer. The beneficiary is NOT a party to the contract unless he is the party to be insured. Also Note: LGBTQ+ members have the right to designate their domestic partners as beneficiaries. An individual who has secured a life insurance policy on his or her own life may designate any person as beneficiary provided that such designation does not fall under the enumerations provided in Article 739 of the Civil Code. (Insurance Commission, Legal Opinion No. 2020-02, dated March 04, 2020) SUBJECT MATTER Risks or Perils That May be Insured a. Any contingent or unknown event, whether past or future, which may damnify (cause damage to) a person having an insurable interest; or b. Any contingent or unknown event, whether past or future, which may create a liability against the person insured (Insurance Code, Sec. 3) Past Events – Marine Insurance A past event which may be insured against is peculiar to Marine Insurance. A person insured by a contract of marine insurance is presumed to have knowledge, at the time of insuring, of a prior loss, if the information might possibly have reached him in the usual mode of transmission and at the usual rate of communication. (Insurance Code, Sec. 111) Contingent Liability Example: Reinsurance Note: Sec. 4 does not authorize an insurance for or against the drawing of any lottery, or for or against any chance or ticket in a lottery drawing a prize. (Insurance Code, Sec. 4) Elements of a Lottery a. Consideration; b. Prizes; and c. Chance [A married woman] may also take out insurance on her paraphernal or separate property, or on property given to her by her husband (Harding v. Commercial Union Assurance, G.R. No. L-12707, 1918) Page 5 of 393 ATENEO CENTRAL COMMERCIAL LAW BAR OPERATIONS 2020/21 Insurance Contract vs. Gambling Contract INSURANCE CONTRACT GAMBLING CONTRACT The parties seek to distribute possible loss by reason of mischance. The parties contemplate gain through mere chance. The insurer seeks to avoid misfortune. The gambler courts fortune. The contract tends to equalize fortune. The contract tends to increase the inequality of fortune. What one insures against is not at the expense of another insured person. Whatever one person wins from a wager is lost by the other wagering party. The purchase of insurance does not create a new, and therefore, nonexisting risk of loss to the purchaser. The purchaser faces an already existing risk of economic loss (“insurable interest”). As soon as a party makes a wager, he creates a risk of loss to himself where no such risk existed previously. In both cases, one party promises to pay a given sum to the other upon the occurrence of a given future event, the promise being conditioned upon the payment of, or agreement to pay, a stipulated amount by the other party to the contract. In either case, one party may receive more, or much more, than he paid or agreed to pay. C. CHARACTERISTICS AND NATURE OF INSURANCE CONTRACTS Consensual Perfected by the meeting of the minds of the parties (Civil Code, Art. 1315) Voluntary It is not compulsory and the parties may incorporate such terms and conditions as they may deem convenient which will be binding. Provided: They are not contrary to law, morals, good customs, public order, or public policy. Aleatory It is an aleatory but not a wagering contract. By an aleatory contract, one of the parties or both reciprocally bind themselves to give or to do something in consideration of what the other shall give or do upon the happening of an event which is uncertain, or which is to occur at an indeterminate time. The insurer’s liability depends upon the happening of an uncertain event which is to occur at an indeterminate time. Unilateral A contract of insurance is executed as to the insured after the payment of the premium. It is executory as to the insurer since it is not executed until payment for a loss. Personal Each party to it, in entering into the insurance contract, takes into account the character, credit and conduct of the other. Conditional The insurer’s liability is based on the happening of the event insured against. Contract of Indemnity General Rule: Indemnity is the basis of all property insurance. The insured who has insurable interest over a property is only entitled to recover the amount of actual loss sustained and the burden is upon him to establish the amount of such loss. Exception: life and accident insurance where measure of indemnity is the amount fixed in the policy. Uberrimae Fides Contract The contract of insurance is one of perfect good faith not for the insured alone, but equally so for the insurer (Qua Chee Gan v. Law Union Rock, G.R. No. L-4611, 1955). Construction of Insurance Contract – Contract of Adhesion Insurance contracts are contracts of adhesion the terms of which must be interpreted and enforced stringently against the insurer which prepared the contract. Page 6 of 393 ATENEO CENTRAL BAR OPERATIONS 2020/21 Limitations of liability on the part of the insurer or health care provider must be construed in such a way as to preclude it from evading its obligations. Accordingly, they should be scrutinized by the courts with extreme jealousy and care and with a jaundiced eye. (Blue Cross Health Care v. Olivares, G.R. No. 169737, 2008) The terms in an insurance policy which are ambiguous, equivocal, or uncertain are to be construed strictly and most strongly against the insurer, and liberally in favor of the insured so as to effect the dominant purpose of indemnity or payment to the insured (Calanoc v. CA, G.R. No. L-8218, 1955) D. CLASSES OF INSURANCE 1. MARINE (Insurance Code, Secs. 101-168) An agreement to indemnify against injury to a ship, cargo, or profits involved in a certain voyage or for a specific vessel during a fixed period. However, the Insurance Code does not limit marine insurance to risks of navigation. (Insurance Code, Sec. 101) 2. FIRE (Insurance Code, Secs. 169-175) Insurance against loss by fire, lightning, windstorm, tornado or earthquake and other allied risks, when such risks are covered by extension to fire insurance policies or under separate policies (Insurance Code, Sec. 169) 3. CASUALTY (Insurance Code, Sec. 176) Insurance covering loss or liability arising from accident or mishap, excluding certain types of loss which by law or custom are considered as falling exclusively within the scope of other types of insurance such as fire or marine. It includes, but is not limited to, employer’s liability insurance, motor vehicle liability insurance, plate glass insurance, burglary and theft insurance, personal accident and health insurance as written by non-life insurance companies, and other substantially similar kinds of insurance (Insurance Code, Sec. 176) 4. SURETYSHIP (Insurance Code, Secs. 177180) COMMERCIAL LAW Agreement whereby a party called the surety guarantees the performance by another party called the principal or obligor of an obligation or undertaking in favor of a third party called the obligee. It includes official recognizances, stipulations, bonds or undertakings issued by any company by virtue of and under the provisions of Act No. 536, as amended by Act No. 2206 (Insurance Code, Sec. 177) 5. LIFE (Insurance Code, Secs. 50, 181-186, 233-237) Insurance on human lives and insurance appertaining thereto or connected therewith (Insurance Code, Sec. 181) 6. MICROINSURANCE Microinsurance is a financial product or service that meets the risk protection needs of the poor where: a. The amount of contributions, premiums, fees or charges, computed on a daily basis, does not exceed 7.5% of the current daily minimum wage rate for nonagricultural workers in Metro Manila; and b. The maximum sum of guaranteed benefits is not more than 1,000 times of the current daily minimum wage rate for nonagricultural workers in Metro Manila. 7. COMPULSORY MOTOR VEHICLE LIABILITY INSURANCE (Insurance Code, Secs. 386-402) Contract of insurance against passenger and third-party liability for death or bodily injuries and damage to property arising from motor vehicle accidents (Insurance Code, Sec. 386 [f]) 8. COMPULSORY INSURANCE COVERAGE FOR AGENCY-HIRED WORKERS Each migrant worker deployed by a recruitment/manning agency shall be covered by a compulsory insurance policy which shall be secured at no cost to the said worker. (Migrant Workers and Overseas Filipinos Act of 1995, as Amended) Compulsory insurance coverage for agencyhired Filipino workers under R.A 10022 shall be without cost to the worker. This will cover accidental death, natural death, compassionate visit, medical evacuation, medical repatriation and repatriation of mortal remains. Page 7 of 393 ATENEO CENTRAL COMMERCIAL LAW BAR OPERATIONS 2020/21 E. VARIABLE CONTRACTS Variable Contract Any policy or contract on either a group or individual basis issued by an insurance company providing for benefits or other contractual payments or values thereunder to vary so as to reflect investment results of any segregated portfolio of investment. F. INSURABLE INTEREST Interest which the law requires the owner of an insurance policy to have in the thing or person insured. General Rule: It is pecuniary in nature. A person is deemed to have an insurable interest in the subject matter insured where he has a relation or connection with or concern in it that he will derive pecuniary benefit or advantage from its preservation and will suffer pecuniary loss or damage from its destruction, termination or injury by the happening of the event insured against. (Lalican v. Insular Life Insurance Co, G.R. No. 183526, 2009) Exception: Life Insurance The expectation of benefit from the continued life of that person need not necessarily be of pecuniary nature. 1. IN LIFE/HEALTH a. Himself, of his spouse and of his children; If a person will insure the life of another payable to himself, he must have an insurable interest in the life of the person whose life he is insuring. b. Any person on whom he depends wholly or in party for education or support, or in whom he has pecuniary interest; Note: Persons obliged to support each other: See Family Code, Art. 195 c. Any person under a legal obligation to him for the payment of money, or respecting property or services, of which death or illness might delay or prevent the performance; and Note: A creditor may insure his debtor’s life for the purpose of protecting his debt, but only to the extent of the amount of the debt and the cost of carrying the insurance on the debtor’s life. d. Any person upon whose life any estate or interest vested in him depends. (Insurance Code, Sec. 10) Life Insurance v. Civil Donation LIFE INSURANCE CIVIL DONATION This is also founded on liberality, as the beneficiary will receive the proceeds of the said insurance. An act of liberality whereby a person disposes gratuitously a thing or right in favor of another who accepts it. As a consequence, the proscription in Civil Code, Art. 739 should equally operate in life insurance contracts (Insular Life v. Ebrado, G.R. No. L44059, 1977) Beneficiary Person who is named or designated in a contract of life, health, or accident insurance as the one who is to receive the benefits which become payable, according to the terms of the contract, upon the death of the insured (44 Am. Jur. 2d. 639 cited in de Leon, 2010, p. 96). Designation of Beneficiary General rule: When one insures his own life, he may designate any person as the beneficiary, whether or not the beneficiary has an insurable interest in the life of the insured. Exceptions: Persons specified in Article 739 of the Civil Code cannot be designated: a. Those made between persons who were guilty of adultery or concubinage (conviction is not a condition precedent); b. Those made between persons found guilty of the same criminal offense, in consideration thereof; Page 8 of 393 ATENEO CENTRAL BAR OPERATIONS 2020/21 c. Those made to a public officer or his wife, descendants or ascendants by reason of his office. In order for Article 739 to apply, it is not required that there be a previous conviction for adultery or concubinage, due to the wording of “preponderance of evidence” (Insular Life v. Ebrado, G.R. No. L-44059, 1977) Note: LGBTQ+ members have the right to designate their domestic partners as beneficiaries. An individual who has secured a life insurance policy on his or her own life may designate any person as beneficiary provided that such designation does not fall under the enumerations provided in Article 739 of the Civil Code. (Insurance Commission, Legal Opinion No. 2020-02, dated March 04, 2020) When is the estate entitled to the proceeds of the insurance? 1. Where the insured has not designated any beneficiary; or 2. When the designated beneficiary is disqualified by law to receive the proceeds (Heirs of Maramag v. Maramag, G.R. No. 181132, 2009) Notes: 1. The designation is revocable unless the right to revoke is expressly waived in the policy. 2. If the insured or beneficiary is a minor, and the amount involved does not exceed P50,000.00, the father, or in his absence or incapacity, the mother may exercise the minor’s rights under the policy, without the need of a court authority or a bond. 3. If the premiums are paid out of the conjugal funds, the proceeds are considered conjugal. If the beneficiary is other than the insured’s estate, the source of premiums (either from paraphernal or conjugal funds) would not be relevant (BPI v. Posadas, G.R. No. L-34583, 1931). COMMERCIAL LAW Right of Insured to Change Beneficiary in Life Insurance General Rule: The insured shall have the right to change the beneficiary he designated in the policy. (Insurance Code, Sec. 11) Exception: If the insured expressly waived his right to change the beneficiary, this makes the latter an irrevocable beneficiary. But despite the waiver, he can still change the beneficiary, provided that he obtains the beneficiary’s consent. (Insurance Code, Sec. 11) Forfeiture by Beneficiary of Interest in Insurance Policy The interest of a beneficiary in a life insurance policy shall be forfeited when the beneficiary is the principal, accomplice, or accessory in willfully bringing about the death of the insured; in which event, the share forfeited shall be paid as follows: 1. To the other beneficiaries if not disqualified; 2. If no other beneficiaries, in accordance with the policy contract; (e.g. to the contingent or substitute of beneficiaries) 3. If the policy contract is silent, to the estate of the insured. (Insurance Code, Sec. 12) 2. IN PROPERTY Coverage of Insurable Interest in Property 1. Property itself; 2. Any relation thereto; or 3. Liability in respect thereof (Insurance Code, Sec. 13) It may consist of: 1. An existing interest; 2. An inchoate interest founded on an existing interest; or 3. An expectancy, coupled with an existing interest in that out of which the expectancy arises Measure of Insurable Interest in Property The extent to which the insured might be damnified by loss or injury thereof. In general, a person has an insurable interest in the property, if he derives pecuniary benefit or advantage from its preservation or would suffer pecuniary loss, damage or prejudice by its destruction whether he has or has no title in, or lien upon, or possession of the property. Hence, Page 9 of 393 ATENEO CENTRAL COMMERCIAL LAW BAR OPERATIONS 2020/21 pecuniary interest over the property is always necessary. Existence of insurable interest is a matter of public policy. Hence, the principle of estoppel cannot be invoked. Exceptions Sec. 20 Life, health, and accident insurance. 21 A change of interest in the thing insured after the occurrence of an injury which results in a loss. 22 A change of interest in one or more of several things, separately insured by one policy. 23 A change of interest by will or succession on the death of the insured. 24 A transfer of interest by one of several partners, joint owners, or owners in common, who are jointly insured, to the others. 57 When a policy is so framed that it will inure to the benefit of whomsoever, during the continuance of the risk, may become the owner of the interest insured. Insurable Interest in Life v. Property LIFE PROPERTY Basis May be based on pecuniary interest, affinity, or consanguinity. Based on pecuniary interest. When Interest Must Exist In life insurance (save that effected by creditor on life of debtor), it is enough that insurable interest exists at the time the policy takes effect and need not exist at the time of the loss. Must exist when the insurance takes effect and when the loss occurs, but need not exist in the meantime. Amount of Insurable Interest General Rule: No limit. Exception: If insurable interest is based on creditordebtor relationship, only to the extent of the credit or debt. Limited to the actual value of damage/injury/loss. Change in Interest of Thing General rule: A change in interest in the thing insured without a change in insurance does not transfer the policy but suspends it until the interest in the thing and the interest in the insurance are vested in the same person. EXCEPTION Note: When there is an express prohibition against alienation in the policy, in case of alienation, the contract of insurance is not merely suspended but is avoided. (Civil Code, Art. 1306) Change of Interest That Suspends an Insurance Contract The change of interest contemplated by law is an absolute transfer of the insured’s entire interest in the property insured to one not previously interested or insured. In the following cases, the policy is not suspended: (ML2R2) a. b. c. Execution of a Mortgage Lease of the insured property Vendor who has a Lien on the property sold until the purchase price is paid or the conditions of the sale are performed d. Judgment debtor whose property has been sold on execution (Right to redeem) e. Mortgagor whose property has been foreclosed (Right of redemption) Page 10 of 393 ATENEO CENTRAL COMMERCIAL LAW BAR OPERATIONS 2020/21 Extent of Insurable Interest in a Mortgage Situation Interest of the Mortgagor and the Mortgagee in the mortgaged property is separate and distinct from the other. In case both of them take out separate insurance policies on the same property, or one policy covering their respective interests, there is no double insurance. the debt of the mortgagor to the extent of the amount paid to the mortgagee. Mortgagor, as owner, may insure the property mortgaged to the full value of such property. Open or Loss-Payable Mortgage Clause It is a contract which provides that the payment of loss to the mortgagee, if any, will be according to his interest as it may appear in the contract. Under such clause, the acts of the mortgagor will affect the mortgagee. Mortgagee can insure the same only to the extent of the amount of his credit. Insurance by Mortgagor for the Benefit of Mortgagee, or Policy Assigned to the Mortgagee: The insurance is still deemed to be upon the interest of the mortgagor who does not cease to be a party to the original contract. Any act of the mortgagor, prior to the loss, which would otherwise avoid the insurance, will have the same effects, although the property is in the hands of the mortgagee. Any act, which under the contract of insurance is to be performed by the mortgagor, may be performed by the mortgagee with the same effect as if it has been performed by the mortgagor. Upon the occurrence of the loss, the mortgagee is entitled to recover to the extent of his credit and the balance, if any, is payable to the mortgagor since such policy is for the benefit of both the mortgagor and mortgagee. Upon recovery of the mortgagee to the extent of his credit from the insurer, the mortgagor is released from his indebtedness. Insurance by Mortgagee of His Own Interest The mortgagee may collect from the insurer upon the occurrence of the loss to the extent of his credit. Unless otherwise stated in the policy, the mortgagor has no right to collect the balance of the proceeds of the policy after payment of the interest of the mortgagee. The insurer, upon payment to the mortgageeinsured, becomes subrogated to the rights of the mortgagee against the mortgagor and may collect Standard or Union Mortgage Clause If a fire insurance policy contains this, the acts of the mortgagor do not affect the mortgagee. It makes a separate and distinct contract of insurance on the interest of the mortgagee. 3. DOUBLE INSURANCE AND OVER INSURANCE Double insurance exists where the same person is insured by several insurers separately in respect to the same subject and interest. Note: It is not prohibited by law. But it may be contractually prohibited by a provision in an insurance policy. Over insurance exists when the amount of the insurance is beyond the value of the insured’s insurable interest. When there is double insurance and over insurance results, the insured can claim in case of loss only up to the agreed valuation or up to the full insurable value from any, some or all insurers, without prejudice to the insurers ratably apportioning the payments. Insured can also recover before or after the loss, from both insurers the excess premium he has paid. Requisites of Double Insurance: a. The person injured is the same; b. There are two or more insurers insuring separately; c. The subject matter is the same; d. The interest insured is also the same; e. The risk or peril insured against is likewise the same. Double Insurance v. Over Insurance DOUBLE INSURANCE OVER INSURANCE There may be no over insurance as Amount of insurance is beyond the value Page 11 of 393 ATENEO CENTRAL COMMERCIAL LAW BAR OPERATIONS 2020/21 when the sum total of the amounts of the policies issued does not exceed the insurable interest of the insured. of the insured’s insurable interest. Several involved. May have only one insurer involved. insurers insurer’s risk. Insured has to give his consent. Reinsurance One by which an insurer procures a third person to insure him against loss or liability by reason of such original insurance. In every reinsurance contract, the original contract of insurance and the contract of reinsurance are separate and distinct and covered by separate policies. Consent of original insured, not necessary. The reinsurance contracts were correctly issued in favor of Plaridel. By its nature, reinsurance contracts are issued in favor of the direct insurer because the subject of such contracts is the direct insurer’s risk, in this case, Plaridel’s contingent liability to MSAPL, and not the risk assumed under the original policy. With or without reinsurance, the obligation of the surety to the party against whom writ of attachment is issued remains the same (Communication and Information Systems Corporation v. Mark Sensing Australia, G.R. No. 192159, 2016). Insurance vs. Reinsurance INSURANCE POLICY REINSURANCE Written document embodying the terms and stipulations of the contract of insurance between the insured and insurer. Any contract by which an insurer procures a 3rd person to insure him against loss or liability by reason of an original insurance. Formal instrument evidencing contract insurance. The original contract of insurance and the contract of reinsurance are covered by separate policies. written the of Reinsurance v. Double Insurance DOUBLE INSURANCE REINSURANCE Involves the same interest. Insurance of different interests. Insurer remains in such capacity. Insurer becomes an insured in relation to insurer. Insured in the 1st contract is a party in interest in the 2nd contract. Original insured has no interest in reinsurance contract. Subject of insurance is property. Subject of insurance is the original 4. MULTIPLE OR SEVERAL INTERESTS ON SAME PROPERTY Effects of insurance when the mortgagor effects insurance in his own name and provides that the loss be payable to the mortgagee: a. The contract is deemed to be upon the interest of the mortgagor; hence he does NOT cease to be a party to the contract; b. Any action of the mortgagor prior to the loss which would otherwise avoid the insurance affects the mortgagee even if the property is in the hands of the mortgagee; c. Any act which under the contract of insurance is to be performed by the mortgagor, may be performed by the mortgagee; d. In case of loss, the mortgagee is entitled to the proceeds to the extent of his credit; and e. Upon recovery by the mortgagee to the extent of his credit, the debt is extinguished. In case it is the mortgagee who effects the insurance in behalf of the mortgagor, the same rules apply. If an insurer assents to the transfer of an insurance from a mortgagor to a mortgagee, and, at the time of his assent, imposes further obligations on the assignee, making a new contract with him, the acts of the mortgagor cannot affect the rights of said assignee. Page 12 of 393 ATENEO CENTRAL BAR OPERATIONS 2020/21 G. PERFECTION OF THE CONTRACT OF INSURANCE Consensual Nature of Contract A contract of insurance must be assented to by both parties, either in person or through their agents and so long as an application for insurance has not been either accepted or rejected, it is merely a proposal or an offer to make a contract. (Perez v. CA, G.R. No. 112329, 2000) Also, according to Enriquez v. Sun Life Assurance (G.R. No. L-15895, 1920): (1) Submission of application, even with premium payment is a mere offer on the part of the applicant, and does not bind the insurer; (2) An insurance contract is also not perfected where the applicant dies before the approval of his application or it does not appear that the acceptance of the application ever came to the knowledge of the applicant; (3) An acceptance made by letter shall not bind the person making the offer except from the time it came to his knowledge. 1. OFFER AND ACCEPTANCE / CONSENSUALITY COMMERCIAL LAW FORM OF THE CONTRACT Form NOT REQUIRED to perfect a contract of insurance The policy is the formal written instrument evidencing the contract of insurance entered into between the insured and the insurer. No form is required to perfect (i.e., to give rise to rights and obligations) a contract of insurance although an insurer is potentially exposed to sanctions if the following are not complied with: Form of Insurance Contracts 1. No policy, certificate or contract of insurance shall be issued or delivered within the Philippines unless in the form previously approved by the Commissioner; and 2. No application form shall be used with, and no rider, clause, warranty or endorsement shall be attached to, printed or stamped upon such policy, certificate or contract unless the form of such application, rider, clause, warranty or endorsement has been approved by the Commissioner. (Insurance Code, Sec. 232) Cover Note It is a contract for temporary insurance for a reasonable time until the policy or policies can be written or issued by the insurer. a. Delay in acceptance A contract of insurance, like other contracts, must be assented to by the parties either in person, or by their agents. Under the law, assent or consent is manifested by the meeting of the offer and the acceptance upon the thing and the cause which are to constitute the contract. If an application has not been either accepted or rejected, there is no contract yet as it is merely and offer or proposal (Insurance, de Leon, p.176). b. Delivery of the policy The delivery of a policy is not, however, a prerequisite to a valid contract of insurance. The contract may be completed prior to delivery of the policy or even without delivery of the policy depending on the intention of the parties (Insurance, de Leon, p.180). Also called: Binding Receipt or Slip, Interim, Temporary or Provisional Policy Rules on Cover Notes: a. Insurance companies doing business in the Philippines may issue cover notes to bind insurance temporarily, pending the issuance of the policy. b. A cover note shall be deemed to be a contract of insurance within the meaning of Section 1(1) of the Code. c. No cover note shall be issued or renewed unless in the form previously approved by the Insurance Commission. d. A cover note shall be valid and binding for a period not exceeding sixty (60) days from the date of its issuance, whether or not the premium therefor has been paid, but such cover note may be cancelled by either party upon at least seven (7) days’ notice to the other party. e. If a cover note is not so cancelled, a policy of insurance shall, within sixty (60) Page 13 of 393 ATENEO CENTRAL BAR OPERATIONS 2020/21 days after the issuance of such cover note, be issued in lieu thereof. Such policy shall include within its terms the identical insurance bond under the cover note and the premium therefor. f. Cover notes may be extended or renewed beyond such sixty (60) days with the written approval of the Commissioner if he determines that such extension is not contrary to and is not for the purpose of violating any provisions of this Code. The Commissioner may promulgate rules and regulations governing such extensions for the purpose of preventing such violations and may by such rules and regulations dispense with the requirement of written approval by him in the case of extension in compliance with such rules and regulations. (Insurance Code, Sec. 52) g. Insurance companies may impose on cover notes a deposit premium equivalent to at least 25% of the estimated premium of the intended insurance coverage but in no case less than P500.00. (Ins. Cir. Letter, Jan. 17,1980.) (De Leon, The Insurance Code of the Philippines Annotated [2014]) The fact that no separate premium was paid on the cover note before the loss insured against occurred, does not militate against its binding effect as an insurance contract. By their nature, cover notes do not contain particulars that would serve as basis for the computation of the premiums and consequently, no separate premiums are intended or required to be paid therefor (Pacific Timber Export Corp. v. CA, G.R. No. L-38613, 1982) Insurance Policy A written document issued by the insurer to the insured, embodying the terms and conditions of their contract of insurance. The policy is not necessary for the perfection of the contract. The Policy is only the formal written instrument evidencing the contract. It is required, however, that all policies issued or delivered must be in the form previously approved by the Insurance Commission. The BEST EVIDENCE that a contract has been entered into between the insurer and the insured is the DELIVERY of the policy by the insurer to the insured. COMMERCIAL LAW Rider Attachment to an insurance policy that modifies the conditions of the policy by expanding or restricting its benefits or excluding certain conditions from the coverage. Formal requirements of riders Riders, together with other attachments to the policy, like clause, warranty or endorsements, are not binding on the insured unless: 1. The descriptive title or name thereof is mentioned and written on the blank spaces provided in the policy and; 2. Countersigned by the insured or owner. Exception: No need to countersign if the rider or other attachment is applied for by the insured or owner of the policy A rider containing an “Automatic Increase Clause” – one that increases the coverage subject to the attainment of a certain age of the insured – is not a separate contract. It is part of the original policy which is in the nature of a conditional obligation (Commissioner of Internal Revenue v. Lincoln Philippine Life Insurance Company, G.R. No. 119176, March 19, 2001). Note: If there is inconsistency between the policy and the rider, the rider prevails, it being a more deliberate expression of the agreement of the parties. Formal Requirements of a Policy a. In printed form which may contain blank spaces; b. Any word, phrase, clause, mark, sign, symbol, signature, number or word necessary to complete the contract of insurance shall be written in the blank spaces provided therein. (Insurance Code, Sec. 50) Contents of an Insurance Policy a. The parties between whom the contract is made; b. The amount to be insured except in the cases of open or running policies; c. The premium, or if the insurance is of a character where the exact premium is only determinable upon the termination of the contract, a statement of the basis and rates upon which the final premium is to be determined; d. The property or life insured; Page 14 of 393 ATENEO CENTRAL COMMERCIAL LAW BAR OPERATIONS 2020/21 e. The interest of the insured in property insured, if he is not the absolute owner thereof; f. The risks insured against; and g. The period during which the insurance is to continue. (Insurance Code, Sec. 51) Kinds of Policies a. Open or Unvalued Policy Value of thing insured is not agreed upon, but left to be ascertained in case of loss;(ex. Marine and Fire Insurances) (Insurance Code, Sec. 60) In an open policy, the value of the property insured is not agreed upon, although the parties may agree on the maximum amount of recovery or limit to the liability of the insurer. In case of loss, this amount must be considered, by agreement of the insurer and the insured, the actual value of the property in the absence of evidence of greater or lesser value. (Dev’t Ins. Corp. v. IAC, G.R. No. L-71360, 1986). b. Valued Policy Definite valuation is agreed upon by both parties, and written on the face of the policy; (ex. Marine and Fire Insurances) (Insurance Code, Sec. 51) An insurer is entitled to payment of the premium as soon as the thing insured is exposed to the peril insured against. Effect of Non-Payment of Premium General Rule: Non-payment of first premium - prevents the contract from becoming binding notwithstanding the acceptance of the application or the issuance of the policy. But non-payment of the balance of the premium due does not produce the cancellation of the contract. (Phil. Phoenix Surety & Insurance v. Woodworks, G.R. No. L-22684, Aug. 31, 1967). Subsequent premiums - does not affect the validity of the contracts unless, by express stipulation, it is provided that the policy shall in that event be suspended or shall lapse. Exceptions to General Rule as to Payment of Premiums: a. In case of life and industrial life whenever the grace period provision applies. Individual Life or Endowment Insurance and Group Life Insurance Grace period of either thirty (30) days or one (1) month within which the payment of any premium after the first may be made c. Running Policy Also called Floating, Adjustable, Blanket or Declaration Policy; Contemplates successive insurances and which provides that the subject of the policy may from time to time be defined. (Insurance Code, Sec. 62) Void Stipulations in an Insurance Contract a. Stipulations for the payment of loss whether the person insured has or has not any interest in the property insured; or b. The policy shall be received as proof of such interest, or c. Policies executed by way of gaming or wagering. 2. PREMIUM PAYMENT Premium Premium is the consideration paid to an insurer for undertaking to indemnify the insured against a specified peril. Industrial Life Insurance Grace period is four (4) weeks, and where premiums are payable monthly, either thirty (30) days or one (1) month. b. Where there is an acknowledgement in the contract or policy of insurance that the premium had already been paid. (Insurance Code, Sec. 79) c. There is an agreement allowing the insured to pay the premium in installments and partial payment has been made at the time of loss (Makati Tuscany Condominium v. Court of Appeals, G.R. No. 95546, 1992) Cf. Where the policy provides for payment in premium in full before the “policy shall be deemed effective, valid, and binding upon the company” – the partial payment is merely treated as a Page 15 of 393 ATENEO CENTRAL BAR OPERATIONS 2020/21 deposit and does not make the policy binding. (Sps. Tibay v. CA, G.R. No. 119655, 1996) d. Where a credit term was agreed upon like the agreement in where the insurer granted a 60-90-day credit term for the payment of the premiums despite full awareness of Section 77 (UCPB General Insurance, Inc. v. Masagana Telemart, G.R. No. 137172, 1999) e. Where the parties are barred by estoppel. (Jose Marques, et al. vs. Far East Bank and Trust Company, et al. / Far East Bank and Trust Company, et al. vs. Jose Marques, et al. G.R. No. 171379/G.R. No. 171419, 2011). Given the provisions of the Insurance Code, which is a special law, the applicable rate of interest shall be that imposed in a loan or forbearance of money as imposed by the BSP. The unpaid amount due from insurer is a forbearance of money. So, the proper rate applies (Stronghold Insurance Co., Inc. v. Pamana Island Resort Hotel and Marina Club, Inc., G.R. No. 174838, 2016). Authority of Agent to Receive Premium Where an insurer authorizes an insurance agent or broker to deliver a policy to the insured, it is deemed to have authorized said agent to receive the premium in its behalf. The insurer is also bound by its agent’s acknowledgement of receipt of payment of premium (American Home Assurance Co. v. Chua, G.R. No. 130421,1999). 3. NON-DEFAULT OPTIONS IN LIFE INSURANCE Options to a Policy-holder The options available to a policyholder in case of non-payment of premium after three full annual premiums have been paid are: a. Received the cash surrender value b. Apply such value as the premium for an extended insurance c. Apply such value as the premium for a paid-up insurance d. Secure from such value an automatic premium loan before the expiration of the grace period COMMERCIAL LAW Cash Surrender Value An amount to be paid to the insured upon surrender of the policy contract. Alternatives to Cash Surrender Value a. Extended Insurance/Term Insurance Where insurance is "extended," the insured is given the right, upon default, after the payment of at least three full annual premiums (see Sec. 227[f].), to have the policy continued in force from the date of default for a time either stated or equal to the amount as the net value of the policy taken as a single premium, will purchase. In case of death of the insured within the extended term, he may recover the face value of the policy. Extended insurance is sometimes called "term insurance," "temporary insurance," or "paid-up extended insurance." (De Leon, The Insurance Code of the Philippines Annotated [2014]) b. Paid-up Insurance Where insurance is "paid-up," the insured is given the right, upon default, after the payment of at least three annual premiums (Ibid.) to have the policy continued in force from the date of default for the whole period of the insurance without further payment of premiums. In case of death of the insured, he may recover only the "paid-up" value of the policy, usually less than the "paid-up" premiums, under the same conditions as the original policy. Technically, the term "paid-up" insurance is often referred to as "reduced paidup" insurance. (De Leon, The Insurance Code of the Philippines Annotated [2014]) c. Automatic Premium Loan This provision protects against the unintentional lapse of the contract by advancing, in the form of policy loan, the unpaid amount of a premium due. The automatic premium loan is advantageous to the policy owner because it helps to continue the contract and all its features in full force and effect. Conditions: 1. In the event of default in premium payment, the Premium Loan provision shall only apply if requested in writing by the policyholder either in the application or at any time before the expiration of the grace period. 2. The moment there is default in premium payment and no option has been elected either in the application or within the time specified in the policy, one of the paid-up options specified therein shall Page 16 of 393 ATENEO CENTRAL BAR OPERATIONS 2020/21 automatically take effect. (De Leon, The Insurance Code of the Philippines Annotated [2014]) 4. REINSTATEMENT OF A LAPSED POLICY OF LIFE INSURANCE A provision that the policyholder shall be entitled to have the policy reinstated at any time within three years from the date of default of premium payment unless the cash surrender value has been duly paid, or the extension period has expired, upon production of evidence of insurability satisfactory to the company and upon payment of all overdue premiums and any indebtedness to the company upon said policy, with interest rate not exceeding that which would have been applicable to said premiums and indebtedness in the policy years prior to reinstatement. Requisites for Reinstatement of Lapsed Life Insurance Policy a. Application shall be made within three years from the date of lapse; b. There should be a production of evidence of the good health of the insured: c. If the rate of premium depends upon the age of the Beneficiary, there should likewise be a production of evidence of his or her good health; d. There should be presented such other evidence of insurability at the date of application for reinstatement; e. There should be no change which has taken place in such good health and insurability subsequent to the date of such application and before the policy is reinstated; and f. All overdue premiums and other indebtedness in respect of the policy, together with interest at six per cent, compounded annually, should first be paid. (Andres v. Crown Life Insurance Co., G.R. No. L-10874, 1958) Insular Life’s argument was that the two-year contestability period of the reinstated insurance policy had not lapsed inasmuch as the insurance policy was reinstated only on December 27, 1999. The Court notes that the reinstatement was conditioned upon the payment of additional premium not only prospectively, that is, to cover the remainder of the annual period of coverage, but also retroactively, that is for the period starting COMMERCIAL LAW June 22, 1999. An insurance contract is a contract of adhesion which must be construed liberally in favor of the insured and strictly against the insurer in order to safeguard the latter’s interest (The Insular Life Assurance Company v. Paz Khu, G.R. No. 195176, 2016). 5. REFUND OF PREMIUMS Instances for Refund The insured is entitled to return of premiums paid when: a. The thing insured was never exposed to the risks insured against; b. Contract is voidable due to the fraud or misrepresentation of insurer; c. Insurer never incurred liability; d. The insurance is for a definite period and the insured surrenders his policy before the termination thereof (pre-termination); e. Contract is voidable because of the existence of facts of which the insured was ignorant without his fault; f. There is over-insurance (but only a ratable return of premium); and g. rescission is granted due to the insurer’s breach of contract. Payment of Interest on Refund of Premium: Sections 243 and 244 of the Insurance Code explicitly provide for payment of interest when there is unjustified refusal or withholding of payment of claim by the insurer. Article 2209 of the Civil Code likewise provides for payment of interest when the debtor is in delay. However, in cases where the refusal to refund insurance premiums is because the insurer wants to rescind the insurance contract on account of concealment, the insurance company did not unreasonably deny or withhold the insurance proceeds (Sun Life v. Tan Kit, G.R. No. 183272, 2014). Premium Necessary for Suretyship General rule: Premium is also necessary in order for the contract of suretyship or bond to be binding. Exception: Where the obligee has accepted the bond, it is binding even if the premium has not been paid subject to the right of the insurer to recover the premium from its principal (Philippine Pryce Assurance Corporation v. CA, G.R. No. 107062, 1994). Page 17 of 393 ATENEO CENTRAL BAR OPERATIONS 2020/21 Note: The official receipts in question serve as proof of payment of the premium for one year on each surety bond. It does not, however, automatically mean that the surety bond is effective for only one (1) year. In fact, the effectivity of the bond is not wholly dependent on the payment of premium (Country Bankers Insurance Corporation v. Antonio Lagman, G.R. No. 165487, 2011). H. RESCISSION OF INSURANCE CONTRACTS Primary Concerns of the Insurer a. Correct estimation of risk which enables insurer to determine if he will approve the policy application and if so, at what premium rate; b. Delimitation of the risk; c. Control of risk to guard against increase in risk; d. Determine if loss occurs and if so, the amount thereof. Devices of Insurer in Ascertaining and Controlling Risks a. Concealment b. Representations c. Warranties Statements or promises by the insured, whether expressed, implied, affirmative or promissory, set forth in the policy itself or incorporated in it by proper reference, the untruth or non-fulfilment of which in any respect, and without reference to whether the insurer was in fact prejudiced by such untruth or nonfulfilment renders the policy voidable by the insurer. d. Conditions e. Exceptions Stipulations excluding certain specified risks that otherwise would be included under the general language describing the risks assumed. 1. CONCEALMENT A neglect to communicate that which a party knows and ought to communicate (Insurance Code, Sec. 26) COMMERCIAL LAW Requisites of Concealment (KDNA) a. A party knows the fact which he neglects to communicate or disclose to the other; b. Such party concealing is duty bound to disclose such fact to the other; c. Such party concealing makes no warranty of the fact concealed; and d. The other party has not the means of ascertaining the fact concealed. Proof of Fraud in Concealment General Rule: Fraud need not be proven in order to prove concealment. Good faith is not a defense. (Saturnino vs Phil. American Life Insurance, G. R. No. L-16163, 1963) Proof of fraudulent intent is unnecessary for the rescission of an insurance contract on account of concealment. It is because in insurance contracts, concealing material facts is inherently fraudulent: "if a material fact is actually known to the [insured], its concealment must of itself necessarily be a fraud." When one knows a material fact and conceals it, "it is difficult to see how the inference of a fraudulent intent or intentional concealment can be avoided.” Thus, a concealment, regardless of actual intent to defraud, "is equivalent to a false representation." (Insular Life vs Heirs of Alvarez, G.R. No. 207526) Exception: When the concealment is made by the insured in relation to the falsity of a warranty, the non-disclosure must be intentional and fraudulent in order that the contract may be rescinded. (Insurance Code, Sec. 29) Effect of Concealment General Rule: Concealment, whether intentional or not, entitles the injured party to rescind a contract of insurance, (Insurance Code, Sec. 27) even if the death or loss is due to a cause not related to the concealed matter. (Sunlife v. CA, G.R. No. 105135, 1995) Exceptions: a. Incontestability Clause (Insurance Code, Secs. 48 and 233[b]) b. Concealment made after the contract has become effective; c. Waiver or estoppel; d. In marine insurance, in situations where concealment does not vitiate the entire Page 18 of 393 ATENEO CENTRAL BAR OPERATIONS 2020/21 contract, but merely exonerates the insurer from a loss resulting from the risk concealed (Insurance Code, Sec. 112) Instances When Concealment Made by an Agent Procuring Insurance Binds Principal a. Where it was the duty of the agent to acquire and communicate information of the facts in question; b. Where it was possible for the agent, in the exercise of reasonable diligence, to have made the communication before the making of the insurance contract. Failure on the part of the insured to disclose such facts known to his agent, or wholly due to the fault of the agent, will avoid the policy, despite the good faith of the insured. Rules on Disclosure of Information Items to disclose to the other, in good faith, even without inquiry  Party concealing must have knowledge of the facts concealed;  Facts concealed must be material to the risk;  Party is duty bound to disclose such fact to the other;  Party concealing makes no warranty as to the facts concealed;  Other party has no other means of ascertaining the facts concealed. Items to disclose upon inquiry General Rule: Neither party to the insurance contract is bound to communicate information on the following matters Exception: Except in answer to the inquiries of the other: a. Those of which the other knows; b. That which, in the exercise of ordinary care, the other ought to know and of which the former has no reason to suppose his ignorance, i.e. political situation, general usages of trade; c. Those of which the other waives communication; d. Those which prove or tend to prove the existence of the risk excluded by a warranty and which are not otherwise material; and e. Those which relate to a risk excepted from the policy and which are not COMMERCIAL LAW otherwise material. (Insurance Code, Sec. 30) Disclosure of Insurable Interest General rule: The insured is not required to communicate the nature (or kind) or the amount of his insurable interest in the life or property insured to the insurer. Exceptions: a. When the insurer makes inquiry from the insured of the nature or amount of the latter’s insurable interest, whether in life or property insurance; b. Insurance policy must specify the interest of the insured in the property insured, if he is not the absolute owner thereof. Waiver of Disclosure of Material Facts a. By the terms of the insurance (express waiver); or b. By the neglect to make inquiry as to such facts, where they are distinctly implied in other facts which information is communicated (implied waiver). (Sec. 33, Insurance Code) No duty to disclose opinions Neither party is bound to communicate his mere opinion, speculation, intention or expectation even upon inquiry, because such opinion would add nothing to the appraisal of the application. (Insurance Code, Sec. 35) Materiality Materiality is to be determined not by the event, but solely by the probable and reasonable influence of the facts upon the party to whom the communication is due: a. In forming his estimate of the disadvantages of the proposed contract; or b. In making his inquiries. (Insurance Code, Sec. 31) Test of Materiality Was the insurer misled or deceived into entering a contract obligation or in fixing the premium of insurance by a withholding of material information or facts within the assured’s knowledge or presumed knowledge? (Argente v. West Coast Life, G.R. No. L-24899, 1928) It is sufficient that his non-disclosure misled the insurer in forming his estimates of the risks of the proposed insurance policy or in making inquiries Page 19 of 393 ATENEO CENTRAL BAR OPERATIONS 2020/21 COMMERCIAL LAW (Sunlife Assurance Company v. CA, G.R. No. 105135, 1995). his part to mislead the insurer. (Ng Zee v. Asian Crusader, G.R. No. L-30685, 1983) The materiality of the existence of other insurance contracts against fire upon the same property insured, when its disclosure is one of the conditions specified in the fire insurance policy, is not open to doubt (Union Mfg. v. Phil. Guaranty, G.R. No. L-27932, October 30, 1972) 2. MISREPRESENTATION/OMISSIONS Materiality in Medical Examinations General rule: non-disclosure is concealment In non-medical insurance (which does away with the usual medical examination before the policy is issued), the waiver by said insurance company makes the previous health conditions of the insured more material (Saturnino v. Phil. American Life Ins., G.R. No. L-16163, 1963) Where the applicant concealed the fact that he had pneumonia, diabetes or syphilis, the policy is avoided although the cause of the death (e.g., plane crash) be totally unconnected with the material fact concealed or misrepresented. The withholding by the applicant, father of oneyear-old insured, of the fact that his daughter was typically a mongoloid child, of which he was fully aware, as such a congenital physical defect could never be ensconced nor disguised, in supplying essential data for the insurance application form which fact is material to the contract, constitutes fraudulent concealment (Great Pacific v. CA, G.R. No. L-31845, 1979) Exception: Imprecise description of information is not concealment. Where the insured lacked sufficient medical knowledge as to enable him to distinguish between “peptic ulcer” and “tumor” the insured cannot claim that he was deceived into entering into the contract. In the absence of evidence that the insured had sufficient medical knowledge as to enable him to distinguish between "peptic ulcer" and a "tumor," his statement that said tumor was "associated with peptic ulcer of the stomach" should be construed as an expression made in good faith of his belief as to the nature of his ailment and operation. Such statement must be presumed to have been made by him without knowledge of its incorrectness and without any deliberate intent on Definition It is a factual statement made by the insured at the time of, or prior to, the issuance of the policy, to give information to the insurer and otherwise induce him to enter into the insurance contract. A representation cannot qualify an express provision in a contract of insurance but it may qualify an implied warranty. (Insurance Code, Sec. 40) Form Oral or written. (Insurance Code, Sec. 36) When made It may be made orally or in writing. It may be made at the time of, or before, the issuance of the policy. (Insurance Code, Sec. 37) It may be altered or withdrawn before the insurance is effected, but not afterwards. (Insurance Code, Sec. 41) Requisites for Misrepresentations (UWiM) 1. The insured stated a fact which is untrue; 2. Such fact was stated with knowledge that it is untrue and with intent to deceive or which he states positively as true without knowing it to be true and which has a tendency to mislead; 3. Such fact in either case is material to the risk. Misrepresentation as Affirmative Defense Misrepresentation is an affirmative defense. To avoid liability, the insurer has the duty to establish such a defense by satisfactory and convincing evidence. (Ng Gan Zee v. Asian Crusader, G.R. No. L-30685, 1983) The fraudulent intent on the part of the insured must be established to entitle the insurer to rescind the contract. Misrepresentation as a defense of the insurer to avoid liability is an affirmative defense and the duty to establish such defense by satisfactory and convincing evidence rests upon the insurer. (Manulife Philippines v. Ybanez, G.R. No. 204736, 2016) Page 20 of 393 ATENEO CENTRAL COMMERCIAL LAW BAR OPERATIONS 2020/21 Kinds of Representation: 1. Affirmative - an affirmation of a fact existing when the contracts begins; or 2. Promissory - a statement by the insured concerning what is to happen during the term of the insurance. Effect of Expressions of Opinion or Expectation on Insurance Policy A representation of the expectation, intention, belief, opinion or judgment of the insured, although false, WILL NOT AVOID a policy of insurance if there is no actual fraud in inducing the acceptance of the risk, or its acceptance at a lower rate of premium (Philam Health Systems v. CA, G.R. No. 125678, 2002); However, in a marine insurance, information of the belief or expectation of a third person, in reference to a material fact, is material. (Insurance Code, Sec. 110) Adoption of Misrepresentation An insured who signed the pension plan application, adopted as his own the written representations and declarations embodied in it (Ma. Lourdes S. Florendo vs. Philam Plans, Inc., Perla Abcede, et al., G.R. No. 186983, 2012). Effect of Misrepresentation If there is misrepresentation, the injured party is entitled to rescind from the time when the representation becomes false. (Insurance Code, Sec. 45) The injured party can rescind the contract when: a. The representation fails to correspond with the facts (Insurance Code, Sec. 44); and b. It is false in a material point (Insurance Code, Sec. 45) Note: The materiality of a representation is determined by the same rules as the materiality of concealment. (Insurance Code, Sec. 46) Concealment vs. Misrepresentation CONCEALMENT The insured withholds information of material facts from the insurer. MISREPRESENTATION The insured makes erroneous statements of facts with the intent of inducing the insurer to enter into the insurance contract. Passive form of the act. Active form of the act. Usually occurs prior to making of the insurance contract. Maybe made at the time of the insurance of the contract. In cases of rescission due to concealment, proof of fraudulent intent not necessary In cases of rescission due to misrepresentation, proof of fraudulent intent necessary The Insurance Code dispenses with proof of fraudulent intent in cases of rescission due to concealment, but not so in cases of rescission due to false representations. Concealment of material facts is fraudulent in and of itself. (The Insular Life Assurance Co., Ltd. v. Heirs of Alvarez, G.R. Nos. 207526 & 210156, 2018) 3. BREACH OF WARRANTIES Warranty A statement or promise set forth in the policy or by reference incorporated therein, the untruth or nonfulfillment of which in any respect, and without reference to whether insurer was in fact prejudiced by such untruth or non-fulfillment, renders the policy VOIDABLE by the insurer. Kinds of Warranties a. Express – An agreement contained in the policy or clearly incorporated therein as part thereof whereby the insured stipulates that certain facts relating to the risk are or shall be true or certain acts relating to the same subjects have been or shall be done. b. Implied – Warranties that are deemed included in the contract, although not expressly mentioned. They are found usually in marine insurance. c. Affirmative – Asserts the existence of a fact or condition at the time it is made; d. Promissory – The insured stipulates that certain facts or conditions shall exist or thin shall be done or omitted. Page 21 of 393 ATENEO CENTRAL COMMERCIAL LAW BAR OPERATIONS 2020/21 Warranty v. Reproduction WARRANTY REPRESENTATION Part of the contract. Collateral inducement. Written on the policy or in a valid rider or attachment. (except for implied warranties) Need not be written. Generally, conclusively presumed to material. Should established material. be to be be Falsity or nonfulfillment operates as a breach of contract. Falsity renders the policy voidable or rescissible on the ground of fraud. Facts warranted must be strictly complied with. Requires only to be substantially true. Where express warranty must be contained a. The policy itself; or b. In another instrument signed by the insured and referred to in the policy as making a part of it. Effect of Breach of Warranty General Rule: The violation of a material warranty or other material provision of the policy gives the insurer the right to rescind the insurance policy (Insurance Code, Sec. 74) Note: A policy may declare that a violation of specified provisions thereof shall avoid it. Otherwise, the breach of an immaterial provision does not avoid the policy. (Insurance Code, Sec. 75) Exception: The below instances of warranties relating to the future a. Loss occurs before the time of performance of the warranty; b. The performance becomes unlawful; c. Performance becomes impossible. (Insurance Code, Sec. 73) Note: Waiver or estoppel may also prevent the insurer from being discharged from liability (Pioneer v. Yap, G.R. No. L-36232, 1974) Other Insurance Clause – This is a clause in the policy that provides that the policy shall be void if the insured procures additional insurance without the consent of the insurer. The purpose is to prevent over-insurance and thus to avert the possibility of a perpetration of fraud. It is a warranty that entitles the insurer to rescind in case of breach. The “other insurance clause” may be subject to waiver but the waiver must either be express or if it is to be implied from conduct mainly, said conduct must be clearly indicative of a clear intent to waive such right. There must be clear showing that the insurer knew about the violation of the clause (General Insurance and Surety Corp. v. Ng Hua, G.R. No 14373, 1960). EXERCISE OF THE RIGHT TO RESCIND Time to Exercise the Right to Rescind a. Non-Life Policy – Prior to the commencement of an action on the contract. b. Life Policy – Before the incontestability clause sets in. Requisites of Incontestability Clause: a. The insurance is a life insurance policy. b. It is payable on the death of the insured. c. It has been in force during the lifetime of the insured for at least 2 years from its date of issue or of its last reinstatement. Note: The period of 2 years may be shortened but it cannot be extended by stipulation. When incontestability clause sets in Whichever is earlier, between: a. Within 2 years from the date of issuance or its last reinstatement; or b. Upon the insurer’s death (Sun Life v. Sibya, G.R. No. 211212, 2016) After the two-year period lapses, or when the insured dies within the period, the insurer must make good on the policy, even though the policy was obtained by fraud, concealment, or misrepresentation (Sun Life v. Sibya, G.R. No. 211212, 2016). Defenses Not Barred by Incontestability Clause: a. Person taking the insurance lacked insurable interest as required by law; Page 22 of 393 ATENEO CENTRAL BAR OPERATIONS 2020/21 b. Cause of the death of the insured is excepted risk; c. Premiums have not been paid; d. Conditions of the policy relating to military or naval service have been violated; e. The fraud is of a particularly vicious type, wherein: i. The policy was taken in furtherance of a scheme to murder the insured; ii. The insured instituted another person for the medical examination; and, iii. The beneficiary feloniously killed the insured; f. Beneficiary failed to furnish proof of death or to comply with any condition imposed by the policy after the loss has happened; or, g. Action was not brought within the time specified. Insurer is Liable if: a. Loss, the proximate cause of which is the peril insured against; b. Loss, the immediate cause of which is the peril insured against except where proximate cause is an excepted peril; c. Loss through the negligence of insured except where there was gross negligence amount to willful act; and d. Loss caused by efforts to rescue the thing from peril insured against – if during the course of rescue, the thing is exposed to a peril not insured against, which permanently deprives the insured of its possession, in whole or in part. Insurer is Not Liable if: a. Loss by insured’s willful act or gross negligence; b. Loss due to connivance of the insured; c. Loss where the excepted peril is the proximate cause. CANCELLATION OF NON-LIFE INSURANCE COMMERCIAL LAW e. Physical changes in the property insured making it uninsurable; and f. Determination by the Insurance Commissioner that the policy would violate the Insurance Code. (Sec. 64, Insurance Code) Requisites for Cancellation by Insurer (Other Than Life Insurance Contracts) a. Prior notice of cancellation to insured; b. Notice must be based on the occurrence after effective date of the policy of one or more of the grounds mentioned; c. Notice must be in writing, mailed or delivered to the insured at the address shown in the policy; and d. Notice must state the grounds relied upon and upon request of insured, to furnish facts on which cancellation is based. Prior Notice is required to prevent the cancellation of the policy, without allowing the insured ample opportunity to negotiate for other insurance in its stead for his own protection (Saura Import & Export v. Phil. International Surety, G.R. No. L-15184, 1963). Renewal of Non-Life Insurance The insured shall be entitled to renew the policy upon payment of the premium due on the effective date of the renewal. Policy written:  Term of less than one (1) year considered as if written for a term of one (1) year  Term longer than one (1) year or any policy with no fixed expiration date considered as if written for successive policy periods or terms of one (1) year Exception: The insurer at least forty-five (45) days in advance of the end of the policy period mails or delivers to the named insured at the address shown in the policy notice of its intention not to renew the policy or to condition its renewal upon reduction of limits or elimination of coverages (Insurance Code, Sec. 66) Grounds for Cancellation of a Non-Life Policy by the Insurer a. Non-payment of premium; b. Conviction of a crime out of acts increasing the hazard insured against; c. Fraud or material misrepresentation; d. Willful or reckless acts or omissions increasing the risk insured against; Page 23 of 393 ATENEO CENTRAL COMMERCIAL LAW BAR OPERATIONS 2020/21 I. CLAIMS SETTLEMENT AND SUBROGATION 1. NOTICE AND PROOF OF LOSS When Insurer is Liable for Loss a. Unless otherwise provided by the policy, an insurer is liable for a loss of which a peril insured against was the proximate cause, although a peril not contemplated by the contract may have been a remote cause of the loss (Insurance Code, Sec. 86) b. The thing insured is rescued from a peril insured against that would otherwise have caused a loss, if, in the course of such rescue, the thing is exposed to a peril not insured against, which permanently deprives the insured of its possession, in whole or in part; or where a loss is caused by efforts to rescue the thing insured from a peril insured against (Insurance Code, Sec. 87) c. The proximate cause of which is the peril insured against a. Immediate cause of which is the peril insured against except where proximate cause is an excepted peril; b. Loss through the negligence of insured except where there was gross negligence amount to willful act; and c. Loss caused by efforts to rescue the thing from peril insured against – if during the course of rescue, the thing is exposed to a peril not insured against, which permanently deprives the insured of its possession, in whole or in part. When Insurer is Not Liable for Loss a. Loss of which the peril insured against was only a remote cause. (Insurance Code, Sec. 86) b. Loss caused by the willful act or through the connivance of the insured; but he is not exonerated by the negligence of the insured, or of the insurance agents or others (Insurance Code, Sec. 89) c. Loss by insured’s willful act or gross negligence; d. Loss due to connivance of the insured; e. Loss where the excepted peril is the proximate cause. Mandatory Requirement of Notice of Loss and Proof of Loss The requirement of the notice of loss and obligation to file a proof of loss are conditions with which the insured MUST comply before there is any liability on the part of the insurer. When to Give Notice of Loss Without unnecessary delay reasonable time. or within a A requirement of the policy that notice of loss be given immediately or forthwith requires the giving of notice within a reasonable time. (Bachrach v. Britain Am. Assur. Co., G.R. No. L-5715, 1910) Form of Notice or Proof of Loss In case of loss upon fire insurance, the law requires written notice. (Insurance Code, Sec. 90) For other kinds of insurance, absent any stipulation in the policy, notice or proof may be given orally or in writing. When defects in a notice of loss are waived All defects in a notice of loss, or in preliminary proof thereof, which the insured might remedy, and which the insurer omits to specify to him, without unnecessary delay, as grounds of objection, are waived. (Insurance Code, Sec. 92) When Delay in the Presentation of Notice or Proof of Loss is Deemed Waived Delay in the presentation to an insurer of notice or proof of loss is waived if caused by any act of him, or if he omits to take objection promptly and specifically upon that ground. (Insurance Code, Sec. 93) Payment of Proceeds Life Insurance The proceeds shall be paid immediately upon the maturity of the policy (survival benefits) if there is such a maturity date. If the policy matures by the death of the insured, within sixty (60) days after presentation of the claim and filing of the proof of the death of the insured. Property Insurance Proceeds shall be paid within thirty (30) days after proof of loss is received by the insurer and ascertainment of the loss or damage is made either by agreement or by arbitration. Page 24 of 393 ATENEO CENTRAL COMMERCIAL LAW BAR OPERATIONS 2020/21 If no ascertainment is made within 60 days after receipt of proof of loss, the loss shall be paid within 90 days. 2. GUIDELINES ON CLAIM SETTLEMENT a. Unfair claims settlement; sanctions Any of the following acts by an insurance company, if committed without just cause and performed with such frequency as to indicate a general business practice, shall constitute unfair claim settlement practice. It shall be considered sufficient cause for the suspension or revocation of the company's certificate of authority: 1. Knowingly misrepresenting to claimants’ pertinent facts or policy provisions relating to coverage at issue; 2. Failing to acknowledge with reasonable promptness pertinent communications with respect to claims arising under its policies; 3. Failing to adopt and implement reasonable standards for the prompt investigation of claims arising under its policies; 4. Not attempting in good faith to effectuate prompt, fair and equitable settlement of claims submitted in which liability has become reasonable clear; or 5. Compelling policyholders to institute suits to recover amounts due under its policies by offering without justifiable reason substantially less than the amounts ultimately recovered in suits brought by them. b. Prescription of action Nature of Condition for Filing Claim The condition contained in the insurance policy that claims must be presented within one year after rejection is not merely a procedural requirement. The condition is an important matter, essential to a prompt settlement of claims against insurance companies, as it demands that insurance suits be brought by the insured while the evidence as to the origin and cause of destruction have not yet disappeared. It is in the nature of a condition precedent to the liability of the insurer, or in other terms, a resolutory cause, the purpose of which is to terminate all liabilities in case the action is not filed by the insured within the period stipulated. (Sun Insurance v. CA, G.R. No. 8974, 1991) Time to Commence Actions If there is a stipulation in the policy: The stipulation in the policy, if not contrary to Sec. 63, will prevail. (Teal Motor v. Orient Insurance, G.R. No. 39797, 1934) If there is no express stipulation in the policy As the policy is a written contract, the action prescribes in 10 years. (Civil Code, Art. 1144) Limitation to Period to File Claim A condition, stipulation, or agreement in any policy of insurance, limiting the time for commencing an action thereunder to a period of less than one year from the time when the cause of action accrues, is void. (Insurance Code, Sec. 63) Note: In Industrial life insurance, the period cannot be less than 6 years after the cause of action accrues. (Insurance Code, Sec. 231[d]) When does the insured’s cause of action begin to run? The prescriptive period for an insured’s action for indemnity should be reckoned from the “final rejection” of the claim (H.H. Hollero Construction v. GSIS, G.R. No. 152334, 2014). Rationale: Before such final rejection, there is no real necessity for bringing suit (Eagle Star v. Chia Yu, G.R. No. L-5915, 1955). Action or suit must be brought in proper cases, with Commission or the courts within one year from the denial of the claim, otherwise, the claimant’s right of action shall prescribe (Jacqueline Jimenez Vda. De Gabriel v. CA, G.R. No. 103883, 1996). Compulsory Third Party Liability Insurance The claim must be filed within 6 months from the date of accident, otherwise, the claim shall be deemed waived. Action or suit for recovery of damage due to loss or injury must be brought, in proper cases, with the Commissioner or the courts within one (1) year from denial of the claim, otherwise, the claimant’s right of action shall prescribe. (Insurance Code, Sec. 397) c. Subrogation Page 25 of 393 ATENEO CENTRAL BAR OPERATIONS 2020/21 Legal Basis of Subrogation If the plaintiff's property has been insured, and he has received indemnity from the insurance company for the injury or loss arising out of the wrong or breach of contract complained of, the insurance company shall be subrogated to the rights of the insured against the wrongdoer or the person who has violated the contract. If the amount paid by the insurance company does not fully cover the injury or loss, the aggrieved party shall be entitled to recover the deficiency from the person causing the loss or injury (Civil Code, Art. 2207) Definition Subrogation: Substitution of one person in place of another with reference to a lawful claim or right, so that he who is substituted succeeds to the rights of the other in relation to a debt or claim, including its remedies and securities (LSC v. Chubb, G.R. No. 147724, 2004) The right of subrogation has its roots in equity. It is designed to promote and to accomplish justice and is the mode which equity adopts to compel the ultimate payment of a debt by one who in justice and good conscience ought to pay. (Delsan Transport v. CA, G.R. No. 127897, 2001) Subrogation only applies to property insurance If the plaintiff’s property is insured… (Civil Code, Art. 2207) Note: Subrogation also applies in reinsurance. A reinsurer, on payment of a loss, acquires the same rights by subrogation as in similar cases where the original insurer pays a loss. (Pioneer Insurance Co v. CA, G.R. Nos. 84197 & 84157, 1989) When subrogation occurs 1. If the plaintiff's property has been insured, and 2. He has received indemnity from the insurance company for the injury or loss arising out of the wrong or breach of contract complained of (Civil Code, Art. 2207) It is not dependent upon, nor does it grow out of, any privity of contract or upon written assignment of claim. It accrues simply upon payment by the insurance company of the insurance claim. (Delsan Transport v. CA, G.R. No. 127897, 2001) COMMERCIAL LAW The presentation of the marine insurance policy is not necessary for the exercise of the insurer’s right to subrogation. It accrues upon payment of insurance claim (Asian Terminals, Inc. v. Malayan Insurance, G.R. No. 171406, 2011). The subrogation receipt, by itself, is sufficient to establish not only the relationship of insurer and the assured shipper of the lost cargo, but also the amount paid to settle the insurance claim. The right of subrogation accrues simply upon payment by the insurance company of the insurance claim. (Asian Terminals, Inc. v. Malayan Insurance, G.R. No. 171406, 2011). As subrogee of the rights and interest of the consignee, R&B Insurance has the right to seek reimbursement from either Loadmasters or Glodel or both for breach of contract and/or tort (Loadmasters Customs Services, Inc. v. Glodel Brokerage Corporation and R & B Insurance Corporation, G.R. No. 179446, 2011). Effect of Subrogation on Prescriptive Period to Sue the Person Causing the Loss or Injury The insurer acquires a fresh 10-year period arising from law. (Vector Shipping v. AHAC, G.R. No. 159213, 2013) However, the Court must heretofore abandon the ruling in Vector that an insurer may file an action against the tortfeasor within ten (10) years from the time the insurer indemnifies the insured. Following the principles of subrogation, the insurer only steps into the shoes of the insured and therefore, for purposes of prescription, inherits only the remaining period within which the insured may file an action against the wrongdoer. (Henson vs UCPB General, G.R. No. 223134, August 14, 2019) Guidelines relative to the application of Vector and Henson vis-à-vis the prescriptive period in cases where the insurer is subrogated to the rights of the insured against the wrongdoer based on a quasidelict 1. Actions that have already been filed and are currently pending before the courts at the time of the finality of Henson, the rules on prescription prevailing at the time the action is filed would apply. Hence: Page 26 of 393 ATENEO CENTRAL BAR OPERATIONS 2020/21 a. For cases filed by the subrogeeinsurer during the applicability of the Vector ruling (August 15, 2013 up to finality of Henson – August 14, 2019 is the date of promulgation) the prescriptive period is 10 years from the time of payment by the insurer to the insured. b. For cases filed by the subrogeeinsurer prior to the applicability of the Vector ruling (before August 15, 2013), the prescriptive period is 4 years from the time the tort is committed against the insured. 2. Actions that have not yet been filed at the time of the finality of this Decision: a. Where the tort was committed and the consequent loss/injury against the insured occurred prior to the finality of Henson, the subrogee-insurer has a period not exceeding 4 years from the time of finality of Henson to file the action against the wrongdoer. i. Provided, that in all instances, the total period shall not exceed 10 years from the time the insurer is subrogated to the rights of the insured. b. Where the tort was committed and the consequent loss/injury against the insured occurred only upon or after the finality of this Decision, the Vector doctrine is not applicable. Prescriptive period is 4 years from the time the tort is committed against the insured. (Henson vs UCPB General, G.R. No. 223134, August 14, 2019) Right of insurer to recover from 3rd party is limited to the amount recoverable from the latter by the insured The insurer cannot recover in full the amount it paid to the insured if it is greater than that to which the insured could COMMERCIAL LAW lawfully lay claim against the person causing the loss (Rizal Surety v. Manila Railroad, G.R. No. L24043, 1968) Cases When There is No Right of Subrogation: a. The insured by his own act releases the wrongdoer/third person liable for the loss; b. Where the insurer pays the insured for a loss or risk not covered by the policy; c. In life insurance; d. For recovery of loss in excess of insurance coverage. (Malayan Insurance v. CA, G.R. No. 81026, 1990) J. BUSINESS OF INSURANCE; REQUIREMENTS What is an insurer or an insurance company? The term insurer or insurance company shall include all partnerships, associations, cooperatives or corporations, including government-owned or -controlled corporations or entities, engaged as principals in the insurance business, excepting mutual benefit associations. Unless the context otherwise requires, the term shall also include professional reinsurers defined in Section 288. (Insurance Code, Sec. 190.) What are the requirements to transact any insurance business in the Philippines? 1. Must possess the capital and assets required of an insurance corporation doing the same kind of business in the PH and invested in the same manner; 2. Must obtain a certificate of authority from the commissioner. 3. Pay the fees prescribed under the Code. Can a Commissioner refuse to issue a certificate of authority to any insurance company? YES. In these instances: 1. If in his judgment, such refusal will best promote the interest of the people of this country. a. That the grant of such authority appears to be justified in the light of local economic requirements; b. The direction and administration, as well as the integrity and responsibility of the organizers and administrators, the financial organization and the amount of Page 27 of 393 ATENEO CENTRAL BAR OPERATIONS 2020/21 capital, reasonably assure the safety of the interests of the policyholders and the public. 2. If the name of the company is that of any other known company transacting a similar business in the Philippines or a name so similar as to be calculated to mislead the public. 3. When the insurance company is transacting in the Philippines both the business of life and non-life insurance concurrently; unless specifically authorized by the Commissioner. 4. If the insurance company has equity in an adjustment company or the adjustment company has equity in an insurance company. (Insurance Code, Sec. 193) What is the required paid-up capital for a new domestic life or non-life insurance company? It must possess a paid-up capital equal to at least P1 billion. However, a domestic insurance company already doing business in the Philippines shall have a net worth by 30 June 2013 of P250 million; By 31 December 2016, an additional P300 million in net worth; By 31 December 2022, an additional P400 million in net worth. NOTE: The Secretary of Finance, upon recommendation of the Commissioner, increase such minimum paid-up capital stock or cash assets requirement under such terms and conditions as he may impose, to an amount which in his opinion would reasonably assure the safety of the public. What are the requirements for a foreign insurance company to transact business in the Philippines? 1. Comply with Sec. 196 of the Insurance Code. Must designate a resident agent on whom notice, summons, and other legal processes may be served. And that if ever the company left the country, such summons, or other legal processes may be served on the Insurance Commissioner. 2. Must possess unimpaired capital or assets and reserve of not less than P1 billion. 3. Deposit with the Commissioner securities satisfactory to the Commissioner consisting of good securities of the Philippines, including new issues of stock COMMERCIAL LAW of registered enterprises, to the actual market value of not less than the amount herein required: a. At least 50% of such securities shall consist of bonds or other instruments of debt of the Government of the Philippines, its political subdivisions and instrumentalities, or of GOCCs and entities, including the BSP. b. Provided, further, that the total investment of a foreign insurance company in any registered enterprise shall not exceed 20% of the net worth of the foreign insurance company nor 20% of the capital of the registered enterprise, unless previously authorized in writing by the Commissioner. 4. The Commissioner may, as a prelicensing requirement of a new branch office of a foreign insurance company, in addition to the required asset or net worth, require the company to have an additional surplus fund in an amount to be determined by the Insurance Commission. (Insurance Code, Sec. 197) K. INSURANCE COMMISSIONER AND ITS POWERS Faithful execution of insurance laws It is the duty of the Commissioner to see that all laws relating to insurance, insurance companies and other insurance matters, mutual benefit associations, and trusts for charitable uses are faithfully executed. Regulation of the industry To ensure the efficient regulation of the insurance industry in accordance with global best practices and to protect the insuring public. Note: Except as otherwise specified, decisions made by the Commissioner shall be appealable to the Secretary of Finance. Sole and exclusive authority to regulate the issuance and sale of variable contracts provide for the licensing of persons selling such contracts, and to issue such reasonable rules and regulations governing the same. Page 28 of 393 ATENEO CENTRAL COMMERCIAL LAW BAR OPERATIONS 2020/21 1. ADMINISTRATIVE POWERS Rule-making power The Commissioner may issue such rulings, instructions, circulars, orders and decisions as may be deemed necessary to secure the enforcement of the provisions of this Code, Powers and functions of the Commissioner 1. Formulate policies and recommendations on issues concerning the insurance industry and propose legislation and amendments thereto; 2. Approve, reject, suspend or revoke licenses or certificates of registration 3. Impose sanctions 4. Prepare, approve, amend or repeal rules, regulations and orders, and issue opinions and provide guidance on and supervise compliance with such rules, regulations and orders; 5. Enlist the aid and support of, and/or deputize any and all enforcement agencies of the government in the implementation of its powers and functions; 6. Issue cease and desist orders to prevent fraud or injury to the insuring public; 7. Punish for contempt of the Commissioner, both direct and indirect, in accordance with the Rules of Court; 8. Compel the officers of any registered insurance corporation or association to call meetings of stockholders or members thereof under its supervision; 9. Issue subpoena duces tecum and summon witnesses to appear in any proceeding of the Commission and, in appropriate cases, order the examination, search and seizure of all documents, papers, files and records, tax returns, and books of accounts of any entity or person under investigation as may be necessary for the proper disposition of the cases before it, subject to the provisions of existing laws; 10. Suspend or revoke, after proper notice and hearing, the license or certificate of authority of any entity or person under its regulation, upon any of the grounds provided by law; 11. Conduct an examination to determine compliance with laws and regulations if the circumstances so warrant as 12. 13. 14. 15. 16. determined by appropriate rules and regulations Investigate not oftener than once a year from the last date of examination to determine whether an institution is conducting its business on a safe and sound basis: Provided, That, the deficiencies/irregularities found by or discovered by an audit shall be immediately addressed; Inquire into the solvency and liquidity of the institutions under its supervision and enforce prompt corrective action; To retain and utilize, in addition to its annual budget, all fees, charges and other income derived from the regulation of insurance companies and other supervised persons or entities; To fix and assess fees, charges and penalties as the Commissioner may find reasonable in the exercise of regulation; and Exercise such other powers as may be provided by law as well as those which may be implied from, or which are necessary or incidental to the express powers granted the Commission to achieve the objectives and purposes of this Code. (Insurance Code, Sec. 437) Power to impose fines The Insurance Commissioner is hereby authorized, at his discretion, to impose upon insurance companies, and/or their agents, for any willful failure or refusal to comply with this Code, or any order of the Insurance Commissioner, or any commission or irregularities, and/or conducting business in an unsafe or unsound manner, the following: a. Fines not less than Five thousand pesos (P5,000.00) and not more than Two hundred thousand pesos (P200,000.00); and b. Suspension, or after due hearing, removal of directors and/or officers and/or Agents. (Insurance Code, Sec. 438) 2. ADJUDICATORY POWERS The Insurance Commissioner has concurrent jurisdiction with the regular courts to adjudicate, hear and decide claims or complaints for which an insurer may be answerable under any kind of policy or contract of insurance where the amount of the loss, damage or liability excluding interest, Page 29 of 393 ATENEO CENTRAL BAR OPERATIONS 2020/21 costs and attorney’s fees, does not exceed in any single claim P5,000,000. (Insurance Code, Sec. 439) Note: 1. The power of the Commissioner does not cover the relationship between the insurance company and its agents/brokers but is limited to adjudicating claims and complaints filed by the insured against the insurance company. 2. The filing of a complaint with the Commissioner shall preclude the civil courts from taking cognizance of a suit involving the same subject matter. Power to conduct investigation The Commissioner may authorize any officer or group of officers under him to conduct investigation, inquiry and/or hearing and decide claims and he may issue rules governing the conduct of adjudication and resolution of cases. The Rules of Court shall have suppletory application. Appeal Any decision, order or ruling rendered by the Commissioner after a hearing shall have the force and effect of a judgment. Any party may appeal from a final order, ruling or decision of the Commissioner by filing with the Commissioner within thirty (30) days from receipt of copy of such order, ruling or decision a notice of appeal to the Court of Appeals in the manner provided for in the Rules of Court for appeals from the Regional Trial Court to the Court of Appeals. COMMERCIAL LAW When the commissioner may revoke or suspend the license of an insurer: a. If insurance contract is in unsound condition b. If it has failed to comply with the provisions of law or regulations obligatory upon it c. Its conditions or methods of business is such as to render its proceedings hazardous to the public or to its policy holders d. That its paid up capital stock, or its available cash assets, or its security deposits, as the case may be, is impaired or deficient e. That the margin of solvency required of each company is deficient Note: In order for a claim for deposit insurance with PDIC to prosper, the law requires that a corresponding deposit be placed in the insured bank; and a deposit as defined under Section 3(f) of R.A. No. 3591 may be constituted only if money or the equivalent of money is received by a bank. When the evidence shows that the certificates of time deposit were issued in consideration of checks received by the issuing bank, which checks bounced, then the issuing bank received no money therefore, no deposit therefore came into existence, and therefore PDIC cannot be held liable for value of the certificates of time deposit (PDIC v. CA, G.R. No. 118917, 1997). SPECIAL CLASSES OF INSURANCE 1. MARINE INSURANCE Power to administer oath For the purpose of any proceeding under this section, the Commissioner, or any officer thereof designated by him is empowered to administer oaths and affirmation, subpoena witnesses, compel their attendance, take evidence, and require the production of any books, papers, documents, or contracts or other records which are relevant or material to the inquiry. Alternative dispute resolution In order to promote party autonomy in the resolution of cases, the Commissioner shall establish a system for resolving cases through the use of alternative dispute resolution. (Insurance Code, Sec. 439) Scope of Marine Insurance 1. Insurance Against Loss or Damage a. Vessels, craft, aircraft, vehicles, goods, freights, cargoes, merchandise, effects, disbursements, profits, moneys, securities, choses in action, instruments of debts, valuable papers, bottomry, and respondentia interests and all other kinds of property and interests therein, in respect to, appertaining to or in connection with any and all risks or perils of navigation, transit or transportation, or while being assembled, packed, crated, baled, compressed or similarly prepared for shipment or while awaiting shipment, or during any delays, storage, transshipment, or reshipment incident Page 30 of 393 ATENEO CENTRAL BAR OPERATIONS 2020/21 thereto, including war risks, marine builder's risks, and all personal property floater risks; b. Person or property in connection with or appertaining to a marine, inland marine, transit or transportation insurance, including liability for loss of or damage arising out of or in connection with the construction, repair, operation, maintenance or use of the subject matter of such insurance (but not including life insurance or surety bonds nor insurance against loss by reason of bodily injury to any person arising out of ownership, maintenance, or use of automobiles); c. Precious stones, jewels, jewelry, precious metals, whether in course of transportation or otherwise; and d. Bridges, tunnels and other instrumentalities of transportation and communication (excluding buildings, their furniture and furnishings, fixed contents and supplies held in storage); piers, wharves, docks and slips, and other aids to navigation and transportation, including dry docks and marine railways, dams and appurtenant facilities for the control of waterways. 2. Marine Protection and Indemnity Insurance a. Insurance against, or against legal liability of the insured for loss, damage, or expense incident to ownership, operation, chartering, maintenance, use, repair, or construction of any vessel, craft or instrumentality in use of ocean or inland waterways, including liability of the insured for personal injury, illness or death or for loss of or damage to the property of another person. Risk Insured Against General Rule: It is only PERILS OF THE SEA which may be insured against The insurer does undertake to insure against perils of the ship. The purpose of a marine insurance is to secure an indemnity against accidents which may happen and against events which must happen. (La Razon Social Go Taico Hermanos v. Union Insurance Society of Canton, G.R. No. 13983, 1919) Rusting of steel pipes in the course of the voyage is a peril of the sea in view of the effects of the COMMERCIAL LAW wind, water, and salt conditions. (Cathay Insurance v. CA, G.R. No. 76415, 1987) Exception: Unless perils of the ship are covered by an ALL-RISK POLICY. Note: The perils of the sea must be the proximate cause of the loss in order that the insurer may be held liable. Perils of the Sea v. Perils of the Ship PERILS OF THE PERILS OF THE SEA SHIP Covered by marine Not covered by insurance marine insurance Accidents peculiar to Damage or losses the sea which do not resulting from: happen by intervention of man 1. Natural and nor are to be inevitable action prevented by human of the sea prudence. Casualties 2. Ordinary wear due to the: and tear of a ship, 1. Unusual or violence; or 3. Negligent failure 2. Extraordinary of the ship owner action of wind to provide the and wave; or vessel with 3. Other proper equipment extraordinary to convey the causes cargo under connected with ordinary navigation conditions All-Risks Policy It is insurance against all causes of conceivable loss or damage. Except: 1. As otherwise excluded in the policy; or 2. Due to fraud or intentional misconduct on the part of the insured (Choa Tek Seng v. CA, G.R. No. 84507, 1990) Barratry Willful misconduct on the part of the master or crew in pursuance of some unlawful or fraudulent purpose without the consent of owners, and to the prejudice of owner’s interest. This may be expressly covered by the policy. When so covered, proof of willful and intentional act is necessary. No honest error or judgment or mere negligence, unless criminally gross, can be barratry. (Roque v. IAC, G.R. No. L-66935, 1985) Page 31 of 393 ATENEO CENTRAL BAR OPERATIONS 2020/21 Insurable Interest in Marine Insurance 1. Shipowner Over the VALUE OF THE VESSEL, (even if chartered and the charterer agreed to pay the shipowner the value of the vessel in case of loss, however, the shipowner can recover only the amount not recoverable from the charterer). (Insurance Code, Sec. 102) However, if the ship is hypothecated by a bottomry loan, the insurable interest is only up to the excess of the value of the vessel over the loan (Insurance Code, Sec. 103) Over EXPECTED FREIGHTAGE. (Insurance Code, Sec. 105) Note: Freightage may be derived from: a. The chartering of the ship; b. Its employment for the carriage of his own goods; and c. Its employment for the carriage of the good of others (Insurance Code, Sec. 104) 2. Shipper/Cargo Owner Over the CARGO AND EXPECTED PROFITS. (Insurance Code, Sec. 107) 3. Charterer Over the VESSEL up to the extent of the amount he is liable to the shipowner, if the ship is lost or damaged during the voyage. (Insurance Code, Sec. 108) Over his EXPECTED PROFITS OR FREIGHTAGE if he accepts cargoes from other persons for a fee. (Insurance Code, Sec. 105) Over his OWN CARGO OR CLIENT’S CARGO. Bottomry, Respondentia, and Charter Party Loan on Bottomry or Respondentia A loan in which under any condition whatsoever, the repayment of the sum loaned, and of the premium stipulated, depends upon the safe arrival in port of the goods on which it is made or of the price they may receive in case of accident. It is a loan on bottomry when the security is a vessel, and respondentia when the security is cargo. COMMERCIAL LAW Charter Party Contract A contract by virtue of which the owner or the agent of a vessel binds himself to transport merchandise or persons for a fixed price. It has also been defined as a contract by virtue of which the owner or the agent of the vessel lets the vessel or some principal part thereof for the transportation of goods or persons from one port to another. Different Types of Charter Parties: 1. Contracts of Affreightment – use of shipping space on vessels leased by the shipowner in part or as a whole, to carry goods for others a. Time Charter – vessel is leased for a fixed period of time b. Voyage Charter – vessel is leased for a single voyage 2. Charter by Demise or Bareboat Charter – the whole vessel is leased to the charterer with a transfer to him of its entire command and possession and consequent control over its navigation including the master and crew Concealment in Marine Insurance To constitute concealment, it is sufficient that the insured is in possession of the material fact concealed although he may not be aware of it. Each party in a marine insurance contract is bound to communicate the following: 1. All facts within his knowledge which are material to the contract and as to which he makes no warranty, and which the other has not the means of ascertaining. 2. All the information which he possesses, material to the risk Exceptions: a. Those which the other knows; b. Those which, in the exercise of ordinary care, the other ought to know, and of which the former has no reason to suppose him ignorant; c. Those of which the other waives communication; d. Those which prove or tend to prove the existence of a risk excluded by a warranty, and which are not otherwise material; and Page 32 of 393 ATENEO CENTRAL BAR OPERATIONS 2020/21 e. Those which relate to a risk excepted from the policy and which are not otherwise material 3. State the exact and whole truth in relation to all matters that he represents, or upon inquiry discloses or assumes to disclose (Insurance Code, Sec. 109) In marine insurance, there are instances when matters, although concealed, will not vitiate the contract but merely exonerates the insurer from the loss resulting from the risk concealed: 1. National character of the insured; 2. Liability of insured thing to capture (or) and detention; 3. Liability to seizure from breach of foreign laws of trade; 4. Want of necessary documents; and 5. Use of false or simulated papers. (Insurance Code, Secs. 109-112) Concealment in Marine Insurance vs. Other Property Insurance MARINE INSURANCE OTHER PROPERTY INSURANCE Information of Third Persons The information of the belief or expectation of third persons in reference to a material fact is material and must be communicated (Insurance Code, Sec. 110) The information or belief of a third party is not material and need not be communicated unless it proceeds from an agent of the insured whose duty is to give information. (Insurance Code, Sec. 43) Effect of Concealment The concealment of any fact in relation to any of the matters stated in Sec. 112 does not vitiate the entire contract but merely exonerates the insurer from a risk resulting from the fact concealed. Concealment of a material fact will vitiate the entire contract, whether or not the loss results from the risk concealed. COMMERCIAL LAW Representation in Marine Insurance If a representation by a person insured by a contract of marine insurance, is intentionally false in any material respect, or in respect of any fact on which the character and nature of the risk depends, the insurer may rescind the entire contract. The eventual falsity of a representation as to expectation does not, in the absence of fraud, avoid a contract of marine insurance. (Insurance Code, Secs. 113 and 114) Implied Warranties in Marine Insurance a. That the ship is seaworthy at the inception of the insurance (Sec. 115); b. That the ship will not deviate from agreed voyage unless deviation is proper (Secs. 125-127); c. That the ship will not engage in an illegal venture; d. Warranty of possession of documents of neutrality; that the ship will carry the requisite documents of nationality or neutrality of the ship or cargo where such nationality or neutrality is expressly warranted (Sec. 122); e. Presence of insurable interest. Seaworthiness Seaworthiness relates to the vessel’s ACTUAL CONDITION at the time of the commencement of the voyage. The issuance of the certificate neither negates the presumption of unseaworthiness triggered by an unexplained sinking or establishes seaworthiness. (Delsan Transport Lines v. CA, G.R. No. 127897, 2001) Test of Seaworthiness Whether or not the ship is reasonably fit to perform the service and to encounter the ordinary perils of the voyage (Insurance Code, Sec. 117) Note: The implied warranty of seaworthiness also applies to a cargo owner. Since the law provides for an implied warranty of seaworthiness in every contract of ordinary marine insurance, it becomes the obligation of a cargo owner to look for a reliable common carrier which keeps its vessels in seaworthy condition. The shipper of cargo may have no control over the vessel but he has full control in the choice of the common carrier that will transport his goods. Or the cargo owner may enter into a contract of insurance which specifically provides that the insurer answers not only for the perils of the sea Page 33 of 393 ATENEO CENTRAL COMMERCIAL LAW BAR OPERATIONS 2020/21 but also provides for coverage of perils of the ship. (Roque v. IAC, G.R. No. L-66935, 1985) When A Ship Should Be Seaworthy: General Rule: Implied warranty of seaworthiness is complied with if the ship be seaworthy at the time of the commencement of the risk Exceptions: 1. Time Policy – When the insurance is made for a specified length of time, the implied warranty is not complied with unless the vessel is seaworthy at the commencement of every voyage it undertakes during that time; (Insurance Code, Sec. 117[a]) 2. Cargo Policy – When the insurance is upon the cargo which, by the terms of the policy, description of the voyage, or established custom of trade, is to be transshipped at an intermediate port, at the commencement of each particular voyage; (Insurance Code, Sec. 117[b]) 3. Voyage Policy – Where different portions of the voyage are contemplated, at the commencement of each portion; (Insurance Code, Sec. 119) 4. When the ship was seaworthy at the commencement of the voyage but becomes unseaworthy during the voyage to which an insurance related, unreasonable delay in repairing the defect exonerates the insurer on ship or shipowner’s interest from liability from any loss arising therefrom. (Insurance Code, Sec. 120) Coverage of the Warranty of Seaworthiness 1. Condition of the structure of the ship itself, but requires that it be properly laden, and provided with a competent master 2. Sufficient number of competent officers and seamen 3. Requisite appurtenances and equipment, such as ballasts, cables and anchors, cordage and sails, food, water, fuel and lights, and other necessary or proper stores and implements for the voyage. (Insurance Code, Sec. 118) Deviation Departure of vessel from course of voyage, or an unreasonable delay in pursuing voyage, or the commencement of an entirely different voyage. (Insurance Code, Sec. 125) Instances of Deviation Table SEC. DEVIATION - Departure from the agreed voyage 123 Departure from the course of sailing fixed by mercantile usage between the places of beginning and ending specified in the policy 124 Departure from the most natural, direct, and advantageous route between the places specified if the course of sailing is not fixed by mercantile usage 125 Unreasonable delay in pursuing the voyage 125 The commencement of an entirely different voyage Kinds of Deviations 1. Proper Deviations a. If due to circumstances outside the control of the master or ship owner; b. If done to comply with a warranty or to avoid a peril, whether or not the peril is insured against; c. If made in good faith, and upon reasonable ground of belief in its necessity to avoid a peril; d. If made in good faith, for the purpose of saving human life or relieving another distressed vessel. (Insurance Code, Sec. 125) Effect in case of loss or injury: Insurer is still liable, as if there was no deviation. 2. Improper Deviations Every deviation not specified in the last section is improper. (Insurance Code, Sec. 127) Effect in case of loss or injury: Insurer is not liable (Insurance Code, Sec. 128) Page 34 of 393 ATENEO CENTRAL COMMERCIAL LAW BAR OPERATIONS 2020/21 Kinds of Losses in Marine Insurance 1. Actual Total Loss a. Total Destruction; b. Irretrievable loss by sinking or by being broken up; c. Damage rendering the thing valueless for the purpose held; or d. Total Effective deprivation of owner of possession of thing insured at the port of destination. (Insurance Code, Sec. 132) Note: Complete physical destruction of the subject matter is not essential to constitute an actual total loss. Such a loss may exist where the form and specie of the thing is destroyed, although the materials of which it consisted still exist as where the cargo by the process of decomposition or other chemical agency no longer remains the same kind of thing as before (Pan Malayan Insurance Corp v. CA, G.R. No. 95070, 1991) 3. Partial Loss (Insurance Code, Sec. 130) Abandonment The act of the insured by which, after a constructive total loss, he may declares the relinquishment to the insurer of his interest in the thing insured. (Insurance Code, Sec. 140) Requisites of Abandonment SEC. REQUISITE 140 There must be an actual relinquishment by the person insured of his interest in the thing insured 141 There must be a constructive total loss 142 The abandonment be neither partial nor conditional 2. Constructive Total Loss a. Actual loss or more than three-fourths (3/4) of the value of the object; b. Damage reducing value by more than three-fourths (3/4) of the value of the vessel and of cargo; and c. Expenses of shipment exceed threefourths (3/4) of value of cargo. (Insurance Code, Sec. 141) 143 It must be made within a reasonable time after receipt of reliable information of the loss 144 It must be factual 145 It must be made by giving notice thereof to the insurer which may be done orally or in writing In case of constructive total loss, insured may: 1. Abandon the goods or vessel to the insurer and claim for whole insured value (Insurance Code, Sec. 141); or 2. He may, without abandoning vessel, claim for partial actual loss (Insurance Code, Sec. 157). 146 The notice of abandonment must be explicit and must specify the particular cause of the abandonment The word “may” in Section 141 is intended to grant the insured the option or direction to make the choice. This option or discretion is expressed as a right in Section 133. (Keppel Cebu Shipyard v. Pioneer Ins. & Surety, G.R. Nos. 180880-81, 2009) Effect of Total Loss Underwriter is liable for the whole amount insured. Abandonment where the insurance is divisible or indivisible In a case, the policy in question showed that the subject matter insured was the entire shipment of 2,000 cubic meters of logs. SC held that the fact that the logs were loaded in two different barges did not make the contract of insurance several and divisible as to the items insured because the logs on the two barges were not separately valued or separately insured, for only one premium was paid for the entire shipment making only one cause or consideration. The logs having been insured as one inseparable unit, the totality of the shipment of logs should be the basis for the existence of constructive total loss (Oriental Assurance Corp v. CA, G.R. No. 94052, 1991) Page 35 of 393 ATENEO CENTRAL COMMERCIAL LAW BAR OPERATIONS 2020/21 Effects of Abandonment 1. Transfer of Interest An abandonment is equivalent to a transfer by the insured of his interest to the insurer, with all the chances of recovery and indemnity. (Insurance Code, Sec. 148) Exception: When a thing has been hypothecated by bottomry or respondentia, before its insurance, and without the knowledge of the person actually procuring the insurance, he may show the real value (Insurance Code, Sec. 158) 2. Open Policy 2. Transfer of Agency Upon an abandonment, acts done in good faith by those who were agents of the insured in respect to the thing insured, subsequent to the loss, are at the risk of the insurer, and for his benefit. (Insurance Code, Sec. 150) Acceptance of Abandonment It is not necessary if abandonment is properly made. Effects of Acceptance 1. Insurer admits the existence of the loss; 2. Insurer admits the sufficiency of the abandonment; 3. Abandonment becomes irrevocable, unless the upon which it was made prove to be unfounded; 4. Freightage earned previous to the loss belongs to the insurer of said freightage; and 5. Freightage subsequently earned belongs to the insurer of the ship (Insurance Code, Secs. 153-155) Rights of Insurer Who Pays Partial Loss as Actual Total Loss If a marine insurer pays for a loss as if it were an actual total loss, he is entitled to whatever may remain of the thing insured, or its proceeds or salvage, as if there had been a formal abandonment (Insurance Code, Sec. 149) Insurer’s Liability for Refusal of Abandonment If an insurer refuses to accept a valid abandonment, he is liable as upon an actual total loss, deducting from the amount any proceeds of the thing insured which may have come to the hands of the insured. (Insurance Code, Sec. 156) Measure of Indemnity 1. Valued Policy The parties are bond by the valuation if the insured had some interest at risk and there is no fraud (Insurance Code, Sec. 158) The following rules shall apply in estimating a loss: 1. Value of the ship – value at the beginning of the risk; 2. Value of the cargo – actual cost when laden on board, or market value at the time and place of lading; 3. Value of freightage – gross freightage exclusive of primage; and 4. Cost of insurance – in each case, to be added to the estimated value (Insurance Code, Sec. 163) Loss of Profits Separately Insured (Value of property lost / Value of whole property insured) * amount of insurance = Amount of recovery Presumption of Loss of Profits When profits are valued and insured by a contract of marine insurance, a loss of them is conclusively presumed from a loss of the property out of which they are expected to arise, and the valuation fixes their amount. (Insurance Code, Sec. 162) Average Any extraordinary or accidental expense incurred during the voyage for the preservation of the vessel, cargo, or both; and all damages to the vessel and cargo from the time it is loaded and the voyage commenced, until it ends and the cargo is unloaded. Kinds of Averages: Gross v. Particular GROSS / GENERAL AVERAGE SIMPLE/PARTICUL AR AVERAGE These damages and expenses are deliberately caused by the master of the vessel or upon his authority, in order to save the vessel, her Includes all damages and expenses caused to the vessel or to her cargo which have not inured to the common benefit and profit of all the Page 36 of 393 ATENEO CENTRAL BAR OPERATIONS 2020/21 cargo, or both at the same time from a real and known risk. persons interested in the vessel and her cargo the owners are not entitled to receive contribution from other owners concerned in the venture. Must be borne equally by all of the interests concerned in the venture in proportion to the value of the property saved. These are suffered by and borne alone by the owner of the cargo or of the vessel, as the case may be. Requisites to Claim General Average 1. There must be a common danger. This means, that both the ship and the cargo, after has been loaded, are subject to the same danger, whether during the voyage, or in the port of loading or unloading; that the danger arises from the accidents of the sea, dispositions of the authority, or faults of men, provided that the circumstances producing the peril should be ascertained and imminent or may rationally be said to be certain and imminent. This last requirement excludes measures undertaken against a distant peril. 2. For the common safety part of the vessel or of the cargo or both is sacrificed deliberately. 3. From the expenses or damages caused follows the successful saving of the vessel and cargo. 4. Expenses or damages should have been incurred or inflicted after taking proper legal steps and authority (Magsaysay v. Agan, G.R. No. L-6393, 1955) Right of the Insured in General Average Where it has been agreed that an insurance upon a particular thing, or class of things, shall be free from particular average, a marine insurer is not liable for any particular average loss not depriving the insured of the possession, at the port of destination, of the whole of such thing, or class of things, even though it becomes entirely worthless; but such insurer is liable for his proportion of all general average loss assessed upon the thing insured. (Insurance Code, Sec. 138) COMMERCIAL LAW When a person insured by a contract of marine insurance has a demand against others for contribution, he may claim the whole loss from the insurer, subrogating him to his own right to contribution. But no such claim can be made upon the insurer after the separation of the interests liable to contribution, nor when the insured, having the right and opportunity to enforce contribution from others, has neglected or waived the exercise of that right. (Insurance Code, Sec. 167) Freightage Benefit Which is to accrue to the owner of the vessel from its use in the voyage contemplated or the benefit derived from the employment of the ship. Right to Freightage: a. Freightage earned before loss - Belongs to the insurer of freightage b. Freightage earned after loss - Belongs to insurer of ship Co-Insurance A form of insurance in which a person who insures his property for less than the entire value is understood to be his own insurer for the difference which exists between the true value of the property and the amount of insurance. Also applicable to Fire Insurance if stipulated. When Co-Insurance Applies 1. Insurance taken is less than the actual value of the thing insured; and 2. Loss is partial (Insurance Code, Sec. 159) “New for Old” Rule In the case of a partial loss of ship or its equipment, the old materials are to be applied towards payment for the new. Unless otherwise stipulated in the policy, a marine insurer is liable for only 2/3 of the remaining cost of repairs after such deduction, except that anchors must be paid in full. (Insurance Code, Sec. 168) 2. FIRE INSURANCE It is a contract of indemnity by which the insurer for a consideration agrees to indemnify the insured against loss of, or damage to, property by fire. (Insurance Code, Sec. 169) Page 37 of 393 ATENEO CENTRAL BAR OPERATIONS 2020/21 May include loss by lightning, windstorm, tornado or earthquake and other allied risks, when such risks are covered by extension to fire insurance policies or under separate policies. Nature of Fire Fire may not be considered a natural disaster or calamity since it almost always arises from some act of man or by human means. It cannot be an act of God unless caused by lightning or a natural disaster or casualty not attributable to human agency (Phil. Home Assurance Corp v. CA, G.R. No. 106999. June 20, 1996) Friendly Fire v. Hostile Fire FRIENDLY FIRE HOSTILE FIRE So long as a fire burns When the fire occurs in a place where it outside of the usual was intended to burn, confines or begins as and ought to be, it is a friendly fire and merely an agency for becomes hostile by the accomplishment escaping from the of some purpose; not place where it ought a hostile peril. to be to some place where it ought not to be. Insurer is liable. Insurer is not liable. Fire Insurance Policy Instead of paying for actual loss or the valuation stated on the face of the policy, the policy may stipulate a: 1. Co-insurance clause; or 2. Option to rebuild clause - the insurer is given the option to reinstate or replace the building damaged or destroyed or any part thereof, in the same condition as it was at the time of the loss. Ocean Marine Policy vs. Fire Policy A policy of insurance on a vessel engaged in navigation is a contract of ocean marine insurance although it insures against fire risks only. However, where the hazard is fire alone and the subject is an unfinished vessel, never afloat for a voyage, the contract to insure is a fire risk, especially in the absence of an express agreement that it shall have the incidents of marine policy, or where it insures materials in a shipyard for use in constructing vessels. I COMMERCIAL LAW mportance of Distinction 1. The rules on constructive total loss and abandonment only apply in marine insurance; and 2. In case of partial loss of a thing insured for less than its actual value, the insured in a marine policy is a co-insurer of the uninsured portion (Sec. 159), while the insured may only become a co-insurer in fire insurance if expressly agreed upon by the parties. (Sec. 174) Alteration The use of condition of a thing insured from that to which it is limited by the policy made without the consent of the insurer, by means within the control of the insured, and increasing the risks, entitles the insurer to rescind a contract of fire insurance. Effect of an Alteration in the Use or Condition of a Thing Insured from that Limited by the Policy The insurer may rescind a contract of fire insurance, provided the following are present: 1. The use or condition of the thing insured is specially limited or stipulated in the policy; 2. Such use or condition is altered; 3. The alteration is made without the consent of the insurer; 4. The alteration is made by means within the control of the insured; 5. The alteration increases the risk; and 6. There must be a violation of a material policy provision. Alterations with DO NOT AVOID the policy 1. Where risk of loss is not increased; 2. Where the insured property would be useless if questioned acts were prohibited; or 3. A contract of fire insurance is not affected by any act of the insured (which could include alteration) subsequent to the execution of the policy, which does not violate its provisions, even though it increases the risk and is the cause of the loss. (Insurance Code, Sec. 172) Even though the policy contains certain provisions prohibiting specified articles from being kept in the insured premises, the policy will not be avoided by a violation of these provisions if the articles are necessary or ordinarily used in the business conducted in the insured premises, Page 38 of 393 ATENEO CENTRAL COMMERCIAL LAW BAR OPERATIONS 2020/21 like benzine kept in a furniture factory for purposes of operating or for cleaning machinery (Bachrach v. British American Assur. Co., G.R. No. L-5715, 1910). Comparative Table: Alteration in Insurance Code – Sec. 171 vs. Sec. 77 SEC. 171 SEC. 77 Alteration in the risk or condition of the thing insured which does not increase the risk will not affect a contract of fire insurance. The insurer is given the right to insert Ts and Cs in the policy which, if violated would avoid it. Applies if the policy is silent as to breach of immaterial provisions. Applies if the policy stipulates that breach of an immaterial policy will void the insurance. 