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Another Compilation of Business Law
Accountancy (Silliman University)
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BUSINESS LAWS
AND REGULATIONS
Rosalie Dela Cruz-Cada
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Philippine Copyright 2021
by Rex Book Store, Inc.
and
Rosalie Dela Cruz-Cada
RBS Business Laws and Regulations
2021 Edition
ISBN 978-621-04-3651-8
Classification: Textbook (04-AC-00053-0)
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PREFACE
UNIT I
THE LAW ON PARTNERSHIP
CH A PTER 1: G EN ERAL PRO VISIO N S
i
Essen tial ‘Featu res........................................... .............................................. ............ ........
Parties, O b ject an d Fo rm ...,,.......................................:.........................’................. ......
D u ration of P artn ersh ip ................................. .......................... ............. .........................
Ru les to D eterm in e Existe n ce ........................,............................................................. .
Kin d s of Partn ersh ip ....................................... .................. ..............................................
Kin d s of Partn ers........... .................. .................................. ,........................ ......... ..........
Partn ersh ip as D istin gu ish ed from O ther Con tracts........................ ............... .........
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CH A PTER 2: RIG H TS AN D O BLIG ATIO N S
LESSO N 1: RIG H TS AN D O BLIG ATIO N S O F TH E PARTN ERSH IP
Righ t to Con trib u tion .... ....................................... ....................... .................. 15
....... 17
Righ t to Ad d ition al Con trib u tion ...................................... ..................;.
Righ t to Ap p ly Paym en t Received,to Partn ersh ip C red it...
..........
18
Righ t to Retu rn of Cred it Received ........ .......... .............. ................................ .
19
Righ t to In d em n ity for D am ages......... ........................... ........... ................ ......... 19
Suit for D am ages ............................................... ........... .................. £.......... .
20
Resp on sib ility to P artn ers..... ...................................... ................................ .........20
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LESSO N 2: RIG H TS AN D O BLIG ATIO N S O F PARTN ERS IN T ER SE .
Right to Associate An oth er in Sh are.... .......................................................
22
Right to In sp ect Partn ersh ip Book s,.... .....................................— ............. .......22
Right to Form al Accou n t ...i......... ...............................................................22
Prop erty Rights of P a rtn e rs ................................................................................... 23
O w n ersh ip of Certain Prop erties...................... .................................. ................ 23
Rights in a Specific P ro p e rty ............................. .......................... .........................23
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In terest in P a rtn e rsh ip ......................................................................................
Righ t to Particip ate in M a n a g e m e n t............................................................
Righ t to Profits an d O b ligation for Lo s s e s .................................................
24
Exclu sion of Partn er from S h are........'...........................................................
O b ligation to Ren d er In form ation ............................................... ........... .....
28
O b ligation to A ccou n t an d A ct as T r u s te e .... ............................................
28
25
27
28
LESSO N 3: O BLIG A TIO N S O F T H E P A R T N ER S H IP /P A R T N ER S TO
T H IR D P ER S O N S
O b ligation to O p erate u n d er a Firm N a m e ...............................................
29
Liab ility of P artn ersh ip ......................................... ...................... ........ i.........
29
Liab ility of P artn ers for Partn ersh ip C o n tra cts ........................ ................
30
Con veyan ce of Partn ersh ip Real P ro p e rty .................... ..................... ......
Liab ility of P artn ers ................................................................ .........................
31
Liab ility of an In com in g P a r tn e r ...................................................................
33
N otice to or Kn ow led ge of th e P artn e rsh ip ................................ 1........ ....
33
C H A P T ER 3: D IS S O LU T IO N A N D W IN D IN G U P
Cau ses of D isso lu tio n ................ ............ ........... .....................................................
37
Effects of D issolu tion ................. ...................................... .......... ............................
40
W in d in g Up P a rtn e rs ............ ................................................................. ..................
41
Righ ts of P artn ers in Case of D issolu tion ..................................... .............. ......
42
Righ ts of P artn ers in Case of Rescission ......................................... ......................
42
Settlin g of A ccou n ts Betw een P a rtn e rs...............................................................
43
Righ ts of Cred itors of a D issolved Partn ersh ip ..................... ............ ........... .
44
Righ ts of a R etired P artn er or a Rep resen tative of a D eceased P a r t n e r ......
45
Righ t to an A cc o u n t ........................................ ................ .................................. ....
45
C H A P T ER 4: LIM IT ED PA R T N ER SH IP
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C h a r a cte r is tics ................... .......... .....................................- .................. *..................
49
Fo r m a t i o n .................... ............................................................................ ............ *—
50
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M a n a g e m e n t.................. ......... ...... .............................................................................
O b ligation s of a Lim ited P a rtn e r..............:.......................... ................••••••?........
Righ ts of a Lim ited P a rtn e r........... .................... ............. ........................... :*•*•......
D issolu tion of Lim ited P a rtn e rs h ip .............................. ...................•••••...... .
Settlem en t of A cco u n ts .......... .......... .................. ............ .......... ................
A m en d m en t or Can cellation of Certificate................................................ *.......
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UNIT II
REVISED CORPORATION CODE
CH A PTER 1: O RG AN IZATIO N , IN CO RPO RATIO N , AN D FUN CTIO N S O F
D IR EC TO RS/O FFICERS
LESSO N 1:
Lesson 1.1: G EN ER A L PRO VISIO N S
Classes of C orp oration s......................................................................................64
Corp orators, In corp orators, Stockh old ers, an d M em b ers..........................64
65
Classification of S h ares......................................................................
D octrin e of Eq u ality of Sh ares....................................................................... 67
O th er Kin d s of Stock s/Sh ares..................................... ...................................68
D octrin e of Piercin g th e Veil of Corp orate En tity
................ ...............68
Lesson 1.2: IN CO RPO RATIO N AN D O RG AN IZATIO N O F
PRIVATE CO RPO RATIO N S
N u m b er an d Q u alification s of In corp orators............................................... 70
Term s of Corp orate Existen ce............. .............. ............................................. 72
Cap ital Stock R eq u irem en ts.......................
72
Con ten ts of th e Articles of In corp oration ..................................................... 73
Am en d m en t of Articles of In corp oration ...... ............................................. 74
G rou n d s Wh en Articles of In corp oration or Am en d m en t
M ay Be D isap p roved .................................. .................................... ......... ...... 75
Corp orate N am e .......;......
76
Registration , In corp oration , an d Com m en cem en t of
Corp orate Existen ce .................. .................................. ................................ . 77
Effects of N on -u se of Corp orate Ch arter an d
Con tin u ou s In op eration .............. ......................... ............... .......................... 78
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LESSO N 2:
Lesson 2.1: BO ARD O F D IR EC T O R S/T R U ST EES A N D O FFIC ER S
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Th e Board of D irectors or Tru stees of a Corp oration ,
Its Q u alification s an d Term s >......................................................................... 81
D isq u alification of D irectors, Tru stees, or O ffice rs.................................. 82
Election of D irectors or Tru stees ................. ....................... <........................ 84
Corp orate O fficers ............................................................
Rep ort of Election of D irectors, Tru stees, an d O fficers;
N on -h old in g of Election an d Cessation from O ffice .........................
87
Rem oval of D irectors or Tru stees ................................................. ..........
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Vacancies in the Office of D irector or Tru stee; Em ergen cy Board ......... 88
Comp en sation of D irectors or Tru stees....................................................... 90
Liabilities of D irectors, Tru stees, or O fficers.............................................. 91
D ealings of D irectors, Tru stees, or O fficers w ith th e Corp oration ........92
Con tracts Betw een Corp oration s with In terlock ing D irectors............... 93
Disloyalty of a D irector....................................................................................93
Execu tive M an agem en t and O th er Special Com m ittees......................... 95
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Lesson 2.2: PO WERS O F CO RPO RATIO N S
Corp orate Powers and Cap acities................................................... :..............97
Power to Exten d or Shorten Corp orate Term .............................................. 98
Power to In crease or D ecrease Cap ital Stock; In cu r, Create,
or In crease Bond ed In d eb ted n ess.................................................................... 98
Power to Acq u ire O w n Sh ares......... ............................................................. 101
Pow er to Invest Corp orate Fu n d s in An oth er Corp oration or
Bu sin ess or for Any O th er P u rp o se ..............................................................102
Pow er to D eclare D ivid en d s............................................................................ 103
Power to En ter into M an agem en t Con tract................................................. 106
Ultra Vires Acts of the Corp oration s....................... :........................... ........ 107
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LESSO N 3:
Lesson 3.1: BYLAWS
Ad op tion of Bylaw s..... .............................................
Lesson 3.2: M EETIN G S
Regu lar an d Special Meetings of Stockholders or M em b ers
............ 113
Regu lar an d Special Meetings of D irectors or Tru stees; Q u oru m ......... 116
Person in Ch arge of Presid in g the M eetings ........ ....................................117
Righ t to Atten d an d Vote in M eetin gs.........................................................117
M an n er of Voting; Proxies........ »................... .............................................. . 118
C H A P T ER 2: RIG H TS O F STO CKH O LD ER, M ERG ER, AN D APPRA ISA L
RIG H T
LESSO N 1:
Lesson 1.1: STO CKS A N D STO CKH O LD ERS
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Su b scrip tion Con tract............................................................ ......................... *^7
Con sid eration for Stock s.................................................................................^
Certificate of Stock an d Tran sfer of S h ares........................ ................ .......^
Issu an ce of Stock Certificates........ ................ ..............................................
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Liability of D irectors for Watered S tock s................................................... 132
D elin q u ency S a le ............................
134
Effects of D elin q u en cy..................................................................................... 136
Lost or Destroyed C ertificates......... ................................................. ........... 136
Lesson 1.2: CO RPO RATE BO O KS AN D RECO RD S
Books to Be Kept; Slock Tran sfer A g e n t...................................................... 142
Righ t to Fin an cial Statem en ts................................................................... . 144
LESSO N 2:
Lesson 2.1: M ERG ER AN D CO N SO LID ATIO N
Plan of M erger or Con solidation ...... ...........................................................145
Stock h old ers' or M emb ers' Ap p roval............................................................146
Articles of M erger or Con solid ation ..............................................................147
Effectivity of M erger or Con solid ation ......................................................... 148
Effects of M erger or Consolidation .................. ............................................ 149
Lesson 2.2: A PPRA ISA L RIG H T
Wh en to Exercise Ap p raisal R ig h t................................................................. 151
C H A P T ER 3: O T H ER CLASSES O F CO RPO RATIO N S, D ISSO LU TIO N , AN D
PO WERS O F SEC
LESSO N 1: N O N STO C K CO RPO RATIO N
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159
P u r p o s e s ...........................
Righ t to Vote.......................................... ................................................. ............ ....... 160
Election an d Term of Tru stees................... ....................................... ..................... 160
Ru les of D istrib u tion of A ssets...... ........... ...................................................... *...... 161
Con version from a S to c Corporation to a N on stock C orp oration ................ 162
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LESSO N 2:
Lesson 2.1: CLO SE CO RPO RATIO N S
Articles of In corp oration ..............................
164
Effects of Issu an ce or Tran sfer of Stock s in Breach of
Q u alifyin g Con d ition s......................................v..............................................164
165
Agreem en ts b y Stock h old ers......................................
Wh en a Board M eetin g is U n n ecessary or Im p rop erly H e ld ................. 166
Am en d m en t of Articles of In corp oration ................................
166
166
D ead lock s............................
With d raw al of Stock h old er or D issolu tion of Corp oration ......................167
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LESSO N 2.2: SPECIAL CO RPO RATIO N S
LESSO N 2.2.1: ED UCATIO N AL CO RPO RATIO N S
Board of T ru stees...................... ............................................................. 168
LESSO N 2.2.2: RELIG IO US CO RPO RATIO N S
Corp oration Sole............................................. ........................................ 169
Articles of In corp oration .........................................................................169
Submission of th e Articles of In corp oration ..................................... 170
Acquisition and Alienation of P r o p e rty ..............................................170
Filling of Vacan cies.................................................................................. 171
D issolu tion ;.........................................-.................................................. 171
Religious Societies................................................................................... 171
LESSO N 2.2.3: O N E-PERSO N CO RPO RATIO N
M in im u m Capital Stock N ot Required for
O n e-p erson Corp oration .......... ....................................
172
Articles of In corp oration ..................................................................... 172
Bylaw s....................................................................................................... 173
Display of Corp orate N am e................................................................... 173
Single Stockholder as Director and Presid en t................................... 173
N om in ee and Alternate N om in ee........................................................ 173
Treasurer, Corp orate Secretary, and O th er O fficers.........................174
Minute Books, Records, and Rep ortorial Req u irem en ts.................175
Conversion from an O rd in ary Corp oration to O P C .........................176
Conversion from OPC to an O rd in ary Stock Corp oration .............177
LESSO N 3: D ISSO LUTIO N O F CO RPO RATIO N
M eth od s of D issolu tion ............ ........................
180
Volu n tary Dissolution Wh ere No Cred itors Are A ffected ................................180
Volu n tary Dissolution Wh ere Cred itors Are Affected ; Proced u re an d
Con ten ts of Petition ...... ...........................
181
D issolu tion by Sh orten in g Corp orate Term ........................................................182
With d raw al of Requ est and Petition for D issolu tion ...... ............. .....................182
In volu n tary D issolu tion ..................................................................
183
Corp orate Liqu id ation >.................... .......................*................... ............................ 184
LESSO N 4: FO REIG N CO RPO RATIO N S
Ap p lication for a Licen se.;.................................................................... A.................187
Issu an ce of a Licen se..............................................
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Resident Agen t; Service of P ro ce ss...........................................................
191
Applicable La w s ..........................................:............... ............................................ 192
Am en d m en ts to Articles of In corp oration or Bylaws of
Foreign Corp oration s..............................................................
193
M erger or Con solid ation Involving a Foreign Corp oration
Licen sed in the Ph ilip p in es...................................................................................... 193
Doing Bu sin ess With ou t a Licen se................................ :...................................... 193
Revocation of a Licen se............................................................................................. 195
With d raw al of Foreign Corp oration s......... ........................................................... 197
197
Foreign In vestm en ts Act of 1991..........
LESSO N 5:
Lesson 5.1: IN VESTIG ATIO N S, O FFEN SES, AN D PEN ALTIES
In vestigation an d Prosecu tion of O ffen ses..................................................200
Ad m in istrative San ction s................................................................................201
Lesson 5.2: M ISCELLAN EO US PRO VISIO N S
204
Rep ortorial Requ irements of Corp oration s.................
Visitorial Pow er an d Confidential N atu re of Exam in ation Resu lts...... 205
Pow ers, Fu n ction s, an d Jurisdiction s of the S EC ....................................... 205
D evelop m en t an d Implementation of Electron ic Filin g an d
M on itorin g S ystem ...........................................................................................208
Arb itration for Corp oration s.......... ............................................................ 208
UNIT III
COOPERATIVES
C H A P T ER 1: PH ILIPPIN E CO O PERATIVE CO D E O F 2008
(REPUBLIC ACT N O . 9520)
Pu rp ose.................................................................................
214
Pow ers...................................
214
Types of C oop eratives................... ...................................................................................214
Registration of Coop eratives................................
217
Memb ership in a Coop erative..................................................................................... 219
General A s s e m b ly .............................................................................................................. 219
Board of D irectors......................... ............................. ................................................... — 220
Com m ittees of th e Coop erative...........................................................................
221
Liability for D am ages an d Secret Profits....................................................................... 221
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Com p en sation ................................................................................................ .....................223
Self-dealing Directors, Officers or Com m ittee M em b ers...........................................223
Disloyalty of a D irector.......................... .......................................................................... 223
Illegal Use of Confidential In form ation ............................. ................................... ....... 224
Removal of Officers,............................................. ..............................................................224
Tax Treatment of Coop eratives........................................................................................ 224
In solven cy............................................................................................... ............................ 224
D issolu tion ...........................................................................................................................225
Liqu idation of a Coop erative........ ...................................................................................225
Sou rce of Cap ital.................................................................................................................226
Investmen t of Cap ital.........................................................................................................226
CH A PTER 2: CO O PERATIVE D EVELO PM EN T A U T H O R IT Y
CH ARTER O F 2019 (REPUBLIC ACT N O . 11364)
Powers, Fu n ction s, and Responsibilities of the Coop erative
D evelop m en t Auth ority (CDA).... ...................................... ............................................ 231
Pow ers an d Fu n ction s of the Board of D irectors.........................................................232
Office of the Ad m in istrator..................................... ........................................................233
Registration for Tax Exem p tion .................................... ...................................................233
Proh ib ition ................................... ........................................................................................233
Settlem en t of D isp u tes..... ................................................................................................. 234
Train in g S tan d ard s.......................................................... ................................. ............... 234
Coop eratives in Different Sectors ....................:.............................................................235
UNIT IV
NEGOTIABLE INSTRUMENTS LAW
C H A P T ER 1: CLASSES, PARTIES, AN D REQ U ISITES O F
N EG O TIA BLE IN STRUM EN TS
LESSO N 1: P R ELIM IN A R Y CO N SID ERATIO N S
Con cep t an d Classes of N egotiab le In stru m en ts............................................... 239
G en eral Ch aracteristics of a Prom issory N o t e ....................................................240
G en eral Ch aracteristics of a Bill of Exch an ge....................................................-241
Fu n ction s an d C h aracteristics................................................... v——.................... 242
N egotiab le In stru m en ts Com p ared w ith O th er P ap ers....................................242
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LESSO N 2: FO R M A N D IN TERPRETA TIO N
Req u isites of N e g o tia b ility ........................
245
M u st Be in Writin g, Sign ed b y th e M ak er or D raw er................................. ......245
M u st Con tain an Un con d ition al Prom ise or O rd er to Pay a Sum
Certain in M on ey................................................................. ........................... ......... .. 246
M u st b e Payab le on D em an d or at a Fixed or D eterm in ab le Fu tu re T im e.... 247
M u st b e Payab le to O rd er or to Bearer............................................... .......... ,...... 248
Con cep t of a Fictitiou s Person ................................................... .'.................. .......... 250
Id en tification of th e D raw ee..............................................
250
Com p letion an d D elivery of In stru m en ts........................................................... 254
In com p lete b u t D elivered In stru m en ts.............*................... ......... ......................254
In com p lete In stru m en t N ot D elivered ................................................................... 256
Com p lete b u t Un d elivered In stru m en ts...... ......................
257
Ru les to Be Follow ed in In terp retin g Negotiable In stru m en ts ....................... 258
Liab ility on th e In stru m en t....................................................................................... 258
Fo r g e r y ......................................................
259
Cu t-off R u le ............... ................ ....................... ............ .................................... .......262
M aterial A lteration ...............................
263
C o n s id e r a tio n .....................
264
C H A P T ER 2: N EG O TIATIO N AN D H O LD ERS
LESSO N 1: N EG O TIA TIO N
M od es of Tran sfer..................
Con cep t of N egotiation .... ....
Ways of N egotiation ..............
In d o rse m e n t..... ....................
N egotiation b y a Prior Party
273
274
274
274
281
LESSO N 2: H O LD ERS
G en eral Con cep t of a H old er....................................................>............................. . 283
H old er in D u e C o u r s e ...... ................................. ........ ............. ............................... 283
Righ ts of H old er in D u e C o u rse...................... „............ ............... ...............^ ....*.287
Shelter Ru le................................................................................ ......................;4........288
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CH A PT ER 3: LIABILITY O F PARTIES, D EFEN SES, AN D EN FO RCEM EN T
LESSO N 1: LIA BILITY O F PARTIES
Prim ary an d Secon d ary Liab ility.........................................................................293
Liab ility an d /or Warran ties of Parties.... ..................... r .................................. 294
LESSO N 2: D EFEN SES
Real D efen ses.................................. ..........................................................................300
Person al D efen ses..................................... >!.,............,.......... .......... .j .......:.........
301
••,
•
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LESSO N 3: EN FO RCEM EN T O F LIABILITY
Parties Prim arily Liable and Parties Secon d arily Liable........................ .......... 305
Gen eral Steps in Enforcin g Liab ility.......................... ............ .............................. 305
Presen tm en t for Paym en t....................................................................................... 305
N otice of D ish on or..... ................... .................. .................... .......... ................................
CH APTER 4: D ISCH ARG E OF IN STRUM EN T AN D O F PARTIES
SECO N D ARILY LIABLE
LESSO N 1: D ISCH ARG E OF IN STRUM EN TS
H ow In stru m en t Is D isch arged ............................................................................ 317
D isch arge of Persons Secondarily Liab le............... ............................................. 318
LESSO N 2: PRO M ISSO RY N O TE D ISTIN G UISH ED FRO M
BILL O F EXCH AN G E
Prom issory N ote....... ............................... ...............................................................320
Bills of Exch an ge................................................ ...................................... .......... ..... 320
Presen tm en t for Accep tan ce ............................................... [................................ 321
322
A ccep tan ce...... .....................................
Referee in Case of N eed ........................................ ....................... ............ ............. 323
Protest..............................................................................................
324
Protest for Better S ecu rity......... .............................................. ............................ 325
Accep tan ce for H o n o r.............................................................
325
Paym en t for H on or...... ............................................................................................. 326
Bills in a S e t......................... .'..................... ...............................................................327
C H A P T ER 5: CH ECK AS A SPECIAL TYPE O F BILL O F EXCH AN G E
Con cep t of a C h e ck ........................
x xi
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C H A P T ER 6: TH E BO UN CIN G CH ECKS LAW AN D
ARTICLE 315 (SW IN D LIN G ) O F T H E REVISED PEN AL CO D E
LESSO N 1: T H E BO UN CIN G CH ECK S LAW (BATAS PAM BAN SA BLG . 22)
Elem en ts of th e C r i m e ..................................................... .-....................................... 348
D efen ses.........................................
349
Pen alty...... .................................................
351
LESSO N 2: A R T IC LE 315. PAR. 2 (D ) O F TH E REVISED PEN AL CO D E
(SW IN D LIN G O R ESTAFA)
Elem en ts of th e C r i m e ................................................................................................354
Pen alty.............................................................................................................................355
BIBLI O G R A P H Y................................................................................................................. 359
I N D E X.................................................................................................................................... 385
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xiv
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1
This book is inten d ed p rim arily for accou n tan cy stu d en ts, b u sin ess stud en ts,
and Certified Public Accou n tan t Licen su re Exam in ation can d id ates. This w ork can
also serve as a simplified material for u se of law stu d en ts. Bu sin ess ow n ers an d
m an agers can u se th is as a gu id e in their business op eration s.
'
i
The p rovision s of each law w ere exp lained in th e sim plest w ay possible w ith
the u se of laym an 's lan gu age, examples, and exercises tak en from b ar exam in ation
q uestion s an d cases d ecid ed by the Supreme Cou rt w h ich w ere also in corp orated to
assist th e read er and in sp ire them to do an extra read in g as th e titles an d citation s of
the cases w ere lik ewise included. Legal term s w ere defined for easy com p reh en sion .
Lesson su m m ary is p rovided at the end of each topic and exercises in th e form of
h yp oth etical q uestion s and cases as well as True or False q u estion s w ere p rovid ed
at th e en d of each ch ap ter to test the knowledge acq u ired from th e lesson .
It is h ard to p u t 5 to 6 laws in one book and I h op e th at th e effort I p u t th rou gh
in w ritin g it will serve the p u rp ose of the stu dents—to learn th e law s th ey w ill n eed
to excel in th e career th ey choose.
I w an t to exp ress my heartfelt gratitu d e to m y lovin g h u sb an d , Dr. Leo Cad a
Jr., an d m y lovely d au gh ters Shirley Marie, Dr. Joan n e Irish , Elizab eth G race, an d
Dr. Clau d in e Rose, m y sons-in-law, and gran d d au gh ters for all th eir su p p ort w h ile I
w as w ritin g th e book. Special th an k s to Mr. Eugene Villaceran w h o en cou raged m e
to w rite th is book.
Th at in all th in gs God m ay be glorified!
Rosalie J. D ela Cru z-C ad a
xv
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xvi
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IN TRO D UCTIO N
A p a r tn er sh ip a r ise s from a con tract en tered in to b y p eo p le w n o tr u s t on e
a n o th er a n d a r e w illin g to co n trib u te th eir m on ey, p r op erty , a n d se r v ice to a
co m m o n fu n d th a t w ill b e u sed to g en erate p rofit. Th e v ery fo u n d a tio n a n d essen ce
o f a p artn ersh ip is th e m u tu al d esire an d con sen t o f th e p artn ers w h o h av e th e righ t
to ch o o se w ith w h o m t h e y w ish to a sso cia te . Th e en tir e-p r o v isio n s o f la w r ela tiv e
to p a r tn e r sh ip ca n b e fo u n d in A rticles 1767 to 1867 o f Title IX, Bo o k IV o f th e C iv il
Cod e o f th e P h ilip p in es.
IN TEN D ED LEARN IN G O UTCO M ES
A t th e en d o f th e Ch a p ter , th e stu d en ts w ill b e able to e xp la in th e n a tu r e o f a
p a r tn e r sh ip a s a co n tr a ct a n d k n o w h ow to p u t u p a p a r tn er sh ip .
Essen tial Featu res
A p a r t n e r s h ip is a ty p e o f b u s in e s s o r g a n iz a tio n cr ea ted b y a co n tr a ct. A s
p r ov id ed u n d e r A rticles 1767 o f Book IV o f th e Civil Cod e o f th e P h ilip p in es in ord er
th a t th e r e m a y b e a p a r tn er sh ip , tw o or m o r e p e r so n s m u st a g r ee to u n it e th eir
m on ey, p r o p er ty , labor, o r s k ill in ca r r y in g ou t a le g itim a te b u sin e ss fo r p r o fit. Tw o
or m or e p e r so n s m a y a lso fo r m a p a r tn e r sh ip fo r th e exer cise o f t h e ir p r o fessio n . A
p a r tn er sh ip d u ly fo r m ed u n d er th e la w is a ju r id ica l p er so n th a t h a s a p e r so n a lity
se p a r a te a n d d istin ct fr o m th e p a r t n e r s . A cco r d in g to A rticle 1768, it m a y a cq u ir e
an d p o sse ss a ll k in d s o f p r o p e r tie s; in cu r o b lig a tio n s, a n d file ca se s or b e co m e
d efen d a n ts in ca ses filed in co u r ts. A rticle 1774 p r o v id es th a t r e a l p r o p e r tie s or an y
in ter est th e r e in m a y b e a cq u ir ed in th e p a r tn e r sh ip n a m e sin ce it h a s a ju r id ica l
p e r so n a lity sep a r a te fr o m a n d d is tin ct fr o m th e p a r tn e r s a n d o w n er sh ip ca n b e
co n v ey ed o n ly in th e n a m e o f th e p a r tn er sh ip .
1
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In ord er to estab lish th e existen ce of a p artn ersh ip , th ere m u st be: fl) -t valid
Con tract; (2) legal cap acity of th e p erson s form in g th e p artn ersh ip ; (3) m u tu al
con trib u tion of m on ey, p rop erty, or in d u stry to a com m o n b u sin ess; (4) a law fu l
b u sin ess; an d (5) p rim ary p u rp ose w h ich is to ob tain p rofits an d to d ivid e th e sam e
am o n g th e p arties. Sin ce th e p artn ersh ip is for th e com m o n b en efit or interest of
th e p a r tn e rs , it is n ot n e ce s s a ry th a t th e
in te n tio n to d ivid e th e p ro fits a m o n g th e
p a rtn e rs be in eq u al sh ares.
A p artn ersh ip as a con tract h as th e follow in g ch a racteristics:
•
Con sen su al - it is p erfected by m ere con sen t, w h en tw o or m ore p erson s
agree exp ressly or im p lied ly, excep t if real p ro p e rty is con trib u ted
w h erein , it b ecom es a form al or solem n co n tra ct th at req u ire s th e con tract
of p artn ersh ip to be n otarized an d an in ven tory of real p r o p e rty attach ed
to th e said p u b lic in stru m en t.
•
Bilateral - it is en tered b etw een tw o or m ore p e rso n s With recip ro cal righ ts
an d ob ligation s.
•
Prin cip al - jt d oes n ot d ep en d for its valid ity or e xiste n ce u p on s o m e o th er
con tract
•
Com m u tative - the u ndertaking of one p artn er is regard ed as the
equivalent of that of the other partners.
•
Prep aratory - it is en tered in to so th at su ch p erson s m ay law fu lly e n g a g e in
b u sin ess to realize p rofits w h ich will th en b e d ivid ed a m o n g th em selv es.
•
O n erou s - w h ere p artn ers con trib u te som eth in g so th at th ey m a y s h a re in
th e p rofits of th e b u sin ess.
•
N om in ate - it has a special n ame or designation u nd er th e law.
Parties, O b ject an d Form
An y p erson capacitated to a con tract may enter into a con tract of partn ersh ip .
As su ch , p erson s wh o are suffering from civil interdiction, m in ors, in san e or
d em en ted p erson s, deaf-mutes who do nojt know how to write, and incompetents
w h are u n d er gu ard ian sh ip can n ot enter into a partnersh ip. On th e oth er hand, the
cap acity of the following p erson s to en ter into a con tract of p artn ersh ip is limited: (1)
th ose w h o are prohibited from givin g each oth er any donation or ad van tage cannot
en ter into a u n iversal p artn ersh ip ;1 and (2) a corp oration which can n ot en ter into a
p artn ersh ip in the absence of exp ress au th orization by statu te or ch arter, but may
en gage in a joint ven tu re with oth ers.*2
'A rticle 1781, Civil Cp d e of the Ph ilip p ines.
2Au rb ach vs. San itary Wares M an u factu rin g Corp oration , G.R. N o. 75875, D ecem b er 15,1989.
2
BU SIN ESS LAWS A N D REG U LA TIO N S
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The essential elements of a p artn ersh ip are the lawful object and common
benefit or interest of the p artn ers. Since a p artn ersh ip is really a contract between
the p arties, the p arties are free to choose the business or transaction they want to
enter into p rovid ed this is lawful and for the com m on benefit of the parties. If the
p artn ersh ip h as an unlawful object or p urpose, then the con tract is void ab initio.
Once dissolved by ord er of the cou rt, the p artn ersh ip 's profits, the instrumen t or
tools, and p roceed s of the crim e shall be confiscated in favor of the government
and even the contribu tion s Of the p artn ers shall be con fiscated if they are used as
in stru m en ts or tools of the crim e.3
As to its object, a p artn ersh ip m ay either be a u n iv er sa l p a r tn er sh ip which
refers to all th e p resen t p rop erty or to all profits or a p articu lar p artn ersh ip which
h as for its object d eterm in ate things, their use or fruits, or specific u n d ertak in g, or
the exercise of a profession or vocation. Article 1778 provides th at in a universal
p artn ersh ip of all p resen t property, the p artn ers contribute all the p rop erties that
belong to th em to a com m on fund together with the profits they m ay acqu ire from
said p rop erties. The p rop erties contributed include all those own ed by the p artn ers
at the time of the constitution of the partnership. Accord in g to Article 1779, they
m ay also agree to include all other profits they m ay subsequently receive but the
p rop erty th at th e p artn ers m ay acquire subsequently by in heritan ce, legacy, or
donation ca n n o t b e in clu d ed in their agreement, except the fruits thereof.
To illu strate: H oward, Sheldon, and Leon ard entered into a u n iv er sa l
p artn er sh ip of all p resent property, and they agreed that all p rop erties subsequently
acq u ired wou ld belong to the partnership. Subsequently, Leo n a r d received a
p arcel of land by in h er ita n ce from his father. H ow ard received a p arcel of land
with fruit-b earin g trees as p ay m en t fo r h is serv ices from his client. Given the facts,
only H o w a r d 's p a r ce l o f la n d with fruit-bearing trees will go to th e p artn ership .
The p arcel of land which Leon ard inherited will n ot go into the p artn ersh ip since
future in h eritan ce can n ot be stipulated upon. However, the fru its o f Leon ard 's lan d
b elon g to th e p a r tn er sh ip if there is a stipulation to th at effect b ecau se th ey m av be
considered as p rop erties subsequently acquired.
On the oth er hand , accord in g to Article 1780,. a u n iv er sa l p a r tn er sh ip o f profits
comprises all th at th e p artn ers m ay acquire by th eir in d u stry or w ork d u rin g the
existence of the p artn ersh ip . Only th e u su fr u ct o v er th e p r o p e r ty of the p artn ers
passes to the p artnership. .Article 1781 p rovides th at when the a r ticles o f u n iv er sa l
p a r t n e r s h ip d o n o t sp e cify th e n atu re of the partn ersh ip , the p r esu m p tio n is that
the p artn ers intended only a u niversal p artn ersh ip of profits.
3Article 1770, Civil Cod e of the Philipp in es.
U N IT I | TH E LAW O N P A RTN ERSH IP
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To illu strate: Wiw on , Ahmong, an d Shelly formed a universal p artn ersh ip of
profits. Wiw on contributed the use of h is land. At the end of the p artnership, the
land should be retu rn ed to Wiwon because only the use of the landwas contributed,
an d own ership h as always b een with him.
Accord in g to Article 1782, persons who are prohibited by law to give donations
to each other, such as a h u sb an d an d w ife , can n ot form a u n iversal p artn ersh ip .
A h usband and wife may, however, form a p articu lar p artn ersh ip . While spouses
can n ot en ter in to a u n iversal p artn ersh ip , th ey can form an d be p artn ers in a
limited p artn ersh ip .4 Article 1783 contemplates a p articu lar p artn ersh ip k n ow n as
a p rofession al p artn ersh ip formed by professionals wh o join togeth er to practice
th eir profession.
Accord in g to Article 1771, as a gen eral rule a con tract of p artn ersh ip m ay be
m ad e orally or in w ritin g, unless real p rop erty or rights are contribu ted, in which
case, it should be in a public in stru m en t Article 1772 p rovides th at w h en cash or
p rop erty w orth P3,000 or more is contributed as capital, th e Articles of Partn ersh ip
shall be in a public in stru m en t an d registered w ith teh Secu rities am d Exch an ge
Commission (SEC). If said requirements are not complied with, it will n ot affect the
liability of the p artn ersh ip and its p artn ers to th ird p arties. If th e p artn ersh ip is not
w ritten in a public in stru m en t, the rem edy of the p artn er is to comp el the execution
of a public in stru m en t th rou gh an action for a specific perform ance.
To illu strate: Breech an d Chandler orally agreed to form a p artn ersh ip . Each
con tribu ted cash an d personal p roperties w orth P10,000 to a com m on fu nd b u t they
did n ot register th e p artn ersh ip with the SEC. In this case, th e p artn ersh ip is still
valid.
Also, accord in g to A,r.ticle_1723, if real p roperty, regard less of value, is
Contributed b y an y of the partners, the con tract of the p artn ersh ip m u st be in a public
in stru m en t, an d attach ed to it should be an in ven tory of the p rop erty contributed,
d u ly sign ed b y th e p arties.
To illu strate: Mocha, Blan ca, an d Julio entered into a con tract of partnership
for th e op eration of an employment agency. Mocha con tribu ted PI million cash,
an d Blan ca, a u n it in a com m ercial building. Julio contributed h is in d u stry by being
task ed to m an age th e business. The con tract w as n ot accomp anied w ith an inventory
of th e p rop erty con trib u ted b y Blanca, and it is not in a public in stru m en t. In this
case, th e con tract is void b ecau se it is n o: in a p ub lic in stru m en t,an d there is no
in ven tory of th e immovable p rop erty con trib u ted attach ed to th e said con tact.
4cm vs. Su ter an d
4
CTA, G.R. N o. L-25532, Feb ru ary 28,1969.
BU SIN ESS LAW S A N D REG U LA TIO N S
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The element of delectus personae (defined as th e right of a p erson to choose w h om
h e w an ts to associate w ith) exists in a p artn ersh ip . A p artn ersh ip is thus formed by
th e volu n tary agreem en t b etw een th e p arties, an d it is a m u st th at the p arties be
fu lly ap p rised of th e agreem en t an d all th e m atters affectin g th e p artn ership since
a p artn er is con sid ered th e agen t of his p artn ers an d the p artn ersh ip w ith resp ect
to its tran saction s. Article 1775 p rovid es th at association s w h ose articles are kept
secret am on g th e m em b ers an d w h ere th ey con tract in th eir own n am e w ith third
p erson s are n ot p artn ersh ip s b ecau se th ey do n ot h ave ju rid ical personality, an d are
govern ed b y th e p rovision s on co-ow n ersh ip .
D u ration of Partn ersh ip
Since a p a r tn e r sh ip is a con sen su al con tract, th at is, p erfected b y m ere con sen t
or agreem en t of th e p arties, it exists from th e m om en t of th e e x e cu t io n o f th e
con tract u n less th e p arties stip u lated oth erw ise.5 Thus, a p artn ersh ip com m en ces
on th e d ate agreed u p on b y th e p artn ers, u p on the h ap p en in g of a con d ition agreed
u p on b y th e p artn ers, or in th e absence of an agreemen t, u p on th e execu tion of th e
con tract.
As to d u ra tion a p artn ersh ip mgy either be for a fix e d t e r m o r a p a r t ic u la r
u n d er ta k in g , or at will, th e form ation an d d issolu tion of w h ich d ep en d s on th e m u tu al
d esire an d con sen t of th e p arties. An y one of the p artn ers may, at h is sole p leasu re,
d ictate th e d issolu tion of th e p artnership, even in bad faith, subject to liability for
d am ages.6 Accord in g to Article .128$, a p artn ersh ip term m ay b e exten d ed exp ressly
or impliedly, w h en th e p artn ersh ip is for a fixed term or p articu lar u n d ertak in g an d
is con tin u ed , w ith ou t an y exp ress agreement, after th e term in ation of th e fixed term
or p articu lar u n d ertak in g.
Ru les to D eterm in e Existen ce
Wh en t h e in t e n t o f th e p a r t ie s is cle a r , su ch intent shall govern . Wh en it does
n o t clea r ly ap p ear , th e following ru les apply:
•
P er so n s w h o a r e n o t p a r tn e r s to each oth er are n ot p artn ers as to th ird p erson s
u n less th ere is esto p p el.
•
C o -o w n er sh ip o r co -p o sse ssio n d oes n ot establish a p artn ersh ip , even wh en
th ere is sh arin g of p rofits in th e u se of th e p rop erty.
•
Sh arin g of g ro ss r e tu r n s d oes n ot establish a p artn ersh ip , even w h en the p arties
h ave a joint or com m on in terest in an y p rap ertv from w h ich the retu rn s-are
d erived .
5Article 1784, Civil Cod e of th e Ph ilip p in es.
6O rtega vs. CA, G .R. N o. 109248. Ju ly 3,1995.
U N IT I | T H E LA W O N P A RTN ERSH IP
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The receip t b y a p erson of a sh are in th e p rofits of a b u sin ess is
•
p r im a
facie
evid en ce th at h e is a p a rtn e r, w h ich m ay be con trad icted b y p roof th at such
p rofits w ere received in p aym en t of a d eb t, w ages, ren ts, an n u ity, in terest on a
loan , or as con sid eration for th e sale of a good w ill of a b u sin ess.7
To illu strate: th ere is no p artn ersh ip created in each of th e following instances:
A.
Bailey an d Boyito in h erited from th eir m oth er a h u ge su m of m on ey, which
th ey u sed to b u y a con d om in iu m u n it th at is leased to Ch an d ler.
B.
Shirley receives a sh are of th e p rofits, as p aym en t of a d eb t to h e r b y th e
p artnership.
C.
Leo agreed to m an age th e Sand an d Gravel Co. H e solicited h au lin g tran saction s
from d ifferen t con stru ction firm s, an d h e receives as com p en sation 10% of the
p roceed s.
D.
Clau d in e loan ed m on ey to Grace for h er on lin e b u sin ess. G race retu rn ed the
m on ey in in stallm en ts from th e p rofits of th e b u sin ess.
E.
D ogon gh ei, Partn ersh ip en tered into a m an agem en t agreem en t w ith their
cred itors to en su re p artn ersh ip p aym en t of th eir cred its.
F.
G race receives a sh are of th e profits, as p aym en t of h e r com m ission from the
p artn ersh ip .
G.
Joan n e receives a sh are of th e p rofits, as p aym en t for ren t in th e b u ild in g used
b y th e p artn ersh ip .
H.
Breech an d Ch an d ler su b seq u en tly ow n ed a com m ercial b u ild in g, earning
P400,000 m on th ly lease, w h ich th ey in herited from th eir fath er.
I.
Th e em p loyees in a com p an y form ed a u n ion for p u rp oses of collective
b argain in g.
i•
K in d s of Partn ersh ip
Th ere are d ifferen t k in d s of p artn ersh ip s, to wit:
•
As to th e legality of its existen ce, a p artn ersh ip m ay eith er;b e a p artn ersh ip de
jure th at h as com p lied w ith all th e req u isites for its law fu l establish ment, or a
p artn ersh ip de facto th at failed to so comply.
•
As to its object, a p artn ersh ip m ay eith er b e a u n iversal p artn ersh ip of all the
p resen t p rop erty or of all p rofits, or a p articu lar p artn ersh ip .
7A rticle 1769* Civil Cod e of th e Ph ilip p in es.
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•
A s to th e lia b ility o f th e p a r tn er s, a p a r tn er sh ip m a y eith er b e a g en eral
p a r tn e r sh ip co n sistin g o f g en er a l p a r tn er s w h o a r e liable pro rata an d
su b sid ia r ily or at tim es so lid a r ily w ith th eir sep ar a te p r o p er ty for p a r tn er sh ip
o b lig a tio n s, or a lim ited p a r tn er sh ip w h ich is'fo r m ed b y tw o or m or e p er so n s
h a v in g a s m em b er s o n e or m or e g en er a l p a r tn er s an d on e or m ore lim ited
p a r tn e r s w h o a r e n o t p e r so n a lly lia b le for th e p a r tn e r sh ip o b lig a tio n s.8
•
As to its publicity, a p artn ersh ip m ay either be a secret p artn ersh ip — one where
the existen ce of certain p erson s as p artn ers is n ot m ad e k n ow n b v th e p artn ers
or an op en or n otoriou s p artn ersh ip w h ose existen ce is m ad e k n ow n to the
p u b lic b y th e p artn ers.
1
•
As to its p u rp ose, a p artn ersh ip m ay either b e a com m ercial or trad in g
p artn ersh ip th at exists for th e tran saction of b u siness or a p rofession al or n on ­
trad in g p artn ersh ip th at exists for th e exercise of a p rofession .
•
As to its d u ration , a p artn ersh ip m ay either be for a fixed term or p articu lar
u n d ertak in g or a p artn ersh ip at will.
K in d s o f Partn ers
1i
As th ere are d ifferen t k in d s of p artn ersh ip s, th ere are also d ifferen t k in d s of
p artn ers, to w it:
•
cap italist p artn er w h o contribu tes m on ey or p rop erty;
•
in d u strial p artn er w h o con tribu tes only h is in du stry, skills, or services;
•
gen eral p artn er w h ose liability to th ird p erson s exten d s to h is sep arate
p rop erty;
•
:
lim ited p artn er w h ose liability to th ird p erson s is lim ited to h is capital
con trib u tion ;
•
/
v'
■
I
m an agin g p artn er w h o is d esign ated to m an age th e affairs or b u sin ess of the
p artn ersh ip ;
i
•
liq u id atin g p artn er w h o tak es ch arge of w in d in g u p th e p artn ersh ip affairs;
•
p artn er b y estop p el w h o is n ot really a p artn er b u t ,is liable as su ch for the
St ’ ['
V
1
p rotection of in n ocen t th ird p erson s;
•
con tin u in g p artn er w h o con tin u es th e b u sin ess after th e dissolu tion of
th e p artn ersh ip b y th e ad m ission of a n ew p artn er, or retirem en t, d eath , or
exp u lsion of existin g p artn ers;
8Article 1776, Civil Cod e of th e Ph ilip p in es.
\
•
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•
su rvivin g p a r tn e r w h o rem ain s a p artn er after d issolu tion by th e d eath of any
p artn er;
•
su b -p artn er w h o is not a m em b er of th e p artn ersh ip an d , tech n ically and
legally sp eak in g, n ot a p artn er as h e on ly con tracts w ith a p artn er con cern in g
th e sh are of th e latter in th e p artn ersh ip ;
•
osten sib le p artn er w h o tak es an active p art in th e b u sin ess of th e p artn ersh ip
an d is k n ow n b y th e public;
•
secret p artn er w h o tak es an active p art in th e b u sin ess, b u t is u n k n ow n to the
th ird p erson s as a p artn er;
•
silen t p a rtn e r w h o d oes n ot tak e an active p a rt in th e b u sin ess, b u t maybe
k n ow n to b e a p artn er by th ird p erson s;
,
•
d orm an t p a rtn e r w h o dobs n ot tak e an active p art in th e b u sin ess an d is not
k n ow n or h eld ou t as a p artn er;
•
origin al p a rtn e r w h o h as b een a p artn er sin ce th e con stitu tion of th e p artn ersh ip ;
•
in com in g p a r tn e r w h o is ab ou t to join or be tak en as a m em b er in to an existing
p artn ersh ip ; an d
>
»
•
retirin g p artn er w ^ ° *s w ith d raw in g from th e p artn ersh ip .
P a rtn e rs h ip as D istin gu ish ed from O th er C on tracts
Partn ersh ip s h ave d istin gu ish in g featu res n ot fou n d in oth er con tracts and
m ay b e d ifferen tiated from oth er con tracts, to wit:
•
Partn ersh ip d istin gu ish ed from joint ven tu re
A p artn ersh ip op erates w ith a firm n am e an d legal p erson ality, while a
join t ven tu re op erates w ith ou t a firm n am e an d legal p erson ality. A p artn ersh ip
gen erally relates to a con tin u in g b u sin ess of variou s tran saction s of a certain
k in d , w h ile a join t ven tu re is Usually lim ited to a sin gle tran saction . A
corp oration m ay n ot en ter in to a p artn ersh ip b u t m ay en ter in to join t ventures.
•
Partn ersh ip d istin gu ish ed from co-ow n ersh ip
A p artn ersh ip is, gen erally, created b y eith er an exp ress or implied
con tract, w h ile a co-ow n ersh ip is gen erally created b y law an d m ay exist even
w ith ou t a con tract. A p artn ersh ip h as a sep arate ju rid ical p erson ality, while
co-ow n ersh ip h as n o sep arate ju rid ical p erson ality. Generally, th e-p u rpose of
th e p artn ersh ip is to ob tain p rofits w h ile th e p u rp ose of co-ow n ersh ip is the
com m on en joym en t of a th in g or righ t. Th e d u ration of th e p artn ersh ip has, no
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limitation , w h ile in co-ow n ersh ip , an agreem en t to k eep a th in g u n d ivid ed
for m ore th an 10 years is n ot allow ed , but m ay be exten d ed , ilrere is m u tu al
agen cy b etw een p artn ers, w hile th ere is no m u tu al rep resen tation am on g co­
ow n ers. D eath or in cap acity of a p artn er d issolves th e p artn ersh ip , w hile d eath
or in cap acity of a co-ow n er d oes n ot d issolve th e co-ow n ersh ip . A p artn er
can n ot d isp ose of h is in terest, so as to m ak e th e assign ee a p artn er, w ith ou t
the con sen t of oth ers, w h ile a co-ow n er can d isp ose of h is sh are w ith ou t the
con sen t of oth ers.
• Partn ersh ip d istin gu ish ed from a corp oration
A p artn ersh ip is sim ilar to a corp oration in a n u m b er of w ays. Like a
corp oration , a p artn ersh ip h as a ju ridical p erson ality sep arate an d d istin ct from
its m em b ers. A p artn ersh ip acts th rou gh agen ts. It con sists of an aggregate
of in d ivid u als an d d istrib u tes profits to th ose w h o con trib u ted cap ital to
th e b u sin ess. It can be organ ized only w h ere th ere is a law au th orizin g its
organ ization . It is taxab le as in a corp oration . It h as n o lim itation in d u ration .
O n th e oth er h an d , th ere are also d ifferences b etw een a p artn ersh ip an d
a corp oration . A p artn ersh ip is created by agreem en t, w h ile a corp oration is
created b y op eration of law, i.e., the Revised Corp oration Cod e. A p artn ersh ip
in volves at least tw o p erson s while a corp oration can exist w ith a sin gle
stock h old er, as in th e case of a on e-p erson corp oration . A p artn ersh ip 's
p erson ality com m en ces from th e m omen t of execu tion of th e con tract; w h ile
a corp oration 's p erson ality comm ences, from th e issu an ce of th e certificate of
in corp oration b y the SEC. A p artn ersh ip can exercise an y p ow er au th orized b y p artn ers, w h ile a corp oration can exercise on ly p ow ers con ferred b y th e
Revised Corp oration Code or by its articles of in corp oration , an d su ch as are
n ecessary or in cid ental to the exercise of su ch p ow ers. Wh en m an agem en t is
n ot agreed up on , every p artn er m ay act for th e p artn ersh ip , w h ile m an agem en t
is vested in th e b oard of d irectors or tru stees. Partn ers are gen erally liable
for p artn ersh ip debts, w hile th e stock h old ers are liable on ly to th e exten t of
their sh ares in a corp oration . A p artn er can n ot d isp ose of h is in terest, so as to
make the assign ee a p artn er, w ith ou t th e con sen t of oth ers, w h ile a stock h old er
h as the righ t to tran sfer his sh ares w ith ou t th e con sen t of oth ers. Lastly, a
p artn ersh ip m ay b e d issolved at an y tim e b y an y p artn er or all of th e p artn ers,
while a corp oration m ay on ly b e d issolved w ith th e con sen t of th e State.
Partn ersh ip d istin gu ish ed from conjugal p artn ersh ip of gain s
A p artn ersh ip is created by volu n tary agreem en t b etw een tw o or m ore,
p artn ers of either sex, w h ile th e conjugal p artn ersh ip of gain s arises in case
U N IT I I TH E LA W O N P A RTN ERSH IP
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the spouses, of opposite sex, agree before m arriage. A p artn ersh ip is governed
p rimarily by the agreement of the p artn ers, w h ile law (Fam ily Code of the
Philippines) governs a conjugal p artn ersh ip of gain s. A p artn ersh ip has a
juridical personality, while a conjugal p artn ersh ip of gain s h as no juridical
personality. The com m en cem en t d ate of a p artn ersh ip m ay b e agreed upon,
while the com m encement date of a con jugal p artn ersh ip of gain s is on the
date of th e celebration of th e m arriage an d an y stip u lation to th e con trary is
void. Share in profits m ay b e stip u lated in a p artn ersh ip , in th e absence of
which, th e share of p artn ers is in p rop ortion to th e con trib u tion , while the
share in profits is equal in a con jugal p artn ersh ip of gain s. In a partnership,
m an agem en t is sh ared b y all p artn ers, u n less oth erw ise agreed u p on while in
a conjugal p artn ersh ip of gain s, ad m in istration b elon gs to th e sp ou ses jointly,
but the d ecision of th e h u sb an d p revails in case of d isagreem en t. A p artn er can
d isp ose of in terest even w ith ou t th e con sen t of oth ers, w h ile a sp ou se cannot
d ispose of in terest d u rin g th e m arriage, even w ith con sen t.
Partn ersh ip d istin gu ish ed from association
A p artn ersh ip h as a juridical p e r son ality, w h ile an association h as no
ju rid ical p erson ality. A p artn ersh ip is organ ized for profit, w h ile an association
is n ot always organ ized for profit. Capital is con trib u ted to a p artn ersh ip , while
cap ital is n ot con tribu ted to an association alth ou gh fees are collected from
m em b ers. The p artn ersh ip is p rim arily liable, and th e p artn ers are liable only
subsidiarily, while the members of the association are liable in divid u ally for
th e d ebts th at th ey au th orized or ratified. Share in p rofits m ay b e stipulated in
a p artn ersh ip , in the absence of which, the sh are of p artn ers is in p rop ortion to
th e contribu tion , while the share in profits is eq u al in an association .
PRA CTICE EXERCISES
1.
Can a h u sb an d an d wife form a limited p artn ersh ip to en gage in real estate
b u sin ess, w ith th e w ife b ein g a limited p artn er?
2.
Can tw o corp oration s organ ize a gen eral p artn ersh ip u n d er th e Civil Code of
th e Ph ilip pin es?
r
3.
10
Can a corp oration an d an in d ivid u al form a gen eral p artn ersh ip ?
BU SIN E SS LA W S A N D REG U LA TIO N S
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RELEVAN CE O F TH E LESSO N
A p artn ersh ip is b est for a sm all n u m b er of people w h o k now eafeh oth er
and w an t to start a b u siness. It is relatively easy to p u t up, an d h avin g a juridical
p ersonality sep arate an d d istin ct from th e p artn ers, a p artn ersh ip provides lesser
liability as com p ared to op eratin g as a sole prop rietorship . A sole proprietorship is
a business en tity ow n ed by th e p erson d irectly m an agin g it w h ose p erson al funds
comingle w ith th e fu n d s an d earn in gs of the b usiness. In oth er w ord s, in a sole
p rop rietorship, th e ow n er an d m an ager are one an d th e sam e—th e business is not
con sidered as a sep arate legal en tity an d the ow n er gets taxed as an in divid u al
who d erives in com e from th e op eration s of his business. Siiice all the assets of the
business are ow n ed b y th e p rop rietor, th en all the debts of th e b usin ess are also
his. The p rop rietor h as u n lim ited liability—he is fully, solely, an d p erson ally liable
for costs, debts, an d legal liabilities of th e business and m u st p ay for th em even if it
m ean s u sin g h is p erson al fu n ds for the p urp ose.
LESSO N SUM M ARY
•
A p a r tn e r sh ip is a ty p e o f b u sin ess o r g a n iz a tio n crea ted b y a co n tr a ct en ter ed
b y tw o o r m o r e p e r s o n s w h o con trib u te th eir m on ey, p rop erty , a n d in d u str y to
a co m m o n fu n d w ith th e in ten tio n of d iv id in g th e p r o fits a m o n g th em selv es.
It h a s a p e r so n a lity sep a r a te an d d istin ct fr om th e p a r tn er s. It m a y a cq u ir e an d
p o s s e ss a ll k in d s o f p r op er ties, in cu r O bligation s a n d file ca ses in co u r ts or
b e co m e d efen d a n ts in ca ses.
•
''
■ '
J.
• ’
Since a p artn ersh ip is a con sen su al con tract, it exist$ from th e m om en t of th e
execu tion of th e con tract, u nless oth erw ise stipulated b y th e p artn ers.
•
A s a gen eral ru le, a con tract of p artn ersh ip m ay b e m ad e orally or in w ritin g,
u n less th e cap ital of th e p artn ersh ip is P3,000 or m ore in w h ich case it m u st
be in a p ub lic in stru m en t, or if real p rop erty or righ ts are con trib u ted , in
w h ich case it m u st b e in a public in stru m en t w ith an in ven tory of th e p rop erty
con tribu ted , an d in b oth cases, m u st be registered w ith th e SEC.
•
As to its object, a p artn ersh ip m ay eith er be a u n iversal p artn ersh ip of. all
p resen t p rop erty or of all p rofits, or a p articu lar p artn ersh ip . As to d uration, a
p artn ersh ip m ay eith er b e for a fixed term or p articu lar u n d ertak in g or at will.
U N IT I I TH E LA W O N P A RTN ERSH IP
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Tru e or False
X
A p artn ersh ip m ay be form ed for ch aritab le p u rp oses-
.2. A con tract of p artn ersh ip m ay b e m ad e orally or in w ritin g regard less
of th e valu e of the con trib u tion s u n less th e im m ovab le p rop erty or
p erson al righ ts are con tribu ted , in w h ich case th ere is a n eed for the
execu tion of a public in stru m en t.
3. A p artn ersh ip formed for an u n law fu l p u rp ose is yoid ab initio, b u t the
p artn ers acq u ire certain righ ts and in cu r-ob ligation s sin ce th ey gave
th eir con sen t to the p artn ersh ip con tract.
4. A p artn ersh ip at will is one in w h ich h o tim e is sp ecified an d is n ot .
form ed for a p articu lar u n d ertak in g or ven tu re, an d w h ich m ay b e
term in ated an ytim e b y m u tu al agreem en t of the p artn ers, or b y th e
w ill of an y on e p artn er alone p rovid ed th ere is ju st cau se.
_5. A p artn ersh ip b egin s from the tim e th e p artn ersh ip is registered w ith
th e Secu rities an d Exch an ge Com m ission (SEC).
_6. In a u n iversal p artn ersh ip of all p resen t p rop erty, p rop erty su b seq u en tly
acq u ired b y in h eritan ce, legacy or d on ation can b e in clu d ed if th ere is
a stip u lation b etw een the p artn ers.
7. A h u sb an d an d his wife can n ot en ter in to an y k in d of p artn ersh ip or be
m em b ers thereof.
8. A p artn ersh ip con tract is con sen su al b ecau se it is p erfected b y th e
d elivery of th e m on ey an d p rop erty th at p artn ers h ave p rom ised to
con trib u te to th e com m on fu n d .
9. A p artn ersh ip is form ed w h en tw o b roth ers are receivin g p rofits/
ren tals from a p rop erty th at th ey in h erited from th eir d eceased father.
10. Articles of u n iversal p artn ersh ip en tered in to w ith ou t sp ecification of
its n atu re con stitu tes u n iversal p artn ersh ip of all p resen t p rop erty.
C H A PT ER PRO JECT
Based on w h at you h ave learn ed from th e lesson , d raft an Articles of
Partn ersh ip . You m ay search th e in tern et for exam p les th at you m ay u se as a gu id e.
U N IT 1 I TH E LA W O N P A R TN ER SH IP
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BUSIN ESS LAWS AN D REG ULATIO N S
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CHA PTCK 2:
r ig h t s a n d o b l ig a t io n s
IN TRO D UCTIO N
A con tract of p artn ersh ip creates four k in d s of relation sh ip s: (1) am on g the
p artn ers; (2) b etw een h e p artn ers and th e p artn ersh ip ; (3) b etw een th e p artn ersh ip
and third p erson s; an d (4) b etw een th e p artn ers an d th ird p erson s.
IN TEN D ED LEA R N IN G O UTCO M ES
At th e end of th is ch ap ter, th e stu d en ts will be able to d escrib e th e righ ts of a
p artn ersh ip , su m m arize th e righ ts an d obligations of p artn ers am on g th em selves,
an d form u late step s for th e oth er p artn ers to take in case on e p artn er b reach es h is
obligation.
Lesson 1: R ig h ts an d O b ligation s of th e Partn ersh ip
R igh t to C o n trib u tio n
Th e p artn ersh ip h as a righ t to th e contribu tion fro m th e p a rtn e rs, i h e m on ey or
p rop erty con trib u ted , or th eir u se or fru its b ecom es th e p rop erty of th e p artn ersh ip .
Regard less of th e n atu re Of h is con trib u tion to th e p artn ersh ip —w h eth er as a
cap italist p artn er or an in d u strial p artn er, every p artn er is obliged to con trib u te at
th e b egin n in g of th e p artn ersh ip or at th e stip u lated tim e th e m on ey, p rop erty, or
in d u stry th at h e m ay h ave p rom ised to con trib u te to th e p artn ersh ip .
To illu strate:
A.
Pom p om ,' Cream o, an d Ch loe en tered in to a p artn ersh ip w h ere Ch loe
con trib u ted h er ap artm en t situ ated in Pasay City to b e con verted in to an office
of th e firm . Before th e d elivery of th e title an d p ossession of th e said p rop erty
to th e p artn ersh ip , a fire com p letely razed th e said ap artm en t. In th is case, th e
p artn ersh ip is d issolved b ecau se Ch loe can n o lon ger d eliver th e con trib u tion
she h as p rom ised .
B.
AA, BB, CC, DD, an d EE are p artn ers. A A p rom ised to d eliver h is car to th eir
p artn ersh ip . MM, a sep arate cred itor of AA, attach es th e car as p aym en t for
th e ou tstan d in g ob ligation of AA to h im . In th is case, M M can still attach th e
p rop erty b ecau se p artn er A A is still th e ow n er of th e p rop erty.
u k lT I i THE LAW ON PARTNERSHIP
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A cco rd in g to Article 1786, if a p a rtn e r p rom ised to con trib u te sp e cific p rop erty,
h e is ob liged to p reserve said p rop erty w ilh th e d iligen ce of a go od fath er of a fam ily
p e n d in g d elivery to th e p artn ersh ip . If h e fails to con trib u te th e p ro p e rty th at he
p ro m ise d , h e b ecom es ipso jure\ \ ob\ c a s a d eb tor of th e p artn ersh ip , w ith o u t th e n eed
of an y d em an d , an d th e oth er p a rtn ers can file an action a g a in s t h im for sp ecific
p erform an ce' w ith d am ages. Becau se of th e d elay, h e is a Iso liab le to th e p artn ersh ip
for th e fru its of th e p rop erty from th e tim e it sh ou ld h ave b een co n trib u te d u p to the
tim e of actu al d elivery, Me is ob liged to in d em n ify th e p a rtn e rs h ip for an y d am age
ca u se d to th e p artn ersh ip b ecau se of th e d elay in h is con trib u tion . D e m a n d is not
n ecessary to p u t h im in delay, as an excep tion to th e gen eral ru le. H e is lik ew ise
liab le for eviction in case th e p artn ersh ip is d ep rived of th e p r o p e rty con trib u ted .
To illu stra te : In A, B, C, an d D p artn ersh ip , on ly 13 d id n ot d eliv er h is agreed
cap ital con trib u tion in th e form of a sp ecific h ou se an d lot. Th e re m e d y a g a in s t h im
is for sp ecific p erform an ce.
According to Article 1787, when what is to be contributed by the p artn er consists
of goods, there should be an appraisal of the value of said good s in accord an ce
with the agreement of the p artn ers to determin e how much has been con tribu ted
by the p artn ers and if there is no agreement, the appraisal shall be d on e by exp erts
chosen by the p artn ers and accord in g to cu rren t prices. Article 1788 p rovid es that
every p artn er is required to contribute on the date due the am ou n t he h as p rom ised
to contribute to the p artn ersh ip and to reimburse any am ou n t he m ay h ave taken
from the com m on fund and converted to his own use. In case he fails to p ay his
con tribu tion on time, or if he takes an amoun t for his p erson al u se from th e com m on
fund, h e shall pay interest, He is also obliged to indemnify the p artn ersh ip for the
d am ages caused to the p artnership for his delay in th e contribu tion or by reason of
his h avin g converted any sum from the common fund for his p erson al benefit. He
is liable to pay both interest and d amages counted from the time he should have
comp lied with his obligation to contribute the sum of money or from the tim e he
con verted the am ou n t to his own use. Note that the remedy of the oth er p artn ers
in case th ere is a failure by a p artn er to contribute the p rop erty p rom ised is not
rescission but specific p erform an ce with d amages from the defaulting p artn er.
Un d er Article 1790, if there is no agreem ent on the contribu tion of unequal
sh ares to the com m on fund, it is p resum ed that the p artn ers' con tribu tion s are in
equal shares. Unless oth erw ise agreed upon by the p artn ers, an in du strial p artn er
b ecom es a debtor of the p artn ersh ip for his work or services from the moment of
th e com m en cem en t of the p artn ersh ip ; the p artn ersh ip acquires an exclusive right
to avail itself of its p erson al service. If the indu strial p artn er engages in business
for h imself, w h eth er it i9 the sam e b usiness in w h ich the partn ership is engaged
or an y kind of business, such act is considered as prejudicial to the interest bf the
p artn ersh ip and the oth er p artn ers as well. Hence, he is absolutely prohibited from
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BU S1N ES9 LAW S A N D REG U LA TIO N S
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engaging in business for himself without the express permission of the partnership.
If he engages in business for himself, without the express permission of the
partnership, the capitalist p artners, as well as th e other industrial partn ers since
they are equally prejudiced by the act of their co-ind ustrial p artn er, have the right
either to exclude him from the p artnership or to avail themselves of the benefits
which said industrial p artn er may have obtained, with a right to, d amages in either
case.
,
To illu strate: Uno, Dos, Tres, and Quatro are capitalist p artn ers while Cinco
is an industrial p artn er in Kastila Partnership. The partn ership is engaged in real
estate business. Without the consent of Uno, Dos, Tres, and Quatro, Cinco put up a
construction supply store to supply Kastila partnership with con stru ction materials.
In this case, Uno, Dos, Tres, and Quatro may exclude Cinco from the p artn ersh ip or
avail themselves of the benefits which Cinco,may have obtained from the operation
of the con stru ction supply store, with a right to damages in either case.1
On the other hand, unless the p artners agreed otherwise, the capitalist p artn er
is prohibited from engaging for his own account in any business, wh ich is the same
or similar to and in competition with the business in which the p artn ersh ip is
engaged; Under Article 1808 a capitalist p artner who engaged for his ow n accou n t
in an.operation which is of the same kind of business in which the p artn ersh ip is
engaged can be compelled to bring to the common fund of th e p artn ersh ip any
profits accru in g to him from his transactions, but if there is a loss, he shall p erson ally
bear the said loss. The p artn ers may by agreement, however, p erm it the capitalist
p artner to engage in the sauie kind of business as that of the partnership.
To illu strate: Bing is the capitalist partner and Geller is th e in d u strial p artn er.
Bing is engaged personally in the same kind of business the p artn ersh ip is en gaged
in. In this case, | f there are profits. Bing must give the profits to the p artn ersh ip . If
there are losses, Bing will personally bear it.
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Righ t to Ad d ition al Con trib u tion
According to Article 1791, a capitalist p artn er is one who contributes money
or property to the common fund. As a general rule, he is not bou nd to contribute
to the partnership more th an what he agreed to contribute. However, in case of an
imminent loss of the business of the partnership where the majority of the capitalist
partners are of the Opinion that an additional contribution to the common fund
would save the business, and in th e absence of an agreement to the contrary, he
is obliged to contribute an additional share to save the business. If such p artn er
refuses to do so (deliberately and not because he is financially unable), he shall be
obliged to sell his interest to the other partners.
1Article 1789, Civil Cod e of the Philippines.
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Righ t to Ap p ly Payment Received to Partn ersh ip Credi t
One who manages the business of the partnership is commonly referred fo an
a managing partner. He is appointed either in the articles of partnership or after
the constitution of the partnership. According to Article 1792, a partner authorized
to manage, who collects a demandable sum owed to him in his own name from a
person who also owes the partnership a demandable sum, is obliged to apply the
sum collected to both credits vro rata, even if he issued a receipt for his own credit
only. However, in case the receipt was issued for the account of the partnership
credit only, the sum shall be applied to the partnership credit alone. Also, when the
debtor declares, at the time of making the payment, to y/hich debt the sum must be
applied, it shall be so applied.
To illustrate:
A.
/
Penny is indebted to Sheldon, the managing p artn er of Big Bang & Co. for
P10,000 and to the partnership for P20,000. Sheldon collected P15,000 from
Penny when both debts are due and demandable. The payment will be applied:
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P15,000 to Big Bang & Co. if Sheldon issued a receipt for p artn ersh ip credit.
2.
P10,000 to Big Bang & Co. andP5,000 to Sheldon if Sheldon issued a receipt
for his credit.
3.
P15,000 to Sheldon if Penny applied the payment to h er debt with Sheldon
provided such debt is more onerous than her debt to Big Ban g & Co.
B.
Geller and Bing are partners in a certain business, Geller b eing the manager.
Tribiarmi owes Geller P50,000 and the partnership F100,000, both debts are
n ow due and demandable. Tribianni pays Geller P30,000 and the latter issues
a receipt under his name. The P30,000 shall be'applied proportionately to the
p artn ersh ip credit and Geller's credit, that is, P20,000 to the former an d Pit),000
to the latter.
C.
Rachel, Monica, and Phoebe are partners. Monica is the m an agin g partner.
Joey is indebted to the partnership for P4,000 and to Monica personally foi
an oth er P4,000. Joey is also indebted to Phoebe for P4,000. All debts are due.
Joey p aid Phoebe, P4,000 and Phoebe issued a receipt in h er name. In this case,
the act of Phoebe is p roper because she h as the discretion to do so as she is not
a m an agin g partner.
D.
The creditors of Jay are Max, m an agin g partn er of XYZ & Co. for P10,000 and
the partnership for P20,000. When both debts are due and demandable, Max
collected from Jay is P10,000. For said collection, Max gave a receipt in his own
n ame. In this case, the P10,000 shall be proportionately applied to both debts
since there was no application of payment made by Jay.
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Righ t to Retu rn of Cred it Received
• Accord in g to Article 1793, a partner, authorized to m an age or not, who alread y
received, in whole or in p art, his share of a p artn ersh ip credit, is obliged to bring to
the p artn ersh ip capital w hat he received when the oth er p artn ers have not collected
their shares and the p artn ersh ip debtor has b ecom e in solven t This obligation exists
even when he issued a receip t for his share only.
To illu strate: Geller, Bing, and Tribianni of GBT Partn ersh ip have a partnersh ip
credit again st Coop er in the am ou n t of P300,000. In the cou rse of con d u ctin g the
business of th e p artn ersh ip , Geller, Bing, and Tribianni agreed to equally divide the
cred it of P300,000 am on g themselves. Bing and Tribianni w ere able to collect from
Coop er P100,000 each , b ut Geller was not able to collect b ecau se Coop er b ecam e
insolvent. In th is case, Bing and Tribianni should retu rn to th e p artn ersh ip capital
w hat th ey h ave collected .
Righ t to In d em n ity for D am ages
Accord in g to Article 1794, every p artn er is responsible to the p artn ersh ip for
d am ages su ffered b y it th rou gh his fault. As a general rule, the liability for d am ages
can n ot b e set-off or com p en sated by profits or benefits w h ich th e p artn er m ay
h ave earn ed for th e p artn ersh ip by his industry; but if u n u su al p rofits are realized
th rou gh th e extraord in ary efforts of the p artn er at fault, th e cou rts m ay eq uitab ly
m itigate th e liability for d am ages of the p artn er at fault/
Accord in g to Article 1795, in d eterm in ing wh o b ears th e risk of loss of the
th in gs con trib u ted to th e partn ersh ip , the following ru les apply:
•
In case of specific and d etermin ate th in gs w h ich are n ot fungible an d w h ere
on ly th e u se is con tribu ted by the p artn er, the risk of loss is b orn e b y the
p artn er.
•
In case of sp ecific an d d eterm in ate th in gs the ow n ersh ip of w h ich is tran sferred
to the p artn ersh ip , th e risk of loss is for th e accou n t of th e p artn ersh ip .
•
In case of fungible or con su m ab le th in gs, thfe risk of loss is b orn e by the
p artn ersh ip .
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•
In case of th in gs con trib u ted in ord er th at th e p artn ersh ip m ay sell the same,
the p artn ersh ip b ears th e risk of loss.
•
In case of th in gs b rou gh t an d ap p raised in th e inventory, th e p artn ersh ip b ears
the rish of loss.
•
If th e loss is due to th e fault of an y of th e p artn ers, th e p artn er at fault shall be
liable for d am ages to the p artn ersh ip in accord an ce w ith Article 1794.
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The risk of loss of things contributed is b orn e b y th e p artn ersh ip where:* the
th in g is intended for sale, the th in g is fungible w h ich can n ot b e k ep t or u se without
con su m in g, and the thing is d etermin ate, an d ow n ersh ip is tran sferred to the
p artn ersh ip .
Su it for D am ages
Before a p artn er m ay sue an oth er for alleged frau d u len t m an agem en t and
resu ltan t d am ages, th ere m u st be a liq u id ation first to d eterm in e th e exten t of
th e d am age. Without liquidation of p artn ersh ip affairs, a p artn er can n ot claim
d am ages.2
Resp on sib ility to Partn ers
Accord in g to Article 1796, the p artn ersh ip is obliged to refu n d to th e partner
the am ou n ts d isb ursed by h im on behalf of th e p artn ersh ip , su ch as advances
for p artn ersh ip obligations due and payable, togeth er w ith th e corresp on d in g
Interest from the time the exp en ses were in cu rred . It is also obliged to an sw er for
th e obligation, w hich a p artn er may h ave con tracted in good faith in th e interest
of p artn ersh ip business, and is obliged to an sw er for risk s in con seq u en ce of its
m an agem en t.
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PRA CTICE EXERCISE
Simon an d Ragesh form ed a p artn ersh ip to op erate a car rep air sh op in Manila.
Simon p rovid ed th e capital while Ragesh con tribu ted h is lab or an d in d u stry. On one
sid e of th eir shop, Simon opened an d op erated a coffee shop, w h ile on th e oth er side,
Ragesh p u t up a car accessories store. May th ey en gage in su ch sep arate businesses?
RELEVAN CE O F TH E LESSO N
A p artn ersh ip h as a p erson ality sep arate an d d istin ct from th e p artn ers. It is
im p ortan t to rem em b er th at h avin g a sep arate p erson ality, an d as a ju rid ical person,
a p artn ersh ip h as its corresp on d in g rights an d con seq u en tial obligations which
u n d er th e law it can n ot just p ass on to th e p erson s con stitu tin g th e partn ersh ip .
2Son cu ya vs. D e Lu n a, G .R. N o. L-45464, Ap ril 28,1939.
20 b u s in es s l a w s a n d ,s im u l a t io n s
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LESSO N SUM M ARY
•
The p artn ersh ip has a right to the contribu tion from the p artn ers.
•
In case of an im m in en t loss of the business of th e p artn ersh ip and an additional
contribu tion to the com m on fu nd is n eed ed to save the business, the capitalist
p artn er m u st con tribu te an ad dition al sh are and if h e refu ses to do so, he shall
sell his in terest to the oth er p artn ers.
•
An in d u strial p artn er is absolutely p rohibited from en gagin g in b usiness
for h im self w ith ou t th e exp ress p erm ission of th e p artn ersh ip , oth erw ise,
the cap italist p artn ers, m ay either exclu de h im from th e p artn ersh ip or avail
th em selves of th e benefits w h ich he m ay h ave ob tain ed , w ith a righ t to d am ages
in eith er case.
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The cap italist p artn er can n ot engage for his ow n accou n t in an y b usin ess w h ich
is sim ilar to an d in com p etition w ith the business in w h ich th e p artn ersh ip is
en gaged ; oth erw ise, he shall b rin g to the com m on fu n d an y p rofits h e d erived
from his tran saction s, b ut shall p erson ally b ear th e losses.
•
A m an agin g p artn er w h o collects a su m owed to h im in his ow n n am e from a
p erson w h o also owes the p artn ersh ip is obliged to apply th e su m collected to
b oth cred its' pro rata; if he issued a receipt in the n am e of the p artn ersh ip , th e
su m sh all be applied to the p artn ersh ip cred it alone.
•
A p artn er w h o received , in whole or in p art, his sh are of a p artn ersh ip cred it,
is obliged to b rin g to the p artn ersh ip capital w h at h e received w h en th e oth er
p artn ers h ave n ot collected th eir shares an d th e p artn ersh ip d eb tor h as b ecom e ,
in solvent.
•
Every p artn er is responsible to the p artn ersh ip for d am ages su ffered b y it
th rou gh h is fault.
•
The p artn ersh ip is obliged to refu n d to th e p artn er th e am ou n ts d isb u rsed
by h im on b eh alf of th e p artn ersh ip togeth er w ith in terest from th e tim e the
exp en ses w ere in cu rred .
•
The p artn ersh ip is also obliged to an sw er for th e obligation w h ich th e p artn er
m ay h ave con tracted in good faith, an d to an sw er for risk s in con seq u en ce of
its m an agem en t.
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Lesson 2: Righ ts an d O b ligation s Of Partn ers I n t e r S e
Righ t to Associate An oth er in Sh are
Accord in g to Article 1804, every p artn er h as th e righ t to associate an oth er
p erson with h im in his sh are of th e p rofits coin in g from th e p artn ersh ip even
w ith ou t the consent of the p artn ers. This p erson is called a su b -p artn er— he is not
a p artn er and shall not b ecom e su ch u n less th ere is u n an im ou s con sen t of all the
oth er p artn ers, even if the p artn er associatin g w ifh h im is a m an agin g p artn er. As
a sub-partner, he acquires n eith er th e righ ts n or th e liability of a p artn er as h e does
n ot enjoy the mu tu al tru st an d con fid ence am on g th e p artn ers an d h is in clu sion as
a new p artn er will result in a m od ification of th e existin g con tract of p artn ersh ip .
To Illu strate: Tachi, Fern an , an d G u zm an are p artn ers. Tach i w ith ou t the
knowledge of Fern an an d G u zm an en tered in to a con tract w ith Jayjay w h ereb y Jayjay
will p articip ate in Tachi's sh are in th e profits of th e p artn ersh ip . Jayjay b ecom es a
sub -p artner of Tachi.
•
Righ t to In sp ect Partn ersh ip Book s
The p artn ersh ip books are p resu m ed to con tain th e tru e an d correct record of
th e accou n ts of the p artn ersh ip an d are n orm ally in th e cu stod y of th e m an agin g
p artn er or p artn ers, or in th e absence of the m an agin g p artn er or p artn ers, the.active*
p artn ers. Accord in g to Article 1805, the p artn ersh ip b ook s sh all b e k ep t at th e place
agreed u p on by th e p artn ers an d wh en th ere is n o su ch agreem en t, at th e p rin cip al
p lace of b u siness of the p artn ersh ip . Every p artn er shall, at an y reason ab le hour,
h ave access to an d m ay in sp ect or cop y an y of th em . O th er p artn ers m ay, however,
d en y a p artn er of h is righ ts to in sp ect th e b ooks if th e in form ation to b e gath ered
w ill b e u tilized for som e p u rp ose oth er th an th e p artn ersh ip p u rp ose.
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R igh t to Form al A ccou n t
As a gen eral ru le, th e righ t to a form al accou n t of p artn ersh ip affairs accru es only
w h en th e p artn ersh ip is d issolved . Un d er Article 1809, h ow ever, form al accou n tin g
m ay b e d em an d ed b y an y p artn er pven b efore d issolu tion in th e follow in g instances:
•
if h e is w ron gfu lly exclu d ed from th e p artn ersh ip b u sin ess or p ossession of its
p rop erty b y h is p artn ers;
•
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if th e righ*- pvists u n d er th eir agreem en t;
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•
if without his consent, a p artn er has derived profits from any transaction
connected with the formation, conduct, or liquidation of the partnership or
from any u se of p artnership p roperty; or
•
whenever other circu mstan ces render it just and reasonable.
Property Righ ts of Partn ers
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Under Article 1810, the p rop erty rights of each p artn er are the following: his
rights in specific partn ership property, his interest in the partnership, and his right
to participate in the management.
Own ersh ip of Certain Prop erties
The ownership of p rop erty used by the partnership depends on the intention
of the p arties, w h ich m ay be d rawn from an express agreement or their condu ct—a
p artn er m ay allow the p rop erty to be used by the partnership without transfer of
ownership, contributing only the use or enjoyment thereof, and he m ay also hold
title to p artn ersh ip property, without acquiring its ow nersh ips Prop erty acqu ired
by a p artn er w ith partnership funds is presumed to be partnership p rop erty and
the same p resum ption also arises when the prop erty is indicated in the p artn ersh ip
books as a p artn ersh ip asset.
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Righ ts in a Sp ecific Prop erty
The p artn ers have equal rights to possess partnership p rop erty for p artn ersh ip
p urposes, but for other purposes, the consent of their p artn ers is necessary. If the
p artn er is excluded, he may ask for a formal accounting34 or dissolution b y judicial
decree.5 Accord in g to Article 1811, the partner's right in such p rop erty is n ot
assignable, excep t when all the p artn ers assign their rights in the sam ep rop erty.
The right is n ot subject to attachment or execution, except on a claim against
the partnership. In case of such attachment, the p artn ers, or an y of them, or the
representatives of a deceased partner, cann ot claim any right u nd er th e homestead
or exemption laws. The right is n ot subject to legal support.
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To illu strate: Kihi, Kibot, and Kwek are p artn ers. Kibi assigned the assets of
the partnership to Kokey On the condition that Kokey would pay the debts of the
.partnership. The assignment h as the approval of Kibot but Kw*»k objected. In this
case, the assignment is n ot valid.
3Article 1819, Civil Cod e of the Philippines.
,4Article 1809, Civil Cod e of the Philippines.
5Article 1831, Civil Cod e of the Philippines.
UNIT I | THE LAW ON PARTNERSHIP
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In te re st in Partn ersh ip
Accord in g to Article 1812, th e p artn er's in terest in th e p artn ersh ip con sists of
h is sh are in the profits d u rin g th e existen ce of th e p artn ersh ip an d h is share in
th e su rp lu s after its dissolution. The p artn er's in terest is h is sh are of th e residue
or b alan ce after a form al accou n t h as b een tak en an d th e valu e of a p artn er's share
can n ot b e d eterm in ed until liquidation of th e b u sin ess h ad tak en p lace an d all the
ob ligations of th e p artn ersh ip settled . The p artn er's in terest is h is p erson al prop erty
an d is th erefore assignable by h im in th e ab sen ce of an y con trary agreem en t. It
m ay also b e levied u pon by a ju d gm en t cred itor an d su b ject to legal su p p ort. Under
Article 1813, an assign m en t by a p artn er of h is w h ole in terest in th e p artn ersh ip
d oes n ot dissolve the p artn ersh ip . It also d oes n ot en title th e assign ee to interfere
in th e m an agem en t of the p artn ersh ip b u sin ess, req u ire in form ation or accou n t of
th e p artn ersh ip , or in sp ect th e p artn ersh ip b ooks. It m erely en titles th e assignee
to receive th e profits to w h ich th e assign in g p artn er w as en titled . In case of fraud
in m an agem en t, he m ay avail h im self of th e u su al rem ed ies. In case of d issolution,
h e is entitled to receive h is assign or's in terest an d to req u ire an accou n tin g from
th e d ate on ly of th e last accou n t agreed to b y all th e p artn ers. Th us, w h en ever a
p artn er sells his wh ole in terest in th e p artn ersh ip , w h ich d oes n ot of itself dissolve
th e p artn ersh ip , th e b u yer w ou ld h ave the figh t to receive th e sh are of th e p rofit for
wh ich th e p artn er-seller is entitled.
To illu strate:
A.
Boyito, Bailey, an d Simon are general p artn ers in a m erch an d isin g1firm.
H avin g contrib u ted eq u al am ou n ts to th e capital, th ey also agreed on equal
d istrib u tion of w h atever n et p rofit is realized p er fiscal p eriod . After tw o years
of op eration , however, Simon con veys h is w hole in terest in th e p artn ersh ip to
Perry, w ith ou t th e k nowledge an d con sen t of Boyito an d Bailey. In th is case, the
p artn ersh ip is n ot dissolved. A con veyan ce b y a p artn er of h is w h ole in terest
in a p artn ersh ip d oes n ot in itself d issolve th e p artn ersh ip in th e ab sen ce of an
agreem en t. Also, Perry m ay receive th e n et p rofits to w h ich Sim on w ou ld have
oth erw ise b een entitled . Perry, however, can n ot in terfere or p articip ate in the
m an agem en t or ad m in istration of th e p artn ersh ip b u sin ess of affairs.
B.
Ah ran g, Boyito, an d Ghloe form ed a p artn ersh ip to con tin u e for a term of five
years. In th e th ird year, Ch loe sold h is en tire in terest to D om d om . In su ch a
case, D om d om h as a righ t to receive p rofits to w h ich Ch loe w ou ld oth erw ise
b e en titled , b u t h e can n ot ask for ju d icial rescission . H e can n ot exercise acts of
m an agem en t b ecau se he is n ot a p artn er, an d h e can n eith er in sp ect th e hooks
of th e p artn ersh ip n or ask for form al accou n tin g.
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BU SIN E SS LA W S A N D REG U LA TIO N S
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C.
Leon ard , Sh eld on , Rag esh , an d H ow ard are p a rtn er s. H ow ard assig n ed h is
in terest in th e p a r tn er sh ip to h is d au g h ter H alley. In th is case, th e p a r tn er sh ip
is n ot d issolv ed .
With reg ard to p a r tn er sh ip p rop erty, p a r tn er sh ip cred itor s are p r eferred
over th e p er son al cred ito r s of th e p a r tn er s. Bu t, acco rd in g to A rticle 1814, on d u e
ap p lication by an y ju d g m en t cred ito r of a p artn er, a co m p eten t co u r t m ay ch ar g e
th e in terest of th e p a r tn er for th e sa tisfa ctio n of th e ju d g m en t d ebt. Th e cou rt m ay
also ap p oin t a r eceiv er of th e sh a r e of th e p ro fits an d an y o th er m on ey a ccr u in g to
th e p a rtn er ; an d m a k e all o th er ord ers, d ir ectio n s, acco u n ts, an d in q u iries, w h ich
th e d ebtor p a r tn e r m ig h t h av e maide, or w h ich th e cir cu m sta n ces m a y req u ire. Th e
in ter est ch an ged m ay b e r ed eem ed b efo re for eclosu re or, in ca se o f sa le d ir ected by
th e co u rt, m a y b e p u r ch a sed w ith ou t ca u sin g d issolu tio n w ith sep a r a te p r o p er ty
by on e or m or e o f th e p a r tn er s or w ith p a r tn er sh ip p r o p er ty b y on e or m or e o f th e
p a r tn er s w ith co n sen t of all, excep t th e d ebtor p artn er.
Righ t to Particip ate in M an agem en t
M an agem en t of the p artn ersh ip is p rimarily governed by th e agreem en t of
Jth e-p artn ers in th e articles of partnership. It m ay be agreed th at th e p artn ersh ip
is m an aged b y all th e p artn ers or by a n um ber of p artn ers ap p oin ted as m an agers
in the articles of p artn ersh ip or after the constitution of the p artn ersh ip . Wh en the
m an n er of th e m an agem en t h as not been agreed upon, all th e p artn ers shall be
con sid ered as agen ts of the partnership. The p artn er d esign ated as a m an ager in
the articles m ay execu te all acts of admin istration despite op p osition b y th e oth er
p artn ers, b u t he can n ot do so when he acts in bad faith.
To illu strate: In the p artn ersh ip of Ah m on g, Bailey, an d Ch an d ler, Ah m on g
w as ap p oin ted in th e Articles of Partn ersh ip as m an agin g p artn er. As su ch m an ager
and actin g in good faith, he m ay execu te all acts of ad m in istration d espite the
opp osition of Bailey an d Chandler.
Article 1800 p rovid es th at if the m an agin g p artn er is ap p oin ted in th e articles
of p artn ersh ip , h is p ow ers m ay be revok ed w h en th ere is ju st or lawful cau se for
the revocation an d b y th e p artn ers rep resen tin g th e con trollin g in terest. If h e is
ap p ointed after th e con stitu tion of th e p artn ersh ip , h is p ow ers m ay be revok ed
at any tim e an d for an y cause. Accord in g to Article 1801, w h en th ere are tw o or
more m an agin g p artn ers ap p oin ted , w ith ou t specification of th eir d uties or with out
agreem en t on h ow each on e w ill act, each one m ay sep arately execu te all acts of
ad min istration . But if an y of th e oth er m an agin g p artn ers op p oses the acts of the
oth ers, the decision of th e m ajority p revails. In case of a tie. th e p artn ers ow n in e the
con trollin g interest will decide.
U N IT I | TH E
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O N P A RTN ERSH IP
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To illu strate: Wiwon, Sparky, Junjay, an d Cream o organ ized a general
p artn ersh ip with Wiwon and Sparky as in d u strial p artn ers an d Junjay an d Creamo
as capitalist p artn ers. Junjay contributed P50,000 an d Cream o con tribu ted F20,000
to the comm on fund. By a u n an im ou s vote of the p artn ers, Wiwon an d Sparky were
appointed m an agin g p artn ers, without any specification of th eir resp ective powers
and duties. Tachi applied for the position of Secretary an d M ax applied for the
position of Accou n tan t of the p artn ersh ip . The h irin g of Tachi w as d ecid ed upon by
Wiwon and Sparky, but w as op p osed by Junjay and Cream o. The h irin g of M ax was
decided upon by Wiwon and Creamo, but w as op p osed by Sparky an d Junjay. Whc
of the applicants should be h ired by the p artn ersh ip ?
Answer: Tachi should be hired. The h irin g of Tachi p revails b ecau se it is an act
of ad min istration th at can be p erform ed by the duly appointed m an agin g partners,
Wiwon and Sparky. M ax can n ot be h ired , because, in case of a tie in th e decision
of the m an agin g p artn ers, such deadlock will be decided b y th e p artn ers owning
the controlling interest. In this case, the opposition of Sparky an d Junjay prevails
b ecau se Junjay ow n s the controlling interest.
Accord in g to Article 1802, if there are more th an one m an agin g partner
ap p oin ted by the p artn ers and it is agreed that none of th e m an agin g p artn ers shall
act w ith ou t th e con sent of the other man agin g p artn ers, all of th em m u st concur
for th eir acts to be valid. The absence or the disability of an y of th em can n ot be
u sed as an excu se or justification for not complying w ith said req u irem en t. The sole
excep tion is w h en th ere is an imm inent d anger of grave or irrep arable in ju ry to the
p artn ersh ip in w h ich case a m an agin g p artn er m ay act alone an d even w ith ou t the
con sen t of th e other, m an agin g p artn er or p artn ers wh o m ay b e ab sent or under
disability. But u n an im ou s consent is n ot required in case of rou tin e transaction^ or
tran saction s req u ired in th e regu lar cou rse of business of a p artn ersh ip , in which
case an y of th e p artn ers can act w ithout the con sen t 6f oth ers an d h is or her act
alon e sh all b e valid.
,
Wh en th ere is no agreem en t as. to the m an n er of m an agem en t, all the partners
are con sid ered agen ts. This is referred to as m u tu al agen cy; w h atever an y one does
alon e b ind s th e p artn ersh ip , u nless th ere is a timely opposition to th e act, und er
Article 1801. An y im p ortan t alteration in the immovable p rop erty of th e partnership,
even if u sefu l to th e p artn ersh ip , req u ires u n an im ity; b ut th e con sen t of others is not
req u ired if th e alteration Tsm ecessary for the p reservation of th e property. Article
1803 p rovid es th at if the Refu sal to give con sen t is man ifestly prejudicial to the
p artn ersh ip , th e con sen tin g p artn ers m ay go to cou rt an d ask for its intervention.I
I»
26
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BUSINESS LAWS AN D REGULATIONS
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Right to Profits an d O b ligation for Losses
Profits and losses shall be distributed in con formity with the partnersh ip
agreement. If only the share in profits has been stipulated, the share in the losses shall
be in the same proportion. In the absence of any stipulation, the share in the profits
of the capitalist p artn ers shall be in proportion to their contributions. The losses
shall be borne by the capitalist partn ers, also in p rop ortion to their contributions.1
The share of the industrial p artn ers in the profits is th at share as may be just
and equitable; if he also contributed capital, he will receive a sh are of the profits
in proportion to his contribution. The industrial p artn er, w ho did n ot contribute
capital, is not liable for losses.6 If there is an agreemen t to divide the profits and
losses accord in g to their capital contribution, the same shall be observed. If there
is no agreemen t on the division of profits and losses, profits shall be distributed
according to the capitalist p artn ers' capital contribution and th e cap italist p artn ers
shall d eterm in e the sh are of the industrial partner.
r
To illu strate:
A.
B.
Jade, Grei, an d Boch are p artn ers with a capital contribution of: Jade -P10,000,
Grei - P20,000, and Boch - P30,000. The profit of the p artn ersh ip is P60,000. The
following are the ways ip which the profit be distributed:
1.
Equally, at P20,000 each for Jade, Grei, and Boch as they agreed .
2.
Proportionately, Jade - P10,000, Grei - P20,000, and Boch - P30>000 as
p rovid ed by law.
'
.
3.
,' '
At su ch am ou n t fixed by Shepot, a third p arty appointed by th e p artn ers
to fix th eir share.
v
’’1
• ,o •
\
f.
*
,
Tachi an d M arth a are capitalist p artn ers and Fernan is th eir in du strial partn er.
Their contributions to the capital of their partn ership are: Tachi - P20,000,
M arth a - P10,000, and Fern an 1-P30,000 in addition to his services. They agreed
to a profit an d loss sharin g ratio as follows: p roportion ate to th eir capital
contribution, and Fern an gets 40% of the profit as an indu strial p artn er. The
partn ersh ip realized a profit of P100,000. In th is case, the shares of th e p artn ers
in the profit are: Tachi - P20,000, M arth a - P10,000, an d Fern an - P70,000,
representing his 40% share as industrial p artn er (P40,000), an d his sh are as
capitalist p artn er (P30,000).*•
6Article 1797, Civil Cod e of th e Philippines.
*•
•
•
3
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UNIT I | THE LAW*ON PARTNERSHIP
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Exclu sion of Partn er from Sh are
Any stipulation that excludes one or m ore p artn ers from an y share in the
profits and tossesJs void, but the p artn ersh ip rem ain s valid an d subsists arid the
profits and losses shall be distributed as if there w as no agreem en t. With regard to
the industrial partner, a stipulation .exemp ting _him from the losses is valid since
the law itself excludes h im from losses.7 A stipulation th at exclu d es an industrial
p artn er from any share in the losses is valid, but this is b ind ing on ly to th e partners
and will not affect the rights of partn ersh ip creditors.
O b ligation to Ren d er In form ation
Since th ere exists mu tu al tru st and confidence am on g th e p artn ers, th e partners
h ave the obligation to disclose all information affectin g th e p artn ersh ip to any
p artn er, the legal representative, of any d eceased p artn er, or th e legal representative
of any p artn er u n d er legal disability.8 Note that this obligation to d isclose pertains
on ly to those m atters th at are n ot reflected j n the p artn ersh ip books.
O b ligation to Accou n t an d Act as Tru stee
Un d er Article 1807, all p artn ers hold a fiduciary p osition as again st each other
an d as such, m u st accou n t to the p artn ersh ip tor an y benefit an d hold as tru stees for
th e p artn ersh ip an y profits they derived without th e con sen t of th e oth er partners
from an y tran saction con n ected with the formation, con d u ct, or liqu id ation of the
p artn ersh ip ; or from an y u se by the p artn ers of th e p artn ersh ip p rop erty.
PRA CTICE EXERCISE
BY, CX, DW, EV, FU, GT, HS, IR, an d }Q are p artn ers in a coffee shop
' b u sin ess w h ere th ey each contributed P10,000. AZ, BY, an d CX w ere appointed as
m an agers. Wh ile lookin g for a location, AZ w an ted th at th e sam e sh all be placed
insid e th e Mall of Asia in Pasay City, while BY w an ted th e sam e to b e p laced inside
Green b elt in M ak ati City. CX agreed w ith BY b u t DW, EV, FU, an d GT op p osed AZ
an d BY b ecau se th ey w an ted th e sam e to be placed inside th e Pod iu m in Pasig City.
Wh ich d ecision should p revail?
7Article 1799, Civil Cod e of th e Ph ilip p in es.
8Article 1806, Civil Cod e of th e Ph ilip p in es.
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BU SIN ESS LAW S A N Ep REG U LA TIO N S
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RELEVAN CE O F TH E LESSO N
A p artn er enjoys certain rights an d privileges. Being a p artn er in a p artn ersh ip
requires com m itm en t and ad h eren ce to the atten d an t obligations, p articu larly with
regard to the oth er p artn ers and the p artn ersh ip itself.
LESSO N S y M M A R Y
•
Every p artn er enjoys the following rights: the right to associate an oth er in his
share; right to in sp ect p artn ersh ip books; right to form al accou n t; an d p rop erty
rights (which include rights in specific p artn ersh ip p rop erty, in terest in the
partnership, an d the right to p articip ate in the management).
•
M an agem en t of the p artn ersh ip is p rimarily governed by the agreem en t of the
p artn ers in th e articles of the p artn ersh ip but if there is. no agreem en t, all the
p artn ers are con sid ered agents of the partnership.
The m an agin g p artn er m ay execute all acts of ad min istration despite op p osition
by th e oth er p artn ers, but he can n ot do so when he acts in bad faith, in w h ich
case h is p ow ers m ay be revoked.
•
Profits an d losses shall be distributed in accord ance w ith the agreem en t; w h en
th ere is n o agreem en t, in p rop ortion to their contributions, in w h ich case th e
sh are of th e in d u strial p artn ers in the profits is th at sh are as m ay b e ju st an d
equitable, b u t h e is n ot liable for losses.
Lesson 3: O b ligation s of th e Partn ersh ip /Partn ers to T h ird Person s
O b ligation to O p erate u n d er a Firm N am e
Und er A rtid e 1815,' every p artn ersh ip shall op erate u n d er a firm n am e. People
who allow th eir n am es to be included in the p artn ersh ip n am e even if th ey are n ot
p artn ers shall p e liable as p artn ers.
Liab ility of Partn ersh ip
Und er Article 1816/th e p artn ersh ip is p rim arily liable for con tracts en tered into
in its n am e an d for its accou n t, u n d er its1sign atu re, an d b y a p erson au th orized to
act for it. Up on exh au stion of its assets, all p artn ers are liable pro rata w ith all th eir
p rop erty. An y p artn er m ay en ter into a sep arate ob ligation to p erform a p artn ersh ip
contract.
U N IT I | TH E LAVy C O P A RTN ERSH IP
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To illu strate: Angie, Beng, an d Ch ing form ed ABC p artn ersh ip for th e purpose
of con tractin g w ith the Governmen t in th e con stru ction of one of its bridges. On
June 30, 2021, after the completion of the project, th e b rid ge w as tu rn ed over by the
p artn ers to the Government. On Au gu st 30, 2021, D om d om , a supplier of materials
u sed in the p roject sued Angie for collection of th e in d eb ted n ess to h im. An gie moved
to d ism iss the complaint again st h er on th e grou n d th at it w as th e ABC partnership
th at is liable for the debt. Domdom replied th at th e ABC p artn ersh ip w as dissolved
u pon completion of the p roject for w h ich p u rp ose th e p artn ersh ip w as formed. Ip
th is case, the complaint again st An gie should n ot be d ism issed b ecau se Angie is
still liable as a general p artn er for h er pro rata sh are of on e-th ird . The dissolution of
a p artn ersh ip caused by th e term in ation of th e p articu lar u n d ertak in g specified in
the agreem en t does n ot extin gu ish obligations, w h ich m u st be liqu id ated d u ring the
"w in d in g u p " of th e p artn ersh ip affairs.
The p artn ers are liable subsidiarily, i.e., th e liability arises on ly upon
exh austion of p artn ersh ip assets.9 However, a th ird p erson w h o tran sacted w ith the
p artn ersh ip canihold th e p artn ers solidarity liable for th e whole obligation in case of
w ron gfu l acts or om ission and m isapplication of m oney or p rop erty b y a p artn er in
th e ord in ary cou rse of business. Under Article 1826. a p erson ad m itted as_a_p>artner
into, an existin g p artn ership is (liable for all the obligations'of th e p artn ersh ip arising
b efore h is ad mission , b ut his liability shall be satisfied on ly ou t of partnership
p rop erty u n less th ere is an agreement to the contrary. In oth er w ord s, h e is not
p erson ally liable.
Un d er Article 1816, the p artn ers are liable pro rata. An in d u strial p artn er is
n ot exem p t from th is liability, but he can recover* the am ou n t h e h as p aid from
th e cap italist p artn ers unless th e p artn ersh ip agreem en t p rovid es oth erw ise. Any
stipu lation again st th is individual liability is void again st th ird p erson s b u t valid
am on g th e p artn ers. The pro rata liability of p artn ers, in clu d in g th e industrial
p artn er on u n settled contracts, entered into in th e n am e an d for th e accou n t of the
p artn ersh ip after all p artn ersh ip assets are exh au sted m ean s th at th e p artn ers share
in th e liability equally an d jointly.
1
Liab ility of Partn ers for Partn ersh ip Con tracts
Un d er Article 1818, an y act of a p artn er, w h ich is ap p aren tly for th e carrying
on of th e u su al business of th e p artn ersh ip w ill b ind th e p artn ersh ip , including
th e execu tion of any in stru m en t in th e p artn ersh ip n am e; b ut th e partn ersh ip is
n ot b ou n d wh en th e p artn er does n ot h ave au th ority to act an d th e p erson with
w h om h e d eals k n ew about his lack of authority. Also, th e acts of a p artn er that is
9
30
La Com p an ia M aritim a vs. M u n oz, G.R. N o. L-3704; D ecem b er 12,1907.
BUSINESS LAWS AtyPREG ULATIO N S
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not ap p aren tly for carryin g on of the u su al business will n ot bind the p artn ership ,
unless the oth er p artn ers au th orized him to do the act. Excep t when au th orized by
the other p artn ers or u n less the p artn ers h ave abandoned the business, one or m ore
but less th an all the p artn ers do not h ave the au th ority to:
•
assign the p artn ersh ip p rop erty in tru st for cred itors or on the assignee's
p rom ise to p ay th e debts of the p artn ersh ip ;
,•
d isp ose of th e good w ill of the business;
•
do an y oth er act th at wou ld mak e it impossible to carry on th e ord in ary
v
b u sin ess of a p artn ersh ip ;
•
con fess a ju d gm en t;
*
•
en ter in to a com p rom ise con cern in g a p artn ersh ip claim or liability;
•
su b m it a p artn ersh ip 'claim or liability to arb itration; an d
• , , ■,
• v ren ou n ce a claim of th e p artn ersh ip .101
, j
, v
.• '
- i :
Any. act of a p artn er in con travention of a limitation on au th ority d oes n ot b ind
the p artn ersh ip to p erson s h avin g knowledge of such limitation.
•• •
1‘
, s■
•
■
.
'
Con veyan ce p f Partn ersh ip Real Prop erty
- •
''
'
, .
1
.
(
■
' >•
• .
.•
/'
•
U n d er Article 1819, an y p artn er niay convey the real p rop erty in th e n am e of
th e p artn ersh ip . The p artn ersh ip can recpyer it, excep t: w h en th e act of th e p artn er
b inds th e p artn ersh ip b ecau se the said p artn er is au th orized to. carry ou t th e u su al
b u sin ess of th e p artn ersh ip ;11 or if he is n ot au thorized , th e p rop erty h as b een
con veyed b y th e gran tee, or a p erson claim ing u n d er h im , to a h old er for valu e
wh o d id n ot k n ow th at th e p artn er exceeded h is authority.12 A p artn er au th orized
to carry ou t th e u su al b u sin ess m ay convey, in his ow n n ame, th e equitable in terest
of the p artn ersh ip .13 Wh ere the title is in th e n am e of one or m ore b u t n ot all th e
p artn ers, an d th e record d oes n ot disclose the righ t of th e p artn ersh ip , th e p artn ers,
h avin g title m ay con vey title. The p artn ersh ip m ay recover it w h en th e p artn ers
con veyin g title h ave n o au th ority to carry on the u su al b u sin ess of th e p artn ersh ip
u nless th e p u rch aser or h is assign ee is a h older for valu e w h o d id n ot k n ow th at
the act exceed ed au thority.14 On th e oth er h an d , if th e title is in th e n am e of on e
or more or all th e p artn ers, or in a th ird p erson in tru st for th e p artn ersh ip a
p artn er au th orized to carry on th e u su al b usiness m ay con vey equitable title in th e
10Article
11Article
12Article
13Article
1818, p ar.
1818, p ar.
1819^ p ar.
1819, p ar.
3, Civil
1, Civil
1, Civil
2, Civil
Cod e
Cod e
Cod e
Cod e
of th e
of th e
of th e
of th e
Ph ilip p in es.
Ph ilip p in es.
Ph ilip p in es.
Ph ilip p in es.
14Article 1819, p ar. 3, Civil Cod e of th e Ph ilip p in es.
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UNITI | THEEAWON PARTNERSHIP
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p artn ersh ip n ame or his own name.15 If the title is in the n ames of all the partners,
a con veyance executed by all of them will transfer all the rights to the property.16
Liab ility of Partn ers
Und er Article 1820, an admission or representation by any p artn er may be used
as evidence against the partn ersh ip w hen it con cern s p artn ersh ip affairs, and such
affairs are within the scope of said p artn er's authority. The p artn ership is solidarily
liable with the p artn er who causes loss or injury to any p erson who is n ot a partner or
in curs any p en alty th rou gh any w rongfu l act or omission in the ord in ary course of
the business of the p artn ersh ip or although not in such ord in ary cou rse of business,
with the au thority of his p artn ers.17 Accordin g to Article 1823, the p artn ersh ip is also
liable for losses suffered by a th ird p erson whose money or p rop erty w as received
by a p artn er who acted within the scope of his ap parent authority an d misapplied
it, or received b y th e partn ersh ip in the cou rse of its business and misapplied by any
p artn er wh ile it is in the cu stod y of the partnership. Under Article 1824, all partners
are solidarily liable w ith the p artnersh ip for its liabilities u n d er Articles 1822 and
1823, w ith ou t p rejudice to the guilty p artn er being liable to the oth er p artn ers.
Article 1825 defines a p artn er by estoppel as a p erson who, by w ord s spoken
or w ritten or by conduct, represents himself as a p artn er or con sen ts to another
rep resen tin g h im to anyone as a p artn er in an existing p artn ersh ip or w ith one or
m ore p erson s who are not actual partners. He is liable as th ou gh he is a partner
w h erein an existin g partnership, all the partn ers consented to the representation
an d a p artn ersh ip liability results. He is liable jointly and pro rata ,(as th ough he
is a p artn er in fact) with those who consented to the rep resen tation w h en there is
an existin g p artn ersh ip but not all the p artn ers consented; or th ere is no existing
p artn ersh ip an d all those represented as p artn ers consented to the representation.
H e is liable separately when there is an existing p artn ersh ip but none of th e partners
con sen ted or th ere is no existing p artnership and not all of th ose represented as
p artn ers con sen ted to the representation.
To illu strate:
v
A.
,sArticle 1819, par. 4, Civil Cod e of the Ph ilipp ines.
16Article 1819, p ar, 5, Civil Cod e of the Ph ilipp ines.
17Article 1822, Civil Cod e of th e Ph ilipp in es.
32
,
If Pomp om an d Breech are not p artn ers as to each other, neither will they be
p artn ers w ith resp ect to Chloe, a th ird person. But if Pompom, w ith the consent
of Breech, rep resen ts to Ch loe th at th ey are partn ers, th en Pom p om and Breech
will be con sid ered p artn ers as to Chloe, even if th ey are n ot really partners.
>
BU SIN ESS LAW S A N D REG U LA TIO N S
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B.
A, S, T, and G formed ASTG Company. PJ rep resen ted h im self as a p artn er
of ASTG Comp any. Simon, on the faith of su ch rep resen tation , exten ded
f 10,000,000 cred it to ASTG Company. If all the p artn ers con sen ted to PJ's
rep resen tation , th ey are con sid ered p artn ersh ip b y estop pel, an d thus, are all
liable.
C.
XO and YO establish ed a p artn ersh ip by con trib u tin g each at P500,000. ZO, a
th ird p arty allow ed h is n am e to be included in th e firm n am e of the p artn ersh ip .
The p artn ersh ip w as insolvent and after exh au stin g all th e rem ain in g assets,
th ere w as a liability left to th ird p erson s iri th e am ou n t of P300,000. In th is case,
the cred itors can com p el XO, YO, and ZO to p ay P100,000 each.
Liab ility of an In com in g Partn er
*
Accord in g to Article 1826, a p erson ad mitted as a p artn er into an existin g
p artn ersh ip is liable for all th e obligations of the p artn ersh ip arisin g b efore h is
ad m ission as th ou gh he h ad been a p artn er when such ob ligations w ere in cu rred ,
excep t th at th is liability shall be satisfied only out of p artn ersh ip p rop erty u n less
th ere is an agreem en t to the contrary. Hence, the liability of an in com in g p artn er
is limited to h is sh are in th e p artn ersh ip p rop erty for existin g ob ligations an d h is
sep arate p rop erty for subseq uent obligations.
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N otice to or Kn ow led ge of th e Partn ersh ip
Un d er Article 1821, the following operates as notice to or k n ow ledge of th e
p artn ersh ip :
.
,
•
n otice to an y p artn er of any m atter relating to p artn ersh ip affairs;
•
k n owled ge of the p artn er actin g in the p articu lar m atter acq u ired w hile a
p artn er;
.
•
k n owled ge of th e p artn er actin g in th e p articu lar m atter th en p resen t to
•
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h is m in d ; or
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k n owledge of an y oth er p artn er who reasonably cou ld an d should h ave
com m u n icated it to th e actin g p artner.
But th ese d o n ot apply in case of fraud on the p artn ersh ip com m itted b y or
with the con sen t of th e p artn er.
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PRACTICE EXERCISE
Wh at is the liability of a person who by words spoken or written or by con du ct,
rep resen ts h im self or con sen ts to an oth er rep resen tin g h im to anyone, as a p artn er
in an existin g p artn ersh ip or w ith one or m ore p erson s, n ot actu al p artn ers?
U N IT I I TH E LA W O N P A RTN ERSH IP
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RELEVAN CE O F TH E LESSO N
A p artn ersh ip is a fid u ciary relation— one en tered into and maintained
the basis of tru st and confidence. As su ch , both the p artn ersh ip and the partner*
com p osin g it m u st ob serve the u tm ost good faith, fairness, and in tegrity in their
d ealin gs n ot on ly with and am on g th em selves but m ore p articu larly, in their
d ealin gs w ith th ird p arties who tran sact with them.
LESSO
N SUM M< ARY
i
•
The p artn ersh ip shall be liable for con tracts entered into in its n am e and for it*
accou n t, u n d er its sign atu re, an d by a person au th orized to act for it.
•
Up on exh au stion of its assets, ail p artn ers are liable pro rata with all their
p rop erty. An in d u strial p artn er is n ot exem p t from this liability, but he can
recover the am ou n t h e h a s paid from the capitalist p artn ers u n less th ere is a
stip u lation to th e con trary.
•
An y act of a p artn er, wh ich is ap p arently for the carryin g on of th e usual
b u sin ess of th e p artn ersh ip , binds the latter unless th e p artn er h as n o authority
to act an d th e p erson w ith whom he deals has k n ow led ge of sudh fact. On
th e oth er h an d , th e acts of a p artn er th at is n ot ap p aren tly for carryin g on
of th e u su al b usiness do not bind the p artn ersh ip , u n less th e oth er partners
au th orized h im.
•
With ou t au th ority from the oth er p artn ers or u n less th e latter h ave abandoned
th e b u siness, one or m ore p artn ers h ave no au th ority to d o acts of strict
d om in ion or own ersh ip . An y act of a p artn er in con traven tion of a restriction
on au th ority d oes n ot b ind th e p artn ersh ip to p erson s h avin g k n ow led ge of the
restriction .
•
An ad m ission or rep resen tation by an y p artn er m ay be u sed as evidence
again st th e p artn ersh ip w h en it con cern s p artn ersh ip affairs w ith in th e scope
of h is au thority.
•
N otice to an y p artn er of an y m atter relatin g to p artn ersh ip affairs and
k n ow led ge of th e p artn er of p articu lar m atters acq u ired as a p artn er operate
as n otice to or k n ow led ge of th e p artn ersh ip .
•
The p artn ersh ip is solid arily liable for w ron gfu l acts of an d m isap p lication ot
m on ey or p rop erty b y a p artn er, an d all p artn ers are solid arily liable with the
p artn ersh ip for su ch liabilities, w ith ou t p reju d ice to th e gu ilty p artn er being
liable to the oth er p artn ers.
•
34
A p artn er b y estop pel is liable for p artn ersh ip liability w h ile th e liability of
an in com in g p artn er is lim ited to h is sh are in th e p artn ersh ip p rop erty for
existin g ob ligations an d h is sep arate p rop erty for su b seq u en t obligations.
BU SIN ESS LAW S A N D REG U LA TIO N S
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INai TIC’--- ----------- -
Date:
inrfri irtn r
Section:
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M
B
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Score:
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Tru e or False
1. Th e p artn ersh ip m ay p roceed again st a n egligen t p artn er w h o cau sed
in ju ry to th e p artn ersh ip .
_2. N otice to a p artn er is a n otice to the p artn ersh ip regard less of w h eth er
th e p artn er is a m an agin g p artn er or not.
_3. Every p artn ersh ip shall op erate u n d er a firm n am e w h ich sh all alw ays
in clu d e th e p artn ers' su rn am es, if n ot th eir initials.
_4. A n in d u strial p artn er is exem p ted from liability to th ird p erson s.
_5. All p artn ers are liable jointly w ith the p artn ersh ip in case of torts.
_6. A p artn ersh ip is n ot b ou n d by a p artn er's b reach of tru st an d th e errin g
p artn er alon e shall be held liable for en su in g d am ages.
7. An in com in g p artn er is liable only for p artn ersh ip ob ligation s in cu rred
after h is ad mission
.
. . .
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8. An y act of a p artn er, w h ich is ap p aren tly for th e carryin g on of th e
u su al b u sin ess of th e p artn ersh ip , will b ind th e p artn ersh ip .
9. A p artn er m ay n ot con vey th e real p rop erty in th e n am e of th e
p artn ersh ip b ecau se to do so am ou n ts to d isloyalty to th e p artn ersh ip .
10. Up on exh au stion of its assets, all p artn ers are liable w ith all th eir p rop erty
for p artn ersh ip debts, in p rop ortion to their, cap ital con trib u tion ..
CH A P TER PRO JECT
1.
M ak e a facts ch art sh ow in g in d etail th e righ ts of a p artn ersh ip .
2.
Prep are a table to sh ow th e righ ts an d ob ligations of p artn ers am on g th em selves;
3.
Write a letter to a frien d ad visin g h im on legal issu es th e latter raised ab ou t
a p artn er's b reach of h is obligation to accou n t for an d act as tru stee to th e
p artn ersh ip fund.
u n it
i | t h e l a w o n p a r t n e r s h ip
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3:
CHA PTER
D IS S O LU T IO N A N D W IN D IN G U P
IN TRO D UCTIO N
v
Article 1828 of the law on p artn ersh ip defines d issolu tion as the ch an ge in
the relation of th e p artn ers cau sed by an y p artn er ceasin g to be associated in
the carryin g on of th e business. Accord in g to Article 1829, the p artn ersh ip is n ot
term inated b u t con tin u es u ntil the w in d in g up (or settlin g) of p artn ersh ip affairs
is completed. Win d in g u p is th e actu al p rocess of settlin g th e p artn ersh ip bu siness
or affairs after dissolution. It involves the collection an d d istrib u tion of p artn ersh ip
assets, p aym en t of debts, an d d etermin ation of the valu e of the in terest of the
p artn ers in th e p artn ersh ip . Termination is the p oint w h en all p artn ersh ip affairs
are completely w ou n d u p and finally settled; it signifies th e end of th e life of th e
p artn ersh ip .
IN TEN D ED LEARN IN G O UTCO M ES
At th e end of this chapter, the students will be able to d escrib e th e d ifferen t
cau ses of dissolu tion of a p artn ersh ip and p red ict the con seq u en ces on th e
p artn ersh ip w h en a p artn er dies.
.
Cau ses of D issolu tion
There are m an y w ays to dissolve a partnership, to wit:
•
With ou t violation of the agreement—a p artn ersh ip m ay be d issolved w ith ou t
violation of th e agreem en t between the p artn ers in th e followin g in stan ces:
1.
term in ation of th e definite term or p articu lar u n d ertak in g sp ecified in th e
agreem en t;
2.
th e exp ress will of an y p artn er, who m u st act in good faith w h en n o
definite term or p articu lar u n d ertak in g is specified;
3.
the exp ress will of all the p artn ers who have not assign ed th eir in terest or
ch arged th em for th eir sep arate debts, either before or after th e term in ation
of an y specified term or p articu lar u n d ertak in g;
4.
the bona fide exp ulsion of any p artn er from th e b u siness in accord an ce
With p ow er con ferred by the agreem en t.1*
'Article 1830, par. 1, Civil Cod e of th e Philipp in es.
U N IT I | TH E LA W O N P A RTN ERSH IP
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In con traven tion of th e agreem en t—w h ere circu m stan ces d o n ot p erm it
•
d issolu tion u n d er an y oth er p rovision of Article 1830, it m ay also b e d issolved
b y th e exp ress w ill of an y p artn er at an y tim e. Th u s, even if th ere is a specified
term , on e p artn er can cau se its d issolu tion b y exp ressly w ith d raw in g even
b efore th e exp iration of th e p eriod , w ith or w ith ou t ju stifiab le cau se. If the
cau se is n ot ju stified or n o cau se w as given , th e w ith d raw in g p artn er is liable
for d am ages b ut in n o case can h e b e com p elled to rem ain in th e firm .2
•
By op eration of law— a p artn ersh ip m ay also b e d issolved b y op eration of law
u n d er the following in stan ces:
1.
any even t w h ich m ak es it u n law fu l for th e b u sin ess of th e p artn ersh ip to
be carried on or for th e m em b ers to ca rry it on in p artn ersh ip ;
2.
w h en a sp ecific th in g w h ich a p artn er h ad p rom ised to con trib u te, p erish es
b efore d elivery, or b y th e loss of th e th in g, on ly th e u se or en joym en t of
w h ich h as b een con trib u ted ;
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v
3.
th e d eath of an y p artn er;
4.
th e in solven cy of an y p artn er or of th e p artn ersh ip ; or
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th e civil in terd iction of an y p artn er.
By d ecree of a cou rt—a p artn er m ay ap p ly for d issolu tion in cou rt in case:
.
1.
a p artn er is d eclared in san e in an y ju dicial p roceed in g or sh ow n to b e of
u n sou n d m in d ;
* . , •,
2.
in cap acity of a p artn er to p erform h is p art of th e p artn ersh ip con tract;
3.
a p artn er is gu ilty of con d u ct p reju d icial to th e b u sin ess of th e p artn ersh ip ;
4.
a p artn er's w illfu l or p ersisten t b reach of th e p artn ersh ip agreem en t or
5.
con d u ct th at m ak es it reason ab ly im p racticab le to Carry on th e b u sin ess of
th e p artn ersh ip w ith h im ;
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b u sin ess can on ly b e carried on at a loss;
6.
oth er circu m stan ces w h ich ren d er d issolu tion eq u itab le; or
7.
u p on ap p lication b y th e p u rch aser of a p artn er's in terest— (a) after the
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term in ation of a sp ecified term or p articu lar u n d ertak in g; or (b) an ytim e
if p artn ersh ip at w ill w h en in terest w as assign ed or ch argin g ord er was
issu ed .3
v
2 Rojas vs. M aglan a, G .R. N o. 30616, D ecem b er 10,1990.
3A r t i d e 1831, Civil C od e of th e Ph ilip p in es.
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•
A partn ersh ip is also dissolved und er the following instances:
1.
when a new p artn er is admitted into an existing partnership;
2.
when any_partner retires;
3.
when the oth er p artn ers assign their rights to the. sole rem ain in g p artn er;
or
4.
when all the p artn ers assign their rights in the p artn ersh ip p rop erty to
th ird p erson s.4
To illu strate: Pauline, Patricia, and Priscilla formed a business p artn ersh ip
for the p u rp ose of en gagin g in neon ad vertising for a term of five years. Pauline
subsequently assign ed to Philip her interest in the partnership. Wh en Patricia and
Priscilla learn ed of the assign ment, they decided to dissolve the p artn ersh ip before
the exp iration of its term as they had an unp rodu ctive business relationship with
Philip in the past. On the oth er hand, u naware of the decision mad e by Patricia an d
Priscilla b ut sen sin g th eir negative reaction to his acquisition of Pauline's interest,
Philip simu ltan eou sly petitioned for the dissolution of the p artn ership . Based on
the facts given, th e dissolution done by Patricia and Priscilla w ith ou t the con sen t of
Pauline or Philip is valid. The dissolution by Patricia and Priscilla did n ot violate the
con tract of p artn ersh ip even though Pauline and Philip did not con sen t th ereto. The
consen t of Pauline is not n ecessary because she had already assign ed h er in terest
to Philip. The con sen t of Philip is also not n ecessary b ecau se the assign m en t to h im
of Pauline's in terest did n ot make him a partner, u nd er Article 1813. Consequently,
Philip h as no righ t to petition for the dissolution of the p artn ersh ip b efore the
exp iration of its specified term because he does not have the stan d in g of a p artn er.
If, after th e exp iration of the definite term or p articu lar u n d ertak in g, th e
p artn ers con tin u e the p artn ersh ip without m akin g a n ew agreem en t, th e firm
b ecomes a p artn ersh ip at will. Any one of the p artn ers may, at his sole p leasu re,
dictate th e d issolu tion of a p artn ersh ip at will but he m u st act in good faith;
oth erw ise, it can resu lt in liability for d am ages.5
To illu strate: Bailey, Boyito, and Perry formed Doug Company, a p artn ersh ip
to en gage in retail trad e w ith a d uration of 10 years. Each con tribu ted P100,000 to
the com m on fund. Since Bailey w as appointed as the m an ager, he w as given 50%
of the profits while Boyito an d Perry w ere given 25% each. Profit-sh arin g is m ad e
every end of the year. After 10 years of existen ce of the p artn ersh ip , the p arties
con tinued the p artn ersh ip affairs w ith ou t th eir exp ress con sen t in the same w ay it
was h abitually con d u cted before the exp iration of its p eriod . Now, d u rin g the first
4A rticle 1840, Civ il Cod e o f th e Ph ilip p in es.
5O rtega, et al. vs. CA, et al., G.R. N o. 109248. Ju ly 3,1995.
U N IT I | TH E LAW O N P A RTN ERSH IP
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p rofit-sh arin g, Boyito an d Perry claim th at th e p rofits sh ou ld b e d ivid ed equally
b etw een th e p artn ers. Th e claim of Boyito an d Perry is in correct b ecau se th e profitsh arin g sh ou ld b e th e sam e as th e p rofit-sh arin g u n d er th e d issolved p artn ersh ip .
D eath of a p artn er is n ot a grou n d for th e ju d icial d issolu tion of a p artn ersh ip .
In san ity of a p artn er, w h en th e b u sin ess can b e carried on on ly at a loss, and
m iscon d u ct an d p ersisten t b reach of th e p artn ersh ip agreem en t b y a p artn er are
cau ses for ju d icial d issolu tion of a p artn ersh ip .
Effects of D issolu tion
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The d issolu tion of th e p artn ersh ip p rod u ces th e follow in g effects, to w it:
•
O n th e au th ority of th e p artn ers - excep t so far as m ay b e n ecessary to wind
u p p artn ersh ip affairs or to com p lete tran saction s b egu n b u t n ot th en finished,
d issolu tion term in ates all au th ority of an y p artn er to act for th e p artn ersh ip :
1.
w ith resp ect to th e p artn ers—w h en th e d issolu tion is n ot d u e to th e act,
in solven cy, or d eath of a p artn er, or w h en th e d issolu tion is d u e to th e act,
in solven cy, or d eath of a p artn er; an d
2.
•
•
w ith resp ect to p erson s, n ot p artn ers.6
With resp ect to p artn ers - u n d er Article 1833, if th e d issolu tion is d u e to the
act, d eath , or in solven cy of a p artn er, each p artn er is liable to h is p artn ers for
h is sh are of an y liab ility created b y an y p artn er actin g for th e p artn ersh ip as if
th e p artn ersh ip h ad n ot b een d issolved u n less:
1.
th e d issolu tion is d u e to th e act of an y p artn er, th e p a rtn e r actin g for the
p artn ersh ip h ad k n ow led ge of th e d issolu tion ; an d
2.
th e d issolu tion is d u e to th e d eath or in solven cy of a p artn er, th e p artn er
actin g for th e p artn ersh ip h ad k n ow led ge or n otice of th e d eath or
in solven cy.
W ith resp ect to th ird p erson s - a p artn er can still b in d th e p artn ersh ip even
after d issolu tion in:
1.
tran saction s in con n ection to w in d in g u p p artn ersh ip affairs or completing
tran saction s u n fin ish ed at d issolu tion ; an d
2.
tran saction s th at w ou ld b in d th e p artn ersh ip if d issolu tion h ad not
tak en p lace w h en th e oth er p a rty or cred itor: h ad exten d ed cred it to the
p artn ersh ip p rior to d issolu tion an d h ad n o k n ow led ge or n otice of the
d issolu tion , or th ou gh h e d id n ot exten d cred it to th e p artn ersh ip , he
h ad k n ow n th e p artn ersh ip p rior to d issolu tion , an d h ad n o knowledge
6A r ticle 1832, C iv il C o d e o f th e P h ilip p in es.
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or n otice of d issolu tion , th e fact of d issolu tion w as n ot ad vertised in
a
n ew sp ap er of gen eral circu lation in th e p lace w h ere th e p artn ersh ip
b u sin ess is regu larly carried on .7
•
On liability for tran saction s after d issolu tion - th e liability of a p artn er shall
be satisfied ou t of p artn ersh ip assets alon e w h en su ch p artn er h ad been p rior
to d issolu tion: (1) u n k n ow n as a p artn er to th e p erson w ith w h om th e con tract
is m ad e; an d (2) so far u n k n ow n an d in active in p artn ersh ip affairs th at the
b u sin ess rep u tation of th e p artn ersh ip cou ld n ot b e said to h ave b een in any
d egree d u e to h is con n ection w ith it. But th e p artn ersh ip is in n o case b ou n d
by an y act of a p artn er after d issolu tion:
1.
w h ere th e p artn ersh ip is d issolved b ecau se it is u n law fu l to carry on th e
b u sin ess u n less th e act is ap p rop riate for w in d in g u p p artn ersh ip affairs
2.
w h ere th e p artn er h as b ecom e insolvent; and
,
, 3.
*
j
w h ere th e p artn er h as no au th ority to w in d up p artn ersh ip affairs; excep t
b y a tran saction w ith one w h o h ad exten d ed cred it to th e p artn ersh ip p rior
to d issolu tion an d h ad no knowledge or n otice of his w an t of au thority,
or h ad n ot exten d ed cred it to the p artn ersh ip p rior to d issolu tion , an d ,
h avin g n o k n ow led ge or notice of h is w an t of au th ority, th e fact of h is
w an t of au th ority h as n ot been ad vertised in the m an n er p rovid ed for
ad vertisin g th e fact of dissolution.
•
O n existin g liability of p artn ers - a p artn er is d isch arged from an y existin g
liab ility u p on d issolu tion of the p artn ersh ip by an agreem en t to th at effect
b etw een h im self, th e p artn ersh ip creditor, and the p erson or p artn ersh ip
con tin u in g th e b usiness. Such agreem en t m ay be in ferred from th e cou rse
of d ealin g b etw een th e cred itor h avin g knowledge of the d issolu tion an d th e
p erson or p artn ersh ip contin u in g the business. The in d ivid u al p rop erty of a
d eceased p artn er shall be liable for all obligations of the p artn ersh ip in cu rred
while h e w as a p artn er, but subject to the p rior p aym en t of his sep arate d ebts.8
As a gen eral ru le, d issolu tion of the p artn ersh ip d oes n ot of itself d isch arge
the existin g liability of an y p artn er, excep t w h en th ere is an agreem en t to th at
effect b etw een h im self, the p artn ersh ip cred itor, and p erson or p artn ersh ip
con tin u in g th e b usiness.
