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Table of Contents
PARTNERSHIPS .........................................1
A. General Provisions .............................................. 1
B. Rights and Obligations of Partnership and
Partners ....................................................................... 8
C. DISSOLUTION AND WINDING UP ....... 15
D. LIMITED PARTNERSHIP ........................... 22
CORPORATIONS ......................................31
A. Definition of Corporation ................................ 32
B. Classes of Corporations .................................... 33
C. Nationality of Corporations ............................. 35
D. Corporate Juridical Entity ................................ 38
E. Capital Structure ................................................. 42
F. Incorporation and Organization ...................... 50
G. Corporate Powers .............................................. 65
H. Stockholders and Members.............................. 79
I. Board of Directors and Trustees ...................... 99
J. Capital Affairs .................................................... 109
K. Dissolution and Liquidation .......................... 120
L. Other corporations........................................... 130
M. Merger and Consolidation ............................. 149
BANKING LAWS .....................................154
A. NEW CENTRAL BANK ACT .................... 155
B. GENERAL BANKING LAW OF 2000..... 162
C. SECRECY OF BANK DEPOSITS (R.A. No.
1405, as amended, and R.A. No. 6426, as amended)
.................................................................................. 169
D. ANTI-MONEY LAUNDERING ACT ..... 172
INSURANCE ............................................183
I. Basic Concepts ..................................... 184
A. Elements of an Insurance Contract .............. 186
B. Characteristics/Nature of Insurance Contracts
.................................................................................. 187
C. Classes of Insurance ........................................ 189
D. When insurable interest should exist ............ 202
E. Double Insurance and Over- insurance ....... 207
F. No Fault, Suicide, and Incontestability Clauses
.................................................................................. 208
II. Perfection of the Insurance Contract . 210
III. Rights and Obligations of Parties ..... 214
A. Insurer................................................................ 214
B. Insured ............................................................... 215
C. Beneficiary ......................................................... 216
D. Unlawful Acts .................................................. 252
E. Powers of the President to Suspend or Prohibit
Transaction or Investment .................................. 253
F. Investments by an Entity Controlled by or
Acting on Behalf of the Foreign Government, or
Foreign State-owned Enterprises ....................... 253
G. Reciprocity Clause .......................................... 253
INTELLECTUAL PROPERTY CODE . 255
I. Intellectual Property Code ................... 256
A. In General ......................................................... 256
B. Patents ............................................................... 257
C. Trademarks ....................................................... 265
D. Copyrights ........................................................ 277
ELECTRONIC COMMERCE ACT ....... 294
I. Policy of the Law ........................................... 295
II. Definition of terms ...................................... 295
III. Legal Recognition of Electronic Data
Messages, Documents, and Signatures .......... 296
IV. Presumption Relating to Electronic
Signatures............................................................ 297
V. Admissibility and Evidential Weight of
Electronic Data Message or Electronic
Document ........................................................... 298
VI. Obligation of Confidentiality .................... 298
VII. Punishable Acts & Penalties.................... 298
FOREIGN INVESTMENTS ACT .......... 300
I. Declaration of Policy [Sec. 2]....................... 301
II. Definitions [Sec. 3] ...................................... 301
III. Inter-Agency Investment Promotion
Coordination Committee (IIPCC) [Sec. 4] .... 303
IV. Registration of Investments of NonPhilippine Nationals [Sec. 5] ............................ 304
V. Foreign Investments in Export Enterprises
[Sec. 6] ................................................................. 305
VI. Foreign Investments in Domestic
Enterprises [Sec. 7]............................................ 305
VII. Foreign Investment Negative List [Sec. 8]
.............................................................................. 305
TAXATION 1 ........................................... 310
I.
GENERAL
PRINCIPLES
OF
TAXATION ......................................... - 311 -
TRANSPORTATION LAW .................... 225
A. Common Carriers ............................................ 225
B. Obligations and Liabilities .............................. 229
C. The Montreal Convention of 1999 ............... 243
A.
POWER
OF
TAXATION
AS
DISTINGUISHED FROM POLICE POWER
AND EMINENT DOMAI ........................... - 311 B. INHERENT AND CONSTITUTIONAL
LIMITATIONS OF TAXATION .................... 312
C. KINDS OF TAXES ....................................... 325
D. DOCTRINES IN TAXATION................... 327
PUBLIC SERVICE ACT .......................... 248
II. NATIONAL TAXATION.................. 338
IV. Rescission of Insurance Contracts .... 216
A. Critical Infrastructure ...................................... 249
B. Foreign State-Owned Enterprise ................... 249
C. Public Service as Public Utility....................... 249
A. TAXING AUTHORITY ............................... 338
a. Powers and Duties of the Bureau of Internal
Revenue [Sec. 2, NIRC] ....................................... 338
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b. Interpreting Tax Laws and Deciding Tax Cases
.................................................................................. 338
c. Non-retroactivity of rulings (Sec. 246, NIRC)
.................................................................................. 338
B. Income Tax ....................................................... 340
TAXATION 2 ...........................................412
I. NATIONAL TAXATION .................... 413
A. Value – Added Tax (VAT) ............................. 413
B. Tax Remedies Under The NIRC ................... 439
II. LOCAL TAXATION .......................... 454
A. Local Government Taxation.......................... 454
B. Taxing Powers of Provinces........................... 457
C. Taxing Powers of Municipalities ................... 460
D. Taxing Powers of Cities ................................. 465
E. Taxing Powers of Barangays .......................... 465
III. REAL PROPERTY TAXATION ..... 473
IV. JUDICIAL REMEDIES.................... 488
A. Jurisdiction of The Court Of Tax Appeals .. 488
B. Procedures......................................................... 490
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PARTNERSHIPS
COMMERCIAL LAW
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PARTNERSHIPS
COMMERCIAL LAW
PARTNERSHIPS
A. General Provisions
1.
Definition,
Characteristics
Elements,
and
a. Definition
By the contract of partnership:
1. Two or more persons bind themselves to
contribute to a common fund:
a. Money,
b. property, or
c. industry.
2. With the intention of dividing the profits
among themselves.
Two or more persons may also form a
partnership for the exercise of a profession
[Art. 1767, Civil Code].
b. Elements
1. Two or more persons bind themselves to
contribute money, property, or industry to a
common fund [Art. 1767, Civil Code].
Money
Must be in legal tender. Checks, drafts,
promissory notes, and other mercantile
documents are not money. There is no
contribution of money until they have been
cashed [Art. 1249, Civil Code].
Property
May be real, personal, corporeal, or
incorporeal property. Hence, credit or even
goodwill may be contributed as property [De
Leon, supra].
Industry
Means the active cooperation, the work of the
party associated, which may be either personal
manual efforts or intellectual, and for which he
receives a share in the profits (not salary) of the
business [De Leon, supra].
Common Fund
The Civil Code requires the parties “bind
themselves to contribute” to a common fund.
The partnership may therefore exist even
before the common fund is created. The
common fund may not even come from the
partners themselves but may be borrowed from
third persons. The form of the common fund
may not even be cash or property; it can be in
the form of credit or industry [Lim Tong Lim v.
Philippine Fishing Gear, G.R. No. 136448
(1999)].
2. Intention of dividing the profits among
themselves
Intention to Divide Profits
If the common fund’s work is “indispensable,
beneficial and economically useful to the
business” of the partners and the profit motive
is the primordial reason to establish the
partnership, even if there are no actual profits,
then there is partnership [AFISCO v. CA, G.R.
No. 112675 (1999)].
Note: There must be a valid contract.
Additionally, a partnership contract must
comply with the necessary elements of a
contract under the Civil Code (cause, object,
and consideration).
c. Parties & Object
1. Parties
General Rule: Any person capacitated to
contract may enter into a contract of
partnership.
Exceptions: The capacity of the following
persons to enter into a contract of partnership,
though capacitated to contract generally, are
limited.
The following persons cannot enter into a
contract of partnership:
1. Those suffering from civil interdiction;
2. Minors;
3. Insane or demented persons;
4. Deaf-mutes who do not know how to write;
5. Incompetents who are under guardianship.
6. Those who are prohibited from giving each
other any donation or advantage cannot
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enter into a universal partnership [Art.
1782, Civil Code].
Void donations:
1. Those made between persons who were
guilty of adultery or concubinage at the
time of the donation [Art. 739, Civil Code]
2. Those made between persons found guilty
of the same criminal offense, in
consideration thereof [Art. 739, Civil Code]
3. Those made to a public officer or his wife,
descendants and ascendants, by reason of
his office [Article 739, Civil Code]
4. Every donation or grant of gratuitous
advantage, direct or indirect, between the
spouses during the marriage shall be void,
except moderate gifts, which the spouses
may give to each other on the occasion of
any family rejoicing. The prohibition shall
also apply to persons living together as
husband and wife without a valid marriage
[Art. 87, Family Code].
5. A corporation cannot enter into a
partnership in the absence of express
authorization by statute or charter
[Mendiola v. CA, G.R. No. 159333 (2006)].
Under Sec. 35 of the Revised Corporation
Code (RCC), every corporation incorporated
under the RCC has the power and capacity to
enter into a partnership, joint venture, merger,
consolidation, or any other commercial
agreement with natural and juridical persons.
There is no prohibition against a partnership
being a partner in another partnership [De
Leon, supra].
time of the constitution of the
partnership.
c. A stipulation for the common
enjoyment of any other profits may also
be made. However, the property which
the partners may acquire subsequently
by inheritance, legacy or donation
cannot be included in such stipulation,
except the fruits thereof [Art. 1779, Civil
Code].
2. All the profits
a. It comprises all that the partners may
acquire by their industry or work during
the existence of the partnership.
b. Only the usufruct over the property of
the partners passes to the partnership
[Art. 1780, Civil Code].
When the articles of universal partnership do
not specify its nature (all present property or all
the profits), the partnership will be considered
as one only of all the profits [Art. 1781, Civil
Code].
Rule on After-Acquired Properties
Aside from the contributed properties, only the
profits of the contributed common property (no
other profits) are included. Thus, should a
partner subsequently acquire a property as
remuneration for his work, such property and
its fruits are not to be enjoyed by the universal
partnership of all present property [Paras, Civil
Code of the Philippines Annotated, Vol. V
(2008)].
2. Object
Properties
subsequently
acquired
by
inheritance, legacy, or donation, cannot be
included in the stipulation but the fruits thereof
can be included in the stipulation.
A. In a Universal Partnership
B. In a Particular Partnership
A universal partnership may refer to:
1. All present property
a. The partners contribute all the property
which belongs to them to a common
fund, with the intention of dividing the
same among themselves, as well as
the profits they may acquire therewith
[Art. 1778, Civil Code].
b. The property contributed includes all
those belonging to the partners at the
A particular partnership has for its object:
1. Determinate things,
2. Their use or fruits, or
3. A specific undertaking, or
4. The exercise of a profession or vocation
[Art. 1783, Civil Code].
C. Effect when the object is unlawful
If the partnership has an unlawful object or
purpose:
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1. The contract is void ab initio [Art. 1409 (1),
Civil Code];
2. Once dissolved by judicial decree:
a. The profits shall be confiscated by
favor of the State;
b. The instruments or tools and proceeds
of the crime shall also be forfeited in
favor of the State [Art. 1770, Civil
Code];
3. The contributions of partners shall not be
confiscated unless they are instruments or
tools of the crime [Art. 1411, Civil Code].
d. Form
General Rule
No required form is necessary.
Exceptions: The contract is subject to the
provisions of Arts. 1771, 1772 and 1773, Civil
Code and to the Statute of Frauds.
1. Where immovable property or real rights
are contributed to the partnership, a public
instrument shall be necessary [Art. 1771,
Civil Code].
a. An inventory of said property, signed
by the parties, must be attached to the
public instrument.
b. Otherwise, the contract of partnership
is void [Art. 1773, Civil Code].
2. Every contract of partnership having a
capital of Php 3,000 or more, in money or
property, shall appear in a public
instrument
a. The instrument must be recorded in the
Office of the Securities and Exchange
Commission.
b. Failure to comply with these
requirements shall not affect the
liability of the partnership and the
members thereof to third persons [Art.
1772, Civil Code].
e. Characteristics
1. Generally [De Leon, supra]
1. Principal – does not depend on other
contracts
2. Preparatory – entered as a means to an
end
3. Commutative – undertaking of each one is
considered equal with others
4.
5.
6.
7.
Consensual – perfected by mere consent
Bilateral – entered by two or more persons
Onerous – contributions have to be made
Nominate – has a special designation in
law.
2. Essential Attributes
1. Informal/Consensual and Weak Juridical
Personality [Arts. 1771, 1785, 1830, Civil
Code]
a. Generally, a partnership may be
constituted in any form;
b. The juridical personality of a
partnership is deemed weak since a
partnership may be dissolved without
need of going through a formal
dissolution process.
2. Mutual Agency [Arts. 1803, 1818, Civil
Code]
a. All partners shall be considered agents
and whatever any one of them may do
alone shall bind the partnership;
b. Every partner is an agent of the
partnership for the purpose of its
business, and the act of every partner
binds the partnership.
3. Delectus
Persons)
Personae
(Selection
of
One selects his partners on the basis of their
personal qualifications and qualities (e.g.
solvency, ability, honesty, trustworthiness). It is
for this reason that there is mutual
representation among the partners so that the
act of one is considered the act and
responsibility of the others as well [Bautista,
Treatise on Philippine Partnership Law (2005)].
4. Partners Burdened with Unlimited
Liability [Arts. 1816, 1817, Civil Code]
All partners, including industrial ones, shall be
liable pro rata with all their property and after
all the partnership assets have been
exhausted, for the contracts which may be
entered into in the name and for the account of
the partnership, under its signature and by a
person
authorized
to
act
for
the
partnership [Art. 1816, Civil Code].
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A stipulation among the partners against the
unlimited liability under Art. 1816 is void,
except as among the partners [Art. 1817, Civil
Code].
5. As the consideration for the sale of a
goodwill of a business or other property by
installments or otherwise.
3. Partnership Term
2. Rules to Determine Existence
When the intent of the parties is clear, such
intent shall govern.
Article 1784, Civil Code. A partnership begins from
the moment of the execution of the contract, unless
it is otherwise stipulated.
When the intent of parties does not clearly
appear, the following rules apply [Art. 1769,
Civil Code]:
1. Persons who are not partners to each other
are not partners as to third persons, subject
to the provisions on partnership by
estoppel.
2. Co-ownership or co-possession does not
of itself establish a partnership, even when
there is sharing of profits in the use of the
property.
As to period, a partnership may either be:
1. For a fixed term or particular
undertaking; or
2. At will, the formation and dissolution of
which depend on the mutual desire and
consent of the parties. Any one of the
partners may, at his sole pleasure, dictate
the dissolution of the partnership, even in
bad faith, subject to liability for damages
[Ortega v. CA, G.R. No. 109248 (1995)].
Exception: The co-ownership of inherited
properties is automatically converted into
an unregistered partnership the moment
said common properties and/or the income
derived therefrom are used as a common
fund with intent to produce profits for the
heirs in proportion to their respective
shares in the inheritance as determined in
a project partition [Oña v. CIR, G.R. L19342 (1972)].
3. Sharing of gross returns does not of itself
establish a partnership, even when the
parties have joint or common interest in any
property from which the returns are
derived.
4. The receipt by a person of a share in the
profits of a business is prima facie evidence
that he is a partner.
Exception: No such inference is drawn if the
profits are received in payment:
1. As a debt by installments or otherwise;
2. As wages of an employee or rent to a
landlord;
3. As an annuity to a widow or representative
of a deceased partner;
4. As interest on a loan, though the amount of
payment vary with the profits of the
business;
A partnership term may be extended by:
1. Express renewal; or
2. Implied renewal, when these requisites
concur:
a. The partnership is for a fixed term or
particular undertaking;
b. It is continued after the termination of
the fixed term or particular undertaking
without any express agreement [Art.
1785, Civil Code].
Note: A continuation of the business by the
partners or such of them as habitually acted
therein during the term, without any settlement
or liquidation of the partnership affairs, is prima
facie evidence of a continuation of the
partnership [Art. 1785 (2), Civil Code].
4. Partnership by Estoppel
a. Definition
Estoppel is a bar which precludes a person
from denying or asserting anything contrary to
that which has been established as the truth by
his own deed or representation, either express
or implied [De Leon, supra].
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b. Partner by Estoppel
Representation
A partner by estoppel is a person who, by
words spoken or written or by conduct: (1)
represents himself as a partner or (2) consents
to another representing him to anyone as a
partner
1. In an existing partnership; or
2. With one or more persons not actual
partners [Art. 1825, Civil Code].
Liability of a Partner by Estoppel
1. Personal Representation
A partner by estoppel is liable to any such
persons:
1. To whom such representation has been
made; and
2. Who has, on the faith of such
representation, given credit to the actual or
apparent partnership [Art. 1825 (1), Civil
Code].
2. Public Representation
If he has made such representation or
consented to its being made in a public
manner, whether the representation has or has
not been (personally) made or communicated
to such persons so giving credit by or with his
knowledge:
1. When partnership liability results, he is
liable as though he were an actual member
of the partnership.
2. When no partnership liability results, he is
liable pro rata with the other persons, if any,
so consenting to the contract or
representation.
3. When there are no such other persons, he
is separately liable [Art. 1825 (1), Civil
Code].
Effect on Existing Partnership or Other
Persons not Actual Partners [Art. 1825 (2),
Civil Code]
Representation
Effect
When a person has
been represented to
be a partner (1) in an
existing partnership,
He is an agent of the
persons consenting
to
such
representation:
Effect
or (2) with one or 1. To bind them to
more persons not
the same extent
actual partners
and in the same
manner,
as
though he were a
partner in fact
2. With respect to
persons who rely
upon
the
representation.
When
all
the A partnership act or
members of the obligation results
existing partnership
consent
to
the
representation
In all other cases
The representation is
the joint obligation of
the person acting
and the persons
consenting to the
representation
Nature of Liability
A partner by estoppel is liable in the following
manner [Art. 1825, Civil Code]:
1. He is liable as though he were a partner
when:
a. There is an existing partnership;
b. All the partners consented to the
representation; and
c. A partnership liability results.
2. He is liable jointly and pro rata (as though
he were a partner in fact) with those who
consented to the representation when:
a. There is an existing partnership but not
all the partners consented; or
b. There is no existing partnership and all
those
represented
as
partners
consented to the representation.
3. He is liable separately when:
a. There is an existing partnership but
none of the partners consented; or
b. There is no existing partnership and
not all of those represented as partners
consented to the representation.
Note: Art. 1825, Civil Code does not create a
partnership as between the alleged partners.
The law only considers them as partners and
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the association as a partnership insofar as it is
favorable to third persons, pursuant to the
equitable principle of estoppel. Thus,
partnership liability is created only in favor of
persons who have, on the faith of such
representation, given credit to the partnership
[MacDonald vs. National City Bank of New
York, G.R. No. L-7991 (1956)].
5. Partnership as Distinguished from
Joint Venture
Partnership
Joint venture
Operates with firm Operates without firm
name
and
legal name
and
legal
personality
personality
Generally relates to a Usually limited to a
continuing business single transaction
of
various
transactions of a
certain kind
A joint venture is an agreement between two
parties to enter into a commercial undertaking.
It may fall under a partnership with a limited
purpose.
Under Philippine law, a joint venture is a form
of partnership and should thus be governed by
the laws of partnership [Aurbach v. Sanitary
Wares Manufacturing Corp., G.R. Nos. 75951,
75875, 75975-76 (1989)].
6. Professional Partnership
Definition
Those formed by persons for the sole purpose
of exercising their common profession, no part
of the income of which is derived from
engaging in any trade or business [Sec. 22 (B),
National Internal Revenue Code].
in their individual capacity computed on
their distributive shares of partnership
profits [Tan v. Del Rosario, G.R. Nos.
109289 and 109446 (1994)].
7. Management
a. In General
The property rights of a partner are:
1. His rights in specific partnership property;
2. His interest in the partnership; and
3. His right to participate in the management
[Art. 1810, Civil Code].
Management of the partnership is primarily
governed by the agreement of the partners in
the articles of partnership.
It may be stipulated that the partnership will
be managed by:
1. All the partners; or
2. A number of partners appointed as
managers which may be appointed
a. In the articles of partnership; or
b. After the constitution of the partnership.
b. Scope of Powers of a Managing
Partner
General Rule: The partner designated as
manager in the articles may execute all acts of
administration, despite opposition by the other
partners.
Exception: He cannot do so when he acts in
bad faith [Art. 1800, Civil Code].
c. Managing Partner’s Power to Revoke
General Rule: Power is irrevocable without
just or lawful cause.
The powers of the managing partner may be
revoked:
1. If appointed in the articles of partnership,
Distinguished from an Ordinary Partnership
when:
The distinction between a Partnership and a
a. There is just or lawful cause for
General Professional Partnership (GPP) is
revocation; and
material in taxation.
b.
The
partners
representing
the
1. A GPP is not taxable as an entity.
controlling interest revoke such power.
2. The income tax is imposed not on the
2.
If
appointed
after the constitution of the
professional partnership, which is tax
partnership,
at
any time and for any cause
exempt, but on the partners themselves
[Art. 1800, Civil Code].
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Rationale: Such appointment is a mere
delegation of power, not founded on a change
of will on the part of the partners, the
appointment not being a condition of the
contract.
It is merely a simple contract of agency, which
may be revoked at any time. The vote of
revocation, however, should also be done by
the partners having the controlling interest [De
Leon, supra].
d. In case of Two or More Managing
Partners
When there are two or more managing
partners appointed:
1. Each one may separately execute all acts
of administration.
2. If any of them opposes the acts of the
others, the decision of the majority prevails.
3. In case of a tie, the partners owning the
controlling interest will decide [Art. 1801,
Civil Code].
Requisites for Applicability of Art. 1801:
1. Two or more partners have been appointed
as managers;
2. There is no specification of their respective
duties; and
3. There is no stipulation that one of them
shall not act without the consent of all the
others.
The right to oppose is not given to nonmanagers because in appointing their other
partners as managers, they have stripped
themselves of all participation in the
administration [Paras, supra].
The other managers, however, should make
the opposition before the acts produce legal
effects insofar as third persons are concerned.
Note: Those who vote against the contract
shall prevail, the same having been entered
into without authority [De Leon, supra].
e. Stipulation of Unanimity
General Rule: In case there is a stipulation that
none of the managing partners shall act without
the consent of others,
1. The concurrence of all is necessary for the
validity of the acts, and
2. The absence or disability of one cannot be
alleged.
Exception: Unless there is imminent danger of
grave or irreparable injury to the partnership
[Art. 1802, Civil Code].
f. When Manner of Management was not
Agreed Upon
When there is no agreement as to the manner
of management, the following rules apply:
1. All the partners are considered agents
(mutual agency). Whatever any one does
alone binds the partnership, unless there is
a timely opposition to the act, under Art.
1801, Civil Code.
2. Any important alteration in the immovable
property of the partnership, even if useful
to the partnership, requires unanimity.
If the alteration is necessary for the
preservation of the property, however,
consent of the others is not required. If the
refusal is manifestly prejudicial to the
partnership, court intervention may be
sought [Art. 1803, Civil Code].
The consent need not be express. It may be
presumed from the fact of knowledge of the
alteration without interposing any objection [De
Leon, supra].
g. Mutual Agency
In addition to the Art. 1801, Civil Code there is
effectively a mutual agency in the following
cases:
1. Partners can dispose of partnership
property even when in partnership name
[Art. 1819, Civil Code].
2. An admission or representation made by
any partner concerning partnership affairs
is evidence against the partnership [Art.
1820, Civil Code].
3. Notice to any partner of any matter relating
to partnership affairs is notice to the
partnership [Art. 1821, Civil Code].
4. Wrongful act or omission of any partner
acting for partnership affairs makes the
partnership liable [Art. 1822, Civil Code].
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5. Partnership is bound to make good the
losses for wrongful acts or misapplications
of partners [Art. 1823, Civil Code].
B. Rights and Obligations of
Partnership and Partners
1. Rights and Obligations of the
Partnership/Obligations
of
the
Partners to the Partnership
a. Obligation to Contribute and to
Warrant
Art. 1786, Civil Code. Every partner is a debtor of
the partnership for whatever he may have promised
to contribute.
He shall also be bound for warranty in case of
eviction with regard to specific and determinate
things which he may have contributed to the
partnership, in the same cases and in the same
manner as the vendor is bound with respect to the
vendee. He shall also be liable for the fruits thereof
from the time they should have been delivered,
without the need of any demand.
1. Contribution of Money or Property
With respect to contribution of money or
property, a partner is obliged:
1. To contribute, at the beginning of the
partnership or at the stipulated time, the
money, property or industry which he
undertook to contribute;
Effect of failure to contribute: Makes the
partner ipso jure a debtor of the partnership
even in the absence of demand. The
remedy is not rescission but an action for
specific performance with damages and
interest [Sancho v. Lizarraga, G.R. L33580 (1931)].
Note: When contribution is in goods, the
amount thereof must be determined by
proper appraisal of the value as prescribed
in the contract of partnership, or in the
absence thereof, the current prices, at the
time of contribution [Art. 1787, Civil Code].
2. In case a specific and determinate thing is
to be contributed:
a. To warrant against eviction in the same
manner as a vendor; and
b. To deliver to the partnership the fruits
of the property promised to be
contributed, from the time they should
have been delivered, without need of
demand [Art. 1786, Civil Code];
3. In case a sum of money is to be
contributed, or in case he took any amount
from the partnership coffers: To indemnify
the partnership for
a. Interest; and
b. Damages from the time he should have
complied with his obligation, or from
the time he converted the amount to his
own use, respectively [Art. 1788, Civil
Code].
4. To preserve the property with diligence of
a good father of a family pending delivery
to the partnership [Art. 1163, Civil Code].
5. To indemnify for any interest and damages
caused by the retention of the property or
by delay in its obligation to contribute a sum
of money [Arts. 1788 and 1170, Civil
Code].
2. Amount of Contribution
General Rule: Partners are to contribute equal
shares to the capital of the partnership.
Exceptions:
1. When there is an agreement to the
contrary, the contribution shall follow such
agreement [Art. 1790, Civil Code].
2. Industrial partners, unless he has
contributed capital pursuant to an
agreement to that effect.
3. Additional Capital Contribution
Any partner who refuses to contribute an
additional share to the capital, except an
industrial partner, to save the venture shall be
obliged to sell his interest to the other partners,
unless there is an agreement to the contrary
[Art. 1791, Civil Code].
Requisites:
1. There is an imminent loss of the business
of the partnership;
2. The majority of the capitalist partners are of
the opinion that an additional contribution
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to the common fund would save the
business;
3. The capitalist partner refuses deliberately
(not because of financial inability) to
contribute an additional share to the
capital; and
4. There is no agreement that even in case of
imminent loss of the business, the partners
are not obliged to contribute.
4. Contribution of Industry
An industrial partner is obliged to contribute his
industry at the stipulated time.
b. Obligation to Apply Sums Collected
Pro Rata
General Rule: A partner (a) authorized to
manage, (b) 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 pro rata, even if he issued a receipt
for his own credit only [Art. 1792, Civil Code].
Exceptions
1. In case the receipt was issued for the
account of the partnership credit only,
however, the sum shall be applied to the
partnership credit alone.
2. When the debtor declares, pursuant to Art.
1252, Civil Code at the time of making the
payment, to which debt the sum must be
applied, and if the personal credit of the
partner is more onerous to him, it shall be
so applied [Art. 1792, Civil Code].
1. Requisites for Applicability of Art. 1792,
Civil Code
1. There exist at least two (2) debts, one
where the collecting partner is creditor, and
the other, where the partnership is the
creditor;
2. Both debts are demandable; and
3. The partner who collects is authorized to
manage and actually manages the
partnership.
c. Obligation
Damages
to
Compensate
for
Every partner is responsible to the partnership
for damages suffered by it through his fault [Art.
1794, Civil Code].
1. Set-Off of Liability
General Rule: The liability for damages cannot
be set-off or compensated by profits or benefits
which the partner may have earned for the
partnership by his industry.
Rationale: The partner has the obligation to
secure the benefits for the partnership. As
such, the requirement for compensation that
the partner be both a creditor and a debtor of
the partnership at the same time, is not
complied with [Art. 1278, Civil Code].
Exception: The court may equitably lessen the
liability if, through his extraordinary efforts in
other activities of the partnership, unusual
profits were realized [Art. 1794, Civil Code].
Note, however, that there is still no
compensation in this case.
d. Obligation to Account and Act as
Trustee
Every partner must
1. Account to the partnership for any benefit;
and
2. Hold as trustee for it any profits derived by
him without the consent of the other
partners:
a. From any transaction connected with
the formation, conduct, or liquidation of
the partnership; or
b. From any use by him of its property
[Art. 1807, Civil Code].
General Rule: The partner cannot use or apply
exclusively to his own benefit partnership
assets or results of the knowledge or
information gained by him as a partner to the
detriment of the partnership [Pang Lim &
Galvez vs. Lo Seng, G.R. No. 16318 (1921)].
Exception: If the taking by the partner is with
the consent of all other partners [Lim Tanhu v.
Ramolete, G.R. L-40098 (1975)].
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The duty to account continues until the
partnership relation is terminated [Art. 1829,
Civil Code].
This obligation exists even when he issued a
receipt for his share only [Art. 1793, Civil
Code].
Rationale: In this case, the debt becomes a
bad debt. It would be unfair for the partner who
already collected not to share in the loss of the
other partners.
Credit collected after dissolution: The
collecting partner need not bring the same to
the partnership capital. Art. 1793 presupposes
that there exists partnership capital. Upon
dissolution of the partnership and the return to
each principal of what he contributed, the
community of interest between them
disappears altogether [De Leon, supra; Espiritu
and Sibal, op. cit., citing 11 Manresa 352-353].
2. Obligations of the Partners Among
Themselves
b. Obligation not to Engage in Another
Business
1. Industrial Partners
General Rule: An industrial partner cannot
engage in business for himself.
Should he do so, the capitalist partners, as well
as industrial partners may either:
1. Exclude him from the firm; or
2. Avail themselves of the benefit which he
may have obtained with a right to damages
[Art. 1789, Civil Code].
Exception: He may engage in business for
himself when the partnership expressly permits
him to do so [Art. 1789, Civil Code].
Remedy of the other partners
The other partners have the remedy of either
excluding the erring partner from the firm or of
availing themselves of the benefits which he
may have obtained.
a. Obligation to Render True and Full
Information
An action for specific performance to compel
the partner to perform the promised work is not
available as a remedy because this will amount
to involuntary servitude [De Leon, supra].
Partners shall render on demand true and full
information of all things affecting the
partnership to:
1. Any partner;
2. The legal representative of any deceased
partner; or
3. The legal representative of any partner
under legal disability [Art. 1806, Civil
Code].
Rationale:
1. To prevent the industrial partner from
exploiting his services for his own personal
benefit without the permission of the firm.
2. To prevent conflict of interest and to ensure
compliance by said partner with his
prestation.
Even without demand, honesty demands the
giving of vital information, the refraining from all
kinds of concealment [Paras, supra].
By “information”, it is meant that which can be
used for partnership purposes, it is in the sense
of a property which the partnership has a
valuable right [De Leon, supra].
2. Capitalist Partners
General Rule: For a capitalist partner, the
prohibition on engaging in another business
extends only to any operation which is of the
same or similar kind of business in which the
partnership is engaged
Exception: Unless there is a stipulation to the
contrary.
If the capitalist partner violates this prohibition,
he shall:
1. Bring to the common funds any profits
accruing to him from his transactions; and
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2. Personally bear all the losses [Art. 1808,
Civil Code].
The test is the possibility of unfair
competition
A partner occupies a fiduciary position with
respect to his co-partners imposing duties of
utmost good faith and he may not carry on any
other business in rivalry with the business of
the partnership, whether in his own name or for
the account of another at the expense of the
partnership [De Leon, supra].
c. Obligation
Profits/Losses
to
Share
in
the
1. Rules for Distribution of Profits and
Losses
1. They shall be distributed in conformity with
the agreement.
2. If only the share in profits has been
stipulated, the share in the losses shall be
in the same proportion.
3. In the absence of any stipulation:
a. The share in the profits of the capitalist
partners shall be in proportion to their
contributions.
b. The losses shall be borne by the
capitalist partners, also in proportion to
the contributions.
c. The share of the industrial partners in
the profits is that share as may be just
and equitable. If he also contributed
capital, he will receive a share of the
profits in proportion to his contribution;
and
d. The industrial partner, who did not
contribute capital, is not liable for
losses [Art. 1797, Civil Code].
2. Exclusion of Partner From Share
General Rule: A stipulation excluding one or
more partners from any share in the profits or
losses is void [Art. 1799, Civil Code].
Exception: A stipulation exempting an
industrial partner from losses is valid, since, if
the partnership fails to realize profits, he can no
longer withdraw his work or labor [De Leon,
supra; 11 Manresa 377].
Note: But this does not exempt the industrial
partner from liability insofar as third persons
are concerned. He may however, recover what
he has given to third persons from the other
partners, for he is exempted by law from losses
[La Compania Maritima v. Muñoz, G.R. No. L3704 (1907)].
3. Obligations of the Partners to Third
Persons
a. Liability for Partnership Debts
The partnership is primarily liable for contracts
entered into:
1. In its name and for its account;
2. Under its signature; and
3. By a person authorized to act for it.
Upon exhaustion of its assets, all partners are
liable pro rata with all their property. Any
partner may enter into a separate obligation to
perform a partnership contract [Art. 1816, Civil
Code].
1. Nature
Liability
of
Individual
Subsidiary
General Rule: The partners are liable
subsidiarily. It only arises upon exhaustion of
partnership assets [La Compania Maritima v.
Muñoz, supra].
Exceptions:
1. A third person who transacted with the
partnership can hold the partners solidarily
(rather than subsidiarily) liable for the
whole obligation if the case falls under Art.
1822 or 1823, Civil Code [Muñasque v. CA,
G.R. L-39780 (1985)]. The provisions refer
to wrongful acts or omission and
misapplication of money or property by a
partner in the ordinary course of business.
2. A person admitted as a partner into an
existing partnership is liable for all the
obligations of the partnership arising before
his admission, except that his liability shall
be satisfied only out of partnership
property, unless there is a stipulation to the
contrary [Art. 1826, Civil Code]. In other
words, he is not personally liable.
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2. Pro Rata
b. Liability of Partners for Partnership
Contracts
The partners are liable pro rata. This liability is
not increased even when a partner:
1. Has left the country and the payment of his
share of the liability cannot be enforced
[Co-Pitco v. Yulo, G.R. No. L-3146 (1907)];
or
2. His liability is condoned by the creditor
[Island Sales v. United Pioneers, G.R. No.
L-22493 (1975)].
1. Acts apparently for the carrying on of
usual business
General Rule: The partnership is liable for any
act of a partner which is apparently for the
carrying on of the usual business of the
partnership, including the execution of any
instrument in the partnership name.
Basis for Pro-rating
Pro rata must be understood to mean equally
or jointly and not its literal meaning. After all
partnership assets have been exhausted, prorating is based on the number of partners and
not on the amount of their contributions to the
common fund, subject to adjustment among
the partners [De Leon, supra].
Exception: The partnership is not bound when
the following concur:
1. The partner has in fact no authority to act;
and
2. The person with whom he deals has
knowledge of such fact [Art. 1818 (1), Civil
Code].
3. Liability of an Industrial Partner
2. Acts not apparently for carrying on of
the usual business
An industrial partner, who is not liable for
losses, is not exempt from this liability (for
partnership debts). However, he can recover
the amount he has paid from the capitalist
partners, unless there is a stipulation to the
contrary [La Compania Maritima v. Muñoz,
supra].
General Rule: Acts of a partner which is not
apparently for carrying on of the usual business
does not bind the partnership.
4. Stipulation against Individual Liability
3. Acts of strict dominion
Any stipulation against pro rata liability is void
against third persons but valid among the
partners [Art. 1817, Civil Code].
General Rule: One or some of the partners
have no authority to do the following acts of
strict dominion:
1. Assign the partnership property in trust for
creditors or on the assignee’s promise to
pay the debts of the partnership;
2. Dispose of the goodwill of the business;
3. Do any other act which makes it impossible
to carry on the ordinary business of the
partnership;
4. Confess a judgment;
5. Enter into a compromise concerning a
partnership claim or liability;
6. Submit a partnership claim or liability to
arbitration;
7. Renounce a claim of the partnership.
A stipulation which excludes one or more
partners from any share in the profits or losses
is void [Art. 1799, Civil Code].
Note: The exemption of the industrial partner to
pay losses relates exclusively to the settlement
of the partnership affairs among the partners
themselves, and has nothing to do with the
liabilities of the parties to third persons.
Art. 1816 refers to “liabilities” while Art. 1797
speaks of “losses.”.
There is therefore no conflict between the two
articles [Nachura].
Exception: The partnership is bound if the
other partners authorized him to do the act [Art.
1818 (2), Civil Code].
Exceptions:
They may do so if:
1. Authorized by all the partners; or
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2. The other partners have abandoned the
business [Art. 1818 (3), Civil Code].
4. Acts in contravention of a restriction
Any act of a partner in contravention of a
restriction on authority does not bind the
partnership to persons having knowledge of
the restriction [Art. 1818 (4), Civil Code].
The partnership is not liable to third persons
having actual or presumptive knowledge of the
restrictions, whether or not the acts are for
apparently carrying on in the usual business of
the partnership [De Leon, supra].
Conveyance of Partnership Real Property
1. Title in Partnership Name
Any partner may convey the real property in the
name of the partnership. The partnership can
recover it, except when:
1. The act of the partner binds the
partnership, when he has authority to carry
out the usual business of the partnership,
under Art. 1818 (1), Civil Code; or
2. If not so authorized, the property has been
conveyed by the grantee, or a person
claiming under him, to a holder for value
and without knowledge that the partner
exceeded his authority [Art. 1819 (1), Civil
Code].
A partner authorized to carry out the usual
business may convey, in his own name, the
equitable interest of the partnership [Art. 1819
(2), Civil Code].
2. Title in the Name of Other Persons
Where the title is in the name of one or more
but not all the partners, and the record does not
disclose the right of the partnership:
1. The partners having title may convey title.
2. The partnership may recover it when the
partners conveying title have no authority
to carry on the usual business of the
partnership, unless the purchaser or his
assignee is:
a. A holder for value; and
b. Without knowledge that the act
exceeded authority [Art. 1819 (3), Civil
Code].
Where the title is in the name of one or more or
all the partners, or in a third person in trust for
the partnership, a partner authorized to carry
on the usual business may convey equitable
title in the partnership name or in his own name
[Art. 1819 (4), Civil Code].
Where the title is in the names of all the
partners, a conveyance executed by all of them
passes all the rights to the property [Art. 1819
(5), Civil Code].
c. Liability for Admission by a Partner
An admission or representation by any partner
may be used as evidence against the
partnership when:
1. It concerns partnership affairs; and
2. Such affairs are within the scope of his
authority [Art. 1820, Civil Code].
Instances Where Knowledge of a Partner is
Considered Knowledge of the Partnership
1. Knowledge of the partner acting in the
particular matter
a. Acquired while a partner, or
b. Then present to his mind;
2. Knowledge of any other partner who
reasonably could and should have
communicated it to the acting partner [Art.
1821, Civil Code].
d. Liability for Wrongful Acts of a
Partner
The partnership is solidarily liable with the
partner who causes loss or injury to any person
not a partner, or incurs any penalty through any
wrongful act or omission:
1. In the ordinary course of the business of
the partnership, or
2. Not in the ordinary course of business, but
with the authority of his co-partners [Art.
1822, Civil Code].
e. Liability for Misapplication of Money
or Property
The partnership is liable for losses suffered by
a third person whose money or property was:
1. Received by a partner
a. Acting within the scope of his apparent
authority, and
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b. Misapplied it
2. Received by the partnership
a. In the course of its business, and
b. Misapplied by any partner while it is in
the custody of the partnership [Art.
1823, Civil Code].
Solidary liability
All partners are solidarily liable with the
partnership for its liabilities under Arts. 1822
and 1823 [Art. 1824, Civil Code].
This is without prejudice to the guilty partner
being liable to the other partners. However, as
far as third persons are concerned, the
partnership is answerable [De Leon, supra].
Applicability of the Rule of Respondeat
Superior
The rule of respondeat superior (also called the
rule of vicarious liability) applies to the law of
partnership in the same manner as other rules
governing the agency relationship [De Leon,
supra; Teller, op. cit., p. 61].
It is not only the partners who are liable in
solidum; it is also the partnership [Art. 1824,
Civil Code].
The injured party may proceed against the
partnership or any partner [Paras, supra].
The reason for the law’s imposition of wider
liability on the partnership with respect to torts
and breach of trust is based on public policy
[De Leon, supra].
Criminal Liability for Criminal Acts
A non-acting partner in a partnership engaged
in a lawful business is not criminally liable for
the criminal acts of another partner but he is
criminally liable if the partnership is involved in
an unlawful enterprise with his knowledge or
consent.
Partnership Liability
1. Does Not Extend to criminal liability
where the wrongdoing is regarded as
individual in character (e.g. embezzlement)
2. Extends to criminal liability where the
crime is statutory, especially where it
involves fine or imprisonment [De Leon,
supra].
f. Liability in case of Partnership by
Estoppel
Note: Refer to the discussion above on
Partnership by Estoppel.
g. Liability of an Incoming Partner
A person admitted as a partner is liable for
obligations incurred subsequent to his
admission as the other partners are liable. This
is because he is already part of the partnership.
The partner is liable for obligations incurred
before his admission, but will be satisfied only
out of the partnership property, unless
otherwise stipulated that he fully assumes such
obligations [Art. 1826, Civil Code].
Rationale:
1. The new partner partakes of the benefits of
the partnership property and an already
established business.
2. He has every means of obtaining full
knowledge of the debts of the partnership
and remedies that amply protect his
interest [De Leon, supra].
Notice to or Knowledge of the Partnership
The following operate as notice to or
knowledge of the partnership:
1. Notice to any partner of any matter relating
to partnership affairs;
2. Knowledge of the partner acting in the
particular matter acquired while a partner;
3. Knowledge of the partner acting in the
particular matter then present to his mind;
or
4. Knowledge of any other partner who
reasonably could and should have
communicated it to the acting partner.
These do not apply in case of fraud on the
partnership committed by or with the consent
of the partner [Art. 1821, Civil Code].
Preference of Partnership Creditors in
Partnership Property
With respect to partnership assets, the
partnership creditors are entitled to priority of
payment. However, the private creditors of
each partner may ask for the attachment and
public sale of the share of the latter in the
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partnership assets as provided in Art. 1814,
Civil Code [Art. 1827, Civil Code].
Property Preference:
1. Partnership Property – Partnership
creditors are preferred
2. Partner’s Individual Property – Partner’s
individual creditors are preferred [Art. 1839
(8), Civil Code].
Remedy in Case of Insufficiency of Assets:
1. Partnership Creditor – After exhaustion of
partnership assets, the creditor may come
after the private property of the partners.
2. Partner’s Individual Creditor – Ask for
attachment and public sale of the share of
the partner in the partnership assets [Arts.
1827 and 1814, Civil Code].
h. Liability with Regard to Personal
Creditors of Partners
Interest by Personal Creditors
General Rule: Partnership creditors are
preferred over the personal creditors of the
partners as regards partnership property.
Exception: On due application by any
judgment creditor of a partner, a competent
court may:
1. Charge the interest of the partner for the
satisfaction of the judgment debt;
2. Appoint a receiver of the share of the
profits and of any other money due or to fall
due to the partner; and
3. Make all other orders, directions, accounts
and inquiries, which the debtor partner
might have made, or which the
circumstances may require [Art. 1814 (1),
Civil Code].
The interest charged may be redeemed before
foreclosure or, in case of sale directed by the
court, may be purchased without causing
dissolution:
1. With separate property, by one or more of
the partners; or
2. With partnership property, by one or more
of the partners, with consent of all, except
the debtor partner [Art. 1814 (2), Civil
Code].
C. DISSOLUTION AND WINDING
UP
1. Concepts
Dissolution is the change in the relation of the
partners caused by any partner ceasing to be
associated in the carrying on of the business.
1. It is different from the winding-up of the
business [Art. 1828, Civil Code].
2. It does not terminate the partnership, which
continues until the winding up of
partnership affairs is completed [Art. 1829,
Civil Code].
Note:
1. The dissolution of a partnership must not
be understood in the absolute and strict
sense so that at the termination of the
object for which it was created, the
partnership is extinguished [Testate Estate
of Mota v. Serra, G.R. No. L-22825 (1925)].
2. The partnership, although dissolved,
continues to exist until its termination, at
which time the winding up of its affairs
should have been completed and the net
partnership assets are partitioned and
distributed to the partners [Emnace v. CA,
G.R. No. 126334 (2001)].
Winding up means the administration of the
assets of the partnership for the purpose of
terminating the business and discharging the
obligations of the partnership [De Leon, supra].
Termination is the point in time when all
partnership affairs are completely wound up
and finally settled. It signifies the end of the
partnership life [De Leon, supra].
2. Causes of Dissolution
a. Without Violation of the Agreement
Between the Partners
1. By the termination of the definite term or
particular undertaking specified in the
agreement;
2. By the express will of any partner, who
must act in good faith, when no definite
term or particular is specified;
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3. By the express will of all the partners who
have not assigned their interests or
suffered them to be charged for their
separate debts, either before or after the
termination of any specified term or
particular undertaking;
4. By the expulsion of any partner from the
business bona fide in accordance with
such a power conferred by the agreement
between the partners [Art. 1830 (1), Civil
Code].
5. If, after the expiration of the definite term or
particular undertaking, the partners
continue the partnership without making a
new agreement, the firm becomes a
partnership at will [Art. 1785, Civil Code].
6. Any one of the partners may, at his sole
pleasure, dictate the dissolution of the
partnership at will. He must, however, act
in good faith, not that the attendance of bad
faith can prevent the dissolution of the
partnership, but that it can result in a
liability for damages [Ortega v. CA, supra].
b. In Contravention of the Agreement
Between the Partners
Where circumstances do not permit dissolution
under any other provision of Art. 1830, Civil
Code, it may also be dissolved by the express
will of any partner at any time.
Thus, even if there is a specified term, one
partner can cause its dissolution by expressly
withdrawing even before the expiration of the
period, with or without justifiable cause. If the
cause is not justified or no cause was given,
the withdrawing partner is liable for damages,
but in no case can he be compelled to remain
in the firm [Rojas v. Maglana, G.R. No. 30616
(1990)].
c. By Operation of Law
1. By any event which makes it unlawful for
the business of the partnership to be
carried on or for the members to carry it on
in partnership;
Note: If the business or object had been
unlawful from the very beginning, the firm
never had juridical personality [Paras,
supra].
2. When a specific thing which a partner had
promised to contribute, perishes before
delivery, or by the loss of the thing, only the
use or enjoyment of which has been
contributed; the loss of a specific thing,
however, does not dissolve the corporation
after its ownership has already been
transferred to the partnership;
3. By the death of any partner;
4. By the insolvency of any partner or of the
partnership;
Note: The insolvency of the partner or of
the partnership must be adjudged by the
court [Sec. 32, The Insolvency Law (RA
10142)].
5. By the civil interdiction of any partner;
Civil interdiction deprives the offender
during the time of his sentence of the right
to manage his property and dispose of
such property by any act or any
conveyance inter vivos [Art. 34, Revised
Penal Code].
Rationale: One who is without capacity to
manage his own property should not be
allowed to manage partnership property
[Arts. 1327 and 38, Civil Code].
d. By Decree of Court
A partner may apply for dissolution in court
when:
1. A partner has been declared insane in any
judicial proceeding or is shown to be of
unsound mind;
Note: The partner may have been
previously declared insane in a judicial
proceeding; otherwise, his insanity must be
duly proved. It must materially affect the
capacity of the partner to perform his
contractual duties as such [De Leon,
supra].
2. A partner becomes in any other way
incapable of performing his part of the
partnership contract;
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Note: The incapacity must be lasting, from
which the prospect of recovery is remote
[De Leon, supra].
3. A partner has been guilty of such conduct
as tends to affect prejudicially the carrying
on of the business;
4. A partner willfully or persistently commits a
breach of the partnership agreement, or
otherwise so conducts himself in matters
relating to the partnership business that it
is not reasonably practicable to carry on
the business in partnership with him;
Rationale: They defeat and materially
affect and obstruct the purpose of the
partnership [De Leon, supra].
5. The business of the partnership can only
be carried on at a loss;
Note: A court is authorized to decree
dissolution,
notwithstanding
the
partnership has been making profits, where
it appears at the time of the application that
the business can only be carried on at a
loss
[De
Leon,
supra].
6. Other circumstances render a dissolution
equitable.
Reason for necessity of court decree: In
the instances mentioned in Art. 1831, the
facts may be so far open to dispute as to
make necessary judicial determination as
to dissolution, rather than allow them to be
the occasion for automatic dissolution by
operation of law [De Leon, supra].
COMMERCIAL LAW
2. When any partner retires;
3. When the other partners assign their rights
to the sole remaining partner;
4. When all the partners assign their rights in
the partnership property to third persons
[Art. 1840, Civil Code]
3. Effects of Dissolution
a. On Authority of the Partners
In general
Upon dissolution, the authority of the partners
to represent the partnership is confined only to
acts necessary to:
1. Wind up partnership affairs; or
2. Complete transactions began but not then
finished [Art. 1832 (1), Civil Code].
With respect to partners
The authority of partners to act for the
partnership is terminated, with respect to
partners:
1. When the dissolution is not by the act,
insolvency or death of a partner, or
2. When the dissolution is by such act,
insolvency or death, when the partner
acting for the partnership has knowledge or
notice of the cause [Art. 1832, Civil Code].
In other cases, each partner is still liable for his
share in the liability created by the partner
acting for the partnership [Art. 1833, Civil
Code].
With respect to third persons who are not
partners
1. After dissolution, a partner can bind the
partnership by any act appropriate for:
a. Winding up partnership affairs; or
A person who acquires the interest of a
b. Completing transactions unfinished at
partner may likewise apply:
dissolution.
1. After the termination of the specified term
2. He can also bind it by any transaction
or particular undertaking;
which would bind the partnership as if
2. At any time if the partnership was a
dissolution had not taken place, provided
partnership at will when the interest was
the other party to the transaction:
assigned or when the charging order was
a. Had extended credit to the partnership
issued.
prior to dissolution and had no
knowledge or notice thereof; or
e. Other Causes
b. Had not so extended credit but had
known of the partnership prior to
1. When a new partner is admitted into an
dissolution, and having no knowledge
existing partnership;
or notice of dissolution, the fact had not
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been advertised in a newspaper of
general circulation in the place (or in
each place if more than one) at which
the partnership business was regularly
carried on [Art. 1834, Civil Code].
Note the character of the notice required:
1. As to persons who extended credit to the
partnership prior to dissolution, notice must
be actual.
2. As to persons who merely knew of the
existence of the partnership, publication in
a newspaper of general circulation in the
place of business of the partnership is
sufficient.
b. On Liability for Transactions after
Dissolution
The liability of a partner, in general, is the same
as in ordinary contracts (pro rata and
subsidiary).
In the following cases, however, the liability
shall be satisfied out of the partnership
assets alone (i.e., there is no subsidiary
liability):
1. When the partner had been, prior to the
dissolution, unknown as a partner to the
person with whom the contract is made;
2. When the partner had been, prior to the
dissolution, so far unknown or inactive in
partnership affairs that the business
reputation of the partnership could not be
said to have been in any degree due to his
connection with it [Art. 1834, Civil Code].
Any act of a partner after dissolution in no
case binds the partnership in the following
cases:
1. Where the partnership is dissolved
because it is unlawful to carry on the
business, unless the act is appropriate for
winding up partnership affairs;
2. Where the partner has become insolvent;
or
3. Where the partner has no authority to wind
up partnership affairs, except by a
transaction with one who:
a. Had extended credit to the partnership
prior to dissolution and had no
knowledge or notice of his want of
authority; or
b. Had not extended credit to the
partnership prior to dissolution and,
having no knowledge or notice of his
want of authority, the fact of his want of
authority has not been advertised [Art.
1834, Civil Code].
Art. 1834 does not affect the liability under Art.
1825 of any person who, after dissolution,
represents himself or consents to another
representing him as a partner in a partnership
engaged in carrying on business [Art. 1834,
Civil Code].
c. On Liability for Contracts after
Dissolution by Specific Causes [Art.
1833, Civil Code]
Trigger: A contract
1. Entered into by a partner acting for the
partnership
2. After dissolution by a partner’s:
a. act,
b. death, or
c. insolvency
General Rule: Binds the other partners.
Exceptions:
1. The dissolution being by act of any partner,
the partner acting for the partnership had
knowledge of the dissolution; or
2. The dissolution being by death or
insolvency of a partner, the partner acting
for the partnership had knowledge or notice
of the death or insolvency.
d. On Existing Liability of Partners [Art.
1835, Civil Code]
General Rule: Dissolution does not of itself
discharge the existing liability of any partner.
Exception: A partner may be relieved when
there is an agreement to that effect between:
1. Himself;
2. The partnership creditor; and
3. The person or partnership continuing the
business.
Such agreement may be inferred from the
course of dealing between:
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1. The creditor having knowledge of the
dissolution; and
2. The person or partnership continuing the
business.
In case of dissolution by death, the individual
property of a deceased partner is liable for
obligations of the partnership incurred while he
was a partner, after payment of his separate
debts.
4. Winding Up
a. Who May Wind Up
The following partners have the right to wind
up the partnership affairs:
1. Those designated in an agreement;
2. Those who have not wrongfully dissolved
the partnership; or
3. The legal representative of the last
surviving partner, who was not insolvent.
Any partner or his legal representative or
assignee may obtain winding up by the court,
upon cause shown [Art. 1836, Civil Code].
b. Manner of Winding Up
1. Extrajudicial, by the partners themselves;
or
2. Judicial, under the control and direction of
the proper court.
The action for liquidation of the partnership is
personal. The fact that sale of assets, including
real property, is involved does not change its
character, such sale being merely a necessary
incident of the liquidation of the partnership,
which should precede and/or is part of its
process of dissolution [Claridades v. Mercader,
G.R. No. L-20341 (1966)].
5. Rights of Partners in Case of
Dissolution
a. Dissolution Without Violation of the
Agreement
Each partner may have:
1. The partnership property applied to
discharge the partnership liabilities; and
2. The surplus applied in cash to the net
amount owing to the respective partners.
This is a right as against his co-partners and all
partners claiming through them in respect of
their interests in the partnership. It cannot be
availed if there is an agreement to the contrary
[Art. 1837, Civil Code].
Note: When dissolution is caused by expulsion,
the expelled partner may be discharged from
all partnership liability in the same manner as
above, but he shall receive in cash only the net
amount due him from the partnership [Art.
1835, Civil Code].
b. Dissolution in Contravention of the
Agreement
1. Partner who did not cause the
dissolution
The partners who did not cause the dissolution
wrongfully has the following rights:
1. To demand the right under Art. 1837 (1),
Civil Code
2. To be indemnified for damages for breach
of the agreement against the partner who
caused the dissolution wrongfully [Art.
1837 (1), Civil Code];
3. To continue the business:
a. In the same name,
b. By themselves or jointly with others,
c. During the agreed term for the
partnership.
For the purpose of continuing the business, the
said partners may possess the partnership
property, provided:
1. They secure the payment by bond
approved by the court; or
2. They pay any partner, who has caused the
dissolution wrongfully, the value of his
interest in the partnership, less any
damages recoverable, and indemnity
against all present or future partnership
liabilities [Art. 1837, Civil Code].
2. Partner who caused the dissolution
The partner who caused the dissolution
wrongfully has the following rights:
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1. If the business is not continued: All the
rights in Art. 1837 (1), Civil Code, subject
to liability for damages;
3. If the business is continued: The right, as
against his co-partners and all claiming
through them, to:
a. Ascertainment, without considering the
value of the goodwill of the business,
and payment to him in cash the value
of his partnership interest, less any
damage, or have the payment secured
by a bond approved by the court; and
b. Be released from all existing liabilities
of the partnership [Art. 1837 (3), Civil
Code].
The goodwill of a business may be defined to
be the advantage which it has from its
establishment or from the patronage of its
customers, over and above the mere value of
its property and capital. The goodwill (which
includes the firm name) is part of the
partnership assets and may be subject of a
sale [De Leon, supra].
6. Rights of Partners in Case of
Rescission
Rights
A partner, who is induced by fraud or
misrepresentation to become a partner, may
rescind the contract. Without prejudice to any
other right, he is entitled:
1. To a lien on, or right of retention of, the
surplus of the partnership property after
satisfying the partnership liabilities to third
persons for any sum of money paid by him
for the purchase of an interest in the
partnership and for any capital or advances
contributed by him;
2. To stand, after all liabilities to third persons
have been satisfied, in the place of the
creditors of the partnership for any
payments made by him in respect of the
partnership liabilities; and
3. To be indemnified by the person guilty of
the fraud or making the representation
against all debts and liabilities of the
partnership [Art. 1838, Civil Code].
COMMERCIAL LAW
of the prospects of enterprises or of value of
the property which he has put into the firm as
capital is not ground for dissolution [Pineda,
Partnership, Agency and Trusts (2006)].
7. Settling of Accounts between
Partners
Subject to any agreement to the contrary, the
following rules shall be observed in settling
accounts between partners after dissolution:
a. Composition of Partnership Assets
1. The partnership property; and
2. The contributions of the partners
necessary for the payment of all the
liabilities [Art. 1839 (1), Civil Code].
In accordance with the subsidiary liability of the
partners, the partnership property shall be
applied first to satisfy any liability of the
partnership [Art. 1839 (3), Civil Code].
b. Amount of Contribution for Liabilities
The rules for distribution of losses shall
determine the contributions of the partners [Art.
1839 (4), Civil Code]. As such:
1. The contribution shall be in conformity with
the agreement.
2. If only the share in profits has been
stipulated, the contribution shall be in the
same proportion.
3. In the absence of any stipulation, the
contribution shall be in proportion to the
capital contribution [Art. 1797, Civil Code].
c. Enforcement of Contribution
The following persons have the right to enforce
the contributions:
1. An assignee for the benefit of creditors;
2. Any person appointed by the court; or
3. To the extent of the amount which he has
paid in excess of his share of the
partnership liability, any partner or his legal
representative [Art. 1839 (5) & (6), Civil
Code].
Nature of Fraud or Deceit
The individual property of a deceased partner
The fraud or deceit must be material or
shall be liable for the contributions [Art. 1839
substantial. Mere exaggerations of one partner
(7), Civil Code].
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d. Order of Application of Assets
The partnership liabilities shall rank, in order of
payment, as follows:
1. Those owing to creditors other than
partners;
2. Those owing to partners other than for
capital and profits;
3. Those owing to partners in respect of
capital;
4. Those owing to partners in respect of
profits [Art. 1839 (2), Civil Code].
e. Doctrine of Marshaling of Assets
When partnership property and the individual
properties of the partners are in possession of
a court for distribution:
1. Partnership creditors have priority on
partnership property;
2. Separate creditors have priority on
individual property, saving the rights of lien
of secured creditors;
3. Anything left from either shall be applied to
satisfy the other [Art. 1839 (8), Civil Code].
f. Distribution of Property of Insolvent
Partner
Trigger: Where
1. A partner has become insolvent; or
2. His estate is insolvent,
Rule: The claims against his separate property
shall rank in the following order:
1. Those owing to separate creditors;
2. Those owing to partnership creditors;
3. Those owing to partners by way of
contribution [Art. 1839 (9), Civil Code].
8. Rights of the Creditors of the
Dissolved Partnership
a. Admission of a new partner into the
existing partnership;
b. Retirement or death of any partner, and
his rights to partnership property are
assigned to: [1] two or more of the
partners, or [2] one or more of the
partners and one or more third
persons;
c. Retirement of all but one (1) partner,
and their rights to partnership property
are assigned to the remaining partner,
who continues the business, either
alone or with others;
d. Wrongful dissolution by any partner,
and the remaining partners continue
the business, either alone or with
others; or
e. Expulsion of a partner, and the
remaining partners continue the
business, either alone or with others.
2. When the cause of dissolution is the
retirement or death of any partner, and
business is continued with the consent of
the retired partner or the representative of
the deceased partner, without assignment
of their rights to partnership property.
3. When the cause of dissolution is the
assignment by all the partners or their
representatives of their rights in
partnership property to one or more
third persons who promise to pay the
debts and who continue the business of the
partnership [Art. 1840 (1), Civil Code].
b. Liability of A New Partner
The liability to the creditors of the dissolved
partnership of a new partner in the partnership
continuing the business shall be satisfied out of
the partnership property alone. However, he
may, through agreement, assume individual
liability [Art. 1840 (2), Civil Code].
a. As Creditors of the New Partnership
c. Priority of Creditors of Dissolved
Partnership
In the following cases, creditors of the
dissolved partnership are also creditors of the
person or partnership continuing the business:
1. When the business is continued without
liquidation, and the cause of dissolution
is:
Creditors of the dissolved partnership have
prior right to any claim of the retired partner or
the representative of the deceased partner
against the person or partnership continuing
the business [Art. 1840 (3), Civil Code].
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This is without prejudice to the right of creditors
to set aside any assignment on the ground of
fraud [Art. 1840 (4), Civil Code].
Rationale: Business will be hampered if
outside creditors are not given superior rights.
It will be risky for them to deal with
partnerships. Moreover, if partners enjoy
priority right, in the natural order of things, they
will prefer their own interests to that of the
outside creditors. Such a state will make it easy
to defraud non-partner creditors [Pineda,
supra].
d. Rights of a Retired Partner or a
Representative of Deceased Partner
Trigger:
1. When any partner retires or dies, and
2. The business is continued without any
settlement of accounts as between him or
his estate and the person or partnership
continuing the business
COMMERCIAL LAW
Exception: There is an agreement to the
contrary [Art. 1842, Civil Code].
D. LIMITED PARTNERSHIP
1. Definition
1. A partnership;
2. Formed by two or more persons;
3. Having as members:
a. One or more general partners; and
b. One or more limited partners [Art.
1843, Civil Code].
The limited partners as such shall not be bound
by the obligations of the partnership [Art. 1843,
Civil Code], except to the extent of their capital
contributions.
2. Characteristics
1. A limited partnership is formed by
compliance
with
the
statutory
requirements [Art. 1844, Civil Code].
General Rule: He or his legal representative,
2. The business is controlled or managed by
as against such person or partnership, subject
one or more general partners, who are
to the prior rights of creditors of the dissolved
personally liable to creditors [Arts. 1848 &
partnership:
1850, Civil Code].
1. May have the value of his interest at the
3. One or more limited partners contribute to
date of dissolution ascertained; and
the capital and share in the profits but do
2. Shall receive as an ordinary creditor:
not manage the business and are not
a. An amount equal to the value of his
personally liable for partnership obligations
interest in the dissolved partnership
beyond their capital contributions [Arts.
with interest; or
1845, 1848, 1856, Civil Code].
b. At his option or at the option of his legal
4. Obligations or debts are paid out of the
representative, in lieu of interest, the
partnership assets and the individual
profits attributable to the use of his right
property of the general partners [Art. 1843,
in the property of the dissolved
Civil Code].
partnership.
5. The limited partners may have their
contributions back subject to conditions
Exception: Unless otherwise agreed upon
prescribed by law [Arts. 1844 and 1857,
[Art. 1841, Civil Code].
Civil Code].
6. A limited partnership has the following
9. Right to an account
advantages:
a. For general partners, to secure
General Rule: The right to an account of his
capital from others while retaining
interest shall accrue to any partner, or his
control and supervision for the
legal representative at the date of dissolution,
business (Sec. 17, Commissioners’
as against:
Note, 8 Uniform Laws Annotated, pp.
1. The winding up partners;
2-5.);
2. The surviving partners; or
b. For limited partners, to have a share
3. The person or partnership continuing the
in the profits without risk of personal
business.
liability (40 Am. Jur. 474.).
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3. General and
Distinguished
COMMERCIAL LAW
Limited
Partners
General partner
Limited partner
Firm name
General partner
Limited partner
Extent of liability
Personally,
but
subsidiarily liable for
obligations of the
partnership
[Art.
1816, Civil Code].
Liable only to the
extent of his capital
contributions
(subject
to
exceptions) [Arts.
1845, 1848, 1856,
Civil Code].
Right to participate in management
Unless
otherwise
agreed upon, all
general partners have
an equal right to
manage
the
partnership
[Arts.
1803 and 1810 (3),
Civil Code].
No
right
to
participate
in
management [Art.
1848, Civil Code].
Prohibition to engage in other business
Prohibited in any kind
of business if he is an
industrial partner [Art.
1789, Civil Code], or
in the same kind of
business in which the
partnership
is
engaged, if he is a
capitalist partner [Art.
1808, Civil Code].
Not
prohibited,
unless he is also a
general partner [Art.
1853, Civil Code].
Effect of retirement, death, insanity or
insolvency
Nature of contribution
Cash, property or Cash or property
industry [Art. 1767, only, not industry
Civil Code].
[Art. 1845, Civil
Code].
Proper party in proceedings by or
against partnership
Proper party
Name may appear in Name must not
the firm name [Art. appear in the firm
1815, Civil Code].
name (subject to
exceptions)
[Art.
1846, Civil Code].
Not a proper party,
unless: (1) he is also
a general partner
[Art. 1853, Civil
Code]; or (2) where
the object of the
proceedings is to
enforce his right
against or liability to
the partnership [Art.
1866, Civil Code].
Dissolves
partnership
1860, 1830,
Civil Code].
Does not dissolve
[Art. partnership; rights
1831, transferred
to
executor
or
administrator
for
selling his estate
[Art. 1861, Civil
Code].
Assignability of interest
Not
assignable Freely assignable
without the consent of [Art. 1859, Civil
the other partners Code].
[Art.
1813,
Civil
Code].
Note: The limited
partner
is
a
necessary but not
an
indispensable
party.
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4. General and Limited Partnership
Distinguished
5. Formation
a. General Requirements
General
partnership
Limited
partnership
Creation
May be constituted in Partners must: [1]
any form, subject to sign and swear to a
exceptions
certificate
in
compliance with Art.
1844, Civil Code;
and [2] file the
certificate for record
in the SEC [Art.
1844, Civil Code].
Composition
Only
partners
general One
or
more
general, and one or
more limited partners
[Art.
1843,
Civil
Code].
Two or more persons desiring to form a limited
partnership shall:
1. Sign and swear to a certificate stating the
items in Art. 1844, Civil Code; and
2. File, for record, the certificate in the SEC
[Art. 1844, Civil Code].
A limited partnership is formed if there is
substantial compliance in good faith with the
requirements [Art. 1844, Civil Code].
When there is failure to substantially comply
with the requirements:
1. In relation to third persons, the partnership
is general, unless they recognize that the
firm is a limited partnership [Jo Chung
Cang v. Pacific com. Co., G.R. No. 19892
(1923)]; and
2. As between the partners, the partnership
remains limited, since they are bound by
their agreement [68 C.J.S. 1016; Hoefer
vs. Hall, 411 P.d. 230].
Firm name
Must contain the
word
“Company”
[SEC Memo. Circ.
No. 14-00], except
for
professional
partnerships.
Must include the
word “Limited” [SEC
Memo. Circ. No. 1400]
Must not include
name
of
limited
May or may not partners, unless: [1]
include the name of it is also the surname
one or more of the of a general partner,
partners.
or [2] prior to the time
when the limited
partner
became
such, the business
has been carried on
under a name in
which his surname
appeared [Art. 1846,
Civil Code]
Rules governing dissolution
Arts.
1828-1842, Arts.
1860-1863,
Civil Code
Civil Code
b. Purpose of Filing
1. To give actual or constructive notice to
potential creditors or persons dealing with
the partnership; and
2. To acquaint them with its essential
features, including the limited liability of
limited partners, so that they will not be
misled or defrauded [De Leon, supra].
c. Firm Name
General Rule: The surname of a limited
partner shall not appear in the partnership
name.
Exceptions:
1. It is also the surname of a general partner;
or
2. Prior to the time when the limited partner
became such, the business had been
carried on under a name in which his
surname appeared.
A limited partner whose surname appears in a
partnership name contrary to this prohibition
is liable as a general partner to partnership
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creditors who extend credit without actual
knowledge that he is not a general partner [Art.
1846, Civil Code].
d. False Statement in the Certificate
If the certificate contains a false statement, one
who suffers loss by reliance thereon may hold
liable any party to the certificate who knew the
statement to be false.
Requisites:
1. The partner knew the statement to be false:
a. At the time he signed the certificate; or
b. Subsequently, but having sufficient
time to cancel or amend it, or file a
petition for its cancellation or
amendment, and he failed to do so [Art.
1847, Civil Code].
2. The person seeking to enforce liability has
relied upon the false statement in
transacting business with the partnership;
and
3. The person suffered loss as a result of
reliance upon such false statement [Art.
1847, Civil Code].
e. General and Limited Partner at the
Same Time
A person may be a (1) general; and (2) limited
partner in the same partnership at the same
time.
This fact must be stated in the certificate
provided for in Art. 1844.
Such person shall have:
1. All the rights and powers of a general
partner; and
2. Be subject to all the restrictions of a general
partner [Art. 1853, Civil Code].
Except that, in respect to his contribution
as a limited partner, he shall have the rights
against the other members which he would
have had if he were not also a general partner
[Art. 1855-1858, Civil Code].