3. CASUALTY INSURANCE It is an insurance covering loss or liability arising from accident or mishap, Excluding those falling under those types of insurance such as fire, suretyship, life or marine. Accident or Health Insurance Insurance against specified perils which may affect the person and/or property of the insured. (ex. Personal Accident, Robbery/Theft Insurance) Third Party Liability Insurance Insurance against specified perils which may give rise to liability on the party of the insured for claims for injuries to or damage to property of others. (ex. Motor Vehicle Liability, Professional Liability, Product Liability) liability of the insured to the injured third person attaches. Prior payment by the insured to the injured third person is not necessary in order that the obligation of the insurer may arise. From the moment that the insured became liable to the third person, the insured acquired an interest in the insurance contract, which interest may be garnished like any other credit. (Perla Compania de Seguros v. Ramolete, G.R. No. L-60887, 1991) Right of the Injured Person to Sue Insurer of the Party at Fault SCENARIO EFFECT The contract provides for indemnity against liability to 3rd persons. 3rd persons, to whom the insured is liable, CAN sue the insurer. The contract is for indemnity against actual loss or payment. 3rd persons CANNOT proceed against the insured. (Guingon v. Del Monte, G.R. No. L-22042, 1967) Note: The injured person may sue the insurer and the person at fault, notwithstanding the stipulation against suing the insurer (“no-action” clause) in the policy. (Guingon v. Del Monte, G.R. No. L22042, 1967) Rules as to Death or Injury Resulting from Accidental Means “Intentional” Implies the exercise of the reasoning faculties, consciousness and volition Where the provision of the policy excludes intentional injury, the intention of the person inflicting is the controlling factory. Where the contract is one of indemnity against liability, it becomes operative as soon as the liability of the person indemnified arises irrespective of whether or not he has suffered actual loss (Republic Glass Corp v. Qua, G.R. No. 144413, 2004) However, if the injuries suffered by the insured clearly resulted from the intentional act of a third person, the insurer is relieved from liability as stipulated (Biagtan v. The Insular Life Assurance Co. Ltd., G.R. No. 26194, 1972). In a third-party liability insurance contract, the insurer assumes the obligation of paying the injured third party to whom the insured is liable. 20 The insurer becomes liable as soon as the “Accidental” That which happens by chance or fortuitously, without intention or design, which is unexpected, unusual and unforeseen (Sun Insurance v. CA, G.R. No. 92383, 1992) Page 39 of 393 ATENEO CENTRAL COMMERCIAL LAW BAR OPERATIONS 2020/21 The terms “accident” and “accidental” do not, without qualification, exclude events resulting in damage or loss due to fault, recklessness or negligence of third parties. (Pan Malayan Insurance v. CA, G.R. No. 81026, 1990) “No Fault” The concept of accident is not necessarily synonymous with “NO FAULT”. It may be utilized simply to distinguish intentional or malicious acts from negligent or careless acts of man (Pan Malayan Insurance Corp. v. CA, G.R. No. 81026, 1990). 4. SURETYSHIP An agreement whereby one undertakes to answer, under specified terms and conditions, for the debt, default or miscarriage of another in favor of a third party. (Insurance Code, Sec. 177) Under Sec. 177, a suretyship is: a. As a contract or agreement b. Whereby a party, called the surety, guarantees c. The performance by another party, called the principal or obligor, d. Of an obligation or undertaking in favor of a third party, called the obligee. Suretyship v. Property Insurance SURETYSHIP PROPERTY INSURANCE Accessory contract Principal contract Parties: 1. Surety 2. Principal debtor/ obligor, and 3. creditor/ obligee Parties: 1. Insurer, and 2. Insured Credit transaction, Contract where the surety indemnity. assumes primary liability. Surety is entitled to reimbursement from the principal and this guarantors for the loss it may suffer under the contract. Generally, can only be cancelled with the consent of the obligee or by the Commissioner or by a court of competent jurisdiction. May be cancelled unilaterally either by the insured or by the insurer on grounds provided by law. (Sec. 64) The obligee must accept before the suretyship becomes valid and enforceable. The insurance contract does not need the acceptance of any 3rd party. It includes official recognizances, stipulations, bonds or undertakings issued under Act 536, as amended. When does Suretyship arise? Suretyship arises upon the solidary binding of a person – deemed the surety – with the principal debtor, for the purpose of fulfilling an obligation. Surety agreement as ancillary contract Such undertaking makes a surety agreement an ancillary contract as it presupposes the existence of a principal contract. Although the contract of a surety is in essence 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. And notwithstanding the fact that the surety contract is secondary to the principal obligation, the surety assumes liability as a regular party to the undertaking. of In subrogation, the 3rd party against whom the insurer may proceed is not a party to the contract. Liability of Surety The extent of a surety’s liability is determined by the language of the suretyship contract or bond itself. It cannot be extended by implication, beyond the terms of the contract. Thus, to determine whether petitioner is liable to respondent under the surety bond, it becomes necessary to examine the terms of the contract itself (First Lepanto-Taisho Insurance Corporation (now known as FLT Prime Insurance Corporation) vs. Chevron Philippines, Inc. (formerly known as Caltex Philippines, Inc.), G.R. No. 177839, 2012). Page 40 of 393 ATENEO CENTRAL COMMERCIAL LAW BAR OPERATIONS 2020/21 Nature of Liability of Surety a. The liability of the sureties under a bond is joint and several / solidary (Arts. 1207-1208, NCC) b. The liability is limited to the amount of the bond (Republic v. CA, G.R. No. 103073, 2001). c. The liability is contractual as it is determined strictly by the terms of the contract of suretyship in relation to the principal contract between the obligor and the obligee (Zenith Insurance Corp v. CA, G.R. No. L-57957, Dec. 29, 1982.). Note: In Suretyship, the obligee accepts the surety’s solidary undertaking to pay if the obligor does not pay. Such acceptance, however, does not change in any material way the obligee’s relationship with the principal obligor. Neither does it make the surety an active party to the principal obligee-obligor relationship. Thus, the acceptance does not give the surety the right to intervene in the principal contract. (Asset Builders Corporation vs. Stronghold Insurance Co., Inc., G.R. No. 187116, 2010). Continuing Suretyship By executing such an agreement, the principal places itself in a position to enter into the projected series of transactions with its creditor; with such suretyship agreement, there would be no need to execute a separate surety contract or bond for each financing or credit accommodation extended to the principal debtor. A continuing suretyship covers current and future loans, provided that, with respect to future loan transactions, they are within the description or contemplation of the contract of guaranty (Aniceto G. Saludo, Jr. v. Security Bank Corporation, G.R. No. 184041, 2010). Rules on Payment of Premium The premium is the consideration for furnishing the bond or the guaranty and the obligation to pay the same subsists for as long as the liability of the surety shall exist. (Reparations Commission v. Universal Deep-Sea Fishing Corporation, A.M. No. 219091-96, 1978) 1. The premium becomes a debt as soon as the contract of suretyship or bond is perfected and delivered to the obligor (Insurance Code, Sec. 78) 2. The contract of suretyship or bonding shall not be valid and binding unless and until the premium therefor has been paid; 3. Where the obligee has accepted the bond, it shall be valid and enforceable notwithstanding that the premium has not been paid (Philippine Pryce Assurance v. CA, G.R. No. 107062, 1994); 4. If the contract of suretyship or bond is not accepted by, or filed with the obligee, the surety shall collect only a reasonable amount; 5. If the non-acceptance of the bond be due to the fault or negligence of the surety, no service fee, stamps, or taxes imposed shall be collected by the surety; and 6. In the case of a continuing bond (for a term longer than one year or with no fixed expiration date), the obligor shall pay the subsequent annual premium as it falls due until the contract is cancelled (Insurance Code, Sec. 179) Note: Where a contract of surety is terminated under its terms, the liability of the principal for premiums after such termination ceases notwithstanding the pendency of a lawsuit to enforce a liability that accrued during its stipulated lifetime (Capital Insurance & Surety Co v. Ronquillo Trading, G.R. No. L-36488, 1983). Suretyship v. Guaranty GUARANTY SURETY Promise to answer for the debt, default, or miscarriage of another. Insurer of the debtor’s solvency bound to pay when the principal is unable to pay. Insurer of the debt obligates himself to pay when the principal does not pay. Undertaking that the debtor shall pay. Undertaking that the debt shall be paid. Liable based on an independent agreement to pay if the primary debtor fails to do so. Liable as a regular party to the undertaking. Guaranty is collateral undertaking. a Surety is charged as an original promisor and debtor from the beginning. or Primary, although a Secondarily Page 41 of 393 ATENEO CENTRAL COMMERCIAL LAW BAR OPERATIONS 2020/21 subsidiarily liable. surety is secondary to a valid principal obligation. Guarantor contracts to pay if, by use of due diligence, the principal cannot pay the debt. Surety undertakes directly the payment w/o reference to principal’s solvency. Not bound to take notice of the nonperformance of the principal. Ordinarily held to know every default of his principal. Discharged by the mere indulgence of the creditor or principal. Usually not discharged by the mere indulgence of the creditor or principal. Usually not liable unless notified of the principal’s default. Art. 2080 applicable guarantors. Statute of applies promise. is to Surety cannot claim release from his obligation. Frauds special Statute of Frauds does not apply suretyship is an original promise. 5. LIFE INSURANCE Scope a. Insurance on human life b. Insurance appertaining thereto or connected therewith may be payable: i. On the death of the insured; ii. On his surviving a specified period (endowment/annuities); and iii. Otherwise, contingently on the continuance or cessation of life (endowment/annuities) Note: Life insurance VALUED policies. policies are always Life Insurance vs. Fire and Marine Insurance LIFE INSURANCE FIRE AND MARINE INSURANCE Not a contract of indemnity (save that effected by a creditor on the life of the debtor), but of investment Contracts indemnity of Always regarded as a valued policy May be open or valued May be transferred or assigned to any person, even if he has no insurable interest The transferee or assignee must have an insurable interest in the thing insured Unless expressly required, the consent of the insurer is not essential to the validity of the assignment of a life policy Such consent, in the absence of waiver by the insurer, is essential in the assignment of a fire or marine policy Save that effected by a creditor on life of debtor, insurable interest in the life or health of the person insured need not exist after the insurance takes effect or when the loss occurs The insurable interest in the property insured must exist not only when the insurance takes effect but also when the loss occurs The contingency that is contemplated (i.e., death) is a certain event, the only uncertainty being the time when it will take place The contingency insured against may or may not occur Page 42 of 393 ATENEO CENTRAL BAR OPERATIONS 2020/21 Unless written only for a term, the liability of the insurer to make payment is certain, the only uncertain element being when such payment must be made. The amount insured will have to be paid sooner or later. Liability is uncertain because the happening of the peril insured against is uncertain. The amount insured may not have to be paid. Although it may be terminated by the insured, cannot be cancelled by the insurer, and, therefore, is usually a long-term contract It may be cancelled by either party and is usually for a term of one (1) year COMMERCIAL LAW if the words “industrial” policy are printed upon the policy as part of the descriptive matter. Kinds of Life Insurance a. Whole Life or Ordinary Policies The insured agrees to pay annual, semiannual or quarterly premiums while he lives. The insurer agrees to pay the face value of the policy upon the death of the insured. b. Limited Payment Life Policies A whole life or ordinary policy where premiums are paid only for a specified period of years. The "loss" to the beneficiary caused by the death of the insured can seldom be measured accurately in terms of cash value The reverse is generally true of the loss of property The beneficiary is under no obligation to prove actual financial loss as a result of the death of the insured in order to collect the insurance The insured is required to submit proof of his actual pecuniary loss as a condition precedent to collecting the insurance Classification of Life Insurance a. Individual Life Insurance on human lives and insurance appertaining thereto or connected therewith; b. Group Life A blanket policy covering a number of individuals c. Industrial Life A form of life insurance under which the premiums are payable either monthly or oftener, if the face amount of insurance provided in any policy is not more than five hundred times that of the current statutory minimum daily wage in the City of Manila and c. Term Policy Insured pays only once and insurer’s liability arises only upon the death of the insured within the agreed term as period. If the latter survives the period, the contract terminates and the insurer is not liable. d. Endowment Policy Insurer agrees to pay a certain sum to the insured if the latter outlives a designated period; if he dies before that time, the proceeds are paid to the beneficiary e. Life Annuity Debtor binds (the insurer) himself to pay an annual pension or income during the life of one or more persons in consideration of a capital consisting of money or other property, whose ownership is transferred to him with the burden of income. Variable Contract Any policy or contract on either a group or individual basis issued by an insurance company providing for benefits or other contractual payments or values thereunder to vary so as to reflect investment results of any segregated portfolio of investment. Rules on Transferability of Life Insurance Contracts A policy of insurance upon life or health may pass by transfer, will or succession to any person, whether he has an insurable interest or not, and such person may recover upon it whatever the insured might have recovered. (Insurance Code, Sec. 184) All life insurance policies are declared by law to be assignable regardless of whether the assignee has an insurable interest in the life of the insured Page 43 of 393 ATENEO CENTRAL COMMERCIAL LAW BAR OPERATIONS 2020/21 or not (Sun Life Assur. Co. of Canada v. Ingersoll, G.R. No. 16475, 1921) Necessity of Beneficiary’s Consent to Assignment The consent of the beneficiary depends if there is a waiver of the right to change the beneficiary See discussion on Parties to An Insurance Contract (B) Liability of Insurer in Case of Death or Suicide 1. Suicide The insurer is LIABLE in the following cases: a. Suicide was committed after the policy has been in force for a period of two years from the date of its issue or its last reinstatement; b. Suicide committed in a state of insanity regardless of the date of the commission of the suicide; or c. If committed after the lapse of a shorter period in the policy (Insurance Code, Sec. 183) Note: Any stipulation extending the two-year period is void. The insurer is NOT LIABLE in the following cases: a. The suicide is not by reason of insanity and is committed within the two-year period; b. The suicide is by reason of insanity but is not among the risks assumed by the insurer regardless of the date of commission; and c. The insurer can show that the policy was obtained with the intention to commit suicide even in the absence of any suicide exclusion in the policy. 2. Killing by the Beneficiary General Rule: The interest of a beneficiary in a life insurance policy shall be forfeited when the beneficiary is the principal, accomplice, or accessory in willfully bringing about the death of the insured. In such a case, the share forfeited shall pass on to the other beneficiaries, unless otherwise disqualified. In the absence of other beneficiaries, the proceeds shall be paid in accordance with the policy contract. If the policy contract is silent, the proceeds shall be paid to the estate of the insured. (Insurance Code, Sec. 12) Exceptions: a. Accidental killing; b. Self-defense; and c. Insanity of the beneficiary at the time he killed the insured 6. COMPULSORY MOTOR LIABILITY INSURANCE (CMVLI) VEHICLE A protection coverage that will answer for legal liability for losses and damages for bodily injuries and/or property damage that may be sustained by another arising from the use and operation of a motor vehicle by its owner. It is unlawful for any land transportation operator or owner of a motor vehicle to operate the same in public highways unless there is an insurance or guaranty to indemnify the death or bodily injury of a third party or passenger arising from the use thereof. (Insurance Code, Sec. 387) Motor Vehicle Shall mean any vehicle propelled by any power other than muscular power using the public highways (R.A. No. 4136, Sec. 3[a]) Exceptions: road rollers, trolley cars, street sweepers, sprinklers, lawn mowers, bulldozers, graders, forklifts, amphibian trucks, and cranes if not used in public highways, vehicles which run only on rails or tracks, and tractors, trailers and traction engines of all kinds used exclusively for agricultural purposes. Scope of Coverage Required Owners of private motor vehicles Operators of land transportation Comprehensive against 3rd party liability for death or bodily injuries Comprehensive against 3rd party liability for death or bodily injuries In case a private motor vehicle is being used to transport passengers for compensation, such coverage shall, in addition, include passenger liability The insurer may extend additional other risks at its option Page 44 of 393 ATENEO CENTRAL BAR OPERATIONS 2020/21 Rules of Comprehensive Third-Party Liability Insurance (CTPL): Registration of any vehicle will not be made or renewed without complying with the requirements The protection may be complied with using any of the following: a. Insurance policy b. Surety bond c. Cash bond The purpose of CTPL is to give immediate financial assistance to victims of motor vehicle accidents and/or their dependents, especially if they are poor regardless of the financial capability of motor vehicle owners or operators responsible for the accident. (First Integrated Bonding and Ins. Co., Inc. v. Hernando, G.R. No. 51221, 1991). “No Fault” Clause The injured third party or passenger or heirs of the deceased is given the option to file a claim for death or injury without the necessity of proving fault or negligence of any kind. Conditions for application of no-fault clause: a. The claim must be for death or bodily injuries only (property damage/liability not included). b. The total indemnity in respect of any person shall not be less than fifteen thousand pesos (P15,000). c. The following proofs of loss, when submitted under oath, shall be sufficient evidence to substantiate the claim: i. Police report of accident; and ii. Death certificate and evidence sufficient to establish the proper payee; or, iii. Medical report and evidence or medical or hospital disbursement in respect of which refund is claimed. d. Claim may be made against one motor vehicle only; i. Against the insurer of the vehicle where one is a passenger ii. in any other case, the offending vehicle Claimant The claimant or victim may be a “passenger” or a “third party” (Insurance Code, Sec. 391) COMMERCIAL LAW 1. Passenger Any fare paying person being transported and conveyed in and by a motor vehicle for transportation of passengers for compensation, including persons expressly authorized by law or by the vehicle’s operator or his agents to ride without fare. (Insurance Code, Sec. 386[b]] 2. Third Party Any person other than a passenger as defined in this section and shall also exclude a member of the household, or a member of the family within the second degree of consanguinity or affinity, of a motor vehicle owner or land transportation operator, as likewise defined herein, or his employee in respect of death, bodily injury, or damage to property arising out of and in the course of employment (Insurance Code, Sec. 386[c]) Proper Insurer to Claim From In the case of an occupant of a vehicle, claim shall lie against the insurer of the vehicle in which the occupant is riding, mounting or dismounting from. If not an occupant, claim shall lie against the insurer of the directly offending vehicle. The claimant is not free to choose from which insurer he will claim the "no-fault indemnity" as the law, by using the word "shall," makes it mandatory that the claim be made against the insurer of such vehicle. That said vehicle might not be the one that caused the accident is of no moment since the law itself provides that the party paying the claim may recover against the owner of the vehicle responsible for the accident. (Perla Compania de Seguros v. Ancheta, G.R. No. L49699 August 8, 1988) Note: In all cases, the right of the party paying the claim to recover against the owner of the vehicle responsible for the accident shall be maintained. (Insurance Code, Sec. 391) Periods in Claims Settlement Notice of Claim: must be presented within six (6) months from the date of the accident Otherwise the claim is deemed waived. Bringing an Action or Suit: The action must be filed in court of the Insurance Commission within one (1) year from denial of the claim. Page 45 of 393 ATENEO CENTRAL BAR OPERATIONS 2020/21 Prescription starts to run from the denial of the claim by the Insurance Company (Summit Guaranty and Insurance Co. v. Arnaldo, G.R. No. L-48546, 1988) Payment of Claims If there is an agreement, the insurance company shall forthwith ascertain the truth and extent of the claim and make payment within five (5) working days after reaching an agreement. If no agreement is reached, the insurance company shall pay only the no-fault indemnity without prejudice to the claimant from pursuing his claim further, in which case, he shall not be required or compelled by the insurance company to execute any quit claim or document releasing it from liability under the policy of insurance or surety bond issued. Note: If the policy provides for indemnity against liability, the insurer can be sued directly by a third person. But, if the policy provides for “reimbursement after actual payment by the insured”, or for the indemnity against loss, a third person has no cause of action against the insurer (Bonifacio Brothers v. Mora, G.R. No. 20853, 1967). COMMERCIAL LAW vehicle by order of a court of law or by reason of any enactment or regulation in that behalf Note: If the claimant was able to present a driver’s license, the same is presumed to be genuine. The license will still be sustained in the absence of proof that it was not validly issued (CCC Insurance Corporation v. CA, G.R. No. 26167, 1970). A driver (not the insured himself) who holds an expired driver’s license is not an authorized driver (Gutierrez v. Capital Insurance Co., G.R. No. 30892, 1984). Theft Clause The risks insured against in the policy may include theft. If there is such a provision and the vehicle was unlawfully taken, the insurer is liable under the theft clause and the authorized driver clause does not apply. The insured can recover even if the thief has no driver’s license. (Peria Compania de Seguros v. CA, G.R. No. 96452, 1992) ————- end of topic ————- While insurer’s liability may be direct, it does not mean that the insurer can be held solidarily liable with the insured. The insurer’s liability is based on contract; that of the insured is based on torts. Furthermore, the insurer’s liability is limited to the amount of the insurance coverage (Pan Malayan Insurance Corp. v. CA, G.R. No. 81026, 1990). Authorized Driver Clause A stipulation in a motor vehicle insurance which provides that the driver, other than the insured owner, must be duly licensed to drive the motor vehicle otherwise the insurer is excused from liability. The clause means that the insurer indemnifies the insured owner against loss or damage to the car but limits the use of the insured vehicle to the insured himself or any person who drove on his order or with his permission. Authorized driver refers to: 1. The insured; 2. Any person driving on the insured’s order or with his permission, provided that the person driving is permitted in accordance with the licensing, or other laws or regulations to drive the motor vehicle and is not disqualified from driving such motor Page 46 of 393 PRE-NEED Commercial Law ATENEO CENTRAL COMMERCIAL LAW BAR OPERATIONS 2020/21 A. DEFINITION II. PRE-NEED TOPIC OUTLINE UNDER THE SYLLABUS 1. PRE-NEED PLANS A. DEFINITION 1. Pre-need plans 2. Pre-need company B. REGISTRATION PLANS OF PRE-NEED C. LICENSING OF SALES COUNSELOR AND GENERAL AGENT D. DEFAULT AND TERMINATION E. CLAIMS SETTLEMENT "Pre-need plans" are contracts, agreements, deeds or plans for the benefit of the planholders which provide for the performance of future service/s, payment of monetary considerations or delivery of other benefits at the time of actual need or agreed maturity date, as specified therein, in exchange for cash or installment amounts with or without interest or insurance coverage and includes life, pension, education, interment and other plans, instruments contracts or deeds as may in the future he determined by the Commission. (Pre-need Code, sec 4 (b)) Under Sec. 4, pre-need plans are: 1. contracts, agreements, deeds or plans for the benefit of the planholders 2. for the performance of future service/s, payment of monetary considerations or delivery of other benefits at the time of actual need or agreed maturity date 3. in exchange for cash or installment amounts with or without interest or insurance coverage 2. PRE-NEED COMPANY "Pre-need company" refers to any corporation registered with the Commission and authorized/licensed to sell or offer to sell preneed plans. ((Pre-need Code, sec 4 (c)) The term "pre-need company" also refers to schools, memorial chapels, banks, nonbank financial institutions and other entities which have also been authorized/licensed to sell or offer to sell pre-need plans insofar as their pre-need activities or business are concerned. B. REGISTRATION OF PRE-NEED PLANS Registration of Pre-need Contracts/Plans Within a period of 45 days after the grant of a license to do business as a pre-need company, and for every pre-need plan which the pre-need company intends to offer for sale to the public, the pre-need company shall file with the Commission a registration statement for the sale of pre-need Page 47 of 393 ATENEO CENTRAL BAR OPERATIONS 2020/21 plans pursuant to this Code. (Pre-need Code, sec 14) Documentary Requirements 1. Duly accomplished Registration Statements; 2. Board resolution authorizing the registration of applicant’s pre-need plans; 3. Opinion of independent counsel on the legality of the issue; 4. Audited financial statements; 5. Viability study with certification, under oath, of pre-need actuary accredited by the Commission; 6. Copy of the proposed pre-need plan; and 7. Sample of sales materials Note: It must contain appropriate risk factors as may be determined by the Insurance Commission. C. LICENSING OF SALES COUNSELOR AND GENERAL AGENT Sales counselor "Sales counselors" refers to natural persons who are engaged in the sale of, or offer to sell, or counsel of prospective planholders for the purpose of selling, whether or not on commission basis, pre-need plans upon the authority of the pre-need company. (Pre-need Code, sec. 4(h)) Qualifications 1. of good moral character and must not have been convicted of any crime involving moral turpitude; 2. undergone a training program approved by the Commission and such fact has been certified under oath by a duly authorized representative of a pre-need company; and 3. has passed a written examination administered by the. Commission or by an independent organization under the supervision of the Commission. Grounds for the denial, suspension, revocation of license 1. Material misrepresentation relating to: a. Application requirements b. Terms and conditions of preneed plans 2. Obtained or attempted to obtain a license by fraud or misrepresentation; COMMERCIAL LAW 3. Solicited, sold or attempted to solicit or sell a pre-need plan by means of false or misleading representation and other fraudulent means; 4. Terminated for cause from another preneed company; 5. Willfully allowing the use of one's license by a non-licensed or barred individual; and 6. Analogous circumstances. 7. Grounds under Section 11 a. Conviction of crime involving a pre-need plan or other financial product b. Conviction of an offense involving moral turpitude or fraud or embezzlement, theft or estafa c. Enjoined, by reason of any misconduct, from acting as a director, officer, employee occupying any fiduciary position d. Violation of the Pre-need Code, Insurance Code, Securities Regulation Code or any other related laws General agent If the issuer should contract the services of a general agent to undertake the sales of its plans, such general agent shall be required to be licensed as such with the Commission, in accordance with the requirements imposed by the Commission. D. DEFAULT AND TERMINATION Grace period The pre-need company must provide in all contracts issued to planholders a grace period of at least sixty (60) days within which to pay accrued installments, counted from the due date of the first unpaid installment. Default Nonpayment of a plan within the grace period shall render the plan a lapsed plan. Payment beyond the grace period General Rule: Any payment by the planholder after the grace period shall be reimbursed Exception: the planholder duly reinstates the plan. Page 48 of 393 ATENEO CENTRAL BAR OPERATIONS 2020/21 Reinstatement The planholder shall be allowed a period of not less than two (2) years from the lapse of the grace period or a longer period as provided in the contract within which to reinstate his plan. Note: No cancellation of plans shall be made by the issuer during such period when reinstatement may be effected. Notice Requirement Within thirty (30) days from the expiration of the grace period and within thirty (30) days from the expiration of the reinstatement period, which is two (2) years from the lapse of the grace period, the pre-need company shall give written notice to the planholder that his plan will be cancelled if not reinstated within two (2) years. Failure to give either of the required notices shall preclude the pre-need company from treating the plans as cancelled. Termination of Pre-need plans Section 24. Termination of Pre-need Plans. - A planholder may terminate his pre-need plan at any time by giving written notice to the issuer. COMMERCIAL LAW 2. Failing to acknowledge with reasonable promptness pertinent communications with respect to claims arising under its plan; 3. Failing to adopt and implement reasonable standards for the prompt investigation of claims arising under its plan; 4. Failing to provide prompt, fair and equitable settlement of claims submitted in which liability has become reasonably clear; or 5. Compelling planholders to institute suits or recover amounts due under its plan by offering, without justifiable reason, substantially less than the amounts ultimately recovered in suits brought by them. Note: Any violation of this section shall be considered sufficient cause for the suspension or revocation of the company's certificate of authority. Payment of Plan Proceeds 1. Scheduled benefit plans Termination values A pre-need plan shall contain a schedule of termination values to which the planholder is entitled to upon termination. The termination value of the pre-need plan shall be predetermined by the actuary of the pre-need company upon application for registration of the pre-need plans with the Commission and shall be disclosed in the contract. E. CLAIMS SETTLEMENT No pre-need company shall refuse, without just cause, to pay or settle claims arising under coverages provided by its plans nor shall any such company engage in unfair claim settlement practices. Unfair Claims Settlement Practices Any of the following acts by a pre-need company, if committed without just cause, shall constitute unfair claims settlement practices: 1. Knowingly misrepresenting to claimants pertinent facts or plan provisions relating to coverages at issue; In the case of scheduled benefit plans, the proceeds of the plan shall be paid immediately upon maturity of the contract, unless such proceeds are made payable in installments or as an annuity, in which case the installments or annuities shall be paid as they become due. Refusal or failure to pay the claim within fifteen (15) days from maturity or due date will entitle the beneficiary to collect interest on the proceeds of the plan for the duration of the delay at the rate twice the legal interest unless such failure or refusal to pay is based on the ground that the claim is fraudulent: Provided, That the planholder has duly complied with the documentary requirements of the pre-need company. 2. Contingent benefit plans In the case of contingent benefit plans, the benefits shall be paid by the pre-need company thirty (30) days upon submission of all necessary documents. Recovery of Investment The planholder may institute the necessary legal action in court to recover his/her investment in the Page 49 of 393 ATENEO CENTRAL BAR OPERATIONS 2020/21 COMMERCIAL LAW pre-need company thirty (30) days upon submission of all necessary documents. However, in case the insolvency or bankruptcy is a mere cover - up for fraud or illegality, the planholder may institute the legal action directly against the officers and/or controlling owners of the said pre-need company. Consequences of Delay or Default The pre-need company shall be liable to pay damages, consisting of actual damages, attorney’s fees and legal interest, to be computed from the date the claim is made until it is fully satisfied: Provided, That the failure to pay any such claim within the time prescribed shall be considered prima facie evidence of unreasonable delay in payment. Distribution of Profits A pre-need company may declare dividends: Provided, That the following shall remain unimpaired, as certified under oath by the president and the treasurer with respect to items (a) and (b); and in the case of item (c), by the trust officer: (a) One hundred percent (100%) of the capital stock; (b) An amount sufficient to pay all net losses reported, or in the course of settlement, and all liabilities for expenses and taxes; and (c) Trust fund. Note: Any dividend declared shall be reported to the Commission within thirty (30) days after such declaration. Note: Section 30 of R.A. No. 9829 expressly stipulates that the trust fund is to be used at all times for the sole benefit of the planholders, and cannot ever be applied to satisfy the claims of the creditors of the company. (Securities and Exchange Commission v. College Assurance Plan Philippines, Inc., G.R. No. 202052, [March 7, 2018]) ————- end of topic ————- Page 50 of 393 TRANSPORTATION LAW Commercial Law ATENEO CENTRAL COMMERCIAL LAW BAR OPERATIONS 2020/21 III. TRANSPORTATION LAW TOPIC OUTLINE UNDER THE SYLLABUS III. TRANSPORTATION LAW A. COMMON CARRIERS 1. Diligence required of common carriers 2. Liabilities of common carriers 3. Classification of transport network vehicle services and transport network companies B. VIGILANCE OVER GOODS 1. Exempting causes a. Requirement of absence of negligence b. Absence of delay c. Due diligence to prevent or lessen the loss 2. Contributory negligence 3. Duration of liability a. Delivery of goods to common carrier b. Actual or constructive delivery c. Temporary loading or storage 4. Stipulation for limitation of liability a. Void stipulations b. Limitation of liability to a fixed amount c. Limitation of liability in absence of declaration of greater value 5. Liability for baggage of persons a. Checked-in baggage b. Baggage in possession of passengers C. SAFETY OF PASSENGERS 1. Void stipulations 2. Duration of liability a. Waiting for carrier or boarding of carrier b. Arrival at destination 3. Liability for acts of others c. Employees d. Other passengers and strangers 4. Liability for delay in the commencement of voyage 5. Liability for defects in equipment and facilities 6. Extent of liability for damages D. BILL OF LADING 1. Three-fold character 2. Delivery of goods a. Period for delivery b. Delivery without surrender of bill of lading c. Refusal of consignee to deliver 3. Period for filing claims 4. Period for filing actions 5. Effects of stipulations E. MARITIME COMMERCE 1. Charter parties a. Bareboat/demise charter b. Time charter c. Voyage/trip charter 2. Liability of shipowners and shipping agents a. Liability for acts of captain b. Exceptions to limited liability 3. Accidents and damages in maritime commerce a. General average b. Collisions and allisions 4. Carriage of Goods by Sea Act a. Application b. Notice of loss or damage c. Period of prescription d. Limitation of liability F. PUBLIC SERVICE ACT 1. Definition of public utility 2. Necessity for certificate of public 3. 4. convenience a. Requisites i. Citizenship ii. Promotion of public interests iii. Financial capability b. Prior operator rule i. Meaning ii. Exceptions iii. Ruinous competition Fixing of rate a. Rate of return b. Exclusion of income tax as expense Unlawful arrangements a. Boundary system b. Kabit system Page 52 of 393 ATENEO CENTRAL BAR OPERATIONS 2020/21 5. Approval of sale, encumbrance, or lease of property G. THE WARSAW CONVENTION 1. Applicability 2. Limitation of liability a. Liability to passengers b. Liability for checked passengers c. Liability for hand-carried baggage 3. Willful misconduct COMMERCIAL LAW A. COMMON CARRIERS Contract of Transportation Natural or juridical persons bind themselves to transport persons, goods, or both for compensation offering their services to the public. Elements of a Common Carrier: 1. Persons, corporations, firms, or associations; 2. Engaged in the business of carrying or transporting passengers or goods or both; 3. By land, water, or air; 4. For compensation; and 5. Offering their services to the public. (Civil Code, Art. 1732) Tests to Determine Whether the Entity is a Common Carrier 1. It must be engaged in the business of carrying goods for others as a public employment and must hold itself out as ready to engage in the transportation of goods generally as a business and not as a casual occupation; 2. It must undertake to carry goods of the kind that to which its business is confined; 3. It must undertake to carry by the method by which his business is conducted, and over its established roads; 4. The transportation must be for hire. (First Philippine Industrial Corporation v. CA, 360 Phil. 852) The “true” test for a common carrier is not the quantity or extent of the business actually transacted, or the number and character of the conveyances used in the activity, but whether the undertaking is part of an activity engaged in by the carrier that he has held out to the general public as his business or occupation. (Sps. Pereña v. Sps. Zarate, 693 Phil. 373) Parties to the Contract of Transportation Carriage of Passengers a) Carrier: Party who binds himself to transport persons, goods, or both. It may be a common carrier or a private carrier. b) Passenger: One who travels in a public conveyance by virtue of an express or Page 53 of 393 ATENEO CENTRAL BAR OPERATIONS 2020/21 implied contract with the common carrier, paying fare or what is the equivalent thereof Carriage of Goods a) Shipper: Person who delivers the goods to the carrier for transportation and pays the consideration, or on whose behalf the payment is made b) Carrier: (see earlier discussion) c) Consignee: Party who receives the goods or cargo. The consignee and the shipper may be the same. Doctrinal Pronouncements Related to the Determination of Common Carriers  The Civil Code does not distinguish between one whose principal activity is the carrying of goods and one who does such carrying of goods only as an ancillary activity. (A.F. Sanchez Brokerage Inc. v. CA, 488 Phil. 430)  The Civil Code does not distinguish between a person or enterprise offering transportation services on a regular or scheduled basis and one offering such service on an unscheduled basis. (De Guzman v. CA, 250 Phil. 613)  The Civil Code does not distinguish between a carrier offering its services to the general population and one who offers its services only from a narrow segment of the general population (Id.)  A Certificate of Public Convenience is not a requisite to incur liability under the Civil Code provisions governing common carriers. (Id.)  The Civil Code makes no distinction as to the means of transportation as long as it is done through land, water, or air. (First Philippine Industrial Corporation v. CA, 360 Phil. 852)  A carrier will be considered a common carrier regardless of whether it owns the vehicle it used or has to actually hire one as long as the entity holds itself out to the public for transport of goods as a business. (TorresMadrid Brokerage, Inc. v. FEB Mitsui Marine Insurance Co., 789 Phil. 413) Private carriers are persons or entities who undertake to transport goods or persons from one place or another by special agreement in a particular instance only, without making the activity a vocation or without holding himself out COMMERCIAL LAW to the public as ready to act for all who may desire his/her/its services, either gratuitously or for hire. (Sps. Pereña v. Sps. Zarate, 693 Phil. 373) Common Carriers v. Private Carriers COMMON PRIVATE CARRIERS CARRIERS Holds himself / herself Engage with / itself for all people particular individuals indiscriminately or groups only Governed by the Civil Governed by the Civil Code provisions Code provisions on related to common obligations and carriers, the Public contracts Service Act, Code of Commerce, and other special laws regarding transportation. Required to exercise Only required to extraordinary exercise ordinary diligence diligence Common carriers are No presumption of presumed to be at fault or negligence is fault or negligent in present for private cases of losses of the carriers. effects of the passengers or injuries caused to passengers (Sps. Pereña v. Sps. Zarate, 693 Phil. 373) 1. DILIGENCE REQUIRED OF COMMON CARRIERS Extraordinary Diligence or Responsibility of Common Carriers Regarding Passengers and Goods Common carriers are required to exercise extraordinary diligence both over the goods and over the safety of the passengers they are transporting, according to all the circumstances of each case. (Civil Code, Art. 1733) The Common Carrier Is Not an Insurer of Absolute Safety The common carrier is not required to exercise all the care, skill, or diligence the human mind can conceive nor does it free the passenger from all possible risks. (Japan Airlines v. CA, G.R. No. 118664, 1998) Page 54 of 393 ATENEO CENTRAL BAR OPERATIONS 2020/21 COMMERCIAL LAW 2. LIABILITIES OF COMMON CARRIERS General Rule: Common carriers are liable for: 1. The loss, destruction, or deterioration of the goods they are transporting  Exceptions: a) Natural disaster or calamity; b) Act of the public enemy in war, whether international or civil; c) Act or omission of the shipper or owner of goods d) The character of the goods or defects in the packaging or in the containers; e) Order or act of a competent public authority. (Civil Code, Art. 1734) 2. Deaths and injuries caused to passengers. (Civil Code, Art. 1756) Disputable Presumption of Fault or Negligence on Common Carriers Common carriers are presumed to be or negligent if the goods transported by them are lost, destroyed, or deteriorated. This also applies to deaths and injuries caused to passengers. (Civil Code, Art. 1735 & Art. 1756) To overcome this presumption, the common carrier must prove that he exercised extraordinary diligence in transporting the goods and/or passengers. In order to prove the exercise of extraordinary diligence, the carrier must do more than merely showing the possibility that some other party could be responsible for the damage. (Calvo v. UCPB General Insurance, Co., Inc., 429 Phil. 244) 3. CLASSIFICATION OF TRANSPORT NETWORK VEHICLE SERVICES AND TRANSPORT NETWORK COMPANIES Transport Network Companies (TNCs) Persons or entities that provide pre-arranged transportation services for compensation, using an internet-based technology application or digital platform technology to connect passengers with drivers using their personal vehicles. (DOTr Order 2018-013, Sec. 1) Transportation Network Vehicle Services (TNVS) Refers to TNC-accredited private vehicle owner using the internet-based technology application or digital platform technology transporting passengers from one point to another for compensation. (DOTr Order 2018-013, Sec. 2) TNVSs are expressly considered to be common carriers. Furthermore, TNVSs cannot operate as common carriers outside of or independent from the use of internet-based technology of the TNC or TNCs to which they are accredited. (DOTr Order 2018-013, Sec. 2) Example: Grab and Angkas are examples of a TNC, while a Grab driver and Angkas rider are examples of TNVS. B. VIGILANCE OVER GOODS General Rule: Common Carriers are responsible for the loss, destruction, or deterioration of the goods they are transporting. (Civil Code, Art. 1734) Mere proof of delivery of goods in good order to the common carrier and the arrival of the same goods in bad order at their destination constitutes prima facie case of fault or negligence against the carrier. (Belgian Overseas Chartering and Shipping N.V. v. The Philippine First Insurance Co., Inc., 432 Phil. 567) 1. EXEMPTING CAUSES Common carriers are responsible for the loss, destruction, or deterioration of the goods, UNLESS the same is due to any of the following causes ONLY: (1) Flood, storm, earthquake, lightning, or other natural disaster or calamity; (2) Act of the public enemy in war, whether international or civil; (3) Act or omission of the shipper or owner of the goods; (4) The character of the goods or defects in the packing or in the containers; Page 55 of 393 ATENEO CENTRAL BAR OPERATIONS 2020/21 (5) Order or act of competent public authority. (Civil Code, Art. 1734) COMMERCIAL LAW A tire blow-out is not considered a fortuitous event, as there are human factors involved in the situation (Yobido v. CA, G.R. No. 113003, 1997) NOTE: The list of exemptions is an exclusive list. (1) Flood, Storm, Earthquake, Lightning, or Other Natural Disaster or Calamity Conditions Required: 1. Natural disaster was the proximate and only cause 2. Common carrier must have exercised due diligence to prevent or minimize the loss before, during, and after the occurrence of the natural disaster (Civil Code, Art. 1739) 3. Common carrier not in delay. (Civil Code, Art. 1740) Requisites for Caso Fortuito (Force Majeure): 1. The event must be independent of human will; 2. The occurrence must render it impossible for the debtor to fulfill its obligation in a normal manner; 3. The debtor must not have participated or aggravated the injury to the creditor; and 4. The event must have been unforeseeable, or if it could be foreseen, unavoidable. Fire cannot be considered as a natural disaster or calamity that exempts common carriers from liability. Fire will only exempt carriers if it was caused by lightning or by other natural disaster or calamity (Eastern Shipping Lines, Inc v. Intermediate Appellate Court, 234 Phil. 455) Heavy seas and rain are not causes for carriers to be exempted from liability. Rather, those are normal occurrences that a vessel would encounter (Eastern Shipping Lines, Inc v. Intermediate Appellate Court, 234 Phil. 455) Mechanical defects are not within the ambit of a natural disaster or fortuitous events. (Necesito v. Paras, 104 Phil. 75) High jacking is not an exempting cause under Art. 1734. However, common carriers are not held liable for the acts or events which cannot be foreseen or are inevitable, provided that they exercised extraordinary diligence (De Guzman v. CA, G.R. No. L-47822, 1988) (2) Act of the Public Enemy In War, Whether International or Civil Conditions Required: 1. Act was the proximate and only cause; 2. Common carrier must have exercised due diligence to prevent or minimize loss before, during, and after the act; and 3. Common carrier not in delay (Civil Code, Art. 1740) (3) Act or Omission of the Shipper or Owner of the Goods Conditions Required: 1. If proximate cause, exempting 2. If contributory negligence, mitigating 3. Immediate protest by the carrier; otherwise, carrier may be in estoppel When the private respondent did furnish the common carrier with an inaccurate weight of the payloader, the common carrier is nonetheless liable, for the damage caused to the machinery could have been avoided by the exercise of reasonable skill and attention on its part in overseeing the unloading of such a heavy equipment. It was the duty of its Chief Officer to determine the weight of heavy cargoes before accepting them (Compania Maritima v. CA, G.R. No. 31379, 1997) (4) The Character of the Goods or Defects in the Packing or In The Containers Conditions Required: 1. Exercise of due diligence to forestall or prevent loss; and 2. Immediate protest by the carrier if the problem with the goods or the packing or Page 56 of 393 ATENEO CENTRAL COMMERCIAL LAW BAR OPERATIONS 2020/21 containers is visible; otherwise, carrier may be in estoppel This particular exempting cause only refers to cases when goods are lost or damaged while in transit as a result of: a) Natural decay of perishable goods; b) Fermentation or evaporation of substances liable therefor; c) Necessary and natural wear and tear of goods in transport; d) Defects in the packages; or e) Natural propensities of animals. (Belgian Overseas Chartering and Shipping N.V. v. Philippine First Insurance Co., Inc., 432 Phil. 567) If the improper packaging is known to the carrier or his/her/its employees or the improper packaging is apparent under ordinary observation but nevertheless accepts it without protest, Art. 1734, paragraph 4 will not relieve the carrier from any liability (Calvo v. UCPB General Insurance Co., Inc., 429 Phil. 244) (5) Order or Act of Competent Public Authority Condition Required: 1. Said public authority had the power to issue the order. (Civil Code, Art. 1740) Similar conditions: the order was lawful; or the order was issued under legal processes of authority. (Ganzon v. CA, 244 Phil. 644) Summary Table: Art. 1734 and Defenses CONDITIONS DEFENSES REQUIRED Flood, storm, Proximate and only earthquake, lightning, cause; or other natural disaster or calamity Act of the public Exercise of diligence enemy in war, to prevent or minimize whether international loss; and or civil No delay Act or omission of the shipper or owner of the goods If owner or shipper is the proximate cause, exempting If there is contributory negligence, mitigating The character of the goods or defects in the packing or in the containers Order or competent authority act of public Immediate protest by carrier; else: estoppel Exercise of due diligence to forestall or prevent loss Immediate protest by carrier; else: estoppel Said public authority had the power to issue the order a. Requirement of absence of negligence In order to avail the defense of natural disasters, it must be shown that the natural disaster must have been the proximate and only cause of the loss, destruction, or deterioration. (Civil Code, Art. 1739). This defense cannot be availed then if the carrier is negligent. b. Absence of delay A common carrier is still liable, even though the loss, destruction, or deterioration of the goods was caused by a natural disaster, when it incurs delay in the transportation of goods. (Civil Code, Art. 1740) c. Due diligence to prevent or lessen the losses Common carriers are required to exercise due diligence to prevent or minimize the loss, destruction, or deterioration of the goods in the following exempting causes: 1. Natural disasters 2. Acts of public enemy in war 3. Character of the goods or defects in the packaging or in the containers Page 57 of 393 ATENEO CENTRAL BAR OPERATIONS 2020/21 2. CONTRIBUTORY NEGLIGENCE If the shipper/owner contributed to the loss, destruction, or deterioration of the goods caused proximately by the common carrier, the carrier’s liability shall be equitably reduced. (Civil Code, Art. 1741) 3. DURATION OF LIABILITY Common carriers are required to exercise extraordinary diligence over the goods to be transported:  From the time the goods are unconditionally placed in the possession of and received by carrier until the goods are delivered, actually or constructively, to the consignee or to the person who has a right to receive them and a reasonable time is given to remove the goods. (Civil Code, Art. 1736; Nedlloyd B.V. Rotterdam v. Glow Laks, G.R. No. 156330, 2014)  Even when the goods are temporarily unloaded or stored in transit, unless the shipper used right of stoppage in transit.  Even during the time of the storage at the warehouse of the common carrier at place of destination, until consignee is advised of the goods’ arrival and has had opportunity to remove or dispose them. a. Delivery of goods to common carrier The fact that only a portion of the goods had been delivered and loaded to the carrier does not impair the contract of carriage, as the goods still remained in the custody and control of the carrier. (Ganzon v. CA, 244 Phil. 664) b. Actual or constructive delivery Actual delivery is when possession has been turned over to the consignee or to his duly authorized agent and a reasonable time is given to him to remove the goods (Westwind Shipping Corporation v. UCPB General Insurance Co., Inc., 722 Phil. 38) Delivery of the bill of lading to the consignee or any person who has a right to receive the goods under the bill of lading can be considered as a COMMERCIAL LAW constructive delivery. After all, the issuance of a bill of lading is prima facie evidence of the receipt of the goods by the carrier (Saludo v. CA, G.R. No. 95536) c. Temporary unloading or storage General Rule: Common carriers are still required to exercise extraordinary diligence over the goods, even if the goods are temporary unloaded or stored in transit. Exception: Common carriers are not required to exercise extraordinary diligence anymore if the shipper/owner has made use of their right of stoppage in transitu. (Civil Code, Art. 1737) Stoppage In Transitu Right of an unpaid seller to stop delivery and regain possession of the goods while they are in transit to the buyer who has been declared bankrupt/insolvent. 4. STIPULATION FOR LIMITATION OF LIABILITY Degree less than extraordinary diligence The Common carrier and the shipper/owner can stipulate in limiting the carrier’s liability for the loss, destruction, or deterioration of the goods to be transported to a degree less than extraordinary diligence. This stipulation is valid if it is: 1. In writing, signed by the shipper or owner; 2. Supported by a valuable consideration other than the service rendered by the carrier; and 3. Reasonable, just, and not contrary to public policy (Civil Code, Art. 1744) Other Stipulations Limiting Liability of Common Carrier A stipulation limiting the common carrier’s liability: a) May be annulled by the shipper/owner if the carrier refused to carry the goods, unless the shipper/owner agreed to such stipulation (Civil Code, Art. 1746) b) Cannot be availed of if the common carrier, without just cause, delays the transportation of the goods or changes the stipulated or Page 58 of 393 ATENEO CENTRAL BAR OPERATIONS 2020/21 usual route in cases of loss, destruction, or deterioration of the goods. (Civil Code, Art. 1747) c) For delay on account of strikes or riots is valid. (Civil Code, Art. 1748) d) To the value of the goods appearing in the bill of lading is valid, unless the shipper/owner declares a greater value. (Civil Code, Art. 1749) Determination if stipulation is within public policy The fact that the common carrier has no competitor along the line or route, or a part thereof, to which the contract refers shall be taken into consideration on the question of whether a stipulation limiting the common carrier's liability is reasonable, just and in consonance with public policy. (Civil Code, Art. 1751) NOTE: Presumption of negligence against the carrier in cases of loss, destruction, or deterioration of the goods is still present despite stipulations limiting liability. (Civil Code, Art. 1752.) a. Void Stipulations The following are void stipulations in a contract of carriage for being unreasonable, unjust, and contrary to public policy: (1) That the goods are transported at the risk of the owner or shipper; (2) That the common carrier will not be liable for any loss, destruction, or deterioration of the goods; (3) That the common carrier need not observe any diligence in the custody of the goods; (4) That the common carrier shall exercise a degree of diligence less than that of a good father of a family, or of a man of ordinary prudence in the vigilance over the movables transported; (5) That the common carrier shall not be responsible for the acts or omission of his or its employees; (6) That the common carrier's liability for acts committed by thieves, or of robbers who do not act with grave or irresistible threat, violence or force, is dispensed with or diminished; COMMERCIAL LAW (7) That the common carrier is not responsible for the loss, destruction, or deterioration of goods on account of the defective condition of the car, vehicle, ship, airplane or other equipment used in the contract of carriage. (Civil Code, Art. 1745) b. Limitation of liability to a fixed amount A contract can fix the sum that may be recovered by the shipper/owner in case of loss, destruction, or deterioration of the goods. It must be: 1. Reasonable and just under the circumstances; and 2. Fairly and freely agreed upon. (Civil Code, Art. 1750) c. Limitation of liability in absence of declaration of greater value General Rule: A stipulation limiting the carrier’s liability to the value of the goods appearing in the bill of lading is valid. Exception: Unless the shipper/owner declares a greater value. (Civil Code, Art. 1749) 5. LIABILITY FOR BAGGAGE OF PERSONS a. Checked-in baggage Checked-in baggage is considered “goods” and the passenger is considered the shipper/consignee. Thus, extraordinary diligence is required. (Civil Code, Art. 1754) b. Baggage in possession of passengers Hand-carried baggage are considered items of necessary deposit. Common carriers shall be treated as depositaries. Thus, only ordinary diligence is required. (Civil Code, Art. 1754) Inspection Duties General Rule: Carrier may only inquire into the nature of the passenger’s baggage, but not search nor inspect its contents Inquiry may be made as to the nature of passengers’ baggage, but beyond this, constitutional boundaries are already in danger of being transgressed (Nocum Page 59 of 393 ATENEO CENTRAL BAR OPERATIONS 2020/21 v. Laguna Tayabas, G.R. No. L-23733, October 31, 1969). Exception: Airline companies are required to inspect each and every cargo brought into the aircraft (R.A. No. 6235, Sec. 8) Hand-Carried Baggage v. Checked-in Baggage HANDCHECK-IN CARRIED Applicable Civil Code, Civil Code, Rule Arts. 1998, Arts. 17332000-2003 1753 Legal Necessary Goods Nature of deposit Baggage Diligence Ordinary Extraordinary Required diligence diligence C. SAFETY OF PASSENGERS Common Carriers are bound to carry passengers as far as human care and foresight can provide, using the utmost diligence of very cautious persons, with a due regard for all the circumstances. (Civil Code, Art. 1755) Despite the requirement of the exercise of the highest degree of diligence, common carriers should not be considered as insurers of the absolute safety of the passengers (Pilapil v. CA, 259 Phil. 1031) Passenger One who travels in a public conveyance by virtue of an express or implied contract with the common carrier paying fare or what is equivalent thereof. (Jesusa Vda. De Nueca v. Manila Railroad Company, G.R. No. 31731-R, 1968) Presumption of Negligence Common Carriers are presumed to be negligent in cases of death or injuries to passengers, unless they prove extraordinary diligence. (Civil Code, Art. 1756) COMMERCIAL LAW Presumption of negligence applies so long as: 1. A contract exists between the passenger and the common carrier; and 2. The injury or death took place during the existence of the contract (Sulpicio Lines, Inc. v. Sesante, G.R. No. 172682) Defenses available to common carriers 1. Proof that they exercised extraordinary diligence; or 2. Proof that the injury or death was caused by a fortuitous event. (Sanico v. Colapino, G.R. No. 209969) In order for a common carrier to be absolved of liability for accidents caused by fortuitous events, the common carrier must still prove that it is not negligent in causing the injuries resulting from the accident (Bachelor Express v. CA, 266 Phil. 233) The presumption of negligence will not apply if the injury of the passenger was not caused by any defect in the means or method of transport or to the negligent or willful acts of the common carrier’s employees. (G.V. Florida Transport, Inc. v. Heirs of Battung, G.R. No. 208802) 1. VOID STIPULATIONS General Rule: A common carrier’s liability cannot be dispensed with or lessened by stipulation, posting of notices, statements on tickets, or otherwise. A reduced fare also cannot justify limited liability. (Civil Code, Art. 1757 & 1760) Exception: If the carriage is gratuitous or for free, a stipulation limiting liability is valid. Exception to the Exception: The stipulation limiting liability does not cover a carrier’s willful acts or gross negligence. (Civil Code, Art. 1758) NOTE: Moral damages may be recovered in an action for breach of contract of carriage when death results. Even if the passenger does not die, the passenger can recover moral damages if the carrier is guilty of fraud or bad faith. However, only the passenger is entitled to moral damages not anyone else. Page 60 of 393 ATENEO CENTRAL BAR OPERATIONS 2020/21 2. DURATION OF LIABILITY The duty to exercise extraordinary diligence commences when the passenger places himself in the care and control of the common carrier who accepts him/her as a passenger NOTE: Do not confuse perfection of the contract of carriage with the commencement of the duty to exercise extraordinary diligence. The contract of carriage may be perfected in January while the duty to exercise extraordinary diligence may only start or commence in March. a. Waiting for carrier or boarding of carrier A public vehicle, once it stops, is in effect making a continuous offer to prospective passengers. Hence, it becomes the duty of the drivers and conductors to do no act which would have the effect of increasing the peril to a passenger while he/she was attempting to board the vehicle. (Dangwa Transportation Co., Inc. v. CA, 278 Phil. 629) It is the duty of common carriers to stop their conveyances at a reasonable length of time in order to afford the passengers an opportunity to board and enter. Carriers become liable for injuries suffered by boarding passengers resulting from the starting up or jerking of the vehicle while boarding. (Id.) b. Arrival at destination The duty to exercise extraordinary diligence terminates, when the passenger alights from the vehicle at the place of destination and has reasonable opportunity to leave the common carrier’s premises. (Aboitiz Shipping Corporation v. CA, 258-A Phil. 665) All persons who remain on the premises a reasonable time after leaving the conveyance are deemed passengers. What constitutes as a “reasonable time” is to determined from all the circumstances, which includes a reasonable time to see after his/her baggage and prepare for his/her departure. (Id.) COMMERCIAL LAW For passengers of ships, the SC has ruled that a reasonable time to leave and pick up baggage is an hour after arrival (Id.) 3. LIABILITY FOR ACTS OF OTHERS a. Employees Common carriers are liable for the death or injuries to passengers through its employees’ negligence or willful acts. This liability exists even if the employees may have acted beyond the scope of their authority or in violation of their orders of the common carriers. (Civil Code, Art. 1759) A Common carrier’s liability to the acts or negligence of its employees will be extinguished if it is able to show diligence of a good father of a family in the selection and supervision of its employees. (Civil Code, Art. 1759) Art. 1759 of the Civil Code does not establish a presumption of negligence similar to Art. 1756. Instead, it makes the common carrier explicitly liable for deaths and injuries caused by the fault or negligence of the carrier’s employees. (Sulpicio Lines, Inc. v. CA, G.R. No. 172682) b. Other passengers and strangers Common Carriers are responsible for injuries to passengers caused by other passengers or strangers if the carrier’s employees could have prevented or stopped the act causing the injury through the exercise of the diligence of a good father of a family. (Civil Code, Art. 1763) Common carriers should be given sufficient leeway in assuming that the passengers they take in will not bring in anything that would prove dangerous to himself/herself or to other passengers unless there is something that will require a more stringent search. (Nocum v. Laguna Tayabas Bus Company, 140 Phil. 459) Page 61 of 393 ATENEO CENTRAL BAR OPERATIONS 2020/21 4. LIABILITY FOR DELAYS IN THE COMMENCEMENT OF VOYAGE If the departure of a vessel is delayed, the passengers have the right to: 1. Remain on board; and 2. Be furnished with food for the account of the vessel. (Code of Commerce, Art. 698) These rights will not be present if the delay is due to an accidental cause or force majeure. (Code of Commerce, Art. 698) If the delay exceeds ten days, the passengers are entitled to: 1. The return of the passage, should the passengers request it; and 2. Demand indemnity for losses and damages, if the delay is caused exclusively by the captain or agent. (Code of Commerce, Art. 698) 5. LIABILITY FOR DEFECTS IN EQUIPMENT AND FACILITIES The carrier will be liable for the accident if the cause of the accident is a mechanical defect of the conveyance or the fault of the equipment which was easily discoverable if the vehicle had been subjected to more thorough or rigid inspections. (La Mallorca v. De Jesus, 123 Phil. 857) 6. EXTENT OF LIABILITY FOR DAMAGES Damages can be awarded in cases of injuries suffered by or deaths of passengers in accordance to the provisions of the Civil Code on Damages. (Civil Code, Art. 1764) Kinds of Damages (1) Actual or Compensatory Damages (2) Moral Damages (3) Exemplary Damages (4) Nominal Damages (5) Temperate Damages (6) Liquidated Damages (7) Attorney’s Fees COMMERCIAL LAW Rule on Moral Damages General Rule: Moral damages are not recoverable in actions for damages predicated on a breach of contract of carriage. Exceptions: Moral Damages may be awarded in a breach of contract caused by the common carrier where: 1. There is death of a passenger (Civil Code, Art. 1764) or 2. The carrier was guilty of fraud or bad faith even if there is no death. (Sulpicio Lines, Inc. v. Curso, G.R. No. 157009) D. BILL OF LADING A Bill of Lading is a written acknowledgment of the receipt of the goods and an agreement to transport and deliver them at a specified place to a person named or on his/her order. It is signed by the captain and shipper, and furnished to the consignee (Saludo, Jr. v. CA) NOTE: It is not indispensable to the creation of a contract of carriage. The contract itself arises from the moment the goods are delivered by the shipper to the carrier and the carrier agrees to carry them. The bill of lading must state: (1) The name, registry, and tonnage of the vessel; (2) The name of the captain and the captain’s domicile; (3) The port of loading and unloading; (4) The name of the shipper; (5) The name of the consignee, if the bill of lading is issued to order; (6) The quantity, quality, number of packages, and marks of the merchandise; and (7) The freight and the primage stipulated (Code of Commerce, Art. 706) 1. THREE-FOLD CHARACTER A bill of lading serves three purposes: 1. It is receipt of the goods shipped; Page 62 of 393 ATENEO CENTRAL BAR OPERATIONS 2020/21 The issuance of a bill of lading carries the presumption that the goods were delivered to the carrier issuing the bill and is prima facie evidence of the receipt of the goods by the carrier (Saludo v. CA, G.R. No. 95536) 2. It is a contract between the parties; and The acceptance of a paper containing the terms of a proposed contract generally constitutes an acceptance of the contract and all of its terms and conditions of which the acceptor has actual or constructive notice. (Keng Hua Paper Products, Co., Inc. v. CA, 349 Phil. 925) COMMERCIAL LAW b. Delivery without surrender of bill of lading The surrender of the bill of the original bill of lading is not a condition precedent for a common carrier to be discharged of its contractual obligation. If the surrender is not possible, acknowledgment of delivery by singing the delivery receipt suffices. (Republic of the Philippines v. Lorenzo Shipping Corporation, 491 Phil. 151) c. Refusal of consignee to take delivery 3. It is a symbolic representation of the goods, i.e., it is a document of title In the charter of the entire vessel, the bill of lading issued by the master to the charterer is in fact a receipt and document of title, not a contract. (Home Insurance v. American Steamship Agencies, Inc., 131 Phil. 552) 2. DELIVERY OF GOODS Common carriers are obliged to deliver the goods in the same condition which they were at the time of their receipt, without any detriment or impairment. (Code of Commerce, Art. 363) This obligation will not apply if the goods suffered damage or impairment: 1. Due to accidents; 2. Due to force majeure; or 3. By virtue of the nature or defect of the goods (Code of Commerce, Art. 363 & Code of Commerce, Art. 361) a. Period of delivery The period of delivery will depend on what is provided on the bill of lading.  No fixed period – First shipment of the same or similar goods which the carrier may make to the point of delivery. (Code of Commerce, Art. 358)  Stipulated period – Within the period provided in the bill of lading. (Code of Commerce, Art. 370) Instances When Consignee Can Refuse to Accept the Goods a. Only a PART of the goods are delivered and it cannot make use of the goods without the others (Code of Commerce, Art. 363) b. If the goods are DAMAGED and thus rendered useless for the purposes of sale or consumption. In this instance, the consignee may leave the goods to the carrier and demand payment for the goods at its current market price (Code of Commerce, Art. 365) c. When there is DELAY on account of the fault of the carrier. This is considered to be an abandonment. In this case, the carrier shall satisfy the total value of the goods as if the goods were lost or misplaced. (Code of Commerce, Art. 371) 3. PERIOD FOR FILING CLAIMS The period of filing of claims will depend on whether the damage or average can be determined from the exterior of the packaging:  If the damage CAN BE ASCERTAINED from the exterior of the packaging – Claims should be filed upon the receipt of the package;  If the damage CANNOT BE ASCERTAINED from the exterior of the packaging – Claims should be filed within twenty-four (24) hours following the receipt of the goods. Page 63 of 393 ATENEO CENTRAL BAR OPERATIONS 2020/21 No claims shall be admitted against the Common carrier with regard to the condition of the goods after the lapse of these periods. (Code of Commerce, Art. 366) Claims are conditions precedent to the accrual of a right of action to recover damages. (Southern Lines, Inc. v. CA, 114 Phil. 198) 4. PERIOD FOR FILING ACTIONS Actions relating to the delivery of cargo or to the indemnity for delays and damages suffered by the goods transported prescribe after one (1) year. The prescriptive period will be counted from: 1. The day of delivery of the cargo at the place of its destination; or 2. From the day on which it should be delivered according to the conditions of its transportation. (Code of Commerce, Art. 952) COMMERCIAL LAW was agreed upon, the carrier must select the shortest, least expensive, and practically passable route. (Id.) Change in the Consignment of Goods The shipper may change the consignment of the goods delivered to the common carrier as long as the place of delivery is not changed. The change is considered a novation. The carrier shall comply with this change, provided that the bill of lading be returned to the carrier at the time of the making the change of the consignee. (Code of Commerce, Art. 360) All expenses arising from the change of consignment shall be shouldered by the shipper. (Code of Commerce, Art. 360) E. MARITIME COMMERCE 1. CHARTER PARTIES Claim vs. Suit CLAIM File a CLAIM against the carrier:  Upon receipt of the goods; or  Within 24 hours following the receipt of the merchandise SUIT The CLAIM is a condition precedent to the filing of a SUIT. A Charter Party is a contract by virtue of which the owner or the agent of a vessel binds himself to transport merchandise or persons at a fixed price. (San Miguel Corporation v. Heirs of Inguito, 433 Phil. 428) The consignee shall file a SUIT within 1 year from either:  Delivery of the goods; or  Denial of the claim A Charter Party may either be: 1. Bareboat or demise charters; or 2. Contracts of affreightment, which includes time charters and voyage charters. (San Miguel Corporation v. Heirs of Inguito, 433 Phil. 428) 5. EFFECTS OF STIPULATIONS Change of Route General Rule: Common carriers cannot change the agreed route to which the transportation is to be made. (Code of Commerce, Art. 359) Exception: When the carrier is obliged to change its route due to force majeure. If the transportation costs increase in such an instance, the carrier shall be reimbursed for the increase. (Id.) a. Bareboat/demise charter Under a Bareboat/Demise Charter, the charterer mans the vessel with his own people and becomes, in effect, the owner of the ship for the voyage or service stipulated, subject to the liability for damages caused by negligence. (San Miguel Corporation v. Heirs of Inguito, 433 Phil. 428) NOTE: If the carrier changes its route without just cause, the carrier shall be liable to pay damages suffered by the goods for any cause. If no route Page 64 of 393 ATENEO CENTRAL BAR OPERATIONS 2020/21 General Categories or Kinds of Charter Party DEMISE / CONTRACT OF BAREBOAT AFFREIGHTMENT The charterer mans The owner of a vessel the vessel with its leases the whole or own people, and is part of its space to considered the owner haul goods for pro hac vice (for this another. occasion only). Owner completely and exclusively relinquishing possession, command, and navigation to the charterer. Charterer is liable for damages Carrier is converted to private carrier – ordinary diligence Owner retains possession, command, and navigation of the ship. Shipowner is liable for damages Carrier remains as common carrier – extraordinary diligence b. Time charter The leased vessel is leased to the charterer for a fixed period of time. (San Miguel Corporation v. Heirs of Inguito, 433 Phil. 428) c. Voyage/trip charter The ship is leased for a single voyage. (San Miguel Corporation v. Heirs of Inguito, 433 Phil. 428) 2. LIABILITY OF SHIPOWNERS AND SHIPPING AGENTS Persons Participating in Maritime Commerce a. Ship owner and/or ship agent – the ship agent is the person entrusted with the provisioning of a vessel or who represents her in the port in which she may be found b. Captain or Master — the person in charge of the vessel and navigates it. The captain also acts as the general agent of the ship owner. c. Other officers of the vessel (i.e. sailing mate, second mate, third mate, marine engineer) COMMERCIAL LAW d. Supercargo — the person specially employed by the owner of cargo to take charge of and sell to the best advantage merchandise which has been shipped, and to purchase returning cargoes and to receive freight a. Liability for acts of captain The ship owner and ship agent shall be civilly liable for the: 1. Acts of the captain; and 2. The obligations contracted by the captain to repair, equip, and provision the vessel, provided the creditor proves that the amount claimed was invested therein. (Code of Commerce, Art. 586) The ship agent shall also be civilly liable for the indemnities in favor of third persons which arose from the conduct of the captain in the care of the goods. However, the agent may exempt himself from this liability by abandoning the vessel with all her equipment and the freight he may have earned during the voyage. (Code of Commerce, Art. 587) When Ship Owner/Ship Agent is NOT Liable The ship owner and ship agent shall NOT be liable for obligations contracted by the captain which exceeds the powers and privileges granted to the latter. However, the owner and agent will be again liable if the amounts claimed were used for the benefit of the vessel. (Code of Commerce, Art. 588) b. Exceptions to limited liability Limited Liability Rule General Rule: The liability of the ship owner is limited to the value of the vessel, its equipment, and freight. The rule is “no vessel, no liability.” (Code of Commerce, Art. 837) Exceptions: 1. The injury or death is due either to the fault of the shipowner or to the concurring negligence of the shipowner and captain 2. The vessel is insured Page 65 of 393 ATENEO CENTRAL BAR OPERATIONS 2020/21 3. Workmen’s Compensation Cases (Chua Yek Hong v. Intermediate Appellate Court, 248 Phil. 422) Who Can Exercise the Right of Abandonment General Rule: Only the ship owner and the ship agent can make an abandonment. Exception: in cases of co-ownership of a vessel, a co-owner may exempt himself from liability by the abandonment of the part of the vessel belonging to him. Abandonment may be done to avoid liability in the following cases: a. For civil liability to third persons arising from the conduct of the captain in the vigilance over the goods which the vessel carried; b. For the proportionate contribution of coowners of the vessel to a common fund for the results of the acts of the captain referred to in Art. 587 of the Code of Commerce; and c. For the civil liability incurred by the ship owner in case of collision. 3. ACCIDENTS AND DAMAGES IN MARITIME COMMERCE a. General Average Averages are: 1. All extraordinary or accidental expenses which may be incurred during the navigation for the preservation of the vessel or cargo, or both; or 2. All damage or deterioration the vessel may suffer from the time she puts to sea from the port of departure until she casts anchor in the port of destination, and those suffered by the merchandise from the time it is loaded in the port of shipment until it is unloaded in the port of consignment. (Code of Commerce, Art. 806) Averages shall either be: 1. Simple or Particular Average – The expenses and damages caused to the vessel or to her cargo which have not redounded to the benefit of all persons interested in the vessel and her cargo. (Code of Commerce, Art. 809) COMMERCIAL LAW This shall be borne by the owner of the goods which gave rise to the expense or suffered the damage. (Code of Commerce, Art. 810) 2. General or Gross Average – The expenses and damages which are deliberately caused in order to save the vessel, her cargo, or both at the same time, from a real known risk. (Code of Commerce, Art. 811) This shall be borne by all persons having an interest in the vessel and cargo at the time of the occurrence of the average. (Code of Commerce, Art. 812) To incur the expenses and cause of damages as general/gross average, there must be: 1) A resolution of the captain, adopted after deliberation with the sailing mate and other officers of the vessel; and 2) A hearing with the persons interested in the cargo who may be present. (Code of Commerce, Art. 813) b. Collisions and allisions Collisions – The impact of two or more vessels, both of which are moving. Allisions – The impact between a moving vessel against a stationary object. Zones of Collision and the Doctrine of Error in Extremis: 1. First Zone – All the time up to the moment the risk of collision begins; 2. Second Zone – All the time from the moment the risk of collision begins up to the moment the collision becomes a practical certainty; and 3. Third Zone – All the time when the collision is certain up to the point of impact. (A. Urrutia Co v. Baco River Plantation Co., 26 Phil. 632) Doctrine of Error in Extremis A sudden movement by a faultless vessel during the third zone of collision with another vessel which is at fault during the second zone of collision will not make the faultless vessel responsible for any fault due to the sudden Page 66 of 393 ATENEO CENTRAL COMMERCIAL LAW BAR OPERATIONS 2020/21 movement. (A. Urrutia Co v. Baco River Plantation Co., 26 Phil. 632) Rules Governing Collisions (1) If a vessel collides with another through the fault, negligence, or lack of skill of the captain, sailing mate, or any other member of the crew, the owner of the vessel at fault shall be liable for the suffered losses and damages after appraisal (Code of Commerce, Art. 826) (2) If both colliding vessels are at fault, each vessel shall be liable for its own damages. Moreover, both vessels shall be solidarily liable to the damages suffered by their cargoes. (Code of Commerce, Art. 827) (3) If it cannot be determined which of the two vessels are at fault, it will be considered as if both vessels are at fault. Therefore, both vessels shall be liable for their own damages but solidarily liable for the damages suffered by their cargoes. This is also called as the Doctrine of Inscrutable Fault. (Code of Commerce, Art. 828) (4) If a vessel is forced to collide with another by reason of accident or force majeure, each vessel shall be liable for their own damage. (Code of Commerce, Art. 830) (5) If a vessel is forced to collide with another by a third vessel, the owner of the third vessel shall indemnify all losses and damages caused. The captain of the third vessel will then be liable to the owner of the third vessel. (Code of Commerce, Artlcle 832) (6) If a storm or force majeure forces a properly anchored and moored vessel to collide with other vessels in her immediate vicinity, the damages caused shall be considered as a simple/particular average. (Code of Commerce, Art. 832) Shipwreck It covers all types of loss/wreck of a vessel at sea either by being swallowed up by the waves or by running against another vessel or thing at sea or at the coast and the vessel is rendered incapable of navigation. Liability in Shipwrecks General Rule: The losses and deteriorations suffered by a vessel and her cargo by reason of shipwreck or stranding shall be individually for the account of the owners, the part of the wreck which may be saved belonging to them in the same proportion. (Code of Commerce, Art. 840) Exception: If the wreck or stranding should arise through the malice, negligence, or lack of skill of the captain, or because the vessel put to sea insufficiently repaired and prepared, the owner or the freighters may demand indemnity of the captain for the damages caused to the vessel or cargo by the accident. (Code of Commerce, Art. 841) Maritime Protest It is a written statement under oath, made by the master of a vessel, after the occurrence of an accident or disaster in which the vessel or cargo is lost or injured, with respect to the circumstances attending such occurrence. It is intended to show that the loss or damage resulted from a peril of the sea, or some other cause for which neither master nor owner was responsible, and concludes with a protest against any liability of the owner for such loss or damage. It is a condition precedent or prerequisite to recovery of damages arising from collisions and other maritime accidents (Code of Commerce, Art. 835)    Made By Whom: Captain When Made: Within 24 hours from the time the collision took place (Code of Commerce, Art. 835); Upon arrival at the place of destination, the captain shall ratify the protest within 24 hours. Before Whom Made: Competent authority at the point of collision or at the first port of arrival, if in the Philippines and to the Philippine consul, if the collision took place abroad (Code of Commerce, Art. 835) Maritime Protest is Required In The Following Cases: a. Collision; b. Arrival under stress c. Shipwreck; and d. In case the vessel has gone through a hurricane or when the captain believes that the cargo has suffered damages. Page 67 of 393 ATENEO CENTRAL COMMERCIAL LAW BAR OPERATIONS 2020/21 Maritime Protest shall also be done if the vessel having been wrecked, the captain is saved alone or with part of the crew, in which case, the captain shall appear before the nearest authority and make a sworn statement of the facts. Salvage - it is the compensation allowed to persons by whose voluntary assistance a ship at sea or her cargo or both have been saved in whole or in part from an impending peril, or such property recovered from actual peril or loss. Salvor takes possession and may retain possession until he is paid Court has power to reduce the amount of remuneration if unconscionable Tower has no possessory lien; only an action for recovery of sum of money Court has no power to change amount in towage even if unconscionable 4. CARRIAGE OF GOODS BY SEA ACT a. Application In case of shipwreck, derelict or recapture; a service which one person renders to the owner of a ship or goods by his own labor, preserving the goods or ship which the owner or those entrusted with the care of them either abandoned in distress at sea or are unable to protect and secure. Derelict It is a ship or cargo which is abandoned and deserted at sea by those who are in charge of it, without any hope of recovering it, or without any intention of returning to it. Elements of a Valid Salvage 1. A marine peril 2. Service voluntarily rendered when not required as an existing duty or from special contract 3. Success, in whole or in part, or that the services rendered contributed to such success (Barrios vs. Go Thong, G.R. No. L-17192, 1963) Contract of Towage A contract to render service whereby a vessel pulls or tows another from one place to another for compensation. It is not a contract of carriage or transportation. Only the owner of the towing vessel can ask for compensation. Salvage v. Towage SALVAGE Crew of salvaging ship is entitled to salvage, and can look to the salvaged vessel for its share TOWAGE Crew of the towing ship does not have any interest or rights with the remuneration pursuant to the contract The COGSA is the applicable law for all contracts of carriage by sea to and from the Philippines in foreign trade. (COGSA, Sec. 1 & Cua v. Wallem Philippines Shipping, Inc., 690 Phil. 491) However, it may also apply to domestic trade provided there is a Paramount Clause in the contract. Paramount Clause - a stipulation or clause either on the bill of lading or charter party stipulating the laws that the parties agreed to be used of that particular transport. Responsibility of the Carrier under the COGSA The responsibility of the carrier begins when the goods are brought to the carrier and crosses one side of the vessel (portside). It ceases only when the goods cross the other side (starboard side). This is also known as the “tackle to tackle” rule. Requisites of Contracts Covered by COGSA e. Contracts for the carriage of goods f. By sea g. To and from Philippine ports h. In foreign trade Shipper’s Guaranty upon Delivery of the Goods to Carrier for Shipment The shipper guarantees at the time of shipment the accuracy of the marks, number, quantity and weight of the goods. The shipper shall indemnify the carrier against all losses, damages and expenses arising from errors or inaccuracies. Page 68 of 393 ATENEO CENTRAL BAR OPERATIONS 2020/21 The carrier shall be bound before and at the beginning of the voyage, to exercise due diligence to: 1. Make the ship seaworthy 2. Properly man, equip, and supply the ship 3. Make the holds, refrigerating and cooling chambers, and all other parts of the ship in which goods are carried, fit and safe for reception, carriage and, preservation. b. Notice of loss or damage When there is loss or damage of the goods, there must be a written notice that provides: 1. The general nature of such loss or damage 2. Given to the carrier or his agent 3. At the port of discharge or at the time of the removal of the goods. If the loss or damage is not apparent, the notice must be given within 3 days from delivery. The notice of loss or damage may be endorsed upon the receipt for the goods given by the person taking delivery thereof. The notice or writing need not be given if the state of the goods at the time of their receipt has been the subject of Joint Survey Inspection. (COGSA, Sec. 3(6)) Under COGSA, the filing of a notice of claim is NOT a condition precedent to filing a suit (UCPB v. Aboitiz Shipping G.R. No. 168433, 2009) “Loss” contemplates merely a situation where no delivery at all was made by the shipper of the goods because the same had perished, gone out of commerce, or disappeared in much a way that their existence is unknown or they cannot be recovered. It does not include a situation where:  There was indeed delivery — but delivery to the wrong person, or a misdelivery (Ang. V. American Steamship, G.R. No. L-22491, 1967)  Damage arising from delay or late delivery (Mitsui O.S.K. Lines v. CA, G.R. No. 119571, 1998). COMMERCIAL LAW In such instances, the Civil Code rules on prescription shall apply. c. Period of prescription Actions must be brought within one (1) year after: 1. Delivery of the goods; or 2. The date when the goods should have been delivered. (COGSA, Sec. 3[6]) Failure to file within the prescriptive period will discharge the common carrier and the vessel from liability. (COGSA, Sec. 3[6]) However, the shipper shall not lose the right to initiate an action against the carrier or the vessel if no notice of loss or damage is given. (COGSA, Sec. 3[6]) When The One-Year Period In COGSA Is Interrupted: a. When an action is filed in court; (Universal Shipping Lines v. IAC, G.R. No. 74125, 1990); and b. When there is a contrary agreement between the parties. (Stevens v. Norddeuscher, G.R. No. L-17730, 1962) d. Limitation of liability Carriers and vessels shall be liable for any loss or damage in connection with the transportation of goods. However, such liability is limited to: 1. Maximum of $500 per package or, if not shipped in packages, per customary freight unit (e.g. metric ton). 2. Carriers and vessels will be subject to greater liability if the nature and value of goods are declared by shipper and inserted in bill of lading; declaration is prima facie evidence and not conclusive on carrier. 3. Shipper and carrier may agree on another maximum amount, but not more than amount of damage actually sustained. The fixed maximum amount must also not be less than $500 per package/per customary freight unit. (COGSA, Sec. 6 [5]) Page 69 of 393 ATENEO CENTRAL BAR OPERATIONS 2020/21 COMMERCIAL LAW F. PUBLIC SERVICE ACT Repormang Samahan ng mga Tsuper v. City of Mandaluyong, G.R. No. 218593, [June 15, 2020]) 1. DEFINITION OF PUBLIC UTILITY No public utility or public service shall operate in the Philippines without securing a Certificate of Public Convenience/Certificate of Public Convenience and Necessity. (Public Service Act, Sec. 15) The term “public utility” includes: 1. Every individual, co-partnership, association, corporation, or joint-stock company, whether domestic or foreign, their lessees, trustees, or receivers appointed by any court whatsoever, or any municipality province or other department of the Government of the Philippines; 2. That may own, operate, manage, or control in the Philippines, for hire or compensation, any common carrier, railroad, street railway, traction railway, subway, freight, and/or passenger motor vehicles, with or without fixed route, freight or any other car service, express service, steamboat or steamship line, ferries, small water craft; 3. Engaged in the business of transportation of passengers or cargo, shipyard, marine railway, marine repair shop, public warehouse, wharf, dock not under the jurisdiction of the Insular Collector of Customs, ice, refrigeration, canal, irrigation, pipe line, gas, electric, light, heat, power, water, oil, sewer, telephone, wire or wireless telegraph system, plant or equipment, and broadcasting stations; 4. Whether the owner or operator be an individual, co-partnership, association, corporation, or joint-stock company, either domestic or foreign, or a trustee or receiver appointed by any court whatsoever, or any municipality, province, or department of the Government of the Philippines, or any other entities. (Public Service Act, Sec. 14) What constitutes as public utility is not the ownership thereof but their use or service to the public. (Tatad v. Garcia, 313 Phil. 296) 2. NECESSITY FOR CERTIFICATE OF PUBLIC CONVENIENCE A certificate of public convenience does not vest property rights to its holder to conduct business along the route covered in it. It is a mere license or privilege. (Bagong Repormang Samahan ng mga Tsuper v. City of Mandaluyong, G.R. No. 218593, 2020) This privilege is subject to compliance with local traffic regulations because the Land Transportation Franchising and Regulatory Board's (LTFRB) authority to issue such certificates is only supplemental to the right of local governments to control and regulate traffic in their localities. (Id.) a. Requisites Before a certificate to operate a public service or utility may be granted, the applicant must comply with three requisites: 1. The applicant must be a citizen of the Philippines, or a corporation, co-partnership, association, joint stock company constituted and organized under the laws of the Philippines 60% at least of the stock or paidup capital of which entirely belongs to citizens of the Philippines; 2. The applicant must be financially applicable of undertaking the proposed service and meeting the responsibilities incident to its operation; and 3. The applicant must prove that the operation of the public service will promote the public interest in a proper and suitable manner. (Vda. de Lat v. Public Service Commission, 241 Phil. 973) i. Citizenship Certificate of Public Convenience It is a permit authorizing operations of land transportation services for public use. (Bagong Certificates of Public Convenience/Certificates of Public Convenience and Necessity will be granted only to: Page 70 of 393 ATENEO CENTRAL BAR OPERATIONS 2020/21 1. Citizens of the Philippines; or 2. Corporations, co-partnerships, associations, or joint stock companies constituted and organized under the laws of the Philippines, 60% of which is owned by Filipinos. (Public Service Act, Sec. 16 [a]) While the Public Service Act initially allowed American citizens and juridical entities to be granted with certificates of public convenience, this is essentially removed by Art. XII, Sec. 11 of the 1987 Constitution. The constitutional provision states that no franchise, certificate, or any other form for the authorization for the operation of a public utility shall be granted except to citizens of the Philippines or corporations or associations organized under the laws of the Philippines at least 60% of whose capital is owned by Philippine citizens. (1987 Constitution, Art. XII, Sec. 11) ii. Promotion of public interests Public necessity is the primary consideration for the authorization of the operation of public services and the issuance of certificates of public convenience. (In re: Gregorio, 77 Phil. 906) iii. Financial capability The commission shall have the power, without previous hearing, to require any public service to furnish annual reports of finances and operations. (Public Service Act, Sec. 17 [h]) b. Prior operator rule COMMERCIAL LAW 1. The Certificate of Public Convenience granted to the new operator is a maiden certificate (Mandbusco, Inc. v. Francisco, 143 Phil 372) 2. The old operator does not offer to meet the increase in traffic (Isidro v. Ocampo, 105 Phil. 911) 3. The old operator violated the law, in this case by operating despite the expiration of its franchise (Buenaflor v. Camarines Sur Industry Corporation, 108 Phil. 472) 4. If the application of the rule results in a monopoly (Raymundo Transportation Co., Inc. v. Cervo, 91 Phil. 313) iii. Ruinous competition An opposition for an application for Certificate of Public Convenience based on ruinous competition must show that that the opposing party would be deprive of fair profits on the capital invested in its business. It must be shown that the business would not have sufficient gains to pay a fair rate of interest on its capital investment. (Halili v. Daplas, 121 Phil. 789) Ruinous Competition, When Not Applicable The argument of ruinous competition is not applicable in the following instances: 1. When public necessity requires that a new operator be allowed to put an additional service. (Raymundo Transportation Co., Inc. v. Cervo, 91 Phil. 313) 2. The opponent only showed a mere possibility of reduction in the earnings of a business (Raymundo Transportation, Co., Inc. v. Tanchingco, 97 Phil. 105) i. Meaning 3. FIXING OF RATE The Prior Operator Rule provides that a public utility operator should be afforded with an opportunity to improve its equipment and service before allowing a new operator to serve in the same territory it covers. (Mandbusco, Inc. v. Francisco, 143 Phil 372) ii. Exceptions a. Rate of return The rate of return is a judgment percentage which provides a fair return on the public utility for the use of its property and service to the public. This is fixed by administrative and judicial pronouncements. (Republic of the Philippines v. Manila Electric Company, 440 Phil. 389) The invocation of the Prior Operator Rule is not applicable in the following instances: Page 71 of 393 ATENEO CENTRAL BAR OPERATIONS 2020/21 COMMERCIAL LAW The jurisprudentially-provided rate of return for public utilities is 12% (Republic of the Philippines v. Manila Electric Company, 440 Phil. 389) motor vehicles to operate them under his/her license. It is void contrary to public policy. (Lim v. CA, 424 Phil. 457) b. Exclusion of income tax as expense It is a Void Contract for violating Public Policy Hence, courts cannot grant affirmative relief to the parties of such arrangement under the principle of in pari delicto. (Lita Enterprises v. Intermediate Appellate Court, 214 Phil. 63) Income tax is not included in the computation of the operating expenses of a public utility. It is inconsistent with the nature of operating expenses (Republic of the Philippines v. Manila Electric Company, 440 Phil. 389) Income tax is imposed on an individual or entity as a tax on the privilege of earning income. By its nature, income tax payments of a public utility are not expenses which are incurred in connection with the production of profit. (Republic of the Philippines v. Manila Electric Company, 440 Phil. 389) The purpose of the law in enjoining the Kabit System is to identify the person upon whom the responsibility may be fixed in cases of accidents, with the end view of protecting the riding public. The policy then loses its application if the public, at large is not deceived or involved; e.g. when the participants of a Kabit System arrangement are not being held liable for damages by the public arising from the operation of the public vehicle. (Lim v. CA, 424 Phil. 457) 4. UNLAWFUL ARRANGEMENTS a. Boundary system Under the Boundary System, a driver is engaged to drive an operator’s vehicular unit. On each trip, the driver is required to remit to the operator a minimum amount – the “boundary”. Whatever the driver earns in excess of the minimum amount shall be the driver’s income (Paguio Transport Corporation v. National Labor Relations Commission, 356 Phil. 158) Relationship of Operator and Driver The relationship between the driver and the operator operating under the boundary system is considered to be an employer-employee relationship. (Doce v. Workmen’s Compensation Commission, 104 Phil. 946) Owners and operators of public vehicles who operate under the Boundary System cannot argue that they are only mere lessors in order for them to be exempted from liability caused by their drivers. (Sps. Hernandez v. Sps. Dolor, 479 Phil. 593) b. Kabit system 5. APPROVAL OF SALE, ENCUMBRANCE OR LEASE OF PROPERTY The Land Transportation and Traffic Code provides for the compulsory registration of motor vehicles to the Land Transportation Office. Furthermore, the same law requires all mortgages, attachments, and all other encumbrances to be recorded to the LTO in order to be valid against third parties. (Land Transportation and Traffic Code, Sec.s 5 [a] & 5 [e]) Registered Owner as Primarily Liable Case law provides that the registered owner of the vehicle should primarily be responsible to the public or to third persons for injuries caused while the vehicle is being driven on the highway or streets. (Erezo v. Jepte, 102 Phil. 103) A sale or lease that is not registered does not bind third persons who are aggrieved in tortuous incidents, for third persons only need to rely on the public registration of a motor vehicle as conclusive evidence of ownership. (PCI Leasing and Finance, Inc. v. UCPB General Insurance Co., Inc., 579 Phil. 418) The Kabit System is an arrangement where a person who is granted a certificate of public convenience allows other persons who own Page 72 of 393 ATENEO CENTRAL COMMERCIAL LAW BAR OPERATIONS 2020/21 G. THE WARSAW CONVENTION 1. APPLICABILITY The Warsaw Convention applies to all international transportation of persons, baggage, or goods performed by aircraft for hire. It applies equally to gratuitous carriage by aircraft performed by an air transport undertaking. (Warsaw Convention, Art. 1[1]) “International Transportation By Air” Under the Warsaw Convention, “international transportation by air” shall mean any transportation in which the place of departure and place of destination are either: 1. Within the territories of two Contracting Parties, regardless of whether or not there be a break in the carriage or transshipment; or 2. Within the territory of a single Contracting Party, if there is an agreed stopping place within a territory subject to the sovereignty, mandate, or authority of another power, even though that power is not a party to the Convention. (Warsaw Convention, Art. 1[2]) Carriage to Be Performed by Several Successive Air Carriers Transportation to be performed by several successive air carriers shall be deemed to be one undivided transportation if it has been regarded by the parties as a single operation, whether it has been agreed upon under one contract or a series of contracts. (Warsaw Convention, Art. 1[3]) Moreover, such transportation will not lose its international character merely due to one contract being performed within the territory subject to the sovereignty of the same Contracting Party. (Id.) Carrier Who Issued Ticket Deemed Principal The carrier issuing the passenger’s ticket is considered the principal party and other carriers merely subcontractors or agents. Reason: The principal, in issuing a ticket with several trips to be performed by various carriers, guarantees the performance of the successive carriers (i.e. they have a space for him and will transport him on a particular segment of the trip). (Lufthansa German Airlines v. CA, GR No. 83612, 1994) Remedy: The remedy of the principal is to file a third-party complaint or cross-claim against the guilty carrier. (China Airlines v. Chiok, GR No. 152122, 2003) 2. LIMITATION OF LIABILITY Quick Summary: a. For each passenger – limited to 250,000 francs b. For goods and checked-in baggage – limited to 250 francs per kilogram c. For hand carry – limited to 5,000 francs per passenger (Warsaw Convention, Art. 22) Any stipulation in the contract relieving the carrier of liability or fixing a lower limit of liability shall be null and void. (Warsaw Convention, Art. 23) The nullity of the stipulation will not render the entire contract of transportation null and void. Only the stipulation which removed or lowered the carrier’s liability shall be considered void. (Warsaw Convention, Art. 23) a. Liability of passengers The carrier’s liability for each passenger shall be limited to 250,000 francs. If the liability of the carrier is awarded in the form of periodical payments, the equivalent value of said payment shall not exceed 250,000 francs. (Warsaw Convention, Art. 22[1]) The carrier and the passenger may agree to a higher limit of liability by special contract. (Warsaw Convention, Art. 22[1]) Hence, the principal may be liable for damages even when the breach of contract had occurred not on its own flight but on that of another airline. (British Airways v. CA, GR No. 121824, 1998) Page 73 of 393 ATENEO CENTRAL BAR OPERATIONS 2020/21 COMMERCIAL LAW b. Liability for checked baggage The liability of the carrier for each checked baggage and goods shall be limited to 250 francs per kilogram. (Warsaw Convention, Art. 22[2]) The carrier can be subjected to a higher value of liability if the consignor, at the time when the package was handed to the carrier: 1. A special declaration of the value at delivery; and 2. Paid a supplementary sum, if the case requires. (Warsaw Convention, Art. 22[2]) If the consignor made a declaration of value, the carrier’s liability will be liable to pay a sum not exceeding the declared sum, unless the carrier proves that the declared value is greater than the actual value of the baggage or goods. (Warsaw Convention, Art. 22[2]) c. Liability for hand-carried baggage The carrier’s liability for hand-carried baggage shall be limited to 5,000 francs per passenger. (Warsaw Convention, Art. 22[3]) Instances When a Common Carrier Cannot Avail of the Limitation a. Willful misconduct b. Default amounting to willful misconduct c. Accepting passengers without ticket d. Accepting goods without airway bill or baggage without baggage check 3. WILLFUL MISCONDUCT When 2-Year Period Does Not Apply If the cause of action is based on the Civil Code such as 4 years if the action is based on tort or quasi-delict (United Airlines v. Uy, G.R. No. 127768, 1999) Where the plaintiff was forestalled from filing an action because of the defendant-airline’s delaying tactics (United Airlines v. Uy, G.R. No. 127768, 1999) Notice Requirement  Damage to baggage: within 3 days from receipt  Damage to goods: within 7 days from receipt  Delay: within 21 days from receipt Source: The Montreal Convention, Art. 31(2), to wit: “In the case of damage, the person entitled to delivery must complain to the carrier forthwith after the discovery of the damage, and, at the latest, within seven days from the date of receipt in the case of checked baggage and fourteen days from the date of receipt in the case of cargo. In the case of delay, the complaint must be made at the latest within twenty-one days from the date on which the baggage or cargo have been placed at his or her disposal.” This is an amendment to Art. 26(2) of the Warsaw Convention, which states that notice should be done within 14 days from the delay. The carrier is not entitled to limited liability under the Warsaw Convention if the damage was caused by the carrier’s willful misconduct or any default on its part which is considered by the courts as willful misconduct. (Warsaw Convention, Art. 25[1]) NOTE: The notice requirement constitutes a condition precedent. Failure to comply with a condition precedent constitutes failure to state a cause of action as a ground for a motion to dismiss. (Federal Express Corp. v. American Home Insurance Co., GR No. 150094, 2004) Extinguishment of Right to Damages The right to damages shall be extinguished if an action is not brought within 2 years counted from date of arrival at the place of destination or from date on which the aircraft ought to have arrived or from date on which the transportation stopped. (Warsaw, Art. 29) --------- end of topic --------- Page 74 of 393 BUSINESS ORGANIZATIONS Commercial Law ATENEO CENTRAL BAR OPERATIONS 2020/21 IV. BUSINESS ORGANIZATIONS TOPIC OUTLINE UNDER THE SYLLABUS IV. BUSINESS ORGANIZATIONS A. PARTNERSHIPS 1. General provisions a. Definition b. Elements c. Characteristics d. Rules to determine existence e. Partnership term f. Partnership by estoppel g. Partnership as distinguished from joint venture h. Professional partnership i. Management 2. Rights and obligations of partnership and partners a. Rights and obligations of the partnership b. Obligations of partners among themselves c. Obligations of partners to third persons 3. Dissolution and winding up 4. Limited Partnership B. CORPORATIONS 1. Definition of corporation 2. Classes of corporations 3. Nationality of corporations a. Control test b. Grandfather rule Legislative power 4. Corporate juridical personality a. Doctrine of separate juridical personality i. Liability for tort and crimes ii. Recovery of damages b. Doctrine of piercing the corporate veil c. Grounds for application of doctrine i Test in determining applicability 5. Capital structure a. Number and qualifications of incorporators b. Subscription requirements c. Corporate term COMMERCIAL LAW d. Classification of shares i Preferred shares versus common shares ii Scope of voting rights subject to classification iii Founder's shares iv Redeemable shares v Treasury shares 6. Incorporation and organization a. Promoter i Liability of promoter ii Liability of corporation for promoter's contracts b. Subscription contract c. Pre-incorporation subscription agreements d. Consideration for stocks e. Articles of Incorporation i Contents ii Non-amendable items e. Corporate name; limitations on use of corporate name f. Registration, incorporation, and commencement of corporate existence g. Election of directors or trustees h. Adoption of by-laws i Contents of by-laws ii Binding effects iii Amendments i. Effects of non-use of corporate charter 7. Corporate powers a. General powers; theory of general capacity b. Specific powers; theory of specific capacity c. Power to extend or shorten corporate term d. Power to increase or decrease capital stock or incur, create, increase bonded indebtedness e. Power to deny pre-emptive rights f. Power to sell or dispose corporate assets g. Power to acquire own shares h. Power to invest corporate funds in another corporation or business Page 76 of 393 ATENEO CENTRAL BAR OPERATIONS 2020/21 i. Power to declare dividends j. Power to enter into management contract k. Limitations i Ultra vires acts • (a) Applicability of ultra vires doctrine • (b) Consequences of ultra vires acts l. Doctrine of individuality of subscription m. Doctrine of equality of shares n. Trust fund doctrine o. How exercised i By the shareholders ii By the board of directors iii By the officers 8. Stockholders and members a. Fundamental rights of a stockholder b. Participation in management i Proxy ii Voting trust iii Cases when stockholders' action is required • (a) By a majority vote • (b) By a twothirds vote • (c) By cumulative voting iv Manner of voting c. Proprietary rights i Right to dividends ii Appraisal right • (a) When available • (b) Manner of exercise of right iii Right to inspect iv Preemptive right v Right to vote vi Right to dividends d. Remedial rights i Individual suit ii Representative suit iii Derivative suit e. Obligations of a stockholder f. Meetings COMMERCIAL LAW i ii iii Regular or special Notice of meetings Place and time of meetings iv Quorum v Minutes and agenda of meetings 9. Board of directors and trustees a. Repository of corporate powers b. Tenure, qualifications and disqualifications of directors c. Requirement of independent directors d. Elections i Cumulative voting ii Quorum e. Removal f. Filling of vacancies g. Compensation h. Disloyalty i. Business judgment rule j. Solidary liabilities for damages k. Personal liabilities l. Responsibility for crimes m. Special fact doctrine n. Inside information o. Contracts i By self-dealing directors with the corporation ii Between corporations with interlocking directors p. Executive and other special committees i Creation ii Limitations on its powers q. Meetings i Regular or special • (a) When and where • (b) Notice • (c) Attendance in meetings ii Who presides iii Quorum iv Rule on abstention 10. Capital affairs a. Certificate of stock i Nature of the certificate Page 77 of 393 ATENEO CENTRAL COMMERCIAL LAW BAR OPERATIONS 2020/21 ii iii b. c. d. e. f. Uncertificated shares Negotiability; requirements for valid transfer of stocks iv Issuance • (a) Full payment • (b) Payment prorata v Stock and transfer book • (a) Contents • (b) Who may make valid entries • (c) Stock transfer agent vi Lost or destroyed certificates vii Situs of the shares of stock Watered stocks i Definition ii Liability of directors for watered stocks iii Trust fund doctrine for liability for watered stocks Payment of balance of subscription i Call by board of directors ii Notice requirement Sale of delinquent shares i Effect of delinquency ii Call by resolution of the board of directors iii Notice of sale iv Auction sale Alienation of shares i Allowable restrictions on the sale of shares ii Sale of partially paid shares iii Sale of a portion of shares not fully paid iv Sale of all of shares not fully paid v Sale of fully paid shares vi Requisites of a valid transfer vii Involuntary dealings Corporate books and records i 11. 