Win d in g Up Partn ers
Un d er Article 1836, in the ab sen ce of agreem en t as to the w in d in g-u p p artn er,
any p artn er wh o h as n ot w ron gfu lly d issolved the p artn ersh ip or the legal
i
•
7A rticle 1834, Civ il C od e of the Ph ilip p in es.
8A rticle 1835, Civ il Cod e of the Ph ilip p in es.
UNIT I | THE LAW ON PARTNERSHIP
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rep resentative of the last su rvivin g p artn er who is not insolvent, has the right to
wind up the p artn ersh ip affairs.
Righ ts of Partn ers in Case of D issolu tion
i
The following are the rights of p artn ers in case of dissolution, to wit:
•
Dissolution w ith ou t violation of agreem en t - u n d er Article 1837, p ar.l, when
d issolu tion is cau sed n ot in con traven tion of th e p artn ersh ip agreement, each
p artn er m ay h ave th e p artn ersh ip p rop erty applied to d isch arge its liabilities,
an d th e su rplu s applied to p ay in cash th e n et am ou n t ow in g to the respective
p artn ers.
•
Dissolution in con traven tion of th e agreem en t - u n d er Article 1837, par. 2, when
the dissolution is .caused in con traven tion of the p artn ersh ip agreement, the
p artn ers w ho did n ot cau se th e d issolution w ron gfu lly shall h ave the right to
apply the p artn ersh ip p rop erty to d isch arge the liabilities of the partnership.
They also have th e righ t to apply the surplus, if any, to p ay in cash the n et amount
owed to p artn ers an d the right to be indemnified for d am ages for b reach of
the agreem en t cau sed by the p artn er who caused the d issolution wrongfully.
They also h ave the right to continue the business in the same n am e either by
themselves or jointly w ith oth ers d uring the agreed term for th e partnership.
If the b usiness is continued, th ey have the right to p ossess the partnership
p rop erty p rovid ed th ey secu re the paymen t by a bond ap p roved by th e court;
or th ey pay any p artn er who h as caused the dissolution w ron gfu lly the value
of h is interest in the partn ersh ip , less any d am ages recoverable, and indemnity
again st all p resent or futu re p artn ersh ip liabilities.
O n th e oth er hand, u nd er Article 1837, par. 3, the p artn er who cau sed the
d issolu tion w rongfu lly h as the rights, if the business is not continued by others, to
ap ply p artn ersh ip property, to d ischarge the liabilities of p artn ersh ip and receive in
cash h is sh are of surplu s less d amages caused by his w ron gfu l dissolution. If the
b usiness is con tinu ed by others, he has the right to have th e valu e of his interest at
the time of dissolution ascertain ed (without considering the valu e of the goodwill
of the business) an d paid in cash or secu red bond ap proved by the cou rt, and be
released from all existin g or futu re p artn ersh ip liabilities.
Righ ts of Partn ers in Case of Rescission
Und er Article 1838, a p artn er who is induced by fraud or misrepresentation
to b ecome such p artn er may rescin d the p artn ersh ip contract. Among other rights,
he is entitled to a lien on, or right of retention of, the surplus of the partnership
p rop erty after satisfying the p artn ersh ip liabilities to third persons for any sum
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of money he paid for the p u rch ase of an interest in the partnership and for any
capital or ad van ces he contributed. He has the right to stand, after all liabilities to
third p erson s have been satisfied, in the place of the creditors of the partnership for
the p artn ersh ip liabilities he paid. He also has the right to be indemnified by the
person gu ilty of the fraud or mak in g the representation again st all obligations of
the partnership.
Settlin g of Accou n ts Betw een Partn ers
Under Article 1839, in settlin g accoun ts b etween the p artn ers after dissolution,
the following ru les shall be observed, subject to any agreem en t to the con trary:
A.
Comp osition of p artn ersh ip assets - the assets of the p artn ersh ip are the
p artn ersh ip p rop erty and the contributions of the p artn ers n eeded to pay all the
liabilities. Pu rsu an t to the subsidiary liability of the p artn ers, the p artn ersh ip
p rop erty shall be applied first to satisfy any liability of the p artnership.
B.
O rd er of ap p lication of assets - the liabilities of the p artn ersh ip shall ran k in
•the following ord er of payment: (1) those due to creditors oth er th an p artn ers;
(2) th ose d ue to p artn ers other than for capital and profits; (3) th ose due to
p artn ers in resp ect of capital; and (4) those due to p artn ers in resp ect of profits.
C.
Am ou n t of con trib u tion for liabilities - the rules for distribution of losses
shall d eterm in e the contributions of the partners. As such, the con trib u tion
shall con form to the agreement. If only the share in profits h as been agreed
u pon , th e con trib u tion shall be in the same proportion. In the absence of any
agreem en t, th e contribution shall be in proportion to the capital contribu tion .
D.
En forcem en t of contribution - an assignee for the benefit of cred itors or any
p erson ap p oin ted by the cou rt shall have the right to enforce the con tribu tion s
sp ecified. An y p artn er or his legal representative shall have the right to en force
the con trib u tion s up to the am ou n t he has paid more th an his sh are of the
liability. The in dividu al p rop erty of a deceased p artn er shall be liable for the
con trib u tion s specified in letter (C).
E.
D octrin e of m arsh alin g of assets - when p artn ersh ip p rop erty and the
individual p rop erties of the p artn ers are in p ossession of a cou rt for distribution,
p artn ersh ip cred itors shall h ave p riority on p artn ersh ip p rop erty and separate
cred itors on in dividu al prop erty, subject to the rights of lien or of secu red
cred itors.
i
F.
Distribution of p rop erty of insolvent p artn er - where a p artn er has b ecome
insolvent or his estate is insolvent, the claims again st his separate p rop erty shall
ran k in the following order: (1) those due to separate creditors; (2) those due to
p artn ersh ip cred itors; an d (3) those due to p artn ers by way of contribution.
U N IT I I TH E LAW ON PA RTN ERSH IP
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* The ord er of p aym en t of th e gen eral p artn ersh ip 's liabilities is: first, p ay what is
due to the firm's cred itors; n ext, p ay th e p artn er-cred itor; th en p ay the p artn ers f0r
their capital con tribu tion s; an d lastly, p ay th ose d ue as profits to th e p artn ers.
Righ ts of Cred itors of a D issolved Partn ersh ip
Un d er Article 1840, p ar. 1, th e cred itors of th e d issolved p artn ersh ip are also
cred itors of th e p erson or p artn ersh ip con tin u in g th e business:
A.
If th e b u sin ess is con tin u ed w ith ou t liquidation, an d th e cau se of dissolu tion is:
1.
ad m ission of a n ew p artn er into the existin g p artn ersh ip ;
2.
retirem en t or d eath of an y p artn er, and his righ ts to p artn ersh ip property
are assign ed to tw o or m ore of the p artn ers, or one or m ore of th e partners
an d on e or m ore th ird p erson s;
3.
retirem en t of all b ut one p artn er, and th eir righ ts to p artn ersh ip prop erty
are assign ed to the rem ain in g p artn er, wh o con tin u es th e b u sin ess, either
alone or w ith others;
4.
w ron gfu l dissolution by any p artn er, and th e rem ain in g p artn ers continue
th e b usiness, either alone or w ith others; or
5.
exp u lsion of a p artn er, an d the rem ain in g p artn ers con tin u e th e business,
eith er alone or w ith others.
B.
If th e cau se of dissolution is the retirem en t or d eath of an y p artn er, an d business
is con tin u ed w ith the con sen t of the retired p artn er or th e rep resen tative of the
d eceased p artn er, w ithou t assign m en t of th eir righ ts to p artn ersh ip p rop erty.
C.
If th e cau se of dissolution is the assign m en t b y all th e p artn ers or the
rep resen tatives of th eir rights in p artn ersh ip p rop erty to on e or m ore third
p erson s w h o p rom ise to pay th e debts an d w ho con tin u e th e b u sin ess of the
p artn ersh ip .
The liability of a th ird p erson , w h o b ecam e a p artn er in th e p artn ersh ip
con tin u in g th e b u sin ess, to th e cred itors of th e d issolved p artn ersh ip shall be
satisfied ou t of th e p artn ersh ip p rop erty only. But h e m ay agree to assu m e individual
liability.9 Cred itors of th e d issolved p artn ersh ip h ave a p rior righ t to an y claim of
th e retired p artn er or th e rep resen tative of th e d eceased p artn er again st th e person
or p artn ersh ip con tin u in g th e b u sin ess.101 This is w ith ou t p reju d ice to th e right of
cred itors to set aside an y assign m en t on th e grou n d of frau d .11
9A rticle 1840, p ar. 2, Civ il Cod e of th e P h ilip p in es.
10A rticle 1840, p ar. 3, C iv il Cod e of th e P h ilip p in es.
11A rticle 1840, p ar. 4, Civ il Co d e of th e P h ilip p in es.
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Righ ts of a Retired Partn er or a Rep resen tative of a
D eceased Partn er
,
Under Article 1841, u n less oth erw ise agreed u pon, wh en any p artn er retires
or dies, an d th e b u sin ess is con tin u ed w ith ou t an y settlem en t of accoun ts, he or
his legal rep resen tative, subject to th e p rior rights of th e cred itors of the dissolved
p artnership, m ay h ave th e valu e of his in terest at th e d ate of d issolution ascertain ed.
He shall receive as an ord in ary cred itor an am ou n t eq ual to th e valu e of his in terest
in the d issolved p artn ersh ip w ith interest, or at h is op tion or th e op tion of h is legal
represen tative, in lieu of in terest, the profits attrib utab le to th e u se of h is right in the
p rop erty of th e d issolved p artn ersh ip .
Righ t to an A ccou n t
»
Accord in g to Article 1842, in the absence of an y agreem en t to th e con trary,
th e righ t to an accou n t of his interest shall accru e to an y p artn er, or h is legal
rep resen tative at th e d ate of dissolution, as again st the w in d in g-u p p artn er, the
su rvivin g p artn ers, an d the p erson or p artn ersh ip con tin u in g the b usiness.
PRA C TIC E EXERCISE
Wh y w ill th e d eath of a p artn er terminate the p artn ersh ip ? Exp lain .
RELEVAN CE O F TH E LESSO N
D issolu tion of th e p artn ersh ip can come about by th e ch an ge in th e relation sh ip
of th e p artn ers, su ch as w h en a p artn er chooses to cease b ein g p art of th e p artn ersh ip ,.
the exp u lsion of a p artn er, loss of the th in g p rom ised to be con trib u ted to th e
p artn ersh ip , d eath , insolvency, or civil interdiction of a p artn er. Wh atever m ay be
the cau se of th e d issolu tion of a p artn ersh ip , it h as con seq u en ces th at all p artn ers,
as well as p artn ersh ip cred itors, m u st be aw are of.
LESSO N SUM M ARY
•
A p artn ersh ip m ay be dissolved w ith ou t violation of th e agreem en t, in
con traven tion of th e agreem en t, by op eration of law, b y d ecree of a cou rt, and
u p on ap p lication by a p erson w ho acq u ires th e in terest of a p artn er.
•
A p artn ersh ip is also d issolved w h en a n ew p artn er is ad m itted into an
existin g p artn ersh ip , an y p artn er retires, the oth er p artn ers assign th eir rights
to th e sole rem ain in g p artn er, an d all the p artn ers assign th eir rights in the
p artn ersh ip p rop erty to th ird p erson s.
U N IT I I TH E LAW O N P A RTN ERSH IP
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•
The d issolu tion of a p artn ersh ip term in ates all au th ority of an y p artn er to act
for the p artn ersh ip excep t for w in d in g u p its affairs or com p letin g tran saction s
u n fin ish ed at d issolu tion.
•
Th e p artn ersh ip is n ot bou nd by an y act of a p artn er after d issolu tion where
the p artn ersh ip is d issolved b ecau se it is u n law fu l to carry on th e business,
w h ere th e p artn er h as b ecom e in solven t, or w h ere th e p artn er h as n o authority
to w ind up p artn ersh ip affairs.
•
A p artn er is d isch arged from an y existin g liability u p on d issolu tion of the
p artn ersh ip by an agreem en t to th at effect b etw een h imself, th e partn ersh ip
cred itor, and the p erson or p artn ersh ip con tin u in g th e b u sin ess.
•
Wh en d issolu tion is cau sed n ot in con traven tion of th e p artn ersh ip agreement,
each p artn er m ay h ave the p artn ersh ip p rop erty applied to d isch arge its
liabilities, and th e su rp lu s applied to p ay in cash th e n et am ou n t ow in g to
th e resp ective p artn ers. On the oth er h an d , when d issolu tion is cau sed in
con traven tion of th e p artn ersh ip agreem en t, th e p artn ers w h o d id n ot cause
th e d issolu tion w ron gfu lly shall h ave the followin g righ ts: to d em an d the
i
sam e righ ts as m en tion ed earlier plus the righ t to be in d em n ified for d am ages
for b reach of th e agreem en t again st the p artn er w h o cau sed th e dissolution
w ron gfu lly, an d to con tin u e the business in the sam e n am e eith er b y th em selves
or join tly w ith oth ers d u rin g the agreed term for th e p artn ersh ip .
•
In case of d issolu tion, th e p artn ersh ip p rop erty shall b e ap p lied first to satisfy
an y liability of th e p artn ersh ip an d p aym en t shall b e m ad e as follow s: to
cred itors oth er th an p artn ers, to p artn ers oth er th an for cap ital an d p rofits, to
p artn ers in resp ect of capital, an d to p artn ers in resp ect of p rofits. Th e rules
for th e d istrib u tion of losses shall d eterm in e th e con trib u tion s of th e p artn ers.
Cred itors of th e d issolved p artn ersh ip are also cred itors of th e p erson or
p artn ersh ip con tin u in g th e b usiness.
•
The liability of a th ird p erson , w h o b ecam e a p artn er in th e p artn ersh ip
con tin u in g th e b u sin ess, to th e cred itors of th e d issolved p artn ersh ip shall be
satisfied ou t of th e p artn ersh ip p rop erty only.
,
•
Cred itors of th e d issolved p artn ersh ip h ave a p rior righ t to an y claim of the
retired p artn er or th e rep resen tative of th e d eceased p artn er again st th e person
or p artn ersh ip con tin u in g th e b u sin ess.
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NampInstructor:
Datp:
<
Score:
Section:
/
Tru e or False
________1. The w in d in g up of a dissolved p artn ersh ip m ay be done extra-jud icially
by th e p artn ers or judicially by a com p eten t cou rt.
________2. As a general rule, if the cau se of dissolution is the d eath of a p artn er,
the au th ority of the other p artn ers to bind the p artn ersh ip ceases u pon
knowledge of the dissolution.
________3. The right to demand an accou n tin g of p artn ersh ip affairs m u st be
d irected again st the winding-up p artner, or the su rvivin g p artn ers, or
the p artn ers continuing the business.
________4. The individual p rop erty of a d eceased p artn er shall an sw er for the
latter's share of the contributions needed to settle th e p artn ersh ip
d eath s in cu rred while he was a partner.
________5. Dissolution of a partnership may be ordered by the cou rt u p on p etition
by a p artn er or his assignee in case he has assign ed h is in terest in the
p artn ersh ip .
________6. The dissolution of a partn ersh ip m ay be b rou gh t about b y ch an ge
th rou gh : ad mission of a new p artn er; retirem en t of a p artn er, d eath,
w ithd rawal, or expulsion; or when all the p artn ers assign th eir righ ts
to a th ird p erson or a sole rem ainin g p artn er.
________7. D eath of a p artn er causes judicial dissolution of a p artn ersh ip .
________8. In cap acity of a general p artn er is a cau se for judicial d issolu tion of a
gen eral p artn ersh ip .
9. Wh en a b usiness can be carried only at a loss, it resu lts in th e au tom atic
dissolu tion of the p artn ersh ip .
_______ 10. On application b y or for a p artn er th e cou rt shall d ecree dissolu tion in
case of in solven cy of a p artn er.
CH A PTER PRO JECT
1.
Make facts ch art on the d ifferent cau ses of th e dissolu tion of a p artn ersh ip .
2.
Do a Th ink-Pair-Share with a p artn er about w h at will h ap p en n ext after a
p artn er dies.
U N IT 1 | TH E LA W O N P A RTN ERSH IP
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IN TRO D UCTIO N
Article 1843 d efin es a lim ited p artn ersh ip as on e form ed b y tw o or m ore p erson s,
h avin g as m em b ers on e or m ore gen eral p artn ers an d on e or m ore lim ited p artn ers
w h o are n ot b ou n d b y th e ob ligation s 6f th e p artn ersh ip . A lim ited p artn ersh ip h as
the follow in g ad van tages— for gen eral p artn ers, to secu re cap ital from oth ers w h ile
retain in g con trol an d su p ervision for th e b u sin ess, an d for lim ited p artn e rs, to sh are
in th e p rofits w ith ou t risk of p erson al liability.
INTEN D ED LEARN IN G O UTCO MES
At th e en d of th is ch ap ter, th e stu d en ts w ill b e able to recall th e p ro ce d u re s in th e
form ation of a lim ited p artn ersh ip , com p are th e d issolu tion of a lim ited p a rtn e rsh ip
to th e d issolu tion of a gen eral p artn ersh ip , an d su m m arize th e p ro te ctio n afford ed
to a lim ited p artn er.
Ch aracteristics
A lim ited p artn ersh ip h as th e follow in g ch aracteristics:
It is form ed b y com p lian ce w ith th e statu tory req u irem en ts.1
Its b u sin ess is con trolled or m an aged b y on e or m ore gen eral p a rtn e rs , w h o a re
p erson ally liab le to cred itors.2
Its ob ligation s or d eb ts are p aid ou t of th e p artn ersh ip a ssets an d th e in d iv id u al
p rop erty of th e gen eral p artn ers.3
O n e or m ore lim ited p artn ers con trib u te to th e cap ital an d sh are in th e p rofits
b u t d o n ot m an age th e b u sin ess an d are n ot p erson ally liab le for p a rtn e rsh ip
ob ligation s b eyon d th eir cap ital con trib u tion s.4
The lim ited p a rtn ers m ay h ave th eir con trib u tion s b ack su b ject to con d ition s
p rescrib ed b y law .5
’Article 1844, Civil Cod e of the Philip p in es.
2Articles 1848 and 1850, Civil Cod e of the Ph ilip p in es.
3Article 1843, Civil Cod e of the Philip p in es.
‘‘Articles 1845,1848, and 1856, Civil Cod e of the Ph ilip p in es.
5Articles 1844 and 1857, Civil Cod e of the Philip p in es.
U N IT I ) ;TH E LAW O N P A RTN ERSH IP
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Form ation
Tw o or m or e p er so n s d e sir in g to fo r m a lim ited p a r t n e r s h ip s h a ll sig h and
sw ear to a cer tifica te sta tin g th e item s in A r t icle 1844 a n d file fo r th e reco rd of
th e cer tifica te in th e SEC. A lim ited p a r tn e r s h ip is fo r m ed if th e r e is su b sta n tia l
co m p lia n ce in g o od faith w ith th e r e q u ir e m e n ts. Th e p u r p o s e o f filin g th e cer tifica te
in th e SEC is to g iv e a ctu a l or co n s tr u ct iv e n o tice to p o t e n t ia l cr e d ito r s or p erson s
d e a lin g w ith th e p a r tn er sh ip a n d to a cq u a in t th e m w it h its e s se n t ia l featu res,
in clu d in g th e lim ited lia b ility o f lim ite d p a r tn e r s.
Th e su r n a m e o f a lim ited p a r tn e r s h a ll n o t a p p ea r in th e p a r t n e r s h ip n am e
u n le s s it is a lso th e su r n a m e o f a g en er a l p a r tn e r o r p r io r to th e tim e w h en the
lim ited p a r tn er b e ca m e su ch , th e b u sin e ss h a d b e e n ca r r ie d o n u n d e r a n am e
in w h ich h is su r n a m e a p p ea r ed . A lim ited p a r tn e r w h o se s u r n a m e a p p ea r s in
a p a r tn er sh ip n a m e co n tr a r y to th is p r o h ib itio n is lia b le a s a g e n e r a l p a r tn e r to
p a r tn er sh ip cr ed ito r s w h o exten d cr ed it w ith o u t a ctu a l k n o w le d g e t h a t h e is n ot a
g en er al p ar tn er .
U n d er A r t icle 1847, if th e cer tifica te co n ta in s a fa lse sta te m e n t, o n e w h o relied
on it a n d su ffe r e d a lo ss m ay h o ld lia ble an y p a r ty to th e ce r t ifica t e w h o k n e w th at
th e sta te m e n t is fa lse at th e tim e h e sig n ed th e ce r t ifica te or su b se q u e n tly , su ch
p e r s o n h a d en o u g h tim e to ca n cel or a m en d it b u t fa iled to d o so.
A cco r d in g to A r ticle 1853, if a p er so n is b o th a g en er a l a n d a lim it e d p a rtn er
in th e sa m e p a r tn e r sh ip at th e sa m e tim e, th is fa ct m u st b e sta ted in th e certifica te.
A p e r so n w h o is a g en er a l, a n d a lso at th e sa m e tim e a lim it e d p a r tn e r , sh a ll have
all th e r ig h ts an d p o w ers, a n d b e su b je ct to a ll th e r e st r ictio n s o f a g e n e r a l p artn er,
excep t th at, in r e sp e ct to h is co n tr ib u tio n as a lim ite d p a r tn e r , h e sh a ll h a v e the
r ig h ts a g a in st th e o th e r m em b er s w h ich h e w ou ld h a v e h a d if h e w er e n o t also a
g e n e r a l p a r tn er .
.
M an ag em en t
O n ly g e n e r a l p a r tn e r s h a v e th e r ig h t to m a n a g e th e p a r tn e r sh ip . U n d er A rticle
1848, if a lim it e d p a r tn e r ta k e s p a r t in th e co n tr o l of th e b u sin e ss, h e b e co m e s liable
as a g e n e r a l p a r tn er . A g en er a l p a r tn e r in a lim ited p a r tn e r sh ip h a s th e r ig h ts and
p o w e r s a n d is su b je ct to a ll lim it a tio n s an d lia b ilitie s o f a p a r tn e r in a gen eral
p a r tn e r sh ip . U n d er A r t icle 1850, h e h a s g en er a l a u th o r ity ov er th e b u sin ess, but
w r it t e n co n se n t or r a tifica tio n b y a ll lim ite d p a r tn e r s is n eed ed for h im to b e able to:
•
d o a n y a ct in co n tr a v en tio n o f th e cer tifica te;
•
d o a n y a ct w h ich w o u ld m a k e it im p o ssib le to ca r r y o n th e o r d in a r y bu sin ess
o f th e p a r tn e r sh ip ;
•
50
,
'
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co n fe s s a ju d g m e n t a g a in st th e p a r tn er sh ip ;
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•
p ossess p a r tn er sh ip p rop erty, or assig n th eir rig h ts in a sp ecific p rop erty, for
oth er th a n a p a r tn er sh ip p u r p o se;
( .
•
ad m it a p erson as a g en eral p ar tn er ;
•
ad m it a p erson as a lim ited p ar tn er , u n less th e rig h t to d o so is g iv en in th e
certificate; or
•
co n tin u e th e b u sin ess w ith p a r tn er sh ip p r o p er ty on th e d eath , retirem en t,
in san ity , civ il in ter d ictio n , or in so lv en cy of a g en er al p a rtn er , u n less th e righ t
so to d o is g iv en in th e cer tificate.
O b ligation s of a Lim ited Partn er
>
'
#
U n d er A r ticle 1845, th e lim ited p a r tn er m ay co n trib u te ca sh or o th er p rop erty ,
bu t n ot serv ices. H e is liable to th e p a r tn er sh ip for th e d iffer en ce b e tw e e n h is
a ctu al co n tr ib u tio n an d th at stated in th e cer tifica te as h a v in g b een m a d e an d for
an y u n p aid co n tr ib u tio n w h ich h e ag reed to m a k e in th e fu tu r e at th e tim e an d on
th e co n d itio n s sta ted in th e cer tifica te.6 H e h old s as tr u stee for th e p a r tn e r sh ip sp ecific p r o p er ty sta ted in th e cer tifica te as co n tribu ted by h im , b u t w h ich w as
n o t co n tr ib u ted or w h ich h as b een w r o n g fu lly r etu r n ed , as w ell as m o n ey or o th er
p r o p er ty w r o n g fu lly p aid or con v eyed to h im on accou n t of h is co n tr ib u tio n .7
Th ese lia b ilitie s ca n b e w aiv ed or co m p rom ised on ly by th e co n sen t o f a ll p a r tn e r s
b u t su ch w a iv er o r co m p ro m ise sh all n ot a ffect th e rig h t of cred ito r s w h o exten d ed
cred it or w h o se cla im arose, after th e filin g or b efore ca n cella tio n or a m en d m en t
of th e cer tifica te .8 Ev en if a lim ited p a r tn er h a s r ig h tfu lly r eceiv ed th e r e t u r n in
w h ole o r in p a r t o f h is cap ital co n trib u tion , h e is still liable to th e p a r tn e r sh ip for
an y su m , n o t exce e d in g said r etu r n w ith in terest, n eed ed to d isch a r g e its lia b ilitie s
to all cr ed ito r s w h o exten d ed cred it or w h ose cla im s a ro se b efo r e su ch r e tu r n .9
A p e r so n w h o h a s co n trib u ted cap ital to a p a r tn er sh ip , er r o n eo u sly b e lie v in g
th at h e h a s b e co m e a lim ited p ar tn er , a lth ou g h h is n a m e w a s in d ica ted in th e
cer tifica te as a g en er a l p a r tn er or h e w as n ot d esig n a ted as a lim ited p a r tn er , is
n ot p er so n a lly lia b le as a g en er a l p a r tn er b y r ea so n of h is exer cise o f th e r ig h ts o f a
lim ited p a r tn er , p r o v id ed : on a sce r ta in in g th e m ista k e, h e p r o m p tly r en o u n ces h is
in ter est in th e p r o fits o f th e b u sin e ss or o th er co m p en sa tio n b y w ay o f in co m e;101h e
d oes n o t p a r ticip a te in th e m a n a g em en t of th e b u sin ess;11 a n d h is su r n a m e d o es n o t
ap p ear in th e p a r tn e r sh ip n a m e.12
6A rticle 1858, p ar. 1, Civ il Cod e of th e Ph ilip p in es.
7A rticle 1858, p ar. 2, Civ il Cod e of the Ph ilip p in es.
8A rticle 1858, p ar. 3, Civ il Cod e of the Ph ilip p in es.
9A rticle 1858, p ar. 4, Civ il Cod e of th e Ph ilip p in es.
10A rticle 1852, Civ il Cod e of th e Ph ilip p in es.
11A rticle 1848, Civ il Cod e of th e Ph ilip p in es.
12A rticle 1846, Civ il Cod e of th e Ph ilip p in es.
U N IT I | TH E LA W O N P A RTN ERSH IP
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To illu strate: Th e p a r tn e r s o f Sa n to s, C r u z , Rey es, & Co. Ltd . are: Fer n a n Santos,
Bailey C r u z , M ilo Rey es, g en era l p a r tn er s, an d C h lo e Rey es, lim ited p a r tn er . Ch loe
Rey es is liab le as a g en er a l p a r tn e r to cr ed ito r s w h o exten d cr ed it to th e p a rtn er sh ip
n o t k n o w in g C h lo e Rey es as a lim ited p a r tn er .
'■if/
U n d er A r ticle 1843, a lim ited p a r tn e r is n o t lia b le as a g en er a l p a r tn er . H is
lia b ility is lim ite d to th e exten t o f h is co n tr ib u tio n s. H e is lia b le as a g en er a l p artn er
w h e n h is su r n a m e a p p ea r s in th e p a r tn e r sh ip n a m e, w ith ce r t a in e xce p tio n s13 and
h e ta k e s p a r t in th e co n tr o l o f th e b u sin e ss .14
A r t icle 1862 p r o v id es th a t a n y sep a r a te cr ed ito r o f a lim it e d p a r tn e r m a y ap p ly
to th e co u r t fo r a ch a r g in g ord er. Th e co u r t m a y ch a r g e th e lim ite d p a r t n e r 's in terest
w it h p a y m e n t o f th e u n sa tisfie d a m o u n t o f su ch cla im , a p p o in t a r eceiv er , a n d m ake
a ll o th e r o r d er s, d ir e ctio n s, a n d in q u ir ie s as a r e n ecessa r y . Th e in t e r e st ch arg ed
m a y b e r e d e e m e d w ith th e sep a r a te p r o p e r ty o f a n y g en er a l p a r tn e r , b u t m a y n o t be
r e d e e m e d w it h p a r tn e r s h ip p rop er ty .
R igh ts o f a Lim ited Partn er
In g e n e r a l, a lim it e d p a r tn e r sh a ll h a v e th e sa m e r ig h ts a s a g e n e r a l p a r t n e r to:
•
r e q u ir e th a t th e p a r tn e r sh ip b o o k s b e k ep t at th e p r in cip a l p la ce o f b u s in e s s of
th e p a r t n e r s h ip ;
•
in s p e ct a n d co p y a n y o f th em at a r ea so n a b le h o u r ;
•
d e m a n d t r u e a n d fu ll in fo r m a tio n of a ll th in g s a ffe ct in g th e p a r t n e r s h ip ;
•
d e m a n d a fo r m a l a cco u n t o f p a r tn e r sh ip a ffa ir s w h e n e v e r cir cu m s ta n ce s
r e n d e r it ju s t a n d r ea so n a b le;
.< '
•
a s k fo r d isso lu t io n a n d w in d in g u p b y d ecr ee o f co u r t;
•
r e ce iv e a s h a r e o f th e p r o fits or o th er co m p e n sa tio n b y w a y o f in co m e ; a n d
•
r e ce iv e t h e r e t u r n o f h is co n tr ib u tio n p r o v id ed th e p a r t n e r s h ip a s s e t s a r e in
e xce ss o f a ll its lia b ilitie s. (A r ticle 1851)
.
,
U n d er A r t icle 1854, a lim it e d p a r t n e r m a y len d m o n e y to t h e p a r tn er sh ip ,
t r a n sa ct o th e r b u s in e s s w it h th e p a r tn e r sh ip , a n d if h e is n o t a ls o a g e n e r a l p artn er ,
r eceiv e a p r o r at a s h a r e o f th e p a r t n e r s h ip a s se t s w it h g e n e r a l cr e d ito r s. Bu t w ith
r e sp e ct to h is t r a n s a ct io n s w it h th e p a r tn e r s h ip , h e ca n n o t r e ce iv e o r h old as
co lla ter a l s e cu r it y a n y p a r t n e r s h ip p r o p e r t y or r e ce iv e a n y p a y m en t, co n v ey a n ce, or
r elea se fr o m lia b ility if it w ill p r e ju d ice t h e r ig h t o f th ir d p e r so n s. Vio la tio n o f the
p r o h ib itio n is co n sid er ed a fr a u d o n th e cr e d ito r s o f th e p a r tn e r sh ip .
13A r ticle 1846, p ar. 2, Civ il C od e of th e Ph ilip p in es.
14 A rticle 1848, Civ il Co d e o f th e Ph ilip p in es.
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Accord in g to A rticle 1856, a lim ited p artn er m ay receive from th e p artn ersh ip
the sh are of th e p rofits or th e com p en sation by w ay of in com e as stated in th e
certificate. Th is righ t is su bject to th e con d ition th at th e p artn ersh ip assets are in
excess of th e p artn ersh ip liabilities after su ch p aym en t. Th e p artn ersh ip liabilities
referred to exclu d e th e liabilities to th e lim ited an d gen eral p artn ers.
Und er A rticle 1857, p ar. 1, a lim ited p artn er sh all n ot receive from a gen eral
p artn er or ou t of p artn ersh ip p rop erty an y p art of h is con tribu tion s u n til:
A.
all liabilities of th e p artn ersh ip , excep t liabilities to gen eral p artn ers and to
lim ited p ar tn er s on accou n t of th eir con tribu tion s, h ave b een p aid or th ere
rem ain s th e p rop erty of th e p artn ersh ip su fficien t to p ay th em ;
B.
th e con sen t of all m em bers is had , u n less th e retu rn m ay be d em an d ed as a
m atter of righ t; an d
C.
1
th e cer tifica te is can celled or so am en d ed as to set forth th e w ith d raw al or
red u ction .
Th e r etu r n of h is con tribu tion s m ay be d em an d ed , as a m atter of rig h t (i.e.,
even w h en n ot all th e oth er p artn ers' consent), w h en (A) and (B) above are com p lied
w ith on th e d issolu tion of th e p artn ersh ip , u p on th e arrival of th e d ate stated in th e
certificate for th e retu rn , or after th e exp iration of a six-m on th n otice in w r itin g h e
gave to th e oth er p ar tn er s if n o tim e is fixed in th e certificate for th e r etu r n of th e
con tribu tion or th e d issolu tion of th e p artn ersh ip .15 A lim ited p a r tn er h a s on ly th e
righ t to d em an d an d receive cash in retu rn for h is con tribu tion , reg a rd less of w h eth er
h e con tribu ted m on ey or p rop erty. H e may, how ever, receive h is co n tribu tion in a
form oth er th a n cash w h en p rovid ed in th e certificate or w h en all th e p a rtn er s'
con sen t.16
A rticle 1855 p rov id es th at w h ile th e lim ited p artn ers stan d on eq u al footin g,
p riority or p referen ce m ay be given to som e lim ited p ar tn er s over oth ers w ith
resp ect to th e r etu r n of con tribu tion s, th eir com p en sation by w ay of in com e or an y
oth er m atter, if all th e gen eral an d lim ited p artn ers agree in th e certificate.
Th e in terest of a lim ited p artn er is assign able. Th e assig n ee m ay becom e a
su bstitu ted lim ited p artn er or a m ere assign ee. A su bstitu ted lim ited p artn er is a
p erson ad m itted to all th e righ ts of a lim ited p artn er w h o h a s d ied or h as assign ed
h is in terest in a p artn ersh ip . H e h as all th e righ ts an d p ow ers, an d is su bject to all
th e restriction s an d liabilities of h is assign or, excep t th ose liabilities th at h e w as
ign oran t of an d ' can n ot be ascertain ed from th e certificate.17 O n th e oth er h an d , an
assign ee is on ly en titled to receive th e sh are of th e p rofits or oth er com p en sation
15Article 1857, par. 2, Civil Cod e of the Philip p in es.
• 16Article 1857, par. 3, Civil Cod e of the Philip p in es.
17Article 1859, p ars. 2 and 6, Civil Cod e of the Philip p in es.
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b y w ay of in com e, or th e retu r n of co n trib u tio n , to w h ich th e a ssig n o r would
o th er w ise b e en titled . H e h as n eith er th e rig h t to r eq u ir e a n y in for m at ion or account
o f th e p a r tn er sh ip tr a n sa ctio n s n or th e righ t to in sp ect th e p a r tn er sh ip b o o k s.’* An
assig n ee h as th e righ t to b eco m e a su b stitu ted lim ited p a r tn er if all th e p artn ers'
con sen t th ereto or th e a ssig n o r w h o w as em p o w ered to d o so by th e cer tifica te, gives
h im th at rig h t.1
819 An a ssig n ee a lso b eco m es a su b stitu ted lim ited p a r tn er w h en the
cer tifica te is ap p rop riately a m en d ed .20 U n d er A rticle 1857, p ar. 4, a lim ited partner
m ay h ave th e p a r tn er sh ip d issolv ed an d its a ffa ir s w ou n d u p w h en h e righ tfu lly
bu t u n su ccessfu lly d em a n d s th e r etu r n of h is co n trib u tio n or h e h a s a righ t to
co n tribu tion bu t h is co n trib u tio n is n ot p aid b eca u se th e p a r tn e r sh ip p r o p er ty is
in su fficien t to p ay its lia b ilities.
D issolu tion of Lim ited Partn ersh ip
A r ticle 1860 p rov id es th at th e r etirem en t, d eath , in so lv en cy , in sa n ity , or civil
in ter d ictio n of a gen eral p a r tn er d isso lv es th e p ar tn er sh ip . Bu t it is n ot so d issolved
w h en th e b u sin ess is con tin u ed by th e r em a in in g g en eral p a r tn e r s u n d er a rig h t to
d o so stated in th e cer tifica te or w ith th e co n sen t o f all m em b er s. Up on th e d eath of
a lim ited p artn er, h is execu tor or a d m in istr a to r sh all h ave all th e r ig h ts o f a lim ited
p a r tn er for th e p u r p o se of settlin g h is esta te and th e p ow er to co n stitu te an assign ee
as a su b stitu ted lim ited p artn er, if th e d eceased w as so em p o w er ed in th e certificate.
U n d er A r ticle 1861, th e esta te of a d eceased lim ited p a r tn er sh a ll be lia b le fo r all his
lia b ilities as a lim ited p artn er.
,
,
~
’1
I ,
'
'
'
Settlem en t of Accou n ts
A r t icle 1863, p ar. 1 p rov id es th a t in se ttlin g a cco u n ts a fte r d isso lu tio n , the
lia b ilitie s o f th e p a r tn er sh ip sh a ll b e p aid in th e fo llo w in g or d er :
•
th o se to cr ed ito r s, in clu d in g lim ited p a r tn er s excep t th o se on a cco u n t of their
co n tr ib u tio n s, in th e ord er of p r io r ity as p ro v id ed b y law ;
•
th o se to lim ite d p a r tn e r s in r esp ect to th eir sh a r e o f th e p r o fits an d other
co m p e n sa tio n by w a y o f in co m e in th eir co n tr ib u tio n s;
•
th o s e to lim ite d p a r tn e r s in r e sp e ct to th e ca p ital o f th e ir co n tr ib u tio n s;
•
th o se to g en er a l p a r tn e r s o th er th a n for ca p ita l an d p r o fits;
•
th o se to g en er a l p a r tn e r s in r e sp e ct to p ro fits; an d
•
t h o s e to g e n er a l p a r tn e r s in r e sp e ct to cap ita l.
,
18A r ticle 1859, p ar. 3, C iv il Cod e o f th e Ph ilip p in es.
19A rticle 1859, p ar. 4, Civ il C od e o f th e Ph ilip p in es.
20A rticle 1859, p ar. 5, Civ il C od e o f th e Ph ilip p in es.
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The sh are of lim ited p artn ers in the capital, p rofits, or for com p en sation by w ay
of income, is in p rop ortion of th eir con trib u tion , u n less th ere is a statem en t in the
certificate as to th eir sh are in th e p rofits or th ere is a su b sequ ent agreem en t fixin g
th eir sh are.21
,
*'
Amend ment or Can cellation of Certificate
Un d er Article 1864, w h en th e p artn ersh ip is d issolved or all lim ited p artn ers
cease to be su ch lim ited p artn ers, th e certificate shall b e can celed . O n the other
h an d , a certificate sh all b e am en d ed w h en:
•
th ere is a ch an ge in th e n am e of th e p artn ersh ip or in th e am ou n t or ch aracter
of th e con trib u tion of an y lim ited p artn er;
•
a p erson is su b stitu ted as a lim ited p artn er;
•
an ad d ition al lim ited p artn er is ad m itted ;
•
a p erson is ad m itted as a gen eral p artn er;
•
a gen eral p artn er retires, dies, b ecom es in solven t or in san e, or is sen ten ced to
civil in terd iction an d the b u sin ess is con tin u ed ;
•
th ere is a ch an ge in th e ch aracter of th e b u sin ess of th e p artn ersh ip ;
•
th ere is a false or erron eou s statem en t in th e certificate;
•
th ere is a ch an ge in th e tim e as stated in th e certificate for th e d issolu tion of th e
p artn ersh ip or for th e retu rn , of a con trib ution ;
•
a tim e is fixed for th e d issolu tion 1of th e p artn ersh ip or th e re tu rn of a
con trib u tion , b u t n o tim e w as sp ecified in th e certificate; or
•
th e p artn ers d esire to m ak e a ch an ge in an y oth er statem en t in th e certificate to
accu rately rep resen t th e agreem en t am on g th em .
A rticle 1865 p rovid es th at to am en d or can cel a certificate, th e am en d m en t
or can cellation m u st b e in w ritin g an d m u st b e sign ed arid sw orn to b y all th e
p artn ers in clu d in g th e n ew p artn ers, an d th e assign in g lim ited p artn er in case
of su b stitu tion or ad d ition of a lim ited or gen eral p artn er. Th e w ritin g to am en d
(w ith th e certificate, as am en d ed ) or to can cel m u st b e filed w ith th e SEC. If a
p artn er d esign ated to execu te th e w ritin g refu ses to d o so, a p artn er w h o d esires
th e can cellation or am en d m en t m ay p etition th e cou rt to ord er th e can cellation or
am en d m en t. Th e cou rt sh all ord er th e SEC to record th e can cellation or am en d m en t
if it fin d s th at th e p etition er h as a righ t to h ave th e w ritin g execu ted .
21 Article 1863, par. 2, Civil Cod e of the Philip p ines.
U N IT I | TH E LAW ON PARTN ERSH IP
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!
PRACTICE EXERCISE
Ba sed on w h at you le a r n e d from th e lesso n , d r a ft a n A r t icle s of Limited
P a rtn ersh ip . You m ay se a r ch th e in ter n et for exa m p les th a t y ou m a y u se as guide.
RELEVAN CE O F TH E LESSO N
Bein g a lim ited p a r tn e r in a lim ited p a r tn e r sh ip seem s m o r e ad van tageou s
th a n b e in g in a g en er a l p a r tn er sh ip . O n e's lia b ility as a lim ite d p a r tn e r is on ly up
to th e exten t o f h is in v e stm e n t in th e p a r tn er sh ip . In ca se th e p a r tn e r sh ip becom es
lia ble for so m e o b lig a tio n , th e lim ited p a r tn e r is a ssu r e d th a t h is p e r so n a l assets
w ill n o t b e lia b le u n lik e if h e is a g en er a l p a r tn er . Th e lim it e d p a r tn e r h a s little
co n tr o l o v er th e co m p a n y a s h e is co n sid er ed m er ely a s a n in v e sto r a n d h e neither
g e ts to m a n a g e th e p a r tn er sh ip , n or m a k e ev er y d a y d e cisio n s in its o p er a tio n s, and
m o r e im p o r ta n tly , h e is n o t p er so n a lly lia ble for p a r tn e r sh ip o b lig a tio n s.
LES S O N SUM M ARY
•
1
A lim ited p a r tn e r sh ip is for m ed b y co m p lia n ce w ith th e s ta tu to r y req u ir em en ts.
Its b u sin e ss is co n tr o lled or m a n a g ed b y on e or m o r e g e n e r a l p a r tn e r s , w h o are
p e r so n a lly lia b le to cred ito r s. Its o b lig a tio n s a re p a id o u t o f th e p a rtn er sh ip
a ssets an d th e in d iv id u a l p r o p er ty o f th e g en er a l p a r tn er s.
•
In s e t t lin g a cco u n ts a fter d isso lu tio n , th e lim ited p a r tn e r s h ip 's lia b ilit ie s shall
b e e n title d to p a y m en t in th e fo llo w in g or d er: to cr ed ito r s, in clu d in g lim ited
i
p a r t n e r s exce p t th o se on a cco u n t o f th eir co n tr ib u tio n s, to lim it e d p a r tn e r s in
r e s p e ct to t h e ir sh a r e o f th e p r o fits aftd o th er co m p e n sa tio n b y w a y o f incom e
in t h e ir co n tr ib u tio n s, to lim ited p a r tn er s in r e sp e ct to th e ca p ita l o f their
. co n t r ib u tio n s, to g en er a l p a r tn er s o th er th a n for ca p ita l a n d p r o fits, to gen eral
p a r t n e r s in r e sp e ct to p r o fits, an d to g en er a l p a r tn e r s in r e s p e ct to ca p ital.
•
Th e ce r t ifica t e o f r e g istr a tio n o f th e lim ited p a r tn e r sh ip s h a ll b e ca n ce le d w hen
it is d isso lv e d , or a ll lim ite d p a r tn e r s cea se to b e su ch lim it e d p a r tn e r s.
•
A lim it e d p a r t n e r m a y h a v e h is co n tr ib u tio n s b a ck su b je ct to con d ition s
v
•
p r e scr ib e d b y law .
A lim it e d p a r t n e r m a y b e a g en er a l a n d a lim it e d p a r t n e r in th e sam e
p a r t n e r s h ip a t th e s a m e tim e, b u t t h is fa ct m u st b e sta ted in th e cer tifica te.
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A lim ited p a r tn er m ay loa n m on ey to th e p a r tn er sh ip , tr a n sa ct o th er b u sin ess
w ith th e p ar tn er sh ip ; an d receiv e a p r o rat a sh a r e o f th e p a r tn er sh ip a ssets w ith
g en eral cred ito r s if h e is n o t a lso a g en era l p a rtn er .
A lim ited p a r tn er 's in ter est is assig n able.
A lim ited p a r tn er m ay h av e th e p a r tn er sh ip d isso lv ed an d its a ffa ir s w o u n d u p
w h en h e r ig h tfu lly b u t u n su ccessfu lly d em a n d s th e r e tu r n of h is co n trib u tio n
or h e h a s a r ig h t to co n trib u tio n , b u t h is co n tr ib u tio n is n o t p a id b eca u se th e
p a r tn er sh ip p r o p er ty is in su fficien t to p a y its lia b ilities.
A lim ited p a r tn e r 's r etir em en t, d eath , in solv en cy , in sa n ity , or civ il in ter d ictio n
of a g en er a l p a r tn e r d isso lv es th e p a r tn er sh ip .
,
/
U N IT I I TH E LA W O N P A R TN ER SH IP
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i
V '
i
, i>
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BU SIN E SS LA W S A N D REG U LA TIO N S
’\ '
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Score:
Name:
Date:
In ctn irtn r;
Section :
/
True or False
_______ 1. A lim ited p a r tn er ca n v a lid ly d em a n d for m a l a cco u n tin g of p a r tn er sh ip
a ffa ir s a n y tim e at h is p leasu re.
________2. A p a r tn er sh ip is n ot d issolved u p on th e d eath of a lim ited p artn er.
________3. A lim ited p a r tn er w h o tak es an activ e p a r t in th e m a n a g em en t of th e
fir m b eco m es liable as a g en eral p artn er.
________4. A g en er a l p a r tn er sh ip m ay be form ed in for m a lly w h ile a lim ited
p a r tn er sh ip h a s to com p ly w ith th e fo rm alities laid d ow n b y law .
________ 5. Th e h e ir s of a d eceased lim ited p a rtn er sh all be liable for all h is lia b ilities
as a lim ited p artn er.
________ 6. A lim ited p a r tn er sh ip is v alid ly or g an iz ed b y execu tin g a cer tifica te
sig n ed a n d sw orn by th e p a rtn ers an d filed w ith th e SEC.
________ 7.
A lim ited p a r tn er m ay len d m on ey to th e p a r tn er sh ip an d h old as
co lla ter a l secu r ity an y p artn er sh ip p rop erty.
________ 8. Th e cer tifica te sh a ll b e am en d ed w h en all lim ited p a r tn er s cea se to b e
su ch .
________ 9. A lim ited p a r tn er 's in ter est is n ot assig n able.
________ 10. A lim ited p a r tn er m ay d em an d th e r etu r n of h is co n trib u tio n a n y tim e.
CH APTER PRO JECT
1.
List a ll th e p r o ced u r es in p u ttin g u p a lim ited p ar tn er sh ip .
2.
Cr ea te a ch a r t of sim ila r ities an d d iffer en ces b etw een a lim ited p a r tn er sh ip
an d a g en er a l p a r tn er sh ip as to d issolu tio n .
3.
P r ep a r e a flo w ch a r t to sh ow h o w a lim ited p a r tn er is p r o tected in a lim ited
p a r tn er sh ip .
U N IT 1 | TH E LAW O N P A RTN ERSH IP
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IN TRO D UCTIO N
O n Febr u ary 23, 2019, Rep u blic Act No. 112321 (or th e Rev ised Corp oration
Cod e) b eca m e effectiv e, rep lacin g Batas Pam ban sa Big. 68. Th e n ew law in trod u ces
fresh an d p rog ressiv e con cep ts aim ed to p rovid e ease in d oin g bu sin ess, p rom ote
good corp orate gov ern an ce and afford m ore p rotection to corp oration s, in vestors,
cred itors, an d oth er stakeh old ers alik e th rou gh key p rov ision s su ch as: p er p etu a l
term for th e corp oration ; on e-p erson corp oration (OPC); n o m in im u m cap ital
stock; p articip atio n in absen tia via rem ote com m u n ication s; em ergen cy boa rd ; an d
electron ic filin g an d m on itorin g system .
IN TEN D ED LEARN IN G OUTCOMES
At th e en d of th is chap ter, th e stu d en ts w ill be able to exp lain th e step s in
p u ttin g u p a corp oration an d com p are th e fu n ction s of th e d ir ectors an d th e officers
of a corp oration .
Lesson 1
Lesson 1.1: G en eral Provision s
Section 2 of th e Rev ised Corp oration Cod e (RCC) d efin es a corp oration as an
ar tificial b ein g created by op eration of law h a v in g th e rig h t of su ccession an d th e
p ow ers, attribu tes, an d p rop erties exp ressly au th orized by law or in cid en tal to its
existen ce. Th e m ain ad van tage of a corp oration over a p artn er sh ip as a m ed iu m for
d oin g bu sin ess in th e Ph ilip p in es is th e cen tra lized m an ag em en t of th e corp oration
th rou gh a board of d irectors or tru stees. A ccord in g to th e in corp oration test, th e
n ation ality of th e corp oration is d eterm in ed by th e state w h ere it w as in corp orated
1Th is Cod e shall be kn ow n as the "Rev ised Corp oration Cod e of the Ph ilip p in es".
(S ect i o n 1)
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r eg a r d less o f th e n a t io n a lit y o f its sto ck h o ld e r s. A d o m estic co r p o r a tio n is on e that
is o r g a n iz e d u n d er th e la w s o f th e P h ilip p in e s w h ile a fo r e ig n co r p o r a tio n is one
th a t is o r g a n iz e d u n d e r th e la w s o f a n o th e r co u n tr y . A sid e fr o m th e in corp oration
test, th e n a t io n a lit y o f a co r p o r a tio n m a y b e d e te r m in e d u n d er : (a) d o m icile test,
d e te r m in e d b y th e sta te w h er e it is d o m icile d — th e p la ce fixe d b y th e la w which
cr e a te d o r r e co g n iz e d it, a n d , in its a b sen ce, th e p la ce w h e r e its le g a l rep resen tation
is e sta b lish e d or w h e r e it e xe r cise s its p r in cip a l fu n ctio n s; a n d (b) co n tr o l test,
d e t e r m in e d b y th e n a t io n a lit y o f th e co n t r o llin g sto ck h o ld e r s or m e m b e r s, an d is
u se d in tim e s o f w ar . Th e cu r r e n t a p p lica tio n o f th e co n tr o l test ca n b e fo u n d in one
ca se w h e r e th e Su p r e m e C o u r t h eld th a t th e sh a r e s b e lo n g in g to co r p o r a tio n s at least
60% o f th e ca p ita l o f w h ich is o w n ed b y Filip in o cit iz e n s sh a ll b e co n sid e r e d as of
P h ilip p in e n a tio n a lity , b u t if th e p er ce n ta g e o f Filip in o o w n e r sh ip in th e corp oration
o r p a r t n e r s h ip is le ss t h a n 60%, o n ly th e n u m b e r o f sh a r e s co r r e s p o n d in g to such
p e r ce n t a g e s h a ll b e co u n te d a s o f P h ilip p in e n a tio n a lity .2 In ter estin g ly , th e Su p rem e
C o u r t, in a n e a r lie r ca se, h eld th a t a co r p o r a tio n o r g a n iz e d u n d e r th e la w s of the
P h ilip p in e s o f w h ich at lea st 60% o f th e ca p ita l sto ck o u tsta n d in g a n d en titled to
v o te is o w n e d a n d h e ld b y cit iz e n s o f th e P h ilip p in es, is co n sid er ed a Ph ilip p in e
N a t io n a l.3
A s to th e r ela tio n sh ip o f m a n a g e m e n t a n d co n tr o l, a co r p o r a tio n may
b e: (1) a h o ld in g co r p o r a t io n th a t h o ld s sto ck s in o th er co m p a n ie s fo r p u r p o se s of
co n t r o llin g s u ch o th e r co m p a n ie s as su b sid ia r ies; (2) a su b sid ia r y co r p o r a tio n w hich
is s o r e la t e d to a n o t h e r co r p o r a tio n th a t th e m a jo r ity of its d ir e cto r s ca n b e elected
d ir e ct ly o r in d ir e ct ly b y su ch o th er co r p o r a tio n ; (3) a n a ffilia t e or a co m p a n y w h ich
is s u b je ct to co m m o n co n tr o l o f a m o th er h o ld in g co m p a n y a n d o p er a tes u n d er it; or
(4) a o n e -p e r s o n co r p o r a t io n (OPC).
A co r p o r a t io n h a s a ju r id ica l p e r so n a lity sep a r a te a n d d is tin ct fr o m th a t o f its
s t o ck h o ld e r s , sh a r e h o ld e r s, 'or m em b er s.
To illu stra te : D o w n s 99% o f th e ca p ita l sto ck o f Q Q Q C o r p o r a tio n . D also
o w n s 99% o f R R R C o r p o r a tio n . Q Q Q C o r p o r a tio n o b ta in e d a lo a n fr o m WY
Ba n k . O n d u e d a te, Q Q Q C o r p o r a tio n d efa u lted . RRR C o r p o r a tio n is fin an cially
h ea lth y . R R R C o r p o r a tio n ca n n o t b e a u to m a tica lly h eld lia b le fo r th e lo a n o f QQQ
C o r p o r a tio n . Q Q Q C o r p o r a tio n a n d R R R C o r p o r a tio n , a lth o u g h b o th a r e o w n ed by
D, a r e tw o d is t in ct co r p o r a t io n s w it h sep a r a te ju r id ica l p e r so n a litie s.4
A s a co n s e q u e n ce o f th e d o ctr in e o f th e sep a r a te p e r so n a lity o f a corp oration ,
a co r p o r a tio n m a y b r in g civ il a n d cr im in a l a ctio n s in its o w n n a m e in th e same
m a n n e r as n a tu r a l p e r so n s. Its p e r s o n a lity r e m a in s u n ch a n g ed an d u n a ffected by
2N arr a N ick el M in in g an d D e v elo p m en t C o rp o r a tio n v s. Red m o n t Con solid ated M in es Corp oration , G.R
N o. 195580, A p ril 21, 2014.
3M ar issa R. U n ch u a n vs. A n to n io J.R Lozad a, A n ita Loza d a , an d th e Reg ister of D eed s of Cebu City, G.RN o. 172671, A p ril 16, 2009.
4Th e illu str ativ e case w as p attern ed from 2012 Bar exa m in a tio n q u estion in M ercan tile Law .
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ch an ges in th e p er so n s co m p osin g it. It is liable w h en ev er a tortu o u s act is com m itted
by an officer or ag en t u n d er th e exp ress d ir ectio n or au th ority of th e stock h old ers or
m em bers a ctin g as a bod y, or, gen erally, from th e d ir ecto r s as th e g ov er n in g bod y .56
Th e oblig ation s it in cu rred , a ctin g th r ou g h its au th or ized agen ts, are its sole liabilities.
6 Prop erty con v eyed to or a cq u ired by th e co rp o ration b eco m es th e p r o p er ty of th e
corp oration as a d istin ct leg a l en tity. U n d er th e Ru les of Co u r t,7 serv ice of su m m on s
m ay be m ad e on its p resid en t, g en eral m an ager, corp ora te secretary , treasu rer, or
in -h ou se co u n sel. Sin ce it is a m ere leg al fiction , th e cor p or a tion ca n n o t be held
liable for a cr im e co m m itted by its officer s b eca u se it d oes n ot h ave th e essen tia l
elem en t of m alice; in su ch case, it w ou ld be th e r esp on sib le officer s w h o w ou ld be
crim in a lly liable.8 A cor p or a tion w ou ld be liable for th e acts of its Board of D ir ecto r s
if th e la tter p er fo r m ed th e acts in accord an ce w ith p ow ers g r a n ted to th em u n d er
th e RCC, th e a r ticles of in cor p ora tion , an d bylaw s of th e corp oration , an d th e law s
an d r eg u la tio n s g o v er n in g th e op eration s of th e corp oration . Th e cor p or a tion w ill
also b e lia ble for th e acts of th e officers if th e latter acted p u r su a n t to r eso lu tio n s
ap p rov ed b y its Boa rd of D irectors.
A ccor d in g to th e lea d in g cases d ecid ed by th e Su p rem e Cou rt, a co rp o ra tio n ,
as a ju r id ica l p erson , is en titled to co n stitu tion al g u ar a n tees of d u e p r ocess,9 eq u a l
p r o tectio n of th e law ,101an d p rotection ag ain st u n r ea son able sea r ch es an d seiz u r es,11
b u t it ca n n o t in v ok e th e rig h t again st self-in cr im in a tion .12 A co r p o r a tio n is n o t
en titled to m or a l d a m a g es becau se it h as n o feelin g s, n o em otion s, an d n o sen ses.13
It ca n n o t exp er ien ce p h ysical su fferin g or su ch sen tim en ts as w o u n d ed feelin g s,
seriou s a n xiety , m en ta l an g u ish , or m oral sh ock. Th e on ly excep tio n to th is r u le is
w h en th e co rp o ra tio n h as a rep u tation th at is d ebased , r esu ltin g in its h u m ilia tio n
in th e b u sin ess r ea lm 14 in w h ich case it can v alid ly com p lain for libel or an y o th er
form of d efa m atio n , an d th u s cla im for m oral d am ag es u n d er item 7 o f A r ticle 2219
of th e C iv il Cod e.15
5PN B v s . CA, G.R. N o . L-27155, M ay 18,1978; 83 SCRA 237.
'
6Cease vs. CA, G.R. N o. L-33172, O ctober 18, 1979; 93 SCRA 483; H eirs of Fe Tan Uy v s. In tern ation al
Exch an ge Ban k, G.R. 166282, Febru ary 13, 2013.
7 S ee
Section 12, Ru le 14 of the Ru les of Cou rt, as am en d ed .
8Peop le vs. Tan Boon Kon g, G.R. N o. 32652, M arch 15,1930; 54 Ph il.607.
9A lbert vs. U n iv ersity Pu blish in g Co., Inc. G.R. N o. L-19118, Jan u ary 30,1965.
10Sm ith , Bell & Co. vs. N ativid ad , G.R. N o. 15574, Sep tem ber 17,1919; 40 Ph il 1631.
11Ston eh ill vs. Diokn o, G.R. N o. L-19550, Ju n e 19,1967; 20 SCRA 383.
12Bataan Sh ip yard vs. PCGG, G.R. N o. 75885, M ay 27,1987.
13A BS-CBN vs. CA, G.R. N o. 128690, Jan u ary 21,1999.
14M an ila Electric Com p an y vs. T.E.A.M. Electron ics Corp oration , Tech n ology Electron ics A ssem bly and
M an agem en t Pacific Corp oration , an d Ultra Electron ics In stru m en ts, Inc., G.R. N o. 131723, D ecem ber 13, 2007.
15Filip in as Broad castin g N etw ork, Inc. vs. AGO M ed ical and Ed u cation al Cen ter-Bicol Ch ristian College of
Med icin e, (A M EC-BCCM ) an d A n gelita F. Ago, G.R. N o. 141994, Jan u ary 17, 2005.
U N IT II
| REVISED C O RP O RA TIO N
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C lasses o f C o rp o ra tio n s
U n d er Sectio n 3 of th e RCC, co r p o r a tio n s form ed or o r g a n iz ed m ay b e stock
or n on stock . Sto ck co r p o r a tio n s a r e th o se w h ich h a v e ca p ita l sto ck d iv id ed into
sh ar es an d are a u th o r iz ed to d istr ib u te to th e h old er s of su ch sh a r es, d iv id en d s, or
allo tm en ts of th e su r p lu s p r o fits on th e b a sis o f th e sh a r es h eld . A ll o th er corp oration s
are n o n sto ck co rp o ra tio n s. A s to th e existen ce of sh a r es o f sto ck , a co rp o ra tio n may
eith er be: (1) a sto ck co rp o ra tio n w h ose ca p ital sto ck is d iv id ed in to sh a r es and
w h ich is a u th o r iz ed to d istr ib u te to sh a r eh o ld er s d iv id en d s or a llo tm en ts of the
su r p lu s p r o fits on th e b a sis of th e sh a r es h eld ; or (2) a n o n sto ck co r p o r a tio n that
d oes n o t issu e sto ck s16 n or d istr ib u te d iv id en d s to th eir m em b er s. U n d er Section
4, co r p o r a tio n s created b y sp ecial law s or ch a r te r s sh a ll b e g o v er n ed p r im a r ily by
th e p r o v isio n s o f th e sp ecia l law or ch a r ter cr ea tin g th em or a p p lica b le to them,
su p p lem en ted by th e p r o v isio n s of th e RCC w h en ap p licab le.
C orp orators, In corp orators, Stock h old ers, an d M em b ers
Th e fo llo w in g a r e th e co m p on en ts of a corp ora tion :
•
co r p o r a to r s
who
com p ose
a
corp ora tion ,
w h eth er
as
sto ck h o ld er s or
sh a r eh o ld er s in a sto ck co rp o ration or as m em ber s in a n o n sto ck corp oration ;
•
in co r p o r a to r s w h o a r e m en tion ed in th e a r ticles of in co r p o r a tio n a s originally
fo r m in g an d
co m p o sin g th e co rp oration , h a v in g sig n ed
th e a r ticles of
in co r p o r a tio n 17 (Sectio n 5) an d ack n o w led g ed th e sa m e b efo r e a n o ta r y public;
th ese n a tu r a l p er so n s h av e n o p ow ers bey o n d th o se v ested in th em by the
RCC;
•
sto ck h o ld e r s w h o a r e th e ow n er s of sh a r es o f sto ck in a sto ck corp or atio n ;
•
m e m b e r s w h o a r e th e co rp or ator s o f a n o n sto ck co rp o ra tio n ;
•
p r o m o ter w h o, a ctin g alon e or w ith oth er s, ta k es in itia tiv e in fo u n d in g and
i
o r g a n iz in g th e b u sin e ss or en ter p r ise of th e issu er a n d receiv es consid eration
th er efo r ; h e is a n ag en t of th e in co r p or ator s b u t n ot of th e cor p or a tion ; contracts
en ter ed in to b y th e p r o m o ter for an d on b e h a lf o f a p r o p o sed corp oration
g en er a lly b in d o n ly h im , su b ject to a n d to th e exten t of h is rep resen tation s, and
n o t th e co r p o r a tio n , u n le ss th ese co n tra cts a r e su b seq u en tly ra tified , exp ressly
or im p lied ly , b y its b o a r d of d ir ector s/ tru stees;
•
su b scr ib er w h o h a s a g r eed to ta k e an d p ay for or ig in a l, u n issu ed sh ares of a
co r p o r a tio n fo r m ed or to b e form ed .
16N on sto ck cor p oration , as a g en eral ru le, d o n ot issu e stocks, u n like stock corp oration s, In the case of CIR
vs. Th e Clu b Filip in o (G.R. N o. L-12719, M ay 31,1962), h ow ev er the Su p rem e Cou rt h eld th at the corp oration was
n ot d eem ed a stock corp o ration d esp ite issu in g sh ares.
17Section 5, RCC.
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Classification of Sh ares
Th e cla ssifica tio n
of sh ares, th eir co rresp on d in g
righ ts, p riv ileg es, or
restriction s, an d th eir stated p ar valu e, if any, m u st b e in d icated in th e a rticles of
in corp oration . Excep t w h en oth erw ise p rovid ed in th e a r ticles of in cor p or ation an d
th e certificate of stock, each sh are sh all be equ al in all r esp ects to ev ery oth er sh are;
th is is referred to as th e d o ctr in e o f eq u a lity o f sh a r es Fu rth er, th e sh a r es in stock
corp oration s m ay be d iv id ed in to classes or series of sh ares, or both .
Com m on sh a r e s are th e basic class of stock s o r d in a r ily an d u su a lly issu ed
w ith ou t extr a or d in a r y rig h ts an d p rivileg es. O w n ers of co m m on sh a r es are en titled
to a p ro rat a sh a re in th e p rofits of th e corp oration an d its a ssets u p on d issolu tion
and , also, in th e m an ag em en t of its a ffairs w ith ou t an y p referen ce. O n th e o th er
h an d , p r efer r ed sh a r es are issu ed w ith p ar valu e an d m ay be g iv en p r efer en ce in
th e d istrib u tio n of d iv id en d s and in th e d istribu tion of corp orate a ssets in case of
liqu id ation , or su ch oth er p referen ces. Th e board of d irectors, if a u th o r iz ed in th e
articles of in cor p or ation , m ay fix th e term s and con d ition s of p r efer r ed sh a r es of
stock or an y series th ereof. Su ch term s and con d ition s of th e p r efer red sh a r es sh a ll
b e effectiv e u p on th e filin g of a certificate th ereof w ith th e SEC.
Par v alu e sh a res h av e a v alu e fixed in th e certifica tes o f stock an d th e aricles o f
in corp oration . O n th e oth er h an d , n o-p ar valu e sh ares d o n ot h av e p a r v alu e b u t are
issu ed for a con sid er ation of at least P5 p er share. Th ey can n ot b e issu ed as p r efer r ed
stocks. O n ce n o-p a r v alu e sh ares are issu ed , th ey are d eem ed fu lly p aid an d n o n ­
assessable, an d th e h old er of th ese sh ares sh all n ot be liable to th e co r p o r a tio n or its
cred itors. Th e en tir e con sid eration for th e issu an ce of n o-p ar v alu e sh a r es co n stitu tes
cap ital, an d ca n n o t be d istribu ted as d ivid en d s. Th e articles of in co r p o r a tio n m u st
state th e fact th at it issu ed n o-p ar valu e sh ares as w ell as th e n u m b er o f said sh a r es.
Ban k s, tr u st co m p a n ies, in su ra n ce com p an ies, p u blic u tilities, b u ild in g an d loa n
association s, an d oth er corp oration s au th orized to ob ta in or access fu n d s fr o m th e
p u blic w h eth er p u blicly listed or not, sh all n ot be p er m itted to issu e n o -p a r v alu e
sh ares of stock.
Votin g sh a r es h a v e th e r ig h t to v ote, w h ile n on -v otin g sh a r es d o n ot h a v e th e
righ t to vote. Th e RCC on ly au th orizes th e d en ial of v otin g r ig h ts in th e ca se of
red eem able sh a r es an d p referred sh ares, p rov id ed th at th ere sh a ll alw ay s b e a class
or series of sh a r es th at h av e com p lete v otin g r ig h ts.Th ese r ed eem a b le an d p r e fe r r ed
sh ar es, w h en su ch v otin g rig h ts are d en ied , sh all n ev er th eless be en titled to vote on
th e follow in g fu n d a m en ta l m atter s:
•
•
am en d m en t of articles of in corp oration ;
ad op tion an d am en d m en t o f bylaw s;
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•
sa le ,
lease, exch an ge, m ortgage, p led ge, or o t h e r dispoMillon o f a ll o r
su b stan tia lly all o f th e co rp orate p rop er ties;
•
in cu rrin g , creatin g , or in cr ea sin g bon d ed in d eb ted n ess;
•
in cr ea se or d ecrease o f au th orized cap ital stock;
•
m erg er or con solid ation of the corp oration w ith an oth er corp oration or
oth er corp oration s;
•
in vestm en t of corp orate fu nd s in an oth er corp oration or b u sin ess p u rp ose
in accord an ce w ith th e RCC; and
•
corp orate d issolu tion .
To illustrate:
A.
An n ie, Bon n ie, Con n ie, Don n a, Em m a, and Fiona are h old ers of n on-votin g
sh ares of O cean Six, Inc. Su bsequ en tly, th e Board of Sea Sh ell, Inc. ad op ted
a p rop osal for th e m erger of th e corp oration Sea Sh ell, Inc. w ith Sea Shore,
Inc. Th e corp orate secretary th en sent n otice to all h old ers of v otin g sh a r e;
for a gen eral stockh old ers' m eetin g th e p u rp ose of voting u p on th e p rop osal.
.Annie, Bon n ie, Con n ie, Don n a, Em m a, and Fiona w ere not n otified an d were
not able to p articip ate in th e m eetin g w h ere th e m erger w as ad op ted . ( oven the
facts, th e fa ilu re of th e corp oration to n otify An n ie, Bon n ie, C on n ie, Donna,
Em m a, and Fion a an d th eir n on -in clu sion in th e m eetin g w h ere th e m erger
w as ad op ted are n ot ju stified by th e fact th at they are not h old ers of voting
sh ares, an d th at m ajority of the stockh old ers ap p roved th e sam e. Th e absen ce
of n otice an d n on -in clu sion of A n n ie, Bon n ie, Con n ie, D on n a, Em m a, and
Fion a in th e said m eetin g in valid ated th e ap p roval of th e m erger b eca u se even
h old ers of n on -v otin g sh ares h ave the righ t to vote on th e issu e of m erger and
con solid ation of th e com p any.
B.
Eksw aysi Corp oration issu ed 2% of its cap ital stock to M iloki, w h ich is
how ever, a n on -v otin g sh are, and an oth er 1%, w h ich is a v otin g sh are. The
corp oration h as a total cap ital of P100 m illion and th e corp oration in ten d s to
sell P90 m illio n of its assets to Eybisi Corp oration . Miloki can vote on w hether
or n ot to ap p rove th e in ten d ed sale by th e corp oration up to h is total aggregate
sh ares, w h ich is 3%. U sin g th e sam e facts, if th e Eksw aysi Cor p or ation , instead
of sellin g P90 m illion of its cap ital, d ecid ed to in vest ju st a m ere PIC) m illion of
its cap ital w ith Eybisi Corp oration , M iloki can also vote on w h eth er or not to
in vest su ch m in im al am ou n t o f th e cap ital up to h is total sh ar e w h ich shall be
3%.
Fou n d ers' sh ares are sh ares issu ed to o r g a n iz er s and p rom oters of a corp oration
in con sid eration of som e su p p osed righ t or p rop erty. Section 7 of th e RCC provides
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th at th ese sh a r es m ay b e g iv en cer ta in rig h ts an d p r iv ileg es n ot en joyed by th e
ow n ers of o th er sto ck su ch as sp ecia l p referen ce in v otin g rig h ts and d iv id en d
p aym en ts. If a n exclu siv e rig h t to v ote an d be voted for in th e election of d ir ecto r s
is gran ted , it m u st b e for a lim ited p eriod n ot to exceed 5 y ea rs from th e d ate of
in corp oration , b u t su ch exclu siv e rig h t sh all n ot be allow ed if its exer cise w ill v iolate
the Com m on w ea lth A ct N o. 108 (A n ti-D u m m y Law ), Rep u blic A ct N o. 7042 (Foreig n
In v estm en ts A ct of 1991), an d oth er p er tin en t law s.
A ccor d in g to Sectio n 8, red eem able sh ar es p er m it th e issu in g corp ora tion to
red eem or r ep u r ch a se said sh ares. Th ey m ay be issu ed by th e corp ora tion w h en
exp ressly p r o v id ed in th e a r ticles of in cor p or ation and m ay b e p u r ch a sed by th e
corp oration fr o m th e h old ers of su ch sh ar es u p on th e exp ira tio n of a fixed p er io d ,
w h eth er or n o t th er e ar e u n r estr icted retain ed ea r n in g s in th e cor p or a te b o o k s, an d
on su ch o th er ter m s an d con d ition s stated in th e a r ticles of in co r p o r atio n an d th e
certifica te o f sto ck r ep r esen tin g th e sh ares. Red eem able sh a r es ar e su b je ct to r u le s
an d r eg u la tio n s issu ed by th e SEC, e.g., th at after th e red em p tio n , th e co r p o r a tio n
sh ou ld still h a v e su fficien t assets in its bo ok s to cover d ebts and lia b ilities in clu siv e
of cap ital sto ck .18
Sectio n 9 d efin es tr ea su r y sh ares as sh ares of stock th at h av e b een issu ed a n d
fu lly p aid for, b u t su b seq u en tly reacq u ired by th e issu in g co rp o ra tio n th r o u g h
p u rch ase, r ed em p tio n , d on ation , or som e oth er law fu l m ean s. Su ch sh a r es m a y
again b e sold for a p r ice fixed by th e board of d ir ecto r s— n ot n e ce ssa r ily at p a r
or issu ed v a lu e, as lon g as it is th e best p rice ob tain able an d r ea son ab le. Tr ea su r y
sh ares h a v e n o v o tin g rig h ts an d are n ot en titled to d iv id en d s or a ssets a s lon g as
th ey r e m a in in tr e a su r y (u n called an d su b ject to reissu e). If th ese a r e p u r ch a se d
from sto ck h o ld er s, th e tr a n sa ctio n is d eem ed a r etu r n to th e sto ck h o ld er s of th e
valu e o f th e ir in v estm en t in th e corp oration an d a rev er sion of th e sh a r es to th e
co rp oration . Th e co rp o ra tio n sh ou ld h ave su rp lu s p rofits w ith w h ich to b u y th e
sh ares; o th er w ise, th e tr a n sa ctio n m ay cau se an im p a ir m en t of th e co r p o r a tio n 's
cap ital. If th e sh a r es ar e acq u ired by d on ation from th e stock h old ers, su ch w ou ld
be eq u iv a len t to a su r r en d er of th eir stock w ith ou t g ettin g b a ck th eir in v estm en ts
w h ich a r e th en co n sid er ed as v olu n ta rily g iv en to th e corp oration .
D octrin e of Eq u ality of Sh ares
If th e a r ticles of in co r p o r a tio n d o n ot p ro v id e for an y d istin ctio n o f th e sh a r es
of stock, a ll sh a r es issu ed b y th e cor p or a tion ar e p r esu m ed to b e 1eq u a l an d en jo y th e
sam e rig h ts an d p r iv ileg es an d su b je ct to th e sa m e lia b ilities.
18 S e e SEC-O G C O p in ion N o. 19-20 d ated M ay 27, 2019.
:
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O th er Kin d s of Stock s/Sh ares
Escrow stocks are d ep osited w ith a th ird p erson to be delivered to a
stockholder or his assign after com p lyin g w ith certain cond ition s, u su ally payment
of full subscription price. O ver-issu ed stock s or sp u riou s stock s are th ose issued
in excess of the au th orized cap ital stock; h en ce, its issu an ce is consid ered null and
void. Watered stock s are th ose issu ed n ot in exch an ge for th eir eq u ivalent either
in cash, p rop erty, sh are, stock d ivid en d s, or services. Street certificates are those
endorsed by the registered h old er in b lan k , w ith th e tran sferee h avin g the right to
order the issuing corp oration to tran sfer the sh ares rep resen ted b y th e certificates to
his n ame. Con vertible sh ares are th ose sh ares th at gran t th e stock h old er the right to
convert said sh ares from on e class to an oth er at a certain p rice an d w ith in a certain
p eriod. Fraction al sh ares are th ose th at h ave a value of less th an on e full share.
Doctrine of Piercing the Veil of Corporate Entity
The veil of the corp orate existen ce of a corp oration is a fiction of law that
should not d efeat th e en d s of justice.19 The d octrin e of p iercin g th e veil of corporate
entity req u ires the cou rt to see th rou gh the p rotective sh rou d th at exem p ts its
stockh olders from liabilities th at they ord in arily w ould b e su b ject to, or distinguishes
a corp oration from a seem in gly sep arate one, w ere it n ot for th e existin g corporate
fiction.20 The corp orate existen ce m ay be d isregard ed if th e corp oration is formed
or u sed for n on -legitim ate p u rp oses, su ch as to evad e a ju st an d d u e ob ligation , or to
ju stify a w ron g, to shield or p erp etrate frau d, or to carry ou t sim ilar or inequitable
con sid eration s, oth er u n justifiable aim s or in ten tion s, in w h ich case, th e fiction will
be d isregard ed an d the in divid u als com p osin g it an d th e tw o corp oration s will be
treated as id en tical.21
The veil of corp orate entity is p ierced in frau d cases as w h en a corporation
is u sed as a cloak to cover frau d or to do w ron g. Piercin g th e veil of corporate
entity is n ecessary in eq u ity cases or defeat of pu blic con ven ien ce as to wh en the
corp orate fiction is u sed as a veh icle for the evasion of an existin g ob ligation . When
the corp orate veil is p ierced , th e corp oration an d its stock h old ers are treated as one
p erson , su ch th at w h en th e corp oration is ad ju d ged liable, th e stock h old ers also
b ecom e liable as if th ey w ere th e corp oration .22
Piercin g th e veil of corp orate en tity is also w arran ted w h en th e corporation
is m erely a farce b ecau se it is an alter ego, b u sin ess con d u it, or instrumentality
of a p erson or an oth er corp oration as w h en th e said p erson or oth er corporation
19Gold Line Tours, Inc. vs. H eirs of M aria Con cep cion Lacsa, G.R. No. 159108, Ju n e 18, 2012.
20Lim vs. CA, G.R. N o. 124715, Jan u ary 24, 2000; 323 SCRA 102.
21 Arco Pulp & Pap er Co. Inc. vs. Lim , G.R. N o. 206806, Ju n e 25, 2014.
22G erard o Lan u za, Jr. and An ton io Olbes vs. BF Corp oration , G.R. N o. 174938, O ctob er 1, 2014.
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con trols th e fin a n ce s, p olicy , a n d b u sin e ss p r a ctice in r esp ect to th e a ssa iled
tr a n sa ctio n a n d su ch co n tro l w a s u sed to co m m it fr au d or w r o n g to p e r p e tu a te th e
v iola tio n o f a sta tu to r y or o th er p o sitiv e leg a l d u ty or d ish o n est an d u n ju st a ct in
co n tra v en tio n o f a leg a l r ig h t a n d m u st h a v e p r o xim a tely ca u sed th e in ju r y or u n ju st
loss co m p la in ed o f.23 Ju r isp r u d e n ce lay s d ow n a th r ee-p r o n g ed test to d eter m in e th e
a p p licatio n o f th is a lter eg o th eor y , a lso k n o w n as th e in st r u m e n ta lity th eor y , to w it:
(1) in st r u m e n ta lity or co n tr o l test w h ich r e q u ir e s th a t th e su b sid ia r y b e co m p letely
u n d er th e co n tr o l a n d d o m in a tio n o f th e p a r en t w h en th e a cts co m p la in ed o f to ok
p lace; (2) fr a u d test w h ich r e q u ir e s th a t th e p a r en t co r p o r a tio n 's co n d u ct in u sin g th e
su b sid ia r y co r p o r a t io n b e u n ju st, fr a u d u len t or w r o n g fu l; a n d (3) h a r m test w h ich
r eq u ir es a ca u sa l co n n e ct io n b e tw e e n th e fr a u d u len t co n d u ct co m m itte d th r o u g h th e
in st r u m e n ta lity o f t h e su b sid ia r y an d th e in ju r y su ffer ed or th e d a m a g e in cu r r e d .24
To illu strate: Sp a r ta cu s Corp . o p er a tes a call cen ter th a t r eceiv ed o r d er s for
p iz z a s o n b e h a lf o f Ju n ja e Corp . w h ich o p er a tes a ch a in o f p iz z a r e sta u r a n ts. Th e
tw o co m p a n ie s h a v e th e sa m e set o f co rp o ra te officer s. A fter tw o y ea r s, Sp a r ta cu s
Corp . d is m is s e d its ca ll a g en ts for n o a p p a r en t r easo n . Th e a g en ts filed a co lle ctiv e
su it fo r ille g a l d is m is s a l a g a in st b o th Sp a r ta cu s Corp . a n d Ju n ja e C or p . b a s e d on
th e d o ct r in e o f p ie r cin g th e v eil o f co rp o ra te fiction . Ju n ja e Corp . set u p th e d e fe n se
th a t th e a g e n ts a r e in th e em p lo y of Sp a r ta cu s Corp ., w h ich is a se p a r a te ju r id ica l
en tity. G iv e n t h e fa cts, Ju n ja e Corp .'s d efen se is ap p rop ria te. It is n o t sh o w n t h a t o n e
co m p a n y co m p le t e ly d o m in a te s th e fin a n ces, p o licies, an d b u sin e ss p r a ct ice s o f th e
o th er .25
\
P ie r cin g th e v e il o f co r p o r a te fictio n is a lso w a r r a n ted w h e n a co r p o r a t io n
cea sed to e x is t o n ly in n a m e as it r e-em er g ed in th e p er so n o f a n o th e r co r p o r a t io n
to ev a d e its u n fu lfille d fin a n cia l o b lig a tio n .26
Th e se a r e so m e o f th e ter m s u sed in sto ck co r p o r a tio n s. It is h e lp fu l if o n e
b e co m e s fa m ilia r w it h th e se term s:
•
C a p ita l s t o ck o r sta ted ca p ita l is th e a m o u n t fixe d in th e a r ticle s o f in co r p o r a t io n
to b e s u b s cr ib e d a n d p a id in ca sh , k in d or p r o p e r ty a t th e o r g a n iz a t io n o f th e
co r p o r a t io n o r a fte r w a r d s, w h ich fu n d is u sed to co n d u ct its o p er a tio n .
•
C a p ita l is th e v a lu e o f th e a ctu a l p r o p e r ty (co n sistin g o f m o n e y an d / or p r o p e r ty )
o f th e co r p o r a tio n . Th e co r p o r a tio n 's n e t w o r th (or sto ck h o ld e r 's eq u ity ) is
a r r iv e d a t a fte r d e d u ct in g th e lia b ilitie s fr o m its a ssets.
a W P M In ter n a tio n a l Tra d in g , In c. an d W arlito M a n la p az v s. Fe C o r a z o n Lab a y en , G .R. N o. 182770,
Sep tem ber 17, 2014.
24 D e v elo p m en t Ba n k of th e P h ilip p in es v s. H y d ro Reso u rces C o n tr a cto rs C o rp o r a tio n , G .R. N o. 167603,
M arch 13, 2013.
25Th e illu stra tiv e case w as p attern ed from 2011 Bar exa m in a tio n q u estio n in M er ca n tile Law .
.
26Liv esey v s. Bin sw a n g er P h ilip p in es, In c., G .R. N o. 177493, M a rch 19, 2014.
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A u th orized cap ital stock is th e cap ital stock d ivid ed Info sh ares w ith p ar valiien
•
Par valu e stock s are req u ired in th e ca se ol co rp o ra tio n s issu in g p referred
sh ares, as well as in th e ca s e of h an k s, tru st co m p an ies, in su ran ce com p an ies,
b u ild in g an d loan asso cia tio n s, an d p u b lic u tilitie s ,It iff th e total am ou n t in
th e articles of in co rp oration , w h ich m ay b e raised by th e corp o ratio n Ibr its
op eration s.
•
Su b scrib ed cap ital stock is th e total am ou n t of th e cap ital slock su b scrib ed
w h eth er fu lly p aid or not. ■
•
O u tsta n d in g cap ital stock is th e p ortion of I lie cap ital stock 'issued InsuhHcribcrN
m in u s th e tr e a s u r y stock s.
i
•
Stated cap ital is th e cap ital stock d ivid ed in to n o -p a r valu e sh ares.
•
Paid -u p cap ital is th e am ou n t p aid hy th e sto ck h o ld ers on su b scrip tio n s from
u n issu ed s h a re s of th e co rp oratio n .
Lesson 1.2: In corp oration an d O rgan ization of Private Corp oration s
T h ere a re t h ree step s i n t h e crea t ion of a co r p o ra I io n . Th e f i r s I s te p is p ro m o I ion,
w h ich refers to th e a ct of b rin gin g a corp oratio n in to e xisten ce hy d e te rm in in g the
co rp o ra te p u rp o s e , e v a lu a tin g th e p oten tiality of th e p rop osed b u sin ess of the
corp oratio n , d ev elop in g p lan s, an d fin an cin g th e e xp e n se s related to p u llin g u p the
corp oratio n , an d co o rd in a tio n w ith th e p rop er au th orities.
Th e secon d step is th e in corp oration itself, w h ich in clu d es: (I) d ra ftin g and
execu tion b y th e in co rp o ra to rs of th e a rticles of in co rp oration an d su ch oth er
d o cu m e n ts req u ired for registration of th e co rp o ratio n ; (2) tilin g w ith th e SIX ’ of the
a rticles of in co rp o ra tio n ; (3) p aym en t of filin g an d p u b lication fees; an d (4)issu a n ce
b y th e SEC o f th e C e rtificate o f In co r p o r a tio n .
Th e fin al step is th e form al org a n iz a tio n an d co m m e n ce m e n t of th e tran saction
1 of b u sin ess.
T h ese a r e th e con d itio n s su b seq u en t, w h ich m ay b e satisfied by
su b stan tial co m p lia n ce of th e follow in g in o r d e r th at a co rp o ra tio n m ay legally
con tin u e as su ch : (1) ad o p tion of b ylaw s an d its tilin g w ith th e SIX'; (2) election ol
b oard of d i r e cto r s /tr u s te e s an d officers; (3) estab lish m en t of p rin cip al office; an d 4)
p rov id in g for su b scrip tio n an d p aym en t of cap ital stock .
*
N
N u m b er an d Q u alification s of In corp orators
\
4
Section 10 of th e RCC p ro v id e s th at a co rp o ra tio n m ay b e form ed for any
law fu l p u rp o s e by an y p erson , p artn ersh ip , a sso cia tio n o r co rp o ratio n , sin gly or
jo in tly w i th o t h e r s , n o t e xce e d i n g 15.
Un less o th e r w is e p rovid ed u n d er special
law s, n atu ral p e rs o n s w h o are licen sed to p ra ctice a p rofession , an d p artn ersh ip s
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or associa tio n s o r g a n iz ed for th e p u rp ose of p racticin g a p rofession , sh all n ot be
allow ed to form a corp oration . A s su ch , g rou p s of p rofession als su ch as d octors,
law yers, en g in eers, accou n tan ts, an d d en tists are n ot allow ed u n d er th e law to
organ ize am on g th em selv es a corp oration for th e p ractice of th eir p rofession .
Th e in co rp or ato rs m ay b e n a tu r al or ju r id ica l p erson s, n ot m ore th a n 15 (excep t
in th e case of a on e-p er so n corp oration ), an d ow n in g or su bscribin g to at least one
sh are of th e ca p ita l stock .
To illu strate:
A.
Sim on is a Filip in o im m ig r a n t resid in g in Sacram en to, Ca lifo rn ia . Bailey
is a Filip in o r esid in g in Q u ez on City, Ph ilip p in es. Ch loe is a resid en t alien
resid in g in M a k a ti City. GGG Corp oration is a d om estic corp ora tion - 40%
ow n ed b y fo r eig n ers an d 60% ow n ed by Filip in os, w ith Tach i as au th orized
r ep r esen ta tiv e. CCC Corp oration is a foreign corp oration r eg ister ed w ith
th e P h ilip p in e Secu r ities an d Exch an g e Com m ission . KKK Co rp or ation is a
d om estic co rp o ra tio n (100%) Filip in o-ow n ed . M ar th a is a Filip in o, 16 y ear s of
age a n d th e d a u g h ter of Bailey. A ll of th em w an t to form a corp ora tion . Giv en
th e fa cts, th e n a tu r a l p erson s Sim on , Bailey, Ch loe, an d Tach i, an d th e ju r id ica l
p er so n s, G G G Corp oration , CCC Corp oration , an d KKK Cor p or ation , ca n all
b e in co r p o r a to r s an d su bscribers. H ow ever, M arth a, b ein g a m in or, ca n n o t b e
an in co r p o r a to r b u t sh e can be a su bscriber.
B.
A, B, C, D, a n d E (w h o are all resid en t citizen s), an d F, a n on -r esid en t citiz en ,
d ecid ed to o r g a n iz e a corp oration , X Corp oration . Th ey d ecid ed th a t th e in itia l
A u th o r iz ed Ca p ita l w ou ld be P100 m illion d ivid ed in to 100,000,000 sh a r es of
sto ck . A su b scr ib ed to 15,000,000 sh ares of stock, B su b scr ib ed to 1,000,000
. sh a r es o f sto ck , C su b scr ib ed to 1,000,000 sh ares of stock, D su b scr ib ed to 500,000
sh ares* o f sto ck s, E su b scr ib ed to 200,000 sh ares of stock, an d F su b scr ib ed to
10 sh a r es of stock . Fu rth er, Y Corp oration ag reed to an in itia l su b scr ip tio n of
8,000,000 sh a r es of stock. In th is case: (1) Y Cor p oration ca n v a lid ly su b scr ib e
to th e 8,000,000 sh a r es of stock s of X Cor p oration as th er e is n o p r o h ib itio n on
a r tificia l b e in g s su b scr ib in g to sh ar es of stock s of an in co r p o r a tin g corp or atio n ;
(2) F ca n v a lid ly b eco m e on e o f th e in corp orators ev en if h e su b scr ib ed to on ly
10 sh a r es of sto ck s; (3) If A also ow n s 30% of Y Cor p ora tion , h e is still allow ed
to b eco m e a d ir ecto r of th e bo a rd b eca u se th ere is n o p r o h ib itio n in th e law , as
lon g as h e o w n s at lea st 1 sh are; an d (4) If X Cor p or ation w a s n ot in cor p or ated ,
A, B, C, D, E, a n d F ca n n o t go a fter Y Cor p o ra tio n for an y u n p a id su b scr ip tio n
b eca u se th e su b scr ip tio n co n tra ct can b e revok ed b y Y C or p o ra tio n d u e to n o n ­
in co r p o r a tio n of X Cor p oration .
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Term s of Corp orate Existen ce
Lin d er Sectio n 11, a cor p or atio n h as p er p etu a l existen ce u n less its Articles
of In co r p o r a tio n p r ov id es o th er w ise. Th o se co r p o r a tio n s w ith cer tifica tes of
in cor p or ation issu ed p rior to th e effe ctiv ity o f th e RCC an d w h ich co n tin u e to exist
sh all h av e p er p etu a l existen ce, u n le ss th e co r p o r a tio n , u p on a v ote of th e m ajority
of its sto ck h old ers, d ecid es o th er w ise. A co r p o r a te term for a sp ecific p er iod m ay be
exten d ed or sh or ten ed by a m en d in g th e a r ticle s of in co r p o r a tio n , bu t u n less there
are ju stifia b le r ea so n s for an e a r lier exten sio n as m ay be d eter m in ed by SEC, no
exten sion m ay be m ad e ea r lier th an th r ee y ea r s p r io r to th e o r ig in a l or su bsequ en t
exp ir y d ate. Su ch exten sio n o f th e co r p o r a te term sh all tak e effect on ly on th e day
follow in g th e o r ig in a l or su b seq u en t exp ir y d ate. A co rp o ra tio n w h o se term has
exp ired m ay ap p ly for th e rev iv al o f its co r p o r a te existen ce, to g eth er w ith all the
rig h ts an d p r iv ileg es u n d er its cer tifica te of in co r p o r a tio n an d su b je ct to all of its
d u ties, d ebts, an d lia b ilitie s e xist in g p rior to its rev iv a l. U p on ap p rov al by th e SEC,
th e co r p o r a tio n sh a ll b e d eem ed reviv ed an d a cer tifica te of th e rev iv al of corp orate
existen ce sh a ll b e issu ed w h ich g iv es it p er p etu a l existen ce u n less its a p p lication for
r ev iv a l p r o v id es o th e r w ise . N o a p p lica tio n for reviv al of cer tifica te of in corp oration
of b a n k s, b a n k in g an d q u a si-b a n k in g in stitu tio n s, p r en eed , in su r a n ce an d tru st
co m p a n ies,
n o n sto ck
sa v in g s
an d
loan
a sso cia tio n s
(N SSLA s),
p aw n sh op s,
co r p o r a tio n s en g a g ed in a m o n ey ser v ice b u sin ess, an d o th er fin a n cia l in ter m ed ia r ies
sh a ll b e a p p ro v ed by th e SEC u n less th er e is a fav orable r eco m m en d a tio n of the
a p p r o p r ia te g o v er n m en t ag en cy.
Cap ital Stock Req u irem en ts
Sectio n 12 p r o v id es th a t excep t as o th e r w ise s p e cifica lly p r o v id ed b y sp ecial
law , s to ck co r p o r a tio n s sh a ll n o t h a v e a r e q u ir e d m in im u m ca p ita l sto ck . Exam p les
of co r p o r a t io n s th a t h a v e m in im u m
ca p ita l sto ck r e q u ir e m e n t a r e in su ran ce
co m p a n ie s th a t r e q u ir e a m in im u m ca p ita liz a tio n of P I b illio n ,27 in v e stm e n t h ou ses
th a t r e q u ir e a m in im u m ca p ita liz a tio n o f P 300 m illio n ,28 p a w n sh o p s th a t r eq u ir e a
m in im u m ca p ita liz a tio n o f P 100,000.00,29 a n d m in in g co m p a n ie s w it h a m in im u m
ca p ita liz a tio n o f P100 m illio n .30
27 In su r an ce C o m m issio n C ir cu la r Letter (C L) N o. 2015-02-A d ated 13 Ja n u a ry 2015 (M in im u m Cap italization
Req u ir em en ts u n d er Se ctio n s 194,197, 200, an d 289 o f Rep u b lic Act N o. 10607, th e A m en d ed In su r a n ce Cod e).
28Section 8 o f Pr esid en tia l D e cr ee N o. 129 (In v estm en t H o u ses La w ), as am en d ed by Rep u b lic Act N o. 8366.
29Sectio n 7 o f Pr esid en tia l D ecr ee N o. 114 (P a w n sh o p Reg u la tion A ct), an d Section 4106P o f th e Revised
M a n u al o f Reg u la tio n s for N o n -Ban k Fin a n cia l In stitu tio n s- P a w n sh o p s (M O RN BFI-P ) issu ed by th e Bangko
Sen tr al n g P ilip in a s (BSP), as a m en d ed by BSP C ir cu la r N o. 711 on Ja n u a r y 28, 2011.
30Se ctio n 1 o f D ep a rtm en t o f En v iro n m en t an d N a tu ra l Reso u rces (D EN R) M em o ra n d u m O r d er N o. 2013-01
d ated Feb ru a ry 21, 2013.
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Contents of the Articles of In corp oration
Th e A rticles of In corp oration is th e d ocu m en t p rep ared by th e p erson s
establish in g a corp oration an d filed w ith th e SEC31 co n tain in g th e m atters req u ired
by th e RCC.
All corp oration s sh all file w ith th e SEC articles of in cor p oration in an y of th e
official lan g u ag es, d u ly sign ed an d ackn ow led g ed or au th en ticated , in su ch form
and m an n er as m ay be allow ed by th e SEC, co n ta in in g su bstan tia lly th e follow in g
m atters, excep t as o th er w ise p rescribed by th e RCC or by sp ecia l law :
•
th e n am e of th e corp oration ;
•
th e sp ecific p u rp o se or p u rp o ses32 for w h ich th e corp ora tion is b ein g
form ed . W h ere a corp oration h as m ore th an on e stated p u rp ose, th e ar ticles
of in co rp or ation sh all in d icate th e p r im a ry and seco n d a ry p u r p o se;33
•
th e p lace w h ere th e p rin cip al office34* of th e corp oration is to be located ,
w h ich m u st b e w ith in th e Ph ilip p in es;
•
th e ter m for w h ich th e corp oration is to exist, if th e co rp o ra tio n h a s n ot
elected p er p etu a l existen ce;
•
th e n am es, n ation alities, an d resid en ce ad d resses of th e in co r p o r a to r s;
•
th e n u m b er of d irectors, w h ich sh all n ot be m ore th a n 15 or th e n u m b er of
tr u stees w h ich m ay be m ore th an 15;
•
th e n am es, n ation alities, an d resid en ce ad d resses of p er so n s w h o sh a ll act
as d ir ecto r s or tru stees u n til th e first reg u la r d irecto rs or tr u ste e s a re d u ly
elected an d q u alified in accord an ce w ith th e RCC;
•
if it is a stock corp oration , th e am ou n t of its a u th o r iz ed ca p ita l sto ck ,
n u m b er of sh ares in to w h ich it is d iv id ed , th e p a r v alu e of ea ch , n a m es,
n a tio n a lities, an d resid en ce ad d resses of th e o r ig in a l su b scr ib er s, th e
a m o u n t su b scr ib ed an d p aid by each on th e su b scr ip tio n , an d a sta tem en t
th a t som e or all of th e sh ares are w ith ou t p a r v alu e, if. ap p licable;
31 Th e articles of in corp oration m ay be in an y of the official lan g u ages, d u ly sig n ed an d ackn ow led g ed
or au th en ticated , in su ch form an d m an n er as m ay be allow ed by th e SEC. Th e A rticles of in corp oration an d
ap p lication s for am en d m en ts th ereto m ay be filed in the form of an electron ic d ocu m en t, in accord an ce w ith the
SEC's ru le an d reg u lation s on electron ic filin g.
(
<
32A n on stock corp oration m ay n ot in clu d e a p u rp ose w h ich w ou ld ch an g e or con trad ict its n atu re as su ch.
33If a corp o ration 's p u rp ose, as stated in th e A rticles of In corp oration , is law fu l, th en th e SEC h a s n o au th ority
to in qu ire w h eth er the corp oration h as p u rp oses oth er th an th ose stated , an d m an d am u s w ill lie to com p el it to
issu e the certificate of in corp oration (A l i ci a E . G a la , et a l. v s . E l l i c e A g r o - I n d u s t ri a l C o rp o ra t i o n , et a i , G .R .N o . 1 5 6 8 1 9 ,
D ecem b er 11, 2 0 0 3 ).
34Th e p rin cip al p lace of bu sin ess of a corp oration d eterm in es its resid en ce or d om icile
24, 2 0 0 5 ) .
(H y a t t E l ev a t o rs a n d
E s ca l a t o rs C o rp o ra t i o n v s . G o l d s t a r E l ev a t o rs P h i l s ., I n c ., G .R . N o . 1 6 1 0 2 6 , O c t o b e r
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•
if it is a n o n sto ck cor p or a tion , th e a m o u n t o f its cap ital, th e n am es,
n a tio n a lities, an d resid en ce a d d r esses of th e co n tribu tors, an d am ou n t
con trib u ted by each ; an d
•
su ch o th er m a tters co n sisten t w ith law an d w h ich th e in cor p ora tors may
d eem n ecessa ry an d con v en ien t.
An arb itr ation a g r eem en t m ay b e p rov id ed in th e a r ticles of in corp oration
p u r su an t to Sectio n 181 of th e RCC. Th e a r ticles of in co r p o r a tio n an d ap p lication s
for a m en d m en ts th er eto m ay b e filed w ith th e SEC in th e form of an electron ic
d o cu m en t, in acco r d a n ce w ith th e SEC's ru les an d reg u la tio n s on electr o n ic filing.
35In ad d ition , th e n a m e of tr ea su r er elected by su b scr ib er s, an d if th e corp oration
w ill en g ag e in a n a tio n a liz ed in d u str y ,36 a sta tem en t th a t n o tr a n sfer of sto ck w ill be
allow ed if it w ill r ed u ce th e sto ck o w n er sh ip of Filip in os to a p ercen ta g e below the
r eq u ir ed legal m in im u m , n eed to be in d ica ted .37
Th e issu a n ce of a C er tifica te of In co rp or atio n sig n a ls th e b ir th of the
co rp o ra tio n 's ju r id ica l p er so n a lity an d is an essen tia l r eq u ir em en t for th e existen ce
of a co rp o ra tio n , ev en a d c f a c t o on e. If th e co rp or atio n is g ov ern ed by a sp ecia l law
(as in th e ca se o f b a n k s, b a n k in g an d q u a si-b a n k in g in stitu tio n s, p r en eed , in su r an ce
an d tr u st co m p a n ies, n o n sto ck sa v in g s an d loan a sso cia tio n s, p a w n sh op s, and
o th er fin a n cia l in ter m ed ia r ies) th e a r ticles of in co r p or atio n or a m en d m en ts m u st
be a cco m p a n ied by a fav orable r eco m m en d a tio n of th e ap p rop ria te g ov ern m en t
agen cy . U n less o th e r w ise p r escr ib ed by sp ecia l law , th e a r ticles of in co r p o r a tio n of
all d o m estic co r p o r a tio n s sh a ll com p ly su b sta n tia lly w ith th e form set ou t in Section
14 o f th e RCC, w ith th e a d d itio n a l p ro v isio n : " T h at t h e in cor p or at or s u n d er t ak e to
ch an g e t h e n am e o f t h e cor p or at ion im m ed iat ely u p on r eceip t o f n ot ice f r o m t h e C om m ission
t h at an ot h er cor p or at ion , p ar t n er s h ip or p er s on h as acqu ir ed a' p r ior rig h t to t h e u se o f su ch
n am e , t h at t h e n am e h as been d eclar ed n ot d is t in g u is h able f r o m a n am e alr ead y reg is t er ed or
r es er v ed f o r t h e u se o f an ot h er cor p or at ion , or t h at it is con t r ar y t o law , p u blic m orals, g ood
cu s t om s o r p u b lic p olicy ."
•
•
\
\
A m en d m en t of A rticles of In corp oration
U n d er Se ctio n 15, th e a r ticle s o f in co r p o r a tio n ca n b e a m en d ed su b je ct to the
follo w in g :
•
.*
th e a m en d m en t o f a n y p r o v isio n or m a tte r s sta ted in th e a r ticle s of in corp oration
is n ot allow ed w h en it w ill b e co n tr a r y to th e p r o v isio n s or req u irem en t
p r escr ib ed by th e RCC or b y sp e cia l la w or if it ch a n g e s a n y p r o v isio n in the
a r ticles of in co r p o r a tio n sta tin g an a cco m p lish ed fact;
MSection 13, RCC.
An y bu sin ess or activ ity reserv ed tor Filip in o citizen s.
37 Section 14, RCC.
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•
it m u st b e for leg itim a te p u r p o ses;
•
it m u st b e a p p ro v ed b y th e m a jo r ity v ote o f th e b o a r d o f d ir ecto r s or tr u s te e s
an d th e v o te o r w r itte n , a ssen t o f th e sto ck h o ld er s r e p r e sen tin g at lea st 2/ 3
o f th e o u tsta n d in g ca p ita l sto ck , w ith o u t p r eju d ice to th e a p p r a isa l r ig h t o f
d isse n tin g sto ck h o ld e r s or th e in ca se o f n o n sto ck co r p o r a tio n , th e v o te or
w r itten a sse n t o f at lea st 2/3 of th e m em b er s;
•
th e o r ig in a l a r ticle s an d am en d ed a r ticles to g eth er m u st co n ta in a ll p r o v isio n s
r eq u ir ed b y law to b e set ou t in th e a r ticles o f in co r p o r a tio n ;
•
su ch
a r ticle s,
as
a m en d ed ,
ch a n g e s m ad e, a n d
m u st
be
in d ica ted
a cop y th er eo f d u ly cer tified
by
u n d e r s co r in g
u n d e r o a th
by
th e
th e
co r p o r a te s e cr e t a r y an d a m a jo r ity of th e d ir e cto r s or tr u s t e e s s t a t in g th a t
th e a m e n d m e n ts h a v e b een d u ly ap p rov ed by th e r e q u ir e d v o te o f th e
sto ck h o ld e r s or m em b er s m u st b e su b m itted to th e SEC; an d
•
th e a m e n d m e n ts sh a ll ta k e effect on ly u p on th eir ap p rov al b y th e SEC o r fr o m
th e d a te o f filin g w ith th e SEC if n ot a cted u p on w ith in six m o n th s fr o m th e
d a te o f filin g for a ca u se n ot a ttrib u ta b le to th e co rp o ra tio n .
N o te th a t so m e m a tter s r efer r in g to facts e xistin g as o f th e d a te o f th e
in co r p o r a tio n , ca n n o t b e a m en d ed , su ch as:
•
n a m e s o f in co r p o r a to r s;
•
n a m e s o f o r ig in a l su b scr ib er s to th e cap ita l sto ck o f th e co r p o r a tio n a n d t h e ir
su b s cr ib e d a n d p aid -u p ca p ital;
•
t r e a s u r e r e le cte d b y th e o r ig in a l su b scr ib er s;
\
•
m e m b e r s w h o co n tr ib u ted to th e in itia l ca p ita l of a n o n sto ck co r p o r a tio n ;
•
d a te a n d p la ce o f execu tio n of th e a r ticles of in co r p o r a tio n ; a n d
•
w it n e s se s to th e sig n in g an d a ck n o w led g m en t o f th e a r ticles.
G rou n d s W h en A rticles of In corp oration or A m en d m en t
M ay Be D isap p roved
U n d er Se ct io n 16, th e SEC m a y d isa p p r o v e th e a r ticle s o f in co r p o r a tio n o r an y
a m en d m en t th e r e to if th e sa m e is n o t co m p lia n t w it h th e r e q u ir e m e n ts o f th e RCC.
Th e SEC sh a ll g iv e th e in co r p o r a to r s, d ir ecto r s, tr u ste e s, o r o ffice r s a r e a so n a b le tim e
fr om r eceip t o f th e d isa p p r o v a l w ith in w h ich to m o d ify th e o b je ct io n a b le p o r tio n s
of th e a r ticle s or a m en d m en t. Th e fo llo w in g a r e g r o u n d s fo r su ch d isa p p r o v a l:
•
th e a r ticle s o f in co r p o r a tio n or a n y a m e n d m e n t th e r e to is n o t su b s ta n tia lly in
a cco r d a n ce w ith th e fo r m p r escr ib ed ;
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th e p u r p o se or p u r p o ses of th e co rp o ra tio n a re p aten tly u n con stitu tion al,
illegal^ im m or a l, or co n tra r y to g o v er n m en t ru les an d r eg u la tio n s;
•
th e cer tifica tio n co n cer n in g th e a m o u n t of ca p ita l sto ck su b scr ib ed and / or paid
is false; an d
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th e . r eq u ir ed p er cen ta g e of Filip in o o w n er sh ip of th e cap ita l sto ck under
existin g law s or th e C o n stitu tio n h a s n ot b e e n com p lied w ith .
Th e SEC sh all n ot ap p rov e th e a r ticles of in co r p o r a tio n or am en d m en t
to a r ticles of in co r p o r a tio n of b a n k s, b a n k in g an d q u a si-b a n k in g in stitu tion s,
p ren eed , in su r a n ce an d tr u st com p a n ies, N SSLA S, p a w n sh o p s, an d o th er financial
in ter m ed ia r ies sh a ll b e ap p rov ed by th e SEC u n less th ese a r e a cco m p a n ied by a
favorable r eco m m en d a tio n o f th e a p p rop ria te g o v er n m en t a g en cy to th e effect that
su ch a r ticles or a m en d m en t is in a cco rd an ce w ith th e law .
Corp orate N am e
U n d er Sectio n 17, th e SEC sh a ll n ot allow a co rp o ra te n a m e if it is not
d istin g u ish a b le fr o m th a t alrea d y reser v ed or r eg ister ed for u se b y an oth er
corp ora tion , or if su ch n a m e is alread y p r otected by law , r u les, a n d r eg u la tio n s. The
old cod e p r ov id es th a t th e n a m e of th e p r op osed co rp o ra tio n for r e g istr a tio n must
n o t b e sim ila r to th e n a m e of an y existin g co rp or a tion , m u st n o t b e d ecep tively
sim ila r to th e n a m e of an y existin g co rp or atio n an d m u st n o t b e co n fu sin g ly sim ilar
to th e n a m e o f an y existin g corp oration .
A n a m e is n o t d istin g u ish a b le ev en if it co n ta in s on e or m o r e of th e follow ing:
•
th e w ord s "co rp o ra tio n ," "com p an y ," "in co r p o r a ted ," "lim it e d ," "lim ited
liab ility ," or a n ab b rev ia tio n of on e of su ch w ord s; a n d
•
p u n ctu a tio n s, a rticles, co n ju n ctio n s, co n tra ctio n s, p r ep o sitio n s, abbreviation s,
d iffer en t ten ses, sp a cin g , or n u m b er o f th e sa m e w o rd or p h r a se.
If th e SEC d eter m in es th a t th e co rp or a te n a m e is: (1) n o t d istin g u ish a b le from
a n a m e alr ead y r eser v ed or r eg ister ed for th e u se o f a n o th er co r p o r a tio n ; (2) alread y
p r otected b y law ; an d (3) co n tr a r y to law , r u les a n d r eg u la tio n s, it m a y su m m arily
ord er th e cor p or atio n to im m ed ia tely cea se an d d esist fr o m u sin g su ch n am e and
r eq u ir e th e co rp o ra tio n to r eg ister a n ew on e. It sh a ll a lso ca u se th e rem oval of
all v isib le sign ag e, m ar k s, a d v er tisem en ts, la b els, p r in ts, an d o th er effects bearing
su ch corp orate n am e. U p o n th e ap p rov al of th e n ew co rp o ra te n a m e, it sh all issue
a cer tifica te o f in co r p o r a tio n u n d er th e a m en d ed n a m e. If th e co rp o ra tio n fails to
com p ly w ith th e SEC's ord er, th e la tter m a y h old th e co r p o r a tio n a n d its resp onsible
d ir ecto r s or o fficer s in co n tem p t an d / or h old th em a d m in istr ativ ely , civ illy , and/
or cr im in a lly lia ble u n d er th e RCC a n d o th er ap p lica b le law s an d / or revok e its
reg istra tio n .
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In on e ca se, th e Su p rem e Cou rt h eld th at th e m ere ch an g e in th e corp orate
nam e is n ot co n sid er ed u n d er th e law as th e creation of a n ew corp oration ; h en ce,
the ren am ed co rp o ra tio n r em ain s liable for th e illeg al d ism issa l of its em p loyee
sep arated u n d er th at g u ise .38 A ch an g e in th e corp orate n a m e d oes n ot m ak e a n ew
corp oration, w h eth er effected by a sp ecial act or u n d er g en era l law .39
Registration , In corp oration , an d Com m en cem en t of
Corporate Existen ce
Un d er Sectio n 18, th e in ten d ed corp orate n a m e m u st be su b m itted by th e
in corp orators to th e SEC for v erification . Said n am e sh a ll be reserv ed in fav or o f th e
in corp orators if th e SEC fin d s th a t th e n am e is d istin g u ish ab le fr om a n a m e alrea d y
reserved or r eg ister ed for th e u se of an oth er corp oration , n ot p r otected by law an d
is n ot co n tr a r y to law , ru les, an d regu lation . Th e in corp orators sh a ll th en su b m it
their a r ticles o f in co r p o r a tio n an d bylaw s to th e SEC. If th e SEC ev alu a tes th a t th e
su bm itted d o cu m en ts an d in form ation are fu lly com p lian t w ith th e r eq u ir em en ts
of th e RCC, o th er r elev a n t law s, ru les, an d regu lation s, it sh all issu e th e cer tifica te
of in co rp o ra tio n . A p riv ate corp oration org an ized u n d er th e RCC co m m en ces its
corp orate existen ce an d ju r id ica l p erson ality from th e d ate th e SEC issu es th e
certificate o f in co r p o r a tio n u n d er its official seal. Th ereu p on , th e in co r p o r a to r s,
stockh old ers/ m em bers, an d th eir su ccessors sh all con stitu te a b od y co rp o ra te u n d er
the n a m e sta ted in th e a rticles of in corp oration for th e p eriod of tim e m en tio n ed
th erein, u n le ss sa id p eriod is exten d ed or th e corp oration is soo n er d isso lv ed in
accord an ce w ith law .
A s to leg a l sta tu s, a p rivate corp oration m ay b e a:
•
D e ju r e co rp o ra tio n - org an ized in accord an ce w ith th e r eq u ir em en ts o f law ,
an d w h ich co m m en ced its corp orate existen ce an d ju r id ica l p e r so n a lity fr o m
th e d ate th e SEC issu es th e cer tificate of in cor p or ation u n d er its o fficia l seal.
•
co rp o ra tio n - org an ized w ith colorable com p lia n ce w ith th e
r eq u ir em en ts o f a v a lid law an d w h ich existen ce ca n n o t b e in q u ir ed collaterally ,
D e fact o
bu t sh o u ld b e m ad e by th e Solicitor G en eral in a qu o w ar r a n to p r oceed in g .
•
C or p or atio n b y esto p p el - a g rou p of p erson s th a t a ssu m es to act as a cor p or atio n
k n o w in g it to b e w ith o u t au th ority to d o so, an d en ter s in to a tr a n sa ctio n w ith
a th ir d p er so n on th e str en g th o f su ch ap p earan ce; it ca n n o t b e p er m itted to
d en y its existen ce in a n action u n d er th e said tra n sa ctio n .
38Z u ellig Freig h t an d Cargo Sy stem s vs. N LRC, G.R. N o. 157900, Ju ly 22, 2013.
39RC. Jav ier & Son s, In c., et al. vs. Paic Sav in gs & M ortgage Ban k, Inc., et al„ G.R. N o. 129552, Ju n e 29, 2005.
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Corp or ation by p rescrip tion on e that lias exercised corp orate p ow ers for an
in d efin ite p eriod w ith ou t in terferen ce on th e p art of th e sov ereign p ow er, e.g
Rom an Cath o lic Ch u rch .
To illu strate: Th e Secu r ities an d Iixeh an g e C om m ission ap p roved th e articles of
in cor p or atio n of AAA Corp oration . A lter th e receip t of th e C er tifica te of Registration
from th e SEC, AAA Co rp oration d ecid ed to im m ed iately sta rt th e op eration of its
b u sin ess d esp ite th e fact that it h as no ap p rov ed bylaw s. Given th e facts, AAA is a dc
ju r e co rp oration . It w as or g a n iz ed in acco rd a n ce w ith th e r eq u ir em en ts of law and
com m en ced its corp orate existen ce an d ju r id ical p er son a lity from th e d ate the SEC
issu es th e cer tifica te of in corp oration u n d er its official seal.
U n d er Sectio n 19, th e d u e in corp oration of an y corp ora tion cla im in g in good
faith to b e a co rp o ration , an d its righ t to exer cise co rp or a te p ow ers, sh all not be
in q u ir ed in to co llaterally in an y p rivate su it to w h ich su ch co rp or a tion m ay be a
p arty. Th e So licito r G en eral m ay m ak e su ch in q u iry in a qu o w ar r an t o p roceed in g.
A cco r d in g to Sectio n 20, all p erson s w h o a ssu m e to act as a corp oration
k n o w in g it to b e w ith ou t th e a u th ority to d o so sh all be liable as g en er a l p artn ers for
all d ebts, liabilities, an d d am a g es in cu rred or a r isin g as a resu lt th ereof. W h en such
osten sib le corp o ration is su ed on an y tra n sactio n en tered by it as a corp ora tion or on
an y tort co m m itted by su ch osten sible corp oration , it sh all n ot be allow ed to u se its
la ck of co rp or a te p er so n a lity as a d efen se. A n yon e w h o a ssu m es an ob lig ation to an
o sten sib le corp oration as su ch ca n n o t resist p er fo r m a n ce of said ob lig atio n on the
g rou n d th a t th er e w as in fact n o corp oration .
A cor p or a tion by estop p el resu lts w h en a corp oration rep r esen ted itself to the
p u blic as su ch d esp ite its n ot bein g in cor p or ated .40 In on e ca se, th e Su p r em e Court
h eld th a t w h ile a p erson m ay n ot d ir ectly act on b eh a lf of th e co rp o ra tio n , having
reap ed th e ben efits o f th e co n tract en ter ed in to by p erson s w ith w h om h e p reviou sly
h ad an existin g relation sh ip , h e is d eem ed , h ow ever, to be p a r t o f said association
an d is cov ered by th e scop e of th e d o ctr in e of co rp o ra tio n by esto p p el.41 This
d o ctr in e ap p lies to a th ird p a r ty on ly w h en h e tries to esca p e lia b ility on a contract
fro m w h ich h e h a s ben efited on th e ir relev a n t g rou n d of d efectiv e in corp oration .42
Effects of N on -u se of Corp orate Ch arter an d Con tin u ou s Inoperation
If a cor p or a tion d oes n ot form ally o r g a n iz e an d co m m en ce its b u sin ess within
fiv e y ea r s from th e d ate o f its in co r p o r a tio n , its cer tifica te o f in cor p or ation shall
b e d eem ed revok ed as of th e d ay follow in g th e en d o f th e fiv e-y ear p eriod . If a
40M acasaet vs. Co, G.R. N o. 156759, Ju n e 5, 2013.
41 Liro Tong Lim vs. Ph ilip p in e Fish in g G ear In d u stries, In c., G.R. N o. 136448, N ov em ber 3, 1999.
42 In tern ation al Exp ress Travel & Tou r Services, Inc. vs. H on . Co u rt of A p p eals, H en ri Kah n , Philippine
Football Fed eration , G.R. N o. 119002, O ctober 19, 2000.
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corp oration h a s co m m en ced its bu sin ess bu t su b seq u en tly b eco m es in op er a tiv e for
a p eriod of at lea st five co n secu tiv e years, th e SEC m ay, a fter d u e p r ocess, p lace th e
corp oration u n d er d elin q u en t statu s. A d elin q u en t co rp or a tion sh a ll h a v e a p er io d
of tw o y ears to r esu m e op er atio n s an d com p ly w ith all r eq u ir em en ts th a t th e SEC
shall p rescribe. U p on co m p lia n ce w ith th e req u ir em en ts b y th e co rp or a tion , th e
SEC sh all issu e an or d er liftin g th e d elin q u en t statu s. Th e SEC sh a ll g iv e rea so n a b le
notice to, an d co o r d in a te w ith th e ap p rop riate r eg u la to r y ag en cy b efo r e su sp en d in g
or rev ok in g th e cer tifica te of in co rp or ation o f co m p a n ies u n d er th eir sp ecia l
regu latory ju r isd ictio n .43
Section 6 of P resid en tia l D ecr ee N o. 902-A44 p r ov id es for th e g r o u n d s for
su sp en sion or r ev o ca tio n of Certifica te of Reg istratio n , to w it:
•
frau d in p r o cu r in g its cer tificate of in corp oration ;
•
serio u s m isr ep r esen ta tio n as to w h at th e co rp or a tion can d o or is d o in g to th e
g reat p r eju d ice of, or d am ag e to, th e g en eral p u blic;
•
r efu sa l to com p ly w ith or d efian ce of a law fu l ord er of th e SEC r e s t r a in in g th e
co m m issio n o f acts w h ich w ou ld am ou n t to a grave v io la tio n o f its fr a n ch ise ;
•
con tin u o u s in o p er a tio n for a p eriod of at lea st five years;
•
fa ilu r e to file th e by law s w ith in th e req u ir ed p eriod ; or
•
fa ilu r e to file r eq u ir ed rep orts.
U n d er Se ctio n 21 of th e RCC, th e allow able p er io d for n o n -u se o f a co r p o r a te
ch arter is fiv e y ea r s fr om th e d ate of in corp oration . Th e cer tifica te o f in co r p o r a tio n
shall b e d eem ed rev ok ed as of th e d ay follow in g th e en d of th e fiv e-y ea r p er io d .
M ean w h ile, a co rp o ra tio n th at h as co m m en ced its b u sin e ss b u t su b se q u e n tly
becom es in o p er a tiv e for a p eriod of at least five co n secu tiv e y e a r s m ay, a fte r d u e
p rocess, b e d eem ed a d elin q u en t corp oration an d sh a ll h a v e a p er io d o f tw o y e a r s
to resu m e op eratioxas. Fa ilu re to r esu m e o p er atio n s w ith in th e p er io d g iv en b y th e
SEC sh a ll ca u se th e r ev o ca tio n of its cer tificate o f in co r p o r a tio n .
PRACTICE EXERCISE
'
\
.
•
1
,
N ow n ed a n d co n tro lled N C o n str u ctio n Com p an y . A ctin g for th e com p an y , N
con tracted th e co n str u ctio n of a bu ild in g . W ith o u t fir st in st a llin g a p r o tectiv e n et
atop th e sid ew a lk s a d jo in in g th e co n str u ctio n site, th e co m p a n y p r o ceed ed w ith
the co n str u ctio n w ork. O n e d ay a h ea v y p iece of lu m b er fell fr o m th e b u ild in g a n d
43Section 21, RCC.
44Reorg an ization of the SEC w ith ad d ition al p ow ers and p lacin g th e said ag en cy u n d er tine ad m in istra tiv e
su p ervision of the O ffice of th e Presid en t.
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sm a sh ed a ta xica b w h ich at th a t tim e h ad g o n e o ff th e road a n d o n to th e sid ew alk
in or d er to av oid tr a ffic. Th e ta xica b p a ssen g er d ied as a resu lt.
A.
A ssu m e th a t th e co m p a n y h ad n o m o r e a cco u n t an d p r o p e r ty in its n am e. If
y ou w er e r ep r esen tin g th e h eir s o f th e ta xica b p a ssen g er , w h om will you sm>
for d a m a g es, an d w h at th eo r y w ill you ad op t?
B.
If you w er e r ep r esen tin g N C o n str u ctio n Com p a n y , h ow w ou ld you defend
y o u r clien t? W h a t w ou ld b e y o u r th eo r y ?
RELEVAN CE O F TH E LESSO N
A co rp o ra tio n is a ju r id ica l p er so n created by th e o p er a tio n o f law an d can
exist ev en w ith a sin g le stock h o ld er. It ca n b r in g la w su its, ca n a cq u ir e p rop erties,
en ter in to tr a n sa ctio n s, an d gen erally , p r o tects th e in d iv id u a ls co m p o sin g it from
p er so n a l lia b ility for co rp o ra te d ebts an d o b lig a tio n s as it e xists sep a r a tely an d apart
fro m th o se in d iv id u a ls w h o created it an d ca r r y on its o p er a tio n s. Its p erson ality
co m m en ces fr o m th e issu a n ce o f th e cer tifica te o f in co r p o r a tio n . A cor p or a tion is
rela tiv ely m o r e com p lex to p u t u p com p ar ed to o th er b u sin e ss o r g a n iz a tio n s, bu t it is
w o r th th e co m p lexity rela tiv e to th e p r o tectio n it a ffo r d s th e in d iv id u a ls com p osin g
it.
LESSO N SUM M ARY
•
A cor p or atio n is an a r tificia l b ein g created b y o p er a tio n o f la w h a v in g th e right
o f su ccession , an d th e p ow ers, attrib u tes, an d p r o p er ties exp r e ssly au th orized
b y law an d in cid en ta l to its existen ce. It h a s a ju r id ica l p e r so n a lity sep a r a te and
d istin ct fro m th a t of its sto ck h old er s or m em bers, b u t its co r p o r a te existen ce
m ay b e d isr eg a r d ed in frau d cases, alter ego ca ses, a n d eq u ity ca ses.
•
A s to leg al statu s, a cor p or a tion m ay b e a d e ju r e co r p o r a tio n , a d e fact o
corp oration , a cor p or atio n b y esto p p el, or a co r p o r a tio n b y p r escr ip tio n . As
to th e existen ce o f sh ar es of stock , it m ay eith er b e a sto ck co rp o ra tio n or a
n o n sto ck corp ora tion .
•
A co rp or atio n h a s p er p etu a l existen ce u n le ss its a r ticle s o f in corp oration
p rov id e o th er w ise. It is n o t r eq u ir ed to h a v e m in im u m ca p ita l sto ck , excep t as
o th er w ise sp ecifica lly p r ov id ed b y sp ecia l law . Its a r ticle s o f in co r p o r atio n or
its am en d m en t m ay b e r eje cted on cer ta in g r o u n d s.
•
Th e issu a n ce of a C er tifica te o f In co r p o r a tio n sig n a ls th e b ir th o f a corp oration's
ju r id ica l p erson a lity .
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Lesson 2
Lesson 2.1: Board of D irectors/Tru stees and O fficers
V
<1
'
The Board of D irecto rs or Tru stees of a Corp oration ,
Its Q u alification s an d Term s
Th e b oa r d o f d irector s
tr u stees exer cises th e co rp orate p ow ers, con d u cts all
bu siness, an d co n tr o ls a ll p ro p erties of th e corp oration . Th e d ir ecto r s are elected for
a term of on e y ea r fr o m am on g th e h old ers of stock s r eg ister ed in th e corp ora tion 's
book, w h ile tr u ste e s a r e elected for a term n ot exceed in g th r ee y ear s from a m on g
the m em ber s o f th e co rp o ration . Each d irector and tr u stee sh all h old office u n til th e
su ccesso r is elected an d q u alified . A d irector w h o ceases to ow n at lea st on e sh a r e
of stock or a tr u ste e w h o cea ses to be a m em ber of th e corp ora tion sh all cea se to b e
a d irector or a tr u stee.
Th e b o a r d of th e follow in g corp oration s vested w ith p u blic in ter est sh a ll h a v e
in d ep en d en t d ir ecto r s co n stitu tin g at lea st 20% of su ch board :
•
C o r p o r a tio n s co v ered by Section 17.2 of Rep u blic A ct N o. 8799 (Th e Se cu r itie s
Reg u la tio n Cod e), n a m ely th ose w h ose secu rities are r eg ister ed w ith th e SEC,
co r p o r a tio n s listed w ith an exch an ge or w ith assets of at least P 50,000,000 an d
h a v in g 200 or m ore h old ers of sh ares, each h old in g at least 100 sh a r es of a cla ss
of its e q u ity sh a res.
t
•
Ba n k s a n d q u a si-b a n k s, N SSLAs, p aw n sh op s, co rp oration s en g ag ed in m o n ey
ser v ice b u sin ess, p ren eed , tr u st an d in su r an ce com p an ies, an d o th er fin a n cia l
in ter m ed ia r ies. ,
•
O th er co r p o r a tio n s en g ag ed in b u sin esses vested w ith p u blic in ter est sim ila r to
th e above, as m ay be d eter m in ed by th e SEC, after ta k in g in to a cco u n t r elev a n t
fa ctor s w h ich are g erm a n e to th e objectiv e an d p u r p o se of r e q u ir in g th e
electio n of a n in d ep en d en t d irector, su ch as th e exten t of m in o r ity ow n er sh ip ,
ty p e of fin a n cia l p ro d u cts or secu r ities issu ed or offered to in v estors, p u b lic
in ter est in v o lv ed in th e n a tu r e of b u sin ess op eration s, an d oth er a n a lo g o u s
factors.
\
'
:
A n in d ep en d en t d ir ecto r is a p erson w h o,.ap art from h is fees an d sh a reh old in g s,
is in d ep en d en t of m an ag em en t an d free fro m an y b u sin ess or oth er relation sh ip
w h ich cou ld , or co u ld rea son ab ly b e p er ceiv ed to, m a teria lly in terfer e w ith h is
exercise of in d ep en d en t ju d g m en t in ca r r y in g ou t h is r esp o n sib ilities as a d irector.
In d ep en d en t d ir ecto r s are e le cte d b y th e sh a r e h o ld e r s p r e s e n t o r en titled to v o te
in a b s en t i a d u r in g th e election of d ir ectors, To str en g th en th eir in d ep en d en ce
and to a lig n w ith in ter n a tio n a l b est p ractices, th ey sh a ll b e su b ject to r u les an d
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reg u lation s g ov ern in g th eir q u alificatio n s, d isq u alifica tio n s, v otin g requ irem ents,
d u ration of term and term lim it, m axim u m n u m ber of board m em bersh ip and other
req u irem en ts th at th e SEC w ill p r escr ib e.’5
Th e n u m ber of d irectors in a stock corp oration can n ot exceed 15 w ith a term of
one year each w h ile th e n u m ber of tru stees in a n on stock corp oration can exceed 15,
an d w ith a ter m o f th ree y ears each —-on e-th ird of th e board are elected annu ally.