A general partner shall have the rights and
powers and be subject to all restrictions and
liabilities of a partner in a partnership without
limited partners [Art. 1850, Civil Code]. Thus,
he has general authority over the business.
Exception: If a limited partner takes part in the
control of the business, he becomes liable as a
general partner [Art. 1848, Civil Code].
However, written consent or ratification by
all limited partners is necessary to
authorize the general partners to:
1. Do any act in contravention of the
certificate;
2. Do any act which would make it impossible
to carry on the ordinary business of the
partnership;
3. Confess a judgment against the
partnership;
4. Possess partnership property, or assign
their rights in specific property, for other
than a partnership purpose;
5. Admit a person as a general partner;
6. Admit a person as a limited partner, unless
the right to do so is given in the certificate;
7. Continue the business with partnership
property on the:
a. Death;
b. Retirement;
c. Insanity;
d. Civil interdiction; or
e. Insolvency of a general partner, unless
the right to do so is given in the
certificate [Art. 1850, Civil Code].
7. Obligations of a Limited Partner
a. Obligations Related to Contribution
The contributions of a limited partner may be
cash or other property, but not services [Art.
1845, Civil Code].
A limited partner is liable for partnership
obligations when he contributes services
instead of only money or property to the
partnership [De Leon, supra].
6. Management
General Rule: Only general partners have the
right to manage the partnership.
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A limited partner is liable to the
partnership:
1. For the difference between his actual
contribution and that stated in the
certificate as having been made; and
2. For any unpaid contribution which he
agreed in the certificate to make in the
future, at the time and on the conditions
stated in the certificate [Art. 1858 (1), Civil
Code].
He holds as trustee for the partnership:
1. Specific property stated in the certificate as
contributed by him, but which was not
contributed or which has been wrongfully
returned; and
2. Money or other property wrongfully paid or
conveyed to him on account of his
contribution [Art. 1858 (2), Civil Code].
These liabilities can be waived or
compromised only by the consent of all
members. Such waiver or compromise,
however, shall not affect the right to enforce
said liabilities of a creditor:
1. Who extended credit; or
2. Whose claim arose, after the filing or before
a cancellation or amendment of the
certificate, to enforce such liabilities [Art.
1858 (3), Civil Code].
Even after a limited partner has
rightfully received the return in whole or
in part of his capital contribution, he is
still liable to the partnership for any sum, not in
excess of such return with interest, necessary
to discharge its liabilities to all creditors:
1. Who extended credit; or
2. Whose claims arose before such return
[Art. 1858 (4), Civil Code].
A person designated as general partner
but who exercised the rights of a limited
partner
Trigger: A person:
1. Who has contributed capital to a
partnership;
2. Who erroneously believed that he has
become a limited partner [Art. 1852, Civil
Code]; and
3. Whose name appears in the certificate as
a general partner, or who is not designated
as a limited partner,
Rule: Is not personally liable as a general
partner by reason of his exercise of the rights
of a limited partner, provided:
1. On ascertaining the mistake, he promptly
renounces his interest in the profits of the
business or other compensation by way of
income [Art. 1852, Civil Code];
2. He does not participate in the management
of the business [Art. 1848, Civil Code]; and
3. His surname does not appear in the
partnership name [Art. 1846, Civil Code].
b. Liability to Partnership Creditors
General Rule: A limited partner is not liable as
a general partner. His liability is limited to the
extent of his contributions [Art. 1843, Civil
Code].
Exceptions: The limited partner is liable as a
general partner when:
1. His surname appears in the partnership
name, with certain exceptions [Art. 1846
(2), Civil Code].
2. He takes part in the control of the business
[Art. 1848, Civil Code].
3. The certificate contains a false statement
of which he knows and which was relied
upon, resulting in loss [Art. 1847, Civil
Code].
In cases (a) and (b), the limited partner is
entitled to reimbursement by the general
partner/s [Art. 1863, Civil Code].
Rationale: The general partner/s may not have
been aware of the false statement in the
certificate.
c. Liability to Separate Creditors
On due application to a court of competent
jurisdiction by any separate creditor of a limited
partner, the court may:
1. Charge his interest with payment of the
unsatisfied amount of such claim;
2. Appoint a receiver; and
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3. Make all other orders, directions and
inquiries which the circumstances of the
case may require.
The interest so charged may be redeemed with
the separate property of any general partner,
but may not be redeemed with partnership
property [Art. 1862, Civil Code].
Note: In a general partnership, the interest may
be redeemed with partnership property with the
consent of all the partners whose interests are
not charged [Art. 1814, Civil Code].
8. Rights of a Limited Partner
a. In General
A limited partner shall have the same rights
as a general partner to:
1. Require that the partnership books be kept
at the principal place of business of the
partnership;
2. To inspect and copy any of them at a
reasonable hour;
3. To demand true and full information of all
things affecting the partnership;
4. To demand a formal account of partnership
affairs whenever circumstances render it
just and reasonable;
5. To ask for dissolution and winding up by
decree of court;
6. To receive a share of the profits or other
compensation by way of income; and
7. To receive the return of his contribution
provided the partnership assets are in
excess of all its liabilities [Art. 1851, Civil
Code].
b. Right to Transact Business with the
Partnership
A limited partner may:
1. Loan money to the partnership;
2. Transact other business with the
partnership; and
3. Receive a pro rata share of the partnership
assets with general creditors if he is not
also a general partner [Art. 1854 (1), Civil
Code].
Limitations: A limited partner, with respect to
his transactions with the partnership, cannot:
1. Receive or hold as collateral security any
partnership property; or
2. Receive any payment, conveyance, or
release from liability if it will prejudice the
right of third persons [Art. 1854, Civil
Code].
Violation of the prohibition is considered a
fraud on the creditors of the partnership [Art.
1854 (2), Civil Code].
c. Right to Share in Profits
A limited partner may receive from the
partnership the share of the profits or the
compensation by way of income stipulated for
in the certificate.
This right is subject to the condition that
partnership assets will still be in excess of
partnership liabilities after such payment [Art.
1856, Civil Code]. The partnership liabilities
being referred to exclude the liabilities to the
limited and general partners.
Rationale: Otherwise, he will receive a share
to the prejudice of third-party creditors [Art.
1827, Civil Code].
d. Right to Return of Contribution
A limited partner may have his
contributions withdrawn or reduced when:
1. All the liabilities of the partnership, except
liabilities to general partners and to limited
partners on account of their contributions,
have been paid or there remains property
of the partnership sufficient to pay them;
2. The consent of all members is had, unless
the return may be demanded as a matter of
right; and
3. The certificate is cancelled or so amended
as to set forth the withdrawal or reduction
[Art. 1857 (1), Civil Code].
Note: Once withdrawal has been approved by
the SEC and registered, the partnership may
no longer recover the limited partner’s
contributions.
The return of his contributions may be
demanded, as a matter of right (i.e., even
when not all the other partners consent):
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1. On the dissolution of the partnership;
2. Upon the arrival of the date specified in the
certificate for the return; or
3. After the expiration of a 6-month notice in
writing given by him to the other partners, if
no time is fixed in the certificate for:
a. The return of the contribution; or
b. The dissolution of the partnership [Art.
1857 (2), Civil Code].
Return of Contribution in the Form of
Cash
General Rule: A limited partner, irrespective of
the nature of his contribution, has only the right
to demand and receive cash in return for his
contribution.
Exceptions: He may receive his contribution in
a form other than cash when:
1. There is a statement in the certificate to the
contrary; or
2. All the members of the partnership consent
[Art. 1857 (3), Civil Code].
e. Preference of Limited Partners
General Rule: The limited partners stand on
equal footing.
Exception: By an agreement of all the partners
(general and limited) stated in the certificate,
priority or preference may be given to some
limited partners over others with respect to:
1. The return of contributions;
2. Their compensation by way of income; or
3. Any other matter [Art. 1855, Civil Code].
Note: Such an agreement shall be stated in the
certificate.
f. Right to Assign Interest
The interest of a limited partner is assignable.
The assignee may become:
1. A substituted limited partner; or
2. A mere assignee.
Substituted limited partner
1. He is a person admitted to all the rights of
a limited partner who has died or has
assigned his interest in a partnership.
2. He has all the rights and powers, and is
subject to all the restrictions and liabilities
of his assignor, except those liabilities
which:
a. The assignee was ignorant of; and
b. Cannot be ascertained from the
certificate [Art. 1859 (2) and (6), Civil
Code].
Assignee
1. An assignee is only entitled to receive the
share of the profits or other compensation
by way of income, or the return of
contribution, to which the assignor would
otherwise be entitled. He has no right:
a. To require any information or account of
the partnership transactions;
b. To inspect the partnership books [Art. 1859
(3), Civil Code].
2. An assignee has the right to become a
substituted limited partner if:
a. All the partners consent thereto; or
b. The assignor, being empowered to do so
by the certificate, gives him that right [Art.
1859 (4), Civil Code].
3. An assignee becomes a substituted limited
partner when the certificate is appropriately
amended [Art. 1859 (5), Civil Code].
g. Right to Ask for Dissolution
A limited partner may have the partnership
dissolved and its affairs wound up when:
1. He rightfully but unsuccessfully demands
the return of his contribution; or
2. He has a right to contribution but his
contribution is not paid because the
partnership property is insufficient to pay its
liabilities [Art. 1857, Civil Code].
9. Dissolution
A limited partnership is dissolved in much the
same way and causes as an ordinary
partnership [68 C.J.S. 1042.; Arts. 1860, 1864,
1844, Civil Code]
General Rule: The retirement, death,
insolvency, insanity or civil interdiction of a
general partner dissolves the partnership.
Exception: It is not so dissolved when the
business is continued by the remaining general
partners:
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1. Under a right to do so stated in the
certificate; or
2. With the consent of all members [Art. 1860,
Civil Code].
Upon the death of a limited partner, his
executor or administrator shall have:
1. All the rights of a limited partner for the
purpose of settling his estate; and
2. The power to constitute an assignee as a
substituted limited partner, if the deceased
was so empowered in the certificate.
The estate of a deceased limited partner shall
be liable for all his liabilities as a limited partner
[Art. 1861, Civil Code].
proportion of their contribution [Art. 1863, Civil
Code].
Exceptions: Unless
1. There is a statement in the certificate as to
their share in the profits; or
2. There is a subsequent agreement fixing
their share [Art. 1863, Civil Code].
11. Amendment or Cancellation of
Certificate
a. Cancellation of Certificate
10. Settlement of Accounts
The certificate shall be canceled when:
1. The partnership is dissolved; or
2. All limited partners cease to be such limited
partners [Art. 1864, Civil Code].
a. Order of Payment
b. Amendment of Certificate
In settling accounts after dissolution, the
liabilities of the partnership shall be entitled to
payment in the following order:
1. Those to creditors, including limited
partners except those on account of their
contributions, and excluding general
partners, in the order of priority as provided
by law;
2. Those to limited partners in respect to their
share of the profits and other
compensation by way of income in their
contributions;
3. Those to limited partners in respect to the
capital of their contributions;
4. Those to general partners other than for
capital and profits;
5. Those to general partners in respect to
profits;
6. Those to general partners in respect to
capital [Art. 1863 (1), Civil Code].
A certificate shall be amended when:
1. There is a change in the name of the
partnership or in the amount or character
of the contribution of any limited partner;
2. A person is substituted as a limited
partner;
3. An additional limited partner is admitted;
4. A person is admitted as a general
partner;
5. A general partner retires, dies, becomes
insolvent or insane, or is sentenced to
civil interdiction and the business is
continued;
6. There is a change in the character of the
business of the partnership;
7. There is a false or erroneous statement
in the certificate;
8. There is a change in the time as stated in
the certificate for the dissolution of the
partnership or for the return of a
contribution;
9. A time is fixed for the dissolution of the
partnership, or the return of a contribution,
no time having been specified in the
certificate; or
10. The members desire to make a change in
any other statement in the certificate in
order that it shall accurately represent the
agreement among them [Art. 1864, Civil
Code].
Note: In settling accounts of a general
partnership, those owing to partners in respect
to capital enjoy preference over those in
respect to profits [Art. 1863 (3) and (4), Civil
Code].
b. Share in the Partnership Assets
General Rule: The share of limited partners in
respect to their claims for capital, profits, or for
compensation by way of income, is in
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c. Requirements for Amendment or
Cancellation
partners’ contributions [Art. 1867, Civil
Code]
To amend or cancel a certificate:
1. The amendment or cancellation must be in
writing;
2. It must be signed and sworn to by all the
members including the new members, and
the assigning limited partner in case of
substitution or addition of a limited or
general partner; and
3. The writing to amend (with the certificate,
as amended) or to cancel must be filed, for
record, in the SEC [Art. 1865, Civil Code].
(1) In case of refusal to execute the
writing [Art. 1865, Civil Code].
Trigger: If any person, who is designated in
Art. 1865 as a person who must execute the
writing, refuses to do so
Rule: A person desiring the cancellation or
amendment of a certificate may petition the
court to order a cancellation or amendment
thereof.
Action of the court: The court shall order the
SEC to record the cancellation or amendment
if it finds that the petitioner has a right to have
the writing executed. From the moment the
amended certificate/writing or a certified copy
of a court order granting the petition for
amendment has been filed, such amended
certificate shall thereafter be the certificate of
partnership [Art. 1865, Civil Code].
12. Limited Partnerships Formed Prior
to the Effectivity of the Civil Code
Limited partnerships formed under the law
prior to the Civil Code may:
1. Continue to be governed by the provisions
of the old law; or
2. Become a limited partnership under the
Civil Code by compliance with Art. 1844,
provided that the certificate states:
a. The amount of the original contribution
of each limited partner and the time it
was made; and
b. That the partnership assets exceed its
liabilities to third persons by an amount
greater than the sum of all limited
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COMMERCIAL LAW
CORPORATIONS
A. Definition of Corporation
Revised Corporation Code (RA 11232)
Section 2. A corporation is an artificial being
created by operation of law, having the right of
succession and the powers, attributes, and
properties expressly authorized by law or incident to
its existence
1. Attributes of a Corporation
a. An Artificial Being
A corporation is a juridical entity that exists
apart from its stockholders. It has its own set of
rights and obligations as provided for by law.
Technically, it has no physical existence
although it occupies a principal place of
business.
Being only a juridical entity, the physical acts of
the corporation, like the signing of documents,
can be performed only by natural persons duly
authorized for such purpose by corporate bylaws or by a special act of the Board of
Directors (BOD) [Swedish Match Philippines,
Inc. v. Treasurer of the City of Manila, G.R. No.
181277 (2013)].
A corporation, upon coming into existence, is
invested by law with a personality separate and
distinct from those persons composing it as
well as from any other legal entity to which it
may be related [Yutivo Sons Hardware v. CTA,
G.R. No. L-13203 (1961)]
b. Created by Operation of Law
Mere consent of the parties to form a
corporation is not sufficient. The State must
give its consent either through a special law (in
case of government corporations) or a general
law (i.e., Revised Corporation Code in case of
private corporations).
A corporation comes into existence upon the
issuance of the certificate of incorporation.
Then, and only then, will it acquire juridical
personality to sue and be sued, enter
contracts, hold or convey property or perform
any legal act in its own name.
c. Has the Right of Succession
Since one of the attributes of a corporation is
that it is an artificial being with a distinct
personality, the corporation’s existence is
unaffected by a change in the composition of
stockholders. Its existence is limited only by the
Articles of Incorporation (AOI), may be subject
to Quo Warranto proceedings (Rule 66 of the
Rules of Court), and may be shortened by
dissolution (Title XIV))
d. Has the Powers, Attributes, and
Properties Expressly Authorized by
Law or Incident to Its Existence
A corporation has no power except those
expressly conferred on it by the Revised
Corporation Code and by its articles of
incorporation, those which may be incidental to
such conferred powers, those that are implied
from its existence, and those reasonably
necessary to accomplish its purposes. In turn,
a corporation exercises said powers through its
BOD and/or its duly authorized officers and
agents [Monfort Hermanos Agricultural Dev.
Corp. v. Monfort III, G.R. No. 152542 (2004)].
Being a creature of the law, its powers are
limited by:
1. The law (see Sec. 35 for general powers
and Secs. 36 to 43 for specific powers);
2. By the express terms of its AOI as well
those essential or necessary to carry out its
purpose or purposes under such Articles (see
Sec. 35, last par.); and
3. By those necessary or incidental to its
powers so conferred (see Sec. 44)
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B. Classes of Corporations
1. Stock Corporations
Stock corporations – corporations which have
capital stock divided into shares AND are
authorized to distribute to the holders of such
shares, dividends, or allotments of the surplus
profits based on shares held [Sec. 3]. It is
organized for profit.
The governing body of a stock corporation is
usually the BOD (except in certain instances,
e.g.
one
person
corporations,
close
corporations).
Distribution
of Profits
Note: A corporation is considered a stock
corporation if they have the power to declare
dividends. So long as the corporation has
capital stock and unrestricted retained
earnings and there is no prohibition in its
Articles of Incorporation or in its by-laws for it
to declare dividends, such corporation is a
stock corporation [Sec. 42].
2. Non-stock Corporations
All other corporations
corporations [Sec. 3].
are
non-stock
Non-stock corporations – One where no part of
the income is distributable as dividends to its
members, trustees, or officers, subject to the
provisions of the Code on dissolution [Sec. 86].
It is not organized for profit.
Its governing body is usually the Board of
Trustees
(BoT).
However,
non-stock
corporations may, through their articles of
incorporation or their by-laws, designate their
governing boards by any name other than as
board of trustees [Sec. 174].
Composition
Stock
Non-Stock
Have capital
stock divided
into shares
[Sec. 3]
No part of its
income
is
distributable
as dividends
to
its
members,
trustees,
or
officers [Sec.
86]
Are
authorized
to distribute
to
the
holders of
such shares,
dividends or
allotments of
surplus
profits
on
the basis of
the shares
held [Sec. 3]
Any
profit
may obtain
as an incident
to
its
operations
shall, when
necessary or
proper,
be
used for the
furtherance
of its purpose
or purposes
[Sec. 86]
Composed
Composed of
of
members
stockholders
Profit
It is for profit
It is not for
profit
[Sec.
87]
Other distinctions
Cumulative
Voting
Stock
Non-Stock
Cumulative
voting
in
election
of
directors
is
provided by
law [Sec. 23]
Cumulative
voting
in
election
of
trustees
is
only
available if
provided in
AOI or BL
[Sec. 23]
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Number of
Board
Members
Term
Place of
Meetings
Election of
Officers
Voting
Rights
COMMERCIAL LAW
Stock
Non-Stock
Stock
Maximum of
15 directors
except
in
merger
or
consolidation
of
banks
[Sec. 13(f)]
May be more
than
15
[Secs. 13(f) &
91]
the right to
vote.
Transfer of
Membership
Term
of Maximum
director is 1 term of a
year [Sec. 22] trustee is 3
years [Sec.
91]
Stockholders’
meetings
must be in the
principal
office as set
forth in the
AOI or, if not
practicable,
in the city or
municipality
where
the
principal
office
is
located [Sec.
50]
May
be
anywhere
within
Philippine
territory as
provided by
BL [Sec. 92]
BOe D elects BOT elects
officers [Sec. officers, but
24
they
may
also
be
directly
elected
by
members
[Sec. 91]
One class of
shares must
always have
complete
voting rights
[Sec.
6].
There
are
specific
instances
where even
non-voting
shares have
Right to vote
of members
of any class
may
be
denied in the
AOI or BL
[Sec. 88]
There is free
transfer
of
shares.
Membership
is
not
personal to
the
stockholder.
Note: Subject
to provisions
on
close
corporations
Non-Stock
Transfer of
membership
cannot
be
made without
consent
of
the
corporation
[Sec.
89]
Membership
is personal.
Proxy Vote
May always Vote
by
vote by proxy proxy can be
[Sec. 57]
denied in the
AOI or BL
[Sec. 88]
Termination
Upon transfer
of
share,
seller is no
longer part of
corporation.
Transfer may
only
be
subject
to
restrictions
noted down
in AOI, BL,
and
stock
certificate,
and must not
be
more
onerous than
the right of
first refusal
[Sec. 97].
Note:
Transfer
restrictions
imposed in a
Shareholders
Agreement
may
be
binding upon
the
stockholders
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Membership
may
be
terminated
according to
causes
provided in
the AOI or BL
[Sec. 90].
FOR UP CANDIDATES ONLY
CORPORATIONS
COMMERCIAL LAW
Stock
Non-Stock
who
are
parties
thereto, since
they
are
chargeable
with notice,
unless
palpably
unreasonable
under
the
circumstance
s
(SEC
Opinion,
[June
8,
1995])
Distribution
of Assets
Residual
assets are to
be distributed
to
the
stockholders
upon
dissolution,
after payment
of creditors.
Dissolution is
effected
through the
methods
provided in
the
Code
[Sec. 139].
Under the “liberal” Control Test, there is no
need to further trace the ownership of the 60%
(or more) Filipino stockholdings of the Investing
Corporation since a corporation which is at
least 60% Filipino-owned is considered as
Filipino [Narra Nickel Mining & Development
Corp. v. Redmont Consolidated Mines Corp.,
G.R. No. 195580 (2014)].
Absent any doubt, the Control Test shall be
used in determining the nationality of a
corporation specially in cases where foreign
ownership restrictions apply [SEC OGC
Opinion No. 16-19].
Generally,
members are
not allowed
to participate
in distribution
of
assets.
Assets are to
be distributed
to
such
persons,
societies,
organization
s
,
or
corporations
as may be
specified in a
plan
of
distribution
[Sec. 93].
C. Nationality of Corporations
The nationality of a corporation serves as a
legal basis for subjecting an enterprise or its
activities to the laws, the economic and fiscal
powers, and the various social and financial
policies of the State to which it is supposed to
belong [SEC OGC Opinion No. 22-07].
1. Control Test
The nationality of the private corporation is
determined by the citizenship of the controlling
stockholders.
Control Test is applied in the following:
1. Exploitation of natural resources - Only
Filipino citizens or corporations whose capital
stock is at least 60% owned by Filipinos can
qualify to exploit natural resources [Sec. 2, Art.
XII, Const.]
2. Public Utilities - No franchise,
certificate or any other form of authorization for
the operation of a public utility shall be granted,
except to citizens of the Philippines or to
corporations or associations organized under
the laws of the Philippines at least 60% of
whose capital is owned by such citizens [Sec.
11, Art. XII, Const.].
3. Mass Media [Note: Control test DOES NOT
apply to Mass Media. Grandfather Rule
applies]
4. Advertising industry (70%) – “Only Filipino
citizens or corporations or associations at least
seventy per centum of the capital of which is
owned by such citizens shall be allowed to
engage in the advertising industry” [Sec. 11,
Art. XVI, Const.]
5. Any industry or activity where foreign
ownership is prohibited or restricted under the
Foreign Investment Negative List.
The "control test" is still the prevailing mode of
determining whether or not a corporation is a
Filipino corporation, within the ambit of Sec. 2,
Art. XII of the 1987 Constitution, entitled to
undertake the exploration, development and
utilization of the natural resources of the
Philippines. When in the mind of the Court,
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there is doubt, based on the attendant facts
and circumstances of the case, in the 60-40
Filipino equity ownership in the corporation,
then it may apply the "grandfather rule" [Narra
Nickel Mining & Development Corp. v.
Redmont Consolidated Mines Corp., G.R. No.
195580 (2014)].
The Gamboa Rulings
2011 Gamboa Ruling
The term "capital" in Sec. 11, Article XII of the
1987 Constitution refers only to shares of stock
entitled to vote in the election of directors, and
thus in the present case only to common
shares, and not to the total outstanding capital
stock [common and non-voting preferred
shares].
For stocks to be deemed owned and held by
Philippine citizens or Philippine nationals, mere
legal title is not enough to meet the required
Filipino equity. Full beneficial ownership of the
stocks, coupled with appropriate voting rights
is essential. Thus, stocks, the voting rights of
which have been assigned or transferred to
aliens, cannot be considered held by Philippine
citizens or Philippine nationals [Gamboa v.
Teves, G.R. No. 176579 (2011)].
2012 Gamboa Ruling
In 2012, the Supreme Court modified its ruling,
stating now that:
The term “capital” is not limited to voting shares
since the constitutional requirement of at least
60% Filipino ownership applies not only to
voting control of the corporation, but also to the
beneficial ownership of the corporation. It is
therefore imperative that such requirement
apply uniformly and across the board to all
classes of shares, regardless of nomenclature
and category, comprising the capital of a
corporation.
Preferred shares, denied the right to vote in the
election of directors, are still entitled to vote on
the eight specific corporate matters under Sec.
6. of the Corporation Code [Note: Still Sec. 6
under the RCC] [Gamboa v. Teves, G.R. No.
176579 (2012)].
2017 Gamboa
Herbosa)
Ruling
(Roy
III
v.
However, in 2017, the Supreme Court
explained its ruling in the 2012 Gamboa
decision. It stated that the resolution of the
2012 Gamboa resolution, specifically its
dispositive portion, did not modify the 2011
Gamboa decision.
The Supreme Court clarified that the Gamboa
Decision already held, in no uncertain terms,
that what the Constitution requires is full and
legal beneficial ownership of 60% of the
outstanding capital stock, coupled with 60% of
the voting rights must rest in the hands of
Filipino nationals. Thus, for purposes of
determining compliance with the constitutional
or statutory ownership, the required
percentage of Filipino ownership shall be
applied to both the (a) total number of
outstanding shares of stock entitled to vote in
the election of directors; and (b) the total
number of outstanding shares of stock,
whether entitled to vote or not [Jose M. Roy III
v. Chairperson Teresita Herbosa, G.R. No.
207246 (2017)].
The Supreme Court further said that the
statement in Gamboa that the 60% ownership
percentage must be computed on to BOTH
classes of common and preferred shares is
OBITER.
SEC Memorandum Circular No. 8 dated
20 May 2013
All corporations engaged in identified areas of
activities or enterprises specifically reserved,
wholly or partly, to Philippine Nationals by the
Constitution, the FIA, and other existing laws,
shall, at all times, observe the constitutional or
statutory ownership requirement. For purposes
of determining compliance therewith, the
required percentage of Filipino ownership shall
be applied to both:
1. The total number of outstanding shares of
stock entitled to vote in the election of
directors; AND
2. The total number of outstanding shares of
stock, whether or not entitled to vote in the
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election of directors [Sec. 1-2, SEC MC No.
8].
Note: This was the SEC Memorandum that
was put in question in the Roy III v. Herbosa
case, and subsequently upheld by the Court as
constitutional. Thus, the 60% Filipino
ownership requirement is NOT needed for
EACH AND EVERY CLASS (i.e., common and
preferred) of shares.
2. Grandfather Rule
The Grandfather Rule is a method of
determining the nationality of a corporation,
which is owned in part by another corporation,
by breaking down the equity structure of the
shareholder corporation [De Leon].
The Grandfather Rule is applied if doubt exists
as to the locus of the “beneficial ownership”
and “control” of a corporation, even if the 60-40
Filipino to foreign equity ratio is apparently met
by the subject or investee corporation [Narra
Nickel Mining & Development Corp. v.
Redmont Consolidated Mines Corp., G.R. No.
195580 (2014)].
It involves the computation of Filipino
ownership of a corporation in which another
corporation, of partly Filipino and partly-foreign
equity, owns capital stock. The percentage of
shares held by the second corporation in the
first is multiplied by the latter’s own Filipino
equity, and the product of these percentages is
determined to be the ultimate Filipino
ownership of the subsidiary corporation.
The Grandfather Rule must be applied to
accurately determine the actual participation,
both direct and indirect, of foreigners in a
corporation engaged in a nationalized activity
or business [SEC Opinion re: Silahis Int’l Hotel
(1987)].
“Doubt”
"Doubt" refers to various indicia that the
"beneficial ownership" and "control" of the
corporation do not in fact reside in Filipino
shareholders, but in foreign stakeholders. The
following are indicators of doubt:
1. That the foreign investors provide
practically all the funds for the joint
investment undertaken by these Filipino
businessmen and their foreign partner;
2. That the foreign investors undertake to
provide practically all the technological
support for the joint venture;
3. That the foreign investors, while being
minority
stockholders,
manage
the
company and prepare all economic viability
studies [Narra Nickel Mining and Dev. Corp
v. Redmont Consolidated Mines Corp., G.R.
No. 195580 (2014)].
The Grandfather Rule applies: (i) in enterprises
where the Filipino ownership requirement is
100% (mass media) or (ii) in other instances,
when the 60-40 Filipino foreign equity
ownership is in doubt (i.e. in cases where the
joint venture corporation with Filipino and
foreign stockholders with less than 60%
Filipino stockholdings [or 59%] invests in
another joint venture corporation, which is
either 60-40% Filipino-alien or the 59% less
Filipino) [Narra Nickel Mining and Dev. Corp v.
Redmont Consolidated Mines Corp., G.R. No.
195580 (2014)].
Successive Application of the Tests
The Control Test can be applied jointly with the
Grandfather Rule to determine the observance
of foreign ownership restriction in nationalized
economic activities. They are not incompatible
ownership-determinant methods that can only
be applied alternatively to each other.
The Grandfather Rule, standing alone, should
NOT be used to determine Filipino ownership
and control in a corporation, as it could result
in an otherwise foreign corporation rendered
qualified to perform nationalized or partly
nationalized activities.
Hence, it is only when there is doubt, based on
the Control Test, that the Grandfather Rule is
applied.
If the subject corporation’s Filipino equity falls
below the threshold 60%, the corporation is
immediately considered foreign-owned, in
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which case, the need to resort to the
Grandfather Rule disappears.
If a corporation that complies with the 60-40
Filipino to foreign equity requirement, it can be
considered a Filipino corporation, and if there
is no doubt as to who has the “beneficial
ownership” and “control” of the corporation,
there is no need for the application of the
Grandfather Rule.
However, if there is doubt as to who has the
“beneficial ownership” and “control” of the
corporation
(e.g.
the
Filipino-Owned
corporation subscribed to 60% of the capital
and the foreign corporation subscribed to 40%,
but the subscription of the former is only
nominally paid-up and such corporation
entered into a financial assistance agreement
with the foreign- owned corporation), the
application of the grandfather rule is necessary
[Narra Nickel Mining and Dev. Corp v.
Redmont Consolidated Mines Corp., G.R. No.
195580 (2015)].
D. Corporate Juridical Entity
A private corporation organized under the RCC
commences its corporate existence and
juridical personality from the date the SEC
issues the certificate of incorporation under its
official seal [Sec. 18].
Persons desiring to incorporate must submit to
the SEC:
a.
The intended corporate name for
verification, and
b.
The articles of incorporation and
bylaws [Sec. 18].
Note: One-person corporations are not
required to submit and file bylaws [Sec. 119].
1. Doctrine of Separate Juridical
Personality
Concept
COMMERCIAL LAW
General Rule: Due to the corporation’s
separate juridical personality, a stockholder
may not be made to answer for acts or liabilities
of said corporation, and vice-versa [Land Bank
of the Philippines v. CA, G.R. No. 127181
(2001)].
Exceptions: The corporation’s separate
juridical personality cannot be invoked to
escape liability when:
1. This legal fiction is used for ends
subversive to the policy and purpose
behind its creation or which could not
have been intended by law to which it
owes its being (i.e. to defeat public
convenience, justify wrong, protect
fraud, defend crime, confuse legitimate
legal or judicial issues, used as a
vehicle for the evasion of an existing
obligation, perpetrate deception or
otherwise circumvent the law).
2. The corporate entity is a mere alter
ego, adjunct, or business conduit for
the sole benefit of the stockholders or
of another corporate entity [Land Bank
of the Philippines v. CA, G.R. No.
127181 (2001)]. The corporation is
merely a farce, as it is so organized and
controlled, and its affairs are so
conducted, as to make it merely an
instrumentality, agency, conduit or
adjunct of another corporation [Lanuza
et al v. BF Corporation, et al, G.R. No.
174938 (2014)].
Property
Corporate property is owned by the corporation
as a juridical person, and the stockholders
have no claim on corporate property as
owners. The latter only have a mere
expectancy or inchoate right to the same upon
dissolution of the corporation and after all
corporate creditors have been paid. Such right
is limited only to their equity interest.
Although a stockholder’s interest in the
A corporation has a personality separate and
corporation may be attached by his personal
distinct from that of its stockholders and
creditor, corporate property cannot be used to
members and is not affected by the personal
satisfy his claim [Wise and Co. v. Man
rights, obligations, and transactions of the
SunLung, G.R. No. 46997 (1940)].
latter.
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A stockholder cannot bring an action for
replevin to recover property of the corporation.
The corporation, as an artificial person, must
purchase, hold, grant, sell, and convey the
corporate property, and do business, sue and
be sued, plead and be impleaded, for corporate
purposes, in its corporate name [Button v.
Hoffman, 61 Wis. 20 (1884)].
Corporations are entitled to due process and
equal protection, but subject to the police
power of the state. insofar as their properties
are concerned [Smith, Bell & Co. v. Natividad,
40 Phil. 144 (1920)]. They are also entitled to
protection against unreasonable searches and
seizures [Bache & Co. v. Ruiz, 37 SCRA 823
(1971)]. They are not, however, entitled to the
privilege against self-incrimination [Bataan
Shipyard & Engineering v. PCGG, 150 SCRA
181 (1987)].
a. Liability of Tort and Crime
Being an entity with a separate juridical
personality, a corporation can be held liable for
torts committed by its officers under express
direction from the stockholders or directors,
acting as a body [PNB v. CA G.R. No. L-27155
(1978)].
The corporation itself cannot be arrested and
imprisoned; thus, it cannot be penalized for a
crime punishable by imprisonment. However, a
corporation may be charged and prosecuted
for a crime if the imposable penalty is a fine
[Ching v. Secretary of Justice, G
̧ .R. No.
164317 (2006)].
Note: Sec. 170 of the RCC provides that for
violations of the Code, if it is committed by a
corporation, the same may, after notice and
hearing, be dissolved in appropriate
proceedings before the Commission.
Since a corporation as a person is a mere legal
fiction, it cannot be proceeded against
criminally because it cannot commit a crime in
which personal violence or malicious intent is
required. Criminal action is limited to the
corporate agents guilty of an act amounting to
a crime and never against the corporation itself
[Time Inc. v. Reyes, G.R. No. L-28882 (1971)].
b. Recovery of Moral Damages
General Rule: A corporation, being an artificial
person, has no feelings, emotions nor senses;
therefore, it cannot experience physical
suffering and mental anguish, which are bases
for moral damages under Art. 2217 of Civil
Code [Manila Electric Co. v. Nordec
Philippines, 861 SCRA 515 (2018)].
Exception: The only exception to this rule is
when the corporation has a reputation that is
debased, resulting in its humiliation in the
business realm. But in such a case, it is
imperative for the claimant to present proof to
justify the award. It is essential to prove the
existence of the factual basis of the damage
and its causal relation to the petitioner's acts
[Manila Electric Company v. T.E.A.M
Electronics Corporation, G.R. No. 131723
(2007), as quoted in Manila Electric Co. v.
Nordec Philippines].
2. Doctrine of Piercing the Corporate
Veil
A corporation will be looked upon as a legal
entity as a general rule, and until sufficient
reason to the contrary appears but when the
notion of legal entity is used to defeat public
convenience, justify wrong, protect fraud or
defend crime, the law will regard the
corporation as an association of persons.
Piercing the veil of corporate entity is an
equitable remedy developed to address
situations where the separate corporate
personality of a corporation is abused or used
for wrongful purposes [PNB v. Ritratto Group,
G.R. No. 142616 (2001)].
Note: Doctrine of Limited Liability and Piercing
the Corporate Veil also applies to a One
Person Corporation. Single stockholder must
prove that the property of the One Person
Corporation is independent of the stockholder's
personal property, otherwise the stockholder
shall be jointly and severally liable for the debts
and other liabilities of the One Person
Corporation [Sec. 130].
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Effect of Piercing the Corporate Veil
a. Grounds for Application of Doctrine
The corporation will be considered as a mere
association of persons. Thus, the liability will
directly attach to the stockholders or to the
other corporation [China Banking v. DyneSem, G.R. No. 149237 (2006)].
The veil of separate corporate personality may
be lifted/pierced:
1. When such personality is used to
defeat public convenience, to justify
wrong, to protect fraud or defend crime,
or as a shield to confuse the legitimate
issues;
2. When the corporation is merely an
adjunct, a business conduit or an alter
ego of another corporation; or
3. Where the corporation is so organized
and controlled and its affairs are so
conducted as to make it merely an
instrumentality, agency, conduit or
adjunct of another corporation; or
4. When the corporation is used as a
cloak or cover for fraud or illegality, or
to work injustice, or
5. Where necessary to achieve equity or
for the protection of the creditors
[China Banking v. Dyne-Sem, G.R. No.
149237 (2006)].
For the juridical personality of a corporation to
be disregarded, the wrongdoing must be
clearly and convincingly established, and
cannot be presumed [Del Rosario v. NLRC,
G.R. No. 85416 (1990)].
Procedural Considerations
One cannot pierce the veil to acquire
jurisdiction over a party [Pacific Rehouse Corp.
v. CA, G.R. No. 199687 (2014)].
General Rule
1. Both the individual sought to be held
liable and the corporation must be
impleaded at the first instance;
2. The court must first acquire jurisdiction
over the corporation or corporations
involved before its or their separate
personalities are disregarded; and
3. The doctrine of piercing the veil of
corporate entity can only be raised
during a full-blown trial over a cause of
action duly commenced involving
parties duly brought under the authority
of the court by way of service of
summons or what passes as such
service [Kukan v. Reyes, G.R. No.
182729 (2010)].
Exception: When an aggrieved laborer is
unable to attach the properties of the
corporation, the Labor Arbiter may thereafter
“amend” its decision by ordering that the
individuals responsible be impleaded and their
properties levied. Provided that such
individuals were impleaded and had the
opportunity to be heard [Guillermo v. Uson,
G.R. No. 198967 (2016)].
A sheriff may not pierce the corporate veil,
because such power only belongs to the court
[Cruz v. Dalisay, A.M. No. R-181-P (1987)].
Note: Aside from this general guideline, no
hard and fast rule can be laid down to cover all
cases where the corporate entity theory cannot
be availed of, and each case will have to be
considered on its merits [Campos].
The Court has pierced the veil of corporate
fiction when it was used:
1. To defraud the government of taxes
due it;
2. To evade payment of civil liability;
3. By a corporation which is merely a
conduit or alter ego of another
Corporation;
4. To evade compliance with contractual
obligations;
5. To evade financial obligation to its
employees;
6. To ward off a judgment credit;
7. To avoid inclusion of corporate assets
as part of the estate of the decedent;
and
8. To cover up an otherwise blatant
violation of the prohibition against
forum shopping.
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Only in these and similar instances may the veil
be pierced and disregarded [PNB v. Andrada
Electric and Engineering Co., G.R. No. 142936
(2002)].
b. Test in Determining Applicability
The doctrine has been applied in the following
contexts:
a. When the liability belongs to the
corporations, but the plaintiff seeks to
hold the individual liable.
Mere controlling interest is not enough. There
must be a clear showing that the corporate
fiction is used to defeat public convenience,
justify wrong, protect fraud, or defend crime
[Koppel Phil v. Yatco, G.R. No. L-47673
(1946)].
Note the following badges of fraud:
1. Used as a shield to further an end
subversive of justice; or
2. For purposes that could not have been
intended by the law that created it; or
3. To defeat public convenience;
4. Justify wrong;
5. Protect fraud; or
6. Defend crime; or
7. To perpetuate fraud or confuse
legitimate issues; or
8. To circumvent the law or perpetuate
deception
b. Where the liability is personal to the
individual and he seeks to evade it by
hiding behind a corporate vehicle.
The veil of corporate fiction must be pierced
where the main purpose in forming the
corporation was to evade the incorporator’s
subsidiary civil liability resulting from the
conviction of one of his employees [Palacio v.
Fely Transportation, G.R. No. L-15121 (1962)].
c. The instrumentality or alter ego rule.
COMMERCIAL LAW
transaction attacked so that the
corporate entity as to this transaction
had at the time no separate mind, will
or existence of its own;
2. Such control must have been used by
the defendant to commit fraud or
wrong, to perpetuate the violation of a
statutory or other positive legal duty, or
dishonest
and
unjust
act
in
contravention of plaintiffs’ legal rights;
and
3. The aforesaid control and breach of
duty must proximately cause the injury
or unjust loss complained of [WPM
International v. Labayen, G.R. No.
182770 (2014)].
Circumstances rendering a subsidiary an
instrumentality:
1. The parent corporation owns all or
most of the subsidiary’s capital stock;
2. The parent and subsidiary corporations
have common directors or officers;
3. The parent corporation finances the
subsidiary
4. The parent corporation subscribes to
all the capital stock of the subsidiary or
otherwise causes its incorporation;
5. The subsidiary has grossly inadequate
capital;
6. The parent corporation pays the
salaries and other expenses or losses
of the subsidiary;
7. The subsidiary has substantially no
business except with the parent
corporation or no assets except those
conveyed to or by the parent
corporation;
8. In the papers of the parent corporation
or in the statements of its officers, the
subsidiary is described as a
department or division of the parent
corporation or its business or financial
responsibility is referred to as the
parent corporation’s own;
9. The parent corporation uses the
property of the subsidiary as its own;
10. The directors or executives of the
subsidiary do not act independently in
the interest of the subsidiary but take
their orders from the parent corporation
in the latter’s interest; and
The elements of this modality are
1. Control, not mere majority or complete
stock control, but complete domination,
not only of finances but of policy and
business practice in respect to the
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11. The formal ledger requirements of the
subsidiary are not observed [PNB v.
Ritratto Group, G.R. No. 142616
(2001)]
d.
Successor
corporation
rule
Where a corporation feigns dissolution or
cessation but really continues in existence
organized under another name.
The application of the rule figures prominently
in labor cases where the prior entity seeks to
evade its obligations to its laborers. Some
telltale signs exhibited in Claparols v. CIR [G.R.
No. L-30822 (1975)] include:
Consecutive
date
of
cessation
and
commencement of subsequent entity;
1. Ownership and control by former
controlling stockholder;
2. Turnover of assets.
On the other hand, in Livesey v. Binswanger
[G.R. No. 177493 (2014)], the court pointed to
the following:
1. Same officers;
2. Same office; and
3. Continuation of the business.
Note: SME v. De Guzman, G.R. No. 184517
(2013) allows for the defense of good faith in
case of assets sales between a predecessor
and successor corporation:
In asset sales or when the assets of the
selling corporation are transferred to another
entity, the rule is that –
1. The seller in good faith is authorized
to dismiss the affected employees,
but is liable for the payment of
separation pay under the law
2. The buyer in good faith is not obliged
to absorb the employees affected by
the sale, nor is it liable for the
payment of their claims. The most
that it may do, for reasons of public
policy and social justice, is to give
preference to the qualified separated
personnel of the selling firm.
In stock sales, which takes place at the
shareholder level, the rule is that –
1. A shift in the composition of its
shareholders will not affect its
existence and continuity because the
corporation possesses a personality
separate and distinct from that of its
shareholders
2. The corporation continues to be the
employer of its people and continues to
be liable for the payment of their just
claims.
3. The corporation or its new majority
shareholders are not entitled to lawfully
dismiss corporate employees absent a
just or authorized cause
Note: This overturns the ruling in Manlimos v.
NLRC (1995) allowing for the defense of good
faith in stock sales.
Note: Existence of interlocking directors,
corporate officers and shareholders is also not
enough justification to pierce the veil of
corporate fiction in the absence of fraud or
other public policy considerations [PNB v.
Hydro Resources Contractors Corp., G.R. No.
16570 (2013)].
E. Capital Structure
1. Number and
Incorporators
Qualifications
of
Number: Not more than fifteen [Sec. 10]
a.
The Revised Corporation Code
removed the prescribed minimum
number of incorporators. Previously,
the incorporators must be no less than
five except for special corporations.
[Herbosa, 2019]
b.
A corporation with a single stockholder
is considered a One Person
Corporation
Qualifications
1. Any person, natural or juridical, may
organize a corporation [Sec. 10]
a. Juridical
entities
(partnership,
association or corporation, singly or
jointly with others) are now permitted
to be incorporators, and not merely
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initial subscribers under the Old
Code.
b. The following are NOT allowed to
organize as a corporation, except as
provided under special laws:
1.
Natural persons who are
licensed
to
practice
a
profession
2.
Partnerships or associations
organized for the purpose of
practicing a profession
2. Natural persons must be of legal age
3. Each incorporator must subscribe to at
least one share of the capital stock
shares which correspond to the amount not
paid.
Nevertheless, holders of subscribed shares not
fully paid, which are not delinquent, shall have
all the rights of a stockholder. [Sec. 71]
SEC has opined that the entire subscription,
although not yet fully paid, may be transferred
to a single transferee, who as a result of the
transfer must assume the unpaid balance.
[SEC Opinion, 9 Oct. 1995]
Note: The RCC removed the Philippine
residency requirement for the majority of the
incorporators.
It is necessary, however, to secure the consent
of the corporation because such transfer
contemplates a novation which under Art. 1293
(NCC) cannot be made without consent of the
creditor.
2. Subscription Requirements
Characteristics
No minimum capital requirement
There can be a subscription only with reference
to unissued shares of the Authorized Capital
Stock (ACS), in the following cases:
1. The original issuance of the ACS at the
time of incorporation.
2. The opening, during the life of the
corporation, of the portion of the
original ACS previously unissued; or
3. The increase in ACS achieved through
a formal amendment of the Articles and
registration thereof with the SEC
[Villanueva]
Under the Old Corporation Code (CC), at least
25% of the authorized capital stock as stated in
the AOI must be subscribed at the time of
incorporation, and at least 25% of the total
subscription must be paid upon subscription
[Sec 13, CC].
Section 13 has been removed in the Revised
Corporation Code, thus removing such
minimum capital requirements [Sec 12].
However, the increase in capital remains
subject to the 25% subscription and 25%
payment of subscription rule [Sec. 37].
Subscription Agreements
Any contract for the acquisition of unissued
stock in an existing corporation or a corporation
still to be formed shall be deemed a
subscription contract. This is notwithstanding
the fact that the parties may refer to it as a
purchase or some other contract. [Sec. 59]
Nature of Subscription Contracts
A subscription contract is indivisible.
Consequently, where stocks were subscribed
and part of the subscription contract price was
not paid, the whole subscription shall be
considered delinquent, and not only the
Status as Shareholder
One may become a stockholder in a
corporation in either of two ways:
1. By SUBSCRIPTION to shares before
or after incorporation
a. becomes a stockholder upon
acceptance of the corporation
of his offer to subscribe
whether the consideration is
fully paid or not
2. By acquisition of already issued shares
a. from an existing stockholder
b. purchase
of
TREASURY
SHARES from the corporation
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Types of Subscription Contracts
1. Pre-incorporation subscription - It is a
subscription for shares of stock of a
corporation still to be formed.
2. Post-incorporation
subscription
Entered into after incorporation.
[Sundiang Sr. & Aquino, 2009]
Rules on Pre-Incorporation Subscription
General Rule: A pre-incorporation
subscription is IRREVOCABLE:
A. For a period of at least 6 months from
the date of subscription;
Exceptions:
1. All of the other subscribers
consent to the revocation, or
2. The incorporation fails to
materialize within 6 months or
within a longer period as may
be stipulated in the contract of
subscription
B. After the submission of the Articles of
Incorporation to the SEC. [Sec. 60]
Interest on Unpaid Subscription
General Rule: A stockholder is NOT liable to
pay interest on his unpaid subscription. He is
not considered a corporate debtor for the
unpaid amount of his subscription. [Herbosa,
2019]
Exception: If expressly stipulated in the
subscription contract. [Sec 65]
3. Corporate Term
Perpetual existence
General Rule: The Revised Corporation Code
provides that a corporation shall have
perpetual existence. The AOIs of existing
corporations shall be deemed amended to
reflect their perpetual term
A corporation already existing upon effectivity
of the RCC may opt out of the rule on perpetual
existence by:
a. Obtaining the vote of its stockholders
representing
majority
of
the
Outstanding Capital Stock, without
prejudice to the appraisal right of
dissenting stockholders
b. Notifying the Commission that it elects
to retain its specific corporate term, as
provided in its AOI. [Herbosa, 2019]
It is presumed that shareholders, when they
incorporated, assented to the perpetual
character of their contract. Their corporate
relations will only end upon agreement
between or among the prescribed number of
shareholders or involuntarily upon the court’s
or the SEC’s determination.
Extending or shortening the corporate
term
General Rule: If a corporation wishes to
extend its corporate term, it may amend its AOI
at least 3 years prior to the expiration of its
term. Previously, such change should be made
at least 5 years prior to the expiration. [Sec. 11]
Exception: When there exists justifiable
reasons for an earlier extension, to be
determined by the SEC.
Requisites: A private corporation may extend
or shorten its term as stated in the articles of
incorporation when –
1. Approved by a majority vote of the
board of directors or trustees, and
2. Ratified at a meeting by the
stockholders or members representing
at least two-thirds (2/3) of the
outstanding capital stock or of its
members
Note: In case of extension of corporate term, a
dissenting stockholder may exercise the right
of appraisal [Sec. 36]
Revival of Corporate Existence
Exception: The AOIs of corporations created
under the effectivity of this Code provide for a
specific period. [Sec 11]
Corporations with an expired term upon the
effectivity of the RCC, may apply with the SEC
for revival of its corporate existence.
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Upon approval by the SEC, it will then issue a
certificate of revival giving it perpetual
existence, with all its rights and privileges, and
subject to all its duties, debts and liabilities prior
to revival, unless it requests for a limited term.
[Sec. 11]
This benefit does not extend to corporations
whose dissolution was decreed by the SEC or
the courts.
Should the controlling stockholders or
members wish to file the application, they must
represent
the
prescribed
number
of
stockholders or members the application for
voluntary dissolution (i.e. at least 2/3 of
OCS/membership). Dissenting stockholders
may not exercise their appraisal right.
[Herbosa, 2019]
Summary of changes [Herbosa, 2019]
For newly
established
corporations
GR: Automatic perpetual
term
XPN: AOI provides a
specific corporate term
For existing
corporations
GR: AOI shall be deemed
amended to reflect a
perpetual term
XPN: The corporation
opts out and elects to
retain their existing term;
Requires majority vote of
shareholders/members
For
corporations
with expired
terms
GR: May apply with the
SEC for the revival of the
corporation. Upon
approval, they will have a
perpetual term
XPN: Their application
indicates a fixed term
For
corporations
with a limited
term
GR: May file an
application for extension
of such term 3 years prior
to the expiration of the
term
XPN: There are justifiable
reasons for an earlier
extension
4. Classification of Shares
Nature of Shares of Stock
Shares of stock are units into which the capital
stock is divided. A share of stock represents
interest of the holder thereof to participate in
the management of the corporation, to share
proportionally in the profits of the business and,
upon liquidation, to obtain an aliquot part of
corporate assets after all corporate debts have
been paid [Campos].
Classes of Shares of Stock
The shares in stock corporations may be
divided into classes or series of shares, or both.
The rights, privileges, or restrictions, and the
stated par value of the class or series of shares
must be indicated in the Articles of
Incorporation [Sec. 6]
General Rule: No share may be deprived of
voting rights [Sec. 6].
Exceptions:
1. Preferred non-voting shares
2. Redeemable shares,
3. Provided by the Code (e.g. Treasury shares)
There shall always be a class/series of shares
which have COMPLETE VOTING RIGHTS
[Sec. 6].
Doctrine of Equality Shares
Each share shall be EQUAL in ALL respects to
every other share, except as otherwise
provided in the Articles of Incorporation and
stated in the certificate of stock [Sec. 6].
Classes of shares of stock
Classification of shares:
1. Preferred Shares vs. Common Shares
2. Scope of Voting Rights Subject to
Classification
3. Founders’ Shares
4. Redeemable Shares
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5. Treasury Shares
6. Par value shares vs. No-par value
shares
1. Preferred Shares vs. Common
Shares
Preferred Shares
Stocks which are given, by the issuing
corporation:
a. Preference in dividends
b. Preference in the distribution of assets
of the corporation in case of liquidation,
or
c. Preference in both dividends and
distribution, or
d. Such other preferences as may be
stated in the Articles of Incorporation
which do not violate the Corporation
Code.
Note: Preferred shares may be issued only with
a stated par value [Sec. 6].
Unless the right to vote is clearly withheld, a
preferred stockholder would have such right as
it is an incident to stock ownership. The Board
of Directors may fix the terms and conditions
only when so authorized by the Articles of
Incorporation and such terms and conditions
shall be effective upon filing a certificate
thereof with the SEC [Sec. 6].
Kinds of Preferred Shares
a. Preferred Shares as to Assets vs.
Preferred Shares as to Dividends
b. Cumulative vs. Non-Cumulative
c. Participating vs. Non-participating
Preferred Shares as to Assets vs. Preferred
Shares as to Dividends
a. Preferred shares as to assets –gives
the holder preference in the distribution
of the assets of the corporation in case
of liquidation.
b. Preferred shares as to dividends entitled to receive dividends on said
share to the extent agreed upon before
any dividends at all are paid to the
holders of common stock.
Cumulative vs. Non-cumulative
a. Cumulative - regardless of lack of
profits in any given year, and lack of
declaration of dividends, the arrears for
such year must be paid to the preferred
stocks in a subsequent year (once
profits are made) before any dividends
can be paid to the common stocks.
b. Non-Cumulative – entitlement to
receipt of dividends essentially
depends on declaration of such; types:
1. Discretionary – right to dividends in
a particular year depends on the
discretion of the board, even if the
corporation has profits.
2. Mandatory – a positive duty is
imposed to declare preferred
dividends
every
year
that
unrestricted retained earnings are
available.
3. Earned cumulative or dividend
credit – board has discretion not to
declare dividends, however, once
the board decides that dividends
will be declared, the preferred
stockholders have a right to arrears
in dividends for the years when
there were unrestricted retained
earnings are available but no
dividend was declared.
Participating and Non-participating
Unless otherwise provided, preferred stocks
are non-participating.
a. Participating - those which, after
getting their fixed dividend preference,
share with common stocks the rest of
the dividends
b. Non-participating – those which, after
getting their fixed dividend preference,
have no more right to share in the
remaining dividends with the common
stocks.
Common shares
A common stock represents the residual
ownership interest in the corporation. It is a
basic class of stock ordinarily and usually
issued without extraordinary rights or privileges
and entitles the shareholder to a pro rata
division of profits” [CIR v. CA, 301 SCRA 152
(1999)].
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The owners thereof are entitled to
management (via exclusive right to vote) of the
corporation and to equal pro-rata division of
profits.
Comparison
Common
Preferred
Stock which
entitles the
owner to an
equal pro
rata division
of profits
Stock which
entitles the
holder to
some
preference,
either in the
dividends, or
in the
distribution
of assets, or
both
Value
Depends if it
is a par or
no-par value
share
Stated par
value [Sec.
6]
Voting
Rights
Usually
vested with
the exclusive
right to vote
May be
deprived of
voting rights
except for
the instances
provided in
Section 6
[Sec. 6]
Definition
Preference
upon
Liquidation
No
advantage,
priority or
preference
over any
other
stockholder
in the same
class
May have
first crack at
dividends/pr
ofits/
distribution
of assets
depending
on the
features of
the shares
2. Scope of Voting Rights Subject to
Classification
otherwise provided in the Revised Corporation
Code.
General Rule: Non-Voting Shares are not
entitled to vote. The law only authorizes the
denial of voting rights in the case of
redeemable shares or preferred shares,
provided that there shall always be a class or
series of shares which have complete voting
rights [Sec. 6].
Exception: Shares whose voting rights are
denied, shall nevertheless be entitled to vote
on the following fundamental matters:
a. Amendment of the Articles of
Incorporation;
b. Adoption and amendment of by-laws;
c. Sale,
lease,
exchange,
other
disposition of all or substantially all of
the corporate property;
d. Incurring, creating or increasing
bonded indebtedness;
e. Increase or decrease of capital stock;
f. Merger and consolidation;
g. Investment of corporate funds in
another corporation or business;
h. Dissolution of the corporation
3. Founders’ Shares
Founders’ Shares are shares classified as
such in the AOI, which are given certain rights
and privileges not enjoyed by the owners of
other stocks. These may be given special
preference in voting rights and dividend
payments.
Where exclusive right to vote and be voted for
in the election of directors is granted, such right
must be for a limited period not to exceed 5
years, subject to approval by SEC The 5-year
period shall commence from date of approval
by SEC.
Founder’s shares given the exclusive right to
vote and be voted for are not allowed to
exercise that right in violation of the
AntiDummy Law and the Foreign Investment
Act [Sec. 7].
Only preferred and redeemable shares may be
deprived of the right to vote [Sec. 6], except as
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b. Optional - the corporation is not
mandated to redeem the shares.
4. Redeemable Shares
Redeemable Shares are shares which may be
purchased by the corporation from the holders
of such shares upon the expiration of a fixed
period, regardless of the existence of
unrestricted retained earnings in the books of
the corporation.
The RCC made the redemption subject to the
rules and regulations that may be issued by
SEC, in addition to what may be stipulated in
the AOI and Certificate of Stock [Sec. 8].
Limitations
a. Redeemable shares may be issued
only when expressly provided for in the
AOI [Sec. 8].
b. The terms and conditions affecting said
shares must be stated both in the AOI
and in the certificate of stock [Sec. 8].
c. Redeemable or preferred shares may
be deprived of voting rights in the AOI
[Sec. 6].
d. The corporation is required to maintain
a sinking fund to answer for redemption
price if the corporation is required to
redeem [SEC-OGC Opinion No. 0703].
e. The redeemable shares are deemed
retired upon redemption, unless
otherwise provided in the AOI (i.e., if
the AOI allows for reissuance of such
shares) [SEC Rules Governing
Redeemable and Treasury Shares, 26
April 1982].
f. Unrestricted retained earnings are
NOT necessary before shares can be
redeemed, but there must be sufficient
assets to pay the creditors and to
answer for operations [Republic
Planters Banks v. Agana, G.R. No.
51765 (1997)] See also Sec. 8.
g. Redemption cannot be made if such
redemption will result in insolvency or
inability of the corporation to meet its
obligations [SEC Opinion, 24 Aug
1987]
Kinds of redeemable shares
a. Compulsory - the corporation
required to redeem the shares.
5. Treasury Shares
Treasury Shares are shares which have been
issued and fully paid for, but subsequently
reacquired by the issuing corporation by
purchase, redemption, donation or through
some other lawful means. Such shares may
again be disposed of for a reasonable price
fixed by the BOD [Sec. 9].
Shares may be reacquired without impairing
the corporate trust fund. Reacquisition of
shares is allowed, provided the corporation will
use assets up to the extent of its unrestricted
retained earnings [SEC Rules Governing
Redeemable and Treasury Shares, Sec 3, par
(1)(a)].
It should be recalled that corporate earnings
are not part of the corporate trust fund
[Herbosa, 2019]. They are excluded from the
definition of outstanding capital stock.
Pre-emptive right of stockholders in close
corporations shall extend to reissuance of
treasury shares, unless otherwise provided in
the AOI [Sec. 101].
Delinquent stocks, which are stocks that have
not been fully paid, may become treasury
stocks upon bid of the corporation in absence
of other bidders [Sec. 67].
Limitations on treasury shares
a. They may be re-issued or sold again as
long as it is for a reasonable price fixed
by the BOD.
b. Cannot participate in dividends.
c. It has no voting right as long as such
shares remain in the Treasury [Sec.
56].
d. It cannot be represented during
stockholder’s meetings.
e. The amount of URE equivalent to the
cost of treasury shares being held shall
be restricted from being declared and
issued as dividends.
is
Note: When treasury shares are sold below its
par or issued value, there can be no watering
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of stock because such watering of stock
contemplates an original issuance of shares.
6. Par Value Shares vs. No-Par Value
Shares
For both stock corporations and close
corporations, the pre-emptive right of
stockholders extends to the re-issuance or sale
treasury shares, unless the articles of
incorporation provide otherwise [Sec. 38 and
101; SEC Opinion, 14 January 1993].
Par value shares
Treasury Shares are not Retired Shares
Treasury shares do not revert to the unissued
shares of the corporation, but are regarded as
property acquired by the corporation, which
may be reissued or resold at a price to be fixed
by the Board of Directors [SEC Rules
Governing Redeemable and Treasury Shares,
CCP No. 1-1982].
Note: Under the SEC Rules, the redemption of
redeemable shares does not necessarily make
them as treasury shares. Instead, it leads to
their automatic retirement or cancellation,
unless the contrary is specifically stipulated.
The articles thus provide advance notice to
ordinary shareholders that the board may, at its
own discretion, reissue redeemable shares
with the same features.
Treasury shares distributed by way of
dividends
Treasury shares may also be distributed as
property dividends. In order for treasury shares
to be distributed as property dividends, the
amount of the retained earnings previously
used to support their acquisition must not have
been impaired by losses. Further, such
retained earnings must not be used to justify
the distribution of treasury shares as property
dividends. They may only be distributed out of
the other earnings of the corporation [SECOGC Opinion No. 12-06, dated April 20, 2012].
Note: Treasury shares are treated as assets of
the corporation [Herbosa, 2019]. Since a
treasury share is a fully paid share re-acquired
by the corporation, it is not outstanding and
may be re-issued and resold. It cannot receive
dividends before the resale because the
corporation cannot grant dividends to itself
[CIR v. Manning].
These are shares with a stated or fixed value
set out in the Articles of Incorporation, which
remains the same regardless of the profitability
of the corporation. This gives rise to financial
stability, and is the reason why banks, trust
corporations, insurance companies and
building and loan associations must always be
organized with par value shares.
Par value is minimum issue price of such share
in the Articles of Incorporation which must be
stated in the certificate [Sec 61].
No par value shares
These are shares without a stated value in the
AOI. They are without nominal value. They
may be issued for the amount stipulated in the
AOI or fixed by the Board [Sec 61].
Limitations on no par value shares [Sec. 6]
a. Cannot have an issue price of less than
P5.00 per share;
b. Once issued, they shall be deemed
fully paid and non-assessable, and the
holders of such shares shall not be
liable to the corporation or to its
creditors in respect thereto;
c. Entire consideration received by the
corporation shall be treated as capital
and shall not be available for
distribution as dividends;
d. The AOI must state the fact that the
corporation issues no-par shares and
the number of shares;
e. Cannot be issued as preferred stock;
f. Cannot be issued by banks, insurance
companies, public utilities and building
and loan associations;
g. Cannot be issued by all corporations
authorized to obtain or access funds
from the “public”.
Note: A new addition in the Revised
Corporation Code is the prohibition on the
issuance of no-par shares being imposed on all
corporations authorized to obtain or access
funds from the “public.” This prohibition is not
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anymore limited to banks, insurance
companies, public utilities and building and
loan associations.
F. Incorporation and
Organization
1. Promoter
Promoters – persons who, acting alone or with
others, take initiative in founding and
organizing the business or enterprise of the
issuer and receives consideration therefor.
[Sec. 3.10, RA 8799, The Securities Regulation
Code]
Promoter’s Contracts
Promoter’s contracts are those types of
contracts entered into in behalf of a corporation
which is in the process of organization and
incorporation, and such fact is acknowledged
as an essential ingredient in the process of
perfection. [Villanueva]
a. Liability of Promoter
General rule: The promoter binds himself
personally and assumes the responsibility of
looking to the proposed corporation for
reimbursement.
● The promoter binds himself to ensure
that the corporation, once formed, will
ratify the contract entered into in its
name.
● Otherwise, he becomes personally
liable for such contract in the event that
corporation does not ratify.
Exceptions:
1. Express or implied agreement to the
contrary
2. Novation, not merely adoption or
ratification, of the contract
b.
Liability
of
Corporation
Promoter’s Contracts
for
bind it. [Cagayan Fishing Development Co.,
Inc. v. Sandiko, G.R. No. L-43350 (1937)]
Exceptions: A corporation may be bound by
the contract if it makes the contract its own by:
a. Adoption or ratification of the ENTIRE
contract after incorporation.
b. Novation or the intent to novate the
original contract is required to adopt or
ratify the pre-incorporation contract.
[Campos]
c. The Court’s ruling in Cagayan Fishing
v. Teodoro Sandiko, that “a corporation
should have a full and complete
organization and existence as an entity
before it can enter into any kind of a
contract or transact any business”, is
not absolute. One of the exceptions
recognized by American courts is that
“a contract made by the promoters
of a corporation on its behalf may be
adopted, accepted or ratified by the
corporation when organized”. [Rizal
Light v. PSC and Morong Electric
(1968)]
d. Acceptance of benefits under the
contract with knowledge of the terms
thereof.
e. Performance of its obligation under the
contract.
The contract must of course be one which is
within the powers of the corporation to enter.
[Builders’ Duntile Co. v. Dunn Mfg. Co. (1929)]
The corporation adopts the entire contract, not
only parts which are beneficial. [Campos]
2. Subscription Contract
A subscription contract is any contract for the
acquisition of unissued stock in an existing
corporation, or corporation still to be formed.
Notwithstanding the fact that the parties refer
to the contract as a purchase or some other
contract, it shall be deemed a subscription as
long as it involves the acquisition of unissued
stock in an existing corporation or a corporation
still to be formed. [Sec. 59]
General rule: A corporation is NOT bound by
the contract. A corporation, until organized, has
no life and no legal existence. It could not have
had an agent [the promoter] who could legally
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3.Pre-Incorporation
Agreements
COMMERCIAL LAW
Subscription
A
pre-incorporation
subscription
agreement is a type of promoter’s contract for
the acquisition of unissued stock in a
corporation still to be formed.
Subscription for shares of stock of a
corporation still to be formed shall be
irrevocable for a period of at least six (6)
months from the date of subscription,
UNLESS:
1. All of the other subscribers consent to
the revocation; or
2. The corporation fails to incorporate
within the same period or within a
longer period stipulated in the contract
of subscription.
No pre-incorporation subscription may be
revoked after the articles of incorporation is
submitted to the Commission. [Sec. 60]
The rule on irrevocability of a pre-incorporation
subscription agreement embodied in the RCC
is a combination of the features of two theories:
● Contract
Theory:
Subscription
agreement among several persons to
take shares in a proposed corporation
becomes a binding contract and is
irrevocable
from
the
time
of
subscription unless cancelled by all
parties
before
acceptance
of
corporation.
● Offer Theory: Subscription agreement
is only a continuing offer to a proposed
corporation, offer does not ripen into a
contract until accepted by the
corporation
when
organized.
[Villanueva]
4. Consideration for Stocks
Stocks shall not be issued for a consideration
less than the par or issued price thereof.
Consideration for the issuance of stock may
be:
1. Actual cash paid to the corporation;
2. Property, tangible or intangible, which
must be:
a. Actually
received
by
the
corporation; and
3.
4.
5.
6.
7.
8.
b. b. Necessary or convenient for its
use and lawful purposes
c. At a fair valuation equal to the par
or issued value of the stock issued;
Labor performed for or services
actually rendered to the corporation
Previously incurred indebtedness of
the corporation;
Amounts transferred from unrestricted
retained earnings to stated capital;
Outstanding shares exchanged for
stocks in the event of reclassification or
conversion;
Shares of stock in another corporation;
and/or
Other generally accepted form of
consideration [Sec. 61].
Invalid Consideration
The following cannot be exchanged for the
issuance of shares of stock [Sec. 61]:
1. Promissory notes
2. Future service
In case a subscription contract contemplates
unlawful consideration exchanged for shares of
stock:
1. The subscription contract would be
valid and binding on both the
corporation and subscriber
2. But the provision on such unlawful
consideration is deemed void, such
that the subscription agreement would
be construed to be for cash, and the
unpaid amount treated as part of
subscription receivables.
It would not be in consonance with the trust
fund doctrine to consider the subscription
contract void [Villanueva].
Valuation of Consideration
Where the consideration is other than actual
cash, or consists of intangible property, the
valuation thereof shall initially be determined
by the stockholders or the board of directors,
subject to the approval of the Commission
[Sec. 61].
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5.
Articles
COMMERCIAL LAW
of
Incorporation
Corporate Name
The AOI is a basic contract document, defining
the charter of the corporation, and serves as
the basis by which to judge whether it exists for
legal purposes.
See 6. Corporate Name; Limitations on Use
of Corporate Name
The charter of the corporation is a contract
between 3 parties:
a.
between the State and the corporation;
b.
between the stockholders and the
State;
c.
between the corporation and its
stockholders. [Villanueva]
d.
among the stockholders [Campos]
A corporation only has such powers as are
expressly granted by law and the AOI. The
purpose clause confers and limits the powers
that a corporation may exercise.
The AOI must be filed with the SEC for the
issuance of the Certificate of Incorporation.