12. Records to be kept at principal office ii Right to inspect corporate records iii Effect of refusal to inspect corporate records Dissolution and liquidation a. Modes of dissolution i Voluntary dissolution • (a) Where no creditors are affected • (b) Where creditors are affected • (c) By shortening of corporate term • (d) Withdrawal of dissolution ii Involuntary dissolution b. Methods of liquidation i By the corporation itself ii Conveyance to a trustee within a three-year period iii By management committee or rehabilitation receiver iv Liquidation after three years Other corporations a. Close corporations i Characteristics of a close corporation ii Validity of restrictions on transfer of shares iii Issuance or transfer of stock in breach of qualifying conditions iv When board meeting is unnecessary or improperly held v Preemptive right vi Amendment of articles of incorporation vii Deadlocks b. Non-stock corporations i Definition ii Purposes Page 78 of 393 ATENEO CENTRAL BAR OPERATIONS 2020/21 iii iv c. d. e. f. Treatment of profits Plan and distribution of assets upon dissolution Educational corporations Religious corporations i Corporation sole; nationality ii Religious societies One person corporations i Excepted corporations ii Capital stock requirement iii Articles of incorporation and bylaws iv Corporate name v Corporate structure and officers vi Nominee vii Minutes and records viii Liability ix Conversion of corporation to one person corporations and vice-versa Foreign corporations i Bases of authority over foreign corporations • (a) Consent • (b) Doctrine of "doing business" ii Necessity of a license to do business • (a) Requisites for issuance of a license • (b) Resident agent • (c) Amendment of license iii Personality to sue iv Suability of foreign corporations v Instances when unlicensed foreign corporations may be allowed to sue (isolated transactions) COMMERCIAL LAW vi Grounds for revocation of license 13. Merger and consolidation a. Definition and concept b. Distinguish: constituent and consolidated corporation c. Plan of merger or consolidation d. Articles of merger or consolidation e. Procedure f. Effectivity g. Limitations h. Effects 14. Investigations, offenses, and penalties a. Authority of Commissioner i Investigation and prosecution of offenses ii Administration of oath and issuance of subpoena iii Cease and desist power iv Contempt b. Sanctions for violations i Administrative sanctions ii Prohibited Acts iii Penalties iv Who are liable c. Authority of the Securities and Exchange Commission Page 79 of 393 ATENEO CENTRAL COMMERCIAL LAW BAR OPERATIONS 2020/21 A. PARTNERSHIPS 1. GENERAL PROVISIONS 3. This does not mean that there could be no contractual relations amongst the parties; there is only no partnership or association with distinct legal personality. A. Definition C. Characteristics Partnership Defined Partnership is a contract whereby two or more persons bind themselves to contribute money, property, or industry to a common fund, with the intention of dividing the profits among themselves. Two or more persons may also form a partnership for the exercise of a profession (Art. 1767) B. Elements Essential Features of Partnership (VaLeCLO) 1. There must be a Valid contract. 2. The parties must have Legal capacity to enter into the contract. 3. There must be a mutual Contribution of money, property or industry to a common fund. (Art. 1767) 4. There must be a Lawful object. (Art. 1770) 5. The purpose or primary purpose must be to Obtain profits and divide the same among the parties. (Art. 1767) Requirement D. Rules to determine existence General Rule Elements of a Partnership (ACD) 1. Meeting of minds (Agreement) 2. To Contribute money, property, or industry to a common fund; and 3. Intent to Divide profits (and losses) among the contracting parties (Jarantilla, Jr. v. Jarantilla, G.R. No. 154468, 2010) Additional Personality Characteristics of a Partnership 1. Essentially contractual in nature (Arts. 1767, 1784) 2. Separate juridical personality (Art. 1768) 3. Delectus personae (Arts. 1804, 1813) 4. Mutual Agency (Art. 1803) 5. Personal liability of partners for partnership debts (Arts. 1816, 1817) for Juridical 1. It is also required that the articles of partnership must not be kept secret among the members; otherwise, the association shall have no legal personality and shall be governed by the provisions on Co-ownership. (Art. 1775) 2. "Kept secret among the members" where secrecy is directed not to third persons but to some of the partners. (Art. 1775) Persons who are not partners as between themselves, cannot be partners as to third persons (Art. 1769[1]) Exception Partnership by estoppel (Art. 1825) [see Section (f) below] Other rules to determine partnership exists (Art. 1769) whether a The following, alone, do not establish a partnership: (a) Co-ownership or co-possession (b) Sharing of gross returns, whether or not the persons sharing them have a joint or common right or interest in any property from which the returns are derived (c) Receipt by a person of a share of the profits of a business is prima facie evidence that he is a partner in the business, unless such were received in payment as: 1. Debt by installments or otherwise; 2. Wages or rent; 3. Annuity; 4. Interest on loan; 5. Consideration for sale of goodwill of business or other property by installments or otherwise Page 80 of 393 ATENEO CENTRAL COMMERCIAL LAW BAR OPERATIONS 2020/21 A partnership must have a lawful object or purpose and must be established for the common benefit or interest of the partners. (Art. 1770) Effects of an Unlawful Partnership (a) Void ab initio such that it never existed in the eyes of the law (Art. 1409[1]) (b) Profits shall be confiscated in favor of the government (Art. 1770) (c) Instruments or tools and proceeds of the crime shall also be forfeited in favor of the government (Art. 1770; Revised Penal Code, Art. 45) (d) The contributions of the partners shall not be confiscated unless they fall under (c) (Arts. 1411 and 1412) Judicial decree is not necessary to dissolve an unlawful partnership. Use of the term “partner” does not necessarily show existence of partnership. Non-use of the terms “partnership” or “partners” are not conclusive as to non-existence or partnership but entitled to weight. E. Partnership term Partnership at will One in which no fixed term is specified and is not formed for a particular undertaking or venture which may be terminated anytime by mutual agreement. Partnership with a fixed term One in which the partners agree to themselves the term of which the partnership is to subsist. Common Types of Partnership That there is no legally constituted partnership does not mean that there are no contractual or legal relations among the parties. Effect of Partial Illegality Where a part of the business of a partnership is legal and a part illegal, an account of that which is legal may be had. Where, without the knowledge or participation of the partners, the firm's profits in a lawful business have been increased by wrongful acts, the innocent partners are not precluded as against the guilty partners from recovering their share of the profits. Formation of Partnership a. How Partnership is Formed General Rule: No special form is required for the validity of a contract. (Art. 1356) b. Burden of Proof and Presumption The existence of a partnership must be proven, not presumed. Persons acting as partners are presumed to have entered into a contract of partnership. The burden of proof is shifted to the party denying its existence. An extant partnership is presumed to exist until proven terminated. 1. Universal v. Particular Partnership (a) Universal Partnership 1. Universal Partnership of Present Property (Art. 1779) All Comprises the following: - Property which belonged to each of the partners at the time of the constitution of the partnership - Profits which they may acquire from all property contributed 2. Universal Partnership of Profits Comprises all that the partners may acquire by their industry or work during the existence of the partnership (Art. 1780). But persons who are prohibited from giving donations or advantage to each other cannot enter into a universal partnership (Art. 1782). - Those made between persons who were guilty of adultery or concubinage at the time of the donation; - Those made between persons found guilty of the same criminal Page 81 of 393 ATENEO CENTRAL COMMERCIAL LAW BAR OPERATIONS 2020/21 - offense, in consideration thereof; and Elements to establish liability as a partner on the ground of estoppel: Those made to a public officer or his wife, descendants and ascendants, by reason of his office. (Art. 739) 1. Defendant represented himself as partner or represented by others as such; 2. Not denied or refuted by defendant; 3. Plaintiff relied on such representation; and 4. Statement of defendant not refuted. (b) Particular Partnership (Art. 1783) A particular partnership has for its objects: a. Determinate things b. Their use or fruits c. Specific undertaking d. Exercise of profession or vocation 2. General v. Limited Partnership (a) General Partnership Consists of general partners who are liable pro rata and subsidiarily and sometimes solidarily with their separate property for partnership debts (b) Limited Partnership One formed by two or more persons having as members one or more general partners and one or more limited partners, the latter not being personally liable for the obligations of the partnership. F. Partnership by estoppel Partnership by estoppel, defined Either by words or conduct, a person does any of the following: 1. Directly represents himself to anyone as a partner in an existing partnership or in a nonexisting partnership 2. Indirectly represents himself by consenting to another representing him as a partner in an existing partnership or in a non-existing partnership When a person has been thus represented to be a partner in an existing partnership, or with one or more persons who are not actually partners, he is an agent of the persons consenting to such representation in order to bind them to the same extent and in the same manner as though he were a partner in fact (Art. 1825). LIABILITIES IN ESTOPPEL When all the A partnership act or members of an obligation results, the existing partnership therefore consent to the partnership is liable representation Other cases It is the joint act or obligation of the person acting and persons consenting to the representation. Person who represented himself & all those who made representation liable pro-rata/ jointly G. Partnership as distinguished from joint venture The observation that a joint venture is for a single transaction while a partnership entails a continuing business is not entirely accurate in Philippine law. A partnership may be universal or particular and a particular partnership has for its object a specific undertaking (Roque, Jr. v. COMELEC, G.R. No. 188456, 2009). Generally understood to mean an organization formed for some temporary purpose, a joint venture is likened to a particular partnership or one which “has for its object determinate things, their use or fruits, or a specific undertaking, or the exercise of a profession or vocation. (Realubit v. Jaso, G.R. No. 178782, 2011) Particular Partnership In a joint account, the participating merchants can transact business under their own name, and can be individually liable therefor. A partnership generally relates to a continuing business of various transactions of a certain kind. (Heirs of Tan Eng Kee v. CA, G.R. No. 126881, 2000) Page 82 of 393 ATENEO CENTRAL COMMERCIAL LAW BAR OPERATIONS 2020/21 Joint Venture A joint venture is a form of partnership, and thus, to be governed by the laws on partnership. (Marsman Drysdale Land, Inc. v. Philippine Geoanalytics, G.R. No. 183374, 2010) As a rule, corporations are prohibited from entering into partnership agreements; consequently, corporations can enter into joint venture agreements with other corporations or partnerships for certain transactions in order to form “pseudo partnerships.” A joint venture agreement between and among corporations may be seen as similar to partnerships since the elements of partnership are present. (Narra Nickel Mining and Dev’t Corp. v. Redmont Consolidated Mines Corp., G.R. No. 195580, 2014) Note: Section 35(h) of the Revised Corporation Code now expressly allows corporations to form partnerships with both natural and juridical persons. A verbal agreement to form a joint venture company is valid and binding. The failure to reduce the agreement to writing does not affect its validity or enforceability as there is no law or regulation which provides that an agreement to incorporate must be in writing. (Fong v. Dueñas, G.R. No. 185592, 2015) H. Professional partnership General professional partnership A general professional partnership exists when two or more persons may also form a partnership for the exercise of a profession (Art. 1767 [2]). The Architecture Act of 2004 (R.A. No. 9266) 1. This law states that a firm, firm, company, partnership, corporation or association may be registered or licensed as such for the practice of architecture under the following conditions: Only Filipino citizens properly registered and licensed as architects under this Act may, among themselves, or together with allied technical professionals, form and obtain registration as a firm, company, partnership, association or corporation for the practice of architecture; 2. Registered and licensed architects shall compose at least seventy-five percent (75%) of the owners, shareholders, members incorporators, directors, executive officers, as the case may be; 3. Individual members of such firm, partnership association or corporation shall be responsible for their individual and collective acts as an entity and as provided by law; 4. Such firm, partnership, association or corporation shall be registered with the Securities and Exchange Commission and Board. Other Classifications of Partnership a. As to Legality of Existence 1. De jure partnershipone which has complied with all the legal requirements for its establishment 2. De facto- one which has failed to comply with all the legal requirements for its establishment b. As to purpose 1. Commercial or trading partnershipone formed for the transaction of business 2. Professional or non-trading partnershipone formed for the exercise of a profession I. Management POWERS OF THE PARTNER/S APPOINTED AS MANAGER Partner is Power of Vote of appointed managing partners manager in partner is representing the Articles of irrevocable controlling partnership without interest is (Art. 1800) just/lawful necessary to cause; revoke power (Art. 1800) Revocable only when in bad faith (Art. 1800) Page 83 of 393 ATENEO CENTRAL COMMERCIAL LAW BAR OPERATIONS 2020/21 Partner is appointed manager after constitution of partnership (Art. 1800) Two or more persons entrusted with management of partnership without specification of duties/ stipulation that each shall not act w/o the other's consent (Art. 1801) Stipulated that none of the managing partners shall act w/o the consent of others (Art. 1802) Manner of management not agreed upon (Art. 1803) Power is revocable any time for any just or lawful cause by the vote of the partners (Art. 1800) Each may execute all acts of administratio n (Art. 1801) Concurrence of all necessary for the validity of acts (Art. 1802) All partners are agents of the partnership Unanimous consent required for alteration of immovable property (Art. 1803(1)) ? 2. RIGHTS AND OBLIGATIONS OF PARTNERSHIP AND PARTNERS A. Rights and obligations of the partnership In case of opposition, decision of majority shall prevail; In case of tie, decision of partners owning controlling interest shall prevail (Art. 1801) Absence or disability of any one cannot be alleged unless there is imminent danger of grave or irreparable injury to partnership (Art. 1802) If refusal of partner is manifestly prejudicial to interest of partnership, court's intervention may be sought (Art. 1803(2)) All partners, including industrial ones, shall be liable pro rata with all their property and after all the partnership assets have been exhausted, for the contracts which may be entered into in the name and for the account of the partnership, under its signature and by a person authorized to act for the partnership. However, any partner may enter into a separate obligation to perform a partnership contract. (Art. 1816) Note: Except limited liability partners Any stipulation against personal liability of partners for partnership debts is void, except as among them. (Art. 1817) Partners are liable solidarily with the partnership for everything chargeable to the partnership when caused by the wrongful act or omission of any partner acting in the ordinary course of business of the partnership or with authority from the other partners and for partner's act or misapplication of properties. (Art. 1824) A newly admitted partner into an existing partnership is liable for all the obligations of the partnership arising before his admission but out of partnership property shares. (Art. 1826) Partnership creditors are preferred to those of each of the partners as regards the partnership property. (Art. 1827) Upon dissolution of the partnership, the partners shall contribute the amounts necessary to satisfy the partnership liabilities. (Art. 1839(4), (7)) A partner’s obligation for partnership liabilities is subsidiary in nature - they shall only be liable with their property after all partnership properties have been exhausted. (Co-Pitco v. Yulo, G.R. No. L3146, 1907) Page 84 of 393 ATENEO CENTRAL COMMERCIAL LAW BAR OPERATIONS 2020/21 B. Obligations of partners among themselves Obligation to Contribute to the Common Fund 1. What May Be Contributed Contribution must be in equal shares unless otherwise stipulated. (Art. 1790) (a) Money Failure to contribute promised money makes the promissory-partner liable for the amount promised including the interest due and damages arising from the time he should have complied with his or her undertaking. (Art. 1786, Par. 1) If there is fraud or misrepresentation, action for rescission may be filed, and the party entitled to rescind, without prejudice to any other right, has the right to: 1. Lien on, or right of retention over, the surplus of partnership property after satisfying partnership liabilities to third persons (for any sum paid by the injured partner for the purchase of an interest in the partnership and for any capital or advances contributed by the latter) 2. Stand in place of creditors of the partnership for any payments made by the injured partner in respect of partnership liabilities, after all liabilities to third persons have been satisfied 3. Indemnity by the guilty partner against all partnership debts and liabilities (Art. 1838); relate to Art. 1831: with or without fraud or misrepresentation, injured partner may seek judicial dissolution (b) Property May include intangible or incorporeal (e.g. credit). (Lim Tong Lim v. Phil. Fishing Gear, G.R. No. 136448, 1999) Liable for fruits from the time property should have been delivered without need of demand; also include obligation to preserve the promised property with the diligence of a good father of a family pending delivery. (Art. 1786 [1] and [2]) (c) Industry May concur with any or both of the first two or in the absence of any one or both of them; manual and/or intellectual in consideration of share in the profits; hence, as generally, partners are not entitled to charge each other. (Marsh’s Appeal, 69 Pa. St. 30) Every partner is bound to work to the extent of his ability for the benefit of the whole, without regard to the services of his co-partners, and without comparison of value; for services to the firm cannot, from their very nature, be estimated and equalized by compensation of differences. (Beatty v. Wray, 7 Harris 519) But: A partner who has agreed to render special service to the partnership, for the performance of which he is qualified, and which is one of the inducements for the other members to enter the partnership, was found liable civilly to account for the value of such service upon a finding that he wrongfully refused to perform such service. But then again: Specific performance not available due to constitutional prohibition against involuntary servitude. A limited partner is not allowed to contribute services, only “cash or other property” (Art. 1845); otherwise, he is considered an “industrial and general partner” and thus, not exempted from personal liability. 2. When Immovables Contributed or Real Rights General Rule: Failure to comply with the requirement of appearance in public instrument and SEC Registration will not affect the liability of the partnership and the members thereof to third persons. (Art. 1772, [2]) Exception: When immovable property or real rights are contributed. Public instrument plus inventory made and signed by the parties and attached to the public instrument is required for the benefit of third persons. (Arts.1771 and 1773) Page 85 of 393 ATENEO CENTRAL BAR OPERATIONS 2020/21 EFFECT OF ABSENCE OF REQUIREMENTS UNDER ARTICLES 1771 AND 1773 No Public Instrument, Void No Inventory With Public Instrument, Void No Inventory No Public Instrument, Void With Inventory With Public Instrument, Valid With Inventory Note: Partnerships void under Art.1773, in relation to Art. 1771 may still be considered either de facto or estoppel partnerships vis-à-vis third persons; may even be treated as an ordinary contract from which rights and obligations may validly arise, although not exactly a partnership under the Civil Code. (Torres v. CA, G.R. No. 134559, 1999) Failure to prepare an inventory of the immovable property contributed, in spite of Art. 1773 declaring the partnership void would not render the partnership void when: 1. No third party is involved (since Art. 1773 was intended for the protection of 3rd parties); 2. Partners have made a claim on the partnership agreement. 3. Consequence of Failure to Contribute Each partner has the obligation: 1. To contribute at the beginning of the partnership or at the stipulated time the money, property or industry which he may have promised to contribute. (Art. 1786) 2. To answer for eviction in case the partnership is deprived of the determinate property contributed (Art. 1786) 3. To answer to the partnership for the fruits of the property the contribution of which he delayed, from the date they should have been contributed up to the time of actual delivery (Art. 1786) 4. To preserve said property with the diligence of a good father of a family pending delivery to partnership (Art. 1163) 5. To indemnify partnership for any damage caused to it by the retention of the same or by the delay in its contribution (Arts.1788, 1170) COMMERCIAL LAW In the event that there is a failure to contribute property promised:  Partners become ipso jure a debtor of the partnership even in the absence of any demand (Art. 1169[1])  Remedy of the other partner is not rescission but specific performance with damages from defaulting partner (Art. 1788) In the event that there is a failure to contribute money promised:  To contribute on the date fixed the amount he has undertaken to contribute to the partnership  To reimburse any amount he may have taken from the partnership coffers and converted to his own use  To pay for the agreed or legal interest, if he fails to pay his contribution on time or in case he takes any amount from the common fund and converts it to his own use  To indemnify the partnership for the damages caused to it by delay in the contribution or conversion of any sum for his personal benefit (Art. 1788) A partner who promises to contribute to partnership becomes a promissory debtor of the partnership, including liability for interests and damages caused for failure to pay, and which amounts may be deducted upon dissolution of the partnership from his share in the profits and net assets. (Rojas v. Maglana, G.R. No. 30616, December 10, 1990) 4. Obligations with respect to Contribution to Partnership Capital Partners must contribute equal shares to the capital of the partnership unless there is stipulation to contrary. (Art. 1790) Capitalist partners must contribute additional capital in case of imminent loss to the business of the partnership and there is no stipulation otherwise; refusal to do so shall create an obligation on his part to sell his interest to the other partners. (Art. 1790) Page 86 of 393 ATENEO CENTRAL COMMERCIAL LAW BAR OPERATIONS 2020/21 A. Requisites: 1. There is an imminent loss of the business of the partnership 2. The majority of the capitalist partners are of the opinion that an additional contribution to the common fund would save the business 3. The capitalist partner refuses deliberately to contribute (not due to financial inability) 4. There is no agreement to the contrary B. Fiduciary Duty A partnership is a fiduciary relation—one entered into and to be maintained on the basis of trust and confidence. With that, a partner must observe the utmost good faith, fairness, and integrity in his dealings with the others: i. He cannot directly or indirectly use partnership assets for his own benefit; ii. He cannot carry on a business of the partnership for his private advantage; iii. He cannot, in conducting the business of the partnership, take any profit clandestinely; iv. He cannot obtain for himself that which he should have obtained for the partnership (e.g. business opportunity) v. He cannot carry on another business in competition with the partnership; and vi. He cannot avail himself of knowledge or information, which may be properly regarded as the property of the partnership. 1. Prohibition to Engage in Competitive Business If an industrial partner engages in any business a. He can be excluded from the partnership; or b. The capitalist partners can avail of the benefit he obtained from the business; or c. The capitalist partners have the right to file an action for damages against the industrial partner, in either case. (Art. 1789) If the capitalist partner engages in a business (which competes with the business of the partnership) a. He may be required to bring to the common fund the profits he derived from the other business; or b. He shall personally bear the losses; or c. He may be ousted form the partnership, especially if there was a warning. (Art. 1808) INDUSTRIAL PARTNER Cannot engage in business (w/n same line of business with the partnership) unless partnership expressly permits him to do so. (Art. 1789) CAPITALIST PARTNER Cannot engage in business (with same kind of business with the partnership) for his own account, unless there is a stipulation to the contrary. (Art. 1808) As a rule, an industrial partner may not engage in any business during the existence of the partnership, unless the capitalist partners expressly permit him to do so (Art. 1789). The reason is that his industry must be given only to the partnership. This is true even if the business is not competitive. (Albano Civil Law Reviewer, p. 822, 2008 ed.) When a partner engages in a separate business enterprise that is competitive with that of the partnership, the other partner’s withdrawal becomes thereby justified and for which the latter cannot be held for damages. (Rojas v. Maglana, G.R. No 30616, 1990) 2. Managing Partner who Collects Debt from Third Party Obligation of a managing partner who collects debt from person who also owed the partnership (Art. 1792): a. Apply sum collected to 2 credits in proportion to their amounts. b. If he received it for the account of partnership, the whole sum shall be applied to partnership credit. Requisites: 1. There exist at least two debts, one where the collecting partner is creditor and the other, where the partnership is the creditor 2. Both debts are demandable 3. The partner who collects is authorized to manage and actually manages the partnership Page 87 of 393 ATENEO CENTRAL COMMERCIAL LAW BAR OPERATIONS 2020/21 3. Partner who Receives Share of Partnership Credit Obligation of partner who receives share of partnership credit: Obliged to bring to the partnership capital what he has received even though he may have given receipt for his share only (Art. 1793) C. Rules for Distribution of Profits and Losses (Art. 1797) PROFITS LOSSES With According to According to agreement agreement agreement Without Share of If sharing of agreement capitalist profits is partner is in stipulated proportion to apply to his capital sharing of contribution losses Share of industrial partner is not fixed - as may be just and equitable under the circumstances Requisites: 1. A partner has received in whole or in part, his share of the partnership credit 2. The other partners have not collected their shares 3. The partnership debtor has become insolvent BEARING THE RISK OF LOSS OF THINGS CONTRIBUTED (Art. 1795) Specific and Risk is borne by determinate things partner which are not fungible where only the use is contributed Specific and Risk is borne by determinate things the partnership ownership of which is transferred to the partnership Fungible things Risk is borne by (consumable) partnership Things contributed to Risk is borne by be sold partnership Things brought and Risk is borne by appraised in the partnership inventory Specific and Risk is borne by determinate things partner which are not fungible where only the use is contributed If no profit sharing stipulated: losses shall be borne according to capital contribution Purely industrial partner not liable for losses NOTE: A stipulation which excludes one or more partners from any share in the profits and losses is void. (Art. 1799) D. Other Rights and Obligations of Partners Every partnership shall operate under a firm name. Persons who include their names in the partnership name even if they are not members shall be liable as partners. (Art. 1815) i. ii. iii. Right to associate another person with him in his share without consent of other partners (sub-partnership) (Art. 1804) Right to inspect and copy partnership books at any reasonable hour (Art. 1805) Right to a formal account as to partnership affairs (even during existence of partnership): (Art. 1809) a. If he is wrongfully excluded from partnership business or possession of its property by his copartners b. If right exists under the terms of any agreement Page 88 of 393 ATENEO CENTRAL COMMERCIAL LAW BAR OPERATIONS 2020/21 c. iii. iv. As provided by Art. 1807, whenever other circumstances render it just and reasonable Duty to render on demand true and full information affecting partnership to any partner or legal representative of any deceased partner or of any partner under legal disability (Civil Code, Art. 1806) Duty to account to the partnership as fiduciary (Art. 1807) E. Responsibility of Partnership to Partners i. To refund the amounts disbursed by partner in behalf of the partnership plus corresponding interest from the time the expenses are made (loans and advances made by a partner to the partnership aside from capital contribution) ii. To answer for obligations partner may have contracted in good faith in the interest of the partnership business iii. To answer for risks in consequence of its management C. Obligations of partners to third persons All partners shall be liable for contractual obligations of the partnership with their property, after all partnership assets have been exhausted: i. Pro rata ii. Subsidiary (Art. 1816). Admission or representation made by any partner concerning partnership affairs within scope of his authority is evidence against the partnership. (Art. 1820) General rule: Notice to partner of any matter relating to partnership affairs operate as notice to partnership. Exception: Except in case of fraud.  Knowledge of partner acting in the particular matter, acquired while a partner  Knowledge of the partner acting in the particular matter then present to his mind  Knowledge of any other partner who reasonably could and should have communicated it to the acting partner (Art.1821) Partners and the partnership are solidarily liable to third persons for the partner's tort or breach of trust. (Art. 1824) Liability of incoming partner is limited to: 1. His share in the partnership property for existing obligations 2. His separate property for subsequent obligations (Art. 1826) Creditors of partnership preferred in partnership property & may attach partner's share in partnership assets. (Art. 1827) Power of Partner as an Agent of the Partnership (Art. 1818) ACTS EFFECT Acts for carrying on in Every partner is an the usual way the agent and may business of the execute acts with partnership binding effect even if he has no authority Except: when 3rd person has knowledge of lack of authority not bind Act which is not Does partnership unless apparently for the carrying of business authorized by other partners in the usual way Acts of strict dominion or ownership: a. Assign partnership property in trust for creditors b. Dispose of goodwill of business c. Do an act which would make it impossible to carry on ordinary business of partnership d. Confess a judgment e. Enter into compromise concerning a partnership claim or liability Page 89 of 393 ATENEO CENTRAL COMMERCIAL LAW BAR OPERATIONS 2020/21 f. Submit partnership claim or liability to arbitration g. Renounce claim of partnership Acts in contravention of a restriction on authority Title in name of all partners, Conveyance in name of all partners Partnership is not liable to 3rd persons having actual or presumptive knowledge of the restrictions Effects of Conveyance of Real Property Belonging to Partnership (Art. 1819) TITLE EFFECT Title in partnership Conveyance passes name, Conveyance in title but partnership partnership name can recover if: 1. Conveyance was not in the usual way of business, or 2. Buyer had knowledge of lack of authority Title in partnership Conveyance does not name, Conveyance in pass title but only partner's name equitable interest, unless: 1. Conveyance was not in the usual way of business, or 2. Buyer had knowledge of lack of authority Title in name of 1 or Conveyance passes more partners, title but partnership Conveyance in name can recover if: if partner/partners in 1. Conveyance was whose name title not in the usual stands way of business, or 2. Buyer had knowledge of lack of authority Title in name of Conveyance will only 1/more/all partners or pass equitable 3rd person in trust for interest partnership, Conveyance executed in partnership name if in name of partners Conveyance will pass title 3. DISSOLUTION AND WINDING UP Dissolution is the change in the relation of the partners caused by any partner ceasing to be associated in the carrying on of the business; partnership is not terminated but continues until the winding up of partnership affairs is completed. (Art. 1828) Winding up is the process of settling the business or partnership affairs after dissolution, which includes the paying of previous obligations, collecting of assets previously demandable. (Idos v. Court of Appeals, G.R. No. 110782, 1998) Termination is that point when all partnership affairs are completely wound up and finally settled. It signifies the end of the partnership life. (Idos v. Court of Appeals, G.R. No. 110782, 1998) A. Causes of Dissolution (Art. 1830) i. ii. Without violation of the agreement between the partners a. By the termination of the definite term/ particular undertaking specified in the agreement b. By the express will of any partner, who must act in good faith, when no definite term or particular undertaking is specified c. By the express will of all the partners who have not assigned their interests to be charged for their separate debts, either before or after the termination of any specified term or particular undertaking d. By the bona fide expulsion of any partner from the business in accordance with power conferred by the agreement In contravention of the agreement between the partners, where the circumstances do not permit a dissolution under any other provision of Article 1830, by the express will of any partner at any time Page 90 of 393 ATENEO CENTRAL COMMERCIAL LAW BAR OPERATIONS 2020/21 iii. By any event which makes it unlawful for business to be carried on/for the members to carry it on for the partnership iv. Loss of specific thing promised by partner before its delivery v. Death of any partner vi. Insolvency of a partner/partnership vii. Civil interdiction of any partner viii. Decree of court under Art. 1831. If a partnership has no fixed term, then it is a partnership at will and can be dissolved by the will of any partner. However, such partner must be in good faith, otherwise, he will be liable for damages. Among partners, mutual agency arises and the doctrine of delectus personae allows them to have the power, but not necessarily the right, to dissolve the partnership (Ortega v. Court of Appeals, G.R. 109248, 1995). Grounds for dissolution by decree of court (Art. 1831): i. Partner declared insane in any judicial proceeding or shown to be of unsound mind ii. Incapacity of partner to perform his part of the partnership contract iii. Partner guilty of conduct prejudicial to business of partnership iv. Willful or persistent breach of partnership agreement or conduct which makes it reasonably impracticable to carry on partnership with him v. Business can only be carried on at a loss vi. Other circumstances which render dissolution equitable vii. Upon application by purchaser of partner's interest: a. After termination of specified term/particular undertaking b. Anytime if partnership at will when interest was assigned/charging order issued If a partnership has no fixed term, then it is a partnership at will and can be dissolved by the will of any partner. However, such partner must be in good faith, otherwise, he will be liable for damages. Among partners, mutual agency arises and the doctrine of delectus personae allows them to have the power, but not necessarily the right, to dissolve the partnership (Ortega v. Court of Appeals, G.R. 109248, July 3, 1995). B. Effects of Dissolution 1. Authority of Partner to Bind Partnership General rule: Authority of partners to bind partnership is terminated. (Art. 1832) Exceptions: 1. To wind up partnership affairs 2. Complete transactions not finished (Art. 1834) 2. Qualifications (a) With respect to Partners (Art. 1833) Authority of partners to bind partnership by new contract is immediately terminated when dissolution is not due to act, death, or insolvency (ADI) of a partner. If due to ADI, partners are liable as if partnership not dissolved, when the following concur: a. If cause is act of partner, acting partner must have knowledge of such dissolution; and b. If cause is death or insolvency, acting partner must have knowledge/ notice. (b) With respect to Persons not Partners (Art. 1834) Partner continues to bind partnership even after dissolution in following cases: i. Transactions in connection to winding up partnership affairs/completing unfinished transactions ii. Transactions which would bind partnership if not dissolved, when the other party/obligee: Situation 1 1. Had extended credit to partnership prior to dissolution; and 2. Had no knowledge/notice of dissolution Situation 2 1. Did not extend credit to partnership; 2. Had known partnership prior dissolution; and to Page 91 of 393 ATENEO CENTRAL BAR OPERATIONS 2020/21 3. Had no knowledge/notice of dissolution/fact of dissolution not advertised in a newspaper of general circulation in the place where partnership is regularly carried on 3. Post Dissolution (Art. 1834) Partner cannot bind the partnership anymore after dissolution: i. Where dissolution is due to unlawfulness to carry on with business (except: winding up of partnership affairs) ii. Where partner has become insolvent iii. Where partner unauthorized to wind up partnership affairs, except by transaction with one who: Situation 1 1. Had extended credit to partnership prior to dissolution, and 2. Had no knowledge/notice of dissolution; or Situation 2 1. Did not extend credit to partnership prior to dissolution 2. Had known partnership prior to dissolution 3. Had no knowledge/notice of dissolution/fact of dissolution not advertised in a newspaper of general circulation in the place where partnership is regularly carried on C. Rights of Partners upon Dissolution General rule: Dissolution does not discharge existing liability of partner Exceptions: Except by agreement. i. Between the partner and himself ii. Between the person/partnership continuing the business iii. Between partnership creditors (Art. 1835) 1. Rights of Partner where Dissolution not in Contravention of Agreement (Art. 1837) a. Apply partnership property to discharge liabilities of partnership b. Apply surplus, if any to pay in cash the net amount owed to partners COMMERCIAL LAW 2. Rights of Partner where Dissolution in Contravention of Agreement (Art. 1837) (a) Partner who did not cause dissolution wrongfully a. Apply partnership property to discharge liabilities of partnership b. Apply surplus, if any to pay in cash the net amount owed to partners c. Indemnity for damages caused by partner guilty of wrongful dissolution d. Continue business in same name during agreed term e. Possess partnership property if business is continued (b) Partner who wrongly caused dissolution 1. If business not continued by others a. Apply partnership property to discharge liabilities of partnership b. Receive in cash his share of surplus less damages caused by his wrongful dissolution 2. If business continued by others a. Have the value of his interest at time of dissolution ascertained and paid in cash/secured by bond b. Be released from all existing/future partnership liabilities 3. Rights of Injured Partner where Partnership Contract is Rescinded on Ground of Fraud/Misrepresentation by One Party (Art. 1838) a. Right to lien on surplus of partnership property after satisfying partnership liabilities b. Right to subrogation in place of creditors after payment of partnership liabilities c. Right of indemnification by guilty partner against all partnership debts & liabilities 4. Settlement of Accounts between Partners Assets of the partnership 1. Partnership property (including goodwill) 2. Contributions of the partners (Art. 1839 [1]) Order of Application of Assets 1. Partnership creditors 2. Partners as creditors Page 92 of 393 ATENEO CENTRAL COMMERCIAL LAW BAR OPERATIONS 2020/21 3. Partners as investors—return of capital contribution 4. Partners as investors—share of profits if any (Art. 1839 [2]) partner, his legal representative or his assignee, upon cause shown, may obtain winding up by the court (Primelink Properties and Development Corp. v. Lazatin-Magat, G.R. No. 167379, 2006). The partners will contribute the amount necessary to satisfy the liabilities based on the rules for distribution of profits and losses in Art. 1797 (Art. 1839 [4]). Even the individual property of a deceased partner shall be liable for such contributions (Art. 1839 [7]). A partner’s share cannot be returned without first dissolving and liquidating the business for the partnership’s outside creditors have preference over the enterprise’s assets. The firm’s property cannot be diminished to their prejudice. (Magdusa v. Albaran, G.R. No. L-17526, 1962) D. When Business of Dissolved Partnership is Continued Due to its separate juridical personality from the individual partners, it is thus the partnership – having been the recipient of the capital contributions – which must refund the equity of retiring partners. Such duty does not pertain to partners who managed the business. The amount to be refunded consistent with the partnership being a separate and distinct entity, must necessarily be limited to the firm’s total resources. It can only pay out what it has for its total assets. But this is subject to the priority enjoyed by outside creditors. “After all the (said) creditors have been paid, whatever is left of the partnership assets becomes available for the payment of partners’ shares. (Villareal v. Ramirez, G.R. No. 144214, 2003) Effects: 1. Creditors of old partnership are also creditors of the new partnership, which continues the business of the old one w/o liquidation of the partnership affairs (Art.1840) 2. Creditors have an equitable lien on the consideration paid to the retiring /deceased partner by the purchaser when retiring/deceased partner sold his interest w/o final settlement with creditors (Art. 1840) The retired or deceased partner or his legal representatives may a. Have the value of his interest ascertained as of the date of dissolution b. May receive as ordinary creditor the value of his share in the dissolved partnership with interest or profits attributable to use of his right, at his option (Art. 1841) E. Persons Authorized to Wind Up i. ii. iii. Partners designated by the agreement In absence of agreement, all partners who have not wrongfully dissolved the partnership Legal representative of last surviving partner (Art. 1836) Unless otherwise agreed, the partners who have not wrongfully dissolved the partnership or the legal representative of the last surviving partner, not insolvent, has the right to wind up the partnership affairs, provided, however, that any 4. LIMITED PARTNERSHIP A. Characteristics of Limited Partnership i. ii. iii. iv. v. Formed by compliance with statutory requirements (Art. 1843) One or more general partners control the business (Art. 1843) One or more general partners and one or more limited partners. (Art. 1843) Limited partners contribute cash or other property, but not services (Art. 1845) and share in the profits but do not participate in the management of the business (Art. 1848) and are not personally liable for partnership obligations beyond their capital contributions May ask for the return of their capital contributions under conditions prescribed by law (Art. 1857) Partnership debts are paid out of common fund and the individual properties of general partners (Art. 1857) Page 93 of 393 ATENEO CENTRAL COMMERCIAL LAW BAR OPERATIONS 2020/21 B. General Partnership v. Limited Partnership GENERAL Personally liable for partnership obligations (Art. 1816) When manner of management not agreed upon, all general partners have an equal right in the management of the business (Art. 1803) Contribute cash, property or industry (Art. 1767) Proper party to proceedings by/ against partnership (Art. 1866) Interest not assignable w/o consent of other partners (Art. 1804) Name may appear in firm name (Art. 1815) Prohibition against engaging in business (Art. 1789, Art. 1808) Retirement, death, insolvency, insanity of general partner dissolves partnership (Art. 1830) LIMITED Liability extends only to his capital contributions ( Art. 1843) No participation in management (Art. 1848) Contribute cash or property only, not industry (Art. 1845) Not proper party to proceedings by/ against partnership (Art. 1866) Interest is freely assignable (Art. 1859) Certificate must be filed with the SEC. i. To validly form a limited partnership, all that is required is substantial compliance in good faith with all the requirements under Art. 1844 as enumerated above. ii. If no substantial compliance, then the firm becomes a general partnership as far as third persons are concerned (but as amongst the partners, still limited) (Jo Chung Cang v. Pacific Commercial Co., 45 Phil 142) D. Consent/Ratification of All Limited Partners Needed i. ii. iii. iv. v. vi. vii. Name must appear in firm name (Art. 1846) No prohibition against engaging in business Does not have same effect; rights transferred to legal representative (Art. 1861) C. Requirements for Formation of Limited Partnership Certificate of articles, of the limited partnership must state the following matters: 1. Name of partnership plus the word "Limited" 2. Character of business 3. Location of principal place of business 4. Name/place of residence of members 5. Term for partnership is to exist 6. Amount of cash/value of property contributed 7. Additional contributions 8. Time agreed upon to return contribution of limited partner 9. Sharing of profits/other compensation (Art. 1844) Any act in contravention of the certificate Any act which would make it impossible to carry on the ordinary business of the partnership Confess judgment against partnership Possess partnership property/assign rights in specific partnership property other than for partnership purposes Admit person as general partner Admit person as limited partner - unless authorized in certificate Continue business with partnership property on death, retirement, civil interdiction, insanity, or insolvency of gen partner unless authorized in certificate (Art.1850) E. Specific Rights of Limited Partners i. ii. iii. iv. v. vi. vii. Right to have partnership books kept at principal place of business Right to inspect/copy books at reasonable hour Right to have on demand true and full info of all things affecting partnership Right to have formal account of partnership affairs whenever circumstances render it just and reasonable Right to ask for dissolution and winding up by decree of court Right to receive share of profits/other compensation by way of income Right to receive return of contributions provided the partnership assets are in excess of all its liabilities (Art. 1851) F. Requisites for Return of Contribution of Limited Partner 1. 2. All liabilities of partnership have been paid/if not yet paid, at least sufficient to cover them Consent of all members has been obtained Page 94 of 393 ATENEO CENTRAL BAR OPERATIONS 2020/21 3. Certificate is cancelled/amended as to set forth withdrawal /reduction of contribution (Art. 1857) G. Liabilities of A Limited Partner 1. To the Partnership a. For the difference between his contribution as actually made and that stated in the certificate as having been made, and b. For any unpaid contribution which he agreed in the certificate to make in the future time (Art. 1858) 2. As a Trustee for the Partnership a. For the specific property stated in the certificate as contributed by him but which he had not contributed; b. For the specific property of the partnership which had been wrongfully returned to him; and c. Money or other property wrongfully paid or conveyed to him on account of his contribution. (Art. 1858) H. Dissolution of Limited Partnership 1. Priority in Distribution of Assets a. Those due to creditors, including limited partners b. Those due to limited partners in respect of their share in profits/compensation c. Those due to limited partners of return of capital contributed d. Those due to general partner other than capital and profits e. Those due to general partner in respect to profits f. Those due to general partner for return of capital contributed (Art. 1863) I. Amendment of Certificate of Partnership Instances when Certificate of Partnership may be amended 1. In case any of the ten enumerated changes and circumstances in Art. 1864, par. 2 are present. 2. It must be signed and sworn to by all the members including the new members if some are added; in case of substitution, the assigning limited partner must also sign. 3. The cancellation or amendment must be recorded in the SEC.(Art.1864) COMMERCIAL LAW Note: Any person who suffers loss by reliance on false statement in certificate may hold liable for damages any party to the certificate who knew the statement to be false at the time the latter signed the certificate or came to know such falsity subsequently but within sufficient time before reliance to enable such party to cancel or amend the certificate or file the proper petition for such purpose (under Art. 1865). (Art. 1847; Walraven v. Ramsay, 55 N.W.d 853, 1952) A general partner’s DIIC (Death, Insolvency, Insanity, or Civil interdiction) dissolves the partnership unless the business is continued by the surviving general partners under a right stated in the certificate or with their common (i.e. all) consent (Civil Code, Art. 1860). Still, even if allowed under the certificate or consented to by all, there must be an amendment further to Arts. 1864 and 1865. Otherwise, limited partners will not be able to avail of the protection of the law as regards liability. The partnership will be considered general. (Lowe v. Arizona Power & Light Co., 427 P. d. 366, 1967) A limited partner shall not become liable as a general partner, unless in addition to the exercise of his rights and powers as a limited one, he takes part in the control (and management) of the business (Art. 1848; Holzman v. Escamilla, 195 P. d. 833, 1948) A person may be general and limited at the same time provided it is stated in the certificate. He shall have all the powers, rights, and restrictions of a general partner; but with respect to his capital contribution, his right against the other members of the firm would be that of a limited partner (Art. 1853). General rule: A limited partner may also loan money to and transact other business with the firm. Exceptions: Except that he cannot: 1. Receive or hold as collateral any partnership property; or 2. Receive from a general partner or from the firm any payment, conveyance, release if at that time assets of the firm are not sufficient to discharge liabilities to outside creditors. Any violation would be fraud on such creditors (Art. 1854). Page 95 of 393 ATENEO CENTRAL COMMERCIAL LAW BAR OPERATIONS 2020/21 B. CORPORATION Note: The remedy of a general partner who suffers from or faces interference from his partners is dissolution. (Weil v. Diversified Properties, 319 F. Supp., 1970) CORPORATION LAW Republic Act No. 11232 – Revised Corporation Code Liability of a Limited Partner Whose Surname Appears in the Partnership Name GENERAL PRINCIPLES General Rule: A limited partner whose surname appears in the partnership name is liable as a general partner to the partnership creditors who extended credit without actual knowledge that he is not a general partner. Exceptions: i. If the surname is also the surname of a general partner; or ii. If prior to the time the partner became a limited partner, the business has been carried under such name. --------- end of topic --------- 1. DEFINITION OF CORPORATION An artificial being created by operation of law, having the right of succession and the powers, attributes and properties expressly authorized by law or incident to its existence. (RCC,1 Sec. 2) Attributes of a Corporation (Sec. 2) a. Artificial Being b. Created by operation of law c. Has right of succession – A corporation has the capacity for continuous existence despite changes in stockholders/members d. Has only the powers, attributes, and properties authorized by law or incident to its existence. Corporate Fiction A corporation has a personality separate and distinct from the persons composing it. (Civil Code, Arts. 44-47; PNB v. Andrada Electric & Engineering Co., G.R. No. 142936, 2002). Corporation v. Partnership CORPORATION PARTNERSHIP Manner of Creation Commences only By mere agreement from the issuance of a Certificate of Incorporation by the SEC, or, in proper cases, passage of a special law Number of Organizers Any person/s but not At least 2 more than fifteen (15).2 Powers 1 For purposes of this part of the reviewer, unless otherwise specified, all references refer to the Revised Corporation Code, Republic Act no. 11232. (hereinafter RCC) 2 Note- There is no 5 person minimum anymore for the number of organizers (i.e., incorporators) of a Corporation under the RCC. (see discussion at page 15, Subheading 5.A) Page 96 of 393 ATENEO CENTRAL COMMERCIAL LAW BAR OPERATIONS 2020/21 Restricted due to Subject to the limited powers agreement of partners Authority of Those Who Compose It Stockholders are not Mutual agency agents of the between partners corporation in the absence of express authority Transfers of Interest Freely transferable Cannot be transferred without the consent of without the consent of other stockholders the other partners (unless there is a stipulation to the contrary) Succession Existence continues Death of a partner even as persons who ends the partnership compose it change to a special charter or through a general enabling act such as the Corporation Code. b. Public corporations - Formed or organized for the government of a portion of the state (e.g., barangay, municipality, city and province) Created for political purposes connected with the public good in the administration of the civil government Public Corporation v. Private Corporation PUBLIC PRIVATE CORPORATION CORPORATION Government holds Government may the controlling hold the controlling interest interest Created under the Corporation Code Created by its charter Corporations as partners in a partnership Corporations have the power to enter into a partnership, joint venture, merger, consolidation, or any other commercial agreement with natural and juridical persons (Sec. 35(h)). Can a defective corporation result into a partnership? (Two Views) No Partnership: When investors intended only to invest in a corporate venture with no intention of participating in its corporate affairs, and the corporation was not formed, no partnership relation is established by the failure to incorporate, such investors cannot even be held liable for the contracts and transactions sued upon. (Pioneer Insurance v. CA, G.R. No. 84197, 1989) Partnership Exists: However, when there was a clear intention to form a partnership venture through a corporate vehicle (there was intention to be active participants in the corporation’s business), even those who did not directly participate in the contract or transaction being sued upon, but benefitted therefrom may be held liable as general partners. (Lim Tong Lim v. Philippine Fishing Gear, G.R. No. 136448, 1999) 2. CLASSES OF CORPORATIONS In Relation To The State a. Private corporations – Formed by private persons alone, by or with the State pursuant Created for a public purpose Exists primarily for the government of a portion of the state Subject to control and supervision by the State or its agency However, GOCCs may also be created by special charter Generally created for profit generation Note: ● Ownership of the government of the majority of the shares of a corporation does not by itself constitute such an entity as a public corporation (National Coal Co., v. Collector of Internal Revenue, G.R. No. L-22619, 1994). ● When the law vests corporate powers in a government instrumentality, it does not necessarily become a corporation; a GOCC must be organized as a stock or non-stock corporation. (MIAA v. CA, G.R. No. 155650, 2006) ● Test to determine whether a corporation is public or private: If the corporation is created by the State as the latter’s own agency or instrumentality to help it in carrying out its governmental functions, then that corporation is considered public; otherwise it is private. (Philippine Society for the Prevention of Cruelty to Animals v. COA, G.R. No. 169752, 2007) Page 97 of 393 ATENEO CENTRAL BAR OPERATIONS 2020/21 a. Quasi-public corporation A species of private corporations created by special law and required to render public service or supply public wants. (Id.) Usually covers school districts, water districts and the like. b. Government owned and controlled corporations (GOCCs) Created under a special law or charter, or any agency organized as a stock or non-stock corporation, vested with functions relating to public needs whether governmental or proprietary in nature, and owned by the Government of the Republic of the Philippines directly or through its instrumentalities either wholly or, where applicable as in the case of stock corporations, to the extent of at least a majority of its outstanding capital stock (R.A. No. 10149) Note: A GOCC when organized under the Corporation Code is still a private corporation. But being a GOCC makes it subject to laws and provisions applicable to the Government or its entities and subject to the control of the Government (Cervantes v. Auditor General, G.R. No. L-4043, 1952). The GOCC Governance Act (R.A. 10149), which governs compensation and position classification systems within the GOCC Sector, does not distinguish between chartered and non-chartered GOCCs, and its provisions apply equally to both. (GSIS Family Bank Employees Union v. Villanueva, G.R. No. 210773, 2019). In order to qualify as a GOCC, one must be organized either as a stock or non-stock corporation. Section 31 defines a stock corporation as one whose “capital stock is divided into shares and ... authorized to distribute to the holders of such shares dividends.” Although BCDA has an authorized capital of P100 Billion, however, it is not divided into shares of stock; it has no voting shares; and has no provision which authorizes the distribution of dividends and allotment of surplus and profits to BCDA’s stockholders. It cannot qualify also as a non-stock corporation because its primary purpose do not fall within the purposes enumerated under Section 88. (BCDA v. CIR, G.R. No. 205925, 20 June 2018) COMMERCIAL LAW However, there is now formal administrative and statutory recognition of “government instrumentalities with corporate powers/government corporate entities,” which may not fall within the definition of stock and nonstock corporations, but are government instrumentalities that are vested with corporate powers. (LRTA v. Quezon City, G.R. No. 221626, 2019) Under the Constitution, the COA has audit jurisdiction over both GOCCs with original charters (subject to COA pre-audit) and those without original charters (those organized under the Corporation Code—subject to post-audit). (Alejandrino v. COA, G.R. No. 245400, 2019). As to Place of Incorporation a. Domestic – one incorporated under laws of the Philippines b. Foreign – one formed, organized or existing under any laws other than those of the Philippines, and whose laws allow Filipino citizens and corporations to do business in its own country. (Sec. 140) As To Legal Status a. De jure corporation ● Corporation organized in accordance with requirements of law; ● Every corporation is deemed to be a de jure until proven otherwise b. De facto corporation (Sec. 19) ● A corporation claiming in good faith to be a corporation under the Corporation Code but where there exists a flaw in its incorporation or it falls short of the requirements provided by law. ● It is the result of an attempt to incorporate under an existing law coupled with the exercise of corporate powers. ● A de facto corporation will incur the same obligations; have the same powers and rights as a de jure corporation. ● The due incorporation of any corporation claiming in good faith to be a corporation under the Corporation Code, and its right to exercise corporate powers, shall not be inquired into collaterally in any private suit. Page 98 of 393 ATENEO CENTRAL BAR OPERATIONS 2020/21 ● Under the Rules of Court Rule 66, inquiry must be done by the Solicitor General in a quo warranto proceeding where the main issue is the right to exist as a corporation Elements of a de facto corporation a. Valid law under which incorporated; b. Attempt in good faith to incorporate or “colorable compliance;” c. Assumption of corporate powers; and d. Issuance of certificate of incorporation. (Arnold Hall v. Piccio, G.R. No. L-2598, 1950) Note: A corporation which has failed to file its bylaws within the prescribed period does not ipso facto lose its powers as such (Sawadjaan v. CA, G.R. No. 141735, 2005). c. Corporation by estoppel (Sec. 20); All persons who assume to act as a corporation knowing it to be without authority to do so shall be liable as general partners for all debts, liabilities and damages incurred or arising as a result thereof When such ostensible corporation is sued on any transaction entered by it as a corporation or on any tort committed by it as such, it shall not be allowed to use its lack of corporate personality as a defense. Anyone who assumes an obligation to an ostensible corporation as such cannot resist performance thereof on the ground that there was in fact no corporation. d. Corporation by prescription The Roman Catholic Church is a corporation by prescription, with acknowledged juridical personality inasmuch as it is an institution which antedated by almost a thousand years any other personality in Europe (Barlin v Ramirez, G.R. No. L-2832, 1906). As To Existence of Stocks a. Stock corporation ● Stock corporations are those which have capital stock divided into shares and are authorized to distribute to the holders of such shares, dividends, or allotments of the surplus profits on the basis of the shares held. (Sec. 3) COMMERCIAL LAW b. Nonstock corporation (Secs. 86-87) ● A corporation where no part of its income is distributable as dividends to members, trustees or officers ● Any profit obtained as an incident to its operations shall, whenever necessary or proper, be used for the furtherance of the purpose for which the corporation was organized. As To Control a. Holding company – one that controls another as a subsidiary or affiliate by the power to elect its management; one which holds shares in other companies for purposes of control rather than for mere investment. (SEC Opinion No. 15-15) b. Affiliate company – one that is subject to common control of a parent or holding company and operated as part of a system. (SEC Opinion No. 15-15) c. Parent and subsidiary companies – when a corporation has a controlling financial interest in one or more corporations, the one having control is known as the “parent company” and the controlled corporations are known as the “subsidiary companies”. As To Purpose of Incorporation a. Municipal corporation b. Religious corporation c. Educational corporation d. Charitable, Scientific or corporation e. Business corporation Vocational As To Number of Members a. Aggregate - a corporation which consists of many persons united to form a body politic and corporate (IEMELIF v. Lazaro, G.R. No. 184088, 2010). b. Corporation sole – Formed by one person who may be the chief archbishop, bishop, minister, rabbi, or other presiding elder of any religious denomination, sect or church. (Sec. 108) Purpose: created to administer and manage the affairs, properties, temporalities of the church to which the holder of the office belongs and also to transmit the same to his successor in office. Page 99 of 393 ATENEO CENTRAL BAR OPERATIONS 2020/21 Close Corporation- a corporation where: a. stockholders of record shall not exceed twenty (20); b. all the issued stock shall be subject to one or more specified restrictions on transfer permitted by this Title; and c. the corporation shall not list in any stock exchange or make any public offering of its stocks of any class. Notwithstanding, a corporation shall not be deemed a close corporation when at least 2/3 of its voting stock is owned or controlled by another corporation which is not a close corporation within the meaning of this Code. (Sec. 95) d. One Person Corporation- a corporation with a single stockholder. Only a natural person, trust, or an estate may form a One Person Corporation. Banks and quasi-banks, preneed, trust, insurance, public and publiclylisted companies, and non-chartered government-owned and -controlled corporations may not incorporate as One Person Corporations. A natural person who is licensed to exercise a profession may not organize as a One Person Corporation for the purpose of exercising such profession except as otherwise provided under special laws. (Sec. 115) COMMERCIAL LAW c. 3. NATIONALITY OF CORPORATIONS Nationality of Corporation Serves as a legal basis for subjecting the enterprise or its activities to the laws, the economic and fiscal powers, and various social and financial policies of the state to which it is supposed to belong. Tests: 1. Place of Incorporation 2. Control Test 3. Grandfather Rule3 4. War-time – in times of war, nationality of corporation is determined by the character or citizenship of its controlling stockholders 5. Investment Test 6. Place of Principal Business In order to determine the nationality of a corporation, the following steps should apply: 1st Step: The nationality of a corporation is determined by the country under whose laws it is incorporated (Place of Incorporation Test). 2nd Step: If the corporation is applying for a (2nd) franchise for public utility and etc. which requires a certain percentage of control of stock, the Test of Controlling Ownership would be applied. 3rd step: If there is doubt as to the domestic control of the percentage of stock in a corporation with corporate stockholders, Grandfather test would be applied (Narra Nickel Mining and Development Corp. v. Redmont Consolidated Mines Corp., G.R. No. 195580, 2014) MAIN TESTS A. Place of Incorporation Test A corporation is a national of the country under whose laws it has been organized and registered B. Control Test In cases involving properties, business or industries reserved for Filipinos, in addition to the place of incorporation test, the nationality of a corporation is determined by the nationality of the “controlling stockholders”. Absent any doubt, the Control Test shall be used in determining the nationality of a corporation specially in cases where foreign ownership restrictions apply. (SEC OGC Opinion No. 16-19) [T]here are two cases in determining the nationality of the Investee Corporation. The first case is the ‘liberal rule’, later coined by the SEC as the Control Test in its 30 May 1990 Opinion, and pertains to the portion in said Paragraph 7 of the 1967 SEC Rules which states, ‘(s)hares 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.’ Under the liberal Control Test, there is no need to further trace the ownership of the 60% (or more) Filipino stockholdings of the Investing Corporation since a corporation which is at least 60% Filipino-owned is considered as Filipino. (Narra Nickel Mining and Development 3 Emphasis on no. 2 & 3 for they are expressly indicated in the bar syllabus. Page 100 of 393 ATENEO CENTRAL BAR OPERATIONS 2020/21 COMMERCIAL LAW Corp. v. Redmont Consolidated Mines Corp., G.R. No. 195580, 2014). Opinion No. 04-14 in reference to the Foreign Investments Act) The required percentage of Filipino ownership shall be applied to both: a. The total number of outstanding shares of stock entitled to vote in the election of directors, and b. The total number of outstanding shares of stock, whether or not entitled to vote in the election of directors. (SEC Memorandum Circular No. 8, s. 2013, Sec. 2) Some instances wherein the control test applies: a. Exploitation of natural resources (> 60%) ● Sec 2, Art XII, 1987 Constitution – policy of the State is to ensure that the exploitation of natural resources or the pursuit of the activities deemed to be of public or national interest are in the control of the Filipinos ● The State may directly undertake such activities, or it may enter into coproduction, joint venture, or production sharing agreements with: o Filipino citizens; or o Corporations or associations, at least 60% owned by such citizens b. Public Utilities (> 60%) ● Sec 11, Art XII, 1987 Constitution – requires that only domestic corporations with at least 60% of the capital stock owned by Filipinos may own and operate public utilities in the Philippines ● The nationality test for public utilities applies not at the time of the grant of the primary franchise that makes a corporation a juridical person, but at the grant of the secondary franchise that authorizes the corporation to engage in a nationalized industry. (People v. Quasha, G.R. No. L-6055, 1953) ● The Constitution requires a franchise for operating a public utility; however, it does not require a franchise before one can own the facilities needed to operate a public utility so long as it does not operate them to serve the public.(Tatad v. Garcia, Jr., G.R. No. 114222, 1995). c. Mass Media (100%) ● Sec 11, Art XVI, 1987 Constitution – ownership of mass media shall be limited to the citizens of the Philippines, or to corporations, cooperatives or associations, wholly-owned and managed by such citizens (100% Filipino management of the entity) ● Cable Industry - CATV as “a form of mass media which must, therefore, be owned and managed by Filipino citizens, or Mere legal title is not enough. Full beneficial ownership of 60 percent of the outstanding capital stocks, coupled with 60 percent of the voting rights, is constitutionally required for the State's grant of authority to operate a public utility. Thus, voting rights of stocks which have been assigned or transferred to aliens cannot be considered held by Philippine citizens or nationals (cannot give proxies to vote). (Roy III v. Herbosa, et al., G.R. No. 207246, 2016) The definition of “beneficial owner or beneficial ownership in the SRC-IRR, which is in consonance with the concept of “full beneficial ownership” in the FIA-IRR, is relevant in resolving only the question of who is the beneficial owner or has beneficial ownership of each “specific stock” of the public utility whose stocks are under review. If the Filipino has the voting power of the “specific stock”, i.e., he can vote the stock or direct another to vote for him, or the Filipino has the investment power over the “specific stock”, i.e., he can dispose of that “specific stock” or direct another to vote or dispose it for him, then such Filipino is the “beneficial owner” of that “specific stock.” Being considered Filipino, that “specific stock” is then to be counted as part of the 60% Filipino ownership requirement under the Constitution. The right to the dividends, jus fruendi—a right emanating from ownership of that “specific stock” necessary accrues to its Filipino “beneficial owner.” (Roy III v. Herbosa, G.R. No. 207246 (Resolution), 18 April 2017.) General rule: The Control Test cannot overcome the Place of Incorporation Test. Exception: A corporation organized abroad and registered as doing business in the Philippines under the Corporation Code, whose capital outstanding stock and entitled to vote is wholly owned by Filipinos is a Philippine National. (SEC Page 101 of 393 ATENEO CENTRAL COMMERCIAL LAW BAR OPERATIONS 2020/21 corporations, cooperatives or associations, wholly-owned and managed by Filipino citizens pursuant to the mandate of the Constitution.” (DOJ Opinion No. 95, series of 1999). d. Advertising Industry (> 70%) ● Sec 11, Art XVI, 1987 Constitution – only Filipino citizens or corporations or associations at least 70% of the capital of which is owned by such citizens shall be allowed to engage in the advertising agency e. NEDA could advise Congress to set limitations of stock ownership in Corporations vested with Public Interests (Sec. 176) C. Grandfather Rule Where corporate shareholders are present (and when the Filipino-foreign equity ownership is in doubt), the percentage of the Filipino equity in corporations is computed by attributing the nationality of the second or subsequent tier of ownership to determine the nationality of the corporate shareholder Example: MV Corporation and AC Corporation have equal interest in XYZ Company. MV Corporation is 60% owned by Filipinos, while AC Corporation is 50% owned by Filipinos. By the grandfather rule, MV Corporation would have a 30% Filipino interest in XYZ Company (60% of 50%), while AC Corporation would have a 25% Filipino interest in XYZ Company (50% of 50%). Hence, the total Filipino interest is only 55%. The Control test is still the prevailing mode of determining whether or not a corporation is a Filipino corporation within the ambit of the natural resources provisions of the Constitution. But when in the mind of the court there is doubt based on attendant facts and circumstances, in the 6040 Filipino equity ownership in the corporation, then it may apply the grandfather rule (Narra Nickel Mining and Development Corp. v. Redmont Consolidated Mines Corp., G.R. No. 195580, 2014). The “grandfather rule” does not eschew, but in fact supplements the “control test”, as the latter implements Filipinization provisions of the Constitution. (Narra Nickel Mining and Development Corp. v. Redmont Consolidated Mines Corp., G.R. No. 195580, 2015). OTHER TESTS A. War-Time Test In times of war, nationality of corporation is determined by the character or citizenship of its controlling stockholders B. Investment Test “Philippine National” a. A corporation organized under Philippine laws of which at least 60% of the outstanding capital stock entitled to vote is owned and held by Filipino citizens; and b. A corporation organized abroad and registered as “doing business” in the Philippines under the Corporation Code of which 100% of the capital stock entitled to vote belong to Filipinos (R.A. No. 7042, Sec. 3[a], as amended or Foreign Investment Act of 1991) Double 60% Rule Where a corporation and its non-Filipino stockholders own stock in a SEC-registered enterprise, at least 60% of the outstanding capital stock and entitled to vote of both corporations and at least 60% of the members of the Board of Directors of both corporations must be Filipino citizens (R.A. No. 7042, Sec. 3[a], as amended) C. Place of Principal Business Test Residence of a corporation is the place where its principal office is located, as stated in its Articles of Incorporation. The place where the principal office of the corporation is to be located is one of the required contents of the articles of incorporation to be filed with the SEC (Hyatt Elevators v. Goldstar, G.R. No. 161026, 2005). Applied to determine whether a state has jurisdiction over the existence and legal character of a corporation, its capacity or powers, internal organization, capital structure, the rights and liabilities of directors, officers, and shareholders towards each other and to creditors and third persons. 4. CORPORATE JURIDICAL PERSONALITY General Rule: The Corporation has a separate and distinct juridical personality from its directors, Page 102 of 393 ATENEO CENTRAL BAR OPERATIONS 2020/21 officers, trustees and shareholders (Doctrine of Separate Juridical Personality). Exception: When the corporation is used as a cloak for fraud, illegality, or in other certain circumstances, the courts may disregard the separate and distinct personality of the corporation and treat the corporation as a mere collection of individuals undertaking business as a group (Doctrine of Piercing the Veil of Corporate Fiction). A. Doctrine of Separate Juridical Personality A corporation is a juridical entity with a legal personality separate and distinct from those acting for and on its behalf, and, in general, from the people comprising it; the obligations incurred by the corporation, acting through its directors, officers and employees are its sole liabilities (Santos v NLRC, G.R. No. 101699, 1996). While a share of stock represents a proportionate or aliquot interest in the property of the corporation, it does not vest the owner thereof with any legal right or title to any of the corporate property, his interest in such property being equitable or beneficial in nature. Shareholders are in no legal sense the owners of corporate property, which is owned by the corporation as a distinct legal person (Magsaysay-Labrador v CA, G.R. No. 58168, 1989). Corporate Liability i. Liability for Torts and Crimes a) On Torts A corporation is civilly liable in the same manner as natural persons for torts, because the rules governing the liability of a principal for a tort committed by an agent are the same whether the principal be a natural person or a corporation, and whether the agent be a natural or artificial person. That a principal is liable for every tort which he expressly directs or authorizes, is just as true of a corporation as a natural person (PNB v. CA, G.R. No. L-27155, 1978). A corporate officer who caused the tort act to be committed in the name of the corporation is also personally liable as a joint-tortfeasor. COMMERCIAL LAW The failure of the corporate employer to comply with a legal duty, such as under the Labor Code to grant separation pay to employees constitutes tort and its stockholder who was actively engaged in the management of the business should be held personally liable (Naguiat v. NLRC, G.R. No. 116123, 1997). A corporation can be held liable for the tortious acts of a corporate officer, in the absence of a prior express direction from the BOD, if such was connected to the business of the corporation. The remedy of the corporation is to recover damages against the acting corporate officer responsible for the tortious act. b) On Crimes General rule: Corporations cannot commit felonies under the RPC for it is incapable of the requisite intent to commit these crimes. It also cannot commit crimes that are punishable under special laws because crimes are personal in nature requiring personal performance of overt acts. A corporation cannot be arrested and imprisoned; hence, cannot be penalized for a crime punishable by imprisonment. Exceptions: If the crime is committed by a corporation, the directors, officers, employees or other officers thereof responsible for the offense shall be charged and penalized for the crime, precisely because of the nature of the crime and the penalty therefore. However, the corporation may be charged and prosecuted for a crime if the imposable penalty is fine (Ching v. Secretary of Justice, G.R. No. 164317, 2006). When a law expressly provides that a corporation may be proceeded against criminally, the responsible officer will be held personally liable for the crimes committed by the corporation. However, such liability will only attach to the officer when the corporation is directly required by law to do an act in a given manner, and the same law makes the person who fails to perform the act in the prescribed manner expressly liable criminally (Sia v. Court of Appeals, G.R. No. 108222, 1997). For example: 1) Under the Anti-Money Laundering Act, juridical persons are also defined as offenders. Page 103 of 393 ATENEO CENTRAL BAR OPERATIONS 2020/21 2) The RCC provides situations where corporations are liable for criminal sanctions: a) SEC. 161. Violation of Duty to Maintain Records, to Allow their Inspection or Reproduction; b) SEC. 165. Fraudulent Conduct of Business; c) SEC. 166. Acting as Intermediaries for Graft and Corrupt Practices; d) SEC. 167. Engaging Intermediaries for Graft and Corrupt Practices ii. Recovery of Moral Damages General rule: A corporation cannot recover moral damages as it cannot suffer physical suffering and mental anguish (Prime White Cement v IAC, G.R. No. L-68555, 1993). Exception: A corporation with a good reputation, if besmirched, is allowed to recover moral damages upon proof of existence of factual basis of damage (actual injury) and its causal relation (Crystal v. BPI, G.R. No. 172428, 2008). The following Constitutional rights apply to a corporation: a. Due process - The due process clause is universal in its application to all persons without regard to any differences of race, color, or nationality. Private corporations, likewise, are “persons” within the scope of the guaranty insofar as their property is concerned.” (Smith Bell & Co. v. Natividad, G.R. No. 15574, 1919). b. Equal protection of the law (Smith Bell & Co. v. Natividad, G.R. No. 15574, 1919) c. Unreasonable searches and seizures (Stonehill v. Diokno, G.R. No. L-19550, 1967). In organizing itself as a collective body, the corporation waives no constitutional immunities applicable to it. Its property cannot be taken without compensation; can only be proceeded against by due process of law; and is protected against unlawful discrimination (Bache & Co. (Phil.), Inc. v. Ruiz, G.R. No. 32409, 1971, citing Hale v. Henkel, 201 U.S. 43, 50 L.Ed. 652.). COMMERCIAL LAW Note: The right against self-incrimination has no application to juridical persons. (Bataan Shipyard v. PCGG, G.R. No. 75885, 1987) ● The right against self-incrimination refers only to testimonial compulsion; ● A corporation cannot testify; and ● The State can freely open the books of the corporation to ensure that it does not exceed its powers Implications of the Existence of the Corporate Veil or a Separate and Distinct Juridical Personality a) Controlling interest of and/or dealings in shareholdings Ownership of a majority of capital stock and the fact that majority of directors of a corporation are the directors of another corporation creates no employer-employee relationship with the latter’s employees (DBP v. NLRC, G.R. No. 86932, 1990; Francisco, et al. v. Mejia, G.R. No. 141617, 2001). The mere fact that a stockholder sells his shares of stock in the corporation during the pendency of a collection case against the corporation, does not make such stockholder personally liable for the corporate debt, since the disposing stockholder has no personal obligation to the creditor, and it is the inherent right of the stockholder to dispose of his shares of stock anytime he so desires (Remo, Jr. v. IAC, G.R. No. L-67626, 1989). Mere substantial identity of the incorporators of the two corporations does not necessarily imply fraud, nor warrant the piercing of the veil of corporate fiction. In the absence of clear and convincing evidence to show that the corporate personalities were used to perpetuate fraud, or circumvent the law, the corporations are to be treated as distinct and separate from each other (Laguio v. NLRC, G.R. No. 108936, 1996). b) Transaction amongst the corporation and stockholders The transfer of the corporate assets to the stockholder is not in the nature of a partition but is a conveyance from one party to another (Stockholders of F. Guanzon and Sons, Inc. v. Register of Deeds of Manila, G.R. No. L-18216, 1962). Page 104 of 393 ATENEO CENTRAL BAR OPERATIONS 2020/21 Note: A corporation may not be made to answer for acts or liabilities of its stockholders or those of the legal entities which it may be connected and vice-versa (ARB Constructions Co., Inc. v. Court of Appeals, G.R. No. 126554, 2000). c) Pertaining to privileges enjoyed The tax privileges enjoyed by a corporation do not extend to its stockholders. A corporation has a personality distinct from that of its stockholders, enabling the taxing power to reach the latter when they receive dividends from the corporation. It must be considered as settled in this jurisdiction that dividends of a domestic corporation which are paid and delivered in cash to foreign corporations as stockholders are subject to the payment of the income tax, the exemption clause to the charter [of the domestic corporation] notwithstanding. (Manila Gas Corporation. v. Collector of Internal Revenue, G.R. No.L-42780, 1936). d) Assumption as a corporate officer Being an officer or stockholder of a corporation does not by itself make one’s property also of the corporation, and vice-versa, for they are separate entities, and that shareholders are in no legal sense the owners of corporate property which is owned by the corporation as a distinct legal person (Good Earth Emporium, Inc. v. CA, G.R. No. 82797, 1991). The mere fact that one is president of the corporation does not render the property he owns or possesses the property of the corporation, since that president, as an individual, and the corporation, are separate entities (Cruz v. Dalisay, A.M. No. R-181-D, 1987). e) Properties, obligations and debts A corporation has no legal standing to file a suit for recovery of certain parcels of land owned by its members in their individual capacity, even when the corporation is organized for the benefit of the members (Sulo ng Bayan v. Araneta, Inc., G.R. No. L-31061, 1976). The corporate debt or credit is not the debt or credit of the stockholder nor is the stockholder’s debt or credit that of the corporation (Traders Royal Bank v. CA, G.R. No. L-78412, 1989). COMMERCIAL LAW shareholders in corporate property is purely inchoate (Saw v. CA, G.R. No. 90580, 1991). The interests of payees in promissory notes cannot be off-set against the obligations between the corporations to which they are stockholders absent any allegation, much less, even a scintilla of substantiation, that the parties interest in the corporation are so considerable as to merit a declaration of unity of their civil personalities (CKH Industrial and Development Corp. v. CA, G.R. No. 111890, 1997). Even when the foreclosure on the assets of the corporation was wrongful and done in bad faith, the stockholders of the corporation have no standing to recover for themselves moral damages. Otherwise, it would amount to the appropriation by, and the distribution to, such stockholders of part of the corporation’s assets before the dissolution of the corporation and the liquidation of its debts and liabilities (APT v. CA, G.R. No. 121171, 1998). Where real properties included in the inventory of the estate of a decedent are in the possession of and are registered in the name of the corporations, in the absence of any cogency to shred the veil of corporate fiction, the presumption of conclusiveness of said titles in favor of said corporations should stand undisturbed (Lim v. CA, G.R. No. 124715, 2000). f) Third-parties to corporate acts The fact that respondents are not stockholders of the disputed corporations does not make them non-parties to the case. In this case, it is alleged that the aforementioned corporations are mere alter egos of the directors-petitioners, and that the former acquired the properties sought to be reconveyed to FGSRC in violation of directorspetitioners’ fiduciary duty to FGSRC. The notion of corporate entity will be pierced or disregarded and the individuals composing it will be treated as identical if, as alleged in the present case, the corporate entity is being used as a cloak or cover for fraud or illegality; as a justification for a wrong; or as an alter ego, an adjunct, or a business conduit for the sole benefit of the stockholders (Gochan v. Young, G.R. No. 131889, 2001). Stockholders have no personality to intervene in a collection case covering the loans of the corporation on the ground that the interest of Page 105 of 393 ATENEO CENTRAL BAR OPERATIONS 2020/21 B. Doctrine of Piercing the Veil of Corporate Fiction Under certain circumstances, the courts may disregard the separate and distinct personality of the corporation from its members or stockholders and treat the corporation as a mere collection of individuals or an aggregation of persons undertaking business as a group such as when the corporate legal entity is used as a cloak for fraud or illegality (Kukan Int’l v Reyes, G.R. No. 182729, 2010). It is an equitable doctrine used as a last resort only when the objective is to hold the officers and/or stockholders liable. Thus, in one case, it cannot be applied in order to declare a foreclosure proceeding a nullity (Umali v. CA, GR No. 89561, 1990). Being merely an equitable remedy, employment of the piercing doctrine can only be for the “protection of the interests of innocent third persons dealing with the corporate entity which the law aims to protect by this doctrine” (Traders Royal Bank v. Court of Appeals, G.R. No. 93397, 1997). Classification of piercing cases: a. Fraud piercing – when a corporate entity is used to commit fraud or justify a wrong or to defend a crime. b. Alter-ego piercing – when a corporate entity is used to defeat public convenience or is merely a farce since the corporation is merely the alter ego, business conduit, or instrumentality of a person or another entity. c. Equity cases – when piercing the corporate fiction is necessary to achieve justice or equity. Note: The three cases may appear together in one application (R.F. Sugay & Co. v. Reyes, G.R. No. L-20451, 1964). i. Grounds for application of the different types of piercing For Fraud Cases: 1. There must have been fraud or an evil motive in the affected transaction, and the mere proof of control of the corporation by itself would not authorize piercing; and 2. The main action should seek for the enforcement of pecuniary claims COMMERCIAL LAW pertaining to the corporation corporate officers or stockholders. against Example cases: a) Where a stockholder, who has absolute control over the affairs of the corporation, entered into a contract with another corporation through fraud and false representations, such stockholder shall be liable solidarily with co-defendant corporation even when the contract sued upon was entered into on behalf of the corporation (NAMARCO v. Associated Finance Co.,G.R. No. L-20886, 1967). b) Piercing is allowed where the corporation is used as a means to appropriate a property by fraud which property was later resold to the controlling stockholders. (Heirs of Ramon Durano, Sr. v. Uy, G.R no.136456, 2000). c) Fraud and bad faith on the part of certain corporate officers or stockholders may warrant the piercing of the veil of corporate fiction so that the said individual may not seek refuge therein, but may be held individually and personally liable for his or her actions. (Lafarge Cement Phils., Inc. v. Continental Cement Corp., G.R. no. 155173, 2004) For Alter-ego Cases: ● The doctrine applies in this case even in the absence of evil intent; it applies because of the direct violation of a central corporate law principle of separating ownership from management. ● The doctrine in such cases is based on estoppel: if stockholders do not respect the separate entity, others cannot also be expected to be bound by the separate juridical entity. ● Piercing in alter ego cases may prevail even when no monetary claims are sought to be enforced against the stockholders or officers of the corporation. ii. Tests for Applicability of the Doctrine of Piercing the Veil of Corporate Fiction: (CUP) a. Control – not mere stock control but Complete Domination – not only of finances, but of policy and business practice in respect to the transaction attacked and must have been such that the corporate entity as to this transaction had at the time no separate mind, will or existence of its own. b. Such control must have been Used by the defendant to commit a fraud or wrong to Page 106 of 393 ATENEO CENTRAL COMMERCIAL LAW BAR OPERATIONS 2020/21 c. perpetuate the violation of a statutory or other positive legal breach of duty, or a dishonest and an unjust act in contravention of the plaintiff’s legal right; and, The said control and breach of duty must have Proximately caused the injury or unjust loss complained of (Concept Builders Inc. v. NLRC, 108734, 1996). These were expanded as three-pronged tests: The first prong is the "instrumentality" or "control" test. This test requires that the subsidiary be completely under the control and domination of the parent corporation or shareholder. It seeks to establish whether the corporation has no autonomy and the parent corporation or shareholder "is operating the business directly for itself or themselves." The second prong is the "fraud" test. This test requires that the conduct in using the corporation be unjust, fraudulent or wrongful. The third prong is the "harm" test. This test requires the plaintiff to show that the defendant’s control, exerted in a fraudulent, illegal or otherwise unfair manner toward it, caused the harm suffered (PNB v. Hydro Resources Contractors Corporations, G.R. no. 167530, 2013). Factors to Consider in cases of Parent and Subsidiary corporations in Alter-ego Piercing: ● The parent corporation owns all or most of the capital of the subsidiary. ● The parent and subsidiary corporations have common directors or officers. ● The parent company finances the subsidiary. ● The parent company subscribed to all the capital stock of the subsidiary or otherwise caused its incorporation. ● The subsidiary has grossly inadequate capital. ● The parent corporation pays the salaries and other expenses or losses of the subsidiary. ● The subsidiary has substantially no business except with the parent corporation or no assets except those conveyed to or by the parent corporation. ● The papers of the parent corporation or in the statements of its officers, the subsidiary is described as a department or subdivision of the parent corporation, or its business or financial responsibility is referred to as the parent corporation’s own. ● ● ● The parent corporation uses the property of the subsidiary as its own. The directors or executives of the subsidiary do not act independently in the interest of the subsidiary but take their orders from the parent corporation. The formal legal requirements of the subsidiary are not observed (Phil. National Bank v. Ritratto Group, Inc., GR No. 142616, 2001). Note: Mere ownership by a single stockholder or by another corporation of all or substantially all of the capital stock of the corporation does not justify the application of the doctrine (Francisco v. Mejia, G.R. No. 141617, 2001). Example Cases: a) Where the stock of a corporation is owned by one person whereby the corporation functions only for the benefit of such individual owner, the corporation and the individual should be deemed the same (Arnold v. Willets and Patterson, Ltd., G.R. No. L-20214, 1923). b) When the corporation is merely an adjunct, business conduit or alter ego of another corporation, the fiction of separate and distinct corporation entities should be disregarded (Tan Boon Bee & Co. v. Jarencio, G.R. No. L-41337, 1988). c) Employment of same workers; single place of business, etc. (La Campana Coffee Factory v. Kaisahan ng Manggagawa, G.R. No. L5677, 1953). d) Use of nominees (Marvel Building v. David, G.R. No. L-508, 1951) e) Avoidance of tax. (Yutivo Sons Hardware v. Court of Tax Appeals, G.R. No. L-13203, 1961; Liddell& Co. v. Collector of Internal Revenue, G.R. No. L-9687, 1961). f) Mixing of bank deposit accounts. (Ramirez Telephone Corp. v. Bank of America, G.R. No. L-22614, 1969). g) Where it appears that two business enterprises are owned, conducted, and controlled by the same parties, both law and equity will, when necessary to protect the rights of third persons, disregard the legal fiction that two corporations are distinct entities and treat them as identical (Sibagat Timber Corp. v. Garcia, G.R. No. 98185, 1992) h) Thinly-capitalized corporations (McConnel v. Court of Appeals, G.R. No. L-10510, 1961). Page 107 of 393 ATENEO CENTRAL BAR OPERATIONS 2020/21 i) j) Parent-subsidiary relationship. (Koppel (Phil.), Inc. v. Yatco, G.R. No. L-47673,1946; Philippine Veterans Investment Development Corporation v. CA, G.R. No. 85266, 1990) Affiliated companies (Guatson International Travel and Tours, Inc. v. NLRC, G.R. No. 100322, 1994) Summary of Probative Factors (Philippine National Bank vs. Ritratto Group, Inc., et al., G.R. No. 142616, 2001; Concept Builders, Inc. v. NLRC, G.R. No. 108734, 1996): Whether the separate personality of the corporation should be pierced depends on questions of facts, appropriately pleaded. Mere allegation that a corporation is the alter ego of the individual stockholders is insufficient. The presumption is that the stockholders or officers and the corporation are distinct entities. The burden of proving otherwise is on the party seeking to have the court pierce the veil of corporate entity (Ramoso v. CA, G.R. No. 117416, 2000). For Equity Cases: These are cases, where there is no fraud or alter ego circumstances that can warrant the piercing of the corporate veil. This mainly used to render justice in the situation at hand, or to brush aside technical defenses. COMMERCIAL LAW Union-PTGWO v. Calica, G.R. No. 96490, 1992). Note: However, piercing in alter ego cases may prevail even when no monetary claims are sought to be enforced against the stockholders or officers of the corporation. (e.g. piercing for other purposes such as laborer’s rights) (d) Piercing is forbidden when the personal obligations of an individual are sought to be enforced against the corporation (Robledo v. NLRC, G.R. No. 110358, 1994). Note: As an exception to this rule, the Supreme Court allowed such piercing by applying the concept of “reverse piercing”. In a traditional veil-piercing action, a court disregards the existence of the corporate entity so a claimant can reach the assets of a corporate insider. In a reverse piercing action, however, the plaintiff seeks to reach the assets of a corporation to satisfy claims against a corporate insider." The veil may not always be pierced, especially in the following circumstances: Reverse piercing has two (2) types: 1. Outsider reverse - piercing occurs when a party with a claim against an individual or corporation attempts to be repaid with assets of a corporation owned or substantially controlled by the defendant. 2. Insider reverse piercing - the controlling members will attempt to ignore the corporate fiction in order to take advantage of a benefit available to the corporation, such as an interest in a lawsuit or protection of personal assets. (International Academy of Management and Economics vs. Litton and Company, G.R. No. 191525, 2017). (a) Piercing is a remedy of last resort and is not available when other remedies are still available (Umali v. CA, G.R. No. 89561, 1990). (b) One cannot successfully invoke the piercing doctrine when it was proven that the act done was contrary to the existing rules, which were well-known to the officers of the one invoking it (Traders Royal Bank v. Court of Appeals, G.R. No. 93397, 1997). (c) Piercing is forbidden unless the remedy sought is to make the stockholder, officer or another corporation pecuniarily liable for corporate debts (Umali v. CA, G.R. No. 89561, 1990; Indophil Textile Mill Workers (e) To disregard the separate juridical personality of a corporation, the wrongdoing must be clearly and convincingly established. It cannot be presumed (DBP vs. CA, G.R. No. 126200, 2001). (f) Piercing of the veil of corporate fiction is not allowed when it is resorted to justify under a theory of co-ownership the continued use and possession by stockholders of corporate properties (Boyer-Roxas v. Court of Appeals, G.R. No. 100866, 1992). (g) The piercing doctrine cannot be availed of in order to dislodge from the jurisdiction of the SEC the petition for suspension of payments filed under Section 5(e) of Pres. For example: a) When used to confuse legitimate issues (Telephone Engineering and Service Co., Inc. V. WCC, G.R. No. L-28694, 1981). b) When used to raise issues relating only to technicalities (Emilio Cano Ent. v. CIR, G.R. No. L-20502, 1965). Page 108 of 393 ATENEO CENTRAL COMMERCIAL LAW BAR OPERATIONS 2020/21 (h) (i) (j) (k) Decree No. 902-A, on the ground that the petitioning individuals should be treated as the real petitioners to the exclusion of the petitioning corporate debtor (Union Bank v. CA, G.R. No. 131729, 1998). Changing of the petitioner’s subsidiary liabilities by converting them to guarantors of bad debts cannot be done by piercing the veil of corporate identity (Ramoso v. CA, G.R. No. 117416, 2000) Piercing doctrine is meant to prevent fraud, and cannot be employed to perpetrate fraud or a wrong (Araneta, Inc. v. Tuason, G.R. No. L-2886, 1952). Corporate persons are entitled to due process protection. Thus, failure to implead a corporation in a suit for recovery of illgotten wealth against its stockholders cannot bind the corporation itself; otherwise, its fundamental right to due process will be violated. (COCOFED v. Republic, G.R. No. 177857-58, 2016) Mere ownership of all or nearly all of the capital stocks of a corporation is not in itself a sufficient reason for disregarding the fiction of separate corporate personalities. The probate court applied doctrine of piercing the corporate veil since Rosario had no other properties that comprise her estate other than her shares. Although the intention to protect the shares from dissipation is laudable, it is still an error to order tenants to remit payments to the estate. Also, the court has not acquired jurisdiction over Primrose and its properties. Piercing applies to the determination of liability not of jurisdiction. It is not available to confer jurisdiction over a party not impleaded in a case. (Mayor v. Tiu, G.R. No. 203770, 2016) They must: a. Be a natural person, partnership, association or corporation, singly or jointly with others but not more than fifteen (15)5 ; i. may be composed of any combination of natural person/s, SEC-registered partnership/s, SEC-registered domestic corporation/s or associations, and foreign corporation/s (SEC MC no. 16-19) b. If natural persons, be of Legal Age; c. Each owns or subscribes to at least one share for stock corporations and be a member for non-stock corporations. Note: Natural persons who are licensed to practice a profession, and partnerships or associations organized for the purpose of practicing a profession, shall not be allowed to organize as a corporation (for the practice of such profession) unless otherwise provided under special laws.(Sec. 10) 1) Incorporators4 – Incorporators are those stockholders or members mentioned in the articles of incorporation as originally forming and composing the corporation and who are signatories thereof (Sec. 5). Additional Guidelines issued by the SEC(SEC MC no. 16-19): 1) For Partnership as Incorporators: ● Application for registration must be accompanied with an affidavit, executed by all the partners, indicating that they authorized the partnership to be an incorporator and have designated one of the partners to sign the incorporation documents. ● Partnerships under Dissolved or Expired status with the SEC shall not be authorized to become an incorporator. 2) For Domestic Corporations or Associations as Incorporators: ● Its investment in the new corporation must be approved by a majority of the board of directors or trustees ratified by the stockholders representing at least twothirds (⅔) of the outstanding capital stock, or at least two-thirds (⅔) of the members in cases of nonstock corporations. ● A Directors'/Trustees' Certificate or a Secretary's Certificate, indicating the 4 5 5. CAPITAL STRUCTURE A. Number and Qualifications of Incorporators Note: Amendments were introduced by the RCC removing the qualifications to be natural persons, and majority must be residents of the Philippines; A corporation with a single stockholder is considered either as an One Person Corporation or a Corporation Sole. Page 109 of 393 ATENEO CENTRAL COMMERCIAL LAW BAR OPERATIONS 2020/21 necessary approvals, as well as the authorized signatory to the incorporation documents, shall be executed under oath and submitted by the applicant. ● Domestic corporations under "delinquent", "suspended", "revoked" or "expired" status with the SEC shall not be authorized to become an incorporator. 3) For Foreign Corporations as incorporators: ● The application for registration must be accompanied by a copy of a document duly authenticated by a Philippine Consulate or with an apostille affixed thereto, authorizing the foreign corporation to invest in the corporation being formed and specifically naming the designated signatory on behalf of the foreign corporation. B. Minimum Capital Stock And Subscription Requirements Stock corporations shall not be required to have a minimum capital stock, except as otherwise specifically provided by special law (Sec 12). 6 C. Corporate Term (Sec. 11) New Rule: General rule: A corporation shall have perpetual existence, Exception: Unless its articles of incorporation provide otherwise. For Corporations with certificates of incorporation issued prior to the effectivity of this Code, and which continue to exist shall have perpetual existence, unless: ● upon a vote of its stockholders representing a majority of its outstanding capital stock ● the corporation notifies the SEC that it elects to retain its specific corporate term pursuant to its articles of incorporation. Any change in the corporate term under this section is without prejudice to the appraisal right of dissenting stockholders in accordance with the provisions of this Code. General Rule: A corporate term for a specific period may be extended or shortened by amending the articles of incorporation. Limitation: No extension may be made earlier than three (3) years prior to the original or subsequent expiry date(s) Exception: There are justifiable reasons for an earlier extension as may be determined by the SEC. Effects: If extended: Such extension of the corporate term shall take effect only on the day following the original or subsequent expiry date(s). If not extended or expired: Upon expiration of the period fixed in the articles of incorporation, in the absence of compliance with the legal requisites for the extension of the period, the corporation ceases to exist and is dissolved ipso facto (PNB v. CFI Rizal, G.R. No. 63201, 1992) Doctrine of Relations or Relating Back Doctrine Where the delay in affecting the amendment is due to the neglect of the officer with whom the certificate is required to be filed, or to a wrongful refusal on his part to receive it, the same will be treated as having been filed before the expiry date. The doctrine does not apply where the delay is attributable to the corporation (Alhambra Cigar v. SEC, G.R. No. L-23606, 1968) Revival: If a corporation’s term has expired, it may apply for a revival of its corporate existence, together with all the rights and privileges under its certificate of incorporation and subject to all of its duties, debts and liabilities existing prior to its revival. Upon approval by the SEC, the corporation shall be deemed revived and a certificate of revival of corporate existence shall be issued, giving it perpetual existence, unless its application for revival provides otherwise. Who may file for petition for revival of corporate existence: Extension: 6 The RCC completely removed sec. 13 of the old corporation code which provided for the 25-25 rule upon incorporation. Page 110 of 393 ATENEO CENTRAL BAR OPERATIONS 2020/21 1) Generally, a corporation whose term has expired; 2) An Expired Corporation whose Certificate of Registration has been revoked for non-filing of reports, 3) An Expired Corporation whose Certificate of Registration has been suspended Note for 2) & 3): it shall file the proper Petition to Lift its Suspended Status, which may be incorporated in its Petition to Revive, and must settle the corresponding penalties thereof 4) An Expired Corporation whose corporate name has already been validly re-used, and is currently being used, by another existing corporation duly registered with the SEC, provided that the former shall change its corporate name within thirty (30) days from the issuance of its Certificate of Revival of Corporate Existence. (SEC Memo. Circ. no. 23-19) Who may not file? 1) An Expired Corporation which has completed the liquidation of its assets; 2) A corporation whose Certificate of Registration has been revoked for reasons other than non-filing of reports; 3) A corporation dissolved by virtue of Sections 6(c) and 6(d) of SEC Reorganization Act; 4) An Expired Corporation which already availed of re-registration or other memorandum circulars issued by the SEC pertaining to re-registration, except when: a) The re-registered corporation has given its consent to the Petitioner to use its corporate name, and has undertaken to undergo voluntary dissolution immediately after the issuance of the Petitioner's Certificate of Revival; or b) The re-registered corporation has given its consent to the Petitioner to use its corporate name, and has undertaken to change its corporate name immediately after the issuance of the Petitioner's Certificate of Revival. (SEC Memo. Circ. no. 23-19) No application for revival of certificate of incorporation of following corporations shall be approved by the SEC unless accompanied by COMMERCIAL LAW a favorable recommendation of the appropriate government agency: 1) Banks, 2) Banking and quasi banking institutions, 3) Preneed, Insurance and trust companies, 4) Non-stock savings and loan associations (NSSLAs), 5) Pawnshops, 6) Corporations engaged in money service business, and 7) Other financial intermediaries (Sec. 11) Required Vote to Initiate Revival: The required number of votes for the Revival of an Expired Stock Corporation is at least a majority vote of the board of directors, and the vote of at least majority of the outstanding capital stock. For nonstock corporations, at least a majority vote of the board of trustees, and the vote of at least majority of the members. (SEC MC no. 23-19) D. Classes of Shares of Stock (Sec. 6) The classification of shares, their corresponding rights, privileges, or restrictions, and their stated par value, if any, must be indicated in the articles of incorporation. Doctrine of Equality of Shares Each share shall be equal in all respects to every other share, except as otherwise provided in the articles of incorporation and in the certificate of stock. (sec. 6) i. Common and Preferred shares Common shares are also called ordinary shares and they share in profits pro-rata Preferred shares may be preferred (a) as to dividends, or (b) as to distribution of assets during liquidation, or (c) as to any other manner stated in the Articles, not violative of the Corp Code. If authorized by Articles, Board may fix terms. It is ALWAYS with a stated par value. ii. Par Value and No-Par Value ● Par value shares - with a pre-stated amount or denomination ● Non- par value - no pre-stated value Page 111 of 393 ATENEO CENTRAL BAR OPERATIONS 2020/21 Non-par value shares are deemed fully paid and non-assessable so holders of such are not liable to the corporation or its creditors. The consideration received is treated as capital and cannot be declared as dividends. Because they are vested with public interest, the following types of corporations may only issue par value shares: a. Banks b. Trust Companies c. Insurance Companies d. Public Utilities e. Building and Loan Associations. iii. Voting and Non- Voting Shares ● Voting share with complete voting rights ● Non - voting shares are preferred or redeemable shares that have limited voting rights. Non-Voting Shares Have Voting Rights In The Following Matters: a. Amendment of Articles b. Adoption/ Amendment of By- Laws c. Sale, lease, exchange, mortgage, pledge or dispose of all or substantially all of corporate property d. Incur, create, increase bonded indebtedness e. Increase, decrease capital stock f. Merger/ consolidation with another corporation g. Investment of funds in another corporation h. Dissolution of corporation Other Classes of Shares: (Secs. 7, 8, 9) a. Founder’s shares – Given rights and privileges not enjoyed by owners of other stocks; exclusive right to vote/be voted in the election of directors shall not exceed 5 years. Note: such exclusive right shall not be allowed if its exercise will violate the “Anti-Dummy Law”; the “Foreign Investments Act of 1991”; and other pertinent laws. Since Section 7 makes no distinction (and is found under General Provisions), then it must mean that founders’ shares may be applied to both stock and nonstock corporations. Although [Section 88 of the Revised Corporation Code] allows in a nonstock corporation to limit, broaden COMMERCIAL LAW or deny the right of members of any class, the specific provision of Section 7 to founders’ share must prevail, and that the nonstock corporation can lawfully suspend or define the voting rights of its members, but with respect to founders’ share, the exclusive right to vote and be voted for of the founders’ share should expire after five years from the approval of the SEC. (Forest Hills and Country Club, Inc. v. Kings Properties Corp., G.R. No. 212833, 2019). b. Redeemable shares – Expressly provided in articles; may be purchased/taken up upon expiration of the period of said shares purchased whether or not there are unrestricted retained earnings; may be deprived of voting rights. c. Treasury stocks – stocks previously issued and fully paid for and reacquired by the corporation through lawful means (purchase, donation, etc.); not entitled to vote and no dividends could be declared thereon as corporations cannot declare dividends to itself. Escrow shares – those held by a third person to be released only upon the performance of a condition or the happening of a certain event contained in the agreement. Preferred cumulative participating share of stock - Share entitling its holder to preference in the payment of dividends ahead of common stockholders and to be paid the dividends due for prior years and to participate further with common stockholders in dividend declarations. Over-Issued Stock – Stock issued in excess of authorized capital stock; null and void. 6. INCORPORATION AND ORGANIZATION A. Promoter A person who, acting alone or with others, takes initiative in founding and organizing the business or enterprise of the issuer and receives consideration therefor. (Securities Regulation Code, Sec. 3.10. [R.A. 8799]) i. Liability of a Promoter General rule: Promoter is personally liable in the event the corporation is not duly incorporated. Page 112 of 393 ATENEO CENTRAL BAR OPERATIONS 2020/21 Exception: Investors who were not the “moving spirit” behind the organization of the corporation, but who were merely convinced to invest in the proposed corporate venture on the basis of the feasibility study undertaken, are not liable personally with the corporation for the cost of such feasibility study.