To Illu strate: X is a Filip in o im m ig ra n t r esid in g in Sacram en to, Californ ia. Y
is a Filip in o resid in g in Q u ezon City, Ph ilip p in es. Z is a resid en t alien resid ing in
M ak ati City. GGG Corp oration is a d om estic corp oration - 40% ow n ed by foreigners
an d 60% ow n ed by Filip in os, w ith T as th e au th orized rep resen tativ e. CCC
Corp oration is a foreign corp oration registered w ith th e Ph ilip p in e Secu r ities and
Exch an g e Com m ission . KKK Corp oration is a d om estic corp oration 100% Filipinoow n ed . S is a Filip in o, 16 years of age, and th e d au gh ter of Y. A ll of th em wanted
to or g a n iz e a corp oration . W h o are q u alified to becom e m em ber s of th e board of
d irectors of th e corp oration ? An sw er: X, Y, Z, and T cou ld be d ir ecto r s (su bject to the
resid en cy req u irem en t and an y n ation ality req u irem en t u n d er th e law governing
th e b u sin ess of th e corp oration ) bu t n ot GGG Corp oration , CCC Cor p or ation , and
KKK Corp oration as th ey are n ot n atu ral p erson s. H ow ever, th e aforem en tion ed
co rp oration s cou ld h ave th eir resp ectiv e rep resen tatives n om in ated an d possibly
elected as d irectors by th e stockh old ers, p rovid ed th at su ch r ep r esen ta tiv e also
ow n s at least on e sh are of th e corp oration , as each d irector is r eq u ir ed u n d er the
RCC to ow n at least on e sh are of th e cap ital stock of th e corp oration .
Section 22 p rov id es for th e req u irem en t for an in d ep en d en t d irecto r for
corp oration s v ested w ith p u blic in terest. An in d ep en d en t d ir ecto r is a person
w h o m u st n ot h av e a r ela tio n w ith th e corp oration , w h ich w ou ld in ter fer e w ith h is
exer cise o f in d ep en d en t ju d g em en t in carr y in g ou t th e resp o n sibilities o f a d irector
46 To en su re in d ep en d en ce, th ey are su bject to ru les an d r eg u la tio n s g ov er n in g their
q u alification s, d isq u alification s, v otin g req u irem en ts, d u r ation of ter m an d term
lim it, th e m axim u m n u m ber of board m em bers, an d oth er r eq u ir em en ts th at th e SEC
w ill p rescribe. Th ey sh all con stitu te at least 20% of th e b oa r d of cor p or atio n s vested
w ith p u blic in terest an d are n om in ated an d elected by th e m a jo rity sh areh old ers.
D isq u alification of D irectors, Tru stees, or Officers
Sectio n 26 p rovid es th at a p e r s o n sh a ll b e d isq u a lified to sit a s-a director,
tru stee, or officer of an y corp oration if, w ith in five y ears p rior to h is election or
ap p oin tm en t, h e w as:456
45Section 22, RCC.
46Section 38 of Th e Secu rities Regu lation Cod e.
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A. co n v icted b y f i n a l ju d g em en t of an offen se p u n ish able by im p r ison m en t for a
p eriod exceed in g six years, for v iolatin g th e RCC, or for v iolatin g Rep u blic Act
No. 8799 (Th e Secu r ities Reg u lation Cod e);
B.
fou n d ad m in istra tiv ely liable for an y offen se in volvin g frau d u len t acts; and
C. fo u n d lia b le by a fo r e ig n co u r t or eq u iv alen t foreign reg u latory au th ority for
acts, v iolation s, or m iscon d u ct sim ila r to th ose en u m erated in p arag rap h s (A)
and (B).
Th e SEC, th e p r im a r y reg u lator y agency, or th e P h ilip p in e C o m p etitio n
Com m ission m a y im p o se ad d ition al q u a lificatio n s or oth er d isq u a lifica tio n eith er
in the p ro m otio n o f good corp orate g ov ern an ce or as a san ctio n in its a d m in istr ativ e
p roceed in gs.
D irector s/ Tr u stees m u st n o t h a v e b e e n co n v icted b y fin a l ju d g e m e n t of an
offense p u n ish a b le b y im p r ison m en t for a p eriod exceed in g six y ears or a v iolation
of th e RCC, co m m itted w ith in five y ears from th e d ate of h is election .47 O n ly n a tu r a l
p er so n s, o f leg a l age, ca n b e e lected d ir ecto r s/ tr u stees. In th e case of cor p or ate
stockh old ers or m em bers, th eir rep resen tation in th e board can be a ch iev ed by
m akin g th eir in d iv id u a l rep resen tativ es tru stees of th e sh ares or m em ber s to m a k e
them stock h old ers/ m em b ers of record .
A d ir ecto r or tr u stee sh all p ossess all of th e q u alifica tio n s an d n on e o f th e
d isq u a lifica tio n s set forth u n d er th e RCC. For a d irector of a sto ck co rp o ra tio n ,
ow n ersh ip ofat lea st on e sh a r e ca p ital stock of th e corp oration in h is ow n n a m e is
requ ired , a n d if h eceases to w on at least one sh are in his own nam e, Jie au to m a tica lly
ceases to b e a d irector . For a tru stee in a n on stock corp oration , on ly m em b er s o f th e
rorp oration can b e elected to seat in th e Board of Tru stees, an d h e loses h is sea t if h e
ceases to b e a m em ber .
To illu strate: In th e election of th e d irectors of FEM ELY C or p o ra tio n , A n g ,
Beng, C h in g , D on g , En g, Fon g, an d Gan g w ere n om in ated . A n g , Ben g , C h in g ,
Dong, an d En g g o t th e h ig h est n u m ber of votes an d w ere p r o cla im ed elected . Fon g
p laced sixth w ith 20 v otes lesser th an En g w h o su bseq u en tly sold all h is sh a r es
to Gan g. G a n g cla im s n ow th at h e sh ou ld sit in th e Board b eca u se th e tr a n sfer o f
Eng's sh a r es to h im in clu d es th e latter's p osition in th e Board . Fon g op p osed th e
p osition of G a n g cla im in g th at h e sh ou ld be th e on e to sit in th e Board v acated by
Eng beca u se h e w as th e sixth p lacer in th e election .En g a sse ts t h a t h e co n t in u e s to
be a d ir ecto r u n til h is ter m exp ires b eca u se w h at h e sold w as on ly h is sh a res an d
n ot h is p osition as d irector. In th is case, n o on e am on g En g, G an g , an d Fon g ca n sit
as th e d ir ecto r b eca u se a d ir ecto r n eed s to be elected an d h a s to h av e at least on e
47Section 26, RCC.
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sh a re in h is n am e if h e w ish es to r em a in as a d irector. N o on e a m on g th em satisfies
th ese req u ir em en ts.
N ote th at d isq u a lifica tio n m ay a lso ta k e e ffect b y o p er a tio n o f law as in this
illu stra tiv e case: A law w as p assed d isq u alifyin g form er m em b ers of Con gress from
sittin g in th e b o a r d o f d ir e cto r s o f g o v er n m en t-o w n ed o r co n tr o lled co r p o r a tio n s.
Beca u se of th is, th e bo ar d of d ir ecto r s o f W een er Corp ., a g o v er n m en t-o w n ed and
co n trolled co rp oration , d isq u a lified Bailey, a fo r m er C o n g r essm a n , fr o m con tin u in g
to sit as on e of its m em bers. H ow ever, Ba iley ob jected , in sistin g th a t u n d er th e RCC,
m em ber s of th e bo ar d of d ir ecto r s o f cor p or a tion s m ay o n ly b e r em ov ed b y th e vote
of sto ck h old er s h old in g tw o -th ir d s of its o u tsta n d in g ca p ita l sto ck in a r eg u la r or
sp ecial m eetin g ca lled for th at p u rp o se. In th is case, sin ce th e d isq u a lifica tio n takes
effect by op eration of law, it is su fficien t th at Bailey w as d ecla r ed n o lo n g er a m em ber
of th e bo ar d , an d h is rem ov al n eed n ot be d on e by a v ote o f th e sto ck h o ld er s h old in g
ty vo-th ird s of its ou tsta n d in g cap ital stock in a r eg u la r or sp ecia l m e e tin g ca lled for
th e p u rp o se.
Election of D irectors or Tru stees
Sectio n 23 p rov id es th e follow in g r eq u ir e m e n ts fo r electio n o f d irectors/
tr u stees, to w it:
•
at an y m eetin g of stock h old er or m em bers ca lled for th e ele ctio n o f d ir ecto r s or
tr u stees, th er e m u st b e p resen t eith er in p erson or b y r ep r esen ta tiv e au th orized
to act by w r itten p roxy, th e ow n ers of th e m a jo r ity o f th e o u tsta n d in g cap ital
sto ck or th e m a jor ity of th e m em bers en titled to v ote;
•
th e electio n m u st b e by bal lot if req u ested by an y v o tin g m em b er or stockh old er;
•
a sto ck h o ld er ca n n o t be d ep riv ed in th e a r ticles o f in co r p o r a tio n or in the.
b y la w s of h is sta tu tor y rig h t to u se an y of th e m eth o d s o f v o tin g in th e election
o f d irector s;
•
n o d elin q u en t stock sh all b e v oted ; an d
•
th e ca n d id a tes r eceiv in g th e h ig h est n u m b er of v o tes sh a ll b e d ecla r ed elected .
Sectio n 23 a lso p rov id es for th e m eth o d s o f v o tin g d u r in g th e electio n of
d ir ecto r s or tru stees, to w it:
•
str aig h t v otin g w h er e ev ery sto ck h o ld er m ay v ote su ch n u m b er o f sh a r es for as
m a n y p er son s as th ere a r e d ir ecto r s to b e elected ;
•
cu m u lative votin g fo r on e can d id ate w h er e a sto ck h o ld er is allow ed to
con cen trate h is v otes an d g iv e on e can d id ate, as m a n y v otes as th e n u m b er of
d ir ecto r s to b e elected m u ltip lied by th e n u m b er o f h is sh a r es sh a ll eq u a l; and
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•
cu m u la t iv e v o t in g b y d is t r ib u t io n w h er e a sto ck h o ld er m ay cu m u la te h is
sh a r es by m u ltip ly in g th e n u m b er of h is sh a r e s by th e n u m b er o f d ir e cto r s to
b e elected an d d istr ib u te th e sa m e a m o n g as m a n y ca n d id a tes as h e sh a ll see
fit.
Th e fo llo w in g a r e th e lim ita tio n s on th e sto ck h o ld er 's r ig h t to v o te:
•
w h er e th e a r ticle s of in co r p o r a tio n p r o v id e for cla ssifica tio n of sh a r es p u r su a n t
to Se ctio n 6, n o n v o tin g sh a r es ar e n ot en titled to v ote excep t as p rov id ed for in
th e la st p a r a g r a p h of Se ctio n 6;
•
p r e fe r r e d o r r e d e e m a b le sh a r e s m ay b e d ep r iv ed o f th e r ig h t to v ote u n less
o th e r w ise p r o v id ed in th e RCC;
»
fa ct io n a l sh a r e s o f sto ck ca n n o t b e v o ted ;
•
tr e a su r y sh a r ed h a v e n o v o tin g rig h ts as lon g as th ey r em a in in th e tr ea su r y ;
•
h o ld e r s o f s t o ck d e cla r e d d e lin q u e n t by th e boar d of d ir e cto r s for u n p a id
su b scr ip tio n ar e n ot en titled to vote or to a r ep r esen ta tio n at a n y sto ck h o ld e r 's
m e e tin g ; an d
•
a tr a n sfe r e e o f stock ca n n o t v ote if h is tr a n sfe r is n ot r eg ister ed in th e sto ck an d
tr a n sfe r b o o k o f th e co rp oration .
Corp orate O fficers
Im m e d ia te ly a fter th eir election , th e d ir ecto r s of a co r p o r a tio n m u st fo r m a lly
o r g a n iz e a n elect: (a) a p r esid en t w h o m u st b e a d ir ecto r ; (b) a tr ea su r er , w h o m u st
b e a r esid en t o f th e P h ilip p in es; (c) a secr eta ry , w h o m u st b e a cit iz e n a n d r esid en t
of th e P h ilip p in es; an d (d) su ch o th e r o fficer s as m ay b e p r o v id ed in th e b y la w s. If
th e co r p o r a tio n is v ested w ith p u blic in terest, th e b o a r d sh a ll a lso e le ct a co m p lia n ce
officer . Th e sa m e p er so n m ay h old tw o or m or e p o sitio n s co n cu r r en tly , excep t th a t
n o on e sh a ll a ct as p r esid en t an d secr eta r y or as p r esid en t a n d tr e a su r e r at th e sa m e
tim e u n le s s o th e r w ise allo w ed in th e RCC. Th e o fficer s sh a ll m a n a g e th e co r p o r a tio n
an d p e r fo r m su ch d u ties as m ay b e p r ov id ed in th e b y la w s an d / or a s r eso lv ed by
th e b o a r d o f d ir ecto r s.48
U n d er Se ct io n 24, th e fo llo w in g ar e th e co rp o ra te officer s:
•
p r esid en t w h o m u st b e a d irector ;
•
tr ea su r er w h o m a y or m ay n o t b e a d irector , an d as a m a tter o f so u n d co rp o ra te
p r a ctice, m u st b e a resid en t;
48Section 24, RCC.
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•
s e cr e ta r y w h o n eed nol In* a d ire cto r u n less req u ired by lh r b ylaw s, an d must
b e a resid en t an d citizen of I h r I ’h 11ipj >i m*H; an d
•
su ch ol h er officers as m ay h e p rovid ed in I h e b ylaw s. '
In on e case, th e Su p rem e C ou rt stressed th at a p osition m u st b e exp ressly
m en tion ed in th e b ylaw s in o rd e r to h e co n sid ered as a co rp o ra te office.'11' In this
case, th e Vice Presid en t for Fin an ce filed a ca se for illegal d ism issa l b efore th e Labor
Arb iter. Th e co rp o ra tio n sou gh t th e d ism issal o f .th e case, a lle g in g th at th e issue
th erein is an in tra -co rp o ra te d isp u te in volvin g a co r p o r a te officer. Th e Su p rem e
C o u rt h eld th at th e office of. Vice Presid en t for Fin an ce w as an o rd in a ry , not a
co rp o ra te , office. Pu rsu an t to Section 25 of th e th en C o rp o ra tio n C o d e, w h oever
a r e th e co r p o r a te officers en u m e ra te d in th e b ylaw s a re th e exclu siv e officers of the
co rp o ra tio n an d th e b oard of d ire cto rs h as n o p o w er to cre a te o th e r offices w ith out
a m e n d in g first th e co r p o r a te b ylaw s. Th e b oard m ay, h ow ever, cre a te ap p oin tive
p ositio n s o th e r th an th e p osition s of co rp o ra te officers but th e p e r s o n s occu p y in g
su ch p osit ion s a r e n ot con sid ered as co rp o ra te officers w it h in th e m e a n in g of Section
25 of th e C o r p o ra tio n C o d e an d a re n ot em p o w ered to e xe rcis e th e f u n ctio n s of the
co r p o r a te officers, e xce p t th ose fu n ction s law fu lly d elegated to th em b y th e b oard .
To i l l u s t r a t e :
A llan , an A u stralian , w as elected Presid en t of M e tro Grab
P h ilip p in es, Inc., a co rp o ra tio n o rg a n iz e d u n d er Ph ilip p in e law s. Lik e w ise , Bailey,
a Filip in o w a s elected S e cre ta ry an d Treasu rer of th e said co r p o r a tio n at th e sam e
tim e. Som e s to ck h o ld e rs of th e corp o ratio n q u estion ed thp leg ality of th e electio n of
A llan an d Bailey. In th is case, th ere is n o th in g illegal w ith th e e le ctio n of A llan and
Bailey b e ca u se th eir election d id n ot violate an y p rov ision of th e RCC.
\
A co rp o ra tio n h as its ow n legal p e rso n ality se p a ra te an d d is t in ct fro m th ose
of its sto ck h o ld e rs, d ire cto rs , or officers. H en ce, ab sen t an y e v id e n ce th a t th ey have
e xce e d e d th eir au th ority, co rp o ra te officers a re n ot p e r s o n a lly liab le for th e ir official
acts.™ In o r d e r for th e C o u r t to h old th e officer yf th e co r p o r a tio n p e r s o n a lly liable
a lo n e for th e d eb ts of th e co rp o ra tio n an d th u s p ie rce th e veil of co r p o r a te fiction ,
th e C o u r t h as re q u ire d th at th e b ad faith of th e officer m u s t first b e estab lish ed
cle a rly a n d co n v in cin g ly .'1
To i l lu s tr a te :
X, th e Presid en t of Z Z Z C o rp o ra tio n , w a s a u th o r iz e d b y the
Board of D ire cto r s of Z Z Z C o rp o ra tio n to ob tain a loan fro m YYY Ba n k a n d to sign
d o cu m e n ts on b e h alf of th e co rp o ra tio n . X p erso n a lly n e g o tia te d for th e lo an and
g o t th e loan at very lo w -in terest rates. U p o n m a tu r ity of th e loan , Z Z Z Corp oration
,w M attin g liu lu slri.il mul C om m er cia l Co rp or atio n , et at. vs. Ricard o R. Coros, G .R. N o. 157802, O ctob er 15.
2010 .
’"Ro la n d o OS, Torres vs. Ru ral ban k of San lo an , Inc. et at., C..R. N o. 184520, M a rch 13, 2013.
1,1 Mercy Vd a. d c Roxas, rep resen ted by A rlen e C. Ro xas-Cru z, in h er cap a city as su bstitu te ap p ellant*
p etition er vs. O u r La d y 's bo u n d atlon , Inc., G .R. N o. 182378, M arch o, 2013.
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w as u n a b le to p ay. In th is ca se, X as th e P resid en t of Z Z Z <Corp oration, ca n n o t b e
p er so n a lly h eld liab le for th e oblig ation of th e corp ora tion ev en th ou g h h e sig n ed a\ \
th e loan d o cu m en ts, b eca u se th e loa n w as a u th or iz ed by th e Board .
Rep ort of Election of D irectors, Tru stees, an d Officers; N on -h old in g
of Election an d Cessation from Office
Sectio n 25 r eq u ir es th at th e n am es, n a tio n a lities, sh a r eh old in g s, an d resid en ce
ad d resses o f th e d ir ecto r s, tr u stees, an d officer s elected b e su b m itted b y th e
secr eta r y or a n y o th er o fficer of th e corp ora tion to th e SEC w ith in 30 d ays after th e
election . In ca se th e electio n w as n o t h eld on th e d ate sch ed u led , th is fa ct an d th e
reaso n th er efo r sh a ll b e rep o rted to th e SEC w ith in 30 d ays fr o m th e d ate of th e
sch ed u led electio n . Th e r ep o r t sh all sp ecify a n ew d ate for th e electio n , w h ich sh a ll
b e w ith in 60 d a y s fr o m th e sch ed u led d ate. If n o n ew d ate h a s b een d esig n a ted , or if
th e r esch ed u led electio n is lik ew ise n ot h eld , th e SEC m ay, u p on th e a p p lica tio n o f a
sto ck h old er, m em b er , d irector, or tru stee, an d after v erifica tio n o f th e u n ju stifia b le
n o n -h o ld in g o f th e election , su m m ar ily ord er th a t an electio n b e h eld . Th e SEC h a s
th e p o w er to issu e su ch ord ers as m ay b e ap p rop riate, su ch as d ir e ctin g th e issu a n ce
of a n o tice sta tin g th e tim e an d p lace of th e election , d esig n a ted p r esid in g o fficer ,
an d th e r eco r d d ate or d ates for th e d eter m in a tio n o f sto ck h o ld er s or m em b er s
en titled to v o te. Th e sh ar es of stock or m em bersh ip r ep r esen ted at su ch m e e tin g an d
en titled to v o te sh a ll con stitu te a q u oru m for p u r p o ses of co n d u ctin g an electio n . If
a d irector , t r u ste e or officer d ies, resig n s, or in an y m a n n er cea ses to h o ld o ffice, th e
secr e ta r y or th e d ir ector , tr u stee or officer of th e co rp oration , sh a ll r ep o r t th e sa m e
in w r itin g to th e SEC w ith in sev en d ays fr om k n ow led g e th er eof.
Rem oval of D irectors or Trustees
Any d irector or tru stee of a corp oration m ay be rem oved from office by th e vote
o f th e sto ck h o ld er s h o ld in g o r r e p r e sen tin g at le a st tw o- th ir d s o f th e ou tsta n d in g
ca p ita l sto ck o r in a n o n s t o ck co r p o r a tio n , b y a v o te o f a t le a s t tw o -th ir d s o f th e
m em b er s en titled to v ote. Th e rem ov al sh a ll ta k e p la ce eith er at a r e g u la r m e e t in g
of th e co r p o r a tio n or at a sp ecial m eetin g called for th e p u r p o se, a n d a fter p r ev io u s
n otice to sto ck h o ld er s or m em ber s of th e cor p or a tion of th e in te n tio n to p r o p o se
su ch r em o v a l at sa id m eetin g .
A sp ecia l m e e tin g of th e stock h old ers or m em b er s for th e p u r p o se of r em o v in g
an y d ir ecto r or tr u stee m u st b e called b y th e secr eta r y on th e ord er o f th e p resid en t,
or u p on w r itte n d em an d of stock h old ers r ep r esen tin g or h o ld in g at least a m a jo r ity
of th e o u tsta n d in g ca p ita l stock , or a m a jo rity of th e m em b er s en titled to vote. If th er e
is n o s e cr e ta r y o f th e secr eta r y , d esp ite d em an d , fa ils or r efu ses to ca ll th e sp ecia l
m eetin g or to g iv e n otice th ereof, th e stock h old er o r m em b er of th e co rp o ra tio n
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sig n in g th e d em an d
m a y ca ll t h e s p e cia l m e e t in g b y d ir e ct ly a d d r e s s in g
the
stock h o ld ers or m em b er s. N otice of th e tim e a n d p la ce o f su ch m e e t in g , as w ell as
of th e in ten tio n to p r o p o se su ch r em o v a l, m u st b e g iv en b y p u b lica tio n o r b y written
n o tice p r escr ib ed in th e RCC.
Rem o v a l m a y b e w ith or w ith o u t ca u se. Bu t r em o v a l w ith o u t ca u se m ay not
b e u sed to d ep riv e m in o r ity sto ck h o ld er s or m em b er s o f th e r ig h t r ep r esen ta tio n to
w h ich th ey m ay b e en titled u n d er th e RCC.
Th e SEC sh all, m ot u p r op io or u p o n a v er ified co m p la in t, a n d a ft e r d u e n o tice and
h ea r in g , ord er th e rem ov a l of a d ir ecto r or tr u ste e elected d esp ite th e d isq u a lification ,
or w h o se d isq u a lifica tio n a r o se or is d isco v er ed su b se q u e n t to a n e le ct io n . Aside
fr o m th e r em o v al of th e d isq u a lified d irector , th e SEC m a y im p o s e s a n ct io n s on the
b o a r d o f d ir ecto r s or tr u stees w h o, w ith k n o w led g e o f th e d is q u a lifica t io n , failed to
rem ov e su ch d ir ecto r or tr u stee.52
U n d er Sectio n 27 of th e RCC, d ir ecto r s/ tr u stees m a y b e r e m o v e d b y a vote of
th e sto ck h o ld er s r ep r esen tin g at lea st tw o -th ir d s o f th e o u t s t a n d in g ca p ita l stock
tw o -th ir d s of th e m em b er s en titled to vote, at a r e g u la r o r s p e cia l m e e t in g after
p r o p er n o tice is g iv en , w ith or w ith ou t cau se. A m in o r ity d ir e ct o r e le ct e d th rou gh
cu m u la tiv e v o tin g , h ow ever, ca n n o t b e rem ov ed w ith o u t ca u se. Th is r eq u ir em en t
e n su r e s p r o tectio n to m in o r ity sto ck h old ers a g a in st a r b it r a r y r e m o v a l b y the
m a jo r ity sto ck h o ld er s an d th u s lose r ep r esen ta tion in th e b o a r d .
Vacan cies in th e Office of D irector or Tru stee; Em e rg e n cy Board
)
'
•
U n d er Sectio n 28, an y v a ca n cy o ccu r r in g in th e b o a r d o f d ir e ct o r s o r tru stees
oth er th a n by rem ov a l o f exp ir a tio n of a ter m m a y b e fille d b y th e v o te o f at least
a m a jo r ity o f th e r em a in in g d ir ecto r s or tr u stees, if still co n s t it u t in g a q u o r u m . If
th e r e is n o q u or u m , th e v aca n cies m u st b e filled b y th e sto ck h o ld e r s o r m em bers
in a r e g u la r or sp ecia l m eetin g ca lled for th a t p u r p o se. If th e v a ca n cy is. d u e to
th e exp ir a tio n of a term , th e electio n sh a ll b e h eld n o t la ter t h a n th e d a y o f such
exp ir a tio n a t a m eetin g ca lled for th a t p u r p o se.
W h en th e v a ca n cy a r ises as a r esu lt of r em o v a l b y th e s to ck h o ld e r s o r m em bers,
th e electio n m ay b e h eld on th e sa m e d ay of th e m e e tin g a u th o r iz in g th e rem oval
an d th is fact m u st b e stated in th e ag en d a a n d n o tice o f sa id m e e tin g . In a ll other
ca ses, th e electio n m u st b e h eld w ith in 45 d ays fr o m th e tim e th e v a ca n cy arose.
A d ir ecto r or tr u stee elected to fill th e v a ca n cy sh a ll b e r efer r ed to a s rep lacem en t
d ir ecto r or tr u stee an d sh a ll serv e on ly for th e u n exp ir ed ter m o f h is p r ed ecesso r in
office.
52 Section 27, RCC.
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Bu t if th e v a ca n cy p r ev en ts th e r e m a in in g d ir ecto r s fr o m co n stitu tin g a q u o r u m
and e m er g en cy a ctio n is r e q u ir ed to p r ev en t g rav e, su b sta n tia l, an d ir r ep a r a b le lo ss
or d am a g e to th e co r p o r a tio n , th e v a ca n cy m ay b e te m p o r a r ily filled fro m a m o n g
th e o fficer s o f th e co r p o r a tio n by u n a n im o u s v ote of th e r e m a in in g d ir ecto r s or
tru stees. Th e a ctio n b y th e d esig n a ted d ir ecto r or tr u ste e sh a ll b e lim ited to th e
em er g en cy a ctio n n ecessa r y , a n d th e ter m sh a ll cea se w it h in a r ea so n a b le tim e fro m
the te r m in a tio n o f th e em e r g e n cy or u p o n th e electio n o f th e r ep la cem en t d ir ecto r or
tru stee, w h ich e v e r co m es ear lier. Th e SEC m u st b e n o tifie d w it h in t h r e e d a y s from
the cr ea tio n o f th e e m e r g e n cy b o a r d , sta tin g th e r ea so n tor its cr ea tio n .
A n y d ir e cto r s h ip or tr u ste e sh ip to b e filled b y a r ea so n o f a n in cr e a se in th e
n u m ber o f d ir e ct o r s or t r u ste e s sh a ll b e filled o n ly b y a n e le ctio n at a r e g u la r or at
a sp ecia l m e e t in g o f sto ck h o ld er s or m em b er s d u ly ca lled for th e p u r p o se , or in th e
sam e m e e t in g w h ich a u th o r iz e s th e in cr ea se of d ir ecto r s or t r u ste e s if so sta ted in
th e n o tice o f th e m e e tin g .
,
In fillin g v a ca n cie s as d iscu ssed , th e p r o ced u r es set fo r th in Se ct io n s 23 a n d 25
sh all ap p ly.
To illu strate:
A.
Sp a r k y is a d ir e ct o r in T Corp . w h o w a s elected to a o n e-y ea r te r m o n Fe b r u a r y
1, 2020. O n A p r il 11, 2020, Sp a r k y r esig n ed an d w a s r ep la ced b y Sn a w tb o y ,
w h o a s s u m e d a s th e d ir ecto r on M ay 17, 2020. O n N ov. 21, 2020, Sn a w tb o y
d ied . Sim o n w a s t h e n elected in h is p lace. In th is ca se, Sim o n sh a ll se r v e a s th e
d ir e ct o r o n ly u n t il Fe b r u a r y 1, 2021.
B.
In t h e N o v e m b e r 2020 sto ck h o ld er s m eetin g of G r in ch C o r p o r a tio n , e ig h t
d ir e ct o r s w e r e e lected to th e b oa rd . Th e d ir ecto r s a ssu m ed t h e ir p o s t s in
Ja n u a r y 2021. Sin ce n o sto ck h o ld er s m eetin g w a s h eld in N o v em b er 2021, th e
eig h t d ir e ct o r s s e r v e d in a h old -o v er ca p acity an d th u s co n tin u ed d is ch a r g in g
t h e ir p o w er s. In Ju n e 2022, tw o of G r in ch C o r p o r a tio n 's d ir ecto r s, D ir e cto r
G e lle r a n d D ir e ct o r C o o p er r esig n ed fr o m th e b o a r d . Rely in g o n Se ct io n 28 of
th e C o d e, th e r e m a in in g six d ir ecto r s elected tw o n ew d ir e cto r s to fill in th e
v a ca n cy ca u se d b y th e r esig n a tio n o f D ir ecto r s G eller a n d C o o p er . Sto ck h o ld e r
K r ip k e y q u e stio n e d th e e lectio n of th e n ew d ir ecto r s, in itia lly , th r o u g h a letter co m p la in t a d d r e sse d to th e b o a r d , a n d la ter (w h en h is le tte r -co m p la in t w en t
u n h eed ed ), th r o u g h a d eriv a tiv e su it filed w ith th e co u r t. H e cla im e d th a t th e
v a ca n cy in th e b o a r d sh o u ld b e filled u p b y th e v o te o f th e sto ck h o ld er s of
G r in ch C o r p o r a tio n . G r in ch C o r p o r a tio n 's d ir e cto r s d efen d ed th e leg a lity o f
th e ir a ctio n . G iv en th e facts, th e b o a r d o f d ir e cto r 's e le ctio n of th e tw o n ew
d ir e cto r s is n o t p ro p er. Th e r e m a in in g d ir ecto r s ca n n o t elect n ew d ir ecto r s to
fill in th e tw o v a ca n cies. Th e b o a r d o f d ir ecto r s m a y fill u p v a ca n cy on ly if th e
g rou n d is n ot d u e to th e exp ir a tio n o f ter m , rem o v al, or in cr e a se in th e n u m b er
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o f b o a r d sea ts. In th is ca se, th e ter m o f th e tw o d ir e cto r s e xp ir ed a fte r on e y e a r .
Th e h o ld -o v er p er io d is n o t p a r t o f th e ir ter m . Th e v a ca n cie s sh o u ld be filled
u p by e le ctio n b y th e s to ck h o ld e r s .53
C.
A , B, C, D, E, F, an d G a r e d u ly elected d ir e cto r s for 2009, w h o se a r ticles o f
in co r p o r a tio n p r o v id e for sev en d ir e cto r s. O n O cto b e r 1, 2009, d ir ecto r s A, B,
C, D, an d E m et to fill th e tw o v a ca n cie s in th e b o a r d b r o u g h t a b o u t by th e
v a lid r em o v a l o f F fo r d islo y a lty to th e co r p o r a tio n an d th e d ea th o f G. In said
m e e tin g , th e r e m a in in g d ir e cto r s v o ted for X to r e p la ce F, a n d Y, son of G, to
r e p la ce h is fath er. Bo th X an d Y a r e o w n e r s o f at lea st o n e s h a r e o f stock. In
th is ca se, o n ly th e e le ctio n o f Y a s d ir e cto r to r e p la ce G is v a lid . Th e election of
X is n o t v a lid b e ca u se th e b o a r d ca n n o t e le ct a d ir e ct o r to fill u p th e vacan cy
b r o u g h t a b o u t b y th e r em o v a l o f F.
Th e e m e r g e n cy b o a r d e xists w h en a v a ca n cy in a co r p o r a t io n 's board o f
d ir e cto r s p r ev en ts th e r e m a in in g d ir ecto r s from
co n s t it u t in g a q u o r u m a n d
co n s e q u e n tly fr o m m a k in g e m er g en cy a ctio n r e q u ir ed to p r e v e n t g r a v e, su bstan tial,
a n d ir r e p a r a b le lo ss or d a m ag e.
C o m p en satio n of D irectors or Tru stees
In th e a b se n ce o f a n y p r o v isio n in th e b y la w s fix in g t h e ir co m p e n sa tio n , th e
d ir e ct o r s or tr u s te e s sh a ll n o t r e ce iv e a n y co m p e n sa tio n in t h e ir ca p a city as su ch
e xce p t for r easo n a b le p er d iem s. Bu t th e sto ck h o ld er s r e p r e s e n t in g a t le a st a majority
o f th e o u t s t a n d in g ca p ita l sto ck or th e m a jo r ity o f th e m e m b e r s m a y gran t d irectors
o r t r u s t e e s co m p e n s a tio n a n d a p p r o v e th e a m o u n t t h e r e o f a t a r e g u la r o r sp e cia l
m e e t in g . In n o ca se sh a ll th e to ta l y ea r ly co m p e n sa tio n o f d ir e ct o r s e xce e d 10% o f
th e n e t in co m e b efo r e in co m e tax o f th e co r p o r a tio n d u r in g t h e p r e ce d in g year.
D ir e cto r s o r t r u s t e e s sh a ll n ot p a r ticip a te in th e d e t e r m in a t io n o f t h e ir ow n per
d ie m s o r co m p e n sa tio n . A n a n n u a l r ep o r t o f th e to ta l co m p e n s a t io n o f e a ch of th e
d ir e cto r s or tr u s te e s o f co r p o r a tio n s v ested w ith p u b lic in te r e st sh a ll b e su bm itted
to t h e ir sh a r e h o ld e r s an d th e SEC .54
U n d er Se ct io n 29 o f th e RCC, d ir e cto r s or tr u s t e e s sh a ll b e e n title d to reason able
p e r d ie m s on ly, excep t: (1) w h e n t h e ir co m p e n s a t io n is fix e d in t h e b y la w s ; (2)
w h e n g r a n t e d b y t h e v o te o f s t o ck h o ld e r s r e p r e s e n t in g at le a s t a m a jo r it y o f th e
o u tsta n d in g ca p it a l sto ck at a r e g u la r or s p e cia l m e e tin g ; o r (3) w h e n th e y a r e also
o ffice r s o f th e co r p o r a t io n .
53 r h e facts o f th e illu strativ e case is p attern ed from th e ca se of Valle Verd e C ou n tr y Clu b, Inc. vs. Africa, G .R .
N o. 151969, Sep tem ber 4, 2009; 598 SCRA 202
^ Se ctio n 29, RCC.
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Liab ilities of D irectors, Tru stees, or Officers
D ire cto rs o r tr u s te e s w h o w illfu lly an d k n o w in g ly v o te for or a sse n t to p a te n tly
u n law fu l a cts of th e co rp o ra tio n or w h o are g u ilty of g r o s s n e g lig en ce o r b ad faith
in d ire ctin g th e a ffa irs of th e co rp o ra tio n or a cq u ire an y p e rso n a l or p e cu n i a r y
in terest in co n flict w ith th eir d u ty as su ch d ire cto rs or tr u s te e s sh all b e liab le join tly
and severally for all re su ltin g d a m a g e s su ffered b y th e co rp o ra tio n , its sto ck h o ld e rs
or m em b ers an d o th e r p e rs o n s . A d irector, tru stee, or officer sh all n ot a tte m p t to
acq u irer an y in te re st a d v e rs e to th e co rp o ra tio n w ith re sp e ct to an y m a tte r w h ich h a s
been rep osed to th em in con fid en ce, an d u p on w h ich , eq u ity im p o s e s a d isab ility
upon th e m s e lv e s to d eal in th eir ow n b eh alf; oth erw ise, th e said d ire cto r, tr u s te e or
officer sh all b e liab le as a tru s te e for th e co rp o ra tio n an d m u st a cco u n t for th e p ro fits
w h ich o t h e r w is e w ou ld h av e accru e d to th e co r p o r a tio n .55
Th e d i r e cto r s or tru ste e s, as well as th e officers, of th e co rp o ra tio n a r e e xp e cte d
to p erform th e d u tie s en join ed on th em by law an d th e b ylaw s.
T h ey m u st
d iligen tly p e rfo rm th eir d u ties. If th ey w illfu lly an d k n o w in g ly v o te for o r a s s e n t
to p aten tly u n la w fu l a cts of th e corp oration or are g u ilty of g r o s s n e g lig e n ce o r b ad
faith in d i r e ctin g th e affairs of th e corp oratio n , th ey sh all b e so lid a rily liab le for all
resu ltin g d a m a g e s su ffered by th e corp oratio n , its sto ck h o ld e rs or m e m b e rs , an d
oth er p e rso n s.
Th e d ir e cto r s or tru s te e s m u st be loyal to th e co rp o ra tio n .
If th e y a cq u ire
any p e cu n ia r y or p erson al in terest in con flict w ith th eir d u ty as s u ch d i r e ct o r s
or tru ste e s, th ey sh all b e liab le solid arily for all resu ltin g d a m a g e s . If a d i r e ct o r
or tru ste e a tte m p ts to acq u ire or acq u ires in violation of h is d u ty, a n y in te re st
ad verse to th e co rp o ra tio n relative to an y m atter w h ich h as b een re p o s e d in h im
in con fid en ce as to w h ich eq u ity im p oses a liab ility u p on h im to d eal in h is o w n
b eh alf, h e sh all b e liab le as tru ste e for th e co rp oratio n an d m u st a cco u n t for all th e
p rofits w h ich o th e r w is e w ou ld h ave accru ed to th e co rp o ra tio n . If a d ire cto r, b y
virtu e of h is office, acq u ire s for h im self a b u sin ess o p p o r tu n ity th at sh o u ld b elo n g
to th e co rp o ra tio n , th ereb y ob tain in g p rofits th at sh ou ld b elon g to th e co r p o r a tio n ,
he m u st a cco u n t to th e corp o ratio n for all su ch p rofits b y d eliv erin g th e s a m e to th e
corp oration .
Th e d ire cto rs h av e a p erso n ality sep arate from th a t of th e co rp o ra tio n an d as
su ch , th ey w ou ld b e p e rso n a lly liab le on ly u n d er th e follow in g in sta n ce s:
•
w illfu lly an d k n ow in gly v o tin g for an d a ssen tin g to p aten tly u n la w fu l a cts of
th e co rp o ra tio n ;
•
gross n egligen ce or b ad faith in d ire ctin g th e affairs of th e co rp o ra tio n ;
55Seetion W„ ®cc..
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•
a cq u irin g an y p er so n a l or p e cu n ia r y in ter est in co n flict of d u ty w h ich acts
resu lt in d a m a g es to th e co rp o ra tio n , its sto ck h o ld er s or oth er p erson s;
•
co n sen tin g to th e issu a n ce of w a tered sto ck s, or h a v in g k n ow led g e thereof,
fa iled to file o b je ctio n s w ith th e secr eta r y ;
•
ag reein g or stip u la tin g in a co n tra ct to h old th em selv es p er son a lly and
solid ar ily liable w ith th e co rp o ra tio n ; or
•
by v ir tu e of a sp ecific p r o v isio n of law .
To illu strate:
A.
Sh eld on is th e o w n er of 75% o f th e sh a r es in Big Ba n g Co rp or a tio n . O n one
occasion , Big Ba n g C o r p or atio n , r ep r esen ted b y Sh eld o n as th e P resid en t and
G en er al M a n a g er , en ter ed in to a co n tr a ct to sell w ith Kr ip k ey in volvin g a
to w n h ou se. For th e fa ilu r e of Big Ba n g C o r p o r a tio n to b u ild th e tow n h ou se,
Kr ip k ey filed a ca se of r escissio n an d d a m a g es a g a in st Sh eld on an d Big Bang
Corp ora tion . In th is case, th e actio n filed a g a in st Sh eld on w ill n o t prosper
b eca u se Big Ba n g C o r p o r a tio n h a s a sep a r a te an d d istin ct p er so n a lity from
th e fo rm er an d th a t w h en Sh eld o n en ter ed in to a co n tr a ct w ith Krip key, he
w as on ly a ctin g on b e h a lf of th e com p an y. O n th e o th er h a n d , th e actio n filed
ag ain st Big Ba n g C or p o r a tio n w ill p r osp er b eca u se th is is a m a tter p ertain in g
to th e co m p an y an d th e com p an y alon e sh ou ld b e h eld lia b le u n le ss Sheld on
acted m a licio u sly or in b a d faith .
B.
Th e Boa rd of D irecto r s of XYZ Corp . u n a n im o u sly p a ssed a resolu tion
ap p rov in g th e ta k in g of step s th a t in r ea lity a m o u n ted to w illfu l ta x evasion.
U p on d isco v er in g th is, th e g o v er n m en t filed ta x ev a sio n ch a r g es a g ain st all
th e com p an y 's m em ber s of th e b o a r d of d ir ecto r s. Th e d ir ecto r s in v ok ed the
d efen se th a t th ey h av e n o p er so n a l liability , b e in g m er e d ir ecto r s of a fictional
bein g. In th is case, th e d ir ecto r s are n o t cor rect. Th e la w m a k e s d ir ecto r s of the
corp oration so lid a r ily lia ble for g r o ss n eg lig en ce a n d b a d fa ith in th e d ischarge
of th eir d u ties; in th is case, th ey sh ou ld b e h eld liab le for h a v in g u n an im ou sly
p assed a reso lu tio n a p p ro v in g th e ta k in g of step s th a t a m o u n ted to w illfu l
tax evasion . It h as b een h eld in a n u m b er o f ca ses th a t p er so n a l liability of
corp orate d irector s, tr u stees, or o fficer s m ay v a lid ly a tta ch w h en th ey assen t to
p aten tly u n la w fu l acts of th e co rp o ra tio n as in th is case.
D ealin gs of D irectors, Tru stees, or Officers w ith th e Corp oration
U n d er Section 31, a co n tra ct of th e co r p o r a tio n w ith on e or m ore o f its d irectors
tr u stees, officers, or th eir sp o u ses an d r ela tiv es w ith in th e fo u r th civ il d egree (
co n sa n g u in ity or a ffin ity is v oid able, at th e o p tio n of su ch co rp or a tion , u n less c
th e follow in g con d ition s are p r esen t:
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A.
th e p r e se n ce o f su ch d ir ecto r or tr u stee in th e b o a r d m eetin g in w h ich th e
co n tra ct w a s a p p r o v ed w a s n ot n ecessa r y to co n stitu te a q u o r u m for su ch
m eetin g ;
g.
th e v o te o f su ch d ir e cto r or tr u stee w a s n o t n e ce ssa r y for th e a p p rov a l of th e
co n tract;
C.
th e co n tr a ct is fa ir a n d r ea so n a b le u n d er th e cir cu m sta n ces;
D.
in th e ca se o f co r p o r a tio n s v ested w ith p u b lic in ter est, m a ter ia l co n tr a cts are
ap p rov ed b y a t le a st a m a jo r ity o f th e in d ep en d en t d ir ecto r s v o tin g to a p p rov e
th e m a te r ia l co n tr a ct; a n d
E.
in th e ca se o f a co n tr a ct en tered in to w ith an officer, said co n tr a ct m u st b e
p r ev io u sly a u th o r iz e d b y th e corp ora tion 's b o a r d of d ir ecto r s.
If a n y o f (A), (B), a n d (C) ab ov e is absen t, a co n tra ct w ith a d ir e cto r or tr u ste e
m ay b e r a tifie d b y th e v o te of th e sto ck h old er s r ep r esen tin g at lea st t w o -t h ir d s o f
the o u tsta n d in g ca p ita l sto ck or at least tw o -th ir d s of th e m em b er s in a m e e tin g
called for th e p u r p o s e . A t su ch m eetin g , th er e m u st b e fu ll d isclo su r e o f th e a d v er se
in terest o f th e d ir e cto r s or tr u stees in v olv ed an d p ro of th a t th e co n tr a ct is fa ir a n d
.
reason able u n d e r th e cir cu m sta n ces.
•
i r‘
V
Con tracts Betw een Corp oration s w ith In terlock in g D irectors
Se ct io n 32 p r o v id es th a t excep t in ca ses of frau d , an d p r o v id ed th e co n tr a ct
is fair a n d r e a so n a b le u n d er th e cir cu m sta n ces, a co n tra ct b e tw e e n tw o o r m o r e
cor p or atio n s h a v in g in ter lo ck in g d ir ecto r s sh all n ot b e in v a lid a ted o n th a t g r o u n d
alone. If th e in te r e st o f th e in ter lo ck in g d irector in on e co rp o ra tio n is su b s ta n tia l a n d
th e in ter est in th e o th e r co rp o ra tio n or co rp o ration s is m er ely n o m in a l, th e co n t r a ct
sh all b e s u b je ct to th e p r o v isio n s of Sectio n 31 in so fa r as th e la tter co r p o r a tio n or
cor p or atio n s a r e co n cer n ed . Fo r p u r p o ses of in ter lo ck in g d ir ecto r sh ip , s to ck h o ld in g
exceed in g 20% o f th e o u tsta n d in g cap ital stock sh a ll b e co n sid er ed su b sta n tia l.
D isloyalty of a D irector
Se ctio n 33 p r o v id es th a t if a d irector, b y v ir tu e of h is office, a cq u ir es a b u sin e ss
op p o rtu n ity w h ich sh o u ld b elo n g to th e co rp or a tion , a n d o b ta in ed p r o fits to th e
latter's p r eju d ice, sa id d ir e cto r m u st a cco u n t for an d r efu n d to th e co r p o r a tio n all
su ch p r ofits u n le ss th e a ct h a s b e e n ra tified b y a v ote of th e sto ck h o ld er s o w n in g
or r ep r esen tin g at lea st tw o -th ir d s of th e o u tsta n d in g cap ita l stock . Th is r u le w ill
ap p ly ev en if th e d ir e cto r r isk ed h is o w n fu n d s in th e v en tu re.
i
t
A s p r o v id ed u n d er Se ctio n s 31 to 33, th er e are sp ecia l r u les on co n tra cts en ter ed
into by d ir ecto r s/ tr u stees or o fficer s. N ote th a t Sectio n s 32 an d 33 ap p ly o n ly to
stock co rp o ra tio n s.
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Con tracts en tered in to by th e corp ora tion w ith on e or m ore of its ow n d irectors/
tru stees, or officers (also r eferr ed to as con tra cts o f self-d ea lin g d irectors) are
void able, u n less:
•
th e p resen ce o f su ch d irector / tru stee in th e b o a r d m eetin g ap p rov in g the
con tract w as n ot n ecessa r y to co n stitu te a q u or u m for su ch m eetin g ;
•
th e vote of su ch d irector / tru stee in th e b o a r d m eetin g a p p ro v in g th e contract
w as n ot n ecessa r y for th e ap p rov al of th e con tract;
•
th e co n tract is fair an d r ea so n a b le u n d er th e cir cu m sta n ces; an d
•
in th e ca se of a n officer, th er e w as p r ev iou s a u th o r iz a tio n b y th e board of
d irectors;
•
in th e ca se of a co rp or atio n v ested w ith p u b lic in terest, m a ter ia l con tracts or
related p a r ty tr a n sa ctio n s in v o lv in g a self-d ea lin g d ir ecto r m u st b e ap p roved
by at lea st tw o -th ir d s of th e en tir e m em bersh ip of th e b o a r d , w ith at least a
m ajor ity of th e in d ep en d en t d irecto rs v otin g to ap p rov e th e m a ter ia l con tracts
or related p a r ty tr an sa ctio n s.
A lth o u g h n ot all said co n d ition s are p resen t, th e cor p or a tion m ay op t n ot to
a ssa il th e v a lid ity of th e con tract, w ith ou t p reju d ice, to th e lia b ility o f th e d irector/
tr u stee for d am ag es u n d er Sectio n 31. .If an y of th e fir st tw o co n d itio n s is absent,
th e said con tract m u st b e r a tified b y th e v ote of th e sto ck h o ld er s r ep r esen tin g at
least tw o -th ir d s of th e o u tsta n d in g cap ital sto ck or tw o -th ir d s of th e m em b er s in a
1m eetin g ca lled
for th e p u rp o se, p rov id ed th at fu ll d isclo su r e o f th e ad v erse in terest
of th e d irector/ tru stee in volved is m ad e at su ch m eetin g .
Th e in terest of a n in ter lo ck in g d ir ecto r in on e co rp o ra tio n m ay b e either
su b sta n tia l o r n om in a l. It is n o m in a l if h is in ter est d oes n o t exceed 20% of the
ou tstan d in g cap ita l stock . O n th e oth er h an d , th e in ter est of a n in ter lo ck in g d irector
is su b sta n tia l if h is in ter est exceed s 20% of th e o u tsta n d in g ca p ita l stock .
A n in ter lo ck in g d ir ecto r is a p er so n w h o serv es a s a m em b er of th e b oa rd of
d irectors of tw o or m or e co rp o ra tio n s d oin g b u sin ess tog eth er. If th e in terlockin g
d irector's in terest in on e cor p or a tion is n o m in a l an d su b sta n tia l in th e oth er, then
all th e con d ition s p r escr ib ed in Sectio n 31 on self-d ea lin g d ir ecto r s m u st b e p resent
w ith resp ect to th e co rp o ra tio n in w h ich h e h a s a n o m in a l in ter est. O n th e other
h an d , if th e in ter lock in g d ir ecto r 's in ter ests in eith er co rp o ra tio n a r e b o th su bstan tial
or b oth n om in al, th en Sectio n 32 ap p lies.
U n d er Section 32, con tr a cts en ter ed in to b e tw e e n co rp o ra tio n s w ith in terlockin g
d ir ecto r s are valid , p ro v id ed th at th e co n tra ct is n ot fr au d u len t an d is fa ir and
reason able u n d er th e cir cu m sta n ces. Th e RCC sa n ctio n s a co n tr a ct b etw een tw o or
m ore corp oration s th at h av e in ter lo ck in g d ir ecto r s, p r o v id ed th er e is n o frau d that
atten d s it, an d it is fa ir an d r ea so n a b le u n d er th e cir cu m sta n ces.
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Section 33 of th e RCC p rovid es th at u n less his act is ratified, a d irector sh all
r e f u n d to th e corp oration all th e p rofits h e realizes on a b u sin ess op p ortu n ity, w h ich
the corp oration is fin an cially able to u n d ertak e in lin e w ith its b u sin ess an d of
practical ad van tage to it an d to w h ich it h as an in terest or a reason ab le exp ectan cy.
This rule ap p lies even th ou gh th e d irector risked h is ow n fu n d s in th e ven tu re. Th is
rule is also k n ow n as th e d octrin e of corp orate op p ortu n ity.
Execu tive M a n a g e m e n t an d O th er Sp ecial C om m ittees
The Execu tive Com m ittee is a b od y created b y th e b ylaw s an d com p osed of n ot
less th an th ree m em b ers of th e b oard of d irectors w h o are ap p oin ted b y th e b oard .
It has all th e au th ority of th e b oard to the exten t p rovid ed in th e b oard resolu tion
or bylaws an d acts b y a m ajority vote of all of its m em b ers. It can n ot, h ow ever,
act on: (1) m atters req u irin g stock h old er ap p roval; (2) filling up of vacan cies in th e
board; (3) am en d m en t, rep eal, or ad op tion of bylaws; (4) am en d m en t or rep eal of an y
resolution of th e b oard w h ich by its exp ress term s is not am en d ab le or rep ealab le;
and (5) cash d ivid en d d istrib u tion .
Un d er Section 34 of th e RCC, the b oard of d irectors m ay create sp ecial
tem p orary or p erm an en t com m ittees and d eterm in e th e com m ittee m em b ers'
terms, com p osition , com p en sation , powers, and responsibilities.
The p ow er of th e b p ard of d irectors/tru stees is subject to lim itation s im p osed
by the Con stitu tion , statu tes, articles of in corporation, or bylaws. Th e b oard can n ot
perform con stitu en t acts or th ose involving fu n d am en tal ch an ges in th e corp oration
that req u ire th e ap p roval of stock hold ers or m embers. M ore im p ortan tly, th ey
cannot exercise p ow ers n ot p ossessed b y th e corp oration . The Su p rem e C o u r t
in one case, em p h asized th at a corp oration can on ly exercise its p ow ers an d can
tran sact its b u sin ess th rou gh its b oard of d irectors an d its officers an d agen ts w h en J
au thorized b y a b oard resolu tion or b y its bylaws?.56 In an oth er case, th e Su p rem e
Court recogn ized th at th e b oard of d irectors exercises th e p ow er of a corp oration
to sue an d b e su ed . It stressed th at th e corp oration 's p hysical acts, su ch as sign in g
d ocuments, can b e p erform ed on ly by n atu ral p erson s w h o are d u ly au th orized for
the p u rp ose eith er b y th e corp orate bylaws or b y a sp ecific act of th e b oard .57
In an oth er case, th e Su p rem e Cou rt stressed th at th e p ow er to issu e stock s is
vested w ith th e b oard of d irectors, an d th ere isjno n eed for a stock h old ers' m eetin g
to approve th e sam e. The ad dition al issu an ce of stock, u n lik e an in crease in cap ital
stock, d oes n ot n eed th e ap p roval of th e stock hold ers. Wh at is on ly req u ired is
56 S p ou ses Fir m e vs. Bu k al En te rp rise s an d D e v elo p m en t C o rp o ra tio n , G .R. N o . 146608, O cto b e r 23, 2003.
57Es g u e r ra v s. H o lcim P h ilip p in es, In c., G .R. N o . 182571, S ep tem b er 2, 2013.
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th e b oa rd resolu tion ap p rov in g th e ad d ition al issu an ce of sh a r es.5859In a n o th er case,
it h eld th a t th e p ow ers to in cr ea se ca p ita liza tion and to offer or g iv e collateral to
se cu r e in d eb ted n ess are also lod ged w ith th e corp ora tion 's board of d irectors;
b u t th is d o es n ot m ean th at th e o fficers of th e corp oration oth er th an th e board of
d ir e cto r s ca n n o t be m ad e cr im in a lly liable for th eir cr im in a l acts if it can be proven
th a t th ey p a rticip a ted th er ein .w
Th e co r p o fa te p ow ers of th e corp oration sh all be exer cised , all bu sin ess
co n d u cted , an d all p r op er ty of su ch corp oration con trolled an d held b y th e board of
d ir e cto r s or tr u stees excep t w h ere th ere is an execu tiv e co m m ittee d u ly au th orized
in th e by law s, or w h er e th er e is a m an agem en t co n tra ct en tered in to u n d er Section
43, an d in ca se of clo se corp oration s, w h ere th e sto ck h old er s m ay m a n a g e the
b u sin e ss o f th e cor p or atio n if th e a rticles o f in corp oration so p rov id e.
Th e b u sin e ss ju d g m en t ru le p rovid es th at resolu tion s an d tr a n sa ctio n s entered
in to b y th e Board w ith th e p ow ers of th e corp oration ca n n o t be reversed b y th e cou rts;
m o r e im p o r ta n tly , d ir ecto r s and officers actin g w ith in su ch b u sin e ss ju d g m en t
ca n n o t b e h eld p er so n a lly liable for su ch acts. Sin ce th ey exer cise th e corp orate
p o w er s an d co n d u ct all corp orate bu sin ess, th ey are exp ected to p er fo r m d u ties as
p r e scr ib e d b y th e co rp oration 's bylaw s, in clu d in g m a k in g d ecisio n s a s r eg a r d s the
in te r n a l a ffa ir s o f th e corp oration . Th e cou rt m ay in ter fer e on ly w h en it is ap p aren t
th a t tr a n sa ctio n s en tered in to by th em are so u n con scion a ble an d o p p r essiv e as to
a m o u n t to w a n to n d estru ctio n of rig h ts of th e m in or ity stock h o ld ers.
To illu strate: Leo, Sh irley, Jad e, Grace, an d Cla u d in e are a ll d u ly elected
m e m b e r s o f th e Boa rd o f D irector s of Ju n jae Corp oration . C h lo e is th e gen eral
m a n a g er . Sh e en ter ed in to a su p p ly con tract w ith an A m er ica n fir m , w h ich con tract
w a s d u ly ap p rov ed b y th e boa rd of d irectors. H ow ever, w ith th e k n o w led g e and
co n se n t o f Ch lo e, n o d eliv er ies w ere m ad e to th e A m erica n fir m . A s a r esu lt o f the
n o n -d eliv er y o f th e p r o m ised su p p lies, th e A m erican fir m in cu r r ed d a m a g es. The
A m e r ica n fir m w ou ld lik e to file a suit, for d am a g es.60 In th is case:
A.
Th e A m er ica n fir m ca n n o t su e th e m em ber s of th e b o a r d of d irectors
in d iv id u a lly for h a v in g ap p rov ed th e tra n sa ctio n . In a p p ro v in g th e tra n saction ,
th e d ir ecto r s w er e n ot a ctin g th eir p er son al ca p a cities b u t r a th er on b e h a lf of
Ju n ja e C or p o r atio n exer cisin g th e p ow ers of th e corp oration an d co n d u ctin g its
b u sin ess.
B.
Th e A m er ica n fir m ca n su e th e corp oration . Th e b oa rd ap p rov ed th e su p p ly
co n tr a ct an d th e G en er al M an ag er en tered in to th e con tract, b o th of them
a ctin g on b e h a lf o f th e Ju n jae Corp oration .
58M ajority of S tock h old ers of Ru b y In d u strial C o rp o ratio n vs. Lim , G .R. N o. 165887, Ju n e 6, 2011.
59Sin gian , Jr. vs. S an d igan b ayan , et al., G .R. N os. 160577-94, D ecem b er 16, 2005.
60 Bar q u estion , 2012.
,
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C,
The Am erican firm can sue Chloe, th e gen eral m an ager, p erson ally, b ecau se
the n on -d elivery w as with h er k nowledge an d con sen t. Ch loe can be su ed in
her p erson al cap acity b ecau se she k n owin gly con sen ted to th e n on d elivery of
the p rom ised su p plies con trary to the con tract th at w as d uly ap p roved b y th e
board of d irectors. N ote that the illustration does n ot in d icate an y circu m stan ce
that would excu se or favorably exp lain the action of Chloe.
Lesson 2.2: Pow ers of Corp oration s
Corp oration s h ave th e following powers:
•
exp ress p ow ers which are gran ted by law, the RCC, and its Articles of
In corp oration or Ch arter;
•
in h eren t or in cid en tal p ow ers which are n ot exp ressly stated b u t are d eem ed to
be w ith in th e cap acity of corp orate entities; and
•
implied or n ecessary p ow ers which exist as a n ecessary con seq u en ce of th e
exercise of th e exp ress p ow ers of the corp oration , or the p u rsu it of its p u rp o ses
as p rovid ed for in th e Ch arter.
Corp orate P o w ers an d Cap acities
Un d er Section 35 every corp oration in corp orated u n d er th e RCC h as th e p ow er
and cap acity:
•
to su e-an d b e su ed in its corp orate n ame;
•
to h ave p erp etu al existen ce unless the certificate of in corp oration p rovid es
oth erw ise;
•
to ad op t an d u se a corp orate seal?
•
to am en d its articles of in corp oration in accord an ce w ith th e p rovision s of th e
RCC;
.
•
to ad op t b ylaw s, n ot con trary to law, m orals or pub lic policy, an d to am en d or
rep eal th e sam e in accord an ce w ith the RCC;
•
in case of stock corp oration s,
issu e Ot sell stock s to su b scrib ers an d fo sell
treasu ry stock y in a cco r d a n t w ith th e p rovision srof th e RCC; an d to ad fttit
gn embers to th e corp oration if it is a n on stock corp oration ?
•
to p u rch ase, receive, tak e or gran t; Mold; convey, sell, lease; p led ge, m o rtg a g e
and oth erw ise d eal w ith su ch real an d p erson al p rop erty in clu d in g secu rities
and b on d s of oth er corp oration s, as th e tran saction of th e law fu l b u sin ess of th e
corp oration m ay reason ab ly an d n ecessarily req u ire, su b ject to th e lim itation s
p rescrib ed by law an d th e con stitu tion;
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•
to en ter in to a p artn ersh ip , join t ven tu re, m erger, con solid ation , or any other
com m ercial agreem en t w ith n atu ral an d ju rid ical p erson s;
•
to m ak e reason ab le d on ation s, in clu d in g th ose for th e pub lic w elfare or for
h ospital, charitab le, cu ltu ral, scientific, civic, or sim ilar p u rp oses. But no foreign
corp oration shall give d on ation s in aid of an y p olitical p arty or can d id ate or for
p u rp oses of p artisan p olitical activity;
•
to estab lish p en sion , retirem en t, an d oth er p lan s for th e b en efit of its directors,
tru stees, officers, an d emp loyees; an d
•
to exercise su ch oth er p ow ers as m ay b e essen tial or n ecessary to carry ou t its
p u rp ose or p u rp oses as stated in th e articles of in corp oration .
P o w er to Exten d or Sh orten Corp orate Term
Section 36 p rovid es th at a p rivate corp oration m ay exten d or sh orten its term as
§tated in th e articles of in corp oration wh en ap proved by a m ajority vote of th e board
of d irectors or tru stees, an d ratified at a m eetin g b y the stock h old ers or member*
rep resen tin g at least tw o-th ird s of the ou tstan d in g capital stock or its members
Written n otice of th e p rop osed action an d the time an d p lace of the m eetin g shall be
sen t to th e stock h old ers or m em b ers at th eir resp ective place of resid en ce as shown
in th e b ook s of th e corp oration . It m u st be deposited to th e ad d ressee in th e post
office w ith p ostage p rep aid . It m ay also be served p erson ally, or w h en allowed
in th e b ylaw s or d on e w ith the con sent of the stockholder; sen t electron ically in
accord an ce w ith th e ru les an d regu lation s of the SEC on th e u se of electron ic data
m essages. In case of .extension of th e corp orate term , a d issen tin g stock h old er may
exercise h is righ t of ap p raisal. The corp orate p ow er to exten d or sh orten corporate
term m ay be u sed as a m ean s to volu n tarily dissolve a corp oration .
/
P o w er to In crease or D ecrease Cap ital Stock ; In cu r, C reate, or In crease
Bon d ed In d eb ted n ess
N o corp oration shall in crease or d ecrease its cap ital Stock or in cu r, create or
in crease an y b on d ed in d eb ted n ess u nless ap p roved b y a m ajority vote of th e board
of d irectors an d b y tw o-th ird s of the ou tstan d in g cap ital stock at a stockholders'
m eetin g duly called for the p u rp ose. Written n otice of th e tim e an d p lace of the
stock h old ers' m eetin g an d th e p u rp ose for th e said m eetin g m u st b e sent to the
stock h old ers at th eir places of residen ce as sh ow n in th e b ook s of th e corporation,
served on th e stock hold ers person ally, or th rou gh electron ic m ean s recognized
in th e corp oration 's bylaws an d /or the SEC's ru les as a valid m od e for service of
n otices. A certificate m u st b e sign ed by a m ajority of th e d irectors of the corporation
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and cou n tersign ed by th e ch airp erson and secretary of th e stock h old ers' m eetin g,
setting forth:
•
that th e req u irem en ts of Section 37 h ave b een com p lied w ith ;
•
the am ou n t of th e in crease or d ecrease of th e cap ital stock ;
•
in case of an i n crease of th e cap ital stock , the am ou n t of cap ital stock or n u m b er
of sh ares of n o-p ar stock th ereof actu ally su b scrib ed , th e n am es n ation alities,
and ad d resses of the p erson s sub scrib ing, the am ou n t of cap ital stock or
number of n o-p ar stock su b scrib ed, the n am es, n ation alities an d ad d resses
of the p erson s su b scrib in g, th e am ou n t of capital stock or n u m b er of n o-p ar
stock su b scrib ed by each , and the am ou n t paid by each on th e su b scrip tion in
cash or p rop erty, or th e am ou n t of capital stock or n u m b er of sh ares of n o-p ar
stock allotted to each stock h old er if such in crease is for th e p u rp ose of m ak in g
effective stock d ivid en d therefor au th orized ;
•
any b on d ed in d eb ted n ess to be in cu rred , created , or in creased ;
•
the am ou n t of stock rep resen ted at the m eetin g; and
•
the vote au th orizin g th e in crease or d ecrease of cap ital stock , or in cu rrin g,
creatin g, or in creasin g of bonded indebtedness.
An y in crease or d ecrease in th e capital stock or th e in cu rrin g, creatin g , or
increasing of an y b on d ed ind eb ted n ess shall req u ire p rior ap p roval of th e SEG
and w h ere ap p rop riate, of th e Philippine Com p etition Com m ission (PCC). Th e
application w ith th e SEC sh all b e m ad e w ith in six m on th s from th e d ate of ap p rov al
of the b oard of d irectors an d stock hold ers, w h ich p eriod m ay b e exten d ed for
justifiable reason ’s. Cop ies of th e certificate shall be k ep t on file in th e office of
the corp oration an d filed w ith th e SEC and attach ed to, th e origin al articles of
incorporation. Th e SEC shall n ot accep t for filing an y certificate of in crease of cap ital
stock u n less accom p an ied b y a sw orn statem ent of th e treasu rer of th e corp oration
lawfully h old in g office at th e tim e of the filing of th e certificate, sh ow in g th at
at least 25% of th e in crease in cap ital stock h as b een su b scrib ed an d th at at least
25% of th e am ou n t su b scrib ed h as b een p aid in actu al cash to th e corp oration or
that p rop erty, th e valu ation of w h ich is eq ual to 25% of th e su b scrip tion , h as b een
transferred to th e corp oration . N o d ecrease in cap ital stock sh all b e ap p roved b y
the SEC if its effect sh all p reju d ice th e righ ts of corp orate cred itors./
N on stock corp oration s m ay incu r, create or in crease b on d ed in d eb ted n ess
when approved b y a m ajority of th e b oard of tru stees an d of at least tw o-th ird s of th e
members in a m eetin g d u ly called for the p u rp ose. Bon d s issu ed by a corp oration
shall be registered w ith th e SEC, w h ich shall h ave th e au th ority to d eterm in e th e
sufficiency of its term s.61 '
61 Section 37, R CC .
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A corp oration has the specific p ow er to in crease or d ecrease corp orate stock
by:
•
in creasing or d ecreasin g the n um ber of sh ares an d retain in g th e p ar value;
•
in creasin g or d ecreasin g the p ar value of existin g sh ares w ith ou t in creasin g or
d ecreasin g the n um ber of shares; and
•
in creasin g or d ecreasin g the n um ber of sh ares an d in creasin g or decreasing
the p ar value.
The corp oration also has the specific p ow er to in cur, create, or in crease bonded
ind eb ted n ess th rou gh loans mad e by the stock hold ers to th e corp oration an d loans
from th ird p ersons.
>
Und en Section 38, all Stockholders of a stock corp oration Shall en joy preemptive
righ t to su b scrib e to all issues or disposition of sh ares ©f an y class, in proportion
to th eir resp ective shareholdings, Unless such right is d en ied b y th e articles of
in corp oration or an amen dmen t thereto. The preemp tive righ t sh all n ot exten d : (1) to
sh ares issued in compliance with laws req uiring stock offerings or m in im u m stock
own ership by th e public; or (2) to shares issued in good faith w ith th e ap p roval of the
stockh old ers representin g tw o-th ird s of the ou tstan d in g capital stock in exchange
for p rop erty n eeded for corporate p urposes or in p aym en t of p reviou sly contracted
debt.
Subject to the provisions of Republic Act No. 10667 (Philipp in e Competition
Act) and oth er related laws, a corporation may, b y a m ajority vote of its b oard of
d irectors or tru stees, sell, leafee, exchange, mortgage, pledge, or oth erw ise d isp ose of
its p rop erty and assets, upon such terms and conditions and for su ch consideration,
w h ich m ay be money, stock, bonds, or other in stru m en ts for th e p aym en t of money
or oth er p rop erty or consideration, as its b oard of d irectors or tru stees m ay deem
exp ed ien t
A sale of all or substantially all of the corporation 's p rop erties an d assets,
including its good w ill m u st be authorized by th e vote of stock h old ers representing
at least tw o-th ird s of the ou tstan d in g capital stock, or at least tw o-th ird s of the
members, m eetin g d uly called for th e p u rp ose.
In n on stock corporation s where th ere are no m em b ers w ith votin g rights, the
vote of at least a major ity<of th e tru stees in office w ill b e sufficient au th orization for
the corp oration to enter into an y tran saction au th orized b y Section 39.
Th e d eterm in ation of wh eth er or not th e sale involves all or substantially
all of the corporation's prop erties and assets,, m u st b e com p u ted b ased on its net
asset value, as shown in its latest financial statements. A .sale or oth er disposition
shall be d eem ed to cover sub stan tially all the corp orate p rop erty an d assets tf
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-thereby the corp oration wou ld be rendered in cap ab le of con tin u in g th e b u sin ess
or accomp lishin g th e p u rp ose of which it w as in corp orated . Written n otice of th e
proposed action an d of th e tim e and place for the m eetin g shall be ad d ressed to
stockholders or m em b ers at th eir places of residence as sh ow n in th e b ook s of th e
corporation an d d ep osited to the ad d ressee in the p ost office w ith p ostage p rep aid ,
served p erson ally, or w h en allowed by the bylaws or done w ith the con sen t of
the stockholder, sen t electron ically: Provided, that an y d issen tin g stock h old er m ay
exercise the right of ap p raisal u n d er the con dition s p rovid ed in th e RCC.
After su ch au th orization or approval by the stock h old ers or m em b ers, th e
board of d irectors or tru stees may, nevertheless, in its d iscretion , ab an d on su ch
sale, lease, exch an ge, m ortgage, pledge, or oth er disposition of p rop erty an d assets,
subject to th e righ ts of th ird p arties u nd er any con tract relatin g th ereto, w ith ou t
further action or ap p roval by the stockholders or mem bers.
N oth in g in Section 39 is intended to restrict the p ow er of an y corp oration ,
without th e au th orization by the stockholders or members, to sell, lease, exch an ge,
mortgage, p led ge, or oth erw ise d isp ose of any of its p rop erty and assets if th e sam e
is n ecessary for th e u su al an d regu lar cou rse of b usiness of th e corp oration or if
the p roceed s of th e sale or oth er disposition of such p rop erty an d assets sh all b e
appropriated for th e con d u ct of its'rem ain in g business.62
The corp oration h as th e specific power to sell, d isp ose, lease, an d en cu m b er
all or su b stan tially all of corp orate assets. There is no ratificatory vote is n eed ed if
it is n ecessary for th e u su al and regu lar cou rse of business an d if th e p roceed s of
the sale or oth er d isp osition of such p rop erty and assets b e ap p rop riated for th e
conduct oh th e/rem ain in g business. But if an asset con stitu tes th e on ly p rop erty of
the corp oration , its sale to a th ird p arty is a sale or d isp osition of all th e corp orate
property an d assets of said corp oration falling squ arely w ith in th e con tem p lation of
Section 39 of th e RCC.63 For th e sale to be valid, th e m ajority vote of th e legitim ate
board of d irectors or tru stees, con cu rred in by the vote of at least tw o-th ird s of th e
stockholders or bona fide m em b ers is needed. ’
\
•
\
Power to A cq u ire O w n Sh ares
Provid ed th at th e corp oration h as u n restricted retain ed earn in gs in its b ook s
to cover th e sh ares to be p u rch ased or acq u ired , a stock corp oration sh all h ave
the power to p u rch ased or acq u ired , a stock corp oration sh all h ave th e p ow er to
purchase or acq u ire its ow n sh ares for a legitim ate corp orate p u rp ose or p u rp oses,
w Section 39, RCC.
Islam ic D irectorate of th e Ph ilip p in es, M an u el F. Perea an d Secu rities & Exch an ge Com m ission vs. C ou rt
of Appeals an d Iglesia N i Cristo, G .R. N o. 117897, May 14,1997.
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in clu d in g th e follow in g cases: (a) to elim in ate fraction al sh ares arisin g out of stock
d ivid en d s; (b) to collect or com p rom ise an in d eb ted n ess to the corp oration , arising
ou t of u n p aid su b scrip tion , in a d elin q u en cy sale, an d to p u rch ase d elinq uent shares
sold d u rin g th e said sale; an d (c) to p ay d issen tin g or w ith d raw in g stockholders
en titled to p aym en t for th eir sh ares u n d er the p rovision s of th e RCC.64
The corp oration h as th e sp ecific p ow er to p u rch ase or acq u ire ow n shares
p rovid ed th ere is an u n restricted retain ed earn in gs an d it is for a legitim ate purpose
su ch as: (1) to elim in ate fraction al sh ares out of stock d ivid en d s; (2) to collect or
com p rom ise an in d eb ted n ess to th e corp orati6n , arisin g out of u n p aid subscription,
in a d elin q u en cy sale an d to p u rch ase delin quen t sh ares sold d u rin g th e said sale;
(3) to p ay d issen tin g stock h old ers; (4) to acq u ire treasu ry sh ares; (5) to red eem shares
regard less of th e existen ce of retain ed earn in gs; (6) to effect a d ecrease of capital
stock ; an d (7) w h en th ere is a d ead lock in the m an agem en t of th e b u sin ess, in close
corp oration s. N ote th at in n u m b ers (1) to (3), th ere m u st be u n restricted retained
earn in gs.
P o w er to In vest Corp orate Fu n d s in An oth er Corp oration or Bu sin ess
or fo r A n y O th er Pu rp ose
0
Sub ject to th e p rovision s of th e RCC, a p rivate corp oratioru m ay in vest its funds
in an y oth er corp oration ^ b usiness, or for any p u rp ose oth er th an th e p rim ary
p u rp ose for w h ich it w as organ ized , wh en ap proved by a m ajority of th e b oard of
d irectors or tru stees an d ratified b y the stockh old ers rep resen tin g at least tw o-th ird s
of th e ou tstan d in g cap ital stock , or b y at least tw o-th ird s of th e ou tstan d in g capital
stock , or b y at least tw o-th ird s of the m em bers in th e case of n on stock corporation s
at a m eetin g d u ly called for the p u rp ose. Notice of the p rop osed in vestm en t an d the
tim e p lace of resid en ce as sh ow n in th e b ooks of the corp oration an d d ep osited to
th e ad d ressee in th e p ost office w ith th e p ostage p rep aid , served p erson ally, or sent
electron ically in accord an ce w ith th e ru les an d regu lation s of th e SEC on th e use
of electron ic d ata m essage, w h en allow ed b y th e b ylaws or d on e w ith th e consent
of th e stock h old ers: Provided, th at an y d issen tin g stock h old er shall h ave appraisal
righ t as p rovid ed in th e RCC: Provided, however, th at w h ere th e in vestm en t by the
corp oration is reason ab ly n ecessary to accom p lish its p rim ary p u rp ose as stated in
th e articles of in corp oration , th e ap p roval of th e stock h old ers or m em b ers shall not
b e n ecessary.65
The corp oration h as th e p ow er to in vest its corp orate fu n d s in another
corp oration or b u sin ess for oth er p u rp oses oth er th an p rim ary p u rp ose—but
th e oth er p u rp oses for w h ich the fu n d s m ay b e in vested m u st be am on g those
64S ectio n 40, R CC .
65 S ection 41, R CC .
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enumerated as secon d ary p u rp oses an d mu st fu rth er comply w ith th e req u irem en ts
of Section 41.
To illu strate: Pom p om Corporation 's p rim ary p u rp ose is to m an u factu re ch eer
dance costu mes, b u t it w ish es to invest in stocks of Cream o Corp oration , w h ich
is engaged in th e m an u factu re of d airy prod ucts. The articles of in corp oration of
pompom Corp oration d o n ot exp ressly gran t it the p ow er to b u y stocks of oth er
corporations b u t m ore th an tw o-th ird s of th e stockholders of Pom p om Corp oration
approved the in vestm en t in Cream o Corporation. In th is case, the ap p roval m ad e by
the stockholders is n ot su fficient to mak e the investment proper. Such in vestm ent in
Creamo Corp oration is ultr&vires act b ecau se it is not related to th e p rim ary p u rp ose
of Pompom Corp oration . If Pom p om Corporation wishes to in vest in Cream o
Corporation, Pom p om Corp oration should first amend its articles of in corp oration
to include th e p ow er to b u y stock s of other corporation s and then get the ap p roval
of two-thirds of its stock h old ers.
/
Power to D eclare D ivid en d s
The b oard of d irectors of a stock corporation m ay.d eclare d ivid end s ou t of th e
unrestricted retain ed earn in gs which shall be payable in cash, p rop erty, or stock
to all stock h old ers b ased on outstan ding stock held by them. An y cash d ivid en d s
due on d elin q u en t stock shall be first be applied to the u n p aid b alan ce on th e
subscription p lu s costs an d expenses. No stock dividend shall be issu ed w ith ou t th e
approval of stock h old ers rep resen tin g at least two-third s of the ou tstan d in g cap ital
stock at a regu lar or sp ecial m eetin g duly called for the p u rp ose. Stock corp oration s
are prohibited from restrain in g surplus profits in excess of 100% of th eir p aid -in
capital stock, excep t: (a) w h en justified by the definite corp orate exp an sion p rojects
or p rograms ap p roved b y the b oard of directors; or (b) w h en th e corp oration is
prohibited u n d er an y loan agreement with financial in stitution s or cred itors,
whether local or foreign , from d eclarin g dividends without th eir con sen t, an d su ch
consent h as n ot yet b een secu red ; or (c) wh en it can be clearly sh ow n th at su ch
retention is n ecessary u n d er sp ecial circu m stan ces obtain in g in the corp oration ,
such as w h en th ere is n eed for special reserve for probable con tin gen cies.66
The corp oration h as th e specific power to d eclare dividends ou t of u n restricted
retained earn in gs. D ivid en d s are corp orate profits set aside, d eclared , and ord ered
to be paid b y th e d irectors for distribution amon g shareholders at a fixed time,
and can tak e th e form of cash , prop erty, or stock dividend. Wh ile cash d ivid end s
due on delinquent sh ares can be applied to the p aym en t of th e u n p aid b alan ce,
stock dividends can n ot b e applied as p aym en t for u np aid subscription. The righ t to
66Section 42, R C C .
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d iv id en d s is b a sed on d u ly reco rd ed sto ck h o ld in g s; accord in g ly, th e corp oration is
p r oh ib ited fr om en titlin g th ereto an y on e else. For th e d ecla r a tio n an d / or issu ance
of a sto ck d iv id en d to b e v alid , th e d iv id en d d ecla r a tio n m u st b e m ad e b y th e board
an d ap p rov ed b y tw o -th ir d s of th e ow n ers of o u tsta n d in g ca p ital stock . Th e issu ance
m ay b e to in cr ea se th e a u th or iz ed cap ital stock ; h ow ever, as lon g as a corp ora tion has
su fficien t u n issu ed sh a res, it m ay d ecla re stock d iv id en d s ev en w ith o u t increasing
th e a u th o r iz ed cap ital sto ck . In b o th cases, h ow ever, th er e sh ou ld b e u n restricted
r eta in ed ea r n in g s.
Sto ck co rp o ra tio n s are p roh ibited from r eta in in g su r p lu s p r o fits in excess of
100% of t h eir p aid -in cap ital stock , excep t:
•
w h en ju stified by d efin ite corp orate exp a n sion p r o jects a p p rov ed by th e board
of d ir ecto r s;
•
w h en th e co rp o ra tio n is p roh ibited u n d er an y loan a g r eem en t w ith a n y financial
in stitu tio n or cred ito r from d ecla r in g d iv id en d s w ith o u t its/ h is co n sen t and
su ch co n sen t h a s n o t y et been secu red ; or
•
w h en it ca n b e clearly sh ow n th at su ch reten tio n is n e ce ssa r y u n d er special
cir cu m sta n ces o b ta in in g in th e corp oration , su ch as w h en th er e is a n eed for
sp ecia l r eser v e for p robable con tin g en cies.
✓
D iv id en d s ca n on ly b e d eclar ed an d p aid ou t of a ctu a l an d b o n a fid e u n restricted
r e ta in e d e a r n in g s, excep t:
•
if a co r p o r a tio n sold its real p rop erty, w h ich is n ot b ein g u sed for b u sin ess, at a
g a in , th e in co m e d eriv ed th er efro m m ay b e av ailed of for d iv id en d d istribu tion ;
•
in cr e a se in th e v alu e of fixed a ssets as a resu lt of r ev a lu a tio n ("revalu ation
su r p lu s") w h ich m ay b e d ecla red as ca sh or sto ck d iv id en d s p r o v id ed that
th e co m p a n y : (1) h a s su fficien t in co m e fr o m o p er a tio n s fr o m w h ich the
d ep r ecia tio n on th e a p p ra isa l in cr ea se w a s ch a r g ed ; (2) h a s n o d eficit at the
tim e th e d ep r ecia tio n on th e ap p ra isa l in cr ea se w a s ch a r g ed to o p er a tio n s; and
(3) su ch d ep r ecia tio n on a p p ra isa l in cr ea se p r ev io u sly ch a r g ed to op erations
h a s n ot b e e n im p a ir ed by losses;
•
d iv id en d s ca n b e d ecla r ed ou t o f th e a m o u n t receiv ed in excess o f th e p a r value
of sh a r es ("p a id -in su r p lu s") w h en : (1) th ey ar e d ecla r ed o n ly a s sto ck d ivid end s
an d n ot ca sh ; (2) n o cr ed ito r s a r e p r eju d iced , a n d (3) th er e is n o im p a ir m en t of
cap ital;
•
r ed u ctio n su r p lu s ca n b e a so u r ce of d iv id en d s a n d th e r u le on p a id -in surplus
is ap p licable; an d
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no d iv id en d s ca n b e d ecla r ed ou t o f ca p ital excep t on ly in tw o in sta n ce s:
liqu id atin g d iv id en d s an d d iv id en d s from in v estm en ts in a w a stin g a s se t
corp oration .
N ote th a t p r o fits r ea liz ed fr om th e sa le of tr ea su r y sh a r es are p a r t o f th e ca p ita l
and cannot be d ecla r ed as ca sh or sto ck d iv id en d as p u r ch a se an d sa le o f su ch sh a r e s
are regard ed as co n tr a ctio n s an d exp a n sio n s of p aid -in cap ital. M or eov er , co r p o r a te
earnings th a t h a v e n o t y et b een received ev en th ou g h th ey co n sist in m o n ey th a t is
due can n ot b e in clu d ed in th e p r ofits ou t of w h ich d iv id en d s m a y b e p aid . Fu r th er ,
the corp oration ca n n o t b o r r o w m on ey for th e d eclaration an d p a y m en t o f d iv id en d s
because d iv id en d s a r e to b e p aid on ly ou t of u n r estricted reta in ed e a r n in g s su b je ct
to the excep tio n s cited in th e p r eced in g p arag rap h .
The follow ing a r e th e d iffe r e n ce s b etw een a cash d ivid en d an d a sto ck d iv id en d :
Sto ck D ivid en d
Cash D ivid en d
Involves a d isb u r se m e n t to th e
stockhold ers o f a ccu m u la ted earn in g s.
D oes n ot in v olv e an y d isb u r se m e n t
to th e stock h old ers o f a ccu m u la ted
earn in gs.
When d ecla r ed a n d p a id b eco m es th e
absolute p r o p e r ty o f th e sto ck h old er
and can n ot b e r ea ch ed b y cred ito rs of
the co rp o ration in th e a b sen ce o f frau d .
W h en d eclared an d issu ed m a y b e
reach ed by co rp o rate cr ed ito r s sin ce it
is still p art of cor p or ate p rop erty .
Declared o n ly b y th e b o a r d o f d irectors
at its d iscretion d u r in g a regu lar/
special m eetin g .
D eclared by th e boar d o f d ir ecto r s, w ith
th e con cu rren ce of th e sto ck h o ld er s
rep resen tin g at lea st tw o -th ir d s o f th e
ou tstan d in g ca p ital sto ck at a r eg u la r /
sp ecial m eetin g.
Does n ot in cr ea se th e co r p o r a te cap ital.
In creases co rp o rate ca p ital.
Declaration o f ca sh d iv id en d creates a
debt from th e co r p o r a tio n to ea ch of its
stockhold ers.
N o d ebt is created b y d ecla r a tio n o f
stock d iv id en d .
The tr u st fu n d d o ctr in e p rov id es th a t su b scr ip tio n s to th e ca p ita l sto ck o f a
corporation co n stitu te a tr u st fu n d to w h ich th e cred itor s h av e a r ig h t to lo o k fo r
the satisfaction o f th e ir cla im s,67 an d w h ich th e co rp o ration m a y n o t d issip a te. Th e
creditors m a y su e th e sto ck h o ld er s d ir ectly for th e la tter's u n p a id su b scr ip tio n . Th e
trust fu n d d o ctr in e ap p lies:
•
w h ere th e co r p o r a tio n h a s d istr ib u ted its cap ital a m on g th e sto ck h o ld er s
w ith ou t p r o v id in g for th e p ay m en t o f cred itor s;
•
w h ere it h a d
su bscrip tion s;
r elea sed th e su b scr ib er s to th e ca p ita l sto ck fr o m
670 n g Yon g, e t al. vs. Tiu , e t al.,
G.R. N o.
144476
t
& G .R.
th e ir
N o. 144629, A p ril 8, 2003.
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•
w h ere it h as tran sferred the corp orate p rop erty in fraud of its creditors; or
•
w h ere the corp oration is insolvent.
l
If the corp oration is solvent, the tru st fund d octrin e exten d s to the capital stock
rep resen ted by the corp oration 's legal cap ital/’8 but if the corp oration is insolvent,
th e tru st fund d octrin e exten d s to the capital stock of the corp oration as well as all
of its p rop erty and assets. The tru st fund d octrin e does not apply in the redemption
of red eemab le sh ares and when there should be a deadlock, and the SEC orders the
p aym en t of the ap praised value of the stockholder's sh are in a close corporation.
Pow er to En ter in to M an agem en t Con tract
/
•
Section 43 p rovid es th at no corporation shall conclude a m an agem en t contract
w ith an oth er corp oration unless such con tract is approved by the b oard of directors
an d by th e stock hold ers own in g at least the majority of the ou tstan d in g capital
stock , or b y at least a majority of the members in the case of a n on stock corporation,
or b oth th e m an agin g and the managed corporation, at a m eetin g d u ly called for the
p u rp ose. The m an agem ent con tract must be approved by the stock hold ers'own in g
at least tw o-th ird s of the total outstanding capital stock entitled to vote, or by at least
tw o-th ird s of th e members in the case of a nonstock corporation :
•
w h ere a stockholder or stockholders represen tin g the sam e in terest of both
the m an agin g and the man aged corporations ow n or con trol m ore th an oneth ird of the total ou tstand ing capital stock entitled to vote of th e managing
corp oration ; or
•
w h ere a majority of the members of the b oard of d irectors of th e managing
corp oration also constitute a majority of the members of th e b oard of directors
of- th e m an aged corporation.
The p rovisions shall apply to any con tract whereby a corp oration u n d ertak es to
m an age or op erate all or substantially all of the called services con tracts, operating
agreem en ts, or oth erw ise. Such service con tracts or op eratin g agreem en ts which
relate to th e exploration, development exploitation, or u tilization of n atu ral resources
m ay be en tered into for such p eriod s as m ay be p rovid ed by th e p ertin en t laws or
regu lation s. No m an agem en t con tracts shall be en tered into for a p eriod longer than
five years for any one term.68
68Legal cap ital is th at am o u n t of a co m p a n y 's eq u ity th at can n o t b e d istrib u ted to sh areh o ld ers th rough a
d ivid en d o r an y oth er d istrib u tion . It refers to th e ag g reg ate a m o u n t of th e p ar v alu e of all th e sh ares th e corp oration
issu ed to its in vestors, an d w h ich m u st b e retain ed in th e b u sin ess for p rotection of th e co rp o ra te cred itors, (reference:
h ttp s: / / w w w .a cco u n tin g to o ls.co m / a r t icle s / w h a t-is-le g a l-ca p ita l.h tm l, h t t p s :/ / w w w .w a llstre e tm o jo .co m / legalca p i t a l /, h t t p s :/ /w itn e s s e th .ty p e p a d .co m /b lo g /le g a l-ca p ita l.h tm l, h t t p s :/ /fin an cial-d iction ary.th efreed iction ary'
co m /le g a l+ ca p ita l , all accessed on Ju n e 15, 2021).
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The corp oration 's sp ecific p ow er to enter into a m an agem en t con tract w ith
another corp oration w h ereb y one corp oration u n d ertak es to m an age all or
substantially all of th e b u sin ess of the oth er corp oration is only for a p eriod n ot
longer than five years for an y one term .
Ultra V i res A cts of th e Corp oration s
Under Section 44, n o corp oration shall p ossess or exercise corp orate p ow ers
other than th ose con ferred by th e RCC or by its articles of in corp oration an d excep t
as necessary or in cid en tal to th e exercise of th e p ow ers con ferred .
The Su p rem e Cou rt, in on e case, defined an ultra vires act as an act th at is
beyond the con ferred p ow ers of a corp oration or th e p u rp oses or objects for w h ich
it is created as d efin ed b y th e law of its organ ization .69 An ultra vires act m ay b e th at
of the corp oration , its Board of D irectors, or its corp orate officers.
To illu strate: O n Ju n e 1, 2020, AA obtained a loan of P100,000 from BB, p ayab le
not later th an 20 D ecem b er 2020. BB req uired AA to issue h im a ch eck for th at
amount to b e d ated 20 D ecem b er 2020. Since he does n ot h ave an y ch eck in g accou n t,
AA, with th e k n ow led ge of BB, req uested his friend, CC, Presid en t of SS Ban k to
accommodate h im . CC agreed , he signed a check for the aforesaid am ou n t d ated
20 December 2020, d raw n again st SS Bank's accoun t w ith th e ABC Com m ercial
Bank. The b ylaw s of SS Ban k req u ire th at checks it issued u n d er th e sign atu re of th e
President an d th e Treasu rer or the Vice President. Since th e Treasu rer w as ab sen t,
CC requested th e Vice Presid en t to co-sign the check, w h ich th e latter relu ctan tly
did. The ch eck w as d elivered to BB. The check w as d ish on ored u p on p resen tm en t
on the due d ate for in su fficien cy of funds. In this case, SS Ban k is n ot liable for th e
check as an accom m od ation p arty. The act of the corp oration in accom m od atin g
a friend of its Presid en t is ultra vires. Considering th at b oth th e Presid en t an d Vice
President w ere sign atories to th e accom mod ation , th ey th em selves can b e su b ject
to the liabilities of accom m od ation p arties to the in stru m en t a n th eir p erson al
capacity.70
Ultra v ires act s are n ot n ecessarily u n lawfu l, but th ey are ou tsid e th e p ow ers
of the corp oration . Th ey can b e ratified, an d can bind th e p arties if w h olly or p artly
executed. In case of ultra vires acts com m itted by a corp oration , th e govern m en t can
seek a ju d gm en t of forfeitu re from th e cou rt, or th e SEC m ay su sp en d or revok e th e
certificate of registration of th e corp oration . The stock h old ers m ay file an in ju n ction
or a derivative suit, w h ile th e cred itors can file a n ullification of con tract in frau d of
creditors.
69Rep u blic v s. A co je M in in g Co., In c., G .R. N o. L-18062, Febru ary 28,1963; 7 SC RA 361.
70Th e illu stra tiv e ca se w a s p a ttern ed from th e case of Cr isolog o-Jose vs. CA, G .R. N o. 80599, Se p tem b er 15,
1989. Th e case w a s in clu d eid as a q u estio n in th e 1991 Bar Exam in ation s in M er can tile Law .
]
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To illu strate: QQQ Corp. is a corp oration en gaged in the development of
softw are technology. Th rough a resolution of its b oard of d irectors, the corporation
invested its funds in RRR Corp., an in vestm ent firm. On accou n t of RRR Corp.'s
excellent business judgment, the in vestm ent grew tremend ou sly. However, X, a
m in ority stockholder in QQQ Corp. assails the in vestm en t as u ltra vires.71 Given
the facts, X is correct. The investment in RRR Corp. is an u ltra vires act of its board
of d irectors, but it may be subject to stock hold ers' ratification.
The Supreme Court, in one case, recogn izes the d octrin e of ap p aren t authority
wh en it held that a corporation will be estop ped from d en yin g th e agen t's authority
if it k nowingly p ermits one of its officers or an y oth er agen t to act w ith in the scope
of ap paren t authority, and it holds him out to the public as p ossessin g th e power to
do th ose acts.72
i
PRACTICE EXERCISE
Assu m e that you and you r friends have decided to form a corp oration . Explain
to them: (1) who are qualified to become members of the b oard of d irectors of the
corp oration ; (2) who is qualified to act as Treasurer of the corp oration ; and (3) who
can be ap pointed Corporate Secretary.
RELEVAN CE O F TH E LESSO N
A corporation exercises its powers and tran sacts its bu siness th rou gh its board
of d irectors/tru stees. Directors and trustees are exp ected to act in th e corporation's
b est interest, failing which they can be held solidarily liable for th e resulting
d am ages to the corporation.
LESSO N SUM M ARY
•
A corporation has express, inherent, and implied p ow ers. It enjoys both
general and specific powers, but it can only exercise th ese p ow ers an d transact
its business th rou gh its b oard of d irectors/tru stees and th rou gh its officers and
agents when authorized by a b oard resolution or by its bylaws, and subject to
certain limitations.
•
• Contracts that are entered into by the corp oration w ith one or m ore of its own
d irectors/tru stees, or officers are voidable, u nless certain conditions are
while contracts entered into between corp oration s w ith interlocking directors
71 Th e illu strative case w as p attern ed after the 2011 Bar Exam in ation q u estion in M ercan tile Law.
72A d vance Pap er Corp oration and H aw vs. Arm a Trad ers Corp oration , et al., G.R. N o 176897, December H'
2013.
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are valid , p rovid ed th at th e con tract is not fraudulent, an d is fair an d reason ab le
under th e circu m stan ces.
•
The corp oration 's execu tive com m ittee h as all th e au th ority of th e b oard to th e
extent p rovid ed in th e b oard resolution or bylaws, b u t it can n ot act on m atters
needing stock h old er ap p roval.
;
•
An em ergen cy b oard exists to take em ergen cy action req u ired to p reven t
grave, su b stan tial, an d irrep arab le loss or d am age in case a vacan cy in its b oard
p revents th e rem ain in g d irectors from con stitu tin g a q u oru m .
•
In a stock corp oration , the d irector m u st ow n at least on e sh are cap ital stock
of the corp oration in his ow n n ame, oth erw ise, he au tom atically ceases to b e a
d irector; on th e oth er h an d , only existin g members of th e n on stock corp oration
can be elected as tru stees.
Lesson 3
Lesson 3.1: Bylaw s
The b ylaw s of a corp oration are the govern in g ru les b y w h ich th e corp oration
operates. It re g u la te s th e con d u ct and p rescrib es th e righ ts an d d u ties of its
stockholders or m em b ers toward th e corp oration an d am on g th em selves in
reference td th e m an agem en t of its affairs.
Ad option o f By law s
Accord in g to Section 45, th e affirmative vote of the stock h old ers rep resen tin g
at least a m ajority of th e ou tstan d in g capital stock, or of at least a m ajority of th e
members in case of n on stock corporation s, shall be n ecessary for th e ad op tion of
bylaws. The^ bylaws sh all be signed by the stockholders or m em b ers votin g for th em
and shall b e k ep t in th e p rin cip al office of th e corporation , subject to th e in sp ection
of the stock h old ers or m em b ers d u rin g office h ou rs. A cop y th ereof, d u ly certified
by a majority of th e d irectors or tru stees and cou ntersign ed ; b y th e secretary of
the corp oration , sh all b e filed w ith th e SEC and attach ed to th e origin al articles of
incorporation.
Bylaws, h ow ever, m ay be ad op ted an d filed p rior to in corp oration ; in su ch
case, such b ylaw s Shall b e ap p roved an d sign ed b y all in corp orators an d su b m itted
to the SEC, togeth er w ith th e articles of in corp oration. In all cases, b ylaws stiall b e
effective on ly u p on th e issu an ce by th e SEC of a certification th at it is in accord an ce
with the RCC.
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The SiliC shall not accep t for filing the bylaws or am en d m en t of the bylaws
of any bank, banking institution, building and loan association , tru st company
in su ran cecom p an y, public utility, educational institution, or any oth er corporations
governed by special laws unless there is a certificate of the appropriate government
agency to the effect that such bylaws or am en d m en ts are in accord an ce with the law.
Every corporation has the inherent power to adop t bylaws for its internal
govern ment, and to regulate the con du ct and p rescribe the rights and duties of its
members, toward itself and am ong themselves, in reference to the management of
its affairs.7' The bylaws supplement the articles of in corp oration as it provides for
d etails hot important enough to be stated in the articles of in corp oration . It serves
as a con tin u in g rule for the government of the corporation an d th e individuals
comp osin g it as it defines the rights and duties of corp orate officers an d directors/
tru stees and stock h old ers/m emb ers toward the corporation and am on g themselves.
It is a sou rce of authority for corporate officers and agents of th e corp oration .
T q illu strate: ABC Corp. increased its capital stock from P10 million to P15
million an d, in the process, issued 1,000 new shares divided into Com m on Shares
"B" and Com m on Shares "C." Tachi, a stockholder own in g 500 shares, insists on
b u ying the newly issued shares through a right of p re-emp tion . The corporation
claim s, however, that its bylaws deny Tachi any right of p re-em p tion . In this case,
the corp oration is not correct. The bylaws cann ot deny a sh areh old er his right of
p re-em p tion . It is the articles of incorporation, or an am en d m en t th ereto, wh ich may
rem ove or deny preemptive rights. Unless such right is denied by th e corporation's
articles of incorporation, or any amendment there, or the issu an ce of additional
sh ares falls u nd £r any of the exceptions provided by Section 38 of th e RCC, all
stock hold ers of a stock corporation shall enjoy preemptive right to subscribe to
all issues or disposition of shares of any class, in p rop ortion to th eir respective
shareholdings. This "right of first refusal" or preemptive right, however, shall not
extend to: (1) shares issued in compliance with laws req u irin g stock offerings oi
m in imu m stock ownership by the public; or (2) shares issued in good faith with
the approval of the stockholders representing two-th ird s of the ou tstan d in g capital
stock, in exchange for p rop erty needed for corporate p u rp oses or in p aymen t of a
previously contracted debt.
For the bylaws to be valid, it must:
•
. n ot be con trary to law nor w ith the Revised Corporation Code;
•
not be con trary to morals and public policy;
•
not impair obligations and contracts;
7,Joh n Gokon gw ei, Jr. vs. Secu rities and Exch an ge Com m ission , et al., G.R. N o. L-45911, A p ril 11,1979.
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*
b e gen eral an d u n iform ;
*
be con sisten t with the ch arter or articles of in corp oration , and
*
be reason ab le, n ot arb itrary or op pressive.
To illu strate: Z Corp oration amen ded its bylaws w h ich now req u ires th at
every d irector of Z Corp oration m u st own at least 100 sh ares of stock in h is n am e. In
this case, the am en d m en t is void b ecau se the RCC only req u ires at least one sh are of
stock in the d irector's n am e.
Under Section 46, a p rivate corp oration may p rovid e the followin g in its b ylaws:
*
*
the time, p lace, an d m an n er of callin g and con d u ctin g regu lar or sp ecial
m eetings of th e d irectors or trustees;
,
»
»
the tim e an d m an n er of callin g and con du cting regu lar or sp ecial m eetin gs
and m od e of n otifyin g the stockholders or members thereof;
*
the req u ired q u oru m in m eetings of stockholders or m em b ers an d th e m an n er
of votin g th erein ;
*
the m od es b y w h ich a stockholder, member, director, or tru stees m ay atten d
m eetin gs an d cast th eir votes;
*
the form for p roxies of stockholders and members and the m an n er of votin g
them;
A.
*
the d irectors' or tru stees' qualifications, duties and resp on sib ilities, th e
gu id elin es for settin g the compensation of d irectors or tru stees an d officers,
and th e m axim u m n u m b er of other b oard representation s th at an in d ep en d en t
d irector or tru stee m ay h ave which shall, in no case, be m ore th an th e n u m b er
p rescrib ed b y th e SEC;
>
*
the tim e for h old in g the an nu al election of d irectors or tru stees an d th e m od e
or m an n er of givin g n otice thereof;
*
the m an n er of election or ap pointment and the term of officers oth er th an
d irectors or tru stees;
*
the p en alties for violation of the bylaws;
*
in the case of stock corp oration s, the m an n er of issu in g stock certificates; an d
*
such oth er m atters m ay be n ecessary for the p rop er or con ven ien t tran saction
of its corp orate affairs for the p romotion of good govern an ce an d an ti-graft
and corru p tion m easu res.
,
*
An arb itration agreem en t m ay be p rovided in the bylaws p u rsu an t to Section
of the RCC.
.V ,
•
,
/ ‘’
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Section 47 provides th at a majority of the b oard of d irectors or tru stees, and the
own ers of at least a majority of the ou tstand ing capital stock, or at least a majority 0f
the members of a nonstock corporation, at a regu lar or special m eetin g duly called
for the p urpose, m ay amend or repeal the bylaws or ad op t new bylaws. The owner
of two-third s of the ou tstand ing capital stock or tw o-th ird s of the members in a
nonstock corp oration m ay delegate to the b oard of d irectors or tru stees the power to
amend or repeal the bylaws or adopt new bylaws. Any p ow er delegated to the board
of d irectors or tru stee to amend or repeal the bylaws or adopt new bylaws shall be
considered as revoked whenever stockholders ow n in g or rep resen tin g a majority of
the ou tstand ing capital stock or majority of the members shall so vote at a regular
or special meeting.
Wh en ever the bylaws are amended or,new bylaws are adopted, the corporation
shall file w ith the SEC such amended or new bylaws and, if applicable, the
stock h olders' or' members' resolution authorizing the delegation of th e power
to amen d an d /or adopt new bylaws, duly certified u nd er oath by th e corporate
secretary an d majority of the directors or trustees. The amen ded or n ew bylaws
sh all on ly be effective u pon the issuance by the SEC of certification th at the same is
in accord an ce w ith the RCC and other relevant laws.
Unlike the articles of incorporation, the execution and filing of bylaws are
con sid ered as a condition subsequent—its absence merely fu rn ish es a ground
for the revocation of the franchise. Bylaws may be executed after incorporation
alth ou gh Section 46 allows the filing of the bylaws simultaneously w ith th e articles
of incorp oration. It may be amended by a majority vote of the b oard of directors/
tru stees and a majority vote of outstanding capital stock or a m ajority of the
memb ers in a nonstock corporation. The power to amend or repeal bylaws or adopt
n ew bylaws m ay be delegated by the two-thirds of the ou tstan ding capital stock or
tw o-th ird s of the members in the case of a nonstock corporation.
To illu strate: In a special meeting called for the p u rpose, tw o-th ird s of the
stockholders representing the outstanding capital stock in X. Co. authorized the
company's b oard of directors to amend its bylaws. By majority vote, the board
then approved the amendment. In this case, the amend men t is valid because the
stockholders can delegate their right to amend the bylaws to the b oard.
Non-filing of the bylaws will not result in automatic dissolution of the
corporation.74 For failure to submit its bylaws on time, a corporation may be
considered a de facto corporation. Under Section 6(1) of PD 902-A, the SEC is
empowered to "suspend or revoke, after proper notice and hearing, the franchise or
certificate of registration of a corporation" on the ground inter alia of "failure to file
74Loyola Gran d Villas H om eow n ers (Sou th) Association , In c. vs. H on. Cou rt of Ap p eals, H om e In su ran ce
and Gu aran ty Corp oration , Em d en En carnacion and H oratio Aycard o, G.R. N o. 117188, Au gu st 7, 1997.
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bylaws w it h in t h e r e q u ir e d p e r io d " Th e SEC Ru les on Su sp en sio n / Rev o ca tio n o f
the C er tifica te o f R e g is t r a t io n o f C o r p o r a tio n s d e ta ils th e p r o ce d u r e s a n d r e m e d ie s
that m ay b e a v a ile d o f b e fo r e a n o r d er o f r ev o ca tio n ca n b e issu e d .75
Lesson 3.2: M e e tin g s
A cco r d in g to Se ct io n 48, m e e tin g s o f th e d ir ecto r s, tr u ste e s, sto ck h o ld er s, or
m em bers m a y b e r e g u la r o r sp e cia l.
/
Regular an d S p e cia l M eetin gs of Stock h old ers or M em b ers
Se ctio n 49 m a n d a t e s t h a t r e g u la r m e e tin g s o f sto ck h o ld er s/ m em b er s b e h eld
on th e d a te fix e d in t h e b y la w s a n d if n o d a te is fixed , on a n y d a te a ft e r A p r il 15 o f
every y ea r a s d e t e r m in e d b y th e b o a r d of d ir ecto r s or tr u ste e s. Sp e cia l m e e t in g s m a y
be h eld at a n y t im e d e e m e d n e ce s s a r y or as p r o v id ed in th e b y la w s. St o ck h o ld e r s ' or
m em bers' m e e t in g s , w h e t h e r r e g u la r or sp ecia l, sh all b e h eld in th e p r in cip a l o ffice
of the co r p o r a t io n a s s e t fo r th in th e a r ticles o f in co r p o r a tio n , or if n o t p r a ctica b le , in
the city o r m u n icip a lit y w h e r e th e p r in cip a l o ffice o f th e co r p o r a tio n is lo ca te d .
W r itte n n o t ice o f r e g u la r m e e tin g s sh a ll b e sen t to a ll sto ck h o ld e r s or m e m b e r s
or record a t le a s t 21 d a y s p r io r to th e m eetin g , u n less a d iffe r e n t p e r io d is r e q u ir e d
in th e b y la w s, law , o r r e g u la tio n . W r itten n o tice o f r e g u la r m e e tin g s m a y b e s e n t
to all s t o ck h o ld e r s o r m e m b e r s o f reco r d th r o u g h e le ctr o n ic m a il or in s u ch o t h e r
m an n er a s t h e SE C s h a ll a llo w u n d er its g u id elin es. A t ea ch r e g u la r m e e t in g o f
stock h o ld ers o r m e m b e r s , th e b o a r d o f d ir ecto r s or tr u stees sh a ll en d ea v o r to p r e s e n t
to s to ck h o ld e r s o r m e m b e r s th e follow in g :
•
th e m in u t e s o f t h e m o s t r ecen t r eg u la r m eetin g w h ich in clu d e:
a.
a d e s cr ip t io n o f th e v o tin g an d th e v o te ta b u la tio n p r o ce d u r e s u se d in th e
p r e v io u s m e e tin g s ;
b.
a d e s cr ip t io n o f th e o p p o r tu n ity g iv en to sto ck h o ld er s o r m e m b e r s to a s k
q u e s t io n s a n d r eco r d o f th e q u estio n s a sk ed a n d a n sw e r s g iv en ;
c.
th e m a t t e r s d is cu s s e d a n d r eso lu tio n s r ea ch ed ;
d.
a r e co r d o f th e v o tin g r esu lts for ea ch a g en d a item ;
e.
a lis t o f th e d ir e cto r or tr u stees, o fficer s, a n d sto ck h o ld e r s o r m e m b e r s
w h o a tte n d e d th e m e e tin g ; an d
L
su ch o th e r ite m s th a t th e SEC m a y r e q u ir e in th e in te r e st o f g oo d co r p o r a te
g o v e r n a n ce a n d p r o tectio n o f m in o r ity sto ck h o ld er s;
75S ap p ari K. S a w a d ja a n v s. H o n o ra b le C o u r t of A p p eals, Civil S erv ice C o m m issio n , a n d A l -a m a n a h
In vestm en t Ban k of th e P h ilip p in es, G .R . N o. 141735, Ju n e 8, 2005.
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a m em b ers' list for n on stock corp o ratio n s an d , for stock corp oration s, material
in fo rm atio n on th e cu rre n t stock h old ers, an d th eir votin g righ ts;
•
a d etailed , d escrip tive, b alan ced , an d com p reh en sib le assessm en t of the
corp oration 's p erform an ce, w h ich sh all in clu d e in form ation on an y material
ch an g e in th e corp oration 's b u sin ess strategy, an d oth er affairs;
►
a fin an cial rep ort for th e p reced in g year, w h ich sh all in clu d e financial
statem en ts d u ly sign ed an d certified in a cco rd an ce w ith th e RCC an d the
ru les th e SEC m ay p rescrib e, a statem en t on th e ad eq u acy of th e corp oration 's
in tern al con trols or risk m an agem en t system s, an d a statem en t of all external
au d it an d n on -au d it fees;
•
an exp lan ation of th e d ivid en d p olicy an d th e fact of p aym en t of d ivid en d s or
th e reaso n s for n on p aym en t th ereof;
•
d ire cto r
or
tru ste e
p rofiles w h ich
shall
in clu d e, am o n g
oth ers, their
q u alification s an d relevan t exp erien ce, len gth of service in th e corp oration ,
tra in in g an d con tin u in g ed u cation atten d ed , an d th eir b oard rep resen tation in
o th er corp oration s;
•
a d irecto r or tru stee atten d an ce rep ort, in d icatin g th e atte n d a n ce of each
d ire cto r or tru stee at each of th e m eetin gs of th e b oard an d its co m m itte e s and
in reg u la r or sp ecial stock h old er m eetin gs;
•
ap p raisals an d p erform an ce rep orts for th e b oard an d th e criteria an d p roced u re
for assessm en t;
•
a d ire cto rs or tru stees com p en sation rep ort p rep ared in a cco rd a n ce w ith the
RCC an d th e ru les th e SEC m ay p rescrib e;
•
d ire cto r d isclosu res on self-d ealin gs an d related p arty tran saction s; a n d /o r
•
th e p rofiles of d irectors n om in ated or seek in g election or reelection .
A d irector, tru stee, stock h old er, or m em b er m ay p rop ose an y oth er m atter for
in clu sion in th e agen d a at an y regu lar m eetin g of stock h old ers or m em b ers.
A stock h old er or m em b er m ay p rop ose th e h old in g of a sp ecial m eetin g and
item s to b e in clu d ed in th e agen d a. N otice of an y m eetin g m ay b e w aived , expressly
or im p lied ly, by an y stock h old er or m em b er b u t g e n e ra l w a iv e rs of n o tice in the
articles of in corp oration or th e b ylaw s sh all n ot be allow ed . Atten d an ce at a m eetin g
sh all con stitu te a w aiver of n otice of su ch m eetin g, excep t w h en th e p erson attends
a m eetin g for th e exp ress p u rp ose of ob jectin g to th e tran saction of an y business
b ecau se th e m eetin g is n ot law fu lly called or con ven ed .
W h en ever for an y cau se, th ere is no p erson au th orized or th e p erson au th orized
u n ju stly refu ses to call a m eetin g, th e SEC, u p on p etition of a stock h old er or member
on a sh ow in g of good cau se th erefor, m ay issu e an ord er, d irectin g th e p etition ing
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stockhold er or m e m b e r to call a m eetin g of th e corp oration by g iv in g th e p rop er
notice r eq u ir ed by th e RCC or th e bylaw s. Th e petitioning stock hold er or member
shall p resid e th e r e a t until at least a majority of the stockholders or m em bers p r esen t
have ch osen from am on g themselves, a p r esid in g officer.
Un less th e b y la w s p r ov id e for a lon ger p eriod , th e stock an d tran sfer b o o k or
membership b ook shall b e clo sed at least 20 days for regu lar m eetin gs an d seven
days for sp ecial m eetin gs befo re th e sch ed u led d ate of th e m eetin g . In ca se of
p ostp onem ent of sto ck h o ld e r s' or m em bers' reg u la r m eetin g s, written n otice th ereof
and the reason th erefor shall be sent to all stock h old ers or m em bers of record at least
two weeks p rior to th e d ate of the meeting, u n less a d iffer en t p eriod is r eq u ir ed
under the b ylaw s, la w or r eg u la tio n . Th e right to vote of stock hold ers or m em b er s
may be exercised in p erson , th r ou g h rem ote com m u n ication or in abs en t ia. Th e SEC
shall issu e th e ru les an d r eg u la tio n s g ov ern in g p articip ation and v o tin g th r o u g h
remote com m u n ication or in abs en t ia , ta k in g in to accou n t th e com p a n y 's scale, th e
number o f sh areh old ers or m em bers, stru ctu re, and oth er factors co n sisten t w ith
the p r otection a n d p r o m o tio n of sh areh old ers' or m em bers' m eetin g s.
The u s e o f rem ote co m m u n ication su ch as v id eo co n fer en cin g an d
telecon feren cin g d u r in g stock h o ld er m eetin g s is allowed. Sto ck h old ers m ay a lso
participate an d vote
in abs en t ia.
U n d er Section 50, n otice of m eetin g s sh all be sen t th r ou g h th e m ea n s o f
com m u n ication p r o v id ed in th e bylaw s, w h ich n otice sh all state th e tim e, p lace, an d
p u rpose o f th e m e e tin g s. Ea ch [notice of a m eetin g sh all fu rth er b e a cco m p a n ied by
the follow in g :
•
th e a g en d a fo r th e m eetin g ;
•
a p r o xy w h ich s h a ll b e su bm itted to th e corp orate secr eta r y w ith in a r ea so n a b le
tim e p r io r to th e m eetin g ;
•
w h en
a tten d a n ce,
p articip a tio n ,
an d
v otin g
are
allow ed
by
rem o te
co m m u n ica tio n or in abs en t ia , th e req u irem en ts an d p r oced u res to b e follow ed
w h en a sto ck h o ld e r or m em ber elects eith er op tion ; an d
•
w h en th e m e e tin g is fo r th e election of d irectors or tr u stees, th e r eq u ir em en ts
and p r o ce d u r e for n o m in a tio n an d election .
All p roceed in gs an d an y business tran sacted at a m eetin g of th e sto ck h old ers
or m em bers, if w ith in th e p ow ers or au th ority of th e corp oration , shall b e valid
even if th e m e e tin g is im p r op erly h eld or called : P rov id ed , th at all th e sto ck h old ers
or m em bers o f th e co rp o ra tio n a re p r esen t or d u ly rep resen ted at th e m eetin g an d
not one of th em exp r essly states at th e b eg in n in g of th e m eetin g th at th e p u r p o se o f
their a tten d a n ce is to o b je ct to th e tr a n sa ctio n of an y b u sin ess b eca u se th e m eetin g
is not la w fu lly ca lled or con v en ed .
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To illu s t r a t e : Th e by la w s o f A BC C o r p o r a tio n is silen t as to w h e n a stockh old er
ca n b e q u a lified to atten d th e m eetin g o f th e sto ck h o ld er s. Th e C o r p o r a te Secretary
se n t ou t th e n o tice of th e sto ck h o ld er s m e e tin g tw o d a y s b e fo r e th e m e e tin g and
at th a t tim e X w as n ot y et a sto ck h old er. O n th e d ay o f th e m e e tin g , h ow ever, X
b e ca m e a sh a r eh o ld er w h ich w a s d u ly r eco r d ed in th e sto ck a n d t r a n s fe r book . In
th is ca se, X ca n a tten d an d v ote in th e sto ck h o ld er 's m e e tin g . X is a sto ck h o ld er of
A BC C o r p o r a tio n as o f th e tim e o f th e m e e tin g o f th e s t o ck h o ld e r s fo r th e p u rp ose
o f e le ct in g th e m em b er s o f th e b oa r d .
Un d er Se ct io n 51, a q u o r u m sh a ll co n sist o f th e sto ck h o ld e r s r e p r e sen tin g a
m ajority o f th e o u tsta n d in g ca p ita l sto ck or a m a jo r ity o f th e m e m b e r s in th e case of
n o n sto ck co r p o r a tio n s, u n less o th e r w ise p r o v id ed in th e RC C o r th e b y la w s.
R egu lar an d Sp ecial M eetin gs of D irectors or Tru stees; Q u oru m
A cco r d in g to Se ctio n 52, u n less th e a r ticles o f in co r p o r a tio n o r th e bylaw s
p r o v id e for a g r ea ter m ajority , a m ajor ity of th e d ir ecto r s or t r u s t e e s a s s ta te d in the
a r ticle s o f in co r p o r a tio n sh a ll co n stitu te a q u o r u m to t r a n sa ct co r p o r a t e bu sin ess,
an d e v er y d ecisio n r ea ch ed by at least a m a jo r ity o f th e d ir e ct o r s o r tru stees
co n s titu tin g a q u o r u m , excep t for th e election o f o fficer s w h ich s h a ll r e q u ir e the
v o te o f a m a jo r ity o f a ll th e m em ber s of th e b o a r d , sh a ll b e v a lid a s a co r p o r a t e act.
R e g u la r m e e tin g s of th e b o a r d of d irecto rs/ tru stees a r e h e ld m o n t h ly u n less
o t h e r w ise p r o v id ed in th e bylaw s. O n th e oth er h a n d , sp e cia l m e e t in g s m a y b e held
at a n y tim e u p o n th e ca ll o f th e p resid en t or as p r o v id ed in th e b y la w s. M eetin g s
o f d ir e cto r s or tr u stees o f cor p or atio n s m a y b e h eld a n y w h e r e in o r o u tsid e the
P h ilip p in e s u n le ss th e by la w s p ro v id e o th er w ise. N o tice o f r e g u la r o r sp ecial
m e e tin g s sta tin g th e d ate, tim e, an d p lace o f th e m e e tin g m u st b e s e n t to every
d ir e cto r or tr u ste e at lea st tw o d ays p rior to th e sch ed u led m e e t in g u n le s s a lon ger
tim e is p r o v id ed in th e bylaw s. A d ir ecto r or tr u stee m a y w a iv e t h is r eq u ir em en t,
eith e r exp r essly or im p lied ly .
D ir e cto r s or tr u stees w h o ca n n o t p h y sica lly a tten d or v o te a t b o a r d m eetin g s
ca n p a r ticip a te an d v ote th r o u g h rem ote co m m u n ica tio n su ch as v id e o co n fe r e n cin g ,
te leco n fer en cin g , or o t h e r . a lter n a tiv e m o d es o f co m m u n ica tio n t h a t a llo w them
r ea so n a b le o p p o r tu n ities to p a r ticip ate. D ir ecto r s or t r u s te e s ca n n o t a tte n d or vote
b y p r o xy at b o a r d m eetin g s. Th e d ir ecto r s or tr u ste e s e xe r cise th e p o w e r s o f the
co r p o r a tio n , an d th ey a r e elected b y th e sto ck h o ld er s or m e m b e r s to d ecid e on
co r p o r a te m atter s, w h ich ta sk ca n n o t b e d eleg ated to ju s t a n y o n e.
A d ir ecto r or tr u stee w h o h a s a p o ten tia l in te r e st in a n y r e la te d p arty
tr a n sa ctio n m u st r ecu se from v otin g on th e a p p ro v a l o f th e r ela ted p a r t y tr a n sa ctio n
w ith o u t p r eju d ice to co m p lia n ce w ith th e r eq u ir em en ts o f Se ct io n 31 o f th e Rev ised
C o r p o r a tio n Cod e.
\ 16
BU SIN ESS LAW S A N D REG U LA TIO N S
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To illu strate: In th e m eetin g of th e boa rd of th e "M ed -Su p p ly Corp oration / ' a
tn ed ical com p an y h eld on O ctob er 15,2020, d irector s A, B, C, D, an d E w ere p resen t
am on g n in e d ir ecto r s. Th e m eetin g h ad for its agen d a: (1) ap p oin tm en t of a n ew
treasu rer; an d (2) ap p rov al of th e con tract for th e n ew m ed ical su p p lies w orth
P500,000 from a n o th er corp oration . W h en v otin g took p lace, d ir ectors A, B, C, an d
D voted for th e electio n of Y as th e n ew treasu rer, an d d irector s A, B, an d C voted
for th e ap p rov al o f th e co n tract for th e aforem en tion ed p u rch ase. In th is case, th e
ap p roval of th e con tr act for th e n ew m ed ical su p p lies is v alid . Th e election of Y as
the n ew trea su r er , h ow ever, is void becau se, u n d er Sectio n 52 of th e RCC, election of
officers r eq u ir es th e v ote of a m ajority of all th e m em bers of th e board . Th e vote of
only fou r ou t of th e n in e d irectors falls short of th e req u ired m ajo rity vote.
D irecto r s m u st act as a bod y in a m eetin g called p u rsu a n t to th e law or th e
corp oration 's bylaw s, oth erw ise, an y action tak en th erein m ay be q u estion ed by an y
objectin g d ir ecto r or sh areh old er; bu t an action of th e board of d irector s d u rin g
a m eetin g , w h ich w a s illeg al for lack of n otice, m aybe ratified eith er exp ressly,
by th e actio n o f th e d irectors in a su bsequ en t legal m eetin g , or im p lied ly, by th e
corp oration 's su bseq u en t cou rse of cond u ct.76
Person in Ch arge of Presid in g the M eetin gs
A cco rd in g to Section 53 u n less th e bylaw s p rovid e oth erw ise, th e ch a ir m a n or,
in h is absen ce, th e p resid en t sh all p resid e at all m eetin g s of th e d irector s or tr u stees
as w ell as o f th e stockh old ers or m em bers.
Righ t to Atten d an d Vote in Meetin gs
i
A cco rd in g to Section 54, in case a stockh old er g ran ts a secu r ity in ter est in h is
or h er sh a res in stock corp oration s, the stockh old er-gran tor sh all h ave th e rig h t to
attend an d v ote at m eetin g s of stockh old ers, u n less th e stockh old er-g ran tor gives th e
secu red cred itor su ch righ t in w ritin g w h ich is record ed in th e ap p rop riate corp orate
books. N o w r itten p roxy is req u ired for execu tors, ad m in istrators, receiv ers, an d
oth er legal rep resen tativ es d u ly ap p oin ted by th e cou rt to atten d an d vote on b eh a lf
of th e stock h old ers or m em bers. Section 55 p rovid es th a t in v otin g sh ares of stock
ow n ed join tly by tw o or m ore p erson s, th e con sen t of all th e co-ow n ers sh all be
n ecessary u n less th ere is a w ritten proxy, sign ed by all th e co-ow n ers, au th orizin g
one or som e of th em or an y oth er p erson to vote su ch sh are or sh ares. If th e sh ares
are ow n ed in an "an d / or" cap acity, any on e of th e join t ow n ers can vote th e said
sh ares or ap p oin t a p roxy. Section 56 m an d ates th at trea su ry sh ares d o n ot h ave
votin g righ t as lon g as th ey rem ain in th e treasu ry.
,<76Lop ez Realty Inc. vs. Sp ou ses Tanjangco, G.R. N o. 154291, N ovem ber 12, 2014.
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M an n er of Voting; Proxies
Stock h old ers or m em b ers m ay atten d an d vote in th eir m eetin gs b y proxy;
d irecto rs can n ot d o so as th ey m u st alw ays act in p erson .
Un d er Section 57, th e stock h old ers or m em b ers of co rp o ratio n s m ay also vote
th rou gh rem ote com m u n ication or in absentia w h en so au th orized in th e bylaws
o r by a m ajority of th e b oard . In su ch a case, th e votes m u st b e received b efore the
corp oration fin ish es th e tally of votes. A stock h old er or m em b er w h o p articip ates
th rou gh rem ote com m u n ication or in absentia sh all b e d eem ed p re se n t for p u rp oses
of q u oru m . Th e corp oration shall estab lish th e ap p ro p riate req u ire m e n ts and
p roced u res for votin g th rou gh rem ote .com m u n ication an d in abs en t ia, ta k in g into
accou n t th e com p an y's scale, n u m b er of sh areh old ers or m em b ers, s tru ctu re , and
oth er factors con sisten t w ith th e b asic right of (Corporate su ffrage.
Un less oth erw ise p rovid ed in th e p roxy form , it sh all b e valid on ly for the
m eetin g for w h ich it is in ten d ed . No p roxy shall be valid an d effectiv e for a period
lon ger th an five years at an y on e time.
A gen eral p roxy con fers a gen eral d iscretion ary p o w er to a tte n d a n d vote
at th e an n u al m eetin gs w h ile a limited p roxy restricts th e a u th o rity to vote to
sp ecified m atters on ly an d m ay d irect the m an n er in w h ich th e vo te sh all b e cast.
Proxies m u st b e in w ritin g an d in an y form au th orized in th e b ylaw s. It m u st be
sign ed by th e stock h old er or m em b er (as p rin cip al) an d given to a n o th e r p e rso n (as
agen t) au th orizin g su ch p erson to exercise th e p rin cip al's v o tin g rig h ts. It should
b e filed an d received by th e corp orate secretary w ith in a reaso n ab le t i m e before
th e sch ed u led m eetin g. The right to vote by p roxy m ay b e e xe rcise d in a n y of the
follow in g in stan ces:
•
election of th e b oard of d irectors or tru stees;
•
votin g in case of joint ow n ersh ip of stock ;
•
votin g by tru stee u n d er votin g tru st agreem en t;
•
p led ge or m ortgage of sh ares; a n d /o r
•
as p rovid ed for in th e b ylaw s.
Un d er Section 58, on e or m ore stock h old ers of a sto ck ’co rp o ra tio n m a y create
a votin g tru st for th e p u rp ose of con ferrin g u p on a tru ste e or tru s te e s th e right
to vote an d oth er righ ts p ertain in g to th e sh ares for a p erio d n o t e xce e d in g five
years at an y tim e. In th e case of a votin g tru st sp ecially req u ired a s a con d ition in
a loan agreem en t, said votin g tru st m ay b e for a p eriod e xce e d in g five y ears but
sh all au tom atically exp ire u p on full p aym en t of th e loan . A v o tin g tru s t agreem en t
m u st be in w ritin g an d n otarized , an d sh all sp ecify its te rm s an d con d ition s. To
b e effective an d en forceab le, a certified cop y of su ch vo tin g tru s t a g re e m e n t must
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ke filed w ith t h e co rp or atio n an d w ith th e SEC. Th e cer tificate or cer tifica tes of
stock covered by th e v o tin g tr u st agreem en t sh all be can celed an d n ew on es sh all b e
issued in th e n am e of th e tru stee or tru stees, statin g th at th ey are issu ed p u r su a n t
to the said v o tin g tr u st ag reem en t. Th e books of th e corp oration sh all state th a t th e
transfer in th e n a m e of th e tru stee or tru stees is m ad e p u rsu a n t to th e v o tin g tr u st
agreement.
The tr u stee or tr u stees sh a ll execu te an d d eliver to th e tran sferors, v o tin g tr u st
certificates, w h ich sh all b e tran sferable in th e sam e m an n er an d w ith th e sam e effect
as certificates of stock .