The AOI and its amendments can be filed
electronically. [Sec. 13]
a. Contents
Purpose Clause
Must indicate the specific PRIMARY and
SECONDARY purposes if there are more than
one purpose; a non-stock corporation may not
include a purpose which would contradict or
change its nature as such. [Sec. 13 (b)]
Must not be patently unconstitutional, illegal,
immoral, and contrary to government rules and
regulations. [Sec. 16 (b)]
Must not be for the purpose of practicing a
profession. [Sec. 10]
The Articles of Incorporation must contain:
1. Corporate Name;
Prohibited Purposes and Activities
2. Purpose Clause;
3. Principal Office;
A corporation may not be formed for the
4. Corporate Term if the corporation has
purpose of practicing a profession like law,
not elected perpetual existence;
medicine or accountancy. [Sec. 10]
5. Incorporators;
6. Trustees/Directors;
Under the present state of our law and
7. For stock corporations:
jurisprudence, a corporation cannot be
a. The authorized capital stock,
organized for or engage in the practice of law
b. Number of shares into which it is
in this country.
divided,
c. The par value of each share,
This cannot be subverted by employing some
d. Names,
nationalities,
and
so-called paralegals supposedly rendering the
residence addresses of the
alleged support services.
original subscribers,
e. Amount subscribed and paid by
The remedy for the apparent breach of this
each on the subscription, and
prohibition is the concern and province of the
f. A statement that some or all of the
Solicitor General who can institute the
shares are without par value, if
corresponding quo warranto action. [Ulep v.
applicable
The Legal Clinic, B.M. No. 553 (1993)]
8. For nonstock corporations:
a. Amount of its capital,
The RCC prohibits to foreign corporations from
b. The names, nationalities, and
giving donations in aid of any political party or
c. Residence addresses of the
candidate or for purposes of partisan political
contributors, and
activity”. [Sec. 35(i)]
d. Amount contributed by each
9. Other matters (including arbitration
Reasons for requiring purpose clause: (a)
agreement pursuant to Sec. 181). [Sec.
investor will know what line of business he will
13]
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be risking his money on; (b) Ultra vires
doctrine; (c) third persons dealing with
corporation can determine if the corporation
can enter into a transaction. [Campos]
Principal Office
The principal office establishes the residence
of a corporation, which is important in
determining the venue in an action by or
against the corporation or the province where
a chattel mortgage of shares should be
registered. [Chua Guan vs. Samahang
Magsasaka, G.R. No. L-42091 (1935)]
1.
Must be within the Philippines [Sec. 13
(c)];
2.
Articles of Incorporation must specify
both province or city or town where it is
located;
3. All corporations and partnerships
applying for registration with the SEC
should state in their Articles of
Incorporation or Articles of Partnership
the following:
a. Specific address of their
principal office, which shall
include, if feasible, the street
number,
street
name,
barangay, city or municipality,
and if applicable, the name of
the building, number of the
building, and name or number
of the room or unit; and
b. Specific residence address of
each incorporator, stockholder,
director, trustee or partner.
[SEC Memorandum Circular
No. 6, s. 2016, Sec. 1]
4. For foreign corporations, the principal
office address in the country of
incorporation, the specific address of
the resident agent, the present
directors and officers, and
the
specific location where it will hold office
in the Philippines, shall be indicated.
[SEC Memorandum Circular No. 6, s.
2016, Sec. 2]
The residence of a corporation is the place
where its principal office is located, as stated in
its Articles of Incorporation.
Thus, the proper venue is not the actual
principal office but that stated in its Articles of
Incorporation.
A corporation has no residence in the same
sense in which the term is applied to a natural
person. [Hyatt Elevators v. Goldstar Elevators,
G.R. No. 161026 (2005)].
Corporate Term
See 3. Corporate Term under E. Capital
Structure
Number, Names, Citizenship
Residences of the Incorporators
and
See 1. Number and Qualification of
Incorporators under E. Capital Structure
Number, Names, Citizenship and
Residences of the Directors/Trustees
The minimum number of directors/trustees has
been repealed. [Sec. 13]
Note: Ordinary corporations can have a
minimum of two (2) directors, since only OPCs
can have one (1) director.
Stock corporations: directors, not more than
15
Non-stock corporations: trustees
1. Non-stock corporations whose articles
or by-laws may provide for more than
15 trustees. [Sec. 91]
2. Banks may have up to 21 directors for
cases of mergers and consolidation.
[Sec. 17, General Banking Act]
For educational non-stock corporations:
1. Trustees may not be less than 5 nor
exceed 15;
2. Number of trustees shall be in multiples
of 5. [Sec. 106]
Nationalized
or
Partially-Nationalized
Industries:
Aliens may be directors but only in such
number as may be proportional to their
allowable ownership of shares.
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Capital/Capital Stock
“Outstanding capital stock” is the total shares
of stock issued under binding subscription
contracts to subscribers or stockholders,
whether fully or partially paid, except treasury
shares. [Sec. 173]
If STOCK corporation:
Authorized capital stock (ACS) in lawful money
of the Philippines
a. The number of shares into which the
ACS is divided
b. If with par value shares, the par value
of each share [Sec. 13[h], Sec. 14[7]]
c. Names, citizenship, residences of
original subscribers
d. Amount subscribed and paid on each
subscription
e. Fact that some or all shares are without
par value
If NON-STOCK:
a. Amount of capital
b. Names, nationalities and residences of
contributors
c.
Amount contributed by each
what the law disqualifies is the corporation from
owning land [J.G. Summit Holdings, Inc. v. CA,
G.R. No. 124293 (2005)
Contents
of AOI
Comments
Corporate
name
Under the RCC, incorporators
undertake to change the name of
the corporation immediately upon
receipt of notice from SEC that
another corporation, partnership or
person has acquired a prior right
to its use, that the name has been
declared not distinguishable from
a name already registered or
reserved for the use of another
corporation, or that it is contrary to
law, public morals, good customs
or public policy. [Sec. 14(11)] See
also SEC Memorandum Circular
No. 13, s. 2019
Purpose
clause
A corporation can only have one
(1) primary purpose. However, it
can have several secondary
purposes.
A corporation has only such
powers as are expressly granted
to it by law & by its articles of
incorporation, those which may be
incidental to such conferred
powers, those reasonably
necessary to accomplish its
purposes & those which may be
incident to its existence.
Other Matters Included in the AOI
1. Classes of shares, as well as
preferences or restrictions on any such
class [Sec. 6].
2. Denial or restriction of pre-emptive
right [Sec. 38]
3. Prohibition against transfer of stock
which would reduce stock ownership to
less than the required minimum in the
case of a nationalized business or
activity [Sec. 14(11)]
4. Arbitration agreement [Sec. 13; 181]
No transfer clause
If the foreign shareholdings of a landholding
corporation exceed 40%, it is not the foreign
stockholders’ ownership of the shares which is
adversely affected but the capacity of the
corporation to own land – that is, the
corporation becomes disqualified to own land.
No law disqualifies a person from purchasing
shares in a landholding corporation even if the
latter will exceed the allowed foreign equity,
Corporation may not be formed for
the purpose of practicing a
profession like law, medicine or
accountancy.
Principal
office
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Must be within the
Philippines
Must contain specific
address of their principal
office, which shall include,
if feasible, the street
number, street name,
barangay, city or
municipality, and if
applicable, the name of
the building, number of
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Contents
of AOI
Comments
●
the building, and name or
number of the room or
unit
Important in determining
venue in an action by or
against the corp., or on
determining the province
where a chattel mortgage
of shares should be
registered
Term
of
existence
●
A corporation shall now
have perpetual existence
unless its AOI provides
otherwise. [Sec. 11]
Incorporat
ors
and
Directors/T
rustees
●
Names, nationalities &
residences of the
incorporators;
Names, nationalities &
residences of the
directors or trustees who
will act as such until the
first regular directors or
trustees are elected;
Treasurer who has been
chosen by the preincorporation
subscribers/members to
receive on behalf of the
corporation, all
subscriptions
/contributions paid by
them See SEC
Memorandum Circular
No. 26, s. 2019
●
●
Contents
of AOI
Capital
stock
Comments
●
●
●
●
●
●
Other
matters
●
●
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Amount of its authorized
capital stock in lawful
money of the Philippines
Number of shares into
which it is divided
In case the shares are par
value shares, the par
value of each,
Names, nationalities and
residences of the original
subscribers, and the
amount subscribed and
paid by each on his
subscription, and if some
or all of the shares are
without par value, such
fact must be stated
For a non-stock
corporation, the amount of
its capital, the names,
nationalities and
residences of the
contributors and the
amount contributed by
each
The provision on
minimum subscribed and
paid up capital has been
repealed.
Classes of shares into
which the shares of stock
have been divided;
preferences of &
restrictions on any such
class; and any denial or
restriction of the preemptive right of
stockholders should also
be expressly stated in
said articles.
If the corporation is
engaged in a wholly or
partially nationalized
business or activity, the
AOI must contain a
prohibition against a
transfer of stock which
would reduce the Filipino
ownership of its stock to
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Contents
of AOI
Comments
●
●
less than the required
minimum.
Transfer restrictions
Arbitration agreement
b. Non-amenable Items
The following items are amendable under Sec.
15:
1. Change of name of the Corporation;
adding business name
2. Adding to or changing the purpose/s
3. Change of principal office
4. Change in the number of directors or
trustees
5. Increase or decrease in authorized
capital stock [subject to Sec. 37]; reclassifying shares in the authorized
capital stock;
6. Adding or revising transfer restrictions
Requirements for Making Amendments to
AOI
1. By a majority vote of the BOD or
trustees; and
2. The vote or written assent of
a. 2/3 of the outstanding capital
stock, without prejudice to the
appraisal right of dissenting
stockholders in accordance
with the provisions of this
Code,
b. 2/3 of the members if it be a
non-stock corporation. [Sec.
15]
3. unless the AOI provides for higher
voting requirements
Limitations
Requirements imposed by the Code or by
special laws
1. Must be for a legitimate purpose
2. Must
be
approved
by
the
directors/trustees
and
the
stockholders/members through the
vote requirement
3. Appraisal Right (in specified cases)
4. Both the original and the amended
articles together must contain all the
provisions required by law to be set out
in the articles
5. If the corporation is governed by a
special law, the amended articles must
be accompanied by a favorable
recommendation of the appropriate
government agency to the effect that
such amendment is in accordance with
law. [Lopez]
6. Will take effect only:
a. Upon their approval by the SEC by
the issuance of a certificate of
filing of amended articles; OR
b. From the date of filing with the
SEC if not acted upon within 6
months from the date of filing for a
cause not attributable to the
corporation
Procedure
a. The original and amended articles
together shall contain all provisions
required by law to be set out in the
articles of incorporation
b. The articles, as amended shall be
indicated by underscoring the change
or changes made
c. A copy shall be submitted to the SEC
1. Duly certified under oath by the
corporate secretary and a
majority of the directors or
trustees
2. Stating the fact that the
amendment or amendments
have been duly approved by
the required vote of the
directors or trustees and
stockholders or members
Non-Amendable Items
The following items state accomplished facts
(fait accompli), therefore, cannot be
amended:
1. The names, nationalities and residences of
the incorporators.
To allow an amendment would mean going
against the definition of “incorporators” in
Sec. 5
2. Treasurer-in-trust
3. First set of directors or trustees
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4. Original stock subscriptions and paid-in
capital
5. Place and date of execution
6. Witnesses [De Leon]
6. Corporate Name and Limitations
on its Use
The name of a corporation is essential not only
for its existence as a juridical person, but also
in the manner of dealing with it, and it cannot
be changed except in the manner provided for
by law. [Villanueva]
SEC Memorandum Circular No. 13 s. 2019
1. The corporate name shall contain the
word "Corporation" or "Incorporated,"
or the abbreviations "Corp." or "Inc."
respectively;
2. In the case of a One Person
Corporation, the corporate name shall
contain the word "OPC" either below or
at the end of its corporate name;
3. The partnership name shall bear the
word "Company" or "Co." and if it is a
limited partnership, the word "Limited"
or "Ltd.".
4. A professional partnership name
may bear the word "Company,"
"Associates," or "Partners," or other
similar descriptions;
5. The corporate name of a foundation
shall use the word "Foundation";
6. The corporate name of all non-stock,
non-profit corporations, including
non-governmental organizations and
foundations, engaging in micro finance
activities
shall
use
the
word
"Microfinance" or "Microfinancing"
a. Provided that said corporations
shall state in the purpose
clause of their AOI that they
shall conduct microfinance
operations
pursuant
to
Republic Act No. 8425 or the
Social Reform and Poverty
Alleviation Act.
Criteria for Allowable Corporate Names
Under present law, no corporate name shall be
allowed by the Commission if it is:
a.
b.
c.
Not distinguishable from that already
reserved or registered for the use of
another corporation, or
Already protected by law, or
Used contrary to existing law, rules and
regulations. [Sec. 17]
A name is not distinguishable even if it
contains one or more of the following:
a.
The word “corporation”, “company”,
“incorporated”,
“limited”,
“limited
liability”, or an abbreviation of one of
such words; and
b.
Punctuations, articles, conjunctions,
contractions,
prepositions,
abbreviations,
different
tenses,
spacing, or number of the same word
or phrase. [Sec. 17]
Note: Instead of being distinguishable, the old
criteria under the Sec. 18 of the OLD
Corporation Code to determine whether or not
a corporate name should be allowed is whether
it is “identical or deceptively or confusingly
similar” to that of any existing corporation or
which is “patently deceptive or patently
confusing”.
If the SEC determines that a corporation’s
name is not allowed, it may:
a.
Summarily order the corporation to
immediately cease and desist from
using a non-distinguishable name and
require it to register a new one,
b.
Cause the removal of all visible
signages, marks, advertisements,
labels, prints and other effects bearing
such corporate name. [Sec. 17]
Business or trade name which is different from
the corporate or partnership name shall be
indicated in the articles of incorporation or
partnership. A company may have more than
one business or trade name. [SEC
Memorandum Circular No. 13 s. 2019]
Change of Corporate Name
A change of corporate name requires the
amendment of the Articles of Incorporation
which must be approved by:
a.
Majority vote of the board; and
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The vote or written assent of
stockholders holding 2/3 of the
outstanding capital stock. [Sec. 16]
AOIs do not become binding as the charter of
the corporation unless they have been filed and
registered with, and certified by the SEC.
Unless the Articles of Incorporation provides
for a higher voting requirement.
DOCUMENTS TO BE FILED WITH SEC:
a.
Articles of Incorporation, and By-Laws
(if crafted prior to incorporation)
b.
Certification concerning the amount of
capital stock subscribed and/or paid
Amendment of a corporation’s Articles of
Incorporation to change its corporate name
does not extinguish the personality of the
original corporation. It is the same corporation
with a different name, and its character is not
changed. Consequently, the “new” corporation
is still liable for the debts and obligations of the
“old” corporation. [Republic Planters Bank v.
CA, G.R. No. 93073 (1992)]
Use of Corporate Names of Dissolved
Corporations
The name of a corporation or partnership that
has been dissolved or whose registration has
been revoked shall not be used by another
corporation or partnership:
a.
Within five years from the approval of
the dissolution; or
b.
Within five (5) years from the date of
revocation, unless its use has been
allowed at the time of the dissolution or
revocation by the stockholders,
members or partners who represent a
majority of the outstanding capital
stock or membership of the dissolved
corporation or partnership, as the case
may be. [SEC Memo Circ. No. 13, s.
2019]
7. Registration,
Commencement
Existence
Incorporation, and
of Corporate
A private corporation organized under the RCC
commences its corporate existence and
juridical personality from the date the SEC
issues the certificate of incorporation under its
official seal. [Sec. 18]
Thereupon, the incorporators, stockholders or
members, and their successors constitute a
body politic and corporate under the name
stated in the AOI, for the period of time
mentioned therein. [Sec. 18]
Note: Sec. 15 of the OLD Corporation
Code requiring that at least 25% of amount
subscribed be paid, and a minimum paidup capital upon incorporation, was
removed under the RCC.
Note: SEC Resolution No. 0331 dated July
20, 2012 no longer requires a bank
certificate of deposit covering the paid-up
capital if payment for shares is made in
cash; where the capital stock is paid by a
combination of cash and property, only the
portion paid by way of property will require
the submission of supporting documents.
c. Undertaking to change the corporate
name in case there is another person
or entity with same or similar name that
was previously registered (unless
already incorporated in the Articles of
Incorporation)
d. Favorable recommendation from the
appropriate government agency that
the AOI or amendments thereto of
banks, banking and quasi-banking
institutions, preneed, insurance and
trust
companies,
NSSLAS,
pawnshops, and other financial
intermediaries, is in accordance with
law. [Sundiang and Aquino; Sec. 16]
Issuance of Certificate of Incorporation By
Sec
Effect: Commencement of corporate existence
and juridical personality. [Sec. 18]
Ground for revocation of certificate of
incorporation: If, after due notice and hearing,
the Commission finds that any provision of this
Code, rules or regulations, or any of the
Commission’s orders has been violated
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Depending on the extent of participation,
nature, effects, frequency and seriousness of
the violation. [Sec. 158]
GROUNDS FOR DISAPPROVING
ARTICLES OF INCORPORATION:
THE
a. Does not substantially comply with
form prescribed
b. Purpose is patently unconstitutional,
illegal,
immoral,
contrary
to
government rules and regulations
c. The certification concerning the
amount of capital stock subscribed
and/or paid is false
d. Required percentage of ownership of
Filipino citizens has not been complied
with when required by existing laws or
the Constitution. [Sec. 16]
SEC shall give the incorporators reasonable
time to correct or modify objectionable portions
of the articles or amendment. [Sec. 16]
Steps in Incorporation
Steps
Promotional
Stage
Comments
Promoter:
● Brings
together
persons who become
interested
in
the
enterprise
● Aids
in
procuring
subscriptions and sets
in
motion
the
machinery which leads
to the formation of the
corporation itself
● Formulates
the
necessary
initial
business and financial
plan and, if necessary,
buys the rights and
property which the
business may need,
with the understanding
that the corporation,
when formed, shall
take over the same
Steps
Comments
Drafting
Articles
of
Incorporation
(see Sec. 13)
[See
e.
Articles
of
Incorporation
under
6.
Incorporation
and
Organization]
● Arbitration agreements
may now be provided in
the AOI (see Sec. 181).
● The
AOI
and
applications
for
amendments may be
filed in an electronic
document
Filing
Articles;
Payment
Fees
of
AOI must be filed w/ the
SEC
&
the
of
corresponding
fees
paid
● Failure to file the AOI
will
prevent
due
incorporation of the
proposed corporation
and will not give rise to
its juridical personality.
It will not even be a de
facto corporation.
● Under present SEC
rules, the AOI once
filed, will be published
in the SEC Weekly
Bulletin at the expense
of the corporation [SEC
Circular # 4, 1982].
For corporations governed by
special laws (banks, insurance
companies, public utilities and
educational institutions) the AOI
must be accompanied by a
favorable recommendation from
the appropriate government
agency.
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Comments
Steps
Comments
Examination Process:
of
Articles;
a.
SEC shall examine
Approval or
them in order to
Rejection by
determine whether they
SEC
are in conformity with
law
b.
If it is not, the SEC
must
give
the
incorporators
a
reasonable time within
which to correct or
modify
the
objectionable portions.
Issuance of Certificate of Incorporation
Certificate of will be issued if:
Incorporation
a. SEC is satisfied that all
legal
requirements
have been complied
with; AND
b.
There are no reasons
for
rejecting
or
disapproving the AOI.
Grounds for rejection or
disapproval of AOI: [Sec. 16]
a.
AOI/amendment not
substantially
in
accordance with the
form prescribed
b. Purpose/s are patently
unconstitutional, illegal,
immoral, or contrary to
government rules and
regulations
c.
The certification
concerning the amount
of
capital
stock
subscribed and/or paid
is false
d.
Required percentage
of ownership has not
been complied with
Should it be subsequently found
that the incorporators were
guilty of fraud in procuring the
certificate of incorporation, the
same may be revoked by the
SEC, after proper notice and
hearing.
Favorable recommendation
from the appropriate
government agency did not
accompany the AOI or
amendments thereto of banks,
banking and quasi-banking
institutions, preneed, insurance
and trust companies, NSSLAS,
pawnshops, and other financial
intermediaries, is in
accordance with law.
It is only upon such issuance
that the corporation acquires
juridical personality. [Sec. 18]
8. Election of Directors or Trustees
When Elections are Held
The time for holding the annual election of
directors of trustees and the mode or manner
of giving notice thereof are provided in the bylaws. [Sec. 49]
Nomination
General Rule: Each stockholder or member
shall have the right to nominate any director or
trustee who possesses all of the qualifications
and none of the disqualifications set forth in this
Code.
Exception: When the exclusive right to
nominate directors or trustees is reserved for
holders of founders’ shares under Section 7 of
the RCC. [Sec. 23]
Required Participation
At all elections of directors or trustees, there
must be present, either in person or through a
representative authorized to act by written
proxy:
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Stock Corporations: The owners of majority of
the outstanding capital stock
Non-Stock Corporations: A majority of the
members entitled to vote. [Sec. 23]
Voting via
Absentia
Remote
Communication/In
The stockholders or members may also vote
through remote communication or in absentia:
a.
By a resolution of the majority of the
board of directors; Provided, That the
resolution shall only be applicable for a
particular meeting.
b.
Notwithstanding the absence of a
provision in the bylaws of the
corporation
[SEC
Memorandum
Circular No. 6, s. 20]
c.
distribute them on the same principle
among as many candidates as may be
seen fit: Provided, That –
a. The total number of votes cast
shall not exceed the number of
shares
owned
by
the
stockholders as shown in the
books of the corporation
multiplied by the whole number
of directors to be elected
b. No delinquent stock shall be
voted. [Sec. 23]
Nominees for directors receiving the highest
number of votes shall be declared elected.
They shall perform their duties as prescribed
by law, rules of good corporate governance,
and bylaws of the corporation. [Sec. 23]
Voting in Non-Stock Corporations
The right to vote through such modes may be
exercised in corporations vested with public
interest, notwithstanding the absence of a
provision in the bylaws of such corporations.
[Sec. 23]
A stockholder or member who participates
through remote communication or in absentia,
shall be deemed present for purposes of
quorum.
The election must be by ballot if requested by
any voting stockholder or member.
Voting in Stock Corporations
Stockholders entitled to vote shall have the
right to vote the number of shares of stock
standing in their own names in the stock books
of the corporation at the time fixed in the
bylaws, or where the bylaws are silent, at the
time of the election.
The said stockholder may:
a.
vote such number of shares for as
many persons as there are directors to
be elected;
b.
cumulate said shares and give one (1)
candidate as many votes as the
number of directors to be elected
multiplied by the number of the shares
owned; or
General Rule: Members of nonstock
corporations may cast as many votes as there
are trustees to be elected but may not cast
more than one (1) vote for one (1) candidate.
Exception: Unless otherwise provided in the
articles of incorporation or in the bylaws. [Sec.
23]
Nominees for trustees receiving the highest
number of votes shall be declared elected.
They shall perform their duties as prescribed
by law, rules of good corporate governance,
and bylaws of the corporation. [Sec. 23]
Report to SEC
Within thirty (30) days after the election of the
directors, trustees and officers of the
corporation, the secretary, or any other officer
of the corporation, shall submit to the
Commission, the elected trustees’ and
officers’:
i.
Names
ii. Nationalities
iii. Shareholdings, and
iv. Residence addresses [Sec. 25]
All corporations shall file with the Commission
their GIS within 30 calendar days from the date
of actual annual stockholders'/members'
meeting. [SEC MC No. 09 s. of 2022]
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When No Election is Held
Election of Officers
The meeting may be adjourned if:
a.
If no election is held; or
b.
The owners of majority of the
outstanding capital stock or majority of
the members entitled to vote are not
present in person, by proxy, or through
remote communication or not voting in
absentia at the meeting.
Immediately after the election of directors, the
directors must formally organize by electing the
corporate officers. They are tasked to carry out
the policies laid down by the Board, the AOI
and the by- laws. [Sec. 24]
Report to SEC
After such adjournment, the non-holding of
elections and the reasons therefor shall be
reported to the Commission within thirty (30)
days from the date of the scheduled election.
[Sec. 25]
The report shall specify a new date for the
election, which shall not be later than sixty (60)
days from the scheduled date.
SEC Order to Hold Election
If no new date has been designated, or if the
rescheduled election is likewise not held:
1. The Commission may summarily order
that an election be held.
a. Upon the application of a
stockholder, member, director
or trustee; and
b. After
verification
of
the
unjustified non-holding of the
election
2. The Commission shall have the power
to issue such orders as may be
appropriate, including orders directing
the issuance of a notice stating the:
a. Time and place of the election,
b. Designated presiding officer,
and
c. The record date or dates for the
determination of stockholders
or members entitled to vote.
[Sec. 25]
The shares of stock or membership
represented at such meeting and entitled to
vote shall constitute a quorum for purposes of
conducting an election under this section.
Notwithstanding any provision of the articles of
incorporation or bylaws to the contrary.
Who are the Corporate Officers
1. President – must be a director;
2. Treasurer – may or may not be a
director; must be a resident
3. Secretary – need not be a director
unless required by the by-laws; must
be a citizen and resident of the
Philippines; and
4. Other officers as may be provided in
the by-laws.
5. Compliance officer – only for
corporations vested with public
interest. [Sec. 24]
Note: Any 2 or more positions may be held
concurrently by the same person, EXCEPT
that no one shall act as president and secretary
or as president and treasurer at the same time,
unless otherwise allowed in the Code. [Sec 24]
The number of officers is not limited to those
three enumerated in Sec. 24. A corporation
may have such other officers as may be
provided for by its by-laws. [Garcia v. Eastern
Telecommunications Philippines, Inc., G.R.
No. 173115 (2009)].
Qualifications of Corporate Officers
President Secretary
Treasurer
Director
YES
NO
NO
Filipino
Citizen*
NO
YES
NO
Residency
NO
YES
YES
Prohibited
concurrent
positions
Secretary
or
Treasurer
President
President
*Subject to rule if corporation is engaged in a
nationalized or partially-nationalized industry.
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Additional qualifications of officers may be
provided for in the by-laws. [Sec. 46(f)]
9. Adoption of By-Laws
By-laws are regulations, ordinances, rules or
laws adopted by an association or corporation
for its internal governance, including rules for
routine matters such as calling meetings. [SMC
v. Mandaue, G.R. No. 152356 (2005)]
May be done either:
1. Prior to incorporation - approved and
signed by all the incorporators and
submitted to SEC together with Articles
of Incorporation; or
2. After incorporation - The requirement
of adoption of by-laws one (1) month
after receipt of the notice of issuance of
certificate of incorporation has been
deleted in the RCC. [Sec. 45]
Nature: It is a product of agreement of the
stockholders or members. [Campos]
Function: It establishes the rules for internal
government of the corporation [Campos]. It
also regulates the affairs and relationship
between and among stockholders, BOD and
corporation. [Lopez]
Note: OPCs are not required to have by-laws.
EFFECT OF FAILURE TO FILE THE BYLAWS
REQUISITES OF VALID BY-LAWS
Approval requirement: Must be approved by
the affirmative vote of the stockholders
representing at least a MAJORITY of the
outstanding capital stock, or majority of
members. [Sec. 45]
If filed pre-incorporation: Must be approved
and signed by all incorporators.
Record-Keeping: Must be kept in the principal
office of the corporation, subject to inspection
by any director, trustee, stockholder or member
of the corporation in person or by a
representative at reasonable hours on
business days. [Sec. 45]
Filing with SEC: A copy of the by-laws duly
certified by a majority of the directors or
trustees and countersigned by the secretary of
the corporation, shall be filed with the
Commission and attached to the original
articles of incorporation. [Sec. 45]
No provision of the by-laws can be adopted if it
is contrary to law. Since the provision in
question is contrary to law, the fact that for
fifteen years it has not been questioned or
challenged but, on the contrary, appears to
have been implemented by the members of the
association cannot forestall a later challenge to
its validity. [Grace Christian High School v. CA,
G.R. No. 108905 (1997)]
a. Contents of By-Laws
Does not imply the "demise" of the
corporation. By-laws may be required by law
for an orderly governance and management of
corporations but they are not essential to
corporate birth. Nonetheless, failure to file
them within the period required by law by no
means tolls the automatic dissolution of a
corporation. [Loyola Grand Villas Homeowners
Association v. CA G.R. No. 117188 (1997)]
Note: Sec. 21 on the effect of failure to formally
organize within 5 years from incorporation, the
corporation’s corporate powers cease and the
corporation is deemed dissolved. Organization
includes: the filing and approval of by-laws with
the SEC and the election of directors and
officers. [Campos]
Matters Usually Found in By-Laws
a.
The time, place and manner of calling
and conducting regular or special
meetings of the directors or trustees;
b.
The time and manner of calling and
conducting regular or special meetings
and mode of notifying the stockholders
or members thereof;
c.
The required quorum in meetings of
stockholders or members and the
manner of voting therein;
d.
The modes by which a stockholder,
member, director, or trustee may
attend meetings and cast their votes;
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e.
f.
g.
h.
i.
j.
k.
l.
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The form for proxies of stockholders
and members and the manner of voting
them;
The
directors’
or
trustees’
qualifications,
duties
and
responsibilities, the guidelines for
setting the compensation of directors
or trustees and officers, and the
maximum number of other board
representations that an independent
director or trustee may have which
shall, in no case, be more than the
number prescribed by the Commission;
The time for holding the annual election
of directors or trustees and the mode or
manner of giving notice thereof;
The manner of election or appointment
and the term of office of all officers
other than directors or trustees;
The penalties for violation of the
bylaws;
In the case of stock corporations, the
manner of issuing stock certificates;
and
Such other matters as may be
necessary for the proper or convenient
transaction of its corporate affairs for
the promotion of good governance and
anti-graft and corruption measures.
An arbitration agreement may be
provided in the bylaws pursuant to
Section 181 of RCC. [Sec. 46]
Note: In close corporations - restrictions on
the right to transfer shares must appear in both
the articles of incorporation and in the by-laws
as well as in the certificate of stock; otherwise,
restriction shall not be binding on any
purchases of good faith. [Sec. 97]
Matters That Cannot Be Provided for in the
By-laws (must be in the AOI)
1. Classification of shares of stock
and preferences granted to
preferred shares
2. Provisions on founder’s shares
3. Providing for redeemable shares
4. Provisions on the purposes of the
corporation
5. Providing for the corporate term of
existence
6. Capitalization of stock
corporations
7. Corporate Name
8. Denial of pre-emptive rights
[Villanueva]
b. Binding Effects
When Binding: ONLY from date of issuance
of SEC of a certification that the by-laws are not
inconsistent with the Code [Sec. 45] Pending
such approval, they cannot bind stockholders
or corporation.
Effect on third parties: Mere internal rules
among stockholders cannot affect or prejudice
3rd persons who deal with the corporation
unless they have knowledge of the same
[China Banking Corp v CA G.R. No. 117604
(1997)].
c. Amendments
Effected by: majority vote of the members of
the board and majority vote of owners of the
Outstanding Capital Stock or members, in a
meeting duly called for the purpose. [Sec. 47]
Unless a higher requirement is provided in the
by-laws
Delegation to BOD of power to amend
By vote of stockholders representing 2/3 of the
Outstanding Capital Stock or 2/3 of the
members. [Sec. 47]
Delegation to BOD may be revoked
Any power delegated to the BOD or trustees to
amend or repeal any by-laws or adopt new bylaws shall be considered as revoked whenever
stockholders owning or representing a majority
of the outstanding capital stock or a majority of
the members in non-stock corporations, shall
so vote at a regular or special meeting. [Sec.
47]
Filing with SEC
Whenever the bylaws are amended or new
bylaws are adopted, the corporation shall file
with the Commission:
a.
Such amended or new bylaws; and,
b.
If applicable, the stockholders’ or
members’ resolution authorizing the
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delegation of the power to amend
and/or adopt new bylaws, duly certified
under oath by the corporate secretary
and a majority of the directors or
trustees. [Sec. 47]
Effectivity of Amended By-Laws
The amended or new bylaws shall only be
effective upon the issuance by the Commission
of a certification that the same is in accordance
with this Code and other relevant laws. [Sec.
47]
10. Effects of Non-Use of Corporate
Charter
Failure to Organize
If a corporation does not formally organize and
commence its business within five (5) years
from the date of its incorporation, its certificate
of incorporation shall be deemed revoked as
of the day following the end of the five (5) year
period. [Sec. 21]
Continuous Inoperation
If a corporation has commenced its business
but subsequently becomes inoperative for a
period of at least five (5) consecutive years, the
Commission may, after due notice and hearing,
place the corporation under delinquent
status. [Sec. 21]
A delinquent corporation shall have a period of
two (2) years to resume operations and comply
with all requirements that the Commission shall
prescribe.
Upon compliance by the corporation, the
Commission shall issue an order lifting the
delinquent status.
Failure to comply with the requirements and
resume operations within the period given by
the Commission shall cause the revocation of
the corporation’s certificate of incorporation.
[Sec. 21]
G. Corporate Powers
Powers Exercised By
Shareholders or Members
the
Corporate Acts Requiring All (Voting and
Non-Voting) Shareholders’ Approval
General Rule: Vote necessary to approve a
particular corporate act as provided in this
Code shall be deemed to refer only to stocks
with voting rights [Sec. 6].
Exceptions [Sec. 6]:
Voting and non-voting shares shall be entitled
to vote in the following cases:
1. Amendment of Articles of Incorporation
[Sec. 15]
2. Adoption, Amendment and Repeal of
By-Laws [Sec. 47]
3. Sale, Lease, Mortgage or Other
Disposition
of
Substantially
all
corporate assets [Sec. 39]
4. Incurring, Creating or Increasing
Bonded Indebtedness [Sec. 37]
5. Increase or Decrease of Capital Stock
[Sec. 37]
6. Merger and Consolidation [Sec. 76-79]
7. Investment of funds in another
corporation or business or for any
purpose other than the primary
purpose for which it was organized
[Sec. 41]
8. Dissolution of the Corporation [Secs.
133-138]
Some Corporate Acts Requiring Voting
Shareholders’ Approval
1. Declaration of Stock Dividends [Sec.
42]
2. Management Contracts [Sec. 43]
3. Fixing the Consideration of No-Par
shares [Sec. 61]
4. Fixing the Compensation of Directors
[Sec. 29]
5. Under certain conditions, instances
involving contracts with Directors, or
Officers
or
contracts
between
corporations with interlocking directors
[Secs 31 & 32]
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6. Under certain conditions, material
contracts entered by corporations
vested with public interest [Sec. 31].
Powers Exercised by the Board of Directors
Unless otherwise provided in this Code, the
board of directors or trustees shall exercise the
corporate powers, conduct all business, and
control all properties of the corporation [Sec.
22].
Majority vote of the Board is needed in the
exercise of the ff. powers:
1. Filling of vacancies in the board, except
when it is due to removal by the
stockholders/members or by expiration
of term
2. Extension or shortening of the
corporate term
3. Increase or decrease of capital stock or
the creation of bonded indebtedness
4. Sale or other disposition of all or
substantially all assets
5. Acquisition of its own shares
6. Investment of corporate funds in any
corporation or business or for any
purpose other than its primary purpose
7. Declaration of cash, property, and
stock dividends
8. Entering into management contracts
9. Amendment of AOI
10. Amendment of the by-laws
11. Approval of the plan of merger or
consolidation
12. Dissolution of the corporation
1. General Powers; Theory of General
Capacity
General Powers
Every corporation has the power and capacity:
1. To sue and be sued in its corporate
name;
2. To have perpetual existence;
a. Unless the certificate of
incorporation
provides
otherwise
3. To adopt and use a corporate seal;
4. To
amend
its
articles
of
incorporation in accordance with the
provisions of this Code;
5. To adopt bylaws, and to amend or
repeal the same in accordance with
this Code;
a. Must not contrary to law,
morals or public policy
6. In case of stock corporations: To issue
or sell stocks to subscribers and to
sell treasury stocks in accordance with
the provisions of this Code; and In case
of non-stock corporations: To admit
members to the corporation;
7. To purchase, receive, take or grant,
hold, convey, sell, lease, pledge,
mortgage, and otherwise deal with
such real and personal property,
including securities and bonds of other
corporations;
a. As the transaction of the lawful
business of the corporation
may
reasonably
and
necessarily require
b. Subject to the limitations
prescribed by law and the
Constitution
8. To enter, with natural and juridical
persons, into a:
a. Partnership, (Note: New in the
RCC)
b. Joint venture, (Note: New in
the RCC)
c. Merger,
d. Consolidation, or
e. Any
other
commercial
agreement
9. To make reasonable donations,
including those for the public welfare or
for hospital, charitable, cultural,
scientific, civic, or similar purposes:
a. Provided, That no foreign
corporation
shall
give
donations in aid of any political
party or candidate or for
purposes of partisan political
activity;
b. Note: Under OLD Corporation
Code, both domestic and
foreign corporations were
prohibited
from
giving
donations in aid of any political
party or candidate or for
purposes of partisan political
activity.
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10. To establish pension, retirement,
and other plans for the benefit of its
directors, trustees, officers, and
employees; and
11. To exercise such other powers as
may be essential or necessary to
carry out its purpose or purposes as
stated in the articles of incorporation.
[Sec. 35]
A corporation has:
a. Express Powers – such powers as are
expressly granted by law and its
articles of incorporation;
b. Implied Powers – those reasonably
necessary to accomplish its purposes,
as stated in its articles of incorporation;
and
Note: Such implied powers are deemed to exist
because of the following provisions –
● “Except such as are necessary or
incidental to the exercise of the powers
so conferred” [Sec. 44]
● “Such powers as are essential or
necessary to carry out its purpose or
purposes as stated in the Articles of
Incorporation” – catch-all phrase.
[Sec. 35(k)]
c. Incidental Powers – those which may
be incident to its existence as a juridical
entity [Pilipinas Loan v. SEC, 356
SCRA 193 (2001)]
The Theory of General Capacity states that a
corporation is said to hold such powers as are
not prohibited or withheld from it by general
law.
2. Specific Powers; Theory of Specific
Capacity
The Theory of Specific Capacity states that
the corporation cannot exercise powers except
those expressly/impliedly given.
Under the Theory of Specific Capacity, the
specific powers of a corporation are as
follows:
a. Power to extend or shorten
corporate term [Sec. 36]
b. Power to increase or decrease
capital stock, or incur, create,
c.
d.
e.
f.
g.
h.
i.
increase bonded indebtedness [Sec.
37]
Power to deny pre-emptive rights
[Sec. 38]
Power to sell or dispose corporate
assets [Sec. 39]
Power to acquire own shares [Sec.
40]
Power to invest corporate funds in
another corporation or business, or for
any other purpose [Sec. 41]
Power to declare dividends [Sec. 42]
Power to enter into management
contract [Sec. 43]
Power to amend AOI [Sec. 15]
3. Power
Corporate
to
Extend
or
Shorten
Term
A private corporation may extend or shorten its
term as stated in the articles of incorporation.
[Sec. 36]
Perpetual existence under the RCC applies to
existing corporations. AOIs shall be deemed
amended to reflect its perpetual term, unless
the corporation elects to retain its limited term
[Herbosa, 2019].
When Exercised
Period to extend the corporate term has been
reduced by the RCC to three years before
expiration.
When the term expires, it is not ipso facto
dissolved but may apply for a revival of its
corporate existence. [Divina, 2020]
Requirements
1. Approval by majority vote of the
board of directors or trustees, and
2. Ratification at a meeting by the
stockholders or members representing
at least two-thirds (2/3) of the
outstanding capital stock or of its
members.
3. Notice Requirement – Written notice
of the proposed action and the time and
place of the meeting shall be:
a. Sent to stockholders or
members at their respective
place of residence as shown in
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the books of the corporation,
and
b. Either:
1.
Deposited
to
the
addressee in the post
office with postage
prepaid,
served
personally, OR
2.
Sent electronically in
accordance with the
rules and regulations of
the Commission on the
use of electronic data
messages,
when
allowed in the by-laws
or done with the
consent
of
the
stockholder. [Sec. 36]
Exercise of Appraisal Right
In case of extension of corporate term, a
dissenting stockholder may exercise the right
of appraisal under the conditions provided in
this Code. [Sec. 36]
An extension of corporate term actually
novates the corporate contract with each
shareholder by extending the corporate
relationship beyond the original term.
Shortening the corporate term DOES NOT
trigger the right of appraisal because there
would be no violation of the original
contractual intent, since shortening would
mean the early realization of the value of the
shares of a dissenting stockholder with the
dissolution of the corporation. [Villanueva]
4. Power to Increase or Decrease
Capital Stock or Incur, Create,
Increase Bonded Indebtedness
Power to Increase or Decrease Capital
Stock
An increase or decrease of the capital stock
amends
the
underlying
contractual
relationships between and among members of
the corporation.
Aside from the requisites in Sec. 37, when the
capital stock is increased or decreased, the
provisions of Sec. 15 on the amendment of the
articles of incorporation must also be complied
with. [Villanueva]
Power to Incur, Create, or Increase Bonded
Indebtedness
“Bonded indebtedness” are long term debts of
the corporation, secured by mortgage on real
or personal property of the corporation, which
are:
1. Structured in denominated units of
indebtedness
2. Intended to eventually circulate within
the investing public as securities,
representing units of investment
Thus, the power to incur, create, or increase
bonded indebtedness is a form of distributing
liability securities to the public, and constitutes
an aspect of the inherent power of every
corporation to borrow or to incur loan
obligations. [Villanueva]
Requirements [Sec. 37]
1. Approval by a majority vote of the
board of directors or trustees
2. Approval by two-thirds (2/3) of the
outstanding capital stock or at least
two-thirds (2/3) of the members at a
stockholders’ meeting duly called for
the purpose
3. Notice Requirement – Written notice
of the time and place of the
stockholders’ meeting and the purpose
for said meeting must be:
a. Sent to the stockholders at
their places of residence as
shown in the books of the
corporation and
b. Served on the stockholders
personally,
OR
through
electronic means recognized in
the corporation’s bylaws and/or
the Commission’s rules as a
valid mode for service of
notices.
4. Certification Requirement – A
certificate must be signed by a majority
of the directors of the corporation and
countersigned by the chairperson and
secretary of the stockholders’ meeting,
setting forth:
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5.
6.
7.
8.
9.
10.
11.
12.
COMMERCIAL LAW
a. That the requirements of this
section have been complied
with;
b. The amount of the increase or
decrease of the capital stock;
c. In case of an increase of the
capital stock:
d. The amount of capital stock or
number of shares of no-par
stock
thereof
actually
subscribed,
e. The names, nationalities and
addresses of the persons
subscribing,
f. The amount of capital stock or
number of no-par stock
subscribed by each, and
g. The amount paid by each on
the subscription in cash or
property, or the amount of
capital stock or number of
shares of no-par stock allotted
to each stockholder, if such
increase is for the purpose of
making effective stock dividend
therefor authorized;
Any bonded indebtedness to be
incurred, created or increased;
The amount of stock represented at the
meeting; and
The vote authorizing the increase or
decrease of the capital stock, or the
incurring, creating or increasing of any
bonded indebtedness.
Sworn Statement of the Treasurer –
A sworn statement of the corporation’s
treasurer must accompany the filing of
the certificate, and it must show that:
At least twenty-five percent (25%) of
the increase in capital stock has been
subscribed; and
At least twenty-five percent (25%) of
the amount subscribed has been paid
in actual cash to the corporation or
that property, the valuation of which is
equal to twenty-five percent (25%) of
the
subscription,
has
been
transferred to the corporation
Note: A treasurer’s affidavit is required
in an increase of capital stock, not in a
decrease in capital stock.
Prior SEC Approval – The application
with the Commission shall be made
within six (6) months from the date of
approval of the board of directors and
stockholders, which period may be
extended for justifiable reasons.
13. Prior PCC Approval – Where
appropriate, prior approval of the
Philippine Competition Commission is
required for any increase or decrease
in the capital stock or the incurring,
creating or increasing of any bonded
indebtedness
14. SEC Registration – Applicable only to
bonds issued by a corporation.
After approval and the issuance by the
Commission of its certificate of filing:
1. The capital stock shall be deemed
increased or decreased; and
2. The incurring, creating or increasing of
any bonded indebtedness authorized,
as the certificate of filing may declare
Provided, That:
1. The Commission shall not accept for
filing any certificate of increase of
capital stock unless accompanied by a
sworn statement of the treasurer (with
the abovementioned contents)
2. No decrease in capital stock shall be
approved by the Commission if its
effect shall prejudice the rights of
corporate creditors. [Sec. 37]
Copies
of
the
certificate
of
the
increase/decrease in capital shall:
1. Be kept on file in the office of the
corporation and
2. Filed with the Commission and
3. Attached to the original articles of
incorporation. [Sec. 37]
Exercise of Appraisal Right
In Cases of Increase or Decrease of Capital
Sock
The right of appraisal can be exercised in
cases of increase of capital stock because it
has the potential effect of diluting the
proportionate interest of a stockholder in the
corporation.
Even with the existence of the pre-emptive
right, there is no guaranty that the stockholder
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can preserve his proportional interest since he
might not have the financial resources to
exercise his pre-emptive right on the increase.
The right of appraisal CANNOT be exercised in
cases of decrease in capital stock since the
decrease would result in returning part of the
investments of the stockholders, including
dissenting stockholders. [Villanueva]
In Cases of Incurring, Creating or Increasing
Bonded Indebtedness
The appraisal right CANNOT be exercised by
dissenting stockholders when the corporation
validly incurs, creates, or increases bonded
indebtedness.
To allow them to do so would drain the financial
resources of the corporation, which is contrary
to the purpose for which the power is
exercised, which is to raise funds for corporate
affairs. [Villanueva]
5. Power to Deny Pre-Emptive Rights
Preemptive right
The preferential right of shareholders to
subscribe to all issues or disposition of shares
of any class in proportion to their present
shareholdings. [Sec 38] The purpose of preemptive right is to enable the shareholder to
retain his proportionate control in the
corporation and to retain his equity in the
surplus.
General Rule: All shareholders of a stock
corporation have the preemptive right to
subscribe to all issues or disposition of shares
of any class, in proportion to their respective
shareholdings.
Exception: If such right is denied by the AOI
or an amendment thereto. [Sec. 38]
“All issues” of shares extends to BOTH
issuances of:
1. New shares resulting in an increase in
capital stock, and
2. Previously unsubscribed shares which
formed part of the existing capital
stock. [Herbosa, 2019; SEC Opinion
No. 5-03]
For close corporations, the pre-emptive rights
extend to all stock to be issued, including
reissuance of treasury shares, whether for
money, property or personal services, or in
payment of corporate debts, unless the AOI
provides otherwise. [Sec. 101]
Pre-emptive right can only be exercised to the
same class of shares issued or disposed with
that owned by the stockholder (Share-a-like
basis).
Requirements
1. Approval by majority vote of the
board of directors, and
2. Ratification at a meeting by the
stockholders or members representing
at least two-thirds (2/3) of the
outstanding capital stock.
3. Notice Requirement – Written notice
of the proposed action and the time and
place of the meeting shall be:
a. Sent to stockholders at their
respective place of residence
as shown in the books of the
corporation, and
4. Either:
a. Deposited to the addressee in
the post office with postage
prepaid, served personally, OR
b. Sent
electronically
in
accordance with the rules and
regulations of the Commission
on the use of electronic data
messages, when allowed in the
by-laws or done with the
consent of the stockholder.
Denial
of
preemptive
right
The AOI may deny pre-emptive right. It may
also be denied when circumstances call for its
denial, specifically when:
1. Shares to be issued are to comply with
laws requiring stock offerings or
minimum stock ownership by the
public; [Sec. 38]
2. Shares to be issued are in good faith
with the approval of the stockholders
representing 2/3 of the OCS in
exchange for property needed for
corporate purposes; [Sec. 38]
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3. Shares to be issued are issued in
payment of previously contracted
debts; [Sec. 38]
4. In case the right is denied in the AOI;
5. Waiver of the right by the stockholder.
Note: The validity of issuance of additional
shares may be questioned if done in breach of
trust by the controlling stockholders
notwithstanding the non-existence of the preemptive
right,
(i.e.
when
controlling
stockholders’ primary purpose is to perpetuate
or shift control of the corporation or to “freeze
out” the minority interest).
Amendment of the Articles of Incorporation
to deny pre-emptive right
Such amendment to the AOI to deny preemptive right may trigger the exercise of a
dissenting stockholder of his appraisal right.
This is because such amendment prevents the
dissenting stockholder from maintaining his
equity interest in the corporation. The test is
whether the company controllers initiated the
questioned amendment. [Herbosa, 2019]
6. Power to Sell or Dispose Corporate
Assets
A corporation may sell, lease, exchange,
mortgage, pledge, or otherwise dispose of its
property and assets:
1. For such consideration as its board of
directors or trustees may deem
expedient, which may be:
a. Money
b. Stocks
c. Bonds, or
2. Other instruments for the payment of
money or
3. Other property or consideration
4. Subject to the provisions of Republic
Act No. 10667, otherwise known as
“Philippine Competition Act”, and other
related laws.
Requisite: A majority vote of its board of
directors or trustees [Sec. 39]
Sale of all or substantially all of corporate
assets
A corporation may sell all or substantially all of
the its properties and assets, including its
goodwill. [Sec. 39]
To determine whether a sale or other
disposition shall be deemed to cover all or
substantially all the corporate property and
assets:
1. Make a computation based on the
corporation’s net asset value, as
shown in its latest financial statements.
2. Assess whether the corporation would
be rendered incapable of continuing
the business or accomplishing the
purpose for which it was incorporated.
[Sec. 39]
The exercise of this power does not render the
corporation empty, since it is still left with
assets received in exchange. It always
receives something of equal value to what has
been disposed. [Villanueva]
Requirements
1. Vote
of
the
stockholders
representing at least two- thirds
(2/3) of the outstanding capital
stock, or at least two-thirds (2/3) of
the members, in a stockholders’ or
members’ meeting duly called for the
purpose; OR
2. Vote of at least a majority of the
trustees in office in nonstock
corporations, where there are no
members with voting rights
3. Notice Requirement – Written notice
of the proposed action and of the time
and place for the meeting shall be:
a. Addressed to stockholders or
members at their places of
residence as shown in the
books of the corporation; and
b. Deposited to the addressee in
the post office with postage
prepaid, served personally, OR
sent
electronically,
when
allowed by the by-laws or done
with the consent of the
stockholder. [Sec. 39]
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Abandonment of Sale/Lease/Mortgage
After obtaining the authorization or approval
by the stockholders or members, the board of
directors or trustees may abandon such sale,
lease, exchange, mortgage, pledge, or other
disposition of property and assets.
However, this is subject to the rights of third
parties under any contract relating thereto,
without further action or approval by the
stockholders or members. [Sec. 39]
Where only the approval of a quorum of the
BOD/T is required
Corporation is not restricted in its power to sell
or dispose of its assets without the
authorization of shareholders or members:
1. If the same is necessary in the usual
and regular course of business of
the corporation or
2. If the proceeds of the sale will be
appropriated for the conduct of its
remaining business
3. If the transaction does not cover all or
substantially all of the assets. [Sec. 39]
Exercise of Appraisal Right
Any stockholder who disagrees from the sale,
lease, exchange, mortgage, pledge and any
other disposition may exercise his appraisal
right. [Sec. 39]
The transfer should not prejudice the
creditors of the assignor
The only way the transfer can proceed without
prejudice to the creditors is to hold the
assignee liable for the obligations of the
assignor. The acquisition by the assignee of all
or substantially all of the assets of the assignor
necessarily includes the assumption of the
assignor’s liabilities, unless the creditors who
did not consent to the transfer choose to
rescind the transfer on the ground of fraud.
[Caltex (Phils.) Inc. v. PNOC Shipping and
Transport Corp, G.R. No. 150711 (2006)]
De facto Merger – Continuity-of-business
enterprise requirement
There is a de facto merger when a corporation
(transferring corporation) exchanges all or
substantially all of its assets for the shares of
another
(transferee
corporation).
The
transferring corporation may later on be
dissolved, where the shares of the transferee
corporation will be distributed by way of
liquidating dividends to the shareholders of the
transferring corporation.
The
continuity-of-business
enterprise
requirement is what differentiates a de facto
merger from a voluntary dissolution of a
corporation. [Herbosa, 2019]
7. Power to Acquire Own Shares
The power of a corporation to acquire its
own shares
A stock corporation shall have the power to
purchase or acquire its own shares for a
legitimate corporate purpose or purposes.
This corporate power does not need
shareholder’s approval. Discretion solely rests
on the board, subject to the existence of
unrestricted retained earnings (“URE”) and
for a legitimate corporate purpose/s. [Sec.
40]
Unrestricted Retained Earnings
This is defined as the amount which is:
The accumulated profits and gains realized out
of the normal and continuous operations of the
company AFTER deducting therefrom:
1. Distributions to stockholders and
2. Transfers to capital stock or other
accounts, and
3. NOT appropriated by its Board of
Directors for corporate expansion
projects or programs:
4. NOT covered by a restriction for
dividend declaration under a loan
agreement; and
5. NOT required to be retained under
special circumstances obtaining in the
corporation such as when there is a
need for a special reserve for probable
contingencies. [SEC Memorandum
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Circular No. 11-08, (December 5,
2008)]
8. Power to Invest Corporate Funds in
Another Corporation or Business
General Rule: The corporation may only
acquire its own stocks in the presence of URE.
[Sec. 40]
General Rule: The corporation is not allowed
to engage in a business different from those
enumerated in its AOI.
Rationale: Existence of URE is required before
a corporation acquires its own shares because:
1. The repurchase of shares is a method
of distribution or withdrawal of assets,
and is subject to abuse, as creditors
have a right to assume that so long as
there are debts and liabilities, the
Board will not use corporate assets to
purchase its own stock; and
2. Treasury shares may be availed of to
perpetrate control of the enterprise
without the expensive requisite of a
majority voting stock. [Villanueva]
Exception: The purpose will be amended to
include the desired business activity among its
secondary purpose.
Exceptions:
1. Redeemable shares may be acquired
even without surplus profit for as long
as it will not result to the insolvency of
the Corporation;
2. In cases that the corporation conveys
its stocks in payment of a Debt;
3. In a Close corporation, a stockholder
may demand the payment of the fair
value of shares regardless of existence
of retained earnings for as long as it will
not result to the insolvency of the
corporation.
Legitimate Corporate Purposes [Sec. 40]
Legitimate corporate purposes include, but is
not limited to the following:
1. To eliminate fractional shares arising
out of stock dividends
2. To collect or compromise an
indebtedness to the corporation,
arising out of unpaid subscription, in a
delinquency sale, and to purchase
delinquent shares sold during said
sale; and
3. To pay dissenting or withdrawing
stockholders.
Rules in case a corporation wants to invest
in an undertaking
1. Investment of a corporation in a
business which is in line with its
primary purpose requires only the
approval of the board.
2. Investment of assets for any of its
secondary purposes requires the prior
approval of its shareholders/members
3. If the investment is outside the
purpose/s for which the corporation
was
organized,
Articles
of
Incorporation must be amended first,
otherwise it will be an Ultra Vires act.
Requirements
1. Approval by majority vote of the
board of directors or trustees, and
2. Ratification at a meeting by the
stockholders or members representing
at least two-thirds (2/3) of the
outstanding capital stock or of its
members.
3. Notice Requirement – Written notice
of the proposed action and the time and
place of the meeting shall be:
a. Sent to stockholders or
members at their respective
place of residence as shown in
the books of the corporation,
and
4. Either:
a. Deposited to the addressee in
the post office with postage
prepaid, served personally, OR
b. Sent
electronically
in
accordance with the rules and
regulations of the Commission
on the use of electronic data
messages, when allowed in the
by-laws or done with the
consent of the stockholder
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COMMERCIAL LAW
Exercise of Appraisal Right
Any stockholder who disagrees from the
investment of corporate funds in another
corporation or business may exercise his
appraisal right.
9. Power to Declare Dividends
Requirements
1. Must be distributed out of URE
2. Payable in cash, in property, or in stock
to all shareholders on the basis of
outstanding stock held by them
3. Resolution by the Board
Additional requirement for stock dividend
Approved by 2/3 of shareholders representing
the outstanding capital stock at a
regular/special meeting called for that purpose
Note: The approval requirement for the
declaration of stock dividends underscores that
the payment of dividends to a stockholder is not
a matter of right but a matter of consensus.
[Republic Planters Bank v. Agana, 269 SCRA
1 (1997)]
A corporation must have also a sufficient
number of authorized unissued shares for
distribution to stockholders (if ACS is
insufficient, corporation must apply for increase
in capital stock).
and such consent has not yet been
secured;
3. When it can be clearly shown that such
retention is necessary under special
circumstances obtaining in the
corporation.
Note: In case a corporation unjustifiably retains
surplus profits in excess of one hundred
(100%) percent of the paid-in accumulated
capital, it will be liable for Improperly
Accumulated Earnings Tax (IAET) equal to
10% of the improperly accumulated taxable
income. [Sec. 29 (A), NIRC] Moreover, it will
also be liable to pay a penalty imposed by the
SEC. [SEC Memo. Circ. No. 6, s. 2005]
Forms of dividends
1. Cash - Any cash dividend due on
delinquent stock shall first be applied to
the unpaid balance on the subscription
plus cost and expenses. [Sec. 42]
2. Stock - Stock dividends shall be
withheld
from
the
delinquent
stockholder
until
his
unpaid
subscription is fully paid; Stock
dividends cannot be issued to a person
who is not a stockholder in payment of
services rendered.
3. Property - Stockholders are entitled
to dividends pro-rata based on the
total number of shares and not on the
amount paid on shares.
Cash Dividends vs. Stock Dividends
Source of dividends
Dividends may only be declared out of actual
and bona fide unrestricted retained earnings.
Prohibition imposed by law on UREs of a
stock corporation
Stock corporations are prohibited from
retaining surplus profits in excess of 100% of
their paid-in capital stock, except:
1. When justified by definite corporate
expansion projects or programs
approved by the BOD;
2. When the corporation is prohibited
under any loan agreement with any
financial institution or creditor from
declaring dividends without its consent,
Cash
Dividends
Stock
Dividends
Voting
Board
of Board
of
requirements Directors
Directors + 2/3 of
for issuance
stockholders
Effect on
delinquent
stock
Shall
be
applied
to
the unpaid
balance on
the
subscription
plus
cost
and
expenses
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Shall be withheld
from
the
delinquent
stockholder until
his
unpaid
subscription
is
paid
FOR UP CANDIDATES ONLY
CORPORATIONS
Cash
Dividends
Can this be
issued by
Executive
Committee?
COMMERCIAL LAW
Stock
Dividends
No [Sec. 34] No, since this
requires
stockholders’
approval [Sec.
34]
Rule on shares of stock issued to pay for
services
A corporation may legally issue shares of stock
in consideration of services rendered to it by a
person not a stockholder, or in payment of its
indebtedness. But a share of stock thus issued
should be part of:
1. The original capital stock of the
corporation upon its organization; or
2. The stocks issued when the
increase of the capitalization of a
corporation is properly authorized.
In other words, it is the shares of stock that
are
ORIGINALLY
ISSUED
by
the
corporation and FORMING PART OF THE
CAPITAL that can be exchanged for cash or
services rendered, or property; that is, if the
corporation has original shares of stock unsold
or unsubscribed, either coming from the
original capitalization or from the increased
capitalization. STOCK DIVIDENDS are issued
only to stockholders because only stockholders
are entitled to dividends. [Nielson and Co. v.
Lepanto Consolidated Mining, G.R. No. L21601., (1968)].
Rule on the receipt of dividends in case of
mortgaged or pledged shares
General Rule: The mortgagor or the pledgor
has the right to receive the dividends.
Exception: When the mortgagor or pledgor
defaults and the mortgagee or pledgee
acquires the pledged stocks and the transfer is
recorded in the books of the corporation, the
mortgagee or pledgee is entitled to receive the
dividends.
10. Power to Enter into Management
Contract
General Rule: No management contract shall
be entered into for a period longer than 5 years
for any one term.
Exception: Service contracts or operating
agreements which relate to exploration,
development, exploitation or utilization of
natural resources may be entered into for such
periods as may be provided in the pertinent
laws and regulations.
Requirements
1. Approval by majority vote of the BOD
of both the managing and the managed
corporation
2. Approval by shareholders owning at
least the majority of the outstanding
capital stock or at least a majority of
the members of both the managing and
the managed corporation
However, the contract must be approved by 2/3
of stockholders owning outstanding capital
stock/members of the managed corporation
when:
1. Stockholders representing the same
interest of both the managing and
managed corporations own more than
1/3 of the total outstanding capital
stock entitled to vote of the managing
corporation (Interlocking stockholders);
or
2. A majority of the members of the BOD
of the managing corporation also
constitute a majority of the BOD of the
managed corporation (Interlocking
directors).
For the managed corporation: There is a
need for such ratification as such contract is a
deviation from the principle that corporate
affairs shall be managed by the BOD.
For the managing corporation: There is a
need for such ratification as such contract is a
deviation from the principle that the BOD would
devote their time and resources for the affairs
of the corporation. [Villanueva]
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11. Doctrine
Subscription
COMMERCIAL LAW
of
Individuality
of
13. Ultra Vires Doctrine
Ultra Vires Acts
The Doctrine of Individuality of Subscription
states that a subscription is one entire and
indivisible whole contract. It cannot be
divided into portions.
Consequently, where stocks were subscribed
and part of the subscription contract price was
not paid, the whole subscription shall be
considered delinquent, and not only the
shares which correspond to the amount not
paid.
Nevertheless, holders of subscribed shares not
fully paid, which are not delinquent, shall have
all the rights of a stockholder. [Sec. 71]
1. SEC has opined that the entire
subscription, although not yet fully
paid, may be transferred to a single
transferee, who as a result of the
transfer must assume the unpaid
balance. [SEC Opinion, 9 Oct. 1995]
2. It is necessary, however, to secure the
consent of the corporation because
such transfer contemplates a novation
which under Art. 1293 (NCC) cannot be
made without consent of the creditor.
12. Doctrine of Equality of Shares
Those acts which a corporation is not
empowered to do or perform because they are
outside or beyond the express and implied
powers conferred by its Articles of
Incorporation or by the Revised Corporation
Code, or not necessary or incidental to the
exercise of the powers so conferred [Sec. 44].
Types of Ultra Vires Acts
1. Acts done beyond the powers of the
corporation as provided in the law or its
articles of incorporation;
2. Ultra Vires acts of officers and not of
the corporation
3. Acts or contracts, which are per se
illegal as being contrary to law
[Villanueva].
Kinds of Ultra Vires acts by reason
1. By reason of Lack of Authority (ultra
vires acts)
2. By reason of Illegality (illegal acts)
Basis
Ultra Vires
Acts
Illegal Acts
Lawfulness
Lack
of
authority;
Not
necessarily
unlawful,
but outside
the powers
of
the
corporation
Illegality;
Unlawful;
against law,
morals,
public policy,
and
public
order
Ratification
Can
be Cannot
ratified
ratified
The doctrine of equality of shares states that all
stocks issued by the corporation are presumed
equal with the same privileges and liabilities,
provided that the Articles of Incorporation is
silent on such differences [Sec. 6].
There is a presumption of equality of the rights
and features of shares when nothing is
expressly provided to the contrary.
1. Although a corporation has the power
to classify its shares of stock, provide
for preferences and other conditions,
no presumption should exist to
distinguish one share from another.
2. Sec. 6 of the RCC now requires that the
distinguishing features be stated also
in the Certificate of Stock.
Binding power Can bind
the parties
if wholly or
partially
executed
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be
Cannot bind
the parties
Void
and
cannot
be
validated
FOR UP CANDIDATES ONLY
CORPORATIONS
COMMERCIAL LAW
Basis
Ultra Vires
Acts
Illegal Acts
Enforceability
Voidable,
and may be
enforced
by
performanc
e,
ratification,
or estoppel
Void
and
cannot
be
validated
Acts
or
contracts,
which are per
se illegal as
being
contrary
to
law.
Examples
1.Acts
done
beyond the
powers of
the
corporation
as provided
in the law
or its
articles
incorporati
on;
2.
Ultra
Vires acts
of officers
and not of
the
corporation
\\Acts
or
contracts,
which are per
se illegal as
being
contrary
to
law.
Applicability of the Ultra Vires Doctrine
The application of the Ultra Vires Doctrine is a
question, in each case, of the logical relation of
the act to the corporate purpose expressed in
the charter.
It may fairly be considered within the charter
powers if:
1. The act is one which is lawful in itself,
and not otherwise prohibited;
2. The act is done for the purpose of
serving corporate ends; AND
3. The act reasonably tributary to the
promotion of those ends, in a
substantial, and not in a remote and
fanciful sense.
of the corporation’s business, incident to the
express powers and reasonably necessary to
their exercise. If so, the corporation has the
power to do it; otherwise, not [Montelibano v.
Bacolod-Murcia Milling Co., Inc., G.R. No. L15092 (1962)].
Consequences of Ultra Vires Acts
Ultra vires acts, which are per se illegal are
generally void.
While ultra vires acts which are not illegal but
are within the scope of the articles of
incorporation, are merely voidable and may
become binding and enforceable when ratified
by stockholders [Montelibano v. BacolodMurcia Milling Co., Inc., G.R. No. L-15092
(1962)].
Consequences of Ultra Vires Acts with
respect to contracts:
1. Executed contract – courts will not set
aside or interfere with such contracts;
2. Executory contracts – no enforcement
even at the suit of either party (void and
unenforceable);
3. Partly executed and partly executory –
principle of “no unjust enrichment at
expense of another” shall apply;
4. Executory
contracts
apparently
authorized but Ultra Vires – the
principle of estoppel shall apply.
Remedies in case of Ultra Vires Acts
1. State
a. Dissolution of the corporation
thru a quo warranto proceeding
b. Injunction
c. Suspension or revocation of
the certificate of registration by
the SEC
2. Stockholders
a. Injunction
b. Derivative suit
c. Ratification (except when a 3rd
party is prejudiced or the act is
illegal)
3. Creditors - Nullification of contract in
a. fraud of creditors
The test to be applied is whether the act in
question is in direct and immediate furtherance
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COMMERCIAL LAW
14. Trust Fund Doctrine
The Trust Fund Doctrine states that the capital
stock, properties, and other assets of a
corporation are regarded as equity in trust for
the payment of corporate creditors.
All funds received by the corporation in
payment of the shares of stock shall be held in
trust for the corporate creditors and other
stockholders of the corporation.
No fund shall be used to buy back the issued
shares of stock except only in instances
specifically allowed by the Corporation Code
[Boman
Environmental
Development
Corporation v. CA, G.R. No. 77860 (1988)].
Effects of the trust fund doctrine
Dividends must never impair the subscribed
capital stock and must only be declared out of
unrestricted
retained
earnings
(URE)
[Philippine Trust Co. v. Rivera, G.R. No. L19761 (1923)].
Subscription
commitments
condoned or remitted.
cannot
be
General Rule: The corporation cannot buy its
own shares using the subscribed capital as the
consideration therefore [NTC v. CA. G.R. No.
127937 (1999)].
Note: Rescission of a subscription agreement
is not one of the instances when distribution of
capital assets and property of the corporation
is allowed (Ibid).
Exceptions to the Trust Fund Doctrine --When Distribution of Corporate Capital is
Allowed
The Trust Fund Doctrine, first enunciated by
this Court in the 1923 case of Philippine Trust
Co. v. Rivera is the underlying principle in the
procedure for the distribution of capital assets,
embodied in Corporation Code, which allows
the distribution of corporate capital only in three
instances:
1. Amendment of the AOI to reduce the
authorized capital stock,
2. Purchase of redeemable shares by the
corporation,
regardless
of
the
existence of unrestricted retained
earnings, and
3. Dissolution and eventual liquidation of
the corporation.
The creditors of a corporation have the right to
assume that so long as there are debts and
liabilities, the BOD will not use corporate
assets to purchase its own shares of stock or
to declare dividends to its stockholders when
the corporation is insolvent [Steinberg v.
Velasco, G.R. No. L-30460 (1929)].
Scope of the Trust Fund Doctrine
Exceptions:
1. Redeemable shares may be acquired
even without surplus profit for as long
as it will not result to the insolvency of
the Corporation;
2. In cases that the corporation conveys
its stocks in payment of a Debt; or
3. In a Close corporation, a stockholder
4. may demand the payment of the fair
value of shares regardless of existence
of retained earnings for as long as it will
not result to the insolvency of the
corporation
5. Rescission
of
a
subscription
agreement is not allowed since it will
effectively result in the unauthorized
distribution of the capital assets and
property of the corporation [Ong Yong
v. Tiu, G.R. No. 144476 (2003)].
The trust fund doctrine is NOT limited to
reaching
the
stockholder’s
unpaid
subscriptions.
A corporation has no legal capacity to release
an original subscriber to its capital stock from
the obligation of paying for his shares, in whole
or in part, without a valuable consideration, or
fraudulently, to the prejudice of creditors.
The creditor is allowed to maintain an action
upon any unpaid subscriptions and thereby
steps into the shoes of the corporation for the
satisfaction of its debt.
The scope of the doctrine when the corporation
is insolvent also encompasses other property
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and assets generally regarded in equity as a
trust fund for the payment of corporate debts.
All assets and property belonging to the
corporation held in trust for the benefit of
creditors that were distributed or in the
possession of the stockholders, regardless of
full payment of their subscriptions, may be
reached by the creditor in satisfaction of its
claim.
To make out a prima facie case in a suit against
stockholders of an insolvent corporation to
compel them to contribute to the payment of its
debts by making good unpaid balances upon
their subscriptions, it is only necessary to
establish that the stockholders have not in
good faith paid the issue price of the stocks of
the corporation [Donnina Halley v. Printwell,
Inc., G.R. No. 157549 (2011)].
H. Stockholders and Members
1.