(Caram, Jr. v. CA, G.R. No. L-48627, 1987) ii. Liability of Corporation for Promoter’s Contracts General Rule: Corporation is not bound to a contract made by a promoter before its incorporation (Cagayan Fishing v. Sandiko, G.R. No. L-43350, 1937) Exceptions: a) Adopts or ratifies the contract; or b) Accepts its benefits with knowledge of the terms thereof (Rizal Light v. Morong, G.R. No. L-20993, 1968) Ratification is the key element in upholding the validity and enforceability of promoter's contracts. Without ratification by a corporation after its due incorporation, a contract entered into on behalf of a corporation yet to be organized or still in the process of incorporation is void as against the corporation (Cagayan Fishing Development Co., Inc. v. Teodoro Sandiko, G.R. No. L-43350, 1937). Although a franchise may be treated as a contract, 1. The eventual incorporation of the applicant corporation after the grant of the franchise; and 2. Its acceptance of the franchise as shown by its action in prosecuting the application filed with the SEC for the approval of said franchise, …not only perfected a contract between the respondent municipality and Morong Electric but cured the deficiency in the application of Morong Electric (Rizal Light & Ice Co., v. Municipality of Morong, Rizal, G.R. No. L-20993, 1968). B. Subscription Contracts Any contract for the acquisition of unissued stock shall be deemed a subscription, notwithstanding the fact that the parties refer to it as a purchase or some other contract. (Sec. 59) COMMERCIAL LAW C. Pre-incorporation subscription (Sec. 60) It is entered into before the incorporation and irrevocable for a period of six (6) months from the date of subscription unless: i. All other subscribers consent to the revocation, or ii. The corporation failed to materialize after 6 months or within the stipulated period. It cannot be revoked after filing the Articles of Incorporation with the SEC. In contrast Post-incorporation subscription – entered into after incorporation, such as for the unsubscribed portion of the authorized capital stock and for the purchase of increased capital stocks after an amendment of the article of incorporation. D. Consideration for Stocks (Sec. 61) Stocks shall not be issued for a consideration less than the par or issued price thereof. Consideration for issuance of stock may be by any or a combination of any two or more of the following: a. Cash actually paid b. Property (tangible or intangible) actually received and necessary or convenient for the corporation’s use c. Labor performed or service actually rendered to the corporation d. Debts incurred previously by the corporation (for subscriptions after incorporation) e. Amounts from unrestricted dividends (for declaration of stock dividends) f. Outstanding shares exchanged in reclassification or conversion g. Shares of stock in another corporation; and/or h. Other generally accepted forms of consideration. Other Rules pertaining to consideration of stocks a. Where the consideration is other than actual cash, or consists of intangible property such as patents of copyrights, the valuation thereof shall initially be determined by the incorporators or the board of directors, subject to approval by the SEC. Page 113 of 393 ATENEO CENTRAL COMMERCIAL LAW BAR OPERATIONS 2020/21 b. No issuance of shares on promissory notes or future services. c. The same considerations under sec. 61 whenever applicable are to be used for bonds issued by the corporation. d. The issued price of no par value shares is the amount fixed: i. In the Articles ii. By the Board if authorized by its Articles or By-Laws, or iii. if not so fixed, by the stockholders representing the majority of the outstanding capital stock (Sec. 61) Note: A special stipulation contained in a subscription to corporate stock which, if valid, would lessen the capital of the company and relieve the subscriber from liability to be sued upon the subscription, is illegal (National Exchange v. Dexter, G.R. No. L-27872, 1928). c. d. e. f. g. h. E. Articles of Incorporation Nature and Function of Articles The Articles of Incorporation is a basic contract document in Corporate Law which defines the charter of the corporation. Section 13 of the Corporation Code provides that the Articles of Incorporation do not become binding as the charter of the corporation unless they have been filed with and registered with the SEC. Note: The Articles of Incorporation defines the contractual relationships between the State and the corporation, the stockholders and the State, and between the corporation and its stockholders (Lanuza v. CA, G.R. No. 131394, 2005). i. Contents (Sec. 13) All corporations shall file with the SEC articles of incorporation in any of the official languages, duly signed and acknowledged or authenticated, in such form and manner as may be allowed by the SEC, containing substantially the following matters, except as otherwise prescribed by this Code or by special law: a. The name of the corporation; b. The specific purpose or purposes for which the corporation is being incorporated. Where a corporation has more than one stated purpose, the articles of incorporation shall state which is the primary purpose and which is/are the secondary purpose or purposes: Provided, That a non-stock corporation may i. j. not include a purpose which would change or contradict its nature as such; The place where the principal office of the corporation is to be located, which must be within the Philippines; The term for which the corporation is to exist, IF not elected the perpetual existence; The names, nationalities and residences of the incorporators; The number of directors or trustees, which shall not more than fifteen (15); The names, nationalities and residences of persons who shall act as directors or trustees until the first regular directors or trustees are duly elected and qualified in accordance with the Corporation Code; If it be a stock corporation, the amount of its authorized capital stock in lawful money of the Philippines, the number of shares into which it is divided, and in case the share are par value shares, the par value of each, the names, nationalities and residences of the original subscribers, and the amount subscribed and paid by each on his subscription, and if some or all of the shares are without par value, such fact must be stated; If it be a non-stock corporation, the amount of its capital, the names, nationalities and residences of the contributors and the amount contributed by each; and Such other matters as are not inconsistent with law and which the incorporators may deem necessary and convenient. An arbitration agreement may be provided in the articles of incorporation pursuant to Section 181 of this Code. Note: The articles of incorporation and applications for amendments thereto may be filed with the SEC in the form of an electronic document, in accordance with the SEC’s rules and regulations on electronic filing. Amendments Requirement for Amending Articles of Incorporation (Sec. 15) a. A legitimate purpose for the amendment; b. Majority vote of directors or trustees and the vote or written assent of the stockholders representing at least two-thirds (2/3) of the Page 114 of 393 ATENEO CENTRAL COMMERCIAL LAW BAR OPERATIONS 2020/21 outstanding capital stock, without prejudice to the appraisal right of dissenting stockholders if available, or if it be a non-stock corporation, two-thirds (2/3) of the members. c. The original and amended articles together shall contain all provisions required by law to be set out in the articles of incorporation. d. Indication in the articles, by underscoring, the change or changes made. e. A copy of amended articles duly certified under oath by the corporate secretary and a majority of the directors or trustees stating the fact that said amendment or amendments have been duly approved by the required vote of stockholders or members, as the case may be. When would take effect: a. The amendments shall take effect upon their approval by the SEC or b. From the date of filing with the said Commission, if not acted upon within six (6) months from the date of filing for a cause not attributable to the corporation. Grounds for Rejecting Incorporation or Amendment to Articles of Incorporation (Sec. 16) a. Not in prescribed form; b. Illegal purpose; c. False Treasurer’s affidavit; and d. Non-compliance with required Filipino stock ownership. The SEC shall give the corporation a reasonable time to correct or modify objectionable portions. Note: A favorable recommendation of the appropriate government agency to the effect that such article or amendment is in accordance with law is required in the following types of corporation: ● Banks, banking and quasi-banking institutions, ● Preneed, insurance and trust companies, ● Non-stock savings and loan associations (NSSLAS), ● Pawnshops, and ● Other financial intermediaries ii. Non-Amendable Items: 1) Names of incorporators 2) Names of incorporating directors/trustees 3) Names of original subscribers to capital stock and subscribed and paid-up capital 4) Treasurer-in-trust elected by original subscribers 5) Members who contributed to the initial capital of non-stock corporation 6) Witnesses and acknowledgments F. Corporate Name (Sec. 17) A corporation’s right to use its corporate and trade name is a property right, it is a right in rem which it may assert or protect against the whole world in the same manner as it may protect its tangible property against trespass or conversion (Philips Export v. CA, G.R. No. 96161, 1992) Statutory Limitations on Use of Corporate Name (NPC) No corporate name shall be allowed by the SEC if: a. it is Not distinguishable from that already reserved or registered for the use of another corporation, b. if such name is already Protected by law, or c. when its use is Contrary to existing law, rules and regulations. Not Distinguishable A name is not distinguishable even if it contains one or more of the following: a) The word “corporation”, “company”, “incorporated”, “limited”, “limited liability”, or an abbreviation of one of such words; and b) Punctuations, articles, conjunctions, contractions, prepositions, abbreviations, different tenses, spacing, or number of the same word or phrase. Effects if Statutory Limitations are Violated: a) SEC may summarily order the corporation to immediately cease and desist from using such name and require the corporation to register a new one. b) The SEC shall also cause the removal of all visible signages, marks, advertisements, labels, prints and other effects bearing such corporate name. Page 115 of 393 ATENEO CENTRAL COMMERCIAL LAW BAR OPERATIONS 2020/21 c) Upon the approval of the new corporate name, the SEC shall issue a certificate of incorporation under the amended name. Note: If the corporation fails to comply with the SEC’s order, the SEC may hold the corporation and its responsible directors or officers in contempt and/or hold them administratively, civilly and/or criminally liable under this Code and other applicable laws and/or revoke the registration of the corporation.(Sec. 17) Other Limitations on the Use of Corporate Name: a) The Corporate Name of the following entities shall include: i. For a Corporation- "Corporation" or "Incorporated," or the abbreviations "Corp." or "Inc." ii. For One Person Corporations“OPC” iii. Partnerships1) General Partnerships "Company" or "Co." 2) limited partnership, the word "Limited" or "Ltd." 3) Professional partnership - "Company," "Associates," or "Partners," or other similar descriptions; iv. For Foundations- “Foundation” v. For engaging in microfinance activities "Microfinance" or "Microfinancing" vi. Other words or phrases, authorized by law or other rules and regulations, to be used by specific corporations or partnerships b) A term that describes the business of a corporation in its name should refer to its primary purpose. If there are two such terms, the first should refer to the primary purpose and the second to the secondary purpose. c) If the name is similar to a registered corporation or partnership, the applicant shall add distinctive word/s to the proposed name to remove the similarity from the registered name Note: This shall not be allowed if the registered name is coined or unique unless the board of directors or majority d) e) f) g) h) i) j) of the partners gives its consent to the applied name. A name that consists solely of special symbols, punctuation marks or specially designed characters shall not be registered. The name of an internationally known foreign corporation cannot be used by a domestic corporation unless it is its subsidiary and the parent corporation has consented to such use. A name written in a foreign language, even if registered in another country, shall not be registered if the name violates good morals, public order or public policy The name of a local geographical unit, site or location cannot be used as a corporate or partnership name unless it is accompanied by a descriptive word or phrase. The name of a corporation or partnership that has been dissolved or whose registration has been revoked shall not be used by another corporation or partnership within five (5) years from the approval of dissolution or five (5) years from the date of revocation, unless its use has been allowed at the time of the dissolution or revocation by the stockholders, members or partners who represent a majority of the outstanding capital stock or membership of the dissolved corporation or partnership, as the case may be. A corporate or partnership name, which was previously used but become the subject of amendment, shall not be re-registered or used by another corporation or partnership for a period of three (3) years from the date of the approval of the adoption of the new corporate or partnership name. An earlier period may be allowed for the registration or use of the former corporate or partnership name provided that the corporation or partnership, which previously owned the used corporate or partnership name, gives its consent. Names of absorbed/constituent corporation may not be used unless it is the surviving corporation intending to use the said absorbed/constituent corporate name, Page 116 of 393 ATENEO CENTRAL COMMERCIAL LAW BAR OPERATIONS 2020/21 or that another corporation may use the names of absorbed/constituent corporation if consent of the surviving corporation is obtained Doctrine of Secondary Meaning General Rule: A corporation whose corporate name is a word or phrase which is generally descriptive or geographical cannot prevent another corporation, which uses the same or phrase as its corporate name, from using such. Exception: A word or phrase originally incapable of exclusive appropriation with reference to an article on the market because geographically or otherwise descriptive, might nevertheless have been used so long and so exclusively by one producer with reference to his article that, in that trade and to that branch of the purchasing public, the word or phrase has come to mean that the article was his product. (Lyceum v. CA, G.R. No. 101897, 1993) Change of Corporate Name A corporation may change its name by the amendment of its articles of incorporation, but the same is not effective until approved by the SEC (Philippine First Insurance Co. v. Hartigan, G.R. No. L-26370, 1970). A change in the corporate name does not make a new corporation, and whether affected by special act or under a general law, has no effect on the identity of the corporation, or on its property, rights, or liabilities (Republic Planters Bank v. CA, G.R. No. 93073, 1992). holding that a corporation may be sued under the name by which it makes itself known to its workers (Pison-Arceo Agricultural Development Corp. v. NLRC, G.R. No. 117890, 1997). To determine the existence of confusing similarity in corporate names, the test is whether the similarity is such as to mislead a person, using ordinary care and discrimination. In so doing, the court must examine the record as well as the names themselves. Proof of actual confusion need not be shown. It suffices that confusion is probably or likely to occur. (Indian Chamber of Commerce Phils, Inc. v. Filipino Indian Chamber of Commerce in the Philippines, Inc., G.R. No. 184008, 2016) G. Registration, Incorporation and Commencement of Corporate Existence (Sec. 18) Registration A person or group of persons desiring to incorporate shall submit the intended corporate name to the SEC for verification. If the SEC finds that the name is distinguishable from a name already reserved or registered for the use of another corporation, not protected by law and not contrary to law, rules and regulations, the name shall be reserved in favor of the incorporators. The incorporators shall then submit their articles of incorporation and bylaws to the SEC. Issuance of Certificate of Incorporation: Other Doctrines: Corporate Name Similarity in corporate names between two corporations would cause confusion to the public especially when the purposes stated in their charter are also the same type of business (Universal Mills Corp. v. Universal Textile Mills Inc., G.R. No. L-28351, 1977). If the SEC finds that the submitted documents and information are fully compliant with the requirements of this Code, other relevant laws, rules and regulations, the SEC shall issue the certificate of incorporation. A corporation has no right to intervene in a suit using a name other than its registered name; if a corporation legally and truly wants to intervene, it should have used its corporate name as the law requires and not another name which it had not registered (Laureano Investment & Development Corp. v. CA, G.R. No. 100468, 1997). A private corporation organized under this Code commences its corporate existence and juridical personality from the date the SEC issues the certificate of incorporation under its official seal and thereupon the incorporators, stockholders/ members and their successors shall constitute a body corporate under the name stated in the articles of incorporation for the period of time mentioned therein, unless said period is extended or the corporation is sooner dissolved in accordance with law. (Sec. 18) There would be no denial of due process when a corporation is sued and judgment is rendered against it under its unregistered trade name, Commencement of Corporate Existence Page 117 of 393 ATENEO CENTRAL BAR OPERATIONS 2020/21 H. Election of Directors or Trustees (Sec. 23)7 Manner of Election ● In any form; or ● By ballot when requested by any voting stockholder or member ● In stock corporations, voting may be in person or by proxy Time to Determine Voting Right ● At the time fixed in by- laws ● If by- laws are silent, at time of election I. Adoption of By-Laws By-laws Relatively permanent and continuing rules of action adopted by the corporation for its own government and of the individuals composing it and those having direction, management and control of its affairs, in whole or in part, in the management and control of its affairs and activities. Regulations, ordinances, rules or laws adopted by an association or corporation or the like for its internal governance, including rules for routine matters such as calling meetings and the like (San Miguel Corp. v. Mandaue Packing Products Plants Union-FFW, G.R. No. 152356, 2005). By-laws are intended merely for the protection of the corporation, and prescribe regulation, not restrictions, they are always subject to the charter of the corporation (Rural Bank of Salinas v. CA, GR No. 96674, 1992). Requisites of Valid By-Laws: a. It must be consistent with the Corporation Code, other pertinent laws and regulations. b. It must be consistent with the Articles of Incorporation. c. It must be reasonable and not arbitrary or oppressive. d. It must not disturb vested rights, impair contract or property rights of stockholders or members or create obligations unknown to law. COMMERCIAL LAW Binding Effects The by-laws of the corporation are its own private laws that have the same effect as the laws of the corporation. They are deemed written into the charter. Thus, they become part of the fundamental laws of the corporation which are binding upon the corporation and its officers, and the litigating parties who are not part of the corporation in accordance with their terms (Peña v. CA, G.R. No. 91478, 1991; Forest Hills Golf Club v. Gardpro Inc., G.R. No. 164686, 2014). Procedure on Adoption of By-Laws (Sec. 45) a. After Incorporation: i. Approval by the majority of outstanding shares/members ii. By-laws must be signed by stockholders/members voting for them iii. Kept in the principal office of the corporation iv. Subject to inspection by stockholders or members v. Certified copy signed by majority of directors, countersigned by the corporate secretary, filed w/ SEC and attached to original Articles of Incorporation b. Prior to Incorporation: i. such by-laws shall be approved and signed by all the incorporators and ii. submitted to the SEC, together with the articles of incorporation. Note: A certification of the appropriate government agency to the effect that such bylaws or amendments are in accordance with law is required before he SEC shall accept for filing the bylaws or any amendment thereto of the following: 1) Bank, 2) Banking institution, 3) Building and loan association, 4) Trust company, 5) Insurance company, 6) Public utility, 7) Educational institution, or 8) Other special corporations governed by special laws 7 This will be discussed extensively under the heading Board of Directors and Trustees (9.D). Page 118 of 393 ATENEO CENTRAL COMMERCIAL LAW BAR OPERATIONS 2020/21 Failure to Adopt and Maintain the Bylaws Now Specifically Criminally Punishable and Subject to SEC’s Contempt Power (Sec. 161, please see discussion below) of the corporation (Rural Bank of Salinas, Inc. v. CA, 1992; quoting from Thompson on Corporation Sec. 4137, cited in Fleischer v. Nolasco, G.R. No. L-23241, 1925). Common Law Limitations on By-Laws ● ● By-laws cannot be contrary to law and articles of incorporation By-law provisions cannot discriminate among its stockholders or members Authority granted to a corporation to regulate the transfer of its stock does not empower corporation to restrict the right of a stockholder to transfer his shares, but merely authorizes the adoption of regulations as to the formalities and procedure to be followed in effecting transfer (Thomson v. CA, G.R. No. 116631, 1998). i. Contents of by-laws (Sec. 46) A private corporation may provide the following in its bylaws: a) The time, place and manner of calling and conducting regular or special meetings of the directors or trustees; b) The time and manner of calling and conducting regular or special meetings and mode of notifying the stockholders or members thereof; c) The required quorum in meetings of stockholders or members and the manner of voting therein; d) The modes by which a stockholder, member, director, or trustee may attend meetings and cast their votes; e) The form for proxies of stockholders and members and the manner of voting them; f) The directors’ or trustees’ qualifications, duties and responsibilities, the guidelines for setting the compensation of directors or trustees and officers, and the maximum number of other board representations that an independent director or trustee may have which shall, in no case, be more than the number prescribed by the SEC; g) The time for holding the annual election of directors or trustees and the mode or manner of giving notice thereof; h) The manner of election or appointment and the term of office of all officers other than directors or trustees; i) The penalties for violation of the bylaws; j) In the case of stock corporations, the manner of issuing stock certificates; and k) Such other matters as may be necessary for the proper or convenient transaction of its corporate affairs for the promotion of good governance and anti-graft and corruption measures. By-laws are intended merely for the protection of the corporation, and prescribe regulation, not restrictions; they are always subject to the charter Note: An arbitration agreement may be provided in the bylaws pursuant to Section 181 of this Code. A by-law provision granting to a stockholder a permanent representation in the Board of Directors is contrary to the Corporation Code requiring all members of the Board to be elected by the stockholders or members. Even when the members of the association may have formally adopted the provision, their action would be of no avail because no provision of the by-laws can be adopted if it is contrary to law (Grace Christian High School v. CA, G.R. No. 108905 , 1997). Although the right to amend by-laws lies solely in the discretion of the employer, this being in the exercise of management prerogative or business judgment, such right cannot impair the obligation of existing contracts or rights or undermine the right to security of tenure of a regular employee. Otherwise, it would enable an employer to remove any employee from employment by the simple expediency of amending its by-laws and providing the position shall cease to exist upon occurrence of a specified event (Salafranca v. Philamlife (Pamplona) Village Homeowners Association, Inc., G.R. No. 121791, 1998) By-laws that prohibit directors who have interests in competitor corporations are reasonable in order to protect the interests of the company (Gokongwei v. SEC, G.R. No. L-45911, 1979) ● By-laws cannot be unreasonable or be contrary to the nature of by-laws (GPI v. El Hogar Filipino, G.R. No. L-26649, 1927). Page 119 of 393 ATENEO CENTRAL BAR OPERATIONS 2020/21 ii. Binding effect of by-laws: ● As to the corporation and its components – Binding not only upon the corporation but also on its stockholder, members and those having direction, management and control of its affairs. They have the force of contract between the members/stockholders. ● As to third persons – Not binding unless there is actual knowledge. Third persons are not even bound to investigate the content because they are not bound to know the bylaws which are merely provisions for the government of a corporation and notice to them will not be presumed (China Banking Corp. v. CA, G.R. No. 118332 1997). iii. Amendment or Revision (Sec. 47) 1) With stockholders or members approval - Majority vote of the members of the Board; and - Majority of the outstanding capital stock or majority of the members in case of non- stock corporation, in a meeting duly called for the purpose 2) The board may be delegated to have the power to amend or repeal any by- laws or adopt new by- laws, by a vote of: - 2/3 of the shareholders representing the outstanding capital stock; or - 2/3 of the members in a non- stock corporation. Such power of the Board may be revoked by majority vote of the outstanding capital stock or majority of the members in a non- stock corporation Note: The power to adopt the first original bylaws cannot be delegated to the board of directors or trustees; only the power to amend or repeal any by- laws or adopt new by- laws that will supplant the old by- laws can be validly delegated. Filing and Effectivity Whenever the bylaws are amended or new bylaws are adopted, the corporation shall file with the SEC a) amended or new bylaws and, b) if applicable, the stockholders’ or members’ resolution authorizing the delegation of the power to amend and/or COMMERCIAL LAW adopt new bylaws, duly certified under oath by the corporate secretary and a majority of the directors or trustees. The amended or new by-laws shall only be effective upon the issuance by the SEC of a certification that the same is in accordance with this Code and other relevant laws. J. Effects Of Non-Use Of Corporate Charter (Sec. 21) a) If a corporation does not formally organize and commence its business within five (5) years from the date of its incorporation, its certificate of incorporation shall be deemed revoked as of the day following the end of the five-year period. b) If a corporation has commenced its business but subsequently becomes inoperative for a period of at least five (5) consecutive years, the SEC may, after due notice and hearing, place the corporation under delinquent status. Delinquent Corporation: A Corporation placed by the SEC under delinquency status after due notice and hearing, because it commenced its business but subsequently becomes inoperative for a period of at least five (5) consecutive years. Effects of Delinquency Status: A delinquent corporation shall have a period of two (2) years to resume operations and comply with all requirements that the SEC shall prescribe. a) Upon compliance by the corporation, the SEC shall issue an order lifting the delinquent status. b) Failure to comply with the requirements and resume operations within the period given by the SEC shall cause the revocation of the corporation’s certificate of incorporation. Corporations under special regulatory jurisdiction The SEC shall give reasonable notice to, and coordinate with the appropriate regulatory agency prior to the suspension or revocation of the certificate of incorporation of companies under their special regulatory jurisdiction. Page 120 of 393 ATENEO CENTRAL COMMERCIAL LAW BAR OPERATIONS 2020/21 7. CORPORATE POWERS A. General Powers; Theory of General Capacity The general capacity theory maintains that a corporation is said to hold such powers as are not prohibited or withheld from it by general law. a. Express powers – Those expressly authorized by the Corporation Code and other laws, and its Articles of Incorporation or Charter b. Implied/necessary powers – Those that can be inferred from or necessary for the exercise of the express powers or for the pursuit of its purposes as provided in the Charter. Examples are powers related to the same line of business (e.g. stevedoring services to unload coal to its pier for corporations supplying electric power) c. Incidental/inherent powers – Those that are deemed to be within the capacity of corporate entities. These “necessarily flow” from the business and attach at the moment of creation without regard to express powers or primary purpose. General Express Powers under the Corporation Code (Sec. 35) a. Sue and be sued in its corporate name; b. Succession; c. Adopt and use a corporate Seal; d. Amend Articles of Incorporation e. Adopt, amend or repeal By-laws; f. For stock corporations – Issue stocks to subscribers and to sell treasury stocks; for non-stock corporations – admit members; g. Purchase, receive, take, or grant, hold, convey, sell, lease, pledge, mortgage and otherwise deal with real and personal property, pursuant to its lawful business; h. Enter into Partnership, joint venture, merger, consolidation, or any other commercial agreement with natural and juridical persons; i. Reasonable Donations for public welfare, hospital, charitable, cultural, scientific, civil or similar purposes (Prohibited: for partisan political activity); j. Establish pension, retirement and other Plans for the benefit of directors, trustees, officers and employees; and k. Other powers essential or necessary to carry out its purposes. B. Specific Powers: Theory of Specific Capacity The specific capacity theory maintains that the corporation cannot exercise powers except those expressly/impliedly given. Specific Powers Granted by the RCC: 1) Power to extend or shorten corporate term (Sec. 36) 2) Power to increase or decrease capital stock or incur, create, increase bonded indebtedness (Sec. 37) 3) Power to deny pre-emptive rights (Sec. 38) 4) Power to sell or dispose corporate assets (Sec. 39) 5) Power to acquire own shares (Sec. 40) 6) Power to invest corporate funds in another corporation or business (Sec. 41) 7) Power to declare dividends (Sec. 42) 8) Power to enter into management contract (Sec. 43) C. Power to Extend or Shorten corporate term (Sec. 36) There should be a written notice of stockholders/members meeting stating: ● Proposed action and time and place of meeting ● Addressed to each stockholder/ member ● Deposited to the addressee in post office, with postage prepaid or served personally; Note: When allowed in the by-laws or done with the consent of the stockholder, sent electronically in accordance with the rules and regulations of the SEC on the use of electronic data messages Vote needed: ● Board majority (in board meeting) and ● Ratified by 2/3 of OCS or members in a meeting – mere written assent is not enough Page 121 of 393 ATENEO CENTRAL BAR OPERATIONS 2020/21 COMMERCIAL LAW Appraisal rights available to dissenting stockholders ● In case of extension of term – right of appraisal exists ● In shortening of term – right of appraisal recognized in Sec 81(1) – amendment of Articles to shorten or extend corporate term Note: No decrease of capital stock shall be approved by the SEC if it will prejudice the rights of corporate creditors D. Power to Increase or Decrease Capital Stock or Incur, Create, Increase Bonded Indebtedness (Sec. 37) Incur, create, or increase bonded indebtedness (non-stock)- There should be no incurring, creating or increasing any bonded indebtedness unless : ● Approved by majority of the board ● Approved by at least 2/3 of members in a meeting ● With notice of the proposal and meeting given to stockholders ● With prior approval of the SEC Bonds issued by a corporation shall be registered with the SEC, which shall have the authority to determine the sufficiency of the terms thereof. Power to increase or decrease capital stock provided that in the case of an increase in capital stock, the 25-25 rule is complied with, as approved by the SEC There shall be no increase or decrease of capital stock unless : ● Approved by majority of the board ● Approved by at least 2/3 of OCS in a meeting ● With notice of the proposal and meeting given to stockholders- given personally or through electronic means if allowed ● With prior approval of the SEC o The application with the SEC shall be made within six (6) months from the date of approval of the board of directors and stockholders, which period may be extended for justifiable reasons. ● Accompanied by a sworn statement of the treasurer showing that the 25-25 rule has been complied with 25-25 Rule The SEC shall not accept for filing any certificate of increase of capital stock unless accompanied by a sworn statement of the treasurer of the corporation lawfully holding office at the time of the filing of the certificate, showing that at least twenty-five percent (25%) of the increase in capital stock has been subscribed and that at least twenty-five percent (25%) of the amount subscribed has been paid in actual cash to the corporation or that property, the valuation of which is equal to twenty-five percent (25%) of the subscription, has been transferred to the corporation: From and after the approval by the SEC and the issuance of its certificate of filing, capital stock shall stand increased or decreased as the certificate may declare E. Power to Deny Pre-Emptive Rights (Sec. 38) General rule: Stockholders have the pre-emptive right to subscribe to all issues or disposition of shares by the corporation of any class in proportion to their shareholdings Unless: ● Denied by the Articles of Incorporation or amendment thereto; ● Shares are issued in compliance with laws requiring minimum stock ownership by the public ● Shares issued in good faith in exchange for property for corporate purposes approved by 2/3 of the OCS ● Shares in payment of previously contracted debts approved by 2/3 of OCS F. Power to Sell or Dispose Corporate Assets (Sec. 39) This Power is subject to the provisions of the “Philippine Competition Act”, and other related laws. Votes Required: Power to Sell or Dispose Corporate Assets (Not all or Substantially All) Majority Vote by Board of Directors or Trustees ONLY Page 122 of 393 ATENEO CENTRAL COMMERCIAL LAW BAR OPERATIONS 2020/21 Power to Sell or Dispose All or Substantially All Corporate Assets Including its Goodwill Needs vote of: 1) Majority Vote by Board of Directors or Trustees 2) 2/3 of OCS or members Note: In nonstock corporations where there are no members with voting rights, the vote of at least a majority of the trustees in office will be sufficient authorization for the corporation to enter into any transaction authorized by this section. Sale of all or substantially all corporate assets: Net Asset Value Test- The determination of whether or not the sale involves all or substantially all of the corporation’s properties and assets must be computed based on its net asset value, as shown in its latest financial statements. Incapacity Test- A sale or other disposition shall be deemed to cover substantially all the corporate property and assets if thereby the corporation would be rendered incapable of continuing the business or accomplishing the purpose for which it was incorporated. (Sec. 39) Notice: Written notice of stockholder/member meeting proposing said action served personally at their places of residence and deposited to the addressee in the post office with postage prepaid, or when allowed by the by-laws or done with the consent of the stockholder, sent electronically Dissenting stockholders have appraisal rights. After authorization or approval by the stockholders/members, the Board may however, abandon proposed action without prior authorization/approval of stockholders/members, subject to rights of 3rd parties However, stockholders’/members’ authorization not needed if ● Disposition of property and assets is necessary in the usual and regular course of business, or ● If the proceeds of sale or disposition is appropriated for the conduct of the remaining business G. Power to Acquire Own Shares (Sec. 40) Requirements: 1) Corporation has unrestricted retained earnings in its books to cover the shares to be purchased or acquired, 2) It is for a legitimate corporate purpose or purposes, including the following cases: ● To eliminate fractional shares arising out of stock dividends; ● To collect or compromise an indebtedness to the corporation, arising out of unpaid subscription, in a delinquency sale, and to purchase delinquent shares sold during said sale; ● To pay dissenting or withdrawing stockholders entitled to payment for their shares under the provisions of the Corporation Code. Shares of stock which have been issued and fully paid for, but subsequently reacquired by the issuing corporation through purchase, redemption, donation, or some other lawful means are Treasury Shares. Such shares may again be disposed of for a reasonable price fixed by the board of directors (Sec. 9) subject to stockholders’ preemptive rights. H. Power to Invest Corporate Funds in another Corporation or For Non-Primary Purpose (Sec. 41) Needs vote of: ● Board majority in meeting ● 2/3 of OCS or members Stockholders/members’ approval not needed if investment in stock of other corporations is reasonably necessary to accomplish primary purpose ● Written notice of proposed investment and time and place of meeting sent to stockholders ● Dissenting stockholders have appraisal rights Investment by a sugar central in the equity of a jute-bag manufacturing company used in packing sugar, falls within the implied powers of the sugar central as part of its primary purpose (De La Rama v. Ma-ao Sugar Central, G.R. No. L-17504, 1969) Page 123 of 393 ATENEO CENTRAL COMMERCIAL LAW BAR OPERATIONS 2020/21 I. Power to Declare Dividends (Sec. 42) Only Board action is needed (except stock dividends where stockholder action is needed) ● Cash dividends due on delinquent stock should first be applied to unpaid balance plus cost and expenses ● Stock dividends shall be withheld from delinquent stockholders until the unpaid subscription is fully paid ● Stock dividends need 2/3 vote of the OCS ● Dividends are payable out of unrestricted retained earnings ● Stock corporations cannot retain surplus profits more than 100% of paid-in capital stock unless: - Needed for corporate expansion projects approved by the board - Or prohibited by loan agreement which prohibits declaration of dividends without financial institution’s consent - Or needed under special circumstances ● Unless otherwise provided in the articles of incorporation, distribution of dividends is done on a pro rata basis. The power to declare dividends under [Sec. 42 of RCC] is with the Board of Directors, and can be declared only out of its unrestricted retained earnings. Assuming that a corporate director was authorized by the Board to fix the monthly dividends, dividends can be declared only out of unrestricted retained earnings of a corporation, which earnings cannot obviously be fixed and predetermined 5 years in advance. (Ongkingco v. Sugiyama, G.R. No. 217787, 2019). J. Power to Enter Into Management Contract (Sec. 43) Where one corporation undertakes to manage all or substantially all of the business of another corporation, whether the contract is called “service contracts” or “operating agreement” General Rule: Contract may not exceed 5 yrs per term Exception: Contracts relating to exploration, development, exploitation or utilization of natural resources, where pertinent laws or regulations will govern A management contract is not an agency contract, and therefore is not revocable at will (Nielson v. Lepanto, G.R. No. L-21601, 1968) This needs approval of: 1. Board of Directors of both managing and managed corporation 2. Majority of outstanding shares or members of both managed and managing corporation 3. But 2/3 vote of outstanding stock/members of managed corporation necessary in the ff: o Where stockholders of both managing and managed corporation (the common stockholders) own or control more than 1/3 or the outstanding stock of managing corporation o Where majority of directors in both corporations are the same K. Limitations i. Ultra Vires Acts 1. Applicability of Ultra Vires Doctrine An act not within the express or implied, and incidental powers of the corporation. Types of Ultra Vires Cases a. First type: Acts done beyond the powers of the corporation as provided for in the law or its articles of incorporation (Sec. 44) b. Second type: Acts or contracts entered into on behalf of the corporation by persons without corporate authority, even though the contract is within the powers of the corporation (Manila Metal Container Corp. v. PNB, G.R. No. 166862, 2006) and c. Third type: Acts or contracts, which are per se illegal as being contrary to law. 2. Consequences of Ultra Vires Acts ● Executed contract – Courts will generally not set aside or interfere with such contracts; ● Executory contracts – No enforcement even at the suit of either party (void and unenforceable); Page 124 of 393 ATENEO CENTRAL BAR OPERATIONS 2020/21 ● Partly executed and partly executory – Principle against unjust enrichment shall apply. Ultra vires test: It is a question, therefore, in each case, of the logical relation of the act to the corporate purpose expressed in the charter. If that act is one which is lawful in itself, and not otherwise prohibited, is done for the purpose of serving corporate ends, and is reasonably tributary to the promotion of those ends, in a substantial, and not in a remote and fanciful, sense, it may fairly be considered within charter powers. The test to be applied is whether the act in question is in direct and immediate furtherance of the corporation’s business, fairly incident to the express powers and reasonably necessary to their exercise. If so, the corporation has the power to do it; otherwise, not. (University of Mindanao, Inc. v. Bangko Sentral ng Pilipinas, G.R. 19496465, 2016) L. Doctrine of Individuality of Subscription No certificate of stock shall be issued to a subscriber until the full amount of the subscription together with interest and expenses (in case of delinquent shares), if any is due, has been paid. (Sec. 63) The foregoing provision sets forth the Doctrine of Indivisibility/Individuality of Subscription. This doctrine espouses that the subscription contract is one, entire, indivisible and whole contract which cannot be divided into portions. It cannot be divided into portions so that no stockholder shall be entitled to a certificate of stock until said stockholder has paid the entire value of the shares subscribed, including the interest and expenses. The Doctrine of Indivisibility of Subscription is absolute since the above-quoted Section 64 speaks of no exception. The purpose of the prohibition is to prevent the partial disposition of a subscription which is not fully paid, because if it is permitted, and the subscriber subsequently becomes delinquent in the payment of his subscription, the corporation may not be able to sell as many of his subscribed shares as would be necessary to cover the total amount due from him, which is authorized under section [67]. (SEC OGC Opinion No. 16-05) COMMERCIAL LAW M. Doctrine of Equality of Shares Under the doctrine of equality of shares – all stocks issued by the corporation are presumed equal with the same privileges and liabilities, provided that the Articles of Incorporation is silent on such differences (CIR vs. CA, G.R. No. 108576, 1999) This is now indicated under Sec. 6 of the RCC Each share shall be equal in all respects to every other share, except as otherwise provided in the articles of incorporation and in the certificate of stock. (Sec. 6) N. Trust Fund Doctrine The subscriptions to the capital stock of a corporation constitute a fund to which the creditors have a right to look for satisfaction of their claims and that the assignee in insolvency can maintain an action upon any unpaid stock subscription in order to realize assets for the payment of its debts. (Phil. Trust Co. v. Rivera, G.R. No. L-19761, 1923) [Hence,] there can be no distribution of assets among the stockholders without first paying corporate creditors; any disposition of corporate funds to the prejudice of creditors is null and void. (Boman Environmental Dev. Corp. v. Court of Appeals, G.R. No. 77860, 1988). This is without prejudice to the ability of a corporation to effect distributions to its stockholders by way of dividends charged against unrestricted retained earnings. Coverage of the Trust Fund Doctrine 1. In case of Solvency: The coverage of the trust fund doctrine is only up to the extent of the “subscribed capital stock” of the corporation. In this sense, the unrestricted retained earnings do not constitute part of the capital stock. Hence, the corporation is at liberty to pay out assets to the stockholders by way of dividends up to the extent of the unrestricted retained earnings. 2. In case of Insolvency: The trust fund doctrine is not limited to reaching the stockholders’ unpaid subscriptions. The scope of the doctrine when the corporation is insolvent encompasses not Page 125 of 393 ATENEO CENTRAL COMMERCIAL LAW BAR OPERATIONS 2020/21 only the capital stock, but also other property and assets generally regarded in equity as a trust fund for the payment of corporate debts. Thus, the Trust Fund Doctrine extends to all assets (not just subscribed capital stock) when a corporation becomes insolvent. (Halley v. Printwell, G.R. No. 157549, 2011) 3. Releasing Subscribers: where the corporation released the subscribers to the capital stock from their subscriptions without valuable consideration. (Ong yong v. Tiu, G.R. No.144476, 2003) O. How Corporate Powers are Exercised 1. By the Shareholders (Note: Generally, the vote requirement of the shareholders or members are joined with a vote of, or a ratification by, a majority of the Board of Directors) Vote of stockholders representing 2/3 of the outstanding capital stock or 2/3 of members (as applicable) are needed in the following instances: (1) Extension or shortening of corporate term (2) Increase or decrease of capital stock or the creation of bonded indebtedness (3) Power to deny pre-emptive right, in these cases: (a) Shares issued in good faith in exchange for property for corporate purposes (b) Shares in payment of previously contracted debts (4) Sale of all or substantially all corporate assets (5) Investing corporate funds in another corporation or business or for any other purpose other than its primary purpose (6) Power to enter into management contracts in the following instances: (a) where stockholders representing the same interest of both the managing and the managed corporations own more than one-third (1/3) of the total outstanding capital stock entitled to vote of the managing corporation; or (b) where a majority of the members of the Board of Directors of the managing corporation also constitute a majority of the members of the Board of Directors of the managed corporation (7) Declaration of stock dividend However, among the “powers of corporations” only majority vote is needed in: (1) Power to enter into management contracts, except in instances mentioned in number (6) of the preceding section 2. By the Board of Directors The Board of Directors is the main agency by which all corporate powers and authority are exercised General rule: Majority vote of the Board is needed in the following instances: a. Extension or shortening of the corporate term b. Increase or decrease of capital stock or the creation of bonded indebtedness c. Sale or other disposition corporate assets d. Sale or other dispositions of all or substantially all corporate assets (with 2/3 stockholders or members authorization, Sec 39) e. Acquisition of its own shares f. Investment of corporate funds in any corporation or business or for any purpose other than its primary purpose (with 2/3 stockholders ratification, Sec. 41) g. Declaration of cash, property, and stock dividends (if stock dividends, it must be joined with 2/3 vote of shareholders, sec. 42) h. Entering into management contracts (accompanied by the approval of the shareholders or members, Sec. 43) 3. By the Officers The officers shall manage the corporation and perform such duties as may be provided in the bylaws and/or as resolved by the board of directors. (Sec. 24) Executive Committee (Sec. 34) General rule: The Executive Committee may act, by majority vote, on specific matters within the competence of the board as delegated to it. Such an Executive Committee may be established if the bylaws so provide. Page 126 of 393 ATENEO CENTRAL BAR OPERATIONS 2020/21 Exception: 1. Acts where stockholders’ approval is also needed 2. Filling vacancies within the Board of Directors 3. Amending, repealing or adopting by-laws 4. Amending or repealing resolutions of the Board where the resolution by express terms is not so amendable or repealable by the Executive Committee 5. Distribution of cash dividends Requisites for Valid Proxy 1. The proxy shall be in writing; 2. Signed by the stockholder or member; and 3. Filed before the scheduled meeting with the corporate secretary (Sec. 57) 8. STOCKHOLDERS AND MEMBERS Note: No proxy shall be valid and effective for a period longer than five (5) years at any one time. A. Fundamental Rights of Stockholders and Members The following are important rights of stockholders, which continue to exist even when the shares have been sequestered: a. Right to attend meetings and to vote b. Right to receive dividends c. Right to receive distributions upon liquidation of the corporation d. Right to inspect the books of the corporation e. Pre-emptive rights (Cojuangco, Jr. vs. Roxas, G.R. No. 91925, 1991) B. Participation In Management i. ii. COMMERCIAL LAW Proxy – Section 57 of the Corporation Code provides that stockholders and members may vote in person or by proxy in all meetings of stockholders or members. Voting Trust Agreements – A stockholder confers upon a trustee the right to vote and other rights pertaining to the shares for a period not exceeding 5 years at any one time. (Sec. 58). However, if the voting trust was a requirement for a loan agreement, period may exceed 5 years but shall automatically expire upon full payment of the loan. Pooling or voting agreements – two or more stockholders agree that their shares shall be voted as a unit. Usually concerned with the election of directors to gain control of the management. Duration of Proxy General Rule: It shall be valid only for the meeting for which it is intended. Exception: Unless otherwise provided in the proxy The by-laws of the corporation may prescribe a particular form for proxy and fix the deadline for its submission. Generally, proxies, even those with irrevocable terms, have always been considered as revocable, unless coupled with an interest, and their revocation may be by formal notice, orally, or by conduct as by the appearance of the stockholder or member giving the proxy, or the issuance of a subsequent proxy, or the sale of shares. Note: Proxies, who are not stockholders or members, cannot be elected as a director or trustee. (Lim v. Moldex Land, Inc., G.R. No. 206038, 2017) Proxy Disputes—Jurisdiction The regular courts now have the power to hear and decide cases involving all matters and conduct of the elections of directors, including validation of proxies. The power of SEC to regulate proxies remains only in instances when stockholders vote on matters other than the election of directors (SEC v. CA, G.R. No. 187702/189014, 2014). Requisites for Valid Voting Trust a. In writing and notarized b. Specifying the terms and conditions c. A certified copy must be filed with the corporation and with the SEC. (Sec. 58) Duration General Rule: Not exceeding 5 years Exception: If the voting trust was a requirement for a loan agreement, period may exceed 5 years Page 127 of 393 ATENEO CENTRAL COMMERCIAL LAW BAR OPERATIONS 2020/21 but shall automatically expire upon full payment of the loan. b. No voting trust must be used for the purposes of fraud. Stockholders who are defrauded by their trustees have a right to revoke the trust and recover damages from such trustee. Voting Trust v. Proxy VOTING TRUST Trustee votes as owner Agreement must be notarized Trustee acquires legal title to the shares of the transferring stockholder; only beneficial title remains with the stockholder Trustee may vote in person or by proxy unless the agreement provides otherwise Trustee is not limited to act at any particular meeting Trustee can vote and exercise all the rights of the stockholder even when the latter is present Agreement must not exceed 5 years at any one time, except when the same is made a condition of a loan Voting right is divorced from the ownership of stocks Agreement irrevocable is c. d. PROXY Proxy holder votes as agent Proxy need not be notarized Proxy has no legal title to the shares of the principal e. f. g. Proxy must vote in person Proxy can only act at a specified stockholder’s meeting (if not continuing) Proxy can only vote in the absence of the owners of the stock Proxy cannot exceed 5 years at any one time Right to vote is inherent or inseparable from the right to ownership of the stock Revocable anytime, except if coupled with interest Limitations on Right to Vote a. Where the Articles of Incorporation provides for classification of shares pursuant to Sec. 6, non-voting shares are not entitled to vote except as other provided in the said section. Preferred or redeemable shares may be deprived of the right to vote unless otherwise provided. Fractional shares of stock cannot be voted unless they constitute at least one full share. Treasury shares have no voting rights as long as they remain in treasury. Holders of stock declared delinquent by the board for unpaid subscription have no voting rights. A transferee of stock if his stock transfer is not registered in the stock and transfer book of the corporation and does not have a proxy from or voting trust agreement with the transferor may not vote the purchased/acquired shares. A stockholder who mortgages or pledges his shares retains the right to vote unless he gives authority for the creditor to vote. iii. Cases When Stockholder’s Action is Required 1. Concurrence of majority of the outstanding capital stock (by majority vote) a. To enter into management contract if any of the two instances stated above are absent; b. To adopt, amend or repeal the by-laws. 2. Concurrence of 2/3 of outstanding capital stock (by 2/3 vote) (see similar enumeration in the specific express powers of the corporation) a. Extend or shorten corporate term; b. Increase/Decrease Corporate Stock; c. Incur, Create Bonded Indebtedness; d. Deny pre-emptive right; e. Sell, dispose, lease, encumber all or substantially all of corporate assets; f. Investing another corporation, business other than the primary purpose; g. Declare stock dividends h. Enter into management contract if (1) a stockholder or stockholders representing the same interest of both the managing and the managed corporations own or control more than 1/3 of the total outstanding capital entitled to vote of the Page 128 of 393 ATENEO CENTRAL BAR OPERATIONS 2020/21 i. managing corporation; or (2) a majority of the members of the board of directors of the managing corporation also constitute a majority of the members of the board of the managed corporation; Amend the Articles of Incorporation 3. By Cumulative Voting a. See discussion on election of directors 4. Without board resolution a. 2/3 of outstanding capital stock – delegate to the board the power to amend the by-laws; b. Majority of the outstanding capital stock – revoke the power of the board to amend the bylaws which was previously delegated. c. Removal of directors by a vote of the stockholders representing at least 2/3 of the outstanding capital stock The term “outstanding capital stock (OCS),” means the total shares of stock issued under binding subscription contracts to subscribers or stockholders, whether fully or partially paid, except treasury shares. (Sec. 173) iv. Manner of Voting (sec. 57) Stockholders and members may vote in person or by proxy in all meetings of stockholders or members. Voting through remote communication or in absentia; Requisites: 1. Authorized in the by-laws or by a majority of the board of directors 2. Votes are received before the corporation finishes the tally of votes. Effect: A stockholder or member who participates through remote communication or in absentia, shall be deemed present for purposes of quorum. The corporation shall establish the appropriate requirements and procedures for voting through remote communication and in absentia, taking into account the company’s scale, number of shareholders or members, structure and other COMMERCIAL LAW factors consistent with the basic right of corporate suffrage. C. Proprietary Rights i. Right To Dividends The right to dividends vests at the time of its declaration by the Board of Directors. Although stock certificates grant the stockholder the right to receive quarterly dividends of 1%, cumulative and participating, the stockholders do not become entitled to the payment thereof without necessity of a prior declaration of dividends. (Republic Planters Bank v. Hon. Agana, Sr., G.R. No. 51765, 1997) Stock Corporations are prohibited from retaining surplus profits in excess of 100% of their paid-in capital stock, except: 1. When justified by definite corporate expansion projects or programs approved by the board of directors 2. Corporation is prohibited under a loan agreement from declaring dividends without the creditor’s consent. 3. Under special circumstances such as when there is a need for special reserve for probable contingencies Form of Dividends 1. Cash Dividends (revocable before announcement). 2. Property Dividends (revocable before announcement). 3. Stock Dividends, which requires, aside from the declaration by the Board, the approval of 2/3 of the outstanding capital stock (revocable before issuance). Note: No dividends can be declared out of capital, except liquidating dividends distributed at dissolution. ii. Right Of Appraisal The right to withdraw from the corporation and demand payment of the fair value of his shares after dissenting from certain corporate acts involving fundamental changes in corporate structure. 1. When available a. Extension or shortening of corporate term; (Sec. 36) Page 129 of 393 ATENEO CENTRAL COMMERCIAL LAW BAR OPERATIONS 2020/21 b. In case any amendment to the articles of incorporation has the effect of changing or restricting the rights of any stockholders or class of shares, or of authorizing preferences in any respect superior to those of outstanding shares of any class; (Sec. 80) c. Investing of corporate funds for any purpose other than the primary purpose; (Sec. 80) d. Sell or dispose all or substantially all assets of corporation;(Sec. 80) e. Merger or consolidation.(Sec. 80) 2. Manner of exercise of right (Sec 81, RCC) ● A written demand on the corporation within 30 days after the vote was taken (failure to do so means waiver);(Sec. 81) ● From the time of demand, all rights accruing to such shares including voting and dividend rights shall be suspended except the right of such stockholder to receive payment of the fair value of stockholder’s shares. (Sec. 82) ● Ten (10) days from demand, the dissenting stockholder must submit his certificates of stocks for notation that such certificates represent dissenting shares. (Sec. 85) ● The price to be paid is the fair value of the shares on the date the vote was taken; (Sec. 81) ● The fair value shall be agreed upon by the corporation and the dissenting stockholders within 60 days from the date the vote was taken. In case there is no agreement, the fair value shall be determined by a majority of the 3 distinguished persons one of whom shall be named by the stockholder another by the corporation and the third by the two who were chosen; (Sec. 81) ● The right of appraisal is extinguished when: (Sec. 83) a. He withdraws the demand with the corporation’s consent; b. The proposed action is abandoned; c. The SEC disapproves of such action where approval is necessary d. The SEC determines that such dissenting stockholder is not entitled to the appraisal right. ● If the dissenting stockholder is not paid within 30 days from the award, he shall automatically be restored to all his rights as stockholder. (Sec. 82) iii. Right To Inspect What Records Can Be Inspected? Corporate records, regardless of the form in which they are stored, shall be open to inspection by any director, trustee, stockholder or member of the corporation in person or by a representative at reasonable hours on business days, and a demand in writing may be made by such director, trustee or stockholder at their expense, for copies of such records or excerpts from said records. (Sec. 73). Also, a corporation shall furnish a stockholder or member, within 10 days from receipt of their written request, its most recent financial statement (Sec. 74). The first three are the formulation of the old code. Under the Revised Corporation Code, inspection rights covers a’’ “corporate records, regardless of the form in which they are stored” (see Sec. 73) Stock and transfer book Record of: 1. All stocks in the names of the stockholders alphabetically arranged; 2. The installment paid and unpaid on all stock for which subscription has been made, and the date of payment of any installment; 3. A statement of every alienation, sale or transfer of stock made; and 4. Such other entries as the by-laws may prescribe. Notes: Stock and Transfer Book Section [73], while specific in the kinds of records that must be maintained, is not limiting, thus, the inspection right is applicable to the stock and transfer book (Yujuico v. Quiambao, G.R. No. 180416, 2014) The corporate secretary is the officer who is duly authorized to make entries on the stock and transfer book (Gokongwei v. SEC, GR No. 45911, 1979). All transfers of shares not entered in the stock and transfer book of the corporation are invalid as to attaching or execution creditors of the assignors, as well as to the corporation and to Page 130 of 393 ATENEO CENTRAL BAR OPERATIONS 2020/21 subsequent purchasers in good faith and to all persons interested, except the parties to such transfers: “All transfers not so entered on the books of the corporation are absolutely void; not because they are without notice or fraudulent in law or fact, but because they are made so void by statute (Uson vs. Diosomito, G.R. No. 42135, 1935). The entries are considered prima facie evidence only and may be subject to proof to the contrary (Bitong v. CA, G.R. No. 123553, 1998). The stock and transfer book of the corporation cannot be used as the sole basis for determining the quorum as it does not reflect the totality of shares which have been subscribed, and more so when the articles of incorporation show a significantly larger amount of shares issued and outstanding as compared to that listed in the stock and transfer book (Lanuza v. Court of Appeals, G.R. No. 131394, 2005). Grounds for Not Allowing Inspection by a Stockholder a. If the person demanding to examine the records has improperly used any information secured for prior examination, b. He is not acting in good faith, c. A requesting party who is not a stockholder or member of record, or is a competitor shall have no right to inspect or demand reproduction of corporate records. (Sec. 73) Competitor- competitor, director, officer, controlling stockholder or otherwise represents the interests of a competitor shall have no right to inspect or demand reproduction of corporate records. (Sec. 73) In one case, the Supreme Court clarified that the right of inspection may only be exercised by a stockholder of record. As such, the corporation may validly set up the defense in its refusal to grant a claim of the right of inspection on the ground that the person is not a stockholder of record. (Puno v. Puno Enterprises Inc., GR No. 177066, September 11, 2009) In Terelay Investment and Development Corp. v. Yulo, the court ruled that although the corporation may deny a stockholder's request to inspect corporate records, the corporation must show that the purpose of the shareholder is improper by way of defense. COMMERCIAL LAW The purposes held to justify a demand for inspection are the following: (1) To ascertain the financial condition of the company or the propriety of dividends; (2) the value of the shares of stock for sale or investment; (3) whether there has been mismanagement; (4) in anticipation of shareholders' meetings to obtain a mailing list of shareholders to solicit proxies or influence voting; (5) to obtain information in aid of litigation with the corporation or its officers as to corporate transactions. The improper purposes which may warrant the denial of the right of inspection: (1) Obtaining of information as to business secrets or to aid a competitor; (2) to secure business "prospects" or investment or advertising lists; (3) to find technical defects in corporate transactions in order to bring "strike suits" for purposes of blackmail or extortion. (Terelay Investment and Development Corp. v. Yulo, G.R. No. 160924, 2015) The Right to Inspect Corporate Records is Subject to Confidentiality rules The inspecting or reproducing party shall remain bound by confidentiality rules under prevailing laws, such as: 1. Trade secrets or processes under Republic Act No. 8293, or the “Intellectual Property Code of the Philippines”, as amended, 2. Republic Act No. 10173, or the “Data Privacy Act of 2012”, 3. Republic Act No. 8799, or “The Securities Regulation Code”, and 4. the Rules of Court. (Sec. 73) Doctrinal Rulings on Right to Inspect The demand for inspection should cover only reasonable hours on business days; The stockholder, member, director or trustees demanding the right is one who has not improperly used any information secured through any previous examination of the records; The demand must be accompanied with statement of the purpose of the inspection, which must show good faith or legitimate purpose. Page 131 of 393 ATENEO CENTRAL COMMERCIAL LAW BAR OPERATIONS 2020/21 Illegitimate purposes include to obtain corporate secrets (formula), nuisance suit, or to embarrass the company. (Africa v. PCGG, G.R. No. 83831, 1992) If the corporation or its officers contest such purpose or contend that there is evil motive behind the inspection, the burden of proof is with the corporation or such officer to show the same. The RTC, and not the Sandiganbayan, has jurisdiction over a stockholder’s suit to enforce its right to inspect under the Corporation Code where the case does not involve a sequestrationrelated incident, but an intra-corporate controversy (Abad v. PHILCOMSAT, G.R. No. 200620, 2015) A stockholder’s right to inspect corporate records subsists during the period of liquidation (three year period for dissolution per Sec. 145). (Chua v. SEC, G.R. No. 216146, 2016) Remedies If Right to Inspect is Denied Mandamus Refusal to allow stockholders (or members of a non-stock corporation) to examine books of the company is not a ground for appointing a receiver (or creating a mgt. committee) since there are other adequate remedies, such as mandamus. (Ao-as v. CA, G.R. No. 128464, 2006) Damages Administrative Sanction (Sec. 158) Requisites for Section [158] to Apply (Ang-Abaya v. Ang, G.R. no. 178511, 2008) ● ● ● ● A director, trustee, stockholder or member has made a prior demand in writing for a copy of excerpts from the corporations records or minutes; Any officer or agent of the concerned corporation shall refuse to allow the said director, trustee, stockholder or member of the corporation to examine and copy said excerpts; If refusal is made per a resolution or order of the board of directors or trustees, the liability under this section for such action shall be imposed upon the directors or trustees who voted for refusal; Where the officer or agent of the corporation sets up the defense that the person ● ● demanding to examine and copy excerpts from the corporation’s records and minutes has improperly used any information secured through any prior examination of the records or minutes of such corporation or of any other corporation, or was not acting in good faith or for a legitimate purpose in making his demand, the contrary must be shown or proved. The person demanding to examine has improperly used any information secured through any prior examination of the records or minutes of such corporation or for any other corporation; and The one requesting to inspect was not acting in good faith or for a legitimate purpose in making his demand Criminal sanctions under Sec. 170 refer to discussion at the respective topic below iv. Pre-Emptive Right The shareholders’ right to subscribe to all issues or dispositions of shares of any class in proportion to his present stockholdings, the purpose being to enable the shareholder to retain his proportionate control in the corporation and to retain his equity in the surplus. Instances When Preemptive Right Is Not Available a. Shares to be issued to comply with laws requiring stock offering or minimum stock ownership by the public; b. Shares issued in good faith with approval of the stockholders representing 2/3 of the outstanding capital stock in exchange for property needed for corporate purposes; c. Shares issued in good faith with approval of the stockholders representing 2/3 of the outstanding capital stock issued in payment of previously contracted debts; d. In case the right is denied in the Articles of Incorporation; e. Waiver of the right by the stockholder; f. If the shares of a corporation are offered and not subscribed and purchased by the stockholders, and the shares are being offered again, there is no pre-emptive right with respect to the latter offer of shares (Benito v. SEC, G.R. No. L-56655, 1983) Page 132 of 393 ATENEO CENTRAL BAR OPERATIONS 2020/21 Right of first refusal The right of first refusal provides that a stockholder who may wish to sell or assign his shares must first offer the shares to the corporation or to the existing stockholders of the corporation, under terms and conditions which are reasonable; and that only when the corporation or the other stockholders do not or fail to exercise their option, is the offering stockholder at liberty to dispose of his shares to third parties. Pre-Emptive Right v. Right of First Refusal PRE-EMPTIVE RIGHT OF FIRST RIGHT REFUSAL Generally may be Arises only by virtue exercised, subject to of contractual limitations in stipulations or by law Corporation Code Covers unissued Covers shares shares offered for already issued subscriptions Can only be exercised May be exercised by by the owner and not mere trustees or mere trustee or conservators conservator, since it is (Republic v. an act of ownership Sandiganbayan, G.R. (Republic v. No. 107789, 2003) Sandiganbayan, G.R. No. 107789, 2003) Right claimed against Right exercisable the Corporation, against the sellerwhere the stockholder stockholder must pay Note: A corporation has no power to prevent or restrain transfers of its shares, unless such power is expressly conferred in the Articles of Incorporation or the law. (Fleischer v. Botica Nolasco Co., G.R. No. L-23241, 1925) A provision in the by-laws granting the right of first refusal (and therefore, restrains trade) is void and does not bind third parties (Fleischer v. Botica Nolasco Co., G.R. No. L-23241, 1925) By-laws are intended merely for the protection of the corporation and prescribe relation, not restriction; they are always subject to the charter of the corporation. (Rural Bank of Salinas v. CA, G.R. No. 96674, 1992) COMMERCIAL LAW v. Right to Vote The right to vote is given to the shareholders but can be limited if stipulated in the Articles of Incorporation and the Certificate of Stock. However, holders of nonvoting shares shall nevertheless be entitled to vote on the following matters: a) Amendment of the articles of incorporation; (b)Adoption and amendment of bylaws; b) Sale, lease, exchange, mortgage, pledge, or other disposition of all or substantially all of the corporate property; c) Incurring, creating, or increasing bonded indebtedness; d) Increase or decrease of authorized capital stock; e) Merger or consolidation of the corporation with another corporation or other corporations; f) Investment of corporate funds in another corporation or business in accordance with this Code; and g) Dissolution of the corporation vi. Other Rights ● Right to issuance of stock certificate for fully paid shares - Under Section 64 of the Corporation Code, no certificate of stock shall be issued to a subscriber until the full amount of his subscription together with interest and expenses (in case of delinquent shares), if any is due, has been paid. A subscriber must first totally pay his subscription before a certificate of stock covering shares subscribed and paid for could be issued to him. But an unpaid subscription (not declared delinquent) can be voted upon in corporate meetings. Such delinquent shares are also entitled to dividends, subject to the rules set forth in Section 43 of the Corporation Code on delinquent shares. Nevertheless, Section 64 does not prohibit the corporation from “dividing” the subscription of a subscriber by considering portion thereof as fully paid and issuing a corresponding certificate over the paid- up shares. Thus, in the absence of provisions in the by- laws to the contrary, a corporation may apply payments made by subscribers on account of their subscriptions either as: Page 133 of 393 ATENEO CENTRAL BAR OPERATIONS 2020/21 1. 2. Full payment for the corresponding number of shares, the par value of which is covered by such payment; or Payment pro rata to each and all the entire number of shares subscribed for Once an alternative is chosen, it must be applied uniformly to all stockholders similarly situated, and therefore, it cannot be changed without the consent of all stockholders who might be affected. ● Proportionate participation in the distribution of assets in liquidation - Stockholders and stock corporation – Except by decrease of capital stock, and as otherwise allowed by the Corporation Code, no corporation shall distribute any of its assets or property to its stockholders except upon lawful dissolution and after payment of all its liabilities (Sec. 122) - ● Members and foundations – Upon dissolution of a non-stock corporation, all liabilities and obligations must first be paid, and assets received and held subject to limitations permitting their use for specified eleemosynary purposes shall be properly transferred or returned, then the net assets remaining, if any, shall be distributed to the members, or any class or classes of members, to the extent that the articles of incorporation or by- laws provide for a plan of distribution. Otherwise, a plan of distribution may be adopted in the process of dissolution by: a. Majority vote of the Board of Trustees b. Adopted by at least 2/3 of the members having voting rights (Secs. 94–95) Right to transfer of stocks in corporate books; Requirements for valid transfer of stocks 1. There must be delivery of the stock certificate; 2. The certificate must be endorsed by the owner, or his attorney-in-fact, or other persons legally authorized to make the transfer; and COMMERCIAL LAW 3. To be valid against third parties, the transfer must be recorded in the books of the corporation Note: The delivery of the stock certificate duly endorsed by the owner is the operative act of transfer of shares from the lawful owner to the new transferee. (Bitong v. Court of Appeals, G.R. No. 123553, 1998) The delivery contemplated in Section [73], however, pertains to the delivery of the certificate of shares by the transferor to the transferee, that is, from the original stockholder named in the certificate to the person or entity the stockholder was transferring the shares to, whether by sale or some other valid form of absolute conveyance of ownership. It does not pertain to the surrender of the stock certificate to the corporation. (Teng v. SEC, G.R. No. 184332, 2016) However: The surrender of the original certificate of stock is necessary before the issuance of a new one so that the old certificate may be cancelled. A corporation is not bound and cannot be required to issue a new certificate unless the original certificate is produced and surrendered. (Teng v. SEC, G.R. No. 184332, 2016) A transfer of shares not recorded in the stock and transfer book is non- existent as far as the corporation is concerned, and consequently, a petition for mandamus filed by a transferee, compelling it to issue the corresponding certificates in the name of the transferee would be without basis. It is only when the transfer has been recorded in the stock and transfer book that a corporation may rightfully regard the transferee as one of its stockholders. From this time, the consequent obligations on the part of the corporation to recognize such right as it is mandated by law to recognize arises (Ponce v. Alsons Cement, G.R. No. 139802, 2002). Note: In Andaya v. Rural Bank of Cabadbaran, Inc., G.R. No. 188769, 2016, the Court ruled that the registration of a transfer of shares of stock is a ministerial duty on the part of the corporation. Aggrieved parties may then resort to the remedy of mandamus to compel corporations that wrongfully or unjustifiably refuse to record the transfer or to issue new certificates of stock. This remedy is available even upon the instance of a bona fide transferee who is able to establish Page 134 of 393 ATENEO CENTRAL BAR OPERATIONS 2020/21 a clear legal right to the registration of the transfer. D. Remedial Rights Suits by Stockholders/Members Individual Suit – those brought by the shareholder in his own name against the corporation when a wrong is directly inflicted against him. ii. Representative/Class Suit – those brought by the stockholder on behalf of himself and all other stockholders similarly situated when a wrong is committed against a group of stockholders. iii. Derivative Suit – those brought by one or more stockholders/members in the name and on behalf of the corporation to redress wrongs committed against it, or protect/vindicate corporate rights whenever the officials of the corporation refuse to sue, or the ones to be sued, or has control of the corporation. (Ching v. Subic Bay, G.R. No. 174353, 2014) - A lawyer engaged as counsel for a corporation cannot represent members of the Board in a derivative suit against them. To do so would be tantamount to conflicting interest between the Board and the corporation (Hornilla v. Salunat, A.C. 5804, 2003). i. Requisites of Derivative Suit a. He (Plaintiff) was a stockholder or member at the time the acts or transactions subject of the action was filed; b. He exerted all reasonable efforts, and alleges the same with particularity in the complaint, to exhaust all remedies available under the articles of incorporation, by-laws, laws or rules governing the corporation or partnership to obtain the relief he desires; The exhaustion of intra-corporate remedies cannot be dispensed even if the company is a family corporation (Yu v. Yukayguan, G.R. No. 177549, 2009; Ang v. Sps. Ang, G.R. No. 201675, 2013) c. No appraisal rights are available for the act or acts complained of; and d. The suit is not a nuisance or harassment suit (Interim Rules of Procedure for Intra- COMMERCIAL LAW Corporate Controversies, A.M. No. 01-2-04SC, 2001). As a general rule, corporate litigation must be commenced by the corporation itself, with the imprimatur of the board of directors, which, pursuant to the law, wields the power to sue. Therefore, since the derivative suit is a remedy of last resort, it must be shown that the board, to the detriment of the corporation and without a valid business consideration, refuses to remedy a corporate wrong. A derivative suit may only be instituted after such an omission. Simply put, derivative suits take a back seat to boardsanctioned litigation whenever the corporation is willing and able to sue in its own name. (Ago Realty & Dev. Corp. v. Ago, G.R. No.s 210906 & 211203, 2019) E. Obligations of a Stockholder a. Liability to the corporation for unpaid subscription; b. Liability to the creditors of the corporation for unpaid subscription; c. Liability to the corporation for interest on unpaid subscription if so required by the bylaws; d. Liability for watered stock; e. Liability for dividends unlawfully paid; F. Meetings i. Regular or Special: Regular - held annually on a date fixed in the bylaws, or if not so fixed, on date after April 15 of every year as determined by the board of directors or trustees.(Sec. 49) Special - held at any time deemed necessary or as provided in the by- laws. Provided that at least 1 week written notice shall be sent to all stockholders or members, unless otherwise provided in the by- laws. Note that notice of any meeting may be waived, expressly or impliedly by any stockholder or member. ii. Notice of Meeting When - written notice of regular meetings shall be sent to stockholders or members of record at least twenty-one (21) days prior to the meeting. (Sec. 49) Page 135 of 393 ATENEO CENTRAL BAR OPERATIONS 2020/21 How - written notice to regular meetings may be sent to the stockholders or members of record through: a. means of communication provided in the bylaws (Sec. 50) b. electronic mail (Sec.49) c. such other manner as the SEC shall allow under its guidelines. Notice of Meetings shall state the time place and purpose of the meeting and shall be accompanied by: 1. agenda for the meeting 2. proxy form 3. requirements and procedures to be followed in case a stockholder elects and is allowed to participate, attend and vote by remote communication. 4. requirements and procedures for nomination and in case the meeting is for election of directors. (Sec. 50) Section 50 of the Corporation Code expressly allows a shorter period of notice of stockholders’ meetings that those provided under its default two (2) week period, provided the same is provided for in the By-Laws, (Ricafort v. Dicdican, 787 SCRA 163, 2016); such period set in the by-laws is valid even when the period is reckoned from the mailing of the notice rather than when it is actually received by the stockholder of record, (Guy v. Guy, 790 SCRA 288, 2016) iii. Place and time of meetings Where?- The meetings of stockholders or members whether regular or special shall be held in the principal office of the corporation as set forth in the articles or if not practicable, in the city or municipality where the principal office of the corporation is located. (Sec. 49) COMMERCIAL LAW meeting of the corporation by giving proper notice required by this Code or the bylaws, with the petitioner presiding thereat until at least a majority of stockholders/ members present have chosen a presiding officer. (Sec. 49). Who presides over the meetings? General Rule: The chairman Exceptions: 1. In the absence of the chairman, the president shall preside at all meetings of the directors or trustees as well as of the stockholders or members, unless the bylaws provide otherwise. 2. In the following cases: (1) there is no person designated by the by-laws to call a meeting, or (2) the person authorized unjustly refuses to call a meeting, The petitioning stockholders / member shall preside until at least a majority of stockholders/ members present have chosen a presiding officer. (Sec 49). iv. Quorum General rule: Majority of the outstanding capital stock, or of the members, shall constitute a quorum (Sec. 51) Outstanding Capital Stock – the total shares of stock issued under binding subscription agreements to subscribers or stockholders, whether or not fully or partially paid, except treasury shares Who calls for the meetings? In case the ff. shall occur: (1) there is no person designated by the by-laws to call a meeting, or (2) the person authorized unjustly refuses to call a meeting, Exceptions: a. The bylaws provides for a greater majority (Sec. 51) b. If the rescheduled election of directors/trustees is held, the voting shares of stock or membership represented at the meeting ordered by the SEC shall constitute a quorum for purposes of conducting an election under this Section 25. c. In cases where greater vote for an act or business is required by law as when the required vote is 2/3 of the outstanding capital stock, or membership as the case may be. The SEC upon petition of a stockholder/ member, and on the showing of good cause therefore, may issue an order directing the petitioner to call a Note: For stock corporations, the “quorum” referred to in Section 52 of the Corporation Code is based on the number of outstanding voting When? - Regular - held annually ; Special - held at any time deemed necessary Page 136 of 393 ATENEO CENTRAL BAR OPERATIONS 2020/21 stocks. For non- stock corporations, only those who are actual, living members with voting rights shall be counted in determining the existence of a quorum during member’s meetings. Dead members shall not be counted (Tan v. Sycip, G.R. No. 153468, 2006). v. Minutes and agenda of meetings Minutes of the meeting ● Records of all business transactions and minutes of all meetings shall be kept and carefully preserved at a corporation’s principal office ● It shall set forth in detail: - the time and place of the meeting held - how it was authorized - the notice given - the agenda therefor - whether the meeting was regular or special, its object if special - those present and absent, and - every act done or ordered done at the meeting. - upon the demand of any director, trustee, stockholder or member, the time when any director, trustee, stockholder or member entered or left the meeting must be noted in the minutes; - on a similar demand, the yeas and nays must be taken on any motion or proposition, and a record thereof carefully made. - the protest of any director, trustee, stockholder or member on any action or proposed action must be recorded in full upon their. (Sec. 75) The signing of the minutes by all the members of the board is not required—there is no provision in the Corporation Code that requires that the minutes of the meeting should be signed by all the members of the board. The signature of the corporate secretary gives the minutes of the meeting probative value and credibility (People v. Dumlao, G.R. No. 168918, 2009). COMMERCIAL LAW Resolution vs. Minutes Of The Meeting (People v. Dumlao, G.R. No. 168918, 2009) RESOLUTION MINUTES OF THE MEETING A formal action by a A brief statement not corporate board of only of what transpired directors or other at a meeting, usually of corporate body stockholders/members authorizing a or directors/trustees, particular act, but also at a meeting of transaction, or an executive appointment committee Agenda of meetings (Sec. 49) At each regular meeting of stockholders or members, the board of directors or trustees shall endeavor to present to stockholders or members the following: a. The minutes of the most recent regular meeting b. A members’ list for non-stock corporations and, for stock corporations, material information on the current stockholders, and their voting rights; c. A detailed, descriptive, balanced and comprehensible assessment of the corporation’s performance, d. A financial report for the preceding year, e. An explanation of the dividend policy and the fact of payment of dividends f. Director or trustee profiles g. A director or trustee attendance report, indicating the attendance of each director or trustee at each of the meetings of the board and its committees and in regular or special stockholder meetings; h. Appraisals and performance reports for the board and the criteria and procedure for assessment; i. A director or trustee compensation report j. Director disclosures on self-dealings and related party transactions; and/or k. The profiles of directors nominated or seeking election or reelection. The entries contained in the minutes are prima facie evidence of what actually took place during the meeting, pursuant to Section 44, Rule 130 of the Revised Rule on Evidence (People v. Dumlao, G.R. No. 168918, 2009). Page 137 of 393 ATENEO CENTRAL COMMERCIAL LAW BAR OPERATIONS 2020/21 9. BOARD OF DIRECTORS AND TRUSTEES A. Repository of Corporate Powers Doctrine of Centralized Management Unless otherwise provided in this Code, the board of directors or trustees shall exercise the corporate powers, conduct all business, and control all properties of the corporation (Sec. 22). Powers of the Board of Directors General Rule: The Board of Directors ALONE exercises the powers of the corporation. Exceptions: Other persons or groups within the corporation may do so similarly: a) If (1) there is a management contract and (2) powers are delegated by majority of the board to an executive committee; b) Corporate officers (e.g. the President) via authority from (1) law, (2) corporate by-laws; and (3) authorization from the board, either expressly or impliedly by habit, custom or acquiescence in the general course of business; c) A corporate agent in transactions with third persons to the extent of the authority to do so has been conferred upon him; d) Those with apparent authority (doctrine of apparent authority). Theories on Source of Board Power a. Directly-Vested / Original Power Pursuant to Section 22, the source of power of the Board of Directors is primarily and directlyvested by law; it is not a delegated power from the stockholders or members of the corporation b. Delegated Powers from Stockholders The Board of Directors is a creation of the stockholders and controls and directs the affairs of the corporation by delegation of the stockholders. By drawing to themselves the powers of the corporation, they occupy positions of trusteeship in relation to the stockholders. Doctrine of Ratification The corporation may ratify the unauthorized acts of its corporate officer. The substance of the doctrine is confirmation after conduct, amounting to a substitute for a prior authority. Ratification can be made either expressly or impliedly like silence or acquiescence and acceptance of benefits (Yasuma v. Heirs of Cecilio De Villa, G.R. No. 150350, 2006). But illegal acts cannot be ratified. Doctrine of Apparent Authority If a corporation knowingly permits one of its officers, or any other agent, to act within the scope of an apparent authority, it holds him out to the public possessing the power to so do those acts; and thus, the corporation will, as against anyone who has in good faith dealt with it through such agent, be estopped from denying the agent’s authority. (Francisco v. GSIS, G.R. No. L18287, 1963) Apparent through: authority may be ascertained a. The general manner in which the corporation holds out an officer or agent as having the power to act or, in other words, the apparent authority to act in general, with which it clothes him; or b. The acquiescence in his acts of a particular nature, with actual or constructive knowledge thereof, whether within or beyond the scope of his ordinary powers. If a private corporation intentionally or negligently clothes its officers or agents with apparent power to perform acts for it, the corporation will be estopped to deny that the apparent authority is real as to innocent third persons dealing in good faith with such officers or agents. Note: It requires presentation of evidence of similar acts executed either in its favor or in favor of other parties. It is not the quantity of similar acts which establishes apparent authority, but the vesting of a corporate officer with the power to bind the corporation (People’s Aircargo and Warehousing Co., Inc. v. CA., G.R. No. 117847, 1998). When the officers or agents of a corporation exceed their powers in entering into contracts or doing other acts, the corporation, when it has knowledge thereof, must promptly disaffirm the contract or act and allow the other party or third persons to act in the belief that it was authorized or has been ratified. If it acquiesces, with Page 138 of 393 ATENEO CENTRAL BAR OPERATIONS 2020/21 knowledge of the facts, or fails to disaffirm, ratification will be implied or else it will be estopped to deny ratification (Premiere Development Bank vs. CA, G.R. No. 159352, 2004). Efren was Bonanza’s General Property Manager while Miguel was the President. Bonanza leased the lot to Efren but eventually notified the latter about the rescission of lease. Using the Doctrine of Apparent Authority, Bonanza was estopped from denying the existence and enforceability of Lease Contract after it effectively ratified the lease by accepting proceeds throughout several years. Also, while it is true that the doctrine cannot be invoked by one who is not a third party, an officer of a corporation can actually be a third person in contract with the corporation. (Quesada, et al. v. Bonanza Restaurants, Inc., G.R. No. 207500, 2016) B. Tenure, Qualifications and Disqualifications of Directors Term of Office (Sec. 22) ● Directors shall be elected for a term of one (1) year from among the holders of stocks registered in the corporation’s books ● Trustees shall be elected for a term not exceeding three (3) years from among the members of the corporation. Each director/trustee shall hold office until the successor is elected and qualified. Qualifications of Directors a. Must own at least one (1) share of the capital stock of the corporation in his own name or must be a member in the case of non-stock corporations i. Any director who ceases to be the owner of at least one (1) share of the capital stock of the corporation of which he is a director shall thereby cease to be a director. (Sec. 22) b. He must not be disqualified under the RCC (Sec. 26) c. He must possess other qualifications as may be prescribed in the by-laws of the corporation. (Gokongwei, Jr. v. SEC, G.R. No. L-45911, 1979) d. He must be of legal age COMMERCIAL LAW Disqualifications of Directors, Trustees, or Officers (Sec. 26) A person shall be disqualified from being a director, trustee, or officer of any corporation if, within five (5) years prior to the election or appointment as such, the person was: a) Convicted by final judgment: i. Of an offense punishable by imprisonment for a period exceeding six (6) years; ii. For violating this Code; and iii. For violating “The Securities Regulation Code”; b) Found administratively liable for any offense involving fraud acts; and c) By a foreign court or equivalent foreign regulatory authority for acts, violations or misconduct similar to those enumerated in paragraphs (a) and (b) above. Grounds not exclusive The foregoing is without prejudice to qualifications or other disqualifications, which the SEC or the Philippine Competition Commission may impose in its promotion of good corporate governance or as a sanction in its administrative proceedings. (Sec. 26) By-law provisions that prohibit directors who have interests in competitor corporations are reasonable in order to protect the interests of the company (Gokongwei v. SEC, G.R. No. L-45911, 1979) Hold-Over Principle Directors/Trustees may continue to hold office despite the lapse of one year until their successors are elected and qualified. Remaining members of the board of directors cannot elect another director to fill in a vacancy caused by the resignation of a hold-over director. The hold-over period is not part of the term of office of a member of the board of directors. (Valle Verde Country Club v. Africa, G.R. No. 151969, 2009) Thus, when during the holdover period, a director resigns from the board, the vacancy can only be filled-up by the stockholders, since there is no term left to fill-up pursuant to the provisions of Section 29 which mandates that a vacancy occurring in the board of directors caused by the expiration of a member’s term shall be filled by Page 139 of 393 ATENEO CENTRAL BAR OPERATIONS 2020/21 the corporation’s stockholders. (Valle Verde Country Club v. Africa, G.R. No. 151969, 2009) A director continuing to serve after one year from his election (on a holdover capacity), cannot be considered as extending his term. This hold-over period is not part of his term, which, as declared, had already expired. (Valle Verde Country Club v. Africa, G.R. No. 151969, 2009) C. Requirement of Independent Directors (Sec. 22) An independent director is a person who, apart from shareholdings and fees received from the corporation, is independent of management and free from any business or other relationship which could, or could reasonably be perceived to materially interfere with the exercise of independent judgment in carrying out the responsibilities as a director. Requirements: Independent directors must be: 1) independent of management and free from any relationship which could materially interfere with the exercise of independent judgment as a director 2) a shareholder and receive fees from the corporation 3) elected by the shareholders present or entitled to vote in absentia during the election of directors. 4) subject to rules and regulations governing their qualifications, disqualifications, voting requirements, duration of term and term limit, maximum number of board memberships and other requirements that the SEC will prescribe. Corporations required to have Independent Directors The board of the following corporations vested with public interest shall have independent directors constituting at least twenty percent (20%) of such board: a) Corporations covered by “The Securities Regulation Code”, namely: i. those whose securities are registered with the SEC, ii. corporations listed with an exchange or with assets of at least Fifty million pesos COMMERCIAL LAW (P50,000,000.00) and having two hundred (200) or more holders of shares, each holding at least one hundred (100) shares of a class of its equity shares; b) Banks and quasi-banks, NSSLAs, pawnshops, corporations engaged in money service business, pre-need, trust and insurance companies, and other financial intermediaries; and c) Other corporations engaged in business vested with public interest similar to the above, as may be determined by the SEC, considering such factors: i. such as the extent of minority ownership, ii. type of financial products or securities issued or offered to investors, iii. public interest involved in the nature of business operations, and iv. other analogous factors. D. Elections Election of Directors or Trustees (Sec. 23) Manner of Election ● In any form; or ● By ballot when requested by any voting stockholder or member ● In stock corporations, voting may be in person or by proxy Time to Determine Voting Right ● At the time fixed in by- laws ● If by- laws are silent, at time of election i. Cumulative Voting/Straight Voting a. Straight voting – Every stockholder may vote the number of outstanding capital stock in his own name for as many persons as there are directors to be elected; or in non-stock corporations, members may cast as many votes as there are trustees to be elected but may not cast more than one vote for one candidate. (In straight voting, the votes are spread out evenly among all the elective positions) b. Cumulative voting for one candidate – a stockholder may accumulate his shares and Page 140 of 393 ATENEO CENTRAL BAR OPERATIONS 2020/21 c. give one candidate as many votes as the number of directors to be elected multiplied by the number of his shares shall equal; Cumulative voting by distribution – a stockholder may also cumulate his shares by multiplying the number of his shares by the number of directors to be elected and distribute the same among as many candidates as he shall see fit Methods of Voting in Relation to Type of Corporation a) Stock Corporations Stockholders entitled to vote shall have the right to vote the number of shares of stock standing in their own names in the stock books of the corporation at the time fixed in the bylaws or where the bylaws are silent, at the time of the election The stockholder may use: 1) Straight Voting 2) Cumulative voting for one candidate 3) Cumulative voting by distribution Note: The total number of votes cast shall not exceed the number of shares owned by the stockholders as shown in the books of the corporation multiplied by the whole number of directors to be elected; and that no delinquent stock shall be voted. b) Non-stock Corporations General Rule: Members of nonstock corporations may use Straight Voting, i.e. cast as many votes as there are trustees to be elected but may not cast more than one (1) vote for one (1) candidate. Exception: Unless otherwise provided in the articles of incorporation or in the bylaws. (Sec. 23) ii. Quorum At all elections of directors or trustees, there must be present, either in person or through a representative authorized to act by written proxy: ● Stock Corporation – owners majority of outstanding capital stock ● Non-stock Corporation – majority of members entitled to vote COMMERCIAL LAW Note: When so authorized in the bylaws or by a majority of the board of directors, the stockholders or members may also vote through remote communication or in absentia. The right to vote through such modes may be exercised in corporations vested with public interest, notwithstanding the absence of a provision in the by-laws of such corporations. (sec. 23) Who Elects Directors or Trustees ● By the stockholders/members as provided in the by-laws (traditionally during annual SH/M meetings ● By the board, if still constituting quorum for vacancies in the interim (i.e. between annual meetings) due to causes other than removal or expiry of term (Sec. 28) ● If the vacancies are due to removal or expiry of term, the directors/trustees must be elected by the stockholders/members at a meeting for this purpose (special meeting) How Elected ● By owners of majority of outstanding capital stock or by members in annual stockholders’/members’ meeting ● Stockholders/members may be present in person or by written proxy ● For stock corporations: Number of votes = (no. of shares) x (no. of directors to be elected) ● By straight voting or cumulative voting, which is all votes may be cast for a candidate or distributed among the candidates ● For non-stock corporations: Unless otherwise provided in the articles of incorporation or in the by-laws, members of non-stock corporations may cast as many votes as there are trustees to be elected but may not cast more than one vote for one candidate. ● Viva voce (live voice) or must be by ballot if requested ● Delinquent shares and treasury shares cannot vote ● Candidates with highest number of votes will be declared elected Page 141 of 393 ATENEO CENTRAL COMMERCIAL LAW BAR OPERATIONS 2020/21 Election Rules on Stock and Non-Stock Corporations STOCK NON-STOCK CORPORATION CORPORATION Owners of a majority A majority of the of outstanding capital members, either in stock, either in person person or by or by representative representative authorized to act by authorized to act by written proxy, must be written proxy, must be present at the election present at the election of the directors of the trustees Cumulative voting or Cumulative voting is Straight voting can be not available, unless used; a matter of right allowed by the articles granted by law to or by-laws. each stockholder with voting rights. The Board may be elected by region. Directors are elected at large. Alien Membership in Board of Directors P.D. No. 715: "election of aliens as members of the board of directors of governing body of corporations or associations engaging in partially nationalized activity shall be allowed in proportion to their allowable participation or share in the capital of such entities." Non-Filipino citizens may become members of the board of directors of a bank to the extent of the foreign participation in the equity of said bank. (General Banking Law, Sec. 15) Filling Vacancies in Board - Permissive The filling of vacancies in the board by the remaining directors or trustees constituting a quorum as provided for by Section [28] is merely permissive, not mandatory, and the vacancies may still be filled-up by the stockholders of members in a regular or special meeting called for the purpose. However, when the by-laws of the corporation contain a specific mode of fillingup existing vacancies in the board, the same is mandatory (Tan v. Sycip, G.R. No. 153468, 2006). Report Of Election of Directors, Trustees and Officers Within thirty (30) days after the election of the directors, trustees and officers of the corporation, the secretary, or any other officer of the corporation, shall submit to the SEC, the names, nationalities, shareholdings, and residence addresses of the directors, trustees, and officers elected. (Sec. 25) Only the directors and officers of the corporation whose names appear in the report submitted to the SEC are deemed legally constituted to bind the corporation in bringing a suit on behalf of the corporation (Premium Marble Resources v. CA, G.R. No. 96551, 1996). Non-holding of Election The non-holding of elections and the reasons shall be reported to the SEC within thirty (30) days from the date of the scheduled election. The report shall specify a new date for the election, which shall not be later than sixty (60) days from the scheduled date. If no new date has been designated, or if the rescheduled election is likewise not held, the SEC may, upon the application of a stockholder, member, director or trustee, and after verification of the unjustified non-holding of the election, summarily order that an election be held. The SEC shall have the power to issue such orders as may be appropriate, including: a) orders directing the issuance of a notice stating the time and place of the election, b) designated presiding officer, and c) the record date or dates for the determination of stockholders or members entitled to vote. Notwithstanding any provision of the articles of incorporation or bylaws to the contrary, the shares of stock or membership represented at such meeting and entitled to vote shall constitute a quorum for purposes of conducting an election under this section. (Sec. 25) Cessation from Office Should a director, trustee or officer die, resign or in any manner cease to hold office, the secretary, or the director, trustee or officer of the Page 142 of 393 ATENEO CENTRAL BAR OPERATIONS 2020/21 corporation, or in case of death, the officer’s heirs shall, within seven (7) days from knowledge thereof, report in writing such fact to the SEC. (Sec. 25) E. Removal (Sec. 27) Requisites of Removal from the Board a. It must take place either at a regular meeting or special meeting of the stockholders or members called for the purpose; b. There must be previous notice to the stockholders or members of the intention to remove; c. The removal must be by a vote of the stockholders representing 2/3 of the outstanding capital stock or 2/3 of the members, as the case may be; d. The director may be removed with or without cause unless he was elected by the minority, in which case, it is required that there is cause for removal. Note: The SEC shall, motu proprio or upon verified complaint, and after due notice and hearing, order the removal of a director or trustee elected despite the disqualification, or whose disqualification arose or is discovered subsequent to an election. This is without prejudice to other sanctions that the SEC may impose on the board of directors or trustees who, with knowledge of the disqualification, failed to remove such director or trustee. F. Filling of Vacancies (Sec. 28) Replacement director or trustee - A director or trustee elected to fill a vacancy and shall serve only for the unexpired term of the predecessor in office. How Elections should be held: In all elections to fill vacancies under this section, the procedure set forth in Sections 23 and 25 of this Code shall apply. When Elections may be held: a) Due to term expiration- the election shall be held no later than the day of such expiration at a meeting called for that purpose. b) Result of removal- the election may be held on the same day of the meeting COMMERCIAL LAW authorizing the removal and this fact must be so stated in the agenda and notice of said meeting. c) In all other cases, the election must be held no later than forty-five (45) days from the time the vacancy arose. Vacancy NOT by removal or expiration of term May be filled by: a) the vote of at least a majority of the remaining directors or trustees, if still constituting a quorum; b) if not, said vacancies must be filled by the stockholders or members in a regular or special meeting called for that purpose. Cases when Emergency Action is Required Requirements: a) If the vacancy prevents the remaining directors from constituting a quorum b) emergency action is required to prevent grave, substantial, and irreparable loss or damage to the corporation Effects: a) The vacancy may be temporarily filled from among the officers of the corporation by unanimous vote of the remaining directors or trustees. b) The action by the designated director or trustee shall be limited to the emergency action necessary, c) The term shall cease within a reasonable time from the termination of the emergency or upon election of the replacement director or trustee, whichever comes earlier. d) The corporation must notify the SEC within three (3) days from the creation of the emergency board, stating therein the reason for its creation. Vacancy filled by reason of an increase in the number of directors or trustees This vacancy shall be filled only by an election at a regular or at a special meeting of stockholders or members duly called for the purpose, or in the same meeting authorizing the increase of directors or trustees if so stated in the notice of the meeting. Page 143 of 393 ATENEO CENTRAL BAR OPERATIONS 2020/21 G. Compensation (Sec. 30) General Rule: In the absence of any provision in the by-laws fixing their compensation, the directors shall not receive any compensation, as such Exception: They may receive reasonable per diems [i.e. at meetings] Qualifiers to General Rule and Exception Any such compensation other than per diems may be granted to directors by the vote of the stockholders representing at least a majority of the outstanding capital stock at a regular or special stockholders' meeting. However: In no case shall the total yearly compensation of directors, as such directors, exceed 10% percent of the net income before income tax of the corporation during the preceding year. Directors or trustees shall not participate in the determination of their own per diems or compensation. Note: The implication of the phrase “as such directors” is that members of the Board may receive compensation, in addition to reasonable per diems, when they render services to the corporation in a capacity other than as directors or trustees [in this case, if serving as corporate officers] (Western Technology v. Salas, G.R. No. 113032, 1997) For Corporations vested with public interest These corporations shall submit to their shareholders and the SEC, an annual report of the total compensation of each of their directors or trustees. H. Disloyalty Rules on Fiduciaries’ Duties and Liabilities Three-Fold Duties of Directors (Strategic Alliance Development Corporation v. Radstock, G.R. No. 178158, 2009) a. Duty of Obedience (Basis: Sec. 24) To direct the affairs of the corporation only in accordance with the purposes for which it was organized COMMERCIAL LAW b. Duty of Loyalty (Basis: Secs. 30 & 33) Directors or trustees shall not acquire any personal or pecuniary interest in conflict with their duty as such directors or trustees. Disloyalty: Sec. 30(2) v. Sec. 33 SEC. 30(2) SEC. 33 Applicable to Applicable to directors directors, trustees, only and officers Allows ratification of a No ratification allowed transaction by the director Covers stock and Covers stock non-stock corporations only corporations c. Duty of Diligence (Basis: Sec. 30) Directors and/or trustees shall not willfully and knowingly vote for or assent to patently unlawful acts of the corporation or act in bad faith or with gross negligence in directing the affairs of the corporation. Doctrine of Corporate Opportunity If there is presented to a corporate officer or director a business opportunity, which the corporation has an interest or a reasonable expectancy, the self-interest of the officer or director will be brought into conflict with that of his corporation. The law does not permit him to seize the opportunity even if he will use his own funds in the venture. If he seizes the opportunity thereby obtaining profits to the expense of the corporation, he must account all the profits by refunding the same to the corporation. Requisites of Doctrine of Corporate Opportunity a. The Corporation is financially able to undertake the business opportunity. b. From the nature of the business opportunity, it is in line with the corporation’s business and is of practical advantage to the corporation. c. The corporation has an interest or a reasonable expectancy, by embracing the opportunity. Consequence of violation a. Directors must account for all the profits by refunding the same to the corporation b. Directors may be removed from the board. Page 144 of 393 ATENEO CENTRAL BAR OPERATIONS 2020/21 Exception: The act of the director has been ratified by a vote of the stockholders owning or representing at least two-thirds (2/3) of the outstanding capital stock. Violations of Secs. 30 and 33 are not penal offenses in relation Sec. 158: Had the Legislature intended to attach penal sanctions to said sections, it could have expressly stated such intent in the same manner it did for Section 74 of the same Code that the violation thereof is likewise considered an offense under Section 144. (Ient v. Tullet, Inc., G.R. No. 189158, 2016) COMMERCIAL LAW Liability for Watered Stocks Directors or officers consenting to issuance of watered stocks are solidarily liable with the stockholder concerned, to the corporation or its creditors for the difference between the fair value received (by the corporation at the time of the issuance) and the par or issued value of the stock issued. (Sec. 64) K. Personal Liabilities Liability under Sec. 30(1) Personal liability of a corporate director, trustee or officer may so validly attach, as a rule, only when: 1. He assents: a. To a patently unlawful act of the corporation, or b. For bad faith, or gross negligence in directing its affairs, or c. For conflict of interest, resulting in damages to the corporation, its stockholders or other persons (solidary liability under Sec. 30(1)); 2. He attempts to acquire, or acquires any interest adverse to the corporation in respect of any matter which has been reposed in them in confidence (liable as a trustee for the corporation under Sec. 30(2)) 3. He consents to the issuance of watered stocks or who, having knowledge thereof, does not forthwith file with the corporate secretary his written objection thereto (solidary liability under Sec. 64); 4. He agrees to hold himself personally and solidarily liable with the corporation; or 5. He is made, by a specific provision of law, to personally answer for his corporate action (Tramat Mercantile, Inc. v. CA, G.R. No. 111008, 1994). Directors or trustees who willfully and knowingly: a) vote for or assent to patently unlawful acts of the corporation b) are guilty of gross negligence or bad faith in directing the affairs of the corporation c) acquire any personal or pecuniary interest in conflict with their duty as such directors or trustees shall be liable jointly and severally for all damages resulting therefrom suffered by the corporation, its stockholders or members and other persons. Case law states that to hold a director or officer personally liable for corporate obligations, two requisites must concur: 1. it must be alleged in the complaint that the director or officer assented to patently unlawful acts of the corporation or that the officer was guilty of gross negligence or bad faith; and 2. there must be proof that the officer acted in bad faith. (Freyssinet Filipinas Corp. v. Lapuz, G.R. No. 226722, 2019) I. Business Judgment Rule Questions of policy or management are left solely to the honest decision of officers and directors of a corporation and the courts are without authority to substitute their judgment for the judgment of the board of directors; the board is the business manager of the corporation and so long as it acts in good faith its orders are not reviewable by the courts or the SEC. The directors are also not liable to the stockholders in performing such acts (Philippine Stock Exchange, Inc. v. CA, GR No. 130644, 1997). Coverage of the Rule: Two Branches a. Resolutions and transactions entered into by the Board of Directors within the powers of the corporation cannot be reversed by the courts not even on the behest of the stockholders of the corporation; and b. Directors and officers acting within such business judgment cannot be held personally liable for the consequences of such acts. J. Solidary liabilities for damages Page 145 of 393 ATENEO CENTRAL COMMERCIAL LAW BAR OPERATIONS 2020/21 L. Responsibility For Crimes General rule: The Board being generally a policy-making body, directors as such cannot be held liable under a criminal statute making those in charge of the management of the corporation liable for the criminal acts done in pursuit of corporate operations. The members of the Board generally do not concern themselves with the day-to-day affairs of the corporation, except those corporate officers who are charged with the running of the business of the corporation and are concomitantly members of the Board, like the President. (Federated Dealers Assn. v. Del Rosario, G.R. No. 202639, 2016). Exception: To be held criminally liable for the acts of a corporation, there must be a showing that its officers, directors, and shareholders actively participated in or had the power to prevent the wrongful act. (SEC v. Price Richardson Corp., G.R. No. 197032, 2017) M. Special Fact Doctrine Under the Special Facts Doctrine, although a director does not stand in fiduciary relation to the stockholder, he is under legal obligation to make fair and full disclosure of pertinent official information where special circumstances exist, giving rise to the obligation to disclose. (Soledad M. Cagampang, The Fiduciary Duties of Corporate Directors Under Philippine Law, 46 Phil. L. J., 513, 562 [1971]) N. Inside Information Unlawful Acts of Insider (RA 8799, Sec. 27) It shall be unlawful for an insider to sell or to buy a security of an issuer, while in the possession of material information with respect to the issuer or the security that is not generally available to the public unless: 1. The insider proves that the info was not gained from such relationship 2. That the other party selling to or buying from the insider is identified the insider proves a. That he disclosed the information b. That he had reason to believe that the other party otherwise is also in possession of the information Presumption of a Purchase or Sale of a Security of an Issuer of Insider Applies when an insider or an insider’s spouse, or relatives by affinity or consanguinity within the second degree, legitimate or common-law, while in possession of material nonpublic information if transacted after such information came into existence but prior to dissemination of such information to the public and the lapse of a reasonable time for market to absorb such information. This presumption is rebutted upon a showing by the purchaser or seller that he was aware of the material nonpublic information at the time of the purchase or sale. Material Nonpublic Information a. It has not been generally disclosed to the public and would likely affect the market price of the security after being disseminated to the public and the lapse of a reasonable time for the market to absorb the information; or 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. O. Contracts i. By Self-Dealing Corporation (Sec. 31) Directors with the A contract of the corporation with its director/s or trustee/s or officer/s, or their spouses and relatives within the fourth civil degree of consanguinity or affinity is voidable at the option of such corporation, unless the following are present: a. The presence of such director/trustee in the Board meeting in which the contract was approved was not necessary to constitute a quorum. b. The vote of such director or trustee was not necessary for the contract’s approval. c. The contract is fair and reasonable d. In case of corporations vested with public interest, material contracts are approved by at least two-thirds (2/3) of the entire membership of the board, with at least a majority of the independent directors voting to approve the material contract; and e. In case of an officer, the contract with him has been previously authorized by the Board. Page 146 of 393 ATENEO CENTRAL COMMERCIAL LAW BAR OPERATIONS 2020/21 Where any of the first three (3) conditions set forth in the is absent such contract may be ratified by: a) the vote of the stockholders representing at least two-thirds (2/3) of the outstanding capital stock or of at least two-thirds (2/3) of the members in a meeting called for the purpose; and b) Full disclosure of the adverse interest of the directors or trustees involved is made at such meeting and the contract is fair and reasonable under the circumstances. ii. Contracts Between Corporations with Interlocking Directors (Sec. 32) A contract between two (2) or more corporations having interlocking directors shall not be invalidated on that ground alone. These are valid so long as there is no fraud and the contract is fair and reasonable. However, if the director’s interest is nominal in one of the contracting corporations (not exceeding 20% of the outstanding capital stock), then the contract must comply with the requisites provided supra, Sec. 31, otherwise voidable. P. Executive and Other Special Committees Executive Committees (Sec. 34) i. Creation If the bylaws so provide, the board may create an executive committee composed of at least three (3) directors. Said committee may act, by majority vote of all its members, on such specific matters within the competence of the board, as may be delegated to it in the bylaws or by majority vote of the board. ii. Limitations Powers That Cannot Be Delegated to the Executive Committee a. Approval of action requiring concurrence of stockholders; b. Filling of vacancies in the board; c. Adoption, amendment or repeal of by-laws; d. Amendment or repeal of board resolution which by its terms cannot be amended or repealed; e. Distribution of cash dividends. (Sec. 34) Special Committees (Sec. 34) The board of directors may create special committees of temporary or permanent nature and to determine the members’ term, composition, compensation, powers, and responsibilities. Other delegations of authority a) The Board may delegate such powers to either an executive committee or officials or contracted managers. b) The delegation, except for the executive committee, must be for specific purposes. ● Accordingly, the general rules of agency as to the binding effects of their acts would apply. ● For such officers to be deemed fully clothed by the corporation to exercise a power of the Board, the latter must specially authorize them to do so (ABSCBN Broadcasting Corporation v. CA, GR No. 128690, 1999). Q. Meetings The corporation’s by-laws can provide otherwise to all the rules hereunder, so long as minimum requirements are satisfied. i. Regular or Special 1. Regular- held monthly, unless the by- laws provide otherwise 2. Special- held anytime upon the call of the President or as provided in the by- laws (1) When and Where ○ Monthly, unless otherwise provided in the by-laws, or anytime upon the call of the President or as provided in the by- laws ; ○ Anywhere in or outside the Philippines, unless the bylaws provide otherwise. (2) Notice of the meeting - at least two (2) days prior to the scheduled meeting, unless a longer time is provided in the bylaws. A director may waive the requirement, expressly or impliedly. (3) Attendance in Meetings - Directors or trustees cannot attend or vote by proxy at board meetings. Page 147 of 393 ATENEO CENTRAL COMMERCIAL LAW BAR OPERATIONS 2020/21 ○ Those who cannot physically attend or vote at board meetings can participate and vote through remote communication such as videoconferencing, teleconferencing, or other alternative modes of communication that allow them reasonable opportunities to participate. ii. Who Presides - The chairman or, in his absence, the president shall preside at all meetings of the directors or trustees as well as of the stockholders or members, unless the bylaws provide otherwise. (Sec. 53) iii. Quorum of Board General Rule: A majority of the directors or trustees as stated in the articles of incorporation shall constitute a quorum to transact corporate business Exception: Unless the articles of incorporation or the by-laws provides for a greater majority (Sec. 52) Valid Corporate Acts General Rule: Every decision reached by at least a majority of the directors or trustees constituting a quorum are considered valid. Exception: The election of officers shall require the vote of a majority of all the members of the board.