The v otin g tr u st ag r eem en t filed w ith th e corp oration sh a ll b e su b ject to
examination by an y stock h o ld er of th e corp oration in th e sam e m a n n er as an y oth er
corporate b o o k or record . Both th e tru stor and th e tru stee or tr u stees m a y exer cise
the right of in sp ectio n of all corp orate books and record s.
Any oth er sto ck h old er m ay tran sfer the sh ares to th e sam e tr u stee or tr u ste e s
upon the ter m an d con d ition s stated in th e votin g tru st ag reem en t an d sh a ll b e
bound by all th e p r ov ision s of said agreem en t. N o v otin g tr u st a g r eem en t sh a ll
be entered in to for p u r p o ses of circu m v en tin g th e law s ag ain st a n ti-co m p etitiv e
agreements, a b u se of d om in an t p osition , an ti-com p etitive m erg ers an d a cq u isitio n s,
violation of n a tio n a lity an d cap ital requ irem en ts, or for th e p er p etu a tio n of frau d .
All rig h ts g r a n ted in a votin g tru st agreem en t sh all au tom atically exp ir e at th e
end of th e a g r eed p eriod , u n less exp ressly ren ew ed . Th e v o tin g tr u st cer tifica tes,
as well as th e cer tifica te of stock in th e n am e of th e tru stees, sh a ll th en b e d eem ed
canceled an d n ew cer tifica tes of stock sh all be reissu ed in th e n a m e of th e tr u sto r s.
Unless th e v o tin g tr u st ag reem en t p rovid es oth erw ise, th e v o tin g tr u stee or tr u ste e s
may vote by p r o xy or in an y m an n er au th orized u n d er th e bylaw s.
In sh ort, a v o tin g tr u st is an agreem en t w h ereby on e or m ore sto ck h o ld er s
transfer th eir sh ar es of stock s to a tru stee, w h o th ereby acq u ires for a p er io d of
time th e v otin g r ig h ts (and / or an y oth er rights) over su ch sh ares; an d in r etu r n ,
trust cer tifica tes are g iv en to th e stockhold er/ s, w h ich are tr an sfera ble lik e sto ck
certificates, b u t su b ject to th e v otin g tru st agreem en t.
To illu strate: O n N ov em ber 23, 2021, A lp h a H otel Corp oration , as sto ck h o ld er
of Y Corp oration , an d th rou g h its board of d irectors execu ted a Vo tin g Tr u st
Agreem ent tr a n sfer r in g th e b en eficial ow n ersh ip of its sh a res in tr u st to BP, In c. b y
reason of th e loa n ob tain ed by th e form er from th e latter. In th is case, b y r ea so n of
the voting tr u st agreem en t, BP, Inc. acq u ires legal title to th e sh a r es of A lp h a H otel
Corporation in Y Corp oration alth ou gh th e ben eficia l title r em a in s w ith A lp h a
Hotel Corp oration . BP, In c. can vote as th e ow n er of th e sh a res an d exer cise all th e
rights of A lp h a H otel Corp oration in th e stockh old ers' m eetin g of Y Corp oration .
U N IT II I REVISED CO RP O RA TIQ N CO D E
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A votin g trust is distinguished from pr oxy in a num ber of w ays, to wit:
P r o xy ;
V otin g Tru st
Th e tru stee vo tes as ow n er rath er
th an as m ere agen t.
Th e p r o xy h o ld e r v o te s a s agen t.
Th e tru stee m a y vo te in p erson
o r b y p ro xy u n less th e agreem en t
p ro v id e s o th erw ise.
Th e p ro xy m u s t v o te in p e rs o n .
Th e tru ste e acq u ires legal title
to th e sh ares of th e tran sferrin g
sto ck h old er.
Th e p r o xy h a s n o le g a l title to th e
sh ares of th e p rin cip a l.
A v o tin g tru st a greem en t m u st b e
n o ta riz e d .
A p ro xy n eed n o t b e n o ta r iz e d .
T h e v o tin g tru st agreem en t is
irre v o ca b le .
Th e p ro xy is re v o ca b le a n y tim e
excep t on e w ith in te re st.
T h e tru ste e is n ot lim ited to act at
an y p a rticu la r m eetin g.
A p ro xy can on ly a ct a t a sp ecified
sto ck h o ld e r's m e e tin g (if n o t
con tin u in g).
A tru ste e ca n v o te an d exercise all
th e rig h ts of th e stock h old er even
w h e n th e la tte r is p resen t.
A p roxy can on ly v o t e in th e
ab sen ce of th e o w n e rs o f th e stock .
A v o tin g tru st agreem en t m u st n ot
e xce e d five y e a r s at an y on e tim e
e xce p t w h e n th e sam e is m ad e a
co n d itio n of a loan .
A p ro xy is u su a lly of s h o r t e r
d u ration a lth o u g h u n d e r S ection 58
it can n ot e xce e d five y e a r s a t an y
on e tim e.
T h e v o tin g righ t is sep arate from
th e o w n e rsh ip of stock s.
Th e righ t to v o te is in h e r e n t in
or in sep arab le fro m th e r ig h t to
ow n ersh ip of stock .
. . . . . . . —p .
■■ ---------- am------- ------------—
......... ...................
■■■
t-------------
PRACTICE EXERCISE
A p r ov isio n in th e bylaw s of th e corp oration states th a t o f th e 15 m em b er s of its
Bo a rd o f D ir ecto r s, on ly 14 d irector s w ou ld b e elected w h ile th e r e m a in in g m em ber
w ou ld b e th e r ep resen ta tiv e of an ed u cation al in stitu tio n lo ca ted in th e v illag e of
th e h o m eo w n er s. W h ile th e sam e is in v alid , for 15 y ea r s it h a s n o t b e e n qu estioned
or ch a llen g ed an d h a s b een im p lem en ted by th e m em b er s o f th e co r p o r a tio n , hence
a d eem ed w aiv er of its in valid ity. C a n it still b e q u estio n ed ?77
^ G r a ce Ch ristian H igh Sch ool vs. Cou rt of Ap p eals, Grace Village A ssociation , In c., A lejan d ro G. Beltran,
an d Ern esto L. Go, G.R, N o. 108905, O ctober 23,1997.
7
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RELEVANCE OF TH E LESSO N
A corp oration h as to ad op t bylaw s as to th e op eration of th e com p an y to
establish k ey elem en ts of corp orate govern an ce, su ch as reg u lation of th e con d u ct of
officers as w ell as stockh old ers, tim e and p lace of m eetin gs, as w ell as p roced u res
for voting, resolv in g d isp u tes, an d m yriad oth er issu es th at con fron t corp oration s
in the m a n ag em en t of its affairs.
LESSON SUM M ARY
•
Th e bylaw s are ru les of action ad op ted by a corp oration for its in tern a l
g ov er n m en t an d for th e regu lation of con d u ct and p rescribe th e rig h ts an d
d u ties of its stock h o ld er s or m em bers tow ard s itself and am on g th em selv es in
referen ce to th e m an agem en t of its affairs.
•
Reg u la r m eetin g s of stockh old ers/ m em bers are held on th e d ate fixed in th e
bylaw s or if n ot fixed , on an y d ate after Ap ril 15, w h ile sp ecial m eetin g s m ay
b e h eld at an y tim e d eem ed n ecessary or as so p rovid ed in th e bylaw s.
•
Reg u la r m eetin g s of th e board of d irectors/ tru stees are held m on th ly u n less
o th er w ise p rovid ed in th e bylaw s w h ile sp ecial m eetin gs m ay be h eld at an y
tim e u p on th e ca ll of th e p resid ent.
•
Sto ck h old ers or m em bers m ay attend and vote in th eir m eetin g s by p roxy;
d ir ecto r s ca n n o t d o so as th ey m u st alw ays act in p erson .
U N IT II | REVISED CO RPO RA TIO N CO DE
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.
ir .
CH APTER TEST
Date:
Name:
Score:
Section:
Instructor:
Circle the b est a n s w e r from th e given ch oices.
1.
W ith ou t n ecessa r ily p iercin g th e veil of corp orate fiction , p erson a l lia b ility
attach es to a corp ora te d irector, tru stee, or officer w h en :
A.
H e a ssen ts to a p aten tly u n law fu l act of th e corp oration .
B.
H e is g u ilty of b ad faith or gross n egligen ce in d irectin g th e a ffa irs of th e
co rp or atio n .
C.
H e co n sen ts to th e issu an ce of w atered stocks.
D. r A ll of th e above.
2.
O n e of th e fo llo w in g d oes n ot requ ire stockh old ers' ap p roval:
A.
m er g er or con solid ation
B.
ch a n g e of corp orate n am e
C.
d ecla r a tio n of ca sh d ivid en d
D.
in v estm en t of corp orate fu n d for a p u rp ose ou tsid e of th e m a in p u r p o se
of th e cor p or a tion
•
3.
•
.
•
1
\
An a ctio n w h ere a stockh old er brin g s an action in th e n a m e an d on b e h a lf of
the co rp o ra tio n for d am ag es su stain ed by th e latter an d an y r elief ob ta in ed
sh all b en efit th e co rp oration an d n ot th e stockh old er:
A.
in d iv id u a l su it
B.
d eriv ativ e su it
C.
rep r esen ta tiv e su it
D.
co rp orate su it
U N IT II I REVISED CO RP O RA TIO N CO D E
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4.
5.
6.
The following, except one, are the corporate acts in w hich a stockholder of a
corporation shall have the right to dissent and d em and p aym en t of the fair
value of his shares of stock. Which is it?
A.
in case of in cu rrin g, creating or in creasing bonded debts
B.
in case of merger or consolidation
C.
in case of an amend men t to the articles of in corp oration w h ich h as the
effect of chan gin g or restrictin g the rights of any stockholder
D.
in case of sale, lease, mortgage, ot oth er disposals of all or substantially all
of the corporate assets
Con tracts between a corporation and third p erson s mu st be m ad e by or under
the authority of whom?
A.
board of d irectors ,
B.
stockholders
C.
president and chief operating officer
D.
general manager
(
Wh at is required before a person can be selected as president of a corporation?
.
i
7.
mu st be a citizen and resident of the Philippines
B.
mu st not be a stockholder or d irector of a competitor corp oration
C
mu st not be the president of any other corporation
D.
mu st be a director of the corporation
r
,
.
Who from the following group of professionals is allowed u n d er the law to
organ ize among themselves a corporation for the p ractice of th eir profession?
A.
d octors
B.
lawyers
C.
engineers
D.
none of the above
i
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'
A.
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8.
Statement I - Red eem ab le sh ares m ay be red eem ed regard less of th e existen ce
of the u n restricted retain ed earn in gs even if su ch red em p tion w ou ld cau se
insolvency or in ab ility of th e corp oration to m eet its debts as th ey m atu re;
i
\
Statement II - Treasu ry sh ares do n ot revert to th e u n issu ed sh ares of th e
corporation an d are still issu ed sh ares but b eing th e treasu ry, th ey h ave th e
status of ou tstan d in g sh ares.
9.
A.
b oth are tru e
B.
b oth are false
C.
on ly I is tru e
D.
on ly II is tru e
For p u rp oses of in terlock in g d irectors, when is the stock h old in gs con sid ered
substantial?
i
A.
if it exceed s 10% of th e au thorized capital stock
B.
if it exceed s 20% of th e au th orized capital stock
C.
if it exceed s 10% of ou tstan d in g capital s to ck ,
D.
if it exceed s 20% of ou tstan d in g capital stock
•
\
10. Under Ph ilip p in e ju risd iction , w h at is the nationality of a corp oration ?
A.
th e n ation ality of its m em b ers or stockholders
B.
th e n ation ality of its con trollin g interest
C.
th e cou n try w h ere th e corp oration was organ ized
D.
th at of th e cou n try w h ere it holds its p rin cip al p lace of b u sin ess
11. Under w h at vote, as a ru le, m ay an y p rovision or m atter stated in th e Articles
of In corp oration b e am en d ed b y th e Board of D irectors or Tru stees?
A.
u n an im ou s vote
B.
m ajority vote
C.
th ree-fou rth s vote
D.
tw o-th ird s vote
U N IT II I R EV ISED C O R P O RA TIO N C O D E
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12.
Wh at is the requ ired vote of stockholders before any d irector of a corporation
m ay be rem oved from office?
A.
m ajority of the stock hold ers who are present
B.
th ree-fou rth s of the ou tstan d in g capital stock
C.
tw o-th ird s of the ou tstan d in g capital stock
D.
m ajority of the ou tstan d in g capital stock
13. Wh at con stitu tes a q u oru m for the tran saction of corp orate b usiness?
14.
15.
A.
m ajority of th e members
B.
m ajority of the stockholders
C.
m ajority of the d irectors
D.
all of th e above
Wh at is th e req u irem en t to effect the am en d m en t of the b ylaws of a corporation?
A.
m ajority vote of the board of directors
B.
vote of tw o-th ird s of the ou tstan ding capital stock
C.
m ajority vote of the b oard of directors and majority vote of th e outstanding
cap ital stock
D.
m ajority vote of the outstanding capital stock
Un d er w h ich of the following conditions m ay a d irector, as su ch , receive
com p en sation ?
A.
w ith th e vote of stockholders rep resen tin g at least tw o-th ird s of the
ou tstan d in g capital stock gran tin g com p en sation
B.
w h en com p en sation is provided for in the bylaws
C.
b y th e m ajority vote of all the d irectors gran tin g th em selves compensation
D.
n on e of th e above
CH A PTER PRO JECT
1.
Illu strate h ow a corp oration is created u n d er Philip pin e laws.
2.
Con stru ct a graph or table to illustrate th e com p osition of an d fu nction s of
th e p erson alities (d irectors/tru stees, officers, and stock h old ers/m em b ers) in a
corp oration .
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IN TR O D U C TIO N
A su b scrip tion con tract is a con tract for the acqu isition of u n issu ed stock in
an existin g corp oration or a corp oration still to be form ed . The su b scrib ed sh ares
n eed n ot b e p aid in full so th at the su b scrip tion m ay be valid. Certificates of stock s
are issu ed on ly w h en th e su b scrip tion is fully paid for. D elin q u en cy occu rs w h en
a su b scrib er fails to p ay for th e su b scrip tion at the tim e of the call for p aym en t, in
w h ich case a d elin q u en cy sale is held.
Corp oration s m erge or con solidate for a h ost of reason s w h ich in clu d e syn ergies,
m ark et sh are grow th , in crease su p ply-ch ain p ricin g power, an d elim in ation of
com p etition . Th e RCC p rovid es for the req u irem en ts w h ich shall be com p lied w ith
before an y m erger or con solid ation m ay b ecom e effective. An y stock h old er w h o
objects to su ch m erger or con solidation may exercise his ap p raisal righ t.
IN T EN D ED LEA RN IN G O UTCO M ES
At th e en d of th is ch ap ter, the stud ents will be able to k n ow th e righ ts of a
stock h old er; d escrib e w h at h ap p en s d u rin g a m erger; an d exp lain th e p roced u re for
exercisin g a stock h old er's app raisal right.
Lesson 1
Lesson 1.1: Stock s an d Stock h old ers
Su b scrip tion C on tract
Un d er Section 59, an y con tract for th e acq u isition of u n issu ed stock in
an existin g corp oration or a corp oration still to b e form ed sh all b e d eem ed a
su b scrip tion , even if th e p arties refer to it as a p u rch ase or som e oth er con tract.
The su b scrib ed sh ares n eed n ot be p aid in full in ord er th at th o su b scrip tion
may be valid . A su b scrip tion con tract is a con sen su al con tract th at is p erfected u pon
the m eetin g of th e m in d s of th e p arties. The n am e of th e su b scrib er is record ed in th e
stock an d tran sfer b ook, an d from th at time, su ch su b scrib er b ecom es a stockholder
of record en titled to all th e righ ts of a stock hold er. Until th e stock s are fully p aid , it
U N IT II | R EV ISED C O RP O RA TIO N C O D E
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continues to be a subsisting liability that is legally enforceable. A sub scrib er becomes
a stock h older u pon subscription even before full p aym en t of his subscription.
To illu strate: Bailey subscribed to 100,000 shares of stock of PX Corporation,
w h ich h as a p ar value of P'10 p er share. He paid P250,000 and p rom ised to pay
the b alan ce before December 31, 2021. PX Corporation d eclared a cash dividend on
O ctob er 15, 2021, payable on December 1, 2021. In this case, Bailey is entitled to be
paid each cash dividend to the entire 100,000 shares subscribed, and n ot only td the
p aid-up p ortion thereof. The legal ch aracter of being a "stockh older," and therefore
the entitlement to all the rights of a stockholder, are d eterm in ed from the time of
"su b scription " and not from payment of the subscription.
Un d er Section 42 of the RCC, "a stock corporation may d eclare d ivid end s out
of the u n restricted retained earnings which shall be payable in cash , in property,
or in stock to all stockholders on the basis of ou tstand ing stock held b y them"
on not on the basis on what stocks have been paid. Also, u n d er Section 70, only
w hen a stockholder h as been declared delinquent do his rights as a stockholder
b ecome suspended. It means therefore that a stockholder who h as n ot p aid the full
sub scription provided he h as not declared delinquent has the comp lete exercise of
all of h is rights, including the right to receive dividends. But any cash d ivid en d s due
on delinquent stock shall first be applied to the unpaid b alance of the subscription.
An u n d erw ritin g agreement is an agreement between a corp oration and a
th ird p erson , termed the "underwriter," by which the latter agrees, for a certain
comp ensation, to take a stipulated amount of stocks or bonds, sp ecified in the
u n d erw ritin g agreement, if such securities are not taken by those to w h om th ey are
first offered. On the other hand, a stock option is a privilege gran ted to a p arty to
subscribe to a certain portion of the unissued capital stock of a corp oration within
a certain p eriod and under the terms and conditions of the gran t exercisable by the
grantee at any time within the period granted, while a w arran t gives th e holder
the righ t to subscribe to the unissued capital stock of a corp oration or to purchase
issued shares in the future, as evidenced by a Warrant Certificate w h ich may be
sold or offered for sale to the public.
Under Section 60, a subscription of shares in a corporation still to be formed
shall be irrevocable for at least six months from the date of subscription, unless
all of the other subscribers' consent to the revocation, or the corp oration fails to
incorporate within six months or within a longer period stipulated in the contract
of subscription. After the articles of incorp oration are submitted to the SEC, the pre­
incorporation subscription may po longer be revoked.
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Con sid eration for Stock s
As earlier d iscu ssed , sh ares m ay be issu ed th rou gh : (1) su b scrip tion b efore
and after in corp oration to origin al, u n issu ed stock ; (2) sale of treasu ry stock after
in corp oration for money, p rop erty, or service; (3) su b scrip tion to n ew issu es of stock
in case of an in crease in th e cap ital stock ; an d (4) d eclaration of a stock d ivid end
Un d er Section 61, stock s shall n ot be issu ed for a con sid eration less th an the p ar
or issued p rice. Con sid eration for th e issu an ce of stock m ay be:
'
f ''
•
actu al cash p aid to th e corp oration ;
i
\
•
p rop erty, tan gib le Or in tangible, actu ally received b y th e corp oration an d
n ecessary or con ven ien t for its u se and lawful p u rp oses at a fair valu ation
eq u al to th e p ar or issu ed valu e of th e stock issued;
•
labor p erform ed for or services actu ally /en d ered to th e corp oration ;
•
p reviou sly in cu rred in d eb ted n ess of the corporation ;
•
am ou n ts tran sferred from u n restricted retain ed earn in gs to stated capital;
•
ou tstan d in g sh ares exch an ged for stocks in th e even t of reclassification or
con version ;
•
sh ares of stock in an oth er corp oration ; an d /or
•
oth er gen erally accep ted form of consideration.
If th e con sid eration is oth er th an actu al cash, or consists of in tan gible p rop erty
such as p aten ts or cop yrigh ts, th e valuation thereof shall in itially be d eterm in ed b y
the stock h old ers or th e b oard of d irectors, subject to the ap proval of th e SEC. Sh ares
of stock sh all n ot b e issu ed in exch an ge for p rom issory n otes or fu tu re service.
Insofar as ap plicable, th e sam e considerations p rovided m ay be u sed for th e issu an ce
of b on ds b y th e corp oration . The issued price of n o-p ar valu e sh ares m ay be fixed
in th e articles of in corp oration or by th e b oard of d irectors (if au th orized u n d er
the articles of in corp oration or the bylaws), or if n ot so fixed, by th e stock h old ers
rep resen tin g at least a m ajority of th e ou tstan d ing capital stock at a m eetin g d u ly
called for th e p u rp ose.
Certificate of Stock an d Tran sfer of Sh ares
Un d er Section 62, th e capital stock of corp oration s shall be d ivid ed into sh ares
for w h ich certificates sign ed by th e p resid en t or vice p resident, cou n tersign ed b y
the secretary or assistan t secretary, an d sealed w ith the seal of th e corp oration shall
be issued in accord an ce w ith th e bylaws. Shares of stock so issu ed are p erson al
p rop erty an d m ay be tran sferred b y d elivery of th e certificate or certificates
endorsed b y th e ownier, h is attorn ey-in -fact, or an y oth er p erson legally au th orized
to m ak e th e tran sfer. N o tran sfer, h owever, shall be valid, excep t as b etw een th e
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p arties, u ntil th e tran sfer is record ed in th e b ooks of th e corp oration sh ow in g the
n am es of th e p arties to the tran saction , th e d ate of the tran sfer, th e n u m ber of
the certificate or certificates, and the n u m b er of sh ares tran sferred . The SEC may
req u ire corp oration s w h ose secu rities are trad ed in trad in g m ark ets, an d w h ich can
reason ab ly d em on strate their cap ab ility to do so to issue th eir secu rities or shares
of stock s in u n certificated or scrip less form in accord an ce w ith th e ru les of the SEC.
Sh ares of stock again st w h ich the corp oration h olds an y u n p aid claim shall not be
tran sferab le in th e b ook s of th e corp oration .
Th e sh ares of stock s are the in terest or righ t th at an ow n er h as in the
m an agem en t of the corp oration , and its su rp lu s profits, an d, on d issolu tion , in all
of its assets rem ain in g after the p aym en t of corp orate debts. The certificate of stock
is th e d ocu m en t evid en cin g the ow n ersh ip of sh ares of stock s by a stock h old er and
th e full p aym en t of its issue or subscription price. The certificate of stock is not
essen tial to the ow n ersh ip an d /or existen ce of the sh are of stock . Prob lem s arise if
th e certificate of stock reflects a greater volume of sh ares th an th e actu al n u m ber of
sh ares issu ed , in w h ich case, th ere are rules to be followed. To th e exten t th at there
is an over-issu e, the excess issu ance over the au th orized capital Stock or th e stated
cap ital sh all be void as b eing ultra vires. If there is no over-issu e an d n o payment
h as b een m ad e to cover the p ar or stated value of the excess sh ares, th e excess shares
w ou ld con stitu te "w atered " stocks. If th ere is no over-issu e and w aterin g of stocks,
th e corp oration m ay be b ou n d to h on or the certificate (if d uly sign ed an d released
b y its au th orized officers) in the h an d s of a holder in good faith, w ith a right ot
recou rse again st th e culpable or u njustly en rich ed p arty.
» i
For a valid tran sfer to be effective, there m u st be strict com p lian ce w ith the
m od e of tran sfer p rescrib ed by law, i.e., in case of sh ares covered b y a certificate,
th e in d orsem en t of th e ow n er or his agent coupled w ith d elivery is essen tial for
th e tran sfer of stock s. The tran sferee m u st p resen t th e in d orsed certificate to the
corp orate secretary w h o shall cau se th e tran sfer in the corp orate b ook s, issue a
n ew stock certificate in favor of th e tran sferee and can cel th e form er certificate.
If n o certificate h as b een issu ed or for som e reason , it is n ot in th e p ossession of
th e stock h old er, stock s m ay be tran sferred by m ean s of a d eed of assign m en t duly
record ed in the b ooks of th e corp oration . The Su p rem e Cou rt held in on e case that
a d eed of assign m en t of sh ares w ith ou t en d orsem en t an d d elivery is b in d in g only
on th e p arties an d d oes n ot n ecessarily m ak e th e tran sfer effective as again st the
corp oration .1 To be valid again st th e corp oration an d th ird p erson s, th e transfer
m u st b e record ed in the stock an d tran sfer book. The Su p rem e Cou rt emphasized
in an oth er case th at no tran sfer of sh ares of stock shall be valid , excep t as between
1Th e Ru ral Ba n k o f Lip a City, In c., et al. vs. H on or a b le Co u r t o f A p p eals, G .R. N o. 124535, Sep tem ber 28
2001 .
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the p arties, u n til th e tran sfer is record ed in th e b ook s of th e corp oration so as to
show th e n am es of th e p arties to th e tran saction , th e d ate of th e tran sfer, th e n u m b er
of th e certificate or certificates an d th e n u m b er of sh ares tran sferred .2 As h eld b y
the Su p rem e Cou rt in an oth er case, w ith ou t su ch record in g th e tran sferee m ay n ot
be regard ed b y th e corp oration as on e am on g its stock h old ers, an d th e corp oration
m ay legally refu se th e issu an ce of stock certificates ill th e n am e of th e tran sferee
even w h en th ere h as b een com p lian ce w ith th e req u irem en ts of Section 63 of th e
Corp oration Cod e (n ow Section 62 of th e RCC).3
To illu strate: Ron n ie h as in h is n am e 1,000 sh ares of th e cap ital stock of GIE
Corp oration as evid en ced b y stock certificate. Ron n ie d elivered th e stock certificates
to Bobb y w h o n ow claim s to b e th e real ow n er of th e sh ares, h avin g p aid Ron n ie's
su b scrip tion . GIE Corp oration refu sed to recogn ize an d register Bob b y's ow n ersh ip .
GIE Corp oration 's refu sal is ju stified b ecau se th e certificate of stock w as n ot d u ly
in d orsed b y Ron n ie to Bobb y an d th e tran sfer w as n ot registered in th e b ook s of th e
corp oration .
’
,
In an earlier case, th e Sup rem e Cou rt held th at on ly ab solu te tran sfers n eed to
be registered . Th e p led ge or m ortgage itself n eed n ot be record ed in th e stock an d
tran sfer b ook , b u t a ch attel m ortgage m u st com p ly w ith th e Ch attel M ortgage Law ,4
an d a p led ge w ou ld req u ire th e sh ares to be p laced in th e p ossession of th e cred itor
or p led gee. Th e agreem en t m u st ap p ear in a public in stru m en t to tak e effect again st
th ird p erson s.5
Th e u n registered tran sfer of sh ares is valid an d b in d in g b etw een th e tran sferor
an d th e tran sferee, b u t it is in valid as to the corp oration excep t w h en n otice is given
to th e corp oration for p u rp oses of registration . It is also in valid as again st corp orate
cred itors an d th e tran sferor is still liable to th e corp oration . Similarly, it is in valid
as to th e attach in g or execu tin g cred itors of th e tran sferor, as w ell as su b seq u en t
p u rch asers in good faith w ith ou t n otice of th e tran sfer.
Issu an ce of S to ck Certificates
Un d er Section 63, n o certificate of stock sh all be issu ed to a su b scrib er u n til
the full am ou n t of su b scrip tion togeth er w ith in terest an d exp en ses (in case of
d elinq uent sh ares), if an y is due, h as b een p aid.
2In ter p o r t Reso u rces C orp . vs. Secu r ities Sp ecia list In c. an d R.C. Lee Secu rities In c., G .R. N o. 154069, Ju n e
6,2016.
3Vicen te C. P o n ce v s. A lson s C em en t Co rp o ra tio n , an d Fr a n cisco M. G iron , Jr., G .R. N o. 139802, D ecem b er
10, 2002.
4Se ctio n s 1 to 16 o f A ct N o. 1508, oth er w ise k n ow n as "Th e C h a ttel M o rtg a g e La w " h a s b een rep ea led by RA
11057 o f th e P er so n a l P ro p erty Secu r ity A ct, ap p rov ed on A u g u st 17, 2018.
5C h em p h il Exp o r t & Im p o rt C or p o ra tio n v s. CA, et.a l., G .R. N o s 112438-39, D ecem ber 12, 1995; 251 SC RA
257.
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No certificate of stock shall be issued until the full am ou n t of th e subscription
is p aid b ased on the doctrine of the individuality of subscription (the su b scrip tion is one,
entire, indivisible, and whole contract, which can n ot be d ivid ed in to p ortions).
To illu strate:
A.
Bailey subscribed to 100,000 shares of stock of PX Corp oration , w h ich has
a p ar value of P10 p er share. He paid P250,000 an d p rom ised to p ay the
b alance before December 31, 2019. PX Corp oration d eclared a cash dividend
on Octob er 15, 2019, payable on December 1, 2019.6 Based on th e facts, Bailey
can n ot compel PX Corporation to issue to h im on D ecem b er 1, 2019, th e stock
certificate corresp on d ing to the P250,000 paid by h im . N o certificate of stock
can be issued to a subscriber until the full am ou n t of h is su b scrip tion together
w ith in terest and expense, if any is due, has been p aid. A su b scrip tion is one
en tire an d indivisible whole contract that can n ot be d ivid ed in to p ortion s. The
stock h old er is not entitled to a certificate of stock u ntil h e h as rem itted the full
am ou n t of his subscription.
B.
Boyito subscribed 10,000 shares in the capital stocks of D ogon gh ei Corporation
an d p aid 50% of the 10,000 shares. Boyito asked the corp orate se cretary to issue
to h im th e corresp on d ing stock certificate rep resen tin g 50% of w h at h e already
p aid. The corp orate secretary of the corporation refu sed .7 In th is case, the
action of the corporate secretary is correct b ecau se th e RCC p rovid es th at no
certificate of stock shall be issued to a subscriber until th e sh ares as subscribed
h ave b een fully paid.
In on e case, the Supreme Court stressed th at sh ares of stock so issu ed are
p erson al p rop erty and may be transferred by delivery of th e certificate or certificates
en d orsed b y th e own er or his attorney-in-fact or oth er p erson legally au th orized to
m ak e th e tran sfer.8
•
. • •
r
I
'
'
Liab ility of D irectors for Watered Stock s
Accord in g to Section 64, a d irector or officer of a corp oration w h o consents
to th e issu an ce of stocks for a consideration less th an its p ar or issu ed value, or
for con sid eration oth er th an cash, valued in excess of its fair valu e, an d having
k now ledge of the insufficient consideration, d oes n ot file a w ritten ob jection with
th e corp orate secretary, shall be liable to the corp oration or its cred itors solidarity
w ith the stock hold er con cerned for the difference b etw een th e valu e received at the
tim e of issu an ce of th e stock an d the p ar or issued value of th e sam e.
„ 6Th e illu strativ e case w as p attern ed from the 2008 Bar Exam in ation q u estion in M er ca n tile Law .
7Th e illu strativ e case w as p attern ed from the 2012 Bar Exam in ation q u estion in M er ca n tile Law .
8Fil-Estate G o lf an d D evelop m en t, In c. an d Filestate Lan d , In c. vs. Vertex Sa les an d Tr ad in g In c., G.R. No202079, Ju n e 10, 2013.
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"Water" in the stock rep resen ts the difference b etw een the fair m arket valu e at
the time of the issu ance of the stock and the p ar value of the said stock. It includes
stocks:
•
issued w ithou t consideration;
•
issued as fully paid when the corporation has received a lesser su m of money
than its p ar value;
•
issued for a consideration oth er than actu al cash, the fair valu ation of w h ich is
less th an its p ar value; or
•
issued as a stock dividend when there are no sufficient retain ed earn in gs to
justify it.
Un d er Section 65, subscribers to stock shall be liable to the corp oration for
interest on all u np aid subscriptions from the date of subscription, if so req u ired
by and at th e rate of interest fixed in the subscription con tract. If th ere is n o rate
of interest fixed in the subscription contract, the p revailing legal rate shall apply.
Section 66 p rovid es th at subject to the provisions of the sub scrip tion con tract, th e
board of d irectors may, at any time, declare due and payable to the corp oration
unpaid su b scrip tion and may collect the same or such p ercen tage thereof, w ith an y
accru ed in terest, as it may deem necessary.
Paym en t of u n p aid subscription or any percentage thereof, togeth er w ith an y
interest accru ed , shall be made on the date specified in the su b scrip tion con tract
or on th e d ate stated in the call made by the board. Failure to p ay on su ch d ate
renders th e en tire b alance due and payable and makes the stock h old er liable for
interest at the legal rate on such balance unless a different interest rate is p rovid ed
in the su b scrip tion con tract. The interest is computed from the d ate sp ecified , u ntil
full p aym en t of the subscription. Unless the b oard of d irectors ord ers oth erw ise,
if no p aym en t is m ad e within 30 days from the said date, all stock s covered by the
sub scription b ecom e delinquent and shall be subject to sale as p rovid ed u n d er th e
RCC.
Unp aid su b scrip tion may be collected th rough: (1) volu n tary p aym en t, u p on
the date specified in the subscription con tract or u pon call by the b oard of d irectors;
and (2) in volu n tary p aym en t by: (a) extra-judicial d elinquency sale an d application
of d ividends; an d (b) judicial action. The p rescrip tive p eriod in case of sub scrip tion
of shares b egin s to ru n only from the time the b oard of d irectors d eclares th at the
balance is due an d payable. It does not begin to ru n from th e date of the subscription .9
If the su b scrip tion con tract fixes the date for payment, failure to pay on su ch d ate
shall ren d er th e en tire balance due and payable w ith interest. If still unpaid after 30
9Garcia vs. Su arez, G.R. N o. L-45493, Ap ril 21,1939; 67 Phil. 441.
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d ays, the sh ares b ecome delinquent as of the due date, an d subject to sale, u n less the
b oard d eclares oth erw ise. On the other hand, if no date is fixed in th e subscription
con tract, the b oard of d irectors can make the call for p aym en t, an d sp ecify the due
date. The n otice of call is m an d atory and the failure to p ay on su ch d ate sh all render
the en tire b alance due and payable with interest. If after 30 d ays it is still unpaid,
the sh ares b ecome delinquent as of the date of call, an d subject to sale, u n less the
b oard d eclares oth erw ise.
D elin q u en cy S&le
Un d er Section 67, the b oard of d irectors may, by resolu tion , ord er th e sale of
d elin q u en t stock. It shall specifically state the am ou n t due on each su b scrip tion plus
all accru ed interest, and the date, time, and place of the sale w h ich sh all b e within
30 to 60 d ays from th e date the stock become delinquent.
N otice of th e sale, with a copy of the resolution, shall be sent to every delinquent
stock h old er either personally, by registered mail, or th rou gh oth er m ean s provided
in th e b ylaws. The notice of sale shall be published once a w eek for tw o consecutive
w eek s in a n ew sp ap er of general circulation in the p rovin ce or city w h ere the
p rin cip al office of the corporation is located.
o
i
t
Un less th e delinquent stockholder pays to the corp oration , on or b efore the
d ate of d elinq uent sale, the balance due on his subscription togeth er w ith accrued
in terest, costs of ad vertisement, and expenses of sale, or u n less th e b oard of directors
oth erw ise ord ers, the sale shall p roceed as scheduled. The d elin q u en t stock shall be
sold at a p ublic au ction to such bidder who shall offer to p ay th e fu ll am ou n t of the
b alan ce on th e subscription together with accrued interest, costs of advertisement,
an d exp en ses of sale, for the smallest number of shares or fraction of a sh are. The
stock so p u rch ased shall be transferred to such p u rch aser in th e b ook s of the
corp oration an d a certificate for such stock shall be issued in th e p u rch aser's favor.
The rem ain in g sh ares, if any, shall be credited in favor of th e d elin q u en t stockholder
w h o shall likewise be entitled to the issuance of a certificate of stock coverin g such
sh ares.
If th ere is no bidder at th e public auction who offers to p ay th e fu ll am ou n t of the
b alan ce on th e sub scrip tion togeth er with accru ed interest, costs of advertisement,
an d exp en ses of sale, for the smallest num ber of sh ares or fraction of a sh are, the
corp oration may, subject to the provisions of the RCC, bid for th e sam e. If the
corp oration bids, th en the total am ou n t due shall be cred ited as fu lly p aid in the
b ook s of th e corp oration . Title to all the shares of stock covered b y th e subscription
shall b e vested in the corp oration as treasu ry shares an d m ay be d isp osed of by said
corp oration in accord an ce w ith the provisions of the RCC.
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To su m m arize, the following d escrib e the p roced u res for the sale of delin q uen t
lock s:
»
Call by resolu tion d em an d in g p aym en t of the b alance but if the con tract of
sub scrip tion p rescrib es the d ate of p aym en t, no call is n ecessary
•
Notice of th e b oard resolu tion given to the stock h old ers by the corp orate
secretary, eith er p erson ally or by registered mail; publication of n otice of call is
not req u ired .
;
•
Failu re of th e stock h old er to p ay w ith in a grace p eriod of 30 d ays from the
date sp ecified in th e con tract of sub scription or in the call, th e stock s shall be
.
I
d eclared d elin q uen t an d shall be subject to sale.
•
N otice of d elin q u en cy served on the subscribers either p erson ally or registered
m ail an d p ub lication in a n ew sp aper of general circu lation in th e p rovin ce or
th e city w h ere th e p rin cip al office is located once a w eek for tw o con secu tive
w eeks; th e n otice shall state the am ou n t due on each su b scrip tion p lus accru ed
in terest, an d th e date, time, and place of the sale w h ich shall n ot be less th an 30
d ays n or m ore th an 60 days from the date the stock s b ecom e delin quent.
•
Sale of th e d elinquent shares at public auction.
The h igh est bidder in a delinquency sale is the p erson p articip atin g in the
d elin q u en cy sale w h o offers to pay the full amoun t of the b alance of th e su b scrip tion
togeth er w ith th e accru ed interest, costs of advertisement, an d exp en ses of sale
for th e sm allest n u m b er of shares. If there is no bidder as aforem en tion ed , th e
corp oration m ay bid for the same, and the total am ou n t due shall be cred ited as paid
;n full in th e b ook s of the corporation. Such shares shall be con sid ered as treasu ry
;hares.
To illu strate: Subscriber Shirley has a total of 1,000 d elinquent sh ares at P10
Dar value, to be sold at a public auction sale. The total am ou n t recoverab le includes:
otal am ou n t of the delinquent shares, P10,000 and total exp en ses of th e sale, P5,000.
The followin g are th e bids received:
j,
1.
Pom p om w h o is willing to pay the P15,000 for 900 shares
2.
Cream o w h o is w illing to p ay the P15,000 for 920 shares
3.
Bailey wh o is w illin g to p ay the P15,000 for 970 shares
4.
M arth a wh o is w illing to pay the P15,000 for 950 shares.
In th is case, Pom p om will be d eclared the h igh est bidder am on g th e following
bidders in the public sale b ecau se she is willing to pay the P15,000 for 900 shares.
Certificate of stock for 100 shares shall then be issued to Shirley.
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Under Section 68, no action to recover delinquent stock sold can be tiled based
on the grou n d of irregu larity or detect in the notice of sale, or in the sale itself of
the delinquent stock, unless the p arty seeking to maintain such action first pays or
tenders the su m for which the same was sold, with interest from the date of sale at
the legal rate. No such action shall be maintained unless a complaint is filed within
six months from the date of sale. Section 0l> provides that the corp oration may opt
to collect th rou gh cou rt action, the amount due on any unpaid subscription, with
accru ed interest, costs, and expenses.
Effects of D elin q u en cy
Accord in g to Section 70, delinquency produces variou s effects. On the part
of the stockholder, delinquency accelerates the entire am ou n t of the unpaid
sub scrip tion and subjects the shares to interest, exp enses, and costs. It also
d isen fran ch ises the shares from any right that inheres to a shareholder, excep t the
righ t to d ividends, which shall be applied to any am ou n t due on said sh ares or, in
the case of stock dividends, to be withheld by the corporation until full payment of
th e delinquent shares. With regard to the d irector own in g delinquent sh ares, he can
con tin ue servin g in that capacity unless and until said sh ares are totally bid away,
he con tin u es to be the owner thereof and in the interim, he is not d isqualified. A
delinquent stockholder cannot run or be duly elected to the b oard. No delinquency
stock shall be voted for or be entitled to vote or representation at an y stockholders
meeting. A delinquent stockholder is not entitled to any of the rights of a stockholder
excep t the right to dividends in accordance with the provisions of the RCC until and
u nless he p ays the amoun t due on his subscription with accru ed interest, and the
cost and exp enses of advertisement, if any. Holders of subscribed sh ares th at are not
fully p aid and which are not delinquent shall have all the rights of a stockholder.
On the oth er hand, according to Section 71, holders of sub scrib ed shares not
fully p aid wh ich are not delinquent shall have all the rights of a stockholder.
Lost or D estroyed Certificates
Accord in g to Section 72, in case a certificate of stock is lost, stolen, or destroyed,
the registered ow n er of the certificate of stock or his legal rep resen tative must
file w ith the corporation an affidavit in triplicate settin g forth, if possible, the
circu m stan ces as to how the certificate w as lost, stolen or d estroyed , the number
of sh ares rep resented by such certificate, the serial n u m ber of the certificate and
the n am e of the corporation wh ich issued the same. The ow n er of su ch certificate
of stock shall also submit such oth er in formation and evid ence as m ay be deemed
n ecessary.
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After verifyin g th e affidavit and oth er in formation and evidence w ith the
books of the corp oration , the corp oration shall publish a notice in a n ew sp ap er of
general circu lation in the place wh ere the corp oration h as its prin cip al office, on ce
a week for th ree con secu tive weeks at the exp en se of the registered ow n er of the
certificate of stock wh ich h as been lost, stolen or d estroyed . The notice shall state
the n am e of the corp oration , the n am e of the registered owner, th e serial n u m b er
of the certificate, an d th e n u m b er of sh ares rep resen ted by such certificate. It shall
state that after th e exp iration of one year from the date of the last publication, if
no con test h as b een p resen ted to th e corp oration regard in g the certificate of stock,
the righ t to m ak e su ch con test shall be b arred an d the corp oration shall can cel the
lost, d estroyed or stolen certificate of stock, in its b ooks an d in lieu thereof, the
corp oration shall issue a new certificate of stock.
A n ew certificate m ay be issued even before the exp iration of th e on e-year
p eriod if th e registered ow n er files a bond or oth er secu rity as m ay be req u ired ,
effective for a p eriod of one year, for such am ou n t and in such form an d w ith su ch
secu rities as m ay be satisfactory to the b oard of d irectors. The issu an ce of a n ew
certificate of stock in lieu of the lost, d estroyed or stolen certificate shall be su sp en d ed
if a con test h as b een p resen ted to the corporation or if an action is p en d in g in cou rt
regard in g th e ow n ersh ip of the certificate of stock, until the cou rt ren d ers a fin al
d ecision regard in g th e own ership of the certificate of stock w h ich h as b een lost,
stolen or d estroyed . N o action m ay be b rought again st any corp oration w h ich sh all
h ave issu ed a certificate of stock in lieu of th ose lost, stolen, or d estroyed , excep t
wh en th ere is a fraud , bad faith, or negligence on the p art of the corp oration an d its
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officers.
To recap itu late, in ord er th at a n ew certificate of stock m ay be issu ed in lieu
of lost, stolen, or d estroyed ones, an affidavit in triplicate m u st be su b m itted to th e
corp oration by th e registered ow n er settin g forth the circu m stan ces as to h ow th e
certificate w as lost, stolen or d estroyed , the n u m ber of shares, serial n u m b er of th e
certificate an d th e n am e of th e corp oration th at issued th e sam e. The n otice of loss
mu st b e p ub lish ed b y th e corp oration in a n ew sp ap er of gen eral circu lation in th e
place of th e p rin cip al office, on ce a w eek for th ree con secu tive week s. After th e lap se
of on e year from th e d ate of th e last p ublication, if no, con test h as b een p resen ted ,
the corp oration shall can cel in its b ook s th e certificate of stock, w h ich h as b een
lost, stolen, or d estroyed , an d issue in lieu th ereof a n ew certificate of stock . A n ew
certificate of stock may, h owever, be issu ed even before th e exp iration of a on e-year
p eriod if th e registered ow n er files a b ond or oth er secu rities, as m ay be req u ired by
the b oard of d irectors.
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In su m , th e stock h old ers h ave th e followin g rights: m an agerial rights,
p rop rietary rights, an d rem ed ial rights. M an agerial rights are th e votin g righ ts
and th e righ t to rem ove d irectors. O n th e oth er h an d , p rop rietary righ ts include:
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righ t to d ividends, right to issu an ce of the stock certificate for fully paid shares,
righ t to p rop ortion ate p articip ation in the distribution of assets in liquidation,
righ t to tran sfer of stock s in corp orate books, right to recover stock s unlawfully
sold for delinquent p aym en t of sub scrip tion , and p reem p tive right. Note that
while a stockh old er h as p rop rietary rights, it can n ot comp el the corp oration to
p ay d ivid end s as th ese h ave to be d eclared by the b oard of d irectors an d the latter
can n ot do so u nless th ere are sufficient u n restricted retain ed earn in gs. Dividends
can n ot be d eclared for p referred sh ares which w ere gu aran teed a q u arterly dividend
if th ere are no u n restricted retain ed earn in gs. To compel the corp oration to use
its capital to m ak e said p aym en ts will be in violation of th e tru st fund doctrine.
Also, the Su p rem e Cou rt held in one case that while the stock certificate allows
the red em p tion of shares, the stock hold er can n ot compel the red em p tion of shares
b ecau se the option and d iscretion to do so are vested in the corp oration .10 Finally,
the p reem p tive right is the shareholders' preferential right to su b scrib e to all issues
or d isp ositions of sh ares of any class in proportion to th eir p resen t stockholdings.
It exten d s to treasu ry sh ares in case of their reissuance. If the sh ares preferentially
offered to a stock hold er are not subscribed or p urch ased by h im, th ese can n ot be re­
offered on a pro rata basis to the stockholders who already exercised th eir preemptive
rights as th ere is no preemp tive right with respect to the sh are to b e re-offered.
In case of additional issues of originally authorized shares, th ere is n o preemptive
right, excep t if a corporation at its inception offers only a specified p ortion of its
au th orized capital stock for a subscription. In such a case, if subsequently, the
corp oration offers the rem ainin g unsubscribed portion, there wou ld be preemptive
righ t as to the rem ain in g portion now offered for subscription. Preem p tive right is
n ot available wh en denied by the articles of incorporation. It is also n ot available
for sh ares req u irin g stock offering or m in imu m stock own ersh ip b y th e public and
also for sh ares to be issued in good faith with the approval of th e stockholders
rep resen tin g tw o-th ird s of the outstanding capital stock, in exch an ge for property
n eed ed for corp orate p u rp oses or in payment of a p reviously con tracted debt.
To illu strate: In ord er that ABC Corporation could ven tu re into m ore projects,
it n eed ed to raise funds by issuing new shares to in crease its cap italization . Azon,
Shirley, Jade, Grace, and Claudine are the five existing shareholders of th e company.
They hold 20% each .11 In this case, the additional shares shall be d ivid ed among the
existin g shareholders. The existing shareholders can subscribe to th e n ew shares
equ ivalent to their existing shareholdings because the RCC p rovid es th at each of
the existin g stockholders will have p reemp tive rights to the extent of th eir existing
shareholdings.
10Rep u blic Plan ters Ban k vs. H on . Agan a, Sr., et al., G.R. N o. 51765, March 3,1997; 269 SC R A 1.
11Th e illu strativ e case w as p attern ed from the 2012 Bar Exam in ation in M ercan tile Law .
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Stock h old ers exercise th eir rem ed ial righ ts th rou gh th e filin g of an in d ivid u al
suit, a rep resen tative su it, a n d /o r a d erivative su it. An in d ivid u al su it is on e filed b y
a sh areh old er for h is ow n b eh alf again st th e corp oration . A rep resen tative su it is on e
filed b y a sh areh old er in h is b eh alf an d in b eh alf also of oth er stock h old ers sim ilarly
situ ated an d w ith a com m on cau se again st th e corp oration . A d erivative su it is on e
in stitu ted b y th e stock h old er on b eh alf of a corp oration w h en th e acts com p lain ed
of con stitu tin g a w ron g to th e corp oration itself com m itted b y its d irectors, officers
an d /o r con trollin g sh areh old ers of th e corp oration . A d erivative su it is filed to
p rotect or vin d icate corp orate righ ts, w h en ever th e officials of th e corp oration
refu se to su e or are th e on es to b e su ed , or h old th e con trol of th e corp oration .12 As
held b y th e Su p rem e C ou rt in on e case, a d erivative su it is n ot b ased on an y exp ress
p rovision of th e [Revised ] Corp oration Cod e, or even th e Secu rities Regu lation Cod e,
b ut is im p lied ly recogn ized w h en th e said law s m ak e corp orate d irectors or officers
liable for d am ages su ffered b y th e corp oration an d its stock h old ers for violation
of th eir fid u ciary d u ties. In effect, th e su it is an action for sp ecific p erform an ce of
an ob ligation , owed, b y th e corp oration to th e stock h old ers, to assist its righ ts of
action w h en th e corp oration h as b een p u t in d efau lt b y th e w ron gfu l refu sal of th e
d irectors or m an agem en t to ad op t suitable m easu res for its p rotection .13
To illu strate:
A.
Ju n jae is a m in ority stock h old er of CCC Corp oration . Bailey is a m em b er of
th e Board of D irectors of CCC Corp oration an d at th e sam e tim e, h e is th e
Presid en t. Ju n jae b elieves th at Bailey is m ism an agin g CCC Corp oration . H en ce,
as a stock h old er an d on b eh alf of th e oth er stock h old ers, h e w an ted to su e
Bailey.14 In su ch a case, a d erivative suit m u st be in stitu ted on b eh alf of th e
corp oration .
B.
In th e N ovem b er 2020 stock h old ers m eetin g of G rin ch Corp oration , eigh t
d irectors w ere elected to th e b oard . The d irectors assu m ed th eir p osts in
Jan u ary 2021. Sin ce n o stock h old ers m eetin g w as h eld in N ovem b er 2021, th e
eigh t d irectors served in a h old -over cap acity an d th u s con tin u ed d isch argin g
th eir p ow ers. In Ju n e 2022, tw o of G rin ch Corp oration 's d irectors, D irector
G eller an d D irector Coop er resign ed from th e b oard . Relyin g on Section 28
of th e RCC, th e rem ain in g six d irectors elected tw o n ew d irectors to fill in th e
vacan cy cau sed b y th e resign ation of D irectors Geller an d Coop er. Stock h old er
Krip k ey q u estion ed th e election of th e n ew d irectors, initially, th rou gh a lettercom p lain t ad d ressed to th e b oard , an d later (w h en h is letter-com p lain t w en t
12N esto r C h in g an d A n d rew W ellin g to n v s. Su b ic Ba y G o lf an d C o u n try Clu b, In c., et al., G .R. N o. 174353,
Sep tem ber 10, 2014.
13Villam or, Jr. v s. U m a le, G .R. N os. 172843 & 172881, Se p tem b er 24, 2014.
14Th e illu stra tiv e ca se w a s p attern ed frb m th e 2012 Bar Exa m in a tio n in M er ca n tile Law .
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u n h eed ed ), th rou gh a d erivative suit filed w ith th e cou rt. H e claim ed th at the
vacan cy in th e b oard should be filled u p b y th e vote of th e stock h old ers of
G rin ch Corp oration . G rin ch Corp oration 's d irectors d efen d ed th e legality of
th eir action , claim in g as well th at stock h old er Krip k ey's d erivative suit was
im p rop er.15 In th is case, the d erivative suit filed b y stock h old er Krip k ey was
im p rop er. The Sup rem e Cou rt held in a case th at in a d erivative suit, the
corp oration , n ot th e in d ivid u al stock h old er, m u st b e th e aggrieved p arty and
th at th e stock h old er is su in g on b eh alf of th e corp oration . Wh at stockh old er X
is assertin g is h is in d ivid u al right as a stock h old er to elect th e tw o directors.
Th e case p artak es m ore of an election con test u n d er th e ru les on intra-corp orate
con troversy.16
In ord er for a d erivative suit to p rosp er, th ere m u st b e an existin g cause of
action in favor of th e corp oration and the action m u st be b rou gh t in th e n am e of
th e corp oration . The stock h old er/m em b er m u st first m ak e a d em an d u p on the
corp oration or the m an agem en t to sue u nless such a d em an d w ou ld b e futile.
Th e stock h old er/m em b er mu st be such at the time of th e ob jection ab le acts or
tran saction s u n less the tran saction s are continuously injurious.
The followin g are the requisites of a d erivative suit:
•
th e p erson filing the complaint m u st be a stock hold er or m em b er at th e time
th e acts or tran saction s subject of the action w as filed;
•
h e m u st h ave exerted all reasonable efforts to exh au st all rem ed ies available
u n d er th e articles of incorporation, bylaws, laws, or ru les govern in g the
corp oration to ob tain the relief he desires. This fact sh ould b e alleged with
p articu larity in the complaint;
•
th ere should be no ap praisal rights available for the act or acts com p lain ed of;
an d
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th e su it m u st n ot be a nuisance or h arassm en t suit.17
To illu strate: Dogonghei Realty Corp oration (DRC), a local firm engaged
in real estate develop men t, p lans to sell one of its p rim e assets— a three-hectare
lan d valu ed at ab ou t P100 million. For this p u rp ose, the b oard of d irectors of DRC
u n an im ou sly p assed a resolution ap p rovin g the sale of th e p rop erty for P75 million
to Chukoi Real Estate Corp. (CREC) a rival realty firm. The resolu tion also called
for a special stock hold ers' m eetin g at w h ich th e p rop osed sale w ou ld be up for
15Th e facts of th e illu strativ e case are p attern ed from th e case of Valle Verd e Cou n try Clu b, Inc. vs. Africa,
G .R. N o. 151969, Sep tem ber 4, 2009; 598 SCRA 202, d te d as 2013 Bar Exam in ation q u estion in M ercan tile Law.
16Leg asp i Tow ers 300, In c., et al. vs. Mu er, et al., G.R. N o. 170783, Ju n e 18,2012; 673 SCRA 453.
17In terim Ru les of Proced u re for In tra-Corp orate Con troversies u n d er R. A. N o. 8799, A.M. N o. 01-2-04-SC,
A p ril 1, 2001.
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ratification. Atty. Leo, a stockh old er who ow n s only one sh are in DRC, w an ts to stop
the sale. He then com m en ces a d erivative suit for an d on b ehalf of th e corp oration ,
to enjoin the b oard of d irectors and the stock h old ers from ap p rovin g th e sale.
In this case, Atty. Leo, who ow n s only one sh are in th e company, can initiate a
derivative suit, oth erw ise k nown as the m in ority stock h old ers' suit. It is allow ed
by law to enable th e m in ority stock h old ers to p rotect the in terest of th e corp oration
again st illegal or d isad van tageou s acts of its officers or d irectors, th e p eop le w ho
are su p p osed to p rotect the corp oration .18 The suit con stitu tes an in tra-corp orate
d ispute b ecau se it is a suit initiated by a stock h old er again st oth er stock h old ers
who are officers an d d irectors of th e sam e corp oration 19 an d shall be filed in th e
Regional Trial Cou rt d esignated by the Supreme Cou rt as a corp orate or sp ecial
com m ercial cou rt. Given the facts, however, said suit will not p rosp er b ecau se th ere
is no requ isite d em an d on the officers and d irectors con cern ed , h ence, th ere is no
exh au stion of ad m in istrative remedies.
The Su p rem e Cou rt held in one case that the exh au stion of in tra-corp orate
rem ed ies can n ot b e d isp en sed even if the com p an y is a family corp oration .20
In an oth er case, the Supreme Cou rt held that the ow n ersh ip of sh ares of
stock gives stock h old ers the right under the law to be p rotected from p ossib le
m ism an agem en t by its officers. This right is pred icated u p on self-p reservation .21
And in still an oth er case, th e Supreme Cou rt stressed th at th e n u m b er of sh ares of
the stock h old er is im m aterial since he is n ot suing on his ow n behalf, b u t th e m ere
tru stee of sh ares registered in his n am e can n ot file a derivative suit for h e is n ot a
stock h old er in h is ow n righ t.22
Con com itan t w ith the rights are the liabilities of th e stock h old ers: (1) to th e
corp oration for u n p aid subscription; (2) to the corp oration for in terest on u n p aid
su b scrip tion ; (3) to cred itors of the corp oration on th e u n p aid su b scrip tion ; (4) for
w atered stock ; (5) for d ivid en d s u nlawfully paid; an d (6) for failu re to create th e
corp oration .
18Th e facts of th e case w ere p attern ed from th e 2009 Bar Exam in ation q u estion in M er can tile Law as cu lled
from the ca se o f Pascu al vs. D el Sa z O rozco, G.R. N o. L-5174, M arch 17,1911; 19 Ph il. 82.
19P.D. N o. 902-A, Section 5(b ).
20Yu vs. Yu k ay gu an m G. R. N o. 177549, Ju n e 18, 2009; A n g vs. Sp s. An g, G. R. N o. 201675, Ju n e 19, 2013
21 Terelay In v estm en t an d D ev elo p m en t Corp o ra tion vs. Cecilia Teresita Yu lo, G.R. N o. 160924, A u g u st 5,
2015.
22Bito n g vs. CA , et al., G.R. N o. 123553, Ju ly 13,1998; 292 SCRA 304.
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Lesson 1.2: Corp orate Book s an d Record s
Book s to Be Kep t; Stock Tran sfer Agen t
Section 73 req u ires every corp oration to k eep an d carefu lly p reserve at its
p rin cip al office all in form ation relatin g to the corp oration in clu d in g, b u t n ot limited
to: ' .
•
the articles of in corp oration an d bylaws of th e corp oration an d all their
am en d m en ts;
•
the cu rren t ow n ersh ip stru ctu re and votin g righ ts of th e corp oration , including
lists of stock h old ers or m em bers grou p stru ctu res, in tra-grou p relations,
ow n ersh ip d ata, an d beneficial ownership;
•
th e n am es an d ad d resses of all the members of the b oard of d irectors or trustees
and th e execu tive officers;
•
a record of all business tran saction s;
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a record of th e resolutions of the b ioard of d irectors or tru stees an d the
stock h old ers or mem bers;
•
cop ies of th e latest rep ortorial requirements su b mitted to th e SEC; an d
•
th e m in u tes of all m eetin gs of stockholders or m em b ers, or of th e b oard of
d irectors or tru stees. Such minutes shall set forth in d etail am on g oth ers; the
tim e an d th e place of the m eetin g held, h ow it w as au th orized , th e n otice given,
th e agen d a therefor, w h eth er the meeting w as regu lar or sp ecial, its object if
sp ecial, th ose p resen t an d absent, and every act done or ord ered d on e at the
m eetin g. Up on the d em an d pf a d irector tru stee, stock h old er, or m em b er, the
tim e w h en an y d irector, tru stee, stockholder or m em b er en tered or left the
m eetin g m u st be n oted in the minutes; and on a sim ilar d em an d , th e yeas
an d n ays m u st be taken on any motion or p rop osition , an d a record thereof
carefu lly m ad e. The p rotest of a d irector, tru stee, stock h old er, or m em b er on
an y action or p rop osed action m u st be record ed in full u p on th eir d em an d .
Section 73 m an d ates th at corp orate record s, regard less of th e form in which
th ey are stored , shall be op en to in sp ection by an y d irector, tru stee, stockholder,
or m em b er of th e corp oration in p erson or by a rep resen tative at reason ab le hours
on b u siness d ays, an d a d em an d in w ritin g m ay be m ad e b y su ch d irector, trustee,
or stock h old er at th eir exp en se, for cop ies of su ch record s or excerp ts from said
record s. The in sp ectin g or rep rod u cin g p arty shall rem ain b ou n d b y confidentiality
ru les u n d er p revailin g laws, su ch as th e ru les on trad e secrets or p rocesses under
Republic Act No. 8293 (Intellectual Prop erty Cod e of th e Ph ilip p in es, as amended),
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Republic Act No. 10173 (Data Privacy Act of 2012), Republic Act No. 8799 (The
Securities Regulation Code), and the Rules of Court.
A req u estin g p arty who is not a stockholder or mem b er of record, or is a
competitor, d irector, officer, controlling stockholder, or oth erw ise rep resen ts the
interests of a com p etitor shall have no right to in spect or d eman d rep rodu ction
of corp orate record s. An y stockholder who shall abuse the rights gran ted shall be
p enalized u n d er Section 158 of the RCC, w ith ou t prejudice to the provision s of
Republic Act No. 8293 (Intellectual Prop erty Code of the Philippines, as amend ed )
and Republic Act No. 10173 (Data Privacy Act of 2012).
An y officer or agent of the corporation who shall refuse to allow th e in sp ection
an d /or rep rod u ction of record s in accord ance with the provisions of the RCC shall
be liable to su ch director, tru stee, stockholder, or member for d am ages, an d in
addition, shall be gu ilty of an offense which shall be punishable u n d er Section 161
of the RCC. If su ch refusal is made p ursuant to a resolution or order of the b oard of
d irectors or tru stees, the liability for such action shall be imposed upon the d irectors
or tru stees w h o voted for such refusal. That the person d emanding to exam in e an d
copy excerp ts from th e corporation's record and minutes has improperly u sed an y
in form ation secu red th rou gh any prior examination of the record s or m in u tes of
such corp oration or of any other corporation, or that he was not actin g in good
faith or for a legitim ate p u rpose in making the demand to exam in e or rep rod u ce
corp orate record s, or th at he is competitor, director, officer, controlling stock hold er
or oth erw ise rep resen ts the interest of a competitor, are all valid defenses in an y
action filed again st the d irector or trustee who voted for refusal.
If th e corp oration denies or does not act on a demand for in sp ection an d /or
rep rod u ction , the' aggrieved p arty may report such denial or in action to th e SEC.
Within five d ays from receipt of such report, the SEC shall con d u ct a su m m ary
in vestigation and issue an order d irecting the inspection or rep rod u ction of the
req u ested record s.
The corp oration is required to keep the book of minutes of stockholders or
members m eetin gs and of board meetings, the book of all business tran saction s, and
in the case of stock corporation, a stock and transfer book. A stock and transfer book
is a b ook w h ich record s all stocks in the name of the stockholders alphabetically
arran ged, the installments paid or unpaid on all stocks for wh ich subscription
has been made and the date of payment of any installment, a statement of every
alienation, sale or tran sfer of stock made, the date thereof, and by and to whom
made; and such oth er entries as the bylaws may prescribe. The corporate secretary
keeps the stock and transfer book and makes p rop er and n ecessary entries therein.23
23M an u el A. Torres, Jr., (Deceased ), et al. vs. Cou rt of Ap p eals, et al., G.R. N o. 120138, Sep tem ber 5,1997.
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The stock an d tran sfer b ook shall be k ep t at th e p rin cip al office of th e corp oration or
in th e office of its stock an d tran sfer agen t, if any, an d sh all b e op en or in sp ected by
an y d irector or stock h old er of the corp oration at reason ab le h ou rs on b u sin ess days.
A stock tran sfer agen t is on e en gaged p rin cip ally in th e b u sin ess of registering
tran sfers of stock s on b eh alf of a stock corp oration . Before h e can op erate as such,
h e n eed s to secu re from th e SEC a, licen se th at is ren ew ab le an n u ally. A stock
corp oration is n ot p reclu d ed from p erform in g or m ak in g a tran sfer of its ow n stocks,
in w h ich case all th e ru les an d regu lation s im p osed on stock tran sfer agen ts shall
apply, excep t th e p aym en t of a licen se fee. Stock corp oration s th at tran sfer an d/or
trad e stock s in secon d ary m ark ets m ay b e req u ired by SEC to h ave an independent
tran sfer agen t.
The stock h old ers/m em b ers h ave the right to in sp ect th e corp orate books
d u rin g reason ab le h ou rs on b usin ess days, b ut th ey should n ot im p rop erly use
an y in form ation ob tain ed in th eir exam in ation of th e b ook s an d record s of the
corp oration . In oth er w ord s, his d em an d m u st be m ad e in good faith or for a
legitim ate p u rp ose. The righ t applies also to a foreign su b sid iary w h olly ow n ed by
th e corp oration . A crim in al action b ased on the violation of a stock h old er's right
to exam in e or in sp ect th e corp orate record s an d the stock an d tran sfer b ook of a
corp oration u n d er Section 73 of the RCC can only be m ain tain ed again st corporate
officers or an y oth er p erson s actin g on b ehalf of such corp oration . This contemplates
a -situation w h ere a corp oration , actin g th rou gh one of its officers or agen ts, denies
th e righ t of an y of its stockh old ers to in sp ect the record s, m in u tes, an d th e stock and
tran sfer b ook of su ch corp oration .24
The SEC also req u ires corp oration s to keep an d /or register corp orate records
su ch as b ook s of accou n t, list of stockholders or mem bers, an d fin an cial record s.
Righ t to Fin an cial Statem en ts
• Un d er Section 74, a corp oration shall fu rn ish a stock h old er or m em b er, within
10 d ays from receip t of th eir w ritten request, its m ost recen t fin an cial statem ent, in
th e form an d su b stan ce of the fin an cial rep ortin g req u ired b y th e SEC. The board
of d irectors or tru stees shall p resen t to the regu lar m eetin g of th e stock h old ers or
m em b ers a fin an cial rep ort of the op erations of the corp oration for th e p reced in g year,
w h ich shall inclu de fin an cial statem ents, duly sign ed an d certified in accordance
w ith th e RCC, an d th e ru les th e SEC m ay p rescrib e. But if th e total assets or total
liabilities of th e corp oration are less th an P600,000, or su ch oth er am ou n t as may
b e d eterm in ed ap p rop riate by th e D ep artm en t of Fin an ce, the fin an cial statements
m ay b e certified u n d er oath by th e treasu rer an d th e’president.
24Yu ju ico v s. Q u iam bao, G.R. N o. 180416, Ju n e 2, 2014.
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PRACTICE EXERCISE
W h en is th ere an u ltra v ir es act on th e p a r t of: (1) th e corp oration , (2) th e b o ar d
of d irectors; an d (3) th e corp orate officers? Exp la in th e effect of su ch u ltra v ir es act.
RELEVAN CE O F TH E LESSO N
To b etter p r o tect th eir in ter ests in a co rp oration , sto ck h old er s m u st b e aw are of
th eir m a n a g er ia l an d p r o p r ieta r y righ ts, as w ell as th eir rem ed ia l r ig h ts w h ich aim
to p r otect th e fir st tw o righ ts.
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LESSO N SUM M ARY
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Th e n a m e of th e su b scr ib er is record ed in th e stock an d tr a n sfer b o o k , an d
fr o m th a t tim e, su ch su b scrib er b eco m es a s t ock h old er o f recor d en titled to all th e
r ig h ts o f a stock h old er.
•
Th er e m u st b e p a y m en t of th e fu ll am ou n t of th e su b scr ip tio n b efo r e a cer tifica te
of sto ck sh a ll b e issu ed . U n p aid su bscrip tion s m ay b e co llected th r o u g h eith er
v o lu n ta r y p ay m en t or in v olu n tary p aym en t.
•
Th e p r escr ip tiv e p er iod in case of su bscrip tion of sh a r es b e g in s to r u n o n ly
fr o m th e tim e th e b o a r d of d irectors d eclares th a t th e b a la n ce is d u e an d
p ay a b le a n d n ot fr om th e d ate of th e su bscrip tion .
•
In ca se o f d elin q u en cy sale, th e sh ares are sold to th e p er so n co n sid er ed as th e
h ig h e st bid d er.
•
In o r d er th a t a tr a n sfer o f stock m ay b e valid , th er e m u st b e str ict co m p lia n ce
w ith th e m od e o f tr a n sfer p rescr ib ed b y law.
•
Sto ck h o ld er s en jo y m an a g er ia l righ ts, p r o p r ieta r y rig h ts, a n d r e m e d ia l r ig h ts
w h ich p r o te ct th e fir st tw o righ ts.
•
Th e sto ck h old ers/ m em b ers h ave th e rig h t to in sp ect th e co r p o r a te b o o k s,
su b ject to cer ta in lim ita tio n s.
Lesson 2
Lesson 2.1: M erger an d Con solid ation
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Plan of M erger or Con solid ation
U n d er Se ctio n 75, tw o or m or e cor p or a tion s m a y m erg e in to a sin g le co rp o ra tio n
w h ich sh a ll b e on e of th e co n stitu en t co rp o ration s, or m ay co n solid ate in to a n ew
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sin g le co r p o r a tio n w h ich sh a ll b e th e co n so lid a ted co r p o r a tio n . Th e b o ar d of
d ir e cto r s or tr u ste e s o f e a ch co r p o r a tio n , p a r ty to th e m er g er or co n so lid a t io n , shall
a p p r o v e a p la n o f m er g er or co n so lid a tio n s e ttin g fo r th th e fo llo w in g :
•
th e n a m e s o f th e co r p o r a tio n s p r o p o sin g to m er g e or co n so lid a t e (or the
co n stitu e n t co r p o r a tio n s);
•
th e ter m s o f th e m er g er or co n so lid a tio n an d th e m o d e o f ca r r y in g th e same
in to effect;
•
a sta tem en t o f th e ch a n g es, if any, in th e a r t icle s o f in co r p o r a t io n of the
s u r v iv in g co r p o r a tio n in ca se of m er g er ; an d , in ca se o f a co n so lid a tio n , all
th e sta tem en ts r eq u ir ed to b e set forth in th e a r t icle s o f in co r p o r a tio n for
co r p o r a t io n s o r g a n iz ed u n d er th e RCC; an d
•
su ch o th e r p r o v isio n s w ith r esp ect to th e p r op osed m e r g e r o r co n so lid a tio n as
a r e d eem ed n e ce ssa r y or d esirable.
A m e r g e r is a u n io n o f tw o or m 'ore e xistin g co r p o r a tio n s w h e r e b y o n e or more
o f t h e se co r p o r a tio n s a r e ab so rb ed by a n o th er co r p o r a tio n . Th e Su p r e m e C o u r t in
o n e case; sa id t h a t a m er g er r esu lts w h en on e of th e co m b in in g co r p o r a t io n s su rvives
a n d co n tin u e s th e co m b in ed b u sin ess, w h ile th e rest a re d isso lv ed a n d a ll t h e ir rights,
p r o p e r tie s, a n d lia b ilitie s a r e a cq u ir ed by th e su r v iv in g co r p o r a t io n .25 Con so lid a tio n
is a u n io n o f tw o or m o r e e xistin g co rp o ra tio n s to fo r m a n e w co r p o r a t io n called
th e co n so lid a ted co r p o r a tio n . Th e Su p rem e C o u r t in a n o th e r ca s e d e scr ib e d the
co n so lid a t io n a s a u n io n w h ere all th e co n stitu en ts a r e d isso lv e d a n d a b so r b ed by
th e n e w co n so lid a ted en ter p r ise. Th e su r v iv in g or co n so lid a ted co r p o r a t io n assu m es
a u to m a tica lly th e lia b ilities of th e d issolv ed co rp o ra tio n s, r e g a r d le s s o f w h e th e r the
cr e d ito r s h a v e co n sen ted or n o t to su ch m erg er or co n so lid a t io n .26
S to ck h o ld ers' or M em b ers' Ap p roval
Se ct io n 76 p r o v id es th a t u p o n ap p rov a l b y a m a jo r ity v o te o f e a ch o f th e board
o f d ir e cto r s or tr u ste e s o f th e co n stitu en t co r p o r a tio n s o f th e p la n o f m erg er or
co n so lid a tio n , it m u st b e su b m itted for a p p ro v al b y th e sto ck h o ld e r s o r m em bers
o f e a ch o f su ch co r p o r a tio n s at sep a r a te co r p o r a te m e e t in g s d u ly ca lle d for the
p u r p o se . N o tice o f su ch m e e tin g s sh a ll b e g iv en to a ll sto ck h o ld e r s or m em bers
o f th e r esp ectiv e co r p o r a tio n s in th e sa m e m a n n e r a s g iv in g n o tice o f r eg u la r or
sp e cia l m e e tin g s u n d er Se ct io n 49 o f th e RCC. Th e n o tice s h a ll sta te th e p u r p o se of
th e m eetin g an d in clu d e a co p y or a s u m m a r y o f t)ie p la n o f m er g er o r con solid ation .
25A ssociated Ban k v s. Co u r t of A p p eals an d Loren zo Sar m ien to , Jr., G .R. N o. 123793, Ju n e 29,1998; Babst vs.
C ou rt o f A p p eals, et al„ G.R. N o. 99398 & 104625, Ja n u a ry 26, 2001; 350 SCRA 341.
26Joh n F. M cLeod vs. N LRC, et al., G .R. N o. 146667, Ja n u a ry 23, 2007.
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Th e a ffir m a t iv e v o te o f sto ck h o ld e r s r e p r e sen tin g at lea st t w o -t h ir d s o f th e
o u tsta n d in g ca p ita l sto ck o f e a ch co r p o r a tio n in th e ca se o f s to ck co r p o r a t io n s or at
lea st tw o -t h ir d s o f th e m e m b e r s in th e ca se o f n o n sto ck co r p o r a tio n s is n e ce s s a r y
for th e a p p r o v a l o f su ch p lan . A n y d isse n tin g sto ck h o ld e r m a y e xe r cise th e r ig h t o f
a p p r a isa l in a cco r d a n ce w ith th e RCC. If a fte r th e a p p r o v a l b y th e sto ck h o ld e r s o f
su ch p la n , th e b o a r d o f d ir e cto r s d ecid es to a b a n d o n th e p la n , th e r ig h t o f a p p r a isa l
sh a ll b e e xtin g u ish e d .
A n y a m e n d m e n t to th e p la n o f m er g er or co n so lid a tio n m a y b e m a d e. Su ch
a m en d m en t m u st b e a p p r o v ed b y a m a jo r ity v o te o f th e r e sp e ct iv e b o a r d s o f d ir e cto r s
or tr u ste e s o f a ll th e co n stitu e n t co r p o r a tio n s a n d r a tifie d b y th e a ffir m a t iv e v o te
of sto ck h o ld e r s r e p r e s e n t in g at lea st tw o -t h ir d s o f th e o u ts ta n d in g ca p ita l sto ck
or o f t w o -t h ir d s o f th e m e m b e r s o f ea ch o f th e co n stitu e n t co r p o r a tio n s. Th e p la n ,
to g eth er w it h a n y a m e n d m e n t, sh a ll b e co n sid er ed as th e a g r e e m e n t o f m e r g e r or
co n so lid a tio n . ,
Articles of M e rg e r or Con solid ation
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Se ct io n 77 r e q u ir e s th a t a fter th e a p p rov a l b y th e sto ck h o ld e r s or m e m b e r s
Df th e p r o p o s e d m er g er or con so lid a tio n , th e a r ticles o f m er g er o r a r t icle s o f
co n s o lid a t io n s h a ll b e execu ted b y ea ch o f th e co n stitu e n t co r p o r a t io n s, to b e
sig n ed b y t h e p r e sid e n t or v ice p r esid en t an d cer tified b y th e s e cr e t a r y o r a s s is t a n t
s e cr e t a r y o f e a ch co r p o r a tio n . Th e a r ticles o f m er g er or co n so lid a tio n sh a ll se t fo r th
th e fo llo w in g m a tte r s:
•
th e p la n o f th e m er g er or th e p la n o f co n so lid a tio n ;
•
t h e n u m b e r o f sh a r es o u tsta n d in g in th e ca se o f a sto ck co r p o r a t io n , or th e
n u m b e r o f m e m b e r s, in th e ca se o f n o n sto ck co r p o r a tio n s;
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as to e a ch co r p o r a tio n , th e n u m b er o f sh a r es or m e m b e r s v o t in g fo r o r a g a in s t
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su ch p la n , r e sp e ctiv e ly ;
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th e ca r r y in g a m o u n ts a n d fa ir v a lu es o f th e a sse ts a n d lia b ilit ie s o f th e
r e sp e ct iv e co m p a n ie s as o f th e a g r eed cu t-o ff d ate;
•
th e m e th o d to b e u sed in th e m er g er or co n so lid a tio n o f a cco u n t s o f th e
co m p a n ie s;
•
th e p r o v isip n a l or p r o fo r m a v a lu es, as m er g ed or co n so lid a ted , u sin g th e
a cco u n t in g m e th o d ; a n d
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su ch o th e r in fo r m a tio n a s m a y b e p r e scr ib e d b y th e SEC.
U N IT II I R E V ISE D C O RP O RA TIO N C O D E
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Effectivity of M erg er or C on solid ation
Se ctio n 78 r e q u ir e s th a t th e a r ticle s o f m er g er or co n so lid a tio n , sig n ed and
cer tifie d a s r e q u ir e d b y th e RCC, b e su b m itted to th e SEC fo r its a p p r o v a l. In case
o f m er g er or co n so lid a t io n o f b a n k s or b a n k in g in st it u t io n s, lo a n a sso cia tio n s, tru st
co m p a n ies, in s u r a n ce , co m p a n ies, p u b lic u tilitie s, ed u ca tio n a l in st it u t io n s , and
o th e r s p e cia l co r p o r a tio n s g o v er n ed b y sp e cia l law s, th e fa v o r a b le r eco m m en d a tio n
o f th e a p p r o p r ia te g o v e r n m e n t a g en cy sh a ll fir s t b e o b ta in e d . Th e SEC sh a ll issue
a ce r t ifica te a p p r o v in g th e a r ticle s a n d p la n o f m er g er o r o f co n s o lid a t io n if it is
sa tisfie d th a t th e m er g er or co n so lid a tio n o f th e co r p o r a tio n s co n ce r n e d is con sisten t
w ith th e p r o v isio n s o f th e RCC a n d e xist in g law s. Th e m e r g e r o r con solid a tio n
s h a ll b e e ffe ct iv e u p o n issu a n ce o f th e cer tifica te a p p r o v in g th e a r t icle s a n d p lan of
m e r g e r or co n so lid a tio n .
If th e SEC b eliev es, h ow ev er , th a t th e p r o p o sed m e r g e r o r co n so lid a tio n is
co n t r a r y to o r in co n siste n t w ith th e p r o v isio n s o f th e RCC o r e x is t in g la w s, it sh a ll set
a h e a r in g to g iv e th e co r p o r a tio n s co n cer n ed th e o p p o r t u n ity to b e h e a r d . W ritten
n o tice o f t h e d ate, tim e, an d p lace o f th e h e a r in g sh a ll b e g iv en to e a ch co n stitu en t
co r p o r a t io n at lea st tw o w eek s b efo r e th e sa id h ea rin g .
It is cle a r th er efo r e th a t a m er g er d oes n o t b eco m e e ffe ct iv e u p o n th e m ere
a g r e e m e n t o f th e co n stitu en t cor p or a tion s. A s h eld b y th e Su p r em e C o u r t in one
ca se, a ll th e r e q u ir e m e n ts sp ecified in th e law m u st b e co m p lied w it h in o r d er for
m e r g e r to t a k e effect. It en u m er a ted th e step s to b e u n d e r ta k e n to e ffe ct a m er g er or
co n so lid a tio n . Th e b o a r d of d ir ecto r s or tr u stees of ea ch co r p o r a tio n s h a ll ap p rove
a p la n o f m er g er or co n so lid a tio n . Th e p la n sh a ll b e su b m itted fo r a p p r o v a l by
t h e sto ck h o ld e r s or m em b er s o f ea ch of su ch co r p o r a tio n at se p a r a te corp orate
m e e t in g s d u ly ca lled for th e p u r p o se. Th e a r ticles o f m er g er or co n so lid a t io n shall
b e e xe cu te d b y ea ch o f th e co n stitu en t co rp o r a tio n s a n d su b m itted to th e SEC for
ap p r o v a l. Th e SEC m a y or m ay n o t con d u ct a h ea r in g . U p o n a p p r o v a l, th e SEC
s h a ll issu e a ce r tifica te o f m er g er or co n so lid a tio n .27 Th e Su p r em e C o u r t, in an oth er
ca se, str e sse d th a t a m er g er or co n so lid a tio n is n o t e ffectiv e w ith o u t t h e ap p roval
o f th e SEC; fo r a v a lid m er g er or co n so lid a tio n , th e a p p ro v a l b y th e Se cu r it ie s and
Exch a n g e C o m m issio n (SEC) of th e a r ticles o f m er g er or co n so lid a tio n is r eq u ir ed .28
To illu strate: EKS C o r p o r a tio n an d W A I C o r p o r a tio n h a v e a g r e e d to b e m erged
. /
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V
in to o n e co r p o r a tio n . To fa cilita te th e m erg er, b o th co r p o r a tio n s a g r e e d th a t the
m er g er b e m a d e e ffe ct iv e o n M a y 31,2021. Th e Se cu r itie s a n d Exch a n g e Com m ission
(SEC) a p p ro v ed th e A r ticles of M er g er on Ju n e 30, 2021. A s su ch , th e e ffe ct iv ity date
o f th e m er g er is Ju n e 30, 2021.
27Ban k o f Com m erce vs. Rad io Ph ilip p in es N etw ork , In c., et al., G .R. N o. 195615, A p ril 21, 2014.
“ Ph ilip p in e N ation al Ban k & N ation al Su g ar D ev elo p m en t C or p o ra tio n vs. A n d rad a Electr ic & Engineering
Com p an y , G .R. N o. 142936, A p ril 17, 2002.
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Effects of M erger or Con solid ation
Th e Su p r em e C o u r t h eld in on e ca se th at th e issu a n ce of th e cer tifica te of
m erger is cr u cia l b eca u se n ot on ly d o es it b ea r ou t SEC's ap p rov al, b u t it a lso m a r k s
th e m om en t w h en th e co n seq u en ces of a m er g er tak e p lace. By o p er a tio n o f law ,
u p on th e e ffe ctiv ity of th e m erger, th e ab so rb ed co r p o r a tio n cea ses to e xist b u t its
righ ts an d p r o p er ties, as w ell as liab ilities, sh a ll b e ta k en a n d d eem ed tr a n sfer r ed to
an d v ested in th e su r v iv in g co rp o ra tio n .29
U n d er A r ticle 79, a m erg er or co n so lid a tio n p r o d u ces a n u m b er o f effects. First,
th e co n stitu en t co r p o r a tio n s sh a ll b eco m e a sin g le co r p o r a tio n w l>ich, in ca se o f a
m erger, sh a ll b e th e su r v iv in g corp ora tion d esig n ated in th e p la n o f m erg er, a n d in
case of a co n so lid a tio n , sh a ll b e th e co n solid a ted co rp o ra tio n d esig n a ted in th e p la n
of co n so lid a tio n . Seco n d , th e sep a ra te existen ce of th e co n stitu en t co r p o r a tio n sh a ll
cease, excep t th a t o f th e su r v iv in g co rp oration . Th ird , th e su r v iv in g o r co n so lid a ted
co rp o ra tio n sh a ll p o ssess all righ ts, p riv ileg es, im m u n ities, a n d p o w er s an d
su b ject to a ll th e d u ties an d lia bilities of a corp oration . Fo u r th , th e s u r v iv in g or
co n so lid a ted co r p o r a tio n sh a ll p o ssess all th e righ ts, p r iv ileg es, im m u n itie s, a n d
fr a n ch ises o f ea ch co n stitu en t corp oration . Sixth , all rea l or p er so n a l p r o p e r ty a n d
all r eceiv a b les d u e to, a n d all oth er in ter ests of each co n stitu en t co r p o r a tio n , sh a ll
b e d eem ed tr a n sfer r ed to an d v ested in su ch su r v iv in g or co n so lid a ted co r p o r a tio n
w ith o u t fu r t h e r a ct or d eed . Sev en th , th e su r v iv in g or co n so lid a ted co r p o r a tio n
sh a ll b e r esp o n sib le for a ll th e lia bilities an d o b lig a tio n s of ea ch o f th e co n stitu e n t
co rp o ra tio n s. Eig h t, an y p en d in g claim , action , or p r o ceed in g p e n d in g b y or a g a in st
an y o f th e co n stitu en t co rp or a tion s m ay be p r o secu ted b y or a g a in st th e su r v iv in g
or co n so lid a ted co rp o ra tio n s. Lastly, th e m erg er or co n so lid a tio n sh a ll n o t im p a ir
th e r ig h ts o f th e cred ito r s or lien u p on th e p r o p er ty of a co n stitu en t co r p o r a tio n .
A cco r d in g to th e Su p rem e Cou rt, th e ter m s of th e m er g er b e t w e e n tw o
co rp o ra tio n s, w h en d eter m in a tiv e of th eir jo in t or resp ectiv e lia b ilities to w a r d s th ir d
p a r ties, ca n n o t b e assu m ed . Th e p a r ty a lleg in g th e co r p o r a tio n s' jo in t lia b ilitie s
sh ou ld e sta b lish th e alleg a tio n ; oth er w ise, th e lia b ilities o f e a ch o f th e m sh a ll b e
sep a ra te.30
In o n e ca se, th e Su p r em e C o u r t h eld th a t on e o f th e effe cts o f a m er g er is th a t
th e su r v iv in g co m p a n y sh a ll in h er it n o t on ly th e a ssets b u t a lso th e lia b ilitie s o f th e
cor p or atio n it m er g ed w ith .31 In a n o th er case, th e Su p r em e C o u r t str essed th a t as a
29M in d an ao Sav in g s an d Loan A ssociation , In c., rep resen ted b y its Liqu id ator, th e Ph ilip p in e D ep osit
In su ran ce Cor p or ation vs. Ed w ard W illkom , G ild a Go, Rem ed ios Uy, M alay o Ban tu as, in h is cap acity as th e
Dep u ty Sh er iff of Reg ion al Trial Cou rt, Bran ch 3, Ilig an City, an d th e Reg ister o f D eed s o f Cag ay an d e O ro City,
G.R. N o. 178618, O ctober 11, 2010.
30Ba n k o f Co m m erce vs. H eirs o f Dela Cru z, G.R. N o. 211519, A u g u st 14, 2017.
31 Su m ifru (P h ilip p in es) Corp oration (su rviv in g en tity in a m erg er w ith D av ao Fru its C orp or ation an d oth er
com p an ies) v s. Bem a b e Baya, G.R. N o. 188269, A p ril 17, 2017.
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g e n e r a l r u le, w h e n o n e co r p o r a tio n b u y s a ll th e s h a r e s o f a n o t h e r co r p o r a t io n , this
w ill n o t o p e r a te to d isso lv e th e o th e r co r p o r a tio n a n d a s th e tw o co r p o r a t io n s are
still m a in t a in in g th e ir se p a r a te co r p o r a te e n titie s, o n e w ill n o t a n sw e r fo r th e d ebts
o f th e o th er . Th e exce p tio n as to n o n -a s s u m p tio n o f lia b ilit ie s a r e: (1) if t h e r e is an
e x p r e s s a s su m p t io n o f lia b ilitie s; (2) if th e r e is a co n s o lid a t io n or m e r g e r ; (3) if the
p u r ch a s e w a s in fra u d o f cr e d ito r s; a n d (4) if th e p u r ch a s e r is a co n t in u a t io n o f the
s e lle r .32 Th is r u le is a lso k n o w n a s th e N ell D o ct r in e . H en ce, a cq u is it io n s m a y be of
t h r e e ty p e s : a s se t s-o n ly lev el, b u s in e s s -e n t e r p r is e lev el, a n d e q u it y lev el.
In a n a s se t s-o n ly lev el, or a s se t sa le, th e co r p o r a tio n s e lls a ll o r su b sta n tia lly
a ll o f its a s se t s to a n o th e r en tity . Th e p u r ch a s e r is in te r e ste d o n ly in th e r a w assets
a n d p r o p e r t ie s o f th e b u s in e s s an d n o t in th e co r p o r a tio n it s e lf o r its g oo d w ill.
Th e Su p r e m e C o u r t h eld in o n e ca se th a t in an a sse t sa le, th e s e lle r in g o o d faith
is a u th o r iz e d to d is m is s th e a ffected em p lo y ees, b u t is lia b le fo r th e p a y m e n t of
se p a r a t io n p a y u n d er th e law . Th e b u y er in g ood fa ith , on th e o t h e r h a n d , is not
o b lig e d to a b so r b th e em p lo y ees a ffected by th e sa le, n o r is it lia b le fo r t h e p a y m en t
o f t h e ir cla im s. Th e m o st th a t it m a y d o, for r e a so n s o f p u b lic p o licy a n d social
ju s t ice , is to g iv e p r efer en ce to th e q u a lifie d sep a r a ted p e r so n n e l o f t h e s e llin g fir m .33
O n th e o th e r h a n d , in th e b u sin e ss-e n te r p r ise lev el a cq u isitio n , th e tr a n sfer ee
m e r e ly co n t in u e s th e sa m e b u sin e ss of th e tr a n sfer o r b e ca u se h e o b t a in s t h e ea r n in g
ca p a b ility o f th e v e n tu r e a n d is lia b le for th e d eb ts an d lia b ilit ie s o f th e tr a n sfer o r .
Fin a lly , in a n eq u ity lev el, or sto ck sale, th e tr a n sa ct io n ta k e s p la ce at the
sh a r e h o ld e r lev el.
Th e in d iv id u a l or co rp o ra te sh a r e h o ld e r s sell a co n tr o llin g
b lo ck o f s to ck to n ew or e xist in g sh a r eh old er s. Th e p u r ch a s e r t a k e s co n t r o l and
o w n e r sh ip o f th e b u sin e ss b y p u r ch a sin g th e sh a r eh o ld in g s o f t h e co r p o r a t e ow n er.
W h a t is a ctu a lly p u r ch a se d is th e a b ility to elect th e m e m b e r s o f t h e b o a r d o f the
co r p o r a t io n w h o r u n th e b u sin ess. A cco r d in g to th e Su p r em e C o u r t in o n e ca se, the
fa ct t h a t th e r e w a s a ch a n g e in th e co m p o sitio n o f its sh a r e h o ld e r s w ill n o t affect
th e e m p lo y er -em p lo y ee r e la tio n sh ip b e tw e e n th e em p lo y ees a n d t h e co rp o ra tio n ,
b e ca u s e a n e q u ity tr a n sfe r a ffe cts n eith er th e e xiste n ce n o r th e lia b ilit ie s of a
co r p o r a tio n . Th u s, th e co r p o r a tio n co n tin u ed to b e th e em p lo y er o f th e co rp o ra tio n 's
e m p lo y ees n o t w it h s t a n d in g th e eq u ity ch a n g e in th e co r p o r a tio n . Th is o u tco m e is
in lin e w ith th e r u le th a t a co r p o r a tio n h a s a p e r so n a lity se p a r a te a n d d is t in ct from
th a t o f its in d iv id u a l sh a r eh o ld er s o r m em b er s, su ch th a t a ch a n g e in t h e com p osition
o f its sh a r e h o ld e r s or m em b er s w o u ld n o t a ffe ct its co r p o r a te lia b ilit ie s .34
32Th e Ed w ard J. N ell Com p an y vs. P acific Farm s, In c., G.R. N o. L-20850, N o v em b er 29, 1965; 15 SC RA 415;
Jo h n F. M cLeo d vs. N LRC, et al., G .R. N o. 146667, Ja n u a ry 23, 2007.
33SM E Ban k , In c., et al. vs. De G u zm an , e t al., G .R. N o. 184517, O cto b er 8, 2013.
34 Ibid.
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To illu strate: X o w n s 99% o f A A A H o tel C o r p o r a tio n . H e sold a ll h is s h a r e s
in A A A H o tel C o r p o r a tio n to Y. A s th e n ew o w n er , Y w a n ted a r e o r g a n iz a tio n o f
th e h o tel, w h ich is to in clu d e p r im a r ily th e se p a r a tio n o f a ll e xist in g em p lo y ees an d
th e h ir in g o f n e w e m p lo y e e s.35 In th is ca se, th e e x is t in g em p lo y ees o f A A A H o tel
ca n n o t b e a u to m a tica lly co n sid er ed sep a r a ted . D esp ite th e ch a n g e in sh a r eh o ld er ,
th ere is a ctu a lly n o ch a n g e in th e ju r id ica l e n tity a n d th e r e fo r e e xis t in g em p lo y ees
ca n n o t a u to m a tica lly b e co n sid e r e d sep a r a ted .
i
Lesson 2.2: A p p raisal R igh t
W h en to Exercise A p p raisal Righ t
U n d er Se ct io n 80, a n y sto ck h o ld er o f a co r p o r a tio n sh a ll h a v e th e r ig h t to d is s e n t
an d d e m a n d p a y m e n t o f th e fa ir v a lu e o f th e sh a r e s in th e fo llo w in g in st a n ce s:
/
•
'
in ca se a n a m e n d m e n t to th e a r ticle s h a s th e e ffe ct o f ch a n g in g or r e s t r ict in g th e
r ig h ts o f sh a r e h o ld e r s or o f a u th o r iz in g p r efer en ces o v er th o se o f o u t s t a n d in g
sh a r e s, o r ch a n g in g th e ter m o f co rp o ra te existen ce;
•
in ca se o f sa le, lea se, exch a n g e, tr a n sfer, m or tg a g e, p led g e, or o th e r d is p o s it io n
o f a ll o r s u b s t a n t ia lly a ll o f th e co rp o ra te p r o p e r ty a n d a ssets;
•
in ca s e o f m e r g e r or co n so lid a tio n ; an d
•
in ca se o f in v e stm e n t o f co rp o ra te fu n d s in a n o th er co r p o r a tio n or in a p u r p o s e
o t h e r t h a n th e p r im a r y p u r p o se of th e co rp o ra tio n .
A p p r a is a l r ig h t is th e sto ck h o ld er 's r ig h t to w ith d r a w fr o m th e co r p o r a t io n
an d d e m a n d p a y m e n t o f th e fa ir v a lu e o f h is sh a r es a fte r d is s e n tin g fr o m ce r t a in
co r p o r a te a ct s in v o lv in g fu n d a m e n ta l ch a n g es in th e co r p o r a te s tr u ctu r e .
To illu strate: In a sto ck h o ld er s m eetin g , Sh ir ley d isse n te d fr o m t h e co r p o r a te
a ct co n v e r tin g p r e fe r r e d v o tin g sh a r es to n o n v o tin g sh a r es. Th er ea fter , Sh ir le y
su b m itted h e r ce r t ifica te s o f sto ck for th e n o ta tio n th a t h e r s h a r e s a r e d isse n tin g .
Th e n e xt d ay, Sh ir le y tr a n sfe r r e d h er sh a r es to C la u d in e to w h o m n ew ce r t ifica t e s
w er e issu ed . N ow , C la u d in e d em a n d s fr o m th e co r p o r a tio n th e p a y m e n t o f t h e v a lu e
o f h e r s h a r e s .36 In t h is ca se, C la u d in e ca n n o lo n g er e xe r cise th e r ig h t o f a p p r a isa l.
W h en Sh ir le y t r a n sfe r r e d h is sh a r es to C la u d in e a n d C la u d in e w a s issu e d n ew
sto ck ce r t ifica te s, th e a p p r a isa l r ig h t o f Sh ir ley cea sed , a n d C la u d in e a cq u ir e d a ll
th e r ig h ts o f a r e g u la r sto ck h o ld er . Th e tr a n sfe r o f sh a r e s fr o m Sh ir le y to C la u d in e
co n stitu tes a n a b a n d o n m e n t o f th e a p p r a isa l r ig h t o f Sh irley . A ll th a t C la u d in e
a cq u ir ed fr o m th e issu a n ce o f n e w sto ck cer t ifica te s w a s th e r ig h ts o f a r e g u la r
sto ck h old er .
352012 Bar Exa m in a tio n (M C Q ) in M er ca n tile Law .
36Th e illu stra tiv e case w as p attern ed from th e 2007 Ba r Exam in atio n s q u estio n in M er can tile Law .
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Se ct io n 81 p r o v id e s th a t th e d is s e n t in g s to ck h o ld e r w h o v o tes a g a in st a
p r o p o se d co r p o r a te a ctio n m a y e xe r cis e th e r ig h t o f a p p r a isa l b y m a k in g a w ritten
d e m a n d on th e co r p o r a t io n fo r th e p a y m e n t o f th e fa ir v a lu e o f s h a r e s h eld w ith in
30 d a y s fr o m th e d a te on w h ich th e v o te w a s ta k e n . Fa ilu r e to m a k e th e d em an d
w it h in su ch p e r io d sh a ll b e d e e m e d a w a iv er o f th e a p p r a isa l r ig h t. If th e p rop osed
co r p o r a t e a ctio n is im p le m e n te d , th e co r p o r a t io n sh a ll p a y th e sto ck h o ld e r , u p on
s u r r e n d e r o f th e ce r t ifica t e or ce r t ifica t e s o f sto ck r e p r e s e n t in g th e stock h old er's
sh a r e s, th e fa ir v a lu e t h e r e o f a s o f th e d a y b e fo r e th e v o te w a s t a k e n e xclu d in g any
a p p r e cia tio n or d e p r e cia tio n in a n ticip a t io n o f s u ch co r p o r a t e a ctio n . If, w ith in 60
d a y s fr o m th e a p p r o v a l o f th e co r p o r a te a ctio n b y th e sto ck h o ld e r s , th e w ith d ra w in g
sto ck h o ld e r a n d th e co r p o r a t io n ca n n o t a g r ee o n th e fa ir v a lu e o f t h e sh a r e s , it shall
b e d e t e r m in e d a n d a p p r a ise d b y t h r e e d is in te r e st e d p e r s o n s , o n e o f w h o m shall
b e n a m e d b y th e sto ck h o ld er , a n o th e r b y th e co r p o r a t io n , a n d th e th ir d b y th e two
th u s ch o se n . Th e fin d in g s o f th e m a jo r ity o f th e a p p r a ise r s s h a ll b e fin a l, a n d th eir
a w a r d sh a ll b e p a id b y th e co r p o r a tio n w ith in 30 d a y s a ft e r su ch a w a r d is m a d e. But
n o p a y m e n t s h a ll b e m a d e to a n y d is s e n tin g sto ck h o ld e r u n le s s th e co r p o r a t io n has
u n r e s t r ict e d r e ta in e d e a r n in g s in its b o o k s to co v er su ch p a y m e n t . U p o n p ay m en t
b y t h e co r p o r a t io n o f th e a g r eed or a w a r d ed p rice, th e s t o ck h o ld e r s h a ll t h e n tran sfer
th e s h a r e s to th e co r p o r a tio n .
A r e a d in g o f Se ct io n 81 o f th e RCC w ill tell u s th a t th e e x e r cis e o f ap p raisal
r ig h ts is s u b je ct to ce r t a in lim ita tio n s. A n y of th e in s t a n ce s p r o v id e d fo r b y la w for
th e e xe r cis e o f t h e r ig h t m u st b e p r esen t. Th e d is s e n t in g s t o ck h o ld e r m u s t have
v o ted a g a in s t th e p r o p o sed co r p o r a te a ctio n . H e m u st h a v e m a d e a w r it t e n d em an d
w it h in 30 d a y s fr o m th e d a te th a t th e v o te w a s ta k e n . Th e p r ice m u s t b e b a se d on
th e fa ir v a lu e o f th e sh a r e s a s o f th e d a y p r io r to th e d a te in w h ich t h e v o te w as
ta k e n . Th e p a y m e n t o f th e sh a r es m u st b e m a d e o n ly o u t o f th e u n r e s t r ict e d retain ed
e a r n in g s o f th e co r p o r a tio n , a n d u p o n p a y m en t, th e s to ck h o ld e r m u s t t r a n sfe r his
s h a r e s to th e co r p o r a tio n .
Th e v a lu a tio n o f th e sh a r e s o f a sto ck h o ld e r w h o e xe r cis e s h is a p p r a is a l rights
is d e te r m in e d a s o f th e d ay p r io r to th e d a te o n w h ich th e v o te w a s ta k e n , w ith ou t
co n sid e r a tio n o f a n y d e p r e cia tio n or a p p r e cia tio n in th e s h a r e 's fa ir v a lu e. In case
o f d isa g r e e m e n t b e t w e e n th e co r p o r a tio n a n d a w it h d r a w in g sto ck h o ld e r who
e xe r cise s h is a p p r a isa l r ig h t on th e fa ir v a lu e o f h is sh a r e s, a t h r e e -m e m b e r grou p
sh a ll b y m a jo r ity v o te r eso lv e th e issu e w ith fin a lity . Se ct io n 82 r e q u ir e s th a t from
th e tim e o f d em a n d for p a y m e n t o f th e fa ir v a lu e o f a s to ck h o ld e r 's sh a r e s u ntil
e ith e r th e a b a n d o n m e n t o f th e co r p o r a te a ctio n in v o lv ed o r th e p u r ch a s e of the
sa id sh a r es b y th e co r p o r a tio n , a ll r ig h ts a ccr u in g to su ch sh a r es, in clu d in g voting
a n d d iv id en d r ig h ts, sh a ll b e su sp en d ed in a cco r d a n ce w ith th e p r o v isio n s of the
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RRC, excep t th e rig h t of su ch stock h old er to receiv e p ay m en t for th e fair v alu e of
h is sh ares. If th e d issen tin g stock h old er is n ot p aid th e valu e of th e said sh ares
w ith in 30 d ays a fter th e aw ard , th e v otin g an d d iv id en d righ ts sh all im m ed iately be
restored .
U n d er Sectio n 83, n o d em an d for p ay m en t m ay b e w ith d ra w n u n less th e
corp oration co n sen ts th ereto. Bu t if su ch d em an d for p ay m en t is w ith d ra w n w ith
th e con sen t o f th e co rp o ration , or if th e p rop osed corp orate action is aban d on ed
or r escin d ed by th e corp ora tion or d isap p roved by th e SEC w h ere su ch ap p roval
is n ecessary , or if th e SEC d eterm in es th a t su ch stock h old er is n o t en titled to th e
ap p raisal rig h t, th en th e rig h t of th e stock h old er to be p aid th e fa ir v alu e of th e
sh a res sh a ll cease, th e sta tu s as th e stockh old er sh all be restored , an d all d iv id en d
d istr ib u tio n s w h ich w ou ld h ave accru ed on th e sh ares sh all be p aid to th e
stock h old er.
W h en th e a p p ra isa l rig h t is exercised , all righ ts accr u in g to su ch sh a r es sh all
be su sp en d ed an d th e d issen tin g stockh olcjer sh all be en titled to receiv e p a y m en t
of th e fa ir v a lu e o f h is sh ares as agreed u p on betw een h im an d th e corp ora tion or
as d eter m in ed b y th e ap p raisers ch osen by th em . A s d iscu ssed in Sectio n 83, th e
d issen tin g sto ck h o ld er w h o d em an d s p aym en t of h is sh ares can n o lon ger w ith d ra w
from h is d ecisio n , excep t w h en : (1) th e corp oration con sen ts to th e w ith d ra w a l; (2)
th e p r o p o sed co rp or ate action is aban d on ed or rescin d ed by th e co rp oration ; or (3)
th e p r o p o sed co rp or ate action is d isap p roved by th e SEC, or th e SEC d eter m in es
th at su ch sto ck h o ld er is n o t en titled to ap p raisal righ t.
U n d er Sectio n 84, th e costs an d exp en ses of ap p raisal sh all be b o r n e b y th e
co rp o ra tio n , u n less th e fa ir valu e ascertain ed by ap p raisers is ap p roxim ately th e
sa m e as th e p r ice th a t th e corp oration m ay h ave offered to p ay th e stockh old er, in
w h ich ca se th ey sh a ll be b or n e by th e stockh old er. In th e case o f an action to recov er
su ch fa ir v alu e, a ll co sts an d exp en ses sh all be assessed a g ain st th e co rp oration ,
u n less th e r e fu sa l o f th e stock h old er or receive p ay m en t w as u n ju stified .
Sectio n 85 p r ov id es th at w ith in 10 d ays after d em an d in g p ay m en t for sh ares
h eld , a d issen tin g sto ck h old er sh all su bm it th e certificates of stock r ep r esen tin g th e
sh a res to th e co rp o ra tio n for th e n otation th at su ch sh ares are d issen tin g sh ares.
Failu re to d o so sh all, at th e op tion of th e corp oration , term in a te h is righ ts. If th e
sh ares r ep r esen ted b y th e cer tificates b ea r in g su ch n otatio n are tran sferred , an d
th e cer tifica tes co n seq u en tly can celed , th e righ ts of th e tran sferor as a d issen tin g
sto ck h old er sh a ll cea se an d th e tra n sferee sh all h ave all th e rig h ts of a reg u lar
stock h o ld er ; an d all d iv id en d d istrib u tio n s w h ich w ou ld h ave accru ed on su ch
sh a res sh a ll b e p aid to th e tran sferee.
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P R A C T IC E EXER C ISE
W h a t d o y ou t h in k is th e m a in id ea b e h in d h a v in g a p p r a isa l r ig h t a m o n g the
p r o v isio n s in th e Re v ise d C o r p o r a tio n C o d e? C a n a sto ck h o ld e r w h o a v a iled of his
a p p r a isa l r ig h t ch a n g e h is m in d la ter on ?
RELEVAN CE O F TH E LESSO N
M e r g e r a n d co n so lid a t io n a r e co r p o r a te str a te g ie s to co m b in e w ith another
co r p o r a te e n tity a n d la ter o p er a te a s a sin g le leg a l en tity , co m m o n ly r e so r te d to in
o r d er to a ch ie v e e co n o m ie s o f sca le b y s e cu r in g m o r e r e so u r ce s a n d in cr e a sin g the
sca le o f o p e r a tio n , to g a in a ccess to a la r g er m a r k e t a n d cu s to m e r b a se , a n d to red uce
co m p e titio n a m o n g th e co r p o r a tio n s. Th e se w ill e n a b le co r p o r a t io n s to exp lo r e new
m a r k ets, d iv e r sify th e ir o ffe r in g o f p r o d u cts a n d se r v ice s, th u s, in cr e a s e p rofits
th r o u g h b e t t e r p la n n in g a n d u tiliz a tio n o f fin a n cia l r e so u r ce s.
LESSO N SUM M ARY
•
A m e r g er is a u n io n w h er eb y on e or m or e e xist in g co r p o r a t io n s a r e absorbed
b y a n o th e r co r p o r a tio n th a t su r v iv es an d co n tin u e s th e co m b in e d bu sin ess
w h ile co n so lid a t io n is a u n io n of tw o or m or e e x is t in g co r p o r a t io n s to form a
n ew co r p o r a tio n ca lled th e co n so lid a ted co r p o r a tio n .
•
A ll th e r e q u ir e m e n ts sp ecified in th e law m u st b e co m p lie d w it h in o r d er for
m e r g er to ta k e effect. By o p er a tio n o f law , u p o n th e e ffe ct iv it y o f t h e m erger,
th e a b so r b e d co r p o r a tio n cea ses to exist b u t its r ig h ts a n d p r o p e r t ie s , a s w ell as
lia b ilitie s, sh a ll b e ta k en an d d eem ed tr a n sfer r ed to a n d 'v e ste d in th e su rv iv in g
co r p o r a tio n .
•
•
A s a g en er a l ru le, w h en on e co r p o r a tio n b u y s a ll th e s h a r e s o f an oth er
co r p o r a tio n , t h is w ill n o t op era te to d isso lv e th e o th er co r p o r a t io n a n d becau se
th e tw o co r p o r a tio n s a r e still m a in t a in in g th e ir sep a r a te co r p o r a t e e n tities, one
w ill n o t a n sw e r for th e d eb ts of th e oth er.
•
Th e a p p r a isa l r ig h t is a v aila b le to a sto ck h o ld er w h o d is s e n t s fr o m certain
. co r p o r a te a cts in v o lv in g fu n d a m e n ta l ch a n g e s in a co r p o r a te str u ctu r e . When
it is exer cised , all r ig h ts a ccr u in g to su ch sh a r e s sh a ll b e su sp e n d e d an d the
d isse n tin g sto ck h o ld er sh a ll b e en titled to r eceiv e p a y m en t o f th e fa ir valu e of
h is sh a r es.
•
A d isse n tin g sto ck h o ld er w h o d em a n d s p a y m en t o f h is sh a r e s is n o longer
allo w ed to w ith d r a w fr o m h is d ecisio n , excep t w h en a llo w ed b y th e corp oration ,
th e p r o p o sed co r p o r a te a ctio n is r escin d ed by th e co r p o r a tio n or d isap p roved
by th e SEC, or th e SEC d e te r m in e s th a t su ch sto ck h o ld er is n ot en titled to
ap p ra isa l rig h t.
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Namp’
Datp:
Instructor:
Section:
Score:
/
Circle th e b est a n s w e r from th e given ch oices.
1.
2.
3.
4.
W h en d o es a su b scr ib er b eco m e a stock h old er?
A.
W h en th e su b scr ib er h ad fu lly p aid h is su b scr ip tio n to th e co rp or atio n .
B.
W h en th e su b scr ib er h ad p ar tially p aid h is su b scr ip tio n to th e cor p or atio n .
C.
U p o n su b scr ip tio n even before fu ll p ay m en t of h is su b scr ip tio n .
D.
n o n e o f th e above
A t h o w m u ch co n sid er ation m ay a sh are of stock b e issu ed ?
A.
n o t less th a n p a r v alu e
B.
n o t less th a n th e issu ed p rice for n o-p ar v alu e sh ar e
C.
m o r e th a n p a r v alu e an d issu ed p rice
D.
a ll o f th e abov e
W h ich o f th e fo llo w in g m ay n ot be a co n sid eration for th e issu a n ce o f stock ?
A.
A ctu a l ca sh p aid to th e corp oration .
B.
La b o r p er fo r m ed or serv ices a ctu a lly r en d er ed to th e cor p or a tion .
C.
P a ten ts or co p y r ig h ts a ctu a lly tr a n sfer r ed to th e corp ora tion .
D.
a ll o f th e ab ov e
W h ich o f th e fo llo w in g is n o t co n sid ered a w ater ed stock?
A.
sto ck s issu ed g r a tu ito u sly
B.
sto ck s issu ed for m on ey o f p r o p er ty less th a n th e p a r v alu e
C.
sto ck s exch a n g ed for ser v ices a ctu a lly r en d er ed
D.
sto ck s issu ed in as d iv id en d s, w h en n o u n r estr icted r eta in ed ea r n in g s
exist.
U N IT II I REVISED CO RP O RA TIO N CO D E
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5.
Statem en t I - Th e h igh est b id d er in a d elin q u en cy sale is th e p erson offerin g to
p ay th e full am ou n t of th e b alan ce on th e su b scrip tion togeth er w ith accrued
in terest, if any, cost of ad vertisem en t an d exp en ses of sale for th e highest
n u m b er of sh ares.
Statem en t II - H old ers of su b scrib ed sh ares, n ot fu lly p aid sh all h ave all the
righ ts of stock h old er.
6.
A.
b oth statem en ts are tru e
B.
b oth statem en ts are false
C.
on ly statem en t I is tru e
D.
on ly statem en t II is tru e
Statem en t I - Red eem ab le sh ares m ay b e red eem ed regard less of th e existence
of th e u n restricted retain ed earn in gs even if su ch red em p tion w ou ld cause
in solven cy or in ab ility of th e corp oration to m eet its d eb ts as th ey m atu re.
Statem en t II - Treasu ry sh ares d o n ot revert to th e u n issu ed sh ares of the
corp oration an d are still issu ed sh ares b u t b ein g th e treasu ry, th ey h ave the
statu s of ou tstan d in g sh ares.
7.
A.
b oth are tru e
B.
b oth are false
C.
on ly I is tru e
D.
on ly II is tru e
It is a d octrin e th at m ain tain s th at th e corp oration h old s th e assets of the
corp oration as rep resen ted b y its cap ital stock an d b ein g h eld in th e tru st to be
u sed to p ay corp orate cred itors.
A.
d octrin e of lim ited liability
B.
d octrin e of corp orate op p ortu n ity
C.
tru st fu n d d octrin e
D.
d octrin e of p iercin g th e veil of corp orate en tity
'i
8.
.
k
A stock issu ed for n o valu e at all:
A.
n o-p ar valu e stock
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156
B.
w atered stock
C.
d ivid en d
D.
d elin q u en t stock
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9.
10.
11.
The following are the rem ed ies to en force p aym en t of stock su b scrip tion ,
except:
A.
public au ction
B.
judicial action
C.
collection from cash d ivid end s
D.
w ith h old in g of com p en sation
The followin g are th e corp orate acts in w h ich a stock h old er of a corp oration
shall h ave th e righ t to d issen t and d em an d p aym en t of th e fair valu e of h is
sh ares of stock, excep t one:
A.
in caise of in cu rrin g, creatin g, or in creasin g b on d ed d ebts
B.
in case of m erger or consolidation
C.
in case of an am en d m en t to the articles of in corp oration w h ich h as th e
effect of ch an gin g or restrictin g the rights of an y stock h old er
D.
in case of sale, lease, mortgage, or oth er d isp osal of all or su b stan tially all
of th e corp orate asset
A p erson m ay b ecom e a shareholder in the following in stan ces, excep t:
A.
b y p u rch ase from th e corporation of treasu ry sh ares
B.
b y acqu isition of the assets of an existing corp oration :
C.
b y tran sfer from a p revious stockholder of the ou tstan d in g sh ares
D.
by su b scrip tion con tract w ith an existin g corp oration for th e acq u isition
of u n issu ed sh ares
■1
12.
•
.
'•
_
'
’
'
A
The followin g are the different mod es b y w h ich sh ares m ay be issu ed, excep t:
A.
b y sale of treasu ry stock after in corp oration for money, p rop erty, or service
B.
b y su b scrip tion n ew stocks, w h en all the origin al stock s h ave b een issu ed
an d th e am ou n t of the capital stock in creased
C.
b y su b scrip tion before an d after in corp oration
' D.
b y tran sfer of sh ares
U N IT II I REVISED C O RP O RA TIO N CO D E
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13.
14.
15.
Th e follow in g are th e lim itation in th e issu an ce of stock s, excep t:
A.
sh ares of stock shall n ot be issu ed for con sid eration m ore th an th e p ar or
issu ed p rice th ereof
B.
th ey shall n ot be issued in exch an ge for p rom issory n otes
C.
w h en th e con sid eration is oth er th an actu al cash or con sists of intangible
p rop erty, th e valu e shall b e d eterm in ed by th e in corp orators or th e board,
su b ject to ap p roval by th e SEC
D.
th e issu ed p rice of n o-p ar valu e sh ares m u st be fixed
W h ich statem en t is in correct?
1
(
A.
O n ly absolute tran sfers of sh ares of stock n eed to b e registered in the
b ook s of th e corp oration .
B.
A stock b ecom es d elinquent u pon failure of th e h old er to p ay th e unpaid
su b scrip tion or b alan ce th ereof w ith in 60 d ays from th e d ate sp ecified in
th e con tract of sub scrip tion .
C.
Th e b oard of d irectors m ay d eclare due an d p ayab le u n p aid subscription s.
D.
In th e ab sen ce of bidders, the corp oration m ay p u rch ase for itself the
d elin q u en t stock.
Th e follow in g are th e effects of an u n registered tran sfer of sh ares, excep t:
A.
It is in valid in sofar as the corp oration is con cern ed excep t w h en n otice is
given to th e corp oration for p u rp oses of registration .
B.
It is valid as again st corp orate cred itors.
C.
It is valid and b in d in g b etw een the tran sferee an d th e tran sferor.
D.
It is in valid as again st the cred itors of th e tran sferor w ith ou t n otice of the
tran sfer.
CH A PTER PRO JECT
1.
D iscu ss w ith a p artn er th e difference b etw een m erger an d con solid ation .
2.
Search th e in tern et abou t com p an ies th at m erged or con solid ated an d write a
rep ort ab ou t h ow th is m erger or con solid ation w as done.
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IN TRO D UCTIO N
This Ch ap ter will d iscu ss th e featu res, p u rp ose, an d req u irem en ts of th e oth er
typ es of corp oration s existin g u n d er the RCC, su ch as th e n on stock corp oration ,
the close corp oration , sp ecial corp oration s, th e on e-p erson corp oration , an d th e
foreign corp oration . Th ere will also be a th orou gh d iscu ssion on th e d issolu tion
or th e extin gu ish m en t of th e fran ch ise of a corp oration an d th e term in ation of its
corp orate existen ce. The last p art will d iscu ss th e acts con sid ered as violation s of
the RCC w h ich are w ith in the p ow er of the SEC to in vestigate an d p u n ish .
IN TEN D ED LEARN IN G O UTCO M ES
/
At th e en d of th is chapter, the students will be able to d iscu ss th e d ifferen ce1
b etw een an d th e salien t features of n on stock corp oration , close corp oration , sp ecial
corp oration s, on e-p erson corporation , and foreign corp oration ; d iscu ss th e volu n tary
and in volu n tary m eth od s of dissolving a corp oration ; com p are an d con trast a
foreign corp oration an d a d omestic corporation ; an d p red ict w h at w ill h ap p en w h en
a d om estic corp oration is m ism an aged and the SEC step s in to in vestigate.
\
Lesson 1: N on stock Corp oration
Section 86 of th e RCC defines a n on stock corp oration as on e w h ere n o p art of its
in com e is d istrib u tab le as dividends to its mem bers, tru stees, or officers. A n on stock
corp oration d oes n ot h ave sh ares an d can n ot d istrib ute p rofits to its m em b ers. An y
profit w h ich it m ay ob tain incidental to its op eration s shall, w h en ever n ecessary
or p rop er, be u sed for the fu rth eran ce of the p u rp ose or p u rp oses for w h ich th e
corp oration w as organ ized . N on stock corp oration s are govern ed b y th e sam e
rules estab lish ed for stock corp oration s, w h en ever p ertin en t, subject, h ow ever, to a
■
»
.
',
n um ber of sp ecial features.
Pu rp oses1
Un d er Section 87, n on stock corp oration s m ay be form ed or organ ized for
charitable, religiou s, ed u cation al, p rofession al, cu ltu ral, fratern al, literary, scien tific,
’ Th e old Co rp o ra tio n Cod e (BP Big. 68) p rov id es th at n on sto ck corp o ration s m a y be org a n ized for
eleem osy n ary p u rp oses.
U N IT II | R EV ISED C O RP O RA TIO N C O D E
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social, civic service, or sim ilar p u rp oses like trad e in d u stry, agricu ltu ral an d like
ch am b ers, or an y com b in ation th ereof, su b ject to th e sp ecial p rovision s governing
p articu lar classes of n on stock corp oration s.
R ig h t to Vote
Section 88 p rovid es th at th e righ t of th e m em b ers of an y class or classes to
vote m ay b e lim ited , b road en ed , or d en ied to th e exten t sp ecified in th e articles of
in corp oration or th e b ylaws. Un less so limited , b road en ed , or d en ied , each member,
regard less of class, shall b e entitled on e vote. Un less oth erw ise p rovid ed in the
articles of in corp oration or th e b ylaws, a m em b er m ay vote b y p roxy, in accordance
w ith th e p rovision s of th e RCC. The b ylaws m ay lik ew ise au th orize votin g through
rem ote com m u n ication an d /or in absentia.
A m em b er of a n on stock corp oration is entitled to one vote u n less otherwise
p rovid ed in th e articles or bylaws. He is en titled to vote by p roxy u n less otherwise
p rovid ed in th e articles or b ylaws. He h as th e righ t to tran sfer m em b ersh ip if
allow ed b y th e articles or b ylaws, as well as th e right to be elected as tru stee.
Un d er Section 89, m em b ersh ip in a n on stock corp oration an d all th e righ ts arising
th erefrom are p erson al an d nontransferable, u n less th e articles of in corp oration or
th e b ylaw s oth erw ise p rovide. It's m em b ers can n ot tran sfer m em b ersh ip unless
allow ed b y its articles or bylaws. Membership shall be term in ated in th e manner
an d for th e cau se p rovid ed in th e articles of in corp oration or th e b ylaw s. Section 90
p rovid es th at term in ation of membersh ip shall extin gu ish all righ ts of a member
in th e corp oration or in its p rop erty, u n less oth erw ise p rovid ed in th e articles of
in corp oration or th e b ylaws.
Ele ctio n an d Term of Tru stees
Section 91 req u ires th at th e n u m b er of tru stees w h ich m ay or m ay not be
m ore th an 15 is fixed in th e articles of in corp oration or b ylaws. Tru stees sh all hold
office for n ot m ore th an th ree years u n til th eir su ccessors are elected an d qualified.
Tru stees elected to fill Vacancies occu rrin g b efore th e exp iration of a particular
term sh all h old office for th e u n exp ired p eriod . Excep t w ith resp ect to independent
tru stees of a n on stock corp oration vested w ith p ub lic in terest, on ly a m em b er of the
corp oration sh all be elected as a tru stee. Un less oth erw ise p rovid ed in th e articles of
in corp oration or th e b ylaws, th e m em b ers m ay d irectly elect officers of a nonstock
corp oration .
Section 92 m an d ates th at th e corp oration shall, at all tim es, k eep a list of its
m em b ers an d th eir p roxies of record in th e form th e SEC m ay req u ire. The list
sh all b e u p d ated to reflect th e m em b ers an d p roxies of record 20 d ays prior .to
-
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any sch edu led election . The bylaws m ay p rovid e th at th e m em b ers of a n on stock
corporation m ay h old th eir regu lar or sp ecial m eetin gs at an y p lace even ou tsid e th e
place w h ere th e p rin cip al office of the corp oration is located . Prop er n otice m u st b e
sent to all m em b ers in d icatin g the date, time, an d p lace of th e m eetin g w h ich sh all
be w ithin th e Ph ilip p in e territory.
Ru les of D istrib u tion of Assets
Section 93 p rovid es th at the assets of a n on stock corp oration u n d ergoin g the
p rocess of d issolu tion for reason s oth er th an th ose set forth in Section 139 of the
RCC shall b e ap p lied an d d istrib uted as follows:
•
all. liabilities an d obligations of the corp oration shall be p aid , satisfied an d
d isch arged , or ad eq u ate provision shall be m ad e th erefor;
•
assets h eld b y th e corp oration u pon a con dition req u irin g retu rn , tran sfer, or
con veyed an d w h ich condition occu rs by reason of th e d issolu tion , sh all be
retu rn ed , tran sferred , or conveyed in accord an ce w ith su ch req u irem en ts;
•
assets received an d held by the corp oration subject to lim itation s p erm ittin g
th eir u se on ly for a charitable, religious, benevolent, ed u cation al, or sim ilar
p u rp ose, b u t n ot held u pon a condition req u irin g retu rn , tran sfer, or con veyan ce
by reason of th e dissolution, shall be tran sferred or'con veyed to on e or m ore
corp oration s, societies or organ ization s en gaged in activities in th e Ph ilip p in es
su b stan tially sim ilar to those of the dissolvin g corp oration accord in g to a p lan
of d istrib u tion ad op ted ;
.
•
assets oth er th an th ose mentioned in the p reced in g p aragrap h s, if any, sh all b e
d istrib u ted in accord an ce with the p rovisions of th e articles of in corp oration or
th e b ylaw s, to th e exten t that the articles of in corp oration or th e b ylaw s exten t
th at th e articles of in corp oration or the bylaws d eterm in e th e d istrib u tive righ ts
of m em b ers, or an y class or classes of mem b ers, or p rovid e for d istrib u tion ; an d
•
in an y oth er case, assets m ay be d istrib uted to su ch p erson , societies,
organ ization s, or corp oration s, w h eth er or n ot organ ized for p rofit, as m ay b e
sp ecified in a p lan of d istrib ution ad op ted.
Accord in g to Section 94, a plan p rovid in g for th e d istrib u tion of assets m ay be
adopted b y a n on stock corp oration in th e p rocess of d issolu tion as follows:
•
the b oard of tru stees shall, by m ajority vote, ad op t a resolu tion recom m en d in g
a p lan of d istrib u tion an d d irectin g th e su b m ission th ereof to a vote at a regu lar
or sp ecial m eetin g of m em b ers h avin g votin g rights;
•
each m em b er entitled to vote shall be given a w ritten n otice settin g forth th e
p rop osed p lan of d istrib ution or su m m ary th ereof an d th e d ate, tim e, an d
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p lace of su ch m eetin g w ith in th e tim e an d in th e m an n er p rovid ed in th e RCC
for th e givin g of n otice of m eetin gs; an d
•
su ch p lan of d istrib u tion shall b e ad op ted u p on ap p roval of at least two-third s
of th e m em b ers h avin g votin g righ ts p resen t or rep resen ted b y p roxy at such
m eetin g.
C o n v e rs io n fro m a Sto ck C o rp o ra tio n to a N o n s to ck C o rp o ra tio n
If a stock corp oration w ish es to con vert to a n on stock corp oration , the
con version m ay b e m ad e b y m ere am en d m en t of th e articles of in corp oration . If a
n on stock corp oration w ish es to con vert to a stock corp oration , th e corp oration must
first b e d issolved b ecau se th e con version w ou ld ch an ge th e corp orate n atu re from
n on -p rofit to m on etary gain .
i
P R A C T IC E EXER C IS E
H ow d o you con vert a stock corp oration to a n on stock corp oration ? If given
th e op p ortu n ity, w h at n on stock corp oration w ill you ch o ose to co n v e rt yo u r stock
corp oration to?
R ELEV A N C E O F TH E LESSO N
A n on stock corp oration is sim p ler to ru n th an a stock co rp o r a tio n an d yet both
en joy righ ts an d are exp osed to liabilities. Kn ow in g h ow to effectively an d properly
ru n a n on stock corp oration is im p ortan t so u n w an ted liab ilities m a y b e avoid ed .
).
'
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LES S O N SU M M A R Y
•
A n on stock corp oration is on e organ ized for a n e le e m o s y n a r y p u rp o se , and
n o p a rt of w h ose in com e is, d u rin g its existen ce, d istrib u tab le as dividends
to its m em b ers, tru stees, or officers, su b ject to th e p ro v isio n s of th e RCC on
d issolu tion .
•
A n o n sto ck corp oration is govern ed b y th e sam e ru le s estab lish ed for stock
corp oration s, w h en ever p ertin en t, su b ject, h ow ever, to a n u m b e r of special
featu res.
•
If a stock corp oration w ish es to con vert to a n o n sto ck corp oration , the
con version m ay b e m ad e b y m ere am en d m en t of th e article s of incorporation;
b u t if a n on stock corp oration w ish es to con vert to a sto ck corp oration , the
co rp o ration m u st first b e d issolved .
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Lesson 2
Lesson 2.1: Close Corp oration s
Section 95 d efin es a close corp oratio n as on e w h ose a rticles of in co rp oration
p rovid es th at: (a) all th e corp oration 's issu ed stock of all classes, exclu sive of
treasu ry sh ares, sh all b e h eld of record b y n o t m ore th a n a sp ecified n u m b er of
p erson s, n ot e xce e d in g 20; (b) all th e issu ed stock of all classes sh all b e su b ject to 1
or m ore sp ecified re striction s on tran sfer; an d (c) th e co rp o ratio n sh all n o t list in an y
stock e xch a n g e o r m ak e an y p u b lic offerin g of its stock s of an y class. A co rp o ra tio n
sh all n ot b e d e em ed a close corp oration w h en at least tw o -th ird s of its v o tin g stock
or votin g righ ts is o w n ed or con trolled b y an o th er co rp o ratio n th a t is n o t a close
corp oration w ith in th e m e a n in g of th e RCC. In on e case, th e Su p rem e C o u rt h eld
th at a n a r r o w d istrib u tion of ow n ersh ip d oes n ot, b y itself, m ak e a close co rp o ra tio n .