Fundamental
Stockholder
Rights
of
a
1. Direct or indirect participation in
management [Sec. 6]
2. Voting rights [Sec. 6]
3. Right to remove directors [Sec. 27]
4. Proprietary rights
(a) Right to dividends [Sec. 42 and
70]
(b) Appraisal rights [Sec. 80]
(c) Right to issuance of stock
certificate for fully paid shares
[Sec. 63]
(d) Proportionate participation in the
distribution of assets in liquidation
[Sec. 139]
(e) Right to transfer of stocks in
corporate books [Sec. 62]
(f) Pre-emptive right [Sec. 38]
5. Right to inspect books and records
[Sec. 73]
6. Right to be furnished with the most
recent financial statements/reports
[Sec. 73]
7. Right to recover stocks unlawfully sold
for delinquent payment of subscription
[Sec. 68]
8. Right to file individual suit,
representative suit and derivative suits
Nature of the Rights of Members
The eleemosynary nature (i.e. charitable) of
every non-stock corporation defines the
characteristic of membership therein as being
essentially personal in character and therefore
essentially
non-transferable
in
nature.
[Villanueva]
Sec. 88 of the Revised Corporation Code
specifically provides that in a non-stock
corporation, the right of members of any class
or classes to vote “may be limited, broadened
or denied to the extent specified in the articles
of incorporation or the by-laws.”
Political Rights
Shareholders have a right to:
1. Requisitions and/or attend meetings
2. Elect and be elected as directors
3. Approve the exercise of special
corporate powers
4. Access basic corporate information
Economic Rights
Shareholders individually have a right to:
1. Dividends
2. Transfer shares
3. Right to receive residual assets,
following the corporation's partial or full
liquidation
Affiliation Rights
As a rule, a corporation issues shares to
investors without regard to their personal
circumstances. Similarly, shareholders may
transfer shares to investors without consent or
over the objection of the other shareholders.
Right to Institute Court Action
Shareholders or members may institute a court
action to protect, and seek redress for violation
of their rights. (See Remedial Rights)
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COMMERCIAL LAW
2. Participation in Management
a. Proxy
Stockholders and members may vote in person
or by proxy in all meetings [Sec. 57].
The word “proxy” may be understood in two
ways:
1. First, it may refer to the person duly
authorized by a stockholder to vote in
his behalf in a stockholder’s meeting
2. Secondly, it may refer to the document
which
evidences
this
authority
[Campos].
Right to Issue a Proxy
The right to issue a proxy is vested with public
interest when it comes to stock corporations.
1. Although it may be regulated under the
by-laws, it cannot be denied, since it is
an aspect of ownership interest of
stockholders.
2. However, the right of members to vote
by proxy may be denied under the
articles of incorporation or bylaws of a
non-stock corporation [Sec. 88;
Campos].
Requisites for a Valid and Enforceable
Proxy:
1. It must be in writing;
2. Signed by the stockholder or member
of record; and
3. Filed with the corporation before th
scheduled meeting with the Corporate
Secretary [Sec. 57].
Period of Effectivity
Unless otherwise provided in the proxy, it shall
be valid only for the meeting for which it is
intended. No proxy shall be valid and effective
for a period longer than five (5) years at any
one time [Sec. 57].
concerns the validation of such
secured and submitted proxies;
2. The SEC’s power to pass upon the
validity of proxies in relation to election
controversies has effectively been
withdrawn, tied as it is to its abrogated
quasi-judicial powers, and has been
transferred to the RTC Special
Commercial Courts pursuant to the
terms of Sec. 5.2 of the Securities
Regulation Code;
Note: The SEC has the power to impose or
recommend new modes by which a
stockholder, member, director, or trustee may
attend meetings or cast their votes, as
technology may allow, taking into account the
company’s scale, number of shareholders or
members, structure, and other factors
consistent with the basic right of corporate
suffrage [Sec. 179].
The fact that the jurisdiction of the RTC Special
Commercial Courts is confined to the voting on
election of officers, and not all matters which
may be voted upon by stockholders, elucidates
that the power of the SEC to regulate proxies
remains extant and could very well be
exercised when stockholders vote on matters
other than the election of directors [GSIS v.
C.A., G.R. No. 183905 (2009)].
b. Voting Trust
Voting Trust
An arrangement created by one or more
stockholders:
1. For the purpose of conferring upon a
trustee or trustees the right to vote and
other rights pertaining to the shares;
2. For a period not exceeding 5 years at
any time [Sec. 58].
Under a voting trust agreement, a stockholder
of a stock corporation parts with the naked or
legal title, including the power to vote, of the
shares and only retains the beneficial
ownership of the stock.
Procedural Matters Relating to Proxies:
1. Proxy
solicitation”
involves
the
securing
and
submission
of
proxies,while
“proxy
validation”
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Voting trustee
A share owner vested with colorable and naked
title of the shares covered for the primary
purpose of voting upon stocks that he does not
own.
A voting trust agreement shall be ineffective
and unenforceable unless:
1. It is in writing and notarized;
2. It specifies the terms and conditions
thereof; and
3. A certified copy of such agreement is
filed with the corporation and with the
SEC [Sec. 58].
Period of Effectivity
General Rule: Voting trust agreements shall
not exceed five (5) years at any one time.
Exception: Voting trust agreements may be for
a period exceeding five (5) years if it is
specifically required as a condition in a loan
agreement.
This envisions a situation where a corporation
obtains a loan from a bank, but as a condition
of the loan, the majority stockholders would be
required to execute voting trust agreements to
ensure that the lending institution would have a
controlling interest in the corporate votes to be
taken that may affect the ability of the
borrowing corporation to pay. The voting trust
agreement therefore constitutes further
security to the lending institution [Villanueva].
Such voting trust agreement conditioned upon
a loan agreement, however, shall automatically
expire upon full payment of the loan [Sec. 58].
Unless the agreement is expressly renewed, all
rights granted in the agreement shall
automatically expire at the end of the agreed
period [Sec. 58].
Limitation of a Voting Trust Agreement
No voting trust agreement shall be entered into
for the purposes of circumventing the laws
against:
1. Anti-competitive agreements;
2. Abuse of dominant position;
3. Anti-competitive
mergers
and
acquisitions;
4. Violations of nationality and capital
requirements; or
5. Fraud [Sec. 58].
c. Cases When Stockholders’ Actions is
Required
Right to Vote in Stock Corporations
General Rule: Each share of stock is entitled
to vote [Sec. 6].
1. The stockholder of record has the right
to participate and to vote [Villanueva].
2. Executors, administrators, receivers,
and other legal representatives duly
appointed by the court may attend or
vote in behalf of stockholders without
need of any written proxy [Sec. 54].
Exception: Unless otherwise provided in the
articles of incorporation or declared delinquent
under Sec. 66 [Sec. 6].
Note: “Outstanding capital stock” means stocks
entitled to VOTE.
Nevertheless, ALL stockholders, regardless of
classification as voting or non-voting, are
entitled to vote in the following matters:
1. Amendment of the articles of
incorporation;
2. Adoption and amendment of by-laws;
3. Sale,
lease,
exchange,
mortgage,pledge, or other disposition
of all or substantially all of the corporate
property;
4. Incurring, creating, or increasing
bonded indebtedness;
5. Increase or decrease of capital stock;
6. Merger or consolidation;
7. Investment of corporate funds in
another corporation or business; and
Dissolution of the corporation [Sec. 6].
Right to Vote in Non-Stock Corporations
In non-stock corporations, the voting rights
attach to membership. Members vote as
persons, in accordance with the law and the bylaws of the corporation.
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General Rule: Each member shall be entitled
to one vote [Sec. 88].
Executors, administrators, receivers, and other
legal representatives duly appointed by the
court may attend or vote in behalf of
stockholders without need of any written proxy
[Sec. 54].
Exception: Unless the right to vote is limited,
broadened, or denied in the articles of
incorporation or by-laws.
When the principle for determining the quorum
for stock corporations is applied by analogy to
non-stock corporations, only those who are
actual members with voting rights should be
counted [Sec. 88].
d. Manner of Voting
1. By a majority vote
a. Power to enter into management
contracts [Sec. 43]
General Rule: Requires approval by —
1. Majority of the BOD/BOT ; and
2. Stockholders owning at least the
majority of the outstanding capital
stock/majority of members of both the
managing
and
the
managed
corporation.
Exceptions: In the ff. cases, at least 2/3 votes
of the outstanding capital stock/membership of
the managed corporation are required. BUT
only majority vote is required for the managing
corporation:
1. Where a stockholder/s representing
the same interest of both the managing
and the managed corporations own or
control more than one-third (1/3) of the
total outstanding capital stock entitled
to vote of the managing corporation; or
2. Where a majority of the members of the
managing corporation’s BOD also
constitute a majority of the managed
corporation’s BOD.
b. Amendments to by-laws [Sec. 47]
Requires approval by:
1. Majority of the BOD/BOT ; and
2. Stockholders owning at least the
majority of the outstanding capital
stock/majority of members. Includes all
stockholders with or without voting
rights.
c. Revocation of delegation to the BOD of
the power to amend or repeal or adopt bylaws [Sec. 47]
Requires approval by stockholders owning at
least the majority of the outstanding capital
stock/majority of members.
d. Granting compensation other than per
diems to directors [Sec. 29]
Compensation other than per diems may be
granted to directors by the vote of the
stockholders representing at least a majority of
the outstanding capital stock.
e. Fixing the consideration for no-par
shares [Sec. 61]
When the Articles of Incorporation or the BOD
does not provide for the value of no-par shares,
the value of such shares shall be determined
by the stockholders representing at least
majority of the outstanding capital stock.
f. Voluntary dissolution of a corporation
where no creditors are affected [Sec. 134]
If dissolution of a corporation DOES NOT
prejudice the rights of any creditor having a
claim against it, the dissolution may be effected
by:
1. Majority vote of the BOD/BOT ; and
2. A resolution adopted by the affirmative
vote of the stockholders owning at least
majority of the outstanding capital
stock/membership.
g. Revocation of Delegation to the Board
of the Power to Amend/Repeal/Adopt Bylaws [Sec. 47]
Any power delegated to the board of directors
or trustees to amend or repeal the by-laws or
to adopt new by-laws shall be considered
revoked when stockholders representing a
majority of the outstanding capital stock, or a
majority of the members shall so vote at a
regular or special meeting.
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h. Calling a Meeting to Remove Directors
or Trustees [Sec. 27]
Amendment of Articles of Incorporation of
close corporations [Sec. 102]
A special meeting for the purpose of removing
any director or trustee must be called:
1. By the secretary on order of the
president; or
2. Upon written demand of stockholders
representing or holding at least a
majority of the outstanding capital
stock, or a majority of the members
entitled to vote [Sec. 27].
An affirmative vote of at least two-thirds (2/3) of
the outstanding capital stock, whether with or
without voting rights, at a meeting duly called
for the purpose is required to make any
amendment to the AOI which seeks to:
1. Delete or remove any provision; or
2. Reduce a quorum of the voting
requirement stated in the articles shall
require.
2. By a two-thirds vote
c. Delegating the power to amend or
repeal by-laws or adopt new by-laws [Sec.
47]
a. Removal of directors or trustees [Sec.
27]
Any director or trustee of a corporation may be
removed from office by a vote of —
1. The
stockholders
holding
or
representing at least two-thirds (2/3) of
the outstanding capital stock; or
2. At least two-thirds (2/3) of the
members entitled to vote in a nonstock corporation.
Note: Such removal shall take place —
1. Either at a regular meeting of the
corporation or at a special meeting
called for the purpose; and
2. In either case, after previous notice to
stockholders or members of the
corporation of the intention to propose
such removal at the meeting.
b. Amendment of AOI [Sec. 15]
Amendment of the AOI may be made by:
1. 1. A majority vote of the BOD/BOT; and
2. The vote or written assent of the
stockholders representing at least twothirds (2/3) of the outstanding capital
stock, or by the vote or written assent
of at least two-thirds (2/3) of the
members.
Note: Includes all stockholders with or without
voting rights.
Delegation to the BOD/BOT of the power to
amend or repeal by-laws or adopt new by-laws
requires approval by at least 2/3 of the
outstanding capital stock/membership.
Note: Revocation of the delegation requires
only majority vote of the outstanding capital
stock/membership.
d. Extending/shortening corporate term
[Sec. 36]
1. Requires approval by a majority vote of
the BOD/BOT and approval by at least
2/3 of the outstanding capital
stock/membership.
2. Includes all stockholders with or
without voting rights.
e. Increasing/decreasing capital stock
[Sec. 37]
Requires approval by:
1. A majority vote of the BOD; and
2. At least 2/3 of the outstanding capital
stock.
Includes all stockholders with or without voting
rights.
f. Incurring, creating, increasing bonded
indebtedness [Sec. 37]
1. Requires approval by a majority vote of
the BOD and approval by at least 2/3 of
the outstanding capital stock.
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2. Includes all stockholders
without voting rights.
with
or
k. Power to enter into management
contracts [Sec. 43]
g. Issuance of shares not subject to preemptive right [Sec. 38]
General Rule: Requires approval by —
1. Majority of the BOD/BOT ; and
2. Stockholders owning at least the
majority of the outstanding capital
stock/majority of members of both the
managing
and
the
managed
corporation.
Shares in good faith in exchange for property
or previously incurred indebtedness with the
approval of the stockholders representing 2/3
of the outstanding capital stock are not subject
to pre-emptive rights.
h. Sale/disposition of all or substantially
all corporate assets [Sec. 39]
A sale of all or substantially all the corporation’s
properties and assets, including its goodwill
must be authorized by the vote of:
1. The stockholders representing at least
2/3 of the outstanding capital stock; or
2. At least 2/3 of the members, in a
stockholders’ or members’ meeting
duly called for the purpose.
Note: In non-stock corporations where there
are no members with voting rights, the vote of
at least a majority of the trustees in office will
be sufficient authorization.
i. Investment of funds in another
business [Sec. 41]
Requires approval by:
1. A majority vote of the BOD/BOT; and 2.
At least 2/3 of the outstanding capital
stock/membership.
Includes all stockholders with or without voting
rights.
However, where the investment by the
corporation is reasonably necessary to
accomplish its primary purpose as stated in the
articles of incorporation, the approval of the
stockholders or members shall not be
necessary.
j. Stock Dividend declaration [Sec. 42]
Requires approval by:
1. A majority vote of the BOD; and
2. At least 2/3 of the outstanding capital
stock.
Note: Declaration of cash and property
dividends only requires BOD/BOT approval.
Exceptions: In the ff. cases, at least 2/3 votes
of the outstanding capital stock/membership of
the managed corporation are required. BUT
only majority vote is required for the managing
corporation:
1. Where a stockholder/s representing
the same interest of both the managing
and the managed corporations own or
control more than one-third (1/3) of the
total outstanding capital stock entitled
to vote of the managing corporation; or
2. Where a majority of the members of the
managing corporation’s BOD also
constitute a majority of the managed
corporation’s BOD.
l. Ratifying contracts with respect to
dealings with directors/trustees [Sec. 31]
A contract of the corporation with one or more
of its directors is voidable, at the option of such
corporation, unless all of the following
conditions are present:
1. The presence of such director/trustee
in the board meeting in which the
contract was approved was not
necessary to constitute a quorum for
such meeting;
2. The vote of such director or trustee was
not necessary for the approval of the
contract;
3. The contract is fair and reasonable
under the circumstances;
In case of corporations vested with public
interest, material contracts are approved by at
least two-thirds (2/3) of the entire membership
of the board, with at least majority of the
independent directors voting to approve the
material contract; and
In case of an officer, the contract has been
previously authorized by the BOD.
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Note: Where any of the first 3 conditions in the
preceding paragraph is absent, in the case of a
contract with a director/trustee, the contract
may be ratified by the vote of the stockholders
representing 2/3 of the outstanding capital
stock or at least 2/3 of the members in a
meeting called for that purpose.
p. Incorporation of a religious society
[Sec. 114]
Full disclosure of the adverse interest of the
directors/trustees involved is made at such
meeting and the contract is fair and reasonable
under the circumstances [Sec 31].
Upon written consent and/or by an affirmative
vote at a meeting called for the purpose of at
least 2/3 of its membership;
For the administration of its temporalities or for
the management of its affairs, properties, and
estate
m. Ratifying acts of disloyalty of a
director [Sec. 33]
General Rule: Where a director, by virtue of
such office, acquires a business opportunity,
which should belong to the corporation,
thereby obtaining profits to the prejudice of
such corporation, the director must account for
and refund to the latter all such profits.
Exception: His act may be ratified by a vote of
the stockholders owning or representing at
least 2/3 of the outstanding capital stock.
n. Plan of merger or consolidation [Sec.
76]
Requires approval by:
1. Majority of each of the BOD/BOT of the
constituent corporations of the plan of
merger or consolidation; and
2. At least 2/3 of the outstanding capital
stock/membership of each corporation
at separate corporate meetings duly
called.
Amendments to the plan of the merger or
consolidation also requires approval by
majority vote of each of the BOD and 2/3 vote
of the outstanding capital stock/membership of
each corporation voting separately.
Includes all stockholders with or without voting
rights.
o. Plan of distribution of assets in nonstock corporations [Sec. 94]
The BOT shall, by majority vote, adopt a
resolution recommending a plan of distribution
which shall be approved by at least 2/3 of the
members with voting rights.
General Rule: Any religious society or
religious order, or any diocese, synod, or
district
organization
of
any
religious
denomination, sect, or church, may incorporate
Exception: Unless forbidden by the
Constitution, rules, regulations or discipline of
the religious denomination, sect, or church of
which it is a part, or by competent authority.
q. Voluntary dissolution of a corporation
where creditors are affected [Sec. 135]
If dissolution of a corporation may prejudice the
rights of any creditor having a claim against it,
the dissolution may be effected by:
1. Majority vote of the BOD/BOT ; and
2. A resolution adopted by the affirmative
vote of the stockholders representing
at least 2/3 of the outstanding capital
stock/membership.
3. By cumulative voting
Election of Directors or Trustees [Sec. 23]
Stockholders entitled to vote may:
a. Vote such number of shares for as
many persons as there are directors to
be elected [Straight Voting];
b. Cumulate said shares and give 1
candidate as many votes as the
number of directors to be elected
multiplied by the number of the shares
owned [Cumulative Voting for 1
Candidate]; or
c. Distribute them on the same principle
among as many candidates as may be
seen fit [Cumulative Voting by
Distribution].
Note: No delinquent stock shall be voted [Sec.
23].
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Members of a non-stock corporation may cast
as many votes as there are trustees to be
elected but may not cast more than 1 vote for
1 candidate.
Nominees for directors or trustees receiving
the highest number of votes shall be declared
elected
Upon written consent and/or by an affirmative
vote at a meeting called for the purpose of at
least 2/3 of its membership;
For the administration of its temporalities or for
the management of its affairs, properties, and
estate
3. Proprietary rights
a. Rights to Dividends
Concept of Dividends
A dividend is —
1. That portion of the profits of the
corporation set aside, declared and
ordered by the directors to be paid
ratably to the stockholders on demand
or at a fixed time.
2. Payment to the stockholders as a
return
upon
their
investment
[Villanueva]
Discretion of Board to Declare Dividends
General Rule: The board of directors of a stock
corporation may declare dividends out of the
unrestricted
retained
earnings
to
all
stockholders on the basis of outstanding stock
held by them [Sec. 42].
Upon lawful declaration of dividends by the
BOD, dividends become a debt owing to the
shareholders. No revocation can be made.
Exceptions:
1. Dividends are revocable if NOT yet
announced or communicated to the
stockholders.
2. Stock dividends, even if already
declared, may be revoked prior to
actual issuance since these are not
distributions
but
merely
representations of changes in the
capital structure.
3. Such declaration is essentially within
the business judgment of the board
of directors.
4. The fact that profits have accrued in the
prosecution of the corporate business
does not necessarily impose upon the
directors the duty to declare them as
dividends [Villanueva].
Exception: Stock corporations are prohibited
from retaining surplus profits in excess of 100%
of their paid-in capital stock.
Exception to the exception: Stock
corporations may retain surplus profits in
excess of 100% of their paid-in capital stock:
1. When justified by definite corporate
expansion projects or programs
approved by the board of directors; or
2. When the corporation is prohibited
under any loan agreement with
financial institutions or creditors,
whether local or foreign, from declaring
dividends without their consent, and
such consent has not yet been
secured; or
3. When it can be clearly shown that such
retention is necessary under special
circumstances obtaining in the
corporation, such as when there is
need for special reserve for probable
contingencies [Sec. 42].
Note: Right to dividends vests upon declaration
so whoever owns the stock at the record date
fixed by the board owns the dividends.
Subsequent transfer of stock would not carry
with it the right to dividends UNLESS agreed
upon by the parties
Unrestricted Retained Earnings
The board of directors of a stock corporation
may declare dividends out of the unrestricted
retained earnings [Sec. 42]
Retained Earnings
Represents the accumulation of net profits
of the corporation over the years and
likewise losses sustained, as well as
deductions made upon previous dividends
declared.
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Restricted
Retained Earnings
Unrestricted
Retained Earnings
Represents the
accumulation of net
profits of the
corporation over the
years and likewise
losses sustained, as
well as deductions
made upon previous
dividends declared.
That portion which is
free and can be
declared as
dividends to
stockholders.
In case of no-par value shares, the entire
consideration received by the corporation for
its no-par value shares shall be treated as
capital and shall not be available for distribution
as dividends [Sec. 6].
b. Appraisal Right
Appraisal Right — The right to withdraw from
the corporation and demand payment of the
fair value of the shares after dissenting from
certain corporate acts involving fundamental
changes in corporate structure [Sec. 80].
Who is Entitled to Exercise
A prejudiced stockholder who dissented in the
meeting where the proposal was approved.
Mere silence or abstention does not suffice.
The stockholder must have voted against the
corporate action [Villanueva].
Amount Paid to Dissenting Stockholder
Provided that the corporation has sufficient
unrestricted retained earnings, the amount
paid to the stockholder is the fair value of his
shares as of the day prior to the date on which
the vote was taken, excluding any appreciation
or depreciation in anticipation of the corporate
action [Sec. 81]
2. Extension of the term of corporate
existence
[Sec.
80],
including
Voluntary Dissolution (by Petition or by
shortening corporate term); [Secs. 134136]
3. Extension and shortening of corporate
term, which is an error carried over
from the old Corporation Code.
4. Sale, lease, exchange, transfer,
mortgage, pledge or other disposition
of all or substantially all of the corporate
property and assets [Sec. 80];
5. Merger or consolidation [Sec. 80];
6. Investment of corporate funds for any
purpose other than the primary
purpose of the corporation [Sec. 80];
7. Increasing or decreasing capital stock.
Note: Can be exercised only if the
increase of capital stock results in or
has the effect of changing or restricting
the rights of any stockholder or class of
shares, or of authorizing preferences in
any respect superior to those of
outstanding shares of any class [Sec.
80(a)].
Manner of Exercise of Right
Requirements for Exercise of Appraisal
Right [Secs. 81 & 85]
1. Stockholder must have voted against
the corporate act.
2. Stockholder must make a written
demand on the corporation within 30
days after the vote was taken for
payment of the fair value of his shares.
a. Failure to make demand within
such period shall be deemed
waiver of the appraisal right.
3. Stockholder must submit his certificate
of stock to the corporation for notation
within 10 days after demand for
payment.
a. Otherwise, right to appraisal
may be terminated at the
option of corporation.
When Available [Sec. 80]
1. If amendment of AOI results in:
a. Changing or restricting the
Effect of Demand for Payment [Sec. 82]
rights of any stockholder or
1. ALL rights accruing to such shares,
class of shares; or
including voting and dividend rights,
b. Authorizing preferences in any
shall be suspended, EXCEPT the right
respect superior to those of
of such stockholder to receive payment
outstanding share of any class
of the fair value thereof.
[Sec. 80];
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2. There is RESTORATION of voting and
dividend rights if the dissenting
stockholder is not paid the value of his
shares within 30 days after the award
Note: The award shall be —
1. Agreed upon by the dissenting
stockholder and corporation; or
2. Determined and appraised by 3
disinterested persons, if they fail to
agree within 60 days from the date
when the corporate action was
approved, these 3 persons shall be;
a. One
named
by
the
shareholder;
b. One named by the corporation;
c. One chosen by a & b.
d. The findings of the majority of
the appraisers shall be final
[Sec. 81].
3. If shares represented by the
certificates bearing a notation that such
shares are dissenting shares are
transferred, and the certificates
consequently cancelled:
a. The rights of the transferor as a
dissenting stockholder under
this Title [Appraisal Right] shall
cease; and
b. The transferee shall have all
the rights of a regular
stockholder; and all dividend
distributions which would have
accrued on such shares shall
be paid to the transferee [Sec.
85].
When Right to Payment Ceases [Sec. 83,
generally]
General Rule: No demand for payment may
be withdrawn.
Exceptions: The right may be extinguished in
the following instances —
1. Withdrawal of demand by the
stockholders WITH CONSENT of the
corporation
2. Abandonment of the proposed
corporate action
3. Disapproval by SEC of the proposed
corporate action where such approval
is necessary
4. Where SEC determines that such
stockholder is not entitled to appraisal
right
5. Failure to submit the certificates of
stock representing his shares to the
corporation for notation as dissenting
shares within 10 days after demand for
payment, at the option of the
corporation [Sec. 85].
Effect of Extinguishment of Right
1. Right of dissenting stockholder to be
paid for the fair value of his shares shall
cease;
2. His status as a stockholder shall
thereupon by restores; and
3. All dividend distributions which would
have accrued on his shares shall be
paid to him [Sec. 83]
c. Right to Inspect
Basis of Right
As the beneficial owners of the business, the
stockholders have the right to know the
financial condition and management of
corporate affairs.
A stockholder’s right of inspection is based on
his ownership of the assets and property of the
corporation. Therefore, it is an incident of
ownership of the corporate property, whether
this ownership or interest is termed an
equitable ownership, a beneficial ownership, or
quasi-ownership. Such right is predicated upon
the necessity of self-protection [Gokongwei Jr.
v. SEC, G.R. No. L-45911 (1979)].
Records Subject to Inspection [Sec. 73]
Every corporation shall keep and carefully
preserve at its principal office all information
relating to the corporation including, but
not limited to:
a. The AOI and by-laws of the corporation
and all their amendments;
b. The current ownership structure and
voting rights of the corporation,
including lists of stockholders or
members, group structures, intra-group
relations,
ownership
data,
and
beneficial ownership;
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c. The names and addresses of all the
members of the BOD or BOT and the
executive officers;
d. A record of all business transactions;
e. A record of the resolutions of the BOD
or BOT and of the stockholders or
members;
f. Copies of the latest reportorial
requirements
submitted
to
the
Commission; and
g. The minutes of all meetings of
stockholders or members, or of the
BOD/BOT, which shall set forth –
1. Time and place of the meeting
held;
2. How meeting was authorized;
3. Notice given;
4. Agenda;
5. Whether meeting was regular
or special (its object, if special)
6. Those present and absent
7. Every act done or ordered
done at the meeting
h. Upon
demand
of
the
BOD/BOT/stockholder or member –
1. Time when any director,
trustee, stockholder or member
entered or left the meeting
must be noted in the minutes;
2. The yeas and nays must be
taken on any motion or
proposition, and a record
thereof carefully made;
3. The protest of a director,
trustee, stockholder or member
on any action or proposed
action
Requirements for the exercise of the right
of inspection [Sec. 73]
a. The records are open to inspection
only by any director, trustee,
stockholder, or member of the
corporation in person or by a
representative.
b. Must be done at reasonable hours on
business days.
c. A demand in writing may be made by
the director, trustee, or stockholder at
their expense, for such records or
excerpts from the records.
d. The inspecting or reproducing party
shall remain bound by confidentiality
rules under prevailing laws such as
1. Intellectual Property Code
2. Data Privacy Act
3. Securities Regulation Code
4. Rules of Court
Test to Determine Whether the Purpose of
Inspection is Legitimate
A legitimate purpose is one which is genuine to
the interests of the stockholders as such and
not contrary to the interests of the corporation
[Gokongwei Jr. v. SEC, G.R. No. L-45911
(1979)].
Legitimacy of purpose is always assumed, and
it is up to the corporation or officer to claim and
prove otherwise
Valid defenses of the officer or agent of the
corporation who refuses to allow
inspection and/or reproduction of records:
a. The person demanding to examine and
copy excerpts from the corporation’s
records and minutes has improperly
used any information secured through
any prior examination of the records or
minutes of such corporation or of any
other corporation;
b. The person was not acting in good
faith;
c. The person was not acting for a
legitimate purpose in making the
demand to examine or reproduce
corporate records;
d. The person is a competitor, director,
officer, controlling stockholder or
otherwise represents the interests of a
competitor [Sec. 73].
Remedies when inspection is refused
a. Mandamus
Under the Rules of Court, the writ of
mandamus should be granted only if
the court is satisfied that justice so
requires [Sec. 8, Rule 65].
b. Injunction
c. Action for damages [Sec. 73]
d. File an action under Sec. 161 to impose
a penal offense by fine
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The unjustified failure or refusal by the
corporation, or by those responsible for
keeping and maintaining corporate
records, to comply with the pertinent
rules and provisions of the RCC on
inspection and reproduction of records
shall be punished with a fine ranging
from P10,000.00 to P200,000.00, at
the discretion of the Court.
When the violation of this provision is
injurious or detrimental to the public,
the penalty is a fine ranging from
P20,000.00 to P400,000.00 [Sec. 161]
e. Summary investigation by SEC [Sec.
73]
d. Preemptive Right
Definition
Pre-emptive right — An option or privilege of
an existing stockholder to subscribe to a
proportionate part of shares subsequently
issued by the corporation before the same can
be disposed of in favor of others.
● This right includes all issues and
disposition of such shares any class.
● It is a common law right and may be
exercised by stockholders even without
legal provision.
Basis of Preemptive Right: Preservation of
the existing proportional rights of the
stockholders [Campos].
Distinguished from Right of First Refusal
Preemptive Right
Right of First
Refusal
Grants stockholders
the option to
subscribe to all new
issues or disposition
of shares of any
class, in proportion
to their respective
shareholdings [Sec.
38].
Grants the existing
stockholders or the
corporation the
option to purchase
the issued and
outstanding shares
of the transferring
stockholder [Sec.
97]
All stockholders of a
stock corporation
Arises only by virtue
of contract
Preemptive Right
Right of First
Refusal
shall enjoy the
preemptive right to
subscribe to all
issues or disposition
of shares of any
class, in proportion
to their respective
shareholdings [Sec.
38].
stipulations, by
which the right is
strictly construed
against the right of
person to dispose or
deal with their
property.
A right claimed
against the
corporation on
unissued shares of
its capital stock, and
likewise on treasury
shares held by the
corporation
[Villanueva].
A right exercisable
against another
stockholder on his
shares of stock
[Villanueva].
Purpose of Pre-emptive Right
The purpose is to enable the shareholder to
retain his proportionate control in the
corporation and to retain his equity in the
surplus.
Scope of Pre-emptive Right
The broad phrase “all issues or disposition of
shares of any class” is construed to include:
1. New shares issued in pursuance of
increase in capital stock or from the
unissued shares which form part of the
ACS; and also
2. Treasury shares
a. Treasury shares would come
under the term “disposition”
b. Likewise considering that it is
not included among the
exceptions
enumerated
therein, where pre-emptive
right shall not extend, the
intention is to include it in its
application [SEC Opinion, 14
January 1993].
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Limitations to Exercise of Pre-emptive right
[Sec. 38]
1. Such pre-emptive right shall NOT
extend to shares to be issued in
compliance with laws requiring stock
offerings or minimum stock ownership
by the public;
2. It shall also NOT extend to shares to be
issued in good faith with the approval
of the stockholders representing 2/3 of
the outstanding capital stock, in
exchange for property needed for
corporate purposes or in payment of a
previously contracted debt;
3. It shall not take effect if denied in the
AOI or an amendment thereto;
4. If one shareholder does not want to
exercise his pre-emptive right, the
other shareholders are not entitled to
purchase the corresponding shares of
the shareholder who declined. But if
nobody purchased the same and later
on the board re-issued the shares, the
pre-emptive right applies [Sundiang
and Aquino].
Waiver/Denial of Preemptive Right
Allowed by the Code provided that it is made in
the AOI
1. Denial made through AOI would bind
present and subsequent shareholders;
2. 2/3 vote of all voting and non-voting
shares is necessary before waiver is
binding;
3. Result of non-placement of waiver
clause in AOI: Waiver shall not bind
future stockholders but only those who
agreed to it.
Exceptions to the Pre-emptive Right
1. When such right is denied by the
articles of incorporation or an
amendment thereto; and
2. Shares to be issued:
a. In compliance with laws requiring
stock offerings or minimum stock
ownership by the public; or
b. To shares to be issued in good faith
with
the
approval
of
the
stockholders representing ⅔ of the
outstanding capital stock in
exchange for:
1. Property
needed
for
corporate purposes; or
2. In payment of a previously
contracted debt [Sec. 38].
e. Right to Vote
Remedies in case of unwarranted denial
1. Injunction
2. Mandamus
3. The suit should be individual and not
derivative because the wrong done is
to the stockholders individually
4. SEC can cancel shares if the 3rd party
is not innocent
The shareholders must be given reasonable
time within which to exercise their preemptive
rights.
1. Upon expiration of such period, any
shareholders who did not exercise
such will be deemed to have waived it.
2. This is necessary so as to not hinder
future financing plans of the
corporation. Some new investors may
be willing to invest only if all the new
shares will be issued to them
[Campos].
Nature of the Right to Vote
The right to vote is inherent and incidental to
the ownership of corporate stocks [Tan v.
Sycip, 499 SCRA 216 (2016)].
It represents the right of a stockholder to
participate in the control and management of
the corporation. However, it is subject to the
rule of the majority [Villanueva].
General Rule: No share may be deprived of
voting rights.
Exception: Shares classified and issued as
“preferred” or “redeemable” may be deprived of
voting rights: Provided, that there shall always
be a class or series of shares with complete
voting rights [Sec. 6].
Non-Voting Shares Non-voting shares are not
entitled to vote, except as provided for in par. 3
of Sec. 6. Holders of nonvoting shares shall
nevertheless be entitled to vote on the
following matters:
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a. Amendment of the articles of
incorporation;
b. Adoption and amendment of bylaws;
c. Sale, lease, exchange, mortgage,
pledge, or other disposition of all or
substantially all of the corporate
property;
d. Incurring, creating, or increasing
bonded indebtedness;
e. Increase or decrease of authorized
capital stock;
f. Merger or consolidation of the
corporation with another corporation or
other corporations;
g. Investment of corporate funds in
another corporation or business in
accordance with this Code; and
h. Dissolution of the corporation.
Except in the above cases, the vote necessary
to approve a particular corporate act shall be
deemed to refer only to stocks with right to vote
[Sec. 6].
Rules Applicable to Certain Kinds of Shares
a. Preferred or redeemable shares may
be deprived of the right to vote [Sec. 6].
b. Fractional shares of stock cannot be
voted.
c. Treasury shares have no voting rights
as long as they remain in the treasury.
d. No delinquent stock shall be voted
[Sec. 70].
e. A transferee of stock cannot vote if
his transfer is not registered in the
stock and transfer book of the
corporation.
f. In case a stockholder grants security
interest in his or her shares in stock
corporations, the stockholder-grantor
shall have the right to attend and vote
at meetings of stockholders.
Exception: The secured creditor is
expressly
given
by
the
stockholdergrantor such right in writing
which is recorded in the appropriate
corporate books [Sec. 54]
g. The sequestration of shares does not
entitle the government to exercise acts
of ownership over the shares. Even
sequestered shares may be voted
upon by the registered stockholder of
record [Cojuangco, Jr. v. Roxas, 195
SCRA 797 (1991)].
Exception: The PCGG may exercise
the voting right on sequestered shares
whenever it is able to comply with the
“two-tiered” or “public character” tests:
1. The two-tiered test is satisfied
when:
a. Prima facie evidence
show that the wealth
and/or the shares are
indeed illgotten; and
b. There is demonstrated
imminent danger of
dissipation
of
the
assets.
2. The two-tiered test does not
apply when the funds are prima
facie public in character or, at
least, affected with public
interest
[Republic
v.
COCOFED, 372 SCRA 462
(2001)].
h. When shares are jointly owned by
two or more persons, the consent of all
the co-owners shall be necessary.
Exception: There is a written proxy,
signed by all the co-owners,
authorizing one or some of them or any
other person to vote such share or
shares: Provided, That when the
shares are owned in an “and/or”
capacity, any one of the joint owners
can vote said shares or appoint a proxy
therefor [Sec. 55].
4. Remedial Rights
a. Individual Suit
A suit brought by the shareholder in his own
name against the corporation when a wrong is
directly inflicted against him.
Where a stockholder or member is denied the
right of inspection, his suit would be individual
because the wrong is done to him personally
and not to the other stockholders or the
corporation [Ago Realty & Development
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Corporation v. Dr. Angelita F. Ago, G.R. No.
211203 (2019)]
b. Representative Suit
A suit brought by the stockholder in behalf of
himself and all other stockholders similarly
situated when a suit brought by the
shareholder in his own name against the
corporation when a wrong is directly inflicted
against him or a wrong is committed against a
group of stockholders.
Where the wrong is done to a group of
stockholders, as where preferred stockholders'
rights are violated, a class or representative
suit will be proper for the protection of all
stockholders belonging to the same group [Ago
Realty & Development Corporation v. Dr.
Angelita F. Ago, G.R. No. 211203 (2019)]
c. Derivative Suit
The right of stockholders to bring derivative
suits is not based on any provision of the
Corporation Code or the Securities Regulation
Code but is a right that is implied by the
fiduciary duties that directors owe corporations
and stockholders. Derivative suits are,
therefore, grounded not on law, but on equity
[Ago Realty & Development Corporation v. Dr.
Angelita F. Ago, G.R. No. 211203 (2019)].
Definition
A suit brought by a stockholder for and on
behalf of the corporation for its protection from
the wrongful acts committed by the
directors/trustees of the corporation, when the
stockholder finds that he has no redress
because the directors/trustees, are the ones
vested by law to decide whether or not to sue.
It is an action brought by minority shareholders
in the name of the corporation to redress
wrongs committed against the corporation, for
which the directors refuse to sue.
It is a remedy designed by equity and has been
the defense of minority shareholders against
abuses by the majority [Villanueva].
An individual stockholder is permitted to
institute a derivative suit on behalf of the
corporation wherein he holds stock in order to
protect or vindicate corporate rights, whenever
officials of the corporation refuse to sue or are
the ones to be sued or hold the control of the
corporation. In such actions, the suing
stockholder is regarded as the nominal party,
with the corporation as the party in interest
[Ago Realty & Development Corporation v. Dr.
Angelita F. Ago, G.R. No. 211203 (2019)].
Derivative
Suit
Jurisprudence
as
Defined
in
It is a suit by a shareholder to enforce a
corporate cause of action.
It is a condition sine qua non that the
corporation be impleaded as a party because
not only is the corporation an indispensable
party, but it is also the present rule that it must
be served with process.
The judgment must be made binding upon the
corporation in order that the corporation may
get the benefit of the suit and may not bring
subsequent suit against the same defendants
for the same cause of action [Chua v. C.A.,
G.R. No. 150793 (2004)].
It is a suit brought by one or more
stockholders/members in the name and on
behalf of the corporation to redress wrongs
committed against it or protect/vindicate
corporate rights whenever the officials of the
corporation refuse to sue, or the ones to be
sued, or has control of the corporation
[Sundiang and Aquino].
The institution of a derivative suit need not be
preceded by a board resolution.
Since the board is guilty of breaching the trust
reposed in it by the stockholders, it is but logical
to dispense with the requirement of obtaining
from it authority to institute the case and to sign
the certification against forum shopping [Ago
Realty & Development Corporation v. Dr.
Angelita F. Ago, G.R. No. 211203 (2019)].
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Business Judgment Rule
As a general rule, when a wrong is committed
against a corporation, whether to bring the suit
or not primarily lies within the discretion and
exercise of business judgment of the BOD.
But where corporate directors are guilty of a
breach of trust, not of mere error of judgment
or abuse of discretion, and intra-corporate
remedy is futile or useless, a shareholder may
institute a derivative suit in behalf of himself
and other stockholders and for the benefit of
the corporation.
The purpose of the suit is to bring about a
redress of the wrong inflicted directly upon the
corporation
and
indirectly
upon
the
stockholders [Bitong v. C.A., G.R. No. 123553
(1998)].
Parties to a Derivative Suit
In a derivative suit, the suing stockholder is
merely a nominal party, while the corporation is
the real party in interest. Thus, the action must
be brought for the benefit and in the name of
the corporation [Villanueva].
The corporation is an unwilling co-plaintiff [Rule
3 Section 10, Rules of Court].
● The corporation should be made a
party to the suit, either as plaintiff or
defendant, for res judicata to apply.
● BUT the personal injury suffered by the
stockholder cannot disqualify him from
filing a derivative suit in behalf of the
corporation. It merely gives rise to an
additional cause of action for damages
against the erring corporate officers
[Gochan v. Young, G.R. No. 131889
(2001)].
Proper Forum for Derivative Suits
The Regional Trial Courts exercise jurisdiction
over derivative suits [Sec. 5.2., Securities
Regulation Code].
Requisites of Derivative Actions
1. That the person instituting the action be
a stockholder or member at the time
the acts or transactions subject of the
2.
3.
4.
5.
action occurred and the time the action
was filed;
That the stockholder or member
exerted all reasonable efforts, and
alleges the same with particularity in
the complaint, to exhaust all remedies
available under the AOI, by-laws, laws
or rules governing the corporation or
partnership to obtain the relief he
desires;
That there is no appraisal right
available for the act(s) complained of;
That the suit is not a nuisance or
harassment suit; [Rule 8, Interim Rules
of Procedure for Intra-Corporate
Controversies]
The
action
brought
by
the
stockholder/member must be “in the
name of the corporation or association”
[implied from 1st par. of Rule 8, Sec. 1
of the Interim Rules; see also Florete v.
Florete, G.R. No. 174909 (2016)].
The action brought by the shareholder
or member must be in the name of the
corporation or association [Villamor v.
Umale, G.R. No. 172843 (2014)].
6. Exhaustion
of
intra-corporate
remedies, i.e., has made a demand on
the BOD for the appropriate relief but
the latter has failed or refused to heed
his plea; and
7. The cause of action devolves on the
corporation, the wrongdoing or harm
having been, or being caused to the
corporation and not to the particular
stockholder bringing the suit [Lisam
Enterprises, Inc., represented by Lolita
A. Soriano and Lolita A. Soriano v.
Banco de Oro Unibank, Inc. et al., G.R.
No. 143264 (2012)].
Note: The “wrong” contemplated in a derivative
suit is one in which the injury alleged be indirect
as far as the stockholders are concerned and
direct only insofar as the corporation is
concerned [de Leon]. The reliefs sought pertain
to the corporation [Symaco Trading Corp. v.
Santos, G.R. No. 142474 (2005)].
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Stockholder may commence a derivative suit
“for mismanagement, waste or dissipation of
corporate asset because of a special injury to
him for which he is otherwise without redress
[Yu v. Yukayguan, G.R. No. 177549 (2009)].
Exhaustion of Administrative Remedies
General Rule: A derivative suit can only be
filed when there has been a showing of
exhaustion of intra-corporate remedies.
Exception: But where corporate directors are
the ones guilty of a breach of trust, and intracorporate remedy is futile or useless,
shareholders may institute a derivative suit for
the benefit of the corporation without having to
exhaust intra-corporate remedies in order to
bring about a redress of the wrong inflicted
directly upon the corporation and indirectly
upon the stockholders [Villanueva].
Requisites of a Derivative Suit according to
Jurisprudence [SMC v. Kahn, G.R. No. 85339
(1989)]
a. The party bringing the suit should be a
shareholder as of the time of the act or
transaction complained of the number
of his shares not being material;
b. He has tried to exhaust intra-corporate
institute the relevant suit against the
erring parties.
5. Obligations of a Stockholder
A subscription contract is unconditional (i.e.,
obligation to pay is not subject to any
contingency) and indivisible (as to the amount
and transferability). [Fua Cun v. Summers
(1923)] Hence, if the subscriber paid 20% of his
subscription, he is not entitled to the issuance
of certificates corresponding to 20% of the
shares.
Unpaid claim refers to any unpaid subscription,
and not to any indebtedness which a
subscriber may owe the corporation rising from
any other transaction. [China Banking Corp. v.
C.A., G.R. No. 117604 (1997)]
Liability to the Corporation for Interest on
Unpaid Subscription if so Required by the
By-Laws [Sec. 65]
General Rule: Subscribers for stock are NOT
liable to pay interest on his unpaid subscription.
Exception: If so required in the by-laws at the
rate fixed in the by-laws. If no rate is fixed in the
subscription contract, the prevailing legal rate
shall apply. [Sec. 65]
Notes: Transfer for consideration of treasury
shares is a sale (or disposition) by the
corporation (not subscription). A transfer of
previously issued shares by a stockholder to a
third person in a sale (or disposition). Transfer
of unissued shares is subscription.
Shareholders are not creditors of the
corporation with respect to their shareholdings
thereto and the principle of compensation or
set-off has no application.
Liability to the Corporation for Unpaid
Subscription [Sec. 66]
Payment of unpaid subscription or any
percentage thereof, together with any interest
accrued shall be made:
1. On the date specified in the
subscription contract; or
2. On the date stated in the call made by
the board.
Subscription contract is NOT required to be in
writing.
Failure to pay on such date shall:
1. Render the entire balance due and
payable; and
2. Make the stockholder liable for interest
at the legal rate on such balance,
unless a different interest rate is
provided in the subscription contract.
Watered Stocks — Shares issued as fully paid
when in truth no consideration is paid, or the
consideration received is known to be less than
the par value or issued value of the shares.
[Sec. 64]
Liability for Watered Stocks [Sec. 64]
Definition
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See b. Watered stocks under 10. Capital
Affairs
Liability of directors or officers [Sec. 64]
Any director or officer of a corporation who:
1. Consents to the issuance of stocks for
a consideration less than its par or
issued value;
2. Consents to the issuance of stocks for
a consideration other than cash, valued
in excess of its fair value; or
3. Having knowledge of the insufficient
consideration, does not file a written
objection with the corporate secretary.
The director or officer shall be liable to the
corporation or its creditors, SOLIDARILY with
the stockholder concerned to the corporation
and its creditors for the difference in value.
[Sec. 64]
Value received at
time of issuance of
the stock
Php XXX
Par or issued value
(XXX)
Liability for watered
stock
Php XXX
Personal liability of corporate directors,
trustees or officers attaches when they consent
to the issuance of watered down stocks or
when, having knowledge of such issuance, do
not file with the corporate secretary their written
objection. [SPI Technologies Inc. V. Mapua,
G.R. No. 191154 (2014)]
Liability for Dividends Unlawfully Paid
The sanction can be found in Sec. 158 which
can be:
1. A fine from P5,000 and not more than
P1,000 for each day of continuing
violation but in no case to exceed
P2,000,000;
2. An issuance of a permanent ceaseand-desist order, suspension or
revocation of the certificate of
incorporation, or dissolution and
forfeiture of corporate assets.
Liability for Assuming to Act as a
Corporation Knowing it to be Without
Authority
All persons who assume to act as a
corporation, knowing it to be without authority
to do so, shall be liable as general partners for
all debts, liabilities and damages incurred or
arising as a result thereof.
When any such ostensible corporation is sued
on any transaction entered or on any tort
committed by it as a corporation, it shall not be
allowed to use as a defense its lack of
corporate personality.
Anyone who assumes an obligation to an
ostensible
corporation
cannot
resist
performance thereof on the ground that there
was in fact no corporation. [Sec. 20]
6. Meetings
Kinds of Meetings
Meetings of directors, trustees, stockholders,
or members may be regular or special [Sec.
48].
When [Sec. 52]
The director, trustee or officer shall be liable as
a trustee for the corporation and must account
Regular meetings of directors or trustees shall
for the profits, which would otherwise have
be held monthly unless the by-laws provide
accrued to the corporation when:
otherwise.
1. A director, trustee willfully attempts to
acquire, or acquires any interest
Special meetings of the BOD or trustees may
adverse to the corporation
be held at any time upon the call of the
2. In respect of any matter which has
president
or as provided in the by-laws.
been reposed in them in confidence,
and upon which, equity imposes a
disability upon themselves to deal in
their own behalf. [Sec. 30]
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address administrative, technical, and logistical
issues [SEC Memo. Circ. No. 6, s. 2020].
Where [Sec. 53]
Meetings of directors or trustees of
corporations may be held anywhere in or
outside of the Philippines unless the by-laws
provide otherwise.
Notice
Notice of regular or special meetings stating
the date, time and place of the meeting must
be sent to every director or trustee at least two
(2) days* prior to the scheduled meeting,
unless a longer time is provided by the by-laws.
Note: This was previously just one day, under
the old corporation code.
A director or trustee may waive this
requirement, either expressly or impliedly [Sec.
52].
Attendance and Voting by Proxy
Directors or trustees cannot attend or vote by
proxy at board meetings [Sec. 52].
In the Philippines, teleconferencing and
videoconferencing of members of BOD of
private corporations is a reality, in light of
Republic Act No. 8792. The Securities and
Exchange
Commission
issued
SEC
Memorandum Circular No. 15, series of 2001,
on November 30, 2001, providing the
guidelines to be complied with in relation to
such conferences [Expertravel and Tours, Inc.
v. CA, G.R. No. 152392 (2005)].
Mandatory Recusal
In the old corporation code, directors or
trustees cannot be represented or voted by
proxies at board meetings [Sec. 25, CC].
A director or trustee who has a potential
interest in any related party transaction must
recuse from voting on the approval of the
related party transaction without prejudice to
compliance with the requirements of Section
31 of this Code [Sec. 52].
Allowable Alternative Modes of Attendance
Who Presides
Attendance in Meetings
Directors or trustees who cannot physically
attend or vote at board meetings can
participate and vote through:
1. Remote communication such as
videoconferencing, teleconferencing;
or
2. Other
alternative
modes
of
communication that allow them
reasonable opportunities to participate
[Sec. 52].
If a director or trustee intends to participate in
a meeting through remote communication,
he/she shall notify in advance the Presiding
Officer and the Corporate Secretary of his/her
intention. The Corporate Secretary shall note
such fact in the Minutes of the meeting.
The chairman, or in his absence, the president
shall preside at all meetings of the directors or
trustees as well as of the stockholders or
members, unless the bylaws provide otherwise
[Sec. 53].
Quorum
Quorum to Transact Corporate Business
General Rule: Majority of the directors or
trustees as stated in the articles of
incorporation, shall constitute a quorum to
transact corporate business [Sec. 52].
Exception: Unless the articles of incorporation
or the by-laws provide for a GREATER
majority.
Corporations may issue their own internal
procedures for the conduct of board meetings
through remote communication or other
alternative modes of communication to
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Decisions Reached by Majority of
Quorum
General Rule: Every decision reached by at
least a majority of the directors or trustees
constituting a quorum shall be valid as a
corporate act.
Exception: A vote of a majority of all the
members of the board is required in case of
election of officers [Sec. 52] and in other
instances provided for in the Revised
Corporation Code, such as, amendment to the
articles of incorporation and by-laws, and other
instances set forth in Secs. 36, 37, 39, and 41.
In Case of Death of Board Members
In stock corporations: Shareholders may
generally transfer their shares. Thus, on the
death of a shareholder, the executor or
administrator duly appointed by the Court is
vested with the legal title to the stock and
entitled to vote it. Until a settlement and division
of the estate is effected, the stocks of the
decedent are held by the administrator or
executor.
In non-stock corporations: Membership in
and all rights arising from a non-stock
corporation are personal and non-transferable,
unless the articles of incorporation or the
bylaws of the corporation provide otherwise. In
other words, the determination of whether or
not “dead members” are entitled to exercise
their voting rights (through their executor or
administrator), depends on the Articles of
Incorporation or by-laws [Tan v. Sycip, G.R.
No. 153468 (2006)].
Rule on Abstention
No inference can be drawn in a vote of
abstention. When a director or trustee
abstains, it cannot be said that he intended to
acquiesce in the action taken by those who
voted affirmatively. Neither, for that matter, can
such inference be drawn from the abstention
that he was abstaining because he was not
then ready to make a decision [Lopez v. Ercita,
G.R. No. L-32991 (1972)].
Summary of Board Meetings
Regular
Meeting
Special
Meeting
Description
Meetings
that are fixed
by law or as
provided by
the by-laws
Meetings
that are
called for a
special
purpose
Date and
time
Held
monthly,
unless
otherwise
provided by
the by-laws
Held anytime
upon call
Venue
Anywhere in and outside the
Philippines, unless
otherwise provided by bylaws
Notice
Date, time, and place of the
meeting must be sent to
every member at least two
(2) days prior to the
scheduled meeting, unless a
longer time is provided in
the by-laws
This requirement may be
waived
Attendance
Proxy not allowed
Voting through remote
communication is allowed
(videoconferencing,
teleconferencing, etc.)
Who
Presides
The chairman and in his
absence, the president
Quorum
General Rule: Majority of
the directors or trustees, as
stated in the AOI
Exception: Unless the AOI
or the by-laws provide for a
GREATER majority
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of
Directors
and
1. Repository of Corporate Powers
Doctrine of centralized management
Board is Seat of Corporate Powers
General Rule: Unless otherwise provided in
this Code, the board of directors or trustees
shall exercise the corporate powers, conduct
all business, and control all properties of the
corporation [Sec. 22].
Governing Body of the Corporation
It is well established in corporation law that the
corporation can act only through its board of
directors in the case of stock corporations, or
board of trustees in the case of non-stock
corporations [De Leon].
In case of close corporations, the
stockholders may manage the business of
the corporation rather than by a BOD, if the
Articles of Incorporation so provide [Sec.
96]
The power to purchase real property is vested
in the BOD or trustees. While a corporation
may appoint agents to negotiate for the
purchase of real property needed by the
corporation, the final say will have to be with
the board, whose approval will finalize the
transaction [Spouses Constantine Firme v.
Bukal
Enterprises
and
Development
Corporation, G.R. No. 146608 (2003)].
Indisputably, one of the rights of a stockholder
is the right to participate in the control or
management of the corporation. This is
exercised through his vote in the election of
directors because it is the BOD that controls or
manages the corporation [Gamboa v. Teves,
G.R. No. 176579 (2011)].
Exceptions:
In case of an Executive Committee duly
authorized in the by-laws [Sec. 34];
Exception to Exception: The following may
not be delegated to the executive committee:
1. Approval of any action for which
shareholders'
approval
is
also
required;
2. The filing of vacancies in the board;
3. The amendment or repeal of by-laws or
the adoption of new by-laws;
4. The amendment or repeal of any
resolution of the board which by its
express terms is not so amendable or
repealable; and
5. A distribution of cash dividends to the
shareholders [Sec. 34.]
In case of a contracted manager which may
be an individual, a partnership, or another
corporation
Note: In case the contracted manager is
another corporation, the special rule in Sec. 43
applies.
Limitations on powers of BOD/BOT
1. Limitations imposed by the Constitution,
statutes, articles of incorporation or bylaws;
2. Certain acts of the corporation that require
joint action of the stockholders and BOD:
a. Removal of director [Sec. 27]
b. Amendments
of
Articles
of
Incorporation [Sec. 15]
c. Fundamental changes [Sec. 37]
d. Declaration of stock dividends
[Sec. 42]
e. Entering
into
management
contracts [Sec. 43]
f. Fixing of consideration of no- par
shares [Sec. 61]
g. Fixing of compensation of directors
[Sec. 29]
3. Cannot exercise powers notpossessed by
the corporation.
Principle on Delegation of Board
Power
Under Sec. 23 (now Sec. 22, RCC), the power
and the responsibility to decide whether the
corporation should enter a contract that will
bind the corporation is lodged in the board,
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subject to the articles of incorporation, by-laws,
or relevant provisions of law.
However, just as a natural person may
authorize another to do certain acts for and on
his behalf, the BOD may validly delegate some
of its functions and powers to officers,
committees, or agents. The authority of such
individuals to bind the corporation is generally
derived from law, corporate by-laws or
authorization from the board, either expressly
or impliedly by habit, custom or acquiescence
in the general course of business [People’s
Aircargo v. CA, G.R. No. 117847 (1998)].
Corporate powers may be directly conferred
upon corporate officers or agents by statute,
the articles of incorporation, the by-laws, or by
resolution or other act of the board of directors
[Citibank, N.A. v. Chua, 220 SCRA 75 (1993)].
2.
Tenure,
Qualifications,
Disqualifications of Directors
and
a. Tenure
Directors – Term of 1 year from among the
holders of stocks registered in the corporation’s
books [Sec. 22].
Term v. Tenure
Term
Tenure
Time during which
the officer may claim
to hold the office as
of right and fixes the
interval after which
the several
incumbents shall
succeed one
another.
The period within
which the director
holds office,
including the
holdover period after
the end of his term
Not affected by the
holdover
Includes holdover
Fixed by statute, and
it does not change
simply because the
office may have
become vacant, nor
because the
incumbent holds
over in office beyond
the end of the term
due to the fact that a
successor has not
been elected and
has failed to qualify.
May be shorter or
longer (in case of a
holdover) than the
term for reasons
within or beyond the
power of the
incumbentMay be
shorter or longer (in
case of a holdover)
than the term for
reasons within or
beyond the power of
the incumbent
Trustees – Term not exceeding 3 years from
among the members of the corporation [Sec.
22].
[Valle Verde Country Club v. Africa, G.R. No.
151969 (2009)]
Holdover Principle
Permanent representation not allowed in
BOD
Upon failure of a quorum at any meeting of the
stockholders or members called for an election,
the directorate naturally holds over and
continues to function until another directorate
is chosen and qualified.
Each director and trustee shall hold office until
the successor is elected and qualified [Sec.
22].
The board of directors of corporations must be
elected from among the stockholders or
members directors every year. Estoppel does
not set in to legitimize what is wrongful (Grace
Christian High School v. CA, G.R. No. 108905,
October 23, 1997).
b. Qualifications
The failure to elect does not terminate the
terms of incumbent officers nor dissolve the
corporation.
Director: Must own at least one (1) share of
stock.
Trustee: Must be a member of the corporation.
A director who ceases to own at least one (1)
share of stock or a trustee who ceases to be a
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member of the corporation shall cease to be
such [Sec. 22].
To be eligible as a director, what is material is
the legal title to, not beneficial ownership of, the
stock as appearing on the books of the
corporation [Lee v. CA, G.R. No. 93695
(1992)].
Must be a natural person, of legal age, possess
full legal capacity
Must not be convicted by final judgment of an
offense punishable by imprisonment for a
period exceeding 6 years [Sec. 26]
Other qualifications as may be prescribed in
the by-laws of the corporation [Sec. 46].
While additional qualifications may be
prescribed, this cannot conflict with the
requirements as set by the RCC.
Note: The RCC removed the requirement that
majority of the directors or trustees must be
residents of the Philippines.
c. Disqualifications
A person shall be disqualified from being a
director, trustee, or officer of any corporation if,
within five (5) years prior to the election or
appointment as such, the person was:
a. Convicted by final judgment:
1. Of an offense punishable by
imprisonment for a period exceeding six (6)
years;
2. For violating this Code; and
3. For violating Republic Act No. 8799,
otherwise known as “The Securities
Regulation Code”; administratively liable for
any
b. Found administratively liable for any
offense involving fraud acts; and
COMMERCIAL LAW
Note: The foregoing is without prejudice to
qualifications or other disqualifications, which
the Commission, the primary regulatory
agency, or the Philippine Competition
Commission may impose in its promotion of
good corporate governance or as a sanction in
its administrative proceedings.
An amendment to the corporation’s by-laws
which renders a stockholder ineligible to be a
director, if he be also a director in a corporation
whose business is in competition with that of
the other corporation, has been sustained as
valid. This is based upon the principle that
where the director is so employed in the service
of a rival company, he cannot serve both, but
must betray one or the other. Such an
amendment "advances the benefit of the
corporation and is good" [Gokongwei, Jr. v.
SEC, G.R. No. L-45911 (1979)].
Note: See Sec. 160
3. Requirement
Directors
of
Independent
Independent Directors
An independent director is a person who, apart
from shareholdings and fees received from the
corporation, is independent of management
and free from any business or other
relationship which could or could reasonably
be perceived to materially interfere with the
exercise of independent judgment in carrying
out the responsibilities as a director [Sec. 22].
Requirement for Independent Directors
Corporations vested with public interest are
now required to have independent directors
constituting at least twenty percent (20%) of
the board [Sec. 22]. This is to promote good
governance.
These corporations include:
a. Corporations covered by the Securities
c. By a foreign court or equivalent foreign
Regulation Code, namely:
regulatory authority for acts, violations, or
1. Those whose securities are
misconduct similar to those enumerated in
registered with the Commission;
paragraphs (a) and (b) above [Sec. 26].
2. Corporations listed with an
exchange or with assets of at least Fifty
million pesos (P50,000,000.00); and
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3. Having two hundred (200) or more
holders of shares, each holding at least
one hundred (100) shares of a class of
its equity shares;
b. Banks and quasi-banks, NSSLAs,
pawnshops, corporations engaged in money
service business, pre-need, trust and
insurance companies, and other financial
intermediaries;
c. Other corporations engaged in business
vested with public interest like the above, as
may be determined by the Commission [Sec.
22].
Rules Governing all Methods of Voting
a.
The total number of votes cast shall not
exceed the number of shares owned by
the stockholders as shown in the books
of the corporation multiplied by the
whole number of directors to be elected
b.
No delinquent stock shall be voted
[Sec. 23].
Straight Voting
Every stockholder may vote such number of
shares for as many persons as there are
directors to be elected [Sec. 23].
Manner of Election
Cumulative Voting
Independent directors must be elected by the
shareholders present or entitled to vote in
absentia during the election of directors [Sec.
22].
Independent directors shall be subject to rules
and regulations governing their:
a. Qualifications, disqualifications, voting
requirements, duration of term and
term limit, maximum number of board
memberships; and
b. Other
requirements
that
the
Commission
will
prescribe
to
strengthen their independence and
align with international best practices
[Sec. 22].
4. Elections
Number of Directors and Trustees
Directors: Not more than fifteen (15)
Trustees: May be more than fifteen (15) [Sec.
13 and 91]
The RCC removed the minimum number of
directors which stood at five (5) under the old
code [Sec. 14, Old Corporation Code].
Election of Directors or Trustees [Sec. 23]
Methods of Voting
a.
Straight voting
b.
Cumulative voting for one candidate
c.
Cumulative voting by distribution
Cumulative Voting for One Candidate
A stockholder is allowed to concentrate his
votes and give one candidate as many votes
as the number of directors to be elected
multiplied by the number of his shares shall
equal [Sec. 23].
Illustration:
If there are 5 directors to be elected and Pedro,
as shareholder, has 100 shares, Pedro can
give 500 (5 x 100 shares) votes to just one
candidate.
Cumulative Voting by Distribution
A stockholder may cumulate his shares by
multiplying the number of his shares by the
number of directors to be elected and distribute
the same among as many candidates as he
shall see fit [Sec. 23].
Illustration:
In the illustration above, Pedro instead may
choose to give 100 votes to candidate 1, 100
votes to candidate 2, 100 votes to candidate 3,
150 votes to candidate 4, and 50 votes to
candidate 5.
Quorum
At all elections of directors or trustees, there
must be present, either in person or through a
representative authorized to act by written
proxy:
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a.
b.
COMMERCIAL LAW
Stock Corporations: The owners of
majority of the outstanding capital
stock
Non-Stock Corporations: A majority of
the members entitled to vote [Sec. 23].
It is necessary that there be a quorum. An
election without quorum is invalid.
If the owners of the majority of the outstanding
capital stock or majority of the members
entitled to vote are not present in person, by
proxy, or through remote communication, or
not voting in absentia at the meeting, such
meeting may be adjourned [Sec. 23].
b. The secretary, upon written
demand of the stockholders
representing or holding at least
a MAJORITY of the capital
stock or a MAJORITY of the
members entitled to vote;
3. There must be previous notice to the
stockholders or members of the
intention to remove a director; and
4. There must be a vote of the
stockholders representing 2/3 of
outstanding capital stock or in case of
a nonstock corporation, 2/3 of
members entitled to vote.
New Power of the SEC under the Revised
Corporation Code [Sec. 27]
Election Contests
All matters affecting the manner and conduct of
the election of directors are properly
cognizable by the regular courts. Otherwise,
these matters may be brought before the SEC
for resolution based on the regulatory powers it
exercises over corporations, partnerships, and
associations [SEC v. CA, 739 SCRA 99
(2014)].
5. Removal [Sec. 27]
General Rule: Any Director or Trustee of a
corporation may be removed from office, with
or without cause. [Sec. 27]
The Commission shall, motu proprio or upon
verified complaint, and after due notice and
hearing, order the removal of a director or
trustee elected despite the disqualification, or
whose disqualification arose or is discovered
subsequent to an election.
The removal of a disqualified director shall be
without prejudice to other sanctions that the
Commission may impose on the board of
directors or trustees who, with knowledge of
the disqualification, failed to remove such
director or trustee. [Sec. 27]
6. Filling of Vacancies [Sec. 28]
Exception: If the director was elected by the
minority, there must be cause for removal
because the minority may not be deprived of
the right to representation to which they may be
entitled to under Sec. 23 of the Code. [Sec. 27]
Note: The right to representation refers to the
right to cumulative voting for one candidate.
Requisites for Removal:
1. It must take place either at a regular
meeting or special meeting of the
stockholders or members called for the
purpose;
2. A special meeting for the purpose of
removing directors or trustees must be
called by:
a. The secretary, on order of the
president; or
Ways which the filling of a vacancy may
occur:
1. Expiration of term;
2. Removal;
3. Grounds other than the above, but the
remaining directors can constitute a
quorum.
4. Grounds other than the above, but the
remaining directors cannot constitute a
quorum for the purpose of filling the
vacancy;
5. By reason of an increase in the number
of directors or trustees.
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Cause of
Vacancy
Expiration
of term
Removal
COMMERCIAL LAW
Procedure
The election by stockholders shall
be held no later than the day of
such expiration at a meeting called
for that purpose.
The election may be held on the
same day of the meeting
authorizing the removal and this
fact must be so stated in the
agenda and notice of said
meeting.
Other
The election must be held no later
grounds,
than forty-five (45) days from the
but
the time the vacancy arose.
remaining
directors
can
constitute a
quorum
Other
grounds,
but
the
remaining
directors
CANNOT
constitute a
quorum:
a. The vacancy must be filled by
the stockholders or members in a
regular or special meeting for that
purpose; or
b. In case of the necessity of
emergency action, the vacancy
may be temporarily filled from
among the officers of the
corporation by unanimous vote of
the remaining directors or trustees.
By reason
of
an
increase in
the number
of directors
or trustees
Shall be filled only by an election
at a regular or at a special meeting
of stockholders duly called for the
purpose, or in the same meeting
authorizing the increase of
directors or trustees if so stated in
the notice of the meeting.
Note: In all elections to fill vacancies under this
section, the procedure set forth in Sections 23
and 25 of the Revised Corporation Code shall
apply. [Sec. 28]
Designation of director or trustee
A vacancy may be temporarily filled from
among the officers of the corporation by
unanimous vote of the remaining directors or
trustees when:
1. The vacancy prevents the remaining
directors from constituting a quorum;
and
2. Emergency action is required to
prevent grave, substantial, and
irreparable loss or damage to the
corporation.
The action by the designated director or trustee
shall be limited to the emergency action
necessary. [Sec. 28]
Term of designated director or trustee
The term of the designated director or trustee
shall cease:
1. Within a reasonable time from the
termination of the emergency; or
2. Upon election of the replacement
director or trustee, whichever comes
earlier. [Sec. 28]
7. Compensation [Sec. 29]
General Rule: Directors or trustees are only
entitled to reasonable per diems. They are not
entitled to compensation as directors or
trustees. [Sec. 29]
Exceptions:
a.
When Articles of Incorporation, bylaws, or an advance contract provides
for compensation.
b.
Compensation other than per diems
may also be granted to directors by the
vote of the stockholders representing
at least a majority of the Outstanding
Capital Stock or a majority of the
members at a regular or special
stockholders’ meeting.
Note: The total yearly compensation of
directors shall not exceed 10% of the net
income before income tax of the corporation
during the preceding year. [Sec. 29]
Added in the RCC
a.
The directors or trustees shall NOT
participate in the determination of their
own per diems or compensation.
b.
Corporations vested with public
interest
shall
submit
to
their
shareholders and the Commission, an
annual report of the total compensation
of each of their directors or trustees.
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Compensation of Directors as Corporate
Officers
The position of being Chairman and ViceChairman, like that of treasurer and secretary,
are not considered directorship positions, but
officership positions that would entitle the
occupants to compensation.
Duty of Diligence
The directors should not willfully and knowingly
vote for or assent to patently unlawful acts of
the corporation or act in bad faith or with gross
negligence in directing the affairs of the
corporation. [Sec. 30]
Likewise, the limitation placed under Sec. 30
(now Sec. 29, RCC) of the Corporation Code
that directors cannot receive compensation
exceeding 10% of the net income of the
corporation would not apply to the
compensation given to such positions since it
is being given in their capacity as officers of the
corporation and not as board members.
[Western Institute of Technology v. Salas, G.R.
No. 113032 (1997)]
Note: The conditions for the application of Sec.
31 (now Sec. 30, RCC) of the Corporation
Code require factual foundations to be first laid
out in appropriate judicial proceedings. Hence,
concluding that a person breached fiduciary
duties as an officer and member of the BOD of
a corporation without competent evidence
thereon would be unwarranted and
unreasonable. [Republic of the Philippines v.
Sandiganbayan (First Division) et al., G.R. No.