(Sec. 52) Note: A director or trustee who has a potential interest in any related party transaction must recuse from voting on the approval of the related party transaction without prejudice to compliance with the requirements of Section 31 of this Code. iv. Rule on Abstention In case of abstention during a board meeting on a vote taken on any issue, the general rule is that an abstention is counted in favor of the issue that won the majority vote; since by their act of abstention, the abstaining directors are deem to abide by the rule of the majority. (Lopez v. Ericta, G.R. No. L-32991, 1972) Page 148 of 393 ATENEO CENTRAL BAR OPERATIONS 2020/21 Types of Meetings Place of Meetings When held Notice of Meeting Who presides Quorum COMMERCIAL LAW Comparison Between Stockholders’ and Directors’ Meeting STOCKHOLDERS’ MEETING DIRECTORS’ / TRUSTEES’ MEETING Regular and Special Regular and Special Held in the principal office of the corporation as set forth in the articles of incorporation, or if not practicable, in the city or municipality where the principal office of the corporation is located. REGULAR – held annually on a date fixed by the by- laws, or if not so fixed, on any date after April 15 every year as determined by the board of directors or trustees SPECIAL – held at any time deemed necessary or as provided in the by- laws REGULAR – notice must be sent at least 21 days before the meeting SPECIAL – notice must be sent at least 1 week. Notice may be waived, expressly or impliedly, by any stockholder or member General Rule: Person designated in the bylaws In default: Chairman, and in his absence, the president Majority of the outstanding capital stock, or of the members. EXCEPT:(a) greater majority is provided in the bylaws (b) in cases where greater vote for an act or business is required by law. Note: For stock corporations, quorum is based on outstanding voting stocks. For non-stock corporations, only those who are actual, living members with voting rights shall be counted.(Tan v. Sycip, G.R. No. 153468, 2006 Anywhere in or outside of the Philippines, unless the by- laws provide otherwise REGULAR – held monthly SPECIAL – held at any time upon the call of the President Notice must be sent at least two (2) days prior to the scheduled meeting, unless a longer time is provided in the bylaws. Notice may be waived expressly or impliedly, by any Director or Trustee The chairman or, in his absence, the president shall preside Majority of the number of directors and trustees as fixed in the articles of incorporation, unless the articles of incorporation or the by-laws provides for a greater majority. Page 149 of 393 ATENEO CENTRAL BAR OPERATIONS 2020/21 10. CAPITAL AFFAIRS COMMERCIAL LAW certificate. The subscription price of the stocks subscribed by him should first be paid. A. Certificate of stock A stock certificate or a certificate of stock is defined as a written instrument signed by the proper officer of a corporation stating or acknowledging that the person named in the document is the owner of a designated number of shares of its stock. It is prima facie evidence that the holder is a shareholder of a corporation. (Teng v. Securities and Exchange Commission, G.R. No. 184332, [February 17, 2016], 781 PHIL 133-148) i. Nature of the certificate It is the paper representation or tangible evidence of the stock itself and of the various representations therein. It expresses the contract between the corporation and the stockholder. It is not essential to the ownership and/or existence of the share of stock. It is prima facie evidence that the holder is a shareholder in a corporation (Makati Sports Club v. Cheng, G.R. No. 178523, 2010) It is a written acknowledgment by the corporation of the stockholder’s interest in the corporation. It is a personal property that may be mortgaged or pledged. Transfer binds the corporation only when it is recorded in the corporate books. Note: It is the shares that can be the subject of a security interest, not the certificate of stock Shares of Stock v. Certificate of Stock SHARES OF STOCK CERTIFICATE OF STOCK Unit of interest in a Evidence of the corporation holder’s ownership of the stock and of his right as a shareholder and up to the extend specified therein Incorporeal or It is concrete and intangible property tangible May be issued by the May be issued only if corporation even if the the subscription is subscription is not fully paid fully paid Note: A stockholder who does not pay his subscription is not entitled to the issue of a stock b. Consideration for Shares of Stock (See earlier discussion) ii. Uncertificated Shares/Securities Defined as security evidenced by electronic or similar records. (Securities and Regulation Code, Sec. 3.14) Note: Under Sec. 43.1 of the Securities and Regulation Code, a corporation whose shares of stock are registered pursuant to the Corporation Code or listed in a stock exchange may: a. If so resolved by its Board of Directors and agreed by a shareholder, issue shares to, or record the transfer of some or all of its shares into the name of said shareholders, investors or, securities intermediary in the form of uncertificated securities; b. The use of uncertificated securities shall be without prejudice to the rights of the securities intermediary subsequently to require the corporation to issue a certificate in respect of any shares recorded in its name; and c. If so provided in its articles of incorporation and by-laws, issue all of the shares of a particular class in the form of uncertificated securities and subject to a condition that investors may not require the corporation to issue a certificate in respect of any shares recorded in their name. iii. Negotiability; Requirements for Valid Transfer of Stocks Negotiability Stock certificates are not negotiable instruments under the purview of Negotiable Instruments Law because there is no promise or order to pay money. A stock certificate is a quasi-negotiable instrument because it may be transferred by endorsement coupled with delivery but the holder thereof takes it without prejudice to such rights or defenses as the registered owner or creditor may have under the law, except insofar as such rights or defenses are subject to the limitations imposed by the principles governing estoppel. (De los Santos v. McGrath, G.R. No. L-4818, 1955) Page 150 of 393 ATENEO CENTRAL BAR OPERATIONS 2020/21 Requirements for Valid Transfer of Stock: 1. If represented by a certificate, the following must be strictly complied with: a. Endorsement by owner or his representative b. Delivery coupled with an intention of constituting the person to whom the stock is delivered the transferred (sic) thereof.(Neugene Marketing, Inc. v. Court of Appeals, G.R. No. 112941, [February 18, 1999], 362 PHIL 633646) c. Must be recorded in the corporation’s Stock and Transfer Book (STB) to bind the corporation and third parties (Teng v. SEC, Gr 184332, February 17, 2016) Note: Recording in STB is only required for absolute transfers, which do not include pledges, mortgages, etc. (Monserrat v. Ceron, G.R. No. 37078, September 27, 1933) 2. If NOT represented by the certificate (such as when the certificate has not yet been issued or where for some reason is not in the possession of the stockholder): a. By means of deed of assignment or public document; and b. Such deed of assignment or public document must be duly recorded in the books of the corporation (Ponce v. Alsons Cement Corporation, G.R. No. 139802, December 10, 2002) If, however, the reason for the absence of a certificate is that the subscription has not been fully paid, the corporation may refuse to record a sale given that under Sec. 62, “[n]o shares of stock against which the corporation holds any unpaid claim shall be transferable in the books of the corporation.” iv. Issuance 1. Full Payment (Sec. 63) No stock certificate shall be issued unless there is full payment of: 1. Subscription; 2. Interest; and 3. Expenses (in case of delinquent shares). COMMERCIAL LAW Principle of Indivisibility of Subscription A subscription is one entire and indivisible contract. It cannot be divided into portions, so that the stockholder shall not be entitled to a certificate of stock until he has remitted the full payment. 2. Payment pro rata All partial payments on one subscription shall be deemed applied proportionately among the number of shares. To permit the issuance of a stock certificate without full payment will be in violation of Sec. 63 (Timoteo Aquino, 2018) In the absence of special agreement to the contrary, the subscriber’s right consists only in an equity entitling him to a certificate for the total number of shares subscribed for by him upon payment of the remaining portion of the subscription price (Fua Cun vs. Summers, G.R. No. 19441, 1923). Requisites for Issuance of Certificate of Stock 1. The certificate must be signed by the president or vice-president, countersigned by the secretary or assistant secretary; 2. The certificate must be sealed with the seal of the corporation; 3. The certificate must be delivered; 4. The par value, as to par value shares or full subscription as to no par value shares must first be fully paid; and 5. The original certificate must be surrendered where the person requesting the issuance of a certificate is a transferee from the stockholder (Bitong v. CA, G.R. No. 123553, July 13, 1998) v. Stock And Transfer Book 1. Contents Stock corporations must keep a stock and transfer book, which shall contain a record of: 1. All stocks in the names of the stockholders alphabetically arranged; 2. The installments paid and unpaid on all stock for which subscription has been made, and the date of payment of any installment; 3. A statement of every alienation, sale or transfer of stock made; and 4. Such other entries as the by-laws may prescribe. (Sec. 73) Page 151 of 393 ATENEO CENTRAL COMMERCIAL LAW BAR OPERATIONS 2020/21 Only absolute transfers of shares of stock are required to be recorded in the corporation’s stock and transfer book in order to have force and effect as against third persons. Attachments of shares are not “transfers” and need not be recorded in the corporation’s stock and transfer book. (Ferro Chemicals v. Garcia, et al., G.R. 168134, 2016) 2. Who May Make Valid Entries Only the corporate secretary is duly authorized to make entries on the stock and transfer book. Hence, entries made by the Chairman or the President are invalid. (Torres Jr. v. CA, G.R. No. 120138, 1997). Registration of a transfer of shares of stock is a ministerial duty on the part of the corporation. Aggrieved parties may then resort to the remedy of mandamus to compel corporations that wrongfully or unjustifiably refuse to record the transfer or to issue new certificates of stock. This remedy is available even upon the instance of a bona fide transferee who is able to establish a clear legal right to the registration of the transfer. (Andaya v. Rural Bank of Cabadbaran, Inc., G.R. No. 188769, 2016) 3. Stock transfer agents A stock transfer agent or one engaged principally in the business of registering transfers of stocks on behalf of a stock corporation. (Sec. 75) A stock transfer agent shall be allowed to operate in the Philippines upon compliance with the following: 1. securing a license from the SEC (renewable annually) 2. payment of a fee fixed by the SEC vi. Lost or Destroyed Certificate Procedure for the issuance of new certificates to replace those lost, stolen, or destroyed: (Sec. 72) a. The registered owner of a certificate of stock in a corporation or his legal representative shall file with the corporation an affidavit in triplicate setting forth the ff: i. Circumstances of the Loss; ii. Certificates and Serial Numbers of lost certificates; and iii. Other Information and Evidence. b. The corporation shall publish a notice of loss once a week for at least three (3) consecutive weeks in a newspaper of general circulation in the place where the corporation has its principal office. The notice shall state the ff: i. name of the corporation ii. name of the registered owner iii. the serial number of the certificate iv. the number of shares represented by such certificate v. after one (1) year from the date of the last publication without contest, the right to make such contest shall be barred and the corporation shall cancel the lost certificate vi. in lieu thereof, a new certificate of stock is issued c. If a contest is presented to the corporation or if an action is pending in court, issuance of new certificates is suspended until the court renders a decision regarding the ownership of the certificate of stock d. No action is allowed against the corporation for issuing new shares except for fraud, bad faith, or negligence. vii. Situs of the Shares of Stocks The situs of shares of stock is the domicile of the corporation (Tayag v. Benguet Consolidated Inc., G.R. No. L-23145, 1968). B. Watered Stock (Diluted Stock) i. Definition Stocks issued for a consideration less than the par or issued price thereof. (Sec. 61) ii. Liability Of Directors For Watered Stock Directors or officers who shall commit the following will be liable to the corporation or its creditors, solidarily with the stockholder Page 152 of 393 ATENEO CENTRAL COMMERCIAL LAW BAR OPERATIONS 2020/21 concerned for the difference between the value received at the time of issuance of the stock and the par or issued value of the same : (Sec. 64) 1. consents to the issuance of stocks for a consideration less than the par or issued value; 2. consents to the issuance of stocks for a consideration other than cash, valued in excess of its fair value; 3. having knowledge of the insufficient consideration does not file a written objection with the corporate secretary iii. Trust Fund Doctrine On Watered Stocks The Trust Fund Doctrine is the basis for the prohibition on issuing watered stock. A Corporation has no power to release an original subscriber of its capital stock from the obligation of paying for his shares, without a valuable consideration for such release; and as against creditors, a reduction of the capital stock can take place only in the manner and under the conditions prescribed by the statute or the charter or the articles of incorporation (Philippine Trust Corp. v. Rivera, G.R. No. L-19761, 1923). See subsection F.4. for discussion on Trust Fund Doctrine. C. Payment of Balance of Subscription i. Call by Board of Directors The board of directors may, at any time, declare due and payable to the corporation unpaid subscriptions and may collect the same or such percentage thereof, in either case, with accrued interest, if any, as it may deem necessary. Requisites for a valid call a) Must be made in the manner prescribed by law; b) Must be made by the Board of Directors; and c) Must operate uniformly upon all shareholders Note: A call is not necessary in two cases 1. when the date of payment is specified in the subscription 2. when the corporation becomes insolvent (Velasco v. Poizat) ii. Notice Requirement The unpaid subscriptions are not due and payable without a call. A corporation cannot file an action to recover the unpaid price if the action is not preceded by a call, until a call is made, no cause of action accrues (Lingayen Gulf Electric Power Company v. Baltazar, G.R. No. L-4824, June 30, 1954). Payment of balance of subscription Payment of unpaid subscription or any percentage thereof, together with any interest accrued, shall be made on the date specified in the subscription contract or on the date stated in the call made by the board.(Sec 66) Effect of Failure to Pay Balance (Sec. 66) 1. The entire balance shall be due and payable 2. The stockholder shall liable for interest 3. If no payment is made within thirty (30) days from the said date, all stocks covered by the subscription shall thereupon become delinquent and shall be subject to sale as hereinafter provided, unless the board of directors orders otherwise. The prescriptive period in case of subscription of shares begins to run only from the time the board of directors declares that the balance is due and payable (Garcia v. Suarez, G.R. No. 45493, 1939) Unpaid Subscriptions (Sec. 66) a. There will be interest imposed on unpaid subscriptions b. Payable to the corporation from date of subscription c. If required by and interest fixed in the By-laws d. If interest is required but not fixed – legal rate e. Therefore, no interest on unpaid subscription is required: b. If not required by by-laws c. If not required by subscription contract Methods of Collection of Unpaid Subscription a. Call for payment b. Declaration of delinquency and sale at public auction of delinquent shares; c. Ordinary civil action; Page 153 of 393 ATENEO CENTRAL BAR OPERATIONS 2020/21 d. Collection from cash dividends and other amounts due to stockholders if allowed by bylaws/agreed to by him. COMMERCIAL LAW iv. Auction Sale Auction Sale is conducted not less than thirty (30) days nor more than sixty (60) days from the date the stocks become delinquent. D. Sale of Delinquent Shares Delinquent stocks - Stocks not paid within 30 days from the date fixed in the contract of subscription or from the date stated in the call made by the Board of Directors. i. Effect of Delinquency 1. They shall be subject to delinquency sale. 2. The stock shall not be voted or be entitled to vote or to representation at any stockholder’s meeting. 3. The holder shall not be entitled to any of the rights of a stockholder except the right to dividends 4. The corporation has the right to apply cash dividends due to the unpaid balance plus cost and expenses and to withhold stock dividends until the unpaid subscription is fully paid. Note: the only right that may not be exercised is the right to dividends Procedure of Delinquency Sale ii. Call by resolution of the board of directors The board of directors shall issue a resolution ordering the sale of delinquent stocks. (Sec. 67) There is no need for a call if the subscription contract specifies dates when subscription balance is due. If no payment is made within thirty (30) days from the date specified, the board shall order the sale of delinquent shares. iii. Notice of Sale 1. Notice of the sale, with a copy of the resolution, shall be sent to every shareholder with unpaid subscriptions either personally, by registered mail, or through other means provided in the bylaws. 2. Notice of the sale shall be published once a week for two (2) consecutive weeks in a newspaper of general circulation in the province or city where the principal office of the corporation is located. 1. The delinquent stock shall be sold at a public auction to such bidder who shall offer to pay ff: a. the full amount of the balance on the subscription together b. accrued interest c. costs of advertisement d. expenses of sale for the smallest number of shares or fraction of a share. 2. The stock so purchased shall be transferred to such purchaser in the books of the corporation and a certificate for such stock shall be issued in the purchaser’s favor. 3. The remaining shares, if any, shall be credited in favor of the delinquent stockholder who shall likewise be entitled to the issuance of a certificate of stock covering such shares. (Sec. 67) Note: There shall be no sale at public auction if: a. The delinquent stockholder pays on or before the sale: (a) balance due, (b) accrued interest, or (c) advertising costs and expenses of sale. b. The Board orders otherwise, on any of the following grounds: (a) Defect in the Notice of Sale; or (b) Defect in sale itself. (Sec. 67) When Sale May Be Questioned a. The action is filed on the ground of irregularity or defect in the notice of sale, or in the sale of the delinquent stock; b. The party seeking to maintain such action first pays or tenders to the party holding the stock the sum for which the same was sold with interest from the date of the sale at the legal rate; and c. The complaint was filed within 6 months from the date of the sale (Sec. 68) Page 154 of 393 ATENEO CENTRAL BAR OPERATIONS 2020/21 COMMERCIAL LAW E. Alienation of shares i. Allowable restrictions on the sale of shares The authority granted to a corporation to regulate the transfer of its stock does not empower the corporation to restrict the right of a stockholder to transfer his shares, but merely authorizes the adoption of regulations as to the formalities and procedure to be followed in effecting transfer (Thomson v. CA, G.R. No. 116631, 1998). ii. Sale of partially paid shares Section 62 provides that no share of stock against which the corporation holds any unpaid claims shall be transferable in the books of the corporation. iii. Sale of a portion of shares not fully paid A stockholder who has not paid the full amount of his subscription cannot transfer part of his subscription in view of the indivisible nature of a subscription contract. iv. Sale of all shares not fully paid The entire subscription, although not yet fully paid, may be transferred to a single transferee, who as a result of the transfer must assume the unpaid balance. (SEC Opinion) Consent of the corporation must first be secured since the transfer of subscription rights and obligations contemplates a novation of contract. (Civil Code, Art. 1923) The SEC correctly categorized the assignment of the subscription agreements as a form of novation by substitution of a new debtor and which required the consent of or notice to the creditor. In this case, the change of debtor took place when R.C. Lee assigned the Oceanic shares under the subscription agreements to SSI so that the latter became obliged to settle the 75% unpaid balance on the subscription. The SEC was correct in saying that Interport was duly notified of the assignment when SSI tendered its payment for the 75% unpaid balance, and that it could not anymore refuse to recognize the transfer of the transfer of the subscription agreements to SSI was to extinguish the obligation of R.C. Lee to Oceanic, now Interport. Interport was no longer obliged to accept any payment from R.C. Lee because the latter had ceased to be privy to the subscription agreements, but was now legally bound to accept SSi’s tender of payment as the new debtor. (Interport Resources Corporation v. Security Specialist, Inc., G.R. No. 154069, 2016) v. Sale of fully paid shares Section 63 provides that shares of stock issued with a corresponding certificate of stock are personal property and may be transferred by delivery of the certificate or certificates indorsed by the owner or his attorney-in-fact or other person legally authorized to make the transfer. vi. Requisites of a valid transfer If represented by a certificate, the following must be strictly complied with: a. Delivery of the certificate; b. Indorsement by the owner or his agent; c. To be valid against third parties, the transfer must be recorded in the books of the corporation (Rural Bank of Lipa v. CA, G.R. No. 124535, 2001). If NOT represented by a certificate, the following must be complied with: a. By means of a deed of a Deed of Assignment; b. The same must be recorded in the books of the corporation. If, however, the reason for the absence of a certificate is that the subscription has not been fully paid, the corporation may refuse to record a sale given that under Sec. 62, “[n]o shares of stock against which the corporation holds any unpaid claim shall be transferable in the books of the corporation.” The failure by a seller to deliver, within a reasonable time, the stock certificates representing shares of stock subject of a sale transaction may be a basis to rescind such sale (Fil-Estate Gold and Development v. Vertex, G.R. No. 202079, 2013) Note: Recording in STB is only required for absolute transfers, which do not include pledges, mortgages, etc. (Monserrat v. Ceron, G.R. No. 37078, September 27, 1933) In case of chattel mortgage [Note: the Personal Property Security Act has done away with chattel mortgages], a double registration is necessary with the Register of Deeds where: a. The debtor resides b. The corporation has its principal place of business. Registration on the stock and transfer book would be of no effect Page 155 of 393 ATENEO CENTRAL BAR OPERATIONS 2020/21 In case of attachments and levies, shares may be attached by leaving with the corporate officer a copy of the writ and notice. No recording in the stock and transfer book is needed. The moment the notice has been duly delivered, it becomes binding. vii. Involuntary dealings As an incident of ownership, a stockholder may pledge, mortgage or encumber his shares of stocks. Restrictions by the corporation are only valid when: a. They appear in the Articles of Incorporation, by-laws, and the certificates. b. They are not more onerous than granting existing stockholders an option to purchase within a reasonable period and within reasonable terms. F. Corporate Books and Records i. Corporate records to be kept at principal office: (Sec. 73) [AB-O-NA-BResRepMi] 1. The articles of incorporation and bylaws of the corporation and all their amendments; 2. The current ownership structure and voting rights of the corporation, including lists of stockholders or members, group structures, intra-group relations, ownership data, and beneficial ownership; 3. The names and addresses of all the members of the board of directors or trustees and the executive officers; 4. A record of all business transactions; 5. A record of the resolutions of the board of directors or trustees and of the stockholders or members; 6. Copies of the latest reportorial requirements submitted to the SEC; and 7. The minutes of all meetings of stockholders or members, or of the board of directors or trustees. Note: This is not an exclusive list. Section 73 states that Every corporation shall keep and carefully preserve at its principal office all information relating to the corporation including, but not limited to the abovementioned. COMMERCIAL LAW ii. Right to inspect corporate records What does the right to inspect corporate records include? (Sec. 73) 1. Right to inspect corporate records 2. Right to demand for their reproduction, provided that [D-E-Co]: a. demand in writing is made by the requesting party b. copies are reproduced at the requesting party’s expense c. The inspecting or reproducing party shall remain bound by confidentiality rules under prevailing laws, such as the rules on trade secrets or processes under Republic Act No. 8293, otherwise known as the “Intellectual Property Code of the Philippines”, as amended, Republic Act No. 10173, otherwise known as the “Data Privacy Act of 2012”, Republic Act No. 8799, otherwise known as “The Securities Regulation Code”, and the Rules of Court. Who may inspect corporate records? A director, trustee, stockholder or member of the corporation in person or by a representative has the right to inspect corporate records (Sec. 73). The ff. may NOT inspect or demand reproduction of corporate records: (Sec. 73) 1. One who is not a stockholder or member of record, 2. A competitor, director, officer, controlling stockholder or otherwise represents the interests of a competitor shall have no right to inspect or demand reproduction of corporate records. Any stockholder who shall abuse the rights granted under Sec. 73 shall be penalized under Section 158 the RCC without prejudice to the provisions of Republic Act No. 8293, otherwise known as the “Intellectual Property Code of the Philippines”, as amended, and Republic Act No. 10173, otherwise known as the “Data Privacy Act of 2012”. Page 156 of 393 ATENEO CENTRAL COMMERCIAL LAW BAR OPERATIONS 2020/21 Requisites for the exercise of the right to inspect 1. It must be exercised at reasonable hours on business days 2. The stockholder has not improperly used any information he secured through any previous examination 3. The demand is made in good faith and for a legitimate purpose When may corporate records be inspected? Authorized persons may inspect corporate books at reasonable hours on business days (Sec. 73) iii. Effect of refusal to inspect corporate records Any officer or agent of the corporation who shall refuse to allow the inspection and/or reproduction of records shall be liable for: 1. damages 2. shall be guilty of an offense which shall be punishable under Section 161, RCC If such refusal is made pursuant to a resolution or order of the board of directors or trustees, the liability under this section for such action shall be imposed upon the directors or trustees who voted for such refusal. (Sec. 73) Defenses that may be used by officer / agent / director / trustee: 1. the requesting party improperly used any information secured through any prior examination of the records or minutes of such corporation or of any other corporation, 2. the requesting party was not acting in good faith or for a legitimate purpose in making the demand to examine or reproduce corporate records, 3. the requesting party is a competitor, director, officer, controlling stockholder or otherwise represents the interests of a competitor (Sec. 73) 11. DISSOLUTION AND LIQUIDATION Dissolution Extinguishment of the franchise of a corporation and the termination of its corporate existence. However, the corporation shall nevertheless be continued as a body corporate for three (3) years after the time when it would have been so dissolved, for the purpose of prosecuting and defending suits by or against it and enabling it to settle and close its affairs, to dispose of and convey its property and to distribute its assets, but not for the purpose of continuing the business for which it was established. (Sec. 122) A. Modes of Dissolution: i. Voluntary 1. Where No Creditors Are Affected Procedure where no creditors are affected by the dissolution of the corporation: 1. A meeting must be held on the call of directors or trustees; 2. Notice of the meeting should be given to the stockholders by personal delivery or registered mail at least twenty (20) days prior to the meeting; 3. The notice of meeting should also be published for once in a newspaper published in the principal place of business, otherwise, in a newspaper of general circulation 4. The resolution to dissolve must be approved by the majority of the directors/trustees and approved by the stockholders representing at least majority of the outstanding capital stock or majority of members; 5. A verified request for dissolution is then filed with the SEC stating: a. the reason for dissolution b. the form, manner and time when the notices were given c. names of the stockholders and directors or members and trustees who approved the dissolution d. the date, place, and time of the meeting in which the vote was made; and e. details of publication Page 157 of 393 ATENEO CENTRAL BAR OPERATIONS 2020/21 6. In addition, the following shall be submitted to the SEC: a. Copy of the resolution authorizing the dissolution, certified by a majority of the board and countersigned by the secretary; b. Proof of publication c. Favorable recommendation from the appropriate regulatory agency, when necessary. 7. The SEC shall, within 15 days from the receipt of the verified request for dissolution, and in the absence of any withdrawal within said period, approve the request and issue the certificate of dissolution, upon which the dissolution will take effect. (Sec. 134) 2. Where Creditors Are Affected Procedure where the dissolution of the corporation may prejudice the rights of any creditor: 1. A verified petition for dissolution shall be filed with the SEC. 2. The petition shall be: a. signed by a majority of the corporation’s board of directors or trustees b. verified by its president or secretary or one of its directors or trustees c. shall set forth all claims and demands against it d. that its dissolution was resolved upon by the affirmative vote of the stockholders representing at least two-thirds (2/3) of the outstanding capital stock or at least two-thirds (2/3) of the members at a meeting of its stockholders or members called for that purpose. 3. The petition shall likewise state: a. the reason for the dissolution; b. the form, manner, and time when the notices were given; c. the date, place, and time of the meeting in which the vote was made. COMMERCIAL LAW 4. The corporation shall submit to the SEC the following: a. a copy of the resolution authorizing the dissolution, certified by a majority of the board of directors or trustees and countersigned by the secretary of the corporation; and b. list of all its creditors. 5. By an order reciting the purpose of the petition, the SEC shall fix a deadline for filing objections to the petition (shall not be less than thirty (30) days nor more than sixty (60) days after the entry of the order). 6. Publication: Before such the deadline, a copy of the order shall be published at least once a week for three (3) consecutive weeks in a newspaper of general circulation published in the municipality or city where the principal office of the corporation is situated, otherwise, in a newspaper of general circulation in the Philippines 7. Posting: A similar copy shall be posted for three (3) consecutive weeks in three (3) public places in such municipality or city. 8. After the expiration of the time to file objections, a hearing shall be conducted upon prior five (5) day notice to hear the objections; 9. Judgment shall be rendered dissolving the corporation and directing the disposition of assets; the judgment may include appointment of a receiver. 10. The dissolution shall take effect only upon issuance by the SEC of a certificate of dissolution* (Sec. 135) 3. By Shortening Corporate TermProcedure on voluntary dissolution by shortening of the corporate term (Sec. 36): 1. A private corporation may extend or shorten its term by amending the the articles of incorporation when approved by a majority vote of the board of directors or trustees, and ratified at a meeting by the stockholders or members representing at least two-thirds (2/3) of Page 158 of 393 ATENEO CENTRAL COMMERCIAL LAW BAR OPERATIONS 2020/21 the outstanding capital stock or of its members. 2. Written notice of the proposed action and the time and place of the meeting shall be sent to stockholders or members 3. In case of extension of corporate term, a dissenting stockholder may exercise the right of appraisal under the conditions provided in this Code. (Sec. 137) Note: Under Sec. 11, the RCC now allows the revival of a the corporate existence of an Expired Corporation. If a corporation’s term has expired, it may apply for a revival of its corporate existence, together with all the rights and privileges under its certificate of incorporation and subject to all of its duties, debts and liabilities existing prior to its revival. Upon approval by the SEC, the corporation shall be deemed revived and a certificate of revival of corporate existence shall be issued, giving it perpetual existence, unless its application for revival provides otherwise. (Sec. 11) 4. Withdrawal of dissolution Procedure on Withdrawal of Request for Dissolution: 1. Withdrawal of Request of Dissolution: Not later than 15 days from the receipt by SEC of the request for dissolution, the withdrawal thereof shall be made in writing, duly verified by any incorporator, director, trustee, shareholder, or member and signed by the same number of incorporators, directors, trustees, shareholders, or members necessary to request for dissolution. 2. Upon receipt of a withdrawal of request for dissolution, the SEC shall withhold action on the request for dissolution and shall, after investigation: a. Make a pronouncement that the request for dissolution is deemed withdrawn; b. Direct a joint meeting of the board of directors or trustees and the stockholders or members for the purpose of ascertaining whether to proceed with dissolution; or c. Issue such other orders as it may deem appropriate. (Sec. 137) Procedure on Withdrawal of Petition for Dissolution A withdrawal of the petition for dissolution shall be in the form of a motion and similar in substance to a withdrawal of request for dissolution but shall be verified and filed prior to publication of the order setting the deadline for filing objections to the petition. (Sec. 137) ii. Involuntary A corporation may be dissolved by the SEC motu proprio or upon filing of a verified complaint by any interested party. (Sec. 138) Grounds for dissolution of the corporation: a. Non-use of corporate charter as provided under Section 21 of this Code; b. Continuous inoperation of a corporation as provided under Section 21 of this Code; c. Upon receipt of a lawful court order dissolving the corporation; d. Upon finding by final judgment that the corporation procured its incorporation through fraud; e. Upon finding by final judgment that the corporation: 1. Was created for the purpose of committing, concealing or aiding the SEC of securities violations, smuggling, tax evasion, money laundering, or graft and corrupt practices; 2. Committed or aided in the SEC of securities violations, smuggling, tax evasion, money laundering, or graft and corrupt practices, and its stockholders knew of the same; and 3. Repeatedly and knowingly tolerated the SEC of graft and corrupt practices or other fraudulent or illegal acts by its directors, trustees, officers, or employees. (Sec. 138) If the corporation is ordered dissolved by final judgment pursuant to the grounds set forth in subparagraph (e) hereof, its assets, after Page 159 of 393 ATENEO CENTRAL COMMERCIAL LAW BAR OPERATIONS 2020/21 payment of its liabilities, shall, upon petition of the SEC with the appropriate court, be forfeited in favor of the national government. Such forfeiture shall be without prejudice to the rights of innocent stockholders and employees for services rendered, and to the application of other penalty or sanction under this Code or other laws. (Sec. 138) The SEC shall give reasonable notice to, and coordinate with, the appropriate regulatory agency prior to the involuntary dissolution of companies under their special regulatory jurisdiction.(Sec. 138) Non-use of corporate charter (Sec. 21) If a corporation does not formally organize and commence its business within 5 years ● Effect: certificate of incorporation shall be deemed revoked following the end of the 5-year period Continuous Inoperation (Sec. 21) If a corporation has commenced its business but subsequently becomes inoperative for a period of at least 5 consecutive years ● Effect: after due notice and hearing, the corporation will be put on delinquent status ● Remedy: it shall have a period of 2 years to resume operations. Otherwise, certificate of incorporation will likewise be revoked. “Organization” under SEC Rules ● Adoption of the by-laws and the filing and approval of the same with and by the SEC if the same were not adopted and filed simultaneously with the articles of incorporation; ● Election of the Board of Directors or Trustees and of the officers; ● Establishment of the principal office; and ● Providing for the subscription and payment of the capital stock and the taking of such steps as are necessary to endow the legal entity with capacity to transact the legitimate business for which it was created “Commenced Business” under SEC Rules When the corporation has performed preparatory acts geared towards the fulfillment of the purposes for which it was established such as but not limited to the following: ● ● ● Entering into contracts or negotiations for lease or sale of properties to be used as business or factory site; Making plans for and the construction of the factory; and Taking steps to expedite the construction of the company’s working equipment In the event of failure to file for an extension if a corporation’s term has expired, it may apply for a revival of its corporate existence, together with all the rights and privileges under its certificate of incorporation and subject to all of its duties, debts and liabilities existing prior to its revival. Upon approval by the SEC, the corporation shall be deemed revived and a certificate of revival of corporate existence shall be issued, giving it perpetual existence, unless its application for revival provides otherwise. Demands of Minority for Dissolution Corporate dissolution due to mismanagement of majority stockholder is too drastic a remedy, especially when the situation can be remedied such as giving minority stockholders a veto power to any decision (Chase v. Buencamino, G.R. No. 20395, 1985). Effects of Dissolution (a) Vesting of legal title to the corporate property in the stockholders, who become co-owners thereof (b) The corporation ceases to be a body corporate to continue the business for which it was established. The termination of the life of a juridical entity does not by itself cause the extinction or diminution of the rights and liability of such entity, since it is allowed to continue as a juridical entity for three (3) years for the purpose of prosecuting and defending suits by or against it and enabling it to settle and close its affairs, to dispose of and convey its property, and to distribute its assets (Republic v. Tancinco, G.R. No. 139256, 2002). A board resolution to dissolve the corporation does not operate to so dissolve the juridical entity. For dissolution to be effective “the requirements mandated by the Corporation Code should have been strictly complied with” (Vesagas v. Court of Appeals, G.R. No. 142924, 2001) When the period of corporate life expires, the corporation ceases to be a body corporate for the Page 160 of 393 ATENEO CENTRAL BAR OPERATIONS 2020/21 purpose of continuing the business for which it was organized (PNB v. Court of First Instance of Rizal, Pasig, Br. XXI, G.R. No. 63201, 1992). A party’s stockholding in a corporation, whether existing or dissolved, is a property right which he may vindicate against another party who has deprived him thereof. Stockholders may convey their respective shareholdings toward the creation of a new corporation to continue the business of the old or they may reincorporate by filing new articles of incorporation and by-laws. B. Methods of Liquidation Liquidation Process by which all the assets of the corporation are converted into liquid assets in order to facilitate the payment of obligations to creditors, and the remaining balance if any is to be distributed to the stockholders. There is no time limit within which the trustees must complete a liquidation placed in their hands (Vigilla et.al. v. Philippine College of Criminology, G.R. No. 200094, 2013). Modes of Liquidation a. Through Board of Directors or Trustees – normal method of procedure Even if no trustee is appointed or designated during the three-year period of the liquidation of the corporation, the Court has held that the Board of Directors may be permitted to complete the corporate liquidation by continuing as trustees by legal implication (Vigilla et al. v Philippine College of Criminology, G.R. No. 200094, 2013) Note: This only concerns the matters/actions that are initiated during the 3 year grace period. The Board cannot be considered as trustees for matters initiated after the 3-year period. b. Through Trustee – at any time during the three years of liquidation, a corporation is authorized and empowered to convey all of its property to trustees for the benefit of stockholders, members, creditors, and other persons in interest. The three (3)-year limitation will not apply provided the COMMERCIAL LAW designation of the trustee is made within said period. c. Through Receiver – created by means of judicial or quasi-judicial appointment of the receiver. The receiver is actually an officer of the court and must therefore be accountable to the court. Note: If there is no Board of Directors or Trustees, those having pecuniary interest in the assets, including not only the shareholders but likewise the creditors of the corporation, acting for and in its behalf, may liquidate (Alabang Dev’t v. Alabang Hills Village Ass’n, G.R. No. 196950, 2014) d. Liquidation after Three Years If full liquidation can only be effected after the 3year period and there is no trustee, the directors may be permitted to complete the liquidation by continuing as trustees by legal implication (Reburiano v. CA, G.R. No. 102965, 1999). The trustee may continue to prosecute a case commenced by the corporation within three years from its dissolution until rendition of the final judgment, even if such judgment is rendered beyond the three-year period allowed by Section [139]. However, an already defunct corporation cannot initiate a suit after the lapse of the threeyear period. (Alabang Dev’t v. Alabang Hills Village Ass’n, G.R. No. 196950, 2014) Note: When a corporation threatened by bankruptcy is taken over by a receiver, all the creditors shall stand on equal footing. Not one of them should be given preference by paying one or some of them ahead of the others. The Civil Code provisions on concurrence and preference of credits are applicable to the liquidation proceedings. A corporation in the process of liquidation has no legal authority to engage in any new business, even if the same is in accordance with the primary purpose stated in its articles of incorporation. When a Corporation Must Wind Up (Sec. 139) If it is dissolved by: a. By expiry of term or b. Is annulled by forfeiture, or otherwise, or Page 161 of 393 ATENEO CENTRAL COMMERCIAL LAW BAR OPERATIONS 2020/21 c. Is terminated manner In any other Effects of Winding Up of Affairs: (Sec. 139) a. Continues as a corporate body for 3 years to prosecute and defend suits against it, close its affairs, dispose and convey its property and distribute assets b. Cannot continue business for which it was established c. Can convey property to trustees for the benefit of the stockholders/members, creditors and other persons in interest i. Legal interest vests in business ii. Beneficial interest remains with stockholders/ members, creditors d. Assets distributable to unknown creditors, stockholders/ members, persons in interest or those who cannot be found shall be escheated to the city or municipality where the assets are located. e. Distribution of assets only upon lawful dissolution and payment of all debts and liabilities. Exceptions: a. Decrease of capital stock b. As otherwise allowed in the Corporation Code 12. OTHER CORPORATIONS A. Close Corporations i. Characteristics of a close corporation A close corporation, within the meaning of the Corporation Code, is one whose articles of incorporation provides that: 1. All the corporation's issued stock of all classes, exclusive of treasury shares, shall be held of record by not more than a specified number of persons, not exceeding twenty (20) 2. All the issued stock of all classes shall be subject to one or more specified restrictions on transfer permitted by this Title 3. The corporation shall not list in any stock exchange or make any public offering of any of its stock of any class. Notwithstanding the foregoing, a corporation shall not be deemed a close corporation when at least two-thirds (2/3) of its voting stock or voting rights is owned or controlled by another corporation which is not a close corporation within the meaning of the Corporation Code. (Sec. 95) Suppletory Effect The provisions of other Titles of the Corporation Code shall apply suppletorily except insofar as Title of Close Corporation otherwise provides. (Sec. 95) Management of a close corporation 1. The articles of incorporation of a close corporation may provide that the business of the corporation shall be managed by the stockholders of the corporation rather than by a board of directors. a. When they manage, stockholders are liable as directors; b. There is no need to call a meeting to elect directors; c. To the extent that the stockholders are actively engaged in the management, said stockholders shall be liable for corporate torts unless the corporation has obtained reasonably adequate liability insurance. Companies That Cannot Be Close Corporations (MIPES-BOO) a. Mining companies; b. Insurance companies; c. Public utilities; d. Educational institutions; e. Stock exchanges; f. Banks; g. Oil companies; h. Other corporations declared to be vested with public interest. ii. Validity Of Restrictions On Transfers Of Shares (Sec 97) Restrictions on the right to transfer shares must appear in: 1. The articles of incorporation; 2. The by-laws; and 3. In the certificate of stock Otherwise, the same shall not be binding on any purchaser thereof in good faith. Page 162 of 393 ATENEO CENTRAL BAR OPERATIONS 2020/21 Said restrictions shall not be more onerous than granting the existing stockholders or the corporation the option to purchase the shares of the transferring stockholder with such reasonable terms, conditions or period stated therein. If upon the expiration of said period, the existing stockholders or the corporation fails to exercise the option to purchase, the transferring stockholder may sell his shares to any third person. iii. Effects of Issuance or Transfer of Stock in Breach of Qualifying Conditions. – (a) If shares of stock of a close corporation are issued or transferred to any person who is not eligible to be a holder thereof under any provision of the articles of incorporation, and if the certificate for such stock conspicuously shows the qualifications of the persons entitled to be holders of record thereof, such person is conclusively presumed to have notice of the fact of the ineligibility to be a stockholder. (b) If the articles of incorporation of a close corporation states the number of persons, not exceeding twenty (20), who are entitled to be stockholders of record, and if the certificate for such stock conspicuously states such number, and the issuance or transfer of stock to any person would cause the stock to be held by more than such number of persons, the person to whom such stock is issued or transferred is conclusively presumed to have notice of this fact. (c) If a stock certificate of a close corporation conspicuously shows a restriction on transfer of the corporation’s stock and the transferee acquires the stock in violation of such restriction, the transferee is conclusively presumed to have notice of the fact that the stock was acquired in violation of the restriction. (d) Whenever a person to whom stock of a close corporation has been issued or transferred has or is conclusively presumed under this section to have notice of: 1. the person’s ineligibility to be a stockholder of the corporation; or 2. that the transfer of stock would cause the stock of the corporation to be held by more than the number of persons COMMERCIAL LAW permitted under its articles of incorporation; or 3. that the transfer violates a restriction on transfer of stock, and the corporation may, at its option, refuse to register the transfer in the name of the transferee. (e) The provisions of subsection (d) shall not be applicable if the transfer of stock, though contrary to subsections (a), (b) or (c), has been consented to by all the stockholders of the close corporation, or if the close corporation has amended its articles of incorporation in accordance with this Title. (f) The term “transfer”, as used in this section, is not limited to a transfer for value. (g) The provisions of this section shall not impair any right which the transferee may have to either rescind the transfer or recover the stock under any express or implied warranty. (Sec. 98) Note: Even if the transfer of shares is made in violation of the restrictions enumerated under [Sec. 98 of RCC], such transfer is still valid if it has been consented to by all the shareholders of the close corporation and the corporation cannot refuse to register the transfer of shares in the name of the transferee. (Florete, Sr. v. Florete, Jr., G.R. No. 223321, 2018) Need for factual determination of close corporation to apply Before courts can allow the operation of Section 98 to a case, there must first be a factual determination that the corporation is indeed a close corporation. There needs to be a presentation of evidence on the relevant restrictions in the articles of incorporation and bylaws of the corporation. (Rural Bank of Andaya v. Cabadbaran, G.R. No. 188769, 2016) iv. When board meeting is unnecessary or improperly held (Sec. 100) General Rule: Any action taken by the directors without a board meeting shall be deemed INVALID. Exception: The following shall nonetheless be valid despite the lack of a valid board meeting, unless the by-laws provide otherwise Page 163 of 393 ATENEO CENTRAL BAR OPERATIONS 2020/21 1. Before or after such action is taken, a written consent thereto is signed by all the directors; or 2. All the stockholders have actual or implied knowledge of the action and make no prompt objection in writing; or 3. The directors are accustomed to take informal action with the express or implied acquiescence of all the stockholders; or 4. All the directors have express or implied knowledge of the action in question and none of them makes a prompt objection in writing. An action within the corporate powers taken at a meeting held without proper call or notice, is deemed ratified by a director who failed to attend, unless after having knowledge thereof, the director promptly files his written objection with the secretary of the corporation. v. Pre-Emptive Rights Of Stockholders In Close Corporations (Sec 101) General Rule: It shall extend to all stock to be issued, including reissuance of treasury shares, whether for money, property or personal services, or in payment of corporate debts Exception: Unless the articles of incorporation provide otherwise. vi. Amendment of the articles of incorporation (Sec. 102) Any amendment to the articles of incorporation which seeks to delete or remove any provision required by this Title or to reduce a quorum or voting requirement stated in said articles of incorporation shall require the affirmative vote of at least two- thirds (2/3) of the outstanding capital stock, whether with or without voting rights, or of such greater proportion of shares as may be specifically provided in the articles of incorporation for amending, deleting or removing any of the aforesaid provisions, at a meeting duly called for the purpose. COMMERCIAL LAW vii. Deadlocks (Sec. 103) Power To Buy-Back Shares Of Close Corporations v. Appraisal Right In Stock Corporations CLOSE CLOSE STOCK CORP CORP CORP Sec. 103 Sec. 104 (Deadlocks) (Withdrawal) Exercised by Exercised by Exercised by the the the corporation stockholder stockholder There are certain Exercisable Exercisable instances only in a for any where deadlock reason appraisal situation rights can be exercised Can be directed Available Available either against only against only against the the the corporation corporation corporation or any other stockholder Available Limited only Unrestricted even without in a situation retained unrestricted when the earnings are retained corporation required for earnings and has sufficient buyback to not subject to assets in its happen, any formula books generally Compelling Dissolution In Close Corporations v. Stock Corporations CLOSE CLOSE STOCK CORP CORP CORP Sec. 104 Sec. 105 SEC is given express Majority of power to A stockholder the Board dissolve a must make a plus 2/3 close written stockholder corporation petition to the vote is when there is dissolution required for a deadlock dissolution situation Page 164 of 393 ATENEO CENTRAL BAR OPERATIONS 2020/21 COMMERCIAL LAW B. Non-Stock Corporations i. Definition A non-stock corporation is one where no part of its income is distributable as dividends to its members, trustees, or officers, subject to the provisions of the Corporation Code on dissolution Any profit which a non-stock corporation may obtain as an incident to its operations shall, whenever necessary or proper, be used for the furtherance of the purpose or purposes for which the corporation was organized, subject to the provisions of this Title. (Sec. 86) Requisites: 1. Does not have a capital stock divided into share 2. No part of its income is distributable as dividends to its member 3. They must be formed or organized for purposes specified in Sec. 87 Conversion between Stock and Non-Stock Corporation A non-stock corporation cannot be converted into a stock corporation through mere amendment of its Articles of Incorporation as this would be in violation of Section 87 which prohibits distribution of income as dividends to members. (SEC Opinion, 20 March 1995) However, a non-stock corporation can be converted into a stock corporation only if the members dissolve it first and then organize a stock corporation. The result is a new corporation. (SEC Opinion, 13 May 1992) On the other hand, a stock corporation may be converted into a non-stock corporation by mere amendment provided all the requirements are complied with. Its rights and liabilities will remain. The incurring of profit or losses does not determine whether an activity is for profit or nonprofit, and the courts will consider whether dividends have been declared or its members or that is property, effects or profit was ever used for personal or individual gain, and not for the purpose of carrying out the objectives of the enterprise (Manila Sanitarium and Hospital v. Gabuco, G.R. No. 13873, 1963). In a mutual life insurance corporation, organized as a non-stock nonprofit corporation, the socalled “dividend” that is received by memberspolicyholders is not a portion of profits set aside for distribution to the stockholders in proportion to their subscription to the capital stock of a corporation. One, a mutual company has no capital stock to which subscription is necessary; there are no stockholders to speak of, but only members. And, two, the amount they receive does not partake of the nature of a profit or income. The quasi-appearance of profit will not change its character; it remains an overpayment, a benefit to which the member-policyholder is equitably entitled (Republic v. Sunlife Assurance Company of Canada, GR No. 158085, 2005). Delinquency in Membership Dues of NonStock Corporations A non-stock corporation may seize and dispose of the membership share of a fully-paid member on account of his unpaid monthly dues, when such corporation is authorized to do so under the by-laws, even when no provision on the matter appears in the articles of incorporation, and in spite of the fact that Sec. 67 of Corporation Code on delinquency sale pertains to payment of shares subscription. (Valley Golf v. De Caram, G.R. No. 155805, 2000) Theory on Non-Stock Corporations A non-stock corporation may only be formed or organized for charitable, religious, educational, professional, cultural, fraternal, literary, scientific, social, civic or other similar purposes. It may not engage in undertakings such as the investment business where profit is the main or underlying purpose. Although the non-stock corporation may obtain profits as an incident to its operation such profits are not to be distributed among its members but must be used for the furtherance of its purposes (People v. Menil, G.R. No. 11505466, 1999). Page 165 of 393 ATENEO CENTRAL BAR OPERATIONS 2020/21 Comparative Table: Stock v. Non-Stock Corporations STOCK CORP NON-STOCK CORP Can they earn profit? Yes Yes Distribution of Dividends Yes No Name of “Constituents” Stockholders Members Limitation to Purpose May not include a There can be purpose which would secondary purposes change or contradict its nature in AOI Kind of Board Board of Directors Board of Trustees Number of Board Members may be more than 15 must not be more EXC: special than 15 corporations Term of Board Members 3 years, but AOI or by-laws may provide otherwise 1 year Constant terms 5 years - educational institutions COMMERCIAL LAW explanation if its articles or by-laws provide for more than 15 members of the Board. (Sec. 91) Term Trustees shall hold office for a period of three (3) years until their successors are elected and qualified (Sec. 91) Qualifications of Trustees Only ONE qualification under Sec. 92: Membership in the corporation. Nonetheless, the member who may be elected as trustee may just be a nominee. A trustee who ceases to be a member of the corporation can no longer act as a trustee. Note: An independent trustee of a non-stock corporation vested with public interest need not be a member of such non-stock corporation (Sec. 91) For stock corporations, the "quorum" referred to in Section 52 of the Corporation Code is based on the number of outstanding voting stocks. For nonstock corporations, only those who are actual, living members with voting rights shall be counted in determining the existence of a quorum during members' meetings. Dead members shall not be counted. (Tan v. Sycip, G.R. No. 153468 August 17, 2006) Staggered terms How Board Members are Elected Directly elected by Elected by the the members, unless stockholders (per AOI provides Corp. Code) otherwise Manner of Voting Straight voting, Straight or cumulative unless AOI or byvoting laws provide otherwise Can a stockholder/member disengage from the corporation? Can sell to other Articles or by-laws stockholders OR specifically provide exercise of appraisal for the method of rights termination ii. Purposes A non-stock corporation may be formed or organized for the following purposes: a. Charitable, b. Religious, c. Educational, d. Professional, e. Cultural, f. Recreation, g. Fraternal, h. Literary, i. Scientific, j. Social, k. Civic Service, l. Similar purposes, like trade, industry, agriculture and like chambers, or m. Any combination of thereof (Sec. 87) Number of Trustees A non-stock corporation may OR may not have more than 15 trustees. In the Articles of Incorporation, a non-stock corporation may not include a purpose which would change or contradict its nature as such. NOTE: However, SEC has adopted a policy of requiring registrant corporations to submit an Page 166 of 393 ATENEO CENTRAL BAR OPERATIONS 2020/21 iii. Treatment Of Profits Non-stock non-profit corporations may actually earn profits incidentally from its operations, provided that the profits are devoted to their purpose. The mere fact that a non-stock corporation may earn profit does not make it a profit-making corporation, where such profit is used to carry out the purposes set forth in the Articles of Incorporation and is not distributed to its incorporators, members, trustees, or officers. (SEC Opinion, 13 November 1990, XXIV SEC Quarterly Bulletin 63) Note: Despite its nomenclature, the essence of a nonstock non-profit corporation is not the nonexistence of shares of stock to cover its capital (it is legally possible for a corporation having capital stock to still be considered a non-stock corporation), but that: a. Its primary purpose should be any of those under Sec. 88 of the Corporation Code, and b. There is a prohibition in the articles of incorporation and by-laws that no part of the income or any form of dividend is distributable to the members, trustees, and officers of the corporation (CIR v. Club Filipino Inc. de Cebu, G.R. No. L-12719, 1962) ● Even though the corporation may incidentally earn profits from its operations. (CIR v. University of Visayas, G.R. No. L-13554, 1961) iv. Plan and Distribution of Assets upon Dissolution Rules of Distribution of Assets upon Dissolution The assets of a nonstock corporation undergoing the process of dissolution for reasons other than those set forth in Section 139 of the RCC (every corporation whose charter expires pursuant to its articles of incorporation, is annulled by forfeiture, or whose corporate existence is terminated in any other manner) shall be applied and distributed as follows: 1. All liabilities and obligations of the corporation shall be paid, satisfied and discharged, or adequate provision shall be made therefore; COMMERCIAL LAW 2. Assets held by the corporation upon a condition requiring return, transfer or conveyance, and which condition occurs by reason of the dissolution, shall be returned, transferred or conveyed in accordance with such requirements; 3. Assets received and held by the corporation subject to limitations permitting their use only for charitable, religious, benevolent, educational or similar purposes, but not held upon a condition requiring return, transfer or conveyance by reason of the dissolution, shall be transferred or conveyed to one or more corporations, societies or organizations engaged in activities in the Philippines substantially similar to those of the dissolving corporation according to a plan of distribution adopted pursuant to this Chapter; 4. Assets other than those mentioned in the preceding paragraphs, if any, shall be distributed in accordance with the provisions of the articles of incorporation or the by-laws, to the extent that the articles of incorporation or the by-laws, determine the distributive rights of members, or any class or classes of members, or provide for distribution; and 5. In any other case, assets may be distributed to such persons, societies, organizations or corporations, whether or not organized for profit, as may be specified in a plan of distribution adopted pursuant to this Chapter.(Sec. 93) Plan of Distribution of Assets A non-stock corporation in the process of dissolution may adopt a plan providing for the distribution of assets, not inconsistent with the RCC, in the following manner: 1. The board of trustees shall, by majority vote, adopt a resolution recommending a plan of distribution and directing the submission thereof to a vote at a regular or special meeting of members having voting rights; 2. Each member entitled to vote shall be given a written notice setting forth the proposed plan of distribution or a summary thereof and the date, time and Page 167 of 393 ATENEO CENTRAL BAR OPERATIONS 2020/21 place of such meeting within the time and in the manner provided in this Code for the giving of notice of meetings; and 3. Such plan of distribution shall be adopted upon approval of at least two-thirds (2/3) of the members having voting rights present or represented by proxy at such meeting. Note: Although a non-stock corporation cannot distribute incidental profits or dividends to its members, trustees and officers during its corporate term, in the event of dissolution, after the payment of all liabilities and return of assets received subject to limitations permitting their use, the remaining assets may be distributed to the members, as provided for in the articles of incorporation of by-laws. In the absence of distribution rules, the remaining assets may be distributed to such persons, societies, organizations, or corporations, whether or not organized for profit, as may be specified in a plan of distribution as adopted by the Board of Trustees and ratified by the members. In a regular non-stock corporation it is possible for its net assets and accumulated “earnings” from its operations, to inure to the benefit of private individuals (e.g., its own members) or entities, but only as a consequence of dissolution. Suppletory Effect The provisions governing stock corporation, when pertinent, shall be applicable to non-stock corporations, except as may be covered by specific provisions of this Title. C. Educational Corporations Educational corporations shall be governed by: 1. Special laws (e.g. “Education Act of 1982”) 2. General provisions of the Revised Corporation Code (Sec. 105) Board of Trustees of Educational Corporations Trustees of educational institutions organized as nonstock corporations shall not be less than five (5) nor more than fifteen (15): Provided, That the number of trustees shall be in multiples of five (5).(Sec 106) COMMERCIAL LAW Term of Office Unless otherwise provided in the articles of incorporation or bylaws, the board of trustees of incorporated schools, colleges, or other institutions of learning shall, as soon as organized, so classify themselves that the term of office of one- fifth (1/5) of their number shall expire every year. Trustees thereafter elected to fill vacancies, occurring before the expiration of a particular term, shall hold office only for the unexpired period. Trustees elected thereafter to fill vacancies caused by expiration of term shall hold office for five (5) years. (Sec. 106) Note: For institutions organized as stock corporations, the number and term of directors shall be governed by the provisions on stock corporations.(Sec. 106) Quorum A majority of the trustees shall constitute a quorum for the transaction of business. The powers and authority of trustees shall be defined in the bylaws.(Sec. 106) 1987 Constitution Provisions Article II, Sec. 17 of the Constitution: “The State shall give priority to education [...] to foster patriotism and nationalism, accelerate social progress, and promote total human liberation and development.” Article XIV, Sec. 4 of the Constitution requires: 1. That educational institutions shall be: a. Solely owned by Filipino citizens; OR b. If owned by a corporation, at least 60% of the capital must be owned by Filipino citizens. 2. The control and administration shall be vested in citizens of the Philippines. 3. No educational institution shall be established exclusively for aliens. The 60% ownership requirement does not apply to the following: a. Educational institutions established by religious groups and mission boards; b. Schools established for foreign diplomatic personnel and their dependents; Page 168 of 393 ATENEO CENTRAL BAR OPERATIONS 2020/21 c. Other foreign temporary residents (unless otherwise provided by law) 4. No group of aliens shall comprise more than ⅓ of the enrollment in any school. D. Religious Corporations i. Corporation Sole; Nationality Special form of corporation, usually associated with the clergy and consists of one person only and his successors, who are incorporated by law to give some legal capacities and advantages. A corporation sole does not have any nationality but for purposes of applying our nationalization laws, nationality is determined by the nationality of the members (Roman Catholic Apostolic Church v. LRC, G.R. No. 8451, 1957). Composition A corporation sole may be formed by the chief archbishop, bishop, priest, minister, rabbi, or other presiding elder of such religious denomination, sect or church, for the purpose of administering and managing, as trustee, the affairs, property and temporalities of any religious denomination, sect or church. Articles of Incorporation: Contents In order to become a corporation sole, the chief archbishop, bishop, priest, minister, rabbi, or presiding elder of any religious denomination, sect or church must file with the SEC articles of incorporation setting forth the following: 1. That the applicant chief archbishop, bishop, priest, minister, rabbi, or presiding elder represents the religious denomination, sect or church which desires to become a corporation sole; 2. That the rules, regulations and discipline of the religious denomination, sect or church are consistent with becoming a corporation sole and do not forbid it; 3. That such chief archbishop, bishop, priest, minister, rabbi, or presiding elder is charged with the administration of the temporalities and the management of the affairs, estate and properties of the religious denomination, sect, or church within the territorial jurisdiction, so described succinctly in the articles of incorporation COMMERCIAL LAW 4. The manner by which any vacancy occurring in the office of chief archbishop, bishop, priest, minister, rabbi, or presiding elder is required to be filled, according to the rules, regulations or discipline of the religious denomination, sect or church; and 5. The place where the principal office of the corporation sole is to be established and located, which place must be within the territory of the Philippines. 6. The articles of incorporation may include any other provision not contrary to law for the regulation of the affairs of the corporation. (Sec. 109) Note: The articles must be verified by affidavit or affirmation of presiding elder. Document that such presiding elder was duly elected or appointed as such and this document must be certified by notary public. (Sec. 110) Acquisition and Alienation of Property A corporation sole may purchase and hold real estate and personal property for its church, charitable, benevolent, or educational purposes, and may receive bequests or gifts for such purposes. (Sec. 111) Such corporation may sell or mortgage real property held by it by obtaining an order for that purpose from the Regional Trial Court of the province where the property is situated upon proof that the notice of the application for leave to sell or mortgage has been made through publication or as directed by the Court, and that it is in the interest of the corporation that leave to sell or mortgage be granted. (Sec. 111) Note: In cases where the rules, regulations, and discipline of the religious denomination, sect or church, religious society, or order concerned represented by such corporation sole regulate the method of acquiring, holding, selling, and mortgaging real estate and personal property, such rules, regulations and discipline shall govern, and the intervention of the courts shall not be necessary. (Sec. 111) The doctrine in Republic v. Villanueva (G.R. No. 55418-19, 1982) and Republic v. Iglesia ni Cristo (G.R. No. 180067, 1984), that a corporation sole is disqualified to acquire/hold alienable lands of the public domain, because of the constitutional prohibition qualifying only Page 169 of 393 ATENEO CENTRAL COMMERCIAL LAW BAR OPERATIONS 2020/21 individuals to acquire land and the provision under the Public Land Act which applied only to Filipino citizens or natural persons, has been expressly overturned in Director of Lands v. IAC (G.R. No. 66575 1986). A registered corporation sole can acquire land if its members constitute at least 60% Filipinos. (SEC Opinion, 8 August 1994) Dissolution of a Corporation Sole A corporation sole may be dissolved and its affairs settled voluntarily by submitting to the SEC a verified declaration of dissolution, setting forth: 1. The name of the corporation; 2. The reason for dissolution and winding up; 3. The authorization for the dissolution of the corporation by the particular religious denomination, sect or church; and 4. The names and addresses of the persons who are to supervise the winding up of the affairs of the corporation. Upon approval of such declaration of dissolution by the SEC, the corporation shall cease to carry on its operations except for the purpose of winding up its affairs. (Sec. 113) E. One Person Corporations i. Excepted Corporations The following are not allowed to incorporate as OPC: a. Banks, b. Non-bank financial institutions, c. Quasi-banks, d. Pre-need, e. Trust, f. Insurance public and publicly listed companies, g. Non-chartered GOCCs; and h. Natural person who is licensed to exercise a profession may not organize an OPC for the purpose of exercising such a profession. EXC: unless otherwise provided by special laws. (Sec. 116) ii. Capital stock requirement (Sec. 117) General Rule: A One Person Corporation is not required to have a minimum authorized capital stock. Exception: law. As otherwise provided by special Note: Unless required by applicable laws or regulations, no portion of the authorized capital is required to be paid up at the time of incorporation. (SEC Circular No. 7, Series of 2019) iii. Articles of incorporation and by-laws Requirements for filing the Articles of Incorporation: i. In accordance with Sec. 14 of the RCC. ii. If the single stockholder is a trust or an estate - the name, nationality, and residence of the trustee, administrator, executor, guardian, conservator, custodian, or other person exercising fiduciary duties together with the proof of such authority to act on behalf of the trust or estate iii. Name, nationality, residence of the nominee and alternate nominee, and the extent, coverage and limitation of the authority. (Sec. 118) Note: OPCs are NOT required to file their corporate bylaws. (Sec. 119) iv. Corporate name It should Indicate the letters “OPC” either below or at the end of their corporate name. (Sec. 120) v. Corporate structure and officers One Person Corporation (OPC) (Sec. 116) - a corporation with a single stockholder Who may form? 1. Natural person – must be of legal age a. A foreign natural person may put up an OPC subject to applicable capital requirement and constitutional and statutory restrictions on foreign participation in certain investment areas or activities (SEC Memorandum 7-2019) b. Trust – does not refer to a trust entity, but the subject being managed by a trustee. If the single stockholder is a trustee, administrator, executor, guardian, conservator, Page 170 of 393 ATENEO CENTRAL COMMERCIAL LAW BAR OPERATIONS 2020/21 custodian, or other person exercising fiduciary duties i. proof of authority to act on behalf of the trust or estate must be submitted at the time of incorporation (SEC Memorandum 7-2019) c. Estate Who may NOT form? 1. Banks and quasi-banks, non-bank financial institutions (SEC Memorandum 7-2019) 2. Pre-need, trust, insurance, public and publicly-listed companies 3. Non-chartered government-owned and controlled 4. Natural person who is licensed to exercise a profession to form an OPC for the purpose of exercising such profession Exception: as provided under special laws The single stockholder shall be the sole director and president of the One Person Corporation. (Sec. 121) When to appoint officers? (Sec. 122) Within fifteen (15) days from the issuance of its certificate of incorporation Who to appoint? a. Treasurer b. Corporate secretary c. Other officers as may be deemed necessary Who and when to notify? Securities and Exchange Commission (SEC) - within five (5) days from appointment - using the Appointment Form as may be prescribed by the SEC (SEC Memorandum 7-2019) Single stockholder allowed? - Corporate secretary – NO - Treasurer – YES - Conditions: 1. Give bond to the SEC in such a sum as may be required BOND REQUIREMENT Memorandum 7-2019: ACS 1 to 1,000,000 1,000,001 to 2,000,000 2,000,001 to 3,000,000 3,000,001 to 4,000,000 4,000,001 to 5,000,000 5,000,001 and above as per SEC Surety Bond Coverage 1,000,000 2,000,000 3,000,000 4,000,000 5,000,000 Equal to the OPC’s ACS ● Bond shall be renewed every two (2) years or as often as may be required, upon review of the Audited Financial Statements/ Financial Statements certified under oath by the company’s President/Treasurer ● Bond is a continuing requirement as long as the single stockholder is the self-appointed Treasurer of the OPC ● Bond may be cancelled upon proof of appointment of another person as the Treasurer and Filing of Amended Form for Appointment of Officers 2. Undertake in writing to faithfully administer the One Person Corporation’s funds to be received as treasurer 3. To disburse and invest the same according to the articles of incorporation as approved by the SEC Special Functions of the Corporate Secretary(Sec. 123) In addition to the functions designated by the One Person Corporation, the corporate secretary shall: 1. Be responsible for maintaining the minutes book and/or records of the corporation 2. Notify the nominee or alternate nominee of the death or incapacity of the single stockholder i. notice shall be given no later than five (5) days from such occurrence 3. Notify the SEC of the death of the single stockholder i. within five (5) days from such occurrence ii. state the names, residence addresses, and contact details of all known legal heirs Page 171 of 393 ATENEO CENTRAL COMMERCIAL LAW BAR OPERATIONS 2020/21 4. Call the nominee or alternate nominee and the known legal heirs to a meeting and advise the legal heirs with regard to: i. the election of a new director ii. amendment of the articles of incorporation iii. other ancillary and/or consequential matters vi. Nominee 1. designated by a single stockholder 2. in the event of the single stockholder’s death or incapacity, nominee takes the place of the single stockholder as director and shall manage the corporation’s affairs 3. written consent of both nominee and alternate nominee (SEC Memorandum 72019) – to be attached in the application of incorporation a. may be withdrawn in writing any time before the death or incapacity of the single stockholder 4. may be changed at any time a. by submitting to the SEC the names of the new nominees and their corresponding written consent b. Articles of Incorporation need NOT be amended (SEC Memorandum 7-2019) What shall be contained in articles of incorporation with regard to the nominee and alternate nominee? a. names b. residence addresses c. contact details d. extent and limitations of their authority in managing the affairs of the One Person Corporation. Term of Nominee and Alternate Nominee (Sec. 125) Incapacity of the single stockholder: 1. Temporary - until the stockholder, by self determination, regains the capacity to assume such duties. 2. Death or Permanent - until the legal heirs of the single stockholder have been lawfully determined, and the heirs have designated one of them or have agreed that the estate shall be the single stockholder of the One Person Corporation Alternate Nominee - shall sit as director and manage the One Person Corporation in case of the nominee’s inability, incapacity, death, or refusal to discharge the functions as director and manager of the corporation - for the same term and under the same conditions applicable to the nominee Minimum Capital Stock Required for One Person Corporation (Sec. 117) General rule: No minimum authorized capital stock Exception: as otherwise provided by special law Required Paid Up Capital (SEC Memorandum 7-2019) General rule: No portion of authorized capital stock is required to be paid up at the time of incorporation Exception: as otherwise required by applicable laws or regulations vii. Minutes and records A One Person Corporation shall maintain a minutes book which shall contain all actions, decisions, and resolutions taken by the One Person Corporation. (Sec. 127) When action is needed on any matter, it shall be sufficient to prepare a written resolution, signed and dated by the single stockholder, and recorded in the minutes book of the One Person Corporation. The date of recording in the minutes book shall be deemed to be the date of the meeting for all purposes under this Code. (Sec. 128) viii. Liability (Sec. 130) A sole shareholder claiming limited liability has the burden of affirmatively showing that: 1. the corporation was adequately financed. Page 172 of 393 ATENEO CENTRAL COMMERCIAL LAW BAR OPERATIONS 2020/21 2. the property of the One Person Corporation is independent of the stockholder’s personal property. for all the latter’s outstanding liabilities as of the date of conversion. F. Foreign Corporations The principles of piercing the corporate veil applies with equal force to One Person Corporations as with other corporations ix. Conversion of corporation to OPC and vice-versa Conversion from an Ordinary Corporation to a OPC (Sec. 131) When a single stockholder acquires all the stocks of an ordinary stock corporation, the latter may apply for conversion into a OPC, subject to the submission of such documents as the SEC may require. If the application for conversion is approved, the SEC shall issue certificate of filing of amended articles of incorporation reflecting the conversion. Conversion from an OPC to an Ordinary Stock Corporation (Sec. 132) A One Person Corporation may be converted into an ordinary stock corporation after due notice to the SEC of such fact and of the circumstances leading to the conversion, and after compliance with all other requirements for stock corporations under this Code and applicable rules. Such notice shall be filed with the SEC within sixty (60) days from the occurrence of the circumstances leading to the conversion into an ordinary stock corporation. If all requirements have been complied with, the SEC shall issue an amended certificate of incorporation reflecting the conversion. In case of death of the single stockholder, the nominee or alternate nominee shall transfer the shares to the duly designated legal heir or estate within seven (7) days from receipt of either an affidavit of heirship or self- adjudication executed by a sole heir, or any other legal document declaring the legal heirs of the single stockholder and notify the SEC of the transfer. Within sixty (60) days from the transfer of the shares, the legal heirs shall notify the SEC of their decision to either wind up and dissolve the One Person Corporation or convert it into an ordinary stock corporation. Note: The Converted Corporations shall succeed the former corporation and be legally responsible A corporation formed, organized or existing under any law other than those of the Philippines, and whose laws allow Filipino citizens and corporations to do business in its own country or state. (Sec. 140) A foreign corporation is one which owes its existence to the laws of another state, and generally, has no legal existence within the state in which it is foreign (Avon Insurance PLC v. Court of Appeals, G.R. No. 97642, 1997). A fundamental rule of international jurisdiction is that no state can by its laws, and no court which is only a creature of the state, can by its judgments and decrees, directly bind or affect property or persons beyond the limits of that state (Time, Inc. v. Reyes, GR No. 28882, 1971). i. Bases of Corporations Authority over Foreign 1. Consent - It is the voluntary surrender of jurisdiction over its person in a pending suit before the host state (Salonga, Private International Law, 1979 ed., p.344). 2. “Doing Business” with regard to Foreign Corporations - Continuity of commercial dealings incident to prosecution of purpose and object of the organization. Isolated, occasional or casual transactions do not amount to engaging in business. But where the isolated act is not incidental/casual but indicates the foreign corporation’s intention to do other business, said single act constitutes engaging in business in the Philippines. Test to Determine “Doing Business” a. Isolated Transactions Test: where a foreign corporation needs to obtain a license and fails to do so, whether it should be denied legal standing to obtain remedies from local courts and administrative agencies or not, depends therefore on the issue whether it will engage in business in the Philippines. Not every activity undertaken in the Philippines amounts to doing business as to require a foreign corporation to obtain such license. Page 173 of 393 ATENEO CENTRAL COMMERCIAL LAW BAR OPERATIONS 2020/21 Single or isolated acts, contracts, or transactions of foreign corporations are not regarded as a doing or carrying on of business. Typical examples of these are the making of a single contract, sale, sale with the taking of a note and mortgage in the state to secure payment thereof, purchase, or note, or the mere commission of a tort. In these instances, there is no purpose to do any other business within the country (MR. Holdings, Ltd. V. Bajar, G.R. No. 138104, 2002). BUT: Where a single act or transaction is not merely incidental or casual but indicates the foreign corporation's intention to do other business in the Philippines, said single act or transaction constitutes doing business (Far East Int'l. v. Nankai Kogyo, G.R. No. 13525, 1962). Need to Allege: The fact that a foreign corporation is not doing business in the Philippines must be alleged, if a foreign corporation desires to sue in Philippines courts under the “isolated transactions rule” (Atlantic Mutual Inc. Co. v. Cebu Stevedoring Co., G.R. No. 18961, 1966); if not alleged, it can be dismissed for lack of capacity to sue by the plaintiff (Commissioner of Customs v. K.M.K. Gani, G.R. No. 73722, 1990). b. Twin Characterization Test (Mentholatum Co. Inc v. Mangaliman G.R. No. 47701, 1941) Substance Test: Consider the body or substance of the business or the enterprise for which it was ORGANIZED or whether it has substantially retired from it and turned it over to another. Continuity Test: That 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 incidental to, and in progressive prosecution of, the purpose and object of its organization. Taken together, DOING BUSINESS in the Philippines must cover transactions and series of transactions in pursuit of the main business goals of the corporation and done with the intent to continue the same in the Philippines. c. Contract Test: if the salient points of a contract do not find themselves in the Philippines, Philippine authorities have no business subjecting the parties to local registration and licensing requirements (Pacific Vegetable Oil Corp. v Singzon, G.R. No. 7917, 1955) “Doing Business” Under Investment Act and IRR The Foreign “Doing Business” in the Philippines - Includes: a. Soliciting orders, service contracts, opening offices, whether called “liaison” offices or branches; b. Appointing representatives or distributors domiciled in the Philippines; Note: Includes “appointing representatives or distributors in the Philippines” but not when the representative or distributor “transacts business in its name and for its own account.” (Alfred Hahn v. CA, G.R. No.113074, 1997) 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 Note: “Doing business” was upheld against Pioneer International for soliciting orders and service contracts in the performance of acts that imply continuity of commercial dealings. Pioneer International’s alleged acts in actively negotiating to employ Todaro to run its pre-mixed concrete operations in the Philippines, which acts are hypothetically admitted in Pioneer International’s motion to dismiss, 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. (Pioneer International, LTD v. Guadiz, G.R. No. 156848, 2007) Does Not Include: 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; Page 174 of 393 ATENEO CENTRAL BAR OPERATIONS 2020/21 b. Having a nominee director or officer to represent its interests in such corporation; c. Appointing a representative or distributor domiciled in the Philippines which transacts business in its own name and for its own 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; g. Collecting information in the Philippines; and h. Performing services auxiliary to an existing isolated contract of sale which are not on a continuing basis, such as Installing in the Philippine machinery it has manufactured or exported to the Philippines, servicing the same, training domestic workers to operate it, and similar incidental services. No foreign corporation transacting business in the Philippines without a license, or its successors or assigns, shall be permitted to maintain or intervene in any action, suit or proceeding in any court or administrative agency of the Philippines; but such corporation may be sued or proceeded against before Philippine courts or administrative tribunals on any valid cause of action recognized under Philippine laws (Lorenzo Shipping Corp. v. Chubb & Sons, Inc., et al., G.R. No. 147724, 2004). ii. Necessity of a License to Do Business: ● To place them under the jurisdiction of the courts ● To place them in the same footing as domestic corporations ● Protection for the public in dealing with said corporations. 1. Requisites for Issuance of License A foreign corporation applying for a license to transact business in the Philippines shall submit to the SEC the following: 1. A copy of its articles of incorporation and bylaws, certified in accordance with law and their translation to an official language of the Philippines, if necessary. COMMERCIAL LAW 2. The application shall be under oath and shall specifically set forth the following: a. The date and term of incorporation; b. The address, including the street number, of the principal office of the corporation in the country or State of incorporation; c. The name and address of its resident agent authorized to accept summons and process in all legal proceedings and all notices affecting the corporation, pending the establishment of a local office; d. The place in the Philippines where the corporation intends to operate; e. The specific purpose or purposes which the corporation intends to pursue in the transaction of its business in the Philippines: Provided, That said purpose or purposes are those specifically stated in the certificate of authority issued by the appropriate government agency; f. The names and addresses of the present directors and officers of the corporation; g. A statement of its authorized capital stock and the aggregate number of shares which the corporation has authority to issue, itemized by class, par value of shares, shares without par value, and series, if any; h. A statement of its outstanding capital stock and the aggregate number of shares which the corporation has issued, itemized by class, par value of shares, shares without par value, and series, if any; i. A statement of the amount actually paid in; and j. Such additional information as may be necessary or appropriate in order to enable the Commission to determine whether such corporation is entitled to a license to transact business in the Philippines, and to determine and assess the fees payable. 3. The application shall be accompanied by the following: Page 175 of 393 ATENEO CENTRAL BAR OPERATIONS 2020/21 a. A certificate under oath duly executed by the authorized official or officials of the jurisdiction of its incorporation, attesting to the fact that the laws of the country or State of the applicant allow Filipino citizens and corporations to do business therein, and that the applicant is an existing corporation in good standing. If the certificate is in a foreign language, a translation thereof in English under oath of the translator shall be attached to the application. b. A statement under oath of the president or any other person authorized by the corporation, showing to the satisfaction of the Commission and when appropriate, other governmental agencies that the applicant is solvent and in sound financial condition, setting forth the assets and liabilities of the corporation as of the date not exceeding one (1) year immediately prior to the filing of the application. 4. Foreign banking, financial, and insurance corporations shall, in addition to the above requirements, comply with the provisions of existing laws applicable to them. 5. In the case of all other foreign corporations, no application for license to transact business in the Philippines shall be accepted by the Commission without previous authority from the appropriate government agency, whenever required by law. (Sec. 142) 2. Resident Agent Who may be a Resident Agent a. Individual residing in the Philippines of good moral character and of sound financial standing b. Domestic corporation lawfully transacting business in the Philippines, with a sound financial standing and must show proof that it is in good standing as certified by the SEC (Sec. 144) COMMERCIAL LAW Service of Process upon a Foreign Corporation Through A Resident Agent Before a foreign corporation can be issued a license to transact business in the Philippines, such corporation must first file with the SEC 1. A written power of attorney designating some person who must be a resident of the Philippines, on whom any summons and other legal processes may be served in all actions or other legal proceedings against such corporation; 2. Consent that service upon such resident agent shall be admitted and held as valid as if served upon the duly authorized officers of the foreign corporation at its home office. a. Whenever such service of summons or other process is made upon the SEC, it must, within 10 days thereafter, transmit by mail a copy of such summons or other legal process to the corporation at its home or principal office. When SEC sends such copy, it shall constitute a necessary part of and shall complete such service b. In case of a change of address of the resident agent, it shall be his or its duty to immediately notify the SEC in writing. (Sec. 145) 3. Amendment of license (Sec. 148) A foreign corporation authorized to transact business in the Philippines shall obtain an amended license in the event it changes its corporate name, or desires to pursue other or additional purposes in the Philippines, by submitting an application with the Commission, favorably endorsed by the appropriate government agency in the proper cases. Amendment of the Articles of Incorporation or By-laws of Foreign Corporations Sixty (60) days after the effectivity of the amendment of the articles of incorporation or bylaws of a foreign corporation authorized to transact business in the Philippines, such foreign corporation shall, file with the Commission, and in the proper cases, with the appropriate government agency, a duly authenticated copy of the amended articles of incorporation or bylaws, indicating clearly in capital letters or underscoring the change or changes made, duly certified by the Page 176 of 393 ATENEO CENTRAL COMMERCIAL LAW BAR OPERATIONS 2020/21 authorized official or officials of the country or State of incorporation. Such filing shall not in itself enlarge or alter the purpose or purposes for which such corporation is authorized to transact business in the Philippines. (Sec. 147) iii. Personality to Sue Section 35 enumerates the express powers of a corporation, which includes the corporation’s ability to sue and be sued. The power of the corporation to sue and be sued in any court is lodged with the board of directors that exercises its corporate powers. (Bitong v. CA, G.R. No. 123553, 1998) iv. Suability of Foreign Corporations Every foreign corporation ● Doing business in the Philippines with a license may sue and can be sued in the Philippines ● Doing business in the Philippines without a license cannot sue, but may be sued in the Philippines ● Not doing business in the Philippines, or on isolated transactions may sue and can be sued (if jurisdiction can be acquired) v. Instances When Unlicensed Foreign Corporations May Be Allowed To Sue: a. Isolated transactions; b. Action to protect good name, goodwill, and reputation of a foreign corporation; c. The subject contracts provide that Philippine Courts will be venue to controversies; d. A license subsequently granted enables the foreign corporation to sue on contracts executed before the grant of the license (Eriks Ltd. v. Court of Appeals, G.R. No. 118843, 1997); e. Recovery of misdelivered property; f. Where the defendant is estopped. The Intellectual Property Code provides that any foreign corporation not engaged in business in the Philippines and a national of a country which is a party to any convention, treaty or agreement relating to intellectual property rights or the repression of unfair competition, to which the Philippines is also a party or extends reciprocal rights, may sue in trademark or service mark enforcement action (Sehwani Inc v. In-n-Out Burger, G.R. No. 171053, 2007). Rules Regarding A Foreign Corporation’s Right to Bring Suit in the Philippines FOREIGN CORP CAN FC SUE IN PH? STATUS Doing business in Cannot sue before Philippines without a Philippine courts license Can sue before Philippine courts on an isolated Not doing business in transaction or on a the Philippines cause of action entirely independent of any business transaction Doing business in the Philippines without a license, but Philippine Can sue before citizen or entity has Philippine courts due contracted with said to estoppel corporation or derived benefits from the Foreign Corporation Doing business in the Can sue before Philippines and has Philippine courts on the required license any transaction (Agilent Technologies v. Integrated Silicon, G.R. No. 154618, 2004) Capability to Sue and Suability of Foreign Corporations W/N Doing Business NOT DOING DOING BUSINESS IN BUSINESS IN PHILIPPINES PHILIPPINES Isolated Licensed Unlicensed Transactions Yes, can sue; YES, can sue YES, can be sued NO, cannot sue; EXC: if transactions exhibits intent to EXC: do business, estoppel Foreign Corporation needs license to sue YES, can be sued Qualifier: as long as summons were properly served (to acquire jurisdiction) Page 177 of 393 ATENEO CENTRAL COMMERCIAL LAW BAR OPERATIONS 2020/21 vi. Grounds for Revocation of License Section 151 provides that the SEC may cancel the certificate or license of a foreign corporation on any of the following grounds: a. Failure to file its annual report or pay any fees as required by Code; b. Failure to appoint and maintain a resident agent; c. Failure to inform SEC of the change of resident agent or the latter’s change of address; d. Failure to submit a copy of amended articles of incorporation or by- laws; or articles of merger or consolidation; e. A misrepresentation of any material matters in reports; f. Failure to pay any and all taxes, imposts, assessments or penalties; g. Engaged in a business not authorized by SEC; h. Acting as a dummy of a foreign corporation not licensed to do business in the Philippines; or i. Any other ground as would render it unfit to transact business in the Philippines. Law applicable to Foreign Corporations (Sec. 146) A foreign corporation lawfully doing business in the Philippines shall be bound by all laws, rules and regulations applicable to domestic corporations of the same class, except: 1. those which provide for the creation, formation, organization or dissolution of corporations or 2. those which fix the relations, liabilities, responsibilities, or duties of stockholders, members, or officers of corporations to each other or to the corporation. 13. MERGER AND CONSOLIDATION A. Definition and Concept Merger A union whereby one or more existing corporations are absorbed by another corporation that survives and continues the combined business (Villanueva, 2018). Consolidation The union of two or more existing corporations. A new corporation is created, and consolidating corporations are extinguished. (PNB v. Andrada Electric & Engineering Co., G.R. No. 142936, [April 17, 2002], 430 PHIL 882-903) MERGER A corporation ABSORBS another corporation and REMAINS IN EXISTENCE while the other is DISSOLVED CONSOLIDATION A NEW corporation is created, and constituent corporations are EXTINGUISHED. The power to merge or consolidate is not within the inherent powers of the corporation. Therefore, it must be expressly granted by law. Merger or consolidation does not become effective by mere agreement of the constituent corporations. The approval of the SEC is required (PNB v. Andrada Electric & Engr. Co., Inc., G.R. No. 142936, 2002) Mere Acquisition/Transfer (3 Levels) Merger/ Consolidation Transfer of Property Loss of separate No loss of existence by the separate absorbed corporation (in existence mergers) or the constituent corporations (in consolidation) 1) Assets-Only Level. General Rule: A corporation that purchases the assets of another will not be liable for the debts and liabilities of the selling corporation provided the former acted in good faith. Except, when the following circumstances are present: 1. where the purchasers expressly or impliedly agrees to assume the debts Page 178 of 393 ATENEO CENTRAL BAR OPERATIONS 2020/21 2. where the selling corporation fraudulently enters into the transactions to escape liability for those debts 3. where the purchasing corporation is merely a continuation of the selling corporation 4. where the transaction amounts to a consolidation or merger of the corporations (Edward J. Nell Co. v Pacific Farms Inc., G.R. No. L-20850, 1965) 2) Business Enterprise Level. Purchase of substantially all the assets of the corporation extending to its “going concern” (ability to do business and make money, goodwill, clientele, stock-in-trade, etc). There is case law, based on equity, that holds the transferee liable for the debts and liabilities of the transferor. A “free and harmless clause” holding the transferee free from the liabilities of the transferor is binding only between them and cannot prejudice creditors who are not parties thereto. (Y-I Leisure Philippines, Inc. et al. v James Yu, G.R. No. 207161, 2015) Note: The sale under [Sec. 39] does not contemplate an ordinary sale of all corporate assets; the transfer must be of such degree that the transferor corporation is rendered incapable of continuing its business or its corporate purpose. (Y-I Leisure Philippines, Inc. et al. v James Yu, G.R. No. 207161, 2015)8 However, not every transfer of the entire corporate assets would qualify under Section [39]. It does not apply: (1) if the sale of the entire property and assets is necessary in the usual and regular course of business of corporation, or (2) if the proceeds of the sale or other disposition of such property and assets will be appropriated for the conduct of its remaining business. COMMERCIAL LAW Philippines, Inc. et al. v James Yu, G.R. No. 207161, 2015) 3) Equity Level. Purchaser takes control of the business by purchasing the shareholdings. Purchasing corporation is still protected by the limited liability feature but the same can be pierced. In order to transfer ownership of shares of stock not traded in the Stock Exchange, it is necessary to secure a Certificate of Authorizing Registration (CAR) pursuant to the process laid down in RMO No. 15-03. The receipts of the payment of the tax should also be filed with and recorded by the secretary of the corporation pursuant to Section 11 of RR. No. 06-08. B. Constituent and consolidated corporations Constituent Corporations The corporations that shall cease to exist after joining together through consolidation (Bank of Commerce v. Radio Philippines Network, Inc., G.R. No. 195615, [April 21, 2014], 733 PHIL 491581) Consolidated Corporation The corporation formed after the consolidation of two constituent corporations The names of the corporations proposing to merge or consolidate, hereinafter referred to as the constituent corporations; The constituent corporations shall become a single corporation which, in case of merger, shall be the surviving corporation designated in the plan of merger; and, in case of consolidation, shall be the consolidated corporation designated in the plan of consolidation Thus, the litmus test to determine the applicability of Section [39] would be the capacity of the corporation to continue its business after the sale of all or substantially all its assets.