Th ere is a n eed to look in to th e articles of in corp oration to fin d p ro v isio n s e xp re s sly
statin g th at: (a) th e n u m b er of stock h old ers sh all n ot exceed 20; o r (b) a p re -e m p tio n
of sh ares is re stricte d in favor of an y stock h old er or of th e co rp o ra tio n ; or (c) th e
listin g of th e co rp o ra te stock s in an y stock exch an g e or m a k in g a p u b lic o fferin g of
th ose stock s is p roh ib ited . A corp oration can n o t b e d eem ed as a close co rp o ra tio n
b ased on m e re allegation s th at it w as so.2
A n y co rp o ra tio n m ay b e in corp orated as a close co rp o ra tio n , e xce p t m in in g
or oil co m p a n ie s, stock exch an ges, b an k s, in su ran ce com p an ies, p u b lic u tilities,
ed u cation al in stitu tion s, an d corp oration s d eclared to b e vested w ith p u b lic in te re st
in a cco rd a n ce w ith th e p rovision s of th e Revised C o rp o ratio n C od e. Th e a rticle s of
e
•
.
'
1
in co rp o ra tio n of a close corp oratio n m u st con tain th e sp ecial m a tte rs p re s crib e d b y
Section 95, asid e fro m th e gen eral m atters in Section 14;3 failu re to d o so p re clu d e s a
de ju re
close co rp o ra tio n statu s.
A close co rp o ra tio n h as m a n y ch aracteristics th at d istin g u ish it fro m o th e r
co rp oratio n s. In a close corp oratio n , a stock h old er m a y a ct as a d ire cto r w ith o u t th e
n eed for a n e lectio n an d as su ch , is liable as a d irector. If a sto ck h o ld er is in volved in
th e m a n a g e m e n t, h e is liab le ip th e sam e m a n n e r as a d irecto r. Th e q u o ru m for an y
m eetin g m a y b e g re a te r th a n th e m ere m ajority. C o rp o rate a cts m a y b e b in d in g even
w ith ou t a fo rm a l b o a rd m e e tin g if th e stock h old er h a d k n ow led ge or ratified th e
in fo rm al a ctio n of th e oth ers. Th e SEC settles d ead lo ck s in th e b o a rd u p o n w ritte n
p etition b y a n y stock h old er. A n y tran sfer of stock s to o th ers, w h ich w o u ld in crease
th e n u m b er of stock h old ers of a close co rp o ratio n to m o re th a n th e m a xim u m lim it
2Bu stos vs. M illian s Sh oe, Inc., G.R. N o. 185024, A p ril 24, 2017.
3Sa n Ju a n Stru ctu ra l an d Steel Fabricators, Inc. vs. Cou rt of A p p eals, M otorich Sales Corp oration , N en ita
Lee G ru en berg , A CL D ev elop m en t Corp ., an d JN M Realty and D ev elop m en t Corp ., G.R. N o. 129459, Sep tem ber
29,1998.
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is in valid . The p reem p tive righ t in a close corp oration exten d s to all stock issues. 4
stock h old er m ay avail an d w ith d raw of h is righ t of ap p raisal.
A rticles of In co rp o ratio n
Un d er Section 96, th e articles of in corp oratip n of a close corp oration m ay provide
for: (1) a classification of sh ares or righ ts, th e q u alification s for ow n in g or holding
th e sam e, an d restriction s on th eir tran sfers; (2) a classification of d irectors into one
or m ore classes, each of w h om m ay be voted for an d elected solely b y a particular
class of stock ; an d (3) greater q u oru m or votin g req u irem en ts in th e m eetin gs of
stock h old ers or d irectors. The articles of in corp oration of a close corp oration may
p rovid e th at th e b u sin ess of the corp oration shall b e m an aged b y th e stockholders
of th e corp oration rath er th an by a b oard of d irectors. So lon g as th is provision
con tin u es in effect, th ere is no need to call a m eetin g of stock h old ers to elect directors.
Th e stock h old ers of th e corp oration shall be d eem ed to be d irectors for th e purpose
of ap p lyin g th e p rovision s of th e RCC, u n less th e con text clearly req u ires otherwise.
Th e stock h old ers of th e corp oration shall be subject to all liabilities of d irectors. The
articles of in corp oration m ay likewise p rovid e th at all officers or em p loyees or that
sp ecified officers or emp loyees shall be elected or ap p oin ted b y th e stockholders,
in stead of by th e b oard of d irectors.
Section 97 m an d ates th at restriction s on the righ t to tran sfer sh ares must
ap p ear in th e articles of in corp oration , in the bylaws, as well as in th e certificate ol
stock ; oth erw ise, th e sam e shall n ot be b ind ing on an y p u rch aser in good faith. Said
restriction s shall n ot m ore b u rd en som e th an gran tin g th e existin g stock h old ers or
th e corp oration the op tion to p u rch ase the sh ares of th e tran sferrin g stockholder
w ith su ch reason ab le term s, con ditions or p eriod stated . If u p on th e exp iration of
th e said p eriod , th e existin g stock h old ers or th e corp oration fails to exercise the
op tion to p u rch ase, th e tran sferrin g stock h old er m ay sell th eir sh ares to an y third
p erson .
Effects of Issu an ce or Tran sfer of Stock s in Breach of
Q u alifyin g Con d ition s
Section 98 d iscu sses th e effects of th e issu an ce of tran sfer of stock in breach ol
q u alifyin g con d ition s. If a stock of a close corp oration is issu ed or tran sferred to any
p erson w h o is n ot eligible to be a h old er th ereof u n d er th e articles of incorporation,
an d if th e certificate for su ch stock con sp icu ou sly sh ow s th e q u alification s of
th e p erson s en titled to b e h old ers of record th ereof, su ch p erson is conclusively
p resu m ed to h ave n otice of the fact of th e in eligibility to be a stock h old er. If the
articles of in corp oration of a close corp oration state th e n u m b er of p erson s, not
exceed in g 20, w h o are entitled to b e stock h old ers of record , an d if th e certificate for
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iuch stock conspicuously stales such number, and the issuance or transfer of stock to
any person would cause the stock to be held by more than such num ber of person s,
the person to whom such stock is issued of transferred is conclusively p resu med
to have notice of this fact. If a stock certificate of a close corporation conspicu ou sly
shows a restriction on transfer of the corporation's stock and the transferee acqu ires
the stock in violation of such restriction, the tran sferee is conclusively p resu m ed to
have notice of the fact that the stock was acquired in violation of the restriction.
The corp oration may, at its option, refuse to register the transfer in the name
of the tran sferee wh enever a p erson to whom stock of a close corp oration h as been
issued or tran sferred h as or is conclusively presumed to have notice of: (1) the
person's ineligibility to be a stockholder of the corporation ; or (2) that the transfer of
stock would cau se the stock of the corporation to be held by more th an the n u m b er of
p ersons p erm itted u n d er its articles of incorporation; or (3) th at the transfer violates
a restriction on transfer of stock. This will not apply if the tran sfer of stock has been
con sented to by all stockholders of the close corporation, or if the close corp oration
h as am en d ed its articles of incorporation. The provisions of Section 98 shall n ot
imp air any righ t which the transferee may have to either rescind the tran sfer or
recover th e stock u nd er any express or implied warranty.
Agreem en ts b y Stock h old ers
Un d er Section 99, agreements duty signed and executed by and am on g all
stock hold ers before the formation and organization of a close corp oration shall
su rvive th e incorp oration and shall continue to be valid and bind ing b etw een
such stock hold ers, if it was their intention, to the extent th at such agreem en ts are
con sistent w ith the articles of incorporation. A w ritten agreem en t signed b y tw o
or m ore stockholders may provide that in exercising any votin g right, th e sh ares
held by th em shall be voted as provided or as agreed, or in accord an ce w ith a
p roced u re agreed u pon by them. No provision in a w ritten agreem en t sign ed by
the stock hold ers, relating to any phase of corporate affairs, shall be invalidated
between th e p arties op the grou nd that its effect is to m ak e th em p artn ers am on g
themselves. Similarly, a w ritten agreemen t among some or all the stockholders in a
close corp oration shall n ot be invalidated on the grou n d th at it relates to the con du ct
of the business and affairs of the corporation as to restrict or interfere with the
d iscretion or p ow ers of the b oard of directors. Such agreem en t shall imp ose on the
stock holders wh o are p arties thereto the liabilities for m an agerial acts imposed on
d irectors b y th e RCC. Also, stockholders actively en gaged in the m an agem ent or
op eration of the business and affairs of a close corp oration shall be held to strict
fidu ciary duties to each other and among themselves. The stockholders shall be
p ersonally liable for corporate torts unless the corp oration h as obtained reasonably
adequate liability insurance.
U N IT II I R EV IS ED C O R P O R A T I O N C O D E
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W h en a Board M eetin g is Un n ecessary or Im p rop erly H eld
Un d er Section 100, u n less the b ylaws p rovid e oth erw ise, an y action tak en by
the d irectors of a close corp oration w ith ou t a m eetin g called p rop erly an d w ith due
n otice shall n everth eless be d eem ed valid if:
•
b efore or after su ch action is tak en, a w ritten con sen t th ereto is sign ed by all
th e d irectors; or
•
all the stock h old ers h ave actu al or implied k n ow led ge of th e action an d make
n o p rom p t objection in w ritin g; or
•
th e d irectors are accu stom ed to take in form al action w ith th e exp ress or
imp lied acqu iescen ce of all th e stock hold ers; or
•
all th e d irectors h ave exp ress or implied k n owled ge of th e action in question
an d n on e of th em m ak es p rom p t objection in w ritin g.
An action w ith in the corp orate p ow ers tak en at a m eetin g h eld w ith ou t proper
call or n otice is d eemed ratified by a d irector w ho failed to atten d u n less after
h avin g k nowledge thereof, the .director p rom p tly files h is w ritten ob jection with
th e secretary of the corp oration .4 Section 101 m an d ates th at th e p reem p tive righ t of
stock h old ers in close corp oration s shall exten d to all stock to b e issu ed , including
reissu an ce of services, or in p aym en t or corp orate debts, u n less th e /articles of
in corp oration p rovid e oth erw ise.
'
v
■ 1
. . .
^
I
i
A m en d m en t of Articles of In corp oration
Section 102 p rovid es th at an y am en d m en t to th e articles of in corp oration
w h ich seeks to delete or rem ove an y p rovision req u ired b y th e RCC or to red u ce a
q u oru m or votin g req u irem en t stated in said articles of in corp oration sh all require
an affirm ative vote of at least tw o-th ird s of th e ou tstan d in g cap ital, w h eth er w ith or
w ith ou t votin g righ ts, or of su ch greater p rop ortion of sh ares as m ay b e specifically
p rovid ed in th e articles of in corp oration for am en d in g, d eletin g or rem ovin g any of
th e aforesaid p rovision s, at a m eetin g d uly called for th is p u rp ose.
D ead lock s
Section 103 p rovid es th at n otw ith stan d in g an y con trary p rovision in th e close
corp oration 's articles of in corp oration , b ylaws, or stock h old ers' agreem en t, if the
d irectors or stock h old ers are so d ivid ed on th e m an agem en t of th e corporation's
b u sin ess an d affairs th at th e votes req u ired for a corp orate action can n ot b e obtained,
4
M a n u el R. D u lay En ter p rises, In c., Virg ilio E. Du lay, an d N ep o m u cen o Red o v a n v s. th e H on or a b le Court
o f A p p eals, et al., G .R. N o. 91889, A u g u st 27,1993.
166.
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with the con seq u en ce that the business and affairs of the corp oration can n o lon ger
be con du cted to the ad van tage of the stock hold ers generally, the SEC, u p on w ritten
petition by an y stockholder, shall have the p ow er to arbitrate the dispute. In the
exercise of su ch power, the SEC shall have au th ority to m ak e ap p rop riate ord ers,
such as:
•
can celin g or alterin g an y provision con tain ed in the articles of in corp oration ,
bylaws, or an y stock h old ers' agreem en t;
•
cancelin g, alterin g, or enjoining a resolu tion or act of th e corp oration or its
b oard of d irectors, stockholders, or officers;
•
d irectin g or p rohib itin g an y act of the corp oration or its b oard of d irectors,
stockh old ers, officers, or oth er p erson p arties to the action;
•
req u irin g th e p u rch ase at th eir fair value of sh ares of any stock h old er, eith er by
th e corp oration regard less of the availability of u n restricted retain ed earn in gs
in its b ook s, or by the oth er stockholders;
•
ap p oin tin g a p rovisional director;
•
d issolvin g th e corp oration ; or
•
gran tin g su ch oth er relief as the circu m stan ces m ay w arran t.
f
,
A p rovision al d irector shall be an im p artial p erson wh o is n eith er a stock h old er
nor a cred itor of th e corp oration or any of its subsidiaries or affiliates, an d w h ose
fu rth er q u alification s, if any, m ay be d eterm in ed by th e SEC. H e is n ot a receiver of
the corp oration an d does n ot have the title and p ow ers of a cu stod ian or receiver.
He shall h ave all th e righ ts and powers of a duly elected d irector, in clu d in g th e righ t
to be n otified of an d to vote at meetings of d irectors u ntil rem oved b y ord er of th e
SEC or b y all th e stock hold ers. The comp en sation of the p rovision al d irector sh all be
d eterm in ed b y agreem en t b etw een such p rovisional d irector an d th e corp oration ,
subject to th e ap p roval of the SEC, w h ich m ay fix th e com p en sation ab sen t an y
agreem en t in th e even t of d isagreem en t b etw een th e p rovision al d irector an d th e
corp oration .
W ith d raw al of Stock h old er or D issolu tion of Corp oration
Section 104 p rovid es th at in addition an d w ith ou t p reju d ice to oth er righ ts
and rem ed ies available, an y stock h old er of a close corp oration may, for an y reason ,
comp el th e corp oration to p u rch ase sh ares held at fair value, w h ich shall n ot be
less th an th e p ar or issu ed value, w h en the corp oration h as sufficient assets in its
b ooks to cover its debts an d liabilities exclu sive of capital stock. An y stock h old er of
a close corp oration may, b y w ritten p etition to the SEC, com p el th e d issolu tion of
such corp oration w h en ever an y acts of th e d irectors, officers, or th ose in con tro1 are
U N IT II I REV ISED C O RP O RA TIO N C O D E
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illegal, frau d u len t, d ish on est, op p ressive, or u n fairly p reju d icial to th e corporation
or any stock h old er, or w h en ever corp orate assets are b ein g m isap p lied or wasted.
Lesson 2.2: Sp ecial C orp oration s
Lesson 2.2.1: Ed u cation al C orp oration s
An ed u cation al corp oration is a stock or n on stock corp oration organ ized to
p rovid e facilities for teach in g or in stru ction . A favorable recom m en d ation of the
D ECS is essen tial for th e ap p roval of its articles an d bylaws. It is p rim arily governed
b y sp ecial laws an d su p p letorily by th e p rovision s of th e Revised Corp oration Code.5
Board of Tru stees
Accord in g to Section 106, tru stees of ed u cation al in stitu tion s organ ized as
n on stock corp oration s shall not be less th an five n or m ore th an 15. Th e number
of tru stees sh all b e in multiples of five. Un less oth erw ise stated in th e articles of
in corp oration or bylaws, the b oard of tru stees of in corp orated sch ools, colleges, or
oth er in stitu tion s of learn in g shall, as soon as organ ized , so classify themselves
th at th e term of office of one-fifth of th eir n u m b er shall exp ire every year. Trustees
elected to fill vacan cies occu rrin g before the exp iration of a p articu lar term shall
hold office on ly for th e u n exp ired p eriod . Tru stees elected to fill vacan cies caused
b y th e exp iration of term shall hold office for five years. The Su p rem e Cou rt, in
on e case, stressed th at w h ile the secon d p aragrap h of Section 105 sets th e term of
th e m em b ers of th e Board of Tru stees at five years, it con tain s a p roviso expressly
su b jectin g th e d u ration to w h at is otherwise provided in th e articles of incorporation
or b ylaw s of th e ed u cation al corp oration ; su ch con trary p rovision con trols on the
term of office.6
A m ajority of th e tru stees shall con stitu te a q u oru m for th e tran saction of
b u sin ess. The p ow ers an d au th ority of tru stees shall b e d efin ed in th e b ylaws. For
in stitu tion s organ ized as stock corp oration s, th e n u m b er an d term of d irectors shall
b e govern ed b y th e p rovision s of stock corp oration s.
Lesso n 2.2.2: Religiou s Corp oration s
Section 107 p rovid es th at religiou s' corp oration s m ay b e in corp orated by one
or m ore p erson s. Su ch corp oration s m ay b e classified in to corp oration sole and
religiou s societies. Religiou s corp oration s shall b e govern ed b y Ch ap ter II, Title XIII
of th e RCC an d su p p letorily'b y th e gen eral p rovision s on n on stock corp oration s.
5Se ctio n 105, RCC.
6 P etro n ilo J. Ba ra y u g a vs. A d v en tist U n iv er sity of th e Ph ilip p in es, th rou g h its Bo a rd o f Tru stees, rep resen ted
b y its C h a irm a n , N esto r D . D ay son , G .R. N o. 168008, A u g u st 17, 2011.
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A religiou s corp oration is a corp oration com p osed en tirely of sp iritu al p erson s
an d w h ich is organ ized for th e fu rth eran ce of religion or for p erp etu atin g th e righ ts
of the ch u rch or for th e ad m in istration of ch u rch or religiou s w ork or p rop erty.
It is d ifferen t from an ord in ary n on stock corp oration organ ized for religiou s
p u rp oses. It m ay be in corp orated b y on e or m ore p erson s. Such corp oration s m ay
be classified in to corp oration sole an d religiou s societies, to wit: (1) corp oration sole
w h ich is a sp ecial form of corp oration , u su ally associated w ith th e clergy, con sistin g
of on e p erson on ly an d h is su ccessors, w h o is in corp orated b y law to give som e
legal cap acities an d ad van tages; an d (2) religiou s societies w h ich are n on stock
corp oration s govern ed b y a b oard b u t w ith religiou s p u rp oses; in corp orated b y an
aggregate of p erson s, e.g., religiou s order, d iocese, syn od , sect, etc.
C orp o ratio n Sole
Accord in g to Section 108, a corp oration sole m ay be form ed b y th e ch ief
arch b ish op , b ish op , p riest, m in ister, rabbi, or oth er p resid in g eld ers of su ch religiou s
d en om in ation , sect, or ch u rch for the p u rp ose of ad m in isterin g an d m an agin g as
tru stee, th e affairs, p rop erty an d temp oralities of an y religiou s d en om in ation , sect
or ch u rch .
'
A rticles of In co rp o ratio n
In ord er to b ecom e a corp oration sole, th e chief arch b ish op , b ish op , p riest,
m in ister, rab bi, or p resid in g elder of any religiou s d en om in ation , sect or ch u rch
m u st file w ith th e SEC articles of in corp oration settin g forth th e follow in g:
•
th at th e ap p lican t ch ief arch bishop, bishop, priest, m in ister, rabbi, or p resid in g
eld er rep resen ts th e religiou s d en omin ation , set or ch u rch w h ich d esires to
b ecom e a corp oration sole;
•
th at th e ru les, regu lation s, an d discip lin e of the religiou s d en om in ation , sect,
or ch u rch are con sisten t w ith b ecom in g a corp oration sole an d d o n ot forbid it;
•
th at su ch ch ief arch b ish op , bishop, p riest, m in ister, rabbi, or p resid in g eld er is
ch arged w ith th e ad m in istration of th e tem p oralities an d th e m an agem en t of
th e affairs, estate, an d p rop erties of th e religiou s d en om in ation , sect, or ch u rch
w ith in th e territorial ju risd iction , so d escrib ed su ccin ctly in th e articles of
in corp oration ;
•
th e m an n er b y w h ich vacan cy occu rrin g in th e office of th e ch ief arch b ish op ,
b ish op , p riest, rabbi, or p resid in g eld er is req u ired to be filled, accord in g to th e
ru les, regu lation s, or d iscip lin e of th e religiou s d en om in ation , sect, or ch u rch ;
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•
th e p lace w h ere th e p rin cip al office of th e corp oration sole is to be established
and located , w h ich p lace m u st be w ith in th e territory of th e Philip p in es; and
•
an y oth er p rovision s n ot con trary to law for th e regu lation of th e affairs of the
corp oration .
Su b m ission of th e A rticles of In corp oration
Section 110 m an d ates th at th e articles of th e in corp oration m u st b e verified,
b y affid avit or affirm ation of th e ch ief arch b ish op , b ishop, p riest, m in ister, rabbi, or
p resid in g elder, as th e case m ay be, an d accom p an ied b y a cop y of th e commission,
certificate of election or letter of ap p oin tm en t of su ch ch ief arch b ish op , bishop,
p riest, m in ister, rabbi, or p resid in g elder, d u ly certified to b e correct b y an y notary
public.
From an d after filin g w ith th e SEC of the said articles of in corp oration , verified
b y affid avit or affirm ation , an d accom p an ied by th e d ocu m en ts m en tion ed in the
p reced in g p aragrap h , su ch ch ief arch b ish op, bishop, p riest, m in ister, rabbi, or
p resid in g elder shall b ecom e a corp oration sole an d all tem p oralities, estate and
p rop erties of the religiou s d en om in ation , sect or ch u rch ad m in istered or manage
as su ch ch ief arch bishop , bishop, p riest, m in ister, rabbi, or p resid in g eld er shall be
p erson ally held in tru st as a corp oration sole, for th e u se, p u rp ose, exclu sive benefit
an d on b eh alf of th e religiou s d en om in ation , sect or ch u rch , in clu d in g hospitals,
sch ools, colleges, orp h an asylu m s, p arson ages, an d cem eteries.
A cq u is itio n an d A lien ation of Prop erty
Accord in g to Section 111, a corp oration sole m ay p u rch ase an d h old real estate
an d p erson al p rop erty for each ch u rch , ch aritab le, b en evolen t, or educational
p u rp oses, an d m ay receive b eq u ests or gifts for su ch p u rp oses. It m ay sell or mortgage
real p rop erty h eld b y it b y ob tain in g an ord er fot th at p u rp ose from th e Regional
Trial Cou rt of th e p rovin ce w h ere th e p rop erty is situ ated u p on p roof th at th e notice
of th e ap p lication for leave to sell or m ortgage h as b een m ad e th rou gh publication
or as d irected b y th e Cou rt an d th at it is in th e in terest of th e corp oration th at leave
to sell or m ortgage b e gran ted . The ap p lication for leave to sell or m ortgage must be
m ad e b y d u ly yerified p etition b y th e ch ief arch b ish op , b ish op , p riest, m in ister, rabbi,
or p resid in g eld er actin g as a corp oration sole, an d m ay b e op p osed b y an y member
of th e religiou s d en om in ation , sect, or ch u rch rep resen ted b y th e corp oration sole.
In cases w h ere th e ru les, regu lation s, an d d iscip lin e of th e religiou s denomination,
set or ch u rch , religiou s society, or ord er con cern ed rep resen ted b y su ch corporation
sole regu late th e m eth od of acq u irin g, h old in g, sellin g, an d m ortgagin g real estate
an d p erson al p rop erty, su ch ru les, regu lation s an d d iscip lin e sh all govern , and
cou rt in terven tion is n ot req u ired .
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Fillin g o f V acan cies
Section 112 m an d ates th at th e su ccessor in office of an y ch ief arch b ish op ,
bishop, p riest, m in ister, rabbi, or p resid in g eld er in a corp oration sole b ecom es th e
corporation sole on th eir accession to office an d b e p erm itted to tran sact b u sin ess
as such u p on filin g a cop y of th eir com m ission , certificate of election , or letters
of ap p oin tm en t, d u ly certified b y an y n otary public w ith th e SEC. The p erson s
au th orized b y th e ru les, regu lation s, or d iscip lin e of th e religiou s d en om in ation , sect,
or ch u rch rep resen ted b y th e corp oration sole to ad m in ister th e tem p oralities an d
m an age its affairs, estate, an d p rop erties shall exercise all its p ow ers an d au th ority
d uring a vacan cy in th e office of th e ch ief arch b ish op, bishop, p riest, m in ister, rabbi,
or p resid in g eld er of an y d en om in ation , sect, or ch u rch in corp orated as a corp orate
sole.
•
,
i
•
D issolu tion
i
Accord in g to Section 113, a corp oration sole m ay be d issolved an d its affairs
settled volu n tarily b y su b m ittin g to the SEC a verified d eclaration of d issolu tion ,
settin g forth : (1) th e n am e of th e corp oration ; (2) th e reason of d issolu tion an d
w in d in g u p ; (3) th e au th orization for the d issolu tion of th e corp oration b y th e
p articu lar religiou s d en om in ation , sect or ch u rch ; an d (4). th e n am es an d ad d resses
of the p erson s w h o w ill su p ervise the w in d in g up of th e affairs of th e corp oration .
Up on ap p roval of su ch d eclaration of dissolu tion b y th e SEC, th e corp oration sh all
cease to ca r r y on its op eration s excep t for th e p u rp ose of w in d in g u p its affairs.
Religiou s So cieties
Accord in g to Section 114, u n less forbidden b y th e com p eten t au th ority,
the Con stitu tion , p ertin en t, ru les, regu lation s, or d iscip lin e of th e religiou s
d en om in ation , sect, or ch u rch of w h ich it is p art, an y religiou s society, religiou s
order, d iocese, or syn od , or d istrict organ ization of an y religiou s d en om in ation , sect
or ch u rch , m ay, u p on w ritten con sen t an d /or b y an affirm ative vote at a m eetin g
.
called for th e p u rp ose of at least tw o-th ird s of its m em b ersh ip , in corp orate for th e
ad m in istration of its tem p oralities or th e m an agem en t of its affairs, p rop erties, an d
estate b y filin g w ith th e SEC, articles of in corp oration verified b y the, affid avit of
its p resid in g elder, secretary, or clerk or oth er m em b ers of su ch religiou s society or
religious d en om in ation , sect or ch u rch , settin g forth th e following:
•
th at th e religiou s society or religiou s order, or d iocese, syn od , or d istrict
organ ization is a religiou s organ ization of a religiou s d en om in ation , sect,
or ch u rch ;
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•
th at at least tw o-th ird s of its m em b ersh ip h as given w ritten con sen t or has
voted to in corp orate, at a d u ly con ven ed m eetin g of th e b od y;
•
th at th e in corp oration of th e religiou s society or religiou s order, or diocese,
syn od , or d istrict organ ization is n ot forbidden b y com p eten t, authority
or b y th e Con stitu tion , ru les, regu lation s, or d iscip lin e of th e religious
d en om in ation , sect, or ch u rch of w h ich it form s p art;
•
th at th e religiou s society or religiou s ord er, or d iocese, syn od , or district
organ ization d esires to in corp orate for th e ad m in istration of its affairs,
p rop erties, an d estate;
•
th e p lace w ith in th e Philip p in es w h ere th e p rin cip al office of the
corp oration is to b e estab lish ed an d located ; an d
/
•
th e n am es, n ation alities, an d resid en ce ad d resses of th e tru stees, not
less th an five n o m ore
th an 15, elected to serve for th e first year or such
i
oth er p eriod as m ay b e p rescrib ed b y th e laws of th e religip u s society or
religiou s ord er, or of th e d iocese, syn od , or d istrict organ ization .
Lesson 2.2.3: O n e-p erso n Corp oration
Section 116 d efin es a on e-p erson corp oration (OPC) as a corp oration with a
sin gle stock h old er, w h o can on ly b e a n atu ral p erson , tru st, or estate. Ban k s and
q u asi-b an k s, p ren eed , tru st an d in su ran ce com p an ies, p ub lic an d p u b licly listed
com p an ies, an d n on -ch artered govern m en t-ow n ed an d con trolled corporations
(GOCCs) are n ot allow ed to form OPCs. Excep t as oth erw ise p rovid ed u n d er special
law s, a'n atu ral p erson w h o is licen sed to exercise a p rofession m ay n ot organ ize as
an O PC for th e p u rp ose of exercisin g su ch p rofession .
M in im u m C ap ital Stock N ot R eq u ired for O n e-p erson Corp oration
Excep t as oth erw ise p rovid ed b y sp ecial law, th e O PC is n ot req u ired to have a
m in im u m au th orized cap ital stock .7
,
A rticle s o f In co rp o ratio n
Section 118 m an d ates th e O PC to file its Articles of In corp oration in accordance
w ith th e req u irem en ts of Section 14 of th e RCC of th e Ph ilip p in es. It sh all likewise
su b stan tially con tain th e follow in g:
if th e sin gle stock h old er is a tru st or an estate, th e n am e, n ation ality, and
resid en ce of th e tru stee, ad m in istrator, execu tor, gu ard ian , conservator,
7Section 117, RCC.
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cu stod ian , or oth er p erson exercisin g fid u ciary duties togeth er w ith th e
p roof of su ch au th ority to act on b ehalf of th e tru st or estate; an d
•
n am e, nationality, residence of the n om in ee an d altern ate n om in ee, an d
the extent, coverage, an d limitation of th e authority.
The Articles of In corp oration m u st set forth its p rim ary p u rp ose, p rin cip al
office ad dress, term of existen ce, n am es and d etails of th e single stockholder, the
nominee an d altern ate n om in ee and th e au thorized , su b scrib ed, an d p aid -u p cap ital
and such oth er m atters con sisten t w ith law and w h ich m ay b e d eem ed n ecessary
and convenient. The in corp orator of an OPC b ein g1a n atu ral p erson m u st b e of legal
age. As an in corp orator, th e "tru st" as u sed by the la(w d oes n ot refer to a tru st
entity, b ut as a subject b ein g m an aged by a trustee. If th e single stock h old er is a
tru stee, ad m in istrator, executor, gu ard ian , con servator, cu stod ian , or oth er p erson
exercisin g fid u ciary duties, p roof of authority to act on b eh alf of th e tru st or estate
mu st be su b m itted at th e tim e of incorporation.
Bylaw s
The OPC is n ot req u ired to sub mit and file its corp orate b ylaws.8
D isp lay of Corp orate N am e
Section 120 req u ires a on e-p erson corporation to in d icate th e letters "O PC"
either b elow or at th e en d of its corporate name. A foreign n atu ral p erson m ay p u t
an OPC, sub ject to th e applicable constitutional and statu tory restriction s on foreign
p articip ation in certain in vestm en t areas or activities.
Sin gle Stock h old er as D irector an d Presid en t
Section 121 p rovid es th at th e single stock hold er shall be th e sole d irector an d
p resident of th e OPC.
N om in ee an d A ltern ate N om in ee
Section 124 m an d ates th e single stock h old er ,fo d esign ate a n om in ee an d
an altern ate n om in ee w h o shall, iri th e even t of th e sin gle stock h old er's d eath or
incapacity, tak e th e p lace of th e single stock h old er as d irector an d sh all m an age th e
corp oration 's affairs. The articles of in corp oration shall state th e n am es, resid en ce
ad d resses, an d con tact d etails of th e n om in ee an d altern ate n om in ee, as w ell as
the exten t an d lim itation s of th eir au th ority in m an agin g th e affairs of th e OPC.
8Section 119, RCC.
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Th e w ritten con sen t of th e n om in ee an d altern ate n om in ee sh all b e attach ed to the
ap p lication for in corp oration . Such con sen t m ay b e w ith d raw n in w ritin g any time
b efore th e d eath of th e sin gle stock h old er.
\
Section 125 p rovid es th at w h en th e in cap acity of th e sin gle stock h old er is
tem p orary, th e n om in ee sh all sit as d irector an d m an age th e affairs of th e O PC until
th e stock h old er, b y self-d eterm in ation , regain s th e cap acity to assu m e sucfr duties.
In case of d eath or p erm an en t in cap acity of th e sin gle stock h old er, th e nominee
sh all sit as d irector an d m an age th e affairs of th e O PC u n til th e legal h eirs of the
sin gle stock h old er h ave b een law fu lly d eterm in ed , an d th e h eirs h ave designated
on e of th em or h ave agreed th at th e estate sh all be th e sin gle stock h old er of the
O PC. Th e altern ate n om in ee sh all sit as d irector an d m an age th e O PC in case of
th e n om in ee's in ab ility, in cap acity, d eath , or refu sal to d isch arge th e fu n ction s as
d irecto r an d m an ager of th e corp oration , an d on ly for th e sam e term an d u n d er the
sam e con d ition s ap p licab le to th e n om in ee. Section 126 allow s th e sin gle stockholder
to ch an ge its n om in ee an d altern ate n om in ee an ytim e b y su b m ittin g to th e SEC the
n am es of th e n ew n om in ees an d th eir corresp on d in g w ritten con sen t. Th e articles
of in corp oration n eed n ot b e am en d ed .
To su m m arize, th e sin gle stock h old er shall be th e sole d irector an d president
of th e O PC. H e is req u ired to d esign ate a n om in ee an d an altern ate nominee
n am ed in th e Articles of In corp oration in th e even t of d eath an d in cap acity. The
w ritten con sen t of b oth th e n om in ee an d altern ate n om in ee sh all b e attach ed to
th e ap p lication for in corp oration . The single stock h old er may, at an y tim e, change
its n om in ee an d altern ate n om in ee b y su b m ittin g to th e SEC th e n am es of th e new
n om in ees an d th eir corresp on d in g w ritten con sen t. Th e A rticles of Incorporation
n eed n ot b e am en d ed . In case th e sin gle stock h old er b ecom es in cap acitated , the
n om in ee can tak e over th e m an agem en t of th e O PC as d irector an d p resid en t. At
th e en d of th e in cap acity, th e sin gle stock h old er can resu m e th e m an agem en t of
th e O PC. In case of d eath or p erm an en t in cap acity of th e sin gle stak eh old er, the
n om in ee w ill tak e over th e m an agem en t of th e O PC u n til th e legal h eirs of the
sin gle stock h old er h ave b een law fu lly d eterm in ed an d th e h eirs h ave agreed among
th em selves w h o w ill tak e th e p lace of th e d eceased .
T reasu rer, C o rp o ra te Secretary, an d O th er O fficers
Section 122 m an d ates th at w ith in 15 d ays from th e issu an ce of its certificate
of in corp oration , th e O PC sh all ap p oin t a treasu rer, corp orate secretary, an d other
officers as it m ay d eem n ecessary, an d n otify th e SEC th ereof w ith in 5 d ays from
ap p oin tm en t u sin g th e Ap p oin tm en t Form as m ay b e p rescrib ed b y th e SEC.
Th e sin gle stock h old er m ay n ot b e ap p oin ted as th e corp orate secretary but may
assu m e th e role of a treasu rer. If h e is lik ew ise th e self-ap p oin ted treasu rer of the
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corp oration , he sh all p ost a su rety b ond to th e SEC in su ch a su m as m ay b e req u ired
(to be com p u ted b ased on th e au th orized cap ital stock of th e OPC), an d sign an
u n d ertak in g to faith fu lly ad m in ister the OPC's fu n d s to b e received as treasu rer
and to d isb u rse an d in vest th e sam e accord in g to th e articles of in corp oration as
approved by th e SEC. The b on d shall b e ren ew ed every tw o years or as often as m ay
be req uired .
Accord in g to Section 123, in ad d ition to th e fu n ction s d esign ated b y th e OPC,
the corp orate secretary shall be responsible for m ain tain in g th e m in u tes' b ook an d /
or record s of th e corp oration . H e shall n otify th e n om in ee or altern ate n om in ee
of the d eath or in cap acity of th e single stockholder, w h ich n otice sh all b e given
no later th an five d ays from su ch occu rren ce. He shall also n otify th e SEC of th e
d eath of th e sin gle stock h old er w ith in five days from su ch occu rren ce an d statin g
in su ch n otice th e n am es, resid en ce addresses, and con tact d etails of all k n ow n legal
heirs. H e sh all call th e n om in ee or alternate n om in ee an d th e k n ow n legal h eir to
m eetin g an d ad vise th e legal h eirs w ith regard to, am on g oth ers, th e election of a
n ew d irector, am en d m en t of the articles of in corp oration , an d oth er an cillary a n d /
or con seq u en tial m atters.
M in u te Boo k s, Record s, an d Rep ortorial Req u irem en ts
Section 127 m an d ates an OPC to m ain tain a m in u te b ook th at sh all con tain
all action s, d ecision s, an d resolu tion s it h as taken. Accord in g to Section 128, w h en
action is n eed ed on an y m atter, it shall be sufficient to p rep are a w ritten resolu tion ,
sign ed an d d ated b y th e single stockholder; and record ed in th e m in u tes' b ook of
the OPC, Th e d ate of record in g in the min u te b ook is d eem ed to b e th e d ate of
m eetin g for all p u rp oses u n d er the RCC.
■<;
•
r •
• •
Th e O PC is also m an d ated u n d er Section 129 to sub mit th e follow in g w ith in
such p eriod as th e SEC m ay p rescrib e:
:
,
•
an n u al fin an cial statem en ts audited by an in d ep en d en t certified p u b lic
accou n tan t. If th e total assets or total liabilities of th e corp oration are less
th an P600,000, th e fin an cial statem en ts shall be certified u n d er oath b y th e
corp oration 's treasu rer an d presid en t;
^ .
•
a rep ort con tain in g exp lan ation s or com m en ts b y th e1p resid en t on every
q u alification , reservation , or ad verse rem ark or d isclaim er m ad e b y th e au d itor
in th e latter's rep ort;
•
a d isclosu re of all self-dealin gs an d related p arty tran saction s en tered in to
b etw een th e O PC an d th e single stock h old er/an d
•
oth er rep orts as th e SEC m ay requ ire.
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The fiscal year of a one-person corporation shall be th at set forth in its articles of
in corp oration or, in the absence thereof, the calen d ar year. If the OPC fails to submit
th e rep ortorial req u irem en ts th ree times, consecutively or intermittently, within a
p eriod of five years, the SEC may place the corporation in delinquent status.
Th e on e-p erson corporation com b in es.limited liability w ith th e complete
d om in ion of a sole proprietorship. A sole shareholder claim ing limited liability has
th e b u rd en of affirmatively showing th at the corporation w as ad eq u ately financed.
Accord in g to Section 130, if the single stockholder can n ot p rove th at th e property
of th e OPC is in dependent of the stockholder's p erson al p rop erty, th e stockholder
sh all b e jointly and severally liable for the debts and oth er liabilities of th e OPC.
Th e p rin cip le of p iercin g the corporate veil applies with equal force to O PCs as with
oth er corp oration s.
C on version from an O rd in ary Corp oration to O PC
Un d er Section 131, when a single stockholder acquires all th e stock s of an
ord in ary stock corporation , the ord in ary stock corporation m ay apply for conversion
in to O PC, sub ject to the submission of such d ocuments as the SEC m ay require. If
th e ap plication for conversion is approved, the SEC shall issue a certificate of filing
of am en d ed articles of incorporation reflecting the conversion. The OPC converted
from an ord in ary stock corporation shall succeed the latter and be legally responsible
for all th e latter's ou tstan d in g liabilities as of the date of conversion.
O n ly a d om estic corporation, organized as a stock corp oration , m ay be
con verted in to a on e-p erson corporation. The ord in ary stock corp oration m ay only
ap p ly for its con version to OPC after a natural person of legal age, a tru st, or an
estate ("sin gle stock h old er") acquired all outstanding capital stock s of an ordinary
stock corp oration . Conversion is p rocessed in the same m an n er as am en d m en t of
articles of in corp oration s or bylaws. The following are the req u ired d ocu m en ts for
th e con version to OPC:9
;
•
Am en d ed Articles of In corporation to reflect the following ch an ges:
a.
th e n am e of the corp oration , for the inclusion of th e su ffix OPC and
rem oval of an y suffix in dicatin g an ord in ary stock Corporation such as
Corporation, Incorporated, Corp. or Inc:,
b.
red u cin g th e n u m b er of d irectors to one p rovidin g n am e, nationality, and
resid en ce of th e n atu ral p erson , tru stee, ad min istrator, execu tor, or other
p erson exercisin g fid u ciary duties;
9
Th e SEC issu ed on A u g u st 25,2020, th e SEC M em oran d u m Circu lar N o. 27, Ser ies of 2020 w h ich provides
fo r th e g u id elin es on th e con v ersio n from an ord in ary stock corp oration to a on e-p erson corp or ation an d v ice versa,
p u r su a n t to Title XIII, C h a p ter III o f th e RRC.
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•c.
d.
•
am en d m en t or rem oval of p rovision s d istin ctive to ord in ary stock
corp oration s.
Secretary's Certificate to th e follow in g effect:
•:
,
•
t •
.1
• .
>
\
a.
th e sin gle stock h old er acq u ired all of th e ou tstan d in g sh ares in th e
ord in ary stock corp oration ;
b.
th e sin gle stock h old er h as d ecid ed to con vert th e ord in ary stock
corp oration to O PC an d for th e p u rp ose, h as d ecid ed to: am en d th e articles
of in corp oration , rep eal th e bylaws of th e ord in ary stock corp oration or
ad op t a n ew b ylaws for th e OPC, an d ap p oin t a n om in ee an d altern ate for
th e OPC;
c.
all taxes an d ob ligations in favor of the govern m en t h as b een settled ; an d
•
*
*
,
•
th e O PC, or an y of its stock hold ers, d irector, or officer is n ot in volved in
an y in tra-corp orate dispute.
d.
•
n om in ee an d altern ate n om in ee; an d
Proof of acq u isition of all th e ou tstan d in g sh ares su ch as, b u t n ot lim ited to,
certified tru e copies of d eeds of assign m en ts an d certificates au th orizin g
registration issu ed b y th e Bu reau of Internal Revenue.
•
' i
1
•
Affid avit of accep tan ce execu ted u n d er oath b y th e n om in ee an d b y th e
altern ate n om in ee, if nof yet in cluded in th e secretary'9 certificate.
•
N am e reservation .
•'
M on itorin g an d clearan ce.
•
Un d ertak in g to ch an ge corp orate n am e duly execu ted u n d er oath b y th e sin gle
stock h old er of th e sole rem ain in g d irector, if n ot yet in clu d ed in th e articles of
in corp oration .
>
— , ,.v;
.t
■
Con version from an ord in ary stock corp oration to O PC sh all tak e effect
u p on ap p roval of th e am en d ed articles of in corp oration th rou gh th e issu an ce of a
Certificate of Filin g of Conversion to an OPC.
••
1
(
,,'
_
• v • *t
Con version from O PC to an O rd in ary Stock Corp oration
Un d er Section 132, a on e-p erson corp oration is allow ed to con vert in to
an ord in ary stock corp oration after d ue n otice to th e SEC of su ch fact an d th e
circu m stan ces lead in g to th e con version , an d after com p lian ce w ith all oth er
req u irem en ts for stock corp oration s u n d er th e RCC an d applicable ru les. Such n otice
shall be filed w ith th e SEC w ith in 60 d ays from th e occu rren ce of th e circu m stan ces
U N IT II I R EV ISED C O RP O RA TIO N C O D E
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lead in g to th e con version in to an ord in ary stock corp oration . If all requirements
h ave b een com p lied w ith , th e SEC shall issu e a certificate of filing or amended
articles of in corp oration reflectin g the con version .
In case of d eath of th e sin gle stock h old er, th e n om in ee or altern ate nominee
shall tran sfer th e sh ares to th e d u ly d esign ated legal h eir or estate w ith in seven days
from receip t of eith er an affid avit of h eirsh ip or self-ad ju dication execu ted b y a sole
h eir, or an y oth er legal d ocu m en t d eclarin g th e legal h eirs of th e single stockholder
an d n otify th e SEC of th e tran sfer. With in 60 d ays from th e tran sfer of th e sh ares, the
legal h eirs sh all n otify th e SEC of th eir d ecision to eith er w in d u p an d d issolve the
O PC or con vert it in to an ord in ary stock corp oration . The ord in ary stock corporation
con verted from O PC shall su cceed the latter and be legally resp on sib le for all the
latter's ou tstan d in g liabilities as of the d ate of con version .
PR A C T IC E EXERCISE
A.
A p rivate u n iversity am en d ed its b ylaws to p rovid e th at m em b ers of its board
w ere to serve a term of office of only tw o years an d th at th e officers, who
in clu d ed th e Presid en t w ere to be elected from am on g th e m em b ers of the
Board of Tru stees d u rin g th eir organ ization al m eetin g, w h ich w as h eld during
th e election of th e Board of Trustees every tw o years. Its form er President
q u estion s th e am en d m en t citing th at Section 108 of th e Revised Corp oration
Cod e p rovid es for a term of m em b ers of the b oard at five years. W h ich shall
p revail?
B.
Th in k of som e reason s w h y a stock corp oration m ay w an t to con vert to an OPC
an d exp lain .
C.
If you p lan to p u t up a b usiness and h ave the fin an ces to d o it, are you going
to p u t u p an OPC, an ord in ary stock corp oration , or a n on stock corporation?
Exp lain .
RELEVAN CE O F TH E LESSO N
Each sp ecial corp oration h as special featu res. It is im p ortan t to k n ow the
sp ecific featu res of each to m ak e sou n d d ecision s w h en on e con sid ers organizing
a p articu lar sp ecial corp oration . The on e-p erson corp oration is en ticin g to use as
a legal en tity con sid erin g its featu res w h ich facilitate ease in d oin g b u sin ess. It is
id eal for th ose w h o w an t to enjoy lim ited liability an d at th e sam e tim e th e complete
d om in ion of a sole p rop rietorsh ip . Kn ow in g th e b asics of O PC w ill h elp m ak e good
d ecision s w h en ru n n in g su ch k ind of corp oration .
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LESSO N SUM M ARY
•
A close corp oration is a stock corp oration w h ose articles of in corp oration
p rovide th at the n u m b er of stock h old ers shall n ot exceed 20, its issu ed stock s
are subject to tran sfer restriction s, and it shall n ot be listed in the stock exch an ge
or publicly offered.
•
An ed u cation al corp oration is p rim arily govern ed b y sp ecial laws an d
sup pletorily by th e p rovisions of the RCC w h ile a religiou s corp oration is
a corp oration com p osed entirely of sp iritu al p erson s an d organ ized for th e
fu rth eran ce of religion or for p erp etu atin g the righ ts of th e ch u rch or for th e
ad m in istration of ch u rch or religious work or p rop erty.
•
A on e-p erson corp oration (OPC)fis a corp oration w ith a sin gle stock h old er,
wh o can on ly be a n atu ral p erson , tru st, or estate. It com b in es lim ited liability
w ith th e com p lete d om in ion of a sole proprietorship.
•
An O PC shall file its articles of in corp oration in accord an ce w ith th e
req u irem en ts of Section 14 of the RCC. It is not req u ired to su b m it an d file its
b ylaws an d to h ave a m in im u m au thorized capital stock excep t as oth erw ise
p rovid ed b y sp ecial law.
•
The sin gle stock h old er shall be the OPC's sole d irector an d p resid en t an d w h o
is req u ired to d esign ate a nominee and an altern ate n om in ee w h o con sen ted
th ereto an d is n am ed in the articles of in corp oration in th e even t of h is d eath
an d in cap acity.
•
The O PC's officers shall be appointed w ithin 15 d ays from th e issu an ce of its
certificate of in corp oration.
•
O PC's can n ot b e form ed by banks, non ban k fin an cial in stitu tion s, q u asi-b an k s,
p ren eed , tru st an d in su ran ce companies, public an d p u blicly listed com p an ies,
an d n on -ch artered GOCCs.
•
An O PC can n ot be organ ized for th e p u rp ose of exercisin g a licen sed p rofession .
1
A d om estic corp oration organ ized as a stock corp oration m ay b e con verted
into an OPC an d th e con version shall tak e effect u p on ap p roval of its am en d ed
articles of in corp oration .
U N IT II I REV ISED C O RP O RA TIO N C O D E
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Lesso n 3: D is so lu tio n of C o rp o ra tio n
M e th o d s o f D is s o lu tio n
A ccord in g to Section 133, a corp oration form ed or o rg a n iz e d u n d er the
p rovision s of th e RCC m ay b e d issolved volu n tarily or in volu n tarily. Th e dissolution
of a corp oration is th e extin gu ish m en t of th e fran ch ise of a co rp o ra tio n an d the
term in atio n of its corp orate existen ce. Th e p ow er to revok e co rp o ra te fran ch ises on
cau ses sp ecified b y law is vested on ly in th e SEC. Th e sale of th e corp oration 's assets
>■
an d liab ilities d oes n ot au tom atically d issolve a corp oration .
To illu s tra te : A A A Corp oration is a b an k . Th e op eration s of A A A Corp oration
as a b an k w ere n ot d oin g w ell. So, to avert h n y b an k ru n , A A A C o rp o ra tio n , with
th e ap p ro v al of th e M on etary Board , sold all its assets an d liab ilities to BBB Ban king
C o rp o ratio n w h ich in clu d es all d ep osit accou n ts. In effect th en , BBB Corp oration
w ill se rv ice all d ep osits of all d ep ositors of A AA Corp oration . Th e sale of all assets
an d liab ilities of A A A Corp oration to BBB Ban k in g C o rp oration w ill n o t result
in th e au to m atic d issolu tion or term in ation of th e existen ce of A A A Corp oration .
A d ecision to d issolve A A A Corp oration or to term in ate its co rp o r a te existen ce
w ou ld req u ire sep arate ap p roval by a m ajority of th e Board of D ire cto r s of AAA
C orp oration an d its stock h old ers h old in g at least tw o-th ird s of th e total ou tstan d in g
cap ital stock , as w ell as th e sep arate ap p roval b y th e M on etary Board .
»
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V o lu n ta rily D is s o lu tio n W h ere N o C red itors A re A ffe cte d
/
A cco rd in g to Section 134, if th e d issolu tion of a corp oration d oes n o t prejudice
th e rig h ts of an y cred itor h avin g a claim again st it, th e d issolu tion m a y b e effected by
a m ajo rity vote of th e b oard of d irectors or tru stees, an d b y a resolu tion ad op ted by
th e affirm ativ e vote of th e stock h old ers ow n in g at least m ajority of th e ou tstan d in g
cap ital stock or m ajority of th e m em b ers at a m eetin g to b e h eld u p o n th e call of the
d ire cto rs or tru stees.
A t least 20 d ays p rior to th e m eetin g, n otice sh all b e given to e a ch sh areh old er
or m em b er of record p erson ally, b y registered m ail, or b y an y m e a n s au th orized
u n d er its b ylaw s, w h eth er or n ot en titled to vote at th e m eetin g, in th e manner
p rovid ed in Section 50 of th e RCC. Th e n otice sh all state th at th e p u r p o s e of the
m eetin g is to vote on th e d issolu tion of th e corp oration . N otice of th e tim e, place,
an d ob ject of th e m eetin g sh all b e p u b lish ed on ce p rior to th e d ate of th e meeting
in a n ew sp ap er p u b lish ed in th e p lace w h ere th e p rin cip al office of said corp oration
is located , or if n o n ew sp ap er is p u b lish ed in su ch p lace, in a n ew sp ap er of general
circu lation in th e Ph ilip p in es.
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A verified req u est for dissolution shall be filed w ith the SEC statin g: (1) th e
reason for th e d issolu tion; (2) th e form, m an n er, an d tim e w h en th e n otices w ere
given; (3) n am es of th e stock h old ers an d d irectors or m em b ers an d tru stees w h o
approved the d issolu tion; (4) th e date, place, an d tim e of th e m eetin g in w h ich th e
vote w as m ad e; an d (5) d etails of publication.
The corp oration shall submit th e following to th e SEC: (1) a cop y of th e
resolution au th orizin g th e d issolution, certified b y a m ajority of th e b oard of
d irectors or tru stees an d cou n tersign ed b y the secretary of th e corp oration ; (2) p roof
of p ublication; an d (3) favorable recom m en d ation from th e ap p rop riate regu latory
agency, w h en n ecessary.
!
With in 15 d ays from receip t of the verified req u est for d issolu tion , an d in
„ the ab sen ce of an y w ith d raw al w ith in th e said p eriod , th e SEC sh all ap p rove th e
req uest an d issu e th e certificate of dissolution. The d issolu tion shall tak e effect on ly
u p on th e issu an ce b y th e SEC of th e certificate of d issolution. N o ap p lication for
d issolution of b an k s, b an k in g and quasi-banking in stitu tions, p ren eed , in su ran ce
and tru st com p an ies, NSSLAs, p awnshops, and oth er fin an cial in term ed iaries sh all
be ap p roved b y th e SEC u n less accomp anied by a favorable recom m en d ation of th e
ap p rop riate govern m en t agency.
„
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Volu n tary D issolu tion Wh ere Cred itors Are Affected ; P ro ced u re an d
Con ten ts o f Petition
Accord in g to Section 135, w h ere the dissolution of a corp oration m ay p reju d ice
the righ ts of an y cred itor, a verified petition for dissolution sh all b e filed w ith th e
SEC. The p etition sh all be signed by a majority of th e corp oration 's b oard of d irectors
or tru stees, verified b y its p resid en t o r secretary or on e of its d irector or tru stees,
and shall set forth all claim s an d d em an d s again st it, an d th at its d issolu tion w as
resolved u p on b y th e affirm ative vote of the stock h old ers rep resen tin g at least tw oth ird s of th e ou tstan d in g capital stock or at least tw o-th ird s of th e m em b ers at a
m eetin g of its stock h old ers or m em b ers called for th at p u rp ose. The p etition sh all
lik ewise state: (1) th e reason for the dissolution; (2) th e form, m an n er, an d tim e w h en
the n otices w ere given ; an d (3) th e date, place, an d tim e of th e m eetin g in w h ich
vote w as m ad e. The corp oration shall submit to th e SEC th e followin g: (1) a cop y
of th e resolu tion au th orizin g th e d issolution, certified b y a m ajority of th e b oard of
d irectors or tru stees an d cou n tersign ed b y th e secretary of th e corp oration ; an d (2)
a list of all its cred itors.
If th e p etition is su fficient in form an d su b stan ce, th e SEC sh all b y an ord er
recitin g th e p u rp ose of th e p etition, fix a d eadlin e for filin g ob jections to th e p etition
w ith in 30 to 60 d ays after th e en try of th e order. Before su ch d ate, a cop y of th e ord er
U N IT II I R EV ISED C O RP O RA TIO N C O D E
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shall be p ublish ed at least on e w eek for th ree con secu tive w eek s in a newspaper
of gen eral circu lation in th e m u n icip ality or city w h ere th e p rin cip al office of the
corp oration is situ ated , or if th ere is n o su ch n ew sp ap er, th en in a n ew sp ap er of
gen eral circu lation in th e Ph ilip p in es, an d a sim ilar cop y sh all b e p osted for three
con secu tive w eek s in th ree p ub lic p laces in su ch m u n icip ality or city.
Up on five d ays' n otice given after th e d ate on w h ich th e righ t to file objections
as fixed in th e ord er h as exp ired , th e SEC sh all p roceed to h ear th e p etition an d try
an y issu e raised in th e ob jection s filed; an d if n o su ch ob jection is su fficien t, and
th e m aterial allegation s of th e p etition are tru e, it sh all ren d er ju d gm en t dissolving
th e corp oration an d d irectin g su ch d isp osition of its assets as ju stice req u ires, and
m ay ap p oin t a receiver to collect su ch assets an d p ay th e d eb ts of th e corp oration .
The d issolu tion sh all tak e effect on ly u p on th e issu an ce b y th e SEC of a certificate of
d issolu tion .
D isso lu tio n b y Sh orten in g Corp orate Term
Un d er Section 136, a volu n tary d issolu tion m ay b e effected b y am en d in g the
articles of in corp oration to sh orten th e corp orate term p u rsu an t to th e p rovision s of
the RCC. A cop y of th e am en d ed articles of in corp oration sh all b e su b m itted to the
SEC.
Up on th e exp iration of th e sh orten ed term , as stated in th e ap p roved am en d ed
articles of in corp oration , th e corp oration is d eem ed d issolved w ith ou t an y further
p roceed in gs, su b ject to th e p rovision s of th e Revised C orp oration Cod e on
liq u id ation.
In th e case of exp iration of corp orate term , d issolu tion sh all au tom atically take
effect on th e d ay follow in g th e last d ay of th e corp orate term stated in th e articles
of in corp oration w ith ou t th e n eed for th e issu an ce b y th e SEC of a certificate of
d issolu tion .
W ith d ra w a l o f R e q u e st an d Petition for D is so lu tio n
Section 137 p rovid es a w ith d raw al of th e req u est for d issolu tion m u st be in
w ritin g, d u ly verified b y an y in corp orator, d irector, tru stees, sh areh old er, or member
an d sign ed b y th e sam e n u m b er of in corp orators, d irectors, tru stees, sh arehold ers,
or m em b efs n ecessary to req u est for d issolu tion . Th e w ith d raw al sh all b e submitted
n ot later th an 15 d ays from receip t b y th e SEC of th e req u est for d issolu tion . Upon
w ith d raw al of th e req u est for d issolu tion , th e SEC sh all w ith h old action on the
req u est for d issolu tion an d sh all, after in vestigation : (1) m ak e a p ron ou n cem en t that
th e req u est for d issolu tion is d eem ed w ith d raw n ; (2) d irect a join t m eetin g of the
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board of d irectors or tru stees an d the stock hold ers or m em bers for th e p u rp ose of
ascertain in g w h eth er to p roceed w ith d issolution; or (3) issue su ch oth er ord ers as it
may d eem app rop riate. A w ith d raw al of the p etition for dissolution shall b e in th e
form of a m otion an d sim ilar in su b stan ce to a w ith d raw al of req u est for d issolu tion
but shall be verified an d filed p rior to publication of th e ord er settin g th e d ead lin e
for filing ob jections to th e petition.
In volu n tary D issolu tion
Un d er Section 138, th e SEC m ay dissolve th e corp oration motu propio or'u p on
the filing of a verified com p lain t by an y interested p arty. The followin g m ay be
grou n d s for d issolu tion of th e corporation :
•
if a corp oration d oes n ot form ally organ ize and com m en ce its b u sin ess w ith in
five years from th e d ate of its in corp oration;
•
if a corp oration >has com m en ced its b usiness b ut su b seq u en tly b ecom es
•
in op erative for a p eriod of at least five con secu tive years;
i
*
*
'
,
u p on receip t of a lawful cou rt order dissolving th e corp oration ;
>•
u p on fin d in g b y th e final judgment *that th e corp oration , p rocu red its
in corp oration th rou gh fraud; and
•
,
u p on fin d in g b y final ju dgmen t th at the corp oration :
a.
w as created for the p u rp ose of com m ittin g, con cealin g, or aid in g th e
com m ission of secu rities violation, sm u gglin g, tax evasion , m on ey
lau n d erin g, or graft and corru p t practices; ’
b.
com m itted or aided in the com m ission of secu rities violation s,-sm u gglin g,
tax evasion , m on ey lau nd erin g, or graft an d corru p t p ractices, an d its
stock h old ers k n ew of the same; and^
i*
c.
•
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.
v
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•
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rep eated ly an d k n ow in gly tolerated th e com m ission of graft an d corru p t
p ractices or oth er fraud ulent or illegal acts b y its d irectors, tru stees,
officers, or emp loyees.
v
If th e corp oration is ord ered d issolved b y fin al ju d gm en t p u rsu an t to an y of
th ese grou n d s, its assets, after p aym en t of its liabilities, shall u p on p etition of th e
SEC w ith th e ap p rop riate cou rt, b e forfeited in favor of th e n ation al govern m en t.
Such forfeitu re sh all be w ith ou t p rejudice to th e righ ts of in n ocen t stock h old ers
and em p loyees for services ren d ered , an d to th e ap p lication for oth er p en alties or
san ction s u n d er th e RCC or oth er laws. The SEC sh all give reason ab le n otice to,
an d coord in ate w ith , th e ap p rop riate regu latory agen cy p rior to th e in volu n tary
d issolu tion of com p an ies u n d er th eir sp ecial regu latory ju risd iction .
U N IT II | R E V ISE D C O RP O RA TIO N C O D E
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There are two modes of dissolution of corp orations:
•
•
Volu n tarily b y:
a.
ap p lication for d issolu tion w ith th e SEC; an d
b.
sh orten in g of th e corp orate te rm b y am en d in g th e articles of in corp oration
In volu n tary b y:
a.
exp iration of th e corp orate term ;
b.
failu re to organ ize an d com m en ce b u sin ess w ith in tw o y e a r s from
th e d ate of issu an ce of th e certificate of in corp oration . N ote th at the
d issolu tion , in th is case, is n ot au tom atic— th e corp oration con tin u es to
e xist as su ch , n otw ith stan d in g its n on -op eration al statu s u n til th e SEC
o rd ers its d issolu tion after n otice an d h earin g;
c.
legislative d issolu tion ;
d.
quo w arrant o su it again st a de facto corp oration ;
e.
m in o rity stock h old ers' su it for d issolu tion on ju stifiab le g r o u n d s ;
f.
SEC d issolu tion , u p o n com p lain t an d after n otice an d h e a r in g , on the
follow in g g ro u n d s:
j
a.
th e co rp o ra tio n w as illegally organ ized ;
b.
con tin u ou s in activ ity su b seq u en t to in corp oratio n , organ ization ,
an d co m m e n ce m e n t of b u sin ess for at least five y e a rs;
c.
se rio u s d issen sion in th e corp oration ; an d
d.
co m m iss io n b y th e corp oration of illegal or ultra v ires a cts o r violation s
of th e RCC.
. x
,. . •
•
,)
, i
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Th e S u p re m e C o u r t h eld in on e case th at th ere is n o n eed for th e SEC to m a k e an
in v o lu n ta ry d isso lu tio n of a corp oration w h ose corp orate,term *h ad e n d e d b ecau se
its a rticle s of in co rp o ra tio n h ad in effect exp ired b y its o w n lim itation .*10
To i l l u s t r a t e : Th e te rm of Q Q Q C orp oration in acco rd a n ce w ith its article s of
in co rp o ra tio n e n d e d on Ja n u a ry 30,2020. Th e te rm w as n ot exte n d e d . T h e corp oration
is d isso lv e d ipso fact o.
C o r p o r a t e Li q u i d a t i o n
S e ctio n 139 p ro v id e s th a t e xce p t for nb an k s, w h ich s h a ll.b e co v e r e d b y the
ap p licab le p ro v isio n s of Rep u b lic A ct N o. 7653 (Th e N ew C e n tra l Ba n k A ct, as
i
____________
/
*
10 P h ilip p in e N a tio n a l Ban k v s. C o u r t o f Fir s t I n sta n ce of R izal, P a sig , e t al., G .R . N o . 63201, M a y 27,1992.
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amended), an d Rep u b lic Act No. 3591 (Philipp in e D ep osit In su ran ce Corp oration
Ch arter, as am en d ed ), every corp oration w h ose ch arter exp ires p u rsu an t to its
articles of in corp oration , is an n u lled b y forfeiture, or w h ose corp orate existen ce is
term in ated in an y oth er m an n er, shall rem ain as a b od y corp orate for th ree years
after th e effective d ate of d issolu tion, for th e p u rp ose of p rosecu tin g an d d efen d in g
suits by or again st it an d en ab lin g it to settle an d close its affairs, d isp ose of an d
con vey its p rop erty, an d d istrib u te its assets, b u t n ot for th e p u rp ose of con tin u in g
the b u sin ess for w h ich it w as estab lish ed .
At an y tim e d u rin g said th ree years, th e corp oration is au th orized an d
em p ow ered to con vey all of its p rop erty to tru stees for th e b enefit of stock h old ers,
m em bers, cred itors, an d oth er p erson s in in terest. After an y su ch con veyan ce b y
the corp oration of its p rop erty in tru st for th e b enefit of its stock h old ers, m em b ers,
cred itors, an d oth ers in in terest/ all in terest w h ich th e corp oration h ad in th e p rop erty
term in ates, th e legal in terest vests in th e tru stees, an d th e b en eficial in terest in th e
stock h old ers, m em b ers, cred itors or oth er p erson s in in terest.
Excep t as oth erw ise p rovid ed for in Section s 93 an d 94 of th e RCC, u p on th e
w in d in g-u p of corp orate affairs, an y asset d istrib utab le to an y cred itor or stock h old er
or m em b er w h o is u n k n ow n or can n ot be foun d sh all b e esch eated in favor of th e
n ation al govern m en t. Excep t b y a d ecrease of capital stock an d as oth erw ise allow ed
by th e RCC, n o corp oration shall d istrib u te an y of its assets or p rop erty excep t u p on
lawfu l d issolu tion an d after p aym en t of all its debts an d liabilities.
Section 122 p rovid es for a th ree-year w in d in g-u p p eriod for a corp oration
w h ose ch arter is an n u lled b y forfeiture or oth erw ise to con tin u e as a b od y corp orate
for th e p u rp ose, am on g oth ers, of settlin g and, closin g its affairs11 an d p rosecu tin g
an d d efen d in g su its.b y an d again st it.112 Liqu idation is th e p rocess b y w h ich all th e
assets of th e corp oration are con verted into liquid assets (cash) in ord er to facilitate
the p aym en t of ob ligation s to cred itors, an d th e rem ain in g b alan ce, if any, is to b e
d istrib u ted to th e stock h old ers or m em b ers. Liq u id ation can b e effected : (1) b y th e
corp oration itself th rou gh its b oard of d irectors/ tru stees; (2) b y a tru stee to w h om
the corp orate assets h ave b een con veyed ; an d (3) b y a m an agem en t com m ittee or
reh ab ilitation receiver ap p oin ted b y th e SEC. The th ree-year p eriod of liq u id ation
d oes n ot ap p ly to m eth od s (2) an d (3) as lon g as th e tru stee or th e receiver is ap p oin ted
w ith in th e said p eriod . Th e tru stee (of a d issolved corp oration ) m ay com m en ce
a suit th at can p roceed to fin al ju d gm en t even b eyon d th e th ree-year p eriod of
liqu idation. Th e figh ts of a corp oration th at h as b een d issolved p en d in g litigation
are accord ed p rotection b y Section 145 of th e Corp oration Cod e [n ow Section 184 of
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11Vig illa, e t al. v s. P h ilip p in e C olleg e of C rim jn olog y , In c. an d Ba u tista , G .R. N o. 200094, Ju n e 10,2013.
12P a r a m o u n t In su r a n ce C or p . v s. A .C . O rd on ez C o rp o r a tio n kn d Fra n k lin Su sp in e, G .R. N o. 175109, A u g u st
6,2008.
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th e RCC] w h ich p rovid es "n o righ t or rem ed y in favor of or again st an y corporation ,
its sto ck h old ers, m em b ers, d irectors, tru stees, or officers, n or an y liab ility incurred
b y an y su ch corp oration , stock h old ers, m em b ers, d irectors, tru stees, or officers,
sh all b e rem oved or im p aired eith er b y th e su b seq u en t d issolu tion of th e said
co r p o r a t i o n "13
P R A C T I C E EXER C IS E
W h a t are th e legal req u irem en ts in ord er th at a corp oration m ay b e dissolved?
R ELEV A N C E O F T H E LES S O N
It is im p ortan t to b e k n ow led geab le ab ou t th e d issolu tion of a corp oration so
th a t as a stock h old er or on e of its d irectors, on e w ill k n ow h is righ ts an d obligations
in ca se th e corp oration is d issolved .
LES S O N S U M M A R Y
•
Th e d issolu tion of a corp oration is th e extin gu ish m en t of th e fran ch ise of a
co rp oration an d th e term in ation of its corp orate existen ce.
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Th e d issolu tion of a corp oration m ay b e volu n tary or in volu n tary.
•
Th ere is a th ree-year w in d in g-u p p eriod for th e corp oration to con tin u e as a
b o d y corp orate for th e p u rp ose of settlin g an d closin g its affairs.
Le s s o n 4: Fo re ig n C o rp o ra tio n s
S ectio n 140 d efin es a foreign corp oration as on e form ed , o rg an ized , or existin g
u n d e r law s o th e r th an th ose of th e Ph ilip p in es an d w h ose law s allow Filip in o citizens
a n d co rp o ra tio n s to d o b u sin ess in its ow n cou n try or state. A foreign corp oration
sh all h a v e th e righ t to tra n sa ct b u sin ess in th e Ph ilip p in es after ob tain in g a license
for th a t p u r p o s e in acco rd an ce w ith th e RCC an d certificate of au th ority from the
a p p r o p ria te g o v e rn m e n t agen cy. Section 141 p rovid es th at every foreign corp oration
w h ich , on th e d ate of th e effectivity of th e RCC, is au th orized to d o b u sin ess in the
Ph ilip p in es u n d e r a licen se issu ed to it sh all con tin u e to h ave su ch au th ority under
th e te rm s an d con d ition s ,of its licen se, su b ject to th e p rovision s of th e RCC and
o th e r sp ecial law s.
13 R e n e K n e ch t a n d K n e ch t , In c. v s. U n ite d C ig a r ette C o r p ., r e p r e se n te d b y En ca r n a cio n G o n z a le s W on g , and
E d u a r d o Bo lim a , Sh e r iff, R e g io n a l Tr ia l C o u r t, Br a n ch 151, P a sig City, G .R. N o. 139370, Ju ly 4, 200 .
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The p h rase "w h ose law s allow Filip ino citizen s an d corp oration s to d o b u sin ess
in its ow n cou n try or state" in th e d efin ition of a foreign corp oration is a m ere
condition p reced en t to th e gran t of a licen se to a foreign corp oration to d o b u sin ess
in the Ph ilip pin es. The "in corp oration test" is ap plied in d eterm in in g w h eth er a
corp oration is d om estic or foreign . If it is registered u n d er Ph ilip p in e law s, it is
deemed a Filip ino or d om estic corp oration irresp ective of th e n ation ality of its
stock holders w h ile if it is in corp orated in an oth er state, it is a foreign corp oration . Th e
exception is in tim es of w ar w h en th e "con trol test" w ou ld ap ply in d eterm in in g th e
corp orate n ation ality, i.e., th e citizen sh ip of th e con trollin g stock h old ers d eterm in es
the n ation ality of th e corp oration .
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If a corp oration w ill en gage in a n ation alized in d u stry, tw o tests are u sed in
d eterm in in g th e n ation ality of a corp oration th at h as corp orate stock h old ers: th e
control test an d th e gran d fath er ru le. Control test p rovid es th at sh ares b elon gin g
to corp oration s, at least 60% if th e capital of w h ich is ow n ed b y Filip in o citizen s,
shall b e con sid ered as of Philip pin e n ationality.14 O n th e oth er h an d , in cases w h ere
corp orate sh areh old ers are p resen t, the gran d fath er ru le com p u tes th e p ercen tage of
Filipino eq u ity in a corp oration en gaged in n ation alized an d /or p artly n ation alized
areas of activities, b y attrib u tin g the n ation ality of the secon d or even su b seq u en t
tier of ow n ersh ip to d eterm in e th e n ation ality of th e corp orate sh areh old er. Un d er
this ru le, th e Filip in o ow n ersh ip of th e in vestin g corp oration an d th e in vestee
corp oration are com b in ed to d eterm in e the p ercen tage of Filip ino ow n ersh ip . It is
u sed on ly w h en th ere is d oubt, b ased on facts an d circu m stan ces, as to th e 60%-40%
Filip in o-foreign eq u ity ow n ersh ip is in "d ou b t" or w h en th ere is n on com p lian ce
w ith th e p rovision s of th e Con stitu tion on nation ality restriction .
A corp oration d oes n ot h ave legal existen ce ou tsid e th e b ou n d aries of th e
sovereign b y w h ich it is created . The ‘excep tion is w h en b y virtu e of state com ity,
a corp oration created b y th^ law s of one state is allow ed to tran sact b u sin ess in
oth er states an d to su e in th e cou rts of th e foru m, subject to restriction s an d certain
req u irem en ts im p osed th erein .
Ap p lication for a Licen se
S ection l42 m an d ates th at a foreign corp oration ap p lyin g for a licen se to tran sact
b u siness irt th e Ph ilip p in es su b mit to th e SEC a cop y of its articles of in corp oration
and bylaws, certified in accord an ce w ith th e law, an d th eir tran slation to an official
u N ar ra N ick el M in in g an d D ev elo p m en t Corp o ratio n , et al, v. Red m o n t C on solid ated M in es C or p o ra tio n ,
G.R. N o. 195580, A p ril 21, 2014, citin g p ar a g r ap h 7 of D ep a rtm en t of Ju stice O p in io n N o. 020, Se ries o f 2005.
Th e Su p r em e C ou r t in its resolu tio n in th is case exp lain ed th at ev en if th e 60-40 Filip in o-fo reig n eq u ity ra tio is
ap p aren tly m et b y th e in v estin g or in v estee corp oration , a resort to th e g ra n d fa th er ru le is n ecessa ry if d o u b t exists
as to th e lo cu s of th e b en eficia l ow n er sh ip an d con trol, an d th e d ou bt refers to v a rio u s in d icia th at said b en eficia l
ow n ersh ip an d con trol of th e corp or ation are n ot h eld b y th e Filip in o sh a reh old er s b u t b y foreig n stak eh old ers
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la n g u a g e o f th e P h ilip p in es, if n ecessary . Th e ap p licatio n sh a ll b e u n d er o ath and,
u n le ss a lr ea d y stated in its a r ticles of in co rp or atio n , sh a ll sp ecifica lly set fo rth the
fo llo w in g :
•
th e d a te a n d ter m o f in co r p or a tio n ;
•
th e a d d r ess in clu d in g th e str eet n u m ber, of th e p rin cip a l o ffice o f th e corp oration
in th e co u n tr y or state of in co r p o r a tio n ;
•
th e n a m e an d a d d r ess of its resid en t ag en t a u th o r iz ed to a ccep t su m m on s
an d p r o ce ss in all leg a l p r o ceed in g s an d all n o tices a ffe ct in g th e corp oration ,
p e n d in g th e esta b lish m en t of a local office;
•
th e p la ce in th e P h ilip p in es w h ere th e co rp or atio n in ten d s to o p er a te;
•
th e sp e cific p u r p o se or p u r p o ses w h ich th e co rp o ration in ten d s to p u r su e in the
tr a n sa ctio n o f its b u sin ess in th e Ph ilip p in es. Th e said p u r p o se or p u r p o se s are
t h o se sp e cifica lly stated in th e cer tifica te of a u th ority issu ed b y th e ap p rop riate
g o v e r n m e n t a g en cy ;
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th e n a m e s an d a d d r esses of th e p resen t d irector s an d o fficer s o f th e corp oration ;
•
a sta te m e n t o f its au th or iz ed cap ital stock an d th e a g g r eg a te n u m b e r o f shares
w h ich th e co rp o ra tio n h a s au th ority to issu e, item iz ed b y cla ss, p a r v alu e of
sh a r es, sh a r e s w ith o u t p ar valu e, an d series, if an y;
•
a sta tem en t o f its o u tsta n d in g cap ital stock an d th e a g g r eg a te n u m b e r o f shares
w h ich th e co rp o ra tio n h a s issu ed , item ized by class, p a r v a lu e o f sh a r e s, shares
w ith o u t p a r v alu e, an d series, if an y;
•
a sta te m e n t of th e am ou n t actu a lly p aid in; an d
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su ch a d d itio n a l in fo r m a tio n as m ay b e n ecessa ry or a p p r o p r ia te in ord er to
e n a b le th e SEC to d eter m in e w h eth er su ch corp or atio n is en titled to a licen se to
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tr a n sa ct b u sin e ss in th e Ph ilip p in es, an d d eter m in e a n d a sse ss th e fe e s payable.
A tta ch e d to th e a p p lica tio n for a licen se sh a ll b e a cer tifica te u n d e r o a th duly
exe cu te d b y th e a u th o r iz ed o fficia l or officia ls of th e ju r isd ictio n o f its in corp oration ,
a t t e s t in g to th e fa ct th e law s o f th e co u n tr y or state of th e a p p lica n t a llo w Filip ino
cit iz e n s an d co r p o r a tio n s to d o b u sin ess th er ein , an d th a t th e a p p lica n t is an
e x is t in g co r p o r a tio n in g oo d sta n d in g . If th e cer tifica te is in a fo r eig n lan g u ag e, a
t r a n sla t io n th e r e o f in En g lish u n d er th e oath of th e tr a n sla to r sh a ll b e attach ed to
th e a p p lica tio n .
i
Th e a p p lica tio n for a licen se to tr a n sa ct b u sin ess in th e P h ilip p in e s shall
lik e w is e b e a cco m p a n ied by a sta tem en t u n d er oath of th e p r esid en t or an y other
p e r s o n a u th o r iz ed b y th e co rp o ra tio n , sh o w in g to th e sa tisfa ctio n o f th e SEC and
w h e n a p p r o p r ia te, o th er g o v er n m en ta l ag en cies th at th e a p p lica n t is so lv en t an d in
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sou nd fin an cial con d ition , settin g forth th e assets an d liabilities of th e corp oration as
of th e d ate n ot exceed in g one year im m ed iately p rior to th e filing of th e ap plication .
/
Foreign b an k in g, fin an cial, an d in su ran ce corp oration s shall, in ad d ition to th e
above req u irem en ts, com p ly w ith th e p rovision s of existin g law s applicable to th em .
In th e case of all oth er foreign corp oration s, n o ap plication for a licen se to tran sact
b usiness in th e Ph ilip p in es sh all b e accep ted b y th e SEC w ith ou t p reviou s au th ority
from th e ap p rop riate govern m en t agen cy, w h en ever req u ired b y law.
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The p rim ary p u rp ose of th e licen se req u irem en t is to com p el a foreign
corp oration d esirin g to d o b u sin ess w ith in th e Philip p in es to su b m it itself to th e
ju risd iction of th e cou rts of th e state an d to enable the govern m en t to exercise
ju risd iction over th em for th e regu lation of th eir activities in th e cou n try. If a foreign
corp oration op erates a b u sin ess in th e Philip pin es w ith ou t a licen se an d th u s, d oes
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n ot su b m it itself to Ph ilip p in e laws, it is on ly ju st th at said foreign corp oration b e
n ot allow ed to in vok e th em in ou r cou rts w h en th e n eed arises.15
For a foreign corp oration to tran sact b u sin ess in th e Ph ilip pin es, it m u st h ave
a licen se or p erm it to d o so an d a certificate of au th ority from th e ap p rop riate
govern m en t agen cy. To ap ply for a license, th e foreign corp oration is req u ired to
su b mit to the^ SEC its articles of in corp oration an d bylaws, certified in accord an ce
w ith th e law, an d th eir tran slation to an official lan gu age of th e Ph ilip p in es, if
n ecessary. Th e ap p lication shall be u n d er oath an d, u n less alread y stated in its articles
of in corp oration , sh all sp ecifically set forth: (1) th e d ate an d term of in corp oration ;
(2) th e p rin cip al office of th e corp oration in th e cou n try or state of in corp oration ; (3)
th e resid en t agen t; (4) th e place in th e Philippines w h ere th e corp oration in ten d s to
Operate; (5) th e p u rp ose or p u rp oses of th e corp oration ; (6) th e d irectors an d officers
of th e corp oration ; (7) its au th orized capital stock; (8) its ou tstan d in g cap ital stock ;
(9) th e am ou n t actu ally p aid in; an d (10) su ch ad dition al in form ation as m ay b e
n ecessary or ap p rop riate in ord er to enable th e SEC to d eterm in e w h eth er su ch
corp oration is en titled to a license to tran sact b u sin ess in th e Ph ilip p in es, an d to
d eterm in e an d assess th e fees payable. Attach ed to th e ap plication for a licen se sh all
be a d u ly execu ted certificate u n d er oath b y th e au th orized official or officials of th e
state of its in corp oration , attestin g to th e fact th at th e laws of th e cou n try or state of
th e ap p lican t allow Filip in o citizen s an d corp oration s to d o b u sin ess th erein , an d
th at th e ap p lican t is an existin g corp oration in good stan d in g. If su ch certificate is
in a foreign lan gu age, its tran slation in En glish u n d er th e oath of th e tran slator sh all
also b e attach ed . Th e ap p lication for a licen se to tran sact b u sin ess in th e Ph ilip p in es
shall lik ew ise b e accom p an ied b y a statem en t u n d er oath of th e p resid en t or an y
oth er p erson au th orized b y th e corp oration , sh ow in g to th e satisfaction of th e SEC
an d oth er govern m en tal agen cies >in th e p rop er cases th at th e ap p lican t is solven t
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an d in sou n d fin an cial con d ition , an d settin g forth th e assets an d liabilities of the
corp oration as of th e d ate n ot exceed in g on e year im m ed iately p rior to th e filing
of th e ap p lication . Foreign b an k s, fin an cial an d in su ran ce corp oration s shall, in
ad d ition to th e ab ove req u irem en ts, com p ly w ith th e p rovision s of existin g laws
ap p licab le to th em .
Issu an ce o f a Licen se
Section 143 p rovid es th at if th e SEC is satisfied th at th e ap p lican t h as complied
w ith all th e req u irem en ts of th e RCC an d oth er sp ecial laws, ru les, an d regulations,
it sh all issu e a licen se to tran sact b u sin ess in th e Ph ilip p in es to th e ap p lican t for
th e p u rp o se or p u rp oses sp ecified in su ch license. Up on issu an ce of th e license,
su ch foreign corp oration m ay com m en ce to tran sact b u sin ess in th e Ph ilip p in es and
con tin u e to d o so for as lon g as it retain s au th ority to act as a corp oration under
th e laws* of th e cou n try or state of its in corp oration , u n less su ch licen se is sooner
su rren d ered , revok ed su sp en d ed , or an n u lled in accord an ce w ith th e RCC or other
sp ecial law s.
W ith in 60 d ays after th e issu an ce of the license to tran sact b u sin ess in the
Ph ilip p in es, th e licen see, excep t foreign b an k in g or in su ran ce corp oration s, shall
d ep osit w ith th e SEC for th e benefit of th e p resen t an d fu tu re cred itors of the
licen see in th e Ph ilip p in es, secu rities satisfactorily to th e SEC, con sistin g of bonds
or oth er evid en ce of th e in d eb tedn ess of th e G overn m en t of th e Ph ilip p in es, its
p olitical su b d ivision s an d in stru m en talities, or of govern m en t-ow n ed or controlled
corp oration s an d en tities, sh ares of stock or debt secu rities th at are registered under
Rep u b lic A ct N o. 8799 (The Securities Regulation Code), sh ares of stock in domestic
corp oration s listed in th e stock exch an ge, sh ares of stock in d om estic insuran ce
com p an ies an d b an k s, an y fin an cial in stru m en t d eterm in ed su itab le b y th e SEC,
or an y com b in ation th ereof w ith an actu al m ark et valu e of at least P 500,000 or such
oth er am o u n t th at m ay b e set by the SEC. With in six m on th s after each fiscal year
of th e licen see, th e SEC sh all req u ire th e licen see to d eposit ad d ition al securities
or fin a n cia l in stru m en ts eq uivalen t in actu al m ark et valu e to 2% of th e amount
b y w h ich th e licen see's gross in com e for th at fiscal year exceed s P10,000,000.
Th e SEC sh all also req u ire th e licen see to d eposit ad d ition al secu rities financial
in stru m en ts if th e actu al m ark et of th e d ep osited secu rities or fin an cial in stru men ts
h as d ecreased b y at least 10% of th eir a ctu a l m ark et valu e at th e tim e th ey were
d ep osited , Th e SEC m ay, at its d iscretion , release p art of th e ad d ition al d ep osit if the
gross in com e of th e licen see h as d ecreased , or if th e actu al m ark et vhlue of th e total
d ep osit h as in creased , b y m ore th an 10% of th eir actu al m ark et valu e at th e time
th ey w ere d ep osited . Th e SEC may, from tim e to time, allow th e licen see to make
su b stitu te d ep osits for th ose alread y on d eposit as long as th e licen see is solvent.
Su ch licen see sh all b e en titled to collect th e in terest or d ivid en d s on su ch deposits.
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In the .event the licensee ceases to do business in th e Philippines, its d ep osits shall
be retu rn ed , upon the licensee's application and p roof to the satisfaction of th e SEC
that the licensee h as n o liability to Philippine residents, in cluding the Philip pin e
government. For p u rp oses of com p u tin g the secu rities deposits, th e com p osition of
gross income and allowable d eductions th erefrom shall be in accord an ce w ith th e
rules of the SEC. t h e objective of the law req u iring th e license is n ot to p reven t th e
foreign corp oration from p erform in g isolated or single acts, b ut to p reven t it from
acquiring a domicile for the p u rp ose of p u rsu in g its business w ith ou t tak in g steps
to render it amendable to suit in the local cou rts.16
Wh o M ay b e a Resid en t Agen t
Accord in g to Section 144, a resident agent m ay be either an in d ivid u al resid in g
in the Philippines or a d omestic corporation lawfully tran sactin g b u siness in the
Philippines. An , individual resident agent must be of good m oral ch aracter an d
sound fin an cial stand ing. In the case of a domestic corp oration th at w ill act as a
resident agent, it m u st likewise be of sound financial stan d in g an d m u st sh ow p roof
that it is in good stan d in g as certified by the SEC. The ap p oin tm en t of a resid en t
agent is a con d ition p reced en t to the issuance of a license to tran sact b u sin ess in th e
Philippines b y a foreign corporation. A*i individual resid in g in th e Philip pin es, of
good m oral ch aracter an d of sound financial standing, or a d om estic corp oration
lawfully tran sactin g b usiness in the Philippines (includes p artn ersh ip s su ch as law
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firms an d accou n tin g firms) m ay be appointed, as a resident agent.
Resid en t Agen t; Service of Process
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Section 145 m an d ates as a condition to the issuance of the licen se for a foreign
corporation to tran sact business in the, Philippines, th at su ch corp oration sh all
file w ith th e SEC a w ritten p ower of attorney designating a p erson w h o m u st be a
resident of th e Philippines, on whom su m mon s and oth er legal p rocesses m ay be
served in all action s or legal p roceed ings against such corp oration , an d con sen tin g
that service u p on su ch resident agent shall be ad mitted and held as valid if Served
upon th e d uly au th orized officers of a foreign corp oration at its h om e office. Such
foreign corp oration shall likewise execute and file w ith the SEC an agreem en t or
stipulation, execu ted by, th e p rop er authorities of said corp oration , in form and
substance as follows: "The (name of the foreign corporation) hereby stipulates and agrees,
in consideration of being granted a license to transact business in the Philippines, that if the
corpofation shall cease to transact business in the Philippines, or shall be without any resident
agent in the Philippines on whom any summons or other legal process may be served, then
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16M arsh all-W ells Com p an y vs. H . W. Elser & Co., In c., G.R. N o. 22015, Sep tem ber 1,1924.
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service of any summons or other legal process may be made upon the SEC in any action or
proceeding arising out of any business or transaction which occurred in the Philippines and
such service shall have the same force and effect as if made upon the duly authorized officers
of the corporation at its home office."
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Accord in g to Section 145, whenever such service of summons or oth er process
is m ad e u p on the SEC, it shall, within 10 days thereafter, transmit by mail a copy 0f
such su m m on s or oth er legal processes to the corporation at its h ome or principal
office. The sen d ing of such copy by the SEC shall be a n ecessary p art of and shall
comp lete su ch service. All expenses incurred by the SEC for such service shall be
p aid in ad van ce by the p arty at whose instance the service is made. It shall be the
d u ty of th e residen t agent to immediately notify the SEC in w ritin g of an y change
in th e resid en t agent's address.
Th e ap p oin tm ent of a resident agent is necessary only for th e p u rp ose of
receivin g su m m on s and other legal processes in any legal action or proceeding
again st th e foreign corporation. The following are the modes of service of summons
u p on a foreign corp oration :17 (1) service upon the resident agent which is mand atory
if th e foreign corp oration is licensed to do business in the Philippines; (2) service
u pon th e SEC if th e licensed foreign corporation has ceased to tran sact b usiness in
the Philippines or h as no resident agent in the Philippines; and (3) service u p on any
of its officers or agen ts w ith in the Philippines.
Ap p licab le Law s
Accord in g to Section 146, a foreign corporation lawfully d oin g business
in th e Philip p in es shall be bound by all laws, rules, and regulations applicable
to d om estic corp oration s of the same class, except those which p rovid e for the
creation , form ation , organ ization or dissolution of corporations or th ose which
fix th e relation s, liabilities, responsibilities, or duties of stockholders, m em b ers or
officers of corp oration s to each other or to the corporation.
In tra-corp orate or internal matters not affecting creditors or th e public, in
gen eral, are govern ed n ot by Philippine laws but the law under w h ich th e foreign
corp oration w as form ed or organized. Special laws may p rovide or gran t certain
restriction s, limitations, privileges, or incentives to a foreign 1corp oration not
oth erw ise applicable or gran ted to domestic corporations (e.g., im p ort d uties and
tax in cen tives u n d er the O mnibus Investments Code).
17Sech o n 12, Ru le 14 o f th e Ru les o f Cou rt.
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Am en d m en ts to Articles of In corp oration or Bylaw s of
Foreign Corp oration s
Accord in g to Section 147, wh enever the articles of in corp oration or b ylaws of a
foreign corp oration au th orized to tran sact business in the Philippines are am en d ed ,
such foreign corp oration shall, w ith in 60 d ays after the am en d m en t b ecom es
effective, file w ith the SEC, and in p rop er cases, w ith the ap p rop riate govern m en t
agency, a duly auth en ticated cop y of the amen d ed articles of in corp oration or bylaws,
indicating clearly in capital letters or u n d erscorin g the ch an ge or ch an ges mad e,
duly certified by the au th orized official or officials of the cou n try of in corp oration .
Such filing shall n ot in itself enlarge or alter the p u rp ose or p u rp oses for w h ich su ch
corporation is au th orized to tran sact business in the Philippines.
Section 148 of th e RCC p rovides that a foreign corp oration au th orized to
tran sact b u sin ess in the Philippines shall obtain an amend ed licen se in th e even t it
chan ges its corp orate n ame, or desires to p ursue oth er or ad ditional p u rp oses in the
Philippines, b y su b mittin g an application with the SEC, favorably en d orsed b y the
ap prop riate govern m en t agen cy in the p roper cases.
M erger or Con solid ation In volvin g a Foreign Corp oration Licen sed
in th e Ph ilip p in es
Section 149 allows one or more foreign corporation s au th orized to tran sact
business in the Philippines to merge or consolidate with an y d om estic corp oration or
corp oration s if p erm itted u n d er Philippine laws and by the law of its in corp oration ,
p rovided the req u irem en ts on merger or consolidation as p rovid ed in th e RCC are
followed. Wh en ever a foreign corporation authorized to tran sact b u sin ess in th e
Philippines shall be a p arty to merger or consolidation in its h om e cou n try or State
as p erm itted by th e law authorizing its incorporation, su ch foreign corp oration
shall, w ith in 60 days after the effectivity of such m erger or con solid ation , file w ith
the SEC, an d in p rop er cases, with the appropriate govern m en t agency, a cop y of
the articles of m erger or consolidation duly au then ticated b y the p rop er official or
officials of th e cou n try or state und er whose laws the m erger or con solid ation w as
effected. If th e absorbed corp oration is a foreign corp oration d oin g b u sin ess in the
Philippines, th e latter shall at the same time file a p etition for w ith d raw al of its
license.
D oin g Bu sin ess W ith ou t a Licen se
Section 150 m an d ates th at no foreign corp oration tran sactin g b usiness in
the Philippines w ithou t a license, or its su ccessor or assigns, shall be p erm itted to
m ain tain or in terven e in any action, suit or p roceed in g in any cou rt or ad m in istrative
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agen cy of th e Ph ilip p in es; but su ch corp oration m ay be sued or p roceed ed against
b efore th e Ph ilip p in e cou rts or ad m in istrative trib u n als on an y valid cau se of action
recogn ized u n d er Philip p in e laws.
Th e p rin cip les govern in g a foreign corporation 's righ t to su e in local courts
m ay be con d en sed into th ree statem ents, to wit: (a) if a foreign corp oration does
b u sin ess in th e Ph ilip p in es w ith ou t a license, it can n ot sue b efore th e Philippine
cou rts; (b) if a foreign corp oration is n ot doing b u siness in th e Ph ilip p in es, it needs
n o licen se to su e b efore Philippine cou rts on an isolated tran saction or a cause
of action en tirely in d ep en d en t of any business tran saction ; an d (c) if a foreign
corp oration d oes b u sin ess in th e Philippines with the req u ired licen se, it can sue
b efore Ph ilip p in e cou rts on an y tran saction .18 It is the act of en gagin g in business
w ith ou t th e p rescrib ed license, and not the lack of license p er se, w h ich bars a
foreign corp oration from access to ou r cou rts.19 In oth er w ord s, alth ou gh a foreign
corp oration is w ith ou t a license to tran sact business in the Ph ilip p in es, i.t d oes not
follow th at it h as n o cap acity to bring an action. Such license is n ot n ecessary if it is
n ot en gaged in b u sin ess in the Philippines.20
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To con stitu te "d oin g b usiness," the activity u n d ertak en in th e Philippines
sh ou ld in volve p rofit-m ak in g.21 To be doing or "tran sactin g b u sin ess in the
Ph ilip p in es," th e foreign corp oration must actu ally tran sact b u sin ess in the
Ph ilip p in es, th at is, p erform specific business tran saction s w ith in th e Philippine
territory on a con tin u in g basis in its own name and for its ow n accou n t. Actual
tran saction of b u sin ess w ith in the Philippine territory is an essen tial req u isite for
th e Ph ilip p in es to acq u ire jurisdiction over a foreign corp oration an d th u s require
th e foreign corp oration to secu re a Philippine business licen se.22 W h eth er a foreign
corp oration is "d oin g b u sin ess" does not necessarily d ep en d u p on th e freq u en cy of
its tran saction s, b u t m ore upon the n atu re and ch aracter of th e tran saction s.23 The
tru e test, h ow ever, seem s to be wh ether the foreign corp oration is con tin u in g the
b od y or su b stan ce of th e business or enterprise for w h ich it w as organ ized .24 Thus,
it h as often b een held th at a single act or tran saction m ay be con sid ered as "doing
b u sin ess" w h en a corp oration p erform s acts for w h ich it w as created or exercises
som e of th e fu n ction s for w h ich it w as organ ized .25
18M R H old in g s, Ltd . vs. Bajar, et al., G.R. N o. 138104, A p ril 11, 2002.
19A b oitiz Sh ip p in g Corp . vs. In su ran ce Co. of N orth A m erica, G.R. N o. 168402, A u g u st 6, 2008; 561 SCRA
262.
20C olu m b ia Pictu res, In c., et al. vs. Cou rt of A p p eals, et al., G.R. N o. 110318, A u g u st 28, 1996, 261 SCRA 144.
21 Ca rg ill, In c. v s. In tr a Stra ta A ssu ra n ce Corp oration , G.R. N o. 168266, M arch 15, 2010.
22 B. Van Z u id en Bros., Ltd . v s. G TVL M an u factu rin g In d u stries, Inc., G.R. N o. 147905, M a y 28, 2007; 523
SC RA 233.
23Erik s Pte. Ltd . vs. C ou r t of A p p eals an d En riq u ez, Jr., G.R. N o. 118843, Febru ary 6,1997.
24Av on In su ra n ce PLC, et al. vs. Cou rt of A p p eals, et al., G.R. N o. 97642, A u g u st 29,1997; 278 SCRA 312.
25 H u tch iso n P orts Ph ilip p in es Lim ited vs. Su bic Bay M etrop olitan Au th ority, In tern atio n al Co n ta in er
Term in al Serv ices In c., Roy al Port Serv ices, Inc., an d the Execu tive Secretary, G.R. N o. 131367, A u g u st 31, 2000.
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Accord in g to th e Sup rem e Cou rt in one case, in case of isolated tran saction s, a
foreign corp oration d oin g b u sin ess in th e Philippines m ay sue in Philip pin e Cou rts
although n ot au th orized to do b usin ess in the Philippines again st a Philip pin e citizen
or en tity th at h ad con tracted w ith an d benefited by said corp oration .26 The Su p rem e
Court held in an oth er case th at after con tractin g w ith a foreign corp oration , a d om estic
firm could n o lon ger d en y th e form er's cap acity to sue.27 A p arty is estop p ed from
challen gin g th e p erson ality of a corp oration after h avin g ack n ow led ged th e sam e
by en terin g in to a con tract w ith it. The Sup rem e Cou rt exp lain ed in still an oth er
case th at th e p rin cip le is applied to p reven t a p erson con tractin g w ith a foreign
corp oration from later tak in g ad van tage of its n on com p lian ce w ith th e statu tes,
chiefly in cases w h ere su ch p erson h as received the benefits of th e con tract.28
O n th e oth er h an d , som e exam p les of cau ses of action en tirely in d ep en d en t of
any b u sin ess tran saction , w h ere a foreign corp oration n eed s n o licen se to su e b efore
Philip pin e cou rts are: (1) w h en th e foreign corp oration is n ot seek in g to en force an y
legal or con tractu al righ ts arisin g from, or grow in g ou t of an y b u sin ess w h ich it
h as tran sacted in th e Philippines; (2) wh en the p u rp ose of th e su it is to p rotect its
trad em ark , trad e n am e, corp orate n ame, rep u tation or good w ill; (3) th e su it is b ased
on a violation of th e Revised Penal Code; an d (4) the foreign corp oration is m erely
d efen d in g a su it filed again st it.
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In an oth er case, th e Supreme Cou rt h eld th at a foreign corp oration w h ich h as
n ever d on e an y b u sin ess in th e Philippines an d w h ich is u n licen sed an d u n registered
to d o b u sin ess h ere, b u t is w id ely an d favorably k n ow n in th e Ph ilip p in es th rou gh
th e u se th erein of its p rod u cts b earin g its corp orate an d trad en am e, h as a legal righ t
to m ain tain an action in th e Philippines to restrain th e residen ts an d in h ab itan ts
th ereof from organ izin g a corp oration b earin g th e sam e n am e as th e foreign
corp oration , w h en it ap p ears th at th ey h ave p erson al k n ow led ge of th e existen ce
of su ch a foreign corp oration , an d it is ap p aren t th at th e p u rp ose of th e p rop osed
d om estic corp oration is to deal an d trad e in th e sam e good s as th ose of th e foreign
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corp oration .29
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R evocation o f a Licen se
Accord in g to Section 151, w ith ou t p reju dice to oth er grou n d s p rovid ed
u n d er sp ecial law s, th e licen se of a foreign corp oration to tran sact b u sin ess in th e
26Steelca se , In c. v s. D esig n In tern a tio n a l Selectio n s, In c., G .R. N o. 171995, A p r il 18, 2012.
27Rim b u n a n H ija u G ro u p o f C om p a n ies an d N iu g in i Lu m b er M er ch a n ts Pty., Ltd . v s. O rien tal W ood
P rocessin g C or p o r a tio n , G .R..N o. 152228, Sep tem ber 23,2005; 470 SC RA 650.
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28G lob a I Bu sin ess H old in g s, Inc! v s. Su reco m p So ftw are, B.V., G .R. N o. 173463, O cto b er 13, 2010.
29 C o n v erse Ru b b er C or p o r a tio n v s. U n iv ersal Ru bb er Prod u cts In c. an d Ev a lle, G .R. N o. L-27906, Ja n u a ry
8 ,1 9 8 7 ,1 4 7 SC RA 154.
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Ph ilip p in es m ay be revok ed or su sp en d ed by th e SEC u p on an y of th e following
grou n d s:
•
failu re to file its an n u al rep ort or p ay an y fees as req u ired ;
•
failu re to ap p oin t an d m ain tain a resid en t agen t in th e Ph ilip p in es;
•
failu re, after ch an ge of its resid en t agen t or ad d ress, to su b m it to th e SEC a
statem en t of su ch ch an ge;
•
failu re to su b m it to th e SEC an au th en ticated cop y of an y am en d m en t to its
articles of in corp oration or b ylaw s or of an y articles of m erger or consolidation
w ith in th e tim e p rescrib ed ;
•
a m isrep resen tation of an y m aterial m atter in an y ap p lication , rep ort, affidavit,
or oth er d ocu m en t su b m itted by such corp oration ;
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failu re to p ay an y an d all taxes, imp osts, assessm en ts, or p en alties, if any,
law fu lly d u e to th e Ph ilip p in e G overn m en t or an y of its agen cies or political
su b d ivision s;
•
tran sactin g b u sin ess in th e Philippines outside of th e p u rp ose or p u rp oses for
w h ich su ch corp oration is au th orized u n d er its license;
•
tran sactin g b u sin ess in th e Philippines as an agen t of or actin g on b eh alf of any
foreign corp oration or en tity n ot duly licen sed to do b u sin ess in th e Philippines;
or
•
an y oth er grou n d as w ou ld ren d er it unfit to tran sact b u sin ess in th e Philippines.
Un d er th e G en eral Ban k in g Act, one of the grou n d s for revocation of the
licen se of a foreign b an k is th e im m in en t d an ger of in solven cy. O n th e other
h an d , th e In su ran ce Cod e m en tion s u n sou n d con dition , failu re to com p ly w ith the
p rovision s of law or regu lation ob ligatory u p on it, a con d ition or m eth od of business
h azard o u s to th e p u b lic or its p olicyh old ers, im p airm en t of its secu rity d ep osit, or
d eficien cy in th e m argin of solven cy as grou n d s for revocation of th e licen se of a
foreign corp oration . Lastly, u n d er th e O m n ib u s In vestm en ts Cocie, w illfu l violation
of th e p rovision s of existin g law s an d im p lem en tin g gu id elin es or violation of the
term s an d con d ition s of its licen se, are ad d ition al grou n d s for revocation of the
licen se of a foreign corp oration .
P u rsu a n t to Section 152 of th e RCC, u p on th e revocation of th e licen se to
s. tra n sa ct b u sin ess in th e Ph ilip p in es, th e SEC shall issu e a corresp on d in g certificate
of revocation , fu rn ish in g a cop y to th e ap p rop riate govern m en t agen cy in th e proper
cases. Th e SEC sh all also m ail th e n otice an d cop y of th e certificate of revocation to
th e corp oration , at its registered office in th e Philip p in es.
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With d raw al of Foreign C orp oration s
Un d er Section 153, sub ject to existin g law s an d regu lation s, a foreign corp oration
licensed to tran sact b u sin ess in th e Ph ilip p in es m ay be allow ed to w ith d raw from
the Ph ilip pin es b y filin g a p etition for w ith d raw al of licen se. N o certificate of
w ith d raw al s h a ll b e issu ed b y th e SEC u n less: (1) all claim s w h ich h ave accru ed
in th e Ph ilip p in es h ave b een p aid , com p rom ised , or settled ; (2) All taxes, im p osts,
assessments, an d p en alties, if any, law fu lly d ue to th e Ph ilip p in e G overn m en t or
any of its agen cies o r p olitical su b d ivision s, h ave b een p aid ; an d (3) The p etition for
w ith d raw al of licen se h as b een p ub lish ed on ce a w eek for th ree con secu tive w eek s
in a n ew sp ap er of gen eral circu lation in th e Philip pin es.
Foreign In v estm en ts A ct of 199130
;
D oin g b u sin ess*31 in th e Philip pin es req u ires p rior registration w ith th e
Secu rities an d Exch an ge Com m ission (SEC) for corp oration or p artn ersh ip an d
w ith th e D ep artm en t of Trade an d In d u stry (DTI) for sole or sin gle p rop rietorsh ip .32
There are oth er typ es of b u sin ess en terp rises th at m ayb e set u p u n d er law s oth er
th an th ose of th e Ph ilip pin es w h ich req u ire SEC registration , n am ely: Bran ch office,
Rep resen tative or liaison office,33. Region al H ead q u arters (RH Q ) an d Region al
O p eratin g H ead q u arters (ROHQ).
,
The Ph ilip p in es w elcom es anyone, regard less of n ation ality, to d o b u sin ess
and in vest in th e cou n try, in alm ost all areas of econ om ic activities p rovid ed
th ese are n ot listed in th e Foreign In vestm en ts N egative List (FIN L) of th e Foreign
In vestm en ts A ct of 1991 (Republic Act 7042 as am en d ed b y R.A. 8179). Un d er th e law;
foreign in vestors are allow ed to invest 100% eq u ity in com p an ies en gaged in alm ost
all typ es of b u sin ess activities subject to certain restriction s as p rescrib ed in th e
^ R e p u b lic A ct N o . 7042, as am en d ed by Rep u b lic A ct N o. 8179.
,
31 Se ctio n 3 (d ) o f R.A . 7042 as a m en d ed states: Th e p h ra se "d o in g b u sin e ss" sh a ll in clu d e so licitin g o rd ers,
service con tr a cts, o p en in g offices, w h eth er called "lia iso n " offices o r b r a n ch es; a p p o in tin g r ep r esen ta tiv es or
d istr ib u tors d o m iciled in th e P h ilip p in es or w h o in an y ca len d a r y ea r sta y in th e co u n try fo r a p er io d o r p er io d s
totalin g on e h u n d r ed eig h ty (180) d ay s o r m or e; p a rticip a tin g in th e m a n a g em en t; su p er v is io n o r co n tro l o f a n y
d om estic b u sin ess, firm , en tity o r co rp o ra tio n in th e P h ilip p in es; an d an y oth er a ct or a cts th a t im p ly a co n tin u ity
of com m er cia l d ea lin g s o r a rr a n g em en ts, an d con tem p la te to th a t exten t th e p er fo rm a n ce o f a cts o r w o rk s, o r th e
exercise o f so m e o f th e fu n ctio n s n o rm a lly in cid en t to, arid in p ro g r essiv e p ro se cu tio n of, co m m ercia l g a in o r o f th e
p u rp ose an d o b je ct o f th e b u sin ess o rg an iz ation : Pr ov id ed , h ow ev er, Th a t th e p h ra se "d o in g b u sih e ss" sh a ll n ot b e
d eem ed to in clu d e m er e in v estm en t as?a sh ar eh old er by a for eig n en tity in d o m estic co rp o ra tio n s d u ly reg ister ed
to d o b u sin ess, a n d / o r th e exer cise o f rig h ts as su ch in v esto r; n or h a v in g a n o m in ee d ir ecto r o r officer to r ep re se n t
its in ter ests in su ch co rp o ra tio n ; n o r a p p o in tin g a r ep resen ta tiv e or d istr ib u to r d om iciled in th e P h ilip p in es w h ich
tran sacts b u sin ess in its o w n n am e an d fo r its ow n accou n t.
32Sectio n 2 (a), Ru le IV, Im p lem en tin g Ru les an d Reg u la tion s (IRR) o f R.A . 7042, as a m en d ed sta tes:
ap p lica tio n s fo r r eg istra tio n sh a ll b e filed w ith th e SEC in th e case o f fo re ig n co rp o ra tio n s an d d o m estic co r p o r a tio n s
or p a rtn er sh ip s w h ich are ricm -Ph ilip p in e n a tio n als. In th e case o f sin g le p r o p rietor sh ip s, a p p lica tio n s fo r M etr o
M an ila sh a ll b e filed w ith th e Bu r ea u o f Trad e Reg u latio n an d C o n su m er P ro tectio n (BTRC P ) or th e D TI-N a tio n a l
Cap ital Reg io n , In th e p ro v in ces, a p p licatio n s m a y b e filed w ith th e exten sio n offices o f th e SEC fo r cor p o ra tio n s/
p artn ersh ip s an d th e p ro v in cia l offices o f th e D TI fo r so le p r o p r ieto r sh ip s
^ Se ctio n 1 (c), Ru le I, IRR of R.A . 7042. as am en d ed .
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Foreign In vestm en ts N egative List (FINL).34 The FIN L is a sh ortlist of investment
areas or activities w h ich m ay be op en ed to foreign in vestors a n d /o r reserved to
Filip in o n ation als. Th e Foreign Investm en ts N egative Lists (FIN L)35 are classified as
follows:
A.
List A w h ich con sists of areas of activities reserved to Ph ilip p in e nationals
w h ere foreign eq u ity p articip ation in an y d om estic or exp ort enterprise
en gaged in an y activity listed th erein shall b e lim ited to a m axim u m of 40% as
p rescrib ed b y th e Con stitu tion an d oth er sp ecific laws.
B.
List B w h ich con sists of areas of activities /»w h ere foreign ow n ersh ip is limited
p u rsu an t to law su ch as d efense or law en forcem en t-related activities, which
h ave n egative (implications on public h ealth an d m orals, an d sm all and
m ed iu m -scale en terp rises.
Foreign ers can in vest u p to 100% capital in a d om estic en tity if th e proposed
activity is n ot am on g th ose listed in the FIN L,36 if the p aid -u p cap ital for domestic
m ark et en terp rise is at least US$200,000,37 w h ich m ay b e low ered to US$100,000 in
case of in trod u ction of ad van ced tech n ology or em p loym en t of at least 50 direct
em p loyees an d if th e p rod u ct or service is for exp ort.38 In vestm en t in cen tives are
offered u n d er th e O m n ib u s Investments Code of 1987 (E.O. 226)39 an d th e Special
Econ om ic Zon e Act of 1995 (RA No. 7916, as amen ded),40 an d th e Bases Conversion
an d D evelop m en t Act of 1992 (RA No. 7227, as amen ded ).41
^ Se ctio n 1, Ru le VI, IRR o f RA 7042. as am en d ed .
35Sectio n 9. R.A . 7042, as am en d ed .
36Se ctio n 6, R.A . 7042, as am en d ed .
37Sm a ll an d m ed iu m -sized d om estic m ark et en terp rises, w ith p aid -in eq u ity ca p ita l le ss t h a n th e equ ivalen t
tw o h u n d r ed th o u sa n d U S d ollar s (U S$200,000) are reserved to Ph ilip p in e n ation a ls, p r o v id ed t h a t if: (1) th e y involve
a d v a n ce d tech n o lo g y as d eter m in ed b y th e D ep artm en t of Scien ce an d Tech n olog y o r (2) t h e y e m p lo y a t lea st fifty
(50) d ir ect em p lo y ees, th en a m in im u m p aid -in cap ital of on e h u n d red th o u san d U S d o lla r s (U S$100,000.00) shall
b e a llo w ed to n o n -P h ilip p in e n ation als.
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38Se ctio n 1 (c), Ru le X, IRR of R.A. 7042, as am en d ed .
39Th e fo llo w in g in cen tiv e p riv ileg es m ay b e en joy ed b y BO I reg istered en terp rises: ta x exem p tio n s, tax
cre d its, a d d itio n a l d ed u ctio n fo r lab or exp en se, zero-rated Valu e-A d d ed Tax (VA T); a n d n o n -fis ca l In cen tiv es. The
BO I u ses th e in cen tiv e p a ck a g e u n d er EO 226 to in flu en ce in d u str y an d en co u ra g e e n ter p r ises to lo ca te ou tsid e the
N a tio n a l C a p ita l Reg io n (N CR); it lim its in cen tiv es to firm s th a t lo ca te in con g ested u r b a n cen ter s a n d p rovid es
m a xim u m in cen tiv es t o reg istered en terp rises th at w ill lo ca te in th e p oo rest P h ilip p in e p ro v in ces.
40 P EZ A -re g iste re d en terp rises loca ted w ith in th e eco zbn es ad m in ister ed b y P EZ A m a y a v a il o f th e follow ing
in cen tiv es an d b en efits: (a ) all in cen tiv es u n d er EO 226; (b) p referen tial fin a l tax o f 5% o f g ro ss in co m e in lieu of all
n a tio n a l an d lo ca l ta xes a fter th e in com e tax h olid a y ; (c) tax an d d u ty -free im p o rtatio n o f ca p ita l eq u ip m en t, spare
p a rts, ra w m a teria ls, an d su p p lies, w h ich are n eed ed in th e registered activ ity ; an d (d ) tax cr ed its fo r exp o rters using
lo ca l m a ter ia ls as in p u ts u n d er R.A . 7844 o r th e Exp o rt D ev elop m en t A ct of 1994. A n a m o u n t e q u iv a le n t to oneh a lf o f th e v a lu e o f tra in in g exp en ses in cu rred in d ev elo p in g sk illed or u n sk illed lab or o r fo r m a n a g er ia l or other
m a n a g em en t d ev elo p m en t p ro g r a m s in cu rred b y a PEZ A firm can b e d ed u cted from th e n a tio n a l gov ern m en t's
sh a re o f 3% (o u t o f 5% ) fin a l tax.
;
41 Fiscal in cen tiv es su ch as fin al tax o f 5% on g ross in ep m e earn ed sh all b e p aid in lieu o f all lo ca l an d national
ta xes an d tax an d d u ty -fre e im p o rta tio n o f ra w m a terials an d cap ital eq u ip m en t an d n o n -fisca l in cen tiv es such
as em p lo y m en t o f fo re ig n n a tio n a ls an d p erm an en t resid en cy statu s fo r in v estors, th eir sp o u ses a n d d ep end ent
ch ild re n u n d er 21 y ea r s old , p ro v id ed th ey h a v e con tin u in g in v estm en ts of n ot less th a n U S$250,000.
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All in vestors are en titled to th e basic righ ts an d gu aran tees42 p rovid ed in th e
Philippine Con stitu tion , su ch as:
•
the righ t to rep atriate th e en tire p roceed s of th e liq u id ation of th e in vestm en t
in the cu rren cy in w h ich th e in vestm en t w as origin ally m ad e at th e exch an ge
rate p revailin g at th e tim e of rep atriation ;
•
the righ t to rem it earn in gs from th e in vestm en t in th e cu rren cy in w h ich th e
in vestm en t w as origin ally m ad e an d at exch an ge rate p revailin g at th e tim e of
rem ittan ce;
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th e righ t to rem it, at th e exch an ge rate p revailin g at th e tim e of rem ittan ce, su ch
su m s as m ay b e n ecessary to m eet the p aym en t of in terest an d th e p rin cip al
on foreign loan s an d foreign obligations arisin g from tech n ological assistan ce
con tracts;
•
n o exp rop riation b y th e govern m en t of the p rop erty rep resen ted b y th e
in vestm en ts or of th e p rop erty of en terp rises excep t for p u b lic u se or in th e
in terest of n ation al w elfare and defense an d u p on p aym en t of ju st com p en sation ;
•
n o req u isition of th e p rop erty p resented b y th e in vestm en t or of th e p rop erty
of en terp rises, excep t in th e event of w ar or n ation al em ergen cy an d on ly for
th e d u ration ;
•
tran sfers relatin g to in vestm en ts to be m ad e freely an d w ith ou t d elay in to an d
ou t of its territory, subject to comp liance w ith certain req u irem en ts im p osed b y
laws an d regu lation s; an d
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all in vestm en ts treated eq ually w h eth er m ad e b y foreign or local in vestors to th e
exten t allow ed b y Philip pin e laws in accord an ce w ith cu stom ary in tern ation al
law.
PRACTICE EXER C ISE
Q Q Q Corp oration is a foreign corp oration th at w an ts to op erate a rep resen tative
office h ere in th e Ph ilip p in es. It ap p oin ted a Residen t Agen t in com p lian ce w ith
the con d ition p reced en t'to th e issu an ce of a licen se to tran sact b u sin ess in th e
Philippines. After tw o years, QQ Q Corp oration rem oved its Resid en t Agen t an d
did n ot ap p oin t an yon e an ym ore. Wh at d o you th in k is th e im p lication of su ch act?
42
Th e rig h ts an d g u a ra n tees first ap p eared in Sectio n 4 o f Rep u b lic A ct N o. 5186 (In v estm en t In ce n tiv es A ct),
an old law w h ich to o k effect o n Sep tem ber 16,1967, an d w a s a m en d ed b y P resid en tia l D e cree N o. 285 o n Ju n e 19,
1974. Th e rig h ts an d g u a ra n tees are n ow fou n d u n d er A rticle 42, Ru le II ’ C h a p ter III, Bo o k O n e o f th e Execu tiv e
O rd er N o. 226, w h ich w a s ap p ro v ed on Ja n u a ry 16, 1981, an d to o k effect im m ed ia tely . E.O . N o. 226 r ev ised ,
con solid ated an d cod ified all in v estm en t, a g r icu ltu ra l an d exp o rt in cen tiv es la w s th en existin g ., in clu d in g R.A . N o.
5186, as am en d ed .
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RELEV A N CE O F TH E LESSO N
Kn ow in g th e p rovision s of th e law relative to foreign corp oration s doing
b u sin ess in th e cou n try is im p ortan t for th e p rotection of b oth p arties— th e foreign
corp oration an d th e p erson d ealin g w ith th em . It m ay h ap p en th at on e gets to do
b u sin ess w ith a foreign corp oration , or b e em p loyed in one.
LES S O N SU M M A RY
•
A foreign corp oration is on e form ed , organ ized , or existin g u n d er any laws
oth er th an th ose of th e Philip pin es.
4
•
In ord er to tran sact b u sin ess in th e Ph ilip p in es, a foreign corp oration m u st have
a licen se or p erm it to d o so an d a certificate of au th ority from th e appropriate
govern m en t agency.
•
With ou t a licen se, a foreign corp oration sh all n ot b e p erm itted to maintain
or in terven e in an y suit in an y Philippine cou rt or ad m in istrative agency, but
m ay b e su ed or p roceed ed again st before Ph ilip p in e cou rts or administrative
trib u n als on an y valid cau se of action recogn ized u n d er Ph ilip p in e laws.
•
The ap p oin tm en t of a resid en t agen t is a con d ition p reced en t to th e issu ance of
a licen se to tran sact b u sin ess in th e Philip p in es b y a foreign corp oration .
•
Th e licen se of a foreign corp oration m ay be revok ed or su sp en d ed on certain
4grou n d s p rovid ed u n d er th e RCC an d applicable sp ecial law s.
•
A n y foreign corp oration law fu lly d oin g b u sin ess in th e Ph ilip p in es shall be
b ou n d b y all laws, ru les, an d regu lation s ap plicable to d om estic corp oration s of
th e sam e class excep t law s th at p rovid e for th e creation , form ation , organization,
or d issolu tion of corp oration s an d th ose govern in g in tra-corp orate or internal
m atters n ot affectin g cred itors or th e pub lic in gen eral.
Le ss o n 5
Le s s o n 5.1* In v estig ation s, O ffen ses, andi P en alties
In v e s tig a tio n an d P ro secu tio n o f O ffen ses
Un d er Section 154, th e SEC m ay in vestigate an alleged violation of th e RCC,
or of a ru le, regu lation , or its ord er. It m ay p u b lish its fin d in gs, ord ers, opinions,
ad visories, or in form ation con cern in g an y su ch violation , as m ay b e relevan t to the
gen eral p u b lic or th e p arties con cern ed , su b ject to th e p rovision s of Rep u b lic Act No10173 (D ata P rivacy A ct of 2012), an d oth er p ertin en t law s. It sh all give reasonable
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notice to an d coord in ate w ith the ap p rop riate regu latory agen cy p rior to an y. su ch
publication in volvin g com p an ies u n d er th eir regu latory ju risd iction .
Section 155 p rovid es th at th e SEC, th rou gh its d esign ated officer, m ay
ad m in ister oath s an d affirm ation s, issue subpoena an d subpoena duces tecum, tak e
testimon y in an y in q u iry or in vestigation , an d m ay p erform oth er acts n ecessary to
the p roceed in gs or th e in vestigation .
t
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Un d er Section 156, w h en ever the SEC h as a reason ab le b asis to b elieve th at a
p erson h as violated , or is ab ou t to violate the RCC, a ru le, regu lation , or its ord er, it
m ay d irect su ch p erson to d esist from com m ittin g th e act con stitu tin g th e violation .
It m ay issu e,a cease-an d -d esist ord er ex parte to enjoin an act or p ractice w h ich
is frau d u len t or can b e reason ab ly exp ected to cau se sign ifican t, im m in en t, an d
irrep arab le d an ger or in ju ry to public safety or welfare. The ex parte ord er sh all
be valid for a m axim u m p eriod of 20 days, w ith ou t p reju d ice to th e ord er b ein g
m ad e p erm an en t after d u e n otice an d h earin g. Th ereafter th e SEC m ay p roceed
ad m in istratively again st su ch p erson in accord an ce w ith Section 158 of th e RCC,
an d /or tran sm it evid en ce to the D ep artm en t of Ju stice for p relim in ary in vestigation
or crim in al p rosecu tion an d /or initiate crim in al p rosecu tion for an y violation of th e
RCC, ru le, or regu lation .
.
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Section 157 p rovid es th at any p erson who, w ith ou t justifiable cau se, fails or
refu ses to com p ly w ith an y lawful order, decision, or subpoena issu ed b y th e SEC
shall, after d u e n otice an d h earin g, be held in con tem p t an d fin ed in an am ou n t
h ot exceed in g P30,000. Wh en the refusal amou n ts to clear an d op en d efian ce of th e
SEC's ord er, d ecision , or subpoena, the SEC m ay im p ose a d aily fine of P I,000 u n til
the ord er, d ecision , or subpoena is complied with.
A d m in istrative San ction s
Section 158 p rovid es th at if, after due notice an d h earin g, th e SEC fin d s th at an y
p rovision of th e RCC, ru les or regu lation s, or an y of its ord ers h ave b een violated ,
it m ay im p ose an y or all of th e following sanction s, fak in g in to con sid eration th e
exten t of p articip ation , n atu re, effects, frequency, an d seriou sn ess of th e violation : (a)
imp osition of a fine ran gin g from P5,000 to P2,000,000, an d n ot m ore th an PI,000 for
each d ay of con tin u in g violation b u t in n o case to exceed P2,000,000; (b) issu an ce of
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the p erm an en t cease-an d -d esist ord er; (c) su sp en sion or revocation of th e certificate
of in corp oration ; an d (d) d issolu tion of th e corp oration an d forfeitu re of its assets.
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The followin g are th e p u n ishable crim es an d th eir p en alties u n d er th e RCC:
A.
Un au th orized JJse of Corp orate N am e43 - P10,000 to P200,000 fine;
43Sectio n 159. RCC.
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B.
Violation of Disqualification Provision:44 wh en, d espite th e knowledge
of th e existen ce of a grou n d for d isqualification, a d irector, tru stee or
officer w illfu lly holds office, or willfully con ceals su ch disqualification
- P10,000 to P200,000 fine at th e d iscretion of the cou rt, an d p ermanent
d isq u alification from being a d irector, tru stee or officer of an y corporation;
w h en the violation is injurious or d etrimen tal to the public - P20,000 to
P400,000 fine;
C.
Violation of D u ty to M ain tain Records, to Allow th eir In sp ection or
Rep rod u ction :45 unjustified failure or refusal by the corp oration , or by
th ose responsible for keepin g and m ain tain in g corp orate record s, to
com p ly w ith the p rovisions and other p ertin en t ru les on in sp ection and
rep rod u ction of record s - P10,000 to P200,000 fine, at the d iscretion of the
cou rt, tak in g into consideration the seriousness of the violation and its
im p lication s; w hen the violation is injurious or d etrim en tal to th e public
- P20,000 to P400,000 fine; penalties shall be w ithout p reju d ice to SEC's
exercise of its con temp t powers;
D.
Willfu l Certification of Incomplete, Inaccurate, False, or Misleading
Statem en ts or Rep orts:46 willfully certifying a rep ort req u ired u n d er the
RCC, k n ow in g th at the same contains incomplete, in accu rate, false, or
• m islead in g in formation or statements - P20,000 to P200,000 fine; w h en the
w ron gfu l certification is injurious or detrimental to the pub lic - P40,000
1 to P400,000 fine;
E.
,
F.
In d ep en d en t Aud itor Collusion:47 when an indep end en t au ditor, in
collu sion w ith the corporation's directors or rep resen tatives, certifies the
corp oration 's financial statements despite its incompleteness or inaccuracy,
its failu re to give a fair and accurate presentation of th e corporation's
con d ition , or despite containing false or misleading statem en ts - P80,000
to P500,000 fine; when the statement or rep ort certified is fraud ulent, or
h as th e effect of causing injury to the general public - P100,000 to P600,000
fine;
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O b tain in g Corp orate Registration th rou gh Fraud:48 form ation of a
corp oration th rou gh fraud, assisting d irectly or in d irectly therein
-P 200,000 to P2,000,000 fine; when the violation is injurious or detrimental
to th e public - P400,000 to P5,000,000 fine;
“ Sectio n
45Sectio n
“ Sectio n
47Sectio n
“ Section
202
160, RCC.
161, RCC.
162, RCC.
163, RCC.
164, RCC.
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G.
Frau d u len t Con d u ct of Business: con d u ctin g th e corp oration 's b u sin ess
th rou gh fraud 49 - P200,000 to P2,000,000 fine; w h en th e violation is
in ju riou s or d etrim en tal to th e public -1*400,000 to P5,000,000 fine;
H.
Actin g as In term ed iaries for Graft an d Corru p t Practices:50 u sin g th e
corp oration for frau d , or com m ittin g or con cealin g graft an d corru p t
p ractices as d efin ed u n d er p ertin en t statu tes - P100,000 to P5,000,000
fine; th e corp oration 's failu re to in stall safegu ard s for th e tran sp aren t an d
law fu l d elivery of services an d policies, cod e of eth ics, an d p roced u res
again st graft an d corru p tion shall be optima facie evid en ce of corp orate
liability;
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En gagin g In term ed iaries for Graft an d Corru p t Practices:51 ap p oin tin g
an in term ed iary w h o en gages in graft an d corru p t p ractices for th e
* corp oration 's b enefit or in terest - P100,000 to PI,000,000 fin e;
J.
Toleratin g G raft an d Corru p t Practices:52 k n ow in gly fail to san ction ,
rep ort, or file th e ap p rop riate action w ith p rop er agen cies, allow in g or
toleratin g th e graft an d corru p t p ractices or frau d u len t acts com m itted
b y a corp oration 's d irectors, tru stees, officers, or em p loyees - P500,000 to
P I,000,000 fine;
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K. Retaliation again st Whistleblowers:53 k n ow in gly an d w ith in ten t to
j'-- > retaliate, com m ittin g acts d etrim en tal to a w h istleb low er su ch as
in terferin g w ith th e lawful emp loymen t or livelih ood of th e w h istleb low er
- P100,000 to PI,000,000 fine at the d iscretion of th e cou rt; an d
L. .
O th er Violation s of th e RCC54 - P10,000 to PI,000,000 fine.
Section 170 fu rth er p rovid es th at th e SEC may, after n otice an d h earin g,
dissolve a corp oration th at Commits th e violation. The SEC m ay file th e ap p rop riate
action again st th e d irector, tru stee, or officer of th e corp oration resp on sib le for said
violation . Th e liab ility for an y of th e foregoin g offenses is sep arate ,from an y oth er
ad m in istrative, civil, or crim in al liability u n d er th e RCC an d oth er law s. Wh ile
im p rison m en t is n ot a p enalty, crim in al ch arges m ay b e b rou gh t for falsification ,
u se of a falsified d ocu fn en t, an d oth er p en al offen ses of statu tory offen ses like
violation of th e an ti-graft an d corru p t p ractices act, tax evasion , sm u gglin g, m on ey
lau n d erin g, all of w h ich h ave im p rison m en t as a penalty.
49Se ctio n 165, RCC.
50Se ctio n 166, RCC.