166859 (2011)]
8. Disloyalty
Duty of Loyalty
Three-Fold Duty
General Rule: Where a director, by virtue of
such office, acquires a business opportunity
which should belong to the corporation,
thereby obtaining profits to the prejudice of
such corporation, the director must account for
and refund to the latter all such profits.
In this jurisdiction, the members of the BOD
have a three-fold duty: duty of obedience,
duty of diligence, and duty of loyalty.
1. Duty of Obedience - shall direct the
affairs of the corporation only in
accordance with the purposes for
which it was organized;
2. Duty of Diligence - shall not willfully
and knowingly vote for or assent to
patently unlawful acts of the
corporation or act in bad faith or with
gross negligence in directing the affairs
of the corporation; and
3. Duty of Loyalty - shall not acquire any
personal or pecuniary interest in
conflict with their duty as such directors
or
trustees.
[Strategic
Alliance
Development Corp v. Radstock
Securities Ltd., G.R. No. 178158
(2009)]
Exception: Unless the act has been ratified
by a vote of the stockholders owning or
representing at least two-thirds (2/3) of the
outstanding capital stock. [Sec. 33]
Doctrine of Corporate Opportunity
Unless his act is ratified, a director shall refund
to the corporation all the profits he realizes on
a business opportunity which:
a. Corporation is financially able to
undertake
b. From its nature, is in line with
corporation’s business and is of
practical advantage to it; and
c.
One in which the corporation has an
interest or a reasonable expectancy.
Duty of Obedience
The Directors or Trustees and Officers should
direct the affairs of the corporations only in
accordance with the purposes for which it was
organized.
The rule shall be applied notwithstanding the
fact that the director risked his own funds in the
venture. [Sec. 33]
By embracing the opportunity, the self-interest
of the officer or director will be brought into
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conflict with that of his corporation. Hence, the
law does not permit him to seize the
opportunity even if he will use his own funds in
the venture. [Sundiang & Aquino]
A director, trustee, or officer shall be liable as a
trustee for the corporation and must account
for the profits which otherwise would have
accrued to the corporation if:
1. He attempts to acquire, or acquire any
interest adverse to the corporation
in respect of any matter which has
been reposed in them in confidence;
and
2. Upon which, equity imposes a disability
upon themselves to deal in their own
behalf. [Sec. 30]
Note: Differences between Sec. 30 and Sec.
33:
First, while both involve the same subject
matter (business opportunity) they concern
different personalities; Sec. 33 is applicable
only to directors and not to officers, whereas
Sec. 30 applies to directors, trustees and
officers.
Second, Sec. 33 allows a ratification of a
transaction by a self-dealing director by vote of
stockholders representing at least 2/3 of the
outstanding capital stock.
9. Business Judgment Rule
As a general rule, when a wrong is committed
against a corporation, whether to bring the suit
or not primarily lies within the discretion and
exercise of business judgment of the BOD.
1. But where corporate directors are guilty of a
breach of trust, not of mere error of judgment
or abuse of discretion, and inta-corporate
remedy is futile or useless, a shareholder may
institute a derivative suit in behalf of himself
and other stockholders and for the benefit of
the corporation,
2. The purpose of the suit is to bring about a
redress of the wrong inflicted directly upon the
corporation
and
indirectly
upon
the
stockholders [Bitong v. C.A., G.R. No. 123553
(1998)].
10. Solidary Liabilities for Damages
The directors and trustees are solidarily liable
for damages arising from the ff.
1. Willfully and knowingly voting for and
assenting to patently unlawful acts of
the corporation [Sec. 30];
2. Gross negligence or bad faith in
directing the affairs of the corporation
[Sec. 30];
3. Acquiring any personal or pecuniary
interest in conflict of duty [Sec. 30];
4. Consenting to the issuance of watered
stocks, or, having knowledge thereof,
failing to file objections with secretary
[Sec. 64];
5. Agreeing or stipulating in a contract to
hold himself liable with the corporation;
or
6. By virtue of a specific provision of law.
11. Personal Liabilities
General rule: Members of the Board, who
purport to act in good faith for and on behalf of
the corporation within the lawful scope of their
authority, are not liable for the consequences
of their acts. When the acts are of such nature
and done under those circumstances, they are
attributed to the corporation alone and no
personal liability is incurred [Price v. Innodata
Phils., Inc., G.R. No. 178505 (2008)].
Exception: When sufficient proof exists on
record that the officers acted fraudulently,
beyond his authority or when the officer agrees
to be personally liable on behalf of the
corporation.
Note: Members of the BOD who are also
officers are held to a more stringent liability
because they are in-charge of day-to-day
activities [Campos].
The provisions on seizing corporate
opportunity and disloyalty [Secs. 30 and 33]
shall also apply to corporate officers [Price v.
Innodata Phils., Inc., G.R. No. 178505 (2008)].
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Doctrine of Limited
Liability
Shields
shareholders
corporate
beyond their
contribution
capital
shareholding
corporation
the
from
liability
agreed
to the
or
in the
COMMERCIAL LAW
Doctrine of
Immunity
Protects a person
acting for and in
behalf
corporation
being
personally liable for
his
authorized
actions
Strains in Labor Law
The Supreme Court appears to have different
views regarding the personal liability of officers
when it comes to labor law violations:
Absent proof that the manager exceeded his
authority in dealing as regards the employee,
he cannot be held personally liable for the said
employee’s monetary compensation [Nicario v.
NLRC, GR No. 125340 (1998)].
Officers can be held personally liable for 13th
month pay of employees after the corporation
has ceased to exist. This is because the
officers are deemed to have acted on behalf of
the corporation [Restaurante Las Conchas v.
Llego, 372 Phil 697 (1999)].
12. Responsibility for Crimes
Since a corporation is a person by mere legal
fiction, it cannot be proceeded against
criminally because it cannot commit a crime in
which personal violence or malicious intent is
required.
Note: However, violations of the Code, if it is
committed by a corporation, the same may,
after notice and hearing, be dissolved in
appropriate
proceedings
before
the
Commission [Sec. 170].
If the offender is a corporation, the penalty
may, at the discretion of the court, be imposed
upon:
1. Such corporation and/or upon its
directors,
trustees,
stockholders,
members, officers, or employees
responsible for the violation or
indispensable to its commission; or
2. Anyone who shall aid, abet, counsel,
command, induce, or procure any
violation of this Code, or any rule,
regulation, or order of the Commission
[Sec. 171-172].
Criminal Liability of Corporate Agents
Criminal action is limited to the corporate
agents guilty of an act amounting to a crime
and never against the corporation itself.
Since the BOD is the repository of corporate
powers and acts as the agent of the
corporation, the directors may be held
criminally liable [Time Inc. v. Reyes, G.R. No.
L-28882 (1971)].
Corporations, partnerships, associations, and
other juridical entities cannot be put to jail.
Hence, the criminal liability falls on the human
agent responsible for the violation of the Trust
Receipts Law [Ong v. CA, G.R. No. 119858
(2003); see also Sec. 13, P.D. 115].
13. Special Fact Doctrine
General Rule:
Majority view: Directors only owe their duty to
the corporation. They owe no fiduciary duty to
stockholders, but they may deal with each
other at fair and reasonable terms, as if they
were unrelated. No duty to disclose facts
known to the director or officer. [Taylor v.
Wright, 53 N.Y.S. 423 (1945)]
Note: Minority View (Realistic View)
recognizes the directors’ obligation to the
stockholders individually as well as collectively,
and refuses to permit him to profit at the latter’s
expense by the use of information obtained as
a result of official position and duties.
Exception:
Special Facts Doctrine
Conceding the absence of a fiduciary
relationship in the ordinary case, where special
circumstances or facts are present which make
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it inequitable for the director to withhold
information from the stockholder –
Courts nevertheless hold that the duty to
disclose arises and concealment is fraud
Examples:
Concealment of the defendant-purchaser's
identity (the corporate officer had used an
agent go-between to avoid detection of his
actions by the seller here)
Failure to disclose significant facts that
materially affected the price of the stock.
[Strong v. Repide, 213 U.S. 419 (1909)]
14. Inside Information
The fiduciary position of insiders, directors, and
officers prohibits them from using confidential
information relating to the business of the
corporation to benefit themselves or any
competitor corporation in which they may have
a mere substantial interest.
Since loss and prejudice to the corporation is
not a requirement for liability, the corporation
has a cause of action as long as there is unfair
use of inside information.
It is inside information if it is not generally
available to others and is acquired because of
the close relationship of the director or officer
to the corporation.
An INSIDER means:
1. The issuer;
2. A director or officer (or any person
performing similar functions) of, or a
person controlling the issuer; gives or
gave him access to material
information about the issuer or the
security that is not generally available
to the public;
3. A government employee, director, or
officer of an exchange, clearing agency
and/or self-regulatory organization who
has access to material information
about an issuer or a security that is not
generally available to the public; or
4. A person who learns such information
by a communication from any
foregoing insiders. [Sec. 3.8, Securities
Regulation Code]
15. Contracts
a. By Self-Dealing Directors With the
Corporation [Sec. 31]
General Rule: A contract of the corporation
with (1) one or more of its directors, trustees,
officers or their spouses and relatives within
the fourth civil degree of consanguinity or
affinity is voidable, at the option of such
corporation. [Sec. 31]
Exception:
Such contract is VALID if all of the following
conditions are present:
1. The presence of such director or
trustee in the board meeting in which
the contract was approved was not
necessary to constitute a quorum for
such meeting;
2. The vote of such director or trustee was
not necessary for the approval of the
contract;
3. The contract is fair and reasonable
under the circumstances; and
4. In case of corporations vested with
public interest: Material contracts are
approved by at least two-thirds (2/3) of
the entire membership of the board,
with at least a majority of the
independent directors voting to
approve the material contract; and
5. In case of an officer: The contract has
been previously authorized by the
BOD. [Sec. 31]
Ratification
In case of absence of the first three* conditions
above, contract may be ratified if:
a.
Stockholders representing at least 2/3
of the outstanding capital stock or at
least 2/3 of the members in a meeting
called for the purpose voted to ratify the
contract;
b.
There is full disclosure of the adverse
interest of the directors or trustees
involved is made at such meeting; AND
c.
The contract is fair and reasonable
under the circumstances. [Sec. 31]
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b.
Between
Corporations
Interlocking Directors [Sec. 32]
With
General Rule: A contract between two or more
corporations having interlocking directors shall
NOT be invalidated on that ground alone. [Sec.
32]
Exception: If contract is fraudulent or not fair
and reasonable under the circumstances, such
contract is invalid. [Sec. 32]
Interlocking, characterized
Interlocking directors are persons who serve as
member of the board of directors of two or more
competing corporations or corporations
engaged in practically the same kind of
business.
Interlocking director with nominal and
substantial interest
Nominal Interest – His stockholdings are 20%
or less of the OCS
Substantial Interest –
exceed 20% of the OCS
His
stockholdings
If the interest of the interlocking director in one
of the corporations is substantial, while nominal
in the other, the contract shall be VALID, if the
following conditions are met, insofar as the
latter corporation is concerned:
1. The presence of such director or
trustee in the board meeting in which
the contract was approved was NOT
necessary to constitute a quorum for
such meeting;
2. That the vote of such director or trustee
was not necessary for the approval of
the contract; and
3. That the contract is fair and reasonable
under the circumstances.
Where (a) and (b) are absent, the contract can
be ratified by the vote of the stockholders
representing at least 2/3 of the outstanding
capital stock or at least 2/3 of the members in
a meeting called for the purpose voted to ratify
the contract, provided that:
1. Full disclosure of the adverse interest
of the directors/trustees involved is
made on such meeting;
2. The contract is fair and reasonable
under the circumstances. [Sec. 31-32]
J. Capital Affairs
1. Certificate of Stock
a. Nature of the certificate
Shares of stock so issued are personal
property and may be transferred by delivery of
the certificate or certificates indorsed by the
owner, his attorney-in-fact, or any other person
legally authorized to make the transfer [Sec.
62, RCC].
A certificate of stock is —
An instrument formally issued by the
corporation with the intention that the same
constitute the best evidence of the rights and
status of a shareholder
An instrument signed by the proper corporate
officer acknowledging that the person named in
the document is the owner of a designated
number of shares of stock. It is prima facie
evidence that the holder is a shareholder of a
corporation [Lao v. Lao, 567 SCRA 558,
2008)].
The paper representative or tangible evidence
of the stock itself and of the various interests
therein.
It is merely evidence of the holder’s interest
and status in the corporation, his ownership of
the share represented thereby.
It expresses the contract between the
corporation and the stockholder [Makati Sports
Club v. Cheng, G.R. No. 178523 (2010)].
A certificate of stock is NOT —
1. A condition precedent to the acquisition
of the rights and status of a shareholder
2. A stock in the corporation
3. The equivalent of ownership of the
share it represents
4. Essential to the existence of a share of
stock or the nature of the relation of
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shareholder to the corporation [Makati
Sports Club v. Cheng, G.R. No.
178523 (2010)].
b. Uncertificated shares
An uncertificated share is a subscription duly
recorded in the corporate books but has no
corresponding certificate of stock yet issued.
Uncertificated shares or securities are those
evidenced by electronic or similar records [Sec.
3.14, Securities Regulation Code].
Added provision in Sec. 62 of the Revised
Corporation Code:
The Commission may require corporations
whose securities are traded in trading markets
and, which can reasonably demonstrate their
capability to do so, to issue their securities or
shares of stocks in uncertificated or scripless
form in accordance with the rules of the
Commission.
Notwithstanding Sec. 62, RCC (Certificate of
Stock and Transfer of Shares), a corporation
whose securities are registered pursuant to the
SRC or listed on securities exchange may:
If so resolved by the BOD and agreed by a
shareholder,
investor
or
securities
intermediary, issue shares to, or record the
transfer of some or all its shares into the name
of such shareholders, investors or, securities
intermediary in the form of uncertified
securities.
The use of uncertified securities in these
circumstances shall be without prejudice to the
rights
of
the
securities
intermediary
subsequently to require the corporation to
issue a certificate in respect of any shares
recorded in its name; and
If so provided in its articles of incorporation and
by-laws, issue all of the shares of a particular
class in the form of uncertificated securities
and subject to a condition that investors may
not require the corporation to issue a certificate
in respect of any shares recorded in their name
[Sec. 43, Securities Regulation Code].
Transfers of Uncertificated Securities; How
Made
Valid as between parties - validly made and
consummated by appropriate book-entries in
the securities intermediaries, or in the stock
and transfer book held by the corporation or the
stock transfer agent.
A transfer made pursuant to the foregoing has
the effect of delivery of a security in bearer form
or duly indorsed in blank representing the
amount of security or right transferred,
including the unrestricted negotiability of that
security by reason of such delivery.
Valid as to corporation – when the transfer is
recorded in the books of the corporation so as
to show the names of the parties to the transfer
and the number of shares transferred [Sec.
43.3, Securities Regulation Code].
c. Negotiability; requirements for valid
transfer of stocks
Theory of Quasi-Negotiability
Although a stock certificate is sometimes
regarded as quasi-negotiable, in the sense that
it may be transferred by delivery, it is
wellsettled that the instrument is nonnegotiable, because:
1. The holder thereof takes it without
prejudice to such rights or defenses as
the registered owner or creditor may
have under the law
2. Except insofar as such rights or
defenses are subject to the limitations
imposed by the principles governing
estoppels [Republic v. Sandiganbayan,
G.R. Nos. 107789 & 147214, April 30,
2003].
Certificates of stock are not negotiable
instruments. Consequently —
1. A transferee under a forged
assignment acquires no title which can
be asserted against the true owner
unless the latter’s negligence has been
such as to create an estoppel against
him
2. If the owner of the certificate has
endorsed it in blank, and it is stolen
from him, no title is acquired by on
innocent purchaser for value [De los
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Santos v. Republic, G.R. No. L-4818
(1955)].
deed of assignment is not a fatal flaw which
renders the transfer invalid.
Street Certificate
When a stock certificate is endorsed in blank
by the owner thereof, it constitutes what is
termed as street certificate.
Requisites for a valid transfer per Sec. 62,
RCC:
1. Between the parties:
2. Delivery
3. Indorsement
4. To be valid as to third persons:
Recorded in the books of the
corporation [Republic v. Estate of Hans
Menzi, G.R. No. 152578 (2005)].
Upon its face, the holder is entitled to demand
its transfer into his name from the issuing
corporation.
Such certificate is deemed quasi-negotiable,
and as such the transferee thereof is justified
in believing that it belongs to the holder and
transferor [Santamaria v. Hongkong and
Shanghai Banking Corporation, 89 Phil. 780,
788-789 (1951)].
Requirements for Valid Transfer of Stocks
For a valid transfer of stocks, the requirements
are as follows:
1. There must be delivery of the stock
certificate;
2. The certificate must be endorsed by
the owner or his attorney-in-fact or
other persons legally authorized to
make the transfer; and
3. To be valid against third parties, the
transfer must be recorded in the books
of the corporation (i.e., showing the
names of the parties to the transaction,
the date of the transfer, the number of
the certificate or certificates and the
number of shares transferred) [Sec. 62,
RCC] [Bitong v. CA, G.R. No. 123553
(1998)].
No shares of stock against which the
corporation holds an unpaid claim shall be
transferable in the books of the corporation
[Sec. 62, RCC].
The Revised Corporation Code acknowledges
that the delivery of a duly indorsed stock
certificate is sufficient to transfer ownership of
shares of stock in stock corporations. Such
mode of transfer is valid between the parties.
In order to bind third persons, however, the
transfer must be recorded in the books of the
corporation. Clearly then, the absence of a
The execution of a deed of sale does not
necessarily make the transfer effective. The
delivery of the stock certificate duly indorsed by
the owner is the operative act that transfers the
shares. The absence of delivery is a fatal
defect which is not cured by mere execution of
a deed of assignment [Rural Bank of Lipa City
v. CA, G.R. No. 124535 (2001)].
The stock and transfer book is the basis for
ascertaining the persons entitled to the rights
and subject to the liabilities of a stockholder.
Where a transferee is not yet recognized as a
stockholder, the corporation is under no
specific legal duty to issue stock certificates in
the transferee’s name [Ponce v. Alsons
Cement Corp., G.R. NO. 139802 (2002)].
Citing Hager v. Bryan (1911): A mandamus
should not issue to compel the secretary of a
corporation to make a transfer of the stock on
the books of the company, unless it
affirmatively appears that he has failed or
refused so to do, upon the demand either:
1. Of the person in whose name the stock
is registered, or
2. Of some person holding a power of
attorney for that purpose from the
registered owner of the stock.
The purpose of registration is two-fold:
1. To enable the transferee to exercise all
the rights of a stockholder, including
the right to vote and to be voted for, and
2. To inform the corporation of any
change in share ownership so that it
can ascertain the persons entitled to
the rights and subject to the liabilities of
a stockholder [Batangas Laguna
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Tayabas Bus Co. v. Bitangas, G.R. No.
137934 (2001)].
Until challenged in a proper proceeding, a
stockholder of record has a right to participate
in any meeting.
His vote can be properly counted to determine
whether a stockholders’ resolution was
approved, despite the claim of the alleged
transferee.
On the other hand, a person who has
purchased stock, and who desires to be
recognized as a stockholder for the purpose of
voting, must secure such a standing by having
the transfer recorded in the corporate books.
Until the transfer is registered, the transferee is
not a stockholder, but an outsider
d. Issuance
Full payment
General Rule: No certificate of stock shall be
issued to a subscriber until the full amount of
his subscription together with interest and
expenses (in case of delinquent shares), if any
is due, has been paid [Sec. 63, RCC].
It is not the domicile of the owner of a certificate
but the domicile of the corporation which is
decisive
[Chua
Guan
v.
Samahang
Magsasaka, Inc. (1935)].
The residence of the corporation is the place
where the principal office of the corporation is
located as stated in its AOI, even though the
corporation has closed its office therein and
relocated to another place [Hyatt Elevators and
Escalators Corp. v. Goldstar Elevator Phils.,
Inc., G.R. No. 161026 (2005)].
Exception: In property taxation – the situs of
intangible property, such as shares of stocks,
is at the domicile or residence of the owner.
Exception to the Exception:
1. When a nonresident alien has shares
of stock in a domestic corporation, then
the situs will be in the Philippines; and
2. For purposes of the estate tax, the
gross estate of a resident decedent,
whether citizen or alien, or a citizen
decedent,
whether
resident
or
nonresident, includes his intangible
personal property wherever situated
[De Leon]
2. Watered Stocks
Exception: Where it was the practice of the
corporation since its inception to issue
certificates of stock to its individual
stockholders for unpaid shares of stock and to
give full voting power to shares fully paid
[Baltazar v. Lingayen Gulf Electric Power
Company, G.R. No. L-16236 (1965)].
a. Definition
Payment pro-rata
Watered stocks can either be par or no-par
value shares.
The entire subscription must be paid first
before the certificates of stock can be issued.
Partial payments are to be applied pro rata to
each share of stock subscribed [Nava v. Peers
Mktg. Corp., G.R. No. L-28120 (1976)].
Watered stock are shares issued as fully paid
when in truth —
1. No consideration is paid in any form; or
2. The consideration received is known to
be less than the par value or issued
value of the shares [Sec. 64, RCC].
e. Situs of the Shares of Stock
A watered stock is a stock issued in exchange
for:
1. A consideration less than its par value
or issued price; and
2. A non-cash consideration valued in
excess of its fair value [Herbosa, 2019].
General Rule: The situs of shares of stock is
the country where the corporation is domiciled
[Wells Fargo Bank v. CIR, G.R. No. L-46720
(1940)].
Scope
Watered stocks include the following:
1. Issued without consideration (bonus
share)
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2. Issued as fully paid when the
corporation has received less sum of
money than its par or issued value
(discounted share)
3. Issued for consideration other than
actual cash (i.e., property or services),
the fair valuation of which is less than
its par or issued value
4. Issue stock dividend when there are no
sufficient retained earnings or surplus
profit to justify it.
Note: Subsequent increase in the value of the
property used in paying the stock does not do
away with the watered stocks, nor cure the
defect in issuance. The existence of watered
stocks is determined at the time of issuance of
the stock.
Rationale Behind Prohibition
Stock watering is prohibited because:
1. Corporation is deprived of needed
capital and the opportunity to market its
securities to its own advantage
2. Existing and future stockholders who
are also injured by the dilution of their
proportionate
interests
in
the
corporation
3. Present and future creditors who are
injured as the corporation is deprived of
the assets or capital and reduces the
value of the corporate assets, which
stand as a substitute for the
stockholders’ personal liability to them
4. Persons who deal with it or purchase
its securities who are deceived
because stock watering is invariable
accompanied
with
misleading
corporate accounts and financial
statements
b. Liability of directors or officers [Sec.
64]
Any director or officer of a corporation who:
1. Consents to the issuance of stocks for
a consideration less than its par or
issued value;
2. Consents to the issuance of stocks for
a consideration other than cash, valued
in excess of its fair value; or
3. Having knowledge of the insufficient
consideration, does not file a written
objection with the corporate secretary.
The director or officer shall be liable to the
corporation or its creditors, SOLIDARILY with
the stockholder concerned to the corporation
and its creditors for the difference in value [Sec.
64].
Value received at time of
issuance of the stock
Php XXX
Par or issued value
Liability for watered stock
(XXX)
Php XXX
Personal liability of corporate directors,
trustees or officers attaches when they consent
to the issuance of watered-down stocks or
when, having knowledge of such issuance, do
not file with the corporate secretary their written
objection [SPI Technologies Inc. V. Mapua,
G.R. No. 191154 (2014)].
c. Trust Fund Doctrine for Liability for
Watered Stocks
Where the corporation issues watered stock
and thereby assumes an ostensible
capitalization in excess of its real assets, the
transaction necessarily involves —
1. The
misleading
of
subsequent
creditors; and
2. A constructive fraud upon creditors,
whether done with that purpose in mind
or not
Hence, it is held that recovery may be had by a
creditor in such case, even though the
corporation itself has no cause of action
against the stockholders.
1. Some of the earlier decisions put the
right of recovery in such a case upon
the so-called “trust fund doctrine.”
2. The creditors’ right of action to compel
the making good of the representation
as to the corporation’s capital is based
on fraud, and the trust fund doctrine is
only another way of expressing the
same underlying idea [De Leon].
Despite the view of foreign authors that the
fraud theory is the prevailing view, in the
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Philippine jurisdiction, the trust fund doctrine
on watered stock prevails.
1. Become delinquent; and
2. Subject to sale under Sec. 67 of RCC,
unless the BOD orders otherwise.
3. Payment of Balance of Subscription
Requisites for a valid call
Time when the balance of the subscription
should be paid:
1. On the date specified in the
subscription contract, without need of
demand or call.
2. If no date of payment has been
specified, on the date specified on the
call made by the BOD
3. If no date of payment has been
specified on the call made, within 30
days from the date of call; and
4. When insolvency supervenes upon a
corporation and the court assumes
jurisdiction to wind it up, all unpaid
subscriptions become payable on
demand, and are at once recoverable,
without necessity of any prior call.
a. Call by Board of Directors
The BOD of any stock corporation may, at any
time:
1. Declare due and payable to the
corporation unpaid subscriptions to the
capital stock; and
2. Collect the same or such percentage
thereof, in either case with accrued
interest, if any, as it may deem
necessary.
When Payment Should be Made
Payment shall be made:
a.
On the date specified in the contract of
subscription; or
b.
On the date stated in the call.
Failure to pay on such date shall —
1. Render the entire balance due and
payable; and
2. Make the stockholder liable for interest
at the legal rate on such balance,
unless a different rate of interest is
provided for in the by-laws.
If within 30 days from said date no payment is
made, all stocks covered by said subscription
shall —
SEC opined on July 21, 1976 that the following
are the requisites for a valid call:
1. It must be made in the manner
prescribed by law;
2. It must be made by the BOD; and
3. It must operate uniformly upon all the
shareholders.
There are two instances when call is not
necessary to make the subscriber liable for
payment of the unpaid subscription:
When, under the terms of the subscription
contract, subscription is payable, not upon call,
but immediately, or on a specified day, or when
it is payable in installments at specified times;
[Sec. 66, RCC] and
If the corporation becomes insolvent, which
makes the liability on the unpaid subscription
due and demandable, regardless of any
stipulation to the contrary in the subscription
agreement [Villanueva].
b. Notice Requirement
Where call is necessary, notice must be given
to the stockholder concerned. A call without
notice to the subscriber is practically no
call at all.
The notice is regarded as a condition
precedent to the right of recovery. It must,
therefore, be alleged and proved to maintain an
action for the call [Lingayen Gulf Electric Power
Co., Inc. v. Baltazar, G.R. No. L-4824 (1965)].
The right to notice of call, however, may be
waived by the subscriber [De Leon].
4. Sale of Delinquent Shares
Delinquent Shares - shares in which the
corresponding subscription or balance remains
unpaid after a grace period of 30 days from —
a.
The date specified in the contract of
subscription; or
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The date stated in the call made by the
BOD.
All stocks covered by said subscription shall
thereupon become delinquent and shall be
subject to delinquency sale, unless the BOD
orders otherwise [Sec. 67].
2. The date, time and place of the sale,
which shall not be less than 30 days
nor more than 60 days from the date
the stocks became delinquent, which is
30 days after the date specified in the
contract of subscription or on the date
stated in the call.
a. Effect of Delinquency
Notice of sale [Sec. 67]
Effects of Delinquency
If the BOD resolves to proceed with the sale:
1. Notice of sale and a copy of the
resolution shall be sent to every
delinquent
stockholder
either
personally or by registered mail.
2. Notice of sale shall furthermore be
published once a week for 2
consecutive weeks in a newspaper of
general circulation in the province or
city where the principal office of the
corporation is located.
Generally, delinquency suspends the rights of
a subscriber, except the right to receive
dividends
1. No delinquent stock shall be voted for
2. No delinquent stock shall be entitled to
vote or to representation at any
stockholders’ meeting.
3. Delinquent stock shall be subject to
delinquency sale.
A subscriber acquires all the rights of a
shareholder at the point of subscription. His
political and economic rights are not impaired
by the fact that he has unpaid subscription.
Delinquency suspends the rights of a
subscriber, except the right to receive
dividends.
The dividends corresponding to such shares, if
any, shall be applied against the unpaid
amount. [Herbosa, 2019].
Note: The holder thereof shall NOT be entitled
to any of the rights of a stockholder except the
right to dividends. But the dividends it will
receive will be subject to Sec. 42, RCC, that is
1. Cash dividends shall first be applied to
the unpaid balance on the subscription
plus costs and expenses; and
2. Stock dividends shall be withheld until
the unpaid subscription is fully paid.
b. Call by Resolution of the Board of
Directors
The BOD may, by resolution, order the sale of
delinquent stock and shall specifically state —
1. The amount due on each subscription
plus all accrued interest, and
Auction sale
Procedure for delinquency sale [Sec. 67,
RCC]
1. Call for payment made by the BOD.
2.
Notice of call served on each
stockholder.
3.
Notice of delinquency issued by the
BOD upon failure of the stockholder to
pay within 30 days from date specified.
4. Service of notice of delinquency on the
non-paying
subscriber,
PLUS
publication in a newspaper of general
circulation in the province or city where
the principal office of the corporation is
located, once a week for 2 consecutive
weeks.
Note: Requirements on notice and publication
are mandatory. Lacking such requirements,
the stockholder may question the sale as
provided under Sec. 67, RCC.
Public Auction
The highest bidder is one who is willing to pay
the balance of the subscription for the least
number of shares.
The stock so purchased shall be transferred to
such purchases in the books of the corporation
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and a certificate of such stock shall be issued
in his favor.
The remaining shares, if any, shall be credited
in favor of the delinquent stockholder who shall
likewise be entitled to the issuance of a
certificate of stock covering such shares.
of the
by
a.
b.
c.
stock certificate or certificates, indorsed
The owner; or
The owner’s attorney-in-fact; or
Other person legally authorized to
make the transfer [Sec. 62].
Sale of partially paid shares
If there are no bidders, the corporation must bid
for the whole number of shares regardless of
how much the shareholders has paid. Such
stocks will pertain to the corporation as fully
paid treasury stocks.
Payment by Delinquent Stockholder
The delinquent stockholder may stop the
auction by paying to the corporation on or
before the date specified for the sale the
balance due on his subscription, plus accrued
interest, costs of advertisement and expenses
of the sale.
Otherwise, the public auction shall proceed
and the delinquent shares shall be sold to the
bidder that will pay the full amount of the
balance of subscription with accrued interest,
costs and expenses of the sale, for the smallest
number of shares or fraction of a share.
Irregularities in the delinquency sale [Sec.
68]
Action to recover delinquent stock must be on
the ground of irregularity or defect in:
a.
the notice of sale or
b.
in the sale itself of delinquent stock
Unless, party seeking to recover first pays or
tenders to the party holding the stock the sum
for which the same was sold, with interest from
the date of sale at the legal rate.
The action must be commenced within 6
months from the date of sale.
5. Alienation of Shares
Sale of fully paid shares
Shares of stock so issued are personal
property and may be transferred by the delivery
No shares of stock against which the
corporation holds any unpaid claim shall be
transferable in the books of the corporation
[Sec. 62].
A corporation may refuse to acknowledge and
register a sale or assignment of shares which
are not fully paid and may continue to hold the
original subscriber liable on the payment of the
subscription.
a. However, the above principle in
Section 62 cannot be utilized by the
corporation to refuse to recognize
ownership over pledged shares
purchased at public auction.
b. The term “unpaid claims” refers to “any
unpaid claims arising from unpaid
subscription, and not to any
indebtedness which a subscriber or
stockholder may owe the corporation
arising from any other transactions
[China Banking Corp. v. CA, G.R. No.
117604 (1997)].
Sale of a portion of shares not fully paid
The SEC has opined on several occasions that
a stockholder who has not paid the full amount
of his subscription cannot transfer part of his
subscription in view of the indivisible nature of
a subscription contract.
Rationale Behind Prohibition
The reason behind the principle of disallowing
transfer of not fully paid subscription to several
transferee is that it would be difficult to
determine:
1. Whether or not the partial payments
made should be applied as —
a. Full
payment
for
the
corresponding
number
of
shares which can only be
covered by such payment; or
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b. Proportional payment to each
and all of the entire number of
subscribed shares
2. The unpaid balance to be assumed by
each transferee [Villanueva].
Sale of all of shares not fully paid
The SEC has opined that the entire
subscription, although not yet fully paid, may
be transferred to a single transferee, who
because of the transfer must assume the
unpaid balance.
It is necessary, however, to secure the consent
of the corporation, since the transfer of
subscription
rights
and
obligations
contemplates a novation of contract which
under Article 1293 of the Civil Code cannot be
made without the consent of the creditor
[Villanueva].
5. Alienation of Shares
a. Allowable Restrictions on the Sale of
Shares
General Rule: Free Transferability of Shares
Shares of stock so issued are personal
property and may be transferred [Sec. 62]
Exception:
In
CLOSE
corporations,
restrictions on the right to transfer shares may
be provided in the Articles of Incorporation,
bylaws, and certificates [Sec. 97]. Note: The
SEC has allowed corporations other than close
corporations to provide for restrictions on the
right to transfer share
Involuntary dealings
Right to Encumber
Shares Shares of stock are personal property,
and the owner has an inherent right, as incident
of ownership to transfer the same at will, which
would include the power to encumber the
shares.
The right of a stockholder to pledge, mortgage
or otherwise encumber his shares is
recognized under Sec. 54 of the RCC which
regulates the manner of voting on pledged or
mortgaged shares.
Restrictions on the Right to Encumber
Shares
Restriction
Absolutely prohibits
the stockholders
from pledging or
mortgaging their
shares without the
consent of the BOD
Valid/Invalid
INVALID
It would be violative
of the statutory right
of the stockholders
to encumber shares
of stock as allowed
in Sec. 54
Merely allows the
VALID and binding
corporation or
existing stockholders
to accept the offer
within the option
period, and
thereafter, if no one
accepts the offer,
the stockholder is
free to pledge or
mortgage his shares
in favor of any 3rd
party
Right to Vote of Secured Creditors and
Administrators
General Rule: In case a stockholder grants
security interest in his or her shares in stock
corporations, the stockholder-grantor shall
have the right to attend and vote at meetings of
stockholders
Exception: Unless the secured creditor is
expressly given by the stockholder-grantor
such right in writing which is recorded in the
appropriate corporate books [Sec. 54].
Executors, administrators, receivers, and other
legal representatives duly appointed by the
court may attend and vote on behalf of the
stockholders or members without need of any
written proxy [Sec. 54].
Attachment,
Execution
and
Involuntary Dealings on Shares
Other
Attachments of shares of stock are not
included in the term “transfer” as provided in
[Section 62, RCC]. Both the Revised Rules of
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Court and [Revised Corporation Code] do not
require annotation in the corporation’s STB for
the attachment of shares to be valid and
binding on the corporation and third parties
[Chemphil Export & Import Corp. v. CA, 251
SCRA 257 (1995)].
A bona fide transfer of shares, not registered in
the corporate books, is not valid as against a
subsequent lawful attachment of said shares,
regardless of whether the attaching creditor
had actual notice of said transfer or not. All
transfers not so entered on the books of the
corporation are absolutely void as against third
parties; not because they are without notice or
fraudulent in law or fact, but because they are
made so void by statute [Garcia v. Jomouad,
323 SCRA 424 (2000)].
Bias Against Voluntary Sales
By the strict application of Sec. 63 of the
Corporation Code [now Sec. 62, RCC] to cover
only the sale, assignment, or absolute
disposition of shares of stock, the SC has
placed a bias against voluntary sales,
assignments or dispositions of shares of stock
vis-à-vis pledges, mortgages, attachment or
levy thereof.
To be valid and binding on third parties, the
voluntary sale, assignment or disposition of
shares requires the essential element of
registration in the stock and transfer book
Otherwise the sale, assignment or disposition
is considered void as to third parties, even
when they have actual notice.
In contrast, when it comes to pledge,
mortgage, encumbrance, attachment or levy of
shares, registration thereof in the stock and
transfer book is not essential either for validity
or as a species of notifying third parties
[Villanueva].
The doctrine of equality of shares states that
all stocks issued by the corporation are
presumed equal with the same privileges and
liabilities, provided that the Articles of
Incorporation is silent on such differences [Sec.
6].
There is a presumption of equality of the rights
and features of shares when nothing is
expressly provided to the contrary.
a. Although a corporation has the power
to classify its shares of stock, provide
for preferences and other conditions,
no presumption should exist to
distinguish one share from another.
b. Sec. 6 of the RCC now requires that the
distinguishing features be stated also
in the Certificate of Stock
b. Requisites of a Valid Transfer
Same as requirements for valid transfer of
stocks.
No transfer shall be valid, except as between
the parties, until the transfer is recorded in the
books of the corporation showing:
a. The names of the parties to the
transaction
b. The date of the transfer
c. The number of the certificate or
certificates and
d. The number of shares transferred [Sec.
62].
The failure to register a sale or disposition of
shares of stock in the books of the corporation
would render the same invalid to all persons,
including the attaching creditors of the seller
[Uson v. Diosomito, 61 Phil. 535 (1935)].
6. Corporate Books and Records
Every corporation shall keep and carefully
preserve at its principal office all information
including but not limited to:
1. Articles of incorporation and by-laws
and all their amendments;
2. Current ownership structure and voting
rights of corporation
3. Names and addresses of all members
of BOD/trustees and the executive
officers
4. Record of all business transactions
5. Record of resolutions of BOD/Trustees
and of stockholders/members
6. Copies
of
latest
reportorial
requirements
submitted
to
the
Commission; and
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7. Minutes
of
all
meetings
stockholders/members
or
BOD/trustees.
of
of
Stock Corporations [Sec. 73]
Stock corporations must also keep:
1. Books that record all business
transactions of the corporation which
shall include contract, memoranda,
journals, ledgers, etc;
2. Minute book for meetings of the
stockholders/members;
3. Minute book for meetings of the
board/trustees;
4. Stock and transfer book, which shall
contain:
a. A record of all stocks in the
names of the stockholders
alphabetically arranged;
b. The installments paid and
unpaid on all stocks for which
subscription has been made,
and the date of payment of any
installment;
c. A
statement
of
every
alienation, sale or transfer of
stock made, the date thereof,
by and to whom made; and
d. Such other entries as the bylaws may prescribe
Note: The duty to keep these books is
imperative and mandatory. The stockholder
can likewise inspect the financial statements of
the corporation [Sec. 73].
Financial Statements [Sec. 74]
A corporation shall furnish a stockholder or
member its most recent financial statement
within 10 days from receipt of written request.
At a regular meeting, the Board shall present a
financial report of the operations of the
corporation for the preceding year, which shall
include financial statements duly signed and
certified in accordance with the Code.
Exception: However, if the total assets or total
liabilities of the corporation is less than Six
hundred thousand pesos (P600,000.00), or
such other amount as may be determined
appropriate by the Department of Finance, the
financial statements may be certified under
oath by the treasurer and the president.
a. Right to Inspect Corporate Records
Who May Inspect
Corporate records shall be open to inspection
by any director, trustee, stockholder or
member of the corporation.
A requesting party who is not a stockholder or
member of record, or is a competitor, director,
officer, controlling stockholder or otherwise
represents the interests of a competitor shall
have no right to inspect or demand
reproduction of corporate records.
The inspecting or reproducing party shall
remain bound by confidentiality rules under
prevailing laws, such as the rules on trade
secrets or processes under the Intellectual
Property Code, Data Privacy Act, and the
Securities Regulation Code.
Manner and Time of Inspection
Inspection may be in person or by a
representative at reasonable hours on
business days, and a demand in writing may be
made for copies of such records or excerpts
from said records.
Directors of a corporation have the unqualified
right to inspect the books and records of the
corporation at all reasonable times.
The right of inspection is not to be denied on
the ground that the director or shareholder is
on unfriendly terms with the officers of the
corporation whose records are sought to be
inspected.
A director or stockholder can make copies,
abstracts, and memoranda of documents,
books, and papers as an incident to the right of
inspection, but cannot, without an order of a
court, be permitted to take books from the
office of the corporation.
However, a director or stockholder does not
have any absolute right to secure certified
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copies of the minutes of the corporation until
these minutes have been written up and
approved by the directors [Veraguth v. Isabela
Sugar, G.R. No. L-37064 (1932)].
A stockholder of a sequestered company has
the right to inspect and/or examine the records
of the corporation pursuant to Sec. 74 of the
Corporation Code (now Sec. 73, RCC) [Africa
v. PCGG, G.R. No. 83831 (1992)].
b. Effect of Refusal to Inspect Corporate
Records
If the corporation denies or does not act on a
demand for inspection, the aggrieved party
may report such to the Commission.
The Commission shall conduct a summary
investigation and issue an order directing the
inspection.
Refusal to allow inspection is a criminal
offense. Such refusal, when done in violation of
Sec. 74(4) of the Corporation Code (now Sec.
73, RCC), properly falls within the purview of
Sec. 144 of the same code and thus may be
penalized as an offense [Yujuico and Sumbilla
v. Quiambao and Pilapil, G.R. No. 180416
(2014)]. (please note that the Code’s
provisions have been changed under the RCC)
General Rule:
Any officer or agent of the corporation who
shall refuse to allow inspection shall be liable
to the director, trustee, stockholder or member
for damages, and shall be punished with a
fine: [Sec. 73]
1. Ranging
from
P10,000.00
to
P200.000.00
2. When the violation is injurious or
detrimental to the public, the penalty is
a fine ranging from P20.000.00 to
P400.000.00 [Sec. 161]
Because the obligations provided for in Sec.
73, RCC fall on the corporation, violation of the
same is done by the corporation; thus, criminal
action based on such violation can only be
maintained against corporate officers or other
such persons acting on behalf of the
corporations.
Exception:
If such refusal is made pursuant to a resolution
or order of the BOD/BOT, the liability shall be
imposed upon the directors or trustees who
voted for such refusal:
Defenses
It shall be a defense to any action under
Section 73:
1. That the person demanding to examine
has improperly used any information
secured through any prior examination
2. That the person was not acting in
good faith or for a legitimate purpose
in making the demand to examine
3. That the person is a competitor,
director, officer, controlling stockholder
or otherwise represents the interests of
a competitor.
Remedies when inspection is refused
a. Mandamus
b. Injunction
c. Action for damages
d. File an action under Sec. 161 to impose
a penal offense by fine and/or
imprisonment.
Under the Rules of Court, the writ of
mandamus should be granted only if the court
is satisfied that justice so requires [Sec. 8, Rule
65].
K. Dissolution and Liquidation
1. Modes of dissolution
Based on jurisprudence, the methods of
effecting dissolution as prescribed by law are
exclusive, and a corporation cannot be
dissolved except in the manner prescribed by
law [De Leon].
Dissolutions may be either 1) voluntary or 2)
involuntary
Voluntary
Involuntary
Voluntary surrender
of its charter by the
vote of the BOD/T
Expiration of the
shortened corporate
term [Sec 36
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Involuntary
1. Where no creditors are affected [Sec.
134]
and the
stockholders/membe
rs where no
creditors are
affected [Sec 134
By the judgment of
the SEC after
hearing of petition
for voluntary
dissolution, where
creditors are
affected
a. Voluntary and involuntary dissolution
This type of dissolution is initiated by the
corporation. It does not prejudice, or is not
consented by creditors.
By legislative
enactment
Amending the AOI to Failure to organize
shorten its term [Sec and commence
136]
business within 5
years from
incorporation [Sec
21
In case of a
corporation sole, by
submitting to the
SEC a verified
declaration of the
dissolution for
approval
Cessation of
business for 5 years
[Sec 21
By merger or
consolidation
By order of the SEC
on grounds under
existing laws [Sec
138]
By order of the
Courts following a
quo warranto
proceeding, a
proceeding involving
a financially
distressed
corporation, or for
grounds under
existing laws.
Note: Where the veil of corporate fiction is
pierced, it does not operate as a cause for the
dissolution of the corporation.
Procedure
If dissolution of a corporation does not
prejudice the rights of any creditor (Sec. 134):
a. Notice of the meeting should be given
to the stockholders or members by
personal delivery, registered mail, or by
any means authorized under its bylaws
at least 20 days prior to the meeting.
b. The notice of meeting should also be
published once prior to the meeting
1. Notice shall contain the time,
place and object of the meeting
2. in a newspaper published in
the place where the principal
office of said corporation is
located, or if no newspaper is
published in such place, then in
a newspaper of general
circulation in the Philippines.
c. The resolution to dissolve must be
approved by the majority of the BOD/T
and approved by at least the majority of
the Outstanding Capital Stock or
majority of the members.
d. The corporation must submit the
following to the SEC:
1. A
verified
request
for
dissolution
stating
the
following:
a. the reason for the
dissolution
b. the form, manner, and
time when the notices
were given
c. names
of
the
stockholders
and
directors or members
and
trustees
who
approved
of
the
dissolution
d. the date, place, and
time of the meeting in
which the vote was
made,
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e. date of publication
2. Copy of the resolution certified
by the majority of the BOD/T
and countersigned by the
secretary.
3. Proof of publication
4. Favorable
recommendation
from the appropriate regulatory
agency, when necessary
5. The signed and countersigned
copy will be filed with the SEC
and the latter will issue the
certificate of dissolution.
Withdrawal of the request [Sec. 137]
The corporation may withdraw its verified
request for dissolution within 15 days from
receipt by the SEC. Otherwise, the SEC shall
approve the request and issue the certificate of
dissolution.
Effectivity of the dissolution [Sec. 134]
Dissolution shall take effect upon the issuance
of the certificate of dissolution by the SEC.
Favorable
recommendation
by
the
appropriate agency required [Sec. 134]
No application of dissolution will be approved
without the favorable recommendation of the
appropriate government agency for:
1. Banks,
2. banking and quasi-banking institutions,
3. pre-need,
insurance
and
trust
companies,
4. non-stock
savings
and
loans
associations (NSSLA),
5. pawnshops, and
6. other financial intermediaries
2. Where creditors are affected [Sec.
135]
This covers a case where the corporation
petitions for its dissolution which may prejudice
the rights of creditors or are not consented by
all of them. Here, the corporation is not under
financial distress or in a state of insolvency. In
those cases, the corporation must file a petition
for rehabilitation or liquidation in court
[Herbosa, 2019].
a. A petition shall be filed with the SEC
containing the following:
1. signature by a majority of its
BOD/T or other officers having
management of its affairs;
2. verified by its president, or
secretary or one of its director
or trustees;
3. all claims and demands against
the corporation; and
4. resolved upon by affirmative
vote of the stockholders
representing at least ⅔ of the
Outstanding Capital Stock or ⅔
of members;
b. The corporation must submit the
following to the SEC.
1. The petition for dissolution
stating the following:
a. the reason for the
dissolution;
b. the form, manner, and
time when the notices
were given;
c. the date, place and
time of the meeting in
which the vote was
made
2. A copy of the resolution
authorizing the dissolution,
certified by the majority of the
BOD/T and countersigned by
the secretary.
3. A list of all its creditors
c. If the petition is sufficient in form and
substance, the SEC shall issue an
order fixing the date on or before which
objections to the petition may be filed.
Such date shall not be less than 30
days nor more than 60 days after the
entry of the order.
d. A copy of the order shall be published
at least once a week for 3 consecutive
weeks in a newspaper of general
circulation published in the municipality
or city of the corporation’s principal
office. If none, in a newspaper of
general circulation in the Philippines. A
similar copy shall be posted for 3
consecutive weeks in 3 public places in
such municipality or city.
e. A hearing of any issue or objections
raised shall be conducted 5 days after
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the lapse of the expiration of the time to
file objections.
If the objections are insufficient or the
material facts in the petition are true,
judgment shall be rendered dissolving
the corporation and directing the
disposition of assets. The judgment
may include the appointment of a
receiver.
1. As long as 2/3 vote is obtained,
no member/ stockholder can
prevent such dissolution unless
the majority stockholders acted
in bad faith. The latter may be
held liable for damages
[Campos].
2. Even where there are creditors
of the corporation who may be
prejudiced by the dissolution, it
is still possible for the
corporation to terminate its
existence prior to the expiration
of its term, provided said
creditors
are
given
the
opportunity to present their
claims and objections so that
their
interests
may
be
protected [Campos].
3. By shortening of corporate term [Sec.
136]
A voluntary dissolution may be effected by
amending the AOI to shorten the corporate
term under Sec 16.
Ipso Facto Dissolution
Upon approval of the expired shortened term,
the corporation shall be deemed dissolved
without any further proceedings. The
corporation shall be deemed dissolved without
any further proceedings, taking effect on the
day following the last day of the corporate term.
Shortening vs. Expiration [Divina]
Shortening of the
Corporate Term
Has the effect of
dissolving the
Expiration of the
Original Term
Where a corporation
elects to retain its
Shortening of the
Corporate Term
Expiration of the
Original Term
corporation, ipso
facto, once the
shortened term has
arrived
corporate term, and
such term has
expired, the
corporation may file
a petition for revival
of corporate
existence.
4. Withdrawal of Dissolution [Sec. 137]
A withdrawal of the request for dissolution shall
be:
a. Made in writing;
b. Duly verified by any incorporator,
director, trustee, shareholder, or
member;
c. Signed by the same number of
incorporators,
directors,
trustees,
shareholders, or members necessary
to request for dissolution as set forth in
Sec. 133-136;
d. Submitted no later than fifteen (15)
days from receipt by the Commission
of the request for dissolution.
A withdrawal of the petition for dissolution shall
be in the form of a motion and similar in
substance to a withdrawal of request for
dissolution but shall be verified and filed prior
to publication of the order setting the deadline
for filing objections to the petition.
SEC Action
Upon receipt of a withdrawal of request for
dissolution, the Commission shall withhold
action on the request for dissolution and shall,
after investigation:
a. Make a pronouncement that the
request for dissolution is deemed
withdrawn;
b. Direct a joint meeting of the board of
directors or trustees and the
stockholders or members for the
purpose of ascertaining whether to
proceed with dissolution; or
c. Issue such other orders as it may deem
appropriate.
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5. Involuntary dissolution
third persons or take away the vested
rights of its creditors [De Leon].
By Expiration of Corporate Term
The RCC provides that a corporation shall
have perpetual existence. The AOIs of existing
corporations shall be deemed amended to
reflect their perpetual term. The exception is
when the AOIs of corporations created under
the effectivity of this Code provide for a specific
period [Sec 11].
An existing corporation may opt out of the rule
on perpetual existence by notifying the
Commission, provided it was approved by
shareholders, and without prejudice to the
appraisal right of dissenting stockholders
[Herbosa, 2019]. When such term has expired,
a petition for revival of corporate existence may
be filed [Divina].
Legislative Dissolution
The inherent power of Congress to make laws
carries with it the power to amend or repeal
them. Involuntary corporate dissolution may be
effected through the amendment or repeal of
the Revised Corporation Code [implied from
Sec. 184, De Leon].
The limitations on the power to dissolve
corporations by legislative enactment are as
follows:
a. Under
the
Constitution,
the
amendment, alteration, or repeal of the
corporate franchise of a public utility
shall be made only “when the common
good so requires”;
b. Under Sec. 84 of the Code, it is
provided that: “No right or remedy in
favor of or against any corporation, its
stockholders, members, directors,
trustees, or officers, nor any liability
incurred by any such corporation,
stockholders, members, directors,
trustees, or officers, shall be removed
or impaired either by the subsequent
dissolution of said corporation or by
any subsequent amendment or repeal
of this Code or of any part thereof”;
c. While Congress may provide for the
dissolution of a corporation, it cannot
impair the obligation of existing
contracts between the corporation and
Note: Thus, except for the expiration of
its term, no dissolution can be effective
without some act of the State [Daguhoy
Enterprises v. Ponce, G.R. No. L-6515
(1954)].
Non-Use of Corporate Charter [Sec 21; Sec
138(a)]
If a corporation fails to formally organize and
commence the transaction of its business or
construction of its works within 5 years, its
certificate of incorporation shall be deemed
revoked, its corporate powers shall cease, and
the corporation shall be deemed dissolved
[Sec. 21].
Dissolution in this case is automatic [Campos].
Formal organization includes not only the
adoption of the by-laws but also the
establishment of the body which will administer
the affairs of the corporation and exercise its
powers
By-laws should be adopted within one month of
receipt of official notice of the issuance of the
certificate of incorporation, otherwise the
certificate may be suspended or revoked [PD
902-A, Sec. 6 (i)(5)].
Continuous Inoperation of Corporation
[Sec 21; 138(b)]
If a corporation commenced its business but
fails to continue operations after least 5
consecutive years, the corporation is first
placed on delinquent status, after due notice
and hearing.
The delinquent corporation is given 2 years to
resume operations and comply with all the
requirements that the SEC shall prescribe.
Otherwise, the SEC will prescribe its
dissolution. The corporation may have the
revocation reconsidered. Otherwise, the SEC
may proceed to involuntary dissolution with
notice and hearing.
Dissolution in this case is not automatic
[Campos].
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Dissolution by the SEC on Grounds Under
the Code and Other Existing Laws
Upon receipt of a lawful court order
dissolving the corporation
The Revised Corporation Code also introduced
a number of changes on involuntary
dissolution. Sec. 138 codified the grounds that
may lead to involuntary dissolution by the
Commission motu proprio or upon filing of a
verified complaint by any interested party.
The ground under (c) may involve or arise from
a quo warranto proceeding involving a de facto
corporation (Sec 19, RCC) or a liquidation
proceeding involving an insolvent debtor under
FRIA (infra).
Grounds for dissolution [Sec. 21; Sec 138]
a. Non-use of corporate charter [Sec. 21];
b. Continuous
inoperation
of
a
corporation [Sec. 21];
c. Upon receipt of a lawful court order
dissolving the corporation;
d. Upon finding by final judgment that the
corporation procured its incorporation
through fraud;
e. Upon finding by final judgment that the
corporation:
1. Was created for the purpose of
committing, concealing or
aiding the commission of
securities
violations,
smuggling, tax evasion, money
laundering, or graft and corrupt
practices;
2. Committed or aided in the
commission
of
securities
violations,
smuggling,
tax
evasion, money laundering, or
graft and corrupt practices, and
its stockholders knew; and
3. Repeatedly and knowingly
tolerated the commission of
graft and corrupt practices or
other fraudulent or illegal acts
by its directors, trustees,
officers, or employees.
Non-use of corporate
continuous inoperation
charter
and
The grounds for dissolution under (a) and (b)
as discussed above, will lead to the dissolution
of the corporation unless the corporation files a
petition to set aside its delinquency status, and
the SEC grants it.
Upon finding by final judgment that the
corporation procured its incorporation
through fraud
The ground under (d) constitutes cases where
a corporation misrepresented its purpose of
incorporation, or when the incorporators used
fictitious names, there was then fraud in the
procurement of the certificate.
Upon finding by final judgment that the
corporation was created for an unlawful
purpose
The ground under (e) is a new provision. Here,
a corporation found by final judgment to have
been created for the purpose of committing,
concealing, or aiding the commission of
securities violations, smuggling, tax evasion,
money laundering, or graft and corrupt
practices, may be subjected to involuntary
dissolution by the SEC, motu proprio or upon
filing of a verified complaint by any interested
2. Methods of liquidation
Liquidation is the process by which all the
assets of the corporation are converted into
liquid assets (cash) in order to facilitate the
payment of obligations to creditors, and the
remaining balance if any is to be distributed to
the stockholders.
Among corporate creditors, the rules on
concurrence and preference of credits apply.
It is a proceeding in rem.
The end of corporate relations does not result
in the immediate termination of corporate
existence. A corporation shall have the
extended term of 3 years to wind up its
corporate affairs and liquidate its assets
[Herbosa].
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The RCC provides that any distributable asset
to an unknown creditor or corporator shall be
escheated in favor of the national government.
This was previously in favor of the LGU where
such assets are located, under the old Code.
It may not acquire new rights or incur new
obligations.
Difference Between
Rehabilitation
Pending actions against the corporation are not
extinguished
Liquidation
and
Liquidation
Rehabilitation
The winding up of a
corporation so that
assets are
distributed to those
entitled to receive
them. It is the
process of reducing
assets to cash,
discharging liabilities
and dividing surplus
or loss
Contemplates a
continuance of
corporate life and
activities in an effort
to restore and
reinstate the
corporation to its
former position of
successful operation
and solvency. Both
cannot be
undertaken at the
same time
[Phil. Veterans Bank v. Employees Union, G.R.
No. 105364 (2001)].
Winding up of corporate affairs
Under Sec. 139 of the RCC, a corporation
loses its juridical personality and can no longer
enter into transactions that have the effect of
continuing its business. The only exception to
this is the “winding-up” period which takes
place for 3 years after the loss of the
corporation’s juridical personality.
It continues to be a body corporate for
purposes of prosecuting and defending suits by
and against it and to enable it to settle and
close its affairs, culminating in the disposition
and distribution of its remaining assets.
It may, during the 3-year term, appoint a trustee
or a receiver who may act beyond that period.
A corporation in the process of liquidation has
no legal authority to engage in any new
business, even if the same is in accordance
with the primary purpose stated in its article of
incorporation.
It may only have rights as may be required by
the process of liquidation [Herbosa].
Pending actions against the corporation may
still be prosecuted against the corporation even
beyond the 3-year period.
General Rule: The creditors of the corporation
who were not paid within the 3-year period may
follow the property of the corporation that may
have passed to its stockholders
Exceptions:
1. Unless the action is barred by
prescription or laches; or
2. Unless there was a disposition of said
property in favor of a purchaser in good
faith.
Suits not brought against the corporation
within the 3-year period may still be
prosecuted against the corporation, since there
is nothing in Sec. 122, par. 1 which bars action
for the recovery of the debts of the corporation
against the liquidator thereof after the lapse of
the winding up period of 3 years [Republic of
the Philippines v. Marsman Dev. Co., G.R. No.
L-175109 (1972)].
Right of the corporation to appeal a
judgment is not extinguished by the
expiration of the 3-year period
Corporations whose certificate of registration
was revoked by the SEC may still maintain
actions in court for the protection of its rights
which includes the right to appeal [Paramount
Insurance Corp. v. A.C. Ordonez Corp., G.R.
No. 175109 (2008)].
Methods of Liquidation
a. By the corporation itself or its board of
directors or trustees (Sec. 139[1],
RCC)
b. By conveyance to a trustee within a
three-year period (Sec. 139[2], RCC;
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Board of Liquidators v. Kalaw, G.R. No.
L-18805, 1967)
c. By a management committee or
rehabilitation receiver appointed by
SEC (Sec. 119, RCC)
d. By liquidation after three years
a. By the Corporation Itself
The liquidation and distribution of the assets of
a dissolved corporation is a matter of internal
concern of the corporation and falls within the
power of the directors and stockholders or duly
appointed liquidation trustee [SEC Opinion,
July 23, 1996].
The corporation through its board and/or
executive officers are in charge for this method
of liquidation.
The Legislature intended to let the
shareholders have the control of the assets of
the corporation upon dissolution in winding up
its affairs.
The normal method of procedure is for the
directors and executive officers to have charge
of the winding up operations, though there is
the alternative method of assigning the
property of the corporation to trustees for the
benefit of its creditors and shareholders [China
Banking Corp. V. M. Michelin & Cie, 58 Phil.
261 (1933)].
The termination of the life of a corporate entity
does not by itself cause the extinction or
diminution of the rights and liabilities of such
entity.
If the 3-year extended life has expired without
a trustee or receiver having been expressly
designated by the corporation, within that
period, the BOD (or trustees) itself, may be
permitted to so continue as "trustees" by legal
implication.
Such designation as “trustees” is for the
purpose of completing the corporate liquidation
[Pepsi-Cola Products Philippines, Inc. v. CA,
G.R. No. 145855 (2004)].
A corporation under liquidation may not amend
its articles of incorporation to extend its
lifespan.
When a corporation is liquidating pursuant to
the statutory period of 3 years to liquidate, it is
only allowed to continue for the purpose of final
closure of its business and no other purposes.
In fact, within that period, the corporation is
enjoined from “continuing the business for
which it was established” [Alhambra Cigar and
Cigarette Mfg. v. SEC, G.R. No. L23606
(1968)]
b. Conveyance to A Trustee Within A 3Year Period
Liquidation may also be placed in the hands of
a trustee or assignee. All the corporate assets
are conveyed to such trustee or assignee by a
resolution of stockholders at any time during
the 3-year period [Sec. 139].
In this method, the 3-year limitation DOES
NOT apply, provided that the designation of the
trustees is made within the period.
General Rule: There is no time limit within
which the trustee must finish the liquidation,
and he may sue and be sued as such even
beyond the 3-year period.
Exception: The trusteeship is limited in its
duration by the deed of trust. Trustees to whom
the corporate assets have been conveyed
pursuant to liquidation may sue and be sued as
such in all matters connected with the
liquidation [National Abaca v. Pore, G.R. No. L16779 (1961)].
The trustee of a dissolved corporation may
commence a suit that can proceed to final
judgment even beyond the 3-year period of
liquidation [Reburiano v. CA, G.R. No. 102965
(1999)].
Unless the trusteeship is limited in its duration
by the deed of trust, there is no time limit within
which the trustee must finish liquidation [Board
of Liquidators v. Kalaw, G.R. No. L-18805
(1967)].
Any corporate creditor, shareholder, member,
or other person-in-interest may petition the
courts for the appointment of a different
trustee/s in liquidation [Clemente et.al. v. CA,
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G.R. No. 82407 (1995), citing Gelano v. CA,
103 SCRA 90]
c. By Management Committee
Rehabilitation Receiver
or
In SEC’s judgment dissolving the corporation
and directing disposition of its assets as justice
requires, it may appoint a receiver to collect
such assets and pay the debts of the
corporation [Sec. 135].
In the exercise of its jurisdiction, the
Commission possesses the following powers:
1. To appoint one or more receivers of the
property, real and personal, which is
the subject of the action pending before
the Commission in such other cases
whenever necessary in order to
preserve
the
rights
of
the
partieslitigants and/or protect the
interest of the investing public and
creditors;
2. To create and appoint a management
committee, board, or body upon
petition or motu propio to undertake the
management
of
corporations,
partnerships or other associations not
supervised or regulated by other
government agencies in appropriate
cases [PD 902-A, as amended by PD
1799, Sec. 6].
While the SEC has the authority to dissolve a
corporation, it does not have the authority to
settle disputes arising from its liquidation. A
commercial court is in the best position to
convene all stakeholders, including creditors,
to ascertain their claims and determine their
preferences [Consuelo Metals Corporation v.
Planters Development Bank G.R. No. 152580
(2008)].
Who is a Rehabilitation Receiver
A rehabilitation receiver is a natural or juridical
person appointed by the court pursuant to RA
10142 or the Financial Rehabilitation and
Insolvency Act (FRIA) of 2010, whenever
necessary in order to preserve the rights of the
parties-litigants and/or protect the interest of
the investing public and creditors.
The receiver’s principal duty is to:
a.
Preserve and maximize the value of
the assets of the debtor during the
rehabilitation proceedings;
b.
Assess the viability of rehabilitation,
and implement a Rehabilitation Plan
Unless appointed by the court, the
rehabilitation receiver shall not take over the
management and control of the debtor but may
recommend the appointment of a management
committee over the debtor in the cases
provided by the FRIA [Sec. 31, FRIA].
What is a Management Committee
The management committee is the body
appointed by the court who shall take the place
of the management and the governing body of
the debtor corporation and assume their rights
and responsibilities. A rehabilitation receiver
may also be appointed to assume the
management of the corporation [Sec. 36,
FRIA].
A management committee may be appointed in
the following cases:
1. Actual or imminent danger of
dissipation,
loss,
wastage
or
destruction of the debtor’s assets or
other properties;
2. Paralyzation
of
the
business
operations of the debtor; or
3. Gross mismanagement of the debtor,
or fraud or other wrongful conduct on
the part of, or gross or willful violation
of the FRIA by existing management of
the debtor or the owner, partner,
director, officer or representative/s in
management of the debtor [Sec. 36,
FRIA].
Effects of Appointing a Receiver
The appointment of a receiver suspends the
authority of the corporation, as well as its
directors and officers, over the properties of the
corporation.
The receiver shall act as the representative of
the corporation.
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The receivership shall exist indefinitely until the
complete settlement and liquidation of the
corporation,
unless
otherwise
limited
[Herbosa].
The mere appointment of a receiver, without
anything more, does not result in the
dissolution of the corporation, nor bar it from
the exercise of its corporate rights [Leyte
Asphalt and Mineral Oil Co. Ltd., v. Block
Johnston and Breenbrawn, G.R. No. 9755
(1928)].
While the appointment of a receiver rests within
the sound judicial discretion of the court, such
discretion must, however, always be exercised
with caution and governed by legal and
equitable principles, the violation of which will
amount to its abuse, and in making such
appointment the court should take into
consideration all the facts and weigh the
relative advantages and disadvantages of
appointing a receiver to wind up the corporate
business [China Banking Corp. v. M. Michelin
& Cie, 58 Phil. 261 (1933)].
Receivership vs. Trusteeship
Receivership
Receivership is
created by judicial
appointment of a
rehabilitation
receiver and/or
management
committee
Trusteeship
Trusteeship is a
contractual
relationship that can
be created by a
corporation through
its Board of
Directors.
Both involve transfers of legal/naked title
from the corporation to the trustee, receiver,
or management committee.
From the time the assets of the corporation
are transferred to a trustee or receiver
pursuant to liquidation, all such assets are
then held by and in the name of the trustee
or receiver who can lawfully proceed with
liquidation even if the corporation no longer
exists, because he has title to the assets
The receiver and
management
committee members
The trustee in
liquidation is
accountable under
Receivership
Trusteeship
are deemed officers
of the court and
must therefore be
accountable to the
court by provision of
law
the terms of the trust
agreement
Both are not subject to the 3-year period
because the corporation is substituted in
either case by the trustee or the receiver
who may sue or be sued even after the
expiration of the 3-year period.
However, in the case of trusteeship, the
trustee must have been designated within
the 3-year period
3-Year Period Does Not Apply
When the liquidation of a dissolved corporation
has been placed in the hands of a receiver or
assignee:
a.
The 3-year period prescribed by law for
liquidation cannot be made to apply,
and
b.
The receiver or trustee may institute all
actions leading to the liquidation of the
assets of the corporation even after the
expiration of said period [Sumera v.
Valencia, 67 Phil. 721 (1939)].
d. Liquidation after three years
Under Sec. 139, after the expiration of the 3year winding-up period, pending actions by or
against the corporation are abated.
It should not, however, be construed as to
prevent a corporation from pursuing activities
which would complete the final liquidation of a
dissolved corporation.
In this case, Northern Luzon Corporation Inc.
which term has long expired, was unable to
dispose of its remaining assets even during the
3- year period granted it by Sec. 122 [now Sec.
139, RCC].
Accordingly, it should be allowed to continue
liquidating its remaining assets in order to
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complete the process of dissolving the
corporation.
L. Other corporations
Likewise, it should be allowed to distribute the
proceeds from said disposition to its
stockholders or creditors if any. A contrary
interpretation would have unjust and absurd
results. SEC-OGC Opinion No. 15-07 (2015)
citing SECAC No. 347 (1991).
1. Close corporations
Directors as Trustees
If full liquidation can only be effected after the
3-year period and there is no trustee, the
directors may be permitted to complete the
liquidation by continuing as trustees by legal
implication [Reburiano v. CA, G.R. No. 102965
(1999)].
A corporation’s BOD is not rendered functus
officio by its dissolution.
Sec. 122 [now Sec 139] allows a corporation to
continue its existence for a limited purpose,
necessarily there must be a board that will
continue acting for and on behalf of the
dissolved corporation for that purpose [Aguirre
v. FQB+7, Inc., G.R. No. 170770 (2013)].
Continuation of Pending Suits
The trustee of a corporation may continue to
prosecute a case commenced by the
corporation within 3 years from its dissolution
until rendition of the final judgment, even if such
judgment is rendered beyond the 3-year period
allowed by Sec 139, RCC.
a.
However,
an
already
defunct
corporation is barred from initiating a
suit after the lapse of the said 3-year
period.
b.
If a petition is filed after the corporate
existence, the effect is that petitioner
lacks the capacity to sue as a
corporation.
c.
To allow such petition to prosper, on
the ground that it is for the sole purpose
of liquidating the corporation’s assets,
would be to circumvent the provisions
of Sec. 122 of the Corporation Code
(now Sec. 139, RCC) [Alabang
Development Corporation v. Alabang
Hills Village Association and Rafael
Tinio, G.R. No. 187456 (2014)].
Statutory Definition
A close corporation is –
a. One whose AOI provides that:
1. All the corporation’s issued stock of
all classes, exclusive of treasury
shares, shall be held of record by
not more than a specified number
of persons, not exceeding twenty
(20);
2. All the issued stock of all classes
shall be subject to one or more
specified restrictions on transfer
permitted by this Title; and
3. The corporation shall not list in any
stock exchange or make any public
offering of its stocks of any class.
b. One where two-thirds (2/3) or more of
its voting stock or voting rights is NOT
owned or controlled by another
corporation, which is not a close
corporation within the meaning of this
Code [Sec. 95, RCC].
A narrow distribution of ownership does not, by
itself, make a close corporation. When a
corporation’s AOI does not contain the
provisions enumerated under Sec. 96 of the
Code [now Sec. 95, RCC], such corporation is
not a “close corporation”. It does not become
one either, just because only a few individuals
owned 99.866% of its subscribed capital stock
[San Juan Structural and Steel Fabricators v.
CA, G.R. No. 129459 (1998)].