(Y-I Leisure 8 Please refer to the Net Asset Value Test and the Incapacity Test in p. 123 Page 179 of 393 ATENEO CENTRAL BAR OPERATIONS 2020/21 C. Plan of Merger or Consolidation (Sec. 75) The plan of merger or consolidation shall set forth the ff: 1) The names of the constituent corporations; 2) The terms of the merger or consolidation and the mode of carrying the same into effect; 3) A statement of the changes, if any, in the articles of incorporation of the surviving corporation in case of merger; and, in case of consolidation, all the statements required to be set forth in the articles of incorporation for corporations organized under this Code; and 4) Such other provisions with respect to the proposed merger or consolidation as are deemed necessary or desirable. Note: The plan of merger has to be approved by majority of the board of each constituent corporation; it has to be approved by affirmative vote of stockholders representing ⅔ of the outstanding capital stock or ⅔ of the members in case of a non-stock corporation. D. Articles of Merger or Consolidation (Sec. 78) The articles must be signed by the president or vice president and certified by the secretary or assistant secretary setting forth: 1) The plan of the merger or the plan of consolidation; 2) As to stock corporations, the number of shares outstanding, or in the case of nonstock corporations, the number of members; 3) As to each corporation, the number of shares or members voting for or against such plan, respectively; 4) The carrying amounts and fair values of the assets and liabilities of the respective companies as of the agreed cut-off date; 5) The method to be used in the merger or consolidation of accounts of the companies; 6) The provisional or pro-forma values, as merged or consolidated, using the accounting method; and 7) Such other information as may be prescribed by the SEC. COMMERCIAL LAW E. Procedure of Consolidation or Merger STEP 1: Drawing up of the Plan of Merger or Consolidation (Sec. 75) The board of constituent corporations shall draw up a plan of merger or consolidation. It shall contain the following: a. The names of the constituent corporations; b. The terms of the merger or consolidation and the mode of carrying the same into effect; c. A statement of the changes, if any, in the articles of incorporation of the surviving corporation in case of merger; and, in case of consolidation, all the statements required to be set forth in the articles of incorporation for corporations organized under this Code; and d. Such other provisions with respect to the proposed merger or consolidation as are deemed necessary or desirable. STEP 2: Board Approval (Sec. 75) The plan of merger or consolidation shall be approved by majority vote of each of the boards of the corporations involved at separate meetings; STEP 3: Stockholders’ or Members’ Approval (Sec. 76) 1. Notice of such meeting should be given to all stockholders or members at least 1 week before the meeting. 2. The plan has to be approved by a vote of stockholders representing ⅔ of the outstanding capital stock, if a stock corporation, or ⅔ of the members of the non- stock corporation. 3. Dissenting stockholders may exercise their right of appraisal. However, if the board abandons the plan, such right is extinguished. 4. Any amendment to the plan must be approved by the same votes of the board members or trustees and stockholders or members required for the original plan. Page 180 of 393 ATENEO CENTRAL BAR OPERATIONS 2020/21 STEP 4: Articles of Merger or Consolidation (Sec. 77) Once the required number of stockholders or members approved of the plan, Articles of Merger or Articles of Consolidation shall be executed by each of the constituent corporations, to be signed by the president or vice-president and certified by the secretary or assistant secretary of each corporation, setting forth: a. The plan of the merger or the plan of consolidation; b. As to stock corporations, the number of shares outstanding, or in the case of non-stock corporations, the number of members; c. As to each corporation, the number of shares or members voting for or against such plan, respectively; d. The carrying amounts and fair values of the assets and liabilities of the respective companies as of the agreed cut-off date; e. The method to be used in the merger or consolidation of accounts of the companies; f. The provisional or pro-forma values, as merged or consolidated, using the accounting method; and g. Such other information as may be prescribed by the SEC. STEP 5: Approval by the SEC The Articles of Merger or Articles of Consolidation shall be submitted to the SEC for approval. However, in the case of special corporations, like banks, insurance companies, building and loan associations, etc., the favorable recommendation of the appropriate government agency shall first be obtained. 1. If the SEC is satisfied that the merger or consolidation of the corporations concerned is legal, it shall issue a certificate of merger or of consolidation, at which time the merger or consolidation shall be effective. 2. If the SEC is not satisfied, it shall set a hearing to give the corporations concerned the opportunity to be heard. Written notice of the date, time and place of hearing shall be given to each COMMERCIAL LAW constituent corporation at least two (2) weeks before said hearing. F. Effectivity of Merger or Consolidation A merger does not become effective upon the mere agreement of the constituent corporations, but open approval of the articles of merger by the SEC issuing the certificate of merger as required by Section 79 of the Corporation Code (Bank of Commerce v. Heirs of Rodolfo dela Cruz). G. Limitations of Merger and Consolidation Under the Philippine Competition Act (R.A. no. 10667), the Philippine Competition Commission can review the mergers and acquisitions of a corporation/s based on the factors it deems to be relevant. (Sec. 16 of R.A. no. 10667) Parties to a merger or acquisition agreement without complying with the thresholds are prohibited from consummating their agreement until thirty (30) days after providing notification to the Commission in the form and containing the information specified in the regulations issued by the Commission. A transaction that meets the thresholds and does not comply with the notification requirements and waiting periods set out in Section 5 shall be considered void and will subject the parties to an administrative fine of one percent (1%) to five percent (5%) of the value of the transaction. (Sec. 17 of R.A. no. 10667; PCA Rule 4, as amended by PCC Resolution No. 022020) Thresholds for compulsory notification M&A transactions whose definitive agreements are executed on or after 1 March 2020 will be subject to mandatory notification to the PCC if they meet the ff. thresholds: Size of (i) the aggregate annual gross Party revenues in, into or from the Philippines, or (ii) the value of the assets in the Philippines of the ultimate parent entity (UPE) of either the acquiring or acquired entities exceeds PhP 6 billion Size of The size of transaction will be Transaction met if the transaction value, as determined below, exceeds PhP 2.4 billion. Page 181 of 393 ATENEO CENTRAL COMMERCIAL LAW BAR OPERATIONS 2020/21 Merger or acquisition agreements that substantially prevent, restrict or lessen competition in the relevant market or in the market for goods or services as may be determined by the Commission shall be prohibited. (Sec. 20 of R.A. no. 10667) Exemptions: Notwithstanding such prohibition, the PCC would allow such merger or acquisition provided the parties prove the following: (a) The concentration has brought about or is likely to bring about gains in efficiencies that are greater than the effects of any limitation on competition that result or likely to result from the merger or acquisition agreement; or (b) A party to the merger or acquisition agreement is faced with actual or imminent financial failure, and the agreement represents the least anticompetitive arrangement among the known alternative uses for the failing entity’s assets.(Sec. 21 of R.A. no. 10667) power to file an action for recovery) including: i. subscriptions to shares and other choses in action ii. and every other interest of, belonging to, or due to each constituent corporation 5. Regarding liabilities and pending claims: a. Liabilities and obligations of each constituent corporation: i. Surviving or consolidated corporation shall be responsible b. Pending claim, action or proceeding brought by or against any constituent corporation i. may be prosecuted by or against the surviving or consolidated corporation c. The rights of creditors or liens upon the property of such constituent corporations are not impaired H. Effects of Merger or Consolidation 1. Constituent corporations become a single corporation a. Merger: surviving corporation b. Consolidation: consolidated corporation under the plan of consolidation 2. Separate existence of constituent corporations cease EXCEPT that of the surviving or consolidated corporation 3. Surviving or consolidated corporation possesses the rights privileges immunities; and powers and is subject to all duties and liabilities of a corporation organized under this Code 4. ALL of the following are deemed transferred to and vested in such surviving or consolidated corporation: (BY OPERATION OF LAW) a. Rights b. Privileges c. Immunities d. Franchises of each constituent corporation e. Real or personal property f. Receivables due on whatever account (hence surviving / consolidated corporation has the 14. INVESTIGATIONS, OFFENSES, AND PENALTIES A. Authority of Commissioner i. Investigation and prosecution of offenses The SEC may investigate an alleged violation of this Code, rule, regulation, or order of the SEC. The SEC may publish its findings, orders, opinions, advisories, or information concerning any such violation, as may be relevant to the general public or to the parties concerned, subject to the provisions of the “Data Privacy Act of 2012”, and other pertinent laws. The SEC shall give reasonable notice to and coordinate with the appropriate regulatory agency prior to any such publication involving companies under their special regulatory jurisdiction. ii. Administration of oath and issuance of subpoena The SEC, through its designated officer, may administer oaths and affirmations, issue subpoena and subpoena duces tecum, take testimony in any inquiry or investigation, and may Page 182 of 393 ATENEO CENTRAL BAR OPERATIONS 2020/21 perform other acts necessary to the proceedings or to the investigation. iii. Cease and desist power Whenever the SEC has reasonable basis to believe that a person has violated, or is about to violate, the RCC, rule, regulation, or order of the SEC, it may direct such person to desist from committing the act constituting the violation. COMMERCIAL LAW P1,000.00 for each day of continuing violation but in no case to exceed P2,000,000.00; 2. Issuance of a permanent cease-and-desist order; 3. Suspension or revocation of the certificate of incorporation; and 4. Dissolution of the corporation and forfeiture of its assets under the conditions in Title XIV of the RCC ii. Prohibited Acts and Penalties The SEC may issue a cease and desist order ex parte to enjoin an act or practice which is fraudulent or can be reasonably expected to cause significant, imminent, and irreparable danger or injury to public safety or welfare. The ex parte order shall be valid for a maximum period of twenty (20) days, without prejudice to the order being made permanent after due notice and hearing. Thereafter, the SEC may proceed administratively against such person in accordance with Section 158, and/or transmit evidence to the Department of Justice for preliminary investigation or criminal prosecution and/or initiate criminal prosecution for any violation of this Code, rule, or regulation. iv. Contempt Any person who, without justifiable cause, fails or refuses to comply with any lawful order, decision, or subpoena issued by the SEC shall, after due notice and hearing, be held in contempt and fined in an amount not exceeding P30,000.00. When the refusal amounts to clear and open defiance of the SEC’s order, decision, or subpoena, the SEC may impose a daily fine of P1,000.00 until the order, decision, or subpoena is complied with. B. Sanctions for violations i. Administrative sanctions (Sec. 158) If, after due notice and hearing, the SEC finds that any provision of this Code, rules or regulations, or any of the SEC’s orders has been violated, the SEC may impose any or all of the following sanctions, taking into consideration the extent of participation, nature, effects, frequency and seriousness of the violation: 1. Imposition of a fine ranging from P5,000.00) to P2,000,000.00, and not more than Table of Violations and Fines Violation Fine SEC. 165. Fraudulent 200k - 2M Conduct of Business A corporation that conducts its business through fraud. SEC. 166. Acting as Intermediaries for Graft and Corrupt Practices 400k - 5M (When the violation of this provision is injurious or detrimental to the public) 100k - 5M A corporation used for fraud, or for committing or concealing graft and corrupt practices as defined under pertinent statutes. When there is a finding that any of its directors, officers, employees, agents, or representatives are engaged in graft and corrupt practices, the corporation’s failure to install: a. safeguards for the transparent and lawful delivery of services; and b. policies, code of ethics, and procedures against graft and corruption shall be prima facie evidence of corporate liability under this section. SEC. 167. Engaging Intermediaries for Graft and Corrupt Practices 100k – 1M Page 183 of 393 ATENEO CENTRAL COMMERCIAL LAW BAR OPERATIONS 2020/21 A corporation that appoints an intermediary who engages in graft and corrupt practices for the corporation’s benefit or interest. SEC. 168. Tolerating Graft and Corrupt Practices A director, trustee, or officer who knowingly fails to sanction, report, or file the appropriate action with proper agencies, allows or tolerates the graft and corrupt practices or fraudulent acts committed by a corporation’s directors, trustees, officers, or employees. SEC. 169. Retaliation Against Whistleblowers 500k – 1M Liability for any of the foregoing offenses shall be separate from any other administrative, civil, or criminal liability under this Code and other laws. 100k – 1M Any person who, knowingly and with intent to retaliate, commits acts detrimental to a whistleblower such as interfering with the lawful employment or livelihood of the whistleblower. A whistleblower refers to any person who provides truthful information relating to the SEC or possible commission of any offense or violation under this Code. SEC. 170. Other Violations of the Code Violations of any of the other provisions of this Code or its amendments not otherwise specifically penalized therein If the violation is committed by a corporation, the same may, after notice and hearing, be dissolved in appropriate proceedings before the SEC: - Provided, That such dissolution shall not preclude the institution of appropriate action against the director, trustee, or officer of the corporation responsible for said violation: Provided, further, That nothing in this section shall be construed to repeal the other causes for dissolution of a corporation provided in this Code. iii. Who are liable (Sec. 171-172) 1. Corporation- Penalty may be imposed upon its directors, trustees, stockholders, members, officers, or employees responsible for the violation or indispensable to its commission. 2. Aiders and Abettors- Penalty would be a punishment of a fine not exceeding that imposed on the principal offenders, at the discretion of the Court, after taking into account their participation in the offense. C. Authority of the Securities and Exchange Commission (Jurisdiction) The SEC’s visitorial powers. (Sec. 178) 10k – 1M The SEC shall have visitorial powers over all corporations. These powers include: 1. 2. 3. 4. Examination and inspection of records Regulation and supervision of activities Enforcement of compliance Imposition of sanctions in accordance with the Revised Corporation Code. Should the corporation, without justifiable cause, refuse or obstruct the SEC’s exercise of powers, the SEC may revoke its certificate of incorporation, without prejudice to the imposition of other penalties and sanctions under the RCC. Page 184 of 393 ATENEO CENTRAL COMMERCIAL LAW BAR OPERATIONS 2020/21 GENERAL RULE: All interrogatories propounded by the SEC and the answers thereto, as well as the results of any examination made by the SEC or any other official authorized by law to make an examination of the operations, books, records of any corporation, shall be kept strictly CONFIDENTIAL, EXCEPT: (1) When the law requires the same to be made public; (2) When necessary for the SEC to take action to protect the public; (3) To issue orders in the exercise of its powers under RCC (4) Where such interrogatories, answers or results are necessary to be presented as evidence before any Court. (Sec. 178) What are the functions, powers, jurisdiction of the SEC? (Sec. 179) 10. 11. 12. and SEC shall have the power and authority to: 1. Exercise supervision and jurisdiction over all corporations and all persons acting on their behalf, except otherwise provided by RCC; 2. Retain jurisdiction over pending cases involving intra-corporate disputes submitted for final resolution. (PD 902-A); a. The SEC shall retain jurisdiction over pending suspension of payment/ rehabilitation cases filed as of 30 June 2000 until finally disposed. 3. Impose sanctions for the violation of the RCC, its implementing rules and orders of the SEC; 4. Promote corporate governance and the protection of minority investors, through, among others, the issuance of rules and regulations consistent with international best practices; 5. Issue opinions to clarify of laws, rules, and regulations; 6. Issue cease and desist orders ex parte to prevent imminent fraud or injury to the public; 7. Hold corporations in direct or indirect contempt; 8. Issue subpoena duces tecum and summon witnesses to appear in proceedings before the SEC; 9. In appropriate cases, order the examination, search and seizure of documents, papers, files and records, 13. 14. 15. 16. and books of accounts of any entity or person under investigation as may be necessary for the proper disposition of the cases, subject to the provisions of existing laws; Suspend or revoke the certificate of incorporation after proper notice and hearing; Dissolve or impose sanctions on corporations, upon final court order, for committing, aiding in the SEC of, or in any manner furthering securities violations, smuggling, tax evasion, money laundering, graft and corrupt practices, or other fraudulent or illegal acts; Issue writs of execution and attachment to enforce payment of fees, administrative fines, and other dues collectible under this Code; Prescribe the number of independent directors and the minimum criteria in determining the independence of a director; Impose or recommend new modes by which a stockholder, member, director, or trustee may attend meetings or cast their votes, as technology may allow, taking into account the company’s scale, number of shareholders or members, structure, and other factors consistent with the basic right of corporate suffrage; Formulate and enforce standards, guidelines, policies, rules, and regulations to carry out the provisions of this Code; and Exercise such other powers provided by law or those, which may be necessary or incidental to carrying out, the powers expressly granted to the SEC. Note: In imposing penalties and other requirements, SEC shall take into consideration the size, nature of the business, and capacity of the corporation. NO COURT BELOW THE CA SHALL HAVE JURISDICTION (Sec. 179) Only the CA has the jurisdiction to issue a restraining order, preliminary injunction, or preliminary mandatory injunction in any case, dispute, or controversy that directly or indirectly interferes with the exercise of the powers, duties, and responsibilities of the SEC that falls exclusively within its jurisdiction. Page 185 of 393 ATENEO CENTRAL BAR OPERATIONS 2020/21 JURISDICTIONS On Jurisdiction of RTC in Intra-Corporate Disputes: Section 5 of the Securities Regulation Code transferred the jurisdiction of the (SEC) over intra-corporate disputes to RTCs designated by the Supreme Court as commercial courts. The existence of an intra-corporate dispute must be clearly alleged in the complaint. Two tests to determine existence of intracorporate dispute Relationship Test A dispute is intra-corporate if it is: 1. Between the corporation, partnership or association and the public; 2. Between the corporation, partnership or association and the state insofar as its franchise, permit or license to operate is concerned; 3. Between the corporation, partnership or association and its stockholders, partners, members or officers; and 4. Among the stockholders, partners or associates themselves (Philippine Communications Satellite Corp. v. Sandiganbayan, G.R. No. 203023, 2015) Nature of the Controversy Test The dispute itself must be intrinsically connected with the regulation of the corporation, partnership or association. The controversy "must not only be rooted in the existence of an intra-corporate relationship, but must also refer to the enforcement of the parties' correlative rights and obligations under the Corporation Code as well as the internal and intra-corporate regulatory rules of the corporation." (Dy Teban Trading Inc. v. Dy, G.R. No. 161803, 2008) The following are within the jurisdiction of the RTC: 1. Fraudulent devices and schemes employed by directors detrimental to the public interest and to other firms 2. Intra-corporate dispute and with the state in relation to their franchise and right to exist 3. Controversies in election, appointment of directors or trustees and petition to be COMMERCIAL LAW declared in the state of suspension of payments. 4. Appointment of Rehabilitation Receiver or Management Committee What is a management committee? - Tasked to manage, take custody of and control all existing assets, funds, and records of the corporation. - To determine the best way to protect the interest of its stockholders and creditors. What is a Rehabilitation Receiver? - Appointed when the corporation is in financial distress. - To rehabilitate. Arbitration for unlisted corporations. (Sec. 181) Where can the arbitration agreement be found? The same may be provided in the articles of incorporation or by-laws of an unlisted corporation. When can cases be referred to arbitration? When the agreement is in place, disputes between the corporation, its stockholders or members, which arise from the implementation of the articles of incorporation or by-laws, or from intra-corporate relations. When shall the dispute be non-arbitrable? When it involves criminal offenses and interests of third parties. The arbitration agreement. (Sec. 181) - The same shall be binding on the corporation, its directors, trustees, officers, and executives or managers. - To be enforceable, the same should indicate - the number of arbitrators - the procedure for their appointment. - The power to appoint the arbitrators forming the arbitral tribunal shall be granted to a designated independent third party. - Should the third party fail to appoint the arbitrators in the manner and within the period specified in the arbitration agreement, the parties may request the SEC to appoint the arbitrators. In any case, arbitrators must be accredited or must belong to organizations accredited for the purpose of arbitration. Page 186 of 393 ATENEO CENTRAL BAR OPERATIONS 2020/21 COMMERCIAL LAW The arbitral tribunal (Sec. 181) - shall have the power to rule on its own jurisdiction and on questions relating to the validity of the arbitration agreement. When an intra-corporate dispute is filed with a Regional Trial Court, the Court shall dismiss the case before the termination of the pretrial conference, if it determines that an arbitration agreement is written in the corporation’s articles of incorporation, bylaws, or in a separate agreement. - shall have the power to grant interim measures necessary to ensure enforcement of the award, prevent a miscarriage of justice, or otherwise protect the rights of the parties. Final Arbitral award (Sec. 181) - Shall be executory after the lapse of fifteen (15) days from receipt thereof by the parties and shall be stayed only by the filing of a bond or the issuance by the appellate court of an injunctive writ. (Under Sec. 181 specifically) 2 kinds of arbitration 1. Voluntary- when parties both agree to submit themselves to the jurisdiction of the arbitrators. The parties choose who the arbitrators will be. 2. Compulsory- The judge is a stranger. There is still a decision. This kind of arbitration is more commonly known as “litigation”. The arbitrators are the judges of the courts (MTC, RTC etc.) Jurisdiction over Party-List Organizations. (Sec. 182) - The powers, authorities, and responsibilities of the SEC involving party-list organizations are transferred to the SEC on Elections (COMELEC) - Within 6 months after the effectivity of the RCC, the monitoring, supervision, and regulation of such corporations shall be deemed automatically transferred to the COMELEC. - The COMELEC in coordination with the SEC shall promulgate the corresponding IRR for the transfer of jurisdiction ————- end of topic ————- Page 187 of 393 SECURITIES Commercial Law ATENEO CENTRAL BAR OPERATIONS 2020/21 V. SECURITIES TOPIC OUTLINE UNDER THE SYLLABUS: V. SECURITIES A. State Policy B. Definition of Securities C. Kinds of Securities 1. Exempt Securities 2. Exempt Transactions 3. Non-exempt Transactions D. Powers and functions of the Securities and Exchange Commission E. Procedure for registration of securities F. Prohibitions on fraud, manipulation, and insider trading 4. Manipulation of security prices 5. Short sales 6. Option trading 7. Fraudulent transactions 8. Insider trading G. Protection of shareholder interests 1. Tender offer rule 2. Rules on proxy solicitation 3. Disclosure rule COMMERCIAL LAW A. STATE POLICY The State policies underlying the Securities Regulation Code (SRC) are the following: a. Establish a socially conscious free market that regulates itself; b. Encourage the widest participation of ownership in enterprises; c. Enhance the democratization of wealth d. Promote the development of the capital market; e. Protect investors; f. Ensure full and fair disclosure about securities; and g. Minimize, if not totally eliminate, insider trading and other fraudulent or manipulative devices (SRC, Sec. 2) The overriding objective of the SRC is investor protection through full and fair disclosure about securities to be offered to the public and by minimizing fraudulent and manipulative activities for public companies. Note that the SRC will not apply to non-public company. A public company is defined under the SRC as either a publiclylisted company, or a company with total assets of at least P50M and with at least 200 shareholders each holding 100 shares of the same class. The principal purpose of SRC and its regulations (also known as the Blue Sky Laws) is to protect the public from worthless ventures, that have no basis at all, and the sale of securities therein to investors, who are then left holding certificates representing nothing more than a claim to a square of a blue sky. B. DEFINTION OFSECURITIES Securities are shares, participation or interests in a corporation or in a commercial enterprise or profit-making venture evidenced by a certificate, contract, instrument, whether written or electronic in character. The definition includes investment contracts. (SRC, Sec. 3.1) Page 189 of 393 ATENEO CENTRAL BAR OPERATIONS 2020/21 C. KINDS OF SECURITIES a. “Per Se” Securities: those enumerated specifically under Sec. 3 of the SRC to fall within the definition of “securities”. Examples of those named as securities are shares of stock, bonds, fractional undivided interests in oil/gas/other mineral rights, derivatives like options and warrants, proprietary or nonproprietary membership certificates in corporations, etc. b. “Investment Contracts: as defined under the 2015 IRR of the SRC, An investment contract means a contract, transaction or scheme (collectively "contract") whereby a person invests his money in a common enterprise and is led to expect profits primarily from the efforts of others. An investment contract is presumed to exist whenever a person seeks to use the money or property of others on the promise of profits. c. Catch-all – Other instruments as SEC may determine in the future. Note: “Public offering” for purposes of registration, means a random or indiscriminate offering of securities in general to more than nineteen (19) persons, whether solicited or unsolicited. Turner Test The Turner Test is used to determine whether a contract is an investment contract within the definition of securities.  Under this test, an investment contract may be a transaction, contract, or scheme whereby a person: a. Makes an investment of money, b. In a common enterprise, c. With the expectation of profits, d. To be derived primarily from the efforts of others  The Turner Test was adopted in the Philippines, specifically in the case of Power Homes wherein it was determined that transactions under a pyramiding COMMERCIAL LAW scheme partakes the nature of investment contracts and thus falls under the definition of "securities" under the SRC (Power Homes Unlimited Corp. v. SEC, G.R. No. 164182, 2008). Securities Market Participants a. Issuer is an originator, maker, obligor, or creator of the security. (SRC, Sec. 3.2) b. Broker is a person engaged in the business of buying and selling securities for the account of others. (SRC, Sec. 3.3) The client of the broker is a third party. c. Dealer is a person, who buys and sells securities for his own account in the ordinary course of business. (SRC. Sec. 3.4) A dealer transacts using the dealer’s own resources and not for third parties, unlike a broker. d. Prospectus is the document, made by or on behalf of an issuer, underwriter or dealer, to sell or offer securities for sale to the public through a registration statement filed with the SEC. (SRC. Sec. 3.11) This is the offering circular containing all material information about the issuer and the securities sought to be offered to the public. Registration General rule: Securities are prohibited to be sold or offered for sale or distribution within the Philippines (SRC. Sec. 8.1): a. Without registration statement duly filed with and approved by SEC; and b. Prior to such sale, information on the securities, in such form and with such substance as SEC may prescribe, must be made available to each prospective purchaser. Exception: The following may be sold without need of registration: a. Exempt securities (SRC, Sec. 9) b. Exempt transactions (SRC, Sec. 10) NOTE:  Registration is required whenever securities are sold or offered to be sold to the public. At the end of the registration Page 190 of 393 ATENEO CENTRAL BAR OPERATIONS 2020/21  process, the registration statement will be rendered effective by the SEC and a permit to sell will be issued. Registration allows the SEC to ensure that there is full and fair disclosure of all material information in connection with the public offering. In approving the registration of the securities, the SEC is not only concerned with the requirement that full disclosure of information is given to the public but the SEC is also concerned with the merit of the securities themselves and the issuer (PSE v. Court of Appeals, G.R. No. 125469, 1997). 1. EXEMPT SECURITIES Exempt securities are those to which the requirement of registration under Subsection 8.1 of the SRC generally does not apply. The following are exempt securities: 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. NOTE: The reason why the Government should not be required to furnish a bond is that the State is undoubtedly always solvent (Araneta v. Gatmaitan, G.R. Nos. L-8895, L-9191, 1957). 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 of the a. Office of the Insurance Commission, COMMERCIAL LAW b. Housing and Land Use Rule Regulatory Board, or the; c. Bureau of Internal Revenue. e. Any security issued by a bank except its own shares of stock. (SRC, 9) REMEMBER THIS: When a bank issues securities other than its own shares of stock, common or preferred, it does not need to register the said securities with the SEC as long as the BSP consents thereto. If, however, the security to be issued by a bank is a share of stock, then those shares need to be registered with the SEC prior to any public offering. 2. EXEMPT TRANSACTIONS The enumeration of transactions under Sec. 10 that can qualify as exempt transactions are exclusive and specific. Hence, the exemption is transaction-specific, unlike the exempt securities under Sec. 9 which will always be exempt from registration regardless of the underlying transaction or offering. For the upcoming bar exam, be familiar or understand the rationale for the exemption of the transactions under Sec. 10 – either the SEC approved the issuance (such as for increase in authorized capital stock), or the issuance is approved by a court of law (such as judicial sale), or the issuance is pursuant to a contract (such as exercise of a right of conversion), or is a private placement (less than 20 buyers) or a QIB offering (qualified institutional buyers are those with sophistication, experience and knowledge sufficient to form judgment on whether to invest or not in a securities offering). a. Judicial sale of securities: Any judicial sale, or sale by an executor, administrator, guardian or receiver or trustee in insolvency or bankruptcy NOTE: As distinguished from exempt securities specially issued by the receiver or trustee in a bankruptcy proceeding mentioned above, the shares covered under exempt transactions are ordinary shares; however the owner of the shares is bankrupt and so the shares are sold. Page 191 of 393 ATENEO CENTRAL COMMERCIAL LAW BAR OPERATIONS 2020/21 b. Sale of foreclosed securities: By or on account of a pledge holder or mortgagee or any other similar lien holder, selling or offering for sale or delivery in the ordinary course of business, not for the purpose of avoiding the provisions of SRC, to liquidate a bona fide debt, a security pledged in good faith as security for such debt; c. Isolated transaction: An isolated transaction in which any security is sold, offered for sale, subscription or delivery by the owner thereof, or for his account, not being made in the course of repeated and successive transactions of a like character, and such owner or representative not being the underwriter of such security; h. Broker’s transactions: Broker’s transactions, executed upon customer’s orders, on any registered Exchange or trading market; i. Pre-incorporation subscription or subscription to a capital increase: Subscriptions to shares of capital stock (1) prior to incorporation or (2) pursuant to an increase in authorized capital stock – both to comply with the requirements of the law for minimum subscription; j. Exchange of securities with existing security holders: Exchange of securities by the issuer exclusively with its existing security holders exclusively, where no commission or other remuneration is paid or given directly or indirectly for soliciting such exchange  The difference between (h) and (j) is that the exchange in (h) is for any other security of the issuer while in (j), the exchange is between the issuer and its existing security holders wherein the securities exchanged are not from the same issuer; k. Private placements: Sale of securities by an issuer to fewer than 20 persons during any twelve-month period; and d. Stock dividends: Distribution by a corporation of securities to its stockholders or other security holders as stock dividend or other distribution out of surplus; e. Sale of shares to stockholders not underwritten: Sale of capital stock of a corporation to its own stockholders exclusively – stock which has already been issued; f. Issuance of bonds to a single purchaser: Issuance of bonds or notes secured by mortgage upon real estate or tangible personal property; g. Transaction pursuant to the right of conversion: Issuance and delivery of any security in exchange for any other security of the same issuer pursuant to a right of conversion, provided that the: i. Surrendered has been registered under the SRC or was, exempt, when sold ii. Security issued and delivered in exchange would, at the time of conversion, fall into the class entitled to registration; REMEMBER THIS: This exempt transaction which requires as a precondition the offering to fewer than 20 persons over a 12-month period is the very essence of what constitutes an offering that is not public. If, however, the offering is made to qualified institutional buyers or qualified individual buyers, the number of persons becomes irrelevant as you can see in the subsequent exemption for qualified buyers. l. Sale to qualified buyers: Sale of securities to any of the following qualified buyers: i. Bank ii. Registered investment house iii. Insurance company Page 192 of 393 ATENEO CENTRAL COMMERCIAL LAW BAR OPERATIONS 2020/21 iv. v. vi. Pension fund or retirement plan maintained by the government or managed by a bank or other persons authorized by the BSP to engage in trust functions Investment company Such other person at the Commission may determine as qualified. REMEMBER THIS: The parties to the offering may seek a confirmation of exempt transaction status from the SEC, but this step is optional. Note that the burden of proving entitlement to an exemption rests with the claimant. Only a notice of exempt transaction is required under the 2015 IRR of the SRC. Notes: The SEC may exempt other transactions, if it finds that the requirements of registration under the SRC is not necessary in the public interest or for the protection of the investors such as by the reason of the small amount involved or the limited character of the public offering. (SRC, Sec. 10.2)An example of this provision is a stock option plan or an employee stock purchase plan which is commonly offered by publicly-listed companies to their executives and employees. Issuance from authorized but previously unissued capital stock may be granted exemption (Nestle Philippines v. CA, G.R. No. 86738, 1991) 3. NON-EXEMPT TRANSACTIONS All transactions involving securities which are offered to the public, unless it is an exempt security or an exempt transaction subject to the provisions of the SRC, needs to be registered as such with the Securities and Exchange Commission, unless otherwise provided by law or the Rules, and as such are non-exempt transactions. 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 Securities and Exchange Commission. (SRC, Sec. 8) The Securities and Exchange Commission may conditionally approve registration statements of securities, subject under terms it may deem necessary, and may specify the terms and conditions under which a written communication, including any summary prospectus, shall be deemed not to constitute an offer for sale. (SRC, Sec. 8.2 and 8.3) D. POWERS AND FUNCTIONS OF THE SECURITIES AND EXCHANGE COMMISSION a. Have jurisdiction and supervision over all corporations, partnership or associations who are the grantees of primary franchises and/or a license or a permit issued by the Government; b. Formulate policies and recommendations on issues concerning the securities market, advise Congress and other government agencies on all aspect of the securities market and propose legislation and amendments thereto; c. Approve, reject, suspend, revoke or require amendments to registration statements, and registration and licensing applications; d. Regulate, investigate or supervise the activities of persons to ensure compliance; e. Supervise, monitor, suspend or take over the activities of exchanges, clearing agencies and other SROs; f. Impose sanctions for the violation of laws and rules, regulations and orders, and issued pursuant thereto; g. Prepare, approve, amend or repeal rules, regulations and orders, and issue opinions and provide guidance on and Page 193 of 393 ATENEO CENTRAL COMMERCIAL LAW BAR OPERATIONS 2020/21 supervise compliance with such rules, regulation and orders; h. Enlist the aid and support of and/or deputized any and all enforcement agencies of the Government, civil or military as well as any private institution, corporation, firm, association or person in the implementation of its powers and function under its Code; i. j. Issue cease and desist orders to prevent fraud or injury to the investing public; Punish for the contempt of the Commission, both direct and indirect, in accordance with the pertinent provisions of and penalties prescribed by the Rules of Court; k. Compel the officers of any registered corporation or association to call meetings of stockholders or members thereof under its supervision; l. Issue subpoena duces tecum and summon witnesses to appear in any proceedings of the Commission and in appropriate cases, order the examination, search and seizure of all documents, papers, files and records, tax returns and books of accounts of any entity or person under investigation as may be necessary for the proper disposition of the cases before it, subject to the provisions of existing laws; m. Suspend, or revoke, after proper notice and hearing the franchise or certificate of registration of corporations, partnership or associations, upon any of the grounds provided by law; and E. PROCEDURE FOR REGISTRATION OF SECURITIES Procedure for Registration of Securities a. Filing The issuer must file in the main office of the SEC: a. Sworn registration statement with respect to such securities; and b. Registration statement must include any prospectus required (SRC. Sec. 12.1) NOTE: A registration statement may be withdrawn by the issuer only with SEC’s consent. This is called a voluntary revocation. (2015 IRR of R.A. 8799, Rule 13.2.) b. Signature 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 and accompanied by: a. A duly verified resolution of the board of directors; b. The written consent of the expert, who certified any part of the registration statement; and c. If the registration statement includes shares to be sold by selling shareholders. A written certification by the selling stockholders as to the accuracy of the information of any part of the registration statement. (SRC. Sec. 12.4) c. Payment of Filing Fee Not more than one-tenth (1/10) of one per centum (1%) of the maximum aggregate price of the securities (SRC. Sec. 12.5[a]) d. Publication n. Exercise such other powers as may be provided by law as well as those which may be implied from, or which are necessary or incidental to the carrying out of, the express powers granted the Commission to achieve the objectives and purposes of these laws. (SRC, Sec. 5) 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, reciting that: a. A registration statement for the sale of such security has been filed, Page 194 of 393 ATENEO CENTRAL BAR OPERATIONS 2020/21 b. The registration statement, and its attachments, are open to inspection; and c. Copies shall be furnished to interested parties at such reasonable charge as the SEC may prescribe. (SRC. Sec. 12.5[b]) NOTE: As part of its registration statement, the Issuer shall submit to the SEC an affidavit of publication with a copy of the notice that was published or a copy of the pro-forma notice to be published, with the attestation that the publication has been or will be immediately undertaken. (2015 IRR of R.A. 8799 Rule 12.5(b).2) e. Order Within forty-five (45) days after the date of filing, the SEC shall declare the registration statement effective or rejected. (SRC. Sec. 12.6) f. Entry of Order The SEC will enter an order declaring the registration statement to be effective. (SRC. Sec. 12.6) g. Oath of an Issuer 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. (SRC. Sec. 12.7) NOTE: The order of the Commission rendering effective the registration statement shall, at the expense of the Issuer, be published in a national newspaper of general circulation and uploaded in its website within two (2) business days from its issuance. (2015 IRR of R.A. 8799 Rule 12.5(b).3) h. Offer Period of Securities The sale of the securities subject of the registration statement shall commence within ten (10) business days from the date of the effectivity of the registration statement' and shall continue until the end of the offering period or until the sale is terminated by the Issuer. If the sale is not commenced within ten (10) business days, the RS shall be cancelled and all fees paid thereon forfeited. (2015 of R.A. 8799 Rule 8.1.1.5) COMMERCIAL LAW i. Termination or Completion of Offering A written notification of completion or termination of the offering shall be filed by the Issuer with the Commission within three (3) business days from such completion or termination, and the notice shall state the number of securities sold. (2015 IRR of R.A. 8799 Rule 8.1.1.6) Procedure for Delayed and Continuous Offering and Sale of Securities (Shelf Registration) Securities, which are intended to be issued in tranches at more than one instance after the registration statement has been rendered effective by the Commission, may be registered for an offering to be made on a continuous or delayed basis in the future, for a period not exceeding three (3) years from the effective date of the registration statement under which they are being offered and sold. (2015 IRR of R.A. 8799 Rule 8.1.2) Securities offered after the initial tranche shall comply with the following requirements: a. At least five (5) business days prior to the offering or sale of the securities, it shall disclose to the Commission the required information using SEC Form 12-I-SR; b. Filing Fees c. Upon filing of an RS, the total filing fee shall be computed based on Section 12.5 (a) of the SRC, payable per tranche of issuance and proportional to the issued value. d. The filing fees of the subsequent tranches shall be payable within seven (7) business days prior to commencement of the offer/sale of the said securities. e. The registrant shall execute an Undertaking to pay the remaining registration fees no later than thirty (30) business days prior to the expiry of the three (3) year period reckoned from the date of effectivity of the RS. Page 195 of 393 ATENEO CENTRAL BAR OPERATIONS 2020/21 Rejection and Revocation of Registration Statement a. Grounds for Rejection and Revocation of Registration Statement a. When the issuer: i. Has been judicially declared insolvent; ii. Has violated any of the provision of the SRC, 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; v. 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; 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 underwriter 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. d. Where the issuer refused to comply with the order of SEC for the production of all books and papers, administration of oath, or examination of its officers, or any COMMERCIAL LAW other person connected business affairs. to its NOTE: the term “competent judicial or administrative body” shall include a foreign court of competent jurisdiction as provided for under the Rules of Court. b. Requirements for Voluntary Revocation An Application for Voluntary Revocation of Registration of Securities shall include the following documents: (2015 IRR of R.A. 8799 Rule 13.2.1): 1. Verified Petition for Revocation of Registration; 2. Board Resolution approving the revocation, certified under oath by the corporate secretary and attested to by the president or anyone performing a similar function; 3. List of stockholders indicating their respective shareholdings as of the latest date; 4. All relevant books and papers of the Issuer, as may be determined by the Commission; 5. Proposed Notice of Filing of Petition for Voluntary Revocation of Registration of Securities, reciting the facts supporting the said petition which shall be subject to the approval of the Commission; and 6. Copy of the official receipt representing payment of the prescribed filing fees. NOTE: The Commission may impose such other requirements or conditions it may deem necessary. (2015 IRR of R.A. 8799 Rule 13.2.2) c. Procedure for Voluntary Revocation of Registration of Securities  If, after fifteen (15) business days from the publication of the Notice of Filing of Petition for Voluntary Revocation, the Commission finds that the petition together with all other papers and documents attached to it, is on its face complete and that no Page 196 of 393 ATENEO CENTRAL COMMERCIAL LAW BAR OPERATIONS 2020/21  party stands to suffer any damage from the revocation, it shall prepare an order revoking the registration.  The Order of Revocation shall exempt the Issuer from its reporting obligations under Section 17.2 of the SRC unless it still qualifies as a public company. Consequences of an Incomplete or False and Inaccurate Statement In A Material Respect In The Registration Statement o  If the registration statement is on its face incomplete or inaccurate in any material respect: o o  The Commission shall issue an order directing the amendment of a registration statement; upon compliance with such order, the amended registration statement shall become effective; But if such registration statement has already become effective, the issuer needs to publish a notice of the proposed amendments in 2 newspapers of general circulation in the Philippines stating that the offering in its current form has been cancelled. If the changes shall result to a derogation of rights of existing security holders or purchasers of subject securities who have paid a portion of the selling price: o o The issuer shall include in the above-mentioned publication an offer to rescind all transactions that have been completed for sale to date, without making any deduction and wait for thirty (30) days for purchasers to respond to the rescission offer before initiation of the amended offering. Purchasers may, within thirty (30) days from the date of such notification, renounce their purchase of securities. The issuer, or any person acting on behalf of the issuer in connection with the distribution of said securities, shall, within ten (10) days from receipt of notification of such election, return the contributions paid by such purchasers without making any deduction. Purchasers who decide not to renounce their purchase of securities shall be subject to the terms of the amended offering. (SRC, Sec. 14) Grounds For Suspension Of The Registration Of A Security If at any time, the information contained in the registration statement filed is or has become misleading, incorrect, inadequate or incomplete in any material respect  The sale or offering for sale of the security registered thereunder may work or tend to work a fraud  Pending further investigation of the security registered to ascertain whether the registration of such security should be revoked on any ground specified in the SRC; or  Refusal to furnish information required by the Commission. (SRC, Sec. 15) VI. Procedure For Suspension Of The Sale Of Securities (SRC, Sec. 15)  SEC may order the suspension of the offer and sale of securities pending any investigation, stating the grounds for taking such action.  Such order, although binding upon persons notified thereof, shall be deemed confidential, and shall not be published.  Notice of such order shall be given to the issuer and every dealer and broker known as participating in such offering.  Upon issuance of suspension order, no further offer or sale of such security shall Page 197 of 393 ATENEO CENTRAL COMMERCIAL LAW BAR OPERATIONS 2020/21 be made until lifted or set aside by the SEC; otherwise, such sale is void.  Upon issuance of an order of suspension, the SEC shall conduct a hearing.  If it determines that the sale of any security should be revoked, it shall issue an order prohibiting the sale of such security. (SRC, Sec. 15) from purchasers within 10 days after the notice is first published.  Publication of the Notice of the Order of Revocation or Suspension   If during a public offering, the Commission, after due notice and hearing, revokes the effectivity of a registration statement under Section 13, or suspends registration under Section 15. Such order shall be published in:  A newspaper of general circulation in the Philippines; and/or   Post(ed) on the Commission’s website along with a statement that the– i. Offering in its current form has been cancelled; and ii. Issuer subject to such order, or any person, acting on behalf of such issuer in the distribution of the subject securities and has in his possession any payment for the purchase of securities, has the duty to return any and all payments made by purchasers of the subject securities within 10 days of such publication, and simultaneously furnish the issuer a copy of this notice. Upon receipt of a notice, the issuer and all persons acting on its behalf in the distribution of the subject securities shall immediately terminate the offering and return any and all payments received If the public offering is already terminated and the Commission, after due notice and hearing, revokes the effectivity of the registration statement under Section 13, or suspends registration under Section 15, the Commission shall publish a notice of the order of revocation or suspension in a newspaper of general circulation in the Philippines and/or post in the Commission’s website. NOTE: if the public offering has already terminated, there is no more return of payments. Material Information Generally, it is any fact or omission, which is material to the investor in making his decision whether he should invest in the security or not. However, the Rules provide for an enumeration of matters considered as material information. With regard to those specifically included in the enumeration, the issuer cannot argue otherwise to say that those are immaterial: a. Any event or transaction which creates or increases a risk on the investments or on the securities covered by the registration; b. Increase/decrease in the volume of the securities being offered at an issue price higher/lower than the range set and disclosed in the registration statement and which results to a derogation of the rights of existing security holders, as may be determined by the Commission; c. Major change in the primary business of the registrant; d. Reorganization of the company; e. Change in the work program or use of proceeds; f. Loss, deterioration or substitution of the property underlying the securities; g. Significant or ten percent (10%) or more change in the financial condition or results of operation of the registrant unless a report to that effect is filed with the Commission and furnished the prospective purchaser; Page 198 of 393 ATENEO CENTRAL COMMERCIAL LAW BAR OPERATIONS 2020/21 h. Classification, de-classification or reclassification of securities, which results to derogation of rights of existing security holders, as may be determined by the Commission. REMEMBER THIS: Material information pertains to any and all information that are “marketmoving” in that a reasonable investor will consider the information in the investment decision. Hence, these are what we call “pricesensitive” information which, for publicly listed companies, need to be fully and promptly disclosed for the benefit of the investing public. the SRC or the SEC rules. (SRC, Sec. 24) Examples of manipulative practices: a. Painting the tape - engaging in a series of transactions in securities that are reported publicly to give the impression of activity or price movement in a security; b. Marking the close - buying and selling securities at the close of the market in an effort to alter the closing price of the security; c. F. PROHIBITIONS ON FRAUD, MANIPULATION, AND INSIDER TRADING 1. MANIPULATION OF SECURITY PRICES It shall be unlawful for any person, for himself or through a dealer or broker, directly and indirectly to – a. Create a false or misleading appearance of active trading in any listed security traded in an Exchange; b. Effect along, or with others, a series of transactions in securities that: i. Raises their price to induce purchase; ii. Depresses their price to induce their sale; and iii. Creates active trading to induce purchase or sale through manipulative devices c. Circulation or dissemination of information to the effect that the price of any such security will or is likely to rise or fall because of market operations; d. Make, regarding any security registered on an exchange, any statement which is false or misleading with respect to any material fact, and which he knew or had reasonable ground to believe is false or misleading; e. Effect series of transactions for the purpose of pegging, fixing or stabilizing the price of security trade in an Exchange, unless otherwise allowed by Improper Matched Orders – engaging in transaction where both the buy and sell orders are entered at the same time with the same price and quantity by different but colluding parties, who have knowledge that such orders would create an appearance of active trading of the shares; d. Hype And Dump – engaging in buying activity at increasingly higher prices and then selling securities in the market at the higher prices after announcing a glossy picture of a particular security as good investment and thus lure investors to trade. e. Wash Sales – engaging in stock trading where there is no genuine change in actual beneficial ownership of a security but makes it appear that the stocks are actively traded. f. Squeezing The Float – taking advantage of a shortage of securities in the market by controlling the demand side and exploiting market congestion during such shortages in a way as to create artificial prices g. Disseminating false or misleading market information through media, including the internet. (2015 IRR of R.A. 8799, Rule 24.1.5) 2. SHORT SALES Short sales are any sale of a security which the seller does not own or any sale which is consummated by the delivery of a security Page 199 of 393 ATENEO CENTRAL BAR OPERATIONS 2020/21 borrowed by, or for the account of the seller. (SRC, Sec. 24) No person shall, directly or indirectly, by the use of any facility of a securities exchange, effect a short sale in a security registered or listed on any securities exchange, where the seller does not intend or is unable to make delivery of the securities within the prescribed settlement period. Failure on the part of the seller to make delivery on such date will be construed by the Commission as prima facie evidence of the lack of intention on his part to make such delivery. (2015 IRR of R.A. 8799, Rule 24.2.2.6) 3. OPTION TRADING No member of an Exchange shall, directly or indirectly, endorse or guarantee the performance of any put, call, straddle, option or privilege in relation to any security registered on a securities exchange. (SRC, Sec. 25) 4. FRAUDULENT TRANSACTIONS It is unlawful, with respect to the purchase or sale of securities: a. To employ any device, scheme, or artifice to defraud; b. Obtain money or property by means of any untrue statement of a material fact or any omission to state a material fact, that is necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading c. Engage in any act, transaction, practice, or course of business which would operate as a fraud or deceit upon a person – actual intent to deceive not necessary. (SRC, Sec. 26) Fraud or deceit is required, not mere negligence, on the part of offender (SEC v. CA, 246 SCRA 738 [1995]) 5. INSIDER TRADING It is unlawful for an insider to sell or buy a security of the issuer, while in possession of material information with respect to the issuer that is not generally available to the public – does not COMMERCIAL LAW require taking advantage of information, mere possession is enough (SRC, Sec. 27.4) Who is an insider? (TRIGOD) a. Issuer; b. Director or Officer of issuer; c. Person whose Relationship or former relationship with issuer gives him access to material information not generally available to the public; d. Government employee or director or officer of an exchange, clearing agency and/or self-regulatory organization who has access to material information; or e. A person who learns such information by communication from any of the foregoing insiders. NOTE: In securities parlance, this is called “tippee. This tippee must know that the tipper is an insider” (SRC Sec. 3.8) Defenses against insider trading a. Proof that information was not gained from such relationship or b. If the other party buying or selling is identified, insider proves that: i. The disclosed the information to the other party; or ii. Had reason to believe that the other party already knew of the information. (2015 IRR of R.A. 8799, Rule 27.1) Presumption of Insider Trading Purchase or sale by: a. Insider b. Insider’s spouse or relatives by affinity or consanguinity within the second (2 nd) degree, legitimate or common-law, under the following conditions: i. Transacted after the information came into existence; but ii. Prior to dissemination of the information to the public and a lapse of a reasonable time for the market to absorb such information. (2015 IRR of R.A. 8799, Rule 27.1) NOTE: This is a rebuttable presumption of insider trading. Page 200 of 393 ATENEO CENTRAL COMMERCIAL LAW BAR OPERATIONS 2020/21 Material Nonpublic Information Information is “material nonpublic” 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 (SRC. Sec. 27.2.) G. PROTECTION OF INVESTORS 1. TENDER OFFER RULE Tender Offer Rule A publicly announced intention by a person, acting alone or in concert with other persons, to acquire equity securities of a public company. (SRC, Sec. 19) It also means: a publicly announced intention by a person acting alone or in concert with other persons (hereinafter referred to as "person") to acquire outstanding equity securities of a public company as defined in SRC Rule 3, or outstanding equity securities of an associate or related company of such public company which controls the said public company. (2015 IRR of R.A. 8799 Rule 19.1.8) NOTE: The 2015 IRR of the Securities Regulation Code has expanded the tender offer rule to intended acquisitions of not just the target public company but also to associate company of the target company, where the associate company controls said target company to incorporate the doctrine in Cemco Holdings, Inc. v. national Life Insurance. In the Cemco case, the coverage of the mandatory tender offer rule was clarified by the SC to cover not only direct acquisition but also indirect acquisition or ‘any type of acquisition. The legislative intent behind the tender offer rule makes clear that the type of activity intended to be regulated is the acquisition of control of the listed company through the purchase of shares. Control may [be] effected through a direct and indirect acquisition of stock, and when this takes place, irrespective of the means, a tender offer must occur (Cemco Holdings, Inc. v. National Life Insurance Co., G.R. No. 171815, 2007, as cited in Osmeña, 533 SCRA 313). Both acquisitions from either the associated company or the target company must be taken into account. If the total acquisition of shares in both the companies exceed the threshold of 35% percent a tender offer must be made to both corporations. Target company means any Issuer whose equity securities are sought by an Offeror pursuant to a tender offer. (2015 IRR of R.A. 8799 Rule 19.1.7) Cases A “tender offer” is a publicly announced intention by a person acting alone or in concert with other persons to acquire equity securities of a public company, i.e., one listed on an exchange, among others.  The term is also defined as “an offer by the acquiring person to stockholders of a public company for the latter to tender their shares therein on the terms specified in the offer.” (Morales, The Philippine Securities Regulation Code, 2005 ed., p. 153, as cited in Osmeña, 533 SCRA 313).  Tender offer is in place to protect the interests of minority stockholders of a target company against any scheme that dilutes the share value of their investments. It affords such minority shareholders the opportunity to withdraw or exit from the company under reasonable terms, a chance to sell their shares at the same price as those of the majority stockholders (Cemco Holdings, Inc. v. National Life Insurance Co., G.R. No. 171815, 2007, as cited in Osmeña, 533 SCRA 313).  It is done by filing with the SEC a declaration to that effect, furnishing the issuer with a statement with the facts required by the SEC, and the publication of all requests or invitations for tender. Mandatory Tender Offer Rule 1. Any person or group of person intends to acquire 35% or more of equity shares in a public company, in one or more transactions within a period of 12 months. (2015 IRR of R.A. 8799 Rule 19.2.1) Page 201 of 393 ATENEO CENTRAL COMMERCIAL LAW BAR OPERATIONS 2020/21 2. Acquisition of even less than 35% but would result in ownership of more than 51% of the total outstanding equity securities of a public company (2015 IRR of R.A. 8799 Rule 19.2.5) Creeping Acquisition Any person or group of person intends to acquire 35% or more of equity shares in a public company, in one or more transactions within a period of 12 months. (2015 IRR of R.A. 8799 Rule 19.2.1) NOTE: If any acquisition that would result in ownership of over fifty percent (50%) of the total outstanding equity securities of a public company, the acquirer shall be required to make a tender offer under this Rule for all the outstanding equity securities to all remaining stockholders of the said company at a price supported by a fairness opinion provided by an independent financial advisor or equivalent third party. The acquirer in such a tender offer shall be required to accept all securities tendered. (2015 IRR of R.A. 8799 Rule 19.2.5) Exemptions to the Mandatory Tender Offer Rule under the 2015 IRR of the SRC: a. From unissued capital stock, provided that the acquisition will not result in a 50% or more ownership; b. Increase in authorized capital stock; c. Foreclosure proceedings; d. Privatization by the government; e. Rehabilitation under court supervision; f. Through an open market at the prevailing market price; g. Merger or consolidation; and h. By any person or group of persons who intends to acquire 35% through an exchange trading system. NOTE: Any person or group of persons acting in concert, who intends to acquire thirty five percent (35%) of the outstanding voting shares or such outstanding voting shares that are sufficient to gain control of the board in a public company through the Exchange trading system shall not be required to make a tender offer even if such person or group of persons acting in concert acquire the remainder through a block sale if, after acquisition through the Exchange trading system, they fail to acquire their target of thirty five percent (35%) or such outstanding voting shares that is sufficient to gain control of the board. (2015 IRR of R.A. 8799 Rule 19.2.3) 2. RULES ON PROXY SOLICITATION This only refers to solicited proxies. (SRC, Sec. 20) Requirements a. In writing; signed by the stockholder or duly authorized representative; and b. Filed before the scheduled meeting with the corporate secretary c. Valid only for the meeting for which it is intended.  Cannot be valid for a period longer than five years at one time (Maximum effectivity period: 5 years)  Broker or dealer who holds or acquires the proxy for at least 10% of the outstanding shares of the issuer shall submit a report identifying the beneficial owner within 10 days after such acquisition to the: o Issuer of the security; o The Exchange where the security is traded; and the o SEC. 3. DISCLOSURE RULE This rule only applies to issuer corporations that satisfy the any of the following conditions (SRC Sec. 17): a. Has sold a class of its securities pursuant to a registration; b. Has a class of securities listed for trading on an Exchange; or c. With assets of at least ₱50 Million (or such other amount as SEC shall prescribe), and having 200 or more holders each holding at least 100 shares of a class of its equity securities (“Public company”) Reportorial Requirements a. Annual Report – for fiscal year in which registration statement became effective and every fiscal year thereafter, within 135 days after the end of the fiscal year b. Quarterly Report – within 45 days after the end of each of the first three quarters of the fiscal year Page 202 of 393 ATENEO CENTRAL BAR OPERATIONS 2020/21 c. COMMERCIAL LAW Current Report – whenever necessary to make a full, fair and accurate disclosure to the public of every material fact or event that occurs, which would reasonable be expected to affect investors’ decisions in relation to those securities d. Monthly Report (for issuers of registered commercial papers) – regarding commercial paper total issuances outstanding at the end of each month, within 10 business days following the end of the month REMEMBER THIS: The reportorial obligations of public companies under the SRC pertain to Sections 17 (Annual and quarterly reports), 18 (5% beneficial owners), 20 (Information Statement), and 23 (change in beneficial ownership), among others. Note: Reports Filed By 5% Beneficial Owners any person who directly or indirectly acquires the beneficial ownership of more than five percent (5%) or such lesser per centum as the Commission may prescribe, of any class of equity securities of an Issuer, covered by the Disclosure Rule, shall file a report within five (5) business days after such acquisition submit to the Issuer, the Exchange where the security is traded, and to the Commission a sworn statement prescribed by the SEC (SRC, Sec. 18) ----end of topic---- Page 203 of 393 BANKING Commercial Law ATENEO CENTRAL COMMERCIAL LAW BAR OPERATIONS 2020/21 VI. BANKING TOPIC OUTLINE UNDER THE SYLLABUS: VI. BANKING A. THE NEW CENTRAL BANK ACT 1. State Policies 2. Creation of the Bangko Sentral ng Pilipinas 3. Responsibility and primary objective 4. Corporate powers 5. Operations of the Bangko Sentral ng Pilipinas a. Authority to obtain data and information b. Supervision and examination c. Bank deposits and investments d. Prohibitions e. Examination and fees 6. Monetary Board; powers and functions 7. How the Bangko Sentral ng Pilipinas handles banks in distress a. Conservatorship b. Closure c. Receivership d. Liquidation 8. Administrative sanctions on supervised entities 9. Rules on bank deposits and investments by directors, officers, stockholders and their related interests 10. Supervision and regulation of bank operations a. Loans and other credit accommodations b. Selective regulation i. Margin requirements against letters of credit ii. Required security against bank loans iii. Portfolio ceilings iv. Minimum capital ratios 11. Rate of exchange B. LAW ON SECRECY OF BANK DEPOSITS 1. Purpose 2. Prohibited acts 3. Deposits covered 4. Exceptions 5. Garnishment of deposits, including foreign deposits 6. Penalties for violation C. GENERAL BANKING ACT 1. Definition and classification of banks 2. 3. 4. 5. 6. 7. Distinction of banks from quasi-banks and trust entities Bank powers and liabilities a. Corporate powers b. Banking and incidental powers Diligence required of banks in view of fiduciary nature of banking Nature of bank funds and bank deposits Grant of loans and security requirements a. Ratio of new worth to total risk assets b. Single borrower’s limit c. Restrictions on bank exposure to directors, officers, stockholders, and their related interests d. Prohibited acts of borrowers e. Floating interest rates and escalation clauses Penalties for violations a. Fine, imprisonment b. Suspension or removal of director or officer c. Dissolution of bank D. PHILIPPINE DEPOSIT INSURANCE CORPORATION ACT 1. Basic Policy 2. Powers and functions of the Philippine Deposit Insurance Corporation; prohibitions 3. Concept of insured deposits 4. Liability to depositors a. Deposit liabilities required to be insured with Philippine Deposit Insurance Corporation b. Commencement of liability c. Deposit accounts not entitled to payment d. Extent of liability e. Determination of insured deposits f. Calculation of liability i. Per depositor, per capacity rule ii. Joint accounts iii. Mode of payment iv. Effect of payment of insured deposits v. Payment of insured deposits as preferred credit vi. Failure to settle claim of insured depositor vii. Failure of depositor to claim insured deposits (a) Examination of banks and deposit accounts Page 205 of 393 ATENEO CENTRAL BAR OPERATIONS 2020/21 5. 6. (b) Prohibition against splitting of deposits (c) Prohibition against issuances of temporary restraining orders Concept of bank resolution Role of the Philippine Deposit Insurance Corporation in relation to banks in distress a. Closure and takeover b. Conservatorship c. Receivership d. Liquidation COMMERCIAL LAW A. THE NEW CENTRAL BANK ACT 1. STATE POLICIES The State shall maintain a central monetary authority that shall function and operate as an independent and accountable 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 under this Act, while being a government-owned corporation, shall enjoy fiscal and administrative autonomy. (New Central Bank Act [hereinafter “NCBA”], Sec 1) 2. CREATION OF THE BANGKO SENTRAL NG PILIPINAS (BSP) There is hereby established an independent central monetary authority, which shall be a body corporate known as the BSP. (NCBA, Sec. 2) The BSP is a Constitutionally mandated (not created) authority. (1987 Constitution, Article XII, Sec. 20) The State’s central monetary authority is charged with the responsibility of administering the monetary, banking, and credit system of the country and is granted the power of supervision and examination over bank and non-bank financial institutions performing quasi-banking functions, including savings and loan associations. (Busuego v. Court of Appeals [CA], G.R. No. 95326, 1999) 3. RESPONSIBILITY AND PRIMARY OBJECTIVE Responsibilities of the BSP a. Banker of Government. The government’s political subdivisions and instrumentalities (Sec. 110), and their cash balances should be deposited with the BSP, with only minimum working balances to be held by governmentowned banks, and such other banks incorporated in the Philippines as the Monetary Board may designate. (Sec. 113) b. Representation with the International Monetary Board. The BSP shall represent the government in all dealings, Page 206 of 393 ATENEO CENTRAL BAR OPERATIONS 2020/21 negotiations, and transactions with the IMF, and shall carry such accounts as may result from the Philippine membership in, or operations with IMF. (Sec. 111) c. Representation with other financial institutions. The BSP may represent the government in dealings, negotiations, or transactions with the World Bank and with other foreign or international financial institutions or agencies. (Sec. 112) d. Fiscal operations. The BSP shall open a general cash account for the Treasurer of the Philippines, in which the liquid funds of the Government shall be deposited, and the transfer of funds from this account to be made only upon the order of the Philippine Treasurer. (Sec. 114) Primary Objectives of the BSP a. To provide policy directions in areas of money, banking, and credit, with supervision over operations of banks, and with regulatory and examination powers over money service businesses, credit granting businesses, and payment system operators. (Sec. 3) b. To maintain price stability conducive to a balanced and sustainable growth of the economy and employment (Id.) c. To promote and maintain the monetary stability and convertibility of the peso. (Id.) Monetary stability pertains to preservation of the international value of the Philippine currency. (Commissioner of Customs v. Eastern Sea Trading, GR No. L-14279, 1961) Note: Promotion of financial stability is a shared mandate with the National Government i.e., DOF, SEC, IC, and PDIC. d. To promote broad and convenient access to high quality financial services. (Sec. 3) e. To oversee the payments and settlement systems. (R.A. No. 11127 - National Payment Systems Act, Sec. 3) COMMERCIAL LAW 4. CORPORATE POWERS Corporate powers of the BSP a. To adopt, alter, and use a corporate seal which shall be judicially noticed; b. To enter into contracts; c. To own, lease, sell or dispose real and personal property; d. To sue and be sued; e. To acquire and hold assets and incur liabilities essential to the proper conduct of its operations; f. To compromise, condone, or release any claim or settled liability to the BSP regardless of the amount, and g. To do and perform such other necessary or proper powers to carry out the purposes of the Act. (Sec. 5) 5. OPERATIONS OF THE BANGKO SENTRAL NG PILIPINAS A. Authority to obtain data and information BSP’s has power to require any data: a. Collective or aggregate data may be released to any interested person b. Disaggregated data (i.e. data of individuals and firms). 1. Subject to confidentiality laws; 2. Cannot be made available to the public except upon court order or directive of the Monetary Board; 3. Data on banks are secured pursuant to BSP’s banking supervision powers and are confidential. Its release is subject to conditions imposed by the Monetary Board, government agencies authorized by law, orders of the court, or Congress. (Sec. 27) 4. Can be secured from any person or entity, including government entities. 5. Limited for statistical and policy development purposes. BSP has the power to issue subpoena for the production of books and records, and refusal shall be subject to punishment for contempt under the Rules of Court. (Sec. 23) B. Supervision and examination Supervision is a broad term, which includes examination and investigation. Supervision also Page 207 of 393 ATENEO CENTRAL BAR OPERATIONS 2020/21 includes issuance of rules of conduct and standards, overseeing that laws and regulations are complied with and enforcing prompt corrective actions. (General Banking Law [hereinafter “GBL”], Sec. 4) Supervision includes audit. The Commission on Audit (COA) and the BSP have concurrent jurisdiction to audit government banks. (DBP v. COA, GR. No. 88435, 2002) Coverage of BSP’s supervision and examination powers a. Banks b. Quasi-banks c. Subsidiaries (ownership of more than 50% of the voting stock) and affiliates (ownership of 50% or less) of banks and quasi-banks engaged in allied activities. Note: BSP is also granted the authority to conduct examination of a wholly or majority owned or controlled enterprise by a bank, not necessarily engaged in allied activities. (GBL, Sec. 7) d. Other institutions performing similar functions as provided for by special laws i.e., non-stock savings and loan association (R.A. No. 8367), pawnshops (P.D. No. 114), stand-alone trust entities (GBL, Sec. 79). e. Money service businesses i.e., foreign exchange dealers, money changers and remittance agents f. Credit granting businesses g. Payment system operators (Sec. 25) h. Trust entities (GBL, Sec.4, 79) i. Pawnshops (PD 114, Sec. 17) j. Non-stock savings and loan associations (R.A. No. 8367, Sec. 22) Resolution of examination issues BSP is required to establish a mechanism for resolving issues pertaining to bank examination. The resolution “body” shall be independent and report directly to the Monetary Board. (Sec. 25) Authority of bank examiners BSP bank examiners are authorized to administer oaths and compel the presentation of documents of institutions under examination. This authority is subject to the confidentiality of bank deposits and government debt securities. (Id.) COMMERCIAL LAW Prohibition on issuance of injunction No restraining order or injunction shall be issued by the court enjoining the BSP from examining any institution subject to its supervision or examination powers except when the action of the BSP is plainly arbitrary and made in bad faith. (Id.) C. Authority to approve transfer of shares Transfers or acquisitions, or a series thereof, of at least ten percent (10%) of the voting shares in banks or quasi-banks shall require the prior approval of the BSP. The BSP shall consider the fitness of the incoming stockholders as may be indicated in their integrity, reputation, and financial capacity. (Sec. 25-A) Effect of lack of BSP approval The transfer or acquisition shall have no legal effect and cannot be recognized in the books of the institution or by any government agency. The transferor-stockholders shall remain accountable and responsible. (Sec. 25-A) Transfer of actual control or management shall make the transferor, the transferee, and any person responsible liable. (Id.) D. Prohibitions 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; (Sec. 27[a]) 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; (Sec. 27 [b]) c. Revealing, in any manner, information relating to the condition or business of any such institution unless: 1. Under orders of the court, the Congress or any government office or agency authorized by law, or under such conditions as may be prescribed by the Monetary Board; and 2. The information is to be given to the Monetary Board or the Governor of the BSP, or to any person authorized by either of Page 208 of 393 ATENEO CENTRAL BAR OPERATIONS 2020/21 them, in writing, to receive such information. (Sec. 27 [c]) d. Borrowing from any institution subject to supervision or examination by the BSP unless: 1. It is transacted on an arm's length basis; 2. It is fully disclosed to the Monetary Board; and 3. It shall be subject to such rules and regulations as the Monetary Board may prescribe. (Sec. 27[d]) E. Examination and Fees Banks, quasi-banks, and other BSP-supervised entities shall be examined by BSP examiners in accordance with guidelines, taking into consideration sound and prudent practices. a. There shall be an interval of at least twelve (12) months between regular bank examinations. It is no longer annual. b. Special examinations need at least five (5) votes of the members of the Monetary Board. c. The supervised institution shall afford BSP examiners full opportunity to examine its books and records, assets, and general condition, and review its systems and procedures. d. Reports and papers are confidential and not open to the public, except when incidental to examination proceedings and when necessary for the prosecution of violations. e. There is an annual supervision fee based on cost of supervision. (Sec. 28) 6. MONETARY BOARD, POWERS AND FUNCTIONS The Monetary Board is a seven (7) man body appointed by the President through which the powers and functions of the BSP are exercised. Its members shall serve a term of six (6) years, and no member shall be reappointed more than once. (Sec. 6) Composition a. Chairman who is the BSP Governor; b. A cabinet member to be designated by the President of the Philippines; c. 5 Members who shall come from the private sector, all of whom shall serve full time (Id.) COMMERCIAL LAW While Sec. 6(a) of the NCBA requires that the Governor be subject to confirmation by the Commission on Appointments, he is not among government officials expressly mentioned in Sec. 16, Article VII of the Constitution who should be confirmed. (Tarrosa vs. Singson, G.R. No. 111243, 1994) Vacancies Any vacancy in the Monetary Board created by the death, resignation, or removal of any member shall be filled by the appointment of a new member to complete the unexpired period of the term of the member concerned. (Sec. 7) Qualifications a. Natural-born citizens of the Philippines; b. At least 35 years of age; (except the Governor, who should be at least 40 years of age) c. Of good moral character; d. Of unquestionable integrity; e. Of known probity and patriotism; and f. With recognized competence in social and economic disciplines (Sec. 8) Disqualifications a. Disqualifications imposed by R.A. No. 6713 – Code of Conduct and Ethical Standards for Public Officials; b. Disqualified from being a director, officer, employee, consultant, lawyer, agent or stockholder of any bank, quasi-bank or any other institution which is subject to supervision or examination by the BSP; c. Members coming from the private sector shall not hold any other public office or public employment during their tenure. d. Person who has been connected directly with any multilateral banking or financial institution or has a substantial interest in any private bank in the Philippines, within 1 year prior to his appointment; e. No member shall be employed in any such institution within 2 years after the expiration of his term except when he serves as an official representative of the Philippine Government to such institution; and f. Person who has substantial interest in any private bank in the Philippines, within 1 year prior to his appointment. (Sec. 9) Page 209 of 393 ATENEO CENTRAL BAR OPERATIONS 2020/21 Degree of Diligence The degree of diligence required of Monetary Board Members, BSP Officials, and Employees, is now aligned with that required of public officers under Sec. 38 and 39 of Chapter 9, Book I of the Revised Administrative Code of 1987. They cannot be liable for acts done in the performance of their official duties “unless there is a clear showing of bad faith, malice or gross negligence.” (Sec. 16) The former requirement of extraordinary diligence was already amended. General Rule: Free and Harmless BSP, members of the Monetary Board, and its other personnel, are held free and harmless to the fullest extent permitted by law from any liability. (Sec. 16) Indemnification They shall be indemnified for any and all liabilities, losses, claims, demands, damages, deficiencies, costs and expenses of whatsoever kind and nature that may arise in connection with the exercise of their powers and performance of their duties and functions. (Id.) Exception: Their actions or omissions are finally adjudged to be in willful violation of this Act, performed in evident bad faith, or with gross negligence. (Id.) The legal obligations of diligence and good faith that BSP officials owe to the public start with the official acts of the Monetary Board which, rightly or wrongly, are the cause of loss or injury to third parties, not any preparatory report or recommendation. (Borlongan v. Reyes, G.R. No. 161726, 2005) Removal of Members of the Monetary Board The President may remove any member of the Monetary Board for any of the following reasons: a. The member no longer possesses the qualifications under NCBA, Sec. 8; b. The member is guilty of acts or operations which are fraudulent or illegal; c. The member is physically, or mentally incapacitated and such incapacity lasted for more than 6 months; d. The member is subsequently disqualified under NCBA, Sec. 9. (Sec. 10) COMMERCIAL LAW b. Direct the management, operations, and administration of the BSP; c. Establish a human resource management system; d. Adopt its annual budget and authorize expenditures; e. Indemnify its members and other officials of the BSP against all costs and expenses reasonably incurred by such persons by reason of the performance of their functions or duties in accordance with the free and harmless, and indemnification clause. (Secs. 15 and 16) Myriad of functions BSP is an administrative agency which exercises "powers and/or functions which may be characterized as administrative, investigatory, regulatory, quasi-legislative, or quasi-judicial.” (Bank of Commerce v. Planter’s Development Bank, G.R. Nos. 154470-71 and 154589-90, 2012) The BSP Monetary Board is a quasi-judicial agency exercising quasi-judicial powers or functions. It has the power to issue subpoena, to sue for contempt those refusing to obey the subpoena without justifiable reason, or 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. The BSP Monetary Board can exercise discretion in determining whether administrative sanctions should be imposed on banks and quasi-banks. (UCPB v. Ganzon, G.R. No. 168859, 2009; NCBA, Sec. 37) Decisions appealable to the Court of Appeals Any petition for certiorari against an act or omission of BSP, when it acts through the Monetary Board, must be filed with the Court of Appeals. (Vivas vs. Monetary Board, G.R. No. 191424, 2013). Note: This is a petition for review on certiorari over decisions of quasi-judicial bodies (Monetary Board) under Rule 45 of the Rules of Court. This is different from a special petition for certiorari for bank closures under Sec. 30 of the NCBA. Powers and Functions of the Monetary Board a. Issue rules and regulations; Page 210 of 393 ATENEO CENTRAL BAR OPERATIONS 2020/21 7. HOW THE BANGKO SENTRAL NG PILIPINAS HANDLES BANKS IN DISTRESS Methods Conservatorship, Receivership, and Liquidation A bank placed under conservatorship remains open but under the management and control of the conservator. On the other hand, when a bank is ordered closed by the Monetary Board, it is taken over by the PDIC as statutory “receiver”, and the PDIC is directed to proceed with the liquidation. (Sec. 30(d); New PDIC Charter, Sec. 12) Before the amendments to the PDIC Charter and NCBA by Sec. 12 of R.A. No. 10846 (2016), there was a 90-day period of receivership after closure and before a final order of liquidation by the Monetary Board to determine whether the bank can still be rehabilitated. This period was removed by the amendment. PDIC now takes over the assets of the closed bank for purposes of liquidation and thereafter files a petition for court assisted liquidation. (A.M. No. 19-12-02-SC Rules on Liquidation of Closed Banks, February 18, 2020) Liquidity Ability to pay off obligations when they fall due. An institution which fails to pay its matured obligations or meet the normal demands of withdrawals for deposits due to insufficient cash, or resorts to intermittent/staggered payments or withdrawals may be considered as suffering from liquidity problems. Insolvency There are two tests for insolvency: a. Balance sheet test. It is where the realizable assets of the bank is insufficient to meet its liabilities (Sec.30[b]) b. Equity test. The bank’s inability to pay its liabilities as they become due in the ordinary course of business (Sec. 30[a]) Either is sufficient ground to close a bank. A. Conservatorship A tool in restoring the viability of a bank or quasibank through measures to address its state of illiquidity. For this purpose, the Monetary Board may appoint a conservator. (Sec. 29) COMMERCIAL LAW Appointment of Conservator A conservator is appointed based on a report submitted to the Monetary Board by the appropriate supervising or examining department showing that the bank or quasi-bank is in a state of illiquidity which is not adequate to protect the interest of depositors and creditors. (Id.) Qualifications of a Conservator The conservator should be competent and knowledgeable in bank operations and management. (Id.) The Monetary Board has exclusive power to designate the conservator. (Koruga v. Arcenas, G.R. Nos. 168332, 2009) Duration of Conservatorship Shall not exceed 1 year. (Sec. 29) Powers of a Conservator: a. To take charge of the assets, liabilities, and the management thereof; b. Reorganize the management; c. Collect all monies and debts due said institution; d. Exercise all powers necessary to restore its viability; e. Report and be responsible to the Monetary Board; and f. Where necessary, overrule or revoke the actions of the previous management and board of directors of the bank or quasibank. (Id.) A bank conservator appointed by the BSP has no power to unilaterally rescind contracts entered into by the previous management. The power to revoke cannot extend to post-facto repudiation of perfected transactions otherwise they would infringe against the non-impairment clause of the Constitution. The law merely gives the conservator the power to file court actions to revoke contracts that are defective – void, voidable, unenforceable, or rescissible. (Producers Bank v. NLRC, G.R. No. 118069, 1998; First Philippine International Bank v. CA, G.R. No. 115849, 1996) Remuneration of a Conservator General Rule: The conservator shall receive remuneration in an amount not to exceed 2/3 of the salary of the president of the institution (i.e. Page 211 of 393 ATENEO CENTRAL BAR OPERATIONS 2020/21 the bank under conservatorship) in 1 year, payable in 12 equal monthly payments. Exception: A conservator connected with the BSP, in which case said conservator shall not be entitled to receive any remuneration or emolument. (Sec. 29) Note: If at any time within one-year period, the conservatorship is terminated on the ground that the institution can operate on its own, the conservator shall receive the balance of the remuneration which he would have received up to the end of the year; but if the conservatorship is terminated on other grounds, the conservator shall not be entitled to such remaining balance. (Id.) Expenses The expenses attendant to the conservatorship shall be borne by the bank or quasi-bank concerned. (Id.) Termination of Conservatorship a. When the Monetary Board is satisfied that the institution can continue to operate on its own and the conservatorship is no longer necessary; b. When the Monetary Board determines that the continuance in business of the institution would involve probable loss to its depositors or creditors, in which case, proceedings for receivership and liquidation shall be pursued. (Id.) B. Closure For banks, the Monetary Board may summarily and without need for prior hearing forbid the institution from doing business in the Philippines and designate the PDIC as receiver. The PDIC is directed to proceed with the liquidation of the closed bank. The Monetary Board shall notify in writing, through the PDIC, the board of directors of the closed bank of its decision. (Sec. 30) Note: Formerly, there was a 90-day period to determine whether the bank can still be rehabilitated. COMMERCIAL LAW C. Receivership The PDIC manages the affairs of the closed bank and preserves its assets for the benefit of creditors. (New PDIC Charter, Sec. 10[a][b]) Note: The receiver also has the duty to continue with the liquidation; thus, PDIC as receiver is also the liquidator. (Id., Sec. 4[c]) The appointment of a receiver operates to suspend the authority of the bank and of its directors and officers over its property and effects. (Villanueva v. CA, G.R. No. 114870, 1995) Requisites for Placement of a Bank under Receivership 1. Report of the head of the supervising department involving the bank; 2. Finding of the Monetary Board of the existence of any of the grounds for receivership; 3. Decision of the Monetary Board to forbid the institution from doing business which decision may be done summarily and without need of prior hearing; and 4. Notice in writing to the Board of Directors informing the institution of the Order of the Monetary Board. Grounds for Receivership When the Monetary Board finds that a bank or quasi-bank: a. Notified the BSP or publicly announced a unilateral closure; (Sec. 30[a]) b. Has been dormant for at least sixty (60) days; (Id.) c. Suspended the payment of its deposit or deposit substitute liabilities continuously for more than 30 days; (GBL, Sec 53) d. Is unable to pay its liabilities as they become due in the ordinary course of business (“Equity test”) Exception: Inability to pay caused by extraordinary demands induced by financial panic in the banking community (bank run). (Sec. 30[a]) e. Has insufficient realizable assets to meet its liabilities (“Balance Sheet Test”); (Sec. 30[b]) f. Cannot continue business without involving probable losses to its depositors and creditors; (Sec. 30[c]) Page 212 of 393 ATENEO CENTRAL BAR OPERATIONS 2020/21 g. Has willfully violated a cease-and-desist order under NCBA, Sec. 37 (Administrative Sanctions) that has become final and involves acts or transactions which amount to fraud or a dissipation of assets; (Sec. 30[d]) h. If a bank persists in conducting its business in an unsafe or unsound manner. (GBL, Sec. 56) Close Now-Hear Later Doctrine Due process does not necessarily require prior hearing; a hearing or an opportunity to be heard may be subsequent to 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. In the process, fortunes may be wiped out and disillusionment will run the gamut of the entire banking community. (Rural Bank of Buhi, Inc. vs. CA, G.R. No. L-61689, 1988) The purpose is to prevent unwarranted dissipation of the bank’s assets and as a valid exercise of the police power to protect the depositors, creditors, stockholders, and the general public. (Central Bank of the Philippines v. CA, G.R. No. 72200, 1993) D. Liquidation The recovery and conversion of assets into cash for distribution to all creditors in accordance with the rules on concurrence and preference of credits. PDIC is the receiver and liquidator (AM No. 19-12-02-SC, Sec. 1 (m), Rule 2). Note: With the removal of the 90-day receivership to determine if the bank can still be rehabilitated, a bank placed under receivership is considered also as under liquidation. Types of Liquidation a. Voluntary liquidation In case of the voluntary liquidation of any bank organized under the laws of the Philippines, or of any branch or office in the Philippines of a foreign bank, written notice of such liquidation shall be sent to the Monetary Board before such liquidation is undertaken, and the Monetary Board shall have the right to intervene and take such steps as may be necessary to protect the interests of creditors. (GBL, Sec. 68) COMMERCIAL LAW b. Involuntary Liquidation (Sec. 30) Modes of Liquidation a. Conventional liquidation. b. Purchase of Assets and/or Assumption of Liabilities Note: This shall be further discussed under the topic on PDIC. Judicial Remedy from the decision of the Monetary Board of BSP placing a bank under conservatorship, receivership, or liquidation Final and Executory. The action of the Monetary Board in placing a bank under conservatorship or placing it under receivership or liquidation shall be final and executory and, as a general rule, may not be restrained or set aside by the court. Nature of Action A petition for certiorari 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. Petitioner Petition is filed by the stockholders of record representing the majority of the capital stock within ten (10) days from receipt by the board of directors of the institution of the order directing receivership, liquidation, or conservatorship. (Sec. 30) Court of Appeals The petition for certiorari must be filed with the CA, not the SC, in accordance with Rule 65, since the Monetary Board is a quasi-judicial agency. (Vivas, et al. v. Monetary Board, G.R. No. 191424, 2013) Note: Other decisions of the Monetary Board acting as a quasi-judicial body can be elevated to the Court of Appeals by way of a petition for review under Rule 45. Involuntary dissolution and liquidation CORPORATION NCBA (MONETARY CODE (SEC) BOARD, PDIC) Filing of Complaint Requires filing of a Monetary Board may verified complaint and summarily and without proper notice and need for prior hearing, hearing forbid the bank from doing business Page 213 of 393 ATENEO CENTRAL BAR OPERATIONS 2020/21 Prior to dissolution Requires a BIR Tax PDIC shall Clearance; SEC shall immediately gather issue final order of and take charge of all dissolution after its assets and submission of tax liabilities clearance Authority of the corporation in the dissolution Corporation is allowed Bank is not given the to undertake its own option to undertake its liquidation or at any own liquidation time during 3 years after its dissolution (In re: Petition for Assistance in the Liquidation of the Rural Bank of Bokod Benguet, Inc., PDIC v. BIR, G.R. No. 158261, 2006) Exclusive jurisdiction of the Liquidation Court Liquidation court is a court where the PDIC as receiver files a petition for assistance in the liquidation (judicial liquidation). General Rule: In a judicial liquidation of an insolvent bank, all claims against the bank should be filed in the liquidation proceeding. (In re: Petition for Assistance in the Liquidation of the Rural Bank of Bokod Benguet, Inc., PDIC v. BIR, G.R. No. 158261, 2006) Exceptions: a. When re-filing and re-litigating the case before the liquidation court would be an exercise in futility in view of the number of years the case has been on trial and additional expenses to the party who is living in poverty. (Valenzuela v. CA, G.R. No. L-56168, 1988) b. When more inconveniences would be caused to the parties, entailing waste of more money and precious time (Carandang v. CA, G.R. No. L-44932, 1988); and c. When the issue is the validity of contracts upon which a claim is based. Note: Even if the case falls within the exceptions, the claimant should still file the adjudicated claim with the liquidator or liquidation court for processing of claims to determine the proper concurrence and preference of credit among the different creditors of the bank. (Cudiamat v. Batangas Savings Bank, G.R. No. 182403, 2010) COMMERCIAL LAW 8. ADMINISTRATIVE SANCTIONS ON SUPERVISED ENTITIES The imposition of administrative sanctions shall be fair, consistent, and reasonable. (Sec. 37) Supervised entities The Monetary Board may impose administrative sanctions upon: (1) its supervised entities i.e., those covered by BSPs supervision and examination powers, and (2) their directors, officers, or employees. (Sec. 37) Acts subject to administrative sanction a. Willful violation of its charter or by-laws; b. Willful delay in the submission of reports or publications thereof as required by law, rules and regulations; c. Refusal to permit examination into the affairs of the institution; d. Willful making of a false or misleading statement to the Board or the appropriate supervising and examining department or its examiners; e. Willful failure or refusal to comply with, or violation of, any banking law or any order, instruction or regulation issued by the Monetary Board, or any order, instruction or ruling by the Governor; or f. Commission of irregularities, and/or conducting business in an unsafe or unsound manner as may be determined by the Monetary Board. (Sec. 37) Administrative sanctions Both the Monetary Board and the Governor have administrative disciplinary jurisdiction and authority to impose sanctions. Monetary Board a. Fines 1. Not to exceed P1,000,000 for each transactional violation, or 2. P100,000 per calendar day for violations of a continuing nature 3. Disgorgement. 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. (Sec. 37(a)) b. Suspension of: 1. Rediscounting privileges or access to BSP credit facilities; (Sec. 37(b)) Page 214 of 393 ATENEO CENTRAL BAR OPERATIONS 2020/21 2. 3. 4. Lending or foreign exchange operations or authority to accept new deposits or make new investments; (Sec. 37(c)) Interbank clearing privileges; and/or (Sec. 37(d)) Quasi-banking or other special licenses, including its revocation. (Sec. 37(e)) Governor Authorized to impose fines not in excess of P100,000 for each transactional violation or P30,000 per calendar day for violations of a continuing nature. The imposition is final and executory until reversed, modified, or lifted by the Monetary Board on appeal. (Sec. 37) Resignation or termination from office shall not exempt such director, officer, or employee from administrative or criminal sanctions. (Id.) Administrative Due Process The Monetary Board, as an administrative agency, is legally bound to observe due process, although they are free from the rigidity of procedural requirements. The essence of due process is to be afforded a reasonable opportunity to be heard and to submit any evidence. Petitioners having availed of their opportunity to present their position by lettersexplanation were not denied due process. (Busuego, et al vs. CA, G.R. No. 95326, 1999) Preventive suspension The Monetary Board has authority to issue preventive suspension orders for up to 120 days for bank officers, directors, and employees. After the lapse of the said period, they can be reinstated unless delay is due to their fault. When suspension is only preventive in nature, no notice or hearing is necessary. Until such time that suspended directors have proved their innocence, they may be preventively suspended from holding office so as not to influence the conduct of investigation, and to prevent the commission of further irregularities. (Busuego, et al v. CA, G.R. No. 95326, 1999) Cease and desist order (CDO) A CDO, which is immediately executory, can be issued by the Monetary Board if the institution and/or the directors, officers or employees concerned continue with or otherwise persist in COMMERCIAL LAW the commission of the prohibited practices or violations. (Sec. 37) Procedure on CDO This is in the nature of a reconsideration of the order. 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. Otherwise, the CDO shall become final. (Id.) Injunctions and/or restraining orders No court, other than the Court of Appeals and the Supreme Court, shall issue any temporary restraining order, preliminary injunction, or preliminary mandatory injunction against the BSP for any action under the NCBA. Any restraining order or injunction issued in violation of this section is void and of no force and effect. (Sec. 38-a) 9. SUPERVISION AND REGULATION OF BANK OPERATIONS A. Loans and other credit accommodations As the “lender of last resort” (LOL), the BSP is authorized to extend rediscounts, discounts, loans and advances to banking institutions only. The purpose is limited to influencing the volume of credit consistent with the objective of price stability and maintenance of financial stability. (Sec. 81) Types of Credit Operations Normal credit operations a. Commercial Credits. With maturities of not more than 180 days related to: 1. Importation, exportation, purchase or sale of readily saleable goods and products, or their transportation within the Philippines; or 2. Storing of non-perishable goods and products which are duly insured and deposited in authorized bonded warehouses or in other places approved by the Monetary Board. (Sec. 82[a]) Page 215 of 393 ATENEO CENTRAL COMMERCIAL LAW BAR OPERATIONS 2020/21 b. Production Credits. With maturities of not more than 360 days related to the production or processing of agricultural, animal, mineral, or industrial products. (Sec. 82(b)) c. Other Credit. Special credit instruments not otherwise re-discountable for commercial and production credits. (Sec. 82(c)) d. Advances. The BSP may grant advances, not to exceed 80% of the current market value, against the following collaterals for fixed periods: 1. Gold coins or bullion 2. Securities issued by BSP and other recognized solvent domestic institutions; 3. Commercial and production credit instruments (maximum 180 days); 4. Utilized portions of advances in overdraft commercial and production credit instruments; 5. Government securities and Negotiable bonds with maturity of 3 and 10 years, respectively. (Sec. 82(d)) Special Credit Operations Non collateralized but with maturity not to exceed 7 days and limited to the purpose of providing liquidity to the banking system in times of need. (Sec. 83) Emergency Credit Operations This is granted only to banks under the following circumstances: a. In periods of national and/or local emergency or of imminent financial panic – when these directly threaten monetary and financial stability; and b. During normal periods - To assist a bank in a precarious financial condition or under serious financial pressures brought by unforeseen events, or events which, though foreseeable, could not be prevented by the bank concerned. (Sec. 84) Subject to compliance with the following conditions: a. Bank is not insolvent b. Secured by first class or acceptable collaterals c. Limited to equivalent of 50% of deposits d. Upon an affirmative vote of at least five (5) Monetary Board members, and e. Disbursed in 2 tranches: 1. 1st tranche (25% of total deposits secured by first class collaterals (government securities, secured government guarantees and other acceptable collaterals) 2. Subsequent tranches (vote of at least 5 members, the Monetary Board with indemnity undertaking and adequate security (Id.) B. Selective regulation Guiding principles of the Monetary Board a. The supply, availability, and cost of money are in accord with the needs of the Philippine economy b. Bank credit is not granted for speculative purposes prejudicial to the national interests, and, c. Regulations shall be applied to all banks of the same category uniformly and without discrimination. (Sec. 104) i. Margin requirement against letters of credit Margin is a deposit of money made by the purchaser or seller of goods. A lower margin means the importer will only deposit a small amount to enable him to access bank credit. Higher margin means the importer will carry a higher financing burden of the importation. The Monetary Board may at any time prescribe minimum cash margins (as a percentage) for the opening of letters of credit and may relate the size of the required margin to the nature of the transaction to be financed. (Sec. 105) ii. Required security against bank loans To promote liquidity and solvency of the banking system, BSP may issue regulations on the following: a. Maximum permissible maturities of loans and investments (short, medium, or long term, but BSP issuances are guidelines, not fixed limits). b. Kind and amount of security (real estate, chattels, intangibles) to be required against the various credit operations of banks. (Sec. 106) Page 216 of 393 ATENEO CENTRAL BAR OPERATIONS 2020/21 iii. Portfolio ceilings To prevent or check an expansion of bank credit (to prevent excessive credit risks concentration and diversify risks), an upper limit may be placed on the following: a. Amount of loans and investments which the banks may hold; or b. Rate of increase of such assets within specified periods of time. (Sec. 107) Note: Uniform application to all banks or specific categories without discrimination (NCBA, Sec. 85, 84,96, 104 and 107). There is no retroactivity – it can only be applied on the date of notification. (Id.) COMMERCIAL LAW B. LAWS ON SECRECY OF BANK DEPOSITS 1. PURPOSE R.A. No. 1405 (Bank Secrecy Law) covers deposits in Peso while R.A. No. 6426 (Foreign Currency Deposits Act) covers deposits in foreign currency. Its purpose is as follows: a. To give encouragement to the people to deposit their money in banking institutions; and b. To discourage private hoarding so that the same may be properly utilized by banks in authorized loans to assist the economic development of the country. (RA 1405, Sec. 1) iv. Minimum capital ratios Monetary Board may (1) prescribe minimum riskbased capital adequacy ratios based on internationally accepted standards and may alter said ratios whenever it deems necessary, and (2) may require banks to hold capital beyond the minimum requirements commensurate to their risk profile. (Sec. 108) 10. RATE OF EXCHANGE Exchange rate. It is the price of a unit of foreign exchange in terms of domestic currency (e.g., 1 US$ = Php 53). The Monetary Board shall determine the exchange rate policy of the country. (Sec. 74). The present policy is a floating rate system, which is market driven. State Policy It is hereby declared the policy of the state to protect and preserve the integrity and confidentiality of bank accounts. (AMLA, Sec. 2) Construction of confidentiality If there are doubts in upholding the absolutely confidential nature of bank deposits against affirming the authority to inquire into such accounts, such doubt must be resolved in favor of confidentiality. (Republic v. Eugenio, G.R. No. 174629, 2008) 2. PROHIBITED ACTS Peso Deposits All deposits of whatever nature with the banks in the Philippines, including investments in the government bonds are considered absolutely confidential and may not be examined, inquired, or looked into by any person except as allowed by law. (RA 1405, Sec. 2) The following are liable under RA No. 1405: a. Any person or government official who examines, inquires, or looks into bank deposits or government bond investments in any instance not allowed by law. b. Any official or employee of the banking institution who makes a disclosure concerning bank deposits to another in any instance not allowed by law (Id., Sec. 3); and c. Any person who commits a violation of any provision of this law. (Id., Sec. 5) Page 217 of 393 ATENEO CENTRAL COMMERCIAL LAW BAR OPERATIONS 2020/21 Foreign Currency Deposits All foreign currency deposits are absolutely confidential and cannot be examined, inquired, or looked into by any person, government official, bureau, or office, whether judicial or administrative or legislative, or any other private or public entity. (RA No. 6426, Sec. 8) The following are liable under RA No. 6426: a. Any person or government official who examines, inquires, or looks into foreign currency deposits without written permission of the depositor. (Id., Sec. 8) b. Anyone who shall attach, garnish, or subject the foreign currency deposit to any other order or process of any court, legislative body, or other administrative body. (Id.) c. Any official or employee of the banking institution who makes a disclosure concerning bank deposits to another in any instance not allowed by law. (Id., Sec. 10) d. Any person who commits a violation of any provision of this law as well as regulation of the Monetary Board pursuant to this law. (Id.) Note: Other funds or properties in the bank which are not in the nature of deposits are still confidential. No director, officer, employee, or agent of any bank shall, 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 entities. (GBL, Sec. 55(1)(b)) 4. EXCEPTIONS Grounds to allow examination of a bank account under Section 2 of RA No. 1405: a. Where the depositor consents in writing. Note: A waiver of rights (RA 1405) must be voluntary, knowingly, intelligently, and with sufficient awareness of the relevant circumstances and likely consequences. There must be evidence to show an actual intention to relinquish the right. Mere silence on the part of the holder of the right should not be construed as a surrender thereof. (Doña Adela Export International, Inc. v. TIDCORP, G.R. No. 201931, 2015) 3. DEPOSITS COVERED Examples of waiver: Waiver in case of DOSRI loans (NCBA, Sec. 26) and waiver of a taxpayer in case of compromise of tax liability. (Tax Code, Sec. 6[f]) Peso Deposits. All (peso) deposits of whatever nature with banks or banking institutions in the Philippines including trust accounts. (Ejercito v. Sandiganbayan, G.R. No. 157294-95, 2006) Deposits refer to money or funds placed in a bank which can be withdrawn on depositor’s order or demand. It is characterized as being in the nature of a simple loan and creates a creditordebtor relationship between the depositor and the bank. (NCC, Art. 1980) While trust funds are different, by jurisprudence, this is included in the broad category of deposits under RA 1405. b. Impeachment Cases. It is necessary that there be an order issued by the impeachment court or by its authorized officer to allow examination. It is limited to Peso deposits, as it is not an exemption to the absolute confidentiality of foreign currency deposits under RA 6426. (Philippine Savings Bank v. Senate, G.R. No. 200238, 2012) Investment in bonds issued by the Government of the Philippines, its political subdivisions, and its instrumentalities. (RA 1405, Sec. 2) c. Foreign currency deposits (RA No. 6426) and deposits in offshore banking units (PD No. 1246, Sec. 8) are considered as absolutely confidential. RA No. 6426 only provided for written permission of the depositor as an exception. However, other exceptions evolved by jurisprudence and statutes. By Court Order in cases of; 1. Bribery 2. Dereliction of duty of officials public d. Money invested or deposited is subject of litigation (RA 1405 – An Act Prohibiting Disclosure of or Inquiry into Page 218 of 393 ATENEO CENTRAL BAR OPERATIONS 2020/21 Deposits with any Banking Institution, Sec. 2). Fishing for information as to the amount of damages it can recover does not fall within the exception. Since the subject matter of the dispute is not the money deposited in the drawer's account, it does not, by itself, warrant the examination of the bank deposits. (Union Bank vs. CA, GR No. 134699, 1999) The subject matter of the action is to be determined from the indictment that charges respondent with the offense, and not from the evidence sought. The information charges qualified theft. There was no mention of the supposed bank account in which the funds represented by the checks have allegedly been kept to allow testimony on the bank account. (BSB Group vs. Go, GR No. 168644, 2010) Inquiry into the whereabouts of the amount converted necessarily extends to whatever is concealed (being in the name of persons other than the one responsible for the illegal acquisition) inasmuch as the case is aimed at recovering the amount converted. (Mellon Bank v. Magsino, G.R. No. 71479, 1990) Additional exceptions to the Secrecy of Bank Deposits Act a. Violations of Anti-Graft and Corrupt Practices Act. Section 8 of RA 3019 directs that bank deposits shall be taken into consideration in its enforcement, notwithstanding any provision of the law to the contrary. (PNB v. Gancayco, GR. No. L-18343, 1965) The Courts are authorized to examine bank deposits of spouses and unmarried children of government officials found to have unexplained wealth under RA 3019 – Anti-Graft and Corrupt Practices Act. (RA 3019, Sec. 8) b. Commissioner of Internal Revenue (CIR). The CIR can inquire into the bank accounts of the following taxpayers: 1. A decedent to determine his gross estate; 2. Any taxpayer who has filed an application for compromise of his tax liability on the ground of financial incapacity; and COMMERCIAL LAW 3. A taxpayer, information on whose account is requested by a foreign tax authority. (NIRC, Sec. 6(f)) c. Unclaimed balances. Disclosure to the Treasurer of the Philippines for dormant deposits for at least 10 years. (Act 3936, Sec. 2) d. BSP periodic or special examination. To ensure compliance of the covered institution with the Anti Money Laundering Act. (NCBA, Sec. 25; RA 9160 – Anti-Money Laundering Act (AMLA), Sec. 11) Annual testing solely limited to the determination of the existence and true identity of the owners of the accounts. (AMLA, Sec. 9[a]) e. Human Security Act (RA 9372). After determining existence of probable cause, the Court of Appeals may authorize examination of and gathering of information on deposits, placements, trust accounts, assets, and records in a bank or financial institution; (RA 9372, Sec. 27) of the following: 1. A person charged with or suspected of the crime of terrorism or conspiracy to commit terrorism; 2. Any judicially declared and outlawed terrorist organizations, associations, or group of persons; or 3. Any member of such organization, association, or group of persons in a bank or financial institution and the gathering of any relevant information about the same from said bank or financial institution. (RA 9372, Sec. 28) f. Anti-Money Laundering Act (AMLA). Upon order of a competent court in cases of violation of the AMLA where there is probable cause of money laundering, except that no court order is required in cases of: 1. Kidnapping for ransom 2. Drug trafficking 3. Hijacking, destructive arson, and murder including those perpetrated by terrorists against Page 219 of 393 ATENEO CENTRAL COMMERCIAL LAW BAR OPERATIONS 2020/21 non-combatants and targets. (AMLA, Sec. 11) similar and their subsidiaries and affiliates concerning: 1. Any property or funds that are in any way related to financing of terrorism or acts of terrorism; or 2. Any 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. (RA 10168, Sec. 10) g. Plunder. Sec. 1(d) and 4 of the Plunder Law (RA 7080). Plunder (RA 7080, Sec. 2), which is amassing or accumulating ill-gotten wealth by series of overt or criminal acts, is also analogous to bribery. Therefore, the exception to R.A. 1405 applicable in cases of bribery must also apply to cases of plunder. (Ejercito v. Sandiganbayan, G.R. Nos. 157294-95, 2006) h. Unsafe and unsound banking practices. BSP and PDIC may inquire into bank deposits (both Peso and Foreign Currency Deposits) and all information related thereto if there is a finding of unsafe or unsound banking practice. (New PDIC Charter, Sec. 9) k. Bank Resolution. When there is a failure of Prompt Corrective Action as declared by the Monetary Board due to capital deficiency, the PDIC or its duly authorized officers or employers may examine, inquire, or look at the deposit records of the bank. (New PDIC Charter, Sec. 11[c]) i. In-Camera Inspection. The Ombudsman is granted the express powers to examine and have access to bank accounts and records. (RA 6770 – Ombudsman Act, Sec. 15) The information cannot be shared by PDIC to other persons, including the BSP. l. Requisites: 1. Pending case before a court of competent jurisdiction; 2. Account must be clearly identified; 3. The inspection is limited to the subject matter of the pending case; 4. The bank personnel and the account holder must be notified to be present during the inspection, and such inspection may cover only the account identified in the pending case. (Marquez v. Desierto, G.R. 135882, 2001) Note: An investigation by the Office of the Ombudsman is not a pending litigation to allow examination of a bank account. (Marquez v. Desierto, G.R. No. 135882, 2001) j. Terrorism Financing Prevention and Suppression Act (RA 10168). The AntiMoney Laundering Council (AMLC), without a court order, is authorized to inquire into or examine bank deposits and investments with any banking institution or non-bank financial institution Presidential Commission on Good Governance (PCGG). Investigation by the PCGG to recover ill-gotten wealth (EO 1, Sec. 3[e]) m. Commission on Audit (COA). Audit on government deposits by the COA. (1987 Constitution, Art. IX (D), Sec. 2[1]) Grounds for Disclosure of Foreign Currency Deposits. a. Upon written permission of depositor b. Under Other Laws (as discussed) 1. CIR. (NIRC, Sec. 6[f]) 2. AMLC – with our without a court order under the AMLA and Terrorism Financing Prevention and Suppression Act. (AMLA, Sec. 11; RA 10168, Sec. 10) 3. BSP in limited examination to ensure compliance of supervised institutions to AMLA. (AMLA, Sec. 11) 4. PDIC in banking resolution when there is failure of PCA. (New PDIC Charter, Sec. 11[c]) Page 220 of 393 ATENEO CENTRAL BAR OPERATIONS 2020/21 5. BSP and PDIC when there is a finding of unsafe or unsound banking practice. (Id., Sec. 8) 6. COA and PCGG. (1987 Constitution, Art. IX (D), Sec. 2(1); EO 1, Sec. 3[e]) c. Jurisprudence (equity). The following exceptions are provided on grounds of equity. 