51Se ctio n
52Sectio n
“ Sectio n
“ Sectio n
167, RC C.
168, RCC.
169, RCC.
170, RCC.
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U n d er Section 171, if th e offen d er is a corp oration , th e p en alty m ay, at the
d iscre tio n of th e co u rt, b e im p osed u p on su ch corp oration a n d /o r u p on its directors,
tru ste e s, sto ck h old ers, m em b ers, officers, or em p loyees resp on sib le for th e violation
or in d isp en sab le to its com m ission .
A cco r d in g to Section 172, an yon e w h o aid s, ab ets, cou n sels, com m an d s,
in d u ces, o r ca u s e s an y violation of th e RCC, or an y ru le regu lation or ord er of the
SEC sh all b e p u n ish e d w ith a fin e n ot exceed in g th at im p osed on th e principal
o ffen d ers, at th e d iscretion of th e cou rt, after tak in g in to accou n t th eir p articip ation
in th e offen se.
Le s s o n 5.2: M i s ce lla n e o u s P ro v isio n s
S e ctio n 173 d efin es ou tstan d in g cap ital stock as th e total sh ares of stock issued
u n d e r b in d in g su b scrip tion con tracts to su b scrib ers or stock h old ers, w h eth er fully
o r p a r tia lly p aid ,( exclu d in g treasu ry sh ares.
S e ctio n 174 giv es n on stock or sp ecial corp oration s th e ch oice to d esign ate their
g o v e r n in g b o a r d s b y ,an y n am e oth er th an as a b oard of tru stees.
S e ctio n 175 au th orizes th e SEC to collect an d u se registration , in corp oration ,
a n d o th e r fees to au gm en ts is an op eration al exp en se.
)
S e ctio n 176 allow s th e N ation al Econ om ic an d D evelop m en t Authority,
p u r s u a n t to its d u tie s sp ecified b y Article XIV of th e Con stitu tion , to d ete rm in e if the
co r p o r a te v e h icle h a s b een u sed b y an y corp oration , b u sin ess, or in d u stry to fru strate
th e p ro v is io n s o f th e RCC or ap p licab le law s, an d to su b m it to C on gress, w h en ever
d e e m e d n e ce s s a r y , a re p o rt of its fin d in gs, in clu d in g recom m en d ation s for their
p re v e n tio n o r co rre ctio n . Con gress m ay set m axim u m lim its for stock ow n ersh ip of
in d iv id u a ls o r g r o u p s of in d ivid u als related to each oth er b y con san gu in ity, affinity,
o r b y clo se b u sin ess in terests, in corp oration s d eclared to b e vested w ith , public
in te r e st p u r s u a n t to th e Cod e, or w h en ever n ecessary to p reven t an ti-com p etitive
p ra ctice s as p ro v id e d in Rep u b lic A ct N o. 10667 (Ph ilip p in e Com p etition Act), or to
im p le m e n t n a tio n a l econ om ic p olicies d esign ed to p rom ote th e gen eral w elfare and
e co n o m ic d evelop m en t. In su ch cases, N ED A sh all con sid er th e factors germ an e to
th e re a liz a tio n a n d p rom otion of b u sin ess an d in d u stry. , ,
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Section 177 p rovid es th at every corp oration , d om estic or foreign , lawfully
d oin g b u sin ess in th e Ph ilip p in es sh all su b m it to th e SEC an an n u al rep ort of its
op eratio n s, to g e th e r w ith a fin an cial statem en t of its assets an d liab ilities, certified
b y an y in d e p e n d e n t certified p u b lic accou n tan t in ap p rop riate cases, coverin g the
p re ce d in g fiscal y e a r an d su ch oth er req u irem en ts as th e SEC m ay req u ire. Such
re p o rt sh all b e su b m itted w ith in su ch p eriod as m a y b e p rescrib ed b y th e SEC.
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Excep t as oth erw ise p rovid ed in th e RCC or th e ru les issu ed b y th e SEC, every
corp oration , d om estic or foreign , d oin g b u sin ess in th e Ph ilip p in es sh all su b m it to
the SEC th e an n u al fin an cial statem en ts au d ited b y an in d ep en d en t certified p u b lic
accou n tan t an d a gen eral in form ation sh eet. If th e total assets or total liab ilities of
the corp oration are less th an P600,000, th e fin an cial statem en ts sh all b e certified
u nder oath b y th e corp oration 's treasu rer or ch ief fin an cial officer. Corp oration s
vested w ith p u b lic in terest m u st also su b m it a d irector or tru stee com p en sation
rep ort an d a d irector or tru stee ap p raisal or p erform an ce rep ort an d th e stan d ard s
or criteria u sed to assess each , d irector or tru stee. Th e rep ortorial req u irem en ts sh all
be su b m itted an n u ally an d w ith in su ch p eriod as rhay b e p rescrib ed b y th e SEC.
In case of a corp oration 's failu re to su b m it th e rep ortorial req u irem en ts th ree
times w ith in five years, th e SEC m ay p lace th e corp oration u n d er d elin q u en t
status. Th e SEC sh all give reason ab le n otice to an d coord in ate w ith th e ap p rop riate
regu latory agen cy p rior to p lacin g on d elin q uen t statu s com p an ies u n d er th eir sp ecial
regu latory ju risd iction . An y p erson req u ired to file a rep ort w ith th e SEC m ay red act
con fid en tial in form ation from su ch req u ired rep ort. Such con fid en tial in form ation
shall b e filed in a su p p lem en tal rep ort p rom in en tly labeled "con fid en tial", togeth er
w ith a req u est for con fid en tial treatm en t of th e rep ort an d th e sp ecific grou n d s for
its gran t.
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Section 178 m an d ates th e SEC to exercise visitorial p ow ers over all corp oration s.
These p ow ers in clu d e th e exam in ation an d in sp ection of record s, regu lation , an d
_ su p ervision of activities, en forcem en t of com p liance, an d im p osition of san ction s in accord an ce w ith th is Cod e. If th e corp oration , w ith ou t ju stifiable cau se, refu ses or
ob stru cts SEC's exercise of its visitorial p ow ers, th e SEC m ay revok e its certificate
of in corp oration an d im p ose oth er p en alties an d san ction s. All in terrogatories
p rop ou n d ed b y th e SEC an d th e an sw ers th ereto, as w ell as th e resu lts of an y
exam in ation m ad e b y th e SEC or b y an y oth er official au th orized b y law to m ak e
an exam in ation of th e op eration s, b ook s, an d record s of an y corp oration , sh all b e
kept strictly con fid en tial, excep t in sofar as th e law m ay req u ire th e sam e to b e
m ad e p u b lic or w h ere su ch in terrogatories, an sw ers or resu lts are n ecessary to b e
p resen ted as evid en ce b efore an y cou rt.
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Section 179 gives th e SEC shall h ave th e p ow er an d au th ority to exercise
su p ervision an d ju risd iction over all corp oration s an d p erson s actin g on th eir b eh alf.
Pu rsu an t to Presid en tial D ecree No. 9Q2-A, it retain s ju risd iction over p en d in g cases
in volvin g in tra-corp orate d isp u tes su b m itted for final resolu tion an d over p en d in g
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su sp en sion of p aym en t or rehabilitation cases filed as of 30 Ju n e 2000 u n til finally
d isp osed . It can im p ose san ction s for th e violation of th e RCC, its implementing
ru les, an d ord ers. It p rom otes corp orate govern an ce an d p rotects m in ority investors
th rou gh the issu an ce of rules an d regu lation s con sisten t w ith in tern ation al best
p ractices. It issu es opin ion s to clarify th e application of laws, ru les, an d regulations.
It can issu e cease-an d -d esist ord ers ex parte to p reven t im m in en t frau d or injury to
th e p ub lic an d m ay hold corp oration s in d irect and in d irect con tem p t. It can issue
subpoena duces tecum an d su m m on w itn esses to ap p ear in p roceed in gs b efore it, and
in p rop er cases, ord er the exam in ation , search and seizu re of d ocu m en ts, papers,
files an d record s, an d b ooks of accou n ts of an y en tity or p erson u n d er investigation.
It can su sp en d or revok e the certificate of in corp oration after p rop er n otice and
h earin g, an d d issolve or imp ose sanction s on corp oration s, u p on fin al cou rt order,
for com m ittin g, aid ing in the com m ission of, or in any m an n er fu rth erin g securities
violation s, sm u gglin g, tax evasion, money laund erin g, graft an d corru p t practices,
or oth er fraud ulent or illegal acts. It can issue w rits of execu tion an d attach m en t to
en force p aym en t of fees, ad min istrative fines, and oth er d u es collectib le u n d er the
RCC. It can p rescrib e the n um ber of independent d irectors an d th e m in im u m criteria
in d eterm in in g th e independence of a director. It may im p ose or recom m en d new
. m od es b y w h ich a stockholder, member, director, or tru stee m ay atten d meetings
or cast th eir votes. It m ay formulate and enforce stan d ard s, gu id elin es, policies,
ru les, an d regu lation s to carry out the provisions of the RCC an d exercise su ch other
p ow ers p rovid ed by law or those which m ay be n ecessary or in cid en tal to carrying
ou t th e p ow ers exp ressly gran ted to the SEC. ,
th e SEC sh all tak e into consideration the size, n atu re of th e b u sin ess, an d capacity
of th e corp oration . N o cou rt below the Cou rt of Ap p eals sh all h ave jurisdiction
to issu e a restrain in g order*, p relim in ary injunction, or p relim in ary mandatory
in ju n ction over SEC relative to any case, dispute, or con troversy th at d irectly or
in d irectly in terferes w ith th e exercise of its powers, duties, an d resp on sib ilities.
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Section 179 gives th e SEC su ch p ow er and au th ority to im p lem en t th e provisions
of th e RCC, an d to p rom u lgate ru les and regu lation s reason ab ly n ecessary to enable
it to p erform its d uties h ereu n d er, p articu larly in the p reven tion of frau d an d abuses
on th e p art of th e con trollin g stockholders, members, d irectors, tru stees pr officers.
An in tra-corp orate Controversy is one th at arises b etw een a stock h old er and the
corp oration or am on g th e stockh old ers in volving in tern al affairs of th e corp oration .55
Th e tests in d eterm in in g w h eth er or n ot a case involves an in tra-corp orate d ispute are
th e relation sh ip test an d th e n atu re of th e con troversv test.56 Un d er th e relationship
55Sectio n 5 of P.D. N o. 902-A .
56Rob er to San Jo se an d D elfin A n g ca o v s. Jo se M a. O zam iz, G.R. N o. 190590, Ju ly 12,2017.
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test, an in tra-corp orate con troversy When the conflict, is: b etw een th e corp oration
and the public; b etw een th e corp oration an d the state relative to a fran ch ise, p erm it,
or license to op erate; b etw een the corp oration an d its stockholders, m em b ers, or
officers; and am on g th e stock h old ers themselves. On the oth er h an d , u n d er th e
nature of con troversy test, an in tra-corp orate con troversy arises wh en the d isp ute
stemmed n ot on ly in th e existen ce of an in tra-corp orate relationship b u t also in the
enforcement of th e p arties' correlative rights an d obligations u n d er th e RCC an d the
internal an d in tra-corp orate regu latory ru les of the corp oration .
An in tra-corp orate d isp u te should be filed in th e Region al Trial Cou rt d esign ated
by the Sup rem e Cou rt as a corp orate or com m ercial cou rt.57 N everth eless, th e SEC
still retain s su fficien t p ow ers to ju stify its assu m p tion of ju risd iction over m atters
con cernin g its su p ervisory, ad m in istrative, and regu latory fu n ction s.58 Accord in g
to the Su p rem e Cou rt in on e case, to d eterm in e w h eth er a case involves an in tra­
corporate con troversy, tw o elements m u st con cu r: a. the statu s or relation sh ip of th e
parties, an d b. th e n atu re of the question that is the subject of th eir con troversy. The
first elemen t req u ires th at th e con troversy njust arise ou t of in tra-corp orate relation s
b etween an y or all of th e p arties and the corporation of. w h ich th ey are stock h old ers,
or m em b ers, b etw een an y or all of th em and the corp oration of w h ich th ey are
stock hold ers, m em b ers; an d b etw een such corp oration an d th e State in sofar as it
con cern s th e in d ivid u al franch ises. The second element req u ires th at th e d isp u te
am on g th e p arties b e in trinsically con n ected w ith the regu lation of th e corp oration .
If the n atu re of th e con troversy involves m atters th at are p u rely civil in ch aracter,
necessarily, th e case d oes n ot involve an in tra-corp orate con troversy.59
The RCC p rotects, am on g others, the rights and rem ed ies of corp orate actors
again st oth er corp orate actors. The statu tory p rovision assu res an aggrieved p arty
th at th e corp oration 's d issolu tion will n ot impair, m u ch less rem ove, h is/h er righ ts
or rem ed ies again st th e corp oration , its stockholders, d irectors, or officers. It also
states th at corp orate d issolu tion will n ot extin gu ish an y liability alread y in cu rred
by the corp oration , its stock hold ers, d irectors, or officers. The d issolu tion of th e
corp oration sim p ly p roh ib its it from con tin u in g its b u siness. H ow ever, d esp ite
such d issolu tion, th e p arties involved in th e litigation are still corp orate actors. Th e
d issolution d oes n ot au tom atically con vert the p arties in to total stran gers or ch an ge
their in tra-corp orate relation sh ip s. N either d oes it ch an ge or term in ate existin g
causes of action , w h ich arose b ecau se of the corp orate ties b etw een the p arties. A
cause of action in volvin g an in tra-corp orate con troversy rem ain s an d m u st b e filed
as an in tra-corp orate d isp u te despite th e sub sequent d issolu tion of th e corp oration .60
57Sectio n 5.2 o f th e Secu r ities Reg u latio n Cod e (SRC).
58Ro m an Jr. an d D efen sor v s Secu r ities an d Exch a n g e Com m ission , et ail., G.R. 196329, Ju n e 1, 2016.
59Sp eed D istrib u tin g Corp ., et al. vs. Co u r t o f A p p eals an d Lim , G .R. N o. 149351, M arch 17, 2004.
60A g u irre v s. FQ B +7, In c, G R N o. 170770, Ja n u a ry 9, 2013.
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D evelop m en t an d Im p lem en tation of Electron ic Filin g an d
M on itorin g System
Section 180 m an d ates th e SEC to develop an d imp lement an electron ic filing
an d m on itorin g system an d to p rom u lgate ru les to facilitate an d exp ed ite, among
oth ers, corp orate n am e reservation an d registration , in corp oration , submission of
rep orts, n otices, an d d ocu m en ts req u ired u n d er th e RCC, an d sh arin g of pertinent
in form ation w ith oth er govern m en t agencies.
As p art of efforts of. doin g b usiness in th e cou ntry, th e RCC m an d ated the
SEC to d evelop an d im p lem en t an electron ic filing an d m on itorin g system , which it
started w ith th e im p lem en tation of an online com p an y registration system .
A rb itratio n fo r Corp oration s
Un d er Section 181 of the RCC, an arbitration agreem en t m ay b e p rovid ed in the
articles of in corp oration or bylaws of a corp oration . Wh en su ch an agreem en t is in
p lace, d isp u tes b etw een th e corp oration , its stockholders, or m em b ers, w h ich arise
from th e im p lem en tation of th e articles of in corp oration or b ylaw s, or from intra­
corp orate relation s, shall be referred to arbitration. A d isp ute sh all b e non-arbitrable
w h en it in volves crim in al offenses an d interests of th ird p arties.
Th e arb itration agreem en t shall be b inding on the corp oration , its directors,
tru stees, officers, an d execu tives or m an agers. To be en forceable, it sh ou ld indicate
th e n u m b er of arb itrators and the p roced u re for th eir ap p oin tm en t. Th e p ow er to
ap p oin t th e arb itrators form in g th e arbitral trib u n al shall b e gran ted to a designated
in d ep en d en t th ird p arty. Should th e th ird p arty fail to ap p oin t th e arb itrators in the
m an n er an d w ith in th e p eriod specified in th e arb itration agreem en t, th e parties
m ay req u est th e SEC to ap p oint th e arbitrators. In an y case, arb itrators m u st be
accred ited or m u st b elon g to organ ization s accred ited for th e p u rp ose of arbitration.
Th e arb itral trib u n al shall h ave th e p ow er to ru le on its ow n ju risd iction and
q u estion s relatin g to th e valid ity of th e arb itration agreem en t. W h en an intra­
corp orate d isp u te is filed w ith a Region al Trial Cou rt, th e cou rt sh all dismiss
th e case b efore th e term in ation of th e p retrial con feren ce, if SEC d eterm in es that
an arb itration agreem en t is w ritten in th e corp oration 's articles of incorporation,
b ylaw s, or in a sep arate agreem en t. The arb itral trib u n al sh all h ave th e power to
gran t in terim m easu res n ecessary to en su re en forcem en t of th e aw ard , prevent a
m iscarriage of ju stice, or oth erw ise p rotect th e righ ts of th e p arties. After 15 days
from receip t b y th e p arties, th e fin al arb itral aw ard shall b e execu tory an d shall
b e stayed on ly b y th e filin g of a b on d or the. issu an ce b y th e ap p ellate cou rt of
an in ju n ctive w rit. Th e SEC shall, sub ject to existin g laws on arb itration , formulate
ru les an d regu lation s, w h ich sh all govern arb itration for corp oration s.
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Section 183 p rovid es th at regu lators su ch as th e Ban gk o Sentral n g Pilip in as
and the In su ran ce Com m ission shall con tin u e to exercise p rim ary au th ority over
special corp oration s su ch as b an k s, n on b an k fin an cial in stitu tions, an d in su ran ce
comp anies u n d er th eir su p ervision an d regu lation .
Un d er Section 184, n o righ t or rem ed y in favor of or again st an y corp oration , its
stockholders, m em b ers, d irectors, tru stees, or officers, n or an y liability in cu rred b y
any such corp oration , stock h old ers, m em b ers, d irectors, tru stees, or officers, shall
be rem oved or im p aired eith er by th e subsequent dissolu tion of said corp oration or
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PRACTICE EXER C ISE
DR an d H R, m em b ers in good stan d in g of Club, Inc. alleged th at th ey w ere
su m m arily strip p ed of th eir lawful membership, w ith ou t due p rocess of law b y th e
Club In c/s d u ly elected president, in con sp iracy with the Club In c/s vice p resid en t,
and legal cou n sel. Th ey filed a complaint with the SEC askin g it to d eclare as illegal
their exp u lsion from Club, Inc. as it was allegedly done in u tter d isregard of its
bylaws. Th ey also sou gh t the annu lm ent of the amend ments to th e bylaws. D oes th e
SEC h ave ju risd iction over th e complaint?
RELEVAN CE O F TH E LESSO N
It is im p ortan t to rem em b er , that while SEC exercises su p ervision over
corp oration s, an in tra-corp orate controversy which arises b etw een a stock h old er
and th e corp oration or am on g the stockholders involving in ternal affairs of th e
corp oration , d eterm in ed th rou gh the relationship test an d the n atu re of th e
con troversy test, m u st be filed with the Regional Trial Cou rt w h ich n ow h as
ju risd iction over such.
LESSO N SUM M ARY
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The SEC h as th e p ow er an d authority to implement the p rovisions of th e RCC,
" and to p rom u lgate ru les and regulations reasonably n ecessary to enable it to
p erform its duties thereto.
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The SEC m ay in vestigate any alleged violation of th e RCC, or of a rule, regulation ,
or ord er of th e SEC an d m ay p erform acts n ecessary to the investigation.
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Crim es in volvin g violation s of th e RCC sh all b e p u n ish ed an d th e violators
p en alized .
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If th e violation is com m itted b y a corp oration , it may, after n otice an d hearing,
b e d issolved in ap p rop riate p roceed in gs b efore th e SEC, w ith ou t prejudice
to th e filin g of su its again st th e d irector, tru stee, or officer of th e corporation
resp on sib le for said violation .
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Name:
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Instructor:----------------,---------- Section:
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Tru e or False
1. A corp oration sole m ay be dissolved, and its affairs settled volu n tarily
by su b m ittin g to the SEC a verified declaration of dissolution.
2. An in tra-corp orate con troversy is one th at arises b etw een a stock h old er
an d th e corp oration or am on g the stockholders involving in tern al
affairs of th e corporation .
.3. Un less th e bylaws provide otherwise, any action by the d irectors of a
close corp oration without a meeting shall nevertheless be d eem ed valid
if all th e d irectors have express or implied knowledge of the action in
q u estion an d none of th em makes p rompt objection th ereto in w ritin g.
.4. Un less oth erw ise provided in the articles of in corp oration or the
b ylaws, th e b oard of tru stees of in corp orated schools, colleges, or
oth er in stitu tion s of learning shall, as soon as organ ized , so classify
th em selves th at the term of office of one-third of their n u m b er shall
exp ire every year.
5. The licen se of a foreign corp oration to tran sact b u siness in the
Ph ilip p in es m ay be revoked or suspended by the SEC u p on its failu re
to file its an n u al rep ort or pay any fees as req u ired by th e RCC.
6. Th e visitorial p ow ers of the SEC include the exam in ation an d in sp ection
of record s, regu lation and sup ervision of activities, en forcem en t of
com p lian ce, an d imposition of san ction s in accord an ce w ith th e RCC.
7. A p rovision al d irector shall be an imp artial p erson w h o is n eith er a
stock h old er n or a cred itor of the corp oration or any of its subsidiaries or
affiliates, an d w h ose fu rth er qualifications, if any, m ay be d etermin ed
by th e SEC.
.8. Subject to existin g laws an d regulations, a foreign corp oration licensed
to tran sact b usiness in the Philippines m ay be allowed to w ith d raw
from the Philippines by filing a petition for withd rawal of license.
U N IT II I REVISED C O RP O RA TIO N CO D E
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_9. N on stock corp oration s m ay b e form ed or organ ized for charitable,
religiou s, ed u cation al, p rofession al, cu ltu ral, fratern al, literary,
scien tific, social, civic service, or sim ilar p u rp oses.
10. Th e articles of in corp oration of a close corp oration m ay p rovid e that
all officers or em p loyees or th at sp ecified officers or em p loyees shall
b e elected or ap p oin ted b y th e stock h old ers, in stead of b y th e b oard of
d irectors.
11. U p on th e w in d in g u p of th e corp orate affairs, an y asset d istrib u tab le to
an y cred itor or stock h old er or m em b er w h o is u n k n ow n or can n ot be
jfound sh all b e esch eated to th e city or m u n icip ality w h ere su ch assets
a re located .
12. Th e sin gle stock h old er may, at an y tim e, ch an ge its n om in ee and
altern ate n om in ee b y su b m ittin g to th e SEC th e n am es of th e new
n om in ees an d th eir corresp on d in g w ritten con sen t.
.13. Th e tru stee (of a d issolved corp oration ) m ay com m en ce a su it that
ca n p roceed to fin al ju d gm en t even b eyon d th e th re e -y e a r p eriod of
liq u id ation .
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_14. O n e-p erson corp oration (OPC) is a corp oration w ith a sin gle stock hold er,
w h o ca n ortly b e a n atu ral p erson , tru st, or estate.
_15. Th e sin gle stock h old er sh all be th e sole d irector an d p resid en t of the
O PC.
C H A P T ER PRO JECT
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R e se a rch exam p les of each of th e existin g n on stock corp oration s, close
corp oration s, an d sp ecial corp oration s in th e cou n try, an d d escrib e their
co rp o rate p rofile.
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C reate a ch a r t of sim ilarities an d d ifferen ces b etw een a foreign corp oration
an d a d om estic corp oration .
3.
Th in k -Pair-Sh are w ith a p artn er ab ou t w h at w ill h ap p en n ext w h en a domestic
co rp oration is m ism an aged .
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UN IT III:
CO O PERATIVES
IN TRO D UCTIO N
A coop erative is an autonomous and duly registered association of p erson s,
with a com m on b on d of interest, who have voluntarily joined togeth er to achieve
their social, econ om ic, an d cultural needs and aspirations by m ak in g equitable
con trib u tion s to th e capital required, patronizing their p rod ucts and services and
accep tin g a fair sh are of the risks and benefits of the u n d ertak in g in accord an ce
with u n iversally accep ted cooperative principles.1 The law on coop erative is foun d
in Rep ublic Act No. 9520, oth erwise known as the Philippine Coop erative Cod e of
2008, w h ich w as p assed on Feb ru ary 17, 2009, and amended Republic Act No. 6939
(the Coop erative Cod e of the Philippines).12
IN TEN D ED LEARN IN G O UTCO M ES
At th e en d of th is chapter, the students will be able to know th e attrib utes of a
coop erative an d d escrib e how to organ ise a cooperative.
Every coop erative shall conduct its affairs in accord ance w ith Filipino cu ltu re,
good valu es an d exp erien ce, and the universally accepted principles of coop eration
w h ich in clu de, b u t are not limited to: (1) volun tary and open membership; (2)
d em ocratic m em b er control; (3) member economic participation; (4) autonomy
and in d ep en d en ce; (5) ed ucation trainin g and information; (6) coop eration among
coop eratives; an d (7) con cern for the community.3
1A rticle 1 o f R.A . N o. 9520 (Ph ilip p in e Coop erative Cod e of 2008).
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2Rep u b lic A ct N o. 6939 (th e Coop erativ e Cod e of the Ph ilip p in es), w h ich w as p assed on M arch 10, 1990,
created th e Co op era tiv e D ev elop m en t Au th ority, tran sferred the registration and regu lation fu n ction s of existin g
g ov ern m en t a g en cies on coop erativ es an d con solid ated the sam e w ith the Coop erative Develop m en t Au th ority.
Th e law w as m ore th a n su bstan tially am en d ed on Febru ary 17, 2009 by the p assage of Rep u blic A ct N o. 9520 (th e
Ph ilip p in e Co op era tiv e Cod e of 2008. O n A u gu st 8, 2019, Rep u blic Act N o. 11364 (the Coop erative D evelop m en t
A u th ority C h a rter of 2019) w as p assed to reorgan ize an d stren gth en the Coop erative Dev elop m en t Au th ority
(CDA ) so it can carr y ou t th e p ro v ision s of Rep u blic Act N o. 9520, rep ealing for said p u rp ose Rep u blic Act N o. 6939.
3A rticle 4, R.A . N o. 9520.
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P u rp o s e
A coop erative m ay b e organ ized an d registered for variou s p u rp oses for the
b en efit of its m em b ers.4 A coop erative en cou rages th rift an d savin gs mobilization
am on g th e m em b ers, gen erates fu n d s, an d exten d s cred it to su ch m em b ers, it
en cou rages system atic p rod u ction an d m ark etin g, an d it p rovid es good s an d services.
It d evelop s exp ertise an d skills am on g its m em b ers. It acq u ires lan d s an d provides
h ou sin g b en efits for its m em b ers. It in su res again st th e losses of its m em b ers. It
p rom otes an d ad van ces th e econ om ic, social, an d ed u cation al statu s of its members.
It estab lish es, ow n s, leases, or op erates coop erative b an k s, coop erative wholesale
an d retail'com p lexes, .in su ran ce an d agricu ltu ral/in d u strial p rocessin g enterprises,
an d p ub lic m ark ets. It coord in ates an d facilitates th e activities of coop eratives,
ad vocates for th e cau se of th e coop erative m ovem en ts, an d en su res th e viability
of coop eratives th rou gh the u tilization of n ew tech n ologies. It en cou rages and
p rom otes self-help or self-employment, and u n d ertak es an y an d all oth er activities
for th e effective an d efficient implementation of th e Ph ilip pin e Coop erative Code.
P o w ers
A coop erative enjoys a lot of power.5 It h as th e p ow er to exclu sively u se its
registered n am e, to sue an d be sued, an d the p ow er of su ccession . It h as th e power
to am en d its articles of coop eration , to adopt bylaws, w h ich is n ot con trary to law,
m orals or p u b lic policy, an d to am/md an d rep eal the same. It h as th e p ow er to deal
w ith real an d p erson al p rop erty, an d to enter into d ivision, m erger, or con solid ation .
It h as th e p ow er to form su b sid iary coop eratives an d join fed eration s an d u n ion s. It
h as th e p ow er to avail of loans, cred its, grants, d on ation s from d om estic and-foreign
sou rces, an d to avail of p referen tial righ ts u n d er RA 7160 (Local G overn m en t Code
of 1991). It h as th e p ow er to organ ise an d op erate sch ools in accord an ce w ith R.A.
9155 (G overn an ce of Basic Ed u cation Act oL2001), an d to exercise su ch oth er powers
gran ted b y th e Ph ilip p in e Coop erative Cod e or n ecessary to ca rry ou t its p u rp ose or
p u rp o ses as stated in its articles of cooperation.
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Typ es o f C oop eratives
Coop eratives are of d ifferen t typ es:6
A cred it coop erative p rom otes an d u n d ertak es savin gs an d len d in g services
am on g its m em b ers, gen eratin g a com m on p ool of fu n d s to p rovid e financial
assistan ce an d related services to its m em b ers for p rod u ctive an d provident
p u rp oses.
4A r t icle 6, R.A . N o . 9520.
5A r t id e 9, R.A . N o . 9520.
6A r t id e 23, R.A . N o. 9520.
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A con su m er coop erative p rocu res an d d istrib u tes com m od ities to m em b ers
and n om m em b ers.
A p rod u cer coop erative u n d ertak es joint p rod u ction , w h eth er agricu ltu ral
or in d u strial, an d is form ed an d op erated b y its m em b ers to u n d ertak e th e
p rod u ction an d p rocessin g of raw m aterials or good s p rod u ced b y its m em b ers
into fin ished or p rocessed p rod u cts for sale b y th e coop erative to its m em b ers
and n on -m em b ers.
A m ark etin g coop erative en gages in th e sup p ly of p rod u ction in p u ts to
m em b ers an d m ark ets th eir p rod u cts. '
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A service coop erative en gages in m ed ical an d d en tal care, h osp italization ,
tran sp ortation , in su ran ce, h ou sin g, labor, electric ligh t an d p ow er,
com m u n ication , p rofession al an d oth er services.
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A m u ltip u rp ose coop erative combines tw o or m ore of th e b u sin ess activities of
the d ifferen t typ es of coop eratives.
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An ad vocacy coop erative p rom otes and ad vocates coop erativism am on g its
m em b ers an d th e public th rou gh socially-orien ted p rojects, ed u cation an d
train in g, research an d com m u n ication, an d oth er sim ilar activities to reach
ou t to its in ten d ed beneficiaries.
An agrarian reform coop erative is Organized b y m argin al farm ers m ajority
of w h ich are agrarian reform beneficiaries for th e p u rp ose of d evelop in g an
ap p rop riate system of land tenure, land development, lan d con solid ation , or
la n d m an agem en t in areas covered by agrarian reform.
A coop erative b an k is organ ized for the p rim ary p u rp ose of p rovid in g a w id e
ran ge of fin an cial services to coop eratives an d th eir m em b ers.
A d airy coop erative h as m em b ers en gaged in th e p rod u ction of fresh m i l k ,1
w h ich m ay b e p rocessed an d /or m ark eted as d airy p rod u cts.
An ed u cation coop erative is organ ized for th e p rim ary p u rp ose of ow n in g an d
op eratin g licen sed ed u cation al in stitu tion s n otw ith stan d in g th e p rovision s of
Rep u b lic A ct ,No. 9155.
An electric coop erative is organ ized for the^ p rim ary p u rp ose of u n d ertak in g
p ow er gen eration s, u tilizin g ren ewable en ergy sou rces, in clu d in g h yb rid
system s, acq u isition , arid op eration of su b -tran sm ission or d istrib u tion to its
h ou seh old m em b ers.
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A fin an cial service coop erative is organ ized for th e p rim ary p u rp ose of
en gagin g in savin gs, cred it, an d oth er fin an cial services.
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A fish erm an coop erative is organ ized b y m argin alized fish ers in localities
w h ose p rod u cts are m ark eted eith er as fresh or p rocessed p rod u cts.
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A h ealth services coop erative is organ ized for th e p rim ary p u rp ose of p rovid in g
m ed ical, d en tal, an d oth er h ealth services.
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A h ou sin g coop erative assists or p rovid es access to h ou sin g for th e b en efit of its
regu lar m em b ers w h o actively p articip ate in th e savin gs p rog ram for h ou sin g,
co-ow n ed an d con trolled b y its m em b ers.
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An in su ran ce coop erative is en gaged in th e b u sin ess of in su rin g life and
p rop erty of coop eratives an d th eir m em b ers.
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A tran sp ort coop erative in clu des lan d an d sea tran sp ortation , lim ited to
sm all vessels d efin ed or classified u n d er th e Ph ilip p in e m a ritim e law s, and
organ ized , u n d er Republic Act No. 9520.
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A w ater service coop erative is organ ized to ow n , op erate, an d m an age waters
system s for th e p rovision an d d istrib ution of p otab le w ater for its m em b ers
an d th eir h ou seh old s:
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A w ork ers Cooperative is organ ized b y w orkers, in clu d in g th e self-em p loyed ,
w h o are at th e sam e tim e th e members and ow n ers of th e en terp rise, to p rovid e
em p loym en t an d b usiness op p ortu n ities to its m em b ers an d m an ag e it in
accord an ce w ith coop erative principles.
In term s of membersh ip, coop eratives are categorized into: p rim ary, secon d ary,
an d tertiary. Coop eratives enjoy certain p rivileges.7 Th ey en joy th e p rivilege of
d ep ositin g, free of ch arge, th eir sealed cash b oxes or con tain ers, d ocu m en ts, or any
valu able p ap ers in th e safes of the m u n icip al or city treasu rers an d oth er govern m en t
offices. Coop eratives organ ized am on g govern m en t em p loyees en joy free u se of any
available sp ace in th eir agency. Coop eratives ren d erin g sp ecial typ es of services
an d facilities shall secu re a franchise, therefore, an d op en th eir m em b ersh ip to all
p erson s q ualified in th eir areas of op eration. In areas w h ere ap p rop riate coop eratives
exist, th e coop eratives enjoy preferential righ t to su p ply govern m en t in stitu tion s
an d agen cies rice, corn an d oth er grains, fish an d oth er m arin e p rod u cts, m eat, eggs,
m ilk , vegetables, tob acco, an d oth er agricu ltu ral com m od ities p rod u ced b y their
m em b ers. Th ey enjoy p referential treatm en t in th e allocation of fertilizers, inclu din g
seed s an d oth er agricu ltu ral in pu ts an d im p lements, an d in rice d istrib u tion , an d also
th e p referen tial an d equitable treatm en t in th e allocation or con trol of b ottom ries of
com m ercial sh ip pin g vessels in con n ection w ith th e sh ip m en t of good s an d p rod u cts
of coop eratives. Coop eratives an d th eir fed erations w h ich h ave for th eir p rim ary
p u rp ose th e p rod u ction an d /or th e m ark etin g of p rod u cts from agricu ltu re, fisheries,
7A r t id e 62, R.A . N o. 9520.
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and small en trep ren eu rial industries and federations exercise preferential rights in
the management of public markets an d /or lease of public market facilities, stalls,
or spaces. Coop eratives engaged in credit services an d /or federations are entitled
to loans credit lines, red iscou n tin g of their loan notes, and other eligible p ap ers
with the Development Bank of the Philippines, the Land Bank of the Philippines,
and other financial institutions. A public tran sp ort service cooperative m ay be
entitled to fin an cin g su p port for the acquisition an d /or main tenance of land and sea
transport equipment, facilities, and p arts through the p rogram of the governm en t
financial institutions and h as a preferential right to the management and operation
of public term in als and p orts where the cooperative operates and on secu rin g a
franchise for active or potential routes for the public transport. Cooperatives
transacting business w ith the Government of the Philippines or any of its political
subdivisions or an y of its agencies or instrumentalities, including 'governmentowned and controlled corporation s shall be exempt from prequalification bidding
requirements. Coop eratives enjoy the privilege of being rep resen ted by the
provincial or city fiscal or the Office of the Solicitor General, free of ch arge, except
when the ad verse p arty is the Republic of the Philippines. Cooperatives organ ized
by faculty mem b e’rs and employees of educational institutions have the preferential
right in the m an agem en t of the canteen and other services related to the operation
of the ed ucation al in stitution where they are employed.. The ap prop riate h ou sin g
agencies an d govern m en t financial institutions shall create a special w in d ow for
financing h ou sin g projects undertaken by cooperatives, with interest rates an d
terms equal to, or b etter th an those given for socialized housing projects.
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Registration of Coop eratives /
Fifteen or m ore Filipinos of legal age, having a comm on b ond of interest an d
are actu ally resid in g or working in the intended area of operation, m ay organ ize
a p rim ary cooperative, the prospective members Of which mu st have completed
a Pre-Membership Education Seminar (PMES).8 They shall submit to CDA a
general statem en t describing, among others the stru ctu re and p u rp oses of the
proposed cooperative, as well as an economic survey, indicating th erein the area
of operation, the size of membership, and other pertinent data.9 A cooperative shall
have limited liability and shall exist for a period not exceeding 50 years from the
date of registration u nless sooner dissolved or unless said p eriod is extended. All
cooperatives applying for registration shall, file with the CDA the n otarized articles
of cooperation, th e bylaws, and the general statement together with the economic
survey.
8Article 10, R.A. N o. 9520.
9A rticle 11, R.A. N o. 9520/
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Th e articles of coop eration sh all con tain : (1) th e n am e of th e coop erative which
m u st in clu d e th e “coop erative"; (2) th e p u rp ose/s an d scop e of b u sin ess of the
coop erative; (3) its term of existen ce; (4) The area of op eration an d th e addresses
of its p rin cip al office; (5) th e n am es, n ation ality, an d ad d resses of th e organizers;
(6) th e com m on b on d of m em b ersh ip ; (7) th e n am es of d irectors w h o sh all manage
th e coop erative; an d (8) th e am ou n t of its sh are cap ital, n am es, an d resid en ces of
con trib u tors an d a statem en t of w h eth er th e coop erative is p rim ary, secon d ary oi
tertiary.101
Th e b ylaw s sh all p rovid e for: (1) th e q u alification s for ad m ission to membership
an d th e con d ition s for th e exercise of th e righ t of m em b ersh ip ; (2) th e rights
an d liab ilities of m em b ersh ip ; (3) th e circu m stan ces u n d er w h ich membership
is acq u ired , m ain tain ed , an d lost; (4) th e p roced u re to b e follow ed in cases of
term in ation of m em b ersh ip ; (5) th e conditions u n d er w h ich th e tran sfer of a share
or in terest of th e m em b ers shall be p erm itted ; (6) th e p roced u res an d req u irem en ts
for th e call an d con d u ct of m eetin gs, votin g system s, an d oth er m atters con cernin g
th e b u sin ess affairs of th e gen eral assembly, b oard of d irectors, an d com m ittees; (7)
th e m an n er on con d u ctin g the affairs of the coop erative an d th e p ow ers an d duties
of th e gen eral assemb ly, th e b oard of d irectors, com m ittees, an d th e officers, as well
as th eir q u alification s an d disqualifications; (8) th e m an n er in w h ich th e capital,
m ay b e raised an d th e p u rp oses for w h ich it can b e u tilized ; (9) th e m o d e of custody
an d of in vestm en t of n et surplu s; (10) th e accou n tin g an d au d it system s; (11) the
m an n er of loan in g an d b orrow in g in cluding th e lim itation s th ereof; (12) th e method
of d istrib u tion of n et su rp lu s; (13) th e m an n er of ad op tion , am en d m en t, an d repeal
of b ylaws; (14) altern ative d isp u te resolu tion m ech an ism s for settlem en t of disputes
am on g m em b ers, d irectors, officers, an d com m ittee m em b ers of th e coop erative;
an d (15) oth er m atters in cid ent to th e p u rp oses an d activities of th e coop erative.11
1 A coop erative form ed arid organ ized u n d er th e law acq u ires juridical
p erson ality from th e d ate th e Coop erative D evelop m en t Au th ority (CD A) issues a
certificate of registration u n d er its official seal. All ap p lication s for registration are
acted u p on b y th e CDA w ith in a p eriod of 60 d ays from th e filin g th ereof, otherwise,
th e ap p lication is d eem ed ap p roved u n less th e cau se of th e d elay is attrib u tab le to
th e ap p lican t. In case of a d en ial of th e ap p lication for registration , an ap p eal may
b e filed w ith th e Office of th e Presid en t w ith in 90 d ays from receip t of n otice of such
d en ial. Failu re of th e Office of th e Presid en t to act on th e ap p eal w ith in 90 d ays from
th e filin g th ereof m ean s th at th e ap p lication is ap p roved .12'
A n afn en d m en t of th e Articles of Coop eration n eed s th e tw o -th ird s vote of
m em b ers w ith votin g righ ts w h ile m erger, con solid ation , an d d ivision of coop eratives
10A r ticle 14, R.A . N o. 9520.
11A r ticle 15, R.A . N o. 9520.
12A r ticle s 16 a n d 17, R.A . N o. 9520.
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require th ree-fou rth s of all members w ith votin g rights p resen t an d con stitu tin g a
quorum.13
M em b ersh ip in a Coop erative
There are tw o k inds of m embers in a coop erative: (1) regu lar m em b er wh o
has complied w ith all the mem bersh ip requ irem ents an d entitled to all righ ts an d
privileges of membersh ip; an d (2) associate m em b er wh o h as no votin g righ ts an d is
entitled only to su ch rights and privileges as the bylaws m ay p rovid e.14 To b ecom e
a member, an in dividu al m u st be of legal age, Filipino citizen , capable, an d w illin g
to perform th e responsibilities of a member. Associate m em b ers n eed to q u alify for
regular m emb ersh ip w ith in two years. Elective officials are ineligible to be officers
or d irectors of cooperatives except for party-list rep resen tatives.15 The m em b ers of
the coop erative shall be liable for the debts of the coop erative to th e exten t of th eir
contribution to th e sh are capital of the cooperative.16 Memb ership in th e coop erative
may be term in ated by th e withd rawal of the member, d eath or. in san ity of m em b er
in p rim ary coop eratives, insolvency and dissolution of a m em b er in secon d ary an d
tertiary rep resen tatives, and termination by a vote of the m ajority of all th e m em b ers
of the b oard of d irectors for any of the following causes: (1) w h en a m em b er h as
not p atron ized an y of the services of the cooperative for an u n reason ab le p eriod of
time; (2) w h en a mem ber h as continuously failed to comply w ith h is ob ligations; (3)
when a m em b er h as acted in violation of the bylaws and the ru les of th e coop erative;
and (4) for an y act or omission injurious or prejudicial to th e in terest or th e w elfare
of the coop erative.17
G en eral Assem b ly
The gen eral assembly is the highest policy-making b od y of th e coop erative,
composed of su ch members who are entitled to vote u n d er the articles of coop eration
and bylaws of th e cooperative.18 Its powers include: (1) d eterm in ation an d ap p roval
of amen d ments to the articles of cooperation and bylaws; (2) election or ap p oin tm en t
of the m em bers of th e b oard of d irectors and their removal for cause; an d (3) ap p roval
of developmental plans of the cooperative.
Regu lar meetin gs of the general assembly shall be held annually, w h ile special
meetings m ay be called at any time by a majority vote of the b oard of d irectors or as
13A rticles 18, 20 an d 21, R.A. N o. 9520.
14A rticle 26, R.A. N o. 9520.
15A rticle 27, R.A. N o. 9520.
16A rticle 29, R.A. N o. 9520.
17A rticle 30, R.A. N o. 9520.
18A rticles 32 an d 33, R.A. N o. 9520.
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p rovid ed for in th e b ylaws. The CDA m ay call for a sp ecial m eetin g for th e p u rp ose
of rep ortin g to th e m em b ers th e resu lt of an y exam in ation or oth er in vestigation of
th e coop erative affairs.19 A q u oru m shall con sist of at least 25% of all th e members
en titled to vote b u t in th e case of coop erative b an k s, th e q u oru m sh all b e one-half
p lu s on e of th e n u m b er of votin g sh ares of all th e m em b ers in good stan d in g in
accord an ce w ith Article 99 of th e law. In th e case of electric coop eratives, a quorum
sh all con sist of 5% of all th e m em b ers en titled to vote, u n less oth erw ise p rovid ed in
th e b ylaw s.20 As to th e votin g system , each m em b er of a p rim ary coop erative shall
h ave on ly on e vote, w h ile m em b ers of,secon d ary or tertiary coop eratives sh all have
on e b asic vote an d as m an y in cen tive votes as p rovid ed for in th e b ylaw s b u t n ot to
exceed five votes.21
Board of D irecto rs
Un less oth erw ise p rovid ed in th e bylaws, th e d irection an d m an agem en t of
th e affairs of a coop erative shall b e vested in a b oard of d irectors w h ich sh all be
com p osed of 5 to 15 m em b ers elected b y th e general assem b ly for a te rm of tw o years
u n less
rem oved for cau se.22 The m em bers of th e b oard of d irectors sh all n ot hold
%
an y oth er p osition d irectly involved in th e d ay-to-d ay op eration an d m an agem en t
of th e coop erative. An y m em b er of a coop erative Who h as th e righ t to vote and
w h o p ossesses all th e q ualification s and none of th e d isq u alification s p rovid ed in
th e law s or b ylaw s sh all b e eligible for election as a d irector. A n y p e rso n engaged
in a b u sin ess sim ilar to th at of the coop erative or w h o in an y w ay h as a con flict of
in terest w ith it is d isq u alified from election as a d irector of th e said coop erative.23
Regu lar m eetin gs of th e b oard of d irectors of p rim ary coop eratives sh all be
h eld at least on ce a m on th , while sp ecial m eetin gs m ay b e called at an y tim e b y the
ch airp erson or a m ajority of the m em b ers of th e b oard . Un less th e b ylaw s provide
oth erw ise, a m ajority of the m em b ers of th e b oard sh all con stitu te a q u o ru m for
th e con d u ct of b u sin ess, an d d irectors can n ot atten d or vote b y p ro xy at board
m eetin gs.24 An y vacan cy in the b oard of d irectors m ay b e filled b y th e vote of at
least a m ajority of th e rem ain in g d irectors, if still con stitu tin g a q u o ru m b u t the
vacan cy m u st b e filled b y th e gen eral assem b ly in a regu lar or sp e cia l meeting
called for th e p u rp ose if th ere is n o lon ger a q u oru m an d if th e v a ca n cy is due to
exp iration of th e term of th e d irector.25 The ch airp erson an d v ice -ch a irp e rso n shall
19A rticle 34, R.A. N o. 9520.
20A rticle 35, R.A. N o. 9520.
21A rticle 36, R.A. N o. 9520.
^ A rticle 37, R.A. N o. 9520.
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23A rticle 39, R.A. N o. 9520.
24A rticle 40, R.A. N o. 9520.
25A rticle 41, R.A. N o. 9520.
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be elected b y th e b oard of d irectors from am on g th emselves. They sh all ap p oin t th e
officers of th e coop erative \ vho sh all n ot be m em b ers of th e b oard an d sh all n ot b e
removed excep t for cau se after d ue h earin g. Loss of con fid ence is n ot a valid grou n d
for rem oval u n less th ere is p roof of acts or omission cau sin g loss of con fid en ce in
the h on esty an d in tegrity of su ch officer. Relatives w ith in th e th ird civil d egree of
con san gu in ity or affin ity an d th ose p erson s en gaged in a b u sin ess sim ilar to th at
of the coop erative or w h o h ave in terests in con flict w ith th e coop erative sh all n ot b e
ap pointed as officers.26
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Com m ittees o f th e Coop erative27
The b ylaw s m ay create an execu tive com m ittee to be ap p oin ted b y th e b oard
of d irectors w ith su ch p ow ers an d duties as m ay be d elegated to it in th e b ylaw s’
or by a m ajority vote of all th e m em bers of th e b oard of d irectors. Th e b ylaw s sh all
p rovid e for th e creation of an audit, election, m ed iation an d con ciliation , eth ics,
an d su ch oth er com m ittees as m ay be n ecessary for th e con d u ct of th e affairs of
the coop erative. The m em b ers of b oth the audit and election com m ittee sh all b e
elected b y th e gen eral assemb ly an d the m em b ers of th e oth er com m ittees sh all
be ap p oin ted b y th e b oard . The audit com m ittee shall be d irectly accou n tab le an d
resp on sib le to th e gen eral assembly and shall con tinu ou sly m on itor th e ad eq u acy
and effectiven ess of th e coop erative's m an agem en t con trol system an d au d it th e
p erform an ce of th e coop erative an d its variou s resp on sib ility cen ters.
Liab ility fo r D am ages an d Secret Profits28
D irectors, officers, an d com m ittee members, w h o w illfu lly an d k n ow in gly vote
for or assen t to p aten tly u n law fu l acts or w h o'are gu ilty of gross n egligen ce or b ad
faith in d irectin g th e affairs of th e cooperative or acq u ire an y p erson al or p ecu n iary
in terest in con flict w ith th eir d u ty as such d irectors, officers or com m ittee m em b ers
shall b e liable join tly an d severally for all d am ages or p rofits resu ltin g th erefrom
to th e coop erative, m em b ers; an d oth er p erson s. Wh en th ey attem p t to acq u ire or
acqu ire, in violation of th eir duty, an y in terest or eq u ity ad verse to th e coop erative
in resp ect to an y m atter w h ich h as b een rep osed in h im in con fid en ce, th ey sh all,
as tru stees for th e cp operative, be liable for d am ages an d sh all be accou n tab le for
double th e p rofits w h ich oth erw ise w ou ld h ave accru ed to th e coop erative.
To illu strate: The officers of Palu w agan Cred it Coop erative h ired Pin k y as its
office secretary. Since th e Treasu rer of th e coop erative w as b u sy w ith h is fu ll-tim e
work as an execu tive in a b an k an d cou ld n ot p h ysically rep ort every d ay to th e
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26Article 42, R.A. N o. 9520.
^ A rticle 43, R.A. N o. 9520.
“ Article 45, R.A. N o. 9520.
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coop erative's office, h e req u ested the b oard to allow the secretary, a close relative
of the ch airm an of th e b oard to receive collection s an d p aym en ts in his b eh alf with
the in stru ction to d ep osit to issue receip ts and d eposit all collection s to th e b an k the
followin g day. H is req u est w as ap p roved by the b oard . Little did an yon e k n ow that
th e secretary w as m isap p rop riatin g the collection s in stead of d ep ositin g th e sam e to
the coop erative's b an k ; sh e w ou ld issue only the origin al of the receip ts to th e payor
b u t k ep t th e d u p licate an d trip licate copies in blank so she would be able to write a
sm aller am ou n t th ereon . Ap p aren tly, for the b oard and the officers, th e office of the
cop p erative w as b ein g ru n sm ooth ly as the office secretary would p rep are a daily
rep ort of h er collection s an d the corresp on d in g deposits with the bank , w h ich report
she w ou ld ju st em ail th e Treasu rer and the President of the Coop erative, w h o both
n ever b oth ered to regu larly rep ort to the office an ymore, excep t for occasion al visits
th at w ill last arou n d 30 m in u tes, only to sign checks. D u rin g the regu lar meetings
of th e b oard , th e office secretary would p rep are the statem ent of cash flow, submit
th e sam e to th e Treasu rer for h is sign atu re. The Treasurer then will m ak e th e verbal
rep ort to th e b oard b ased on the statem ent of cash flow, but he n ever verified the
accu racy an d veracity of th e said statement. While one of the d irectors n oticed that
th ere h ave b een lesser collection s (as rep orted by the Treasurer) and p oin ted th is to the
rest, th e b oard m erely resolved to just in crease collection efforts but n ever b othered
to look at th e b an k b ook s. Wh en asked why there was no in crease in th e number
of loan availm en ts b y th e m em bers, the President, relying on the rep resen tation of
th e office secretary, m erely said th at no one b othered to apply for a loan . But the
tru th w as, th e office secretary wou ld inform the mem b ers wh o apply for th e loan
th at all fu n d s w ere ou t, an d collections were h ard when in tru th an d in fact, there
w as on ly a sm all am ou n t of mon ey left in the Cooperative's b an k accou n t since
the office se cre ta ry h as n ot d eposited her collections but in stead m isap p rop riated
th em . Th e frau d u len t sch em e w as d iscovered only when an au d it w as d on e upon
the in sisten ce of th e m em b ers w h ose p aym en ts were not accu rately reflected in
th eir resp ective led gers. N everth eless, the b oard did not p u n ish th e errin g office
secretary in d u e d eferen ce to the ch airm an as the former is h is sister-in-law, and
in stead m erely rep rim an d ed h er an d con sid ered the am ou n t she m isap p rop riated
as a loan , p aym en ts of w h ich will be th rou gh m in im al am ou n t to be d ed u cted from
her salary. Worse, to m ak e su re th at the loan will be paid, th e b oard resolved to
in crease h er salary p u rp orted ly in recogn ition of h er extra work in p erform in g the
fu n ction s of th e Treasu rer. In th is case, the d irectors an d officers w h o are gu ilty of
gross n egligen ce or b ad faith in d irectin g the affairs of the coop erative shall be liable
jointly an d severally for all d am ages resu ltin g th erefrom to the coop erative and its
m em b ers.
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Com p en sation 29
In th e ab sen ce of an y p rovision s in the bylaws fixin g th eir com p en sation , the
d irectors shall n ot receive an y com p en sation excep t for reason ab le per diems, b ut
they shall n ot be entitled to an y per diem wh en, in the p reced in g calen d ar year, the
coop erative rep orted a n et loss or h ad a divid end rate less th an th e official in flation
rate for th e sam e year. The com p en sation of officers of th e coop erative as well as the
members of th e com m ittees created p u rsu an t to the Philip pin e Coop erative Cod e
or its .bylaws, m ay b e fixed in the bylaws. Unless alread y fixed in th e b ylaws, the
com p en sation of all oth er emp loyees shall be d eterm in ed by th e b oard of d irectors.
Self-d ealin g D irectors, Officers, or Com m ittee M em b ers2930
A con tract en tered into by the coop erative with one or m ore of its d irectors,
officers, an d com m ittee m em b ers is voidable, at the op tion of th e coop erative, u n less
all the follow in g con d ition s are present: (1) th at the p resen ce of su ch d irector in
the b oard m eetin g w h erein con tract w as approved w as n ot n ecessary to con stitu te
a q u oru m for su ch m eetin g; (2) th at the vote of such d irector w as n ot n ecessary
for th e ap p roval of th e con tract; (3) th at the con tract is fair an d reason ab le u n d er
the circu m stan ces; an d (4) th at in the case of an officer or com m ittee m em b er, th e
con tract w ith th e officer or com m ittee m ember has b een p reviou sly au th orized b y
the gen eral assem b ly or b y the b oard of d irectors. If any of th e first tw o con d ition s
is absent, in th e case of a con tract w ith a director, such con tract m ay b e ratified b y a
th ree-fou rth s vote of all th e m em bers with voting rights, p resen t an d con stitu tin g a
q u oru m in a m eetin g called for the p u rpose, p rovided full d isclosu re of th e ad verse
interest of th e d irectors involved is made at such m eetin g, an d th at th e con tract is
fair an d reason ab le u n d er the circu m stan ces.
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D isloyalty of a D irector31
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A d irector w ho, by virtu e of his office, acq u ires for h im self an op p ortu n ity
which sh ou ld b elon g to th e coop erative shall be liable for d am ages an d m u st
accou n t for dou ble th e p rofits th at oth erw ise w ou ld h ave accru ed to th e coop erative
by refu n d in g th e same, even if he u sed h is ow n fu n d s in th e ven tu re u n less h is
act h as b een ratified b y a th ree-fou rth s vote of all th e m em b ers w ith votin g rights,
present, an d con stitu tin g a q u oru m .
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29Article 46, R.A. N o. 9520.
30Article 47, R.A. N o. 9520.
31Article 48, R.A. N o. 9520.
UN IT III | CO O PERATIVES
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Illeg al U s e o f C o n fid e n tia l I n f o r m a tio n 32
A d ire cto r or officer, or an associate of a d irecto r or officer, w h o, for h is benefit
or ad van tag e or th at of an associate, m ak es u se of con fid en tial in form ation th at, if
gen erally k n ow n , m igh t reason ab ly b e e xp e cte d to ad versely affect th e op eration
an d viab ility of th e coop erative, sh all com p en sate th e coop erative for th e d irect
losses it su ffered as a resu lt of th e illegal u se of in form ation an d sh all acco u n t to the
co o p erativ e an y d ire ct b en efit or ad van tage received or yet to b e received b y h im or
h is associate, as a resu lt of th e tran saction .
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R e m o v a l o f O fficers33
C o m p lain ts ab ou t th e rem oval of an y elected officer sh all b e filed w ith the
b o ard of d irecto rs. Su ch officer sh all b e given th e o p p o rtu n ity to b e h eard , and
th e m ajo rity of th e b o a rd of d irectors m ay p lace h im u n d er p reven tive su sp en sion
p en d in g th e resolu tion of th e in vestigation . Up on fin d in g of a prim a facie evid en ce
of gu ilt, th e b oard sh all p resen t its recom m en d ation for rem oval to th e gen eral
assem b ly. T h ereafter h e m ay b e rem oved b y th ree-fou rth s votes of th e regu lar
m em b ers p resen t an d con stitu tin g a q u oru m , in a reg u lar or sp ecial g en eral assem b ly
m eetin g called for th e p u rp ose, after h e is given an o p p ortu n ity to b e h e a r d at said
assem b ly.
Tax T re a tm e n t o f C o o p e ra tiv e s 34
C o op eratives w h ich d o n ot tran sact an y b u sin ess w ith n o n -m e m b e rs of the
gen eral p u b lic a re n ot su b ject to an y taxes an d fees im p osed u n d e r th e in tern al
rev en u e law s an d oth er tax law s. Bu sin ess tran saction s of m e m b e rs w ith the
co o p e ra tiv e a re n ot su b ject to an y taxes an d fees. Coop eratives tra n s a ctin g b u sin ess
w ith b o th m e m b e rs an d n on -m em b ers are su b jected on ly to ta x on th e ir tran saction s
w ith n o n -m em b ers, b u t th e coop eratives con tin u e to en joy ce rta in ta x exem p tion s.
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I n s o lv e n cy 35
A coop erative, w h ich is u n ab le to fu lfill its ob ligation s to cre d ito rs d u e to
in solven cy, m a y ap p ly for su ch rem ed ies u n d er A ct N o. 1956 (th e In solven cy Law ).36
32A r t icle 49, R.A . N o . 9520.
33A r t icle 50, R .A . N o . 9520.
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34 A r t icle s 60 a n d 61, R.A . N o. 9520.
35A r t icle 63, R.A . N o . 9250.
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36T h e C o d e p r o v id e s t h a t a co o p e r a t iv e , w h ich is u n a b le to fu lfill its.o b lig a tio n s to cr e d it o r s d u e to in solv en cy,
m a y a p p ly fo r s u ch r e m e d ie s u n d e r A ct N o . 1956 (th e In s o lv e n cy La w ) b u t A ct N o , 1956, h o w e v e r , w a s alread y
r e p e a le d b y R e p u b lic A ct N o . 10142 (Fin a n cia l R e h a b ilit a tio n a n d In s o lv e n cy A ct o f 2010). T h e la t t e r law , h ow ever,
d o e s n o t in clu d e co o p e r a t iv e s in d e fin in g t h e te r m "d e b to r .".
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D issolu tion 37
The d issolution, of a coop erative m ay be d on e in d ifferent w ays. If th ere are.
no cred itors affected , volu n tary d issolu tion m ay b e don e by a m ajority vote of th e
b oard of d irectors, an d b y a resolu tion d u ly ad op ted by th e affirm ative vote of at
least th ree-fou rth s of all th e m em b ers w ith votin g rights, p resen t an d con stitu tin g
a q u oru m at a m eetin g to b e h eld u p on call of th e d irectors- If th ere are cred itors
affected, th e volu n tary d issolu tion m ay be done th rou gh a p etition sign ed b y a
majority of its b oard of d irectors or oth er officers irian agin g its affairs, verified b y
its ch airp erson or b oard secretary or one of its d irectors. The p etition sh all state
all claim s an d d em an d s again st it an d th at its d issolu tion w as resolved u p on b y
the affirm ative vote of at least th ree-fou rth s of all th e m em b ers w ith votin g righ ts,
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p resen t an d con stitu tin g a q u oru m at a m eetin g called for th at piurpose.
In volu n tary d issolu tion , on th e oth er h an d , is d on e b y ord er of a com p eten t
cou rt after a d u e h earin g on the grou n d s of violation of an y law, regu lation , or
p rovision s of its b ylaw s, or insolvency. Dissolution m ay also be d on e b y ord er of
the Coop erative D evelop m en t Au th ority (CDA). The CDA m ay su sp en d or revok e,
after d u e n otice an d h earin g, th e certificate of registration of a coop erative on an y of
the follow in g grou n d s: (1) h avin g ob tain ed its registration b y frau d ; (2) existin g for
an illegal p u rp ose; (3) w illfu l violation, despite n otice b y th e CDA, of th e p rovision s
of th e Ph ilip p in e Coop erative Cod e or its bylaws; (4) w illfu l failu re to op erate on a
coop erative b asis; an d (5) failu re to m eet th e req u ired m in im u m n u m b er of m em b ers
in th e coop erative. Lastly, a coop erative m ay b e d issolved for its failu re to organ ize
an d op erate w ith in tw o years after th e issu ance of its certificate of registration or
h as n ot carried on its b u sin ess for tw o con secu tive years, w ith ou t ju stifiab le cau se,
Liq u id atio n d f a Coop erative3738
Every coop erative w h ose term h as exp ired or w as volu n tary d issolved or
w as d issolved th rou gh an ap p rop riate judicial p roceed in g sh all con tin u e to exist
for th ree years after th e tim e it is d issolved for th e p u rp ose of p rosecu tin g an d
d efen d in g su its b y or again st it, settlem en t an d closu re of its affairs, an d d isp osition ,
con veyan ce, an d d istrib u tion of its p rop erties an d assets.
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37A r ticle s 64 to 68, R.A . N o. 9520.
38A r ticle 69, R.A . N o . 9250.
U N IT III | C O O P ER A T IV E S
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Sou rce of Cap ital39
Coop eratives m ay d erive th eir cap ital from th e m em b ers sh are cap ital, loans
and b orrow in gs (in clu d in g deposits), revolvin g cap ital, an d sub sid ies, donations,
legacies, gran ts, aids, an d su ch oth er assistan ce from an y local or foreign institution.
A m em b er can n ot tran sfer h is sh ares or in terest in th e coop erative or an y part
th ereof u n less h e h as held su ch sh are capital con trib u tion or in terest for n ot less
th an on e year an d th e assign m en t is m ad e to th e coop erative or to a m em b er of the
coop erative, u p on ap p roval b y th e b oard of d irectors of su ch assign m en t.40 The
b ylaw s of every coop erative shall p rovid e a reasonab le an d realistic m em b er capital
b u ild -u p p rogram to allow th e con tin u in g grow th of th e m em b ers' in vestm en t in
th eir coop erative. It m ay also p rescrib e a fine on u n p aid su b scrib ed sh are capital.41
In vestm en t of Cap ital42
A coop erative m ay invest its capital in shares or d eb en tu res or secu rities of any
oth er coop erative. It m ay also invest its capital in any rep u tab le b an k in th e locality,
or an y coop erative, an d in secu rities issued or gu aran teed b y th e govern m en t. It
m ay also in vest its capital in real state p rim arily for th e u se of th e coop erative or its
m em b ers, or in any oth er m an n er authorized in the bylaws.
PR A CTICE EXERCISE
As a ju ridical entity, a coop erative is similar to a corp oration excep t th at while
corp oration s are registered w ith and su p ervised by th e SEC, coop eratives are
registered w ith an d su p ervised by the CDA. Wh y w ou ld you p refer to organ ize a
coop erative in stead of a corporation?
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RELEVAN CE O F TH E LESSO N
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People organ ize coop eratives to help imp rove th eir q u ality of life b y p rovidin g
p rod u cts an d services to help m em bers in crease th eir in com e, savin gs, investments,
p rod u ctivity, an d p u rch asin g power, an d assist th em in reap in g th e m ost favorable
social an d econ om ic benefits th rou gh sou n d an d h on est coop erative p ractices.
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39A rticle
40A rticle
41A rticle
42A rticle
72,
74,
75,
78,
R.A .
R.A .
R.A .
R.A .
N o.
N o.
N o.
N o.
9520.
9520.
9520.
9520.
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l esso n
s u m m a r y
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Coop eratives m ay b e organ ized an d registered for d ifferen t p u rp oses an d are
of d ifferen t typ es.
•
Coop eratives en joy p ow ers an d p rivileges an d certain tax exem p tion s:
•
Coop eratives h ave lim ited liability an d exist for u p to 50 years from th e d ate of
registration .
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Coop eratives sh all acq u ire ju rid ical p erson ality from th e d ate th e CD A issu es
a certificate of registration u n d er its official seal.
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Coop eratives m ay b e d issolved th rou gh volu n tary an d in volu n tary m ean s.
•
Th e cap ital th e coop eratives d erived m ay b e in vested in accord an ce w ith th e
Ph ilip p in e Coop erative Cod e an d th e bylaws.
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Th e gen eral assem b ly is th e h igh est p olicy-m ak in g b od y of th e coop erative.
•
Th e CD A m ay call for a sp ecial m eetin g of th e gen eral assem b ly for th e
p u rp ose of rep ortin g to th e m em b ers th e resu lt of an y exam in ation or oth er
in vestigation of jthe coop erative affairs.
?
•
Th e d irection an d m an agem en t of th e affairs of a coop erative sh all b e vested
in a b oard of d irectors w h o d o n ot hold an y oth er p osition d irectly in volved in
th e d ay-to-d ay op eration of th e coop erative. .
/
•
An y m em b er of a coop erative w h o p ossesses all th e q u alification s an d n on e
of th e d isq u alification s p rovid ed in th e law s or b ylaw s sh all b e eligib le for
election as th e d irector.
•i .
>.
,
D irectors, officers, an d com m ittee m em b ers of a coop erative sh all b e liable
join tly an d severally for all d am ages resu ltin g from acts in violation of th eir
•
, d u ties.
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CH APTER
Name: —
D ate:__
Instructor:
. Section :
Score:
Tru e or False
______ 1. D irectors, officers, an d com m ittee m em b ers of a coop erative sh all b e
liable pro rata w ith th e coop erative for all d am ages resu ltin g from acts
in violation of th eir duties.
______ _2. A con tract en tered into by th e coop erative w ith an y of its d irectors
con stitu tes a con flict of interest and is con sid ered void.
3. A d isloyal d irector shall be liable for d am ages an d m u st accou n t for
double th e p rofits th at oth erw ise would h ave accru ed to th e coop erative
b y refu n d in g th e same, even if he u sed his ow n fu n d s in th e ven tu re.
________4. Coop eratives enjoy certain tax exem p tion s on ly w h en th ey are in th e
first five years of operation.
________ 5. A coop erative m ay only be dissolved volu n tarily or b y ord er of th e
CDA. '
V
'
.
________6. Cap ital d erived by coop eratives con stitutes a tru st fu n d th at can n ot
b e in vested in an y w ay and m u st be reserved for th e m em b ers of th e
'‘
coop eratives.
i
.
________7. Th e b ylaws of every coop erative m ay p rescrib e a fine on th e u n p aid
su b scrib ed sh are capital of its members.
•_____ 8. Coop eratives are prohibited from receivin g gran ts, aid s, or an y
assistan ce from foreign institutions.
;s
________9. A coop erative m a y b e dissolved for its failu re to organ ize an d op erate
w ith in tw o years after th e issu an ce of its certificate of registration or h as
n ot carried on its b u sin ess for tw o con secu tive years, w ith ou t ju stifiable
m
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cau se. , \ ‘
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j . .
________ 10. An am en d m en t of th e articles of coop eration n eed s th e th ree-fou rth s
vote of m em b ers w ith votin g righ ts w h ile m erger, con solid ation , an d
d ivision of coop eratives req u ire tw o-th ird s of all m em b ers w ith votin g
righ ts p resen t an d con stitu tin g a q u oru m .
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C H A PT ER PRO JECT
Based on w h at you h ave learn ed from th e lesson , d raft an articles of
coop eration . You m ay search th e in tern et for exam p les; th at you m ay u se as a
gu id e. .
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IN TRO D UCTIO N
The governin g law for cooperatives is Republic Act No. 11364 (R.A. No. 11364),
otherwise known as the "Cooperative Development Authority Ch arter of 2019."
R.A. No. 11364 was signed into law by President Rodrigo R. Duterte last Augu st 8,
2019, and took effect on August 29, 2019. It accordingly repealed Republic Act No.
6939 dated M arch 10,1990, purposely to strengthen and reorganize the Cooperative
Development Auth ority (CDA) to carry out the provisions of Republic Act No. 9520,
otherwise k n ow n as the "Philippine Cooperative Code of 2008" which amen d ed
R.A. No. 6939.
IN TEN D ED LEARN IN G OUTCOMES
At the end of this chapter, the students will be able to recall all the p ow er an d
function of the CDA and summarize what happens when officers of the cooperative
violate the cooperative laws an d /or the rules and regulations issued by th e CDA.
The Coop erative Development Authority (CDA), as the lead agen cy in the
development and regulation of cooperatives, promotes their viability and grow th
as in stru ments of equity, social justice, and economic development.1 It is the sole
government agency mandated to register all types of cooperatives. It is an attach ed
agency of th e Department of Trade and Industry (DTI) for policy and p rogram
coordination for cooperatives. It has its head office in the National Capital Region
(NCR) and m ain tains the existing 16 extension offices. In the case of the NCR, it is
comprised of field district offices and maintains offices and branches in such oth er
places as the p rop er conduct of its business shall require.12
Pow ers, Fu n ction s, an d Resp on sib ilities of the Coop erative
D evelop m en t Au th ority (CDA)
In p u rsu an ce of its mandate, the CDA has 37 powers, functions, and
responsibilities as compared to the 15 powers vested under the old charter.
It exercises developmental, regulatory and quasi-judicial powers, functions
1Section 1, Ru le II of the IRR, R.A. N o. 11364.
2Section 3, R.A. N o. 11364.
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an d resp on sib ilities,3 an d oth er in h eren t p ow ers su ch as b u t n ot lim ited to th
estab lish m en t an d m ain ten an ce of a con tin u in g ed u cation al an d capab ility-bu ildi^
p rogram . Both sectoral ap ex organ ization s an d a n ation al allian ce of cooperatives
are recogn ized ; th e latter serves as the overall con su ltative an d coord in atin g body
w ith th e CDA. A stron g p artn ersh ip b etw een th e CDA an d th e coop erative sector
an d th e acad em e is established in im p lementing the d evelop m en tal fu n ction s of the
CD A to en su re th e m axim u m p articip ation of th e coop erative sector on matters of
govern m en t plans, p rojects, and policies affectin g coop eratives.4
Pow ers an d Fu n ction s of th e Board of D irectors
The Board of Directors of CDA is comp osed of a Ch airp erson and six
m em b ers— one b oard of d irectors from each of the following clu ster of cooperatives:
(1) cred it an d financial services, banking, an d 'in su ran ce; (2) con su m ers, marketing,
p rod u cers, an d logistics; (3) h u m an services: health, h ou sin g, w orkers, an d labor
service; (4) ed ucation and ad vocacy; (5) agricu lture, agrarian , aq u acu ltu re, farmers,
d airy, an d fisher folk; and (6) public utilities: electricity, water, communications,
an d tran sp ort. As far as practicable, there shall be at least one law yer Member of
th e Board, an d gender balance sfiall be observed in the m em bersh ip of th e Board.
The Secretaries of the D ep artmen t of Trade and Ind ustry (DTI) an d th e Department
of In terior an d Local Government (DILG) serve as ex-officio m em b ers of th e board
an d m ay designate an alternate in a perman en t capacity w ith a ran k of at least an
Assistan t Secretary and whose acts shall be considered as th at of th e p rin cip al.5
The Board as a collegial body is responsible for p olicy form ulation, strategic
p lan n ing an d direction setting of the agency. It exercises the following functions:
(1) formulate policies, rules, and regulations; (2) adopt imp lementing rules and
regu lation s; (3) organ ize the operating stru ctu re and fu n ction s of th e CDA; (4)
ap p rove the work and financial plan; (5) approve annual, m ed iu m -term , and longterm coop erative development plans; (6) provide overall d irection to the CDA; (7)
conduct, regu lar p olicy consultations; (8) decide cases involving cooperatives; (9)
authorize the Ch airp erson or the Adm inistrator to enter into con tracts or agreements
in behalf of the CDA; (10) approve and submit the annual p rop osed budget; (11)
appoint Deputy Ad m in istrators;6 and (12) formulate rules and regulations- and
exercise such other powers as m ay be required to implement the objectives of R.A.
No. 11364.7
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3Section
4Section
5Section
6Section
7Section
232
4, R.A. N o. 11364.
18, R.A. N o. 11364.
5/ R.A. N o. 11364. ;
11, R.A. N o. 11364.
6, R.A. N o. 11364.
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Office of th e A d m in is tra to r8
The Presid en t of the Philippines appoints, upon recom m en d ation of th e b oard
of d irectors, th e Ad m in istrator of the CDA, with the ran k of an Assistan t Secretary.
The Ad m in istrator m u st be a n atu ral-b orn Filipino citizen, holder of an y b ach elor's
degree, p ossess civil service eligibility, and with five years' exp erien ce as an officer
of a coop erative or official or em p loyee in a govern m en t office or NGO d ealin g w ith
cooperatives. Up on ap p oin tm en t, h e/sh e shall cease to h ave an y d irect or in d irect
p ecu n iary in terest or d ealin gs with an y coop erative. H e/Sh e shall execu te an d
administer the policies, decision s, orders and resolutions as ap p roved by th e Board
and shall h ave th e gen eral execu tive direction and su p ervision of the w ork an d
operation of th e CDA.
Registration for Tax Exem p tion
The CDA fu rn ish es the Bureau of Internal Revenue (BIR) and th e local
govern ment u n its (LGUs) a certified list of duly registered coop eratives for p u rp oses
pf p rocessin g tax exemp tion s. Any public official or employee wh o violates or in an y
m an n er circu m ven ts th is provision is dealt with in accord ance w ith Article 140 of
the Philippine Coop erative Code.9
The CDA su b m its to the BLR the Registered Cooperatives M aster List, w h ich
shall con tain th e n am es of all registered cooperatives and the list shall be u p d ated
within 30 d ays after th e close of every calendar year. It also p rovid es the LGUs w ith
an u p d ated list of registered cooperatives within their jurisd iction w ith in 60 d ays
after the close of every calen d ar year.10*
Proh ib ition
Excep t as p rovid ed for u n d er Article 130 of th e Philippine Coop erative Cod e,
the u se by an y p erson or organ ization of the word "coop erative," "coop ," "co-op "
and "k oop " in th eir b usiness name, unless duly registered with th e CDA, shall be
prohibited an d shall be p en alized und er Article 140 of the Philippine Coop erative
Code.11 The CDA m ay m otu prop rio initiate complaints about violations of th is
prohibition.12
8Section s 11 an d 12, R.A. N o. 11364.
’ Section 14, R.A. N o. 11364.
10Section 2, Ru le XV, IRR of R.A. N o. 11364.
"Se ct io n 15, R.A. N o. 11364.
12Section 2, Ru le XIX, IRR of R.A. N o. 11364.
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S ettlem en t of D isp u tes
An y d isp u te, con troversy, or claim arisin g ou t of or relatin g to th e b ylaws of
th e coop erative, th e coop erative law s an d related ru les, ad m in istrative gu id elin es of
th e CDA, in clu d in g d isp u tes in volvin g m em b ers, officers^ d irectors, an d comm ittee
m em b ers, in tra-coop erative d isp u tes, an d related issu es sh all b e referred to and
fin ally resolved b y volu n tary arb itration u n d er th e in stitu tion al ru les-p rom u lgated
b y th e CDA, after com p lian ce w ith th e con ciliation or m ed iation m ech an ism s
em b od ied in th e b ylaws of the coop erative.13 H ow ever, in case of election-related
issu es, th e aggrieved p arty m ay elevate th e case for ad ju d ication to th e CD A without
u n d ergoin g th rou gh th e altern ative d isp u te resolu tion .14
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Train in g Stan d ard s15
Th e CDA d evelop s an d con d u cts train in g p rogram s for officers an d m em b ers of
coop eratives w h ich sh all focu s on en trep ren eu rial capab ilities, m an agerial exp ertise,
an d tech n ical skills req u ired for th e efficient op eration of th eir coop eratives. In
p artn ersh ip w ith learn in g an d train in g in stitu tion s an d th e coop erative sector, it
form u lates stan d ard s of train in g req u irem en ts for coop erative officers an d members.
Th e train in g cu rricu lu m , w h ich focu ses on basic coop erative p rin cip les an d values,
good govern an ce, business and en trep ren eu rial m an agem en t, h u m an resou rce
m an agem en t, risk m an agem en t, con flict m an agem en t, an d tech n ical sk ills required
for th e efficient op eration of th e coop eratives, is also d evelop ed b y th e CD A, together
w ith coop eratives an d oth er train in g organ ization s. The CDA m on itors com p liance
w ith th e form u lated train in g stan d ard s by coop eratives an d oth er accred ited
organ ization s th at are d uly registered u n d er ^Philippine law s an d ar$ en gaged in
th e coop erative p rom otion, organ ization , research , an d ed u cation , su b ject to the
gu id elin es to b e p rescrib ed . Trainings are con d u cted b y th e coop eratives, private
train in g in stitution s, govern m en t agencies, local coop erative d evelop m en t offices,
an d oth er train in g organ ization s, in accord an ce w ith th e gu id elin es to b e p rescrib ed
by the CDA. Th ere is an Accred itation Program th at aim s to in stitu tion alize the
con d u ct of w ell-coord in ated , ration alized , an d stan d ard ized ed u cation an d training
for coop eratives an d th eir Officers an d m em b ers p u rsu an t to th e p rovision s of the
Philippine Coop erative Code. Coop erative graining p rovid ers are in stitu tion s or
organ ization s, en gaged in th e ed u cation an d train in g for coop eratives an d possess
th e m in im u m q ualification s req u ired of a train in g'p rovid er. The CDA monitors
p roviders.
13Section Z , Ru le XTV, IRR of R.A.' N o. 11364.
14Section 4(u ). R.A. N o. 11364.
15Ru le V, IRR of R.A. N o. li3 6 4 .
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Coop eratives in D ifferen t Sectors
The following are clu ster of coop eratives in the different sectors: (a) cred it an d
financial services, b an k in g, an d in suran ce; (b) con su mers, m ark etin g, p rod u cers,
and logistics; (c) h u m an services: health, housing, workers, and labor service; (d)
education an d advocacy;^ (e) agricu ltu re, agrarian , aq u acultu re, farmers, dairy,
and fisherfolk; an d (f) public utilities: electricity, water, com m u n ication s, an d
transport. In ord er to q ualify as a cooperative, there m u st be at least 15 m em b ers in
the p roposed coop erative. The p rop osed business n am e, wh ich should include th e
word "coop erative," m u st b e submitted to the CDA office, and all oth er n ecessary
requirements su ch as th e econ om ic survey, articles of coop eration and its bylaws,
and the n am es of th e coop erative's directors.
PRACTICE EXERCISE
Considering th e tech n ical guidance and financial assistance th e govern m en t .
provides a coop erative, h ow can the government main tain th e p olicy of n on ­
interference in th e m an agem en t and operation of a cooperative so as n ot to in frin ge
upon its objectives an d character?
RELEVAN CE O F TH E LESSON"
The Coop erative Development Authority is the govern m en t agen cy task ed
to carry ou t th e p rovision s of R.A. 9250. Knowing th e fu n ction s, p ow ers, an d
jurisdiction of th e CDA en su res th at institutional d evelop ment an d regu lation
of coop eratives are in p lace so th at cooperatives are able to ach ieve th e p rim ary
objective of th e econ om ic an d social bettermen t of their mem bers.
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LESSO N SUM
M ARY
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The Coop erative Development Authority (CDA) is the lead agen cy in th e
d evelop ment an d regu lation of cooperatives. It exercises d evelop men tal,
regu latory an d quasi-judicial powers, functions and responsibilities, an d oth er
in h erent p owers.
•
The six clu sters of coop eratives are the following: (a) cred it an d fin an cial
services, b an k in g, an d in suran ce; (b) consumers, m ark etin g, p rod u cers, an d
logistics; (c) h u m an services: health, housing, workers, and labor service; (d)
education an d ad vocacy; (e) agricu lture, agrarian , aq u acu ltu re, farmers, dairy,
and fisherfolk; and (f) public utilities: electricity, water, com m u nication s, an d
tran sp ort.
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u n it
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•
A s a collegial b ody, th e b oard of d irectors of th e CDA is responsible for policy
form ulation, strategic p lan n in g, and d irection settin g of th e agency.
•
The Ad m in istrator of th e CDA is ap p ointed by th e Presid en t of th e Philippines
h as th e ran k of an Assistan t Secretary, an d upon ap pointm ent, ceases to have
an y d irect or in d irect p ecu n iary in terest or d ealin gs w ith an y cooperative.
•
Th e CDA fu rn ish es th e Bu reau of Internal Revenue (BIR) and the local
govern m en t u n its (LGUs) a certified list of d u ly registered coop eratives for
p u rp oses of p rocessin g tax exemptions.
•
Excep t as p rovided for u n d er Article 130 of th e Philip pin e Coop erative Code,
th e u se b y an y p erson or organ ization of th e word "coop erative," "coop ," "co­
op " an d "k oop " in th eir business name, unless d u ly registered w ith th e CDA,
sh all b e prohibited and shall be penalized.
•
An y d isp ute, controversy, or claim arisin g ou t of or relatin g to th e b ylaws of the
coop erative, th e coop erative laws and related rules, ad m in istrative guidelines
of th e CDA, shall be referred to and finally resolved b y volu n tary arbitration,
after com p lian ce with th e conciliation or med iation m ech an ism s em b od ied in
th e b ylaw s of th e cooperative.
•
In case of election-related issues, the aggrieved p arty m ay elevate th e case for
ad ju d ication to the CDA without u nd ergoin g altern ative d isp u te resolution.
•
Th e CDA develops and conducts train in g p rogram s for officers an d m em bers of
coop eratives th at focus on en trep ren eurial capabilities, m an agerial expertise,
an d tech n ical skills req uired for the efficient op eration of coop eratives.
•
In ord er to q ualify as a cooperative, th ere m u st be at least 15 m em b ers in the
p rop osed coop erative, and th e p rop osed b usiness n am e togeth er w ith all other
n ecessary req u irem en ts m u st be submitted to th e CDA office.
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CH APTER TEST
Name:___
Date:.
Instructor:
Section :.
Score:
Tru e or False
Com p lain ts ab ou t th e removal of an y elected officer of th e coop erative
sh all b e filed w ith th e Coop erative Developm ent Authority.
_2. The Coop erative Development Au th ority (CDA), as th e lead agen cy in
th e d evelop m en t and regulation of coop eratives, is an attach ed agen cy
of th e D ep artm en t of Interior and Local G overnment.
_3. Th e b oard of d irectors of CDA is com p osed of a Ch airp erson an d
eigh t m em b ers— one b oard of d irectors from each of th e clu sters of
coop eratives.
.
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_4. The Ad m in istrator of the CDA, upon his appointmen t, sh all cease to
h ave an y p ecu n iary interest or dealings w ith an y coop erative.
_5. The Registered Cooperatives M aster List w h ich con tain s th e n am es of
all registered coop eratives shall be u p d ated every th ree years.
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_6. In case of election-related issues, the aggrieved p arty m ay elevate
th e case for adjudication to the p rop er region al trial cou rt w ith ou t
u n d ergoin g alternative dispute resolution.
_7. In ord er to q u alify as a cooperative, there m u st be at leastTO m em b ers
in th e p rop osed cooperative.
,
,
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8. The SEC exercises developmental, regu latory an d q uasi-ju dicial
p ow ers, fu n ction s and responsibilities, and oth er in h eren t p ow ers over
coop eratives.
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_9. An y d ispute, con troversy, or claim arisin g out of or relatin g to th e
•
/
b ylaws of th e cooperative, the coop erative laws an d related ru les,
ad m in istrative gu id elin es of th e CDA are referred to th e region al trial
cou rt for its adjudication.
,
__10. The CDA d evelops and con du cts train in g p rogram s for officers an d
m em b ers of coop eratives.
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CH A PTER PRO JECT
1.
List all th e p ow ers an d fu n ction s of th e CDA.
2.
Prep are a flow ch art or d iagram to show w h at h ap p en s w hen th e officers of
a coop erative violate the coop erative laws an d /or th e ru les an d regulations
issu ed by th e CDA.
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IN TRO D UC TIO N
A n egotiab le in stru m en t is a w ritten con tract for the p aym en t of m on ey w h ich
by its form is in ten d ed as a su b stitu te for money and to p ass from h an d to h an d , to
give th e h old er in d u e cou rse the right to hold the sam e and collect th e su m due. The
entire law govern in g th is sp ecial con tract is the Negotiable In stru m en ts Law (Act
No. 2031). Its p u rp ose is to p rod u ce u niformity in the laws of the d ifferen t cou n tries
in th eir treatm en t of n otes, checks, and oth er negotiable p ap ers. A n egotiab le
in stru m en t is a sign ed w ritin g th at can be u sed either as a sub stitu te for m on ey or as
a m ean s of exten d in g cred it. There are tw o classifications of negotiable in stru m en ts:
p rom issory n ote (p rom ises to pay) and bills of exch an ge (orders to pay).
IN TEN D ED LEARN IN G O UTCO M ES
At th e en d of th is chap ter, the students will be able to u n d erstan d w h y
negotiable in stru m en ts are im p ortan t in m od ern econ om ic system s; d escrib e th e
different classes of n egotiab le in stru m en ts and the p arties to su ch in stru m en ts; learn
the req u isites of an d h ow to sp ot a negotiable in stru m en t; an d k n ow th e p rob lem s
that arise in case of forgery an d m aterial alteration of a negotiable in stru m en t.
Lesson 1: P re lim in a ry Con sid eration s
Con cep t an d Classes of N egotiab le In stru m en ts
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A n egotiab le in stru m en t is a d ocu m en t th at gu aran tees the p aym en t, th rou gh
a w ritten p rom ise b y th e m ak er, or in stru ction given to an oth er p erson , of a sp ecific
am ou n t of m on ey to a sp ecified p ayee, on d em an d , or at a d eterm in ab le fu tu re time.
There are tw o classes of n egotiable in stru m en ts:
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Th e p rom issory n ote w h ich is an u n con d ition al p rom ise in w ritin g m ad e by
on e p erson to an oth er, sign ed b y th e m ak er, en gagin g to p ay on d eman d, or
at a fixed or d eterm in ab le fu tu re tim e, a su m certain in m on ey to ord er or to
b earer.1 In a p rom issory note, th e m ak er is th e p erson m ak in g th e p rom ise to
pay, an d th e p ayee is th e p erson to w h om th e n ote an d certificate of deposit are
m ad e payable.
_
A.
Illu stration (simple form):
P10,000
M an ila, Ph ilip p in es
Ap ril 7, 2021
For valu e received, I p rom ise to p ay to th e ord er of Junjae
Lee th e su m of Ten Th ou san d Pesos (P10,0000) on or b efore
M ay 7, 2021.
(Sgd.) M arth a M ay W h o .
G en eral Ch aracteristics of a Prom issory N ote
lf
The figu res at the u p p er left-hand corn er of th e in stru m en t - 1*10,000
in dicate th e-am ou n t of th e note an d are m ore clearly u n d erstood th an if
w ritten in w ord's.
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2.
The place, "M an ila, Philippines" denote th e p lace of execu tion of the
p rom issory note.
3.
The d ate "April 7, 2021" is u su ally in serted to d eterm in e w h en th e note is
d ue or to fix th e time w h en in terest is to ru n , w h en th e p aym en t of interest
is stip u lated or w h eth er or n ot th e collection of th e in stru m en t is barred
b y th e statu te of limitations.
4.
The "p rom ise to p ay" w h ich con sists of an ab solute p rom ise to do
som eth in g th at is, to pay. It is n ot su bject'to th e fu lfillm en t of a condition.
The w ord s "to th e ord er of" m ean s th at th e p rom ise is to p ay as ord ered or
as com m an d ed by th e payee. But art in stru m en t m ay b e p ayable to bearer.
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6.
The n am e "Junjae Lee" is th e p erson to w h ose Order or com m an d the
m on ey is p rom ised to be paid. H e is k n ow n as th e p ayee.
7.
The n am e "M arth a M ay Wh o" is th e m ak er of th e n ote. She is th e on e who
p rom ises to p ay it at th e first in stan ce.*240
1Section 184, N IL.
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8.
B.
The am ou n t "Ten Th ou san d Pesos" in d icates, as th e figu res do, th e su m
p rom ised to b e p aid . As it is w ritten in w ord s, it can n ot b e easily altered*
an d sin ce it tak es lon ger to w rite th e w ord s th an figu res, th e w ord s are
m ore likely to b e accu rate.
The bill of exch an ge w h ich is an u n con d ition al ord er in w ritin g ad d ressed b y
one p erson to an oth er, sign ed b y th e p erson givin g it, req u irin g th e p erson to
w h om it is ad d ressed to p ay on d em an d or at a fixed or d eterm in ab le fu tu re
time a su m certain in m on ey to ord er or to b earer.2In a bill of exch an ge, th e
p erson issu in g th e bill is th e d raw er, th e p erson ord ered to p ay is th e d raw ee,
an d th e p erson to w h om th e bill is payable is th e p ayee.
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A ch eck is a bill of exch an ge d raw n on a b an k p ayab le on d em an d .3It a
typ e of bill of exch an ge in w h ich th e d raw ee is alw ays a b an k an d th e d raw er
is th e d ep ositor.
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Illu stration (simple form):
M an ila, Ph ilip p in es
April 7 ,2021
P10,000
•\
TH IRTY DAYS after sight, p ay to th e ord er of JUN JAE
LEE th e su m of TEN THOUSAND PESOS (P10,000),
Ph ilip p in e Cu rren cy. Value of received and ch arge th e sam e
to th
* e• accou n t of\ .
(Sgd.) Ch loe An n Ch u k oi
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M arth a M ay Wh o
Shore Residen ces
M O A Com p lex, Pasay City
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G en eral C h aracteristics of a Bill of Exch an ge
1.
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The ord et or com m an d to p ay "Pay to." This is an ord er or com m an d to
pay. Th u s, in stead of a p rom ise, th e bill of exch an ge con tain s a com m an d
or ord er to p ay money.
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2.
The sign atu re "Ch loe An n Ch ukoi." She is th e d raw er an d corresp on d s to
* th e m ak er of p rom issory note.
i - 1.
3.
The n am e "M arth a M ay Wh o." She is th e d raw ee. She is th e One ord ered
or com m an d ed to p ay a su m certain in money.
2Se ctio n 126, N IL.
3Sectio n 185, N IL.
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4.
Th e n am e "Ju n jae Le e /' H e is th e p erson to w h ose ord er th e m on ey is to
b e p aid. H e is k n ow n as th e p ayee.
Th ere are a n u m b er of n egotiab le in stru m en ts cu rren tly in u se. Th e certificate of
d ep osit is d efin ed b y th e Su p rem e Cou rt in on e case as a w ritten ack n ow led gm en t of
a b an k of its receip t of a certain su m w ith a p rom ise to p ay th e sam e to th e depositor
o r th e ord er of th e d ep ositor or som e oth er p erson or h is ord er.4A b on d is a certificate
of in d eb ted n ess on w h ich th e issu in g com p an y or govern m en t agen cy p rom ises to
p ay th e b on d h old ers a sp ecified am ou n t of in terest for a sp ecified len gth of time
an d to rep ay th e loan on th e exp iration d ate. A d eb en tu re is a p rom issory note or
b on d secu red gu aran teed b y th e gen eral cred it of a corp oration an d u su ally not
secu red b y a m ortgage or lien on an y sp ecific p rop erty. A d raft is a bill of exchange
u sed in d ocu m en tary exch an ge like letters of cred it tran saction s. A n in lan d bill on
its face p u rp orts to b e b oth d raw n an d payable w ith in th e Ph ilip p in es, as contrasted
to a foreign bilL A tim e d raft is payable at a fixed d ate w h ile a sigh t or d em an d draft
is p ayab le w h en th e h old er p resen ts it for p aym en t. A trad e accep tan ce is a bill used
in con tracts of sale w h ere th e seller (as d rawer) ord ers th e b u yer (as d raw ee) to pay a
su m certain to th e sam e seller (payee). Lastly, a b ank er's accep tan ce is a timeidraft
w ith th e w ord accep ted w ritten across its face.
Fu n ctio n s an d Ch aracteristics
N egotiab le in stru m en ts fu n ction as follows: as su b stitu te for m on ey, as medium
of exch an ge, as cred it in stru m en t w hich in creases cred it circu lation , to increase
p u rch asin g m ed iu m in circu lation , an d as evid en ce of tran saction . Negotiable
in stru m en ts are u sed as sub stitu tes for money, w h ich m ean s th at w h en negotiated,
th ey can b e u sed to p ay indebtedness. A negotiable in stru m en t h as tw o distinctive
featu res: n egotiab ility an d accu m u lation of secon d ary con tracts. N egotiab ility is
th at attrib u te or p rop erty w hereby a bill or n ote or ch eck m ay p ass from h an d to
h an d sim ilar to money, so as to give the h old er in d ue cou rse th e righ t to hold
th e in stru m en t an d to collect th e su m payable for h im self free from 1defenses.
Accu m u lation of secon d ary con tracts m ean s th at secon d ary con tracts are picked
u p an d carried alon g w ith n egotiable in stru m en ts as th ey are n egotiated from one
p erson to an oth er.
N egotiab le In stru m en ts Com p ared w ith O th er P ap ers
Th e n egotiation of a n egotiab le in stru m en t m u st b e d istin gu ish ed from
th e assign m en t or tran sfer of an in stru m en t w h eth er n egotiab le or n ot. O n ly an
in stru m en t q u alifyin g as a n egotiab le in stru m en t u n d er th e N egotiab le In stru m en ts *
* Pr u d en tial
242
Ban k vs. C om m ission er o f In tern al Rev en u e (CIR), G .R. N o. 180390, Ju ly 27, 2011.
BU SIN E SS LA W S A N D REG U LA TIO N S
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Law m ay be n egotiated either by indorsement thereof coupled w ith d elivery as in
the case of an in stru m en t payable to order, or by delivery alone where th e negotiable
instrument is payable to bearer. A negotiable in stru men t may, however, in stead
of being n egotiated , also be assign ed or transferred. The legal con sequences of
negotiation as d istin gu ish ed from the assign ment of a negotiable in stru m en t will of
course differ. The Supreme Cou rt held in one case th at a non-negotiable in stru m en t
cannot be n egotiated , b ut it m ay be assigned or tran sferred , absent an exp ress
prohibition again st assign m en t or tran sfer w ritten in the face of the in stru m en t.5
There are a n u m b er of non-negotiable in stru men ts w e en cou n ter w h en we
transact b usiness. A d ocu m en t of title is a w ritten in stru ment, such as a bill of lad in g,
a w areh ou se receipt, o r an ord er for the d elivery of goods, th at in th e u su al cou rse of
business or fin an cin g is consid ered sufficient p roof th at the p erson w h o p ossesses it
is entitled to receive, hold, an d d ispose of the in stru men t an d th e good s th at it covers.
The Supreme Cou rt, in one case, describes treasu ry w arran ts as ord ers for p aym en t
out of a p articu lar fu n d 67in th e form of checks th at govern m en t d isb u rsem en ts are
paid. The Su p rem e Cou rt exp lains in another case th at w ith th e treasu ry w arran t,
a d rawer au th orizes som eone to pay a p articu lar sum of money to an oth er, an d th e
indication of, say, Fu n d 501 as the source of the paymen t to be m ad e on th e treasu ry
Warrants m ak es th e ord er or prom ise to pay "not u ncon d ition al" an d th e w arran ts
themselves n on -n egotiab le/A letter of credit is a w ritten in stru m en t from a b an k or
merch an t in on e location th at requests a specifically n am ed p arty to ad van ce m on ey
or items on cred it to th e p arty n am ed in the document. A certificate of stock is a p rin ted
d ocum en t th at states th e nam£, incorporation state, and date of in corp oration , th e
registered n u m b er of th e certificate, the number of shares of stock in a corp oration
the certificate rep resen ts, the n am e of the shareholder, the d ate of issu an ce, an d th e
number of sh ares au th orized in th e p articu lar issue of stock, signed b y th e Presid en t
and Secretary of th e corp oration (or with facsimile signatures). O n th e reverse side
of the certificate is a form for transfer (or indorsement) of th e certificate to an oth er
person so th at th e n ew ow n er will be able to cause th e tran sfer in th e stock an d
transfer b ook of th e corp oration . A p ostal money order is an ord er for th e.p aym en t
of a sp ecified am ou n t of money, u su ally issued and payable a t a p ost office. Postal
money ord ers are n ot negotiable in stru men ts b ecau se in establishing an d op eratin g
a p ostal m on ey ord er system , th e govern m en t is n ot en gaged in th e com m ercial
tran saction s b u t m erely exercises a governm ental p ow er for th e public benefit and
some of th e restriction s imp osed u p on money orders b y p ostal laws an d regu lation s
are in con sisten t w ith th e ch aracter of negotiable in stru m en ts, for in stan ce, su ch
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5Sesb ren o v. C ou r t o f A p p eals, et al., G .R. N o. 89252, M ay 24,1993.
6A bu b ak a r vs. A u d itor G en eral G.R. N o. L-1465, Ju ly 31,1948.
7M etr op olitan Ba n k & Tru st Com p an y vs. Cou rt of A p p eals, Gold en Sav in g s & Loan A ssociation , In c., Lu<?ia
Castillo, M a g n o Castillo, an d G loria Castillo, G.R. N o. 88866, Febru ary 18,1991.
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laws an d regu lation s u su ally p rovid e for n ot m ore th an on e en d orsemen t. Payment
of m on ey ord ers m ay be w ith h eld u n d er a variety of circu m stan ces.8 A certificate of
in d eb ted n ess is on e w h ere n egotiab ility is totally ab sen t as it m erely acknowledges
to p ay a su m of m on ey to a sp ecified p erson or en tity for a p eriod of time.9 The
lan gu age of n egotiab ility th at ch aracterizes a n egotiable p ap er as a cred it instrument
is its freed om to circu late as a sub stitu te for m on ey—th is freed om in negotiability is
totally ab sen t in a certificate of indebtedness.
PR A C T IC E EXERCISE
D istin gu ish a n egotiable in stru m en t from a non-negotiable in stru m en t.
RELEVAN CE O F TH E LESSO N
N egotiable in stru m en ts are im p ortan t because th eir u se allow s p eople to
d o b u sin ess an d get p aid for. services or good s w ith ou t actu ally tran sferrin g any
cash . With ou t a law in p lace th at p rotects b oth the p ayor an d p ayee in a negotiable
in stru m en t, th e econ om y wou ld not be able to fu nction the w ay th at it currently
d oes. Negotiable in stru m en ts are easy to execute and are com m on ly u sed b y both
con su m ers an d b usinesses in the country, but one m ay n ot be aw are of th e legal
im p lication s every tim e he writes, signs, and tran sfers a n egotiab le instrument.
Un d erstan d in g th e law is th u s imp ortant.
LESSO N SUM M ARY
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Th ere are tw o classes of negotiable in struments: the p rom issory n ote an d the
bill of exch an ge.
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Exam p les of negotiable in stru m en ts include the certificate of d eposit, bonds
an d d eb en tu re, in lan d and foreign bill, time, sight, or d em an d d rafts, an d trade
an d b an k er's accep tan ce.
•
N egotiab le in stru m en ts fu nction as a substitute for money, as m ed iu m of
exch an ge, as a cred it in stru m en t, and as evid en ce of a tran saction .
•
A n egotiable in stru m en t h as two distinctive featu res:
accu m u lation of secon d ary contracts.
n egotiab ility and
8Ph ilip p in e Ed u cation Co., In c. vs. M au ricio A. Sorian o, et al., G.R. N o. L-22405, Ju n e 30 ,1971.
’ Trad ers Roy al Ban k vs. Cou rt of Ap p eals, Filriters G u aran ty A ssu ra n ce C orp or ation a n d Cen tral Ban k of
th e Ph ilip p in es, G.R. N o. 93397, M arch 3,1997.
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Lesson 2: Form an d In terp retation
Req u isites of N egotiab ility
i
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Accord in g to Section 1 of the NIL, an in stru m en t to b e negotiable m u st con form
to the following req u irem en ts:
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it m u st be in w ritin g an d signed b y the m ak er or d rawer;
•
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it m u st con tain an u n con d ition al p rom ise or ord er to p ay a su m certain in
money;
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it m u st b e p ayable on d eman d, or at a fixed or d etermin able fu tu re time;
•
it m u st,b e p ayab le to ord er or to b earer; and
•
w here th e in stru m en t is ad d ressed to a drawee, he m u st be n am ed or oth erw ise
in d icated th erein w ith reasonable certainty.
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The form alities req u ired to d istinguish the negotiable in stru m en t from th e
ordinary n on -tran sferrab le w ritten instrument. The negotiability of an in stru m en t
is to be d eterm in ed b y Section 1, by considering the whole of th e in stru m en t an d
what ap p ears on th e face of the instrument. To d etermine w h eth er an in stru m en t
is negotiable or n ot, on ly the in stru m en t itself needs to be exam in ed an d com p ared
with th e req u irem en ts of Section 1. If it appears oh the in stru m en t th at it lack s on e
of the req u irem en ts, it is n ot negotiable. Note that the fact th at an in stru m en t fails
to meet th e req u irem en ts will not affect its validity, but said in stru m en t w ill b e
governed b y th e gen eral law on contracts and not the Negotiable In stru m en ts Law.
Hence, form is an essen tial in gredient for the negotiability of an in stru m en t.
Must Be in Writin g, Sign ed b y th e M ak er or D raw er
In ord er to b e negotiable, there must be a w ritin g of some kind, oth erw ise, th ere
would b e n oth in g to b e n egotiated from h and toTiand and it can n ot b e con sid ered a
substitute for money. The d raw er/m ak er would also w an t some evid en ce of th e n ote
or the bill or evid en ce of an indorsement. "In w ritin g" includes "p rin t"; it in clu d es
not only w h at is w ritten w ith p en or pencil, but also What h as b een typ ed .
To illu strate: M arth a m ad e a p rom issory note complete w ith all th e
requirements in Section 1 of the Negotiable In stru m ents Law an d w rote it on th e
whiteboard of one of the classroom s in the u niversity she attends. The p rom issory
note m ad e b y M arth a is n ot a negotiable in stru m en t b ecau se the p u rp ose of a
negotiable in stru m en t is to be a substitute for money. In this case, th e p rom issory
note w ritten by M arth a can n ot, validly be Transferred from h an d to h an d as a
substitute for money.
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Th e sign atu re is u su ally d on e by w ritin g th e sign ers' n am e; th e full name or
at least, th e su rn am e shou ld ap p ear, b ut it m ay con sist of in itials or even numbers,
Wh ere th e n am e is n ot sign ed , h ow ever, thd h old er m u st p rove th at w h at is written
is in ten d ed as a sign atu re of the p erson sou gh t to be ch arged . Th e sign ature is
b in d in g w h eth er it is in one's h an d w ritin g, or p rin ted , en graved , lithographed or
p h otograp h ed , so lon g as it is intended or ad op ted to be u sed b y th e p arty as his
sign atu re.
To illu strate: JC b orrow ed f 100,000 from PJ as evid en ced b y a p rom issory note
execu ted b y JC as th e maker. All oth er req uisites of n egotiab ility are p resen t in the
n ote excep t th at JC did n ot affix h is usual sign atu re th ereon . As JC w as ailin g at that
tim e, h e w as on ly able to p u t "X" in the blank sp ace m ean t for th e sign atu re of the
m ak er. In th is case, th e letter "X" is sufficient to com p ly with th e req u irem en t that
th e in stru m en t m u st be signed by the maker. It ap p ears from th e p rob lem th at such
letter vyas ad op ted by JC with the intent to au th en ticate th e in stru m en t. It is not
n ecessary th at th e sign atu re is the usual sign atu re of th e maker.
Th e sign atu re of the. m ak er of a note or th e d raw er of a bill is u su ally written
at th e low er righ t-h and corn er thereof. The d raw ee's n am e is u su ally w ritten on the
low er left-h and corn er of the bill. The sign atu res of the p ayee an d th e successive
in d orsees are u su ally w ritten on the back. As long as the p arties to th e bill or note
com p ly w ith th ese long-established and recogn ized cu stom s, it w ou ld b e clear in
w h at cap acity th e p arties signed. But if an y p arty to an in stru m en t d eviates from
th e com m ercial u sage with resp ect to the position of sign atu re, h en ce it is n ot clear
in w h at cap acity he signs, h e is d eemed to be an indorser. »,
ft
M u st C on tain an Un con d ition al Prom ise or O rd er to P ay a Sum
Certain in M on ey
Section 3 of N IL p rovid es th at an unq ualified ord er or p rom ise to pay is
u n con d ition al th ou gh cou p led w ith: (1) an in dication of a p articu lar fu n d out of
w h ich reim b u rsem en t is to be m ad e or a p articu lar accou n t to b e d eb ited w ith the
am ou n t; or (2) a statem en t of th e tran saction w h ich gives rise to th e instrument.
But an ord er or p rom ise to p ay ou t of a p articu lar fu n d is n ot u n con d ition al. If the
p articu lar fu n d in d icated is n ot th e d irect sou rce of p aym en t b u t on ly th e sou rce of
reim b u rsemen t, it is u n con d ition al. It b ecom es con d ition al if th e p articu lar fund
in dicated is th e d irect sou rce of p aym en t b ecau se th e in stru m en t will on ly be paid
if the accou n t exists or if it is sufficiently fu n d ed . If a p rom ise or ord er to pay is
u n con d ition al, it m ean s th at th ere are n o "ifs" or "b u ts"; it is ou trigh t and direct
p rom ise or ord er to pay.
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The in stru m en t m u st con tain a p rom ise or an ord er to p ay A p rom ise to pay is
a w ritten com m itm en t of the m ak er to p ay a su m of m on ey to the p ayee or payee's
/
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order. It con stitu tes an obligation. Mere ack n ow led gm en t of a debt d oes n ot con stitu te
a promise. Th ere sh ould be an exp ress p rom ise on the face of th e in stru m en t to
pay the money. H ow ever, th e w ord "p rom ise" is n ot absolutely n ecessary an d an y
expression equ ivalen t to a p rom ise is sufficient. In a bill of exch an ge, w ord s w h ich
are eq uivalent to an ord er are sufficient. A m ere req u est or au th ority to p ay d oes
not con stitute an ord er b ecau se, in a bill of exchan ge, the in stru m en t is b y its n atu re
d em an din g a right. The ord er to p ay is a d irective to p ay an obligation—it actu ally
in structs an oth er p erson (the drawee) to m ak e th e p aymen t.
Section 2 p rovid es th at th e su m payable is a su m certain alth ou gh it is to be
paid: (1) w ith in terest; (2) b y stated installmen ts; (3) by stated in stallm en ts w ith a
p rovision th at u p on default in p aym en t of any in stallm en t or of in terest, th e wh ole
shall b ecom e due; (4) w ith exchan ge, w h eth er at a fixed rate or at th e cu rren t rate;
and (5) w ith costs of collection or an attorney's fee, in case p aym en t shall n ot be
made at m atu rity.
The am ou n t payable m u st be certain. Paymen t of in terest d oes n ot m ak e th e
sum u n certain b ecau se it can be calcu lated arithmetically. An in stru m en t th at
con tain s an ord er or p rom ise to do an act in addition to th e p aym en t of m on ey is n ot
negotiable b u t if it gives the holder an option to requ ire som eth in g to be done, in lieu
of money, it is still negotiable. Payment in installments does n ot d estroy n egotiab ility
of th e in stru m en t b ecau se certain ty is n ot destroyed b ut th e in stallm en ts m u st b e
stated, an d th e d ate of each in stallment must be fixed or d etermin able.
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M u st Be P a y a b le on D em an d or at a Fixed D eterm in ab le Fu tu re
Tim e 7
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Accord in g to Section 4; an in stru men t is payable at a d eterm in ab le fu tu re tim e
wh ich is exp ressed to b e payable: (1) at a fixed p eriod after date or sight; or (2) on or
before a fixed or determin able fu tu re ,tim£ specified th erein; or (3) on or at a fixed
p eriod after th e occu rren ce of a specified event w h ich is certain to h ap p en , th ou gh
the tim e of h ap p en in g be u ncertain . An in stru m en t payable u p on a con tin gen cy is
not negotiable, an d th e h ap p en in g of th e event does n ot cu re th e defect.
To b e n egotiable, th ere m u st b e a definite d ay on w h ich one w ill b e able to
collect on an in stru m en t. Thie req u iremen t as to the certain ty of tim e of p aym en t
is for th e p u rp ose of in form in g the holder of the in stru m en t of th e d ate w h en he
may en force th e p aym en t thereof. Before such time, h e can n ot com p el th e m ak er
of the n ote or th e accep tor of the bill to pay, u nless th ere is a valid acceleration
p rovision. After sight m ean s, after the; d rawee h as seen th e negotiable in stru m en t
upon p resen tm en t for accep tance. Presentm en t is n ecessary b ecau se it is essen tial
to ch eck if th e sign atu re of the d raw er is authentic; from the tim e th e d raw ee sees
the in stru m en t, he can either accep t the in stru m en t or reject it. By accep tin g it, h e
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b ecom es th e p arty p rim arily liable on th e bill of exch an ge. If th e in stru m en t is a
p rom issory note, th e d ate of m atu rity is d eterm in ed by cou n tin g th e p eriod from
the d ate of its issu an ce. The p h rase "on or b efore" gives th e p erson liable a chance
to p ay on an y oth er d ay b efore th e due date. Paym en t d ate is still certain because
it m erely stip u lates th e d ebtor h as th e op tion to m ak e a p re-p aym en t at an y time
b efore th e absolute due date.
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Section 7 of th e N IL p rovid es th at an in stru m en t is payable on d em an d when it
is so exp ressed to be payable on d em an d , or at sight, or on p resen tation , or in which
n o tim e for p aym en t is exp ressed . If an in stru m en t is issued, accep ted , or indorsed
w h en overd ue, it is, as regard s the p erson so issu in g, accep tin g, or indorsin g it,
p ayable on d eman d .
The case of Jose L. Ponce de Leon vs. Rehabilitation Fin an ce Corp oration (RFC),
et al.10 is a good illustration of Section 7 of the NIL. In O ctob er 1951, p etition er and
Sorian o sign ed a p rom issory note for the loan th ey ob tain ed from resp on d en t RFC,
secu red b y a real estate m ortgage on Soriano's p rop erty, an d p ayab le in monthly
in stallmen ts. The loan w as not paid so RFC initiated a foreclosu re p roceed in g on the
m ortgaged p rop erty. Accord in g to RFC, the month ly p aym en ts w ere su p p osed to be
due in O ctob er 1952. Petitioner contends th at the am ortization s n ever b ecam e due
b ecau se on the face of the p rom issory note it w as w ritten th at th e in stallm en ts have
"n o fixed or d eterm in ed dates of paymen t". As such, he said th e m on th ly payments
w ere n ever due, thus, the foreclosure is void. He insisted th at th e Court sh ou ld first
d eterm in e the d ate of m atu rity of the loan. The Sup rem e Cou rt h eld th at under
Section 7 of th e Negotiable In stru m ents Law, wh en a p rom issory n ote expresses
"n o tiine for p aym en t," it is d eemed "payable on d em an d ." Th erefore, w h en RFC
d em an d ed p aym en t in O ctober 1952, the in stallmen ts b ecom e due.
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M u st Be Payab le to O rd er or to Bearer
, The in stru m en t in ord er to be con sid ered negotiab le m u st con tain the socalled "w ord s of n egotiab ility"—it m u st b e payable to ord er or b earer. Th ese words
con n ote th at the in stru m en t is tran sferrable from on e p erson to .an oth er. Order
m ean s payable to payee, or the p erson identified b y th e p ayee. If th e instrument
is payable on ly to a specified p erson , it is n ot payable to order. O n th e oth er hand,
b earer m ean s payable to w h oever h as p ossession of th e in stru m en t.
The in stru m en t is d raw n payable to th e ord er of a sp ecified p erson Or to h im or
his order. The p ayee m u st be n am ed or oth erw ise in d icated th erein w ith reasonable
certain ty. Accord in g to Section 8, an in stru m en t m ay b e d raw n payable to th e order*I
10G.R. N o. L-24571, D ecem ber 18,1970.
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of: (1) the payee w h o is not maker, drawer, or drawee; (2) the d raw er or m ak er; (3)
the drawee; (4) tw o or m ore p ayees jointly ("AND"); (5) one or some of several p ayees
("OR"); or (6) th e hold er of an office for the time being. There m u st alw ays be a
specified p erson n am ed in the in stru m en t d raw n payable to order and th e bill or
note is to be p aid to th e p erson d esignated in the in stru m en t or to an y p erson w h om
he has indorsed an d delivered the same. The Supreme Court, in one case, stressed
that in the absence of th e words "or ord er" or "to the order of", th e in stru m en t
is payable on ly to th e p erson designated therein and is therefore non-negotiable.
Any subsequent p u rch aser of th e in stru ment will not enjoy the ad van tages of b ein g
a holder of a negotiable instrumen t, but will merely "step into th e sh oes" of th e
person designated in th e in stru m en t and will thus be open to all d efen ses available
against the latter.nWh ere the space for the n ame of payee is unfilled, th e in stru m en t
is not payable to ord er b ecau se the payee is not named, neither is he d esign ated w ith
reasonable certainty. N evertheless, Sections 14, 15, and 16 m ay apply, d ep en d in g
upon h ow th e in stru m en t was delivered. Section 43 p rovides th at th e fact th at
the n ame of th e p ayee w as misspelled or wrongly designated d oes n ot affect th e
negotiability of th e instru ment—if the n ame of the payee is w ron gly d esign ated
or misspelled, h e m ay indorse the instrument as therein described, ad d in g, if h e
thinks fit, h is p rop er signature.
Section 9 states th at an in strum ent is payable to bearer: (1) w h en it is exp ressed
to be so payable; (2) w h en it is payable to a person n amed therein or b earer; (3) w h en
it is payable to th e order of a fictitious or non-existing person, and su ch fact w as
known to th e p erson makin g it so payable; (4) when the n ame of the p ayee d oes n ot
purport to be th e n am e of any person; and (5) when the only or last in d orsem en t is
an indorsement in blank.
A ch eck is "a bill of exchange drawn on a bank payable on d em an d " w h ich m ay
either be an order or a b earer instrument. In one case, the Supreme Cou rt held th at
under, Section 9(c) of the NIL, a check payable to a specified payee m ay neverth eless
be considered as a b earer instrument if it is payable to the order of a fictitious or
non-existing p erson like checks issued to "Prinsipe Abante" or "Si M alak as at si
Maganda," wh o are well-known characters in Philippine mythology.112
In an oth er case, the Supreme Court emphasized that a bill of exch an ge or a
promissory note qualifies as a negotiable in strumen t if it is payable to cash b ecau se
under Section 9(d) it makes the instru men t payable to b earer wh en the n am e of
the payee does n ot p u rp ort to be the n ame of any person. Wh ere a check is jn ad e
payable to the order of "cash", the word "cash" does not p u rp ort to be the n am e of
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11Ju an ita Salas vs. H on . Cou rt of Ap p eals and First Fin an ce & Leasin g Corp oration , G.R. N o. 76788, Jan u ary
22,1990.
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12Ph ilip p in e N atibn al Ban k vs. Erlan d o T. Rod rigu ez and N orm a Rod rigu ez, G.R. N o. 170325, Sep tem ber
26, 2008.
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any p erson , hence, the in stru m en t is payable to bearer. The drawee bank need not
obtain an y in d orsemen t of the check, but may p ay it to the person presenting it
w ith out an y in dorsement.13 Wh en an in stru m en t is payable to bearer, it is payable
to w h oever is in physical possession. It need not be indorsed because it may be
n egotiated by m ere delivery.
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To illu strate: X delivered a check issued by h im an d payable to the order of
CASH to Y in p aym en t for certain obligations in cu rred by X in favor of Y. Y then
d elivered th e ch eck to Z in paymen t for certain obligations. Z can en cash the check
even th ou gh Y did not indorse it.
Con cep t of a Fictitiou s Person
Th e con cep t of a fictitious person is n ot limited to. a fictional p erson or a
p erson w ho d oes n ot exist at all. A person who actu ally exists can be con stru ed as a
fictitiou s p erson w ho h as no right to the in strument if the draw er or m ak er did not
in ten d th at p erson to have a right to that instrument. The n am e is fictitious when it
is feigned or pretended while a non-existent person is one who does n ot exist in the
sen se th at the drawer did not intend h im to be the payee. Note, however, that the
m ak er or d rawer must know that the payee is a fictitious or n on -existing person. In
one case, the Supreme Cou rt explained th at u n d er the fictitious payee rule, a check
mad e expressly payable to a non-fictitious and existing p erson is not n ecessarily an
ord er in stru m en t if the payee is not the intended recipient of the p roceed s of the
check. It said th at th ere is, however, a comm ercial bad faith exception to this rule
w hich p rovides th at a sh owing of comm ercial bad faith on the p art of, th e drawee
bank, or an y tran sferee of th e ch eck for th at matter, will work to strip it of this
defense.14
Id en tification of th e D raw ee
Wh ere th e bill of exch an ge is ad d ressed to a drawee, h e m u st b e n am ed or
oth erw ise in d icated w ith reason ab le certainty. The holder m u st k n ow to w hom he
should p resen t th e bill of exch an ge for accep tan ce an d / or p ayment. According
to Section 128, a bill m ay b e ad d ressed to m ore th an on e d raw ee jointly, whether
th ey are p artn ers or not, b u t n ot to tw o or more d raw ees in th e altern ative or in
succession . A bill of exch an ge d oes n ot qualify as a negotiable in stru m en t if it
n am es tw o altern ative d raw ees b ecau se a bill m ay n ot be ad d ressed to tw o or more
d raw ees in th e altern ative or in succession. To do so m ak es th e ord er conditional.
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13 An g Tek Lian vs. C ou rt of Ap p eals, G.R. N o. L-2516, Sep tem b er 25,1950.
u Ph ilip p in e N ation al Ban k vs. Erlan d o T. Rod rigu ez an d N orm a Rod rigu ez, G.R. N o. 170325, September
26,2008.
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To illu strate: An ton io issu ed th e following in stru m en t:15
August 10, 2023, Makati City
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P100,000 ■
Sixty days after date, I promise to pay Bobby or his designated representative the
sum of O NE HUN DR ED THO USA N D PESOS (P100,000) from my BPI Acct.
No. 1234 if by this due date, the sun still sets in the west to usher in the evening
and rises in the east the follow ing morning to welcome the day,
(Sgd.) Ronnie
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In th is case, th e in stru m en t con tain s a p rom ise to p ay an d w as sign ed b y th e
maker, Ronn ie (Section la). Insofar as the referen ce to th e settin g of th e su n in th e
west in th e even in g an d its rising in the east in the m orn in g are con cern ed , th ese
are certain to h ap p en (Section 4c). The p rom ise to p ay sh ould b e u n con d ition al,
but b ecau se th e m on ey w ill b e tak en from a p articu lar fu n d, BPI Accou n t No. 1234
(Section 3), th e p rom ise to pay b ecomes conditional. The in stru m en t con tain s a
p romise to p ay a su m certain in money, P100,000 (Section lb). The m on ey is p ayab le
at a d eterm in ab le fu tu re time, 60 days after Au gu st 10, 2023 (Section 4a). Th e
in stru m en t is n ot payable to order or to b earer (Section Id). H en ce, th e p rom issory
note is n ot n egotiab le for n ot h avin g complied w ith all th e req u isites u n d er Section
1 of th e N IL.
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A.
Exam p les of n egotiable instru ments:
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To AM : Pay to BN or order the amoun t of P10,000 on O ctob er 30, 2022, an d
reim b u rse you rself out of the p roceed s of the sale of m y lot. Sgd. CO
B.
I p rom ise to p ay AF or his order, P10,000,10 days after th e d ate. Sgd. BG
C.
I p rom ise to p ay AA or his order the am ou n t of P100,000 on O ctob er 30, 2022.
Sgd. BB
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To AC: Pay to th e b earer th e am ou n t of P100,000 on O ctob er 15, 2022. Sgd . BD
E.
Pay to Ch loe or ord er P200,000 and reim bu rse you rself but of m y cash in you r
p ossession . Ad d ressed to Tachi, signed b y D om d om
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I p rom ise to p ay Ch an d ler or ord er P200,000. Sgd. D om d om
G.
Pay to Ch an d ler or ord er P200,000; th is debt arises from th e sale of 200 cavan s
of rice. Ad d ressed to Tachi, signed by D om d om
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I p rom ise to p ay Bailey or ord er P200,000, 30 d ays after th e d eath of h is fath er.
Sgd. Ah m on g
15Th e illu strative case w as p attern ed from th e 2013 Bar Exam in ation q u estion s in M ercan tile Law .
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I.
I p rom ise to p ay XQ or ord er the am ou n t of P10,000 or to deliver a wristwatch
at h is op tion on M arch 30, 2022. Signed AR
J.
I p rom ise to p ay AG or his order the am ou n t of 1*100,000 plus 10% interest on
O ctober 31, 2022. Sgd. BH
Exam p les of non-negotiable in struments:
A. . I p rom ise to pay bearer, Jennifer Aniston, the su m of 1*200,000. Sgd. Junjae Lee
B.
Pay to th e order of Chandler P200,000 out of m y cash in you r possession.
Ad d ressed to Tachi, signed by Domdom
C.
I p rom ise to pay AX the amoun t of'Pl,000 on October 30, 2021. Sgd. Bailey
D.
I p rom ise to pay Breechy or order P200,000 if she will p ass th e CPA examination
in October 2023. Sgd. Chloe
E.
I promise to pay Bree or order P200,000 in four installments. Sgd. Geree
The instru ment is non-negotiable if it contains a p rom ise or ord er to do any
act in addition to the payment of money. If the p romise or order w ou ld give rise
to a cause of action for b reach of con tract should the additional act is n ot done, the
in stru men t is not negotiable. The exceptions are found in Section 5, namely, the
provisions that: (1) au thorizes the sale of collateral securities in case th e instrument
b e not paid at m atu rity; (2) authorizes a confession of judgment if th e in stru m en t is
n ot paid at m atu rity; (3) waives the benefit of any law intended for th e ad van tage or
p rotection of th e obligor; or (4) gives the holder an election to req u ire som eth in g to
be done in lieu of p ayment of money.
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The negotiable ch aracter of an instrument otherwise negotiable is n ot affected
by a p rovision th at waives the benefits of any law intended for th e'ad van tage or
p rotection of the obligor. Ex'amples Of these benefits are the rights to presentment
for p ayment, a notice of dishonor, and protest, all of w h ich m ay be waived. A
negotiable in stru men t must have no obligation other th an the p aym en t of money
b ecau se when it is conjunctive and the other is n ot in the n atu re of p aym en t of a
su m of money, the negotiability is impaired.
To illu strate: Bon borrowed PI million from Leo and offered h im h is BMW car
w orth PI million as collateral. Bon then executed a p rom issory n ote th at reads: "I,
Bon, promise to pay Leo or b earer the amoun t of PI million an d to keep m y BMW
car (loan collateral) free from any other encumbrance. Signed, B."16 This is not a
negotiable instrument since it contains a p rom ise to do an act in addition to the
payment of money.*25
16The illustrative case w as p attern ed from the 2011 Bar Exam in ation q u estion in M ercan tile Law.
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Accord in g to Section 6, th e validity and negotiable ch aracter of an in stru m en t
are not affected by the fact that: (1) it is not dated; (2) it d oes n ot specify th e valu e
given, or th at an y valu e had been given therefore; (3) it does n ot sp ecify th e p lace
where it is d raw n or the place w here it is payable; (4) it b ears a seal; or (5) it d esign ates
a p articu lar kind of cu rren t money in which p aym en t is to be made. If it is n ot
dated, the in stru m en t will be considered dated as of the time it w as issued. A bill
of exchange or a p rom issory note still qualifies as a negotiable in stru m en t if it is
not dated since th e d ate is not a requisite u n d er Section 1 for th e negotiab ility of
an instru men t. But a bill of exchan ge or a p rom issory note will n ot q ualify as a
negotiable in stru m en t if the day and the month, but n ot the year of its m atu rity, is
indicated b ecau se th e time for payment is not determinable in th is case as th e year
is not stated. The law allows any holder to insert the tru e date u n d er Section 13. Date
is important, however, if it is n ecessary to fix the date of m atu rity of th e in stru m en t.
It is also n ecessary if the instrument is payable on demand, to d eterm in e w h eth er
the in stru m en t w as presented within a reasonable period of time from th e last issu e
or last negotiation. Date is important also if the in stru ment is in terest-b earin g. Even
where the valu e given is not specified, still, the in stru men t is n ot ren d ered n on negotiable—it is n ot even n ecessary to state that value has been received b ecau se
consideration is p resum ed. If no place of payment is mentioned, th e law again fills
in the gap b y p rovid in g that presentment should be m ad e at th e ad d ress of th e
person w h o is to pay, if such address is stated; if not, at the u su al p lace of b u sin ess or
residence of th e p erson to make payment, or wherever you can find h im or h is last
known ad d ress.17 Even if the money in which the in stru ment is to be payable is n ot
legal tender, p rovid ed that it is current money or foreign money w h ich h as a fixed
value in relation to the money of the cou ntry in which the in stru m en t is payable,
still, the n egotiability of the instrument is not affected, as th e in stru m en t w ou ld still
be considered payable in money.
To illu strate: Jade issued a promissory note which states "I p rom ise to p ay
Shirley or, b earer th e am oun t of US$50,000 on or before D ecem ber 30, 2023." The
p rom issory n ote is negotiable even though the amoun t is stated in foreign cu rren cy.
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Accord in g to Section 11, where the in stru men t or an accep tan ce or an y
indorsement th ereon is dated, such date is deemed prima facie fo b e th e tru e date of
the m akin g, d raw in g, acceptance, or indorsement, as the case m ay be. The d ate on
the in stru m en t is p resum ed to be the tru e and correct date although this is on ly a
disputable p resum ption . Any person who h as an interest in th at in stru m en t is free
to dispute such p resumption, but as to a holder in due course, th e date ap p earin g on
the in stru m en t is conclusively the date of issuance.*
17Section 73, N IL.