“Incorporated Partnership”
A
close
corporation
embodies
what
businessmen perceive to be the best features
of a partnership and a corporation, such as –
a.
Corporation: separate personality,
limited liability, and the right of
succession
b.
Partnership: delectus personae (the
selection of a person satisfactory to
oneself for a position), and general
management by all partners of
business affairs [Villanueva].
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Incorporating a Close Corporation
General Rule: Any corporation may be
incorporated as a close corporation.
Exceptions: The following cannot be
incorporated as a close corporation –
a. Mining or oil companies
b. Stock exchanges
c. Banks
d. Insurance companies
e. Public utilities
f. Educational institutions;
g. Corporations declared to be vested
with public interest in accordance with
the provisions of this Code [Sec. 95,
RCC].
Applicability of RCC Provisions
The provisions of Title XII (Close Corporations)
primarily govern close corporations, while other
Titles of the RCC apply suppletory, except as
otherwise provided under Title XII [Sec. 95,
RCC].
a.
Characteristics
Corporation
of
a
Close
Direct Management by Stockholders
The AOI of a close corporation may provide
that the business of the corporation shall be
managed by the stockholders of the
corporation rather than by a board of directors
[Sec. 96, RCC].
The feature of a close corporation, whereby
there is a merger of stock ownership and active
management is what significantly distinguishes
it from other corporations [Villanueva].
Identity of Stock Ownership and Active
Management
All or most of the stockholders of a close
corporation are active in the corporate
business either as directors, officers, or other
key men in management [Campos].
Stockholders’ Meeting Unnecessary
So long as the abovementioned AOI provision
continues in effect, no meeting of stockholders
need be called to elect directors.
Provided, that the
corporation shall be:
stockholders
of
the
1. Deemed to be directors for the purpose
of applying the provisions of this Code;
and, unless the context clearly requires
otherwise
2. Subject to all liabilities of directors
[Sec. 96, RCC].
Identity and Number of Stockholders
1. Stockholders of record not more than
20
2. Stocks not publicly listed
3. Restricted transfer of ownership of
stocks [Sec. 95, RCC].
Voting Stock or Voting Rights Not Held by
Another Corporation
A corporation cannot be deemed as a close
corporation when at least two-thirds (2/3) of its
voting stock or voting rights is owned or
controlled by another corporation, which is not
a close corporation within the meaning of this
Code [Sec. 95, RCC].
b. Validity of restrictions on transfer of
shares
In order to be binding on any purchaser in good
faith, restrictions on the right to transfer shares
must appear in the:
1. AOI;
2. By-laws; and
3. Certificate of stock [Sec. 97, RCC].
Right of First Refusal
Restrictions on transfer shall not be more
onerous
than
granting
the
existing
stockholders or the corporation the option to
purchase the shares of the transferring
stockholder.
a.
Said option is subject to such
reasonable terms, conditions or period
stated in the AOI, by-laws, and
certificate of stock.
b.
If upon the expiration of said period, the
existing stockholders or the corporation
fails to exercise the option to purchase,
the transferring stockholder may sell
their shares to any third person [Sec.
97, RCC].
The right of first refusal, as discussed above, is
the most onerous transfer restriction allowed.
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Such right is a control scheme
essential to a close corporation.
It allows the existing stockholders the
power to maintain the character of
delectus personae by preventing an
outsider from coming into and
interfering with the affairs of the close
corporation [Villanueva].
A transfer restriction should NOT amount to a
deprivation of a stockholder’s right to ultimately
dispose of his shareholdings [Rural Bank of
Salinas v. CA, 210 SCRA 510 (1992)].
c. Pre-emptive right
Definition
The preemptive right is a right granted to
stockholders to subscribe to all issues or
disposition of shares of any class, in proportion
to their respective shareholdings. [Sec. 38,
RCC].
No limit to pre-emptive rights. Thus, includes
sale of treasury shares and for acquisition of
properties
Scope of Pre-emptive Right in Ordinary
Corporations
In ordinary corporations, the pre-emptive right
shall not extend to –
1. Shares issued in compliance with laws
requiring stock offerings or minimum
stock ownership by the public; or
2. Shares issued in good faith with the
approval
of
the
stockholders
representing two-thirds (2/3) of the
outstanding capital stock, in exchange
for property needed for corporate
purposes or in payment of a previously
contracted debt [Sec. 38, RCC].
Scope of Pre-emptive Right in Close
Corporations
General Rule: The pre-emptive right of
stockholders in close corporations shall extend
to ALL stock to be issued, including reissuance
of treasury shares, whether:
Exception: The AOI provides otherwise. [Sec.
101, RCC].
d.
Amendment
Incorporation
of
Articles
of
Contents of the AOI of Close Corporations
Mandatory Provisions
The AOI of a close corporation must provide
that:
1. All the corporation’s issued stock of all
classes, exclusive of treasury shares,
shall be held of record by not more
than a specified number of persons,
not exceeding twenty (20);
2. All the issued stock of all classes shall
be subject to one or more specified
restrictions on transfer permitted by
this Title; and
3. The corporation shall not list in any
stock exchange or make any public
offering of its stocks of any class [Sec.
95, RCC].
Optional Provisions
The AOI of a close corporation may provide for:
1. A classification of shares or rights, the
qualifications for owning or holding the
same, and restrictions on their
transfers, subject to the provisions of
the following section;
2. A classification of directors into one (1)
or more classes, each of whom may be
voted for and elected solely by a
particular class of stock;
3. Greater quorum or voting requirements
in meetings of stockholders or directors
than those provided in this Code;
4. The management by the stockholders
of the business of the corporation,
rather than by a board of directors; and
5. The election or appointment by the
stockholders of all officers or
employees, or specified officers or
employees, instead of by the board of
directors [Sec. 96, RCC].
1. For money, property or personal
services; or
2. In payment of corporate debts.
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Amendments
Essence of a Non-Stock Corporation
Any amendment to the AOI, which seeks:
1. To delete or remove any provision
required by this Title; or
2. To reduce a quorum or voting
requirement stated in said articles of
Incorporation
It is legally possible for a corporation having
capital stock to still be considered a non-stock
corporation.
Shall require, at a meeting duly called for the
purpose, the affirmative vote –
1. Of at least two-thirds (2/3) of the
outstanding capital stock, whether with
or without voting rights; or
2. Of such greater proportion of shares as
may be specifically provided in the AOI
for amending, deleting, or removing
any of the aforesaid provisions [Sec.
102, RCC].
2. Non-Stock Corporations
a. Definition
Corporation Code (RA 11232)
Section 3. Classes of Corporations. –
Corporations formed or organized under this Code
may be stock or nonstock corporations. Stock
corporations are those which have capital stock
divided into shares and are authorized to distribute
to the holders of such shares, dividends, or
allotments of the surplus profits on the basis of the
shares held. All other corporations are nonstock
corporations. The territorial and political
subdivisions shall enjoy local autonomy.
A non- stock corporation is one where no part
of its income is distributable as dividends to its
members,trustees, or officers [Sec. 86, RCC].
All other corporations
corporations [Sec. 3].
are
non-stock
Its governing body is usually the Board of
Trustees
(BoT).
However,
non-stock
corporations may, through their articles of
incorporation or their by-laws, designate their
governing boards by any name other than as
board of trustees [Sec. 174].
For this reason, the essence of a non-stock
corporation is NOT the non-existence of shares
of stock, but that:
1. Its primary purpose should be
eleemosynary in nature; and
2. There is a prohibition in its AOI and bylaws that no part of the income or any
form of dividend is distributable to the
members, trustees, or officers of the
corporation [Villanueva].
Purpose
Non-stock corporations may be formed or
organized for the following purposes:
1. Charitable;
2. Religious;
3. Educational;
4. Professional;
5. Cultural;
6. Fraternal;
7. Literary;
8. Scientific;
9. Social;
10. Civic service;
11. Similar purposes, like trade, industry,
agricultural and like chambers; or
12. Any combination thereof, subject to the
special provisions of this Title governing
particular classes of non- stock
corporations [Sec. 87, RCC].
A non-stock corporation may not include in its
AOI a purpose which would change or
contradict its nature as such [Sec. 13(b), RCC].
A nonstock corporation may not engage in an
investment business, where profit is the main or
underlying purpose [People v. Menil, 340 SCRA
125 (2000)].
b. Treatment of Profit
Any profit which a non-stock corporation may
obtain incidental to its operations shall,
whenever necessary or proper, be used for the
furtherance of the purpose or purposes for
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which the corporation was organized, subject to
the provisions of this Title [Sec. 86, RCC].
A non-stock corporation holds its funds in trust
for the carrying out of the objectives and
purposes expressed in its AOI. Thus, if it were
to be converted to a stock corporation, it must
be
dissolved
first,
otherwise,
such
transformation would be tantamount to an
unauthorized distribution of its assets or income
to its members [Villanueva].
Earning of Profits Merely Incidental
It is not inconsistent with the nature of a
nonstock corporation to incidentally earn profits
in pursuing its eleemosynary purpose [CIR v.
University of Visayas, 1 SCRA 669 (1961)].
The incurring of profit or losses does not
determine whether an activity is for profit or nonprofit, what the courts will consider is:
1. Whether dividends have been declared;
or
2. Whether its profit was ever used for
personal or individual gain, and not for
the purpose of carrying out the
objectives of the enterprise [Manila
Sanitarium and Hospital v. Gabuco, 7
SCRA 14 (1963)]
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Summary: Stock v. Non-Stock Corporations
Stock
Non-Stock
Stock corporations are those which have
capital stock divided into shares and are
authorized to distribute to the holders of such
shares, dividends, or allotments of the surplus
profits based on the shares held [Sec. 3,
RCC].
All other corporations [Sec. 3, RCC]. One where
no part of its income is distributable as dividends
to its members, trustees, or officers [Sec. 87,
RCC].
Purpose
Primarily to make profits for its shareholders.
Non-stock corporations may be formed or
organized for charitable, religious, educational,
professional,
cultural,
fraternal,
literary,
scientific, social, civic service, or similar
purposes, like trade, industry, agricultural and
like chambers, or any combination thereof,
subject to the special provisions of this Title
governing particular classes of non-stock
corporations [Sec. 87, RCC].
Distribution of Profits
Profit is distributed to shareholders.
A nonstock corporation is one where no part of
its income is distributable as dividends to its
members, trustees, or officers: Provided, that
any profit which a non-stock corporation may
obtain incidental to its operations shall,
whenever necessary or proper, be used for the
furtherance of the purpose or purposes for which
the corporation was organized, subject to the
provisions of this Title [Sec. 86, RCC].
Scope of Voting Rights
Each stockholder votes according to the
proportion of his shares in the corporation. No
share may be deprived of voting rights except
those classified and issued as “preferred” or
“redeemable” shares, unless otherwise
provided in this Code: Provided, That there
shall always be a class or series of shares
with complete voting rights [Sec. 6, RCC].
Each member, regardless of class, is entitled to
one (1) vote UNLESS such right to vote has
been limited, broadened, or denied in the AOI or
by- laws [Sec. 88, RCC].
Voting by Proxy
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Summary: Stock v. Non-Stock Corporations
Stock
Non-Stock
Stockholders and members may vote in
person or by proxy in all meetings of
stockholders or members.
May be denied by the AOI or the by-laws [Sec.
88, RCC]
When so authorized in the by-laws or by a
majority of the board of directors, the
stockholders or members of corporations may
also vote through remote communication or in
absentia: Provided, That the votes are
received before the corporation finishes the
tally of votes [Sec. 57, RCC].
Who Exercises Corporate Power
Board of Directors or Trustees [Sec. 22, 92,
RCC].
Board of Trustees, which may or may not be
more than 15 trustees, as provided by the AOI
or by-laws [Sec. 23, 91, RCC].
Term of Directors of Trustees
Directors / trustees shall hold office for 1 year
and until their successors are elected and
qualified [Sec. 23].
Directors/trustees shall hold office for not more
than 3 years [Sec. 91].
Election of Officers
Directors shall be elected for a term of one (1)
year from among the holders of stocks
registered in the corporation’s books Each
director and trustee shall hold office until the
successor is elected and qualified [Sec. 22,
RCC].
Trustees shall be elected for a term not
exceeding three (3) years. Except with respect
to
independent
trustees
of
nonstock
corporations vested with public interest, only a
member of the corporation shall be elected as
trustee [Sec. 91, RCC].
The articles of incorporation may provide that
all officers or employees or that specified
officers or employees shall be elected or
appointed by the stockholders, instead of by
the board of directors [Sec. 97].
Officers may directly be elected by the members
UNLESS the AOI or by-laws provide otherwise
[Sec. 91, RCC].
Transferability of interest or membership
Transferable.
Generally non-transferable since membership
and all rights arising therefrom are personal.
However, the AOI or by-laws can provide
otherwise [Sec. 89, RCC].
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3. Educational Corporations
Definition
A stock or nonstock corporation organized for
educational purposes. [Sec. 105, RCC]
Educational corporations shall be governed by
special laws and the general provisions [of the
Revised Corporation Code]. [Sec. 105, RCC]
If organized as a non-stock corporation
Trustees of educational institutions organized
as non-stock corporations shall not be less
than five (5) nor more than fifteen (15).
Provided, however, that the number of trustees
shall be in multiples of five (5). They shall
classify themselves in such a way that the term
of 1/5 of them expires every year, unless
otherwise provided by the AOI or BL [Sec. 106].
If organized as a stock corporation
For
institutions
organized
as
stock
corporations, the number and term of directors
shall be governed by the provisions on stock
corporations [Sec. 106].
Composition of the Board
Non-Stock
Stock
Trustees
of
educational
institutions
organized as nonstock corporations
shall not be less
nor
than five (5)
more than fifteen
(15).
Provided,
however, that:
1. The number
of trustees
shall be in
multiples of
five;
2. They
shall
classify
themselves
in such a
For
institutions
organized as stock
corporations,
the number, and
term of directors
shall
be
governed
by
the
provisions on
stock corporations
[Sec. 106, RCC].
The powers and
authority of trustees
shall be defined in
the bylaws.
Non-Stock
Stock
way; and
3. The term of
1/5 of them
expires
every year
[Sec. 106, RCC].
Rules as to Vacancies
Trustees thereafter elected to fill vacancies,
occurring before the expiration of a particular
term, shall hold office only for the unexpired
Period.
Trustees elected thereafter to fill vacancies
caused by expiration of term shall hold office
for five (5) years [Sec. 106, RCC].
Quorum
A majority of the trustees shall constitute a
quorum for the transaction of business [Sec.
106, RCC].
Constitutional Provisions
Educational Corporations
Related
to
Educational institutions, other than those
established by religious groups and mission
boards, shall be owned solely by citizens of the
Philippines or corporations or associations at
least sixty per centum of the capital of which is
owned by such citizens. The Congress may,
however, require increased Filipino equity
participation in all educational institutions. The
control and administration of educational
institutions shall be vested in citizens of the
Philippines [CONST, Art. XIV, Sec. 4(2), par. 1].
No educational institution shall be established
exclusively for aliens and no group of aliens
shall comprise more than one-third of the
enrollment in any school. The provisions of this
subsection shall not apply to schools
established for foreign diplomatic personnel
and their dependents and, unless otherwise
provided by law, for other foreign temporary
residents [CONST, Art. XIV, Sec. 4(2), par. 1].
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4. Religious Corporations
Classification
Religious corporations may be incorporated by
one or more persons. Such corporations may
be classified into:
1. Corporations sole; and
2. Religious societies [Sec. 107, RCC].
Religious corporations shall be governed by
Title XIII, and by the general provisions on
nonstock corporations insofar as applicable
[Sec. 107, RCC].
a. Corporation Sole
A corporation sole may be formed by the chief
archbishop, bishop, priest, minister, rabbi, or
other presiding elder of such religious
denomination, sect, or church [Sec. 108, RCC].
A corporation sole consists of only one person
and his successors (who will always be one at
a time), in some particular station [Roman
Catholic Apostolic Adm. of Davao v. LRC, 102
Phil. 596 (1957)].
Purpose
A corporation sole is incorporated for the
purpose of administering and managing, as
trustee, the affairs, property and temporalities
of any religious denomination, sect or church
[Sec. 108, RCC].
A corporation sole is not the owner of the
properties that he may acquire, but merely the
administrator
thereof
[Roman
Catholic
Apostolic Adm. of Davao v. LRC, 102 Phil. 596
(1957)]
Nationality
A corporation sole has no nationality, but for
the purpose of applying nationalization laws,
nationality is determined not by the nationality
of its presiding elder but by the nationality of its
members constituting the sect in the
Philippines.
Thus, the Roman Catholic Church can acquire
lands in the Philippines even if it is headed by
the Pope [Roman Catholic Apostolic, etc v.
Register of Deeds of Davao City, G.R. No. L8451 (1957)].
Incorporation Contents of the AOI
The AOI of the corporation sole must set forth
the following:
1. That the applicant chief archbishop,
bishop, priest, minister, rabbi, or
presiding elder represents the religious
denomination, sect, or church who
desires to become a corporation sole;
2. That the rules, regulations and
discipline
of
the
religious
denomination, sect or church are
consistent with becoming a corporation
sole and do not forbid it;
3. That such chief archbishop, bishop,
priest, minister, rabbi, or presiding
elder is charged with:
4. The administration of the temporalities;
5. The management of the affairs, estate
and properties of the religious
denomination, sect, or church within
the territorial jurisdiction, so described
succinctly in the AOI; and
6. The manner by which any vacancy
occurring in the office of chief
archbishop, bishop, priest, minister,
rabbi, or presiding elder is required to
be filled, according to the rules,
regulations or discipline of the religious
denomination, sect, or church; and
7. The place where the principal office of
the corporation sole is to be
established and located, which place
must be within the territory of the
Philippines
[Sec.
109,
RCC].
Submission of the AOI The chief
archbishop, bishop, priest, minister,
rabbi or presiding elder of any religious
denomination, sect or church must file
the AOI with the Commission [Sec.
109, RCC].
The articles of incorporation must be:
1. Verified, by affidavit or affirmation of
the chief archbishop, bishop, priest,
minister, rabbi, or presiding elder, as
the case may be; and
2. Accompanied by a copy of the
commission, certificate of election or
letter of appointment of such chief
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archbishop, bishop, priest, minister,
rabbi, or presiding elder, duly certified
to be correct by any notary public [Sec.
110, RCC].
From and after filing with the Commission of
the said AOI:
1. Such chief archbishop, bishop, priest,
minister, rabbi, or presiding elder shall
become a corporation sole; and
2. All temporalities, estate and properties
of the religious denomination, sect or
church theretofore administered or
managed as such chief archbishop,
bishop, priest, minister, rabbi, or
presiding elder shall be personally held
in trust as a corporation sole.
a. For the use, purpose, exclusive
benefit and on behalf of the
religious denomination, sect,or
church.
b. This
includes
hospitals,
schools, colleges, orphan
asylums, parsonages, and
cemeteries thereof [Sec. 110,
RCC].
Power to Amend AOI
Note that Sec. 107 allows the application to
religious corporations of the general provisions
governing non-stock corporations, insofar as
applicable.
For non-stock corporations, the power to
amend its Articles of Incorporation lies in its
members. The code requires two-thirds of their
votes for the approval of such an amendment.
So how will this requirement apply to a
corporation sole that has technically but one
member (the head of the religious
organization) who holds in his hands its broad
corporate powers over the properties, rights,
and interests of his religious organization?
Although a non-stock corporation has a
personality that is distinct from those of its
members who established it, its AOI cannot be
amended solely through the action of its BOT.
The amendment needs the concurrence of at
least 2/3 of its membership.
If such approval mechanism is made to operate
in a corporation sole, its one member in whom
all the powers of the corporation technically
belong, needs to get the concurrence of 2/3 of
its membership. The one member is but a
trustee of its membership.
There is no point to dissolving the corporation
sole of one member to enable the corporation
aggregate to emerge from it. The one member,
with the concurrence of two-thirds of the
membership of the organization for whom he
acts as trustee, can self-will the amendment.
He can, with membership concurrence,
increase the technical number of the members
of the corporation from “sole” or one to the
greater number authorized by its amended
articles [Iglesia Evangelica Metodista En Las
Filipinas (Corporation Sole) Inc., et al v. Bishop
Nathanael Lazaro, et al, G.R. No. 184088
(2010)].
Filing of Vacancies
The successors in office of any chief
archbishop, bishop, priest, minister, rabbi, or
presiding elder in a corporation sole:
1. Shall become the corporation sole on
their accession to office; and
2. Shall be permitted to transact business
as such upon filing a copy of their
commission, certificate of election, or
letters of appointment, duly certified by
any notary public with the Commission
[Sec. 112, RCC].
During any vacancy in the office, all the powers
and authority of the corporation sole during
such vacancy shall be exercised by the person
or persons authorized by the rules, regulations
or discipline of the religious denomination,
sect, or church represented by the corporation
sole to:
1. Administer the temporalities and
2. Manage the affairs, estate, and
properties of the corporation sole [Sec.
112, RCC].
Alienation of Property
A corporation sole may sell, or mortgage real
property held by it by:
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1. Obtaining an order for that purpose
from the Regional Trial Court of the
province where the property is situated
2. Adducing proof that:
a. The notice of the application for
leave to sell or mortgage has
been made through publication
or as directed by the Court; and
b. It is in the interest of the
corporation that leave to sell or
mortgage be granted.
the purpose of winding up its affairs [Sec. 113,
RCC].
b. Religious Societies
Definition
A religious corporation incorporated by more
than one person. Also called “corporation
aggregate.”
Incorporation
The application for leave to sell or mortgage:
1. Must be made by petition, duly verified,
by the chief archbishop, bishop, priest,
minister, rabbi, or presiding elder
acting as corporation sole, and;
2. May be opposed by any member of the
religious denomination, sect, or church
represented by the corporation sole.
Provided, that in cases where the rules,
regulations, and discipline of the religious
denomination, sect, or church, religious
society, or order concerned represented by
such corporation sole regulate the method of
acquiring, holding, selling, and mortgaging real
estate and personal property:
1. Such rules, regulations and discipline
shall control; and
2. The intervention of the courts shall not
be necessary [Sec. 111, RCC].
Voluntary Dissolution
A corporation sole may be dissolved and its
affairs settled voluntarily by submitting to the
Commission a verified declaration of
dissolution, setting forth:
1. The name of the corporation;
2. The reason for dissolution and winding
up;
3. The authorization for the dissolution of
the corporation by the particular
religious denomination, sect or church;
4. The names and addresses of the
persons who are to supervise the
winding up of the affairs of the
corporation [Sec. 113, RCC].
Upon approval of such declaration of
dissolution by the Commission, the corporation
shall cease to carry on its operations except for
General Rule: Any religious society, religious
order, diocese, synod, or district organization
of any religious denomination, sect, or church,
may incorporate for the administration of its
temporalities or for the management of its
affairs, properties, and estate:
1. Upon written consent of at least twothirds (2/3) of its membership; and/or
2. By an affirmative vote at a meeting
called for the purpose of at least twothirds (2/3) of its membership
Exception: Unless forbidden by competent
authority, the Constitution, pertinent rules,
regulations, or discipline of the religious
denomination, sect, or church of which it is a
part [Sec. 114, RCC].
Filing and Contents of the AOI
The AOI must be:
1. Verified by the affidavit of the presiding
elder, secretary, or clerk or other
member of such religious society or
religious order, or diocese, synod, or
district organization of the religious
denomination, sect, or church; and
2. Filed with the Commission [Sec. 114,
RCC].
The AOI must set forth the following:
1. That the religious society or religious
order, or diocese, synod, or district
organization is a religious organization
of a religious denomination, sect or
church;
2. That at least two-thirds (2/3) of its
membership has given written consent
or has voted to incorporate, at a duly
convened meeting of the body;
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3. That the incorporation of the religious
society or religious order, diocese,
synod, or district organization is not
forbidden by competent authority or by
the Constitution, rules, regulations or
discipline
of
the
religious
denomination, sect, or church of which
it forms part;
4. That the religious society or religious
order, diocese, synod, or district
organization desires to incorporate for
the administration of its affairs,
properties and estate;
5. The place within the Philippines where
the principal office of the corporation is
to be established and located; and
6. The
names,
nationalities,
and
residence addresses of the trustees,
not less than five (5) nor more than
fifteen (15) elected by the religious
society or religious order, or the
diocese, synod, or district organization
to serve for the first year, or such other
period as may be prescribed by the
laws of the religious society, or
religious order, or of the diocese,
synod, or district organization [Sec.
114, RCC].
5. One-Person Corporations
Sole proprietorship v. OPC
Sole Proprietorship
OPC
Has no separate
legal personality
from the proprietor
conducting the
business
Has a legal
personality separate
and distinct from the
sole stockholder of
the corporation
The assets of the
sole proprietorship
are similarly owned
by the proprietor
conducting the
business
The assets of the
OPC are not owned
by its sole
stockholder unless
the OPC is not
adequately financed
and or the assets.
The obligations that
the sole
proprietorship
incurred in
conducting the
business may be
enforced against the
proprietor.
The obligations of
the OPC cannot be
enforced against its
sole stockholder,
unless the situation
warrants the piercing
of the veil of
corporate fiction.
Registered with the
DTI.
Registered with the
SEC.
[Divina, “Highlights of the Revised Corporation
Code”]
Definition
A corporation with a single stockholder. [Sec.
116, RCC]
Who may form OPCs
Only the following may form OPCs:
1. A natural person;
2. A trust; or
3. An estate
Note: A natural person who is licensed to
exercise a profession may not organize as a
OPC for the purpose of exercising such
profession, except as otherwise provided
under special laws [Sec. 116, RCC].
a. Excepted Corporations
Only a natural person, trust, or an estate may
form a One Person Corporation.
The following may NOT incorporate as OCPs:
1. Banks;
2. Quasi-banks;
3. Pre-need companies;
4. Public and publicly-listed companies;
and
5. Non-chartered GOCCs. [Sec. 116,
RCC]
A natural person who is licensed to exercise a
profession may not organize as a One Person
Corporation for the purpose of exercising such
profession except as otherwise provided under
special laws. [Sec. 10, RCC]
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b. Capital Stock Requirement
A One Person Corporation shall not be
required to have a minimum authorized capital
stock, except as otherwise provided by special
law [Sec. 117, RCC].
c. Articles of Incorporation and ByLaws
Articles of Incorporation
A One Person Corporation shall file articles of
incorporation in accordance with the
requirements under Section 14 of this Code. It
shall likewise substantially contain the
following:
1. If the single stockholder is a trust or an
estate:
a. The name, nationality, and
residence of the trustee,
administrator, executor,
guardian,
conservator,
custodian, or other person
exercising fiduciary duties
b. Proof of such authority to act on
behalf of the trust or estate; and
2. Name, nationality, residence of the
nominee and alternate nominee, and
the extent, coverage and limitation of
the authority [Sec. 118, RCC].
Treasurer, Corporate Secretary, and Other
Officers
Within fifteen (15) days from the issuance of its
certificate of incorporation, the OPC shall
appoint:
1. A treasurer;
2. A corporate secretary; and
3. Other officers as it may deem
necessary
Note: The single stockholder may NOT be
appointed as the corporate secretary.
Within five (5) days from appointment, the OPC
shall notify the Commission thereof [Sec. 122,
RCC].
Treasurer’s Bond
The OPC is not required to submit and file
corporate by-laws [Sec. 119, RCC].
A single stockholder who is likewise the selfappointed treasurer of the corporation, shall
give a bond to the Commission in such a sum
as may be required: Provided, that:
1. The said stockholder/treasurer shall
undertake in writing:
a. To faithfully administer the
OPC’s funds to be received as
treasurer, and
b. To disburse and invest the
same according to the articles
of incorporation as approved
by the Commission.
2. The bond shall be renewed every two
(2) years or as often as may be
required [Sec. 122, RCC].
d. Corporate Name
Corporate Secretary’s Special Functions
A One Person Corporation shall indicate the
letters “OPC” either below or at the end of its
corporate name [Sec. 120, RCC].
In addition to the functions designated by the
OPC, the corporate secretary shall:
1. Be responsible for maintaining the
minutes book and/or records of the
corporation;
2. Notify the nominee or alternate
nominee of the death or incapacity of
the single stockholder
a. Such notice shall be given no
later than five (5) days from
such occurrence;
3. Notify the Commission of the death of
the single stockholder within five (5)
By-Laws
e. Corporate Structure and Officers
Single Stockholder as Director, President The
single stockholder shall be the sole director
andpresident of the One Person Corporation
[Sec. 121, RCC].
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days from such occurrence and stating
in such notice:
names,
residence
a. The
addresses, and contact details
of all known legal heirs; and
4. Call the nominee or alternate nominee
and the known legal heirs to a meeting
and advise the legal heirs with regard
to, among others:
a. The election of a new director;
b. Amendment of the AOI; and
c. Other
ancillary
and/or
consequential matters [Sec.
123, RCC].
f. Nominee
The single stockholder shall designate in the
AOI a nominee and an alternate nominee who
shall, in the event of the single stockholder’s
death or incapacity:
1. Take the place of the single
stockholder as director; and
2. Manage the corporation’s affairs [Sec.
124, RCC].
Term of Alternate Nominee
In case of the nominee’s inability, incapacity,
death, or refusal to discharge the functions as
director and manager of the corporation:
1. The alternate nominee shall sit as
director and manage the One Person
Corporation; and
2. The alternate nominee shall serve only
for the same term, and under the same
conditions applicable to the nominee
[Sec. 125, RCC].
Change of Nominee or Alternate Nominee
The single stockholder may, at any time,
change its nominee and alternate nominee by
submitting to the Commission:
1. The names of the new nominees; and
2. The new nominees’ corresponding
written consent. Note: For this purpose,
the AOI need not be amended [Sec.
126, RCC].
g. Liability
Term of Nominee
Limited Liability
When the single stockholder is temporarily
incapacitated:
1. The nominee shall sit as director and
manage the affairs of the OPC; and
2. The nominee shall serve only until the
stockholder, by self-determination,
regains the capacity to assume such
duties. [Sec. 125, RCC].
3.
In case of death or permanent incapacity of the
single stockholder:
1. The nominee shall sit as director and
manage the affairs of the OPC
2. The nominee shall serve until:
a. The legal heirs of the single
stockholder have been lawfully
determined; and
b. The heirs have designated one
of them or have agreed that the
estate shall be the single
stockholder of the OPC [Sec.
125, RCC].
An important advantage of the corporation is
the limitation of an investor’s liability to the
amount of investment, which flows from the
legal theory that a corporate entity is separate
and distinct from its stockholders [San Juan
Structural and Steel, Inc. v. CA, 296 SCRA 631
(1998)].
Liability of Single Shareholder
A sole shareholder claiming limited liability has
the burden of affirmatively showing that the
corporation was adequately financed.
Where the single stockholder cannot prove that
the property of the OPC is independent of the
stockholder’s
personal
property,
the
stockholder shall be jointly and severally liable
for the debts and other liabilities of the OPC.
Applicability of the Doctrine of Piercing the
Corporate Veil
The principle of piercing the corporate veil
applies with equal force to OPCs, as with other
corporations[Sec. 130, RCC]. When the veil of
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corporate fiction is pierced the corporation will
be considered as a mere association of
persons; and the liability will directly attach to
the stockholders or to the other corporation.
h. Conversion of Corporation to One
Person Corporation and Vice-Versa
Conversion from an Ordinary Corporation
to an OPC
When a single stockholder acquires ALL the
stocks of an ordinary stock corporation, the
latter may apply for conversion into a One
Person Corporation, subject to the submission
of such documents as the Commission may
require.
1. Within seven (7) days from receipt of
either an affidavit of heirship or selfadjudication executed by a sole heir, or
any other legal document declaring the
legal heirs of the single stockholder,
the nominee or alternate nominee
shall:
a. Transfer the shares to the duly
designated legal heir or estate;
and
b. Notify the Commission of the
transfer.
2. Within sixty (60) days from the transfer
of the shares, the legal heirs shall notify
the Commission of their decision to
either:
a. Wind up and dissolve the One
Person Corporation; or
b. Convert it into an ordinary
stock corporation.
If the application for conversion is approved:
1. The Commission shall issue certificate
of filing of amended articles of
incorporation reflecting the conversion
2. The OPC converted from an ordinary
stock corporation shall succeed the
latter and be legally responsible for all
the latter’s outstanding liabilities as of
the date of conversion [Sec. 131,
RCC].
The ordinary stock corporation converted
from a One Person Corporation shall
succeed the latter and be legally responsible
for all the latter’s outstanding liabilities as of
the date of conversion [Sec. 132, RCC].
Conversion from a OPC to an Ordinary
Stock Corporation
Definition
A One Person Corporation may be converted
into an ordinary stock corporation after:
1. Due notice to the Commission of such
fact and of the circumstances leading
to the conversion; and
a. Such notice shall be filed with
the Commission within sixty
(60) days from the occurrence
of the circumstances leading to
the conversion into an ordinary
stock corporation
2. Compliance with all other requirements
for stock corporations under this Code
and applicable rules.
If all requirements have been complied with,
the Commission shall issue an amended
certificate of incorporation reflecting the
conversion [Sec. 132, RCC].
6. Foreign Corporations
Those formed, organized, or existing under any
laws other than those of the Philippines and
whose laws allow Filipino citizens and
corporations to do business in its own country
or state [Sec. 140].
In contrast, a domestic corporation is one
formed, organized, or existing under the laws
of the Philippines
a. Bases of Authority Over Foreign
Corporations
Consent
As a rule, a foreign corporation can have no
legal existence or status beyond the bounds of
the State or sovereignty by which it is created
or incorporated and organized. It exists only in
contemplation of law and by force of the law.
In case of death of the single stockholder:
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Where that law ceases to operate, the
corporation can have no existence.
However, this principle does not prevent a
corporation from acting in another State or
country with the latter’s express or implied
consent.
Consent Doctrine
The legal standing of foreign corporations in
the host state is founded on international law
on the basis of consent, whether implied or
express.
A corporation can exercise none of the
functions and privileges conferred by its charter
in another State or country except by the
comity and consent of such State or country.
[DE LEON]
Under Philippine law, the condition is that it
must obtain a license to do business in the
Philippines [CAMPOS].
Consent as
Jurisdiction
Basis
for
Exercise
Said business activities serve as the basis by
which a host state is deemed to have authority
over a foreign corporation within its territorial
jurisdiction [Villanueva].
Concept of doing business
The concept of "doing business" implies a
continuity of commercial dealings and
arrangements and the performance of
acts/works/exercise of some of the functions
normally incident to the purpose or object of a
foreign
corporation’s
organization
[Mentholatum Co., Inc. v. Mangaliman, 72 Phil.
525 (1941)].
It is the crucial point to determine:
1. Whether foreign corporations and
multinational enterprises have come
within the territorial jurisdictions of the
host countries; and
2. To what extent they are bound to obtain
licenses within various host countries
before they can sue with local courts
and administrative bodies [Villanueva].
of
To obtain jurisdiction over foreign corporations,
the considerations of due process and fair play
require that consent be obtained. [Villanueva]
The jurisdiction of courts to render judgment in
personam is grounded on their de facto power
over the defendant's person. His presence
within the territorial jurisdiction of a court is
prerequisite to its rendition of judgment
personally binding him. [Pennoyer v, Neff, 95
U.S. 714 (1877)]
Thus, a foreign corporation may be subjected
to jurisdiction by reason of consent, ownership
of property within the State, or by reason of
activities within or having an effect within the
state. [Villanueva citing Salonga]
Doctrine of “Doing Business”
When a foreign corporation undertakes
business activities within the territorial
jurisdiction of a host state, then it ascribes to
the host state standing to enforce its laws,
rules, and regulations [Villanueva].
Jurisprudential Tests of “Doing Business in
the Philippines”
1. Twin
Characterization
Test
Continuity Test: Doing business
implies a continuity of commercial
dealings and arrangements, or
performance of acts normally incidental
to the purpose and object of the
organization.
Substance Test: Doing business
implies that a foreign corporation is
continuing the body or substance of the
enterprise of business for which it was
organized [Agilent Technologies v.
Integrated Silicon Technology, G.R.
No. 154618 (2004)].
2. Contract Test: A foreign corporation is
doing business in the Philippines if the
contracts entered into by the foreign
corporation or by an agent acting under
the control and direction of the foreign
corporation are consummated in the
Philippines [Pacific Vegetable Oil v.
Singson, G.R. No. L-7917 (1955)].
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b. Necessity of a License to Do
Business
Every foreign corporation, which on the date of
the effectivity of this Code, is authorized to do
business in the Philippines under a license
issued to it, shall continue to have such
authority under the terms and conditions of its
license, subject to the provisions of this Code
and other special laws [Sec. 141, RCC].
A foreign corporation transacting business in
the Philippines is required to secure a license
to have the personality to sue before Philippine
courts. (See c. Personality to Sue and
Suability)
Requisites for the issuance of a license
A foreign corporation shall submit:
1. A copy of its articles of incorporation
and bylaws, certified in accordance
with law; and
2. Their translation to an official language
of the Philippines, if necessary. [Sec
142, RCC]
The application shall be under oath and, unless
already stated in its articles of incorporation,
shall specifically set forth the following:
1. The date and term of incorporation;
2. The address, including the street
number, of the principal office of the
corporation in the country or State of
incorporation;
3. The name and address of its resident
agent authorized to accept summons
and process in all legal proceedings
and
all
notices
affecting
the
corporation, pending the establishment
of a local office;
4. The place in the Philippines where the
corporation intends to operate; The
specific purpose or purposes which the
corporation intends to pursue in the
transaction of its business in the
Philippines:
a. Provided, That said purpose or
purposes are those specifically
stated in the certificate of
authority
issued
by
the
appropriate
government
agency;
5. The names and addresses of the
present directors and officers of the
corporation;
6. A statement of its authorized capital
stock and the aggregate number of
shares which the corporation has
authority to issue, itemized by class,
par value of shares, shares without par
value, and series, if any;
7. A statement of its outstanding capital
stock and the aggregate number of
shares which the corporation has
issued, itemized by class, par value of
shares, shares without par value, and
series, if any;
8. A statement of the amount actually
paid in; and
9. Such additional information as may be
necessary or appropriate in order to
enable the Commission to determine
whether such corporation is entitled to
a license to transact business in the
Philippines, and to determine and
assess the fees payable [Sec. 142,
RCC].
Issuance of a License
Upon issuance of the license, such foreign
corporation may commence to transact
business in the Philippines and continue to do
so for as long as it retains its authority to act as
a corporation under the laws of the country or
State of its incorporation, unless such license
is:
1. Surrendered;
2. Revoked;
3. Suspended; or
4. Annulled in accordance with this Code
or other special laws [Sec. 143, RCC].
Deposit of Securities
Within 60 days, the licensee, except foreign
banking or insurance corporations, shall
deposit with the Commission for the benefit
of present and future creditors of the licensee
in the Philippines, securities satisfactory to
the Commission, consisting of:
1. Bonds
or
other
evidence
of
indebtedness of the Government of the
Philippines, its political subdivisions
and
instrumentalities,
or
of
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2.
3.
4.
5.
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government-owned or - controlled
corporations and entities;
Shares of stock or debt securities that
are registered under RA 8799 (The
Securities Regulation Code);
Shares of stock in domestic
corporations listed in the stock
exchange;
Shares of stock in domestic insurance
companies and banks, any financial
instrument determined suitable by the
Commission, or;
Any combination thereof with an actual
market value of at least Five hundred
thousand(P500,000.00) pesos or such
other amount that may be set by the
Commission [Sec. 143, RCC].
Within 6 Months After Each Fiscal Year of the
License, the Commission shall require:
1. The licensee to deposit additional
securities or financial instruments
equivalent in actual market value to 2%
of the amount by which the licensee’s
gross income for that fiscal year
exceeds P10,000,000.00.
2. The deposit of additional securities or
financial instruments if the actual
market value of the deposited
securities or financial instruments has
decreased by at least 10% of their
actual market value at the time they
were deposited [Sec. 143, RCC].
The Commission may:
1. At its discretion, release part of the
additional deposit if the gross income
of the licensee has decreased, or if the
actual market value of the total deposit
has increased, by more than ten (10%)
percent of their actual market value at
the time they were deposited.
2. Allow the licensee to make substitute
deposits for those already on deposit
as long as the licensee is solvent [Sec
143, RCC].
In the event the licensee ceases to do business
in the Philippines, its deposits shall be
returned:
1. Upon the licensee’s application
therefore; and
2. Upon proof to the satisfaction of the
Commission that the licensee has no
liability
to
Philippine
residents,
including the Government of the
Republic of the Philippines [Sec. 143,
RCC].
Amendment of License
A foreign corporation shall obtain an amended
license in the event it changes its corporate
name, or desires to pursue other or additional
purposes in the Philippines
Said amendment may be made by submitting
an application with the Commission, endorsed
by the appropriate government agency [Sec.
148, RCC].
1. Resident Agent
Definition
A resident agent may be either:
1. An individual residing in the Philippines
(must be of good moral character and
sound financial standing) or
2. A domestic corporation (must likewise
be of sound financial standing and
must show proof of good standing)
lawfully transacting business in the
Philippines [Sec. 144, RCC].
The foreign corporation shall file a written
power of attorney:
1. Designating a person (Philippine
resident), on whom summons and
other legal processes may be served in
all actions or other legal proceedings
against such corporation; and
2. Consenting that service upon such
resident agent shall be admitted and
held as valid, as if served upon the duly
authorized officers of the foreign
corporation at its home office [Sec.
144, RCC].
It shall be the duty of the resident agent to
immediately notify the Commission in writing of
any change in the resident agent’s address
[Sec. 144, RCC].
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c. Personality to Sue and Suability
Summary of Rules
contracting with a foreign corporation from later
taking advantage of its noncompliance with the
statutes chiefly in cases where such person
has received the benefits of the contract
[Communications Materials and Design, Inc. v.
Court ofAppeals, 260 SCRA 673 (1996)].
Status
Consequence
Doing Business in
the PH, WITH a
license
Can sue and be
sued
Suability of Foreign Corporations
Doing Business in
the PH, WITHOUT a
license
General
Rule:
Cannot sue, but may
be sued in the PH
No foreign corporation transacting business in
the Philippines without a license, or its
successors or assigns, shall be permitted to
maintain or intervene in any action, suit or
proceeding in any court or administrative
agency of the Philippines.
Exception:
Capacity to sue
may
not
be
questioned if the
other
party
is
estopped
NOT doing business
in the PH, on
isolated transactions
May
May
sued
sue
be
Capacity to Sue
Foreign corporations which conduct regular
business should be denied any access to
courts until they secure a license to ensure that
they will abide by the decisions of the local
courts [Eriks Ltd. v. CA, 267 SCRA 567 (1997)].
A foreign corporation transacting business in
the Philippines is required to secure a license
to have the personality to sue before, or
intervene in, any court or administrative
proceeding [Sec. 150, RCC; Campos].
By filing an action before Philippine courts, a
foreign corporation puts itself under their
jurisdiction [Communication Materials v. CA,
260 SCRA 673 (1996)].
By estoppel
Nevertheless, such corporation may be sued or
proceeded against before Philippine courts or
administrative tribunals on any valid cause of
action recognized under Philippine laws [Sec.
150, RCC].
A foreign corporation cannot claim exemption
from being sued in Philippine courts for acts
done against a person or persons in the
Philippines
[Facilities
Management
Corporation v. De La Osa, G.R. No. L-38649
(1979)].
e. Instances When Unlicensed Foreign
Corporations May be Allowed to Sue
(Isolated Transactions)
Doctrine
of
Isolated
Transactions
Foreign corporations are not required to obtain
a license to obtain relief from local courts or
agencies [Villanueva].
In an isolated transaction, there is no intent on
the part of the foreign corporation to engage in
a progressive pursuit of the purpose of a
business transaction [Eriks Ltd. v. CA, 267
SCRA 567 (1997)].
General Rule: No foreign corporation
transacting business in the Philippines without
a license, or its successors or assigns, shall be
permitted to maintain or intervene in any
action, suit or proceeding in any court or
administrative agency of the Philippines.
One who has dealt with a corporation of foreign
origin as a corporate entity is estopped to deny
its corporate existence and capacity: The
principle will be applied to prevent a person
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Exceptions:
1. But such may be sued or proceeded
against before Philippine courts or
administrative tribunals on any valid
cause of action recognized under
Philippine laws [Sec. 150, RCC].
2. One who has dealt with a corporation
of foreign origin as a corporate entity is
estopped to deny its corporate
existence and
capacity
[Communications
Materials
and
Design, Inc. v. Court of Appeals, 260
SCRA 673 (1996)].
3. If a foreign corporation is not doing
business in the Philippines, it needs no
license to sue before Philippine courts
on an isolated transaction or on a
cause of action entirely independent of
any business transaction [Agilent
Technologies v. Integrated Silicon,
G.R. No. 154618 (2004)].
f. Grounds for Revocation of License
Grounds for revocation of license:
●
●
●
●
●
●
●
Failure to file its annual report or pay
any fees as required by this Code;
Failure to appoint and maintain a
resident agent in the Philippines as
required by this Title;
Failure, after change of its resident
agent or address, to submit to the
Commission a statement of such
change as required by this Title;
Failure to submit to the Commission an
authenticated copy of any amendment
to its articles of incorporation or bylaws
or of any articles of merger or
consolidation
within
the
time
prescribed by this Title;
A misrepresentation of any material
matter in any application, report,
affidavit or other document submitted
by such corporation pursuant to this
Title;
Failure to pay any and all taxes,
imposts, assessments or penalties, if
any, lawfully due to the Philippine
Government or any of its agencies or
political subdivisions;
Transacting business in the Philippines
outside of the purpose or purposes for
●
●
which such corporation is authorized
under its license;
Transacting business in the Philippines
as agent of or acting on behalf of any
foreign corporation or entity not duly
licensed to do business in the
Philippines; or
Any other ground as would render it
unfit to transact business in the
Philippines. [Sec. 151, RCC]
M. Merger and Consolidation
1. Concept
Definitions
Merger - A corporation absorbs the other and
remains in existence while the others are
dissolved [Sec.75, RCC].
Mergers may be horizontal (between competing
firms), vertical (if a corporation acquires another
which uses or distributes its products) or
conglomerate (neither competing nor related in
the chain of production or distribution)
[Campos].
Consolidation – a new corporation is created,
and
consolidating
corporations
are
extinguished [Sec.75, RCC].
Merger
Consolidation
One or more
corporations are
absorbed by another
which survives and
continues
the
combined business
Union of 2 or more
corporations to form
a new corporation
One
of
the constituent
corporations
remains as
an
existing juridical
person, whereas the
other corporation
shall cease to exist
All
constituent
corporations
disappear
with
the
emergence of a new
corporate entity
The
surviving
corporation shall
The new corporate
entity shall obtain all
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The Plan must be approved by the board of
directors or trustees of each constituent
corporation by majority vote [Sec. 75, RCC].
Consolidation
acquire all the
assets, rights of
action, and
assuming all the
liabilities
of
the disappearing
corporation/s.
the assets of
the disappearing
corporations,
and likewise shall
assume all their
liabilities.
4. Articles of Merger or Consolidation
The Articles of Merger or Consolidation takes
the place of the AOI of the consolidated
corporation or amends the AOI of the surviving
corporation. [Sec. 77, RCC]
There is no liquidation of the assets of the
dissolved corporation, all rights, properties
and franchises are acquired by the
surviving/new corporation.
Merger and consolidation involve fundamental
changes in the corporation, the rights of
stockholders and creditors. There must be an
express provision of law that authorizes them.
Otherwise, such combinations are ultra vires.
With the approval of the Corporation Code,
such express authority has been granted
[Campos].
2. Constituent Corporation
Consolidated Corporation
vs.
Constituent
Corporation
Consolidated
Corporation
Surviving
Corporation
The parties to
a merger or
consolidation.
The new
single
corporation
created
through
consolidation.
One of the
constituent
corporation
s which
remain in
existence
after the
merger.
3. Plan of Merger or Consolidation
Requisites
1. Executed by each of the constituent
corporations;
2. Signed by the president/vice president;
3. Certified by the secretary/assistant
secretary of each corporation. [Sec. 77,
RCC]
Contents
The Articles must contain the following:
1. Plan of the merger/consolidation
2. As to stock corporations, the number of
shares outstanding, or in the case of
non-stock corporations, the number of
members;
3. As to each corporation, the number of
shares or members voting for or
against such plan, respectively;
4. the carrying amounts and fair values of
the assets and liabilities of the
respective companies as of the agreed
cut-off date
5. The method to be used in the merger
or consolidation of accounts of the
companies;
6. The provisional or pro-forma values, as
merged or consolidated, using the
accounting method; and
7. Such other information as may be
prescribed by the Commission [Sec.
77, RCC].
Each of the constituent corporations must draw
Procedure
up a Plan of Merger or Consolidation which
shall set forth:
Approval
of
Plan
or
Merger
or
1. Names of the corporation involved;
Consolidation by BOD and Stockholders of
2. Terms and mode of carrying it to effect;
Constituent Corporations [Sec. 76, RCC]
3. Statement of changes, if any, in the
1. Approval by majority vote of each of the
present articles of the surviving
board of directors or trustees of the
corporation to be formed in the case of
constituent corporations of the plan of
merger; and with respect to the
merger or consolidation.
consolidated corporation in case of
consolidation
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2. Approval by the stockholders or
members of each of such corporations
at separate corporate meetings duly
called for that purpose.
a. The
affirmative
vote
of
stockholders representing at
least two-thirds (2/3) of the
outstanding capital stock of
each corporation in the case of
stock corporations or at least
two-thirds (2/3) of the members
in the case of non-stock
corporations
shall
be
necessary for the approval of
such plan.
b. Holders of non-voting shares
are entitled to vote on the plan
[Sec. 6, par. 6(6)].
3. Notice of such meetings shall be given
to all stockholders or members in the
same manner as giving notice of
regular or special meetings under
Section 49. The notice shall state the
purpose of the meeting and include a
copy or a summary of the plan of
merger or consolidation.
Any
dissenting
stockholder
in
stock
corporations may exercise his appraisal right in
accordance with the Code. Provided that if
after the approval by the stockholders of such
plan, the board of directors decides to abandon
the plan, the appraisal right shall be
extinguished.
Amendment to the plan of merger or
consolidation
An amendment to the Plan may be made by
approval of the majority vote of the
respective boards of directors or trustees of
all the constituent corporations and ratified
by the affirmative vote of stockholders
representing at least two-thirds (2/3) of the
outstanding capital stock or of two-thirds
(2/3) of the members of each of the
constituent corporations. Such plan, together
with any amendment, shall be considered as
the agreement of merger or consolidation
Execution of
Consolidation
Articles
of
Merger
or
Articles of Merger or Articles of Consolidation
shall be executed by each of the constituent
corporations.
Submission to SEC of the Articles
The Articles of Merger or Consolidation are
submitted to the SEC for approval.
Mergers and consolidations of corporations
governed by special laws require a
recommendation
from
the
appropriate
government agency [Sec. 78 (1), RCC].
Action by SEC
1. If necessary, the SEC shall set a
hearing, notifying all corporations
concerned at least 2 weeks before.
2. SEC shall issue a certificate approving
the articles and plan of merger or of
consolidation. [Sec. 78, RCC]
Upon the issuance of the certificate of
merger or consolidation, such merger or
consolidation shall become effective [Sec.
78, RCC].
A merger or consolidation does not
become effective by mere agreement of
the constituent corporations. The approval
of the SEC is required [PNB v. Andrada
Electric and Engr. Co., Inc. (2002)].
Notwithstanding Sec. 79 (now, sec. 78,
RCC), parties may stipulate a specific
effective date of merger (or consolidation)
where no 3rd party will be prejudiced [SEC
Opinion No. 09-13, July 1, 2009].
5. Effects
As enumerated in the RCC, the following are
the legal effects of merger/consolidation:
1. The constituent corporations shall
become a single corporation which, in
case of merger, shall be the surviving
corporation designated in the plan of
merger; and, in case of consolidation,
shall be the consolidated corporation
designated in the plan of consolidation;
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2. The separate existence of the
constituent corporations shall cease,
except that of the surviving or the
consolidated corporation;
3. The surviving or the consolidated
corporation shall possess all the rights,
privileges, immunities, and powers and
shall be subject to all the duties and
liabilities of a corporation organized
under this Code;
4. The surviving or the consolidated
corporation shall possess all the rights,
privileges, immunities and franchises
of each constituent corporation; and all
real or personal property, all
receivables due on whatever account,
including subscriptions to shares and
other choses in action, and every other
interest of, belonging to, or due to each
constituent corporation, shall be
deemed transferred to and vested in
such
surviving
or
consolidated
corporation without further act or deed;
and
5. The
surviving
or
consolidated
corporation shall be responsible for all
the liabilities and obligations of each
constituent corporation as though such
surviving or consolidated corporation
had itself incurred such liabilities or
obligations; and any pending claim,
action or proceeding brought by or
against any constituent corporation
may be prosecuted by or against the
surviving or consolidated corporation.
The rights of creditors or liens upon the
property
of
such
constituent
corporations shall not be impaired by
the merger or consolidation [Sec. 79,
RCC].
Although in a merger, there is dissolution of the
absorbed corporations, there is no winding up
of their affairs, because the surviving
corporation automatically acquires all their
rights, privileges, powers, and liabilities
[Associated Bank v. CA, 291 SCRA 511].
Same goes for the consolidated corporation.
Salient
Advantages
Mergers/Consolidation
of
Unlike regular transfer/acquisition, it is able to
achieve a continuous flow of the juridical
personalities and business enterprises of the
constituent corporations. There is no “legal
break” in their juridical personalities and
business enterprises.
Thus, merger/consolidation is not a violation of
a non-transfer clause. The surviving or
consolidated corporation is not considered a
transferee.
Unlike regular transfer of assets/business
enterprise, there is no gain or loss in the pursuit
of merger or consolidation, thus it is not subject
to taxable gains under Section 40(C)(2)(a) of
the NIRC, as amended by the Train Law.
As to Constituent Corporations Corporate
existence
The constituent corporations shall become a
single corporation. The separate existence of
the constituents shall cease, except that of the
surviving or the consolidated corporation. The
absorbed or constituent corporations are ipso
facto dissolved by operation of law [SEC
Opinion, July 16, 1981].
Assets and liabilities
There is no liquidation of the assets of the
dissolved corporations [Campos].
The surviving or the consolidated corporation
shall possess all the rights, privileges,
immunities, powers, and franchises of each
constituent corporation and the properties shall
be deemed transferred to and vested in the
surviving or consolidated corporation without
further act or deed.
The surviving or the consolidated corporation
shall be subject to all the duties and liabilities
of the dissolving corporation(s).
As to Creditors
The creditors of a corporation cannot prevent
its merger or consolidation with another even if
the surviving or new corporation is not as
acceptable a debtor as the absorbed
corporation [Campos].
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Any claim, action or proceeding pending by or
against any of the constituent corporations may
be prosecuted by or against the surviving or
consolidated corporation.
The rights of the creditors or lien upon the
property of any of each constituent corporation
shall not be impaired by such merger or
consolidation.
Mergers and Consolidations in Employees
Because there is no legal break by the act of
merging, consolidating, it is logical to expect
that the contractual rights of employees and
the existing collective bargaining agreement, if
any, would have to be absorbed by the
surviving/consolidated corporation. However,
SC has made contrary rulings.
The rule on automatic assumption/absorption
does not impair the right of an employer to
terminate the employment of the absorbed
employees for a lawful or authorized cause or
the right of such an employee to resign, retire,
or otherwise sever his employment, whether
before or after the merger, subject to existing
contractual
obligations
[The
Philippine
Geothermal Inc. Employees Union v. Unocal
Philippines, Inc., (2016)].
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A. NEW CENTRAL
BANK ACT
(c) five (5) members who shall come from the private
sector, all of whom shall serve full-time: Provided,
however, That of the members first appointed under
the provisions of this subsection, three (3) shall have
a term of six (6) years, and the other two (2), three
(3) years.
No member of the Monetary Board may be
reappointed more than once.
1. State Policies
New Central Bank Act
Section 1. Declaration of Policy. – The State shall
maintain a central monetary authority that shall
function and operate as an independent and
accountable body corporate in the discharge of its
mandated responsibilities concerning money,
banking and credit. In line with this policy, and
considering its unique functions and responsibilities,
the central monetary authority established under this
Act, while being a government-owned corporation,
shall enjoy fiscal and administrative autonomy.
2. Monetary Board and its Powers and
Functions
a. Composition
New Central Bank Act
Section 6. Composition of the Monetary Board. –
The powers and functions of the Bangko Sentral
shall be exercised by the Bangko Sentral Monetary
Board, hereafter referred to as the Monetary Board,
composed of seven (7) members appointed by the
President of the Philippines for a term of six (6)
years.
Section 7. Vacancies. – Any vacancy in the
Monetary Board created by the death, resignation,
or removal of any member shall be filled by the
appointment of a new member to complete the
unexpired period of the term of the member
concerned.
Section 8. Qualifications. – The members of the
Monetary Board must be natural-born citizens of the
Philippines, at least thirty-five (35) years of age, with
the exception of the Governor who should at least
be forty (40) years of age, of good moral character,
of unquestionable integrity, of known probity and
patriotism, and with recognized competence in
social and economic disciplines.
Section 9. Disqualifications. – In addition to the
disqualifications imposed by Republic Act No. 6713,
a member of the Monetary Board is disqualified from
being a director, officer, employee, consultant,
lawyer, agent or stockholder of any bank, quasibank or any other institution which is subject to
supervision or examination by the Bangko Sentral,
in which case such member shall resign from, and
divest himself of any and all interests in such
institution before assumption of office as member of
the Monetary Board.
The members of the Monetary Board coming from
the private sector shall not hold any other public
office or public employment during their tenure.
The seven (7) members are:
(a) the Governor of the Bangko Sentral, who shall be
the Chairman of the Monetary Board. The Governor
of the Bangko Sentral shall be head of a department
and his appointment shall be subject to confirmation
by the Commission on Appointments. Whenever the
Governor is unable to attend a meeting of the Board,
he shall designate a Deputy Governor to act as his
alternate: Provided, That in such event, the
Monetary Board shall designate one of its members
as acting Chairman;
(b) a member of the Cabinet to be designated by the
President of the Philippines. Whenever the
designated Cabinet Member is unable to attend a
meeting of the Board, he shall designate an
Undersecretary in his Department to attend as his
alternate; and
No person shall be a member of the Monetary Board
if he has been connected directly with any
multilateral banking or financial institution or has a
substantial interest in any private bank in the
Philippines, within one (1) year prior to his
appointment; likewise, no member of the Monetary
Board shall be employed in any such institution
within two (2) years after the expiration of his term
except when he serves as an official representative
of the Philippine Government to such institution.
Section 10. Removal. – The President may remove
any member of the Monetary Board for any of the
following reasons: (a)If the member is subsequently
disqualified under the provisions of Section 8 of this
Act; or (b)If he is physically or mentally incapacitated
that he cannot properly discharge his duties and
responsibilities and such incapacity has lasted for
more than six (6) months; or(c)If the member is guilty
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of acts or operations which are of fraudulent or illegal
character or which are manifestly opposed to the
aims and interests of the Bangko Sentral; or (d)If the
member no longer possesses the qualifications
specified in Section 8 of this Act.
b. Powers, Duties and Functions
Power to close banks.
The action of the MB on this matter is final and
executory. Such exercise may nonetheless be
subject to judicial inquiry and can be set aside
if found to be in excess of jurisdiction or with
such grave abuse of discretion as to amount to
lack or excess of jurisdiction. [Bangko Sentral
ng Pilipinas Monetary Board v. AntonioValenzuela, G.R. No. 184778]
In cases involving the BSP, power to
authorize the BSP Governor to represent it
personally or through a counsel, even a
private counsel, and the authority to
represent the BSP may be delegated to any
of its officers. [Bangko Sentral ng Pilipinas v.
Legaspi, G.R. No. 205966]
Duty to cause the prosecution of those
alleged violators.
However, nothing under the Central Bank Act
and the General Banking Act imposes a clear,
specific duty on the former to do the actual
prosecution of the latter.
Being an artificial person, The Central Bank is
limited to its statutory powers and the nearest
power to which prosecution of violators of
banking laws may be attributed is its power to
sue and be sued. But this corporate power of
litigation evidently refers to civil cases only.
[Perez v. Monetary Board, G.R. No. L-23307]
Exclusive authority to assess, evaluate and
determine the condition of any bank, and
finding such condition to be one of insolvency,
or that its continuance in business would
involve a probable loss to its depositors or
creditors, forbid bank or non-bank financial
institution to do business in the Philippines.
To this end, they shall designate an official of
the BSP or other competent person as receiver
to immediately take charge of its assets and
liabilities. [Koruga v. Arcenas, Jr., G.R. Nos.
168332, 169053]
Power to impose administrative sanctions
on erring banks.
3. The Bangko Sentral ng Pilipinas
and Banks in Distress
a. Conservatorship
New Central Bank Act
Section 29.
Appointment of Conservator. Whenever, on the basis of a report submitted by the
appropriate supervising or examining department,
the Monetary Board finds that a bank or a quasibank is in a state of continuing inability or
unwillingness to maintain a condition of liquidity
deemed adequate to protect the interest of
depositors and creditors, the Monetary Board may
appoint a conservator with such powers as the
Monetary Board shall deem necessary to take
charge of the assets, liabilities, and the management
thereof, reorganize the management, collect all
monies and debts due said institution, and exercise
all powers necessary to restore its viability. The
conservator shall report and be responsible to the
Monetary Board and shall have the power to
overrule or revoke the actions of the previous
management and board of directors of the bank or
quasi-bank.
The conservator should be competent and
knowledgeable
in
bank
operations
and
management. The conservatorship shall not exceed
one (1) year.
The conservator shall receive remuneration to be
fixed by the Monetary Board in an amount not to
exceed two-thirds (2/3) of the salary of the president
of the institution in one (1) year, payable in twelve
(12) equal monthly payments: Provided, That, if at
any time within the one-year period, the
conservatorship is terminated on the ground that the
institution can operate on its own, the conservator
shall receive the balance of the remuneration which
he would have received up to the end of the year;
but if the conservatorship is terminated on other
grounds, the conservator shall not be entitled to
such remaining balance. The Monetary Board may
appoint a conservator connected with the Bangko
Sentral, in which case he shall not be entitled to
receive any remuneration or emolument from the
Bangko Sentral during the conservatorship. The
expenses attendant to the conservatorship shall be
borne by the bank or quasi-bank concerned.
The Monetary Board shall terminate the
conservatorship when it is satisfied that the
institution can continue to operate on its own and the
conservatorship is no longer necessary. The
conservatorship shall likewise be terminated should
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the Monetary Board, on the basis of the report of the
conservator or of its own findings, determine that the
continuance in business of the institution would
involve probable loss to its depositors or creditors, in
which case the provisions of Section 30 shall apply.
Requisites
before
the
order
of
conservatorship may be set aside by a
court:
1. The appropriate pleading must be filed by
the stockholders of record representing the
majority of the capital stock of the bank in the
proper court;
2. Said pleading must be filed within ten (10)
days from receipt of notice by said majority
stockholders of the order placing the bank
under conservatorship; and
3. There must be convincing proof, after
hearing, that the action is plainly arbitrary and
made in bad faith. [Central Bank of the
Philippines v. Court of Appeals, G.R. No.
88353, 08 May 1992]
The powers of a conservator are described as
vast and far-reaching. However, such powers
must be related to the "(preservation of) the
assets of the bank, (the reorganization of) the
management thereof and (the restoration of) its
viability." Such powers cannot extend to the
post-facto
repudiation
of
perfected
transactions, otherwise they would infringe
against the non-impairment clause of the
Constitution.
The conservator merely takes the place of a
bank's board of directors. What the said board
cannot do — such as repudiating a contract
validly entered into under the doctrine of
implied authority — the conservator cannot do
either. [First Philippine International Bank v.
Court of Appeals, G.R. No. 115849, 24 January
1996)]
Procedure
for
Conservatorship
Damages
under
Damages arising
from the MB's act of
placing the bank
under
conservatorship
Damages arising
from the acts of the
conservator
May be claimed only
if the MB's action is
plainly arbitrary and
made in bad faith,
and that the action
therefor
is
inseparable from an
action to set aside the
conservatorship.
Comes
with
injunction to restrain
the enforcement of
the
CB's
implementing
resolutions.
Must be filed within
10 days from receipt
of notice of the order
placing the bank
under
conservatorship.
The fifth paragraph of
Section 29 of the
Central Bank Act
equally
applies
because
the
questioned acts are
but incidental to the
conservatorship.
2. Closure
The action of the MB on closure is final and
executory. [Bangko Sentral ng Pilipinas
Monetary Board v. Antonio-Valenzuela, G.R.
No. 184778, 02 October 2009]
The closure of a bank may be considered as an
exercise of police power. Such exercise may
nonetheless be subject to judicial inquiry and
can be set aside if found to be in excess of
jurisdiction or with such grave abuse of
discretion as to amount to lack or excess of
jurisdiction. [Bangko Sentral ng Pilipinas
Monetary Board v. Antonio-Valenzuela, G.R.
No. 184778, 02 October 2009]
RA 7653 no longer requires that an
examination be made before the MB can issue
a closure order. [Rural Bank of San Miguel Inc.
v. Monetary Board, Central Bank of the
Philippines, G.R. No. 150886, 16 February
2007]
Under the law, the sanction of closure could be
imposed upon a bank by the BSP even without
notice and hearing. [Bangko Sentral ng
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Pilipinas Monetary Board v. AntonioValenzuela, G.R. No. 184778, 02 October
2009]
The "close now, hear later" doctrine has
already been justified as a measure for the
protection of the public interest. Swift action is
called for on the part of the BSP when it finds
that a bank is in dire straits. Unless adequate
and determined efforts are taken by the
government
against
distressed
and
mismanaged banks, public faith in the banking
system is certain to deteriorate to the prejudice
of the national economy itself, not to mention
the losses suffered by the bank depositors,
creditors, and stockholders, who all deserve
the protection of the government. [Bangko
Sentral ng Pilipinas Monetary Board v.
Antonio-Valenzuela, G.R. No. 184778, 02
October 2009]
The period during which the bank cannot do
business due to insolvency is not a fortuitous
event, unless it is shown that the government's
action to place a bank under receivership or
liquidation proceedings is tainted with
arbitrariness, or that the regulatory body has
acted without jurisdiction. [Spouses Poon v.
Prime Savings Bank, G.R. No. 183794, 13
June 2016]
3. Receivership
New Central Bank Act
Section 30. Proceedings in Receivership and
Liquidation. – Whenever, upon report of the head of
the supervising or examining department, the
Monetary Board finds that a bank or quasi-bank:
(a) is unable to pay its liabilities as they become due
in the ordinary course of business: Provided, That
this shall not include inability to pay caused by
extraordinary demands induced by financial panic in
the banking community;
(b) has insufficient realizable assets, as determined
by the Bangko Sentral, to meet its liabilities; or
(c) cannot continue in business without involving
probable losses to its depositors or creditors; or
(d) has willfully violated a cease and desist order
under Section 37 that has become final, involving
acts or transactions which amount to fraud or a
dissipation of the assets of the institution; in which
cases, the Monetary Board may summarily and
without need for prior hearing forbid the institution
from doing business in the Philippines and designate
the Philippine Deposit Insurance Corporation as
receiver of the banking institution.
For a quasi-bank, any person of recognized
competence in banking or finance may be
designated as receiver.
The receiver shall immediately gather and take
charge of all the assets and liabilities of the
institution, administer the same for the benefit of its
creditors, and exercise the general powers of a
receiver under the Revised Rules of Court but shall
not, with the exception of administrative
expenditures, pay or commit any act that will involve
the transfer or disposition of any asset of the
institution: Provided, That the receiver may deposit
or place the funds of the institution in nonspeculative
investments. The receiver shall determine as soon
as possible, but not later than ninety (90) days from
take-over, whether the institution may be
rehabilitated or otherwise placed in such a condition
so that it may be permitted to resume business with
safety to its depositors and creditors and the general
public: Provided, That any determination for the
resumption of business of the institution shall be
subject to prior approval of the Monetary Board.
xxx
The law entrusts to the MB the appreciation
and determination of whether any or all of the
statutory grounds for the closure and
receivership of the erring bank are present.
The MB, under R.A. No. 7653, has been
invested with more power of closure and
placement of a bank under receivership for
insolvency or illiquidity, or because the bank’s
continuance in business would probably result
in the loss to depositors or creditors. [Vivas, v.
Monetary Board of the Central Bank of the
Philippines, G.R. No. 191424, 07 August
2013)]
To address the growing concerns in the
banking industry, the legislature has sufficiently
empowered the MB to effectively monitor and
supervise banks and financial institutions and,
if circumstances warrant, to forbid them to do
business, to take over their management or to
place them under receivership. The legislature
has clearly spelled out the reasonable
parameters of the power entrusted to the MB
and assigned to it only the manner of enforcing
said power. In other words, the MB was given
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a wide discretion and latitude only as to how
the law should be implemented in order to
attain its objective of protecting the interest of
the public, the banking industry and the
economy. [Vivas, v. Monetary Board of the
Central Bank of the Philippines, G.R. No.