1. Account of non-resident alien found guilty of raping a minor was allowed on the basis of equity. (Salvacion v. Central Bank of the Philippines, G.R. 94723, 1997) 2. A co-payee of a check who filed a suit for recovery of a sum of money was considered as a depositor because of the distinctive circumstances of the case. (China Banking Corporation v. Court of Appeals, G.R. 14068, 2006) COMMERCIAL LAW 6. PENALTIES FOR VIOLATION Bank Secrecy Law Imprisonment of not more than five (5) years, or a fine of not more than twenty thousand pesos (Php 20,000), or both, at the discretion of the court. (RA 1405, Sec. 5) Foreign Currency Deposits Act Imprisonment of not less than one (1) year but not more than five (5) years, or fine not less than five thousand pesos (Php 5000) but not more than twenty five thousand pesos (Php 20,000.) or both. (RA 6426, Sec. 10) 5. GARNISHMENT OF DEPOSITS, INCLUDING FOREIGN DEPOSITS Peso deposits RA 1405 does not preclude deposits from being garnished to ensure satisfaction of a judgment. There is no real inquiry in such a case, and if the existence of the deposit is disclosed, the disclosure is purely incidental to the execution process. (China Bank v. Ortega, G.R. L-34964, 1973) Foreign currency deposits Anyone who shall attach, garnish, or subject this to order or process of any court, legislative body, government agency or other administrative body shall be held liable. (RA 6426, Sec. 8) Note: Jurisprudence created 2 exceptions on ground of equity as discussed earlier. Note: Deposits maintained by banks with the BSP as part of their reserve requirements shall be exempt from attachment, garnishments, or any other order or process of any court, government agency, or any other administrative body issued to satisfy the claim of a party other than the Government, or its political subdivisions, or instrumentalities. (NCBA, Sec. 103) Page 221 of 393 ATENEO CENTRAL BAR OPERATIONS 2020/21 C. GENERAL BANKING ACT 1. DEFINITION AND CLASSIFICATION OF BANKS Banks Entities engaged in the lending of funds obtained in the form of deposits. (GBL, Sec. 3.1) Note: Banks have a primary franchise from the Securities and Exchange Commission (SEC) and a secondary banking franchise from the BSP. Its corporate powers are exercised within its banking license. Elements a. Engaged in lending of funds b. Obtained in the form of deposits c. From the public, which shall mean 20 or more persons How Banks are Structured General Rule: Banks are corporations. (Sec. 8[a]) However, cooperative banks may also be formed under the Cooperative Code, but it has to secure a secondary franchise from the BSP to engage in banking. (RA 9520, Sec. 23[i]) Classification of Banks Universal Banks In addition to the powers authorized for a commercial bank in Section 29, they shall have the authority to exercise the powers of an investment house as provided in existing laws and the power to invest in non-allied enterprises as provided in this Act. (Sec. 23) Investment House It is an intermediary between security issuers and investors. It engages in underwriting of securities, among other things. (PD 129, Sec. 2) Non-allied enterprises They are non-bank related activities (e.g., agriculture, mining, manufacturing, public utilities, etc.). (MORB – Manual of Regulations for Banks, Appendix 19) Commercial Banks They shall have, in addition to the general powers incident to corporations: a. All such powers as may be necessary to carry on the business of commercial banking such as accepting drafts and issuing letters of credit; COMMERCIAL LAW b. Discounting and negotiating promissory notes, drafts, bills of exchange, and other evidence 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 g. Extending credit, subject to such rules as the Monetary Board may promulgate. (Sec. 29) Unlike Universal Banks, Commercial Banks can invest only in allied enterprises (bank-related activities), which may be financial or nonfinancial. (Secs. 30, 31, and 32) Thrift Banks They are organized for the purpose of, among other things, accumulating savings of depositors and investing them with capital loans, financing homebuilding, providing short term capital, medium and long term financing for small and medium enterprises and individuals engaged in agriculture, services, industry and housing. (RA 7906 - Thrift Banks Act, Sec. 3[a][1]) They include savings and mortgage banks, private development banks, and stock savings and loans associations organized under existing laws. (Id.) Rural Banks Banks which are designed to make needed credit available and readily accessible in the rural areas on reasonable terms. (RA No. 7353 - Rural Act, Sec. 2) Cooperative Banks Once organized, the majority shares of which is owned and controlled by cooperatives, primarily to provide financial and credit services to cooperatives and their members. (RA 9520 – Philippine Cooperative Code, Art. 2) Islamic Banks Created by Congress to promote and accelerate socio-economic development of the Autonomous Region by performing banking, financing, and investment operations and to establish and participate in agricultural, commercial, and industrial ventures based on the Islamic concept of banking. (RA 6848 – Charter of the Al-Amanah Page 222 of 393 ATENEO CENTRAL BAR OPERATIONS 2020/21 Islamic Investment Bank of the Philippines, Sec. 3) Islamic banking is based on the Islamic concept of banking: risk sharing rather than speculation. Essentially, this is based on basic principles and rulings of Sharia, or Islamic law. interest (riba) is prohibited. (RA 11439 – An Act Providing for the Regulation and Organization of Islamic Banks, Sec. 2[a][4]) Note: There are two existing laws on Islamic Banks, (1) RA No. 6848, and (2) R.A. No. 11439. The latter law is a legal framework which allows the creation of Islamic banks in the Philippines. Foreign Banks A foreign bank is a banking corporation formed, organized or existing under any law other than those of the Republic of the Philippines. (RA 11232 – Revised Corporation Code, Sec. 140) Foreign banks are allowed to enter the Philippine banking system under any of the following modes: a. Acquiring, purchasing, or owning up to 100% of the voting stock of an existing bank; b. Investing in up to 100% of the voting stock of a new banking subsidiary incorporated under the laws of the Philippines; or c. Establishing branches with full banking authority. (RA 10641 – An Act Allowing the Full Entry of Foreign Banks in the Philippines, Sec. 2) Other Classification of Banks as determined by the Monetary Board (Sec. 3) 2. DISTINCTION OF BANKS FROM QUASIBANKS AND TRUST ENTITIES Quasi-Banks 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 NCBA, Sec. 95 for purposes of relending or purchasing of receivables and other receivables. (Sec. 4[3]) Deposit Substitutes An alternative form of obtaining funds from the public, other than deposits, through the issuance, endorsement, or acceptance of debt instruments COMMERCIAL LAW for the borrower's own account, for the purpose of relending or purchasing of receivables and other obligations. (NCBA, Sec. 95) The phrase “obtaining funds from the public” shall mean borrowing from twenty (20) or more lenders at any one time. (Id.) For this purpose, “lenders” shall refer to individuals and corporate entities that are not acting as financial intermediaries, subject to the safeguards and regulations issued by the Monetary Board. (Id.) Note: The definition of deposit substitutes in the banking laws was brought about by an observation that banks and non-bank financial intermediaries have increasingly resorted to issuing a variety of debt instruments, other than bank deposits, to obtain funds from the public. (BDO v. RCBC, G.R. No. 198756, 2016) Under the NIRC, deposit substitutes include not only the issuances and sales of banks and quasibanks for relending or purchasing receivables and other similar obligations, but also debt instruments issued by commercial, industrial, and other non-financial companies to finance their own needs or the needs of their agents or dealers. (Id.) To determine whether the financial assets are deposit substitutes, the “20 or more individual or corporate lenders” rule must apply. (Id.) When the Government Securities Eligible Dealer (GSED) sells the government securities to 20 or more investors, the government securities are deemed to be in the nature of a deposit substitute. (BDO v. Republic, G.R. No. 198756, 2016) Trust Entities A stock corporation, or a person duly authorized by the Monetary Board to engage in trust business, and act as a trustee, administer any trust or hold property in trust or on deposit, for use, benefit or behoof of another (GBL. Sec. 79) Bank, Quasi-Bank, and Trust Entity BANK QUASI-BANK TRUST ENTITY Entities Entities Entities engaged in engaged in the engaged in the lending of borrowing of trust, funds funds through investment obtained in the issuance or management, acceptance of and fiduciary Page 223 of 393 ATENEO CENTRAL COMMERCIAL LAW BAR OPERATIONS 2020/21 the form deposits. of deposit substitutes for the purpose of relending or purchasing receivables or other obligations. business methodology. 3. BANK POWERS AND LIABILITIES A. Corporate powers As banks are required to organize as stock corporations, they shall have the powers enumerated under Sec. 35 of the Revised Corporation Code: a. To sue and be sued in its corporate name; b. To have perpetual existence unless the certificate of incorporation provides otherwise; c. To adopt and use a corporate seal; d. To amend its articles of incorporation in accordance with the provisions of this Code; e. To adopt by-laws, not contrary to law, morals, or public policy, and to amend or repeal the same in accordance with this Code; f. In case of stock corporations, to issue or sell sticks to subscribers and to sell treasury stocks in accordance with the provisions of this Code; and to admit members to the corporation if it be a nonstock corporation; g. To purchase, receive, take or grant, hold, convey, sell, lease, pledge, mortgage and otherwise deal with such real and personal property, including securities and bonds of other corporations, as the transaction of the lawful business of the corporation may reasonably and necessarily require, subject to the limitations prescribed by law and the Constitution; h. To enter into partnership, joint venture, merger, consolidation, or any other commercial agreement with natural and juridical persons; i. To make reasonable donations, including those for the public welfare or for hospital, charitable, cultural, scientific, civic, or similar purposes: Provided, That no foreign corporation shall give donations j. k. in aid of any political party or candidate or for purposes of partisan political activity; To establish pension, retirement, and other plans for the benefit of its directors, trustees, officers, and employees; and To exercise such other powers as may be essential or necessary to carry out its purpose or purposes as stated in the articles of incorporation. (RA 11232, Sec. 35) B. Banking and incidental powers Operations and activities of banks shall be subject to BSP supervision, which shall include: a. Issuance of rules of conduct or the establishment of standards of operation for uniform application to all institutions or functions covered; b. Conduct of examination to determine compliance with laws and regulations; c. Oversee compliance with laws and regulations; d. Regular investigation (not oftener than once a year) to determine whether it is conducting its business on safe or sound basis; e. Inquire into solvency and liquidity of the institution; or f. Enforce prompt corrective action. (Sec. 4) Examination by BSP When examining a bank, BSP shall have the authority to examine an enterprise that is wholly or majority-owned or controlled by the bank. (Sec. 7) BSP Authority Over Quasi-Banks and Trust Entities The BSP shall also have supervision over the operations of and exercise regulatory powers over quasi-banks, trust entities and other financial institutions which under special laws are subject to BSP supervision. (Sec. 4) BSP Powers Policy Direction; Ratios, Ceilings, and Limitations The BSP shall provide policy direction in the areas of money, banking, and credit. Thus, the Monetary Board may do the following: a. Prescribe ratios, ceilings, limitations, or other forms of regulation on the different types of accounts and practices of banks and quasi-banks which shall, to the extent feasible, conform to internationally Page 224 of 393 ATENEO CENTRAL BAR OPERATIONS 2020/21 accepted standards, including those of the BIS; and b. Exempt particular categories of transactions from such ratios, ceilings and limitations, but not limited to exceptional cases or to enable a bank or quasi-bank under rehabilitation or during a merger or consolidation to continue in business with safety to its creditors, depositors and the general public. (Sec. 5) 4. DILIGENCE REQUIRED OF BANKS IN VIEW OF FIDUCIARY NATURE OF BANKING Highest Degree of Diligence The fiduciary nature of banking requires high standards of integrity and performance. (Sec. 2) Fiduciary relationship The bank’s obligation to observe high standards of integrity and performance is deemed written into every deposit agreement between a bank and its depositor. (Philippine Banking Corp. v. CA, G.R. No. 127469, 2004) Banking is vested with public interest As a business affected with public interest and because of the nature of its functions, the bank is under obligation to treat the accounts of its depositors with meticulous care, always having in mind the fiduciary nature of their relationship. (Simex International (Manila) Inc. v CA, G.R. No. 88013, 1990) Banks are expected to exercise the highest degree of diligence in the selection and supervision of their employees. By the very nature of their work, the degree of responsibility, care and trustworthiness expected of their employees and officials is far greater than those of ordinary clerks and employees. (Philippine Commercial and International Bank v. CA, G.R. No. 121413, 2001) Banking business is impressed with public interest, of paramount importance thereto is the trust and confidence of the public in general, the highest degree of diligence is expected, and high standards of integrity and performance are even required of it. (Bank of the Philippine Islands v. Casa Montessori Internationale, G.R. No. 149454, 2004) COMMERCIAL LAW 5. NATURE OF BANK FUNDS AND BANK DEPOSITS By the nature of its business, banks derive its funds principally from its deposit taking or quasibanking operations. It also gets funds from the public when it acts as a trust entity under Chapter IX of the GBL. Nature of Bank Funds The bank can make use as its own, the money deposited. (Tan Tiong Tick v. American Apothecaries, G.R. No. L-43682, 1938) Nature of Bank Deposits Bank deposits are in the nature of irregular deposits. Fixed, savings, and current deposits of money in banks and similar institutions shall be governed by the provisions concerning simple loans. (NCC, Art. 1980) The fiduciary relationship does not "convert the contract between the bank and its depositors from a simple loan to a trust agreement, whether express or implied." It simply means that the bank is obliged to observe "high standards of integrity and performance" in complying with its obligations under the contract of simple loan. (Goyanko, Jr. v. UCPB, G.R. No. 179096, 2013) Bank Deposit as a simple loan Bank acquires ownership of money deposited; obligation to pay the amount, but no obligation to return the same money. (Guingona, Jr. v. City Fiscal of Manila, G.R. No. L-60033, 1984) Payment to proper party-depositor (Fultron Iron Works Co. v. China Banking Corp., G.R. No. 32576, 1930) Deposits are not preferred credits. (Central Bank v. Morfe, G.R. No. L-38427, 1975) Bank has the right to set-off or compensation. (Gullas v. Philippine National Bank, G.R. No. 4391, 1935) Kinds of Deposits a. Savings Deposits. They are interest bearing deposits without a stated maturity. b. Negotiable Order of Withdrawal (NOW). They are interest bearing deposit accounts that combine the payable on demand feature and investment feature of savings accounts. Page 225 of 393 ATENEO CENTRAL BAR OPERATIONS 2020/21 Time Deposits. They are issued for a specific period of time (Sec. 216, MORB), and generally cannot legally be withdrawn before maturity or within a specified number of days. (BPI Family Savings v. First Metro Investment, G.R. 132390, 2004) d. Demand Deposits. They are those liabilities of the BSP and of other banks, which are denominated in Philippine currency and are subject to payment in legal tender upon demand by the presentation of checks. Only banks duly authorized by the BSP may issue demand deposits. (NCBA, Sec. 59) COMMERCIAL LAW c. Checks representing demand deposits do not have legal tender power and their acceptance in the payment of debts, both public and private, is at the option of the creditor. However, a check which has been cleared and credited to the account of the creditor shall be equivalent to a delivery to the creditor of cash in an amount equal to the amount credited to his account. (NCBA, Sec. 60) 6. GRANT OF LOANS AND SECURITY REQUIREMENTS A. Ratio of net worth to total risk assets The Monetary Board shall prescribe the minimum ratio which the net worth of a bank and its subsidiaries must bear to its total risk assets which may include contingent accounts. (Sec. 34) Risk-based Capital It is expressed as the percentage of qualifying capital to risk-weighted assets. Risk-weighted Assets These are assets of the bank weighted according to risks (e.g., cash is zero risk, while nonperforming loan is given a risk of 120%). Capital ----------- = Ratio (CAR) Assets Note: The existing Capital Adequacy Ratio (CAR) requirement is 10%. It is an indicator of a bank’s ability to absorb a reasonable amount of loss. The minimum CAR requirement is a means to protect bank’s depositors and promote stability in the banking system at the same time. In the exercise of this authority, the Monetary Board shall, to the extent feasible, conform to internationally accepted standards, including those of the Bank for International Settlements (BIS). (Sec. 34) B. Single borrower’s limit (SBL) General Rule: The total amount of loans, credit accommodations and guarantees that may be extended by a bank to any person, partnership, association, corporation, or other entity shall not exceed 20% of the net worth of such bank. The basis for determining compliance with single borrower limit is the total credit commitment of the bank to the borrower. (Sec. 35.1) Exception: The SBL may be increased by an additional 10% of Net Worth of such bank provided the additional liabilities of any borrower are adequately secured by trust receipts, shipping documents, warehouse receipts, or other similar documents transferring or securing title covering readily marketable, non-perishable goods which must be fully covered by insurance. It shall include: a. 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. (Sec. 35.2) Note: The Monetary Board has set the SBL at 25% (Sec. 303, MORB, but temporarily increased to 30% for 6 months effective March 2020) of the net worth. Page 226 of 393 ATENEO CENTRAL BAR OPERATIONS 2020/21 Exclusion from computation – non risk assets For purposes of SBL coverage, loans, and other credit accommodations and guarantees shall exclude those which are: a. Secured by obligations of the BSP or Philippine Government; b. Fully guaranteed by the Government as to the payment of principal and interest; c. Covered by assignment of deposits maintained in the lending bank and held in the Philippines; d. Under letters of credit, to the extent covered by margin deposits; e. Those which the Monetary Board may, from time to time, specify as non-risk items. (Sec. 35.5.) Inclusion of Parent Corporation Even if a parent corporation, partnership, association, entity, or an individual who owns or controls a majority interest in such entities has no liability to the bank, the Monetary Board may prescribe the combination of the liabilities of subsidiary corporations or members of the partnership, association, entity or such individual under certain circumstances, including but not limited to any of the following situations: a. Parent corporation, partnership, association, entity, or individual guarantees the repayment of the liabilities; b. Liabilities were incurred for the accommodation of the parent corporation or another subsidiary or of the partnership, association, or entity or such individual; or c. Subsidiaries though separate entities operate merely as departments or divisions of a single entity. (Sec. 35.4) C. Restrictions on bank exposure to directors, officers, stockholders, and their related interests Principles The Monetary Board is granted the authority to regulate the amount of loans and credit accommodations extended to DOSRI. (Sec. 36) The prohibition on DOSRI loans is intended as a protection against over-borrowing of bank funds by bank’s DOSRI, as such over-borrowings may lead to bank failures. (Soriano v. BSP, G.R. No. 162336, 2010) Banks are not created for the benefit of their directors and officers, they cannot COMMERCIAL LAW use the assets of the bank for their benefit. (Go v. BSP, G.R. No. 178429, 2009) General Prohibition: No director or officer of any bank shall, directly or indirectly, for himself or as the representative or agent of others: a. Borrow from such bank; b. Become a guarantor, endorser, or surety for loans from such bank to others; or c. Be an obligor or incur any contractual liability to the bank. (Sec. 36) A stockholder to fall under this provision should own at least 1% of the subscribed capital of the bank. (MORB, Sec. 341[c]) An indirect borrowing includes one that is made by a third party, but the DOSRI has a stake in the transaction; a case where the DOSRI acted for his own benefit, using the name of an unsuspecting person and using dummies to circumvent the requirements of the law. (Soriano v. BSP, G.R. No. 162336, 2010) Related Interest is considered as indirect borrowing or the Directors, Officers and Stockholders. a. Spouse or relative within the first degree (including adoption) b. Partnership where the spouse or relative is a general partner c. Co-ownership of the property mortgaged to secure the loan or other credit accommodations d. Interlocking directorship or officership between the bank and the borrower e. Corporation at least 20% of the capital stock or equity is owned by DOS of the lending bank. (MORB, Sec. 341[e]) Exception: The director or officer may do so, provided the following requirements are complied with: a. Written approval of the majority of all the directors of the bank, excluding the director borrowing and recorded in the books of the bank. (Sec. 36) b. The reportorial requirement where such approval should be entered upon the records of the corporation, and a copy of the entry be transmitted to the appropriate supervising department of the BSP. (Id.; Go v. BSP, GR No. 178429, 2009) c. Ceiling requirement. The limit on the amount of loans and credit Page 227 of 393 ATENEO CENTRAL BAR OPERATIONS 2020/21 accommodations that can be extended to the bank’s DOSRI is equivalent to their respective unencumbered deposits and book value of their paid-in capital contribution in the bank, excluding the following: 1. Secured by assets considered as non-risk by the Monetary Board; 2. In the form of fringe benefits; or 3. Extended by a cooperative bank to its cooperative shareholders. (Id.) d. Terms. Not less favorable to the bank than those offered to others. (Id.) e. Waiver of Secrecy. DOSRI loans are also subject to the waiver of secrecy of bank deposits. (NCBA, Sec. 26) Requisites of a DOSRI loan: a. Borrower is a director, officer or stockholder of a bank; b. He contracts any loan or financial accommodation; c. Loan or financial accommodation is from: 1. his bank or 2. a bank that is a subsidiary of a bank holding company of which both his bank and the lending bank are subsidiaries or 3. a bank in which a controlling proportion of the shares is owned by the same interest that owns a controlling proportion of the shares of his bank; and d. The loan or financial accommodation of the director, officer or stockholder, singly or with that of his related interest, is in excess of 5% of the capital and surplus of the lending bank or in the maximum amount permitted by law (Sec. 36), whichever is lower. Waiver of Secrecy of Bank Deposits If the loan is a DOSRI loan, the lending bank shall require the director, officer, or stockholder to waive the secrecy or confidentiality of his deposits of whatever nature in all banks in the Philippines (NCBA, Sec. 26) Offenses Criminal. Failure to comply with each requirement is already a violation of DOSRI Rules (prosecution of 3 offenses), and violation of each requirement is an offense in itself. (Go v. BSP, GR No. 178429, 2009) COMMERCIAL LAW The violation consists in the failure to observe and comply with procedural, reportorial, or ceiling requirements prescribed by law in the grant of a loan to a director, officer, stockholder and other related interests in the bank. The elements of abuse of confidence, deceit, fraud or false pretenses, and damage, which are essential to the prosecution for estafa, are not elements of a DOSRI violation. (Soriano vs BSP, G.R. Nos. 159517-18, 2009) Thus, a person be held liable both for estafa through falsification of commercial documents and violation of Sec. 83 of the GBL (DOSRI) for a single transaction. Administrative: removal. After due notice to the board of directors of the bank, the office of any bank director or officer who violates the provisions of this Section may be declared vacant. D. Prohibited acts of borrowers No borrower of a bank shall engage in these prohibited transactions: a. Fraudulently overvalue property offered as security for a loan or other credit accommodation from the bank; b. Furnish false, make misrepresentation, or suppress material facts in the loan application for the purpose of obtaining, renewing, or increasing a loan or other credit accommodation or extending its period; c. Attempt to defraud the bank in the event of a court action to recover a loan or other credit accommodation; or d. Offer any director, officer, employee, or agent of a bank any gift, fee, commission, or any other form of compensation in order to influence them in approving a loan or other credit accommodation. (Sec. 55.2 E. Floating interest rates and escalation clauses Floating Rate of Interest While it may be acceptable, for practical reasons given the fluctuating economic conditions, for banks to stipulate that interest rates on a loan not be fixed and instead be made dependent upon prevailing market conditions, there should always be a reference rate upon which to peg such variable interest rates. (Consolidated Bank and Page 228 of 393 ATENEO CENTRAL BAR OPERATIONS 2020/21 Trust Corporation (Solid Bank) v. CA, G.R. No. 114286, 2001) Note: Benchmark interest rates are the reference rate to peg the rate (e.g. Interbank Call Loan Rate, BSP rates, Government securities rates, treasury rate benchmark, PHP BVAL rates). Escalation Clause It refers to stipulations allowing an increase in the interest rate agreed upon by the contracting parties. They are valid stipulations in commercial contracts to maintain fiscal stability and to retain the value of money in long term contracts. It has to comply with the principles on mutuality of contracts. The contract must bind both contracting parties; its validity or compliance cannot be left to the will of one of them. (NCC, Art. 1308) The bank cannot be given an unbridled right to adjust the interest independently and upwardly. Such would negate the mutuality of contracts. (Floirendo v. Metropolitan Bank, G.R. No. 148325, 2007) If a provision neither states an increase nor a decrease in interest rate, but said clause simply states that the interest rate should be based on the prevailing market rate, it violates the mutuality of contracts. (Polotan Sr. v. Court of Appeals, G.R. No. 119379, 1998) 7. PENALTIES FOR VIOLATIONS A. Fine, imprisonment Refusal to make reports or permit examination The willful refusal to file the required report or permit any lawful examination into the affairs of such institution, as required in writing by the Monetary Board or the head of the supervising and examining department, shall subject its officer, owner, agent, manager, director, or officer-in-charge to a fine not less than P50,000 nor more than P2,000,000 or by imprisonment of not less than one (1) year nor more than five (5) years, or both, at the court’s discretion. (NCBA, Sec. 34) COMMERCIAL LAW False statement The willful making of a false or misleading statement on a material fact to the Monetary Board or to the examiners of the BSP shall be punished by a fine of not less than P100,000 nor more than P2,000,000 or by imprisonment of not more than five (5) years, or both, at the discretion of the court. (NCBA, Sec. 35) Violation of the NCBA and other banking laws, rules, regulations, orders, or instructions The persons responsible for the following violations shall be punished by a fine of not less than P50,000 nor more than P200,000 or by imprisonment of not less than two (2) years nor more than ten (10) years, or both, at the discretion of the court: a. When a bank or quasi-bank, including their subsidiaries and affiliates, engages in allied activities or other entity which under this Act or special laws is subject to BSP supervision; or b. When any person or entity willfully violates this Act or other pertinent banking laws being enforced or implemented by the BSP or any order, instruction, rule, or regulation issued by the Monetary Board. (NCBA, Sec. 36) B. Suspension or removal of director or officer If the offender is a director or officer of a bank, quasi-bank, or trust entity, the Monetary Board may also suspend or remove such director or officer who violated the provisions of the GBL. (Sec. 66) C. Dissolution of bank If the violation is committed by a corporation, such corporation may be dissolved by quo warranto proceedings instituted by the Solicitor General (Id.) Note: This applies to affiliate companies whose transactions are subject to examination under this Act. Page 229 of 393 ATENEO CENTRAL COMMERCIAL LAW BAR OPERATIONS 2020/21 D. PHILIPPINE DEPOSIT INSURANCE CORPORATION ACT g. 1. BASIC POLICY The Philippine Deposit Insurance Corporation (PDIC) shall promote and safeguard the interests of the depositing public by providing insurance coverage on all insured deposits and helping maintain a sound and stable banking system. (New PDIC Charter, Sec. 1) 2. POWERS AND FUNCTIONS OF THE PHILIPPINE DEPOSIT INSURANCE CORPORATION; PROHIBITIONS PDIC Board of Directors The powers and functions of the PDIC shall be vested in and exercised by a Board of Directors which shall be composed of 7 members. (Sec. 3) Composition 7 members, appointed by the President of the Philippines, for a term of 6 years with 1 reappointment: a. Ex officio Chairman: Secretary of Finance b. Ex officio Member: BSP Governor c. President and Vice Chairman: Appointed by the President of the Philippines, to serve a full-time basis. d. 4 Members from the private sector to be appointed by the President of the Philippines. (Id.) Powers of PDIC The PDIC as a corporate body shall have the following powers: a. To adopt and use a corporate seal; b. To have succession until dissolved by an Act of Congress; c. To make contracts; d. To sue and be sued, complain, and defend, in any court of law in the Philippines; e. To appoint such officers and employees as are not otherwise provided for in this Act, to define their duties, fix their compensation, require bonds, and fix penalty thereof, and to dismiss them for cause; f. To prescribe by-laws consistent with law, regulating the manner in which its general business may be conducted, and h. i. j. k. l. m. n. o. the privileges granted to it by law may be exercised and enjoyed; To exercise all powers specifically granted by the provisions of this Act, and such incidental powers as shall be necessary to carry on the powers so granted; To conduct examination of banks with prior approval of the Monetary Board; To act as receiver; To prescribe such rules and regulations as it may deem necessary to carry out the provisions of this Act; The PDIC may establish its own provident fund which shall consist of contributions made by both by PDIC and by its officers and employees to a common fund for the payment of benefits to such officers or employees or their heirs; To compromise, condone, or release, in whole or in part, any claim or settled liability to the PDIC, regardless of the amount involved, under such terms and conditions as may be imposed by the Board of Directors to protect the interest of PDIC, and to write off PDIC’s receivables and assets which are no longer recoverable or receivable; To determine qualified interested acquirers or investors for any of the modes of resolution or liquidation of banks; To determine the appropriate resolution method and to implement the same for a bank subject of resolution; and To determine the appropriate mode of liquidation of a closed bank and to implement the same. (Sec. 9) Prohibitions Personnel of the PDIC are prohibited from: a. Being an officer, director, consultant, employee or stockholder, directly or indirectly, of any bank or banking institution except as otherwise provided in this Act; b. Receiving any gift or thing of value from any officer, director or employee thereof: c. Revealing in any manner, except under order of the court or authorized herein in such condition or business of any such institution. The prohibition shall not be held to apply to the giving of information to the Board of Directors or to any person Page 230 of 393 ATENEO CENTRAL BAR OPERATIONS 2020/21 authorized by either of them in writing to receive such information. (Sec. 10[e]) Borrowing from any bank or banking institution by examiners and other personnel of the examination departments of PDIC shall be prohibited only with respect to the particular institution in which they are assigned or are conducting an examination. (Sec. 9) Borrowing from any bank or banking institution by personnel of other departments, offices, or units of the PDIC shall be prohibited during the period that a transaction of such institution with the PDIC is being evaluated, processed, or acted upon by such personnel. (Sec. 9) 3. CONCEPT OF INSURED DEPOSITS Insured deposit It is the amount due to any bona fide depositor for legitimate deposits in an insured bank as of the date of closure but not to exceed P500,000. (Sec. 5[j]) Note: This amount may be increased if there are conditions which threaten the monetary and financial stability of the banking system that may have systemic consequences. There has to be a unanimous approval by the Board of Directors, chaired by the Secretary of Finance, and approved by the President of the Philippines. (Id.) 4. LIABILITY TO DEPOSITORS A. Deposit liabilities required to be insured with Philippine Deposit Insurance Corporation The deposit liabilities of any bank, which is engaged in the business of receiving deposits or which thereafter may engage in the business of receiving deposits, shall be insured with the PDIC. (Sec. 6) B. Commencement of liability The PDIC shall commence the determination of insured deposits due the depositors of a closed bank upon its actual takeover of the closed bank. It 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. (Sec. 21[a]) COMMERCIAL LAW C. 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, fictitious or fraudulent; c. Deposit accounts or transactions constituting, and/or emanating from, unsafe and unsound banking practice/s, as determined by PDIC, in consultation with the BSP, after due notice and hearing, and publication of a cease and desist order issued by PDIC against such deposit accounts or transactions; and d. Deposits that are determined to be the proceeds of an unlawful activity as defined under AMLA. (Sec.5[g]) if such recognition would increase the aggregate amount of the insured deposits in such closed bank, neither PDIC nor such other insured bank shall be required to recognize any person as the owner of any portion of a deposit whose name or interest is not disclosed on the records of the closed bank. (Sec. 21[c]) Pending the determination and payment of the depositor’s liability as a stockholder of the closed bank, or of any liability to said bank or its receiver which is not offset against a claim due from the bank, PDIC may withhold payment of a portion of the insured deposit due to it as payment of such liability. (Sec. 16[e]) D. Extent of liability The maximum deposit insurance coverage is P500,000.00 per depositor, per bank. (Sec. 3) E. Determination of insured deposits In determining such amount due to any depositor, there shall be added together all deposits in the bank maintained in the same right and capacity for his or her benefit either in his or her own name or in the name of others. (Sec. 5[j]) Page 231 of 393 ATENEO CENTRAL BAR OPERATIONS 2020/21 F. Calculation of liability COMMERCIAL LAW National Government in the order of preference under Article 2244 of the NCC. (Id.) i. Per depositor, per capacity rule vi. Failure to settle claim of insured depositor All deposit accounts by a depositor in a closed bank maintained in the same right and capacity shall be added together. (Id.) ii. Joint accounts A joint account, regardless of whether the conjunction ‘and’, ‘or’, ‘and/or’ is used, shall be insured separately from any individually-owned deposit account. (Id.) If the account is held jointly by two or more natural persons, or by two or more juridical persons or entities, the maximum insured deposit shall be divided into as many equal shares as there are individuals, juridical persons or entities, unless a different sharing is stipulated in the document of deposit. If the account is held by a juridical person or entity jointly with one or more natural persons, the maximum insured shall be presumed to belong entirely to such juridical person or entity. (Id.) Note: The aggregate of the interest of each coowner over several joint accounts, whether owned by the same or different combinations of individuals, juridical persons, or entities, shall likewise be subject to the maximum insured deposit of P500,000. (Id.) iii. Mode of payment It shall be paid either (1) by cash or (2) by making available to each depositor a transferred deposit in another insured bank. (Sec. 19) iv. Effect of payment of insured deposits The PDIC, upon payment of any depositor, shall be subrogated to all the rights of the depositor against the closed bank to the extent of such payment. (Sec. 20) v. Payment of insured deposits as preferred credit 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 similar to taxes due to the If there is failure to settle the claim for insured deposit within six (6) months from the date of filing and such failure was due to grave abuse of discretion, gross negligence, bad faith, or malice, the responsible PDIC directors, officers, or employees shall, upon conviction, be subject to imprisonment from six (6) months to one (1) year. (Sec. 19) Note: The period shall not apply if the validity of the claim requires the resolution of issues of facts and or law by another office, body, or agency, or by the PDIC together with such office, body, or agency. (Id.) vii. Failure of depositor to claim insured deposits Unless otherwise waived by PDIC, if the depositor of the closed bank shall fail to claim his insured deposits within two (2) years from actual takeover of the closed bank by the receiver or does not enforce his claim within two (2) years, all rights with respect to the insured deposit shall be barred. (Sec. 21[e]) (a) Examination of banks and deposit accounts The PDIC as a body corporate shall have the power to conduct examination of banks with prior approval of the Monetary Board. (Sec. 9.8) Note: No examination can be conducted within twelve (12) months from the last examination date. The PDIC may, in coordination with the BSP, 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. (Id.) Notwithstanding the provisions of RA 1405, as amended, RA 6426, as amended, RA 8791, and other laws, the PDIC and/or the BSP, may inquire into or examine deposit accounts and all information related thereto in case there is a finding of unsafe or unsound banking practice. (Id.) Page 232 of 393 ATENEO CENTRAL BAR OPERATIONS 2020/21 COMMERCIAL LAW 5. CONCEPT OF BANK RESOLUTION To avoid overlapping of efforts, the examination shall maximize the efficient use of the relevant reports, information, and findings of the BSP, which it shall make available to the Corporation. (Id.) (b) Prohibition against splitting of deposits 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 2 or more accounts in the name/s of natural or juridical persons or entities who have no beneficial ownership on transferred deposits in their names within 120 days immediately preceding or during a bank-declared bank holiday, or immediately preceding a closure order issued by the Monetary Board. It is for the purpose of availing the maximum deposit insurance coverage. (Sec. 26[e]) (c) Prohibition against issuances of temporary restraining orders No court, except the Court of Appeals, shall issue any temporary restraining order, preliminary injunction, or preliminary mandatory injunction against the PDIC for any action under the PDIC Charter. (Sec. 27) 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. (Id.) Supreme Court 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 applicant shall file a bond in an amount to be fixed by the Supreme Court and such bond shall accrue in favor of the PDIC if the court should finally decide that the applicant was not entitled to the relief sought. (Id.) Any restraining order or injunction issued in violation of this Section is void and of no force and effect and any judge who has issued the same shall suffer the penalty of suspension of at least 60 days without pay. (Id.) Resolution Resolution refers to the actions undertaken by the PDIC to: a. Protect depositors, creditors, and the Deposit Insurance Fund; b. Safeguard the continuity of essential banking services or maintain financial stability; and c. Prevent deterioration or dissipation of bank assets. (Sec. 5[s]) Grounds for Resolution The PDIC, in coordination with the BSP, may commence the resolution of a bank upon: a. Failure of Prompt Corrective Action (PCA) as declared by the Monetary Board; or b. Request by a bank to be placed under resolution. (Sec. 11[a][1][2]) The PDIC shall inform the bank of its eligibility for entry into resolution. (Sec. 11) Obligations of stockholders, directors, officers, or employees of the bank a. Ensure bank compliance with the terms and conditions prescribed by the PDIC for resolution of the bank; b. With PDIC’s consent, engage an independent appraiser or auditor to determine the valuation of the bank consistent with generally accepted valuation standards; c. Ensure prudent management and administration of the bank’s assets, liabilities, and records; and d. Cooperate with the PDIC in the conduct or exercise of any or all its authorities under this Act and honor in good faith its commitment or undertaking with the PDIC on the resolution of the bank. (Sec. 11[d]) Within a period of 180 days from a bank’s entry into resolution, the PDIC, through the affirmative vote of at least 5 members of the board, shall determine whether the bank may be resolved through (1) purchase of all its assets and assumption of all its liabilities, (2) merger or consolidation with, or (3) acquisition, by a qualified investor. (Sec. 11[e]) Upon a determination by the PDIC that the bank may not be resolved, the Monetary Board may act Page 233 of 393 ATENEO CENTRAL BAR OPERATIONS 2020/21 COMMERCIAL LAW in accordance with the receivership and liquidation proceedings under NCBA, Sec. 30. bank in their possession, custody, administration, or management. (Id.) 6. ROLE OF THE PHILIPPINE DEPOSIT INSURANCE CORPORATION IN RELATION TO BANKS IN DISTRESS d. When the circumstances so warrant, the local government unit and law enforcement agencies concerned shall, upon request, immediately provide assistance to the receiver during the service of notice of closure and actual takeover operations to ensure the orderly conduct thereof. (Sec. 14[d]) A. Closure and takeover Whenever a bank is ordered closed by the Monetary Board, the PDIC shall be designated as receiver and it shall proceed with the takeover and liquidation of the closed bank in accordance with the PDIC Charter. (Sec. 12[a]) Notice of Closure and Takeover Activities a. Upon the designation of the PDIC as receiver, it shall serve a notice of closure to the highest-ranking officer of the bank present in the bank premise, or in the absence of such officer, post the notice of closure in the bank premises of on its main entrance. (New PDIC Charter, Sec. 14[a]) Note: 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. (Sec. 14[a]) b. The receiver shall have authority to use reasonable force, including the authority to force open the premises of the bank, and exercise such acts necessary to take actual physical possession and custody of the bank and all its assets, records, documents, and take charge of its affairs upon the service of the notice of closure. (Sec. 14[b]) c. Directors, officers, employees, or agents of a bank hold money and other assets of the bank in trust or under administration or management by them for the bank in their fiduciary capacity. (Sec. 14[c]) Upon service of notice of closure to the bank, all directors, officers, employees, or agents of the closed bank shall have the duty to immediately account for, surrender, and turn over to the receiver, and provide information relative to the assets, records, and affairs of the closed B. Conservatorship A conservator is appointed by the Monetary Board based on competence and knowledge in bank operations and management. (NCBA, Sec. 29) There is no express provision providing for the appointment of PDIC as conservator. Banks closed by the Monetary Board shall no longer be rehabilitated. The PDIC, as receiver, shall immediately proceed with the takeover and liquidation. (NCBA, Sec. 39; New PDIC Charter, Sec. 12[a]) C. Receivership Authorities of a Receiver In addition to its powers as receiver under existing laws, the PDIC is also empowered to do the following: a. Represent and act for and on behalf of the closed bank; A closed bank under receivership can only sue or be sued through its receiver, the Philippine Deposit Insurance Corporation (PDIC). Thus, a bank under receivership cannot file a case without PDIC’s authority. (Banco Filipino Savings and Mortgage Bank v. BSP, G.R. No. 200678, 2018) b. Gather and take charge of all the assets, records, and affairs of the closed bank, and administer the same for the benefit of the creditors; c. Convert the assets of the closed bank to cash or other forms of liquid assets, as far as practicable; d. Bring suits to enforce liabilities of the directors, officers, employees, agents of the closed bank and other entities related or connected to the closed bank or to collect, recover, and preserve all assets, Page 234 of 393 ATENEO CENTRAL BAR OPERATIONS 2020/21 including assets over which the bank has equitable interest; e. Appoint or hire persons or entities of recognized competence in banking, finance, asset management, or remedial management, as its deputies, assistant, or agents; f. Appoint or hire persons or entities of recognized competence in forensic and fraud investigations; g. 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; h. Collect loans and other claims of the closed bank and modify, compromise, or restructure the terms and conditions of such loans or claims as may be deemed advantageous to the interests of the creditors of the closed bank; i. Hire or retain private counsel; j. Borrow or obtain a loan, or mortgage, pledge, or encumber any asset of the closed bank, when necessary to (1) preserve or prevent dissipation of its assets, (2) redeem its foreclosed assets, or (3) minimize losses to its depositors and creditors; k. If the stipulated interest rate on deposits is unusually high compared with prevailing applicable interest rates, the receiver may reduce the rate to a reasonable rate; Note: Any modifications or reductions shall apply only to earned or unpaid interest. l. Utilize available funds of the bank, including funds generated by the receiver from the conversion of assets to pay for reasonable costs and expenses incurred for the preservation of the assets and liquidation of the closed bank, without need for approval of the liquidation court; COMMERCIAL LAW Note: Payment of these fees, including any unpaid advances under the immediately preceding paragraph, shall be subject to approval by the liquidation court. n. Distribute the available assets of the closed bank, in cash or in kind, to its creditors in accordance with the Rules on Concurrence and Preference of Credits under the NCC or other laws; o. Dispose records of the closed bank that are no longer needed in the liquidation in accordance with the guidelines set by the PDIC, notwithstanding the laws on archival period and disposal of records; and p. Exercise inherent and necessary powers for the effective discharge of its duties as receiver. (Sec. 13[b]) Surplus Dividends After the payment of all liabilities and claims against the closed bank, the receiver shall pay surplus, if any, dividends at the legal rate of interest from date of takeover to date of distribution to creditors and claimants of the closed bank in accordance with the Rules on Concurrence and Preference of Credits under the Civil Code or other laws before distribution to the shareholders of the closed bank. (Sec. 13[c]) D. Liquidation The PDIC, as receiver is also liquidator. PDIC is authorized to adopt and implement without need of consent of the stockholders, BOD, creditors, and depositors of the closed bank, any or a combination of the following modes of liquidation: a. Conventional liquidation; and b. Purchase of assets and/or liabilities (Sec. 13[a]) Note: For banks with insufficient funds, the PDIC is authorized to advance the foregoing costs and expenses, and collect payments, as and when funds become available. Modes of liquidation under the New PDIC Charter a. Conventional Liquidation. The assets gathered by the receiver shall be evaluated and verified as to their existence, ownership, condition, and other factors to determine their realizable value. (Sec. 16) m. Charge reasonable fees for the liquidation of the bank from the assets of the bank; b. Purchase of Assets and/or Assumption of Liabilities. The receiver shall have the authority to facilitate and Page 235 of 393 ATENEO CENTRAL COMMERCIAL LAW BAR OPERATIONS 2020/21 implement the purchase of the assets of the closed bank and the assumption of its liabilities by another insured bank, without need for approval of the liquidation court. It shall be exercised in accordance with the Rules on Concurrence and Preference of Credits under the NCC or other laws, subject to such terms and conditions as the PDIC may prescribe. (Sec. 15) The powers, voting rights, functions, and duties, as well as the allowances, remuneration and perquisites of the directors, officers, or stockholders (DOS) of such bank are terminated upon its closure. The disposition of the branch licenses and other bank licenses of the closed bank shall be subject to the approval of the BSP. (Id.) Note: The receiver shall exercise all authorities as may be required to facilitate the liquidation of the closed bank for the benefit of all its creditors. (Id.) Note: Such action of the receiver to determine whether a bank may be subject of a purchase of assets and assumption of liabilities transactions shall be final and executory and may not be set aside by any court. Effects of Bank Liquidation The placement of a bank under liquidation shall have the following effects: a. On the corporate franchise or existence. Upon placement by the Monetary Board of a bank under liquidation, it shall continue as a body corporate until the termination of the winding up period. (Sec. 13[e][1]) Note: Winding up period is 6 months from the date of publication of notice of the approval by the court of the final asset distribution plan of the closed bank. (Sec. 1[c]) Such continuation as a body corporate shall only be for the purpose of liquidating, settling, and closing its assets. The receiver shall represent the closed bank in all cases by or against the closed bank and prosecute and defend suits by or against it. (Sec. 13[e][1]) Note: In no case shall the bank be reopened and permitted to resume baking business after being placed under liquidation. (Sec. 13[e][1]) DOS shall be barred from interfering in any way with the assets, records, and affairs of the bank. (Sec. 13[e][2]) c. On the assets. Upon service of closure, all the assets of the closed bank shall be deemed in custodia legis in the hands of the receiver, and as such, these assets may not be subject to attachment, garnishment, execution, levy or any other court processes. A judge, officer of the court or any person who shall issue, order, process or cause the issuance or implementation of the garnishment order, levy, attachment, or execution, shall be liable Provided: collaterals securing the loans and advances granted by the BSP shall not be included in the assets of the closed bank for distribution to other creditors Provided, further: the proceeds in excess of the amount secured shall be returned by the BSP to the receiver. (Sec. 13[e][3]) Note: Any preliminary attachment or garnishment on any of the assets of the closed bank existing at the time of closure shall not give any preference to the attaching or garnishing party. Upon motion of the receiver, the preliminary attachment or garnishment shall be lifted and/or discharged. d. On labor relations. The employeremployee relationship between the closed bank and its employees shall be deemed terminated upon service of the notice of closure of the bank. b. On the Powers and Functions of its directors, officers, and stockholders. Page 236 of 393 ATENEO CENTRAL COMMERCIAL LAW BAR OPERATIONS 2020/21 Payment of separation pay, or benefits provided for by law shall be made from available assets of the bank in accordance with the Rules on Concurrence and Preference of Credits under the Civil Code or other laws. (Sec. 13[e][4]) e. On contractual obligations. Receiver may cancel, terminate, rescind, or repudiate any contract of the closed bank that is not necessary for the orderly liquidation of the bank, or is grossly disadvantageous to the closed bank, or for any ground provided by law. (Sec. 13[e][5]) f. i. General Rule: Actions pending for or against the closed bank in any court or quasi-judicial body shall, upon motion of the receiver, be suspended for a period not exceeding 180 days and referred to mandatory mediation. Exception: Actions pending before the Supreme Court. (Sec. 13[e][9]) j. On interest payments. The liability of a bank to pay interest on deposits and all other obligations as of closure shall cease upon its closure without prejudice to NCBA, Sec. 85. Provided: The receiver shall have the authority, without need for approval of the liquidation court, to assign, as payment to secured creditors, the bank assets serving as collaterals to their respective loans up to the extent of the outstanding obligations including interests as of date of closure (valuation based on the prevailing market value of the collaterals). (Sec. 13([e][6]) h. On bank charges and fees on services. Receiver may impose charges and fees for services rendered after bank closure such as the execution of pertinent deeds and certifications. (Sec. 13[e][8]) On final decisions against the closed bank. Execution and enforcement of a final decision of a court other than the liquidation court against the assets of a closed bank shall be stayed. Prevailing party shall file the final decision as a claim with the liquidation court and settle in accordance with the Rules on Concurrence and Preference of Credits under the Civil Code or other laws. (Sec. 13[e][10]) k. Note: The BSP shall collect interest and other appropriate charges on all loans and advances it extends, the closure, receivership, or liquidation of the debtorinstitution notwithstanding. (NCBA, Sec. 85) g. On liability for penalties and surcharges for later payment and nonpayment of taxes. From the time of closure, the closed bank shall not be liable for the payment of penalties and surcharges arising from the late payment or non-payment of real property tax, capital gains tax, transfer tax and similar charges. (Sec. 13[e][7]) On actions pending for or against the closed bank On docket and other court fees. Payment of docket and other court fees relating to all cases or actions filed by the receiver with any judicial or quasi- judicial bodies shall be deferred until the action is terminated with finality Any such fees shall constitute as a first lien on any judgment in favor of the closed bank or in case of unfavorable judgment, such fees shall be paid in liquidation costs and expenses during the distribution of the assets. (Sec. 13[e][11]) l. On assets, records, and documents of the bank. All assets, records, and documents in the possession of the closed bank at the time of its closure are presumed held by the bank in the concept of an owner. (Sec. 13[e][12]) Assets and documents of the closed bank shall retain their private nature even if administered by the receiver. (Sec. 13[e][14]) ————- end of topic ————- Page 237 of 393 INTELLECTUAL PROPERTY Commercial Law ATENEO CENTRAL BAR OPERATIONS 2020/21 VII. INTELLECTUAL PROPERTY TOPIC OUTLINE UNDER THE SYLLABUS: VII. INTELLECTUAL PROPERTY A. INTELLECTUAL PROPERTY RIGHTS IN GENERAL 1. Intellectual Property Rights 2. Differences Between Copyright, Trademarks, and Patents 3. Technology Transfer Arrangement B. PATENTS 1. Patentable Invention 2. Non-Patentable Invention 3. Ownership of a Patent a. Right to a Patent b. First-to-File Rule c. Invention Created Pursuant to a Commission d. Right of Priority 4. Grounds for Cancellation of a Patent 5. Remedy of the True and Actual Inventor 6. Rights Conferred by a Patent 7. Limitations of Patent Rights a. Prior User b. Use by the Government 8. Patent Infringement a. Tests in Patent Infringement i. Literal Infringement ii. Doctrine of Equivalents b. Civil and Criminal Action c. Prescriptive Period d. Defenses in Action for Infringement 9. Licensing a. Voluntary b. Compulsory 10. Assignment and Transmission of Rights COMMERCIAL LAW a. Dominancy Test b. Holistic Test c. Idem Sonans 7. Well-Known Marks 8. Rights Conferred by Registration 9. Use by Third Parties of Names, Etc. Similar to Registered Mark 10. Infringement and Remedies a. Trademark Infringement b. Damages c. Requirement of Notice d. Penalties 11. Unfair Competition 12. Registration of Marks Under the Madrid Protocol a. Coverage b. Rights Conferred c. Requirements for Registration d. Term of Protection D. COPYRIGHT 1. Basic Principles 2. Copyrightable Works a. Original Works b. Derivative Works 3. Non-copyrightable works 4. Rights of copyright owner 5. Rules on ownership of copyright 6. Limitations on copyright a. Fair use 7. Copyright infringement a. Remedies b. Criminal penalties C. TRADEMARKS 1. Definition of Marks, Collective Marks, and Trade Names 2. Acquisition of Ownership of Mark 3. Acquisition of Ownership of Trade Name 4. Non-Registrable Marks 5. Prior Use of Mark as a Requirement 6. Tests to Determine Confusing Similarity Between Marks Page 239 of 393 ATENEO CENTRAL BAR OPERATIONS 2020/21 A. Intellectual Property RIGHTS IN GENERAL 1. INTELLECTUAL PROPERTY RIGHTS The State recognizes that an effective intellectual and industrial property system is vital to the development of domestic and creative activity, facilitates transfer of technology, attracts foreign investments, and ensures market access for our products. The use of intellectual property bears a social function. To this end, the State shall promote the diffusion of knowledge and information for the promotion of national development and progress and the common good. (Sec. 2, IP Code) All agreements concerning industrial property are intimately connected with economic development. Industrial property encourages investments in new ideas and inventions and stimulates creative efforts for the satisfaction of human needs. They speed up transfer of technology and industrialization, and thereby bring about social and economic progress. (Mirpuri v. Court of Appeals, G.R. No. 114508, 1999). Intellectual property protection is merely a means towards the end of making society benefit from the creation of its men and women of talent and genius. This is the essence of intellectual property laws, and it explains why certain products of ingenuity that are concealed from the public are outside the pale of protection afforded by the law. It also explains why the author or the creator enjoys no more rights than are consistent with public welfare. (ABS-CBN Broadcasting Corp. v. Philippine Multi-Media System, Inc., G.R. Nos. 175769-70, 2009). 2. DIFFERENCES BETWEEN COPYRIGHT, TRADEMARKS, AND PATENTS Copyright Trademarks RATIONALE 1. To promote creativity 2. To encourage creation of works 1. To indicate origin or ownership of the articles to which they are attached COMMERCIAL LAW 2. To guarantee that those articles come up to a certain standard of quality 3. To advertise the articles which they symbolize 1. To foster and reward invention; 2. To promote disclosures of inventions to stimulate Patents further innovation 3. To ensure that ideas in the public domain remain there for the free use of the public SUBJECT MATTER Original intellectual creations in Copyright the literary and artistic domain (literary and artistic works) Any visible sign capable of Trademarks distinguishing the goods A product, process or any Patents improvement thereof which is a technical solution of a problem ELEMENTS 1. Literary or artistic work 2. Independently created Copyright (originality) 3. Involves minimal or a modicum of creativity 1. Visible sign 2. Capable of distinguishing Trademarks [distinctive] the goods or services of an enterprise 1. Technical solution of a problem in a field of human activity Patents 2. Must be new (novelty) 3. Involves an inventive step; (non-obvious) 4. Industrially applicable WHEN PROTECTION BEGINS Upon creation (but registration needed only to recover Copyright damages in cases of infringement) Upon grant of trademark Trademarks registration Patents Upon grant of patent TERM OF PROTECTION Page 240 of 393 ATENEO CENTRAL BAR OPERATIONS 2020/21 Copyright Trademarks Patents Generally, during the life of the author and for 50 years after his death [life + 50] 10 years, renewable for periods of 10 years after the expiration of the original term (perpetual protection as long as renewed) 20 years from grant 3. TECHNOLOGY TRANSFER ARRANGEMENT Contracts or agreements involving the transfer of systematic knowledge for the manufacture of a product, the application of a process, or rendering of a service including management contracts; and the transfer, assignment or licensing of all forms of intellectual property rights, including licensing of computer software except computer software developed for mass market. (Sec. 4, IP Code) B. PATENTS A patent is a grant issued by the Intellectual Property Office of the Philippines (IPOPHL). Through the patent, a patent holder is given the exclusive right to exclude others from making, using, importing, and selling the patented innovation for a limited period of time. The validity of the patent issued by the Philippines Patent Office and the question over the inventiveness, novelty, and usefulness of the improved process therein specified and described are matters which are better determined by the Philippines Patent Office. The technical staff of the Philippines Patent Office, composed of experts in their field, have, by the issuance of the patent in question, accepted the thinness of the private respondent's new tiles as a discovery. There is a presumption that the Philippines Patent Office has correctly determined the patentability of the improvement by the private respondent of the process in question. (Aguas v. De Leon, G.R. No. L-32160, 1982) 1. PATENTABLE INVENTION Any technical solution of a problem in any field of human activity which is (a) new, involves an (b) COMMERCIAL LAW inventive step and is (c) industrially applicable shall be patentable. It may be, or may relate to, a product, or process, or an improvement of any of the foregoing. (Sec. 21, IP Code) A. Novelty An invention shall not be considered new if it forms part of a prior art. (Sec. 23, IP Code). Novelty is an essential requisite of patentability of an invention or discovery. An invention is not new if it has been disclosed or used in public, or sold in the market before the patent application for the invention is filed. (Manzano v. Court of Appeals, G.R. No. 113388, 1997). Prior Art – It consists 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 an application for a patent, utility model, or industrial design registration, published in accordance with this Act, filed or effective in the Philippines, with a filing or priority date that is earlier than the filing or priority date of the application: Provided i. An application which has validly claimed the filing date of an earlier application shall be prior art with effect as of the filing date of such earlier application; ii. The applicant or the inventor identified in both applications are not one and the same. (Sec. 24, IP Code) B. Inventive Step 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. (Sec. 26.1, IP Code) Person Skilled in the Art (POSITA) A hypothetical person presumed to be an ordinary practitioner aware of what was common general knowledge in the art at the relevant date. He or she is also presumed to have: Page 241 of 393 ATENEO CENTRAL BAR OPERATIONS 2020/21 1. knowledge of all references that are sufficiently related to one another and to the pertinent art; 2. knowledge of all arts reasonably pertinent to the particular problems with which the inventor was involved; and 3. normal means and capacity for routine work and experimentation at his or her disposal. In the case of drugs and medicines, there is no inventive step if the invention results from: 1. 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, 2. the mere discovery of any new property or new use for a known substance, or 3. the mere use of a known process unless such known process results in a new product that employs at least one new reactant. (Sec. 26.2, IP Code) C. Industrial Applicability An invention that can be produced and used in any industry shall be industrially applicable. (Sec. 27, IP Code). Industrial applicability refers to an invention’s real-life benefit and practical use. 2. NON-PATENTABLE INVENTIONS The following shall be excluded from patent protection: 1. Discoveries, scientific theories and mathematical methods, and in the case of drugs and medicines, the mere discovery of a new form or new property of a known substance which does not result in the enhancement of the known efficacy of that substance, or the mere discovery of any new property or new use for a known substance, or the mere use of a known process unless such known process results in a new product that employs at least one new reactant. For the purpose of this clause, salts, esters, ethers, polymorphs, metabolites, pure form, particle size, isomers, mixtures of isomers, complexes, combinations, and other derivatives of a known substance shall be COMMERCIAL LAW considered to be the same substance, unless they differ significantly in properties with regard to efficacy; For drugs and medicines, the following are unpatentable: a. Discovery of a new form or new property of a known substance UNLESS it results in the enhancement of the substance’s efficacy; b. Discovery of any new property or use of a known substance; and c. Mere use of a known process UNLESS such process results in a new product that employs at least one new reactant. 2. Schemes, rules and methods of performing mental acts, playing games or doing business, and programs for computers; General Rule: Computer programs are subjects of copyright. Exceptions: The computer program is still subject of copyright protection; in addition, the machine or article described below may be patentable if the computer program: (1) is implemented by a particular machine in a non-conventional and non-trivial manner, or (2) transforms an article from one state to another, then it may be patentable. 3. Methods for treatment of the human or animal body by surgery or therapy and diagnostic methods practiced on the human or animal body; Note: This prohibition, however, does not apply to products and compositions for use in any of these methods. 4. Plant varieties or animal breeds or essentially biological process for the production of plants or animals; Note: This provision shall not apply to microorganisms and non-biological and microbiological processes. Further, Congress may enact a law providing sui Page 242 of 393 ATENEO CENTRAL BAR OPERATIONS 2020/21 generis protection of plant varieties and animal breeds and a system of community intellectual rights protection. Note: Congress has already enacted the Plan Variety Protection Act which grants a Certificate of Plant Variety Protection for varieties that are: (a) new, (b) distinct, (c) uniform, and (d) stable. (Sec. 4, Plant Variety Protection Act) 5. Aesthetic creations; and 6. Anything which is contrary to public order or morality. (Sec. 22, IP Code) 3. OWNERSHIP OF A PATENT Term of Patent The term of a patent shall be 20 years from the filing date of the application. (Sec. 54, IP Code) 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. (Sec. 28, IP Code) First-to-File Rule If two (2) or more persons have made the invention separately and independently of each other, the right to the patent shall belong to the person who filed an application for such invention, or where two or more applications are filed for the same invention, to the applicant who has the earliest filing date or the earliest priority date. (Sec. 29, IP Code) Invention Created Pursuant to a Commission The person who commissions the work shall own the patent, unless otherwise provided in the contract. (Sec. 30, IP Code) If an employee made the invention in the course of his regular employment, the patent shall belong to: 1. The employee, the inventive activity is not part of his regular duties (even if the employee uses the time, facilities, and materials of the employer); 2. The employer, if the invention is the result of the performance of the COMMERCIAL LAW employee’s regular duties UNLESS there is an agreement to the contrary. Right of Priority An application for patent filed by any person who has previously applied for the same invention in another country which by treaty, convention, or law affords similar privileges to Filipino citizens, shall be considered as filed as of the date of filing the foreign application, provided that: 1. The local application expressly claims priority; 2. It is filed within twelve (12) months from the date the earliest foreign application was filed; and 3. A certified copy of the foreign application together with an English translation is filed within six (6) months from the date of filing in the Philippines. 4. GROUNDS FOR CANCELLATION OF A PATENT Any interested person may, upon payment of the required fee, petition to cancel the patent or any claim thereof, or parts of the claim, on any of the following grounds: 1. That what is claimed as the invention is not new or patentable; 2. That the patent does not disclose the invention in a manner sufficiently clear and complete for it to be carried out by any person skilled in the art; or 3. That the patent is contrary to public order or morality. Note: Where the grounds for cancellation relate to some of the claims or parts of the claim, cancellation may be effected to such extent only. 5. REMEDY OF THE TRUE AND ACTUAL INVENTOR If a person, who was deprived of the patent without his consent or through fraud, is declared by final court order or decision to be the true and actual inventor, the court shall order for his substitution as patentee, or at the option of the true inventor, cancel the patent, and award actual and other damages in his favor if warranted by the circumstances. (Sec. 68, IP Code) Page 243 of 393 ATENEO CENTRAL BAR OPERATIONS 2020/21 The remedies of the true and actual inventor are: (a) Substitution as patentee, and (b) Cancellation of the patent. In both remedies, damages may be awarded. Note: There must first be a final court order declaring that he is the true and actual inventor. Patent Application by Persons Not Having the Right to a Patent If a person 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. (Sec. 67, IP Code) 6. RIGHTS CONFERRED BY A PATENT A patent shall confer on its owner the following exclusive rights: 1. 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; 2. 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. Rights of Joint Owners If two or more persons own patent and invention covered thereby, each of the joint owners shall be entitled to personally make, use, sell or import the invention for his own profit. Provided, neither of joint owners shall be entitled to grant licenses or to assign his right, title or interest or part thereof without consent of other owner or owners, or COMMERCIAL LAW without proportionally dividing therewith. (Sec. 107, IP Code) proceeds 7. LIMITATIONS OF PATENT RIGHTS The patentee has no right to prevent third parties in the following circumstances: 1. 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. Note: 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. The right to import the drugs and medicines shall be available to any government agency or any private third party. 2. Where the act is done privately and on a noncommercial scale or for a non-commercial purpose, and the economic interests of the patentee are not significantly prejudiced; 3. 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; 4. 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; 5. 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; and 6. Where the invention is used in any ship, vessel, aircraft, or land vehicle of any other Page 244 of 393 ATENEO CENTRAL COMMERCIAL LAW BAR OPERATIONS 2020/21 country entering the territory of Philippines temporarily or accidentally. the Note: Such invention must be 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. A. Prior User Prior User Any prior user, who, in good faith was using the invention or has undertaken serious preparations to use the invention in his enterprise or business, before the filing date or priority date of the application on which a patent is granted, shall have the right to continue the use thereof within the territory where the patent produces its effect. The right of prior user may only be transferred or assigned together with enterprise or business, or with the part of his enterprise or business in which use or preparations for use have been made. B. Use by the Government A Government agency or third person authorized by the Government may exploit the invention even without agreement of the patent owner where: 1. The public interest, in particular, national security, nutrition, health or the development of other sectors, as determined by the appropriate agency of the government, so require; or 2. 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 3. 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 4. In the case of drugs and medicines, there is a public non- commercial use of the patent by the patentee, without satisfactory reason; or 5. In the case of drugs and medicines, the demand for the patented article in the Philippines is not being met to an adequate extent and on reasonable terms, as determined by the Secretary of the Department of Health. 8. PATENT INFRINGEMENT Consists of the following acts: (1) making, using, offering for sale, selling, or importing a patented product or a product obtained directly or indirectly from a patented process; or (2) use of a patented process without the authorization of the patentee constitutes patent infringement. Notes: 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. (Pearl & Dean (Phil.) v. Shoemart, G.R. No. 148222, 2003) 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. (Creser Precision Systems, Inc. v. Court of Appeals, G.R. No. 118708, 1998) In order to infringe a patent, a machine or device must perform the same function, or accomplish the same result by identical or substantially identical means and the principle or mode of operation must be substantially the same. (Del Rosario v. Court of Appeals, G.R. No. 115106, 1996) However: The exclusive right of a patentee to make, use and sell a patented product, article or process exists only during the term of the patent. (Phil Pharmawealth, Inc. v. Pfizer, Inc., G.R. No. 167715, 2010) A. Tests in Patent Infringement 1. Literal Infringement Resort must be had to the words of the claim. If accused matter clearly falls within the claim, then there is literal infringement. To determine whether the particular item falls within the literal meaning of the patent claims, the Court a. Compares the claims of the patent and the accused product within the overall Page 245 of 393 ATENEO CENTRAL BAR OPERATIONS 2020/21 context of the claims and specifications, and b. Determines whether there is exact identity of all material elements. (Godines v. Court of Appeals, G.R. No. 97343, 1993) 2. Doctrine of Equivalents Infringement also occurs when a device appropriates a prior invention by incorporating its innovative concept and, albeit with some modification and change, performs substantially the same function in substantially the same way to achieve substantially the same result. (Smith Kline Beckman Corp. v. Court of Appeals, G.R. No. 126627, 2003) Under the doctrine of equivalents, there is still patent infringement when: a. There is an appropriation of the inventive step of a prior invention; b. The subsequent invention has been modified or changed; and c. Despite such changes, the subsequent invention performs substantially the same function in substantially the same way to achieve substantially the same result. Rationale: Such imitation would leave room for the unscrupulous copyist to make unimportant and insubstantial changes and substitutions in the patent which, though adding nothing, would be enough to take the copied matter outside the claim, and hence outside the reach of the law. (Godines v. Court of Appeals, G.R. No. 97343, 1993) COMMERCIAL LAW Note: This criminal action is without prejudice to the institution of a civil action for damages, The criminal action herein provided shall prescribe in three (3) years from date of the commission of the crime. (Sec. 84, IP Code) The burden of proof to substantiate a charge for patent infringement rests on the plaintiff. (Smith Kline Beckman Corp. v. Court of Appeals, G.R. No. 126627, 2003) Infringement Action by a Foreign National Any foreign national or juridical entity who meets the requirements of Section 3 (Rule on Reciprocity) and not engaged in business in the Philippines, to which a patent has been granted or assigned under this Act, may bring an action for infringement of patent, whether or not it is licensed to do business in the Philippines under existing law. (Sec. 77, IP Code). 1. 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. (Sec. 76, IP Code). Civil remedies for infringement: (1) recovery of damages, attorney’s fees, and litigation costs; and (2) injunction. B. Civil and Criminal Action Criminal Action for Repetition of Infringement If infringement is repeated by the infringer or by anyone in connivance with him after finality of the judgment of the court against the infringer, the offenders shall be criminally liable therefor and, upon conviction, shall suffer imprisonment for the period of not less than six (6) months but not more than three (3) years and/or a fine of not less than One hundred thousand pesos (P100,000) but not more than Three hundred thousand pesos (P300,000), at the discretion of the court. Rules on Civil Remedies 1. 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. 2. The court may award damages in a sum above the amount found as actual damages sustained. Note: The amount may award an amount more than the actual damages but must Page 246 of 393 ATENEO CENTRAL BAR OPERATIONS 2020/21 not exceed three (3) times the amount of actual damages. 3. The court may order that the infringing goods, materials and implements predominantly used in the infringement be destroyed without compensation. 4. Damages cannot be recovered for acts of infringement committed before the infringer had known, or had reasonable grounds to know of the patent. Note: It is presumed that the infringer had known of the patent if the words “Philippine Patent” and the number of the patent appear on the patented product or on the container or package or the advertising material of the patented product or process. Contributory Infringer – jointly and severally liable with the infringer if he: a. actively induces the infringement of a patent; or b. provides the infringer with a component of a patented product or of a product produced by a patented process knowing it to be used for infringing the patented invention. 2. Criminal Action If infringement is repeated by the infringer or by anyone in connivance with him after finality of the judgment against the infringer, the offenders shall, without prejudice to the institution of a civil action for damages, be criminally liable. Upon conviction, the offenders shall suffer: a. imprisonment for the period of not less than six months but not more than three years, and/or b. a fine of not less than P100,000 but not more than P300,000. C. Prescriptive Period 1. No damages can be recovered for acts of infringement committed more than four (4) years before the institution of the action for infringement. (Sec. 79, IP Code) 2. The criminal action for repetition of infringement shall prescribe in three (3) years COMMERCIAL LAW from date of the commission of the crime. (Sec. 84, IP Code) D. Defenses in Action for Infringement In an action for infringement, the defendant may show the invalidity of the patent, or any claim thereof, on any of the following grounds: a. That what is claimed as the invention is not new or patentable; b. That the patent does not disclose the invention in a manner sufficiently clear and complete for it to be carried out by any person skilled in the art; or c. That the patent is contrary to public order or morality. Note: These are the same grounds for the cancellation of a patent. 9. LICENSING A. Voluntary Licensing To encourage the transfer and dissemination of technology, prevent or control practices and conditions that may constitute an abuse of intellectual property rights having an adverse effect on competition and trade. All technology transfer arrangements must comply with the provisions of the IP Code. Prohibited Clauses The following provisions shall be deemed prima facie to have an adverse effect on competition and trade: 1. Those which impose upon the licensee the obligation to acquire from a specific source capital goods, intermediate products, raw materials, and other technologies, or of permanently employing personnel indicated by the licensor; 2. Those pursuant to which the licensee reserves the right to fix the sale or resale prices of the products manufactured on the basis of the license; 3. Those that contain restrictions regarding the volume and structure of production; Page 247 of 393 ATENEO CENTRAL BAR OPERATIONS 2020/21 4. Those that prohibit the use of competitive technologies in a non-exclusive technology transfer arrangement; 5. Those that establish full or partial purchase option in favor of the licensor; 6. Those that obligate the licensee to transfer for free to the licensor the inventions or improvements that may be obtained through the use of the licensed technology; 7. Those that require payment of royalties to the owners of patents for patents which are not used; 8. Those that prohibit the licensee to export the licensed product unless justified for the protection of the legitimate interest of the licensor such as exports to countries where exclusive licenses to manufacture and/or distribute the licensed product(s) have already been granted; 9. Those which restrict the use of the technology supplied after the expiration of the technology transfer arrangement, except in cases of early termination of the technology transfer arrangement due to reason(s) attributable to the licensee; 10. Those which require payments for patents and other industrial property rights after their expiration or termination of the technology transfer arrangement; 11. Those which require that the technology recipient shall not contest the validity of any of the patents of the technology supplier; 12. Those which restrict the research and development activities of the licensee designed to absorb and adapt the transferred technology to local conditions or to initiate research and development programs in connection with new products, processes or equipment; 13. Those which prevent the licensee from adapting the imported technology to local conditions, or introducing innovation to it, as long as it does not impair the standards prescribed by the licensor; and 14. Those which exempt the licensor from 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. 15. Other clauses with equivalent effects. COMMERCIAL LAW Mandatory Provisions The following provisions shall be included in all voluntary license contracts: 1. That the laws of the Philippines shall govern the interpretation of the agreement and in the event of litigation, the venue shall be the proper court in the place where the licensee has its principal office; 2. That continued access to improvements in techniques and processes related to the technology shall be made available during the period of the technology transfer arrangement; 3. That, in the event the technology transfer arrangement shall provide for arbitration, the Procedure of Arbitration of the Arbitration Law of the Philippines or the Arbitration Law of the United Nations Commission on International Trade Law (UNCITRAL) or the Rules of Conciliation and Arbitration of the International Chamber of Commerce shall apply and the venue of arbitration shall be the Philippines or any neutral country; and 4. That the Philippine taxes on all payments relating to the technology transfer arrangement shall be borne by the licensor. Rights of Licensor Absent a contrary provision in technology transfer arrangement, the grant of a license shall not prevent the licensor from granting further licenses to third persons nor from exploiting the subject matter of the technology transfer arrangement himself. Rights of Licensee The licensee shall be entitled to exploit the subject matter of the technology transfer arrangement during the whole term of the technology transfer arrangement. Non-Registration Technology transfer arrangements that conform with the previous requirements need not be registered with the Documentation, Information and Technology Transfer Bureau (DITTB). Nonconformance, however, shall automatically render the technology transfer arrangement unenforceable, unless the technology transfer agreement is considered as an exceptional case. Page 248 of 393 ATENEO CENTRAL BAR OPERATIONS 2020/21 Exceptional Cases Non-conformance with the requirements in a voluntary licensing contract may be allowed where, after evaluation by the DITTB, substantial benefits will accrue to the economy such as in the following exceptional or meritorious cases: 1. High technology content, 2. Increase in foreign exchange earnings, 3. Employment generation, 4. Regional dispersal of industries and/or, 5. Substitution with or use of local raw materials, or 6. Registered companies with pioneer status. B. Compulsory Licensing The Director of Legal Affairs may grant license to exploit patented invention, even without agreement of patent owner, in favor of any person who has shown his capability to exploit invention, under any of the following circumstances: 1. National emergency or other circumstances of extreme urgency; or 2. Where public interest, in particular, national security, nutrition, health or development of other vital sectors of national economy as determined by the appropriate agency of the Government, so requires; or 3. Where a judicial or administrative body has determined that manner of exploitation by patent owner or his licensee is anti-competitive; or 4. In case of public non-commercial use of patent by patentee, without satisfactory reason; or 5. If patented invention is not being worked in Philippines on commercial scale, although not capable of being worked, without satisfactory reason: Provided, that importation of patented article shall constitute working or using the patent; or 6. Where the demand for patented drugs and medicines is not being met to an adequate extent and on reasonable terms, as determined by the Secretary of the Department of Health. (Sec. 96, IP Code) COMMERCIAL LAW Use of Invention by Government A Government agency or third person authorized by the Government may exploit the invention even without agreement of the patent owner where: a) The public interest, in particular, national security, nutrition, health or the development of other sectors, as determined by the appropriate agency of the government, so requires; or b) 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 the case of drugs and medicines, there is a national emergency or other circumstance of extreme urgency requiring the use of the invention; or d) In the case of drugs and medicines, there is public non-commercial use of the patent by the patentee, without satisfactory reason; or e) In the case of drugs and medicines, the demand for the patented article in the Philippines is not being met to an adequate extent and on reasonable terms, as determined by the Secretary of the Department of Health. (Sec. 74.1, IP Code) Terms and Conditions of the Compulsory License 1. The scope and duration of such license shall be limited to the purpose for which it was authorized; 2. The license shall be non-exclusive; 3. The license shall be non-assignable, except with that part of the enterprise or business with which the invention is being exploited; 4. Use of the subject matter of the license shall be devoted predominantly for the supply of the Philippine market; Note: This 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. Page 249 of 393 ATENEO CENTRAL BAR OPERATIONS 2020/21 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; 6. The patentee shall be paid adequate remuneration taking into account the economic value of the grant or authorization. (Sec. 100, IP Code) Amendment, Cancellation, Surrender of Compulsory License Upon request of patentee, or licensee, Director of Legal Affairs may amend decision granting compulsory license, upon proper showing of new facts or circumstances justifying such amendment; or may cancel compulsory license if: 1. Ground for grant of compulsory license no longer exists and is unlikely to recur; 2. Licensee has neither begun to supply domestic market nor made serious preparation therefore; or 3. Licensee not complied with prescribed terms of license. (Sec. 101, IP Code) Licensee’s Exemption from Liability Any person who works a patented product, substance and/or process under a compulsory license, shall be free from any liability for infringement. In case of voluntary licensing, it must be proven that no collusion with licensor existed. This is without prejudice to rightful patent owner to recover from licensor whatever he may receive as royalties under the license. (Sec. 102, IP Code) 10. ASSIGNMENT AND TRANSMISSION OF RIGHTS Patent owners shall also have the right to assign, transfer by succession the patent, and conclude licensing contracts for the same. COMMERCIAL LAW entire patent and invention, in which event the parties become joint owners thereof. An assignment may be limited to a specified territory. (Sec. 104, IP Code) Form of Assignment The assignment must be in writing, acknowledged before a notary public or other officer authorized to administer oath or perform notarial acts, and certified under the hand and official seal of the notary or such other officer. (Sec. 105, IP Code) Requirements for Recording of Assignment a. It must be in writing and accompanied by an English translation, if it is in a language other than English or Filipino; b. It must be notarized; c. It must be accompanied by an appointment of a resident agent, if the assignee is not residing in the Philippines; d. It must identify the letters patent involved by number and date and give the name of the owner of the patent and the title of the invention. In the case of an application for a patent, it should state the application number and the filing date of the application and give the name of the applicant and the title of the invention. If the assignment was executed concurrently with or subsequent to the execution of the application but before the application is filed or before its application number is ascertained, it should adequately identify the application by its date of execution, the name of the applicant, and the title of the invention. e. It must be accompanied by the required fees. Note: Patents or applications for patents and invention to which they relate, shall be protected in the same way as the rights of other property under the Civil Code. (Sec. 103, IP Code) Assignment of Inventions An assignment may be of the entire right, title or interest in and to the patent and the invention covered thereby, or of an undivided share of the Page 250 of 393 ATENEO CENTRAL BAR OPERATIONS 2020/21 C. TRADEMARKS Modern authorities on trademark law view trademarks as performing three distinct functions: (1) they indicate origin or ownership of the articles to which they are attached; (2) they guarantee that those articles come up to a certain standard of quality; and (3) they advertise the articles they symbolize. (Mirpuri v. Court of Appeals, G.R. No. 114508, 1999) 1. DEFINITIONS OF MARKS, COLLECTIVE MARKS, AND TRADE NAMES Mark Any visible sign capable of distinguishing the goods (trademark) or services (service mark) of an enterprise and shall include a stamped or marked container of goods. (Sec. 121.1, IP Code) Collective Mark Any visible sign designated as such in the application for registration and capable of distinguishing the origin or any other common characteristic, including the quality of goods or services of different enterprises which use the sign under the control of the registered owner of the collective mark. (Sec. 121.2, IP Code) Trade Name Any name or designation identifying or distinguishing an enterprise (Sec. 121.3, IP Code); A name or designation may not be used as a trade name if, by its nature or the use to which such name or designation may be put: 1. It is contrary to public order or morals; 2. It is liable to deceive trade circles or the public as to the nature of the enterprise identified by that name; or 3. It is similar to a mark or a trade name owned by another person and its use would likely mislead the public. A trade name refers to the business and its goodwill; a trademark refers to the goods. (Canon Kabushiki Kaisha v. Court of Appeals, G.R. No. 120900, 2000) COMMERCIAL LAW Spectrum of Distinctiveness of Trademark (Zantarain’s Inc. v. Old Grove Smokehouse, 698 F.2d 786, 1983) (from weakest to strongest) 1. Generic – refers to a particular genus or class of which an individual article or service is a member (e.g. escalator, cellophane, etc.) a. It can never attain trademark protection. b. If a registered trademark becomes generic as to a particular product or service, the mark’s registration is subject to cancellation. 2. Descriptive – identifies a characteristic or quality of an article or service such as its color, odor, function, dimensions, or ingredients General Rule: It is not ordinarily protectable as a trademark because, like a generic term, it belongs to the public domain. (Ong Ai Gui v. Director of Patents, G.R. No. L-6235, 1955) Exception: When the doctrine of secondary meaning applies in such a way that it has acquired a secondary meaning in the minds of the consumers. (Sec. 123.2) 3. Suggestive – requires the consumer to exercise the imagination in order to draw a conclusion as to the nature of the goods or services 4. Arbitrary or Fanciful – bear no relationship to the products or services to which they are applied; protectable without proof of secondary meaning (e.g. Adidas, Rolex, etc.) 2. ACQUISITION OF OWNERSHIP OF A MARK The rights in a mark shall be acquired through registration made validly in accordance with the provisions of this law. (Zuneca Pharmaceutical v. Natrapharm, Inc., G.R. No. 211850, 2020) Note: Any person who shall procure registration in the Office of a mark by a false or fraudulent declaration or representation, whether oral or in writing, or by any false means, shall be liable in a civil action by any person injured thereby for any damages sustained in consequence thereof. (Sec. 162, IP Code) Page 251 of 393 ATENEO CENTRAL BAR OPERATIONS 2020/21 The registration of trademark under the law is required to give notice to the entire world that a mark has already been registered. The failure to give notice of registration bars recovery of damages for trademark infringement, without prejudice to other causes of action based on other laws. (Cagayan Valley Enterprises, Inc. v. Court of Appeals, G.R. No. 78413, 1989) The owner of the registered mark shall not be entitled to recover profits or damages in any suit for infringement, unless the acts have been committed with knowledge that such limitation is likely to cause confusion, to cause mistake, or to deceive. Such knowledge is presumed if the registrant gives notice that his mark is registered by displaying with the mark the words “Registered Mark” or the letter R within a circle or if the defendant had otherwise actual notice of the registration. (Sec. 158, IP Code) Doctrine of Secondary Meaning A word or phrase originally incapable of exclusive appropriation with reference to an article in the market (because it is geographically or otherwise descriptive) might nevertheless have been used for so long and so exclusively by one producer with reference to his article that, in the trade and to that branch of the purchasing public, the word or phrase has come to mean that the article was his property. (Pearl & Dean (Phil.) v. Shoemart, G.R. No. 148222, 2003) Secondary meaning is established when a descriptive mark no longer causes the public to associate the goods with a particular place but to associate the goods with a particular source. (Shang Properties Realty Corp. v. St. Francis Development Corp., G.R. No. 190706, 2014) Requirements for a Geographicallydescriptive Mark to Acquire Secondary Meaning 1. The secondary meaning must have arisen as a result of substantial commercial use of a mark in the Philippines; and 2. Such use must result in the distinctiveness of the mark insofar as the goods or the products are concerned. COMMERCIAL LAW NOTE: Proof of substantially exclusive and continuous commercial use in the Philippines for five (5) years before the date on which the claim of distinctiveness is made is prima facie evidence of distinctiveness. (Sec. 123.2, IP Code) Duration and Renewal 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, as prescribed by the Regulations, within 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. A certificate of registration may be renewed for periods of 10 years at its expiration upon payment of the prescribed fee and upon filing of a request. 3. ACQUISITION OF OWNERSHIP OF TRADE NAME Notwithstanding any laws or regulations providing for any obligation to register trade names, such names shall be protected, even prior to or without registration, against any unlawful act committed by third parties. (Sec. 165.2.a, IP Code) 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. (Sec. 165.2.b, IP Code) Doctrine of Secondary Meaning Applicable to Trade Names The doctrine’s application has been extended to corporate names since the right to use a corporate name to the exclusion of others is based upon the same principle which underlies the right to use a particular trademark or tradename. (Lyceum of the Philippines, Inc. v. Court of Appeals, G.R. No. 101897, 1993) Page 252 of 393 ATENEO CENTRAL BAR OPERATIONS 2020/21 4. NON-REGISTRABLE MARKS 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; d. Is identical with a registered mark belonging to a different proprietor or a mark with an earlier filing or priority date, in respect of: i. The same goods or services, or ii. Closely related goods or services, or iii. If it nearly resembles such a mark as to be likely to deceive or cause confusion; e. Is identical with, or confusingly similar to, or constitutes a translation of a mark which is considered by the competent authority of the Philippines to be wellknown 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; Note: 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 COMMERCIAL LAW 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. Note: Under this provision, (i) the use of the mark in relation to those goods or services must indicate a connection between those goods or services, and the owner of the registered mark; and (ii) the interests of the owner of the registered mark are likely to be damaged by such use. g. Is likely to mislead the public, particularly as to the nature, quality, characteristics or geographical origin of the goods or services; h. Consists exclusively of signs that are generic for the goods or services that they seek to identify; i. Consists exclusively of signs or of indications that have become customary or usual to designate the goods or services in everyday language or in bona fide and established trade practice; j. Consists exclusively of signs or of indications that may serve in trade to designate the kind, quality, quantity, intended purpose, value, geographical origin, time or production of the goods or rendering of the services, or other characteristics of the goods or services; k. Consists of shapes that may be necessitated by technical factors or by the nature of the goods themselves or factors that affect their intrinsic value; l. Consists of color alone, unless defined by a given form; or m. Is contrary to public order or morality. (Sec. 123.1, IP Code) 5. PRIOR USE OF MARK AS REQUIREMENT Under Trademark Law (old rule): The rights to a trademark were acquired through a “first-touse” system. (Sec. 5, Republic Act No. 166) Page 253 of 393 ATENEO CENTRAL BAR OPERATIONS 2020/21 Under the IP Code (new rule): The rights in a mark shall be acquired through registration made validly in accordance with the provisions of this law. (Sec. 122, IP Code) Prior use no longer determines the acquisition of ownership of a mark in light of the adoption of the rule that ownership of a mark is acquired through registration made validly in accordance with the provisions of the IP Code. (Zuneca Pharmaceutical v. Natrapharm, Inc., G.R. No. 211850, 2020) 6. TESTS TO DETERMINE CONFUSING SIMILARITY BETWEEN MARKS To aid in determining the similarity and likelihood of confusion between marks, our jurisprudence has developed two (2) tests: the dominancy test and the holistic test. Dominancy Test Focuses on the similarity of the prevalent features of the competing trademarks that might cause confusion and deception, thus constituting infringement. Holistic Test Entails a consideration of the entirety of the marks as applied to the products, including the labels and packaging, in determining confusing similarity. If the competing trademark contains the main, essential, and dominant features of another, and confusion or deception is likely to result, infringement occurs. Exact duplication or imitation is not required. The discerning eye of the observer must focus not only on the predominant words but also on the other features appearing on both marks in order that the observer may draw his conclusion whether one is confusingly similar to the other. The question is whether the use of the marks involved is likely to cause confusion or mistake in the mind of the COMMERCIAL LAW public or to deceive consumers. (Citigroup v Citystate, G.R. No. 205409, 2018) Idem Sonans Literally “same sound” in Latin; an identity of sound in the pronunciation of words or names. As to the syllabication and sound of the two tradenames “Sapolin” and “Lusolin” being used for paints, it seems plain that whoever hears or sees them cannot but think of paints of the same kind and make. (Sapolin Co., Inc. v. Germann & Co., Ltd., G.R. No. 45502, 1939). Two letters of “SALONPAS” are missing in “LIONPAS”: the first letter a and the letter s. Be that as it may, when the two words are pronounced, the sound effects are confusingly similar. And where goods are advertised over the radio, similarity in sound is of especial. The importance of this rule is emphasized by the increase of radio advertising in which we are deprived of the help of our eyes and must depend entirely on the ear. “SALONPAS” and “LIONPAS”, when spoken, sound very much alike. Similarity of sound is sufficient ground for this Court to rule that the two marks are confusingly similar when applied to merchandise of the same descriptive properties. (Marvex Commericial Co., Inc. v. Petra Hawpia & Co., G.R. No. L-19297, 1966) The determining point in trademark infringement is a likelihood of confusion. The fact that CEEGEEFER is idem sonans for CHERIFER is enough to violate respondent's right to protect its trademark, CHERIFER. (Latest SC decision is Prosel v. Tynor, G.R. No. 248021, 2020) 7. WELL-KNOWN MARKS The countries of the Union undertake, ex officio if their legislation so permits, or at the request of an interested party, to refuse or to cancel the registration, and to prohibit the use, of a trademark which constitutes a reproduction, an imitation, or a translation, liable to create confusion, of a mark considered by the competent authority of the country of registration or use to be well known in that country as being Page 254 of 393 ATENEO CENTRAL BAR OPERATIONS 2020/21 already the mark of a person entitled to the benefits of this Convention and used for identical or similar goods. These provisions shall also apply when the essential part of the mark constitutes a reproduction of any such wellknown mark or an imitation liable to create confusion therewith. (Art. 6bis, Paris Convention) Note: The essential requirement under this Article is that the trademark to be protected must be “well-known” in the country where protection is sought. 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. (Sehwani, Inc. v. InN-Out Burger, Inc., G.R. No. 171053, 2007) The question of whether or not respondent's trademarks are considered “well-known” is factual in nature, involving as it does the appreciation of evidence adduced before the BLA-IPO. The settled rule is that the factual findings of quasi-judicial agencies, like the IPO, which have acquired expertise because their jurisdiction is confined to specific matters, are generally accorded not only respect, but, at times, even finality if such findings are supported by substantial evidence. (Sehwani, Inc. v. In-N-Out Burger, Inc., G.R. No. 171053, 2007) Factors Which Shall Not be Required in Determining Whether a Mark is a Well-known Mark: 1. that the mark has been used in, or that the mark has been registered, or that an application for registration of the mark has been filed in or in respect of the Member State; 2. that the mark is well known in, or that the mark has been registered, or that an application for registration of the mark has been filed in or in respect of, any jurisdiction other than the Member State; 3. that the mark is well known by the public at large in the Member State. (Part I, Art. 2.3, 1999 Joint Recommendation Concerning Provisions on the Protection COMMERCIAL LAW of Well-Known Marks cited with approval in Sehwani v. In-N-Out) Criteria for determining whether a mark is wellknown: 1. Duration, extent and geographical area of any use of the mark, in particular, the duration, extent and geographical area of any promotion of the mark, including advertising or publicity and the presentation, at fairs or exhibitions, of the goods and/or services to which the mark applies; 2. Market share, in the Philippines and in other countries, of the goods and/or services to which the mark applies; 3. Degree of the inherent or acquired distinction of the mark; 4. Quality-image or reputation acquired by the mark; 5. Extent to which the mark has been registered in the world; 6. Exclusivity of registration attained by the mark in the world; 7. Extent to which the mark has been used in the world; 8. Exclusivity of use attained by the mark in the world; 9. Commercial value attributed to the mark in the world; 10. Record of successful protection of the rights in the mark; 11. Outcome of litigations dealing with the issue of whether the mark is a well-known mark; and 12. Presence or absence of identical or similar marks validly registered for or used on identical or similar goods or services and owned by persons other than the person claiming that his mark is a well-known mark. (Rule 102, Rules and Regulations On Trademarks, Servicemarks, Tradenames and Marked or Stamped Containers) Page 255 of 393 ATENEO CENTRAL COMMERCIAL LAW BAR OPERATIONS 2020/21 8. RIGHTS CONFERRED BY REGISTRATION 9. USE BY THIRD PARTIES OF NAMES, ETC. SIMILAR TO REGISTERED MARK The owner of a registered mark shall have the exclusive right: 1. to prevent all third parties not having the owner’s consent 2. 