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A ccord in g to Section 12, th e in stru m en t is n ot in valid for th e reason on ly that
it is an ted ated or p ostd ated , p rovid ed th is is n ot d on e for an illegal or fraudulent
p u rp ose. Th e p erson to w h om an in stru m en t so d ated is d elivered acq u ires th e title
th ereto as of th e d ate of d elivery. An in stru m en t is an ted ated w h en th e d ate written
th ereon is earlier th an th e tru e d ate of its issu an ce or d elivery w h ile an in strument
is p ostd ated w h en th e d ate w ritten th ereon is later th an th e tru e d ate of its issuance
or d elivery. An an ted ated or p ostd ated in stru m en t is n ot ren d ered in valid or nonn egotiab le b y th at fact alon e. It m ay b e n egotiated b efore or after th e d ate given
as lon g as it is n ot n egotiated after its m atu rity. An ted atin g or p ostd atin g a check
d oes n ot affect its n egotiab ility u n less its ob jective is u n law fu l. If an in stru men t
exp ressed to b e p ayab le at a fixed p eriod after th e d ate is issu ed u n d ated , or if the
accep tan ce of an in stru m en t p ayab le at a fixed p eriod after sigh t is u n d ated , any
h old er m ay in sert th erein th e tru e d ate of issu e or accep tan ce, an d th e in stru m en t
sh all b e p ayab le accord in gly.
Accord in g to Section 13, th e in sertion of a w ron g d ate d oes n ot avoid the
in stru m en t in th e h an d s of a su b seq u en t h old er in d u e cou rse; b u t as to h im , the
d ate so in serted is to b e regard ed as th e tru e date.
C o m p letio n an d D elivery of In stru m en ts
Th ere are tw o step s in th e execu tion of a n egotiab le in stru m en t, n am ely: the
act of w ritin g th e in stru m en t com p letely an d in accord an ce w ith Section 1, an d the
d elivery of th e in stru m en t w ith th e in ten tion of givin g effect to it. D elivery of the
in stru m en t m ean s th e tran sfer of p ossession , actu al or con stru ctive, from on e person
to an oth er in ord er to give effect to th e in stru m en t. Th e d elivery of a negotiable
in stru m en t is n ecessary an d b etw een im m ed iate p arties, d elivery m u st b e made
w ith in ten tion to p ass title. Thus, if th e m ak er gives th e in stru m en t to an oth er for
m ere safek eep in g, th ere is n o d elivery w ith in th e m ean in g of th e ab ove provision.
H ow ever, on ce th e in stru m en t is n o lon ger in th e p ossession of th e p erson w h o has
sign ed it, a valid d eliver^ b y h im is p resu m ed , u n til th e con trary is p roved , an d as
to th e h old er in d u e cou rse, th e p resu m p tion is con clu sive, p rovid ed th e in stru m en t
is com p lete.
Th e first d elivery of th e in stru m en t com p lete in form , to a p erson w h o takes it
as a h old er, is called th e issu e or issu an ce of th e in stru m en t.
In co m p lete b u t D e liv e re d In stru m en ts
Accord in g to Section 14, if th e in stru m en t lack s an y m aterial p articu lar, the
p erson in p ossession th ereof h as a prima facie, au th ority to com p lete it b y filling
u p th e b lan k s th erein . An d a sign atu re on a b lan k p ap er d elivered b y th e person
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making the sign atu re in ord er that the p ap er m ay be con verted into a n egotiable
instrument op erates as a prima facie au thority to fill it up as such for an y am ou n t.18
In order, however, th at an y such in stru m en t wh en comp leted m ay be en forced
against an y p erson w h o b ecam e a p arty th ereto p rior to its completion, it m u st be
filled up strictly in accord an ce with the au thority given and w ith in a reasonab le
time. But if any su ch in stru m en t, after completion, is n egotiated to a h old er in d ue
course, it is valid and effectu al for all p u rp oses in his h and s, an d he m ay en force it
as if it had been filled u p strictly in accord an ce with the au thority given an d w ith in
a reasonable time.
A holder in d ue cou rse can enforce the in stru m en t as completed again st p arties
prior or su b seq uen t to completion while a holder not in due cou rse can en force th e
instrument as com p leted only against parties subsequent to the com p letion b ut n ot
against th ose p rior thereto.
To illu strate:
A.
Arth u r, single p rop rietor of a business concern, is about to leave for a b u sin ess
trip and, as h e so often does on these occasions, signs several ch eck s in b lan k .
He in stru cts Brenda, his secretary, to keep the checks an d fill th em ou t w h en
and as req u ired to pay accounts during his absence. Brenda fills ou t on e of
the ch eck s by p lacin g her name as payee, fills in the am oun t, en d orses, an d
delivers th e ch eck to Carol who accepts it in good faith as p aym en t for good s
sold to Bren da. Brenda regrets her action and tells Arth u r w h at she did. A rth u r
d irects th e Ban k in time to dishonor the check. When Carol en cash es th e ch eck ,
it is d ish on ored .19 In this case, Arth u r can be held liable to Carol, assu m in g
th at th e latter gave notice of dishonor to Arthur. This is a case of an in com p lete
in stru m en t th at h as been delivered as it was en trusted to Brenda, th e secretary
of Arth u r. Un d er Section 14 of the Negotiable In stru m en ts Law, Carol, as a
holder in d ue cou rse, can enforce payment of the check as if it h ad b een filled u p
strictly in accord an ce w ith the authority given by Arth u r to Bren d a an d w ith in
a reason ab le time. Moreover, under the d octrine of com p arative n egligen ce,
as b etw een Arth u r and Carol, both innocent parties, it w as th e n egligen ce of
Arth u r in en tru stin g the check to Brenda, which is the p roxim ate cau se of th e
loss.
B.
Lenore issu ed a negotiable p rom issory note to Evoy an d au th orized th e latter
to fill up th e am ou n t in the blank with her loan accou n t in th e su m of P10,000.
However, Evoy in serted P50,Q00 in violation of the in stru ction . She n egotiated
18Section 14 of th e law w as cited in fu ll in the case of Q u irin o G on zales Log gin g Con cession aire, Q u ir in o
Gonzales and Eu fem ia G on zales vs. th e Cou rt of A p p eals (CA) an d Rep u blic Plan ters Ban k, G. R. N o. 126568, A p ril
30,2003.
1
19Th is illu strativ e case w as p attern ed from 1997 Bar Exam in ation q u estion in M ercan tile Law .
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th e n ote to Junjay w h o h ad knowledge of the in firm ity. Ju njay in tu rn negotiated
said n ote to D om d om for valu e an d w h o h ad no k n ow led ge of th e in firmity.20
D om d om can en force the negotiable p rom issory n ote again st Len ore. The
d efen se of Len ore is a m ere p erson al d efen se u n d er Section 14 of th e N IL
Th e law p rovid es th at if an in stru m en t is w an tin g in an y m aterial p articu lar
com p leted b eyon d th e au th ority th at w as given, it is valid an d effectu al for
all p u rp oses in th e h an d s of a holder in due cou rse an d h e m ay en force it as
if it'h ad b een filled up strictly in accord an ce w ith th e au th ority given . Thus,
D om d om can en force the in stru m en t again st Len ore for P50,000.
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In com p lete In stru m en t N ot D elivered
Accord in g to Section 15, if an incomplete in stru m en t h as n ot b een delivered,
it w ill n ot, if com p leted an d n egotiated w ith ou t authority, be a valid con tract in the
h an d s of an y holder, as again st any p erson w hose sign atu re w as p laced thereon
b efore d elivery.
An y h old er can en force in stru m en t as contemplated on ly again st parties
su b seq u en t to th e d elivery b ut not against th ose p rior thereto. Possession of a holder
in d u e cou rse gives rise to a prima facie p resum ption of d elivery w h ich th e m ak er or
d raw er m ay reb u t b y p roof of n on -d elivery while the p ossession of a h old er n ot in
’ d u e cou rse d oes n ot give rise to any p resum ption of delivery.
To illu strate: Pocholo m ak es a p rom issory note for P5,000, b u t leaves the
n am e of th e p ayee in blank b ecau se he wanted to verify its correct sp ellin g first.
H e m in d lessly left th e note on top of his desk at the end of th e workday. When
h e retu rn ed th e following m orn in g, the note w as missing. It tu rn ed u p later when
Sp ark y p resen ted it to Pocholo for payment. Before Sparky, Tachi, w h o turned
ou t to h ave stolen the note from Pocholo's office, had en d orsed th e n ote after
in sertin g h is ow n n am e in the blank space as the payee. Pocholo d ish on ored the
note, con ten d in g th at he did n ot au thorize its completion and delivery. But Sparky
said h e h ad no p articip ation in, or knowledge about, the pilferage an d alteration
of th e n ote and therefore he enjoys the rights of a holder in d u e cou rse u n d er the
Negotiable In stru m en ts Law.21 Given the facts, Pocholo is correct. The in stru m en t is
in comp lete and undelivered. It did n ot create any con tract th at w ou ld b ind Pocholo
to an obligation to p ay the am ou n t thereof.
20Th is illu stra tiv e case w as p attern ed from 1993 Bar Exam in ation q u estion in M ercan tile Law .
21 Th is illu strativ e case w as p attern ed from the 2000 Bar Exam in ation q u estion s in M ercan tile Law .
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Com p lete b u t U n d elivered In stru m en ts
Every con tract on a negotiable in stru m en t is incomplete an d revocable u n til
delivery of th e in stru m en t for th e p u rp ose of givin g effect th ereto. As b etw een
immediate p arties an d as regard s a rem ote p arty oth er th an a h old er in d ue
course, the delivery, in ord er to be effectual, m u st be m ad e either by or u n d er th e
authority of th e p arty m ak in g, d raw in g, accep tin g, or in dorsing, as th e case m ay
be; and, in su ch case, th e d elivery m ay be shown to h ave b een con d ition al, or for
a special p u rp ose only, an d n ot for th e p u rp ose of tran sferrin g th e p rop erty in th e
instrument. But w h ere th e in stru m en t is in the h an d s of a h old er in d u e cou rse, a
valid d elivery th ereof b y all p arties p rior to h im so as to m ak e th em liable to h im is
conclusively p resu m ed . An d w h ere th e in stru m en t is no lon ger in th e p ossession of
a p arty w h ose sign atu re ap p ears th ereon , a valid and intentional d elivery b y h im is
p resumed u n til th e con trary is p roved .2223Possession of a hold er in d u e cou rse gives
rise to a con clu sive p resu m p tion of delivery while possession of a h old er n ot in d ue
course gives rise to a prima facie p resum ption of delivery w h ich the m ak er or d raw er
may rebu t b y p roof of non-delivery.
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To illu strate: AX su cceed ed in m ak in g BX affix h is sign atu re on a ch eck
without h is (BX's) k n ow in g th at it w as a check. At th e tim e of the sign in g, th e ch eck
was com p lete in all resp ects. AX intended to cash the ch eck th e followin g m orn in g,
but, th at n igh t, it w as stolen b y CX who succeeded in n egotiatin g th e sam e to DX,
a holder in d u e cou rse. DX cashed the check the following m orn in g. BX refu sed
to h ave th e am ou n t of th e ch eck d educted from h is b an k deposit. This is a case
of a com p lete h u t u n d elivered in stru ment. If this in stru m en t reach es a h old er in
due cou rse, th e law con clu sively p resu m es th at all p rior d eliveries are valid . In th e
hands of DX, th e h old er in due cou rse, no defense can be availed of b y BX. H en ce,
DX's en cash m en t w ith th e d raw ee b ank being also valid, the said d raw ee b an k can
properly ch arge th e ch eck again st BX's account.*23
^ Se ctio n 16, N IL.
23In th e case o f Tin g Tin g P u a vs. Sp ou ses Ben ito Lo Bu n Tion g an d C arolin e Sio k C h in g Ten g, G .R. N o.
198660, O ctob er 23,2013, p etitio n er filed a com p la in t for su m o f m on ey ag ain st resp on d en t sp o u ses. A s p r o o f o f th e
loan ,,p etition er p r esen ted th e d ish o n ored ch eck s issu ed by resp on d en t w ife w h o d en ied o b ta in in g a lo a n fro m th e
p etitioner. Resp o n d en t alleg ed th at sh e an d p etitio n er 's sister form ed a p artn ersh ip to op era te a m a h jo n g b u sin ess.
After a se rio u s d isa g r eem en t, h ow ev er, th ey d issolv ed th e p ar tn ersh ip an d ceased op eration s, b u t sh e for g o t th a t
she left p re-sig n ed ch eck s w ith p etitio n er 's sister, w h ich w ere th en u sed by p etition er as p ro of o f th e alleg ed loan .
Th e Cou rt h eld th a t u n d er the N eg otia ble In stru m en ts Law , th e p ossessio n by p etitio n er o f th e ch eck s sig n ed
by resp on d en t, ra ises th e p resu m p tion th a t th ey w ere issu ed an d d eliv ered for a v alu a ble con sid er ation . Th e 17
origin al ch eck s, co m p leted an d d eliv ered to p etition er, are su fficien t b y th em selv es to p ro v e th e existen ce o f d ie
loan ob lig ation o f th e resp on d en ts to p etition er. Particu larly, Sec. 16 o f th e N IL p r ov id es th a t w h en an in stru m en t
is n o lon g er in th e p o ssessio n o f th e p erson w h o sig n ed it an d it is com p lete in its ter m s "a v a lid an d in ten tio n al
d elivery b y h im is p r esu m ed u n til th e con trary is p roved .
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Ru les to Be Follow ed in In terp retin g N egotiab le In stru m en ts
Section 17 en u m erates th e rules of con stru ction of negotiable in stru m en ts, if
the su m payable is exp ressed in w ord s an d also in figu res an d th ere is a discrepancy
b etw een th e tw o, th e su m d enoted by the w ord s is the su m payable;24 if th e words
are am b igu ou s or u n certain , referen ce m ay be h ad to the figu res to fix th e amount.
To illu strate: M ax issued a ch eck in favor of his cred itor, Bailey. It read s: "Pay
to th e ord er of Bailey the am ou n t of Seven Th ou san d H u n d red Pesos (1*700,000).
Signed, M ax".25 In this case, it is the am ou n t of f*700,000 th at sh ould b e con stru ed as
tru e.
If the in stru m en t p rovides for the p aym en t of in terest, w ith ou t sp ecifyin g the
date from w h ich interest is to ru n , the interest ru n s from th e d ate of th e instrument,
an d if the in stru m en t is undated, the in terest ru n s from its issue. If th e instrument
is n ot dated, it will be dated as of the time it w as issued.
r
If there is a conflict b etween the w ritten and p rin ted p rovision s of th e instrument,
the w ritten provisions prevail. If a p arty ad d s h an d w ritten or typ ew ritten language
th at is inconsistent w ith the p rep rin ted lan gu age on th e in stru m en t (n ote or bill), the
h an d w ritin g takes p reced en ce over b oth the typ ew ritten an d p rep rin ted language.
Typewritten lan gu age tak es p reced en ce over p rep rin ted lan gu age.
If th e in stru m en t is so amb igu ou s th at th ere is d ou bt w h eth er it is a bill or
note, th e h old er m ay treat it as either at his election. If a sign atu re is so p laced upon
th e in stru m en t th at it is n ot clear in w h at cap acity th e p erson m ak in g th e same
1
/
t
in ten d ed to sign, he is to b e d eemed an indorser. If an in stru m en t con tain in g the
w ord "I p rom ise to p ay" h as the sign atu re of tw o or m ore p erson s, th ey are deemed
to b e solid arity liable th ereon .
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Liab ility on th e In stru m en t
>
Section 18 p rovid es th at a p erson is n ot liable on th e in stru m en t if h is signature
d oes n ot ap p ear th ereon , b u t if he signs in a trad e or assu m ed n am e, h e w ill b e liable
to th e sam e exten t as if h e h ad sign ed ih h is ow n n am e. Accord in g to Section 19, a
d uly au th orized agen t m ay sign for an y p arty an d th ere is n o p articu lar form of
ap p oin tm en t n eed ed for th is p u rp ose; th e au th ority of th e agen t m ay b e established
as in oth er cases of th e agency. Section 20 p rovid es th at if th e in stru m en t contains
or a p erson ad ds to his sign atu re w ord s in d icatin g th at h e sign s for or on behalf
of a p rin cip al or in a rep resen tative capacity, h e is n ot liable on th e in stru m en t if
h e w as duly au th orized ; b u t if he ad d s w ord s d escrib in g h im as an agen t an d he
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24Th is p rov ision u n d er Sectio n 17 w as cited in th e case o f Peop le d f th e P h ilip p in es v s. M a r tin L. Rom er o and
Ern esto C. Rod rig u ez, G .R. N o. 112985, A p ril 21,1 9 9 9 .
’
y
“ Th e illu strativ e case w as p attern ed from th e 2011 Bar Exa m in a tio n q u estio n ,in M er ca n tile Law .
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does n ot d isclose h is p rin cip al, h e w ill b e p erson ally liable.26 Section 21 states th at
a sign atu re b y "procuration" op erates as n otice th at th e agen t h as on ly a lim ited
authority to sign , an d th e p rin cip al is b ou n d on ly if th e agen t in so sign in g acted
within th e actu al lim its of h is au th ority. Thus, a p erson w h o tak es a bill th at is d raw n ,
accepted, or in d orsed b y p rocu ration is d u ty-b ou n d to in q u ire in to th e exten t of th e
agent's au th ority b y exam in in g th e bill to d eterm in e th e exten t of su ch au th ority.
Accord in g to Section 22, th e in d orsem en t or assign m en t of th e in stru m en t b y a
corporation or b y an in fan t p asses th e p rop erty th erein , b u t for w ap t of cap acity, th e
corporation or in fan t w ill n ot b e liable. O rd in arily, a m in or can n ot give con sen t to
contracts an d a con tract en tered to h im is voidable. In th e case of corp oration s, th e
d irectors an d officers can n ot p erform acts b eyond th e scop e of th eir au th ority. Su ch
acts w ou ld b e ultra vires acts. But, if a m in or or a corp oration in d orses an in stru m en t,
the in d orsee acq u ires title to it an d can en force it again st th e m ak er or accep tor Or
other p arties p rior to th e m in or. Such p rior p arties can n ot escap e liability b y settin g
up a d efen se o f,th e in cap acity of th e indorser. An in d orsem en t b y corp oration s
or m in ors p asses th e p rop erty regard less of lack of cap acity b u t th ere w ill b e n o
liability in cu rred . Th ey m ay give own ersh ip , but no liability.
To illu strate:
* i
A. '
.
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_
A execu tes a p rom issory n ote to the ord er of B, m in or, B in d orses th e n ote to
C; C to D, h old er. Alth ou gh B is a minor, h is in d orsem en t p asses title to C; C
to D. D can n ot en force p aym en t again st B. The d efen se of in cap acity i§ a real
d efen se availab le to B. A, th e m ak er an d C, th e indorser, are liable to D d u e to
; th eir w arran ties.
1
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B. A m ad e a p rom issory n ote payable to the ord er of B. A d elivered it to B w h o
n egotiated it to C. C in d orsed the note to D w h o is 16 years old. D in d orsed
it to E w h o later in d orsed it to F, the holder. F p resen ted th e n ote to A w h o
d ish on ored th e in stru m en t. In th is case, F can hold all in d orsers liable excep t
D.
Forgery
■. . . . . . . . . . . . . . . . . . . .
.
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« Forgery is th e cou n terfeit m ak in g or frau d u len t alteration of an y w ritin g. Th e
Supreme Cou rt in on e case said th at forgery m ay con sist in th e sign in g of an oth er's
name, or th e alteration of an in stru m en t in th e n am e, am ou n t, d escrip tion of
the p erson an d th e like, w ith in ten t to d efrau d .27 This in ten t to d efrau d is w h at
d istinguish es forgery from in n ocen t alteration s an d sp oliation. Accord in g to
“ Th is p a rticu la r sectio n w as cited in th e case of Th e Ph ilip p in e Ba n k o f C om m erce v s. Jo se M. A r u eg o, G .R.
N os. L-25836-37, Ja n u a r y 31,1981.
27
Ba n k o f th e P h ilip p in e Islan d s v s. Casa M o n tesso ri In tern atio n a le an d Leo n a rd o T. Yabu t, G .R. N o. 149454,
May 28,2004.
- v
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Section 23, if a sign atu re is forged or m ad e w ith ou t th e au th ority of th e person
w h ose sign atu re it p u rp orts to be, it is w h olly in op erative, an d n o righ t to retain the
in stru m en t, or to give a d isch arge th erefor, or to en force p aym en t th ereof against
an y p a rty th ereto, can b e acq u ired th rou gh or u n d er su ch sign atu re, u n less the
p a rty again st w h om it is sou gh t to en force su ch righ t is p reclu d ed from settin g up
th e forgery or w an t of au thority.
To illu strate: Ah m on g issu es a n egotiable p rom issory n ote to th e ord er of
Bad on g for P10,000 payable after 30 d ays after date. Later Bad on g in d orsed it to
Ch on g. Th en Xerex stole th e n ote from Ch on g, forged th e sign atu re of Ch on g, and
n egotiated it to D on g, an d D on g to Ester, Ester to Fan g, th e holder. O n m atu rity
of th e n ote, Fan g can collect from eith er D on g or Ester, b ecau se th e sign atu res are
gen u in e, an d th e n ote is op erative again st th em . Fan g can n ot collect from Chong
b ecau se it w as Ch on g's sign atu re th at w as forged. Fan g can n ot collect from Badong
b ecau se Bad on g is a p arty p rior to th e forgery.
In on e case, h owever, it is th e excep tion th at applies as th e p etition er therein
is p reclu d ed from settin g u p th e forgery, assu m in g th ere is forgery, d u e to h is own
n egligen ce in en tru stin g to h is secretary h is cred if card s an d ch eck b ook including
the; verification of h is statem en ts of accou n t.28
Section 23 d eals w ith tw o sets of situ ation s: (1) th e sign atu re on th e in stru m en t
is affixed b y on e w h o p u rp orts to be an agent, b u t w ho d oes n ot h ave th e authority
to b in d th e alleged p rin cip al; an d (2) th e isignature is affixed by on e w h o d oes not
claim to act as an agen t an d w h o h as n o au th ority to bind th e ap p aren t signer. In
b oth cases, th e sign atu re is "w h olly in op erative", an d no one can gain title to the
in stru m en t th rou gh su ch a forged sign atu re. Forgery is a real or absolute defense. A
p erson w h ose sign atu re to an in stru m en t w as forged w as n ever a p arty th ereto and
n ever con sen ted to th e con tract th at alleged ly gave rise to su ch in stru m en t. Because
h is sign atu re d oes n ot ap p ear on th e in stru m en t, h e can n ot be held liable th ereon by
an yon e, n ot even b y a h old er in d u e cou rse. Frau d in fact um or frau d in.esse contractus
am ou n ts to forgery an d is a real defense.
To illu strate: Bree ob tain s th e sign atu re of Azon b y tellin g Azon th at it is
on ly for au tograp h in stru m en t. The act h ere am ou n ts to fraud . H ere, th ere is no
in ten tion to issu e an in stru m en t. Wh ere a sign atu re is affixed on a b lan k paper
w ith ou t in ten t to create an in stru m en t, an d som eth in g is w ritten to m ak e it appear
th at th e sign atory is a d raw er, m ak er, in d orser, or p ayee, th ere is frau d in factum.
O n th e oth er h an d , fraud in in d u cem en t d oes n ot am ou n t to forgery an d is only a
p erson al d efen se.
28Ram o n K. Ilu sor io v s. H on . C ou r t o f A p p ea ls an d M a n ila Ba n k in g Co rp or atio n , G.R. N o. 139130, N ovem ber
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It m u st be n oted , however, th at in forgery, on ly th e sign atu re forged or m ad e
without au th ority is stated b y law to be inop erative but neither th e in stru m en t itself
is, nor the gen u in e sign atu res are, ren d ered inoperative. The in stru m en t can b e
enforced by hold ers w h ose title over the in stru m en t w as n ot d erived from th e forged
signature, su ch as art in dorsem en t of an in stru m en t w h ich on its face is p ayable to
bearer.
To illu strate:
A.
Alex issu ed a n egotiable p rom issory n ote payable to Ben ito or ord er in
p aym en t of certain good s. Benito in d orsed the n ote to Celso in p aym en t of an
existin g obligation. Later Alex found th e good s to be defective. Wh ile in Celso's
p ossession th e n ote w as stolen by Den nis wh o forged Celso's sign atu re an d
d iscou n ted it w ith Ed gar, a moneylender wh o did n ot m ak e in q u iries ab ou t
th e note. Ed gar in d orsed th e note to Felix, a holder in d u e cou rse. Wh en Felix
d em an d ed p aym en t of the note from Alex the latter refu sed to pay. D en n is
could no' lon ger be located.29 Given the facts, Felix h as no righ t to claim again st
Alex, Benito, an d Celso wh o are p arties p rior to the forgery of Celso's sign atu re
b y Dermis. Parties to an in stru m en t wh o are p rior to th e forgery can n ot b e h eld
liable b y an y p arty wh o b ecam e such at or subsequent to th e forgery. H ow ever,
Ed gar, w h o b ecam e a p arty to the in stru m en t sub sequen t to th e forgery an d
w h o in d orsed th e sam e to Felix, can b e held liable by the latter. O n th e oth er
h an d , Celso h as th e right to collect from Alex an d Benito. Celso is a p a rty
su b sequ en t to th e two. However, Celso h as no right to claim again st Felix w h o '
is a p arty su b sequ en t to Celso.
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B.
Jose loan ed M ario some money and, to evid en ce h is in d eb ted n ess, M ario /
execu ted an d d elivered to Jose a p rom issory note payable to h is ord er. Jose
in dorsed th e n ote to Pablo. Bert fraudulently ob tain ed th e n ote from Pablo an d
in d orsed it to Ju lian by forging Pablo's signature. Julian th en in d orsed th e n ote
to Cam ilo.30 In th is case: (1) Camilb can n ot enforce th e p rom issory n ote again st
M ario an d Jose b ecau se Cam ilo derived h is righ t from th e forged sign atu re of
in d orsem en t of Pablo. A forged sign atu re is wholly in op erative an d can n ot veist
any righ t to the forger or any p erson w h o d erived h is righ t from th e forged
sign atu re, as again st th ose who b ecam e p arties to th e in stru m en t b efore th e
forgery w as com m itted . (2) Camilo m ay n ot go again st Pablo, b ecau se Pablo's
sign atu re of in d orsem en t is a forgery, h avin g b een affixed b y Ju lian , th e;
forger. A forged sign atu re is in op erative again st th e p erson w h ose sign atu re
w as forged. (3) Cam ilo can en force th e n ote again st Julian, th e latter b ein g th e
forger of Pablo's sign atu re. (4) Julian d oes n ot h ave an y righ t of recou rse again st
29Th e illu strativ e case w as p attern ed after th e 1995 Ba r Exam in ation q u estion in M er ca n tile Law .
30Th e illu strativ e case w as p attern ed after th e 1990 Ba r Exa m in ation q u estio n in M erca n tile Law .
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an y p erson , he b ein g the forger of the sign atu re of an in dorser, Pablo is the
p rob lem. (5) Pablo, b ein g an indorsee of the note, can recover from eith er Mario
or Jose.
Person s w h o are p reclu ded from settin g up the defense of forgery are those
w h o w arran t or ad m it the in stru m en t's gen uinen ess and th ose whb are barred
on accou n t of silence, acts, or negligence. Indorsers, w h eth er q ualified or general,
w arran t th at th e in stru m en t in d orsed by th em is gen uine in all resp ects what it
p u rp orts to be. Person s n egotiatin g by m ere d elivery also w arran t th e instrument
n egotiated by th em is genuine in all resp ects w h at it p u rp orts to be; th e warranties
m ad e are u n d er Section 65 or w arran ties m ad e by a qualified indorser.
Cu t-off Ru le
The cu t-off ru le contemplate^ th at p arties p rior to the forged sign atu re are
cu t-off from th e p arties after the forgery in the sense th at p rior p arties can n ot be
h eld liable an d can raise the defense of forgery. The holder can on ly en force the
in stru m en t again st p arties who b ecam e such after th e forgery. The excep tion to
th is ru le is w h ere the Supreme Cou rt held liable even p rior p arties w h en th ey are
p reclu d ed from settin g u p the defense of forgery either b ecau se of th eir warranties,
rep resen tation , or negligence.31
To illu strate:
A.
<
B.
Du e to h is debt to C, D w rote a p romissory note w h ich is p ayable to th e order
of C. C's b rother, M, misrepresenting h imself as the agen t of C, ob tain ed the
n ote from D. M th en n egotiated the note to N after forging th e sign atu re of C.32
In th is case, N can n ot enforce the note against D since th e sign atu re of C was
forged .
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AL issu ed a p rom issory note to BM who n egotiated th e sam e to CN. The
in stru m en t w as stolen by XX and by forging the sign atu re of CN , XX negotiated
th e sam e to DO wh o negotiated the in stru m en t to EP. Based on th e facts given,
EP can en force p aym en t again st XX and DO.
Forgery of bills of exch an ge may be subdivided into: (a) forgery of an
in d orsem en t on th e b ill; an d (b) forgery of the d rawer's sign atu re, w h ich m ay either
be w ith accep tan ce b y the d rawee, or w ithout accep tan ce b u t th e bill is paid by
th e d raw ee. Note, however, th at u n d er Section 62, a d rawee, by, accep tin g the bill,
ad m its th e genu ineness of th e sign atu re of th e d raw er so h e is p reclu d ed from
claim in g th at the d rawer's sign atu re is forged b ecau se u n d er Section 62, h e warrants
its gen uineness.
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31 G em p esaw v. CA an d Ph ilip p in e Ba n k o f Com m u n ication s, G .R. No.. 92244, Febr u a ry 9,1993.
32Th e illu strativ e case w as p attern ed from th e 2011 Bar Exa m in a tion 'q u estio n in M er can tile Law .
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To illustrate:
A.
D, debtor of C, w rote a p rom issory note payable to the ord er of C. C's b roth er,
M, m isrep resen tin g h im self as C's agent, obtained the n ote from D, th en
negotiated it to N after forgin g C's signature. N indorsed it to E, wh o in d orsed
it to F, a hold er in d ue cou rse.33 In this case, F m ay recover from E sin ce on ly
the forged sign atu re is in operative, and E is b ou n d as indorser.
B.
The sign atu re of X w as forged as d raw er of a check. The ch eck w as d ep osited
in the accou n t of Y and when deposited w as accep ted b y AAA Ban k, the
drawee b an k . Subsequently, AAA Bank found out th at the sign atu re of X w as
actually forged .34 In th is case, the draw ee b ank is estop ped from d en yin g the
gen uinen ess of th e sign atu re of the X, the d raw er of the check,
C.
Xani m ak es a p rom issory note payable to his order, sign in g Yan i's n am e
thereon as m ak er w ith ou t Yani's knowledge and consen t. Xan i th en in d orses
the note to Zon i, w ho, in tu rn , indorses it to Winnie u n d er circu m stan ces th at
make Win n ie a h old er in due course. In such a case, Xan i is n ot liable to Win n ie
because h is forged sign atu re is inoperative, and no rights can arise th erefrom .
Yani, th e forger, is liable. Zoni is liable because his sign atu re is gen u in e an d
b ecause of h is w arran ty as an in d orser.,
Forgery can b e d on e by affixing the counterfeit sign atu re of m ak er, d raw er,
indorser, or d raw ee or b y material altering an in strument, p articu larly th e am ou n t
or name of th e p ayee. Section 23 applies only to forged sign atu res or sign atu res
made w ith ou t th e au th ority of the person whose signatu re it p u rp orts to be. If th e
forgery con sists of alteration in the amount, it is Section 124 (on m aterial alteration )
th atgovern s.
Material A lteration
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Accord in g to Section 124, if a negotiable in stru m en t is m aterially altered
without the assen t of all p arties liable thereon, it is avoided, excep t as again st a p arty
who has h im self m ad e, au thorized , or assented to the alteration an d su b seq u en t
indorsers. But if an in stru m en t th at h as been materially altered is in th e h an d s of a
holder in due cou rse n ot a p arty to the alteration, such holder m ay en force p aym en t
thereof accord in g to its origin al tenor.
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In one case, th e Sup rem e Cou rt held th at an alteration is said to be m aterial if it
alters the effect of the in stru m en t. It m ean s an u n au th orized ch an ge in an In stru m en t
that p u rp orts to m od ify in an y resp ect the obligation of a p arty or an u n au th orized
Th e illu strative case w as p attern ed from th e 2011 Bar Exam in ation q u estion in M ercan tile Law .
Th e illu strativ e case w as p attern ed from th e 2014 Bar Exam in ation q u estion in M ercan tile Law .
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ad dition of w ord s or n um bers or other ch an ges to an incomplete in stru men t with
regard to the obligation of a party. In other words, a material alteration is one that
ch an ges the items req u ired u nd er Section 1 of the Negotiable In stru m ents Law .35
Accord in g to Section 125, any alteration which changes: (1) the date; (2) the sum
payable, either for prin cip al or interest; (3) the time or place of p aymen t; (4) the
n u m b er of the relations of the parties; (5) the m ed iu m or cu rren cy in wh ich payment
is to be made; or (6) w h ich adds a place of p ayment where no place of payment is
sp ecified , or an y oth er ch an ge or addition which alters the effect of the instrument
in an y resp ect, is a m aterial alteration.
To illu strate: Ak on g issued a note to Boyong or ord er for 1*100,000. Boyong
altered th e am ou n t to 1*400,000 and indorsed it to Chayong, a holder in due course.
Ch ayon g can collect 1*100,000 from Akong and P300,000 from Boyong.
A m aterial alteration is any ch an ge in the details of the in stru m en t th at results
in a ch an ge in th e effect of such instrument. It chan ges the con tract of th e parties.
If a n egotiable in stru m en t is materially altered, it is avoided in th e h an d s of one
w h o is n ot a holder in due cou rse as against any prior p arty wh o h as n ot assented
to th e alteration. But th e in stru m en t is not avoided as again st a p arty w h o h as made
th e alteration, a p arty who authorizes or assented to the alteration, an d subsequent
in d orsers.
To illu strate: M arth a makes a p rom issory note for P5,000 payable to the orde
of Perry. Perry n egotiates the note to Boyito who, w ith the con sen t of Perry, raise
th e am ou n t to P50,000, and th ereafter indorses it to Bailey, Bailey to Ch an d ler ana
Ch an d ler to D om dom who is not a holder in due course. In th is case, Perry and
Boyito are liable to Domdom for P50,000.
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Con sid eration
Accord in g to Section 24, every negotiable in stru m en t is d eem ed prima facie to
h ave b een issu ed for a valuable consideration; and every p erson w h ose signature
ap p ears th ereon to h ave b ecom e a p arty th ereto for value. In one <;ase, the Supreme
Cou rt held th at th e m ere in trod u ction of the in stru m en t su ed on in evidence- prima
facie entitles th e p lain tiff to recovery, an d th at a n egotiable in stru m en t is presumed
to h ave b een given or in d orsed for a sufficient con sid eration u n less otherwise
con trad icted an d overcom e b y oth er com p eten t evid en ce.36 The Su p rem e Cou rt held
in an oth er case th at th e p resu m p tion Exists w h eth er th e w ord s "valu e received"
35 Ph ilip p in e N ation al Ba n k vs. C ou rt o f A p p eals, Cap itol City D ev elop m en t Ban k, Ph ilip p in e Bank o
Com m u n ication s, an d F. A ban te M ar k etin g , G.R. N o. 107508, A p ril 25,1996.
^ Trav el-O n , Inc. vs. Cou rt of A p p eals an d A r tu r o S. M iran d a, G.R. N o. L-56169, Ju n e 26, 1992; Quirinc
G on zales Log gin g Con cession aire, Q u ir in o G o n zales, an d Eu fem ia G o n zales vs. th e C ou rt of A p p eals (CA) and
Rep u blic Plan ters Ban k, G. R. N o. 126568, A p r il 30, 2003.
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appear on the in stru m en t or n ot,37 an d fu rth er explain ed in an oth er case th at th e
presumption a n egotiable in stru m en t is issued for valuable con sid eration is on ly
prima facie; it can be reb u tted by p roof to the con trary.38
Accord in g to Section 25, value refers to an y con sid eration sufficient to su p p ort
a simple con tract. An an teced en t or p re-existin g debt con stitu tes valu e, an d is
deemed such w h eth er th e in stru m en t is payable on d em an d or at a fu tu re time.
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A holder for valu e is one w ho h as given a valuable con sid eration for th e
instrument issu ed or n egotiated to h im. Accord in g to Section 26, if a valu e h as at
any time b een given for th e in stru m en t, th e holder is d eem ed a h old er for valu e
in respect to all p arties Who b ecom e such p rior to th at time. Section 27 p rovid es
that if the h old er h as a lien on th e in stru m en t arising either from a con tract or b y
implication of law, h e is d eem ed a holder for value to th e exten t of th e lien in h is
favor.
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Accord in g to Section 28, w an t of consideration is a m atter of d efen se as again st
any p erson n ot a, h old er in due cou rse; and p artial failure of con sid eration is a
defense pro tanto, w h eth er th e failure is an ascertain ed an d liq u id ated am ou n t or
otherwise. The ab sen ce of consideration (or total lack of an y valid con sid eration
for the con tract) is on ly a p erson al defense. The failure or refu sal of on e p arty to
do, p erform , or com p ly w ith th e consideration agreed u p on is also on ly a p erson al
defense.
Section 29 d efin es an, accom m od ation p arty as one w h o h as sign ed th e
in stru m en t as m ak er, d raw er, acceptor, or indorser, w ith ou t receivin g valu e th erefor,
and for th e p u rp ose of len din g his n am e to some oth er p erson . Such a p erson is liable on th e in stru m en t to a holder for value, n otw ith stan d in g su ch h old er, at th e
time of tak in g th e in stru m en t, k new h im to be only an accom m od ation p arty.
To illu strate:
y
A.
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For th e p u rp ose of len d in g h is n am e w ith ou t receivin g valu e th erefor, Pom p om
m ak es a n ote for P20,000 payable to the ord er of Crem o w h o in tu rn n egotiates
it to Lok i, th e latter k n ow in g th at Pom p om is n ot a p arty for valu e. In su ch a
case, Lok i m ay recover from Pom p om w h o is an accom m od ation p arty. The,
ab sen ce of con sid eration is in th e n atu re of accom m od ation dnd can n ot b e
valid ly raised b y an accom m od ation p arty as a d efen se, even again st a h old er
in d u e cou rse. If Pom p om p ays Lok i, Pom p om can recover th e am ou n t from
Crem o w h o is th e accom m od ated p a r ty or th e p arty u ltim ately liable for, th e
in stru m en t sin ce Pom p om is on ly an accom m od ation p arty. O th erw ise, th ere
woulcl b e u n ju st en rich m en t on th e p art of Crem o if she w ill n ot p ay Pom p om .
• t ____ :________
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37Rem ig io S. O n g v s. P eo p le o f th e P h ilip p in es an d C ou rt o f A p p eals, G .R. N o. 139006, N o v em b er 27, 2000.
^ P in e d a v sl D ela Ram a an d CA , G .R. N o. L-31831, A p r il 28,1983. *
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B.
To accom m od ate Crem o, m ak er of a p rom issory n ote, Ju njae sign ed as indorser
th ereon , an d th e in stru m en t w as n egotiated to Ragesh , a h old er for value. At
th e tim e Ragesh took th e in stru m en t, h e k n ew Junjae to b e an accom m od ation
p arty only. Wh en th e p rom issory n ote w as n ot p aid , an d Ragesh discovered
th at Crem o h ad n o fu n d s, h e su ed Junjae. Ju njae p lead s in d efen se th e fact
th at h e h ad en d orsed th e in stru m en t w ith ou t receivin g valu e th erefor, an d the
fu rth er fact th at Ragesh k n ew th at at th e tim e h e took th e in stru m en t Junjae
h ad n ot received an y valu e or con sid eration of an y k in d for h is indorsement.
Based on th e facts, Ju n jae'is liable. An accom m od ation p arty is liable on the
in stru m en t to a h old er for valu e, n otw ith stan d in g th e h old er at th e tim e of
tak in g said in stru m en t k n ew h im to be on ly an accom m od ation p arty. This is
th e n atu re or th e essen ce of accom m od ation .
The Su p rem e Cou rt held in on e case th at it is n ot a valid d efen se th at the
accom m od ation p arty did n ot receive an y valu able con sid eration w h en h e executed
th e in stru m en t. It is also n otfcorrect to say th at th e h old er for valu e is n ot a holder
in d u e cou rse m erely b ecau se at th e tim e he acq u ired th e in stru m en t, h e k n ew that
th e in d orser w as on ly an accom m od ation p arty.39
To illu strate: SS p u rch ased VAs car for P50,000. N ot h avin g en ou gh cash on
h an d , SS offered to p ay in ch eck . VA refu sed to accep t th e ch eck u n less RS, their
m u tu al friend , en d orses it. RS en d orsed SS' ch eck an d VA, k n ow in g th at RS h ad not
received an y valu e for en d orsin g the check, accep ted it. The n ext day, VA presented
th e ch eck to th e d raw ee of th e b an k for p aym en t The p aym en t w as refu sed for
lack of fu n d s. VA gave n otice of d ishonor to RS, b ut RS refu sed to pay, sayin g that
h e en d orsed m erely as a friend. Given the facts, RS is liable to VA. H is liability
sp rin gs from th e fact th at h e (RS) is an accom m od ation in dorser. An accom m od ation
in d orser to an in stru m en t is secon d arily liable to The holder, in spite of th e fact
th at th e h older, at th e tim e of th e affixing of the accom m od ation in d orser d id not
receive an y con sid eration for h is b eing an in dorser to th e in stru m en t. In th e event
RS volu n tarily p ays VA, RS h as a righ t of reim b u rsem en t from th e p erson h e has
accom m od ated — th e relation sh ip b etw een the tw o is th at of th e p rin cip al and
su rety.
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An accom m od ation p arty d oes n ot lend h is n am e b u t len ds h is cred it because
h e exp oses h im self to liability so th e accom m od ated p arty can get cred it. 1
To illu strate: A p u rch ased som e m erch an d ise from B for PI,000. N ot having
an y •cash , A offered to p ay in ch eck . B refu sed to accep t th e ch eck u n less it is
in dorsed b y X. X in d orsed A's ch eck , and B k n ow in g th at X h as n ot received value
for in dorsin g th e ch eck , accep ted it. Up on m atu rity, B p resen ted th e ch eck to that
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39A n g Tion g v s. Loren zo Tin g , d o in g b u sin ess xind er th e n a m e & sty le o f Pru n es Pr eserv es M fg ., & Felip e
An g, G.R. N o. L-26767, Feb ru a ry 22,1968.
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drawee b ank for p ayment. The p aymen t was refused for lack of funds. B gave n otice
of dishonor, in accord an ce w ith the law to X, but X refu sed to pay. In th is case, X
is liable to B. X, as accom m od ation indorser is liable to B who is a holder for valu e
although th e latter m ay k now th at he is a mere accomm od ation party. X as in d orser
is secondarily liable even if h e is only an accomm odation party. He is liable if th e
check is d ish on ored u p on due p resentment and notice of dishonor w as duly given.
PRACTICE EXERCISE
That a b an k is b ou n d to know its depositor's sign atu re is an inflexible ru le in
determining the liability of a b ank in forgery cases. Do you agree?
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RELEVAN CE O F TH E LESSO N
' A negotiable in stru m en t is a claim for funds against the p erson d esign ated on
the in stru m en t. It is im p ortan t therefore to have a clear u n d erstan d in g of its m ost
important featu re—its enforceability in the hands of in nocen t th ird p arties an d th e
corresp on ding extrem e vulnerability of those who m ake the in stru m en t an d allow
it to be circu lated . It is imp ortan t to know also what constitutes forgery an d m aterial
alteration an d th e rights of a p arty in case of such.
LESSO N SUM M ARY
An in stru m en t to be negotiable must conform to req u irem en ts set ou t u n d er
Section 1 of th e NIL.
There are tw o steps in the execution of a negotiable in stru m en t: th e act of
w ritin g th e in stru m en t completely arid in accord an ce w ith Section 1, an d th e
d elivery of th e in stru m en t w ith the intention of givin g effect to it.
The d efective negotiable in stru ments and th eir effects are laid ou t in Section 14
on in comp lete b u t delivered instru men ts, Section 15 on in comp lete in stru m en ts
n ot d elivered , an d Section 16 on coiriplete b ut u nd elivered in stru m en ts, f
A p erson , as a gen eral rule, is n ot liable on the in stru m en t if h is sign atu re d oes
n ot ap p ear th ereon , u nless he signs in a trade or assu m ed n am e or h e au th orized
an oth er to sign for h im an d th e latter indicated h is n am e as prin cip al.
An in d orsem en t b y corp oration s Or m in ors p asses p rop erty regard less of lack
of cap acity b u t th ere Will be no liability in cu rred .
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•
Wh en a sign atu re is forged, it is w holly in op erative, an d n o righ t to retain
th e in stru m en t, or to give a d isch arge therefor, or to en force p aym en t thereof
again st an y p arty th ereto, can b e acq u ired th rou gh or u n d er su ch signature
u n less th e p arty again st w h om it is sou gh t to en force su ch righ t is precluded
from settin g u p th e forgery or w an t of authority.
•
Forgery is a real defense. O n th e oth er h an d , a m aterial alteration changes
th e item s w h ich are req u ired to b e stated u n d er Section 1 of th e Negotiable
In stru m en ts Law.
•
Every negotiable in stru m en t is d eem ed prima facie to h ave b een issu ed for a
valu able con sid eration ; and every p erson w h ose sign atu re ap p ears th ereon to
h ave b ecom e a p arty th ereto for value.
•
An accom m od ation p arty is liable on the in stru m en t to a h old er for value,
n otw ith stan d in g su ch holder, at th e time of tak in g th e in stru m en t, k n ew him
to b e on ly an accom m od ation party.
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Name: 1
Date:
Instructor:
Section:
Score:
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Circle the b est an sw er from th e given choices.
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x j .
1.
Wh ich of th e follow in g p rom issory notes is n ot negotiable for reason th at th e
in stru m en t is n ot payable in su m certain in money?
A.
X p rom ises to p ay to th e order of A P10,000 payable in d ollars at th e rate
of exch an ge p revailin g on October 13, 2023.
B.
X p rom ises to p ay to the ord er of A P10,000 with 12% in terest th ereon .
C.
X p rom ises to p ay to the ord er of A P10,000 in in stallments.
D.
X p rom ises to p ay to the order of A P10,000 in tw o eq u al in stallm en ts,
th e first in stallm en t payable on September 12, 2023, an d th e secon d
in stallm en t on or b efore October 12, 2023.
.
2.
3.
t
Wh ich of th e follow in g in stru m en ts is negotiable?
A.
"I p rom ise to p ay C or order P20,000 if he will p ass the CPA exam in ation
in O ctob er 2023." (Sgd. B).
B.
"I p rom ise to p ay C or order P20,000 in four (4) in stallm en ts." (Sgd. B)
C.
"I p rom ise to p ay C or order P20,000,60 d ays after the d eath of h is fath er."
(Sgd. D).
D.
"I p rom ise to p ay C P20,000." (Sgd. D)
Wh ich of th e followin g in stru m en ts is non-negotiable?
A.
"Pay to C or ord er P20,000 out of my m oney in you r p ossession " (Ad d ressed
to A, sign ed b y B)
B.
"Pay to C or ord er P20,000 and reim b u rse you rself out of m y m on ey in
you r p ossession ." (Ad d ressed to A, signed b y D)
C.
"I p rom ise to p ay C or ord er P20,000 " (Sgd. D)
D.
"Pay to C or ord er P20,000." (Ad d ressed To A, signed D)
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4.
5.
6.
7.
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W h ich of th e follow in g is n ot n egotiable?
A.
Pay to D or ord er P10,000 on or b efore D ecem b er 31, 2027. (sgd. D)
B.
Pay to A or ord er P10,000 n otice of d ish on or w aived , (sgd. B)
C.
Pay to B or ord er P5,000 or d eliver tw o h orses at th e op tion of th e holder
(sgd. C)
D.
Pay to C or ord er P10,000 an d to d eliver 10 sack s of rice. (sgd. D)
W h ich of th e follow in g in stru m en ts is negotiable?
A.
Pay to b earer C P10,000. Reim b u rse you rself ou t of th e ren tal of m y house
in M an ila. To B, sign ed A.
B.
Pay to C P10,000 or h is ord er out of the ren tal of my h ou se in M an ila. To B,
sign ed A.
C.
Pay to C P10,000 an d reim b u rse you rself ou t of th e ren tal of m y h ou se in
M an ila. To B, sign ed A.
D.
Pay to th e ord er of C P10,000. Reim bu rse you rself out of th e ren tal of my
h ou se in M anila. To B, signed A.
Wh ich of th e following is a negotiable bill of exch an ge?
A.
Pay to th e ord er of X the su m of P20,000. Sgd. X, To A or B.
B.
Pay to th e ord er of Y th e su m of P30,000. Sgd. X, To A or in h is ab sen ce, to
B.
C.
Pay to th e ord er of X or Y th e su m of P40,000. Sgd. C, To A or B.
D.
Pay to th e ord er of Y th e su m of P50,000. Sgd. X, To A an d B.
Wh ich of th e followin g is n ot payable to the b earer?
A.
"Pay to th e ord er of b earer PI,000."
B.
"Pay to b earer th e su m of PI,000."
C.
"Pay to B or b earer th e su m of PI,000."
D.
"Pay to Cash th e su m of PI,000."
BUSIN ESS LAWS AN D REG ULATIO N S
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8.
One of th e requisites of a negotiable in stru men t is th at it m u st con tain an
unconditional p rom ise or ord er to pay a sum certain in money. Wh ich of th e
following d enotes non-negotiability?
A.
I p rom ise to p ay to the ord er of L the sum of $900 at the DBP Manila.
B.
I p rom ise to p ay to the order of Y the su m of $600 and to deliver on efou rth of th e rice h arvest on my farm.
C.
I p rom ise to p ay N or b earer in Manila the su m of P18,000 in th e Philippine
p esos or US dollars.
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D.
I p rom ise to p ay E or b earer in Manila the su m of P27,000 in th e Philippine
p esos or US dollars, at the option of the holder.
•
9.
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i
,
M m ak es a note payable to the order of P who indorses it to A. F obtain s
p ossession of the note fraudulently, forges A's signature an d in d orses it to B
who in tu rn indorses it to C. In this case, C can:
A.
en force the in stru men t against M and P 1
B.
en force th e in strument against A
C.
en force th e instru men t against B
D.
an sw er n ot given
i.
10. M m ak es a p rom issory note for P2,000.00 payable to the order of P. P n egotiates
the note to A who, with the consent of P, raises the amoun t to P20,000.00 an d
th ereafter in dorses it to B, B to C, and C to D who is not a holder in d ue cou rse.
In this, case:
■
/
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A.
B.
D can recover P2,000.00 as against M
P an d A are liable
to D • for .P20,000
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C.
B an d C are not liable to D
D.
an sw er n ot given
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CH APTER PROJECT
^
.
1.
Make a facts ch art to show the different classes of negotiable in stru men ts.
2.
Create a leaflet about the five requisites of a negotiable instru men t, detailing
the imp ortan t things to consider.
.
UN IT IV | N EG O TIABLE IN STRUM EN TS LA W
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IN TRO D UCTIO N
The circulation of negotiable instruments begins when the maker or the d rawer
issues an in stru m en t to the payee. The payee is then entitled to collect payment on
the instrument or to p ass it on to a third party. One way to pass it on is by negotiation.
This is possible as long as the instrument meets the requirements of negotiability.
The third p arty who takes possession of the instrument by negotiation becomes;
like the original payee, a holder.
IN TEN D ED LEARN IN G OUTCOM ES
At the end of this chapter, the students will be familiar with how the n egotiation
of negotiable in stru men ts takes place; recall the types and effects of indorsements
of negotiable instru men ts; know what a holder in due course is, his rights as well as
the defenses available against him; and understand the shelter rule.
Lesson 1: N egotiation
A transfer is the physical delivery of an instrument with the intention to p ass
title—the righ t to enforce it. Negotiation is a special type of transfer to a holder.
A holder is a p erson who has an instrument drawn, issued, or indorsed to h im or
his order or to b earer or in blank. How a negotiable instrument m ay be n egotiated
depends on w h eth er the instrument is an order instrument or a b earer in stru m en t.
Order in stru m en ts are negotiated by indorsement and a transfer of p ossession
(delivery). Bearer instruments are negotiated by a transfer of possession (delivery)
alone and indorsement is not required. There are four basic endorsements: blank,
special, restrictive, and qualified. Transferors incur two typ es of liability: th ose who
sign the in stru m en t are contractually liable; those who sign or those wh o do n ot
sign are liable to the transferee in warranty.
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M odes of Tran sfer
There are th ree modes of transfer of instruments: by assignment, by operation
of law, and by negotiation. Assignment or transfer of title to the instrument, mean s
that the assignee generally takes only such title as his assignor has and is subject
to all defenses available against his assignor. Transfer by operation of law h app en?
in case of death of the holder where the title vests in his personal representative,
or in case of b ank ru p tcy of the holder where title vests in his assignee or tru stee,
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or u p on th e d eath of a joint p ayee or in d orsee in w h ich case th e gen eral rule is
th at th e title vests at on ce in th e su rvivin g p ayee or in d orsee. N egotiation is the
tran sfer of a negotiab le in stru m en t from on e p erson to an oth er m ad e in such a
m an n er as to con stitu te the tran sferee th e h old er thereof. N egotiation m ay either be
b y in d orsem en t com p leted by d elivery (in th e case of in stru m en ts p ayable to order)
or b y m ere d elivery (in the case of in stru m en ts payable to bearer).
V
Con cep t of N egotiation
Accord in g to Section 30, an in stru m en t is n egotiated w h en it is transferred
from on e p erson to an oth er in su ch m an n er as to con stitu te th e tran sferee th e holder
th ereof. If p ayable to th e b earer, it is n egotiated b y d elivery;1 if p ayable to order, it is
n egotiated b y th e in d orsem en t of th e hold er and comp leted b y delivery.
Ways of N egotiation
A n egotiab le in stru m en t payable to ord er is n egotiated b y in d orsem en t and
d elivery, w h ile an in stru m en t payable to the b earer is n egotiated b y d eliver only.
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In d o rsem en t
Th e in d orsem en t m u st b e w ritten on the in stru m en t itself or u p on a paper
attach ed th ereto. The sign atu re of the indorser, w ith ou t ad d ition al w ord s, is a
su fficien t in d orsem en t.*2 If w ritten on the in dorsement itself, th e in d orsem en t is
u su ally w ritten on th e b ack th ereof although the in d orsemen t m ay b e w ritten on
th e face of th e in stru m en t. If the in stru m en t no longer h as sp ace for indorsements,
sign atu res m ay b e p laced on an allonge. An allonge is a p ap er attach ed to a
d ocu m en t for receivin g in d orsemen ts too n u m erou s to be w ritten on th e bill itself.
It is im p ortan t to attach the allonge to the in stru m en t in ord er to d eterm in e the
ord er in w h ich th e in stru m en t w as in dorsed so as to d eterm in e th e ord er of liability
of th e in d orsers. Accord in g to Section 32, the in d orsemen t m u st b e an indorsement
of th e en tire in stru m en t. If th e in d orsemen t p u rp orts to tran sfer to th e indorsee
a p art on ly of th e am ou n t payable, or to tran sfer th e in stru m en t to tw o or more
in d orsees severally, it d oes n ot op erate as a n egotiation of th e in stru m en t. But where
th e in stru m en t h as b een p aid in p art, it m ay be in d orsed as to th e residu e.
" To illu strate: Ron n ie issu ed a ch eck in the am ou n t of P20,000 p ayab le to Bobby.
Bobby en d orsed th e ch eck b u t on ly to th e exten t of P10,000. The p artial indorsement
is n ot a valid in d orsem en t, alth ou gh w ill resu lt in th e assign m en t of th at p art.
1Section 30 is cited in th e case of Caltex (Ph ilip p in es), In c. vs. C ou rt of Ap p eals an d Secu rity Ban k an d Trust
Com p an y, G .R. N o. 97753, A u gu st 10,1992.
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2Section 31, N IL.
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An in d orsem en t of a p art of the in stru m en t does n ot op erate as a n egotiation
but it may con stitu te a valid assign m en t binding b etw een th e p arties. The p erson
to whom th e in stru m en t is in dorsed would not be con sid ered an in d orsee b u t
merely an assign ee an d w ou ld therefore tak e the in stru m en t subject to th e d efen ses
available b etw een th e origin al p arties.
To illu strate: Alex issu es a bill payable to the ord er of Bex. Later, Bex w ith ou t
endorsing th e bill tran sfers for con sid eration the said bill to Chelo. In th is case, th e
bill is merely assign ed an d n ot n egotiated. Chelo d oes n ot b ecom e th e holder. The
transfer vests in Ch elo su ch title as Bex h ad th ereon an d Chelo acq u ires th e righ t to
have the in d orsem en t of Bex on th e in stru men t.
Accord in g to Section 33, an in dorsement m ay be eith er sp ecial or in b lan k ;
and it m ay also b e eith er restrictive or qualified, or condition al. Section 34 p rovid es
that a sp ecial in d orsem en t specifies the p erson to w h om , or to w h ose ord er, th e
instrument is to b e payable, an d the indorsement of such p erson is n ecessary to
further n egotiate th e in stru m en t. A special in dorsemen t n am es th e p erson w h o
will receive th e in stru m en t and includes the sign atu re of the in dorser. O n th e oth er
hand, an in d orsem en t in b lank specifies no indorsee. A b lan k in d orsem en t, w h ich
consists on ly of th e sign atu re of the indorser, makes an in stru m en t p ayab le to th e
bearer, an d m ay b e n egotiated by delivery.
To illu strate: An ton io issued a p rom issory n ote w h ich read s: "I p rom ise to
pay Bonifacio or ord er PI0,000. (Sgd). An ton io" Bonifacio su b seq u en tly n egotiated
the n ote to Con rad o, Con rad o to Domingo, Domingo to Eu logio, an d Eu logio to
Feliciano, w h o sign ed it in blank and subsequently lost it but w as fou n d b y G regorio
who d elivered it to H on esto, a holder in due course. In su ch a case, An ton io is liable
on the n ote b ecau se h e is th e maker. Honesto can claim th e P10,000 b ecau se h e is a
holder in d ue cou rse. There w as a valid n egotiation b etw een G regorio an d H on esto
because th e in stru m en t w as con verted to a b earer in stru m en t.
If th e in stru m en t is origin ally payable to order an d it is n egotiated b y a sp ecial
indorsement, said in stru m en t can be fu rth er n egotiated b y in d orsem en t com p leted
by delivery. If th e in stru m en t is origin ally payable to ord er an d it is n egotiated b y
the p ayee th ru b lan k in dorsem en t, it can be fu rth er n egotiated b y th e h old er b y
mere delivery. An in stru m en t origin ally payable to b earer can b e fu rth er n egotiated
by mere delivery, even if th e origin al b earer n egotiated it by sp ecial in d orsem en t.
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A p erson w h o n egotiates b y m ere d elivery is liable on ly to h is im m ed iate
transferee. A sp ecial in dorser, on th e oth er h an d , is liable to su b seq u en t h old ers,
unless the in stru m en t is an origin ally b earer in stru m en t, in w h ich case h e is liable
only to th ose w h o tak e title th roligh his in dorsemen t. Accord in g to Section 35, th e
holder of th e in stru m en t m ay con vert a b lan k in d orsem en t into a sp ecial in d orsem en t
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b y w ritin g over th e sign atu re of the in dorser in b lank an y con tract con sisten t with
th e ch aracter of th e in d orsemen t.
An in stru m en t payable to ord er on its face m ay be con verted into a bearer
in stru m en t b y m ean s of a b lank in dorsement, and said in stru m en t m ay later be
recon verted in to an ord er in stru m en t b y a subsequent sp ecial indorsemen t, the last
in d orsem en t alw ays con trollin g the m ean s of fu rth er negotiation. O n th e oth er hand,
an in stru m en t payable to th e b earer on its face always rem ain s a beareT instrument.
An in d orsem en t of a b earer in stru m en t d oes n ot con vert it to an instrunrient payable
to order.
if
To illu strate: Tachi issued a p rom issory n ote for P10,000 payable to Ivlax or his
ord er on Sep tem b er 15,2020. M ax indorsed th e n ote in b lank and d elivered th e same
to Fern an . Junjae stole th e note from Fern an and on Sep tem b er 14, 2020, presented
it to Tach i for p aym en t. Wh en asked by Tachi, Junjae said M ax gave h im the note
in p aym en t for tw o cavan s of rice. Tachi, therefore, paid Junjae P10,000 on th e same
d ate. O n Sep tem ber 15, 2020, Fernan d iscovered th at th e n ote of Tachi w as not in
h is p ossession, and he Went to Tachi. It w as then th at Fern an found ou t th at Tachi
h ad alread y m ad e th e p aym en t on th e note. Given th e facts, Fern an can n ot claim
p aym en t from Tachi b ecau se Fern an is n ot a holder of th e p rom issory n ote; to make
th e p resen tm en t for p aym en t, it is n ecessary to exhibit th e in stru m en t, w h ich Fernan
can n ot d o b ecau se h e is n ot in p ossession thereof. Suppose Fern an , but of pity for
Tachi w h o h ad alread y p aid P10,000 to Junjae, decided to forgive Tachi an d instead
go after M ax w h o in d orsed th e note in blank to him, M ax will n ot b e liable to Fernan
b y virtu e of th e in d orsem en t in blank b ecau se M ax n egotiated th e in stru m en t by
delivery.
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Section 36 states th at a restrictive in dorsement either: (1) p roh ib its th e further
n egotiation of th e in stru m en t; (2) con stitutes th e in d orsee th e agen t of th e indorser;
or (3) vests th e title in th e in d orsee in tru st for or to th e u se of some oth er p erson s. The
m ere ab sen ce of w ord s im p lyin g p ow er to n egotiate does n ot m ak e an indorsement
restrictive. Wh ile th e omission of w ord s of n egotiability in th e in d orsem en t does
n ot affect th e n egotiab ility of th e in stru m en t, su ch om ission in th e b o4y w ill render
th e in stru m en t n on-negotiable. A restrictive in d orsem en t req u ires th e indorsee to
comp ly w ith in stru ction s stated in th e endorsement, but an in stru m en t negotiable
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on its face can n ot be ren d ered n on-negotiable b y u sin g a restrictive indorsement.
In su ch a case, after th e d irection s are carried out, th e in stru m en t m ay be further
negotiated . A restrictive in d orsem en t either restricts th e righ t of th e indorsee to
fu rth er n egotiate th e in stru m en t or reserves beneficial in terest th erein in th e indorser
or in a th ird p erson . In th e latter case, alth ou gh th e in stru m en t m ay be further
negotiated , all sub seq uent indorsees tak e th e in stru m en t subject to th e rights of the
restrictive in d orser or th e th ird p erson , as th e case m ay be. Accord in g to Section 37,
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a restrictive in d orsem en t con fers u p on th e in d orsee th e right: to receive p aym en t
of the in stru m en t, to b rin g an y action th ereon th at th e in d orser cou ld b rin g, an d to
transfer his righ ts as su ch in d orsee, if th e form of the in d orsem en t au th orizes h im to
do so. But all su b seq u en t in d orsees acq u ire on ly the title of th e first in d orsee u n d er
the restrictive in d orsem en t.
To illu strate: An in stru m en t is in dorsed as follows: "Pay to A, for B" (Sgd.)
C. Then A in d orsed th e in stru m en t "Pay to D " (Sgd.) A, in p aym en t of A's p erson al
loan to D, the in stru m en t w as accep ted by D as in dorsed b y A. D w ill n ot b e actin g
in good faith if h e accep ted th e in stru m en t as in dorsed b ecau se h e k n ew b y p rior
indorsement th at A is m erely a tru stee for B an d h as n o righ t to n egotiate th e
instrument.
The in d orsem en t p asses th e legal title over th e n ote to th e in d orsee so as to
enable h im to d em an d an d receive p aym en t of th e valu e of th e in stru m en t. Th is is
true u n d er an y of th e form s of restrictive indorsement. In a restrictive in d orsem en t
"for d eposit," th e in d orsee can b rin g an action again st the in d orser if th e in d orser
received valu e for said in dorsem en t. The w ord s "u n til it h as b een restrictively
indorsed" in Section 47 d o n ot contemplate every restrictive in d orsem en t b u t a
restrictive in d orsem en t th at prohibits th e fu rth er n egotiation of th e in stru m en t
under Section 36. Wh ere th e in dorsem en t is "Pay to C only," th e in stru m en t b ecom es
non-negotiable. Bu t an in d orsem en t for collection d oes n ot d estroy tran sferab ility
and it can b e rein d orsed so th at th e indorsee can sue in h is ow n n am e. N eith er d oes
an in d orsem en t "for d ep osit on ly" d estroy the tran sferab ility of th e in stru m en t, b u t
the restrictive in d orsee can n ot tran sfer the in stru m en t for h is ow n d eb t or for h is
own benefit. ,
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To illu strate: Zeta w rote ou t an in stru m en t th at states: "Pay to Xeres or ord er,
the am ou n t of PI m illion for collection only. Signed, Zeta." Xeres in d orsed it to h is
creditor, Yago, to w h om h e ow ed PI million. Yago n ow w an ts to collect an d satisfy
Xeres' d ebt th rou gh th e PI m illion on th e check. May h e valid ly d o so? Th e an sw er
is no, since Xeres is m erely an agen t of Zeta, h is on ly righ t b ein g to collect.
• Accord in g to Section 38, a qualified in d orsem en t con stitu tes th e in d orser
a mere assign or of th e title to th e in stru m en t. It m ay be m ad e b y ad d in g to th e
indorser's sign atu re th e w ord s "w ith ou t recou rse" or an y w ord s of sim ilar im p ort.
Such an in d orsem en t d oes n ot im p air th e n egotiab le ch aracter of th e in stru m en t.
A q u alified in d orsem en t ("w ith ou t recou rse") frees th e in d orser from liab ility
if the n egotiab le in stru m en t is n ot p aid b y th e m ak er or d raw ee w h en due. "W ith ou t
recou rse" m ean s w ith ou t resort to a p erson w h o is secon d arily liable after th e d efau lt
of the p erson w h o is p rim arily liable. The q u alified in d orser is n ot en tirely free from
second ary liab ility th ou gh . H e is secon d arily liable on h is w arran ties as an in d orser
under Section 65. H e is liable if th e in stru m en t is d ish on ored b y n on -accep tan ce or
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n on -p aym en t d ue to forgery, lack of good title on the p art of the indorser, lack of
cap acity to in d orse on the p art of the prior p arties, an d th e fact, at th e time of the
in d orsem en t, th at th e in stru m en t was valueless or n ot valid and knew of th at fact.
A con d ition al indorsement is one w here an additional condition is annexed to
th e in d orser's liability. Where an indorsemen t is conditional, the p arty required to
p ay th e in stru m en t m ay d isregard the condition and m ake p aym en t to the indorsee
or h is tran sferee w h eth er the condition h as been fulfilled or not. But any person to
w h om an in stru m en t so indorsed is negotiated will hold the same, or th e proceeds
th ereof, sub ject to th e rights of the person indorsing conditionally.3 A conditional
in d orsem en t d oes not ren der an in stru m en t non-negotiable. But if the condition is
on th e face of the in stru m en t, the condition renders it non-negotiable as the promise
or ord er th erein would not be unconditional. A conditional in d orsemen t does not
affect th e negotiability of the in strument because the original p rom ise or order
rem ain s u n con d ition al; but all holders subsequent to the conditional indorsement
tak e sub ject to th e condition. If the indorsement is conditional, the m ak er or drawee
m ay ign ore th e condition and pay it; or dishonor the in stru m en t and w ait until
th e con d ition is fulfilled. Refusal to pay of the m ak er/d raw er will n ot constitute
d ish on or if th e condition h as not yet been fulfilled. But once the con dition is fulfilled,
th e m ak er/d raw ee should pay.
If an in stru m en t, payable to bearer, is indorsed specially, it m ay nevertheless
b e fu rth er n egotiated b y delivery; but the person indorsing sp ecially is liable as
in d orser to on ly such holders as make title th rou gh his in dorsement.4 A special
in d orser of an origin ally payable to b earer in strument is not liable to a holder who
b ecam e a h older th rou gh delivery because delivery was sufficient to tran sfer title.
H ow ever, a sp ecial in dorser is liable to special indorsees because th ey acq u ire their
title over th e in stru m en t th rou gh the special indorsement as th ey can trace their
title th rou gh a series of unbroken indorsements.
To illustrate:
A.
A d elivers a b earer in stru m en t to B. B then specially in dorses it to C and C
later in d orses it in blank to D. E steals the in stru m en t from D an d, forging the
sign atu re of D, su cceeds in n egotiating it to F who acqu ires th e in stru m en t in
good faith an d for value.5 If, for any reason, the d raw ee b an k refu ses to honor
th e check, F can enforce the in stru m en t again st d raw er A. The instrument
w as payable to the b earer as it was a b earer in stru m en t. It could be negotiated
by m ere d elivery despite the p resence of special in d orsements. The forged
sign atu re is u n n ecessary to p resu m e the juridical relation b etw een or among
3Section 39, N IL.
4Se ctio n 40, N IL."
5Th e illu strativ e case w as p attern ed from the 1997 Bar Exam in ation q u estion in M ercan tile Law .
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the p arties p rior to th e forgery an d th e p arties after th e forgery. The on ly p arty
who can raise th e d efen se of forgery again st a holder in d ue cou rse is th e
person w h ose sign atu re is forged. On the oth er h an d , in case of th e d ish on or
of the ch eck b y b oth th e d raw ee an d th e drawer, F can h old on ly B an d C as
second arily liable on th e in stru m en t, an d n ot D. The in stru m en t at th e tim e
of the forgery w as payab le to b earer, being a b earer in stru m en t.. Also, th e
in stru m en t w as in d orsed in b lan k by C to D. D, w h ose sign atu re w as forged b y
E can n ot b e h eld liable by F.
B.
X m ak es a n ote p ayab le to b earer, and d elivers th e sam e to Y. Y in d orses it to
Z in th is m an n er: "Pay Z, Sgd. Y." Later Z w ith ou t in d orsin g th e p rom issory
note, tran sfers an d d elivers th e sam e to R. The n ote is su b seq u en tly d ish on ored
by X.6 R m ay h old X liable. The in stru m en t is a b earer in stru m en t; h en ce, th e
special en d orsem en t d id n ot con vert th e in stru m en t into an ord er in stru m en t.
Section 40 of th e N IL p rovid es th at if an in stru m en t p ayab le to th e b earer
is in d orsed specially, it m ay n everth eless be fu rth er n egotiated b y d elivery.
Hence, d elivery con stitu tes negotiation of the in stru m en ts to R, an d h e b ecam e
a h old er of th e in stru m en t.
Special in d orsem en ts do n ot con vert the origin al b earer in stru m en t to an ord er
instrument. The h old er in d ue cou rse can cancel the special in d orsem en t p rior to h im
but the sp ecial in d orsem en ts m ad e will still h ave w arran ties u n d er Section 66. Also,
assuming th at th e in stru m en t w as originally an ord er in stru m en t th at h ad a b lan k
indorsement, th e h old er m ay still cancel the p rior sp ecial in d orsem en ts b ecau se th e
blank in d orsem en t alread y m ad e it a b earer in stru m en t. Accord in g to Section 41, if
an in stru m en t is p ayable to th e order of two or m ore p ayees or in d orsees w h o are
not p artn ers, all m u st in d orse u n less the one indorsin g h as au th ority to in d orse
for the oth ers. As su ch , if on ly one p ayee indorses, he p asses on ly h is p art of th e
instrument, an d su ch an in d orsem en t wotild n ot be op erative b ecau se it w ou ld n ot
be an in d orsem en t of th e en tire in stru men t.
' ••
1
Joint in d orsem en t is n ot req u ired if the p ayee or in d orsee in d orsin g h as '
authority to in d orse for th e oth ers, an d if th e p ayees or in d orsees are p artn ers' If
the in stru m en t is p ayab le or in d orsed to A an d B, th ey are join t p ayees an d an
indorsement b y eith er A or B on ly w ill n ot con stitu te a valid n egotiation so as to free
the in stru m en t from d efen ses, u n less th e one in d orsin g is au th orized b y th e oth er.
To illu strate: Piolo d rew a ch eck to Sam an d Lloyd jointly, Sam in d orsed th e
check and also forged Lloyd 's in dorsem en t. The p ayor b an k p aid th e ch eck an d
charged Piolo's accou n t for th e am ou n t of th e ch eck . Lloyd received n oth in g from
the payment. Piolo ask ed th e p ayor b an k to recred it h is accou n t. Given th e facts, th e
6Th e illu stra tiv e ca se w a s p a ttern ed from th e 2004 Ba r Exam in ation q u estion in M er ca n tile Law .
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b ank should recred it Piolo's accoun t. Section 41 of th e N IL p rovides th at all payees
or ind orsees w h o are n ot p artn ers m u st indorse jointly, u nless th e one indorsing has
au th ority to en dorse for the others. Since the sign atu re of Lloyd w as forged, then
the en d orsem en t by Sam w as wholly inoperative. The Bank is u n d er strict liability
to p ay to th e ord er of payee. Paymen t u n d er a forged en d orsemen t is n ot to the
d raw er's order, an d consequently, the d rawee b an k m u st b ear th e loss as against
th e d rawer. Piolo as d rawer is n ot d isch arged on the in stru m en t as payee Lloyd can
recover b ecau se he still retain s his claim on the debt of Piolo.7
*«
Section 42 states th at if an in stru m en t is d raw n or in d orsed to a person as
"cash ier" or oth er fiscal officer of a bank or corp oration , it is d eem ed prima facie
to b e payable to the b ank or corporation of wh ich he is su ch officer, an d may be
n egotiated by either the indorsement of the b ank or corp oration or th e indorsement
of th e officer. Section 43 provides th at if the name, of a p ayee or in d orsee is wrongly
d esignated or misspelled, he m ay indorse the in stru m en t as th erein described
ad d in g, if he thinks fit, his p rop er signature.
Accordin g to Section 44, if any person is u n d er obligation to in d orse in a
rep resen tative capacity, he m ay indorse in such term s as to n egative personal
liability. The p erson indorsing in a representative cap acity m u st in d orse in th e same
m an n er as an agent of the maker, drawer, or accep tor should in ord er to escape
p erson al liability u n d er Section 20—h e m u st add w ord s d escrib in g h im self as an
agen t an d at the sam e time disclose his principal, and he m u st b e d u ly authorized.
Accord in g to Section 45, every negotiation is d eemed prima facie to h ave been
effected before the in stru m en t w as overdue, except if an in d orsem en t b ears date
after the m atu rity of the in stru ment. Section 46 fu rth er p rovid es th at excep t if the
con trary ap p ears, every indorsement is p resum ed prima facie to h ave b een made at
th e p lace w h ere the in stru m en t is dated.
1
Section 47 p rovides th at an in stru m en t negotiable in its origin con tin u es to
b e n egotiable u n til it h as been restrictively in d orsed or d isch arged b y payment
or oth erw ise. After m atu rity, an in stru m en t origin ally n egotiab le con tin u es to
be n egotiab le in the sense th at th e con tracts of th e p arties to'it con tin u e an d are
govern ed b y th e Negotiable In stru m en ts Law. However, th e in stru m en t ceases to be
n egotiab le in the sen se th at a tran sferee after m atu rity is n ot a h old er in d u e course,
an d, th erefore, is n ot free from d efen ses ob tain in g b etw een p rior p arties. Transfer to
su ch tran sferees w ou ld be eq uivalent to a m ere assign m en t an d sub ject to defenses.
Accord in g to Section 48, th e h old er m ay at an y tim e Strike ou t an y indorsement
th at is n ot n ecessary to his title. The in d orser w h ose in d orsem en t is stru ck out,
7
Th e illu strativ e case w as p attern ed from th e case o f A ssociated Ba n k vs. CA,: G .R. N os. 107382 an d 107612,
Jan u ary 31,1996.
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and all in d orsers sub seq uen t to him, are thereby relieved from liability on the
instrument. An in dorsem en t is not n ecessary if mere delivery is sufficient to vest
ownership in the in dorsee. If the in stru m en t is payable to b earer on its face, th en an y
indorsements on the back of the in stru m en t would be im m aterial to the title of the
bearer, who is p resu m p tively the ow ner and holder by his m ere p ossession of such
instrument. N on e of th e indorsemen ts would be n ecessary to his title b ecau se m ere
delivery w ou ld h ave been- sufficient to transfer title from one holder to an oth er.
The holder, th u s h as a right to cancel any or all in dorsements. On the oth er h an d ,
in an in stru m en t payable to ord er on its face, if all the in d orsemen ts ap p earin g on
the back of th e in stru m en t are special, then all of them would be n ecessary to the
holder's title.
•
’
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Accord in g to Section 49, if the holder of an in stru m en t payable to h is ord er
transfers it for valu e w ith ou t indorsing it, the transfer vests in th e tran sferee su ch
title as the tran sferor h ad therein, and the transferee acqu ires in ad d ition , th e righ t to
have the in d orsem en t of the transferor. But for the p u rp ose of d eterm in in g w h eth er
the tran sferee is a holder in due course, the negotiation takes effect as of th e tim e
when the in d orsem en t is actu ally made. This operates as an equitable assign m en t.
N egotiation b y a Prior Party
Accord in g to Section 50, if an instru men t is n egotiated b ack to a p rior p arty,
such p arty m ay reissu e and furth er negotiate the same, b ut h e is n ot en titled to
enforce p aym en t th ereof again st any intervening p arty to w h om he w as p erson ally
liable.
To illu strate: A negotiable p rom issory note is given by A to B; B in d orsed it to
C; C to D an d D to E. E negotiated back the note to A. A ren egotiated th e n ote to F.
As a result, if A, later on, pays the in stru men t to F, he can n ot go after B, D, C, an d E.
PRACTICE EXERCISE
As a ru le u n d er th e Negotiable In stru m ents Law, a su b sequen t p arty m ay h old
a prior p arty liable b u t n ot vice versa. Give tw o in stan ces w h ere a p rior p arty m ay
hold a su b seq u en t p arty liable.
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RELEVAN CE O F TH E LESSO N
One m u st be carefu l in m ak in g and h and lin g a n egotiable in stru m en t. If th is is
tran sferred to a h old er in due cou rse, a p arty to the in stru m en t m ay be held liable. The
holder of a negotiab le in stru m en t can en force its p aym en t w h en p aym en t b ecom es
due. If one d oes n ot h on or the responsibilities u n d er the n egotiable in stru m en t, on e
may be held liable for the d am ages in cu rred by a p arty to the in stru m en t.
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LESSO N SUM M ARY
•
Negotiation is the tran sfer of a negotiable in stru m en t to an oth er in order to
m ak e the tran sferee a holder.
• v If the p roced u res for negotiation are not properly adhered to, the transfer is
only an assignment.
1
•
An in stru m en t payable to order must be negotiated by indorsement and
delivered to the transferee. The indorsement must convey the entire instrument.
•
An in stru men t payable to the bearer may be negotiated simply by delivery to
th e transferee.
i
An indorsement may be either special or in blank; and it may also be either
restrictive or qualified or conditional.
•
•
If an in strument payable to the bearer is indorsed specially, it m ay nevertheless
b e fu rth er negotiated by delivery; but the person indorsing specially is liable as
indorser to only such holders as make title throu gh his indorsement.
•
An instrument negotiable in its origin continues to be negotiable until it has
been restrictively indorsed or discharged by payment or otherwise.
•
The holder may at any time strike out any indorsement which is n ot necessary
to his title.
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If an in stru ment is negotiated back to a prior party, such p arty m ay reissue and
fu rth er negotiate the same, but he is not entitled to enforce p aym en t thereof
again st any intervening p arty to whom he was personally liable.
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Lesson 2: H old ers
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The first person to become a holder of a negotiable in stru men t is the payee to
wh om an in stru m en t has been issued by either the maker in case of promissory
note, or a d rawer in case of bill of exchange. If the payee decides to transfer the
instru ment, he m ay do so by assignment or negotiation although n egotiation is the
p referred way. Whpn an in stru men t is negotiated, each successive p erson who takes
the instrument also b ecomes a holder who may be considered a holder in due course
or an ord in ary holder.
To illu strate:
Geree makes the following p rom issory note:
,
\
"I promise to pay Bree or order P10,000" - (Sgd. Geree)
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In th is case: (1) If G eree k eeps it in h er d raw er an d d oes n ot d eliver it to Bree,
Bree is not the h old er b ecau se while Bree is the payee, she is n ot in p ossession of th e
note. (2) Sup pose G eree delivers th e note to Bree and Bree in d orses it to Ch loe b u t
delivers it to Bailey, n eith er Ch loe n or Bailey is the holder. Bailey is n ot th e h old er
because while h e is in possession of th e note, he is not the in dorsee. Ch loe is n ot th e
holder b ecau se w h ile she is th e indorsee, she is not in p ossession of th e note. (3) If
the note is payable to Bree or b earer and Geree keeps the n ote in h er d raw er, Bree
is not the b earer b ecau se she is not in possession of the note. (4) But su p p ose G eree
delivers the n ote to Bailey b ut not Bree, Bailey is the hold er b ecau se Bailey is in
possession of th e note.
General Con cep t of a H old er
Accord in g to Section 51, the holder of a negotiable in stru m en t is th e p ayee or
indorsee w h o is in p ossession thereof. He is a p erson in p ossession of an in stru m en t
payable to th e b earer or to the identified p erson p ossessin g it. The h old er of a
negotiable in stru m en t .may sue thereon in his own name, an d p aym en t to h im in
due cou rse d isch arges the instrument. Payment in due cou rse is p aym en t m ad e
at or after th e m atu rity of the instrument, to the holder thereof, in good faith , an d
without n otice th at his title is defective.
Hold er in D u e Cou rse
Sectioni ' l l 52
states' th• •at a holder
in, due
cou rse is a hold er w
h .o.‘ h•as tak
en th
e
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instrument u n d er th e following conditions:
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that it is com p lete an d regu lar upon its face;
•
th at h e b ecam e th e holder of it before it w as overdue, an d w ith ou t n otice th at it
has b een p reviou sly dishonored, if, such w as the fact;
•
th at he took it in good faith and for value; and
•
that at th e tim e it w as n egotiated to him, he h ad no n otice;of an y in firm ity in
the in stru m en t or d efect in the title of th e p erson n egotiatin g it.
In oth er w ords, to be a holder in due course, a p erson m u st b e a h old er of p ap er
that is n ot suspiciou sly irregu lar, an d he m u st tak e it in good faith, for valu e, an d
without n otice of an yth in g th at a reasonable p erson w ou ld recogn ize as tain tin g th e
instrument.
m
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To illu strate:
A.
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X b orrow ed m on ey from Y in the am ou n t of PI million an d as p aym en t, issu ed
a check. Y th en in dorsed the check to his sister Z for n o con sid eration . Wh en Z
deposited th e ch eck to her account, the check w as d ish on ored for in su fficien cy
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of fu n d s. Given th e facts, Z is n ot a holder in due cou rse. She did n ot give any
valu ab le con sid eration for the check. To be a holder in due cou rse, the holder
m u st h ave tak en th e ch eck in good faith an d for value.
B.
RL, in ten d in g to b u y a car, saw art old friend, RG, w ho is an agent to sell the
car b elon gin g to DL Clinic. After n egotiation RL d ecid ed to b uy th e said car.
H e d rew u p on req u est of RG, a crossed ch eck for P60,000 payable to DL Clinic
as evid en ce of h is good faith, b ut w h ich w as merely m ean t to be shown to DL
Clin ic b y RG wh o received said check. The ch eck wou ld then be retu rn ed when
RG b rin gs the car an d its registration certificate for RL's in sp ection . For the
failu re of RG to b rin g th e car and its certificate of registration , and to retu rn the
ch eck , RL issu ed a "stop p aym en t ord er" to the d raw ee bank. In th e meantime,
RG p aid th e ch eck to the DL Clinic for the hospital bill of h is wife and was
given P15,558.25 as a change. Given the facts, DL Clinic m ay n ot be considered
a h old er in due cou rse, hence not entitled to recover. Alth ou gh DL Clinic was
n ot in fact aw are of the circu m stan ces with resp ect to the d elivery of the check
to RG, it should h ave noticed th at RG is not the d rawer an d DL Clin ic had no
d ealin gs w ith RL, the am ou n t of the check did not corresp on d exactly with the
ob ligation of RG to the clinic, and that the check could only be d eposited but
m ay n ot b e con verted into cash.8
A p erson is a holder in due course if he has taken the in stru m en t without
reason to q u estion its authenticity on account of obvious irregu larities on its face,
for valu e, in good faith, an d without notice that it is overdue or h as b een dishonored,
or th at it con tain s a forgery or alteration, or th at any p erson h as any d efen se against
it or claim to it. G ood faith mean s h onesty in fact in the con du ct or transaction
con cern ed an d the ob servan ce of reasonable comm ercial stan d ard s of fair dealing.
N otice is n ot limited to receipt of an explicit statement of defenses; a hold er may
b e given n otice th rou gh inferences that should be d raw n from th e ch aracter of the
in stru m en t. Thus, an incomplete in strument, one th at b ears m ark s of forgery, or one
th at in d icates it is overd ue m ay give notice on its face. A holder in due cou rse is not
im m u n e from all defenses b ut he takes the p aper free of m ost defenses. A real, as
op p osed to a p erson al, defense m ay be asserted against the holder in due course.
To illu strate: LY issu ed a negotiable p rom issory note to EN an d au thorized the
latter to fill up the am ou n t in blank with his loan 'accou n t in th e su m of 1*100,000.
H ow ever, EN in serted 1*500,000 in violation of the in stru ction. She negotiated the
n ote to JE w h o h ad k nowledge of the infirmity. JE in tu rn negotiated the said note
to DI for valu e and w ho h ad no knowledge of the infirmity. In this case, DI can
en force th e negotiable p rom issory note against LY in the am ou n t of P500,000. DI is
:. . <• 8Th e illu strativ e case w as p attern ed from the case of Vicen te R. d e O cam p o & Co. vs. A n ita Gatch alian, et
al., G .R. N o. L-15126, N ov em ber 30, 1961.
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a holder in d u e cou rse an d th e b reach of tru st com m itted b y EN can n ot b e set u p
by LY again st DI b ecau se it is p erson al defense. As a h old er in d u e cou rse, DI is n ot
subject to su ch p erson al d efense.
Any h old er p roved to h ave tak en an in stru m en t w h en on e of th e con d ition s
enumerated in Section 52 is lack in g is n ot a h old er in d ue cou rse, as exp lain ed in th e
following in stan ces:
A.
If th e in stru m en t can b e p aid w ith ou t con troversy, th en th e in stru m en t is
comp lete an d regu lar u p on its face. A forgery th at is n ot ap p aren t or is invisib le
to th e n ak ed eye is n ot con sid ered again st a h old er in d u e cou rse.
B.
An in stru m en t is overd u e after th e d ate of m atu rity. The fact th at th e in stru m en t
is overd u e is a stron g in dication th at it w as d ish on ored , an d th e law p u ts th e
p oten tial h old er on in q u iry as to w h eth er it w as d ish on ored an d th e reason
therefor. Wh en th e in stru m en t con tain s an acceleration clau se, k n ow led ge of
the h old er at th e tim e o f acquisition th ereof th at on e in stallm en t or in terest, or
b oth is u n p aid , is n otice th at the in stru m en t is overd u e. If, b y th e term s of th e
in stru m en t, th e p rin cip al w as to b ecom e due u p on d efau lt of th e p aym en t of
the in terest, on e w h o tak es th e in stru m en t u p on w h ich th e in terest is overd u e
is n ot a h old er in d u e cou rse.
C.
H old er in good faith m ean s a holder w ho h as n o k n ow led ge or n otice of
d efen se of an y sort th at cou ld be set u p again st a p rior h old er of th e in stru m en t.
Ab sen ce of k n ow led ge of a defense w h en th e in stru m en t w as tak en is an
essen tial elem en t in th e m atter of good faith. Th ere is good faith w h en th e
h old er h as n o k n ow led ge of the fact th at ren d ers it d ish on est for h im to tak e
th e in stru m en t. Kn ow led ge h ere m ean s actu al k n owled ge of facts. Su sp icion or
sp ecu lation is n ot enough. The test for d eterm in in g w h eth er a h old er acq u ires
an in stru m en t in good faith is n ot w h eth er he w as n egligen t, su ch as in failin g
to m ak e in q u iries, b u t w h eth er his p u rp ose w as d ish on est. Bu t failu re to m ak e
inquiry, w h en circu m stan ces stron gly in d icate a defect, m ak es th e h old er n ot a
h old er in d u e cou rse.
D.
Wh ere th e h old er gave n o valuable con sid eration for th e tran sfer of th e
in stru m en t to h im , h e can n ot be a h old er in d ue cou rse.
E-
Defects of title are d efin ed b y Section 55 to cover all th ose situ ation s w h ich
at com m on law w ere k n ow n as equitable d efen ses, an d also to cover th ose
equities of ow n ersh ip w h ere th ere w as a b reach of faith in n egotiation . O n e
w ho acq u ires an in stru m en t w ith k n ow ledge of th e d efects of title of th e p erson
n egotiatin g is n ot a h old er in due cou rse.
E
If th e tran sferee receives n otice of an y in firm ity in th e in stru m en t or d efect in
th e title of th e p erson n egotiatin g th e sam e b efore h e h as p aid th e fu ll am ou n t
U N IT IV | N EG O T IA BLE IN S T R U M EN T S LA W ’ ’a ' 2 8 5
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agreed to be p aid th erefor, he w ill be d eem ed a hold er in due cou rse only to the
exten t of th e am ou n t th erefore p aid ,b y h im .9
G.
D efen ses in clu de com m on law d efen ses outside th ose covered in Section 55.
Th ey in clu d e m istak e; ab sen ce an d failure of con sid eration ; m in ority an d other
form s of in cap acity to con tract; lack of au th ority of an agen t; an d btheirs. One
acq u irin g an in stru m en t w ith knowledge of an y of th e foregoin g defenses is
n ot a h old er in due cou rse.
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H. .If an in stru m en t p ayab le'on d em an d is n egotiated on an u n reason ab le length
of tim e after its issue, th e holder is n ot d eem ed a hold er in d u e cou rse.10
To illu strate: A issued a p rom issory note w h ich read s: ’"I p rom ise to p ay B or
ord er P10,000. (Signed) A." B subsequently n egotiated th e n ote to C, C to D, D to E,
an d E to F, w h o signed it in b lank and subsequently lost it b ut w as fou n d b y G who
d elivered it to H, a holder in due cou rse. In this case, A is liable on th e n ote because
he is th e m ak er. H can claim the P10,000 b ecau se he is a hold er in d u e cou rse. There
w as a valid n egotiation b etw een G and H b ecau se the in stru m en t w as converted
to a b earer in stru m en t. H can n ot d irectly go again st B b ecau se B's liab ility is only
secon d ary.
,
Section 55 p rovid es th at the title of a p erson w ho n egotiates an in stru m en t is
d efective if h e ob tain ed th e in stru m en t, or any sign atu re th ereto, b y frau d , duress,
or force an d fear, or oth er u n lawfu l means, dr for an illegal con sid eration , or when
h e n egotiates it in b reach of faith, or u n d er such circu m stan ces as am ou n t to a fraud.
To illu strate: Ronald issued a ch eck for PI million w h ich h e u sed to pay
Son n y for k illin g his political enemy. Given th e facts, th e ch eck can be, considered
a n egotiab le in stru m en t even if it w as issu ed to p ay Son n y to kill h is political
enemy. Th e valid ity of the con sid eration is n ot one of th e req u isites of a negotiable
in stru m en t b u t m erely con stitu tes a defect of title.
,,.
In firm ities include th in gs th at are w ron g w ith th e in stru m en t itself as
d istin gu ish ed from th ose th at are lack in g in con tracts on th e in stru m en t. Such’
in firm ities arise in th e following situ ation s: (1) w ron g d ate in serted w h ere the
in stru m en t is exp ressed to be payable at a fixed p eriod after sigh t is u n d ated ; (2)
filling up a b lan k in stru m en t n ot strictly in accord an ce w ith th e au th ority given or
n ot w ith in a reason ab le time, w h ere it w as d elivered w an tin g in a m aterial p articu lar;
(3) filling u p an d n egotiatin g w ith ou t au th ority an in com p lete an d undelivered
in stru m en t; (4) Jack of valid an d in ten tion al d elivery of a m ech an ically complete
in stru m en t; (5) agent sign in g p er p rocu ration b eyon d th e scop e of h is au th ority; (6)
forgery; and (7) material alteration. N otice b y th e h old er of an in stru m en t of any of
’ Section 54, N IL.
10Section 53, N IL.
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the foregoing in stan ces, at th e tim e of n egotiation of th e in stru m en t to h im , w ou ld
make h im n ot a h old er in d u e cou rse. Accord in g to Section 56, to con stitu te n otice
of an in firm ity in th e in stru m en t or d efect in th e title of th e p erson n egotiatin g
the same, th e p erson to w h om it is n egotiated m u st h ave h ad actu al k n ow led ge
of the in firm ity or d efect, or k n ow led ge of su ch facts th at h is action in tak in g th e
instrument am ou n ted to b ad faith.
, •
Rights of H o ld er in D u e Cou rse
Accord in g to Section 57, a h old er in d ue cou rse h olds th e in stru m en t free from
any defect of title of p rior p arties, an d free from defenses availab le to p rior p arties
among th em selves, an d in ay en force p aym en t of the in stru m en t for th e full am ou n t
thereof again st all p arties liable th ereon .11 A holder in due cou rse:
•
m ay sue on th e in stru m en t in h is ow n n ame;
•
m ay receive p aym en t ^and if p aym en t is in due cou rse, th e in stru m en t is
d isch arged ;
.
•
holds th e in stru m en t free from an y defect of title of p rior p arties an d free from
d efen ses availab le to p rior p arties am on g themselves; an d
•
m ay en force p aym en t of the in stru m en t for th e full am ou n t th ereof again st all
p arties liable th ereon .1;
‘
A h old er in d u e cou rse is on ly imm un e to p erson al d efen ses b u t yield s to real
defenses. ' ■ '
’ V
V- ‘
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To illu strate: Ron ald issued a ch eck for PI million w h ich h e u sed to p ay Son n y
for killing h is p olitical enemy. If Sonny n egotiated th e ch eck to Tachi, w h o accep ted
it in good faith an d for value, Tachi can hold Ronald secon d arily liable b ecau se
Tachi is a h old er in d u e cou rse. Ronald can n ot raise th e d efense of illegality of th e
consideration, b ecau se Tachi took the ch eck free from the d efect of title of Sonny.
On the oth er h an d , Son n y d oes n ot h ave a cau se of action again st Ron ald in case of
dishonor of th e ch eck b y th e d raw ee bank. Sonny is n ot ah old er in d u e cou rse; th u s,
Ronald can raise th e d efen se th at th e ch eck w as issued for an illegal con sid eration .
Accord in g to Section 58, in th e h an d s of an y hold er oth er th an a h old er in d u e
course, a n egotiable in stru m en t is subject to th e sam e d efen ses as if it w ere n on negotiable. In th e case of Atriu m M an agem en t Corp oration vs. Cou rt of Ap p eals,
et al.,12 H i-Cem en t Corp oration issued four p ostd ated ch eck s in th e total am ou n t of
P2 million in favor of E.T. H en ry an d Co. Inc. (E.T. Hen ry), as th e p ayee. E.T. H en ry
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“ Th is sectio n w as cited in fu ll in th e case of Ju an ita Salas vs. H on . Cou r t o f A p p ea ls an d Fir st Fin a n ce &
Leasing Corp oration , G.R. N o. 76788, Ja n u a ry 22,1990.
12G.R. N o. 109491, Feb ru ary 28,2001.
UN IT IV | N EG O TIABLE IN S T R U M EN T S LA W
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endorsed the said four checks to Atriu m Management Corporation (Atrium) for
valuable con sideration. Upon presentment for payment, the drawee bank dishonored
all four ch ecks for the reason "p aymen t stopped." Atrium, thus, filed the action
after its d em an d for payment of the value of the checks was denied. The Supreme
Cou rt held th at Atriu m was aware of the fact that the four checks wei;e. crossed
ch eck s an d specifically were all for deposit to E.T. Hen ry's accoun t only. It could not
b e con sid ered a holder in due course; but it does not mean th at just because it was
n ot a h older in due course, it could not recover on the instrumen t—it still can, but is
n ow subject to real defenses such as absence or failure of consideration.
But a holder who derives his title through a holder in due course, and who is
n ot h im self a p arty to any fraud or illegality affecting the in strument, h as all the
righ ts of such former holder in respect of all p arties prior to the latter.
To illu strate: X borrowed money from Y in the am ou n t of PI million and as
p aymen t, issued a check. Y then indorsed the check to his sister Z for no consideration.
Wh en Z deposited the check to her account, the check w as' dishonored for
in su fficiency of funds. In this case, Z can n ot hold Y, the endorser, liable as the latter
can raise the defense that there was no valuable consideration for the endorsement
of th e check.
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Sh elter Ru le
A p erson who could n ot have become a holder in due cou rse d irectly (e.g.,
b ecau se he h ad notice of a defense or claim) m ay become so if he takes as a transferee
from a h older in due cou rse as long as he was not a p arty to any fraud or illegality
affectin g th e in stru m en t or h ad not previously been a holder w ith n otice of a defense
or claim. This is th e shelter rule. It operates to give the rights of a hold er in due
cou rse to a h old er wh o d oes n ot have the statu s of a holder in due cou rse. N ote that
th e h older m u st d erive his title from a holder in due course.
To illu strate:
A.
28#
LY issu ed a negotiable p rom issory note to EN and au th orized th e latter to fill
up th e am ou n t in blank w ith his loan account in the su m of P100,000. However,
EN in serted P500,000 in violation of the instru ction. She n egotiated th e note to
JE w ho h ad knowledge of th e infirmity. JE in tu rn n egotiated said note to DI
for valu e an d who h ad no knowledge of the infirmity. Sup pose DI endorses the.
n ote to BY for value but who h as knowledge of the in firmity, BY can enforce
the n ote against LY. BY is n ot a holder in due cou rse b ecau se she h as knowledge
of the b reach of tru st com m itted by EN again st LY w h ich is just a personal
defense. But h avin g taken the in stru m en t from DI, a hold er in due cou rse, BY
BU SIN ESS LAW S A N D REG U LA TIO N S
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has all the righ ts of a h older in due course. BY did n ot p articip ate in th e b reach
of tru st com m itted by EN w ho filled the blank but filled up the in stru m en t
with 1*500,000 instead of P100,000 as in structed by LY. (Section 58, NIL)
3.
A issued a n egotiable p rom issory note to B. There w as a total failu re of
consideration. B in dorsed the note to C, a holder in due cou rse. C in d orsed th e
note to D w ho k n ew of th e failure of consideration. In th is case, D m ay collect
from A.
.
:
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C.
A p rom issory n ote is indorsed to C who h as k nowledge of th e illegal
consideration b etw een A, m ak er and B, payee. Later C n egotiates th e n ote to
D u nder circu m stan ces th at would make D a holder in due cou rse. D, in tu rn ,
indorses it to E an d E b ack to C. In this case, C can n ot be con sid ered a h old er
in due cou rse.
According to Section 59, every holder is deemed prima facie to b e a h old er in
due course; b ut w hen it is shown that the title of any p erson w ho h as n egotiated
the instrument w as defective, the burden is on the holder to p rove th at h e or som e
person u nder w h om he claim s acquired the title as the holder in d u e cou rse. Bu t th e
last-mentioned ru le d oes n ot apply in favor of a p arty who b ecam e b ou n d on th e
instrument p rior to th e acquisition of such defective title.
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PRACTICE EXERCISE
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Gerry d rew a bill of exchange in the amount of P100,000 payable to Ju liet or
order, with his wife, Bea, as drawee. At the time the bill was d raw n , Bea w as u n aw are
that Juliet is G erry's concubine. Juliet then negotiated th e bill to h er sister, M arge,
who paid for it for value, and who did not know who G erry was. O n d ue d ate,
Marge presented the bill to Bea for payment, but the latter p rom ptly d ish on ored th e
instrument because, by then, Bea h ad already learned of h er husband's d allian ce.
1.
Was th e bill lawfully dishonored by Bea?
,' ,
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2. Does th e illicit cause or consideration adversely affect th e n egotiab ility of
the bill?
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RELEVANCE O F TH E LESSO N
,
Knowing w h eth er a p erson is a holder in due cou rse is im p ortan t so th e p erson s
primarily liable, as well as those secondarily liable, will k now of th e defen ses
available to them, an d the holders will be aware of their rights w ith regard to thdir
claims on a negotiable instrument.
UN IT IV | N EG O TIABLE IN STRUM EN TS LA W ?a
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LESSO N SU M M A RY
•
Th e h old er of a n egotiab le in stru m en t m ay sue th ereon in h is ow n n am e, and
p aym en t to h im in d u e cou rse d isch arges th e in stru m en t.
•
A h old er in d u e cou rse is a h old er w h o h as tak en th e in stru m en t u n d er jthe
follow in g con dition s: (a) th at it is com p lete an d regu lar u p on its face; (b) that
h e b ecam e th e h old er of it b efore it w as overd u e, an d w ith ou t n otice th at it has
b een p reviou sly d ish on ored , if su ch w as th e fact; (c) th at h e took it in good
faith an d for valu e; an d (d) th at at th e tim e it w as n egotiated to h im , h e had
n o n otice of an y in firm ity in th e in stru m en t or d efect in th e title of th e person
n egotiatin g it.
•
A h old er in due cou rse holds th e in stru m en t free from an y d efect of title of prior
I
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p arties, an d free from defenses available to p rior p arties am on g th emselves,
an d m ay en force p aym en t of th e in stru m en t for th e full am ou n t th ereof again st
all p arties liable th ereon .
•
Every h old er is d eem ed prima facie to be a holder in d ue cou rse.
,
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A h old er n ot in due cou rse w h o derives h is title from a h old er in d u e course: and
•
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w h o is n ot h im self a p arty to any fraud or illegality affeicting th e in stru m en t
h as all th e rights of su ch former holder in resp ect of all p arties p rior to the
latter.
'
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CH APTER T EST
Mamp:
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inctri irtor:
Date:
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Score:
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Section:
/
Tru e or False
1. An in d orsem en t th at will convert an order in stru m en t into a b earer
-----7!I
in stru m en t is a b lank indorsement.
___ 2. A h old er of an in stru m en t payable on demand is d eemed n ot tb be a
h old er in due cou rse when the instrumen t was negotiated to h im for an
u n reason ab le len gth of time after its issue.
___ 3. A con d ition al in dorsement will constitute a violation of p aragrap h
2, Section 1 of th e law on negotiable instrumen t that will d estroy its
• r
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n egotiability.
____4. A h old er of the in stru m en t can strike out any indorsement ap p earin g
on th e in stru m en t.
____5. A b earer in stru m en t will always remain as a b earer in stru m en t desp ite
th e p resen ce of a special indorsement.
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____6. In d orsem en t is n ecessary only in negotiating an order in stru m en t.
J __ 7. A h old er for valu e is an endorsee who has both' the legal title an d /th e
b eneficial in terest to the instrument and is subject to b oth real an d
p erson al defenses available against him.
___ 8. A p erson al defense may be used against a holder for value.
___ 9. A h old er in due cou rse is one who possesses both the legal an d beneficial
in terest to the in stru m en t but is subject to person al defenses only.
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___ 10. An en d orsem en t w h ere the indorser adds the p hrase "w ith ou t recou rse"
is called a restrictive indorsement.
CH APTER PRO JECT
List all an d exp lain th e righ ts of a holder in due cou rse in a n arrative.
U N IT IV I N EG O T IA BLE IN S T R U M EN T S LA W
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292
BUSINESS LAWS AND REGULATIONS
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IN TRO D UCTIO N
The p arties to negotiable instruments are classified as to w h eth er they are
primarily or second arily liable. The makers of notes and accep tors of bills are
examples of p arties primarily liable. They have unconditional liability for p aym en t
of the instrument. The drawers of bills, the payee, and indorsers of negotiable
instrument are examp les of parties secondarily liable. Their liability is con dition al.
To make them liable, the holder of the instrument must present it for p aym en t to the
persons p rim arily liable who must then dishonor the in stru ment, an d th e h old er
must give timely notice of dishonor to the parties second arily liable. The p arties,
whether p rimarily or secondarily liable, may set up real and p erson al d efen ses
against holders of negotiable instruments.
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INTEN D ED LEARN IN G OUTCOMES
At the end of this chapter, the students will be able to recogn ize th e tw o typ es
of liability—p rim ary and secondary; recall what needs to be comp lied w ith w h en
enforcing liability for negotiable instruments; relate the d efenses in n egotiab le
instruments law as it applies to them; and understand the con dition s th at m u st be
met before secon d ary liability attaches.
Lesson 1: Liab ility of Parties
Prim ary an d Secon d ary Liab ility
The m ain difference between a p rim ary p arty and a secon d ary p arty is th at
the former is unconditionally liable while the latter is conditionally liable. Being
unconditionally liable, the p rim ary p arty is duty-bound to p ay th e h old er at th e
date of maturity, wh eth er or not the holder demands p aym en t from h im , an d h e is
not relieved from liability even if the instrument should b ecom e overd u e due to the
failure of the holder to make such demand. On the oth er h an d , a p arty secon d arily
liable is not b ou nd to pay unless the following conditions h ave b een fulfilled: d ue
presentment or d em and to the p rim ary p arty for p aymen t or accep tan ce, its d ish on or
by such party, and the taking of proceedings required by law after d ish on or—i.e., a
notice of dishonor to the second ary p arty and, in cases of foreign bills of exch an ge,
protest of the bill.
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Accord in g to Section 63, a p erson p lacin g h is sign atu re u p on an in stru m en t
oth erw ise th an as m ak er, d raw er, or accep tor, is d eem ed to b e in d orser u n less he
clearly in d icates b y ap p rop riate w ord s h is in ten tion to be b ou n d in som e' other
cap acity. Bein g an in d orser lim its h is liability. H e is n ot obliged to p ay th e amount
th ereof to th e h old er or an y su b seq u en t in d orser w h o m ay be com p elled to pay it
u n less th e in stru m en t h as b een p resen ted for p aym en t an d w as d ish on ored , and
n ecessary p roceed in gs on d ish on or w as d u ly tak en .
[
<v
In th e case of An g Tion g vs. Loren zo Ting, d oin g b u sin ess u n d er th e name
& style of Pru n es Preserves MFG., & Felipe An g,1 Tin g issu ed a ch eck for 1*4,000
p ayab le to cash or b earer, w ith An g's sign atu re at th e b ack of th e said ch eck . Ang
Tion g received th e in stru m en t an d th ereafter p resen ted it to th e d raw ee b an k for
p aym en t, b u t it w as d ish on ored . An g Tiong's d em an d for Tin g an d A n g to p ay the
am ou n t of th e ch eck w en t u n h eed ed so he filed a case again st th e tw o. Th e Court
d ecid ed in h is favor an d d irected Ting an d An g to p ay h im P4,000 w ith interest,
attorn ey's fees, an d costs of suit. An g ap p ealed th e d ecision . Th e Su p rem e Court
h eld th at n oth in g ip th e ch eck in question in d icates th at An g is n ot a gen eral indorser
w ith in th e p u rview of Section 63 of th e Negotiable In stru m en ts Law w h ich m ak es a
p erson p lacin g h is sign atu re u p on an in stru m en t, oth erw ise th an as m ak er, drawer
or accep tor, a gen eral in dorser, u n less h e clearly in d icates by ap p rop riate w ord s his
in ten tion to b e b ou n d in som e oth er capacity, w h ich An g d id n ot do. A s an indorser,
h e en gages th at on d u e p resen tm en t, the ch eck shall be accep ted or p aid , or b oth , as
th e case m ay be, an d th at if it is d ishonored, he w ill p ay th e am ou n t th ereof to the
h old er. H en ce, h e m u st p ay An g Tiong th e am ou n t of 1*4,000. '
:L
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Liab ility an d /or Warran ties of Parties
Section 60 p rovid es th at th e m ak er of a n egotiable in stru m en t, b y m ak in g it,
en gages th at h e w ill p ay it accord in g to its tenor, an d ad m its th e existen ce of the
p ayee an d h is th en cap acity to indorse. By execu tin g a n ote, a m ak er w arran ts that
th e p ayee as n am ed in th e in stru m en t is existin g. H e can n ot, th erefore, d en y his.
liab ility on th e grou n d th at n o su ch p ayee in fact exists. The m ak er Consequently is
p reclu d ed from settin g u p th e followin g defenses: (l) 'th at th e p ayee is a fictitious
p erson b ecau se, b y m ak in g th e note, h e ad m its th at th e p ayee exists^ an d (2) th at the
p ayee w as in san e, a m in or, or a corp oration actin g ultra vires b ecau se, b y m ak in g the
n ote, h e ad m its th e cap acity of th e p ayee to in dorse.
>
Un d er th e N egotiable In stru m en ts Law, p erson s w h o w rite th eir n am es on the
face of p rom issory n otes are m ak ers an d liable as su ch .12 The d raw er by d raw in g the
1G.R. N o. L-26767, Feb ru ary 22,1968.
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2Rep u blic Pla n ters Ba n k v s. C ou rt of A p p ea ls an d Can las, G .R. N O . 93073, D e cem ber 21, 1992; 216 SCRA
730 (1992).
•
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instrument ad m its th e existen ce of the payee an d his then cap acity to in dorse; an d
engages that, on d ue p resen tmen t, the in stru m en t will be accep ted or paid, or b oth ,
according to its tenor, an d th at if it be dishonored and the n ecessary p roceed in gs
on dishonor are d u ly taken, he w ill p ay the am ou n t thereof to th e h older or to an y
subsequent in d orser w h o m ay b e compelled to p ay it. But the d raw er m ay in sert
in the in stru m en t an exp ress stipulation n egativin g or limiting his ow n liability
to the holder.3 The secon d ary liability of the d rawer is in favor of the holder, or if
any of the in d orsers in terven in g b etw een the holder and the d raw er is com p elled
to pay by the holder, th e d raw er will be liable to that indorser so com p elled to pay.
The drawer d oes n ot engage to p ay the bill absolutely. He en gages m erely th at th e
bill will be accep ted or paid or both, accord in g to its tenor and th at he will p ay only
when it is d ish on ored , an d the n ecessary p roceedings of dishonor are d u ly taken.
Accordingly, if a bill is n ot paid, t)ie drawer becomes liable for the p aym en t of its
value to th e h old er p rovid ed th at notice of dishonor is given. In the ab sen ce of d ue
presentment, th e d raw er is n ot liable.
,
To illu strate: X b orrow ed money from Y in the am ou n t of PI m illion an d
as payment, issu ed a check. Y then indorsed the check to his sister Z for n o
consideration. Wh en Z deposited the check to her account, the check w as d ish on ored
for insufficiency of fu n ds. In such a case, X, the drawer, will be liable for th e ch eck .
As the d rawer, X en gaged th at on due presentment the check w ou ld b e p aid
according to its ten or an d that if it is dishonored and he is given notice of d ish on or,
he will p ay th e am ou n t to the holder. No notice of dishonor need be given to X if h e
is aware th at h e h as insufficient funds in his account. Under Section 114(d), n otice of
dishonor is n ot req u ired to be given to the drawer where he h as n o righ t to exp ect
that the d raw ee w ill h on or the instrument.
The d raw ee is th e p erson on whom a. bill of exchange or ch eck is d raw n and
who is ord ered to p ay it. He is n ot liable on the in strumen t u n til he accep ts it, an d
even a h older in d ue cou rse can n ot sue h im on the in stru men t before h is accep tan ce.
The mere issu an ce of th e bill does not make the drawee liable th ereon b ecau se it
does not op erate as an assign men t of the funds of the drawee.
Accord in g to Section 62, the acceptor, by acceptin g the in stru m en t, en gages th at
he will p ay it accord in g to the tenor of his acceptance "and ad mits: (1) th e existen ce
of the drawer, th e gen uineness of his signature, and his cap acity an d au th ority to
draw the in stru m en t; an d (2) the existence of the payee an d his th en cap acity to
indorse. Once th e bill is accep ted, the accep tor b ecomes p rim arily liable on th e
instrument. The p resu m p tion is th at every bill of exchan ge is d raw n on accou n t of
some indebtedness from the d raw ee to the drawer, and th at the accejptance is an
appropriation of th e fu n ds of the latter in the h an d s of the former.
3Section 61, N IL.
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To illu strate: A bill of exch an ge h as R as d rawer, E as d rawee, and P as payee.
The bill w as th en in d orsed to G, G to H, an d H to 1.1, th e cu rren t h older presented
the bill to E for accep tan ce. E accep ted but, as it later tu rn ed out, R is a fictitious
p erson . E is n ot freed from liability b ecau se by accep tin g the bill, E ad mits the
existen ce of th e drawer.
Th e accep tor d oes n ot ad m it th e gen uinen ess of the in d orser's signature.
By accep tin g th e in stru m en t, th e accep tor w arran ts th at he is p rim arily liable
an d en gages to p ay accord in g to th e ten or of his accep tance. Wh ile th e m ak er of
a n ote en gages to p ay accord in g to the ten or of the note, an accep tor en gages to
p ay accord in g to the tenor of h is accep tance, not of the bill h e accep ts. This is an
im p ortan t d istin ction for the tenor of the accep tor's accep tan ce m ay be different
from th e ten or of the bill, as the acceptor may accep t the bill w ith qualification s. But,
of cou rse, if h is accep tan ce, is general, the tenor of the bill is the sam e ten or as the
ten or of h is accep tan ce. Thus, suppose that the bill is payable "30 d ays after sight"
an d th e d raw ee accep ts it but payable "60 days after sight". He en gages to p ay the
bill "60 d ays after sight," wh ich is tenor of his acceptance, npt "30 d ays after sight",
th e ten or of th e bill. Suppose th at the bill is for P100,000 and th e accep tor accep ts
it for P60,000, he would be liable only for P60,000, the ten or of his accep tan ce, not
P100,000, th e tenor of the bill.
To illu strate: A bill of exchange states on its face: "On e m onth after sight, pay
to th e ord er of Mr. R the amoun t of P5Q,000, chargeable to the accou n t of Mr. T.
Signed, Mr. T." Mr. S, the d raw ee/accep ted the bill u pon p resen tm en t b y w ritin g on
it th e w ord s, "I shall p ay P30,000 th ree months after sight." H e m ay accep t under
such term s wh ich varies the com m an d in the bill of exch an ge b ecau se a drawee
accep ts accord in g to the ten or of his acceptance.
Un d er Section 63, a p erson placing his sign atu re u pon an in stru m en t oth er than
as m ak er, d raw er, or acceptor, is deemed to be indorser u n less he clearly indicates
by ap p rop riate w ord s h is intention to be b ou n d in some oth er capacity. O n th e other
h an d , Section 64 p rovid es th at if a p erson wh o is not a p arty to an in stru men t,
p laces th ereon his sign atu re in blank before delivery, he is liable as an indorser.
As su ch in d orser, if th e in stru m en t is payable to th e ord er of a th ird p erson ; he is
liable to th e p ayee an d to all subsequent p arties. If the in stru m en t is p ayable to the
ord er of th e m ak er or d rawer, or is payable to the b earer, h e is liable as in d orser to
all p arties sub seq uen t to th e m ak er or drawer. An d as an in dorser, if h e sign s for the
accom m od ation of th e payee, h e is liable to all p arties su b sequent to th e payee.
Accord in g to Section 65, every p erson n egotiatin g an in stru m en t b y delivery
or b y a q ualified in d orsem en t w arran ts: (1) th at th e in stru m en t is gen uine an d in
all resp ects w h at it p u rp orts to be; (2) th at he h as a good title to it; (3) th at all prior
p arties h ad cap acity to con tract; an d (4) th at he h as no k now ledge of an y fact which
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would im p air th e valid ity of th e in stru m en t or ren d er it valueless. But w h en -th e
negotiation is b y d elivery only, the w arran ty exten ds in favor of n o h old er oth er
than the im m ed iate tran sferee.
To illu strate:
A.
B.
C.
M arth a m ak es a p rom issory note th at states: "I, M arth a, p rom ise to p ay P50,000
to Breech or b earer. Signed, M arth a." M arth a n egotiated th e n ote b y d elivery
to Breech, Breech to Ch an dler, and Chan dler to Loki. Breech h ad k n ow n th at
M arth a w as b an k ru p t w h en M arth a issued the note. In th is case, Ch an d ler w ill
be liable to Lok i, b ein g Loki's imm ed iate n egotiator of a b earer note.
‘
.
i.
M ax is th e h old er of an in stru m en t payable to h im (Max) or h is ord er, w ith
Bailey as m ak er. M ax th en indorsed it as follows: "Subject to n o recou rse, p ay
to Tachi. Signed, M ax." Wh en Tachi went to collect from Bailey, it tu rn ed ou t
th at Bailey's sign atu re w as forged. Tachi now sues M ax for collection. In th is
case, th e su it again st M ax will p rosp er because M ax, as a q ualified in d orser,
w arran ts th at th e n ote is genuine.
,
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AA issu ed a p rom issory note payable to BB or bearer. AA d elivered th e n ote
to BB. BB in d orsed th e note to CC. ,CC placed the note in h is d raw er, w h ere
it w as stolen b y th e janitor XX. XX indorsed the note to DD by forgin g CC's
sign atu re. DD in d orsed th e note to EE who in tu rn d elivered th e n ote to FF, a
h older in d u e cou rse, without indorsement. In this case, AA, as th e m ak er of
the p rom issory note, is p rimarily liable to FF, wh o is a h old er in d ue cou rse.
Alth ou gh XX forged the signature of CC, the liability of th e m ak er rem ain s
b ecau se h e en gages to p ay any b earer of the in stru ment. En d orsem en t is n ot
n ecessary for th e title of th e holder b ecau se the in stru m en t m ay b e n egotiated
by m ere delivery. O n th e oth er h and , BB and CC are not liable to FF as p erson s
secon d arily liable. En d orsers of b earer in stru men ts are liable to th ose p erson s
who ob tain title th rou gh th eir endorsement. FF did n ot ob tain title th rou gh
the en d orsem en t of BB and CC b ecau se CC's sign atu re is forged. CC is n ot
even liable to FF as h is forged sign atu re is wholly inop erative. M oreover, th e
in stru m en t w as m erely delivered by EE to FF, h ence even if CC en d orsed th e
in stru m en t, FF can n ot trace his title from th eir en dorsement.
v
The liability of a restrictive indorser w ou ld depend on w h at k in d of restrictive
indorsement h e m ad e. If it prohibits th e fu rth er n egotiation of'th e in stru m en t,
the in stru m en t ceases to be negotiable. Neverth eless, the restrictive in d orser is
liable to h is im m ed iate in d orsee as an unqualified indorser, u n less h e oth erw ise
indicates. However, an y subsequent tran sferee can n ot acqu ire th e righ ts of a h old er
because th e in stru m en t h as b ecom e non-negotiable, and h is rights, if any, w ill b e
merely th at of an ord in ary assignee. Accord in g to Section 66, every in d orser w h o
indorses w ith ou t qualification, w arran ts to all subsequent holders in due cou rse th e
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following: (1) th at th e in stru m en t is genuine an d in all resp ects w h at it purports to
be; (2) th at h e h as a good title to it; (3) th at all p rior p arties had capacity to contract;
an d (4) th at the in stru m en t is, at the time of his indorsement, valid and subsisting.
In ad dition, he engages that, on due p resentmen t, it shall be accep ted or paid, or
b oth , as th e case m ay be, accord in g to its tenor, and th at if it be dishonored and the
n ecessary p roceed in gs on dishonor be duly taken, he will pay the am ou n t thereof
to th e holder, or to an y subsequent indorser who m ay be compelled to p ay it. •
To illu strate:
A. r
M arth a, th e maker, issued a p rom issory note to Perry, the p ayee wh ich states:
"I, M arth a, p rom ise to pay Perry or order the am ou n t of PI million. Signed,
M arth a." Perry n egotiated the note by indorsement to Pompom, th en Pompom
to Simon also b y indorsement, and Simon to Boyito, again by indorsement. But
b efore Simon in dorsed the note to Boyito, Simon's wife w rote the figu re "2" on
th e n ote after "PI" without Simon's knowledge, mak in g it ap p ear th at the note
is for P12 million. In this case, Simon will be liable to Boyito for P12 million
sin ce h e w arran ts th at th e note is genuine and in all resp ects w h at it purports
to be.
. . .
B.
Perry sold to M arth a 10 gram s of shabu w orth P500,000. As h e h ad no money
at th e tim e of th e sale, M arth a w rote a p rom issory note p rom isin g to p ay Perry
or h is ord er P500,000. Perry then indorsed the note to Max (who did n ot know
ab ou t th e shabu)^ and M ax to Bailey. Unable to collect from Perry, Bailey then
su ed M ax on th e note. In this case, M ax can n ot set up the defense of illegality
ofLcon sid eration since he is a general indorser who w arran ts th at th e note is
valid an d subsisting.
.J
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Section 67 p rovid es th at if a p erson places his indorsement bn an instrument
n egotiab le b y delivery, he in cu rs all th e liability of an indorser. Signing a bearer
in stru m en t m ak es th e in d orser liable u n d er Section 66. Accord in g to Section 69, if a
b rok er or oth er agen t n egotiates an in stru m en t w ithou t indorsement, he in cu rs all
th e liabilities p rescrib ed b y Section 65, u nless he discloses th e n am e of h is principal
an d th e fact th at h e is actin g on ly as agent.
..' 1
Su m m ary of d istin ction s b etw een liabilities of p erson s negotiating:
A.
298
As to th e p arty n egotiatin g by delivery, h is w arran ties exten d only to the
, im m ed iate tran sferee, w hile as to th e qualified indorser and the gen eral indorser,
th ey exten d to p arties subsequent to them. As b etw een a qualified indorser
an d a gen eral indorser, the w arran ties of th e first exten d to all subsequent
p arties wh o acqu ire title th rou gh h is in d orsemen t regard less of w h eth er they
are h old ers in due cou rse or not, while as to the second, his w arran ties extend
on ly to subsequent holders in due cou rse, subsequent p arties d erivin g their
title from hold ers in due cou rse an d h is im m ed iate transferee.
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g
Un d er Section 65, th e p arty n egotiatin g b y d elivery or b y q u alified
in d orsem eh t w arran ts on ly th at he is ign oran t of an y fact w h ich w ou ld im p air
the valid ity of th e in stru m en t or ren d er it valu eless, w h ile u n d er Section 66,
the gen eral in d orser w arran ts th at th e in stru m en t is valid an d su b sistin g.
C.
Under Section 65, th e p arty n egotiatin g b y d elivery or qualified in d orsem en t
does n ot en gage to p ay th e in stru m en t if it is d ish on ored b y n on -accep tan ce or
non-payment excep t w h en such dish on or arises from h is fou r w arran ties. In
other w ords, h is secon d ary liability is limited. Un d er Section 66, th e gen eral
indorser en gages to p ay th e holder or an y in terven in g p arty w h o m ay b e
compelled b y th e h old er to p ay if the in stru m en t is d ish on ored eith er b y n on accep tan ce or n on -p aym en t, w h eth er such d ishonor arises from th e w arran ties
or from oth er cau ses such as insolvency. In oth er w ords, h is secon d ary liab ility
is not limited to th e fou r w arranties.
Accord in g to Section 68, w ith resp ect to one an oth er, in d orsers are liable prima
facie in th e ord er in w h ich th ey indorse; but evid en ce is admissible to sh ow th at, as
between or am on g th emselves, th ey have agreed oth erw ise. Joint p ayees or join t
indorsees w h o in d orse are d eemed to indorse jointly an d severally. This ru le ap p lies
only with resp ect to an in dorser as again st anoth er b ut n ot as again st a h old er in
due course. Un d er th is rule, every indorser is liable to all in d orsers su b seq u en t to
him but n ot th ose p rior to h im wh om he, in tu rn , m ak es liable. Am on g th em selves,
indorsers are liable prima facie in the order th ey indorse. But Section 68 d oes n ot
bind the hold er w h o m ay sue any of the indorsers, regard less of th e ord er of th eir
in d orsem en t..'. ,
.
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To illu strate: An in stru m en t payable to the ord er of A b ears th e follow in g
indorsement at th e b ack thereof: A, B, C, and D. The p resen t h old er is E. E m ay
recover p aym en t from an y of said indorsers.
PRACTICE EXERCISE
• Distinguish! an irregu lar in dorser from a gen eral indorser.
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RELEVANCE O F TH E LESSO N
Given th e im p ortan ce of negotiable in stru m en ts, all p arties sh ou ld u n d erstan d
how to en force a n egotiable in stru m en t an d m ak e su re th eir righ ts are p rotected .
The lesson exp lain s th e law regard in g th e en forceab ility of n egotiab le in stru m en ts
and the w arran ties an d th e corresp on d in g liabilities of th e p arties, as w ell as th e
rights of the holder.
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LES S O N SU M M A R Y
•
A p arty p rim arily liable on th e n egotiab le in stru m en t is d u ty-b ou n d to p ay the
h old er at th e d ate of m atu rity, w h eth er or n ot th e h old er d em an d s payment
from h im , an d h e is n ot relieved from liability even if th e in stru m en t should
b ecom e overd u e d ue to th e failu re of th e h old er to m ak e su ch d em an d .
•
A p arty secon d arily liable is n ot b ou n d to p ay u n less th e follow in g conditions
h ave b een fulfilled: d u e p resen tm en t or d em an d to th e p rim ary p arty for
p aym en t or accep tan ce, its d ish on or b y su ch p arty, an d th e tak in g of p roceed in gs
req u ired b y law after dish on or.
•
Th e p arty n egotiatin g b y d elivery or b y q ualified in d orsem en t warrants
on ly th at h e is ign oran t of an y fact w h ich w ou ld im p air th e valid ity of the
in stru m en t or ren d er it valueless; he d oes n ot en gage to p ay th e in stru m en t if it
is d ish on ored b y n on -accep tan ce or n on -p aym en t excep t w h en su ch dishonor
arises from h is fou r w arran ties.
•
A q u alified in d orser's w arran ties exten d to all su b seq u en t p arties w h o acquire
title th rou gh h is in d orsem en t regard less of w h eth er th ey are h old ers in due
cou rse or n ot w h ile th e w arran ties of a p arty n egotiatin g b y d elivery extend
on ly to th e im m ed iate tran sferee.
•
Th e gen eral in d orser w arran ts th at th e in stru m en t is valid an d su b sistin g; his
w arran ties exten d on ly to subsequent holders in d ue cou rse, su b seq u en t parties
d erivin g th eir title from holders in due cou rse an d h is im m ed iate tran sferee; he
en gages to p ay th e h old er or any in terven in g p arty w h o m ay b e com p elled by
th e h old er to p ay if th e in stru m en t is d ish on ored either b y n on -accep tan ce or
n on -p aym en t w h eth er su ch dish on or arises from th e w arran ties or from other
cau ses su ch as insolvency.