191424, 07 August 2013]
The assets of the bank pass beyond its control
into the possession and control of the receiver
whose duty it is to administer the assets for the
benefit of the creditors of the bank. Thus, the
appointment of a receiver operates to suspend
the authority of the bank and of its directors and
officers over its property and effects, such
authority being reposed in the receiver, and in
this respect, the receivership is equivalent to
an injunction to restrain the bank officers from
intermeddling with the property of the bank in
any way. [Abacus Real Estate Development
Center, Inc. v. Manila Banking Corporation,
G.R. No. 162270, 06 April 2005]
A bank receiver only has powers of
administration.
[Abacus
Real
Estate
Development Center, Inc. v. Manila Banking
Corporation, G.R. No. 162270, 06 April 2005]
Granting or approving an "exclusive option to
purchase" is not an act of administration, but
an act of strict ownership, involving, as it does,
the disposition of property of the bank. [Abacus
Real Estate Development Center, Inc. v.
Manila Banking Corporation, supra
If circumstances warrant it, the MB may forbid
a bank from doing business and place it under
receivership without prior notice and hearing.
(Vivas, v. Monetary Board of the Central Bank
of the Philippines, supra)
4. Liquidation
New Central Bank Act
Section 30. Proceedings in Receivership and
Liquidation. – xxx
If the receiver determines that the institution cannot
be rehabilitated or permitted to resume business in
accordance with the next preceding paragraph, the
Monetary Board shall notify in writing the board of
directors of its findings and direct the receiver to
proceed with the liquidation of the institution. The
receiver shall:
(1) file ex parte with the proper regional trial court,
and without requirement of prior notice or any other
action, a petition for assistance in the liquidation of
the institution pursuant to aliquidation plan adopted
by the Philippine Deposit Insurance Corporation for
general application to all closed banks. In case of
quasi-banks, the liquidation plan shall be adopted by
the Monetary Board. Upon acquiring jurisdiction, the
court shall, upon motion by the receiver after due
notice, adjudicate disputed claims against the
institution, assist the enforcement of individual
liabilities of the stockholders, directors and officers,
and decide on other issues as may be material to
implement the liquidation plan adopted. The receiver
shall pay the cost of the proceedings from the assets
of the institution.
(2) convert the assets of the institution to money,
dispose of the same to creditors and other parties,
for the purpose of paying the debts of such institution
in accordance with the rules on concurrence and
preference of credit under the Civil Code of the
Philippines and he may, in the name of the
institution, and with the assistance of counsel as he
may retain, institute such actions as may be
necessary to collect and recover accounts and
assets of, or defend any action against, the
institution. The assets of an institution under
receivership or liquidation shall be deemed in
custodia legis in the hands of the receiver and shall,
from the moment the institution was placed under
such receivership or liquidation, be exempt from any
order of garnishment, levy, attachment, or
execution.
The actions of the Monetary Board taken under this
section or under Section 29 of this Act shall be final
and executory, and may not be restrained or set
aside by the court except on petition for certiorari on
the ground that the action taken was in excess of
jurisdiction or with such grave abuse of discretion as
to amount to lack or excess of jurisdiction. The
petition for certiorari may only be filed by the
stockholders of record representing the majority of
the capital stock within ten (10) days from receipt by
the board of directors of the institution of the order
directing
receivership,
liquidation
or
conservatorship.
The designation of a conservator under Section 29
of this Act or the appointment of a receiver under this
section shall be vested exclusively with the
Monetary Board. Furthermore, the designation of a
conservator is not a precondition to the designation
of a receiver.
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Court with Jurisdiction
Section 29 only finds operation in cases where
there are claims against an insolvent bank. The
exclusive jurisdiction of the liquidation court
pertains only to the adjudication of claims
against the bank. It does not cover the reverse
situation where it is the bank which files a claim
against another person or legal entity. [Manalo
v. Court of Appeals, G.R. No. 141297, 08
October 2001]
The requirement that all claims against the
bank be pursued in the liquidation proceedings
filed by the Central Bank is intended to prevent
multiplicity of actions against the insolvent
bank and designed to establish due process
and orderliness in the liquidation of the bank, to
obviate the proliferation of litigations and to
avoid injustice and arbitrariness. The
lawmaking body contemplated that for
convenience, only one court, if possible, should
pass upon the claims against the insolvent
bank and that the liquidation court should
assist the Superintendents of Banks and
regulate his operations. [Manalo v. Court of
Appeals, supra]
A bank which had been ordered closed by the
monetary board retains its juridical personality
which can sue and be sued through its
liquidator. The only limitation being that the
prosecution or defense of the action must be
done through the liquidator. Otherwise, no suit
for or against an insolvent entity would prosper.
In such situation, banks in liquidation would
lose what justly belongs to them through a
mere technicality. [Manalo v. Court of Appeals,
supra]
The power and authority of the Monetary Board
to close banks and liquidate them thereafter
when public interest so requires is an exercise
of the police power of the State. Police power,
however, is subject to judicial inquiry. It may not
be exercised arbitrarily or unreasonably and
could be set aside if it is either capricious,
discriminatory, whimsical, arbitrary, unjust, or
is tantamount to a denial of due process and
equal protection clauses of the Constitution.
[Miranda v. Philippine Deposit Insurance
Corporation, G.R. No. 169334, 08 September
2006]
"Disputed claims" refer to all claims, whether
they be against the assets of the insolvent
bank, for specific performance, breach of
contract, damages, or whatever. [Miranda v.
Philippine Deposit Insurance Corporation,
supra]
The rationale behind judicial liquidation is
intended to prevent multiplicity of actions
against the insolvent bank. It is a pragmatic
arrangement designed to establish due
process and orderliness in the liquidation of the
bank, to obviate the proliferation of litigations
and to avoid injustice and arbitrariness. The
lawmaking body contemplated that for
convenience, only one court, if possible, should
pass upon the claims against the insolvent
bank and that the liquidation court should
assist the Superintendent of Banks and
regulate his operations. [Miranda v. Philippine
Deposit Insurance Corporation, supra]
In the absence of fraud, the purchase of a
cashier's check, like the purchase of a draft on
a correspondent bank, creates the relation of
creditor and debtor, not that of principal and
agent, with the result that the purchaser or
holder thereof is not entitled to a preference
over general creditors in the assets of the bank
issuing the check, when it fails before payment
of the check. However, in a situation involving
the element of fraud, where a cashier's check
is purchased from a bank at a time when it is
insolvent, as its officers know or are bound to
know by the exercise of reasonable diligence,
it has been held that the purchase is entitled to
a preference in the assets of the bank on its
liquidation before the check is paid. [Miranda v.
Philippine Deposit Insurance Corporation,
supra]
Differences in the procedure for involuntary
dissolution and liquidation of a corporation
under the Corporation Code, and that of a
banking corporation under the New Central
Bank Act:
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Dissolution of Corporation v. Liquidation of
Bank
Dissolution
Corporation
of Liquidation of Bank
May be done upon
the filing of a verified
complaint and after
proper notice and
hearing, on grounds
provided by existing
laws,
rules,
and
regulations.
Upon receipt by the
corporation of the
order of suspension
from the SEC, it is
required to notify and
submit a copy of the
said order, together
with its final tax
return, to the BIR.
The Monetary Board
may summarily and
without need for prior
hearing, forbid the
banking corporation
from doing business
in the Philippines, for
causes enumerated
in Section 30 of the
New Central Bank
Act; and appoint the
PDIC as receiver of
the bank.
PDIC
shall
immediately gather
and take charge of all
the
assets
and
liabilities
of
the
The SEC is also closed bank and
required to furnish the administer the same
BIR a copy of its order for the benefit of its
of suspension.
creditors.
The BIR is supposed
to
issue
a
tax
clearance
to
the
corporation within 30
days from receipt of
the
foregoing
documentary
requirements.
The SEC shall issue
the final order of
dissolution only after
the corporation has
submitted its tax
clearance; or in case
of
involuntary
dissolution, the SEC
may proceed with the
dissolution after 30
days from receipt by
the BIR of the
documentary
requirements without
The summary nature
of the procedure for
the
involuntary
closure of a bank is
especially stressed in
Section 30 of the
New Central Bank
Act, which explicitly
states
that
the
actions
of
the
Monetary
Board
under
the
said
Section or Section 29
shall be final and
executory, and may
not be restrained or
set aside by the court
except on a Petition
for Certiorari filed by
the stockholders of
record of the bank
representing
a
majority of the capital
Dissolution
Corporation
of Liquidation of Bank
a
tax
clearance
having been issued.
The corporation is
allowed to continue
as a body corporate
for three years after
its dissolution, for the
purpose
of
prosecuting
and
defending suits by or
against it, to settle
and close its affairs,
and to dispose of and
convey its property
and distribute its
assets, but not for the
purpose of continuing
its business. The
corporation
may
undertake its own
liquidation, or at any
time during the said
three years, it may
convey all of its
property to trustees
for the benefit of its
stockholders,
members, creditors,
and other persons in
interest.
stock. PDIC, as the
appointed receiver,
shall file ex parte with
the proper RTC, and
without requirement
of prior notice or any
other
action,
a
petition
for
assistance in the
liquidation of the
bank. The bank is not
given the option to
undertake its own
liquidation.
Nothing in Section 30
of RA 7653 requires
the BSP, through the
Monetary Board, to
make
an·
independent
determination
of
whether a bank may
still be rehabilitated
or not. As expressly
stated in the aforecited provision, once
the
receiver
determines
that
rehabilitation is no
longer feasible, the
Monetary Board is
simply obligated to:
(a) notify in writing
the bank's board of
directors of the same;
and (b) direct the
PDIC to proceed with
liquidation.
[In Re: Petition for Assistance in the Liquidation
in the Rural Bank of Bokod Benguet v. Bureau
of Internal Revenue, G.R. No. 158261, 18
December 2006]
Make a separate and distinct factual
determination before it can order the liquidation
of a bank or quasi-bank when the PDIC has
already made such determination. (Apex
Bancrights Holdings, Inc. et. al. v. Bangko
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Sentral Ng Pilipinas, G.R. No. 214866, 2
October 2017)
The liquidation court has the exclusive
jurisdiction to adjudicate disputed claims
against the closed bank, assist in the
enforcement of individual liabilities of the
stockholders, directors and officers, and decide
on all other issues as may be material to
implement the distribution plan adopted by the
PDIC for general application to all closed
banks. Simply put, if there is a judicial
liquidation of an insolvent bank, all claims
against the bank should be filed in a liquidation
proceeding. (Allan Cu v. Small Business
Guarantee and Finance Corporation, G.R. No.
218381, July 14, 2021)
Section 30 of RA 7653 is curative in character
when it declared that the liquidation court shall
have jurisdiction in the same proceedings to
assist in the adjudication of the disputed claims
against the Bank. (Hermosa Savings and Loan
Bank v. Development Bank of the Philippines,
G.R. No. 222972, February 10, 2021)
The rationale for consolidating all claims
against the bank with the liquidation court is "to
prevent multiplicity of actions against the
insolvent bank and x x x to establish due
process and orderliness in the liquidation of the
bank, to obviate the proliferation of litigations
and to avoid injustice and arbitrariness.
(Hermosa Savings and Loan Bank v.
Development Bank of the Philippines, G.R. No.
222972, February 10, 2021)
Section 30 of RA 7653 gives the liquidation
court the authority to "adjudicate disputed
claims against the institution, assist the
enforcement of individual liabilities of the
stockholders, directors and officers, and decide
on other issues as may be material to
implement the liquidation plan adopted."
(Hermosa Savings and Loan Bank v.
Development Bank of the Philippines, G.R. No.
222972, February 10, 2021)
B. GENERAL
BANKING LAW OF
2000
1. Definition and Classification of
Banks
a. Definition
A bank has been defined as a moneyed
institute founded to facilitate the borrowing,
lending and safe-keeping of money and to
deal, in notes, bills of exchange, and
credits. (Republic v. Security Credit and
Acceptance Corporation, G.R. No. L-20583, 23
January 1967)
An investment company which loans out the
money of its customers, collects the
interest and charges a commission to both
lender and borrower, is a bank. (Republic v.
Security Credit and Acceptance Corporation,
G.R. No. L-20583, 23 January 1967)
Any person engaged in the business
carried on by banks of deposit, of discount,
or of circulation is doing a banking business,
although but one of these functions is
exercised. (Republic v. Security Credit and
Acceptance Corporation, G.R. No. L-20583, 23
January 1967)
General Banking Law of 2000
Section 3. Definition and Classification of Banks.
3.1. "Banks" shall refer to entities engaged in the
lending of funds obtained in the form of deposits.
b. Classification
General Banking Law of 2000
Section 3. Definition and Classification of Banks.
Banks shall be classified into:
(a) Universal banks;
(b) Commercial banks;
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Banks
(c) Thrift banks, composed of: (i) Savings and
mortgage banks, (ii) Stock savings and loan
associations, and (iii) Private development banks, as
defined in the Republic Act No. 7906 (hereafter the
"Thrift Banks Act");
(d) Rural banks, as defined in Republic Act No. 73S3
(hereafter the "Rural Banks Act");
(e) Cooperative banks, as defined in Republic Act
No 6938 (hereafter the "Cooperative Code");
(f) Islamic banks as defined in Republic Act No.
6848, otherwise known as the "Charter of Al
Amanah Islamic Investment Bank of the
Philippines"; and
(g) Other classifications of banks as determined by
the Monetary Board of the Bangko Sentral ng
Pilipinas.
2. Distinction of Banks from QuasiBanks and Trust Entities
Banks
Entities
engaged
the lending
funds
obtained
the form
deposits.
(Sec. 3)
QuasiBanks
Trust
Entities
Entities
in engaged in
of the borrowing
of
funds
in through the
of issuance,
endorsement
or
assignment
A moneyed with recourse
institute
or
founded
to acceptance
facilitate the of
deposit
borrowing,
substitutes as
lending and defined
in
safeSection 95 of
keeping of Republic Act
money and No. 7653 for
to deal, in purposes of
notes, bills re-lending or
of exchange, purchasing of
and credits. receivables
(Republic v. and
other
Security
obligations.
Credit
and (Sec. 4)
Acceptance
Corporation,
A
stock
corporation
or a person
duly
authorized by
the Monetary
Board
to
engage
in
trust
business.
(Sec. 79)
Only such a
corporation
may act as a
trustee
or
administer
any trust or
hold property
in trust or on
deposit
for
the
use,
benefit,
or
behoof
of
others. (Sec.
79)
QuasiBanks
Trust
Entities
G.R. No. L20583,
23
January
1967)
An
investment
company
which loans
out
the
money of its
customers,
collects the
interest and
charges
a
commission
to
both
lender and
borrower.
(Republic v.
Security
Credit
and
Acceptance
Corporation,
G.R. No. L20583,
23
January
1967)
Pawnshops
They are non-banks/banking institutions.
The nature of their business activities partakes
that of a financial intermediary in that its
principal function is lending.
Furthermore, pawnshops are under the
regulatory supervision of the Bangko Sentral
ng Pilipinas and covered by its Manual of
Regulations
for
Non-Bank
Financial
Institutions. (First Planters Pawnshop, Inc. v.
Commissioner of Internal Revenue, G.R. No.
174134, 30 July 2008)
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3. Diligence Required of Banks
New Civil Code
Article 1173. The fault or negligence of the obligor
consists in the omission of that diligence which is
required by the nature of the obligation and
corresponds with the circumstances of the persons,
of the time and of the place. When negligence shows
bad faith, the provisions of articles 1171 and 2201,
paragraph 2, shall apply.
If the law or contract does not state the diligence
which is to be observed in the performance, that
which is expected of a good father of a family shall
be required.
General Banking Law of 2000
Section 2. Declaration of Policy. - The State
recognizes the vital role of banks providing an
environment
conducive
to
the
sustained
development of the national economy and the
fiduciary nature of banking that requires high
standards of integrity and performance. In
furtherance thereof, the State shall promote and
maintain a stable and efficient banking and financial
system that is globally competitive, dynamic and
responsive to the demands of a developing
economy.
a. Standards of Diligence
Higher than that of a good father of a family
[Philippine National Bank v. Raymundo, G.R.
No. 208672, 07 December 2016; Consolidated
Bank and Trust Corporation v. Court of
Appeals, G.R. No. 138569, 11 September
2003]
Treat the depositor's account with the utmost
fidelity. [Simex International (Manila) Inc. v.
Court of Appeals, G.R. No. 88013, 19 March
1990]
Treat the accounts of its depositors with
meticulous care. [Simex International (Manila)
Inc. v. Court of Appeals, G.R. No. 88013, 19
March 1990; Consolidated Bank and Trust
Corporation v. Court of Appeals, G.R. No.
138569, 11 September 2003]
Observe "high standards of integrity and
performance." [Consolidated Bank and Trust
Corporation v. Court of Appeals, G.R. No.
138569, 11 September 2003; Citystate
Savings Bank v. Tobias, G.R. No. 227990]
Strict care in the selection and supervision of
its employees [Citystate Savings Bank v.
Tobias, G.R. No. 227990]
Care and trustworthiness expected of bank
employees and officials is far greater than
those of ordinary clerks and employees.
[Philippine National Bank v. Raymundo, G.R.
No. 208672, 07 December 2016]
However, the banks' compliance with this
degree of diligence is to be determined in
accordance with the particular circumstances
of each case. [Spouses Carbonell v.
Metropolitan Bank And Trust Company, G.R.
No. 178467, 26 April 2017]
A bank's disregard of its own banking policy
amounts to gross negligence.
Payment of the amounts of checks without
previously clearing them with the drawee bank,
especially so where the drawee bank is a
foreign bank and the amounts involved were
large, is contrary to normal or ordinary banking
practice. [Philippine National Bank v.
Raymundo, G.R. No. 208672, 07 December
2016]
Rationale:
The business and industry is imbued with
public interest. [Ong Bun v. Bank of the
Philippine Islands, G.R. No. 212362]
There is a fiduciary relationship between the
bank and its depositors.
A blunder on the part of the bank, such as the
dishonor of a check without good reason, can
cause the depositor not a little embarrassment
if not also financial loss and perhaps even civil
and criminal litigation. [Simex International
(Manila) Inc. v. Court of Appeals, G.R. No.
88013, 19 March 1990]
The relationship between the bank and
depositor is fiduciary. [Consolidated Bank and
Trust Corporation v. Court of Appeals, G.R. No.
138569, 11 September 2003]
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The very nature of their work in handling
millions of pesos in daily transactions.
[Philippine National Bank v. Raymundo, G.R.
No. 208672, 07 December 2016]
Their stability depends on the confidence of the
people in their honesty and efficiency.
[Citystate Savings Bank v. Tobias, G.R. No.
227990]
The contract between the bank and its
depositor is governed by the provisions of the
Civil Code on simple loan or mutuum, with the
bank as the debtor and the depositor as the
creditor. [Citystate Savings Bank v. Tobias,
G.R. No. 227990 (2018)]
Liability of Banks
Banking institutions may be held liable for
damages for failure to exercise the diligence
required of it resulting to contractual breach or
where the act or omission complained of
constitutes an actionable tort. [Citystate
Savings Bank v. Tobias, G.R. No. 227990]
When the action against the bank is premised
on breach of contractual obligations, a bank's
liability as debtor is not merely vicarious but
primary, in that the defense of exercise of due
diligence in the selection and supervision of its
employees is not available. Liability of banks is
also primary and sole when the loss or damage
to its depositors is directly attributable to its
acts, finding that the proximate cause of the
loss was due to the bank's negligence or
breach. [Citystate Savings Bank v. Tobias,
G.R. No. 227990]
The doctrine of last clear chance, stated
broadly, is that the negligence of the plaintiff
does not preclude a recovery for the
negligence of the defendant where it appears
that the defendant, by exercising reasonable
care and prudence, might have avoided
injurious consequences to the plaintiff
notwithstanding the plaintiff's negligence. The
doctrine necessarily assumes negligence on
the part of the defendant and contributory
negligence on the part of the plaintiff, and does
not apply except upon that assumption. Stated
differently, the antecedent negligence of the
plaintiff does not preclude him from recovering
damages caused by the supervening
negligence of the defendant, who had the last
fair chance to prevent the impending harm by
the exercise of due diligence. Moreover, in
situations where the doctrine has been applied,
it was defendant's failure to exercise such
ordinary care, having the last clear chance to
avoid loss or injury, which was the proximate
cause of the occurrence of such loss or injury.
[Bank of the Philippine Islands v. Spouses.
Quiaoit, G.R. No. 199562, 16 January 2019]
A bank is liable for wrongful acts of its officers
done in the interests of the bank or in the
course of dealings of the officers in their
representative capacity but not for acts outside
the scope of their authority. [Citystate Savings
Bank v. Tobias, G.R. No. 227990]
Application of these principles is especially
necessary because banks have a fiduciary
relationship with the public and their stability
depends on the confidence of the people in
their honesty and efficiency. Such faith will be
eroded where banks do not exercise strict care
in the selection and supervision of its
employees, resulting in prejudice to their
depositors. [Citystate Savings Bank v. Tobias,
G.R. No. 227990)]
4. Nature of Bank Funds and Bank
Deposits
The complaint filed with the Bangko Sentral ng
Pilipinas was an invocation of the BSP’s
supervisory powers over banking operations
which does not amount to a judicial
proceeding. It brought to the attention of the
BSP the alleged questionable actions of the
bank’s Board of Directors in violation of the
principles of good corporate governance. It
prayed for the conduct of an investigation over
the alleged unsafe and unsound business
practices of the bank and to make necessary
corrective measures to prevent the collapse of
the bank.
A ruling by the BSP concerning the soundness
of the bank operations will not adversely or
directly affect the resolution of the intracorporate controversies pending before the
trial court. [Suan v. Gonzales, A.C. No. 6377,
12 March 2007]
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5. Stipulation on Interests
Equitable PCI Bank, G.R. No. 208336, 21
November 2018)
High interest rates
Stipulated interest rates of 3% per month and
higher
are
excessive,
iniquitous,
unconscionable
and
exorbitant.
Such
stipulations are void for being contrary to
morals, if not against the law. [Macalinao v.
Bank of the Philippine Islands, G.R. No.
175490, 17 September 2009]
There is nothing inherently wrong with the
escalation clause because it is validly
stipulated in commercial contracts as one of
the means adopted to maintain fiscal stability
and to retain the value of money in long term
contracts.
Since the stipulation on the interest rate is void,
it is as if there was no express contract thereon.
Hence, courts may reduce the interest rate as
reason and equity demand. [Macalinao v. Bank
of the Philippine Islands, G.R. No. 175490, 17
September 2009]
The escalation clause that "grants the creditor
an unbridled right to adjust the interest
independently and upwardly, completely
depriving the debtor of the right to assent to an
important modification in the agreement" is
void. Such escalation clause violates the
principle of mutuality of contracts, and should
be annulled.
Central Bank Circular No. 905 did not repeal
nor in any way amend the Usury Law but
simply suspended the latter’s effectivity. The
illegality of usury is wholly the creature of
legislation. A Central Bank Circular cannot
repeal a law. Only a law can repeal another
law.
There should be a corresponding de­
escalation clause that authorizes a reduction in
the interest rates corresponding to downward
changes made by law or by the Monetary
Board. (Villa Crista Monte Realty &
Development Corporation v. Equitable PCI
Bank, G.R. No. 208336, 21 November 2018)
However, nothing in CB Circular No. 905
grants lenders a carte blanche authority to
raise interest rates to levels which will either
enslave their borrowers or lead to a
hemorrhaging of their assets.
6. Prohibitive Transactions by Bank
Directors and Officers
The nullity of the stipulation of usurious interest
does not affect the lender’s right to recover the
principal of a loan, nor affect the other terms
thereof. [Advocates for Truth in Lending Inc. v.
Bangko Sentral ng Pilipinas, Monetary Board,
G.R. No. 192986, 15 January 2013]
Escalation clauses
Requisites for a valid escalation clause:
(1) that there can be an increase in interest
rates if allowed by law or by the Monetary
Board; and
(2) that there must be a stipulation for the
reduction of the stipulated interest rates in the
event that the applicable maximum rates of
interest are reduced by law or by the Monetary
Board (de-escalation clause). (Villa Crista
Monte Realty & Development Corporation v.
a. Single Borrower’s Limit
General Banking Law of 2000
Section 35. Limit on Loans, Credit Accommodations
and Guarantees
35.1 Except as the Monetary Board may otherwise
prescribe for reasons of national interest, the total
amount of loans, credit accommodations and
guarantees as may be defined by the Monetary
Board that may be extended by a bank to any
person, partnership, association, corporation or
other entity shall at no time exceed twenty percent
(20%) of the net worth of such bank. The basis for
determining compliance with single borrower limit is
the total credit commitment of the bank to the
borrower.
35.2. Unless the Monetary Board prescribes
otherwise, the total amount of loans, credit
accommodations and guarantees prescribed in the
preceding paragraph may be increased by an
additional ten percent (10%) of the net worth of such
bank provided the additional liabilities of any
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borrower are adequately secured by trust receipts,
shipping documents, warehouse receipts or other
similar documents transferring or securing title
covering readily marketable, non-perishable goods
which must be fully covered by insurance.
35.3 The above prescribed ceilings shall include (a)
the direct liability of the maker or acceptor of paper
discounted with or sold to such bank and the liability
of a general endorser, drawer or guarantor who
obtains a loan or other credit accommodation from
or discounts paper with or sells papers to such bank;
(b) in the case of an individual who owns or controls
a majority interest in a corporation, partnership,
association or any other entity, the liabilities of said
entities to such bank; (c) in the case of a corporation,
all liabilities to such bank of all subsidiaries in which
such corporation owns or controls a majority
interest; and (d) in the case of a partnership,
association or other entity, the liabilities of the
members thereof to such bank.
35.4. Even if a parent corporation, partnership,
association, entity or an individual who owns or
controls a majority interest in such entities has no
liability to the bank, the Monetary Board may
prescribe the combination of the liabilities of
subsidiary corporations or members of the
partnership, association, entity or such individual
under certain circumstances, including but not
limited to any of the following situations: (a) the
parent corporation, partnership, association, entity
or individual guarantees the repayment of the
liabilities; (b) the liabilities were incurred for the
accommodation of the parent corporation or another
subsidiary or of the partnership or association or
entity or such individual; or (c) the subsidiaries
though separate entities operate merely as
departments or divisions of a single entity.
35.5. For purposes of this Section, loans, other
credit accommodations and guarantees shall
exclude: (a) loans and other credit accommodations
secured by obligations of the Bangko Sentral or of
the Philippine Government: (b) loans and other
credit accommodations fully guaranteed by the
government as to the payment of principal and
interest; (c) loans and other credit accommodations
covered by assignment of deposits maintained in the
lending bank and held in the Philippines; (d) loans,
credit accommodations and acceptances under
letters of credit to the extent covered by margin
deposits; and (e) other loans or credit
accommodations which the Monetary Board may
from time to time, specify as non-risk items.
35.6. Loans and other credit accommodations,
deposits maintained with, and usual guarantees by
a bank to any other bank or non-bank entity, whether
locally or abroad, shall be subject to the limits as
herein prescribed.
35.7. Certain types of contingent accounts of
borrowers may be included among those subject to
these prescribed limits as may be determined by the
Monetary Board.
If the loans were of a DOSRI nature or without
the benefit of the required approvals or in
excess of the Single Borrower’s Limit, they
would not be void for that reason. Instead, the
bank or the officers responsible for the
approval and grant of the DOSRI loan would be
subject only to sanctions under the law.
(Republic v. Sandiganbayan, G.R. Nos.
166859, 169203, 180702, 12 April 2011)
b. Restrictions on Bank Exposure to
DOSRI
(Directors,
Officers,
Stockholders
and
their
Related
Interests
General Banking Law of 2000
Section 36. Restriction on Bank Exposure to
Directors, Officers, Stockholders and Their Related
Interests. - No director or officer of any bank shall,
directly or indirectly, for himself or as the
representative or agent of others, borrow from such
bank nor shall he become a guarantor, endorser or
surety for loans from such bank to others, or in any
manner be an obligor or incur any contractual liability
to the bank except with the written approval of the
majority of all the directors of the bank, excluding the
director concerned: Provided, That such written
approval shall not be required for loans, other credit
accommodations and advances granted to officers
under a fringe benefit plan approved by the Bangko
Sentral. The required approval shall be entered
upon the records of the bank and a copy of such
entry shall be transmitted forthwith to the appropriate
supervising and examining department of the
Bangko Sentral. Dealings of a bank with any of its
directors, officers or stockholders and their related
interests shall be upon terms not less favorable to
the bank than those offered to others. After due
notice to the board of directors of the bank, the office
of any bank director or officer who violates the
provisions of this Section may be declared vacant
and the director or officer shall be subject to the
penal provisions of the New Central Bank Act. The
Monetary Board may regulate the amount of loans,
credit accommodations and guarantees that may be
extended, directly or indirectly, by a bank to its
directors, officers, stockholders and their related
interests, as well as investments of such bank in
enterprises owned or controlled by said directors,
officers, stockholders and their related interests.
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However,
the
outstanding
loans,
credit
accommodations and guarantees which a bank may
extend to each of its stockholders, directors, or
officers and their related interests, shall be limited to
an amount equivalent to their respective
unencumbered deposits and book value of their
paid-in capital contribution in the bank: Provided,
however, That loans, credit accommodations and
guarantees secured by assets considered as nonrisk by the Monetary Board shall be excluded from
such limit: Provided, further, That loans, credit
accommodations and advances to officers in the
form of fringe benefits granted in accordance with
rules as may be prescribed by the Monetary Board
shall not be subject to the individual limit. The
Monetary Board shall define the term "related
interests."
The
limit
on
loans,
credit
accommodations and guarantees prescribed herein
shall not apply to loans, credit accommodations and
guarantees extended by a cooperative bank to its
cooperative shareholders.
General Banking Law of 2000
Section 55. Prohibited Transactions.
55.1. No director, officer, employee, or agent of any
bank shall (a) Make false entries in any bank report or
statement or participate in any fraudulent
transaction, thereby affecting the financial interest
of, or causing damage to, the bank or any person;
(b) Without order of a court of competent jurisdiction,
disclose to any unauthorized person any information
relative to the funds or properties in the custody of
the bank belonging to private individuals,
corporations, or any other entity: Provided, That with
respect to bank deposits, the provisions of existing
laws shall prevail;
(c) Accept gifts, fees, or commissions or any other
form of remuneration in connection with the approval
of a loan or other credit accommodation from said
bank;
(d) Overvalue or aid in overvaluing any security for
the purpose of influencing in any way the actions of
the bank or any bank; or
(e) Outsource inherent banking functions.
55.2. No borrower of a bank shall (a) Fraudulently overvalue property offered as
security for a loan or other credit accommodation
from the bank;
(b) Furnish false or make misrepresentation or
suppression of material facts for the purpose of
obtaining, renewing, or increasing a loan or other
credit accommodation or extending the period
thereof;
(c) Attempt to defraud the said bank in the event of
a court action to recover a loan or other credit
accommodation; or
(d) Offer any director, officer, employee or agent of
a bank any gift, fee, commission, or any other form
of compensation in order to influence such persons
into approving a loan or other credit accommodation
application.
55.3 No examiner, officer or employee of the Bangko
Sentral or of any department, bureau, office, branch
or agency of the Government that is assigned to
supervise, examine, assist or render technical
assistance to any bank shall commit any of the acts
enumerated in this Section or aid in the commission
of the same. (87-Aa)
The making of false reports or misrepresentation or
suppression of material facts by personnel of the
Bangko Sental ng Pilipinas shall be subject to the
administrative and criminal sanctions provided
under the New Central Bank Act.
55.4. Consistent with the provisions of Republic Act
No. 1405, otherwise known as the Banks Secrecy
Law, no bank shall employ casual or non regular
personnel or too lengthy probationary personnel in
the conduct of its business involving bank deposits.
A direct borrowing is obviously one that is
made in the name of the DOSRI himself or
where the DOSRI is a named party, while an
indirect borrowing includes one that is made by
a third party, but the DOSRI has a stake in the
transaction. (Soriano v. People, G.R. No.
162336, 01 February 2010)
If the loans were of a DOSRI nature or without
the benefit of the required approvals or in
excess of the Single Borrower’s Limit, they
would not be void for that reason. Instead, the
bank or the officers responsible for the
approval and grant of the DOSRI loan would be
subject only to sanctions under the law.
[Republic v. Sandiganbayan, G.R. Nos.
166859, 169203, 180702, 12 April 2011]
Section 83 of RA 337 actually imposes three
restrictions.
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The approval requirement (found in the first
sentence of the first paragraph of the law)
refers to the written approval of the majority of
the bank’s board of directors required before
bank directors and officers can in any manner
be an obligor for money borrowed from or
loaned by the bank. Failure to secure the
approval renders the bank director or officer
concerned liable for prosecution and, upon
conviction, subjects him to the penalty provided
in the third sentence of first paragraph of
Section 83.
The reportorial requirement, on the other hand,
mandates that any such approval should be
entered upon the records of the corporation,
and a copy of the entry be transmitted to the
appropriate supervising department. The
reportorial requirement is addressed to the
bank itself, which, upon its failure to do so,
subjects it to quo warranto proceedings under
Section 87 of RA 337.
The ceiling requirement under the second
paragraph of Section 83 regulates the amount
of credit accommodations that banks may
extend to their directors or officers by limiting
these to an amount equivalent to the respective
outstanding deposits and book value of the
paid-in capital contribution in the bank. Again,
this is a requirement directed at the bank. In
this light, a prosecution for violation of the first
paragraph of Section 83, such as the one
involved here, does not require an allegation
that the loan exceeded the legal limit. Even if
the loan involved is below the legal limit, a
written approval by the majority of the bank’s
directors is still required; otherwise, the bank
director or officer who becomes an obligor of
the bank is liable. Compliance with the ceiling
requirement does not dispense with the
approval requirement.
(Go v. Bangko Sentral ng Pilipinas, G.R. No.
178429, 23 October 2009)
C. SECRECY OF
BANK DEPOSITS
(R.A. No. 1405, as
amended, and R.A.
No. 6426, as
amended)
1. Purpose [Sec. 1]
It is hereby declared to be the policy of the
Government to:
1. give encouragement to the people to
deposit their money in banking
institutions and ;
2. to discourage private hoarding so that the
same may be properly utilized by banks
in authorized loans to assist in the
economic development of the country.
The absolute confidentiality rule in R.A. No.
1405 actually aims at protection from
unwarranted inquiry or investigation if the
purpose of such inquiry or investigation is
merely to determine the existence and nature,
as well as the amount of the deposit in any
given bank account. [BSB. Group, Inc. v. Go,
G.R. No. 168644 (2010)]
2. Prohibited Acts [Secs. 2 & 3]
1. Examination, inquiry, or looking into deposits
of whatever nature with banks or banking
institutions in the Philippines including
investments in bonds issued by the
Government of the Philippines, its political
subdivisions and its instrumentalities;
2. Disclosure by banking institutions' officials or
employees to unauthorized persons
regarding information about covered
deposits and investments
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3. Deposits Covered
a. General Rule
All [peso] deposits of whatever nature with
banks or banking institutions in the Philippines
including investments in bonds issued by the
Government of the Philippines, its political
subdivisions and its instrumentalities, are
hereby considered as of an absolutely
confidential nature. [Sec. 2 of RA No. 1405]
The phrase "of whatever nature" proscribes
any restrictive interpretation of "deposits."
Moreover, it is clear from the immediately
quoted provision that, generally, the law
applies not only to money which is deposited
but also to those which are invested. This
further shows that the law was not intended to
apply only to "deposits" in the strict sense of the
word. Otherwise, there would have been no
need to add the phrase "or invested." [Estrada
v. Sandiganbayan (Special Division), G.R.
Nos. 157284-95, 30 November 2006]
b. Deposits and Funds Covered by
Other Laws on Confidentiality
All foreign currency deposits authorized under
this Act, as amended by Presidential Decree
No. 1035, as well as foreign currency deposits
authorized under Presidential Decree No.
1034, are hereby declared as and considered
of an absolutely confidential nature [Sec. 8 of
RA No. 6426]
Funds placed in a bank not in the nature of a
deposit by private individuals or entities.
Disclosure to any unauthorized information
relative to said funds is also prohibited [Sec.
55.1 of Ra No. 8791, The General Banking Law
of 2000]
limited only to accounts which give rise to a
creditor-debtor relationship between the
depositor and the bank. [Estrada v.
Sandiganbayan (Special Division), G.R. Nos.
157284-95, 30 November 2006]
d.
Presumption
confidentiality
in
favor
of
Any exception to the rule of absolute
confidentiality must be specifically legislated.
By force of statute, all bank deposits are
absolutely confidential, and that nature is
unaltered even by the legislated exceptions
referred to above.
There is disfavor towards construing these
exceptions in such a manner that would
authorize unlimited discretion on the part of the
government or of any party seeking to enforce
those exceptions and inquire into bank
deposits.
If there are doubts in upholding the absolutely
confidential nature of bank deposits against
affirming the authority to inquire into such
accounts, then such doubts must be resolved
in favor of the former. Such a stance would
persist unless Congress passes a law
reversing the general state policy of preserving
the absolutely confidential nature of Philippine
bank accounts. [Republic v. Eugenio, Jr., G.R.
No. 174629, 14 February 2008]
e. Zones of Privacy
c. Trust Accounts
Under the RA 1405, bank deposits are
statutorily protected or recognized zones of
privacy. [People v. Estrada, G.R. No. 164368
(2009); Marquez v. Desierto, G.R. No. 135882
(2001); Ople v. Torres, G.R. No. 127685
(1998)]
The contention that trust accounts are not
covered by the term "deposits," as used in R.A.
1405, by the mere fact that they do not entail a
creditor-debtor relationship between the trustor
and the bank, does not lie. An examination of
the law shows that the term "deposits" used
therein is to be understood broadly and not
While the fundamental law has not bothered
with the triviality of specifically addressing
privacy rights relative to banking accounts,
there, nevertheless, exists in our jurisdiction a
legitimate expectation of privacy governing
such accounts. The source of this right of
expectation is statutory, and it is found in R.A.
No. 1405, otherwise known as the Bank
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Secrecy Act of 1955. [BSB Group, Inc., v. Go,
G.R. No. 168644 (2010)]
4. Exceptions
Deposits:
1. Upon written permission of the depositors;
2. Case of impeachment;
3. Upon order of a competent court in cases of
bribery or dereliction of duty of public officials;
4.Cases where the money deposited or
invested is the subject matter of the litigation;
[Sec. 2 of RA No. 1405]
Where the money deposited or invested is
the subject matter:
a. The inquiry into bank deposits allowable
under R.A. No. 1405 must be premised
on the fact that the money deposited in
the account is itself the subject of the
action [BSB Group v. Go, G.R. No.
168644, 16 February 2010]
b. Whether the transaction is considered a
sale or money placement does not
make the money the "subject matter of
litigation" [Oñate v. Abrogar, G.R. Nos.
107303 & 107491, February 23, 1995]
c. Inasmuch as [the case] is aimed at
recovering the amount converted by the
[defendants] for their own benefit,
necessarily, an inquiry into the
whereabouts of the illegally acquired
amount extends to whatever is
concealed by being held or recorded in
the name of persons other than the one
responsible for the illegal acquisition
[Mellon Bank v. Magsino, G.R. No.
71479, 18 October 1990]
Other Exceptions:
a. The Commissioner of Internal Revenue
is hereby authorized to inquire into the
bank deposits and other related
information held by financial institutions
of:
1. A decedent in order to determine his
gross estate; and
2. Any taxpayer who has filed an
application to compromise his tax
liability on the ground of financial
incapacity.
3. A specific taxpayer or taxpayers
subject of a request for the supply of
tax information from a foreign tax
authority
pursuant
to
an
international
convention
or
agreement on tax matters to which
the Philippines is a signatory or a
party of [Sec. 6(f), NIRC]
b. Unexplained wealth under Sec. 8 of the
Anti-Graft and Corrupt Practices Act
(RA 3019). [PNB v. Gancayco, G.R. No.
L-18343 (1965)]’
Not necessarily an exception: Power of the
Ombudsman to “examine and have access to
bank accounts and records” under Sec. 15[8]
of RA 6770. [Morales, The Philippine General
Banking Law (Annotated) (2017) citing
Marquez v. Desierto, infra]
5. Garnishment of Deposits, Including
Foreign Deposits
General rule: The prohibition against
examination of or inquiry into a bank deposit
under Republic Act 1405 does not preclude its
being garnished to insure satisfaction of a
judgment. [China Banking Corporation v.
Ortega, G.R. No. L-34964, 31 January 1973]
In the garnishment of deposits to insure
satisfaction of a judgment, there is no real
inquiry, and if the existence of the deposit is
disclosed, the disclosure is purely incidental to
the execution process. It is hard to conceive
that it was ever within the intention of Congress
to enable debtors to evade payment of their just
debts, even if ordered by the Court, through the
expedient of converting their assets into cash
and depositing the same in a bank. [China
Banking Corporation v. Ortega, supra]
Exception: Foreign Currency Deposits
The foreign currency deposits shall be exempt
from attachment, garnishment, or any other
order or process of any court, legislative body,
government agency or any administrative body
whatsoever. [Sec. 8, RA No. 6426]
Penalties [Sec. 5]
Any violation of this law will subject offender
upon conviction, to an imprisonment of not
more than five years or a fine of not more than
twenty thousand pesos or both, in the
discretion of the court.
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D. ANTI-MONEY
LAUNDERING ACT
The section numbers hereinafter generally
pertain to RA 9160 or the Anti-Money
Laundering Act, as amended by RA 9194 and
RA 10365, unless otherwise indicated.
Money Laundering is a crime where the
proceeds of an unlawful activity are transacted,
thereby making them appear to have originated
from legitimate sources.
It is governed by RA 9160, as amended by RA
9194 (2003), RA 10167 (2012), RA 10365
(2013) and RA 10927 (2017).
1. Policy of the Law
It is the policy of the State to:
1. Protect and preserve the integrity and
confidentiality of bank accounts;
2. Ensure that the Philippines shall not be
used as a money laundering site for the
proceeds of any criminal activity.
Consistent with its foreign policy, the State
shall extend cooperation in transnational
investigations and prosecutions of persons
involved in money laundering activities
whenever committed. [Sec. 2]
2. Covered Institutions and Their
Obligations
Covered Institutions
COMMERCIAL LAW
securities or rendering services as
investment agent, advisor, or
consultant,
b. Mutual funds, close – end investment
companies, common trust funds, pre
– need companies and other similar
entities
c. Foreign exchange corporations,
money changers, money payment,
remittance and transfer companies
and other similar entities, and
d. Other entities administering or
otherwise dealing in currency,
commodities or financial derivatives
based thereon, valuable objects, cash
substitutes
and
other
similar
monetary instruments or property
supervised or regulated by the
Securities
and
Exchange
Commission (SEC).
4. Jewelry dealers in precious metals, who, as
a business, trade in precious metals, for
transactions in excess of Php1,000,000.
5. Jewelry dealers in precious stones, who, as
a business, trade in precious stones, for
transactions in excess of Php1,000,000
6. Company service providers which, as a
business, provide any of the following
services to third parties:
a. Acting as a formation agent of juridical
persons;
b. Acting as, or arranging for another
person to act as:
7. A director or corporate secretary of a
company
8. A partner of a partnership, or
9. A similar position in relation to other juridical
persons;
a. Providing a registered office, business
address
or
accommodation,
correspondence or administrative
address for a company, a partnership
or any other legal person or
arrangement; and
b. Acting as, or arranging for another
person to act as, a nominee
shareholder for another person
10. Persons who provide any of the following
services:
11. Managing of client money, securities or other
assets;
12. Management of bank, savings or securities
accounts;
1. Banks, non-banks, quasi–banks, trust
entities,
foreign
exchange
dealers,
pawnshops, money changers, remittance
and transfer companies and other similar
entities and all other persons and their
subsidiaries and affiliates supervised or
regulated by the BSP;
2. Insurance companies, pre-need companies
and all other persons supervised or
regulated by the Insurance Commission;
3. Those who are:
a.
Securities
dealers,
brokers,
salesmen, investment houses and
other similar entities managing
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13. Organization of contributions for the
creation, operation or management of
companies; and
14. Creation, operation or management of
juridical persons or arrangements and
buying or selling business entities. [Sec. 1]
15. Casinos, including internet and ship-based
casinos, with respect to their casino cash
transactions related to their gaming
operations. [Sec. 1]
Record Keeping
All records of all transactions of covered
institutions shall be maintained and safely
stored for five (5) years from the dates of
transactions.
With respect to closed accounts, the records
on customer identification, account files and
business correspondence, shall be preserved
and safely stored for at least five (5) years from
the dates when they were closed.
The term ‘covered persons’ excludes lawyers
and accountants acting as independent legal
professionals, (1) in relation to information
concerning their clients; or (2) where disclosure
of information would compromise client
confidences or the attorney-client relationship.
Provided, (1) that these lawyers and
accountants are authorized to practice in the
Philippines and (2) shall continue to be subject
to the provisions of their respective codes of
conduct and/or professional responsibility or
any of its amendments. [Sec. 1]
Reporting of Covered and Suspicious
Transactions
Obligations of Covered Institutions
a. Customer Identification
b. Record Keeping
c. Reporting of Covered and Suspicious
Transactions
Customer Identification
Covered institutions shall:
a. Establish and record a true identity of
its clients, based on official documents
b. Maintain a system of verifying the true
identity of their clients
c. In case of corporate clients, require a
system to verify:
1. Legal existence and organizational
structure; and
2. Authority and identification of
persons purporting to act on their
behalf
Anonymous accounts, accounts under fictitious
names, and all other similar accounts shall be
absolutely prohibited. Peso and foreign
currency non- checking numbered accounts
shall be allowed. The BSP may conduct annual
testing solely limited to the determination of the
existence and true identity of the owners of
such accounts. [Sec. 9]
General Rule: Covered institutions shall report
to the AMLC all covered transactions within
five (5) working days from occurrence.
Exception: If the Anti Money Laundering
Council (AMLC) prescribed a longer period not
exceeding fifteen (15) working days. [Sec.
9(c)]
When reporting covered transactions to the
AMLC:
1. Covered institutions and their officers,
and employees are prohibited from
communicating, directly or indirectly,
in any manner, to any person, entity, or
the media:
a. The fact that a covered
transaction report has or is
about to be reported;
b. The contents thereof;
c. Any other information in
relation thereto; and
2. Neither may such reporting be
published or aired in any manner or
form by the mass media, electronic
mail, or other similar devices. [Sec. 9,
RA 10365]
In case of violation, criminal liability ensues as
against the concerned officer and employee of
the covered person and media.
Anti-money laundering regulations
Republic Act No. 9160, otherwise known as the
Anti-Money Laundering Act, as amended
(AMLA) and its 2018 implementing rules and
regulations (IRR) impose certain obligations
upon covered persons to ensure that the
Philippines will not be used as a money
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laundering site for the proceeds of any unlawful
activity. Below are the key obligations of
covered persons under the AMLA and its IRR.
Customer
obligations
due
diligence
(CDD)
Under the AMLA IRR, covered persons must
conduct CDD for the following purposes:
1. To identify the customer, and its agents
and beneficial owners;
2. To determine the risk posed by each
customer;
3. To establish, maintain, close or terminate
the account or business relationship; and
4. To assess the level of monitoring to be
applied.
CDD measures must be undertaken when:
establishing
business
or
professional
relationship;
1. Carrying out occasional transactions
above PHP100,000 or any other
threshold as may be determined by the
relevant supervising authority, with
notice to the Anti-Money Laundering
Council (AMLC), including situations
where the transaction is carried out in a
single operation or in several
operations that appear to be linked;
2. Carrying out occasional wire transfers
under certain circumstances;
3. There is a suspicion of money
laundering/terrorism financing (ML/TF),
regardless of any exemptions or
thresholds; or
4. The covered person has doubts about the
veracity or adequacy of previously
obtained identification information and/or
data.
Further, the AMLA IRR requires covered
persons to apply CDD requirements to existing
customers on the basis of materiality and risk,
and conduct due diligence on existing
relationships at appropriate times, taking into
account whether and when CDD measures
have previously been undertaken and the
adequacy of information and document
obtained.
In conducting CDD, the covered persons must
adopt appropriate CDD measures following a
risk-based approach, which include the
following procedures:
Customer identification process
Covered persons shall identify and record the
true identity of their customers, whether
permanent or occasional, and whether natural
or juridical person, or legal arrangement.
Note that in case the customer engages in a
transaction with a covered person for the first
time, the covered person must require the
customer to present the original and submit a
clear copy of, at least, one identification
document (ID). In case the ID presented does
not bear any photo of the customer, or the
photo-bearing ID or a copy thereof does not
clearly show the face of the customer, a
covered person may utilize information and
communication technology or any other
technology to take the photo of the customer.
Customer verification process
Covered persons shall implement and maintain
a system of verifying the true identity of their
clients, including validating the truthfulness of
the information and confirming the authenticity
of the identification documents presented,
submitted and provided by the customer, using
reliable and independent sources, documents,
data, or information.
The covered persons must independently
verify the collected data during customer
identification process, through any of the
following:
1. Face-to-face contact;
2. Use of information and communication
technology;
3. By confirming the authenticity of the
identification documents to the issuing
office;
4. Reliance on third parties and service
providers; or
5. Such other methods of validation
based on reliable and independent
sources,
documents,
data,
or
information.
Identification and verification of agents
Covered persons shall verify that any person
purporting to act on behalf of a customer is so
authorized, and identify and verify the identity
of that person.
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The covered person must verify the validity of
the authority of the agent. In case of doubt as
to whether the person purporting to act on
behalf of the customer is being used as a
dummy in circumvention of existing laws, the
covered person must apply enhanced due
diligence and file a suspicious transaction
report, if warranted.
Beneficial ownership verification
Covered persons shall identify the beneficial
owner and take reasonable measures to
verify the identity of the beneficial owner,
using the relevant information or data
obtained from a reliable sources, such that the
covered person is satisfied that it knows who
the beneficial owner is.
The covered person must obtain a copy of the
written document evidencing the relationship
and apply the same standards for assessing
the risk profile and determining the standard
of CDD to be applied to both.
Determination of the purpose of
relationship
Covered persons shall understand and, as
appropriate, obtain information on, the
purpose and intended nature of the account,
transaction, or the business or professional
relationship with their customers.
Ongoing monitoring process
Covered persons shall, on the basis of
materiality and risk, conduct ongoing
monitoring by establishing a system that will
enable them to understand the normal and
reasonable account or business activity of
customers, and scrutinize transactions
undertaken throughout the course of the
business or professional relationship to
ensure that the customers’ accounts,
including transactions being conducted, are
consistent with the covered person’s
knowledge of its customer, their business and
risk profile, including where necessary, the
source of funds.
Covered persons must develop a clear set of
criteria for customer risk profiling and
assessment, which must include at least three
of the following:
1. The nature of the service or product to be
availed of by the customers;
The purpose of the account or
transaction;
3. The source of fund and source of wealth;
4. The nature of business and/or
employment;
5. Country of origin and residence of
operations, or the fact that a customer
came from a high- risk jurisdiction or
geographical area;
6. Watchlist of individuals and entities
engaged in illegal activities or terrorist
related activities as circularized by the
BSP, AMLC, and other international
entities or organizations, such as the
Office of Foreign Assets Control of the
U.S. Department of the Treasury and
United Nations Sanctions List;
7. The existence of suspicious transaction
indicators; and
8. Such other factors as the covered
persons may deem reasonable or
necessary to consider in assessing the
risk of a customer, including the amount
of funds to be transacted by a customer
or the size of transactions undertaken,
regularity or duration of the transaction,
and/or are included in the negative list.
2.
Where the risks are higher, covered persons
must conduct enhanced due diligence. On the
other hand, where lower risks of ML/TF have
been identified, through an adequate analysis
of risk by the covered person, reduced due
diligence procedures may be applied.
Transaction reporting
The AMLA IRR provides that covered persons
must report to the AMLC all covered
transactions within five working days, unless
the AMLC prescribes a different period not
exceeding 15 working days. Further,
suspicious transactions shall be filed with the
AMLC within the period prescribed under the
registration and reporting guidelines of the
AMLC.
Record keeping
Under the AMLA IRR, covered persons are
required to maintain and safely store for five
years from the dates of transactions all records
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of customer identification and transactions
documents. Further, covered persons must
keep the electronic copies of all covered and
suspicious transaction reports, for at least five
years from the dates of submission to the
AMLC. In addition, covered persons shall keep
all records obtained through CDD, account files
and business correspondence, and the results
of any analysis undertaken, for, at least, five
years following the closure of account,
termination of the business or professional
relationship or after the date of the occasional
transaction.
If a case has been filed in court involving the
account, records must be retained and safely
kept beyond the five-year period, until it is
officially confirmed by the AMLC Secretariat
that the case has been resolved, decided or
terminated with finality.
Adoption of a money laundering
terrorist financing prevention program
(MTPP)
Under the AMLA IRR, covered persons must
formulate and implement a comprehensive
and risk-based MTPP that is compliant with
the AMLA and Republic Act 10168 (otherwise
known as Terrorism Financing Prevention
and Suppression Act or TFPSA), their
respective IRR, and other AMLC issuances,
and the AML/CTF guidelines of their
supervising authorities. The MTPP must be
commensurate to the size and risk profile of
the covered person. The covered person must
consider the results of the national risk
assessment and its own risk assessment in
the development and/or updating of its MTPP.
The MTPP shall be in writing and shall
include, at the minimum, internal policies,
controls and procedures on the following:
1. Risk management;
2. Compliance management setup,
including the designation of a
compliance officer at the management
level or creation of compliance unit;
3. Screening procedures to ensure high
standards when hiring employees;
4. Continuing education and training
program;
5. Independent audit function;
6. Details of implementation of CDD, record-
keeping and reporting requirements;
7. Compliance with freeze, bank inquiry
and asset preservation orders, and all
directives of the AMLC;
8.
Adequate
safeguards
on
the
confidentiality and use of information
exchange, including safeguards to
prevent tipping-off; and
9. Cooperation with the AMLC and
supervising authority.
Designation of an AML compliance
officer
Covered persons must designate an AML
compliance officer or create a compliance unit,
responsible for the covered person’s day-today compliance with the AMLA and TFPSA,
their respective IRR, and other AMLC
issuances. The internal auditor, general
manager or proprietor, as the case maybe,
shall be the compliance officer in case the
resources of the covered person hamper the
establishments of the compliance unit. The
compliance officer or the head of the
compliance unit must be of senior
management level.
3.
Covered
Transactions
and
Suspicious
General Rule: A covered transaction is a
transaction in cash or other equivalent
monetary instrument involving a total amount in
excess of Php 500,000 within one banking day.
[Sec. 3(b)]
Exception: for Casinos or “covered persons
under Section 3(a)(8),” a single casino
transaction involving an amount in excess of
Php 5,000,000 or its equivalent in any other
currency.
Suspicious Transactions are transactions
with covered institutions, regardless of the
amount involved, where any of the following
circumstances exist:
1. There is no underlying legal or trade
obligation, purpose or economic
justification;
2. The client is not properly identified;
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3.
The amount involved is not
commensurate with the business or
financial capacity of the client;
4. Taking into account all known
circumstances, it may be perceived that
the client’s transaction is structured to
avoid being the subject of reporting
requirements under this Act;
5. Any circumstance relating to the
transaction which is observed to deviate
from the profile of the client and/or the
client’s past transactions with the
covered institution;
6. The transaction is in any way related to
an unlawful activity or offense under this
Act that is about to be, is being or has
been committed. [Sec. 3(b-1)]
5. Safe Harbor Provision
The Safe Harbor Provision states that no
administrative,
criminal
or
civil
proceedings shall lie against any person for
having made a covered transaction report in
the regular performance of his duties and in
good faith, whether or not such reporting
results in any criminal prosecution under this
Act or any other Philippine law. [Sec. 9]
Lawyers
and
accountants
acting
as
independent legal professionals are not subject
to the reporting requirement if the relevant
information was obtained in circumstances
subject to professional secrecy or legal
professional privilege. [Sec. 9(c)]
6. When and How Money Laundering
is Committed (Including Predicate
Crimes)
Money laundering is a crime whereby the
proceeds of an unlawful activity are transacted,
thereby making them appear to have originated
from legitimate sources.
Money Laundering is committed by any
person who, knowing that any monetary
instrument or property represents, involves, or
relates to the proceeds of any unlawful activity:
1. Transacts said monetary instrument or
property;
2. Converts, transfers, disposes of, moves,
acquires, possesses or uses said
monetary instrument or property;
3. Conceals or disguises the true nature,
source, location, disposition, movement
or ownership of or rights with respect to
said monetary instrument or property;
4. Attempts or conspires to commit money
laundering offenses referred to in
paragraphs (a), (b) or (c);
5. Aids, abets, assists in or counsels the
commission of the money laundering
offenses referred to in paragraphs (a),
(b) or (c) above; and
6. Performs or fails to perform any act as a
result of which he facilitates the offense
of money laundering referred to in
paragraphs (a), (b) or (c) above.
Money laundering is also committed by any
covered person who, knowing that a covered
or suspicious transaction is required under this
Act to be reported to the Anti-Money
Laundering Council (AMLC), fails to do so.
[Sec. 4, RA 10365].
Unlawful activity refers to any act or omission
or series or combination thereof involving or
having direct relation to the following:
1. Kidnapping for ransom under Article
267 of Act No. 3815, otherwise known as
the Revised Penal Code, as amended;
2. Sections 4, 5, 6, 8, 9, 10, 12, 13, 14, 15,
and 16 of RA 9165, otherwise known as
the Comprehensive Dangerous Drugs
Act of 2002;
3. Section 3 paragraphs B, C, E, G, H and I
of RA. 3019, as amended; otherwise
known as the Anti-Graft and Corrupt
Practices Act;
4. Plunder under RA 7080, as amended;
5. Robbery and extortion under Articles
294, 295, 296, 299, 300, 301 and 302 of
the Revised Penal Code, as amended;
6. Jueteng and Masiao punished as illegal
gambling under Presidential Decree No.
1602;
7. Piracy on the high seas under the
Revised Penal Code, as amended and
Presidential Decree No. 532;
8. Qualified theft under Article 310 of the
Revised Penal Code, as amended;
9. Swindling under Article 315 of the
Revised Penal Code, as amended;
10. Smuggling under RA Nos. 455 and
1937;
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11. Violations under RA 8792, otherwise
known as the Electronic Commerce
Act of 2000;
12. Hijacking and other violations under RA
6235; destructive arson and murder,
as defined under the Revised Penal
Code, as amended, including those
perpetrated by terrorists against noncombatant persons and similar targets;
13. Fraudulent practices and other
violations under RA 8799, otherwise
known as the Securities Regulation
Code of 2000;
14. Felonies or offenses of a similar
nature that are punishable under the
penal laws of other countries. [Sec. 3 (i)]
RA 10365 further added the following:
1. Terrorism and conspiracy to commit
terrorism as defined and penalized
under Sections 3 and 4 of RA No. 9372;
2. Financing of terrorism under Section 4
and offenses punishable under Sections
5, 6, 7 and 8 of RA 10168, otherwise
known as the Terrorism Financing
Prevention and Suppression Act of 2012;
3. Bribery under Articles 210, 211 and 211A of the Revised Penal Code, as
amended, and Corruption of Public
Officers under Article 212 of the
Revised Penal Code, as amended;
4. Frauds and Illegal Exactions and
Transactions under Articles 213, 214,
215 and 216 of the Revised Penal Code,
as amended;
5. Malversation of Public Funds and
Property under Articles 217 and 222 of
the Revised Penal Code, as amended;
6. Forgeries and Counterfeiting under
Articles 163, 166, 167, 168, 169 and 176
of the Revised Penal Code, as amended;
7. Violations of Sections 4 to 6 of RA 9208,
otherwise known as the Anti-Trafficking
in Persons Act of 2003;
8. Violations of Sections 78 to 79 of Chapter
IV, of Presidential Decree No. 705,
otherwise known as the Revised
Forestry Code of the Philippines, as
amended;
9. Violations of Sections 86 to 106 of
Chapter VI, of RA 8550, otherwise
known as the Philippine Fisheries
Code of 1998;
10. Violations of Sections 101 to 107, and
110 of RA 7942, otherwise known as the
Philippine Mining Act of 1995;
11. Violations of Section 27(c), (e), (f), (g)
and (i), of RA 9147, otherwise known as
the Wildlife Resources Conservation
and Protection Act;
12. Violation of Section 7(b) of RA 9072,
otherwise known as the National Caves
and Cave Resources Management
Protection Act;
13. Violation of RA 6539, otherwise known
as the Anti-Carnapping Act of 2002, as
amended;
14. Violations of Sections 1, 3 and 5 of PD
1866, as amended, otherwise known as
the decree Codifying the Laws on
Illegal/Unlawful
Possession,
Manufacture, Dealing In, Acquisition
or
Disposition
of
Firearms,
Ammunition or Explosives;
15. Violation of PD 1612, otherwise known
as the Anti-Fencing Law;
16. Violation of Section 6 of RA 8042,
otherwise known as the Migrant
Workers and Overseas Filipinos Act
of 1995, as amended by RA 10022;
17. Violation of RA 8293, otherwise known
as the Intellectual Property Code of
the Philippines;
18. Violation of Section 4 of RA 9995,
otherwise known as the Anti-Photo and
Video Voyeurism Act of 2009;
19. Violation of Section 4 of RA 9775,
otherwise known as the Anti-Child
Pornography Act of 2009;
20. Violations of Sections 5, 7, 8, 9, 10(c),
(d) and (e), 11, 12 and 14 of RA 7610,
otherwise known as the Special
Protection of Children Against Abuse,
Exploitation and Discrimination.
7. Authority to Inquire Into Bank
Deposits
General Rule: The AMLC may inquire into or
examine any particular deposit or investment,
including related accounts, with any banking
institution or non-bank financial institution upon
order of any competent court in cases of
violation of this Act when it has been
established that there is probable cause that
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the deposits or investments involved are
related:
1. To an unlawful activity as defined in Sec.
3(i); or
2. To any money laundering offense under
Sec. 4
Related Accounts refers to accounts, funds
and sources of which originated from and/or
are materially linked to the monetary
instrument(s) or property(ies) subject of the
freeze order(s).
Exception: No court order shall be required in
the following cases –
1. Kidnapping for ransom under Article 267
of the RPC
2. Sections 4, 5, 7, 8, 9, 10, 12, 13, 14 ,15
and 16 of RA No. 9615
3. Hijacking and other violations under RA
No. 6235; destructive arson and murder
as defined under the RPC
4. Felonies or offenses of a nature similar to
those mentioned in Section 3(i) (1), (2),
and (12) which are punishable under the
penal laws of other countries;
5. Terrorism and conspiracy to commit
terrorism as defined and penalized under
RA No. 9372.
The authority of AMLC to inquire into or
examine the main account and the related
accounts shall comply with the Due Process
requirements (Art. III, Sec. 2 and 3) of the 1987
Constitution. Likewise, the constitutional
injunction against ex post facto laws and bills
of attainder shall be respected. [Sec. 21, as
amended by RA 10365]
A bank inquiry order may be availed of without
need of a pre-existing case under the AMLA. If
the contrary position is adopted, the AMLC
would be virtually deprived of its character as a
discovery tool, and thus would become less
circumspect in filing complaints against
suspect account holders. However, unlike a
freeze order, it cannot be issued ex parte.
Without doubt, a requirement that the
application for a bank inquiry order be done
with notice to the account holder will alert the
latter that there is a plan to inspect his bank
account on the belief that the funds therein are
involved in an unlawful activity or money
laundering offense. [Republic v Eugenio, G.R.
No. 174629 (2008)]
8. Freezing and Forfeiture
Application for Freeze Orders
Who may apply
Upon verified ex parte petition by the AMLC
and after determination that probable cause
exists that any monetary instrument or property
is in any way related to an unlawful activity, the
Court of Appeals may issue a freeze order,
which shall be effective immediately, directing
the concerned covered persons and
government agency to desist from allowing any
transaction, withdrawal, transfer, removal,
conversion, concealment, or other disposition
of the subject monetary instrument or property.
[Rule 10(a), Revised IRR]
Effectivity
The freeze order shall be effective
immediately and shall not exceed six (6)
months depending upon the circumstances of
the case.
On motion of the AMLC filed before the
expiration of the original period of the freeze
order, the court may, for good cause shown,
extend its effectivity. Upon the timely filing of
such motion and pending resolution by the
Court of Appeals, the freeze order shall remain
effective. [Rule 10(a)(3), Revised IRR]
Duties of covered institutions
1. Implement Freeze Order. - Upon receipt
of the notice of the freeze order, the
covered person and government agency
concerned shall immediately freeze the
monetary instrument or property subject
thereof, and shall immediately desist
from and not allow any transaction,
withdrawal,
transfer,
removal,
conversion,
other
movement
or
concealment thereof.
2. Freeze Related Accounts. - Upon receipt
of the freeze order and upon verification
by the covered person that there are
accounts related to the monetary
instrument or property subject of the
freeze order, the covered person shall
immediately freeze these related
accounts wherever these may be found.
If the related accounts cannot be
determined within 24 hours from receipt
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of the freeze order due to the volume
and/or complexity of the transactions, or
any other justifiable factors, the covered
person shall effect the freezing of the
related accounts within a reasonable
period and shall submit a supplemental
return thereof to the Court of Appeals
and the AMLC within 24 hours from the
freezing of said related accounts.
3. Furnish Copy of Freeze Order to Owner
or Holder. - The covered person and
government agency concerned shall
likewise immediately furnish a copy of
the notice of the freeze order upon the
owner or holder of the monetary
instrument or property or related
accounts subject thereof.
4. Submit Detailed Return. - Within 24 hours
from receipt of the freeze order, the
covered person and government agency
concerned shall submit, by personal
delivery, to the Court of Appeals and to
the AMLC, a written detailed return on
the freeze order.
The covered person shall also submit to the
AMLC, through the internet, an electronic
detailed return in a format to be prescribed by
the latter. [Rule 10(e), Revised IRR]
1. With due diligence, the former cannot be
located, or
2. It has been substantially altered,
destroyed, diminished in value or
otherwise rendered worthless by any act
or omission, or
3. It has been concealed, removed,
converted, or otherwise transferred, or
4. It is located outside the Philippines or has
been placed or brought outside the
jurisdiction of the court, or
5. It has been commingled with other
monetary instrument or property
belonging to either the offender himself
or a third person or entity, thereby
rendering the same difficult to identify or
be segregated for purposes of forfeiture.
[Sec. 12(a), as amended by RA 10365]
Claim on Forfeited Assets
Where the court has issued an order of
forfeiture of the monetary instrument or
property in a criminal prosecution for any
money laundering offense defined under
Section 4 of this Act, the offender or any other
person claiming an interest therein may apply,
by verified petition, for a declaration that the
same legitimately belongs to him and for
segregation or exclusion of the monetary
instrument or property corresponding thereto.
Forfeiture Provisions
Where filed: With the court which rendered the
judgment of forfeiture.
Civil Forfeiture
Upon determination by the AMLC that
probable cause exists that any monetary
instrument or property is in any way related to
an unlawful activity or a money laundering
offense, the AMLC shall file with the
appropriate court (through the OSG) a
verified ex parte petition for forfeiture. [Sec.
12(a), as amended by RA 10365]
When filed: Within 15 days from the date of
the finality of the order of forfeiture, in default of
which the said order shall become final and
executory. [Sec. 12(b)]
Note: This provision shall apply in both civil and
criminal forfeiture.
Payment in Lieu of Forfeiture
Procedural rule applicable: The Rules of
Court on Civil Forfeiture.
What is covered by the forfeiture
The forfeiture shall include those other
monetary instrument or property having an
equivalent value to that of the monetary
instrument or property found to be related in
any way to an unlawful activity or a money
laundering offense, when:
The court may, instead of enforcing the order
of forfeiture of the monetary instrument or
property or part thereof or interest therein,
accordingly order the convicted offender to
pay an amount equal to the value of said
monetary instrument or property, where:
1. The court has issued an order of forfeiture
of the monetary instrument or property
subject of a money laundering offense
(defined under Section 4), and
2. Said order cannot be enforced because:
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a. Any particular monetary instrument
or property cannot, with due
diligence, be located, or
b. It has been substantially altered,
destroyed, diminished in value or
otherwise rendered worthless by
any act or omission, directly or
indirectly, attributable to the
offender, or
c. It has been concealed, removed,
converted,
or
otherwise
transferred to prevent the same
from being found or to avoid
forfeiture thereof, or
d. It is located outside the Philippines
or has been placed or brought
outside the jurisdiction of the court,
or
e. It has been commingled with other
monetary instruments or property
belonging to either the offender
himself or a third person or entity,
thereby rendering the same
difficult to identify or be segregated
for purposes of forfeiture [Sec.
12(c)]
Note: This provision shall apply in both civil and
criminal forfeiture.