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 3. where such use would result in a likelihood of confusion. Registration of the mark shall not confer on the registered owner the right to preclude third parties from using bona fide their names, addresses, pseudonyms, a geographical name, or exact indications concerning the kind, quality, quantity, destination, value, place of origin, or time of production or of supply, of their goods or services: Provided, that such use 1. Is confined to the purposes of mere identification or information, and 2. Cannot mislead the public as to the source of the goods or services. (Sec. 148, IP Code) Note: In case of the use of an identical sign for identical goods or services, a likelihood of confusion shall be presumed. (Sec. 147.1, IP Code) 10. INFRINGEMENT AND REMEDIES A. Trademark Infringement The exclusive right of the owner of a well-known mark which is registered in the Philippines, shall extend to goods and services which are not similar to those in respect of which the mark is registered, Provided: 1. That the use of that mark in relation to those goods or services would indicate a connection between those goods or services and the owner of the registered mark; and 2. That the interests of the owner of the registered mark are likely to be damaged by such use. (Sec. 147.2, IP Code) The ownership of a trademark or tradename is a property right that the owner is entitled to protect. However, when a trademark is used by a party for a product in which the other party does not deal, the use of the same trademark on the latter's product cannot be validly objected to. (Canon Kabushiki Kaisha v. Court of Appeals, G.R. No. 120900, 2000) A person shall be liable for trademark infringement if, without the consent of the owner of the registered mark, he: i. Uses in commerce any reproduction 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 which is likely to cause confusion, or to cause mistake, or to deceive; Note: This includes other preparatory steps necessary to carry out the sale of any goods or services. ii. Reproduces or colorably imitates a registered mark or a dominant feature thereof and applies such reproduction or colorable imitation to signs, packages, 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 which likely to cause confusion, or to cause mistake, or to deceive. Page 256 of 393 ATENEO CENTRAL BAR OPERATIONS 2020/21 Note: It is immaterial that there was no actual sale of goods or services using the infringing material as long as the acts mentioned were actually committed. (Sec. 155, IP Code) The “likelihood of confusion” is the gravamen of trademark infringement. But likelihood of confusion is a relative concept, the particular, and sometimes peculiar, circumstances of each case being determinative of its existence. Thus, in trademark infringement cases, more than in other kinds of litigation, precedents must be evaluated in the light of each particular case. (Philip Morris, Inc. v. Fortune Tobacco Corp., G.R. No. 158589, 2006) To establish trademark infringement, the following elements must be shown: i. The validity of plaintiff’s mark; ii. The plaintiff’s ownership of the mark; and iii. The use of the mark or its colorable imitation by the alleged infringer results in “likelihood of confusion.” (McDonald's Corp. v. L.C. Big Mak Burger, Inc., G.R. No. 143993, 2004) The phrase “colorable imitation” denotes such a “close or ingenious imitation as to be calculated to deceive ordinary persons, or such a resemblance to the original as to deceive an ordinary purchaser giving such attention as a purchaser usually gives, and to cause him to purchase the one supposing it to be the other”. (Etepha, A.G. v. Director of Patents, G.R. No. L20635, 1966) The use of an identical or colorable imitation of a registered trademark by a person for the same goods or services or closely related goods or services of another party constitutes infringement. It is a form of unfair competition because there is an attempt to get a free ride on the reputation and selling power of another manufacturer by passing of one’s goods as identical or produced by the same manufacturer as those carrying the other mark (brand). (Commissioner of Internal Revenue v. San Miguel Corp., G.R. Nos. 205045 & 205723, 2017) COMMERCIAL LAW The general impression of the ordinary purchaser buying under the normally prevalent conditions in trade and giving the attention such purchasers usually give in buying that class of goods, is the touchstone. (Del Monte Corp v. Court of Appeals, G.R. No. 78325, 1990) Right of Foreign Corporation to Sue in Trademark or Service Mark Enforcement Action Any foreign national or juridical person who meets the requirements of Section 3 of the IP Code and does not engage in business in the Philippines may bring a civil or administrative action hereunder for opposition, cancellation, infringement, unfair competition, or false designation of origin and false description, whether or not it is licensed to do business in the Philippines under existing laws. (Sec. 160, IP Code) Limitations to Actions for Infringement 1. A registered mark shall have no effect against any person who, in good faith, before the filing date or the priority date, was using the mark for the purposes of his business or enterprise. Note: Such right may only be transferred or assigned together with his enterprise or business or with that part of his enterprise or business in which the mark is used. Note: cf. (Zuneca v. Natrapharm, G.R. No. 211850, 2020 - wherein the SC held that the first to file rule shall prevail against a user of a mark in good faith.) 2. Where an 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 be entitled as against such infringer only to an injunction against future printing. 3. Where the infringement complained of is contained in or is part of paid advertisement in a periodical or in an electronic communication, the remedies of the owner of the right infringed as Page 257 of 393 ATENEO CENTRAL BAR OPERATIONS 2020/21 against the publisher or distributor of periodical or electronic communication shall be limited to an injunction against the presentation of such advertising matter in future issues. Note: This shall apply only to innocent infringers. 4. There shall be no infringement of trademarks or tradenames of imported or sold drugs and medicines as well as imported or sold off-patent drugs and medicines PROVIDED, the marks appearing thereon have been registered marks that have not been tampered or unlawfully modified. B. Damages The owner of a registered mark may recover damages from any person who infringes his rights. The measure of the damages suffered shall be either: 1. The reasonable profit which the complaining party would have made had the defendant not infringed his rights, or 2. The profit which the defendant actually made out of the infringement. If the measure of damages cannot be readily ascertained with reasonable certainty, the court may award as damages a reasonable percentage based upon the amount of gross sales of the defendant or the value of the services in connection with which the mark or trade name was used in the infringement of the rights of the complaining party. (Sec. 156.1, IP Code) Note: Where there was actual intent to mislead the public or to defraud the complainant, the court may double the amount of damages to be awarded. (Sec. 156.3, IP Code) On application of the complainant, the court may impound during the pendency of the action, sales invoices and other documents evidencing sales. (Sec. 156.2, IP Code) COMMERCIAL LAW C. Damages; Requirement of Notice In any suit for infringement, the owner of the registered mark shall not be entitled to recover profits or damages UNLESS the acts have been committed with knowledge that such imitation is likely to cause confusion, or to cause mistake, or to deceive. Such knowledge is presumed if: 1. The registrant gives notice that his mark is registered by displaying with the mark the words “Registered Mark” or the letter R within a circle, or 2. The defendant had otherwise actual notice of the registration. (Sec. 158, IP Code) D. Penalties Independent of the civil and administrative sanctions imposed by law, a criminal penalty of imprisonment from 2 to 5 years and a fine ranging from P50,000 to P200,000 shall be imposed on any person who is found guilty of committing any of the acts of trademark infringement, unfair competition, or false description or representation. (Sec. 170, IP Code) Power of Court to Order Infringing Material Destroyed In any action involving a violation of a right of the owner of the registered mark, the court may order that goods found to be infringing be disposed of outside the channels of commerce in such a manner as to avoid any harm caused to the right holder or destroyed without compensation of any sort. (Sec. 157.1, IP Code) 11. UNFAIR COMPETITION A person who has identified in the mind of the public the goods he manufactures or deals in, his business or services from those of others, whether or not a registered mark is employed, has a property right in the goodwill of the said goods, business or services so identified, which will be protected in the same manner as other property rights. (Sec. 168.1, IP Code) 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 Page 258 of 393 ATENEO CENTRAL COMMERCIAL LAW BAR OPERATIONS 2020/21 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. (Sec. 168.2, IP Code) the effect is to pass off on the public the goods of one man as the goods of another. It is not necessary that any particular means should be used to this end. (Mighty Corp. v. E. & J. Gallo Winery, G.R. No. 154342, 2004) Any conduct the end and probable effect of which is to deceive the public or pass off the goods or business of a person as that for another constitutes actionable unfair competition. (Alhambra Cigar vs. Mojica, G.R. No. L-8937, 1914) Trademark Infringement Essentially, what the law punishes is the act of giving one’s goods the general appearance of the goods of another, which would likely mislead the buyer into believing that such goods belong to the latter. (Manuel C. Espiritu et. al. v. Petron Corp. et. al., G.R. No. 170891, 2009) The “true test” of unfair competition is 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. One of the essential requisites in an action to restrain unfair competition is proof of fraud; the intent to deceive, actual or probable must be shown before the right to recover can exist. (Superior Commercial Enterprises v. Kunnan Enterprises Ltd., et. al., G.R. No. 169974, 2010) Trademark Infringement vs. Unfair Competition The law on unfair competition is broader and more inclusive than the law on trademark infringement. Trademark infringement is more limited, but it recognizes a more exclusive right derived from the trademark adoption and registration by the person whose goods or business is first associated with it. The law on trademarks is a specialized subject distinct from the law on unfair competition, although the two subjects are entwined with each other and are dealt with together in the IP Code. Hence, even if one fails to establish his exclusive property right to a trademark, he may still obtain relief on the ground of his competitor's unfairness or fraud. Conduct constitutes unfair competition if Unauthorized use of a trademark Essence Fraudulent Intent Prior Registration Unfair Competition Passing off of one’s goods as those of another Unnecessary Essential Prerequisite to the action Unnecessary 12. REGISTRATION OF MARKS UNDER THE MADRID PROTOCOL The Madrid Protocol provides a cost-effective and efficient way for trademark holders to ensure protection for their marks in multiple countries through the filing of one application with a single office, in one language, with one set of fees, in one currency. The Philippines acceded to the Madrid Protocol with effect on July 25, 2012. A. Coverage An international application may be filed only by a natural person or a legal entity having an industrial or commercial establishment in, or being domiciled in, or a national of, the Philippines. An international mark registered under the Madrid System can only be protected within the territories of State parties to the Madrid Union. The protection resulting from any international registration effected under the Madrid Protocol before the date of entry into force of the Philippines cannot be extended to it. International registrations with dates prior to July 25, 2012 are not allowed. B. Rights Conferred From the date of the international registration, the protection of the mark in each of the designated Page 259 of 393 ATENEO CENTRAL BAR OPERATIONS 2020/21 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. An international registration is, therefore, equivalent to a bundle of national registrations. Limitations: Although an international registration is a single registration: 1. 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. 2. It may also be invalidated with respect to one or more of the designated Contracting Parties. 3. Any action for infringement of an international registration must be brought separately in each of the Contracting Parties concerned. COMMERCIAL LAW Minimum requirements to submit an international application 1. Name, address, and contact details of the applicant or the address and contact details of the applicant’s representative, if any; 2. The Designated Contracting Parties; 3. Reproduction of the mark; and 4. Indication of the goods and services for which registration of the mark is sought. 5. Payment of the following fees: a. Basic fee; b. Complementary fee in respect of each designated Contracting Party for which no individual fee is payable; c. Supplementary fee in respect of each class of goods and services beyond the third Note: No supplementary fee is payable where all the designations are ones in respect of which an individual fee has to be paid. D. Term of Protection C. Requirements for Registration A mark may be the subject of an international application only if it has already been registered, or if its registration has been applied for in the IPOPHL to be able to file an international application. This is called the Basic Registration or Basic Application, as the case may be. An international application must be presented to the International Bureau through the IPOPHL. An international application which is presented direct to the International Bureau by the applicant will not be considered as such and will be returned to the sender. The Philippines, as an office of origin, has designated the English language for the filing of international applications and any communications for transmittal to the International Bureau through the IPOPHL. All other documents required to be submitted directly to the IPOPHL by the applicant must also be in English. An international registration is effective for 10 years. It may be renewed for further periods of 10 years on payment of the prescribed fees. The international registration may be renewed in respect of all the designated Contracting Parties or in respect of only some of them. Note: It may not be renewed in respect of only some of the goods and services recorded in the International Register. If the holder wishes to remove some of the goods and services from the international registration, he must separately request cancellation in respect of those goods and services. 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. (IPAP v. Sec. Ochoa, G.R. No. 204605, 2016) Page 260 of 393 ATENEO CENTRAL BAR OPERATIONS 2020/21 D. COPYRIGHT 1. BASIC PRINCIPLES Copyright is not primarily about providing the strongest possible protection for copyright owners so that they have the highest possible incentive to create more works. The control given to copyright owners is only a means to an end: the promotion of knowledge and learning. The goal of copyright is to promote creativity and encourage creation of works. (ABS-CBN Corp. v. Gozon, G.R. No. 195956, 2015) The copyright for a work is acquired by an intellectual creator from the moment of creation even in the absence of registration and deposit (Columbia Pictures v. CA, G.R. No. 110318, 1996) The focus of copyright is the usefulness of the artistic design, and not its marketability. The central inquiry is whether the article is a work of art. (Ching v. Salinas Sr., G.R. No. 161295, 2005) Idea-Expression Dichotomy 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. (Mazer v. Stein, 347 U.S. 201, 1954) Purely Statutory Right Copyright is purely a statutory right. Being a statutory grant, the rights are only such as the statute confers, and may be obtained and enjoyed only with respect to the subjects and by the persons, and on terms and conditions specified in the statute. (Joaquin, Jr. v. Drilon, G.R. No. 108946, 1999) COMMERCIAL LAW without copying that selection or arrangement from another work), and that it display some minimal level of creativity. (Feist Publications, Inc. v. Rural Telephone Service Co., Inc., 499 U.S. 340, 1991) Note: The requisite level of creativity is extremely low; even a slight amount will suffice. Authorship An author is “he to whom anything owes its origin; originator; maker; one who completes a work of science or literature.” (Burrow-Giles Lithographic Company v. Sarony, 111 U.S. 53, 1884) Note: The author must be a natural person. (Sec. 171.1, IP Code) 2. COPYRIGHTABLE WORKS A. Original Literary or Artistic Works These 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; d. Letters; e. Dramatic or dramatico-musical compositions; choreographic works or entertainment in dumb shows; f. Musical compositions, with or without words; g. Works of drawing, painting, architecture, sculpture, engraving, lithography or other works of art; models or designs for works of art; Originality Originality is the sine qua non of copyright. If the basic design reflected in a work or art does not owe its origin to the putative copyright holder, then that person must add something original to that design, and then only the original addition may be copyrighted. (Meshwerks, Inc. v. Toyota Motor Sales U.S.A., 528 F.3d 1258, 2008) Work of Architecture Copyright in a work of architecture shall include the right to control the erection of any building which reproduces the whole or a substantial part of the work either in its original form or in any form recognizably derived from the original Originality requires only that the author make the selection or arrangement independently (i.e., Note: The copyright in any such work shall not include the right to control the Page 261 of 393 ATENEO CENTRAL BAR OPERATIONS 2020/21 reconstruction or rehabilitation in the same style as the original of a building to which that copyright relates. (Sec. 186, IP Code) h. Original ornamental designs or models for articles of manufacture, whether or not registrable as an industrial design, and other works of applied art; i. Illustrations, maps, plans, sketches, charts and three-dimensional 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; l. Audiovisual works and cinematographic works and works produced by a process analogous to cinematography or any process for making audio-visual recordings; m. Pictorial illustrations and advertisements; n. Computer programs; and Computer An electronic or similar device having information-processing capabilities Computer Program A set of instructions expressed in words, codes, schemes or in any other form, which is capable when incorporated in a medium that the computer can read, or causing the computer to perform or achieve a particular task or result. o. Other literary, scholarly, scientific and artistic works. (Sec. 172.1, IP Code) Note: 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. (Sec. 172.2, IP Code) COMMERCIAL LAW B. Derivative Works The following derivative works shall be protected by copyright: 1. Dramatizations, translations, adaptations, abridgments, arrangements, and other alterations of literary or artistic works; and 2. Collections of literary, scholarly or artistic works, and compilations of data and other materials which are original by reason of the selection or coordination or arrangement of their contents. (Sec. 173.1, IP Code) Derivative works shall be protected as new works, provided however, that such new work: a. Shall not affect the force of any subsisting copyright upon the original works employed or any part thereof, or b. Be construed to imply any right to such use of the original works, or to secure or extend copyright in such original works. Published Edition of Work 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. (Sec. 174, IP Code) 3. NON-COPYRIGHTABLE WORKS No protection shall extend to any: 1. Idea, procedure, system, method or operation, concept, principle, discovery or mere data [IPSMOC-PDD]; 2. News of the day and other miscellaneous facts having the character of mere items of press information; or 3. Official text of a legislative, administrative or legal nature, as well as any official translation thereof. (Sec. 175, IP Code) The expression of an idea is protected by copyright, not the idea itself. It is axiomatic that copyright protection does not extend to news "events" or the facts or ideas which are the subject of news reports. But it is equally well-settled that copyright protection does extend to the reports themselves, as distinguished from the substance of the Page 262 of 393 ATENEO CENTRAL BAR OPERATIONS 2020/21 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." Such protection extends to electronic news reports as well as written reports. The idea/expression dichotomy is a complex matter if one is trying to determine whether a certain material is a copy of another. This dichotomy would be more relevant in determining, for instance, whether a stage play was an infringement of an author’s book involving the same characters and setting. In this case, however, respondents admitted that the material under review — which is the subject of the controversy — is an exact copy of the original. Respondents did not subject ABS-CBN’s footage to any editing of their own. The news footage did not undergo any transformation where there is a need to track elements of the original. (ABS-CBN Corp. v. Gozon, G.R. No. 195956, 2015) Works of the Government A work of the Government is a work created by an officer or employee of the Philippine Government or any of its subdivisions and instrumentalities, including government-owned or controlled corporations as part of his regularly prescribed official duties. (Sec. 171.11, IP Code) No copyright shall subsist in any work of the Government of the Philippines. However, the Government is not precluded from receiving and holding copyrights transferred to it by assignment, bequest or otherwise. General Rule: 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 impose as a condition the payment of royalties. Exception: No prior approval or conditions shall be required for the use of any purpose of: 1. Statutes, rules and regulations, or 2. Speeches, lectures, sermons, addresses, and dissertations, pronounced, read or rendered in courts COMMERCIAL LAW of justice, before administrative agencies, in deliberative assemblies, and in meetings of public character. Note: The author of speeches, lectures, sermons, addresses, and dissertations mentioned in the preceding paragraphs shall have the exclusive right of making a collection of his works. Publication or republication by the government in a public document of any copyrighted work shall not be taken to cause any abridgment or annulment of the copyright or to authorize any use or appropriation of such work without the consent of the copyright owner. (Sec. 176.3, IP Code) 4. RIGHTS OF COPYRIGHT OWNER Copyright or Economic Rights Copyright or economic rights shall consist of the exclusive right to carry out, authorize or prevent the following acts: 1. Reproduction of the work or substantial portion of the work; Reproduction Making of 1 or more copies, temporary or permanent, in whole or in part, of a work or a sound recording in any manner or form 2. Dramatization, translation, adaptation, abridgment, arrangement or other transformation of the work; 3. The first public distribution of the original and each copy of the work by sale or other forms of transfer of ownership; 4. Rental of the original or a copy of an audiovisual or cinematographic work, a work embodied in a sound recording, a computer program, a compilation of data and other materials or a musical work in graphic form, irrespective of the ownership of the original or the copy which is the subject of the rental; Rental Transfer of the possession of the original or a copy of a work or a sound recording Page 263 of 393 ATENEO CENTRAL COMMERCIAL LAW BAR OPERATIONS 2020/21 for a limited period of time, for profitmaking purposes 5. Public display of the original or a copy of the work; 6. Public performance of the work; and Definitions of Public Performance a. For Non-audiovisual work – reciting, playing, dancing, acting or otherwise performing the work, either directly or by means of any device or process b. For Audiovisual work – showing of its images in sequence and the making of the sounds accompanying it audible c. For 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 5. RULES ON OWNERSHIP OF COPYRIGHT Rules on Ownership Copyright ownership shall be governed by the following rules: TYPE OF WORK Original Literary and Artistic Works OWNERSHIP Copyright belongs to the author of the work.   Joint Authorship 7. Other communication to the public of the work, e.g. online/Internet. Communication to the public Any communication to the public, including broadcasting, rebroadcasting, retransmitting by cable, broadcasting, and retransmitting by satellite, and includes 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 Employee’s Work Independent Contractor’s Work Co-authors shall be the original owners of the copyright. In the absence of agreement, rights shall be governed by the rules on co-ownership. Note: If 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. Copyright shall belong to: 1. Employee: creation of the object of copyright is not a part of his regular duties even if the employee uses the time, facilities and materials of the employer. 2. Employer: work is the result of the performance of his regularly-assigned duties, UNLESS there is an agreement, express or implied, to the contrary Ownership of the work belongs to the person other than the employer who commissioned the work and who pays for it. Page 264 of 393 ATENEO CENTRAL BAR OPERATIONS 2020/21 Audiovisual Work Copyright remains with the creator, unless there is a written stipulation to the contrary.  Copyright belongs to the producer, the author of the scenario, the composer of the music, the film director, and the author of the work so adapted.  The producer shall exercise the copyright to an extent required for the exhibition of the work in any manner. COMMERCIAL LAW 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. Courts must look into whether the copy of the work adds “new expression, meaning or message” to transform it into something else. (ABS-CBN Corp. v. Gozon, G.R. No. 195956, 2015) 2. The nature of the copyrighted work; Letters Exception: Right to collect performing license fees for the performance of musical compositions, with or without words, which are incorporated into the work Copyright belongs to the writer subject to the provisions of Article 723 of the Civil Code wherein it provides that the court may authorize their publication or dissemination if the public good or the interest of justice so requires. 6. LIMITATIONS ON COPYRIGHT A. Fair Use 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 of copyright. In determining whether the use made of a work in any particular case is fair use, the factors to be considered shall include: [PuCha-Nat-Su-E] 1. The purpose and character of the use, including whether such use is of a commercial nature or is for non-profit educational purposes; If the nature of the work is more factual than creative, then fair use will be weighed in favor of the user. (ABS-CBN Corp. v. Gozon, G.R. No. 195956, 2015) 3. The amount and substantiality of the portion used in relation to the copyrighted work as a whole; and An exact reproduction of a copyrighted work, compared to a small portion of it, can result in the conclusion that its use is not fair. However, 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. (ABS-CBN Corp. v. Gozon, G.R. No. 195956, 2015) 4. The effect of the use upon the potential market for or value of the copyrighted work. (Sec. 185.1, IP Code) If a court finds that the use had or will have a negative impact on the Page 265 of 393 ATENEO CENTRAL BAR OPERATIONS 2020/21 copyrighted work's market, then the use is deemed unfair. (ABS-CBN Corp. v. Gozon, G.R. No. 195956, 2015) COMMERCIAL LAW Note: That a work is unpublished shall not by itself bar a finding of fair use if such finding is made upon consideration of all the above factors. (Sec. 185.2, IP Code) a. Selling, letting for hire, or by way of trade offering or exposing for sale, or hire, the article b. Distributing the article for purpose of trade, or for any other purpose to an extent that will prejudice the rights of the copyright owner in the work; or c. Trade exhibit of the article in public. (Sec. 217.3, IP Code) Doctrine of Fair Use Fair use is a privilege to use the copyrighted material in a reasonable manner without the consent of the copyright owner or as copying the theme or ideas rather than their expression. Fair use 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. (ABS-CBN Corp. v. Gozon, G.R. No. 195956, 2015) 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. (Columbia Pictures, Inc. v. Court of Appeals, G.R. No. 110318, 1996) No question of fair or unfair use arises, however, if no copying is proved to begin with. This is in consonance with the principle that there can be no infringement if there was no copying. It is only where some form of copying has been shown that it becomes necessary to determine whether it has been carried to an “unfair,” that is, illegal, extent. (Habana v. Robles, G.R. No. 131522, 1999) Gravamen of Copyright Infringement The gravamen of copyright infringement is not merely the unauthorized “manufacturing” of intellectual works but rather the unauthorized performance of any of the acts covered by Sec. 177 (economic rights). Hence, any person who performs any of the acts thereunder without obtaining the copyright owner’s prior consent renders himself civilly and criminally liable for copyright infringement. (NBI - Microsoft Corp. v. Hwang, G.R. No. 147043, 2005) 7. COPYRIGHT INFRINGEMENT Any person infringes a right protected under the IP Code when one: a. Directly commits an infringement (direct 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 the right and ability to control the activities of the other person (vicarious infringement); or c. With knowledge of infringing activity, induces, causes or materially contributes to the infringing conduct of another (direct infringement). (Sec. 216, IP Code) Also includes the act of any person who at the time when copyright subsists in a work has in his possession an article which he known, or ought to know, to be an infringing copy of the work for the purpose of: When 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 copy and economic rights. 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. (Olano v. Eng Co, G.R. No. 195835, 2016) The Intellectual Property Code is malum prohibitum and prescribes a strict liability for copyright infringement. Good faith, lack of knowledge of the copyright, or lack of intent to infringe is not a defense against copyright infringement. (ABS-CBN Corp. v. Gozon, G.R. No. 195956, 2015) Page 266 of 393 ATENEO CENTRAL COMMERCIAL LAW BAR OPERATIONS 2020/21 A. Remedies Any person infringing a right protected under the IP Code shall be liable: a. To an injunction restraining such infringement. The court may also order the defendant to desist from an infringement to prevent the entry into the channels of commerce of imported goods that involve an infringement, immediately after customs clearance of such goods. b. 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. Note: 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. The amount of damages to be awarded shall be doubled against any person who: 1. Circumvents effective technological measures; or 2. 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 c. Deliver under oath, for impounding during the pendency of the action, upon such terms and conditions as the court may prescribe, sales invoices and other documents evidencing sales, all articles and their packaging alleged to infringe a copyright and implements for making them. d. Deliver under oath for destruction without any compensation all infringing copies or devices, as well as all plates, molds, or other means for making such infringing copies as the court may order. e. Such other terms and conditions, including the payment of moral and exemplary damages, which the court may deem proper, wise and equitable and the destruction of infringing copies of the work even in the event of acquittal in a criminal case. Statutory Damages The copyright 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 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. (Sec. 216.1, IP Code) B. Criminal Penalties The copyright owner can file a criminal, civil or administrative action for copyright infringement. Where Filed Criminal Case Administrative Case Civil Case Filed in the court situated in the place where the violation occurred Filed at the Bureau of Legal Affairs at the Intellectual Property Office of the Philippines Filed in the appropriate court located at the place where the defendant resides/is located, or where the plaintiff resides/is located, at the option of the plaintiff Page 267 of 393 ATENEO CENTRAL BAR OPERATIONS 2020/21 COMMERCIAL LAW Penalties First Offense Second Offense Third and Subsequent Offenses Imprisonment of between 1 to 3 years and a fine of between 50,000 to 150,000 pesos Imprisonment of 3 years and 1 day to six years plus a fine of between 150,000 to 500,000 pesos Imprisonment of 6 years and 1 day to 9 years plus a fine ranging from 500,000 to 1,500,000 pesos In all cases, subsidiary imprisonment in cases of insolvency. (Sec. 217.1, IP Code) In Determining Number of Years of Imprisonment and Amount of Fine The court shall consider the value of the infringing materials that the defendant has produced or manufactured and the damage that the copyright owner has suffered by reason of the infringement: Provided, That the respective maximum penalty stated in Section 217.1. (a), (b) and (c) herein for the first, second, third and subsequent offense, shall be imposed when the infringement is committed by: a. The circumvention of effective technological measures; b. The removal or alteration of any electronic rights management information from a copy of a work, sound recording, or fixation of a performance, by a person, knowingly and without authority; or c. The distribution, importation for distribution, broadcast, or communication to the public of works or copies of works, by a person without authority, knowing that electronic rights management information has been removed or altered without authority. (Sec. 217.2, IP Code) ————- end of topic ————- Page 268 of 393 SPECIAL LAWS Commercial Law ATENEO CENTRAL COMMERCIAL LAW BAR OPERATIONS 2020/21 c. d. VIII. SPECIAL LAWS TOPIC OUTLINE UNDER THE SYLLABUS: VII. SPECIAL LAWS A. SECURED TRANSACTIONS 1. Personal Property Securities Act a. Definitions and Scope b. Asset-Specific Rules i. Future Property ii. Rights to Proceeds and Commingled Funds iii. Tangible Assets Commingled in a Mass iv. Accounts Receivables c. Perfection of Security Interests d. Registration e. Priority of Security Interests f. Tangible Assets; Intangible Assets g. Enforcement of Security Interests h. Prior Interests and the Transitional Period 2. Real Estate Mortgage Law a. Definition and Characteristics i. Obligations Secured by Real Estate Mortgage ii. Object of Real Estate Mortgage iii. Right to Alienate Mortgage Credit iv. Right to Alienate Collateral b. Essential Requisites 3. Guaranty a. Nature and Extent of Guaranty i. Obligation Secured by Guaranty ii. Parties to a Guaranty iii. Excussion iv. Right to Protection v. Right to Indemnification vi. Right to Subrogation vii. Rights of Co-Guarantors b. Effects of Guaranty c. Extinguishment of Guaranty d. Legal and Judicial Bonds 4. Surety a. Concept b. Form of Surety 5. Obligations Secured Surety Distinguished From Standby Letter of Credit e. Surety Distinguished From Guaranty f. Surety Distinguished From Joint and Solidary Obligations Letters of Credit a. Definition and Purpose b. Kinds of Letters of Credit c. Rule of Strict Compliance d. Independence Principle Page 270 of 393 ATENEO CENTRAL BAR OPERATIONS 2020/21 A. SECURED TRANSACTIONS 1. PERSONAL PROPERTY SECURITIES ACT A. DEFINITIONS AND SCOPE Note: the PPSA repealed the following laws: 1. The Chattel Mortgage Law 2. Articles 2085-2123 (pledge), 2127 (mortgage extends to accessions), 21402141 (chattel mortgage), 2241, 2243, and 2246-2247 (preference of credits for specific movable property) of the Civil Code 3. Sec. 13 of the Financing Company Act of 1998 (Registry of Deeds shall maintain a register of financial leases) 4. Sec. 114-116 (recording and fees for recording of chattel mortgages), and partially Sec. 10 (general function of the Register of Deeds; insofar as inconsistent with the PPSA) of the Property Registration Decree 5. Sec. 5(e) of the Land Transportation and Traffic Code (encumbrances of motor vehicles) 1. TERMS a. Commodity Contact A commodity futures contract, an option on a commodity futures contract, a commodity option, or another contract if the option is: 1. Traded on or subject to the rules of a board of trade that has been designated as a contract market for such a contract; or 2. Traded on a foreign commodity board of trade, exchange, or market, and is carried on the books of a commodity intermediary for a commodity customer; b. Control Agreement With respect to securities It is an agreement in writing among the issuer or the intermediary, the grantor, and the secured creditor, according to which the intermediary agrees to follow the instructions of the COMMERCIAL LAW secured creditor with respect to the security, without further consent from the grantor With respect to rights to deposit account It is an agreement in writing among the deposittaking institution, the grantor, and the secured creditor where the deposit-taking institution agrees to follow the instructions from the secured creditor with respect to the payment of funds credited to the deposit account without further consent from the grantor. With respect to commodity contracts It is an agreement in writing among the grantor, secured creditor, and intermediary, according to which the commodity intermediary will apply any value distributed by the secured creditor without further consent by the commodity customer or grantor c. Grantor A grantor may be: (BuTTLGG) (a) A Buyer or other Transferee of a collateral that acquires it right subject to a security interest; (b) A Transferor in an outright transfer of an accounts receivable; or (c) A Lessee of Goods (d) Grantor of security interest in collateral to secure its own obligation or of another person; d. Non-intermediated Securities Such are: (a) securities other than those credited to a securities account; and (b) rights in securities resulting from the credit of securities to a securities account e. Notice A statement of information that is registered in the Registry relating to a security interest or lien. The term “notice” includes: (a) Initial notice; (b) amendment notice; (c) termination notice; Page 271 of 393 ATENEO CENTRAL BAR OPERATIONS 2020/21 f. Proceeds Proceeds may be: (a) any property received upon sale, lease or other disposition of collateral; or (b) whatever is collected on or distributed with respect to collateral; (c) claims arising out of the loss or damage to the collateral; (d) as well as a right to insurance payment or other compensation for loss or damage of the collateral g. Purchase Money Security Interest A security interest in goods taken by the seller to secure the price or by a person who gives value to enable the grantor to acquire the goods to the extent that the credit is used for that purpose h. Registry The centralized and nationwide electronic registry established in the Land Registration Authority (LRA) where notice of a security interest and a lien in personal property may be registered i. Secured Creditor A person that has a security interest. For the purposes of registration and priority only: (a) includes a buyer of account receivable and a lessor of goods under an operating lease for not less than one (1) year j. Security Interest A property right in collateral that secures payment or other performance of an obligation, regardless of whether the parties have denominated it as a security interest, and regardless of the type of asset, the status of the grantor or secured creditor, or the nature of the secured obligation; including the right of a buyer of accounts receivable and a lessor under an operating lease for not less than one (1) year A security interest is created by a security agreement. (PPSA, Sec. 5(a)) COMMERCIAL LAW also provide for the language to be used. (PPSA, Sec. 6) The security agreement may provide for the creation of a security interest in a future property, but the security interest in that future property is created only when the grantor acquires rights in it or the power to encumber it. (PPSA, Sec. 5(b)) A description of the collateral is sufficient 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 k. Writing For purposes of this act, “writing” includes electronic records 2. SCOPE GR: Applies to all transactions that secure an obligation with a movable collateral EXC: (a) interests in aircrafts subject to the Civil Aviation Authority Act of 2008; and (b) interests in ships subject the Ship Mortgage Decree of 1978(Sec. 4) B. ASSET-SPECIFIC RULES a. Future Property As to the creation of a security interest A security agreement may provide for the creation of a security interest in a future property, but the security interest in that property is created only when the grantor acquires rights in it or the power to encumber it.(Sec. 5b) b. Rights to proceeds and comingled funds These are the rules to be followed (Sec. 8): (a) A security interest in personal property shall extend to its identifiable or traceable proceeds. A security agreement should be contained in a written contract signedby the parties. It should Page 272 of 393 ATENEO CENTRAL BAR OPERATIONS 2020/21 (b) Where proceeds in the form of funds credited to a deposit account or money are commingled with other funds or money: i. ii. 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; 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. c. Tangible assets commingled in a mass Section 3.07 of the IRR. 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. A security interest that extends to a mass is limited to the same proportion of the mass as the quantity of the encumbered asset bore to the quantity of the entire mass immediately after the commingling. Section 3.09 of the IRR. Protection of Account Debtor Except as otherwise provided in the PPSA and these Rules, 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. A payment instruction may change the person, address or account to which the COMMERCIAL LAW debtor of the receivable is required to make payment. d. Accounts receivable Section 3.08 Security Interest in Certain Accounts Receivable. A security interest in an account receivable shall be effective notwithstanding any agreement between the grantor and the account debtor or any secured creditor limiting in any way the grantor's right to create a security interest; Provided: Nothing in this section affects the right of a buyer to create a security interest over the account receivable. Provided, further: that any release of information is subject to agreements on confidentiality. Nothing in this section shall affect any obligation or liability of the grantor for breach of the agreement in subsection (a). Any stipulation limiting the grantor's right to create a security interest shall be void. This section shall apply only to 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. C. PERFECTION OF SECURITY INTERESTS SECTION 11. PERFECTION OF SECURITY INTEREST. A security interest shall be perfected when it has been created and the secured creditor has taken one of the actions in accordance with Section 12. Hence, to perfect a security interest, it must be created then accompanied by either registration, possession, or control; depending on the collateral. Page 273 of 393 ATENEO CENTRAL BAR OPERATIONS 2020/21 On perfection, a security interest becomes effective against third parties. SECTION 12. MEANS OF PERFECTION. A SECURITY INTEREST MAY BE PERFECTED THROUGH THE FOLLOWING MEANS: (RPC) (a) Registration of a notice with the Registry; (b) Possession (actual or constructive) of the collateral by the secured creditor; and (c) Control of investment property and deposit account. A security interest in any tangible asset may be perfected by registration or possession. A security interest in investment property and deposit account may be perfected by registration or control. Perfection in Tangible v. Intangible Assets TANGIBLE ASSETS INTANGIBLE ASSETS May be perfected May be perfected through registration through registration or possession or control. (Please refer to different modes of perfection for specific intangible assets) SECTION 13. PERFECTION BY CONTROL A security interest in a deposit account or investment property may be perfected by control through: (a) The creation of the security interest in favor of the deposit-taking institution or the intermediary; (b) The conclusion of a control agreement; or (c) For an investment property that is an electronic security not held with an intermediary, the notation of the security interest in the books maintained by or on behalf of the issuer for the purpose of recording the name of the holder of the securities. (d) Nothing in this Act shall require a deposittaking institution or an intermediary to enter into a control agreement, even if the grantor COMMERCIAL LAW so requests. A deposit-taking institution or an intermediary that has entered into such an agreement shall not be required to confirm the existence of the agreement to another person unless requested to do so by the grantor. SECTION 14. PERFECTION IN PROCEEDS Upon disposition of collateral, a security interest shall extend to proceeds of the collateral without further act and be continuously perfected, if the proceeds are in the form of money, accounts receivable, negotiable instruments or deposit accounts. Upon disposition, if the proceeds are in a form different from money, accounts receivable, negotiable instruments or deposit accounts, the security interest in the proceeds must be perfected by one of the means applicable to the relevant type of collateral within fifteen (15) days after the grantor receives such proceeds; otherwise, the security interest in such proceeds shall not be effective against third parties. SECTION 15. CHANGE IN MEANS OF PERFECTION A security interest shall remain perfected despite a change in the means for achieving perfection: provided, that there was no time when the security interest was not perfected. SECTION 16. ASSIGNMENT OF SECURITY INTEREST If a secured creditor assigns a perfected security interest, an amendment notice may be registered to reflect the assignment. D. REGISTRATION SECTION 26. ESTABLISHMENT OF ELECTRONIC REGISTRY The Registry shall be established in and administered by the LRA. Page 274 of 393 ATENEO CENTRAL BAR OPERATIONS 2020/21 COMMERCIAL LAW The Registry shall provide electronic means for registration and searching of notices. SECTION 29. ONE NOTICE SUFFICIENT FOR SECURITY INTERESTS UNDER MULTIPLE SECURITY AGREEMENTS SECTION 27. PUBLIC RECORD The registration of a single notice may relate to security interests under one or more security agreements. Information contained in a registered notice shall be considered as a public record. Any person may search notices registered in the Registry. SECTION 28. SUFFICIENCY OF NOTICE An initial notice of security interest shall not be rejected: (a) If it identifies the grantor by an identification number, as further prescribed in the regulations; (b) If it identifies the secured creditor or an agent of the secured creditor by name; (c) If it provides an address for the grantor and secured creditor or its agent; (d) If it describes the collateral: and (e) If the prescribed fee has been tendered, or an arrangement has been made for payment of fees by other means. If the Registry rejects to register a notice, it shall promptly communicate the fact of and reason for its rejection to the person who submitted the notice. Each grantor must authorize the registration of an initial notice by signing a security agreement or otherwise in writing. SECTION 30. EFFECTIVENESS OF NOTICE As to the time of effectivity A notice shall be effective at the time it is discoverable on the records of the Registry. As to its duration It is effective for the duration of the term indicated in the notice unless a continuation notice is registered before the term lapses. As to substantial compliance A notice substantially complying with the requirements of the PPSA shall be effective unless it is seriously misleading. A notice that may not be retrieved in a search of the Registry against the correct identifier of the grantor shall be ineffective with respect to that grantor. SECTION 31. SERIOUSLY MISLEADING NOTICE A seriously misleading notice is one that doesn’t provide the grantor’s identification number. SECTION 32. AMENDMENT OF NOTICE 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. A notice may be amended by the registration of an amendment notice that: (a) Identifies the initial notice by its registration number; and (b) Provides the new information. A notice of lien may be registered by a lien holder without the consent of the person against whom the lien is sought to be enforced. Rules on amendment of the notice: (a) Adding collateral that is not proceeds must be authorized by the grantor in writing. (b) Adding a grantor must be authorized by the added grantor in writing. Page 275 of 393 ATENEO CENTRAL BAR OPERATIONS 2020/21 Instances when a notice must be amended: a) To continue the effectiveness of the notice by filing an amendment notice that identifies the original by its registration number. b) When there is mistake; when the collateral described in the notice includes an item or property which is not under the security agreement. (Sec. 39) c) When the secured creditor assigns a perfected security interest. (Sec. 16) Other Rules An amendment notice shall be effective only as to each secured creditor who authorizes it. An amendment notice that adds collateral or a grantor shall be effective as to the added collateral or grantor from the date of its registration. SECTION 33. CONTINUATION OF NOTICE Continuation of notice may be registered only within six (6) months before the expiration of the effective period of the notice. SECTION 34. TERMINATION OF EFFECTIVENESS OF A NOTICE The effectiveness of a notice may be terminated by registering a termination notice that: (a) Identifies the initial notice by its registration number; and (b) Identifies each secured creditor who authorizes the registration of the termination notice. A termination notice terminates effectiveness of the notice as to each authorizing secured creditor. Instances when a notice may be terminated (Sec. 39): (a) When the obligation has been paid and there is no drag net clause (b) When the security interest is extinguished in accordance with this act COMMERCIAL LAW (c) When the secured creditor has agreed to release part of the collateral described in the notice (d) None Existence. When there is no existing security agreement between the secured creditor and the grantor. SECTION 35. REGISTRY DUTIES The following are the duties of the registry: (a) Assign a unique registration number; (b) Create a record that bears the number assigned to the initial notice and the date and time of registration; and (c) Maintain the record for public inspection. (d) Index notices by the identification number of the grantor and, for notices containing a serial number of a motor vehicle, by serial number. (e) Provide a copy of the electronic record of the notice, including the registration number and the date and time of registration to the person who submitted it. (f) Maintain the capability to retrieve a record by the identification number of the grantor, and by serial number of a motor vehicle. (g) Maintain records of lapsed notices for a period of ten (10) years after the lapse. The duties of the Registry shall be merely administrative in nature. By registering a notice or refusing to register a notice, the Registry does not determine the sufficiency, correctness, authenticity, or validity of any information contained in the notice. SECTION 36. SEARCH OF REGISTRY RECORDS AND CERTIFIED REPORT. The Registry shall communicate the following information to any person who requests it: (a) Whether there are any unlapsed notices in the Registry that indicate the grantor's identification number or vehicle serial number that exactly matches the relevant criterion provided by the searcher; Page 276 of 393 ATENEO CENTRAL BAR OPERATIONS 2020/21 (b) The registration number, and the date and time of registration of each notice; and (c) All of the information contained in each notice. If requested, the Registry shall issue a certified report of the results of a search that is an official record of the Registry and shall be admissible into evidence in judicial proceedings without extrinsic evidence of its authenticity. SECTION 37. DISCLOSURE OF INFORMATION. The secured creditor must provide to the grantor at its request: (a) The current amount of the unpaid secured obligation; and (b) A list of assets currently subject to a security interest. The secured creditor may require payment of a fee for each request made by the grantor in subsection (a) in this section, but the grantor is entitled to a reply without charge once every six (6) months. A security interest in a deposit account shall not: (a) Affect the rights and obligations of the deposit-taking institution without its consent; or (b) Require the deposit-taking institution to provide any information about the deposit account to third parties. SECTION 40. MATTERS THAT MAY BE REQUIRED BY DEMAND Upon receipt of the demand for termination or amendment notice under Section 39, the secured creditor must register such within fifteen working days: (a) Terminating the registration in case of performance of obligation, non-existence of the security agreement, or extinguishment of the security interest under Section 39; (b) Amending the registration to release some property that is no longer collateral COMMERCIAL LAW in a case of mistake or that was never a collateral under a security agreement between the secured creditor and the grantor SECTION 41. PROCEDURE FOR NONCOMPLIANCE WITH DEMAND If the secured creditor fails to comply with the demand within fifteen working days after its receipt, the person giving the demand under Section 39 may ask the proper court to issue an order terminating or amending the notice as appropriate. SECTION 42. COMPULSORY AMENDMENT OR TERMINATION BY COURT ORDER The court may, on application by the grantor, issue an order that the notice be terminated or amended in accordance with the demand, which order shall be conclusive and binding-on the LRA Provided, That the secured creditor who disagrees with the order of the court may appeal the order. The court may make any other order it deems proper for the purpose of giving effect to an order under the previous paragraph. The LRA shall amend or terminate a notice in accordance with a court order as soon as reasonably practicable after receiving the such. SECTION 43. NO FEE FOR COMPLIANCE OF DEMAND A secured creditor shall not charge any fee for compliance with a demand received under section 39. SECTION 44. WHEN REGISTRATION AND SEARCH CONSTITUTES INTERFERENCE WITH PRIVACY OF INDIVIDUAL A person who submitted a notice for registration or carried out a search of the Registry with a frivolous, malicious or criminal purpose or Page 277 of 393 ATENEO CENTRAL BAR OPERATIONS 2020/21 COMMERCIAL LAW intent shall be subject to civil and criminal penalties according to the relevant laws. F. TANGIBLE ASSETS; INTANGIBLE ASSETS E. PRIORITY OF SECURITY INTERESTS PRIORITY RULES FOR TANGIBLE ASSETS Priority of interest is based on the date of perfection and not the date of creation. SECTION 6.03 OF THE IRR - PRIORITY FOR TANGIBLE ASSETS EMBODIED IN INSTRUMENTS. PRIORITY OF INTEREST WITH RESPECT TO SPECIFIC COLLATERAL Goods Secured Creditor: Person who provides services or materials in the ordinary course of business Mode of Perfection: Possession Preferred over: ALL until payment (Sec. 20) Purchase Money Security Interest (PMSI) in Equipment or its Proceeds Secured Creditor: Unpaid seller Mode of Perfection: Registration of notice within three business days after grantor obtains possession Preferred over: ALL (Sec. 23(a)) PMSI in Consumer Goods Secured Creditor: Unpaid seller Mode of Perfection: Registration of notice within three business days after grantor obtains possession Preferred over: ALL (Sec. 23 (b)) PMSI in Livestock, Inventory, and Intellectual Property Secured Creditor: Unpaid seller Mode of Perfection: a. When the grantor receives possession of the inventory or livestock, or acquires the rights in the intellectual property b. Registration or Control PLUS written notice to holders of conflicting interest before grantor obtains possession Preferred over: ALL (Secs. 23(c); 24) Security Certificates Secured Creditor: Anyone Mode of Perfection: Registration or Possession Preference: Possession over Registration (Sec. 18(e) of PPSA; Sec. 6.03(a) of IRR) Instruments or Negotiable Documents Secured Creditor: Anyone Mode of Perfection: Registration or Possession Preference: Possession over Registration (Sec. 19 of PPSA; Sec. 6.03(b) of IRR) Livestock Secured Creditor: Persons who provide food or medicine for the livestock (ex. Vet) Mode of Perfection: Registration or Possession PLUS written notice to holders of conflicting interest before grantor obtains possession Preferred over: ALL EXCEPT perfected PMSI over the livestock. (Sec. 24 of PPSA; Sec. 6.03(c) of IRR) PRIORITY RULES FOR INTANGIBLE ASSETS SECTION 6.02 PRIORITY FOR INVESTMENT PROPERTY AND DEPOSIT ACCOUNTS. Deposit Account Secured Creditor: Deposit-taking Institution (bank) Mode of Perfection: Control or Possession Preferred over: ALL(Sec. 13 of PPSA; Sec. 6.02(a) of IRR) Deposit Account/Investment Account Secured Creditor: Anyone, except deposit-taking institution or intermediary Mode of Perfection: Control Page 278 of 393 ATENEO CENTRAL BAR OPERATIONS 2020/21 COMMERCIAL LAW Preferred over: Security interests perfected through registration and control agreements concluded at a later time. (Sec. 13 of PPSA; Sec. 6.02 (b) of IRR) SECTION 45. RIGHT OF REDEMPTION. 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. (Sec. 6.02(c) of IRR) Any person who is entitled to receive a notification of disposition under Sec. 51 is entitled to redeem the collateral by: (a) Paying; or (b) Performing the secured obligation in full, including the reasonable cost of enforcement. 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. (Sec. 6.02(d) of IRR) The right of redemption may be exercised, unless: (a) The person entitled to redeem has, after the default, waived in writing the right to redeem (waiver); (b) The collateral is sold or otherwise disposed of, acquired or collected by the secured creditor or until the conclusion of an agreement by the secured creditor for that purpose (disposition); and (c) The secured creditor has retained the collateral (retention). Electronic Securities not held by intermediaries Secured Creditor: Anyone Mode of Perfection: Notation in the books maintained by or on behalf of the issuer Preferred over: ALL (Sec. 6.02(e) of IRR) Electronic Securities not held by intermediaries Secured Creditor: Anyone Mode of Perfection: Control Preferred over: Security interests perfected through registration and control agreements concluded at a later time. (Sec. 6.02(f) of IRR) Electronic Securities held by intermediaries Secured Creditor: Anyone Mode of Perfection: Control Preferred over: Security interests in the same securities perfected by any other (Sec. 6.02(g) of IRR) 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. (Sec. 6.02(h) of IRR) G. ENFORCEMENT OF SECURITY INTERESTS SECTION 46. RIGHT OF HIGHER-RANKING SECURED. CREDITOR TO TAKE OVER ENFORCEMENT. Even if another secured creditor or a lien holder has commenced enforcement, a secured creditor whose security-interest has priority over that of the enforcing secured creditor or lien holder shall be entitled to take over the enforcement process. This right may be invoked 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. The right of the higher-ranking secured creditor to take over shall include the right to enforce the rights by any method available to a secured creditor under this Act. Page 279 of 393 ATENEO CENTRAL BAR OPERATIONS 2020/21 SECTION 47. EXPEDITED REPOSSESSION OF THE COLLATERAL. 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. (a) 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, while exercising due care. (b) If, upon default, the secured creditor cannot take possession of collateral without breach of the peace, the secured creditor may proceed as follows: 1. An expedited hearing upon application for an order granting him possession of the collateral. The application shall include a statement by the secured creditor, under oath, verifying the existence of the security agreement and identifying at least one event of default by the debtor under the security agreement; 2. 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; and 3. He will be entitled to an order granting possession of the collateral upon the court finding that a default has occurred 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: COMMERCIAL LAW 4. 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. SECTION 48. RECOVERY IN SPECIAL CASES. Upon default, the secured creditor, without judicial process may: (a) Instruct the account debtor to make payment to the secured creditor, and apply such to satisfy 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) In a negotiable document that is perfected by possession, proceed as to the negotiable document or goods covered; (c) In a deposit account maintained by the secured creditor, apply the balance of the deposit account to the obligation secured; and (d) In other cases of security interest in a deposit account perfected by control, instruct the deposittaking institution to pay the balance of the deposit account to the secured creditor’s account. SECTION 49. RIGHT TO DISPOSE OF COLLATERAL. 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. The secured creditor may buy the collateral 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. Page 280 of 393 ATENEO CENTRAL BAR OPERATIONS 2020/21 COMMERCIAL LAW SECTION 50. COMMERCIAL REASONABLENESS REQUIRED. SECTION 52. APPLICATION OF PROCEEDS. In disposing of collateral, the secured creditor shall act in a commercially reasonable manner. The proceeds of disposition shall be applied in the following order: It is commercially reasonable if collateral is disposed in conformity with commercial practices among dealers in that type of property. (a) The reasonable expenses of taking, holding, preparing for disposition, and disposing of the collateral, including reasonable attorneys’ fees and legal expenses incurred by the secured creditor; (b) The satisfaction of the obligation secured by the interest of the enforcing secured creditor; and (c) The satisfaction of obligations secured by any subordinate security interest in the collateral if a written demand and proof of the interest are received before distribution of the proceeds is completed. A disposition is not commercially unreasonable merely because a better price could have been obtained at a different time or by a different method. If a method of disposition has been approved in any legal proceeding, it is conclusively commercially reasonable. SECTION 51. NOTIFICATION OF DISPOSITION. Not later than ten days before disposition, the secured creditor shall notify: (a) The grantor; (b) Any other secured creditor or lien holder who, five days before the notification is sent to the grantor, held a security interest or lien in the collateral that was perfected by registration; and (c) Any other person from whom the secured creditor received notification of a claim in the collateral if the notification was received before the secured creditor gave notification to the grantor. The grantor may waive the right to be notified. 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 the time and place of a public disposition or the time after which other disposition is to be made. Sending a notification is not required if: (a) the collateral is perishable; or (b) threatens to decline speedily in value; or (c) is of a type customarily sold on a recognized market. The secured creditor shall account any surplus to the grantor. Unless otherwise agreed, the debtor is liable for any deficiency. SECTION 53. RIGHTS OF BUYERS AND OTHER THIRD PARTIES. If a secured creditor sells the collateral, the buyer shall acquire the grantor’s right in the asset, free of the rights of any secured creditor or lien holder. If a secured creditor leases or licenses the collateral, the lessee or licensee shall be entitled to the benefit of the lease or license during its term. If a secured creditor sells, leases or licenses the collateral in violationof this Chapter, the one who acquires the collateral is entitled to the rights or benefits in the two previous paragraphs:Provided, that it had no knowledge of a violation of this Chapter. SECTION 54. RETENTION OF COLLATERAL BY SECURED CREDITOR. 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: Page 281 of 393 ATENEO CENTRAL BAR OPERATIONS 2020/21 (a) The debtor and the grantor; (b) Any other secured creditor or lien holder who perfected its security interest or lien by registration, five days before the proposal is sent to the debtor and the grantor; and (c) Any other person with an interest 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: (a) A proposal for the acquisition of the collateral in full satisfaction of the obligation, unless the secured creditor receives an objection in writing from any person entitled to receive such a proposal within twenty (20) days after the proposal is sent; 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 twenty (20) days after the proposal is sent. H. PRIOR INTEREST AND THE TRANSITIONAL PERIOD SECTION 55. INTERPRETATION OF TRANSITIONAL PROVISIONS. Existing secured creditor a secured creditor with a prior security interest; Prior law any law that existed or was in force before the effectivity of the PPSA Prior interest an interest created by an agreement or transaction that was made or entered into before the effectivity of the PPSA and that had not been terminated before such time. It excludes a security interest that is renewed or extended by a security agreement or other transaction made or entered into on or after the effectivity of the PPSA ; COMMERCIAL LAW Transitional period the period from the date of effectivity of the PPSA until the date when the Registry has been established and operational. SECTION 56. CREATION OF PRIOR INTEREST. Creation of prior interest shall be determined by prior laws. A prior interest remains effective between the parties notwithstanding its creation did not comply with the creation requirements of the PPSA. SECTION 57. PERFECTION OF PRIOR INTEREST. A prior interest that was perfected under prior law continues to be perfected under the PPSA until the earlier of: (a) The time the prior interest would cease to be perfected under prior law; and (b) The beginning of full implementation of the PPSA, which, under Section 10.03 of the IRR, is conditioned upon the Registry being established and operational. If the requirements for perfection under the PPSA are satisfied before the time when theprior interest ceases to be perfected under prior law, the prior interest continues to be perfected under the PPSA from the time when it was perfected under the prior law. If the requirements for perfection under the PPSA are not satisfied before the time when the prior interest ceases to be perfected under prior law, the prior interest is perfected only from the time it is perfected under the PPSA . A written agreement between a grantor and a secured creditor creating a prior interest is sufficient to constitute authorization by the grantor of the registration of a notice covering assets described in that agreement under the PPSA. If a prior interest referred to in subsection (b) of this section was perfected by the registration of a Page 282 of 393 ATENEO CENTRAL BAR OPERATIONS 2020/21 notice under prior law, the time of registration under the prior law shall be the time to be used for purposes of applying the priority rules of the PPSA. SECTION 58. PRIORITY OF PRIOR INTEREST. The priority of a prior interest as against the rights of a competing claimant is determined by the prior law if: (a) The security interest and the rights of all competing claimant arose before the effectivity of the PPSA; and (b) The priority status of these rights has not changed since the effectivity of the PPSA. The priority status of a prior interest has changed only if: (a) It was perfected when the PPSA took effect, but subsequently ceased to be perfected; (b) It was not perfected under prior law, and was only perfected under the PPSA. SECTION 59. ENFORCEMENT OF PRIOR INTEREST. If any step has been taken to enforce a prior interest before the effectivity of the PPSA, enforcement may continue under prior law or may proceed under the PPSA. Subject to previous paragraph, prior law shall apply to a matter that is the subject of proceedings before a court before the effectivity of the PPSA. COMMERCIAL LAW 2. REAL ESTATE MORTGAGE LAW A. Definition and Characteristics Real [Estate] Mortgage is a contract whereby the debtor secures to the creditor the fulfillment of a principal obligation, specially subjecting to such security immovable property or real rights over immovable property in case the principal obligation is not complied with at the time stipulated. (Arts. 2124-2131) Kinds of Mortgage: 1. Voluntary 2. Legal 3. Equitable – one which, although it lacks the proper formalities of a mortgage shows the intention of the parties to make the property as a security for a debt (governed by Civil Code, Arts. 1365, 1450, 1454, 1602, 1603, 1604 and 1607). i. Obligations Secured by Real Estate Mortgage Necessity of a valid Principal Obligation A Mortgage, a purely accessory contract, like a guarantee. They cannot exist without a valid obligation. (Art. 2052 & 2086; Manila Surety & Fidelity Co. v. Velayo, G.R. No. L-21069) Voidable, Unenforceable, Natural Obligations A mortgage may secure the performance of a: 1. Valid Obligation 2. Voidable Contract inasmuch as it is binding, unless it is annulled by a proper action in court 3. Unenforceable Contract, as such contract is not void 4. Civil Obligations 5. Pure and Conditional Obligations (whether suspensive or resolutory) 6. Payment and Performance Obligations 7. Natural Obligation so that the creditor may proceed against the guarantor although he has no right of action against the principal debtor for the reason that the latter’s obligation is not civilly enforceable. a. When the debtor himself offers a guaranty for his natural Page 283 of 393 ATENEO CENTRAL BAR OPERATIONS 2020/21 obligation, he impliedly recognizes his liability, thereby transforming the obligation from natural into a civil one. Effect of Invalidity of Mortgage on Principal Obligation 1. Principal obligation remains valid. 2. Mortgage deed remains as evidence of a personal obligation. When a bank relied on a forged SPA, it has the burden to prove its authenticity and due execution as when there is a defect in the notarization of a document, the clear and convincing evidentiary standard normally attached to a duly-notarized document is dispensed with, and the measure to test the validity of such document is preponderance of evidence. However, where a mortgage is not valid due to a forged SPA, the principal obligation which it guarantees is not thereby rendered null and void. What is lost is merely the right to foreclose the mortgage as a special remedy for satisfying or settling the indebtedness which is the principal obligation. In case of nullity, the mortgage deed remains as evidence or proof of a personal obligation of the debtor and the amount due to the creditor may be enforced in an ordinary action. The partial invalidity of the subject real estate mortgage brought about by the forged status of the subject SPA would not, therefore, result into the partial invalidation of the loan obligation principally entered into by the parties; thus, absent any cogent reason to hold otherwise, the need for the recomputation of said loan obligation should be dispensed with. (Rural Bank of Cabadbaran, Inc. v. Melecio-Yap, G.R. No. 178451, 2014) ii. Object of Real Estate Mortgage Objects of Real Estate Mortgage: 1. Immovables; and 2. Alienable real rights in accordance with the laws, imposed upon immovables. (Art. 2124) COMMERCIAL LAW General rule: Future property cannot be object of mortgage. (Dilag v. Heirs of Resurreccion, G.R. No. 48941) In order to bring future property within the coverage of the mortgage, the mortgagor must execute a mortgage supplement after the mortgagor acquires ownership of the properties or after those properties come into existence. They must be registered with the relevant Register of Deeds. Exception: (After-Acquired Properties) A stipulation subjecting to the mortgage lien, improvements which the mortgagor may subsequently acquire, install, or use in connection with the real property already mortgaged belonging to the mortgagor is valid. (People’s Bank and Trust Co. v. Dahican Lumber Co., G.R. No. L-17500, 1967) Example: X owns a factory. In that factory, he installed a machine and subsequently mortgaged it. The parties may validly stipulate that if the original machine is replaced, the replacement shall be subject to the mortgage. The reason for this is that after-acquired properties are understood to be replacements, as the original machine may be subject to wear and tear. Important Points 1. As a general rule, the mortgagor retains possession of the property. He may deliver said property to the mortgagee without altering the nature of the contract of mortgage. 2. It is not an essential requisite that the principal of the mortgage credit bears interest, or that the interest as compensation for the use of the principal and the enjoyment of its fruits be in the form of a certain percent thereof. Effect of Mortgage 1. Creates right in rem or real rights. A lien inseparable from the property mortgaged, enforceable against the whole world as long as it is registered. If not registered, the third party must know of the mortgage. 2. Creates merely an encumbrance. Page 284 of 393 ATENEO CENTRAL BAR OPERATIONS 2020/21 The law considers void any stipulation forbidding the owner from alienating the immovable mortgaged. (Art. 2130)  The mortgagor’s default does not operate to vest in the mortgagee the ownership of the encumbered property.  His failure to redeem the property does not automatically vest ownership of the property to the mortgagee. Extent of Mortgage (I-GRAPE) A real estate mortgage constituted on immovable property is not limited to the property itself but also extends to its: 1. Accessions 2. Improvements 3. Growing fruits 4. Rents or income 5. Proceeds of insurance should the property be destroyed. 6. Expropriation value of the property should it be expropriated. (Art. 2127) To exclude them, it is necessary that there be an express stipulation to that effect. But if the mortgaged estate passes into the hands of a third person, the mortgage does not extend to any machinery, object, chattel or construction which he may have brought or placed there and which such third person may remove whenever it is convenient for him to do so. Mortgage to Secure Future Advancements Blanket/Dragnet Clause - one which is specifically phrased to subsume all debts of past or future origin. It generally covers only future obligations, unless the parties expressly provide that past obligations are likewise covered.  In a case where a Foreign Letter of Credit (FLC) was executed prior to the execution of a Promissory Note (PN) secured by a Real Estate Mortgage (REM), which covers the said PN and all other loans or credit accommodations that may be granted to the debtor, such REM with a dragnet clause cannot be understood to cover the FLC, as no reference was made to it or to any other COMMERCIAL LAW past obligation. (Panacan Lumber Co. v. Solidbank Corp., G.R. No. 226272, 2020) General rule: There must be a stipulation for the inclusion of future advancements. Mortgage with a dragnet clause enables the parties to provide continuous dealings, the nature or extent of which may not be known or anticipated at the time. This allows them to avoid the expense and inconvenience of executing a new security on each new transaction. A mortgage given to secure future advancements is a continuing security and is not discharged by the repayment of the amount named in the mortgage, until the full amount of the all the loans or advancements is paid. NOTE: A “blanket mortgage clause”, also known as a “dragnet clause” in American jurisprudence, is one which is specifically phrased to subsume all debts of past or future origins. A mortgage which provides a dragnet clause is in the nature of a continuing guaranty and constitutes an exception to the rule that an action to foreclose a mortgage must be limited to the amount mentioned in the mortgage contract. (PCSO vs. New Dagupan Metro Gas Corp., G.R. No. 173171, 2012) As a general rule, a mortgage liability is usually limited to the amount mentioned in the contract. However, the amounts named as consideration in a contract of mortgage do not limit the amount for which the mortgage may stand as security if from the four corners of the instrument the intent to secure future and other indebtedness can be gathered.(Ramos vs. PNB, G.R. No. 178218, 2011) In the absence of clear and supportive evidence of a contrary intention, a mortgage containing a dragnet clause will not be extended to cover future advances, unless the document evidencing the subsequent advance refers to the mortgage as providing security therefor. Reliance on the Security Test: Applies when there is a dragnet clause in a mortgage contract but there is a mortgage constituted on another Page 285 of 393 ATENEO CENTRAL BAR OPERATIONS 2020/21 property to secure a subsequent loan. When the mortgagor takes another loan for which another security was given it could not be inferred that such loan was made in reliance solely on the original security with the "dragnet clause," but rather, on the new security given. (See Prudential Bank v. Alviar, G.R. No. 150197, 2005) Scenario 1: Prudential Bank v. Alviar, G.R. No. 150197, 2005 3 Promissory Notes were executed in the following order: 1. PN 1 – secured by Real Estate Mortgage (REM) with a dragnet clause 2. PN 2 – secured by a foreign currency deposit account 3. PN 3 – (not relevant, since this was not the petitioners’ obligation) secured by “Clean Phase out TOD 3923” and entered into on behalf of a different Corporation The REM should be construed to cover PN 1 and any other obligation incurred by the debtor not covered by the security for PN 2. Hence, a foreclosure is improper on the ground of nonpayment of PNs 2 and 3. It is, however, proper to be seek foreclosure for non-payment of PN 1. Scenario 2: Philippine National Bank v. Heirs of Spouses Alonday, G.R. No. 171865, 2016 2 Obligations with similarly worded Dragnet clauses were entered into in the following order: 1. Agricultural loan – secured by parcel of land in Davao del Sur 2. Commercial loan – secured by parcel of land in Davao City (no reference was made to the prior Agricultural loan) Security used for Commercial loan showed the intention to treat these loans as distinct from one another. The non-payment of the Agricultural loan cannot be used as a ground to foreclose on both the parcels of land, Since the land in Davao City was only intended to secure the Commercial loan. COMMERCIAL LAW iii. Right to Alienate Mortgage Credit Alienation or Assignment of Mortgage Credit The mortgage credit is a real right which may be alienated by the mortgagee without need to obtain the consent of the debtor (except if there is a stipulation against alienation). Alienation of the mortgage credit is valid even if it is not registered. Registration is necessary only to affect third persons.(Art. 2128) NOTE: The sale or transfer of the mortgaged property cannot affect or release the mortgage; thus, the purchaser or transferee is necessarily bound to acknowledge and respect the encumbrance. (Garcia vs. Villar, G.R. No. 158891, 2012) Laws Governing Mortgage 1. New Civil Code 2. P.D. 1529 or The Property Registration Decree 3. Revised Administrative Code 4. R.A. 4882, as regards aliens becoming mortgagee 5. R.A. 8791 General Banking Law iv. Right to Alienate Collateral The law considers void any stipulation forbidding the owner from alienating the immovable mortgaged. (Art. 2130) Stipulation requiring mortgagee’s consent before alienation of Property vs. Right of First Refusal. A stipulation prohibiting the mortgagor from selling his mortgage property without the consent of the mortgagee violates Art. 2130 of the New Civil Code, since the mortgagee can simply withhold its consent and thereby, prevent the mortgagor from selling the property. On the other hand, the right of first refusal has long been recognized as valid in our jurisdiction. (Litonjua v. L & R Corporation, G.R. No. 130722) Foreclosure of Mortgage is the remedy available to the mortgagee by which he subjects the mortgaged property to the satisfaction of the obligation to secure which the mortgage was given. Page 286 of 393 ATENEO CENTRAL BAR OPERATIONS 2020/21 NOTE: A foreclosure sale retroacts to the date of registration of the mortgage and that a person who takes a mortgage in good faith and for valuable consideration, the record showing clear title to the mortgagor, will be protected against equitable claims on the title in favor of third persons of which he had no actual or constructive notice. (St. Dominic Corp., vs. IAC, G.R. Nos. 70623 & L-48630, 1987) NOTE: In the case of Phil. Veterans Bank v. Monillas, the Supreme Court said that a mortgagee-bank who receives titles in their favor as mortgagee, which titles showed neither vice nor infirmity, does not need to make any further investigation and may entirely rely on what is stated on said titles (Phil. Veterans Bank v. Monillas, G.R. No. 167098, 2008). However, in the later case of Homeowner Savings and Loan Bank v. Felonia, the Supreme Court held that a mortgagee-bank who was previously in good faith at the time the mortgage was constituted (because at that point in time, there was no annotated notice of lis pendens on the title) may not be a buyer in good faith by the time it forecloses the property (because by then, a notice of lis pendens had already been annotated) (Homeowners Savings and Loan Bank v. Felonia, G.R. No. 189477, 2014) Mere inadequacy of the price obtained at the sheriff’s sale will not be sufficient to set aside the sale unless “the price is so inadequate as to shock the conscience of the court” taking into consideration the peculiar circumstances attendant thereto. (Sulit vs. CA, G.R. No. 119247, 1997). Absent an adverse claimant or any evidence to the contrary, all accessories and accessions accruing or attached to the mortgaged property are included in the mortgage contract and may thus also be foreclosed with the principal property in the case of nonpayment of the debt secured. (PNB vs. Maranon, G.R. No. 189316, 2013) The action to recover a deficiency after foreclosure prescribes after 10 years from the time the right of action accrues (Arts.1142 & 1144) COMMERCIAL LAW In order that the debtor may be in default, it is necessary that: (a) the obligation be demandable and already liquidated; (b) the debtor delays performance; and (c) the creditor requires the performance judicially or extrajudicially, unless demand is not necessary. Thus, it is only when demand to pay is unnecessary , or when required, such demand is made and subsequently refused that the mortgagor can be considered in default and the mortgagee obtains the right to file an action to collect the debt or foreclose the mortgage. (Maybank Philippines., Inc. v. Spouses Tarrosa, G.R. No. 213014, 2015) The family home is exempt from execution, forced sale or attachment, except for debts secured by mortgages on the premises before or after such constitution. (Art. 155, Family Code; Fortaleza vs. Lapitan, G.R. No. 178288, 2012; Parcon-Song v Parcon, G.R. No. 199582. July 7, 2020) Under the Rural Banks Act, the foreclosure of mortgages covering loans granted by rural banks and executions of judgments thereon involving real properties levied upon by a sheriff shall be exempt from publication where the total amount of the loan, including interests due and unpaid, does not exceed P10,000.00. (Menzon v. Rural Bank of Buenavista, Inc., G.R. 178031, 2013) Judicial Foreclosure (J-PACE-AC) (Rule 68, Rules of Court): 1. Judicial action for the purpose in the proper court which has jurisdiction over the area wherein the real property involved or a portion thereof is situated. 2. Court order to mortgagor to Pay mortgage debt with interest and other charges within a period of not less than 90 days nor more than 120 days from the entry of judgment; and Sale to the highest bidder at public Auction, should the mortgagor fail to pay at the time directed. 3. Confirmation of sale, which operates to divest the rights of all parties in the action and to vest their rights to the purchase, subject to the right of redemption allowed by law. 4. Execution of judgment 5. Application of proceeds of sale to: a. Costs of the sale; Page 287 of 393 ATENEO CENTRAL BAR OPERATIONS 2020/21 b. Amount due the mortgagee; c. Claims of junior encumbrances or persons holding subsequent mortgages in the order of their priority; and d. The balance, if any shall be paid to the mortgagor. 6. Sheriff’s Certificate of sale is executed, acknowledged and recorded to complete the foreclosure. Nature of Judicial Foreclosure Proceedings 1. Quasi in rem action; 2. Foreclosure is only the result or incident of the failure to pay debt; and 3. Survives death of mortgagor. Extra-judicial Foreclosure (governed by Act No. 3135, as amended) 1. Express authority to sell is given to the mortgagee; 2. Authority is not extinguished by death of mortgagor or mortgagee; 3. Public sale should be made after proper notice (posting and publication); 4. Surplus proceeds of foreclosure sale belong to the mortgagor or his assigns; 5. Debtor has the right to redeem the property sold within 1 year from and after the date of sale;one year period is to be reckoned from the registration of the sheriff's certificate of sale. 6. Remedy of party aggrieved by foreclosure is a petition to set aside sale and cancellation of writ of possession; 7. Republication is necessary for the validity of a postponed foreclosure sale (parties have no right to waive the publication requirement). NOTE: Unless the parties stipulate, personal notice to the mortgagor in extrajudicial foreclosure proceedings is not necessary because Section 31 of Act No. 3135 only requires posting of the notice of sale in three public places and the publication of that notice in a newspaper of general circulation. (Ramirez v. TMBC, G.R. No. 198800, 2013) Extra-judicial foreclosure before a notary public is valid under Act No. 3135. (Tagunicar v. Lorna Express,G.R. No. 138592, 2006). COMMERCIAL LAW A creditor is not precluded from recovering any unpaid balance on the principal obligation if the extrajudicial foreclosure sale of the property subject of the real estate mortgage results in a deficiency. (BPI vs. Reyes, G.R. No. 182769, 2012) The mortgagee-bank has no right to include in the foreclosure of the land the portion of the loan separately secured by chattel mortgage. Where the bank collected the entire amount of the loan from the proceeds of the foreclosure sale, including the portion that was not covered by the foreclosure of the real estate mortgage, it must return the excess amount. (Rural Bank of Toboso vs. Agtoto, G.R. Nos. 175697 & 176103, 2011) Procedure for Extra-judicial Foreclosure of Real Estate Mortgage (Act No. 3135)(Act No. 1508, A.M. N0. 99-10-05-0; January 15, 2000)(ARC-DIP-RET) 1. Filing of Application before the Executive Judge through the Clerk of Court; 2. Clerk of Court will examine whether the Requirements of the law have been complied with, that is, whether the notice of sale has been posted for not less than 20 days in at least 3 public places of the municipality or city where the property is situated, and if the same is worth more than P400.00, that such notice has been published once a week for at least 3 consecutive weeks in a newspaper of general circulation in the city or municipality; 3. The Certificate of sale must be approved by the Executive Judge; 4. In extrajudicial foreclosure of real mortgages in Different locations covering one indebtedness, only one filing fee corresponding to such debt shall be collected; 5. The Clerk of Court shall Issue certificate of payment indicating the amount of indebtedness, the filing fees collected, the mortgages sought to be foreclosed, the description of the real estates and their respective locations; 6. The notice of sale shall be Published in a newspaper of general circulation; 7. The application shall be Raffled among all sheriffs; Page 288 of 393 ATENEO CENTRAL BAR OPERATIONS 2020/21 8. After the redemption period has Expired, the Clerk of Court shall archive the records; and 9. Previously, the rule was that no auction sale shall be held unless there are at least Two participating bidders, otherwise the sale shall be postponed to another date. If on the new date there shall not be at least 2 bidders, the sale shall then proceed. The names of the bidders shall be reported by the Sheriff or the Notary Public who conducted the sale to the Clerk of Court before the issuance of the certificate of sale. On January 30, 2001, the Supreme Court issued a resolution amending paragraph 5 of A.M. 99-10-05-0 explicitly dispensing with the "two-bidder rule." Right of mortgagee to recover deficiency 1. Mortgagee is entitled to recover deficiency. 2. If the deficiency is embodied in a judgment, it is referred to as deficiency judgment. 3. Action for recovery of deficiency may be filed even during redemption period. 4. Action to recover prescribes after 10 years from the time the right of action accrues. NOTE: It is settled that if the proceeds of the sale are insufficient to cover the debt in an extrajudicial foreclosure of mortgage, the mortgagee is entitled to claim the deficiency from the debtor. While Act. No. 3135 does not discuss the mortgagee’s right to recover the deficiency, neither does it contain any provision expressly or impliedly prohibiting recovery. (BPI vs. Avenido, G.R. No. 175816, 2011) Nature of power of foreclosure by extrajudicial sale 1. Conferred for mortgagee’s protection. 2. An ancillary stipulation supported by the same cause or consideration for the mortgage. 3. A prerogative of the mortgagee. After the expiration of the redemption period without redemption having been made by petitioner, respondent became the owner thereof and consolidation of title becomes a right. Being already then the owner, respondent became entitled to possession. Petitioner already lost his possessory right over the property after the COMMERCIAL LAW expiration of the said period. (Spouses Gatuslao v. Yanson, G.R. No. 191540, 2015) Stipulation of Upset Price or “tipo” A stipulation of minimum price at which the property shall be sold to become operative in the event of a foreclosure sale at public auction is null and void, for the property must be sold to the highest bidder. (de Leon & de Leon, Jr, citing Banco Espanol Filipino v. Donaldson, 5 Phil. 418) Effect of inadequacy of price in foreclosure sale 1. Where there is right to redeem. General rule: Inadequacy of price is immaterial because the judgment debtor may redeem the property. Exception: The price is so inadequate as to shock the conscience of the court taking into consideration the peculiar circumstances. 2. Property may be sold for less than its fair market value upon the theory that the lesser the price the easier for the owner to redeem. The value of the mortgaged property has no bearing on the bid price at the public auction, provided that the public auction was regularly and honestly conducted. Waiver of security by creditor 1. Mortgagee may waive right to foreclose his mortgage and maintain a personal action for recovery of the indebtedness. 2. Remedies are alternative, not cumulative. 3. Options of the mortgagee in case the debtormortgagor dies: a) To waive mortgage and claim entire debt from the mortgagor’s estate as an ordinary claim; b) To judicially foreclose mortgage and prove any deficiency; or c) To rely on the mortgage exclusively without filing a claim for deficiency Redemption is a transaction by which the mortgagor reacquires or buys back the property which may have passed under the mortgage or divests the property of the lien which the mortgage may have created. Page 289 of 393 ATENEO CENTRAL BAR OPERATIONS 2020/21 Kinds of Redemption 1. Equity of redemption: Right of the mortgagor to redeem the mortgaged property after his default in the performance of the conditions of the mortgage but before confirmation of the sale. a. Applies to judicial foreclosure of real mortgage and chattel mortgage foreclosure. b. A second mortgagee acquires only the equity of redemption vested in the mortgagor, and his rights are strictly subordinate to the superior lien of the first mortgagee. NOTE: Redemption of property where the mortgagee is a banking institution is allowed within 1 year from the date of the registration of the confirmation of sale. 2. Right of redemption: right of the mortgagor to redeem the property within a certain period after it was sold for the satisfaction of the debt. a. Applies only to extrajudicial foreclosure of real mortgage. b. EXC: The right of redemption is also available in judicial foreclosure, in cases where the mortgagee is a bank. (Section 47 of RA 8791 or the General Banking Law of 2000). NOTE: The right of redemption, as long as within the period prescribed, may be exercised irrespective of whether or not the mortgagee has subsequently conveyed the property to some other party (Sta. Ignacia Rural Bank, Inc. v. CA, G.R. No. 97872, 1994) The tender of redemption money may be made to the purchaser of the land or to the sheriff; If made to the sheriff, it is his duty to accept the tender and execute the certificate of redemption. (Yap vs. Dy, Sr., G.R. Nos. 171868 & 171991, 2011). COMMERCIAL LAW The doctrine of indivisibility of mortgage does not apply once the mortgage is extinguished by a complete foreclosure thereof. Nothing in the law prohibits the piecemeal redemption of properties sold at one foreclosure proceedings.(Id). The general rule in redemption is that it is not sufficient that a person offering to redeem manifests his desire to do so; The statement of intention must be accompanied by an actual and simultaneous tender of payment; In case of disagreement over the redemption price, the redemptioner may preserve his right of redemption through judicial action, which in every case, must be file within the one-year period of redemption. (Torbela vs. Rosario, G.R. Nos. 140528 & 140553, 2011) The right of legal redemption must be exercised within specified time limits. However, the statutory period of redemption can be extended by agreement of the parties. (Republic vs. Marawi-Marantao General Hospital, G.R. No. 158920, 2012) Period of Redemption 1. Extra-judicial (Act No. 3135) a. Natural person – 1 year from registration of the certificate of sale with Registry of Deeds. b. Juridical person – same rule as natural person c. Juridical person (mortgagee is bank) – 3 months after foreclosure or before registration of certificate of foreclosure whichever is earlier (General Banking Law, Sec. 47) EXTRAJUDICIAL PERIODS OF FORECLOSURE REDEMPTION Banks Non-Banks Individual 1 year from 1 year from debtors / registration registration mortgagors of sale of sale Juridical Until 1 year from persons as registration registration debtors / of certificate of sale mortgagors of sale or within 3 months from sale whichever is earlier Page 290 of 393 ATENEO CENTRAL BAR OPERATIONS 2020/21 2. Judicial – before confirmation of the sale by the court PERIODS OF JUDICIAL FORECLOSURE REDEMPTION Banks Non-Banks Individual 1 year from X [equity of debtors / registration redemption mortgagors of sale only] Juridical 1 year from X [equity of persons as registration redemption debtors / of sale only] mortgagors NOTE: The registration of the sale is required only in extra-judicial foreclosure sale because the date of the registration is the reckoning point for the exercise of the right of redemption. In contrast, the registration of the sale is superfluous in judicial foreclosure because only the equity of redemption is granted to the mortgagor, except in mortgages with banking institutions. (Robles v. Yapcinco, G.R. No. 169568, 2014) NOTE: Allowing redemption after the lapse of the statutory period when the buyer at the foreclosure sale does not object but even consents to the redemption, will uphold the policy of the law which is to aid rather than defeat the right of redemption (Ramirez v. CA, G.R. No. 98147, 1993). As a rule, the period of redemption is not tolled by the filing of a complaint or petition for annulment of the mortgage and the foreclosure sale conducted pursuant to the said mortgage. Amount of the Redemption Price 1. Mortgagee is not a bank (Act No. 3135 in relation to Sec. 28, Rule 39 of Rules of Court) a. Purchase price of the property; b. 1% interest per month on the purchase price; c. Taxes paid and amount of purchaser’s prior lien, if any, with the same rate of interest computed from the date of registration of sale, up to the time of redemption. 2. Mortgagee is a bank (Section 47, General Banking Act of 2000) a. Amount due under the mortgage deed; COMMERCIAL LAW b. Interest at the rate specified in mortgage; c. Cost and expenses incurred by bank from sale and custody less income derived NOTE: Redemption price in this case is reduced by the income received from the property. Junior Mortgagees 1. After the foreclosure sale, there remains in the second mortgagee a mere right of redemption. His remedy is limited to the right to redeem by paying off the debt secured by the first mortgage. 2. He is entitled to the payment of his credit the excess of the proceeds of the auction sale. 3. In case the credit of the first mortgagee has absorbed the entire proceeds of the sale, the second mortgage is extinguished, since the mortgage cannot be enforced beyond the total value of the mortgaged property. Mortgagee in Possession – one who has lawfully acquired actual or constructive possession of the premises mortgaged to him, standing upon his rights as mortgagee and not claiming under another title, for the purpose of enforcing his security upon such property or making its income help to pay his debt. NOTE: The rights of the first mortgage creditor or mortgage over the mortgaged properties are superior to those of a subsequent attaching creditor and other junior mortgagees. (Lee vs. Bangkok Bank Public Company, Ltd. G.R. No. 173349, 2011) A mortgagor is allowed to take a second or subsequent mortgage on a property already mortgaged, subject to prior rights of the previous mortgages. (Palada vs. Solidbank Corp., G.R. No. 172227, 2011) Rights and Obligations of Mortgagee in Possession 1. Similar to an antichresis creditor – entitled to retain such possession until the indebtedness is satisfied and the property redeemed. Page 291 of 393 ATENEO CENTRAL BAR OPERATIONS 2020/21 2. Without right to reimbursement for useful expenses Right of Purchaser to Writ of Possession Writ of Possession – order whereby the sheriff is commanded to place in possession of real or personal property the person entitled thereto such as when a property is extrajudicially foreclosed.  The issuance of the writ of possession in an extrajudicial foreclosure is merely a ministerial function.  The purchaser at the foreclosure sale is entitled as of right to a writ of possession. Before lapse of redemption period – file an ex parte application and file a bond After lapse of redemption period – file an ex parte application and no need for a bond NOTE: In an extrajudicial foreclosure of real property, when the foreclosed property is in the possession of a third party holding the same adversely to the judgment obligor, the issuance by the trial court of a writ of possession in favor of the purchaser of said real property ceases to be ministerial and may no longer be done ex parte, but for the exception to apply, the property need not only be possessed by a third party, but also held by the third party adversely to the judgment debtor. (BPI vs. Golden Power Diesel Sales Center, G.R. No. 176019, 2011) The implementation of a writ of possession issued pursuant to Act No. 3135 at the instance of the purchaser at the foreclosure sale of the mortgaged property in whose name the title has been meanwhile consolidated cannot be prevented by the injunctive writ. (UCPB v. Spouses Lumbo, G.R. No. 162757, 2013) The purchaser can demand possession of the property even during the redemption period for as long as he files an ex parte motion under oath and post a bond in accordance with Section 7 of Act. No. 3135, as amended. Upon filing of the motion and the approval of the bond, the law also directs the court in express terms to issue the order of a writ of possession. When the redemption period has expired and title over the property has been COMMERCIAL LAW consolidated in the purchaser’s name, a writ of possession can be demanded as a matter of right. (PBCom v. Yeung, G.R. No. 179691, 2013) “Purchaser at the auction sale concerned whether in a judicial or extrajudicial foreclosure shall have the right to enter upon and take possession of such property immediately after the date of the confirmation of the auction sale and administer the same in accordance with law. Any petition in court to enjoin or restrain the conduct of foreclosure proceedings instituted pursuant to this provision shall be given due course only upon the filing by the petitioner of a bond in an amount fixed by the court conditioned that he will pay all the damages which the bank may suffer by the enjoining or the restraint of the foreclosure proceeding.” (The General Banking Law of 2000, Section 47) If a bank filed the Sheriff’s Provisional Certificate of Sale before the Registry of Deeds, and entries thereof were made in the Primary Entry Book, the refusal of the Register to annotate said registration on the titles to the properties should not affect the bank’s right to possess the properties. (Spouses Limso, Davao Sunrise, et. al. v. PNB, G.R. No. 158622, 2016) Redemption and repurchase distinguished The right to redeem becomes functus oficio at the end of the redemption period, and its exercise after the period is not really one of redemption but a repurchase. Distinction must be made because redemption is by force of law; the purchaser at public auction is bound to accept redemption. Repurchase however of foreclosed property, after redemption period, imposes no such obligation. After expiry, the purchaser may or may not re-sell the property but no law will compel him to do so. And, he is not bound by the bid price; it is entirely within his discretion to set a higher price, for after all, the property already belongs to him as owner. B. Essential Requisites Essential Requisites of Mortgage (FAVFAP): 1. Constituted to secure the Fulfillment of a principal obligation; 2. Mortgagor be the Absolute owner of the thing pledged or mortgaged; Page 292 of 393 ATENEO CENTRAL BAR OPERATIONS 2020/21  3. 4. 5. 6. NOTE: Before partition of estate, each heir only has an undivided interest in the estate and in each specific piece of property in the estate. Any mortgage on said property undertaken by an heir is valid, but only up the portion that may be allotted in partition to the heir (Rural Bank of Cabadbaran, Inc. v. Melencio-Yap, G.R. No. 178451, 2014, reiterated in Magsano v. Pangasinan Savings and Loan Bank, G.R. No. 215038, 2016) Mortgagor has Free disposal of the property, and in the absence thereof, that he be legally authorized for the purpose;  NOTE: If the property mortgaged was subject to a conditional contract to sell at the time the mortgage was entered into, which was annotated, such restrictions do not divest the owner of his ownership right. At most, the restrictions merely make the contract voidable by the person in whose favor the restrictions were made. (Vitug v. Abuda, G.R. No. 201264, 2106) Cannot exist without a Valid obligation; When the principal obligation becomes due, the thing in which the mortgage consists may be Alienated for the payment to the creditor; and Appears in a Public document duly recorded in the Registry of Property to be [validly constituted].  If the instrument is not recorded, the mortgage is nevertheless binding between the parties.  NOTE: Under the Doctrine of “Mortgagee in Good Faith”, even if the mortgagor is not the owner of the mortgaged property, the mortgage contract and any foreclosure sale arising therefrom are given effect by reason of public policy; Even if the mortgagor is not the rightful owner of, or does not have a valid title to, the mortgaged property, the mortgagee in good faith is, nonetheless, entitled to protection. (Torbela vs. Rosario, G.R. Nos. 140528 &140553, 2011) When a mortgagee relies upon what appears on the face of a Torrens title and lends money in all good faith on the basis of the title in the name of COMMERCIAL LAW the mortgagor, only thereafter to learn that the latter’s title was defective, being thus an innocent mortgagee for value, his or her right or lien upon the land mortgaged must be respected and protected. (Mahinay vs. Gako, Jr., G.R. Nos. 165338 & 179375, 2011) BUT: A bank whose business is impressed with public interest is expected to exercise more care and prudence in its dealings than a private individual, even in cases involving registered lands. A bank cannot assume that, simply because the title offered as security is on its face free of any encumbrances of lien, it is relieved of the responsibility of taking further steps to verify the title and inspect the properties to be mortgaged. In order for a mortgagee to invoke the doctrine of mortgagee in good faith, the impostor must have succeeded in obtaining a Torrens title in his name and thereafter in mortgaging the property. Where the mortgagor is an impostor who only pretended to be the registered owner, and acting on such pretense, mortgaged the property to another, the mortgagor evidently did not succeed in having the property titled in his or her name, and the mortgagee cannot rely on such pretense as what appears on the title is not the impostor's name but that of the registered owner. (Ruiz v. Dimailig, G.R. No. 204280, 2016) BUT: SC has held in a case that while the bank failed to exercise greater care in conducting the ocular inspection of the properties offered for mortgage, its omission did not prejudice any innocent third parties because the cause of the mortgagors' defective title was the simulated sale between the buyer/mortgagor and seller (the latter questioning the validity of the mortgage). Thus, no amount of diligence in the conduct of the ocular inspection could have led to the discovery of the complicity between the ostensible mortgagors/buyer and the true owners/seller. In fine, the bank can hardly be deemed negligent. Thus, the bank was considered as a mortgagee in good faith (Philippine Banking Corporation v. Dy, G.R. No. 183774, 2012) ALSO: SC has held that a bank should not necessarily be made liable if it did not investigate Page 293 of 393 ATENEO CENTRAL COMMERCIAL LAW BAR OPERATIONS 2020/21 or inspect the property. If the circumstances reveal that an investigation would still not yield a discovery of any anomaly, or anything that would arouse suspicion, the bank should not be liable. Such is the case when the TCT is clean, bearing no annotations evidencing any trust, lien, or encumbrance on the property, not forged or fake. There is also no showing that the bank was aware of any defect or any other conflicting right on the title when the property was mortgaged to it. In fact, the investigation of the property would still fail to bring any doubt as to the validity of the TCT (i.e., the title owners were in actual possession of the property). (Parcon-Song v Parcon, G.R. No. 199582. July 7, 2020) An entrustee under a trust receipt does not have a right to mortgage the property held in trust. This is because the entrustor, not the entrustee, is the owner of the property in trust. A mortgage must be executed by the absolute owner of the chattels to be valid (DBP vs. Prudential Bank, 2005;Art. 2085 (2)). Real estate mortgage over a conjugal property is void if the non-contracting spouse did not give consent (PNB v. Venancio Reyes, Jr., G.R. No. 212483, 2016) Legal Mortgage: The persons in whose favor the law establishes a mortgage have no other right than to demand the execution and the recording of the document in which the mortgage is formalized. Incidents of Registration of Mortgage 1. Mortgagee entitled to registration of mortgage as a matter of right. 2. Proceedings for registration do not determine validity of mortgage or its effect. 3. Registration is without prejudice to better right of third parties. 4. Mortgage deed once duly registered forms part of the records for the registration of the property mortgaged. 5. Mortgage by surviving spouse of his/her undivided share of conjugal property can be registered. Essential Requisites Common to Contracts of Mortgage: (FARVAS) 1. Constituted to Secure the fulfillment of a principal obligation; 2. Mortgagor be the Absolute owner of the thing mortgaged; 3. The persons constituting the mortgage have the Free disposal of their property, and in the absence thereof, that they be legally authorized for the purpose; 4. Cannot exist without a Valid obligation; 5. Debtor Retains the ownership of the thing given as a security; and 6. When the principal obligation becomes due, the thing in which the mortgage consists may be Alienated for the payment to the creditor. NOTE: Third persons who are not parties to the principal obligation may secure the latter by mortgaging their own property (Art. 2085; Chinabank vs. QBRO Fishing Enterprises, G.R. No. 184556, 2012) Important Points 1. Future property cannot be mortgaged. 2. Mortgage executed by one who is not the owner of the property mortgaged is without legal existence and registration cannot validate it. 3. Generally, mortgage of a conjugal property by one of the spouses without the consent of the other spouse is valid only as to ½ of the entire property. 4. In case of property covered by Torrens title, a mortgagee has the right to rely upon what appears in the certificate of title and does not have to inquire further. However, a bank whose business is impressed with public interest is expected to exercise more care and prudence in its dealings than a private individual, even in cases involving registered lands. A bank cannot assume that, simply because the title offered as security is on its face free of any encumbrances of lien, it is relieved of the responsibility of taking further steps to verify the title and inspect the properties to be mortgaged. 5. Mortgagor must have free disposal of property. Page 294 of 393 ATENEO CENTRAL BAR OPERATIONS 2020/21 6. Thing mortgaged may be alienated by the mortgagor. [NOTE: Removal, Sale or Pledge of Mortgaged Property. — The penalty or arresto mayor or a fine amounting to twice the value of the property shall be imposed upon: i. Any person who shall knowingly remove any personal property mortgaged under the Chattel Mortgage Law to any province or city other than the one in which it was located at the time of the execution of the mortgage, without the written consent of the mortgagee, or his executors, administrators or assigns. ii. Any mortgagor who shall sell or pledge personal property already pledged, or any part thereof, under the terms of the Chattel Mortgage Law, without the consent of the mortgagee written on the back of the mortgage and noted on the record thereof in the office of the register of deeds of the province where such property is located. (Revised Penal Code, Art. 319)] 7. Creditor is not required to sue to enforce his credit. 8. Mortgagor may be third person (i.e., not the principal debtor). 9. The liability of an accommodation mortgagor extends only to the property pledged or mortgaged. 10. Mortgage may be constituted on immovables only (Art. 2124) 11. Delivery is not necessary for mortgage 12. The mortgage is not valid against 3rd persons in good faith if not registered (Art. 2125) Right of Creditor Where Debtor Fails to Comply With His Obligation 1. Creditor is merely entitled to move for the sale of the thing mortgaged with the formalities required by law in order to collect. 2. Creditor cannot appropriate to himself the thing nor can he dispose of the same as owner. COMMERCIAL LAW Prohibition against Pactum Commissorium  Stipulation is null and void - stipulation where thing mortgaged shall automatically become the property of the creditor in the event of nonpayment of the debt within the term fixed.  The essence of pactum commissorium is that ownership of the security will pass to the creditor by the mere default of the debtor. (Spouses Solitarios v. Spouses Jaque, G.R. No. 199852, 2014) Requisites of pactum commissorium: 1. There should be a mortgage; and 2. There should be a stipulation for an automatic appropriation by the creditor of the property in the event of nonpayment.(Pen v. Julian, G.R. No. 160208, January 11, 2016) Effect on Security Contract: Nullity of the stipulation does not affect validity and efficacy of the principal contract. There is no automatic appropriation of the object of the contract of mortgage, as it takes the intervention of the court to exact fulfillment of the obligation. If something more is to be done, like the execution of the deed of assignment, there is no pactum commissorium (Uy Tong v. Court Appeals, G.R. No. 77465, 1988). The Memorandum of Agreement and the Dacion in Payment Agreement contain no provisions for foreclosure proceedings nor redemption. Under the MOA, the failure by A to pay his debt within the one-year period gives B the right to enforce the Dacion in Payment transferring to it ownership of A’s land. B, in effect, automatically acquires ownership of the properties upon A’s failure to pay his debt within the stipulated period (Sps. Ong v. Roban Lending Corporation, G.R. No.172592, July 9, 2008). There is no automatic appropriation of the object of the pledge upon maturity of the loan. The prohibition against pactum commissorium is intended to protect the debtor, pledgor or mortgagor against being over-reached by the creditor who holds a piece of property, the value of which is more valuable than the amount of the Page 295 of 393 ATENEO CENTRAL COMMERCIAL LAW BAR OPERATIONS 2020/21 debt. Furthermore, when the security of the debt is also money deposited in a bank, the amount of which is less than the debt, it is not illegal for the creditor to encash the time deposit certificate to pay the debtor’s obligation (Yau Chu v. Court of Appeals, G.R. No. 78159,1989). Important Points 1. Mortgage is indivisible. Exceptions: a. Where each one of several things guarantee determinate portion of credit. b. Where only portion of loan was released. Example: X borrowed 80k from the bank and he mortgaged his 100 ha. property. Lender was only able to release 40k due to CB restrictions. The Court held that the bank can only foreclose on 50% of the mortgaged land (50 hectares) (Central Bank v. CA, G.R. No. L-45710, 1985). c. Where there was failure of consideration. 2. The rule that real property, consisting of several lots which should be sold separately, applies to sales in execution, and not to foreclosure of mortgages. 3. [The mere embodiment of a real estate mortgage and a chattel mortgage in one document does not have the effect of fusing both securities into an indivisible whole. (PBCOM v. Macadaeg, 109 Phil. 981 (1960))] 4. Contract of mortgage may secure all kinds of obligation, be they pure or subject to a suspensive or resolutory condition. 5. A promise to constitute mortgage gives rise only to a personal right binding upon the parties and creates no real right in the property. What exists is only a right of action to compe

Commercial Law

Related documents

Add this document to collection(s)

Add this document to saved

Suggest us how to improve StudyLib