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Lesson 2: D efen ses
The d efen ses referred to in Section 57, from w h ich th e h old er in d u e cou rse is
free, are equitable (p erson al) d efenses only, n ot legal (real) d efen ses, w h ich latter
class of d efen ses can b e set u p again st a h older in due cou rse.
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Real or absolute d efen ses are th ose th at attach to th e in stru m en t itself an d are
availab le again st all holders, w h eth er in due cou rse or not. In real d efen ses, th e right
sou gh t to b e en forced h as n ever existed or ceased to exist. An in stru m en t subject
to real d efen se can n ot be en forced again st th e p erson to w h om th e legal defense is
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available, but it can be enforced against those to whom such a defense is n ot available.
Real defenses are good again st assignees and all holders, including holders in d ue
course. Examples of real defenses are the following: (1) alteration; (2) n on -delivery of
incomplete in stru men t; (3) d uress amounting to forgery (when sign atu re is acq u ired
by duress); (4) fraud in factum or fraud in esse contractus; (5) minority; (6) m arriage in
the case of a wife; (7) in san ity where the insane person has a gu ard ian appoin ted
by the cou rt; (8) ultra vires acts of a corporation, where the corporation is absolutely
prohibited by its ch arter or statute from issuing any comm ercial p ap er u n d er any
circumstances; (9) w an t of authority of agent; (10) execution of in stru m en t b etw een
public enemies; (11) illegality of contract where it is the con tract or in stru m en t itself
which is exp ressly made illegal by statute; (12) forgery; (13) p rescrip tion ; an d (14)
discharge in insolvency.
Personal D efen ses
Personal defenses are good against ordin ary holders, assignees, an d th e
immediate p arties to negotiable instruments, but they are not good again st h old ers
in due course. In other words, personal defenses are available only again st a
person not a holder in due course or a subsequent holder who stan d s in p rivity
with him. Examp les of personal defenses are the following: (1) absence or failu re of
consideration;4 (2) wan t of delivery of complete instrument; (3) in sertion of w ron g
date in an in stru ment, where it is payable at a fixed period after date an d it is issu ed
undated or wh ere it is payable at a fixed period after sight and the accep tan ce is
undated; (4) filling up of blank contrary to authority given or not w ithin reason ab le
time, where the in strum ent is delivered; (5) fraud in inducement; (6) acqu isition of
instrument by force, duress, or fear; (7) acquisition of the in stru m en t b y u n law fu l
means; (8) acquisition of the instrument for an illegal consideration; (9) n egotiation
in breach of faith; (10) negotiation under circumstances that am ou n t to fraud; (11)
mistake; (12) intoxication; (13) ultra vires acts of corporations wh ere th e corp oration
has the power to issue negotiable paper but the issuance was not au th orized for th e
particular p u rp ose for which it was issued; (14) want of authority of agent w h ere he
has apparent authority; (15) insanity where there is no notice of in san ity on the p art
of the one con tractin g with the insane person; and (16) illegality of con tract w h ere
the form or consideration is illegal.
To illustrate:
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Bailey was in desperate need of money to pay his debt to Perry, a loan shark.
Perry threatened to kill Bailey if he failed to pay. Bailey and Perry went to see
Cremeneone, Bailey's rich cousin, and asked her if she could sign a p rom issory
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4State Investm en t H ou se, Inc. vs. CA and Mou lic, G.R. N o. 101163, Jan u ary 11,1993.
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n ote in h is favor in th e am ou n t of PI m illion to p ay Perry. Fearin g th at Perry
w ou ld k ill Bailey, Crem en eon e acced ed to th e req u est. She affixed h er signature
on a p iece of p ap er w ith th e assu ran ce of Bailey th at h e w ill ju st fill it up
later. Bailey th en filled u p th e b lan k p ap er, m ak in g a p rom issory n ote for the
am ou n t of P10 m illion . H e th en in d orsed an d d elivered th e sam e to Perry, who
accep ted th e n ote as p aym en t of th e d ebt. In th is case, th e p erson al defense
w h ich Crem en eon e can set u p again st Perry is th at th e am ou n t of P10 million
is n ot in accord an ce w ith th e au th ority given b y h er to Bailey (in th e presence
of Perry) an d th at Perry w a s n ot a h old er in d u e cou rse for actin g in b ad faith
w h en h e accep ted th e n ote as p aym en t d esp ite h is k n ow led ge th at it w as only
PI m illion th at w as allow ed b y Crem en eon e d u rin g th eir m eetin g w ith Bailey.
B.
Pom p om issu ed tw o p ost-d ated ch eck s to Cream o, as secu rity for p ieces of
jew elry to b e sold. Each ch eck h as a face valu e of P50,000. Th ereafter, Creamo
n egotiated th e ch eck to D ogon gh ei, Inc. w ith ou t th e k n ow led ge of Pomp om.
Pom p om retu rn ed th e p ieces of jew elry to Cream o an d tried to retrieve the
ch eck s. H avin g failed to d o so, Pom p om w ith d rew h er fu n d s from th e drawee
b an k an d th e ch eck s w ere con seq u en tly d ish on ored w h en p resen ted ' for
p aym en t. D ogon gh ei, Inc. su ed Pom p om w h o in terp osed th e d efen se th at the
ch eck s d id n ot h ave an y con sid eration . H ow ever, Pom p om d id n o t p resen t
p roof th at D ogon gh ei, Inc. is n ot a h old er in d u e cou rse. In th is case, th e defense
of ab sen ce of con sid eration w ill n ot p rosp er again st D ogon gh ei, In c. Pom p om
can n o t in vok e th e d efen se of ab sen ce of con sid eration again st D ogon gh ei, Inc.
Th ere is n o sh ow in g th at D ogon gh ei, Inc, is n ot a h old er in d u e cou rse, hence,
th e p resu m p tion on d u e cou rse h old in g stan d s. As a h old er in d u e course,
D ogon gh ei, Inc. is free from p erson al d efen ses of p rior p arties.
C.
Ju n jay w as ab ou t to leave for a b u sin ess trip. As h is u su al p ractice, h e signed
1 b lan k ch eck s. H e in stru cted Ragesh , h is secretary, to fill th em as p aym en t for
h is ob ligation s. Th e ch eck s w ere stolen w h ile in Ragesh 's p ossession an d the
th ief filled a b lan k ch eck , in d orsed , an d d elivered it to Ch loe in p aym en t for
th e go od s h e p u rch ased from her. M ean w h ile, Ragesh im m ed iately rep orted
th e loss to Ju n jay w h o im m ed iately d irected th e d raw ee b an k to d ish on or the
ch eck s so w h en Ch loe en cash ed th e ch eck , it w as d ish on ored . In th is case, Junjay
w ill n ot b e liable to Ch loe if th e ch eck w as d ish on ored . Even th ou gh Chloe
is a h old er in d u e cou rse, th is is an in com p lete an d u n d elivered in stru m en t.
A ccord in g to Section 15 of th e N IL, if an in com p lete in stru m en t h as n ot been
d elivered , it w ill n ot, if com p leted an d n egotiated w ith ou t au th ority, b e a valid
con tract in th e h an d s of an y h old er, as again st an y p erson , in clu d in g Junjay,
w h ose sign atu re w as p laced th ereon b efore d elivery. Su ch d efen se is a real
d efen se even again st a h old er in d u e cou rse, availab le to a p a r ty lik e Junjay
w h ose sign atu re ap p eared p rior to d elivery.
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X m ak es a p rom issory n ote for P5,000 payable to A, a m in or, to h elp h im b u y
sch oolbook s. A in d orses th e n ote to B w h o in tu rn in d orses .the n ote to C. C
k nows A's m in ority In th is case,, if C su es X on th e n ote, lack of con sid eration
b etw een X an d A, can n ot b e set u p b y X as a d efen se again st X b ecau se it is a
p erson al d efen se again st an im m ed iate p arty or again st a p arty n ot a h old er in
due cou rse. M oreover, th e m in ority of A is a defense th at A alon e can in vok e
when su ed .
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BB w as in d esp erate n eed of m on ey to p ay h is d eb t to PP, a loan sh ark . PP
th reaten ed to tak e BB's life if he failed to pay. BB an d PP w en t to see SS, BB's
rich cou sin , an d ask ed h er if she cou ld sign a p rom issory n ote in h is favor in
the am ou n t of *P100,000 to p ay PP. Fearin g th at PP w ou ld kill BB, SS acced ed to
the req u est. She affixed h er sign atu re on a p iece of p ap er w ith th e assu ran ce of
BB th at h e w ill ju st fill it u p later. BB then filled u p th e b lan k p ap er, m ak in g a
p rom issory n oted for th e am ou n t of PI,000,000. He th en in d orsed an d d elivered
the sam e to PP, w h o accep ted the note as p aym en t of th e debt. In th is case. SS
can set u p b oth real d efen ses and p erson al defen ses again st PP w h o can n ot
claim to b e a h old er in d ue cou rse since he k new th e com p u lsion u sed u p on SS.
The follow in g real d efen ses are available: (a) in com p leten ess of th e in stru m en t
b ecau se SS sign ed on ly a b lank piece of p aper; (b) d u ress am ou n tin g to forgery;
/a n d (c) alteration of th e h old er by ch an gin g the am ou n t. The follow in g are th e
p erson al d efen ses th at are available: (a) fraud in in d u cem en t; (b) in com p lete
w h en d elivered in stru m en t; an d (c) lack of consideration.
A in d u ces B b y frau d to m ak e a p rom issory n ote payable on d em an d to ord er
of A in th e su m of P5 million. A can n ot file an action su ccessfu lly again st th e
m ak er B for th e am ou n t of th e note b ecau se B m ay raise th e d efen se of fraucl
in in d u cem en t again st A, w h o is n ot a holder in d ue cou rse. Th is is esp ecially
tru e in th is case w h ere A w as th e on e w ho fraud ulen tly in d u ced B to issu e th e
note. G oin g fu rth er, assu m e th at A tran sfers th e n ote to C w h o p ays P5 m illion
th ereof an d acq u ires th e n ote u n d er circu m stan ces th at m ak e h im a h old er i n 1
d ue cou rse. In th is case, C can file an actidn su ccessfu lly again st B, th e m ak er
of th e n ote, for th e am ou n t of the note. C is p resu m ed to b e th e h old er in d u e
cou rse. ■ ■-,. ;
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PS issu ed in favor of JE a p ost-d ated crossed ch eck , in p aym en t of su gar w h ich
JE p rom ised to d eliver. JE sold an d n egotiated th e ch eck to El at a d iscou n t.
El d id n ot ask JE th e p u rp ose of crossin g th e ch eck . Since j F failed to d eliver
sugar, PS ord ered th e d raw ee b an k to stop p aym en t on th e ch eck . Efforts of
ETto collect from PS failed. In th is case, El is n ot a h old er in d ue cou rse. Th e
in stru m en t in volved is a crossed ch eck an d w as su p p osed to be d ep osited only.
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El is th erefore obligated to in q u ire regard in g th e circu m stan ces in volvin g the
issu an ce of th e ch eck . Failu re on h is p art, as in th is case, w ill p reven t h im froi^
b ecom in g a h old er in due cou rse, an d su ch failu re oi refu sal con stitu ted bad
faith. El is subject to p erson al d efen se w h ich PS can set u p again st JE. There
w as a failu re of con sid eration in th e p rob lem b ecau se JE failed to d eliver the
su gar to PS.
PRA C TIC E EXERCISE
Elizab eth issu ed to Irish a ch eck in th e am ou n t of P50,000 p ost-d ated September
30, 2020, as secu rity for a d iam on d rin g to be sold on com m ission . O n September
15, 2020, Irish n egotiated th e ch eck to Big Ban g In vestmen t, w h ich p aid th e amount
of P40,000 to h er. Elizab eth failed to sell th e rin g, 'so she retu rn ed it to Irish on
Sep tem b er 19, 2020. Unable to retrieve h er check, Elizab eth w ith d rew h er funds
from th e d raw ee b an k . Thus, wh en Big Bang In vestmen t p resen ted th e ch eck for
p aym en t, th e d raw ee b an k dish on ored it. Later on, wh en Big Ban g In vestm en t sued
h er, Elizab eth raised th e defense of absence of consideration, th e ch eck h avin g been
issu ed m erely as secu rity for the rin g th at she could n ot sell. D oes Elizab eth have a
valid d efen se?5
RELEVAN CE O F TH E LESSO N
The p rivileged position of the holder in due cou rse stan d s u p again st th e socalled p erson al defenses. Real defenses are good again st an y holder, in clu d in g a
h old er in d u e cou rse. Wh ile a payee m ay be a holder in due cou rse, h is or h er rights
as su ch are lim ited to avoiding defenses of p erson s the p ayee did n ot d eal with. It
is im p ortan t to k n ow th e defenses so the p arty will k now w h ere h e stan d s with
resp ect to th e negotiable in stru ment.
LESSO N SUM M ARY
Real or absolute defenses are th ose th at attach to the in stru m en t itself an d are
available again st all holders, w h eth er in due cou rse or not, w h ile p erson al defenses
are available on ly again st a p erson not a holder in due cou rse or a su b seq u en t holder
w h o stan d s in p rivity w ith him.*304
5Th is ca se w a s p attern ed from th e case o f State In v estm en t H ou se, In c. vs. CA an d M ou lic, G.R. N o. 101163,
Ja n u a r y 11,1993, w h ich w as g iv en in the 1996 Ba r Exam in ation s in M ercan tile Law .
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Lesson 3: En forcem en t of Liab ility
Parties Prim arily Liab le an d Parties Secon d arily Liab le
Accord in g to Section 192, the p erson "p rim arily" liable on an in stru m en t is
the person wh o, b y th e term s of the in stru m en t, is absolutely req u ired to p ay th e
same. All oth er p arties are "secon d arily" liable. The p arties p rim arily liable on the
instrument are th e m ak er of a p rom issory note and the accep tor of a bill. The d raw ee
is not a p arty liable on th e in stru m en t until and u nless h e accep ts; in su ch case,
he becomes an accep tor an d is p rim arily liable ori the bill. The p arties secon d arily
liable are th e in d orser of b oth a note and a bill, and the d raw er of a bill.
General Step s in En forcin g Liab ility
There are tw o typ es of presentmen t. If it is for payment, its fu n ction al eq u ivalen t
is d emand for p aym en t. If it is for acceptance, it is only n ecessary in cases of b ills
of exchan ge th at are payable at sight or within a certain n u m ber of d ays after sigh t.
According to Section 143, p resentment for accep tance is n ecessary w h en: (1) th e bill
is payable at sigh t or n ecessary to fix m aturity; (2) the bill specifically stip u lates; an d
(3) the bill is d raw n payable at a certain place.' Other th an th ese cases, p resen tm en t
for accep tan ce is n ot n ecessary. If the bill is dishonored by n on -accep tan ce: (1) n otice
of dishonor b y n on -accep tan ce must be given to p erson s secon d arily liable u n less
excused; an d (2) in case of foreign bills, protest for dishonor b y n on -accep tan ce m u st
be made u n less excu sed . But if the bill is accepted, or if the bill is n ot req u ired to b e
i presented for accep tan ce, it m u st be presented for p aym en t to the p erson p rim arily
liable u n less excu sed . If th e bill is dishonored by non-payment: (1) n otice of d ish on or
by n on -accep tan ce m u st be given to persons secondarily liable u n less excu sed ; an d
(2) in case of foreign bills, p rotest for dishonor by n on -accep tan ce m u st b e m ad e
unless excu sed .
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Presen tm en t for Paym en t
Section 70 p rovid es th at p resen tm en t for p aym en t is h ot n ecessary in ord er to
charge the p erson p rim arily liable on the in stru ment; b u t if th e in stru m en t is, b y its
terms, payable at a sp ecial place, an d he is able and willing to pay it th ere at m atu rity,
such ability an d w illin gn ess are equivalent to a ten der of p aym en t u p on h is p art.
But except as h erein oth erw ise p rovided, p resentment for p aym en t is n ecessary in,
order to ch arge th e d raw er an d indorsers.
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Accord in g to Section 71, if th e in stru m en t is n ot payable on d em an d ,
p resen tm en t m u st b e m ad e on the day it falls due. If it is payable on d em an d ,
presentment m u st b e m ad e w ith in a reasonable time after its issue, excep t th at in
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th e case of a bill of exch an ge, p resen tm en t for p aym en t will b e sufficient if made
w ith in a reason ab le tim e after the last n egotiation thereof. Section 72 p rovides that
p resen tm en t for p aym en t, to be sufficient, m u st be m ad e by th e holder, or by some
p erson au th orized to receive p aym en t on h is behalf, at a reasonable h ou r on a business
d ay an d at a p rop er place, to the p erson p rim arily liable on th e in stru m en t, or if he
is ab sen t or inaccessible, to an y p erson found at th e place w h ere th e presentmen t is
m ad e.
Section 73 states th at p resen tm en t for p aym en t is m ad e at th e p rop er place
if p resen ted at th e p lace of p aym en t specified in th e in stru m en t. Presen tm en t for
p aym en t is m ad e at th e p rop er place, if th ere is no place of p aym en t specified,
an d it is p resen ted at th e ad d ress of the person to: m ak e p aym en t as stated in
th e in stru m en t. Presen tm en t for p aym ent is also mad e at th e p rop er p lace if the
in stru m en t is p resen ted at the u su al place of business or residence of th e person to
m ak e th e p aym en t if n o place of p aym en t is specified and no ad d ress is given. In
an y oth er case, p resen tm en t for p aym ent is made at the p rop er p lace if p resented to
th e p erson to m ak e p aym en t w h erever he can be found, or if p resen ted at h is last
k n ow n p lace of business or residence.
Accord in g to Section 74, the in stru m en t must be exhibited to th e p erson from
w h om p aym en t is d em an d ed , and when it is paid, mu st be d elivered up to th e party
p ayin g it. Section 75 p rovid es th at if the in strument is payable at a b ank , presentment
for p aym en t m u st be m ad e d u rin g banking hours unless the p erson to m ak e the
p aym en t h as no fu n d s th ere to m eet it at any ,time during the day, in w h ich case
p resen tm en t at an y h ou r before the bank is closed on th at d ay is sufficient. Section
76 states th at if th e p erson p rim arily liable on the in stru m en t is d ead an d no place
of p aym en t is specified, p resen tm en t for paymen t m u st be m ad e to h is personal
rep resen tative, if su ch th ere be, and if, with the exercise of reason ab le diligence,
h e can b e found. Accord in g to Section 77, if the p erson s p rim arily liable on the
in stru m en t are liable as p artn ers an d no place of p aym en t is specified, presentment
for p aym en t m ay b e m ad e to an y one of them, even th ou gh th e p artn ersh ip h as(
alread y b een d issolved . If th ere are several persons, n ot p artn ers, w h o are primarily
liable on th e in stru m en t an d n o p lace of p aym en t is specified, Section 78 provides
th at p resen tm en t m u st be m ad e to th em all.
Presen tm en t for p aym en t is th e p rod u ction of a bill of exch an ge to th e drawee
for h is accep tan ce, or to the, d raw ee or accep tor for p aym en t or th e p rod u ction of a
p rom issory note to th e p arty liable for p aym en t of the same. It con sists of a personal
d emand for p aym ent at the p rop er p lace w ith the bill or note in read in ess to exhibit
it if required, and to receive p aym en t an d su rren d er it if the debtor is willing to
pay. Presentment for p aym en t to th e p erson p rim arily liable is n ecessary to charge
p erson s secondarily liable.
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The in stru m en t m u st be p resented: (1) on the date of matu rity, if it is p ayab le
on a fixed date; (2) w ith in a reasonable time after issue, if it is a p rom issory n ote;
and (3) within a reason ab le time after the last negotiation, if it is a bill of exch an ge.6
Otherwise, th e d raw er an d in dorsers are d isch arged from liability. In d eterm in in g
what is a "reasonable tim e," regard is to be had to the n atu re of th e in stru m en t,
the usage of trad e or business w ith resp ect to su ch in stru m en ts, an d th e facts of
the p articu lar case.7 Presen tm en t for paymen t mu st be m ad e w ith in th e p eriod
required to the p erson p rim arily liable unless excused and if th e n ote is d ish on ored
by non-payment, a n otice of dishonor by non-payment mu st be given to th e p erson
secondarily liable u n less excused. Presentment for p aym en t is n ot n ecessary to
charge p erson s p rim arily liable. But it is n ecessary to ch arge p erson s secon d arily
liable, except; (1) as to the draw er where he has no right to exp ect or req u ire th at
the drawee or accep tor will p ay the instrument;8 and (2) as to th e in d orser w h ere
the in strument w as m ad e or accepted for his accommodation and h e h as n o reason
to expect th at th e in stru m en t will be paid if presented.9 Presen tm en t for p aym en t
is dispensed with: if after the exercise of reasonable diligence, p resen tm en t can n ot
be made; if th e drawee is a fictitious person; by waiver of exp ress or imp lied
presentment;10 an d if the instru men t has been dishonored by n on -accep tan ce.
To illu strate: X ^executed a promissory note in favor of Y b y w ay of
accommodation. It says: "Pay to Y or order the amount of P50,000. Signed, X." Y
then indorsed th e note to Z, and Z to T. When T sought collection from Y, th e latter
countered th at as in dorser there should have been a p resentment first to th e m ak er
who dishonors it. In this case, Y is not correct because Y is the real debtor an d th us,
there is no need for p resentment for payment and dishonor by the maker.
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According to Section 81, delay in making presentment for p aym en t is excu sed
when the delay is caused by circumstances beyond the control of th e h old er an d
not imputable to his default, misconduct, or negligence, but when the cau se of d elay
ceases to operate, p resentment must be made with reasonable diligence. Section .
83 provides th at the in strument is dishonored by non-payment when: i£ is d uly
presented for p aym en t and payment is refused or cannot be obtained, or p resen tm en t
is excused, and the in stru men t is overdue and unpaid. Section 84 states th at if th e
instrument is dishonored by non-payment, an immediate right of recou rse to all
parties secondarily liable thereon accrues to the holder.
Section 85 provides th at every negotiable instrument is payable at the tim e fixed
therein without grace. When the day of m aturity falls upon Sunday or a holiday, th e
6Intern ation al Corp orate Ban k vs. Sp ou ses Gu eco, G.R. N o. 141968, Febru ary 12,2001; 351 SC RA 516 (2001).
7Section 193, N IL.
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8Section 79, N IL.
9Section 80, N IL.
10Section 82, M L.
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in stru m en ts fallin g d u e or b ecom in g p ayab le on Satu rd ay are to b e p resen ted for
p aym en t on th e n ext su cceed in g b u sin ess d ay excep t th at in stru m en ts p ayab le on
d em an d may, at th e op tion of th e h older, b e p resen ted for p aym en t b efore noon
on Satu rd ay w h en th at en tire d ay is n ot a holiday. Accord in g to Section 86, if the
in stru m en t is p ayab le at a fixed p eriod after date, after sight, or after th at h ap p enin g
of a sp ecified even t, th e tim e of p aym en t is d eterm in ed b y exclu d in g th e d ay from
w h ich th e tim e is to b egin to ru n , an d b y in clu d in g th e d ate of p aym en t. Section 87
p rovid es th at if th e in stru m en t is m ad e p ayab le at a b an k , it is eq u ivalen t to an order
to th e b an k to p ay th e sam e for th e accou n t of th e p rin cip al d eb tor th ereon . Section
88 d efin es p aym en t m ad e in d u e cou rse as one th at is m ad e at or after th e m atu rity
of th e p aym en t to th e h old er th ereof in good faith an d w ith ou t n otice th at h is title is
defective.
Th e Su p rem e Cou rt h eld in one case th at after an in stru m en t is d ish on ored by
n on -p aym en t, in d orsers cease to be m erely secon d arily liable; th ey b ecom e p rin cip al
d eb tors w h ose liability b ecom es identical to th at of th e origin al obligor. Th e holder
of th e n egotiab le in stru m en t n eed not even p roceed again st th e d raw er before
su in g th e in d orser. Presen tm en t for p aym en t is d on e by exh ib itin g in stru m en t
an d d em an d in g p aym en t from th e p arty p rim arily liable on th e in stru m en t. The
in stru m en t m u st b e p resen ted to th e p erson liable to enable th e said p erson to
ch eck its gen u in en ess an d to retrieve th e same u pon p aym en t. It is n ecessary so
th at p erson s secon d arily liable can be m ad e liable in case th e p arty p rim arily liable
refu ses or fails to p ay th e in stru m en t.
N otice of D ish on or
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Th e n otice of dish on or, w h eth er verbally or by w ritin g, b tin gs to th e k n ow led ge
of a d raw er or in d orser of an in stru m en t, th e fact th at a sp ecified negotiab le
in stru m en t, u p on p rop er p roceed in g tak en, h as n ot b een accep ted or h as not
b een p aid , an d th at th e p arty n otified is exp ected to p ay it. Section 96 p rovid es
th at th e n otice m ay be in w ritin g or m erely oral an d m ay be given in an y term s
th at sufficien tly id entify th e in stru m en t, and in dicate th at it h as b een d ish on ored
by n on -accep tan ce or n on -paym en t. It m ay in all cases be given b y d eliverin g it
p erson ally or th rou gh th e mails.
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Accord in g to Section 95, a w ritten n otice n eed n ot be signed, arid an insu fficient
w ritten n otice m ay be su p p lemented an d valid ated b y verbal com m u n ication . A
m isd escrip tion of th e in stru m en t d oes n ot vitiate th e n otice u n less th e p arty to
w h om th e n otice is given is in fact misled thereby. Section 90 p rovid es th at th e notice
m ay b e given by or on b eh alf of th e holder, or b y or on -b eh alf of an y p arty to the
in stru m en t w h o m igh t be com p elled to p ay it to th e holder, an d w ho, u p on tak in g it
u p , w ou ld h ave a righ t to reim b u rsem en t from th e p arty to w h om th e n otice is given.
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According to Section 91, th e n otice of d ish on or m ay be given b y an agen t. It is n ot
necessary th at h e is au th orized to do so by th e p rin cip al. Section 89 p rovid es th at if
an in stru m en t is d ish on ored b y n on -accep tan ce of a bill or n on -p aym en t of a bill or
note, notice of su ch d ish on or m u st b e given to p erson s secon d arily liable, n amely, th e
drawer and in d orsers; oth erw ise, su ch p arties are d isch arged . Accord in g to Section
97, the n otice of d ish on or m ay be given eith er to th e p arty h im self or to h is agen t
on that behalf. Section 98 p rovid es th at if th e p arty is d ead an d h is d eath is k n ow n
to the p arty givin g n otice, th e n otice m u st be given to a p erson al rep resen tative, if
there is one, an d if w ith reason ab le diligence, he can be found. If th ere is n o p erson al
representative, n otice m ay b e sen t to th e last residen ce or last place of b u sin ess of th e
deceased. Accord in g to Section 99, if th e p arties to be n otified are p artn ers, n otice
to any one p artn er is n otice to th e firm, even th ou gh th ere h as b een a d issolu tion .
Section 100 p rovid es th at n otice to joint p erson s wh o are n ot p artn ers m u st b e given
to each of th em u n less on e of th em h as the au thority to receive su ch n otice for th e
others. Section 101 p rovid es th at if a p arty h as been adjudged b an k ru p t or in solven t,
or has m ad e an assign m en t for th e benefit of creditors, n otice m ay be given eith er
to the p arty h im self or to h is tru stee or assignee. Note th at as held by th e Su p rem e
Court in on e case, if th e d raw er or m ak er is an officer of a corp oration , th e n otice of
dishonor to th e said corp oration is not a notice to the employee or officer w h o d rew
or issued th e ch eck for an d in its behalf.111
To illu strate: A issu ed a p rom issory note to B in th e follow in g ten or: "I
' promise to p ay to th e ord er of B P100,000, 60 days after date. Sgd. A " The n ote w as
subsequently n egotiated w ith p rop er indorsement by B to C, C to D, an d D to E, th e
holder. Wh en E p resen ted th e n ote for p aymen t to A, th e latter refu sed to pay. E th en
gave a n otice of d ish on or to C only. In this case, E m ay n ot p roceed im m ed iately
against B or D, b u t h e m ay p roceed again st C. B and D are d isch arged b ecau se th ey
were n ot given b y E a n otice of dishonor. (Section 89, NIL) H ow ever, th e liab ility
of C rem ain s b ecau se a n otice of dishonor w as given to h im . Conseq uently, C m ay
give n otice of d ish on or to B to p rotect his interest again st B b ecau se B is an in d orser
who is liable to C. C h as no in terest again st D b ecau se D is n ot secon d arily liable to
him; C m ay n ot give d u e to n otice of d ishonor to D b ecau se he is a su b seq u en t p arty
who m ay n ot b e com p elled to p ay by C. Also, a notice of d ish on or is n ot n ecessary
in order to ch arge A b ecau se A is th e maker, and his p rim ary liability accru es even
r
in the ab sen ce of n otice of dishonor.
Accord in g to Section 102, n otice m ay be given as soon as th e in stru m en t is
dishonored an d , u n less d elay is excu sed . The tim e for givin g n otice is fixed in
Section 103 (where p arties reside in th e sam e place), Section 104 (where p arties
reside in d ifferent places), an d Section 107 (time of n otice to su b sequen t p arties).
.
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Section 94 p rovid es th at if th e agen t ch ooses to give n otice to h is p rin cip al, he must
give n otice w ith in the tim e allow ed by law as if h e w ere a h older; th e p rin cip al has
also th e sam e tim e to give n otice to the p arties secon d arily liable.
Accord in g to Section 113, d elay in givin g n otice of d ish on or is excu sed when
th e d elay is cau sed by circu m stan ces b eyond the con trol of th e h old er and not
im p u tab le to his default, m iscon d u ct, or n egligen ce. Wh en th e cau se of d elay ceases
to op erate, n otice m u st be given w ith reason ab le diligence. Section 108 provides
th at if a p arty h as ad d ed an ad d ress to his sign atu re, a n otice of d ish on or mu st be
sen t to th at ad dress; but if he h as n ot given su ch ad d ress, th en th e n otice m u st be
sen t as follows eith er to th e p ost office n earest to his place of resid en ce or to the
p ost office w h ere he is accu stom ed to receive h is letters, or if h e lives in on e place
an d h as h is place of business in anoth er, the n otice m ay be sen t to eith er place, or
if h e is sojou rn in g in an oth er place, th e n otice m ay b e sent to th e p lace w h ere he is
so sojou rn in g. Accord in g to Section 105, if th e n otice of d ish on or is d u ly addressed
an d d ep osited in the p ost office, the sen d er is d eemed to h ave given d u e notice,
n otw ith stan d in g any m iscarriage in the mails. Section 106 p rovid es th at n otice is
d eem ed to h ave been deposited in the p ost office w hen d ep osited in an y branch
p ost office or an y letterbox u n d er the con trol of th e p ost office d ep artm en t.
Accord in g to Section 92, if the n otice is given by or on b eh alf of th e holder, it
in u res to th e benefit of all subsequent holders and all p rior p arties w h o h ave a right
of recou rse again st th e p arty to w h om it is given.
l
To illu strate: Azon mak es a n ote payable to Brian a or order. Th e in stru m en t
is in d orsed in th e following order: Brian a to Claud in e to D om d om to Elizab eth to
Fern an (p resen t holder) to Geree (subsequent holder). The n ote is d ish on ored in
th e h an d s of Fern an , w ho notifies Briana, Claudine, D om dom , an d Elizab eth . The
n otice given by Fern an to Briana will benefit Claudine, D om d om , Elizab eth , and
G eree. The n otice to Clau din e benefits D om dom, Elizab eth , an d G eree. Th e notice
to D om d om b enefits Elizab eth an d G eree.' '
v.
Accord in g to Section 93, if a n otice is given by or on b eh alf of a p a rty entitled
to give n otice, it in u res to th e benefit of th e hold er an d all p arties su b seq u en t to the
p arty to w h om th e n otice is given.
N otice of d ish on or to p erson s secon d arily liable is n ecessary to ch arge them
excep t:
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Wh en a n otice is exp ressly or imp liedly w aived eith er b efore th e tim e of giving
a n otice h as arrived or after th e om ission to give due n otice. N ote, however,
accord in g to Section 110, if th e w aiver is em b od ied in th e in stru m en t itself, it is
b in d in g u p on all p arties;,b u t, if it is w ritten ab ove th e sign atu re of an indorser,
it binds h im only.
BUSIN ESS LAWS AN D REG ULATIO N S
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When d isp en sed w ith if, after the exercise of reasonable diligence, it can n ot be
given to or d oes n ot reach the p arties sought to be ch arged .12134
,
When notice of d ish on or is n ot req u ired to be given to the d raw er in eith er of
the following cases:
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a. w here th e d raw er an d d rawee are the same p erson ;
•
b.
when the d raw ee is a fictitious p erson or a p erson not h avin g th e cap acity
to con tract;
c.
when the d raw er is th e p erson to whom the in stru m en t is p resen ted for
p ayment;
d.
wh ere th e d raw er h as no right to exp ect or req uire th at th e d raw ee or
accep tor will h on or the instrument; and
e.
w here th e d raw er h as cou ntermanded payment.1314
Notice of d ish on or is not required to be given to an in d orser in eith er of th e
following cases:
a.
wh en the d raw ee is a fictitious person or person not h avin g th e cap acity
to con tract, and the indorser was aware of that fact at the tim e h e in d orsed
the in stru m en t;
b.
w here the in dorser is the person to whom the in stru m en t is p resen ted for
payment; and
c.
wh ere the in stru m en t was made or accepted for his accom m od ation .15
12Section 112, N IL.
13Section 114, N IL.
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14In the case o f Great A sian Sales Cen ter Corp oration and Tan Ch on g Lin vs. Cou rt of A p p eals an d Ban ca sia
Finance and In v estm en t Corp oration , G.R. N o. 105774, Ap ril 25,2002, to fin an ce its bu sin ess op eration s, p etitio n er s
applied for cred it accom m od ation w ith Ban casia, and by virtu e of a d eed of assign m en t, in d orsed p o st-d a ted ch eck s
payable to p etition ers. Th e ch ecks w ere d ish on ored and for failu re to p ay the loan , Ban casia filed a ca se a g a in st
petitioners for collection of su m of m oney. W h en the case w as d ecid ed in Ban casia's favor, p etitio n ers ap p ealed
contending, am on g oth ers, that the p rop er p arties again st w h om the action for collection sh ou ld b e b ro u g h t are
the d raw ers and in d orser of the ch ecks in qu estion , bein g the real p arties in in terest, an d n ot the p etition ers, an d
that p etition er-corp oration is d ischarged from liability for failu re of the p rivate resp on d en t to com p ly w ith the
provisions of the N eg otiable In stru m en ts Law on the d ish on or of the checks. Th e Su p rem e Cou rt h eld th at by
express p rovision in the D eed s of Assign m en t, Great Asian u ncon d ition ally obligated itself to p ay Ban casia the
full value of the d ishon ored checks. Th u s, w h eth er or n ot Ban casia gives n otice .of d ish on or to G reat A sian , the
latter rem ains liable to Ban casia becau se of th e w it h re co u rs e stip u lation w h ich is in d ep en d en t of th e w arr an ties of
an end orser u n d er the N eg otiable Instru m en ts'Law . Fu rther, there is n oth in g in the N egotiable In stru m en ts Law
that prohibits Great A sian an d Ban casia p arties from ad op tin g the w it h re c o u rs e stip u lation u n iform ly fou n d in the
Deeds of Assign m en t. In stead of bein g n egotiated , a n egotiable instru m en t m ay be assign ed . A s en d orsee o f Great
Asian, Bancasia h ad the op tion to p roceed again st Great Asian u n d er the N egotiable In stru m en ts Law . Ev en if
Bancasia failed to give tim ely n otice of d ishonor, still there w ou ld be n o p reju d ice w h atever to Great A sian . U n d er
the N egotiable In stru m en ts Law, n otice of d ishon or is n ot requ ired if the d raw er h as n o righ t to exp ect or req u ire
the bank to h on or the ch eck, or if th e d raw er h as cou n term an d ed p aym en t. In the in stan t case, all the ch eck s w ere
dishonored for any of the follow ing reason s: "accou n t closed ," "accou n t u n d er g arn ish m en t," "in su fficien cy o f
funds," or "p aym en t stop p ed ." In the first three in stan ces, the d raw ers h ad n o righ t to exp ect or requ ire the ban k
to honor the checks, and in the last instan ce, the d raw ers had cou nterm an d ed p aym en t.
15Section 115, N IL.
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Wh ere d u e n otice of d ish on or by n on -accep tan ce h as b een given in w h ich case
a n otice of a su b seq u en t d ish on or b y n on -p aym en t is n ot n ecessary u n less in
th e m ean tim e th e in stru m en t h as b een accep ted .16
•
As to a h old er in d ue cou rse su b seq u en t to th e om ission .17
To illustrate: Mr. MM issu ed an in stru m en t to Mr. PP p ayab le to th e ord er of
Mr. PP. Mr. PP th en in d orsed th e in stru m en t to Mr. AA th is w ay: "Pay to Mr. AA,
n otice of dishonor. Waived , Sgd., Mr. PP." Th ere w as n o w aiver in th e in stru m en t
itself. Mr. AA th ereafter in d orsed th e in stru m en t to Mr. BB w h o in tu rn in d orsed the
in stru m en t to Mr. CC. In th is case, th e w aiver of th e n otice of d ish on or is b inding
on ly on Mr. PP. In oth er w ord s, Mr. AA, Mr. BB, an d Mr. CG are n ot d eem ed to have
w aived n otice of dish on or. The n otice of d ish on or w as w aived after th e issu an ce
of the in stru m en t by an in dorser, an d th e w aiver is th erefore b in d in g on ly on the
in d orser w h o m ad e th e w aiver. Conseq u en tly; n otice of d ish on or m u st b e given Mr.
AA, an d Mr. BB b u t n o n otice is req u ired to be given to Mr. PP.
Accord in g to Section 118, a negotiable in stru m en t th at h as b een d ish on ored
m ay b e p rotested for n on -accep tan ce or n on -p aym en t, as th e case m ay b e; b u t p rotest
isjriot req u ired excep t in th e case of foreign bills of exch an ge. Section 111 states that
p rotest is n ecessary for foreign bills of exch an ge, while p rotest for oth er n egotiable
in stru m en ts is op tion al. A w aiver of protest, w h eth er i n th e case of a foreign bill of
exch an ge or oth er n egotiable in stru m en ts, is deemed to b e a w aiver n ot on ly of a
form al p rotest b ut also of p resen tm en t and notice of dishonor.
PRA CTICE EXERCISE
Perry is th e h old er of a negotiable p rom issory note w h ich w as origin ally issu ed
b y Ragesh to Boyito as p ayee. Boyito in dorsed the note to Perry for good s b ou gh t by
Boyito. The n ote m en tion s th e place of p aym en t on th e sp ecified m atu rity d ate as
th e office of th e corp orate secretary of Big Ban k d u rin g b an k in g hour's. O n m atu rity
date, Ragesh w as at th e aforesaid office read y to p ay th e n ote, b u t Perry d id not
show up. Wh at Perry later d id w as to sue Boyito for th e face valu e of th e n ote, plus
in terest an d costs. Will th e su it p rosp er?
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RELEVAN CE O F TH E LESSO N
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It is im p ortan t to k n ow th e tw o typ es of liability: p rim ary an d secon d ary, and
h ow to enforce th e in stru m en t again st th ese p arties liable to en su re collection on
the negotiable in stru m en t.
16Section 116, N IL.
17Section 117, N IL.
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l esso n s u m m a r y
•
The m ak er of a n ote an d the accep tor of a b ilh have p rim ary liability on th e
resp ective in stru m en ts. Secon d arily liable are the d raw ers an d in d orsers.
t
The con dition s p reced en t to secon d ary liability are p resen tm en t, d ish on or, an d
notice of d ish on or. Un d er certain circu m stan ces, an y of th ese con d ition s m ay
be w aived or excu sed .
•
Presen tm en t is a d em an d for p aym en t mad e on the mak er, accep tor, or d raw ee,
or d em an d for accep tan ce on the drawee. Presen tm en t m u st be m ad e at th e
time sp ecified in th e in stru m en t unless no time is specified, in w h ich case it
must be at th e tim e specified for payment, or w ithin a reason ab le tim e of a
sight in stru m en t.
s
•
Dishonor occu rs w h en accep tan ce or p aym en t is refu sed after p resen tm en t, at
which tim e a h old er h as the right of recou rse again st secon d ary p arties if h e
has given p rop er n otice of dishonor.
\
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Wh ere n otice of d ish on or is given by or on behalf of the holder, it in u res to
the benefit of all sub sequent holders and all prior p arties w h o h ave a righ t of
recou rse again st th e p arty to wh om it is given but if given by or on b eh alf of a
p arty en titled to give notice, it inures to the benefit of the holder an d all p arties
sub seq uen t to th e p arty to wh om notice is given.
u n it
iv | Ne g
o t ia b l e in s t r u m e n t s l a w
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C H A PT ER T ES T
Score:
Namp-
Hatp-
Instructor
8prtinn:
./
Tru e or False
1. The p u rp ose of an irregu lar in dorsemen t is made to add the signer's
cred it to th e in stru m en t.
2. The accep tor by accep tin g the in stru m en t adm its the existen ce of th e
in d orser, gen u in en ess of his sign ature, and his cap acity and au th ority
to in dorse.
_______ 3. Every p erson n egotiatin g an in stru m en t by delivery or by qualified
en d orsem en t w arran ts th at the p erson n egotiating has no liability to a
th ird p erson .
_______ 4. Frau d in factum is a real defense.
,
/
_______ 5. M atu rity of an u n d ated negotiable in stru men t issued payable 30 d ays
after sigh t is com p u ted from the date of the first p resentation for
accep tan ce.
6. A m ak er can n egate or limit his liability.
_______ 7. The h old er m ay refuse to take a qualified accep tan ce and if h e d oes n ot
ob tain an u nq ualified acceptance, he may treat the. bill as d ish on ored
b y n on -p aym en t.
_______ 8. Every p erson n egotiatin g an in stru m en t by delivery w arran ts th at th e
in stru m en t is, at th e time of his indorsement, valid and subsisting.
_______ 9. A d raw er is p rim arily liable to the holder, or to an y subsequent indorser,
w h o m ay b e com p elled to p ay th e in stru men t.
________10. An irregu lar in d orser is liable to all p rior p arties in an in stru m en t.
,f
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CH A PTER PRO JECT
1.
Write a b rief su m m ary of th e steps in en forcin g liability again st p arties
p rim arily an d p arties secon d arily liable on a negotiable in stru m en t.
2.
Discuss w ith a p artn er h ow th is law on negotiable in stru m en ts con n ects to
h im or her.
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IN TRO D UCTIO N
When the liability of the p arty p rim arily and ultimately liable on th e in stru m en t
comes to an end, the in stru m en t is d isch arged . The d isch arge of the in stru m en t
results in extin gu ish m en t of all rights of action u nd er it and the in stru m en t ceases
to be negotiable. After d isch arge of a negotiable in strument, even a holder in d ue
course acquires no right u n d er it and he can n ot bring a suit on the face of it. Paym en t
discharges the obligation, but oth er meth od s include intentional can cellation ,
renunciation, reacquisition, and oth er acts which will extinguish an obligation. The
discharge of the in stru m en t operates as a d ischarge of parties secon d arily liable. It
ends the life of th e negotiable instrument.
INTEN D ED LEARN IN G O UTCO M ES
At the en d of th is chapter, the students will be able to recall how p arties are
discharged from th eir liability on a negotiable instrument; explain the difference,
in layman's lan gu age, b etween d ischarge of in strument and d isch arge of p erson s
secondarily liable; an d u n d erstand the requirement of p resentment for accep tan ce
to make the d raw ee p rim ary liable as an acceptor, and the p roceed ings to be tak en
to charge p arties secon d arily liable on a bill in case of its dishonor.
Lesson 1: D isch arge of In stru m en ts
How In stru m en t Is D isch arged
Under Section 119, a negotiable in strument is discharged :
A.
By p aym en t in due cou rse by or on behalf of the p rincipal debtor—if p aym en t
is made before the d ate of maturity, the in stru m en t is n ot d isch arged as th e
payment is n ot in due cou rse. The term "principal d ebtor" refers to th e p erson
ultimately b ou n d to p ay the debt—it would include the m ak er an d th e acceptor.
Under Section 88, p aym en t m u st be mad e at or after m atu rity. If nof at or after
maturity, it will be con sid ered a negotiation of the in stru men t. This is b ecau se
the in stru m en t can still be renegotiated. Paymen t m u st be m ad e to th e holder,
otherwise, th e in stru m en t is n ot d isch arged . Paymen t m u st be m ad e in good
faith and w ith ou t notice of the defect of the title of th e holder.
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B.
By p aym en t in d u e cou rse by th e p arty accom m od ated , w h ere th e instrument
is m ad e or accep ted for h is accom m od ation — as b etw een th e accommodation
p arty an d th e accom m od ated p arty, th e latter is th e on e u ltim ately liable on
th e accom m od ation in stru m en t. H en ce, h is p aym en t in d u e cou rse discharges
th e in stru m en t as if p aym en t w as m ad e b y th e p rin cip al d ebtor. Payment
b y th e accom m od ated p arty if th e in stru m en t is m ad e or accep ted for his
accom m od ation is actu ally p aym en t b y th e p rin cip al d ebtor, w h eth er or not he
ap p ears to b e a p arty to th e in stru m en t.
C.
By th e in ten tion al can cellation th ereof by th e h old er— can cellation m ay be done
b y tearin g th e in stru m en t, b u rn in g it or w ritin g across it th e w ord "canceled."
Th ere m u st b e an in ten tion to can cel the n egotiab le in stru m en t b y th e holder
th ereof as su ch in ten tion is an essen tial elem en t of d isch arge on a negotiable
in stru m en t an d a n egotiab le n ote in a torn con d ition is p resu m ed canceled
b y th e h old er th ereof. Thus, the in stru m en t is n ot d isch arged w h ere the
can cellation is m ad e u n d er a m istak en belief th at it h as b een fu lly p aid when
as a m atter of fact th ere is a failure of su ch p aym en t, or w h ere can cellation is
in d u ced b y frau d .
D.
By an y oth er act w h ich will d isch arge a simple con tract for th e p aym en t of
m on ey— n ovation , m erger or con fu sion, an d legal com p en sation would
d isch arge th e in stru m en t.
E.
Wh en th e p rin cip al d ebtor b ecom es th e h old er of th e in stru m en t at or after
m atu rity in h is ow n right—in his ow n righ t m ean s n ot in a rep resen tative
cap acity. Reacqu isition by the p rin cip al d eb tor in h is ow n righ t b u t before
m atu rity will n ot d isch arge th e in stru m en t. It w ill m erely con stitu te a
n egotiation back to th e p rin cip al d eb tor w h o, u n d er th e au th ority of Section 50,
m ay ren egotiate th e in stru m en t.
D isch arge of Person s S eco n d arily Liab le
Section 120 p rovid es th at a p erson secon d arily liable on th e in stru m en t is
d isch arged by: (1) an y act w h ich d isch arges th e in stru m en t; (2) th e intentional
cancellation of h is sign atu re b y th e h old er; (3) th e d isch arge of a p rior p arty; (4) a
valid ten d er or p aym en t m ad e b y a p rior p arty; (5) a release of th e p rin cip al debtor
u nless th e h old er's righ t of recou rse again st th e p arty secon d arily liable is expressly
reserved ; an d (6) an y agreem en t b in d in g u p on th e h old er to exten d th e tim e of
p aym en t or to p ostp on e th e h old er's righ t to en force th e in stru m en t u n less made
with th e assen t of th e p arty secon d arily liable or u n less th e righ t of recou rse against
such p arty is exp ressly reserved .
,
/'
Accord in g to Section 121, if th e in stru m en t is p aid b y a p arty secon d arily liable
thereon, it is n ot d isch arged ; b u t th e p arty so p ayin g it is rem itted to h is former
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rights as regard all prior parties, an d he may-strike out his own and all subsequent
indorsements and again negotiate the instru ment, except: when it is payable to the
order of a third person an d h as been paid by the drawer, and when it w as m ad e or
accepted for accom m od ation an d h as been paid by the p arty accom m od ated .
To illu strate: RX d raw s a bill of exchan ge that states: "O ne mon th from date,
pay to PC or his ord er P100,000. Signed, RX." The d rawee n am ed in th e bill is EX.
PC negotiated the bill to MB, MB to NQ, NQ to OT, and OT to SH. Due to nonacceptance and after p roceed in gs for dishonor were made, SH asked OT to pay,
which OT did. In th is case, OT may recover from RX, being the drawer.
•#
According to Section 122, the holder m ay expressly ren ou n ce his righ ts
against any p arty to th e in stru m en t before, at, or after its maturity. An absolute an d
unconditional ren u n ciation of his rights against the principal debtor m ad e at or after
the maturity of the in stru m en t d isch arges the instrument. A ren unciation, however,
does not affect th e rights of a holder in due cou rse without notice. Ren u n ciation
must be in w ritin g u n less the in stru m en t is delivered up to the p erson p rim arily
liable thereon.
Accordin g to Section 123, a cancellation made u nintentionally or u n d er a
mistake or w ith ou t the au thority of the holder, is inoperative but wh ere an in stru m en t
or any sign atu re th ereon app ears to have been canceled, the b urden of p roof lies on
the p arty who alleges th at the cancellation was made u nintentionally or u n d er a
mistake or w ith ou t authority. Cancellation can be made not only by th e d raw in g
of crisscross lines but also by tearin g, obliterations, erasures, or b u rn in g. It m ay b e
made by an y oth er by m ean s by which the intention to cancel th e in stru m en t m ay
be evident. The ru le is th at the intentional cancellation of a p erson secon d arily
liable results in the d isch arge of the latter. With resp ect to an indorser, th e h old er's
right to cancel h is sign atu re is limited to the case wh ere the in d orsem en t is n ot
necessary to h is title.
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PRACTICE EXERCISE
I
Any agreem en t bind ing u pon the holder to exten d the tim e of p aym en t or to
postpone the holder's right to en force the in stru m en t results in the d isch arge of th e
party second arily liable u nless m ad e with the latter's consent. Wh y d o you th in k
this is so? Explain.
RELEVANCE O F TH E LESSO N
The d isch arge of the in stru m en t effects the extin gu ish m en t of th e obligations
arising thereunder. It relieves all p arties, w h eth er p rim ary or secon d ary, from
further liability on the' in stru m en t.
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LES S O N S U M M A R Y
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A n egotiab le in stru m en t is d isch arged : by p aym en t in due cou rse b y or on behalf
of th e p rin cip al d eb tor; by p aym en t in due cou rse by the p arty accommodated,
w h ere th e in stru m en t is m ad e or accep ted for h is accom m od ation ; by the
in ten tion al can cellation th ereof b y th e hold er; b y an y oth er act w h ich will
d isch arge a sim p le con tract for th e p aym en t of m on ey; an d w h en th e principal
d eb tor b ecom es th e h old er of the in stru m en t at or after m atu rity in his own
righ t.
•
A p erson secon d arily liable on th e in stru m en t is d isch arged by: an y act which
d isch arges th e in stru m en t; the in ten tion al can cellation of h is sign atu re by the
h old er; th e d isch arge of a p rior p arty; a valid ten d er or p aym en t m ad e by a
p rior p arty; a release of the p rin cip al debtor u n less th e h old er's righ t of recourse
again st th e p arty secon d arily liable is exp ressly reserved ; an d an y agreement
b in d in g u p on th e h old er to extend the tim e of p aym en t or to p ostp on e the
h old er's righ t to en force th e in stru m en t u n less m ad e w ith the assen t of the
p a r ty secon d arily liable or unless the righ t of recou rse again st su ch party is
exp ressly reserved .
Le s s o n 2: P ro m isso ry N ote D istin gu ish ed from Bill of Exch an ge
P ro m is s o ry N ote
Accord in g to Section 184, a negotiable p rom issory n ote is an unconditional
p rom ise in w ritin g m ad e by one p erson to an oth er, sign ed b y th e m ak er, engaging
to p ay on d em an d , or at a fixed or determin able fu tu re tim e, a su m certain in money
to ord er or to b earer. If a note is d raw n to th e m ak er's ow n ord er, it is n ot complete
u n til in d orsed b y him.
Bills o f Exch an ge
Section 126 defines a bill of exch an ge as an u n con d ition al ord er in writmg
ad d ressed b y one p erson to an oth er, sign ed b y th e p erson givin g it, req u irin g the
p erson to w h om it is ad d ressed to p ay on d em an d or at a fixed or determinable
fu tu re tim e a su m certain in m on ey to ord er or to b earer. Accord in g to Section 127,
a bill of exch an ge d oes not, of itself, op erate as an assign m en t of th e fu n d s in the
h an d s of the d raw ee available for the p aym en t th ereof, an d th e d raw ee is not liable
on the bill u nless an d u n til h e accep ts th e sam e. Section 128 states th at it may be
ad d ressed to two or m ore d raw ees jointly, w h eth er th ey are p artn ers or not; but riot
to two or m ore d raw ees in th e altern ative or su ccession .
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Section 129 d istin gu ish es an inland bill of exch an ge from a foreign bill of
exchange. An inlan d bill of exch an ge is a bill wh ich is, or on its face p u rp orts to
be, both d raw n an d payable withih the Philippines. Any oth er bill is a foreign bill.
Unless the con trary ap p ears on the face of the bill, the holder m ay treat it as an
inland bill.
Section 130 p rovid es th at the holder m ay treat the in stru m en t at his op tion
either as a bill of exch an ge or as a p rom issory note where in a bill the d raw er an d
drawee are the sam e p erson or wh ere the drawee is a fictitious p erson or a p erson
not h aving cap acity to con tract. In all these cases, a notice of d ishonor need n ot be
given to the d raw er to ch arge him. Treating the bill as a note would con stitu te the
drawer, the m ak er wh o is p rim arily liable on the instrumen t to w hom n otice of
dishonor n eed n ot be given.
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Presen tm en t for Accep tan ce
Accordin g to Section 145, presentment for acceptance means the p rod u ction of
a bill of exch an ge to th e drawee for his acceptance. Presentment for accep tan ce m u st
be made by or on b ehalf of the holder at a reasonable hour, on a business day, an d
i before the bill is overdue, to the drawee or some person authorized to accep t or refu se
acceptance on his behalf. If a bill is addressed to two or more drawees w ho are not
partners, p resen tm en t must be made to them all unless one has authority to accep t
or refuse accep tan ce for all, in which case presentment may be made to h im only. If
the drawee is dead, presentmen t may be made to his personal representative. If the
drawee h as b een adjudged a bank ru pt or an insolvent or h as made an assign m en t
for the benefit of creditors, presentment may be made to h im or to his tru stee Or
assignee.
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Accordin g to Section 146, a bill may be presented for acceptance on an y d ay
on which negotiable in stru ments may be presented for payment u nd er Section 72
and Section 85. Wh en Saturday is not a holiday, presentment for accep tan ce m ay
be made before n oon on th at day. On the other hand, accord in g to Section 143,
presentment for accep tan ce must be made if the bill is payable after sight, or in any
other case, if p resentment for acceptance is n ecessary in order to fix the m atu rity
of the in stru ment.1 It is also required if the bill expressly stipulates th at it shall'b e
1Section 143 is cited in th e case of Pru d ential Ban k vs. Interm ed iate Ap p ellate Cou rt, Ph ilip p in e Ray on M ills
Inc. and An acleto R. Ch i, G.R. N o. 74886, D ecem ber 8,1992. Am on g th e issu es in th e case w as w h eth er p resen tm en t
for accep tance of th e d rafts w as in d isp en sable to m ake resp on d en t liable thereon . Th e Su p rem e Cou rt h eld th at th e
transaction in this case stem m ed resp on d en t's ap p lication for a com m ercial letter of cred it w ith the p etition er w h o
is necessarily th e d raw ee, to w h om the d rafts w ere p resen ted for p aym en t. Th ere w as n o need for accep tan ce as th e
issued d rafts are sigh t d rafts. Presen tm en t for accep tan ce is n ecessary on ly in th e cases exp ressly p rovid ed for in
Section 143 of the N egotiable In stru m en ts Law (N IL). In th e instan t case th e d rafts bein g at sigh t, they are su p p osed
to be p ayable u p on 'accep tan ce u n less p lain tiff ban k h as given th e resp on d en t tim e w ith in w h ich to p ay th e sam e.
Corollarily, th ey are, p u rsu an t to Section 7 o f th e N IL, p ayable on d em an d .
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p resen ted for accep tan ce, and if the bill is d raw n payable elsewh ere th an at the
resid en ce or place of b usiness of the drawee. Section 144 m an d ates th at the holder
of su ch bill either p resen t it for accep tan ce or negotiate it w ithin a reasonable time,
oth erw ise, th e d raw er and all in dorsers are d isch arged . Section 147 states th at if the
h older of a bill d raw n payable oth er th an at the place of business or the residence
of th e d raw ee h as no time, with the exercise of reasonable diligence, to present the
bill for accep tan ce before p resen tin g it for p aym en t on the d ay th at it falls due, the
d elay cau sed by p resen tin g the bill for accep tan ce before p resen tin g it for payment
is excu sed and will not d isch arge the d rawers and indorsers.
Accord in g to Section 148, p resentmen t for accep tan ce is excu sed an d a bill
m ay be treated as d ishonored by n on -acceptance: (1) if the d raw ee is d ead, or has
ab sconded, or is a fictitious p erson or a p erson not h avin g cap acity to con tract by
bill; (2) if, after the exercise of reasonable diligence, p resen tmen t can n ot be made;
and (3) if, alth ou gh p resen tm en t has been irregu lar, accep tan ce h as b een refu sed on
some oth er grou n d .
Accep tan ce
Section 132 defines accep tan ce of a bill as the signification by th e d raw ee of his
assen t to th e ord er of the drawer.2 The accep tance must be in w ritin g an d signed
by th e d raw ee. It m u st not exp ress that the drawee will p erform his p rom ise b y any
oth er m ean s th an th e p aym en t of money. According to Section 133, th e h old er of a
bill p resen tin g th e sam e for accep tance may require th at the accep tan ce be written
on th e bill, an d , if su ch request is refused, may treat the bill as d ish on ored . Section
134 states th at if an accep tan ce is w ritten on a paper other th an th e bill itself, it does
n ot b ind th e accep tor excep t in favor of a person to whom it is shown an d who, on
th e faith th ereof, receives the bill for value. Section 136 provides th at th e d raw ee is
allow ed 24 h ou rs after p resen tmen t in w hich to decide w h eth er or n ot he w ill accept
th e bill; th e accep tan ce, if given, dates as of the day of presentation. •
To illu strate: XY, d raw ee of a bill of exchange, w rote th e w ord s: "Accepted,
w ith a p rom ise to m ak e p aym en t w ithin two days. Signed, XY/' The accep tan ce is
/alid b ecau se th e accep tan ce is in reality a clear assent to the ord er of th e d raw er to
payAccord in g to Section 137, th ere is con stru ctive accep tance: w h en th e drawee
to w h om th e bill is d elivered for accep tan ce d estroys it; or w hen he refu ses, within
24 h ou rs after su ch delivery, or w ith in such time as is given h im, to retu rn th e bill
accepted or n ot accep ted . In any of th ese cases, the d raw ee will be d eem ed to have
accepted th e bill even if th ere is no actu al w ritten accep tan ce by h im. Accordingly,
the d rawee w ill be p rim arily liable as an acceptor.
2See Ibid.
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An accep tan ce is eith er gen eral or qualified. Accord in g to Section 139, a gen eral
acceptance assen ts w ith ou t qualification to th e ord er of the drawer. A qualified
acceptance in exp ress term s varies th e effect of the bill as d rawn . Section 140
provides that an accep tan ce to p ay at a p articu lar place is a general accep tan ce u nless
it expressly states th at th e bill is to be paid there only an d n ot elsewhere. Accord in g
to Section 141, a qualified accep tan ce m ay be: (1) con ditional wh ere the p aym en t by
the acceptor is d ep en d en t on th e fulfillment of a con dition th erein stated ; (2) p artial
where an accep tan ce to p ay p art only of the am ou n t for which the bill is d raw n ; (3)
local which is an accep tan ce to p ay only at a p articu lar place; (4) qualified as to time;
and (5) the accep tan ce of some, one or more of the d rawees but n ot of all.
•
i
Section 142 p rovid es th at a holder need not take a qualified accep tan ce but
instead may insist on a general or unqualified accep tance, and upon his failure to
obtain the latter, m ay treat th e bill as dishonored. However, if he agrees to a qualified
acceptance, he should give notice thereof to the d rawer and indorsers, oth erwise,
the latter will be d isch arged from liability. If notified and they do not exp ress th eir
dissent within a reasonable time, they remain liable on the in strument. Accord in g
to Section 135, an u nconditional p romise in writing to accept a bill before it is d raw n
is deemed an actu al accep tance in favor of every person who; upon the faith thereof,
receives the bill for value.
: •.
’
I
;. ;" ,
Section 138 provides th at a bill may be accepted before it has been signed by
the drawer, or while oth erw ise incomplete, or when it is overdue, or after it h as
been dishonored by a p reviou s refusal to accept, or by nonpayment. But when a bill
payable after sight is dishonored by non-acceptance and the drawee subsequently
accepts it, the holder, in the absence of any different agreement, is entitled to h ave
the bill accepted as of the date of the first presentment.
Referee in Case of N eed
Section 131 provides that the drawer of a bill and any indorser may in sert
thereon the name of a p erson to whom the holder may resort in case of need, i.e.,
when the bill is dishonored by non-acceptance or non-payment. It is in the op tion
of the holder to resort to the referee in case of need or not as he may see fit. If
the instrument is n ot paid and the indorser is being made to pay and he can n ot
perform his liability, the holder has the option to go to the person in case of need.
Such person is not obligated to pay because he did not affix his signature on the
instrument. But if the referee in case of need makes good on the obligation of the
indorser, the referee is substituted to the rights of the indorser and may go after the
other indorsers or the maker.
According to Section 149, a bill is dishonored by non-acceptance when it is duly
presented for acceptance and such an acceptance is refused or cannot be obtained,
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or w hen p resentmen t for accep tan ce is excu sed and the bill is not accepted. Section
150 states that if a bill is duly presented for acceptance and is not accepted within
the p rescrib ed time, the person p resenting it must treat the bill as dishonored by
n on -accep tan ce or he loses the right of recourse against the d rawer and indorsers.
Accord in g to Section 151, when a bill is dishonored by n on-acceptance, an immediate
right of recou rse again st the d rawer and indorsers accrues to the holder and no
p resen tm en t for p aymen t is necessary.
Protest
A p rotest is a formal statement in writing made by a n otary u n d er his seal of
office at the request of the holder of a bill or note, in which it is d eclared th at the
same was on a certain day presented for payment (or acceptance as the case may
be), and such p aymen t (or acceptance) was refused, whereupon the n otary protests
again st all p arties to such in stru ment and declares that they will be held responsible
for all loss or d am age arising from its dishonor. This is done on the day of dishonor
and m an d atory for foreign bills.
Accord in g to Section 157, a bill that has been protested for n on -acceptan ce may
be sub sequently p rotested for non-payment. Section 152 provides that if a foreign bill
is d ish on ored by n on -acceptan ce, it must be duly protested for n on -acceptan ce, and
w h ere such a bill th at h as n ot previously been dishonored by n on -accep tan ce was
d ish on ored b y n on paymen t, it must be duly protested for nonpayment. If it is not so
p rotested , th e d raw er and indorsers are discharged. Where a bill does n ot ap p ear on
its face to be a foreign bill, p rotest thereof in case of dishonor is u nn ecessary. Protest
is n ecessary wh en: (1) the foreign bill is dishonored by n on -acceptan ce or by non­
p aym en t, or w as accep ted for honor but was not paid; or (2) there is a referee in case
of n eed.
Accord in g to Section 153, the protest must be annexed to the bill or must
con tain a cop y th ereof, and must be u nd er the hand and seal of the n otary m ak in g it
and m u st specify: (1) th e time and place of presentment; (2) the fact th at p resentment
w as m ad e an d the m an n er thereof; (3) the cause or reason for p rotestin g the bill;
an d (4) the d em an d m ad e and the an sw er given, if any, or the fact th at th e drawee
or accep tor could n ot be found. Section 154 provides that p rotest m ay be m ad e by a
n otary public or by an y resp ectable resident of the place where the bill is dishonored,
in the p resen ce of tw o or m ore credible witnesses. Section 155 m an d ates th at when a
bill is p rotested, such p rotest m u st be made on the day of its d ish on or u n less delay is
excused. Wh en a bill h as been duly noted, the p rotest m ay be subsequently extended
as of the date of th e n oting. Section 156 req uires th at a bill m u st be p rotested at the
place where it is d ish on ored, excep t th at when a bill d raw n payable at the place of
business or resid en ce of some p erson oth er th an the drawee h as b een dishonored
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by non-acceptance, it m u st be p rotested for n on -p aymen t at the place w h ere it is
expressed to be payable, and there is no need for fu rth er p resentmen t for p aym en t
to, or demand on, the d rawee.
Protest for Better Secu rity
Section 158 p rovid es th at wh ere the accep tor h&s been adjudged a b an k ru p t or
an insolvent or h as m ad e an assign men t for the benefit of cred itors before th e bill
matures, the holder m ay cau se the bill to be protested for b etter secu rity again st
the d rawer and in dorsers. Accord in g to Section 159, p rotest is d isp ensed w ith by
any circu m stan ces that would dispense with notice of dishonor. Delay in n otin g or
protesting is excu sed wh en delay is caused by circu m stan ces beyond the con trol of
the holder and not imputable to his default, misconduct, or negligence. Wh en the
cause of delay ceases to operate, the bill must be noted or protested w ith reason ab le
diligence. Section 160 provides that if a bill is lost or destroyed or is w ron gly
detained from the p erson entitled to hold it, protest m ay be made on a cop y or
written p articu lars of such bill.
Accep tan ce for H on or
Section 161 talks about acceptance for honor. Accep tan ce for h on or is p rop er
only after a bill h as been protested for dishonor by n on -accep tan ce or for b etter
security. It is mad e to save the cred it of a p articu lar p arty on a p articu lar in stru m en t.
The risk of n on -paymen t is greatly diminished because a new p arty comes in w h o is
proposing to pay the instru men t.
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The gen eral effect of an accep tance for honor is to make the accep tor liable
on the bill to the holder and all p arties subsequent to the p arty for w h ose h on or
he accepted. However, h is liability is not absolute but merely conditioned on the
drawee's failure to pay u pon p resentment at maturity, after which a p rotest m u st
be made, and a n otice of dishonor be given to the accep tor for honor. An oth er effect
of an accep tance for h on or is that the holder's rights against secon d ary p arties are
postponed until the following conditions take place: (1) p resentment for p aym en t to
the drawee; (2) d ishonor b y such drawee; (3) dishonor to the accep tor for h on or an d
secondary parties; (4) p rotest; (5) presentment to the accep tor for honor; (6) d ishonor
by him; and (7) n otice of dish on or to the secon d ary p arties. The accep tor for honor,
should he suffer d am ages due to his acceptance, h as a right of recou rse again st the
party for whose honor he accep ted and all p arties again st w hom the latter wou ld
have recourse. Wh en a bill of exch an ge h as been p rotested for d ishonor b y n on acceptance or protested for b etter secu rity and is not overdue, any p erson n ot b eing
’ a p arty already liable th ereon may, w ith the consent of the holder, intervene, an d
accept the bill supra p rotest for the h onor of any p arty liable th ereon or for the h on or
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of th e p erson for w h ose accou n t th e bill is d raw n . The accep tan ce for h on or m ay be
for p art on ly of th e su m for w h ich th e bill is d raw n ; an d w h ere th ere h as been an
accep tan ce for h on or for one p arty, th ere m ay be a fu rth er accep tan ce by a different
p erson for th e h on or of an oth er p arty.
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Accord in g to Section 162, an accep tan ce for h on or supra p rotest m u st be in
w ritin g an d in d icate th at it is an accep tan ce for h on or an d m u st b e signed by the
accep tor for honor. Section 163 p rovid es th at w h ere an accep tan ce for h on or does
n ot exp ressly state for w h ose h on or it is m ad e, it is d eem ed to be an accep tan ce for
th e h on or of th e d rawer. Section 164 states th at the accep tor for h on or is liable to the
h old er an d to all p arties to th e bill sub seq uen t to th e p arty for w h ose h on or he has
accep ted .
Accord in g to Section 165, th e accep tor for honor, by su ch accep tan ce, engages
th at h e will, on d u e p resen tm en t, p ay th e bill accord in g to th e term s of h is accep tan ce
p rovid ed it sh all n ot h ave b een p aid by th e d raw ee and p rovid ed also th at is shall
h ave b een d u ly p resen ted for p aym en t an d p rotested for n on -p aym en t an d notice
of d ish on or given to h im . Section 166 p rovid es th at if a bill payable after sight is
accep ted for h on or, its m atu rity is calcu lated from the date of the n otin g for nonaccep tan ce an d n ot from th e d ate of th e accep tan ce for 'honor. Section 167 states
th at if a d ish on ored bill h as b een accep ted for h on or supra p rotest or con tain s a
referee in case of n eed , it m u st be p rotested for n on -paym en t before it is p resen ted
for p aym en t to th e accep tor for h on or or referee in case of need.
Accord in g to Section 168, p resen tm en t for p aym en t to th e accep tor for honor
m u st b e m ad e as follows: (1) if it is to be p resen ted in the p lace w h ere th e p rotest for
n on -p aym en t w as m ad e, it m u st be p resen ted not later th an th e d ay followin g its
m atu rity; an d (2) if it is to be p resen ted in some oth er place th an th e p lace w h ere it
w as p rotested , th en it m u st b e forw ard ed w ith in the time sp ecified in Section 104.
Section 169 p rovid es th at if th ere is delay in m ak in g p resen tm en t to th e accep tor for
h on or or referee in case of n eed , Section 81 applies. Section 170 states th at w h en the
bill is d ish on ored b y th e accep tor for honor, it m u st be p rotested for n on -p aym en t
b y h im.
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Paym en t for H o n o r
In stead of sim ple n egotiation to th e p erson d esirin g to pay, p aym en t for honor
m ay be availed of w h en th e h old er d oes n ot w an t to in d orse th e bill an d thereby
in cu r the liabilities of an in d orser or one n egotiatin g b y m ere delivery. Under
Section s 171 to 177, on ly a bill w h ich h as b een p rotested can be p aid for h on or and
in ord er n ot to op erate as a m ere volu n tary p aym en t, it h as to be m ad e before a
n otary after a d eclaration by th e p ayor of h is in ten tion to p ay for h on or and for*
w h ose h on or h e pays. A p aym en t for h on or is n ot con fin ed to an accep tor for honor
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but may be m ad e b y an yon e as long as th e req u isites are comp lied with. The effect
of a p ayment for h on or is to d isch arge all p arties su b seq uen t to th e p arty for w h ose
honor it w as paid. Th erefore, th e hold er w h o refu ses such p aym en t loses h is righ t of
recourse again st an y p arty w h o would have been d isch arged by such p aym en t. The
payor for h on or is su b rogated to all the rights and d uties of the holder as regard s
the p arty for w h ose h on or he p ays an d all p arties liable to the latter. The p u rp ose
therefore of a p aym en t for h on or is to free some p arty to the bill from the obligation
to make im m ed iate p aym en t on m atu rity. The hold er gets satisfaction, but the p arty
for whom p aym en t is m ad e is not d isch arged and rem ain s liable to the p ayor for
honor.
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Accordin g to Section 171, if a bill has been p rotested for n on -paymen t, an y
person may in terven e and pay it supra protest for the h onor of an y p erson liable
thereon or for th e h on or of the p erson for whose accou n t it was d raw n . Section 172
requires that the p aym en t for honor supra protest, in order to operate as such and
not as a mere volu n tary payment, mu st be attested by a n otarial act of h on or w hich
may be appended to the p rotest or form an extension to it. Section 173 p rovid es th at
the notarial act of h on or mu st be founded on a declaration mad e by the p ayer for
honor or by his agent on that behalf declaring his intention to p ay the bill for h on or
and for whose h on or he pays. According to Section 174, if tw o or m ore p erson s
offer to pay a bill for the h on or of different parties, the p erson w hose p aym en t will
discharge m ost p arties to the bill is to be given the preference. Section 175 states th at
if a bill has b een p aid for honor, all p arties subsequent to the p arty for w hose h on or
it is paid are d isch arged but the payer for honor is subrogated for, and su cceed s to,
both the rights and duties of the holder as regards the p arty for wh ose h on or he
pays and all p arties liable to the latter. According to Section 176, if the holder of a bill
refuses to receive p aym en t supra protest, he loses his right of recou rse again st an y
party who would have been d ischarged by such payment. Section 177 p rovid es th at
the payer for honor, on p ayin g to the holder the amoun t of the bill and the n otarial
expenses incidental to its dishonor, is entitled to receive both the bill itself an d th e
protest.
Bills in a Set
According to Section 178, a bill composed of variou s parts, each p art b eing
numbered, and con tain in g a reference to the other p arts, all of which p arts con stitu te
but one bill. Bills in a set are for the p u rp ose of increasing the probability of the bill
reaching its destination. For this reason, each p art is sent by different conveyances.
All rules applicable to bills of exchange generally are applicable to bills issued in
sets. But there are special rules rendered n ecessary because of the n atu re of bills
so issued. Where a bill is d rawn in a set, each p art of the set being n umbered
and containing a reference to the other parts, the whole of the p arts constitutes
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on e bill. Section 179 p rovid es th at if tw o or m ore p arts of a set are n egotiated to
d ifferen t h old ers in d u e cou rse, th e h old er w h ose title first accru es is, as between
su ch h old ers, th e tru e ow n er of th e bill. It w ill n ot affect th e righ t of a p erson who,
in d u e cou rse, accep ts or p ays th e p arts first p resen ted to h im . Section 180 p rovides
th at w h ere th e h old er of a set in d orses tw o or m ore p arts to d ifferen t p erson s, he is
liab le on every su ch p art, an d every in d orser su b seq u en t to h im is liable on th e p art
h e h as h im self in d orsed , as if su ch p arts w ere sep arate bills.
. A ccord in g to Section 181, th e accep tan ce m ay be w ritten on an y p art, and it
m u st b e w ritten on on e p art only. If the d raw ee accep ts m ore th an one p art an d such
accep ted p arts n egotiated to d ifferent h old ers in d ue cou rse, h e is liable on every
su ch p art as if it w ere a sep arate bill. Section 182 p rovid es th at w h en th e accep tor of
a bill d raw n in a set p ays it w ith ou t req u irin g the p art b earin g his accep tan ce to be
d elivered u p to h im , an d th e p art at m atu rity is ou tstan d in g in th e h an d s of a holder
in d u e cou rse, h e is liable to the holder th ereon . Accord in g to Section 183, subject to
th e excep tion s in Section s 180,181, and 182, if one p art is d isch arged , th e wh ole bill
is d isch arged . The reason is th at th e bill con stitu tes on ly one bill.
P R A C T IC E EXER C ISE
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In case of n on -p aym en t or w ron g p aym en t of the accep tor to th e h old er of a bill
of exch an ge, d iscu ss: (1) th e liability of the d raw er to the holder; an d (2) th e liability
of th e b an k to th e d raw er/d ep ositor.
RELEVAN CE O F TH E LESSO N
A p rom issory n ote n eed s to be p resen ted fof p aym en t only, u n lik e th e bills
of exch an ge w h ere p resen tm en t for accep tan ce is req u ired to hold th e drawer
p rim arily liable as art accep tor. The p rom issory n ote n eed s to be p resen ted to the
m ak er so th at w h en p aym en t is refu sed , a righ t to go after th e p arties secon d arily
liable accru es to th e holder, sub ject to the n ecessary d ish on or p roceed in gs to be
tak en to m ak e th ese p erson s liable.
LESSO N SU M M A RY
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Presen tm en t for accep tan ce m u st be m ad e b y or on b eh alf of the h old er at a
reason ab le h ou r, on a b u sin ess d ay an d b efore th e bill is overdue, to th e drawee
or som e p erson au th orized to accep t or refu se accep tan ce on his behalf.
•
The accep tan ce of a bill is th e sign ification by th e d raw ee of his assen t to the
ord er of th e d raw er.
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There is con stru ctive accep tan ce: (1) w h ere th e d raw ee to w h om the bill is
d elivered for accep tan ce d estroys it; or (2) w h ere th e d raw ee refuses, w ith in 24
h ou rs after su ch delivery, or w ith in such tim e as is given h im, to retu rn the bill
accep ted or n ot accep ted . In an y of th ese cases, th e d raw ee will be p rim arily
liable as an accep tor.
A bill is d ish on ored b y n on -accep tan ce: (1) w h en it is duly p resented for
accep tan ce an d su ch an accep tan ce as is p rescrib ed is refu sed or can n ot be
ob tain ed ; an d (2) w h en p resen tm en t for accep tan ce is excu sed and the bill is
n ot accep ted .
Wh ere a foreign bill ap p earin g on its face to be such is d ish on ored by nonaccep tan ce, it m u st b e d u ly p rotested for n on -accep tan ce, by n on -accep tan ce is
d ish on ored , an d w h ere su ch a bill w h ich h as not p reviou sly been d ish on ored by
n on p aym en t, it m u st b e d uly p rotested for n on payment. If it is not so p rotested ,
the d raw er an d in d orsers are d isch arged .
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Name:-----
D ate:___
Instructor:
.Section :
Score:
Tru e or False
1. Presen tm en t for accep tan ce of a bill of exch an ge is n ot n ecessary w h ere
it is p ayab le at a certain n u m b er of d ays after th e date.
2. The d istin ction b etw een accep tan ce for h on or and ord in ary accep tan ce
is th at in accep tan ce for honor, the con sen t of th e h old er is req u ired
w h ile in ord in ary accep tan ce, such con sen t is not req u ired .
3. Paym en t in d u e cou rse by the accom m od ation m ak er d isch arges a
n egotiab le in stru m en t.
4. A referee in case of n eed is the p erson n am ed by the d raw er or in d orser
as th e on e to w h om the holder m ay resort in case th e bill is d ish on ored
b y n on -p aym en t or n on -acceptan ce.
5. A n egotiab le in stru m en t is d isch arged by a valid ten d er or p aym en t
m ad e b y a p rior p arty.
1
_______ 6. A p erson secon d arily liable on the in stru m en t is d isch arged b y p aym en t
in d u e cou rse b y th e p arty accom m od ated , w h ere th e in stru m en t is
m ad e or accep ted for his accom mod ation .
7. Wh ere th e d raw ee to w h om a bill is delivered for accep tan ce d estroys
th e sam e, or refu ses w ith in 24 h ou rs after, such delivery, or w ith in su ch
oth er p eriod as th e h old er m ay allow, to retu rn the bill accep ted or n ot
accep ted to th e holder, h e will be d eemed to h ave rejected th e bill.
_______ 8. The m atu rity of an u n d ated negotiable in stru m en t issu ed p ayab le 60
d ays after sigh t is com p u ted from the d ate of th e first p resen tm en t for
accep tan ce.
_____ _ 9 .
Paym en t b y m ak er of a p rom issory note before m atu rity d ate d isch arges
a n egotiab le in stru m en t.
_______ 10. Wh ere a bill is d raw n in a set, each p art of th e set b ein g n u m b ered
an d con tain in g a referen ce to th e oth er p arts, th e whole of th e p arts
con stitu tes on e bill.
C H A P T ER PRO JECT
Illustrate w h at you h ave learn ed as th e m ain idea in d isch argin g in stru m en ts
as contrasted to d isch argin g p erson s secon d arily liable.
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IN TRO D UCTIO N
A check, as a substitute for money, is the m ost frequently u sed n egotiab le
instrument for d oin g business in the Philippines. Und er the d eb tor-cred itor
relationship b etw een a b ank and its depositor, after a d epositor p u ts m on ey in a
bank, the b ank owes th at su m to the depositor and p rom ises to p ay th e m on ey
either to the d epositor or to someone else at the depositor's order. As su ch , th e b an k
is always obligated to h on or the depositor's checks if th ere are sufficien t fu n d s to
cover them and if the check is not stale. If a bank w ron gfu lly d ish on ors a ch eck , it is
liable in d am ages to the depositor. A drawer may stop p aym en t on h is or h er ch eck
by giving the b an k a stop paymen t ordei; either orally or in writing.' If th e b an k
disobeys a stop p aym en t order and pays the instru ment, it is liable to th e d raw er
for any loss resu ltin g from its failure to observe the order. Of cou rse, a d ep ositor
who stops p aym en t without legal justification also has liability to th e h old er for th e
amount of the ch eck plus damages. Depositors have obligations to k eep en ou gh
money in their ch eck in g accounts to cover checks w ritten; to exam in e th e m on th ly
bank statement th ey receive and promptly advise the b ank of an y m istak es; to rep ort
check forgeries an d alterations to the bank; and above all, not to w rite a b ad ch eck .
Writing a bad ch eck exp oses the drawer to crimin al p rosecu tion s for violation of
Batas Pamb ansa Big. 22 an d /or swindling (estafa).
IN TENDED LEARN IN G O UTCO M ES
At the end of th is chapter, the students will be able to d iscu ss w h y a ch eck is
considered as a special bill of exchange and describe w h at h ap p en s if a b an k p ays
or accepts a check by mistake.
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Concept of a Ch eck
Section 185 defines a check as a bill of exch an ge d raw n on a b an k payab le on
demand. Excep t as oth erw ise provided, the provisions of the NIL applicable to a bill
of exchange payable on d em an d apply to a check.
A check is an in stru m en t th at is in the form and n atu re of a bill of exch an ge,
but unlike an ord in ary bill it is always payable on d em an d and always d raw n on
a bank. It is an order addressed to a b ank and p artak es of a rep resen tation th at
the drawer has funds on deposit against which the ch eck is d raw n , sufficient to
ensure payment upon its presentation to the bank. The following are sp ecial typ es (
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of checks: cash ier s ch eck, m an ager's check, m em oran d u m check, certified checks,
and crossed checks.
A m an ager's ch eck is a check issued by a m an ager of a b an k in the n ame of
the b an k again st the b ank itself for the accou n t of the bank. A m em oran d u m check
is d efined by the Supreme Cou rt in one case as an evid en ce of debt again st the
d raw er an d although m ay n ot be intended to be p resented , h as th e sam e effect as
an ord in ary check and if passed on to a th ird p erson , will be valid in h is h an d s like
an y oth er ch eck.1
,
A cash ier's check is a p rim ary obligation of th e issu in g b an k an d accepted
in ad van ce by its m ere issuance. Accord in g to the Supreme Cou rt in an oth er case,
a cash ier's check by its very n atu re is the bank's ord er to p ay d r^ wn u p on itself,
com m ittin g in effect its total resou rces, integrity, an d h on or b eh in d the check. A
cash ier's ch eck by its p ecu liar ch aracter and general u se in the com m ercial world
is regard ed sub stan tially to be as good as the money th at it rep resen ts.12 In two
oth er cases, the Supreme Cou rt ru led th at a judgmen t cred itor can n ot valid ly refuse
accep tan ce of the p aym en t of the judgmen t obligation ten d ered in the form of a
cash ier's check. A cash ier's check issued by a b ank of good stan d in g is d eem ed as
cash ,3 alth ou gh a cashier's check tendered by the ju dgment d ebtor to satisfy the
ju d gm en t debt is n ot a legal tender.4
A crossed ch eck is one wh ere two parallel lines are d raw n across its face or
across its corner. It is different from a canceled check in th at a can celed ch eck is one
m ark ed or stam p ed "p aid " an d /or "can celed " by a d rawee b an k to in d icate payment
thereof. Based on jurisprud ence, the crossin g of a ch eck h as th e followin g effects:
(1) the ch eck m ay n ot be en cashed but only deposited in the b an k ; (2) th e ch eck may
be n egotiated on ly on ce—to the one wh o h as an accou n t w ith th e b an k ; an d (3) the
act of crossin g the ch eck serves as a w arn in g to the holder th at th e ch eck h as been
issu ed for a d efinite p u rp ose and he m u st inquire if he received th e ch eck p ursuant
to th is p u rp ose;5 oth erw ise, he is n ot a holder in due cou rse. Crossin g of checks
should p u t th e h older on in q u iry and u pon h im devolves th e d u ty to ascertain the
indorser's title to th e ch eck or the n atu re of his p ossession .6 In oth er w ord s, the
crossin g of a ch eck is a w arn in g th at the ch eck should be d ep osited on ly in the
accoun t of th e payee. Wh en a ch eck is crossed , it is the d u ty of th e collectin g bank
to ascertain th at the ch eck is only deposited to the payee's accou n t.7 The effects of
1Peop le vs. N itafan an d Lim , G.R. N o. 75954, O ctober 22,1992.
2Tan vs. Cou rt o f A p p eals, G.R. N o. 108555, D ecem ber 20,1994.
'
3N ew Pacific Tim ber vs. Sen eris, et al, G.R. N o. L-41764, D ecem ber 19,1980.
4Tibajia, Jr. an d Tibajia vs. Cou rt of A p p eals an d Tan, G.R. N o. 100290, Ju n e 4,1993.
5State In v estm en t H ou se vs. IAC, et al., G.R. N o. 72764, Ju ly 13,1989; 175 SC RA 310 (1989).
6Bataan Cigar an d Cig arette Factory, Inc. v s. th e Cou rt o f A p p eals an d State In v estm en t H ou se, Inc., G.R.
N o. 93048, March 3,1994.
7Ph ilip p in e Com m ercial In tern ation al Ban k v s. Balm aced a an d Ram os, G.R. N o. 158143, Sep tem ber 21,2011.
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crossing a ch eck relate to th e m od e of its p resen tm en t for p aym en t. Un d er Section
72 of the N egotiable In stru m en ts Law, p resen tm en t for p aym en t m u st be m ad e b y
the holder or by som e p erson au th orized to receive p aym en t on his behalf. Wh o th is
holder or au th orized p erson is d ep en d s on th e face of th e ch eck .8
In one case, the Su p rem e Cou rt held th at in d epositin g th e ch eck in h is n am e,
the depositor did n ot b ecom e th e ou trigh t ow n er of th e am ou n t stated th erein . By
depositing th e ch eck w ith th e b an k , th e d ep ositor w as, in a way, m erely d esign atin g
the bank as th e collectin g b an k . This is in con son an ce w ith th e ru le th at a n egotiab le
instrument, su ch as a ch eck , w h eth er a m an ager's ch eck or ord in ary ch eck , is n ot
legal tender. As su ch , after receivin g the deposit, u n d er its ow n rules, th e b an k sh all
credit the am ou n t to th e d ep ositor's accou n t or in fu se value th ereon on ly after th e
drawee b an k shall h ave p aid th e am ou n t of the ch eck or th e ch eck h as b een cleared
for deposit.9
Section 186 m an d ates th at a check mu st be presented for p aym en t w ith in a
reasonable tim e after its issu e or the d raw er will be d isch arged from liability th ereon
to the extent of th e loss cau sed by the delay. Accord in g to the Supreme Cou rt in on e
case, in d eterm in in g w h at "reasonable tim e" is, regard is to be h ad to th e n atu re
of the in stru m en t, th e u sage of trad e or b usiness w ith resp ect to such in stru m en ts,
and the facts of th e p articu lar case. The test is wh ether the payee em p loyed su ch
diligence as a p ru d en t m an wou ld exercise in his ow n affairs. Failu re to p resen t foij
payment w ith in a reason ab le time will result in the d isch arge of the d raw er on ly to
the extent of th e loss cau sed b y th e delay—it does not totally w ip e ou t all liability.10*
A stale ch eck is on e th at h as not been presented for p aym en t w ith in a reason ab le
time after its issue. Accord in g to the Supreme Cou rt in the previou sly m en tion ed
case, a stale ch eck is valueless and, therefore, should not be p aid 11 alth ou gh th e
underlying ob ligation still exists.
In an oth er case, th e Supreme Cou rt held th at the term "n otice of d ish on or"
denotes that a ch eck h as b een p resented for p aym en t and w as su b seq u en tly
dishonored by th e d raw ee bank. This m ean s th at the check m u st n ecessarily b e d ue
and demandable b ecau se only a ch eck th at h as become due can be p resen ted for
payment and su b sequently be d ishonored. A p ostdated check can n ot be d ish on ored
if presented for p aym en t before its due date.12
8
Associated Ban k an d Con rad o Cru z, vs. H on . Cou rt of A p p eals, an d M erle V. Reyes, d oin g bu sin ess u n d er
the nam e and style "M elissa 's RTW ," G.R. N o. 89802, M ay 7,1992.
9Ban k of th e Ph ilip p in e Islan d s vs. Cou rt of A p p eals an d N ap iza, G.R. N o. 112392, Febru ary 29, 2000; 326
SCRA 641 (2000).
10In tern ation al Co rp orate Ban k vs. Sp s. Fran cis S. G u eco an d Ma. Lu z E. G u eco, G.R. N o. 141968, Feb ru ary
12, 2001.
"Ibid.
•
,
\ '
12Jaim e Dico vs. H on . Cou rt of A p p eals an d Peop le o f th e Ph ilip p in es, G.R. N o. 141669, Feb ru ary 28, 2005.
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Accord in g to Section 187, if a ch eck is certified by the b ank on wfqch it is drawn,
the certification is eq u ivalent to an accep tan ce b ecau se it enables the hold er to u se it
as money.13 A certification is an agreem en t w h ereb y the b an k again st w h om a check
is d raw n , u n d ertak es to pay it at an y fu tu re tim e w hen p resen ted for p aym en t. But
a b an k is n ot obligated to the d ep ositor to certify ch ecks. An d th e d raw ee is not
liable to the holder for refusal of the b ank to certify ch ecks. The refu sal of a bank
d oes n ot d isp en se w ith the req u irem en t of p resen tm en t for p aym en t sin ce a check
is p resentab le only for p aym en t at the b ank on w h ich it is d raw n .
Certification is equivalent to accep tan ce and is th e op erative act th at m ak es the
d raw ee b ank liable. Fu rth erm ore, it op erates as an assign m en t of th e fu n d s of the
d raw er in the h an d s of the d raw ee bank, and if ob tain ed by the holder, it d isch arges
p erson s secon d arily liable. Accord in g to the Supreme Cou rt, the accep tan ce of a
ch eck implies an u n d ertak in g of due diligence in p resen tin g it for p aym en t, an d if
he from w h om it is received su stain s loss by w an t of such d iligence, it w ill be held
to op erate as actu al p aym en t of th e debt or obligation for w h ich it w as given. If no
p resen tm en t is m ad e at all, the d raw er can n ot be held liable irresp ective of loss or
in ju ry u n less p resen tm en t is oth erw ise excu sed .14
i
Accord in g to Section 188, w h ere the holder of a check p rocu res it to b e accep ted
or certified , th e d raw er an d all indorsers are d isch arged from liability th ereon . Only
th e in d orsers at th e tim e of th e certification are d isch arged . In d orsers su b seq u en t to
th e certification are n ot d isch arged . In the Philippines, the p ractice is to certify only
at th e req u est of th e drawer.
Section 189 p rovid es th at a ch eck of itself does n ot op erate ^s an assign m en t
of an y p art of th e fu n d s to th e cred it of the d raw er w ith th e b an k , an d th e b an k is
n ot liable to th e holder u n less an d until it accep ts or certifies th e ch eck . Wh ere the
d raw ee b an k refu ses to certify, accept, or p ay a check: (1) the h old er h as n o action
again st it as a ch eck is of itself n ot an assign m en t of the fu n d s of th e d raw er in the
h an d s of th e d raw ee b ank , an d the d raw ee b an k is n ot liable on th e ch eck u n til it '
h as accep ted or certified it; (2) n eith er h as the holder a righ t of action again st the
d raw er w h ere th e d raw ee b an k refu ses to accep t or certify th e ch eck b u t h e h as a
righ t of action again st th e d raw er w h ere th e d raw ee b an k refu ses to p ay; an d (3)
wh ile the h older h as n o righ t of action again st the d raw ee b an k w h ich refu ses to
pay, accept, or certify a check, th e d raw er h as a righ t of action again st th e drawee
b an k so refusing; su ch righ t of action, however, is n ot b ased on th e ch eck .d raw n but
on the original con tract of d eposit b etw een them.1
1
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V
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13Section 187 is d iscu ssed in the case o f N ew Pacific Tim ber vs. Sen eris, et al., G .R. L-41764, D ecem ber 19,
1980; 101 SCRA 686 (1980).
14M y ron C. Pap a vs. A.U. Valen cia & Co., Inc., et al., G.R. N o. 105188, Ja n u a ry 23,1998.
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To illu strate: A d rew a ch eck for P100,000 on B, the bank , payable to th e ord er
of C and delivered th e ch eck to th e latter for value. C in d orsed the ch eck in b lan k
and n egotiated it to D, w h o lost it. At D's requ est, A ord ered p aym en t stop p ed by
notifying B. The stop ord er w as overlooked, an d th e ch eck w as paid to E, w h o h as
taken the ch eck , w ith ou t actu al k nowledge of the loss, in p aym en t of m erch an d ise
sold to a stran ger w h om h e th ou gh t ow n ed th e check. D n ow sues th e b an k , B, for
the amoun t of the ch eck . Given the facts, th e suit of D again st the b an k m ay n ot
prosper. There is n o p rivity b etw een the b an k and D. This is tru e even if D is a
holder. D is n ot even th e h old er of the ch eck in question b ecau se h e lost th e same.
The b an k is n ot liable to th e holder for n ot h on orin g a ch eck even if it is gen u in e,
negotiable, d raw n again st it, or the holder is really the payee, and th e d raw er h as
sufficient fu n d s in th e h an d s of the bank unless it h as accep ted or certified th e
check. It h as n o con tractu al obligation to pay the holder. The b an k is liable to th e
drawer for p ayin g a ch eck in violation of the stop p aym en t order, or for p ayin g a
check w ithout req u irin g its prod uction or su rren d er after p rop er in d orsem en t, or
for paying a ch eck u n d er a forged sign atu re of the drawer.
The Sup rem e Cou rt held in one case that as a general rule, a b an k or corp oration
who has obtain ed p ossession of a check upon an unau thorized or forged in d orsem en t
of the payee's sign atu re and who collects the amoun t of the ch eck from th e d raw ee,
is liable for the p roceed s th ereof to the payee or other owner, n otw ith stan d in g th at
the amoun t h as b een paid to th e person from whom the check w as ob tain ed . The
theory of the ru le is th at the possession of the check on the forged or u n au th orized
indorsement is w ron gfu l and when the money had been collected on th e ch eck ,
the p roceed s are held for the rightful owners who m ay recover th em. The p ayee
ought to be allowed to recover d irectly from the collecting bank, regard less of
whether the ch eck w as delivered to the payee or not.15 In an oth er case, th e Sup rem e
Court explained th at the position of the b ank taking the ch eck on th e forged or
unauthorized in dorsement is the same as if it had taken the ch eck an d collected
without in dorsemen t at all. The act of the b ank amounts to the conversion of the
check.16
I
S
I
■.
I
S
I
To illu strate: CX m ain tained a checking account w ith UBANK. One of h is
checks in a stub of 50 w as m issin g: Later, he discovered th at Ms. DY forged his
■•o
signature and succeed ed to encash P150,000 from the bank. CX can recover the
money from the bank. Under Section 23 of the Negotiable In stru ments Law, forgery
is a real defense. The forged check is wholly inoperative in relation to CX. CX
cannot be held liable th ereon by anyone, not even by a holder in due course. Und er
15Westm ont Ban k (form erly Associated Ban kin g Corp .) vs. Eu gen e O ng, G.R. N o. 132560, Jan u ary 30, 2002.
16Associated Ban k an d Corirad o Cru z, vs. H on . Cou rt of Ap p eals, and M erle V. Reyes, d oin g bu sin ess u n d er
the n am e and style "M elissa's RTW," G.R. N o. 89802, May 7,1992.(
, ,. ,
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a forged sign atu re of the drawer, th ere is no valid in stru m en t that would give rise
to a contract th at can be the basis or sou rce of liability on the p art of the drawer. The
drawee b ank h as no right or authority to touch the d rawer's funds deposited with
the d rawee bank.
The Supreme Cou rt held in one case th at even if the b ank p erform ed with
u tmost diligence, the d rawer whose signatu re w as forged m ay still recover from the
b an k as long as he or she is not precluded from settin g up the defense of forgery.
If a b ank pays a forged check, it mu st be considered as p ayin g out of its fun ds and
can n ot ch arge the amoun t so paid to the accoun t of the depositor. A b an k is liable,
irresp ective of its good faith, for paying a forged check.17
To illu s tra te :
'
)
A.
XX found a check on the street, d rawn by YY against ANG Bank, w ith ZZ as
payee. XX forged ZZ's signature as an indorser, then indorsed it person ally
an d d elivered it to DEE Bank. The latter, in turn, indorsed it to ANG Bank
w h ich ch arged it to the YY's account. YY later sued ANG Bank, but it set up
the forgery as its defense. The suit against ANG Bank will p rosp er since ANG
Bank is b ou n d to know the signature of YY, its client.
B.
FG w as a depositor of PNB. FG's friend ES took a ch eck from FG's checkbook
w h ich w as left in the car, filled it up for1the amount of P50,000.00, forged FG's
sign atu re, an d en cashed it. FG learned about the tran saction u p on receip t of
th e b ank 's statem ent of account and requested PNB to recred it th e amou n t
to h is accou n t. PNB refused. The issue, in this case, is who shall b ear th e loss
resu ltin g from the forged check. The Supreme Cou rt held th at the p rim e duty
of a b an k is to ascertain the genuineness of the sign ature Of the d raw er or the
d ep ositor on the ch eck being encashed. It is exp ected to u se reasonable business
p ru d en ce in accep tin g and cashing a check being en cashed or p resen ted to
it. Paym en t in n eglect of duty places upon h im the result of su ch negligence.
FG's act in leavin g his checkbook in the car, wh ere his tru sted friend rem ained
in, can n ot be con sid ered negligence sufficient to excu se PNB from its own
negligence. PNB b ears the loss.18
v
>V
iI 1
"B" forged "A's" sign atu re as d rawer of a check d raw n on Citibank. The check
was p u rp orted ly payable to the order of "B". "B" th en in d orsed th e check
to "C," a holder in due cou rse, who deposited the sam e to his accou n t with
the Ban k of PI. The check p assed th rou gh th e n orm al cou rse of clearin g and
accordingly the drawee, Citibank, cred ited the collecting bank, Ban k of P.I.,
with the amoun t of the check wh ich Citibank, in tu rn , debited from "A's"
C.
17Sam su n g Con stru ction Com p an y Philippines^ Inc. vs. Far East Ban k an d Tru st Com p an y an d Cou rt of
Ap p eals, G.R. N o. 129015, Au gu st 13, 2004.
18PN B vs. Q u im p o an d Gozon II, G.R. N o. L-53194, M arch 14,1988.
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deposit accou n t. Upon receivin g his m on th ly statem en t from Citibank, togeth er
with the can celed ch eck s debited from his d eposit accou n t, "A" d iscovered th e
forgery.19 In th is case, A can comp el Citibank to recred it to h is accou n t th e
amount of the forged check. The forged sign atu re is wholly in op erative an d n o
right to give d isch arge th erefore is acqu ired by virtu e of such forged sign atu re.
(Sec. 23, NIL) Hence, Citibank did not h ave any right to pay th e ch eck b earin g
a forged sign atu re. In addition, th e con tract b etween "A" as d ep ositor h im self
or wh oever m ay be au th orized by the sam e d epositor as evid en ced by a d uly
issued check. Citibank is also b ou nd to know the sign atu re of th e d raw er an d
should m ak e su re th at the ch eck is paying bears the sign atu re of its client.
Also, Citibank h as no right of recou rse again st Bank of P.I. Citibank, b y p ayin g
the check, is responsible for the w arran ties of an acceptor. Hen ce, it is d eem ed
to admit the gen uineness of the sign atu re of the drawer. Besides, Citib an k can
be d eemed n egligent b ecau se unlike Bank of P.I., the collectin g b ank, Citib an k
t
as drawee, is ch arged with the knowledge of the d rawer's sign atu re. H en ce,
Citibank w as in a b etter position to determin e if the sign atu re of th e d raw er is
forged. But Citibank an d Bank of P.I. can proceed again st th e forger B b ecau se
his crim in al act w as the p roximate cause of the damage.
D.
H ernan issued a ch eck payable to the order of Fernand o in the su m of P120,000
and w as d raw n to X Bank. The check was delivered to Matilde b y Ad rian o for
encashment. At th at time, the check had the indorsements of: (1) Fern an d o; an d
(2) Rosa. Wh en Matilde encashed it with X Bank, she affixed h er sign atu re on
the check. Up on Matilde's receipt of the cash p roceed s of the ch eck , she tu rn ed
over the am ou n t to Adriano. X Bank was informed by H ern an th at th e alleged
indorsement of th e payee Fernando, was a forgery, since the latter h ad d ied
two years ago. X Bank, h avin g refunded the amount to H ern an , su ed Matild e,
who refused to retu rn the money.20 Given the facts, X b an k w as correct in
paying H ern an . If a check d raw n on a bank is presented to it for en cash m en t,
it is its obligation to see to it th at the one presenting the ch eck for p aym en t,
derives his title from prior p arties who have validly n egotiated th e ch eck . As
the sign atu re of Fern an d o was forged, the issue of the ch eck by H ern an to h im
did not p rod u ce the effect of payment. Fernand o can therefore again d em an d
payment from h im (Hernan). The paymen t by X Bank to H ern an is to rep lace
the amoun t debited from Hernan's accoun t on a ch eck d raw n by h im w h ich
did not accomplish its objective because of a forgery of the payee's (Fernan d o)
signature. X Bank h as a cause of action again st Matilde b ecau se Matilde is an
indorser of the questioned checjk.
19Th e illu strativ e case w as p attern ed from the 1987 Bar Exam in ation q u estion in M ercan tile Law .
20Th e illu strative case w as p attern ed from the 1982 Bar Exam in ation q u estion in M ercan tile Law ,
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On the oth er hand, p aymen t made under materially altered in stru m en t is not
payment done in accord ance with the instruction of the drawer. Accord in g to the
Supreme Cou rt in one case, when the drawee bank pays a materially altered check,
it violates the terms of the check, as well as its d uty to ch arge its client's account
only for bona fide disbursements he had made. Since the d rawee bank, in the instant
case, did not pay according to the original tenor of the in stru ment, as d irected by
the drawer, then it has no right to claim reimbursement from the drawer, much less,
the right to deduct the erroneous p ayment it made from the d rawer's accou n t which
it was exp ected to treat with utmost fidelity.21
To illu stra te : In consideration of some goods he bought, A A issued to BB a
personal check in the amount of P2,800. Without the knowledge of A A, BB raised
the amoun t to P28,000. The alteration is not apparent to the naked eye.; BB deposited
the altered check in his account with the PNB, which released it for clearing. The
Bank of P.I., which is the drawee bank, did not notice the alteration and the check
was therefore cleared. BB was able to withdraw the P28,000, and th ereafter closed
his account. Wh en AA received his bank statement and canceled ch eck s for that
month, he n oticed the d iscrep ancy in the amount after comp arin g the, altered check
with his ch eck stub. He immediately notified and demanded recred it from the Bank
of P.I., wh ich can n ot now locate BB.22 In this case, the Baink of P.I. should recredit
the accoun t of AA. Under Section 124 of the NIL, a material alteration avoids the
instru ment, excep t as those who made, authorized or assented to the alteration and
subsequent endorsers. BB, the holder of the check is not a holder in due cou rse, and
he w as even the one who caused the alteration; hence, the in stru m en t is avoided
as to BB. Bank of P.I. can, in tu rn, collect whatever amount that it retu rn ed to A
from the collecting bank, PNB. As a collecting bank, PNB w arran ts the genuineness
of the check and th at the check is in all respect what it p u rp orts to be. Whatever
amoun t th at PNB paid can be recovered from BB.
A d rawee b ank may refuse to pay checks drawn against it: (1) if th ere is a stop
payment order th at was issued by the drawer; (2) when the bank receives notice of
the drawer's death; and (3) if the drawer's deposit is insufficient. '
In this p articu lar case, however, the bank will become liable even if the drawer's
deposit is insufficient: X draws a check payable against his cu rren t accou n t w ith the
Ortigas Branch of Bonifacio Bank in favor of B. Although X does not h ave sufficient
funds, the bank honors the check when it is presented for payment. Apparently, X
has conspired with the bank's bookkeeper so that his ledger card would show that
he still has sufficient funds. The bank files an action for recovery of the amount
paid to B because the check presented has no sufficient funds.23 Given the facts,
________________ ,
'
.•
*i
'
,
21Metrop olitan Ban k and Tru st Com p an y vs. Ren ato D. Cabilzo, G.R. N o. 154469, Decem ber 6, 2006.
22The illu strative case w as p attern ed from the 1983 Bar Exam in ation q u estion in M ercan tile Law.
23Th is case w as p atterned from 1998 Bar Exam in ation q u estion in Mercan tile Law.
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the bank can n ot recover th e am ou n t p aid to B for th e ch eck . Alth ou gh p aym en t of
a check is n ot eq u ivalen t to accep tan ce, th e d raw ee w h o p ays a ch eck is liable as an
acceptor. As accep tor, th e b an k b ecam e p rim arily liable to th e p ayee, B. The cau se of
action of the b an k is again st X an d its b ook k eep er w h o con sp ired to m ak e X's led ger
show that h e h as su fficien t fu n d s.
/
PRACTICE EXER C ISE
D iscu ss th e legal con seq u en ces w h en a b an k h on ors a forged ch eck .24
RELEVAN CE O F TH E LESSO N
The u se of ch eck s as a sp ecial typ e of bill of exch an ge cu ts ou t th e n eed for
one p arty to tran sfer a large su m of physical cash to an oth er p arty. Th e u se of
checks allow s tw o or m ore p arties to m ak e a m on etary tran saction w ith ou t th e
need of actu ally exch an gin g physical cu rren cy. Use of ch ecks, h ow ever, h as som e
drawbacks, p articu larly w h en it lands in the h an d s of scru p u lou s in d ivid u als w h o
may forge th e sign atu res of th e in dorsers or in trod u ce m aterial alteration s in th e
in stru ment, an d claim p aym en t on it from the d raw ee bank.
LESSO N SUM M ARY
•
A ch eck is a bill of exch an ge d raw n on a b an k payable on d em an d . Excep t as
oth erw ise p rovid ed , th e p rovision s of the law applicable to a bill of exch an ge
payable on d em an d ap p ly to a check.
•
The crossin g of a ch eck h as th e following effects: (a) th e ch eck m ay n ot b e
en cash ed b u t on ly d ep osited in the bank; (b) the ch eck m ay b e n egotiated on ly
once; an d (c) th e act of crossin g the ch eck serves as a w arn in g to th e h old er
th at th e ch eck h as b een issu ed for a definite p u rp ose an d he m u st in q u ire if h e
received th e ch eck p u rsu an t to this p u rp ose; oth erw ise, h e is n ot a h old er in
due cou rse.
•
A stale ch eck is on e th at h as n ot b een p resented for p aym en t w ith in a reason ab le
time after its issu e an d as su ch b ecam e valu eless alth ou gh th e u n d erlyin g
obligation still exists.
•
The term "n otice of d ish on or" d enotes th at a ch eck h as b een p resen ted for
p aym en t an d w as su b seq uen tly d ish on ored b y th e d raw ee b an k .
•
If a ch eck is certified b y th e b an k on w h ich it is d raw n , th e certification is
eq uivalent to an accep tan ce an d is th e op erative act th at m ak es th e d raw ee
b ank liable.
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A b an k is liable, irresp ective of its good faith, for p ayin g a forged ch eck .
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24Q u estion b ased from th e case of A ssociated Ban k vs. CA, G .R. N o. 107382, Ja n u a ry 31,1996.
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Name- -
Date:
Score:
Section:
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Tru e or False
1. The certification of a check, if p rocu red by the holder d isch arges
p erson s secon d arily liable.
2. Even if th e b an k p erform ed w ith u tm ost diligence, the d raw er w h ose
sign atu re w as forged m ay still recover from the b ank as long as h e or
she is n ot p reclu d ed from setting up the defense of forgery.
3. A d raw ee b an k m ay not refuse to pay checks d raw n again st it even if
th e d raw er's deposit is insufficient.
4. A ch eck itself does n ot operate as an assignment of an y p art of the
fu n d s to th e cred it of the d rawer with the bank, and the b an k is n ot
liable to th e holder u nless and until it accepts or certifies the check.
5. A stale ch eck is one which has not been presented for p aym en t w ith in
a reasonable time after its issue and as such became valueless alth ou gh
the u n d erlyin g obligation still exists.
6. The b an k is liable to the d rawer for paying a check in violation of the
stop p aym en t order.
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dishonors
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check,
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for
d
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ages to the
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depositor.
8. A b ank , w hich h onors a check wherein the drawer's sign atu re w as
forged, m u st b ear the loss b ecause it has the legal duty to ascertain th at
the d raw er's sign atu re is genuine before encashing a check.
9. If no p resen tm en t is made, the drawer cann ot be held liable u n less
p resen tm en t is oth erw ise excused.
10. A b an k will n ot be liable if it pays a forged check in good faith. ,
CH APTER PRO JECT
Write about you r view in relation to whether it is better to issue checks for
business transaction s or settle everyth in g in cash given the knowledge learn ed in
the course about the intricacies involving negotiable instruments.
UN IT IV I N EG O TIABLE IN STRU M EN T^ ifA W
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BUSINESS LAWS AND REGULATIONS
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IN TRO D UCTIO N
Writing a b ad ch eck exp oses the d raw er to crim in al p rosecu tion s for violation
of Batas Pam b an sa Big. 22 (BP Big. 22) an d /or sw in d lin g (Estafa) u n d er Article 315,
par. 2(d) of th e Revised Penal Code (RPC). A single act of issu in g a w orth less or
bouncing ch eck m ay give rise to two d istinct crimes, violation of BP Big. 22 an d
estafa. The tw o offen ses h ave different elements and for the cou rt to acq u ire
jurisdiction, each of th e specific elements of each crim e need to be estab lish ed . If a
person is p rosecu ted for Estafa, he may also be p rosecu ted for violation of BP Big.
22, although th e reverse is not n ecessarily true. Violation of BP Big. 22 is con sid ered
malum prohibitum w h ere d am age and intent are not material unlike violation of Art.
315, par. 2(d) of th e RPC w hich is considered malum in se where d am age an d d eceit
are essential elemen ts. BP Big. 22 is a crime again st public interest, w h ile estafa
under Article 315, par. 2(d) of the RPC is a crime against property.
IN TEN D ED LEARN IN G O UTCO M ES
At the end of th is chapter, the students will be able to describe the d ifferen ce
between the crim e of violation of Batas Pambansa Big. 22 and the crim e of sw in d lin g
under Article 315, par. 2(d) of the RPC, and conclude wh eth er the offense com m itted
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is a violation of BP Big. 22 or swindling.
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Lesson 1: Th e Bou n cin g Ch eck s Law (Batas Pam b an sa Big. 22)
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The law th at p en alizes the issuance of u nfun ded checks is Batas Pam b an sa Big.
22. It took effect on July 29,1979. It aims to curb the practice of issuing ch eck s th at are
worthless and is n ot intended to coerce an obligor to pay his obligation. Violation of
said law is con sid ered malum prohibitum where d amage to the com p lain an t an d inten t
of the person issu ing the check are not material. The law was not in tended to am en d
the provision of th e Negotiable In stru m ents and the req uiremen ts u n d er said law
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1Th e top ics in C h a p te r 6 are n o t p a rt of th e N egotiab le In stru m en ts Law . Th ese crim in al law s, Batas
Pam b an sa Big. 22 an d A rticle 315 p ar. 2 (d ) of th e R evised Pen al C od e, b o th p ertain to th e crim in al a ct relative to
the issu an ce of w o rth less o r u n fu n d ed ch eck s, b u t w ith d istin ct elem en ts. Th ey are in clu d ed in th is b ook b e ca u s e
one sim p ly can n ot d iscu ss ch eck s w ith o u t exp lain in g th e crim in al con seq u en ces of d ra w in g o r issu in g w o rth less
or u n fu n d ed ch eck s.
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may be different from the requirements of BP Big. 22. It also does not amend Article
315, par. 2(d) of the Revised Penal Code for estafa. Violation of BP Big. 22 is a crime
against public interest. Violation of BP Big. 22 falls within the jurisdiction of the
first level cou rts—th e Municipal Trial Courts, Municipal Circuit Trial Courts, and
Metropolitan Trial Cou rts. The Supreme Court held in one case that the complaint
mu st be in stituted and tried in the cou rt of the municipality or territory where the
offense was com mitted or where any of its essential elements occu rred as violations
of BP Big. 22 are transitory or continuing crim es.2 It emphasized that a violation
of BP Big. 22 prescribes in four years from the commission of the offense or if not
k nown at that time, from the d iscovery thereof.3 Prosecution und er BP Big. 22 shall
be without prejudice to p unishment under the RPC. There is no double jeopardy.
A violation of BP Big. 22 involves moral turpitude. The Supreme Cou rt affirmed
the suspension of a lawyer from the practice of law after she was con victed for
violation of BP Big. 22. The Court held that conviction of a crime in volving moral
tu rpitu de relates to and affects the good moral character of a person con victed of
such offense. BP Big. 22 violation is a serious criminal offense that deleteriously
affects public interest and order. The effects of the issuance of a w orthless check
tran scend th e private interest of p arties directly involved in the tran saction and
touch the interest of the com m un ity at large. Putting valueless comm ercial papers
in circu lation , multiplied a thousand-fold, can very well pollute the ch an nels of
trad e an d com m erce, injure the banking system, and eventually h urt the welfare of
society and the public interest.4
^
The lan gu age of BP Big. 22 is broad enough to cover all kinds of checks, whether
p resent d ated or p ostdated , whether issued in payment of p re-existin g obligations
or given in mu tu al or simultaneous exchange for something of value. BP Big. 22
is aimed to p ut a stop or to curb the practice of issuing worthless checks, which
is p roscrib ed by the state because of the injury it causes to public interests. The
gravam en of the offense punished by BP Big. 22 is the act of m akin g or issuing a
worthless ch eck or a check that is dishonored upon its presentation for payment. It
is not the non-payment of an obligation that the law punishes. The law publishes
the act n ot as an offense against prop erty but an offense against public order and
interest. The Supreme Cou rt held that the enactment of BP Big. 22 is a valid exercise
of police power and is not repugnant to the constitutional inhibition against
imprisonment for debt. The statute is not unconstitutional.5 The checks covered
within the p u rview of the law are the memorandum checks, p ost-d ated checks,
corporate checks, and personal checks. Foreign checks payable in foreign currency
2Uy VS. CA and Peop le, G.R. N o. 119000, Ju ly 28, 1997; Brod eth and O n al
N ovem ber 29,2017.
vs.
Peop le, G.R. N o. 197849,
3Pan agu iton vs. DOJ, G.R. N o. 167571, N ovem ber 25, 2008.
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4Peop le vs. Tu and a, A.C. No. 3360, Jan u ary 30,1990.
5Lozan o vs. H on. Martin ez and H on. Flam inian o, G.R. N o. L-63419, D ecem ber 18,1986.
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are covered by BP Big. 22 if th ey are d raw n an d issu ed in th e Ph ilip p in es, even if
they are payable ou tsid e th e Philip pin es.
BP Big. 22 ap plies w h eth er th e ch eck w as issu ed on ly as evid en ce of d eb t
and not to be p resen ted for p aym en t,6 as a form of d ep osit or gu aran tee, or as
accommodation ch eck , or th at th e accou n t on w h ich th e ch eck w as d raw n w as
already closed or su b ject to h old -ou t, or th at th e ch eck w as d raw n again st u n cleared
deposit (DAUD). Accord in g to th e Su p rem e Cou rt in one case, th e en actm en t d oes n ot
make any d istin ction as to w h eth er th e ch eck s w ith in its con tem p lation are issu ed
in payment of an ob ligation or m erely to gu aran tee th e said obligation. The h istory
of the en actm en t evin ces th e d efin ite legislative intent to m ak e th e p roh ib ition allembracing w ith ou t m ak in g an y excep tion from th e op eration th ereof in favor of a
guarantee.7
To illu strate: AM is en gaged in th e b usiness of gran tin g in terest-b earin g loan s
and in red iscou n tin g ch eck s. RC, on the oth er h and , is en gaged in sellin g read y-towear clothes at th e Pasay Com m ercial Center. RC frequently b orrow s m on ey from
AM. In 1989, RC b orrow ed P176,000 from AM, w h ich AM d elivered . In tu rn , RC
issued a ch eck for th e sam e amou n t. Wh en the ch eck m atu red , AM p resen ted it to
the bank but w as d ish on ored an d m ark ed "accou nt closed ." Wh en n otified of th e
dishonor, RC p rom ised to p ay in cash. No p aym en t w as mad e, thus, th e crim in al
action for violation of BP Big. 22 w as instituted. In this case, RC is liable for violatin g
BP Big. 22, even u p on th e claim th at th e ch eck was issued to serve a m ere evid en ce
of indebtedness, an d n ot for circu lation or negotiation. Accord in g to th e Su p rem e
Court, a ch eck issu ed as an evid en ce of debt, th ou gh n ot in ten d ed to be p resen ted
for payment h as th e sam e effect of an ord in ary check, hence, it falls w ith in th e
ambit of BP Big. 22. Wh en a ch eck is p resented for p ayment, th e d raw ee b an k w ill
generally accep t th e sam e regard less of w h eth er it w as issu ed in p aym en t of an
obligation or m erely to gu aran tee th e said obligation. Wh at th e law p u n ish es is th e
issuance of a b ou n cin g ch eck , n ot th e p u rp ose for w h ich it w as issu ed n or th e term
and conditions relatin g to its issuance. The m ere act of issu ing a w orth less ch eck is
malum prohibitum.8
The Supreme Cou rt held th at in th e case of DAUD, th e d ep ositor h as on its
face, sufficient fu n d s in h is accou n t, althou gh it is n ot available yet at th e tim e th e
check was d raw n , w h ereas in DAIF, the depositor lack s sufficient fu n d s in h is
account to pay th e ch eck . Moreover, DAUD d oes n ot exp ose th e d raw er to p ossible
prosecution for estafa an d violation of BP Big. 22, while DAIF subjects the d ep ositor
to liability for su ch offenses.9 B. P. Big. 22 deals w ith in sufficiency of fu n d s an d n ot
6People vs. N itafan an d Lim , G.R. N o. 75954, O ctob er 22,1992.
7Que vs. Peop le an d IAC, G.R. N o. 75217-18, Sep tem b er 21, 1987.
8Cru z vs. CA an d Peop le, G.R. N o. 108738, Ju n e 17,1994.
9Bank of th e Ph ilip p ine Islan d s vs. Reyn ald R. Su arez, G.R. N o. 167750, M arch 15, 2010.
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u n collected d ep osits. It includes not only the issu an ce of a ch eck d raw n against
in su fficien t fu n d s b u t also th ose d raw n again st an in existen t accou n t or an already
closed accou n t w h en the ch eck w as p resen ted for p aym en t. Accord in g to the
Su p rem e Cou rt in on e case, wh en w h at w as stam p ed on the ch eck w as "Payment
Stop p ed Fu n d ed " and "D AUD " w hich m ean s d raw n again st u n collected deposits,
th e ch eck w as n ot issued w ith ou t sufficient fu n ds an d w as n ot d ish on ored due to
in su fficien cy of fu nds. Even w ith u n collected deposits, the b an k m ay h on or the
ch eck at its d iscretion in favor of favored clients, in w h ich case th ere w ou ld be no
violation of BP 22.101
The Su p reme Cou rt, in an oth er case, held th at the ab sen ce of d am ages incurred
b y th e p ayee d oes n ot absolve the d raw er from liability. Even if the p ayee suffered
no d am age as a resu lt of the issu ance of the b ou n cin g check, th e d am age to the
in tegrity of th e b an k in g system can n ot be denied. D am age to th e p ayee is n ot an
elemen t of th e crim e p u n ish ed in BP Big. 22.11
Elem en ts of th e Crim e
The gravam en of th e offense p un ish ed u nd er the law is the act of m ak in g and
issu in g a w orth less ch eck ; th at is a check is dishonored u pon its p resen tation for
p aym en t for in su fficien cy of funds. The two ways of violating th e law h ave the
follow in g elem en ts, to wit:
*
A.
*
By m ak in g or d raw in g an d issuing a check to apply "on accou n t or for value,"
k n ow in g at th e tim e of issue th at the check was n ot sufficiently fu n d ed . The
elem en ts of th e offen se are:
1.
th at a p erson m ak es or draw s and issues an y check;
2.
th at th e ch eck is m ad e or d raw n and issued to apply on accou n t or for
valu e;
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3.
th at th e p erson w h o m ak es or d raws and issues th e ch eck k n ow s at the
tim e of issu e th at he d oes n ot h ave sufficient fu nd s in or cred it w ith the
d raw ee b an k for th e p aym en t of such ch eck in full u p on its presentmen t;
an d
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4.
th at th e ch eck is sub sequen tly dish on ored by the d raw ee b an k for
in su fficien cy of fu n d s or cred it, or wou ld h ave b een d ish on ored for the
sam e reason h ad n ot th e d raw ee, w ith ou t an y valid reason , ord ered the
b an k to stop p aym en t.12
10Eliza T. Tan vs. Peop le o f th e Ph ilip p in es, G.R. N o. 141466, Jan u ary 19, 2001.
11Vaca vs. CA , G .R. N o. 131714, N ov em ber 16,1998.
12Th e Su p rem e Cou rt en u m era ted th ese elem en ts of B.P. 22 in th e case o f Lim vs. Peop le, G .R. 130038,
Sep tem ber 18, 2000.
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g.
By h avin g sufficien t fu n d s in or cred it w ith the d raw ee b an k at th e tim e of
issue, but failin g to k eep sufficient fu n d s or cred it w ith th e said b an k to cover
the full am ou n t of th e ch eck w h en p resen ted to the d raw ee b an k w ith in 90
days. The elem en ts of th e offense are:
1.
th at a p erson h as sufficient fu n ds in or cred it w ith th e d raw ee b an k w h en
he m ak es or d raw s an d issues a check;
2.
th at h e fails to k eep sufficient fu n d s or to m ain tain a cred it to cover th e full
am ou n t of th e ch eck if p resen ted w ith in 90 d ays from th e d ate ap p earin g
th ereon ; an d
3.
th at th e ch eck is d ish on ored by th e d rawee bank.
For the prima facie p resu m p tion that th e issuer k new of th e in su fficien cy of
funds in th e b an k , it m u st be shown that he received a n otice of d ish on or an d ,
within five b an k in g d ays th ereafter failed to satisfy the am ou n t of th e ch eck or
make arran gem en t for its p aym en t. Without the n otice of dishonor, th e accu sed is
deprived of h is righ t to avail of the grace period and p reclu d es crim in al p rosecu tion .
The receipt of n otice is th e reck on in g point for the five-day grace p eriod p rovid ed
by law.
The failure of th e p rosecu tion to prove the existence an d receip t b y p etition er of
the requisite w ritten n otice of d ishonor and that he w as given at least five b an k in g
days w ith in w h ich to settle h is accou n t constitutes sufficient grou n d for h is acq u ittal
in a case for violation of BP 22.13
Defenses
The following d efen ses m ay be successfully u sed by the accu sed : (1) lack of
jurisdiction of th e cou rt over the case; (2) im p rop er venue; (3) varian ce b etw een
the in formation an d th e evid en ce p resented; (4) th e in stru m en t is n ot a ch eck ; (5)
signature of th e d raw er is forged or th ere w as fraud in factum; (6) in volu n tarin ess,
such as the p resen ce of coercion or uncontrollable fear; (7) ch eck w as n ot issu ed
on account or for valu e; (8) ch eck w as sufficiently fu nded an d th e d ish on or w as a
mistake of the d raw ee b an k ; (9) d raw er w as not aw are of the in su fficien cy of fu n d ;
(10) no p resen tm en t w as m ad e w ith in a reasonable tim e as in w h ere th e ch eck is
already stale or it w as p resen ted beyond 90 d ays from m atu rity th ereof; (11) lack of
written n otice of d ish on or an d n o p roof of receip t of notice; (12) p aym en t before or
during the five-day grace p eriod ; an d (13) p aym en t before th e filing of th e comp laint.
13Jam es Sv en d sen v s. P eop le of th e Ph ilip p in es, G.R. N o. 175381, Febru ary 26, 2008.
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Accord in g to the Su p rem e Cou rt in one case, p aym en t of th e valu e of th e check
either by the d raw er or b y the d raw ee b an k w ith in five b an k in g d ays from notice of
d ishon or given to th e d raw er is a com p lete defense. The prima facie p resu m p tion that
the d raw er h ad k n ow led ge of the in su fficien cy of fu n d s or cred it at the tim e of the
issu an ce an d at th e tim e it w as p resen ted for p aym en t wou ld be reb u tted by such
p aym en t. Th is d efen se lies regard less of the stren gth of the evid en ce offered by the
p rosecu tion to p rove th e elemen ts of the violation of BP Big. 22.14
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Th e Sup rem e Cou rt also held in an oth er case th at a n otice of d ish on or received
b y th e m ak er or d raw er of th e ch eck is thus indispensable before a conviction
for violation of BP Big. 22 can ensue. The notice of d ish on or m ay b e sen t by the
offen ded p arty or th e d raw ee bank, and it must be in w ritin g. A m ere oral notice
to p ay a d ish on ored ch eck will not suffice. The lack of a w ritten n otice is fatal for
th e p rosecu tion .15 In th e case illustrated next, the Supreme Cou rt held th at a notice
of d ish on or to th e corp oration , which has a p erson ality d istin ct an d sep arate from
the officer of th e corp oration , does not constitute n otice to the latter. The ab sence of
n otice of d ish on or n ecessarily deprives an accu sed of an op p ortu n ity to preclude
crim in al p rosecu tion .
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To illu strate: LL, a junior officer of Pee In vestmen t H ou se (PIH), was
au th orized to sign checks for and on b ehalf of PIH. In the cou rse of b usiness, she
m et Fr. AP, p rovincial treasu rer of SDW. Fr. AP w as au th orized to in vest donations
of the society and had been investing the SDW's money w ith PIH. Fr. AP w as issued
checks in p aym en t of interest for SDW's investments. The checks w ere dishonored
for insu fficiency of funds. Subsequently, PEH w as placed u n d er receivership. Fr.
AP filed a suit again st Lao an d h er co-signatory, TA, head of PIH's op erations, for
violation of BP 22. The issue is w h eth er an employee who as p art of h er regular
duties sign s a b lank corp orate ch eck can be held for violation of BP 22. In th is case,
the ch eck s co-sign ed b y Lao w ere signed in ad vance and in blank, d elivered to TA,
who sub sequ en tly filled in th e n am e of the payee, the am ou n ts an d corresp on d in g
d ates of m atu rity; th is p roced u re followed in keeping w ith h er d uties as a junior
officer. Thou gh BP 22 p rovid es th e p resu m p tion th at a d raw er is k nowledgeable of
the fact of in su fficien cy o