9. Anti-Money Laundering Council;
Functions
The Anti-Money Laundering Council shall be
composed of the Governor of the Bangko
Sentral ng Pilipinas (BSP) as chairman, and
the
Commissioner
of
the
Insurance
Commission and the Chairman of the
Securities and Exchange Commission (SEC)
as members. [Sec. 7]
Functions
The AMLC shall act unanimously in the
discharge of its functions as defined
hereunder:
1. To require and receive covered or
suspicious transaction reports from
covered institutions;
2. To issue orders addressed to the
appropriate Supervising Authority or the
covered institution to determine the true
identity of the owner of any monetary
instrument or property subject of a
covered transaction or suspicious
transaction report or request for
assistance from a foreign State, or
believed by the Council, on the basis of
substantial evidence, to be, in whole or
in part, wherever located, representing,
involving, or related to, directly or
indirectly, in any manner or by any
means, the proceeds of an unlawful
activity;
3. To institute civil forfeiture proceedings
and all other remedial proceedings
through the Office of the Solicitor
General;
4. To cause the filing of complaints with the
Department
of
Justice
or
the
Ombudsman for the prosecution of
money laundering offenses;
5. To investigate suspicious transactions
and covered transactions deemed
suspicious after an investigation by
AMLC, money laundering activities, and
other violations of this Act;
6. To apply before the Court of Appeals, ex
parte, for the freezing of any monetary
instrument or property alleged to be
laundered,
proceeds
from
or
instrumentalities used/ intended for use
in any unlawful activity (as defined in
Section 3(i) hereof);
7. To implement such measures as may be
necessary and justified under this Act to
counteract money laundering;
8. To receive and take action in respect of,
any request from foreign states for
assistance in their own anti-money
laundering operations provided in this
Act;
9. To develop educational programs on
the pernicious effects of money
laundering, the methods and techniques
used in money laundering, the viable
means of preventing money laundering
and the effective ways of prosecuting
and punishing offenders;
10. To enlist the assistance of any branch,
department, bureau, office, agency or
instrumentality of the government,
including government-owned and controlled corporations, in undertaking
any and all anti-money laundering
operations, which may include the use of
its personnel, facilities and resources for
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the more resolute prevention, detection
and investigation of money laundering
offenses and prosecution of offenders;
and
11. To impose administrative sanctions
for the violation of laws, rules,
regulations and orders and resolutions
issued pursuant thereto; [Sec. 7]
12. To require the Land Registration
Authority and all its Registries of Deeds
to submit to the AMLC, reports on all real
estate transactions involving an amount
in excess of Php 500,000 within 15 days
from the date of registration of the
transaction, in a form to be prescribed by
the AMLC. The AMLC may also require
the Land Registration Authority and all its
Registries of Deeds to submit copies of
relevant documents of all real estate
transactions. [Sec. 7]
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INSURANCE
COMMERCIAL LAW
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INSURANCE LAW
COMMERCIAL LAW
INSURANCE
I. Basic Concepts
1. Definition
2. Wherein one undertakes for a
consideration;
3. To indemnify another against loss,
damage, or liability;
4. Arising from an unknown or contingent
event.
Contingent Event
a. Insurance
Insurance is essentially a contract by which
one party (the insurer), for a consideration that
is usually paid in money, either in a lump sum
or at different times during the continuance of
the risk, promises to make a certain payment,
usually of money, upon the destruction or injury
of “something” in which the other party (the
insured) has an interest [Carale, The Philippine
Insurance Law (2014)].
On August 15, 2013, RA 10607 (An Act
Strengthening the Insurance Industry, Further
Amending Presidential Decree No. 612,
Otherwise Known as “The Insurance Code,” as
Amended by Presidential Decree Nos. 1141,
1280, 1455, 1460, 1814 and 1981, and Batas
Pambansa Blg. 874, and for Other Purposes)
was signed into law. It is a restatement of the
Insurance
Code
(PD
612),
with
amendments.
Unknown Event
Event that is not Event
which
is
certain to take place. certain to happen,
but the time of its
happening is not
known.
General Rule: A past event cannot be a
designated event in an insurance contract.
Exception: It may be a designated event only
in cases where it has happened already, but
the parties do not know about it e.g., prior loss
of a ship at sea (applicable only to marine
insurance) [De Leon, The Insurance Code of
the Philippines Annotated (2014)].
The unknown event may be past or future.
Even if the proximate cause of the loss is a
fortuitous event, the insurer may still be liable if
it is the event or peril insured against [De Leon].
2. Form
The section numbers hereinafter generally
pertain to RA 10607, unless otherwise
indicated.
b. Contract of Insurance
A contract of insurance is an agreement
whereby one undertakes for a consideration to
indemnify another against loss, damage or
liability arising from an unknown or contingent
event [Sec. 2(a)].
Note: A contract of suretyship shall be
deemed to be an insurance contract, within the
meaning of the Insurance Code, only if made
by a surety who or which, as such, is doing
an insurance business as hereinafter
provided.
There is no particular form required for a
contract of insurance.
May an Insurance Contract be Oral?
The Insurance Code has no provision requiring
a particular form for the validity of an insurance
contract. In our jurisdiction, the Supreme Court
has not made a categorical ruling against the
validity of an oral contract of insurance
[Carale].
Note: An insurance policy is different from the
contract of insurance. The policy is the
formal written instrument evidencing the
contract of insurance entered into between the
insured and the insurer [Sec. 232].
Thus, a contract of insurance is:
1. A contract of indemnity;
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3. Doing or Transacting Insurance
Business
The term “doing an insurance business or
transacting an insurance business”
includes:
a. Making or proposing to make, as
insurer, any insurance contract;
b. Making or proposing to make, as
surety, any contract of suretyship as a
vocation and not as merely incidental
to any other legitimate business or
activity of the surety;
c. Doing any kind of business, including a
reinsurance business, specifically
recognized as constituting the doing
of an insurance business within the
meaning of the Insurance Code;
d. Doing or proposing to do any business
in substance equivalent to any of the
foregoing in a manner designed to
evade the provisions of the Insurance
Code [Sec. 2(b)].
Note: That no profit is derived from the making
of insurance contracts, agreements, or
transactions, or that no separate or direct
consideration is received therefor, shall not be
deemed conclusive to show that the making
thereof does not constitute the doing or
transacting of an insurance business [Sec.
2(b)].
General Rule: An insurance business consists
in undertaking, for a consideration, to
indemnify another against loss, damage or
liability arising from an unknown or contingent
event.
Exception: Those not formally designated as
insurance businesses but are deemed “doing
or transacting an insurance business” as listed
in Sec. 2(b).
COMMERCIAL LAW
b. From such determination, it concludes
that:
1. If these are the principal
objectives, the business is that
of insurance.
2. But if they are merely incidental
and service is the principal
purpose, then the business is
not insurance.
4. Governing Law
General Rule: The Insurance Code primarily
governs insurance contracts.
Exception: When there is a special law which
specifically governs (e.g., insurance contract
under R.A. 1161 or the Social Security Act), in
which case, the Insurance Code governs
subsidiarily.
Matters not expressly provided for in the
Insurance Code and special laws are regulated
by the Civil Code.
Other Special Laws:
a. National Health Insurance Act of 2013
(RA 10606, amending RA 7875)
b. The Revised Government Service
Insurance Act of 1997 (RA 8291)
c. The Social Security Act (RA 8282)
d. The Property Insurance Law (RA 656,
as amended by PD 245)
e. The Philippine Deposit Insurance Act
of 1963 (RA 3591).
f. RA 4898, as amended by RA 5756
providing life, disability, and accident
insurance to barangay officials
g. Universal Health Care Act (RA 11223)
5. Parties to an Insurance Contract
a. Insurer
Principal Object and Purpose Test
The insurer is the party who assumes or
accepts the risk of loss and undertakes for
!
The “principal object and purpose test”
consideration to indemnify the insured or to pay
a. Determines:
a certain lump sum on the happening of the
1. Whether the assumption of risk
event or peril insured against. May be any
and indemnification of loss are
corporation, partnership, or association, duly
the principal object and
authorized to transact insurance business
purpose of the organization; or
[Sec. 6].
2. Whether they are merely
incidental to its business.
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designated peril. It is based on probability of
loss and extent of liability [43 Am. Jur. 2d326].
b. Insured
The insured is the person in whose favor the
contract is operative and whose loss is the
occasion for the payment of the insurance
proceeds by the insurer [Carale].
c. Exception
Anyone except a public enemy may be
insured [Sec. 7].
There is no definition of what a “public enemy”
is, but a definition that is generally accepted
and in keeping with the nature of an insurance
contract is one where a person possesses the
nationality of the state with which another is at
war [Carale].
A. Elements of an Insurance
Contract
Elements [C2R2IM]
1. Cause — event or peril insured against
2. Consideration — premium payments
paid by the insured
3. Risk of loss or damage being assured
by the insurer
4. Risk-distributing
scheme
—
distribution and transfer by the insurer
of risk of loss, damage or liability
among persons having similar risks
5. Insurable interest — the insured
possesses an interest of some kind,
susceptible of pecuniary estimation,
which the event insured against may
cause loss or damage
6. A meeting of minds of the parties
upon all the foregoing essentials
1. Cause
Cause refers to an event or peril insured
against.
2. Consideration
An insurance premium is the agreed price for
assuming and carrying the risk. It is the
consideration paid to the insurer for
undertaking to indemnify the insured against a
Premium
Assessment
A sum levied and A sum collected to
paid
to
meet meet actual loss
anticipated
loss [Vance].
[Vance].
A sum specifically
levied by mutual
insurance
companies
or
associations, upon a
fixed and definite
plan, to pay losses
and expenses [Sec.
403]
3. Risk of Loss or Damage
Peril is any contingent or unknown event which
may cause a loss. Its existence creates a risk
and its occurrence results in loss.
The event or peril insured against must be such
that its happening will:
a. Damnify or cause loss to a person; or
b. Create liability against him [Sec. 3]
4. Risk-Distributing Scheme
Insurance contracts serve to distribute the
risk of economic loss, damage or liability
among as many as possible of those who are
subject to the same kind of risk.
Scheme:
a. The payment of premiums by all will
inure to a general fund, out of which
payment will be made for anyone who
has suffered an economic loss.
b. Hence, each member contributes to a
small degree toward compensation for
losses suffered by any member of the
group.
5. Insurable Interest
Insurable interest is the interest which the law
requires the owner of an insurance policy to
have in the person or thing insured [Carale].
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In terms of the event insured against, it is the
relation between the insurer and the risk
insured, such that the occurrence of the risk will
cause substantial loss or harm of some kind to
the insured [Carale].
Under the Code, the following are void:
a. Stipulation in a policy for the payment
of loss whether the person insured has
or has not any interest in the property
insured;
b. Stipulation that the policy shall be
received as proof of such interest;
c. Policy executed by way of gaming or
wagering [Sec. 25].
Note: Insurable interest is not required in
industrial life insurance.
6. Meeting of the Minds
The two parties to a contract of insurance
whose minds need to meet regarding the
essential elements are the insurer and the
insured.
The insured is not always the person to whom
the proceeds are paid. Such person is the
beneficiary [Vance].
B. Characteristics/Nature
Insurance Contracts
of
1. In General
An insurance contract is [CAVE-CCPU]
a. Consensual;
b. Aleatory;
c. Voluntary;
d. Executory
and
unilateral
synallagmatic;
e. Conditional;
f. Contract of adhesion;
g. Personal contract;
h. Uberrimae fides contract
but
and acceptance. The insurance policy merely
evidences the terms and conditions thereof.
Exception: It is stipulated that the policy is
essential to the existence of the contract
[Campos].
b. Aleatory
It is aleatory because it depends upon some
contingent event. The obligation of the insurer
to pay depends on the happening of an event
which is uncertain, or though certain, is to occur
at an indeterminate time [Art. 2010, NCC].
Being an aleatory contract does not
necessarily mean that it is a “contract of
chance” because in a contract of insurance,
the parties seek to distribute possible loss by
reason of mischance, unlike a wagering
contract [Carale].
c. Voluntary
General Rule: Parties may incorporate
appropriate provisions and conditions they
choose, as long as they are not contrary to law,
morals, good customs, public order, or public
policy [Art. 1305, NCC].
Exception: Some insurance contracts,
particularly liability insurance, may be required
by law in certain instances:
1. Compulsory motor vehicle liability
insurance for motor vehicles [Secs.
386-402];
2. Compulsory
coverage
in
state
insurance fund for employees [Arts.
168-184, Labor Code];
3. As a condition to granting a license to
conduct business or calling affecting
the public safety or welfare [De Leon];
4. Social insurance for members of the
GSIS and for employees of the private
sector covered by the SSS.
a. Consensual
d. Executory
Synallagmatic
General Rule: An insurance contract is
perfected by the meeting of the minds of the
parties. There must be a concurrence of offer
Once the insured pays the premium, the
contract already takes effect. After the payment
of premiums, the insurance imposes a
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unilateral obligation on the insurer who
promises to indemnify in case of loss.
It is also synallagmatic [Vitug, J., Separate
Opinion in UCPB General Insurance Co., Inc.
v. Masagana Telemart, Inc., G.R. No. 137172
(2001)] and reciprocal such that even if the
contingent event or designated peril does not
occur, the insurer has still provided protection
against the risk for the period covered by the
insurance contract.
e. Conditional
It is conditional because the insurer incurs
liability only upon the happening of the event
insured against. However, many other
conditions are usually required (e.g. payment
of premium or performance of other acts) as
precedent to the right of the insured to claim
benefits under the insurance.
f. Contract of Adhesion (Fine Print Rule)
Insurance contracts are already presented to
the insured in its printed form on a “take it or
leave it” basis. The insured merely must agree
to its terms. Such contracts of adhesion are
valid.
General Rule: When the terms of the contract
are clear and leave no doubt upon the intention
of the contracting parties, the literal meaning of
its stipulations shall control [Art. 1370, NCC].
Exception: Where the terms of the contract
are ambiguous and susceptible to various
interpretations, the issue is to be resolved
against the insurer, being the party who
prepared the contract [Art. 1377, NCC].
Ambiguity is interpreted liberally in favor of the
insured and strictly against the insurer who
prepared the same.
g. Personal Contract
The contract of insurance is basically between
the insurer and the insured.
The insured cannot assign, before the
happening of the loss, his rights under a
property policy to others without the consent of
the insurer [Secs. 20, 58, 83].
h. Uberrimae fides Contract (i.e. a
contract of the highest degree of good
faith)
Each party is required to:
1. Deal with each other in utmost good
faith;
2. Disclose conditions affecting the risk of
which he is aware;
3. Disclose any material fact which the
applicant knows and ought to know.
Violation of this duty gives the aggrieved party
the right to rescind the contract. Where the
aggrieved party is the insured, the bad faith of
the insurer will preclude it from denying liability
on the policy based on breach of warranty
[Campos].
2. For Specific Kinds of Insurance
Contracts
a. For Non-Life Insurance
Contract of Indemnity
The insured who has insurable interest over
the property is only entitled to recover the
amount of actual loss sustained. The burden
is upon him to establish the amount of such
loss. Property insurance is personal in the
sense that it is the damage to the personal
interest and not the property that is being
reimbursed.
General Rule: Only non-life insurance or
property insurance contracts are contracts
of indemnity. Life insurance contracts are not
contracts of indemnity because the value of life
cannot be quantified.
Exception: The basis of the insurable interest
of the policy owner on the life of the insured is
a commercial relationship (e.g. creditordebtor, mortgagor/guarantor-mortgagee).
b. For Life Insurance
Nature of Property
Life insurance policies, unlike property
insurance, are generally assignable or
transferable as they are in the nature of
property [Sec. 81].
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C. Classes of Insurance
1. Marine Insurance
a. Definition
Marine insurance covers loss or damage to
property and persons in connection with all
risks or perils of navigation. It includes “marine
protection and indemnity insurance” against
liability incidental to ownership, operation,
maintenance or construction of vessels and
facilities therefor [Carale].
Marine insurance includes:
1. Loss or damage to:
a. Vessels, cargo, freightage,
profits, and all kinds of property
and interests therein, in
connection with any and all
risks or perils of navigation;
b. Person
or
property
appertaining to a marine,
inland marine, transit or
transportation insurance;
c. Precious
stones,
jewels,
jewelry,
precious
metals,
whether
in
course
of
transportation or otherwise;
d. Instrumentalities
of
transportation
and
communication,
excluding
buildings, aids to navigation
and
transportation,
and
appurtenant facilities for the
control of waterways.
2. Marine protection and indemnity
insurance against liability incidental to
ownership, operation, maintenance or
construction of vessels and facilities
therefore [Sec. 101; Carale].
b. Divisions
1. Ocean Marine Insurance
COMMERCIAL LAW
b. Goods or cargoes;
c. Earnings such as freight, passage
money, commissions, or profits; and
d. Liability (protection and indemnity
insurance).
2. Inland Marine Insurance
Inland marine insurance covers the land or
over-the-land transportation perils of property
shipped by railroads, motor trucks, airplanes,
and other means of transportation. It also
covers risks of lake, river or other inland
waterway transportation and other waterborne
perils outside those covered by ocean marine
insurance.
c. Loan on Bottomry and Loan on
Respondentia Distinguished
Loan on Bottomry
Loan on
Respondentia
Loan obtained for the Loan obtained as
value of the vessel security for the value
on a voyage
of the cargo to be
transported
Both depend upon the safe conclusion of the
voyage [Carale]
In a loan on bottomry, the insurable interest
of a shipowner on its bottomed boat is the
difference between the amount of the loan and
the value of the boat. Thus, if the amount of the
loan does not cover the total value of the boat,
the owner can still insure the boat.
d. Risks
1. Types of Risk
Perils of the Sea
Ocean marine insurance protects ships at sea
and the cargo or freight on such ships from
standard “perils of the sea” or “perils of
navigation.”
Ocean marine insurance insures against risk
connected with navigation to which a ship,
Perils of the sea include:
cargo, freightage, profits, or other insurable
a. Losses caused by sea damage, or by
interest in movable property, may be exposed
the violence of the elements;
during a certain voyage or a fixed period of
b. Losses from extraordinary occurrences
time. Its scope includes:
or those which cannot be guarded
a. Ships or hulls;
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against by the ordinary exertion of
human skill or prudence;
c. Barratry or the willful and intentional act
on the part of the master or the crew, in
pursuance of some unlawful or
fraudulent purpose, without the
consent of the owner, and to the
prejudice of his interest (e.g., burning
the ship, unlawfully selling the cargo).
Perils of the sea do not include ordinary wear
and tear of the voyage and injuries suffered by
the vessel in consequence of her not being
unseaworthy [Roque v. IAC, G.R. No. L-66935
(1985)].
Perils of the Ship
Perils of the ship are those which cause a loss
which, in the ordinary course of events, results
from the:
a. Ordinary, natural, and inevitable action
of the sea;
b. Ordinary wear and tear of the ship; and
c. Negligent failure of the shipowner to
provide the vessel with the proper
equipment to convey the cargo under
ordinary conditions [De Leon].
Perils of the Sea
Perils of the Ship
Covers
casualties
due
to
unusual
violence
or
extraordinary
causes connected to
navigation
Covers
losses
resulting
from
ordinary wear and
tear or other damage
incidental to the
voyage
Covers losses which
cannot be guarded
against by prudence
and the ordinary
exertion of human
skill
Covers losses which
result
from
the
negligent failure of
the shipowner to
provide the vessel
with
the
proper
equipment, and can
thus be guarded
against by ordinary
exertion of human
skill
2. Rules on All Risks Covered
usually contemplated and avoids putting upon
the insured the burden of establishing that the
loss was due to peril falling within the policy’s
coverage. The insurer avoids liability by
demonstrating that a specific provision
expressly excludes the loss from coverage
[Choa Tiek Seng v. Court of Appeals, G.R. No.
84507 (1990)].
Exception: In an all-risk policy, all risks are
covered unless expressly excepted. The
burden rests on the insurer to prove that the
loss is caused by a risk that is excluded
[Filipino Merchants Ins. Co. v. CA, G.R. No.
85141(1989)].
e. Loss
Loss may be total (actual or constructive) or
partial.
1.Total Loss
2. Actual Loss
Actual total loss exists when the subject
matter of the insurance is wholly destroyed or
lost or when it is so damaged that it no longer
exists in its original character [Vance].
Actual loss is caused by:
a. A total destruction of the thing insured;
b. The irretrievable loss of the thing by
sinking, or by being broken up;
c. Any damage to the thing which renders
it valueless to the owner for the
purpose for which he held it;
d. Any other event which effectively
deprives the owner of the possession,
at the port of destination of the thing
insured [Sec. 132].
Actual loss may be presumed from the
continued absence of a ship without being
heard of. The length of time which is sufficient
to raise this presumption depends on the
circumstances of the case [Sec. 134].
3. Constructive Loss
Constructive total loss or “technical total
loss” is one in which the loss, although not
actually total, is of such character that the
insured is entitled, if he thinks fit, to treat it as
total by abandonment [45 CJS 1150]. A
General Rule: An “all risks” provision of a
marine policy extends coverage to risks not
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constructive total loss is one which gives to a
person insured a right to abandon [Sec. 133].
Note: Freightage cannot, in any case, be
abandoned, unless the ship is also abandoned.
Three rules exist as to determining when there
is a constructive total loss:
1. English rule
There is constructive total loss when the
subject matter of the insurance, while still
existent in specie, is so damaged as not to be
worth, when repaired, the cost of the repairs.
f. Abandonment
2. American rule
There is constructive total loss when it is so
damaged that the costs of repairs would
exceed one-half of the value of the thing as
acquired (also known as the “fifty percent
rule”).
3. Philippine rule
The insured may not abandon the thing insured
unless the loss or damage is more than threefourths of its value [De Leon].
A person insured by a contract of marine
insurance may abandon the thing insured and
recover for a total loss thereof when the cause
of the loss is a peril insured against—
a. If more than 3⁄4 thereof in value is
actually lost, or would have to be
expended to recover it from the peril;
b. If it is injured to such an extent as to
reduce its value by more than 3⁄4;
c. If the thing insured is a ship, and the
contemplated voyage cannot be
lawfully performed without incurring
either an expense to the insured of
more than 3⁄4 the value of the thing
abandoned or a risk which a prudent
man would not take under the
circumstances; or
d. If the thing insured is cargo or
freightage, and the voyage cannot be
performed, nor another ship procured
by the master, within a reasonable time
and with reasonable diligence, to
forward the cargo without incurring
either an expense to the insured of
more than 3⁄4 the value of the thing
abandoned or a risk which a prudent
man would not take under the
circumstances [Sec. 141].
Abandonment is the act of the insured by
which, after a constructive total loss, he
declares the relinquishment to the insurer of his
interest in the thing insured [Sec. 140].
Aside from the requirements under Sec. 141
above-mentioned:
1. An abandonment must be neither
partial nor conditional [Sec. 142];
2. An abandonment must be made
within a reasonable time after
receipt of reliable information of the
loss, but where the information is of a
doubtful character, the insured is
entitled to a reasonable time to make
inquiry [Sec. 143];
3. Abandonment is made by giving
notice thereof to the insurer, which
may be done orally, or in writing:
Provided, That if the notice be done
orally, a written notice of such
abandonment shall be submitted within
seven days from such oral notice [Sec.
145];
4. Abandonment must be absolute and
total.
No notice of abandonment is required for
recovery of loss in cases of actual total loss.
Where the information upon which an
abandonment has been made proves
incorrect, or the thing insured was so far
restored when the abandonment was made
that there was in fact no total loss, the
abandonment becomes ineffectual.
A valid abandonment has the following
characteristics:
1. There
must
be
an
actual
relinquishment by the person insured
of his interest in the thing insured;
2. There must be a constructive total
loss;
3. It must be factual [Sec. 144];
4. The notice of abandonment must be
explicit and must specify the
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particular cause of the abandonment
[Sec. 146].
Effects of abandonment:
1. An abandonment is equivalent to a
transfer by the insured of his interest to
the insurer, with all the chances of
recovery and indemnity [Sec. 148];
2. If a marine insurer pays for a loss as if
it were an actual total loss, he is entitled
to whatever may remain of the thing
insured, or its proceeds or salvage, as
if there had been a formal
abandonment [Sec. 149];
3. Upon an abandonment, acts done in
good faith by those who were agents of
the insured in respect to the thing
insured, subsequent to the loss, are at
the risk of the insurer, and for his
benefit [Sec. 150].
g. Average
The following are considered averages:
1. All
extraordinary
or
accidental
expenses which may be incurred
during the navigation for the
preservation of the vessel or cargo, or
both;
2. All damages or deterioration the vessel
may suffer from the time she puts to
sea from the port of departure until she
casts anchor in the port of destination,
and those suffered by the merchandise
from the time it is loaded in the port of
shipment until it is unloaded in the port
of consignment [Art. 806, Code of
Commerce].
There are two kinds of averages:
1. Gross or general
2. Simple or particular
Gross/General
Average
Simple/Particular
Average
Includes damages
and expenses which
are
deliberately
caused
by
the
master of the vessel
or upon his authority,
in order to save the
Includes damages
and
expenses
caused to the vessel
or her cargo, which
have not inured to
the common benefit
and profit of all the
Gross/General
Average
Simple/Particular
Average
vessel, her cargo, or persons interested in
both at the same the vessel and her
time from a real and cargo [Art. 809]
known risk [Art. 811,
Code of Commerce]
Loss is borne by all
the owners of the
interests involved,
who are pro tanto
obliged
to
give
proportionate
contributions
to
make up for such
loss,
since
the
sacrifice was made
for the common
benefit of all who
have an interest in
the venture [Art. 812;
Carale]
Loss is borne alone
by the owner of the
cargo or of the
vessel, as the case
may be [De Leon];
such loss is not
suffered
by
all
persons contributing
ratably [Carale]
Requisites to claim general average
contributions:
1. There must be a common danger to the
vessel or cargo;
2. The sacrifice must be for the common
safety or for the benefit of all;
3. It must be successful (i.e. resulted in
the saving of the vessel and/or cargo);
4. Expenses or damages should have
been incurred or inflicted after taking
proper legal steps and authority
[Magsaysay v. Agan, G.R. No. L-6393
(1955)].
Vance, however, includes as part of the
requisites:
1. Sacrifice was made by the master or
upon his authority; and
2. That it was not caused by any fault of
the party asking for the contribution.
An example of particular average loss would
be the wages of the crew when the vessel is
detained by reason of force majeure. In such a
case, the loss is only partial and must be borne
by the owner of the vessel alone [Carale].
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Rules on averages in marine insurance
Where it has been agreed that an insurance
upon a particular thing, or class of things, shall
be free from particular average:
1. A marine insurer is not liable for any
particular average loss not depriving
the insured of the possession of the
whole of such thing, or class of things
at the port of destination (even though
it becomes entirely worthless);
2. However, such insurer is liable for his
proportion of all general average loss
assessed upon the thing insured [Sec.
138].
h. Warranties
Implied warranties in marine insurance:
1. Implied warranty of seaworthiness
2. Implied warranty against improper
deviation
3. Implied
warranty
of
proper
documentation
Implied Warranty of Seaworthiness
In every marine insurance upon a ship or
freight, or freightage, or upon anything which is
the subject of marine insurance, a warranty is
implied that the ship is seaworthy [Sec. 115].
A vessel is seaworthy if:
1. It is fit to perform the service and to
encounter the ordinary perils of the
voyage contemplated by the parties to
the policy [Sec. 116];
2. It is properly laden;
3. It is provided with a competent master;
4. It is provided with a sufficient number
of competent officers and seamen;
5. It is provided with the requisite
appurtenances and equipment;
6. It is provided with other necessary or
proper stores and implements for
voyage [Sec.118].
Note: There is an implied warranty of
seaworthiness in every contract of ordinary
marine insurance, as provided in Sec. 113 in
relation to Sec. 99. It becomes the obligation of
a cargo owner to look for a reliable common
carrier which keeps its vessels in seaworthy
condition [Roque v. Intermediate Appellate
Court, G.R. No. L-66935 (1985)].
A vessel should be seaworthy at the time
commencement of the risk or start of the
voyage, except:
1. Time policy: When the insurance is
made for a specified length of time, the
implied warranty is not complied with
unless the ship be seaworthy at the
commencement of every voyage it
undertakes during that time;
2. Cargo policy: When the insurance is
upon the cargo which, by the terms of
the policy, description of the voyage, or
established custom of the trade, is to
be transhipped at an intermediate port,
the implied warranty is not complied
with unless each vessel upon which the
cargo is shipped, or transhipped, be
seaworthy at the commencement of
each particular voyage [Sec. 117].
Where different portions of the voyage
contemplated by a policy differ in respect to the
things requisite to make the ship seaworthy
therefor, a warranty of seaworthiness is
complied with if, at the commencement of each
portion, the ship is seaworthy with reference to
that portion [Sec. 119].
The insurer is not liable despite breach of
warranty when the ship becomes unseaworthy
during the voyage to which an insurance
relates, but there is an unreasonable delay in
repairing the defect [Sec. 120].
Implied
Warranty
Deviation
Against
Improper
A deviation is a departure from the course of
the voyage insured, or an unreasonable delay
in pursuing the voyage or the commencement
of an entirely different voyage [Sec.125].
There is proper deviation when:
1. Caused by circumstances over which
neither the master nor the owner of the
ship has any control;
2. Necessary to comply with a warranty,
or to avoid a peril, whether or not the
peril is insured against;
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3. Made in good faith, and upon
reasonable grounds of belief in its
necessity to avoid a peril; or
4. Made in good faith, for the purpose of
saving human life or relieving another
vessel in distress [Sec. 126].
Note: In instances when deviation is proper,
insurer remains liable.
Every deviation not specified in the last section
is improper [Sec. 127].
The effect of any loss subsequent to an
improper deviation is that the insurer is not
liable [Sec. 128].
Implied Warranty of Proper Documentation
Where the nationality or neutrality of a ship or
cargo is expressly warranted, it is implied that
the ship will carry the requisite documents to
show such nationality or neutrality and that it
will not carry any documents which cast
reasonable suspicion thereon [Sec. 122].
2. Fire
a. Definition
Fire insurance is a contract of indemnity by
which the insurer, for a stipulated premium,
agrees to indemnify the insured against loss
by:
1. Fire, lightning, windstorm, tornado, or
earthquake; and
2. Other allied risks, when such risks are
covered by extension to fire insurance
policies or under separate policies
[Sec. 169].
Fire is oxidation which is so rapid as to produce
either a flame or a glow. Spontaneous
combustion is usually rapid oxidation. Fire is
always caused by combustion, but combustion
does not always cause fire [Western Woolen
Mills Co. v. Northern Assurance Co., 139 Fed
637 (1905)].
General Rule: Fire cannot be considered a
natural disaster or calamity or an act of God
since it almost always arises from acts of man
or by human means.
Exception: It is caused by lightning or a natural
disaster or casualty not attributable to human
agency [Phil. Home Assurance Corp. v. CA,
G.R. No. 106999 (1996)].
Fire or other so-called “allied risks”
enumerated in Sec. 169 must be the
proximate cause of the damage or loss.
The presence of heat, steam, or even smoke is
evidence of fire, but taken by itself will not
prove the existence of fire.
b. Risks
The risk assumed by the insurer is the loss and
damage caused by hostile fire and not
friendly fire.
Hostile Fire
Friendly Fire
Fire that escapes
from the place where
it was intended to
burn and ought to be,
or one which remains
completely within its
proper place but
because
of
the
unsuitable materials
used to light it,
becomes inherently
dangerous
and
uncontrollable
[De
Leon].
Fire that burns in a
place where it is
intended to burn
and ought to be (e.g.
fire burning in a stove
or a lamp) [De Leon].
But friendly fire may
become hostile fire
by escaping from the
place where it ought
to be to some place
in which it ought not
to be [Carale].
The principle underlying this distinction is that
the policy shall not be construed to protect the
insured from injury consequent upon his
negligent use or management of fire, so long
as it burns in the place where it ought to be
[Carale].
c. Alterations in Use or Condition
An alteration in the use or condition of a thing
insured from that to which it is limited by the
policy:
1. Entitles an insurer to rescind a contract
of fire insurance if such alteration:
a. Increases the risks, and
b. Was made:
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1. Without the consent of
the insurer, and
2. By means within the
control of the insured.
2. Does not affect a contract of fire
insurance if the alteration does not
increase the risk [Secs. 170-171].
Note: A contract of fire insurance is not affected
by any act of the insured after the execution of
the policy, which does not violate its provisions,
even though it increases the risk and is the
cause of the loss [Sec. 172].
Transferring machinery to another location,
despite a provision in the policy stating that the
machine cannot be transferred without the
consent of the insurer, is considered an
alteration in the condition and location of the
thing insured [Malayan Insurance Co, Ltd. v.
PAP Co., Ltd., G.R. No. 200784 (2013)].
d. Measure of Indemnity
In an open policy, only the expense necessary
to replace the thing lost or injured in the
condition it was at the time of the injury will be
paid.
In an open policy, the actual loss, as
determined, will represent the total indemnity
due the insured except only that the total
indemnity shall not exceed the total value of the
policy [Development. Ins. Corp. v. IAC, G.R.
No. 71360 (1986)].
Valued policy
If there is a valuation, the effect shall be like a
marine insurance policy wherein the valuation
is conclusive between the parties in adjusting
the loss [Sec. 158].
Option-to-rebuild clause
Whenever the insured desires to have a
valuation named in his policy, insuring any
building or structure against fire, he may
require such building or structure to be
examined by an independent appraiser and the
value of the insured’s interest therein may then
be fixed as between the insurer and the
insured. The cost of such examination shall be
paid for by the insured. A clause shall be
inserted in such policy stating substantially that
the value of the insured’s interest in such
building or structure has been thus fixed [Sec.
174].
3. Casualty
In a valued policy, the parties are bound by
the valuation, in the absence of fraud or
mistake [Sec. 173].
The parties may provide for an option-torebuild clause concerning the repairing,
rebuilding, or replacing of buildings or
structures wholly or partially damages [Sec.
174].
Note: No policy of fire insurance shall be
pledged, hypothecated, or transferred to any
person, firm, or company who acts as agent for
or otherwise represents the issuing company
[Sec. 175].
Open policy
In the absence of express valuation in a fire
insurance policy, the insured is only entitled to
recover the amount of actual loss sustained
and the burden of proof is upon him to establish
the amount of such loss by preponderance of
evidence.
a. Definition
Casualty insurance is insurance covering loss
or liability arising from accident or mishap.
Casualty insurance includes but is not limited
to:
1. Employer’s liability insurance;
2. Motor vehicle liability insurance;
3. Plate glass insurance;
4. Burglary and theft insurance;
5. Personal
accident
and
health
insurance, as written by non-life
insurance companies; and
6. Other substantially similar kinds of
insurance.
Casualty insurance does not include certain
types of loss which, by law or custom, are
considered as falling exclusively within the
scope of other types of insurance, such as fire
or marine [Sec. 176].
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b. Intentional Injury and Accidental
Injury Distinguished
Intentional Injury
Accidental Injury
Injury involves the
exercise
of
the
reasoning faculties,
consciousness,
and volition
Injury happens by
chance
or
fortuitously, without
intention or design,
which is unexpected,
unusual
and
unforeseen
Where a provision of
the policy excludes
intentional injury, it is
the intention of the
person inflicting the
injury
that
is
controlling
The terms do not,
without qualification,
exclude
events
resulting in damage
due
to
fault,
recklessness,
or
negligence of third
parties
If
the
injuries
suffered
by
the
insured
clearly
resulted from the
intentional act of the
third person, the
insurer is relieved
from
liability
as
stipulated
Under this kind of insurance, no action will lie
against the insurer unless brought by the
insured for loss actually sustained and paid by
him. Liability of the insurer attaches only after
the insured has paid his liability to the third
party [De Leon].
Note: Except with respect to compulsory motor
vehicle liability insurance, the Insurance Code
contains no other provisions applicable to
casualty insurance or to robbery insurance in
particular. These contracts are, therefore,
governed by the general provisions applicable
to all types of insurance. Outside of these, the
rights and obligations of the parties must be
determined by the terms of their contract,
taking into consideration its purpose and
always in accordance with the general
principles of insurance law [Fortune Insurance
& Surety Co. v. CA, G.R. No. 115278 (1995)].
d. No-Action Clause
A no-action clause is a requirement in a policy
of liability insurance which provides that a suit
must first be instituted, and a final judgment be
first obtained against the insured before the
person injured can recover on the policy.
c. Divisions
1. Liability Insurance
This is insurance against specified perils which
may give rise to liability on the part of the
insured.
The insurer assumes the obligation to pay the
third party in whose favor the liability of the
insured arises. The liability of the insurer
attaches as soon as the liability of the insured
to the third party is established. It covers
liability incurred from quasi-delict or criminal
negligence but cannot cover deliberate criminal
acts [De Leon].
2. Indemnity Insurance
This is insurance against specified perils which
may affect the persons.
However, a no-action clause cannot prevail
over Rules of Court provisions which are aimed
at avoiding multiplicity of suits. Parties (i.e. the
insured and the insurer) may be joined as
defendants in a case commenced by the third
party claiming under a liability insurance, as the
right to relief in respect to the same
transactions is alleged to exist [Sec. 5, Rule 2;
Sec. 6, Rule 3, 2019 Rules of Civil Procedure;
Guingon v. Del Monte, G.R. No. L- 22042
(1967)].
4. Suretyship
a. Definition
A contract of suretyship is an agreement
whereby a party, called the surety, guarantees
the performance by another party, called the
principal or obligor, of an obligation or
undertaking in favor of a third party called the
obligee [Sec. 177].
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It includes official recognizances, stipulations,
bonds, or undertakings issued by any company
by virtue of and under the provisions of Act. No
536, as amended by 2206 [Sec. 177].
Note: The Civil Code shall be applied in a
suppletory character whenever necessary in
interpreting the provisions of a contract of
suretyship [Sec. 180].
b. Nature of Contract
It shall be deemed as insurance contract if
the surety’s main business is that of suretyship,
and not where the contract is merely incidental
to any other legitimate business or activity of
the surety.
It is an accessory contract unlike a contract
of insurance which is the principal contract
itself.
The contract of a surety is evidenced by a
document called surety bond which is
essentially a promise to guarantee the
obligation of the obligor. In turn, the obligor
executes an indemnity agreement in favor of
the insurer [De Leon].
When the obligee accepts the bond, the bond
becomes valid and enforceable, whether or not
the premium has been paid by the obligor,
unlike in an insurance contract where payment
of premium is necessary for the contract to be
valid. If the obligee has not yet accepted, then
payment of premium is still necessary for the
contract of suretyship to be valid.
5. Life
Life insurance is insurance on human lives
and insurance appertaining thereto or
connected therewith.
The following shall be considered a life
insurance contract for purposes of the
Insurance Code:
a. Every contract or undertaking for the
payment of annuities, including
contracts for the payment of lump sums
under a retirement program where a
life insurance company manages or
acts as a trustee for such retirement
program;
b. Every contract or pledge for the
payment of endowments or annuities
[Secs. 181-182].
An insurance upon life may be made payable:
a. On the death of the person;
b. On his surviving a specified period; or
c. On the continuance or cessation of life
[Sec. 182].
The parties to a life insurance are the
following:
a. Owner of the policy: One who has the
power to name the beneficiary, assign
it, cash it in or use as collateral, with the
obligation to pay the premiums.
b. Cestui que vie: One on whose life
insurance is obtained.
c. Beneficiary: One to whom the
proceeds may be paid.
Note: There may be only one person for all
three parties.
c. Liability of Surety
The liability of the surety or sureties under a
bond is joint and several, or solidary [Sec. 178].
This means that upon the default of the
principal obligor, the surety becomes primarily
liable. Unlike a guarantor, a surety is not
entitled to the benefit of exhaustion of the
principal obligor’s assets and assumes as a
regular party to the undertaking.
Said liability is limited or fixed to the amount of
the bond.
a. Types
1. Individual Life
Individual life insurance is insurance on
human lives and insurance appertaining
thereto or connected therewith. It may be made
payable on the death of the person, or after his
surviving a specified period (as an annuity or
endowment), or otherwise contingently on the
continuation or cessation of life.
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2. Group Life
b. Other Classifications of Life Policies
Group life insurance is a blanket policy
covering a number of individuals who are
usually a cohesive group (e.g. employees of a
company) and are subjected to a common risk.
No medical examination is usually required of
each person insured (in contrast to individual
life insurance).
Group insurance is a single insurance
contract that provides coverage for many
individuals. The employer-policy holder is the
agent of the insurer in collecting the premium
[Pineda v. CA, G.R. No. 105562 (1993)].
Typically, the policy owner is an employer, and
the policy covers the employees or members of
the group, with one master contract kept by the
employer. Where the employee is required to
pay a portion of the premium, the arrangement
is called a contributory plan, wherein his
share is deducted from his wages [Carale].
3. Industrial Life
Industrial life insurance refers to an
insurance policy under which the premiums are
payable either monthly or oftener, if:
a. The face amount of insurance provided
in any policy is not more than 500 times
that of the current statutory minimum
daily wage in the City of Manila; and
b. The words “industrial policy” are
printed upon the policy as part of the
descriptive matter [Sec. 235].
It provides insurance coverage to industrial
workers or people who are unable to afford
insurance for bigger amounts.
It shall not lapse after non-payment of
premiums in 3 months after the expiration of
the grace period if such non-payment is due to
the failure of the company to send its
representatives to the insured to collect
premium [Sec. 235].
4. Microinsurance
Infra.
1. Ordinary or Whole Life Policy
2. Term Life Insurance
3. Modified Life Insurance
Ordinary or whole life policy is where the
insurer agrees to pay the face value of the
policy upon the death of the insured.
The following are distinct variations of whole
life policy:
1. Ordinary Life Insurance — Premiums
are paid throughout the lifetime of the
person insured or until the person
reaches a predetermined specified age
at which point the coverage continues
without the payment of additional
premiums.
2. Limited Payment Life Insurance —
Premiums are paid only during a
specified number of years or until a
specified event occurs.
3. Single Premium Life Insurance —
The coverage is acquired by the
payment of a single premium.
4. Joint Life Insurance — Coverage is
payable upon the first death among two
or more insured (normally purchased
by business partners or spouses) and
paid to the survivor.
5. Universal
Life
Insurance
—
Emphasizes the separation of the
portion of the premium that is used to
cover the insurance protection from the
portion of the premium allocated to an
investment.
6. Variable Life Insurance — Some
amount of death benefit provided by a
variable life insurance policy is
guaranteed by the insurer, but the total
death benefit and the cash value of the
insurance before death depend on the
investment performance of that portion
of the premium which is allocated to a
separate fund.
7. Pure Endowment Policy — Where
the insurer pays the insured if the
insured survives a specified period. If
the insured dies within the period, the
insurer is released from liability and
unless the contract otherwise provides,
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need not reimburse any part of the
premiums paid.
8. Endowment Policy — Where the
insured is paid the face value of the
policy if he outlives the designated
period. If he dies within said period, the
insurer pays the proceeds to the
beneficiary. This is a combination of
term policy and pure endowment
policy.
Term life insurance provides for the payment
of a specified amount if death occurs within the
period designated in the policy, usually for
periods of one to five years.
Modified life insurance is a policy that
combines term and whole life insurance into a
single insurance policy. Premiums paid by the
insured are substantially less during the first
few years then later increases during the
remaining term of the policy [Carale].
c. Risks
Five important risks:
1. Death or Survival;
2. Suicide
3. Death at the hands of the law;
4. Killing by the beneficiary; and
5. Accidental Death
Note: Any stipulation extending the 2year period is void.
b. Suicide is committed in a state of
insanity, regardless of the date of the
commission, unless suicide is an
excepted peril [Sec. 183].
Since suicide is contrary to the laws of nature
and the ordinary rules of conduct, it is never
presumed. The burden of proving lies with the
insurer, who seeks to avoid liability under a life
policy, excepting it from coverage [Campos].
Suicide as an Excepted Risk vs. Willful
Exposure to Needless Peril
Suicide and willful exposure to needless peril
are in pan materia because they both signify a
disregard for one's life. The only difference is in
degree, as suicide imports a positive act of
ending such life whereas the second act
indicates a reckless risking of it that is almost
suicidal in intent. To illustrate, a person who
walks a tightrope one thousand meters above
the ground and without any safety device may
not actually be intending to commit suicide, but
his act is nonetheless suicidal. He would thus
be considered as 'willfully exposing himself to
needless peril [Sun Life Insurance v. Court of
Appeals, G.R. No. 92383 (1992)].
3. Death at the Hands of the Law
1. Death or Survival
Life insurance may be made payable on the
death of the person, or on his surviving a
specified period, or otherwise contingently on
the continuation or cessation of life [Campos].
Death at the hands of the law (e.g. legal
execution) is one of the risks assumed by the
insurer under a life insurance policy in the
absence of a valid policy exception [Campos].
4. Killing by the Beneficiary
Death of the insured must be proven by the
beneficiary before the insurer can be made to
pay.
2. Suicide
Insurer is liable only when:
a. Suicide is committed after the policy
has been in force for a period of 2 years
from the date of its issue or of its last
reinstatement unless the policy
provides a shorter period.
General Rule: The interest of a beneficiary in
a life insurance policy shall be forfeited when
the beneficiary is the principal, accomplice, or
accessory in willfully bringing about the death
of the insured. In such an event, the other
beneficiaries so named shall receive their
share and divide among them the forfeited
share of the “guilty” beneficiary. In the absence
of other beneficiaries, proceeds shall be paid
according to the policy contract, and if silent, it
shall be paid to the estate of the insured [Sec.
12].
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Exceptions:
a. Accidental killing
b. Self-defense
c. Insanity of the beneficiary at the time
he killed the insured
d. Negligence
The fact that there were nine wounds in total is
proof that the victim was killed intentionally, as
this cannot be considered accidental. Thus, the
incident is not covered by the supplemental
insurance on death by accident [Biagtan v.
Insular G.R. No. L-25579 (1972)].
Note: Conviction of the beneficiary is
necessary before his interest in the insurance
policy is forfeited in favor of the others indicated
in Sec. 12.
6. Microinsurance
5. Accidental Death
The terms “accident” and “accidental means”
have been taken to mean that they happen by
chance or fortuitously, without intention and
design and are unexpected, unusual, and
unforeseen.
Where the death or injury is not the natural or
probable result of the insured’s voluntary act,
or if something unforeseen occurs in the doing
of the act which produces the injury, the
resulting death is within the protection of the
policies insuring against death or injury from
accident [Carale].
General Rule: Death or injury does not result
from accident or accidental means within the
terms of an accident-policy if it is the natural
result of the insured’s voluntary act,
unaccompanied by anything unforeseen
except the death or injury.
There is no accident when a deliberate act is
performed,
unless
some
additional,
unexpected, independent, and unforeseen
happening occurs which produces or brings
about the result of injury or death [Finnman
General Assurance Corp. v. CA, G.R. No.
100970 (1992)].
An event is not an accident if it is due to a
voluntary and intentional act on the part of
anyone, including third parties. In the absence
of proof that the incident was intentional, the
insurer shall pay the beneficiary the value of
the supplemental policy covering death by
accident [Calanoc v. CA, G.R. No. L-8151
(1955)].
Microinsurance is a financial product or
service that meets the risk protection needs of
the poor, where:
a. The
number
of
contributions,
premiums, fees, or charges, computed
on a daily basis, does not exceed 7.5%
of the current daily minimum wage rate
for nonagricultural workers in Metro
Manila; and
b. The maximum sum of guaranteed
benefits is not more than 1,000 times of
the said current daily minimum wage
rate [Sec. 187].
No insurance company
association shall engage
microinsurance unless it
requirements as may be
Commissioner [Sec. 188].
or mutual benefit
in the business of
possesses all the
prescribed by the
7. Compulsory Motor Vehicle Insurance
Compulsory
motor
vehicle
liability
insurance is a policy of insurance or guaranty
in cash or surety bond to indemnify the death,
bodily injury, and/or damage to property of a
third-party or passenger arising from the use of
a motor vehicle.
It shall be unlawful for any land transportation
operator or owner of a motor vehicle to operate
the same in the public highways unless there is
in force, a policy of insurance or guaranty in
cash or surety bond:
a. Issued in accordance with the
provisions of this chapter;
b. To indemnity the death, bodily injury
and/or damage to property of a thirdparty or passenger arising from the use
thereof [Sec. 387].
It is a requisite for registration or renewal of
registration of a motor vehicle by every land
transportation operator or owner [Sec. 390]. It
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is the only type of compulsory insurance
provided for under the Insurance Code.
It applies to all vehicles whether public or
private.
To the extent that motor vehicle insurance is
compulsory, it must be a liability policy, and
the provision making it merely an indemnity
insurance contract cannot have any effect
[Campos].
The insurer’s liability is direct and primary, so
the insurer need not wait for final judgment in
the criminal case to be liable. The purpose is to
give immediate financial assistance to victims
of motor vehicle accidents and/or their
dependents, regardless of the financial
capability of motor vehicle owners or operators
responsible for the accident sustained [Shafer
v. Judge, RTC Olongapo, G.R. No. 78848
(1988)].
The claimants/victims may be a passenger or
a third party. The insured may be the party at
fault as against claims of third parties (i.e. thirdparty liability) or the victim of the contingent
event.
The following clauses are relevant to
compulsory motor vehicle liability insurance:
a. Authorized Driver Clause is a
stipulation in a motor vehicle insurance
policy which provides that the driver,
other than the insured owner, must be
duly licensed to drive the motor vehicle,
otherwise the insurer is excused from
liability;
b. Theft Clause is a stipulation including
theft as one of the risks insured
against. If there is such a provision and
the vehicle was unlawfully taken, the
insurer is liable under the theft clause
and the authorized driver clause does
not apply. The insured can recover
even if the thief has no driver’s license.
c. No Fault Clause is a provision
required in every compulsory motor
vehicle liability insurance regarding
claims for death or injury to a
passenger or third party on a liability
insurance policy covering the vehicle.
Any claim for death or injury to any passenger
or third party shall be paid without the necessity
of proving fault or negligence of any kind,
provided the total indemnity in respect of any
person shall not exceed P15,000.
The claim shall be made against only one
motor vehicle. It shall lie against the insurer of
the vehicle in which the occupant is riding, and
no other. The claimant is not free to choose
from which insurer he will claim the no fault
indemnity [Perla Compania de Seguros v.
Ancheta, G.R. No. L-49699 (1988)].
8. Compulsory Insurance Coverage for
Agency-Hired Workers
a. Definition
Compulsory insurance coverage for
agency-hired workers is an insurance
mechanism made available by the law to
provide insurance protection for OFWs.
Each migrant worker to be deployed by a
recruitment/manning agency shall be covered
by a compulsory insurance contract which shall
be secured at no cost to the said worker.
Basis: It is the policy of the State to provide
adequate protection to the overseas Filipino
workers by ensuring coverage under the
compulsory insurance requirement in Section
37-A of the Migrant Workers and Overseas
Filipinos Act of 1995, as amended [Sec. 1(b),
Guideline I, Insurance Guidelines on Rule XVI
of the Omnibus Rules and Regulations
Implementing RA 8042].
b. Qualifications
To be qualified to provide for the Migrant
Workers’ Compulsory Insurance Coverage, the
insurance company must:
1. Be a reputable private life, non-life and
composite insurance company;
2. Be duly licensed by IC;
3. Be in existence and operational for at
least five (5) years;
4. Have a net worth of at least Php
500,000,000 based on the audited
financial
statements
for
the
immediately preceding year;
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5. Have a current year certificate of
authority; and
6. Have an IC-approved standard polic
[Sec. 1, Guideline III, Insurance
Guidelines on Rule XVI of the Omnibus
Rules and Regulations Implementing
RA 8042].
c. Disqualifications
Insurance companies who have directors,
partners, officers, employees, or agents with
relatives within the fourth civil degree of
consanguinity or affinity who work or have
interest
in
any
of
the
licensed
recruitment/manning agencies or in any of the
government agencies involved in the overseas
employment program shall be disqualified from
providing the migrant worker’s insurance
coverage.
It shall be the duty of the said directors,
partners, officers, employees, or agents to
disclose any such interest to the IC and POEA
[Sec. 2, Guideline III, Insurance Guidelines on
Rule XVI of the Omnibus Rules and
Regulations Implementing RA 8042].
D. Insurable Interest
Insurable interest (or what may be insured) is
that interest which a person is deemed to have
in the subject matter insured, where he has a
relation or connection with or concern in it, such
that the person will:
1. Derive pecuniary benefit or advantage
from the preservation of the subject
matter insured; and
2. Suffer pecuniary loss or damage from
its destruction, termination, or injury by
the happening of the event insured
against [Lalican v. Insular Life Ins.,
G.R. No. 183526 (2009)].
An insurable interest is one of the most basic
and essential requirements in an insurance
contract. The existence of an insurable interest
gives a person the legal right to insure the
subject matter of the policy of insurance
[Lalican v. Insular Life Ins., G.R. No. 183526
(2009)]. It may not be waived by stipulation.
Absence of insurable interest renders the
insurance contract void [Sec. 25].
General Rule: Insurable interest must be
capable of pecuniary estimation because the
purpose of insurance is to indemnify. It would
be difficult to measure if the benefit derived or
the loss incurred is not capable of pecuniary
estimation.
Exception: The insurable interest need not
always be pecuniary in nature (e.g. in insuring
the life of a person, the purpose is not to
indemnify but to act as an investment or
savings instrument) [Lucena v. Crawford, 2Bos
& PNR 269 (1806)].
Ratio: It is a deterrence to the insured.
A policy issued to a person without insurable
interest is a mere wager policy or contract and
is void for illegality [De Leon].
Evidence that life insurance is regarded as a
wager policy:
1. The original proposal to take out
insurance was that of the beneficiary;
2. The premiums are paid by the
beneficiary;
3. The beneficiary has no interest,
economic or emotional, in the
continued life of the insured [De Leon].
The insurable interest is the measure of the
upper limit of his provable loss under the
contract. Insurance should not provide the
insured means of making a net profit from the
happening of the event insured against [De
Leon].
D. When insurable
should exist
interest
Insurable Interest Required
Inception
Life/Health
Property
✓
✓
Intervening
Period
Occurrence
of Loss
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For Life Insurance: Insurable interest over
life/health must exist at the time of the inception
of the contract but may be lost after [Sec. 19].
may become the owner of the interest
insured during the circumstance of the
risk [Sec. 57].
For Property Insurance: Insurable interest
must exist at the time of the inception of the
contract and at the occurrence of the loss. But
it need not exist during the intervening period
or from the time between when the policy takes
effect, and the loss occurs. The alienation of
insured property will not defeat a recovery if the
insured has subsequently reacquired the
property and possesses an insurable interest
at the time of loss [Sec. 19].
It is an exception to the general rule that upon
maturity, the proceeds of a policy shall be given
exclusively to the proper interest if the person
in whose name or for whose benefit it is made.
Change of interest means the absolute
transfer of the property insured.
General Rule: A change of interest in the thing
insured does not transfer the policy but
suspends the insurance to an equivalent extent
until the interest in the thing and the interest in
the insurance policy are vested in the same
person. Thus, the contract is not rendered void
but is merely suspended [Sec. 20].
Exception:
1. Life, health, and accident insurance.
2. A change of interest in the thing insured
after the occurrence of an injury which
results in a loss does not affect the
policy [Sec. 21].
3. A change in the interest in one or more
of several things, separately insured by
one policy, such as a conveyance of
one or more things, does not affect the
policy with respect to the others not so
conveyed [Sec. 22].
4. A change of interest by will or
succession on the death of the insured.
His interest passes to his heir or legal
representative who may continue the
insurance policy on the property by
continuing paying premiums [Sec. 23].
5. A transfer of interest by one of several
partners, joint owners, or owners in
common, who are jointly insured, to the
others. This will avoid the policy only as
to the selling partners or co-owners,
but not as to others [Sec. 24].
6. Automatic transfers of interest in cases
in which the policy is so framed that it
will inure to the benefit of whosoever
In case of an express prohibition against
alienation in the policy [Art. 1306, NCC],
alienation will not merely suspend the contract
but avoid it entirely.
1. In Life/Health
Every person has an insurable interest in the
life and health:
a. Of himself, of his spouse and of his
children;
b. Of any person on whom he depends
wholly or in part for education or
support, or in whom he has a pecuniary
interest;
General Rule: For blood relationships,
no pecuniary relationship is needed.
The relationship suffices for family
members regardless of whether or not
financial interest exists.
Ratio: One would naturally protect the
life of his family member regardless of
whether
there
is
monetary
consideration. Good faith is presumed.
Exception: Relationships with lesser
degree of kinship (e.g., aunt, niece,
nephew, cousin). Pecuniary benefit is
essential. Relationships by affinity (inlaws) and gratitude and affection are
not deemed sufficient. There must be
actual pecuniary benefit.
c. Of any person under a legal obligation
to him for the payment of money, or
respecting property or services, of
which death or illness might delay or
prevent the performance; and
d. Of any person upon whose life any
estate or interest vested in him
depends [Sec. 10].
A person is not allowed to take out insurance
upon the life of a stranger [Carale].
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There is no insurable interest in the life of
an illegitimate spouse. A creditor may take
out insurance on the life of his debtor, but his
insurable interest is only up to the amount of
the debt, and only when the debt is unsecured
[Carale].
The Insurance Code does not expressly
provide the type of spouse, whether illegitimate
or legitimate. However, it can be presumed that
the provision refers to legitimate spouses,
based on Art. 195 of the Family Code on
support, as well as Art. 739, NCC on prohibited
donations.
On the insurable interest of children: the law
does not make any qualifications on the status
of the child. This is in accord with Art. 195 of
the Family Code.
Measure of Indemnity
General Rule: The measure of indemnity
under a policy of insurance upon life or health
is the sum fixed in the policy.
Exception: The interest of a person insured is
susceptible of exact pecuniary measurement
[Sec. 186].
a. Must be a pecuniary interest;
b. Exists whenever the relation between
the assured and the insured is such
that the assured has a reasonable
expectation of deriving benefit from the
continuation of the life insured or of
suffering
detriment
through
its
termination [De Leon].
General Rule: When the owner of the policy
insures the life of another, and designates a
third party as beneficiary, both the owner
and beneficiary must have an insurable
interest in the life of the cestui que vie.
Exception: An assignee of the insurance
contract is not required to have insurable
interest in the life of the insured, since insurable
interest over life should exist only during the
inception of the contract.
Note: An assignment of the insurance contract
is different from a change in the designated
beneficiary.
But if a person obtains a policy on the life of
another and names himself as the beneficiary,
he must have insurable interest therein [De
Leon].
a. In Life Insurance
iii. Beneficiary
Life insurance policies may be divided into two
general classes:
1. Insurance upon one’s life
2. Insurance upon the life of another
i. Interest in One’s Own Life
The cestui que vie is the insured himself. The
insured can designate anyone to be the
beneficiary of the policy.
Each person has unlimited interest in his own
life, whether the insurance is for the benefit of
himself or another [40 CJS 909].
The beneficiary designated need not have any
interest in the life of the insured when the latter
takes out policy on his own life [De Leon].
A beneficiary is the person named or
designated in a contract of life, health, or
accident insurance as the person who is to
receive the proceeds or benefits which become
payable, if the insured risk occurs.
General Rule: A person may designate a
beneficiary, irrespective of the beneficiary’s
lack of insurable interest, provided he acts in
good faith and without intent to make the
transaction merely a cover for a forbidden
wagering contract [De Leon].
Exception: Any person who is forbidden from
receiving any donation under Art. 739, NCC
cannot be named beneficiary of a life insurance
policy by the person who cannot make any
donation to him [Art. 2012, NCC].
ii. Interest in Life of Another
The insurable interest in the life of another:
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Art. 739, NCC. The following donations are void:
1. Those made between persons who
were
guilty
of
adultery
or
concubinage at the time of the
donation;
2. Those made between persons found
guilty of the same criminal offense,
in consideration thereof;
3. Those made to a public officer or his
wife, descendants and ascendants,
by reason of his office. (…)
iv. Changing the Beneficiary
General Rule: The insured shall have the right
to change the beneficiary he designated in the
policy [Sec. 11].
Exception: If the insured expressly waived his
right to change the beneficiary, this makes the
latter an irrevocable beneficiary. But despite
the waiver, he can still change the beneficiary,
provided he obtained the beneficiary’s consent
[Sec. 11].
Under the Slayer Statute, when the
beneficiary is the principal, accomplice or
accessory in willfully bringing about the death
of the insured, the interest of beneficiary in life
insurance policy is forfeited [Sec. 12].
v. Transfer of Policy
The life insurance policy can be transferred
whether the transferee has insurable interest or
not. Notice of the transfer to the insurer is not
required for the validity of the same [Secs. 184185].
There is no right of subrogation in life
insurance, because it is not a contract of
indemnity.
b. In Health Insurance
General Rule: Interest in the life or health of a
person must exist at the inception of the
insurance contract but need not exist thereafter
or when the loss occurs [Sec. 19].
interest disappears once the debt has
been paid;
2. In the case of a company’s insurance
taken on the life of an employee,
insurable interest disappears once the
employee leaves the company.
2. In Property
The following are considered as insurable
interest, provided that they are of such nature
that a contemplated peril might directly damnify
the insured:
Every interest in real or personal
property; or (e.g. Ownership)
Any relation thereto; or (e.g. Interest of
a trustee or a commission agent)
Any liability in respect thereof [Sec. 13]
(e.g. Interest of a carrier or depository
of goods)
A person has an insurable interest in property
when he sustains such relation with respect to
it that he has a reasonable expectation of:
a. Benefit to be derived from its continued
existence; or
b. Loss or liability from its destruction
[Carale; Gaisano Cagayan Ins. V. Ins.
Co. of North America, G.R. No. 147839
(2006)].
An insurable interest in property may consist in:
a. An existing interest [Sec. 14];
Existing interest in property may be a legal
title or equitable title [De Leon].
Examples of those having existing interest
are:
1. Owners as regards their properties,
2. A buyer in a perfected contract of
sale,
3. A carrier or depository [Sec 15],
4. A warehouseman [General Bonded
Warehouse Act],
5. Trustees in the case of the seller of
property not yet delivered,
6. Mortgagors over the property
mortgaged, and lessor, lessee and
sublessee over the property leased
[De Leon].
Exception:
1. In the case of a creditor’s insurance
taken on the life of the debtor, insurable
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b. An inchoate interest founded on an
existing interest [Sec. 14]; or
Inchoate interest in property exists but
is incomplete or unripe until the
happening of an event [De Leon].
Examples of inchoate interests are:
1. The interest of stockholders with
respect to dividends in case of
profits and shares in the assets,
and
2. The interest of a partner in the
properties belonging to the
partnership [De Leon].
c. An expectancy, coupled with an
existing interest in that out of which
the expectancy arises [Sec. 14].
- For example, a farmer who
planted crops has insurable
interest over his harvest which can
be expected [De Leon].
3. A change in interest by will or
succession upon the death of the
insured [Sec. 23];
4. A transfer of interest by one of several
partners, joint owners, or owners in
common who are jointly insured. The
acquiring co-owner has the same
interest; his interest merely increases
upon acquiring other co-owners
interest [Sec. 24].
Note: This makes a distinction between a
transfer in favor of a partner and in favor of a
stranger. The latter will avoid the policy while
the former will not [Carale].
Mere transfer of the property does not transfer
the policy but suspends it until the same person
becomes the owner of both the policy and the
thing insured [Sec. 20].
b. Measure of Indemnity
A mere contingent or expectant interest in
anything, not founded on an actual right to the
thing, nor upon any valid contract for it, is not
insurable [Sec. 16]. A son has no insurable
interest over the property of his father because
such is just a mere expectancy and has no
legal basis before he inherits such property
[Carale].
a. Time of Existence
General Rule: Interest in property insured
must exist both at inception and at time of loss,
but not in the intervening period [Sec. 19].
This means that the insurable interest in the
property must exist both at the inception of the
contract and at the time of the loss [Carale].
Exceptions:
1. A change in interest over the thing
insured after the loss contemplated.
The insured may sell the remains
without prejudice to his right to recover
[Sec. 21];
2. A change of interest in one or more
several distinct things, separately
insured by one policy. This does not
avoid the insurance as to the others
[Sec. 22].
Being a contract of indemnity, the measure of
insurable interest in property is the extent to
which the insured might be damnified by the
loss of injury thereof [Sec. 17].
The insured cannot recover a greater value
than that of his actual loss because it would be
a wagering policy contrary to public policy and
void.
A carrier or depository of any kind has an
insurable interest in a thing held by him as
such, to the extent of his liability but not to
exceed the value thereof [Sec. 15].
c. Interest in
Distinguished
Property
Property
and
Life
Life
Extent
Limited to actual Unlimited (save in life
value of the interest insurance effected by
thereon
a creditor on the life
of the debtor –
amount of debt only)
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Property
Life
Must exist when the
insurance
takes
effect and when the
loss occurs, BUT
need not exist in the
meantime
Must exist at the time
the insurance takes
effect, BUT need not
exist thereafter
Expectation of benefit to be derived
Must
basis
have
legal Need not have legal
basis
Interest of beneficiary
Must have insurable Need
not
have
interest over the insurable
interest
thing insured
over the life of the
insured if the insured
himself secured the
policy.
But if the
insurance
was
obtained
by
the
beneficiary, the latter
must have insurable
interest over the life
of
the
insured
[Sundiang; Aquino]
E. Double Insurance and Overinsurance
Double insurance exists where the same
person is insured by several insurers
separately in respect to the same subject and
interest [Sec. 95].
Requisites of double insurance:
a. The same person is insured;
b. Two or more insurers insuring
separately;
c. The same subject matter;
d. The same interest insured; and
e. The same risk or peril insured against
[Malayan Insurance v. Philippine First
Insurance, G.R. No. 184300 (2012)].
requires disclosure of other existing insurance
policy. In such case, non-disclosure will avoid
the policy. It is intended to prevent over
insurance and thus avert the perpetration of
fraud.
If there is double insurance and loss occurs:
a. Each of the insurers will be liable only
up to the face value of their respective
policies; and
b. The insured has the option of choosing
the order by which he will claim from
the insurers [Carale].
Over insurance occurs when the value of the
insurance exceeds the value of the insurable
interest.
Over insurance It is not per se void, however,
recovery is allowed only to the extent of the
loss or damage incurred by the insured
[Carale].
An insurer may cancel an insurance policy,
other than life, based on a “discovery of other
insurance coverage that makes the total
insurance in excess of the value of the property
insured,” subject to the requirement of prior
notice [Sec. 64(f)].
The insured is entitled to a ratable return of the
premium, proportioned to the amount by which
the aggregate sum insured in all the policies
exceeds the insurable value of the thing at risk
(in case of an over insurance by several
insurers other than life) [Sec. 83].
If there is over-insurance and loss occurs, then
the insurers will pay pro-rata or in the order as
stated in contract or excess clause.
Double Insurance
Over-insurance
Amount of insurance
may or may not
exceed the value of
the
insured’s
insurable interest
Amount of insurance
exceeds the value of
the
insured’s
insurable interest
Double insurance is not prohibited under the
There are always There may be one or
law unless the policy contains a stipulation to
several insurers
more insurers
the contrary. Usually, insurance policies
contain other insurance clause, which
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Rules for Payment
Where the insured in a policy other than life is
over insured by double insurance:
a. The insured, unless the policy
otherwise
provides,
may
claim
payment from the insurers in such
order as he may select, up to the
amount for which the insurers are
severally liable under their respective
contracts;
b. Each insurer is bound, as between
himself and the other insurers, to
contribute ratably to the loss in
proportion to the amount for which he
is liable under his contract [Sec. 96].
Rules for claiming payment under Valued
Policies vs. Unvalued Policies [Sec. 96]
Valued Policy
Unvalued policy
Any sum received by
him under any other
policy
shall
be
deducted from the
value of the policy
without regard to the
actual value of the
subject
matter
insured
Any sum received by
him under any policy
shall be deducted
against
the
full
insurable value for
any sum received by
him under any policy
Where the insured receives any sum in
excess of the valuation (for valued policies),
or of the insurable value (for unvalued
policies), the insured must hold such sum in
trust for the insurers, according to their right
of contribution among themselves
Sec. 96 enunciates the principle of contribution
which requires each insurer to contribute
ratably to the loss or damage considering that
the several insurances cover the same subject
matter and interest against the same peril. If
the loss is greater than the sum of all the
policies issued, each insurer is liable for the
amount of his policy.
4. Multiple or Several Interests on
Same Property
the person in whose name or for whose benefit
it is made.
Exception: It is otherwise specified in the
policy [Sec. 53].
Examples wherein multiple persons may each
have insurable interest over the same property:
a. Corporations — the corporation and its
stockholders have insurable interest
over the corporate assets.
b. Partnerships — the partnership and the
partners composing it have insurable
interest over its assets.
c. Assignments — the assignor and
assignee have insurable interest over
the property assigned.
d. Trusts — the trustor and trustee have
insurable interest over the property in
trust.
e. Lease Agreements — the lessor,
lessee and sub-lessees have insurable
interest over the property in lease.
f. Mortgages — the mortgagor and
mortgagee/s have insurable interest
over the property mortgaged.
F. No Fault, Suicide,
Incontestability Clauses
and
a. No Fault Clause
The “no fault” clause connotes that the victim
of a tort can recover for his loss from his insurer
without regard to his own contributory fault or
the fault of the tortfeasor. This is to guarantee
compensation or indemnity to persons
suffering loss in motor vehicle accidents
[Campos].
Its essence is in seeking to provide victims of
vehicular accidents or their heirs immediate
compensation, although in a limited amount,
pending final determination of who is
responsible for the accident and liable for the
victims’ injuries or death [Campos].
General Rule: The insurance proceeds shall
be applied exclusively to the proper interest of
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i. Multiple
Property
COMMERCIAL LAW
Interests
over
Mortgaged
The Insurance Code recognizes that both the
mortgagor and mortgagee have each separate
and distinct insurable interest in the mortgaged
property. They may take out separate policies
with the same or different insurance
companies. Insurance taken by one on his own
name only, does not inure to the benefit of the
other [Sec. 53].
Thus, a mortgagor has an insurable interest
equal to the value of the mortgaged property
and a mortgagee, only to the extent of the debt
secured by the mortgage [Geagonia v. CA,
G.R. No. 114427(1995)].
Mortgagor
Mortgagee
As
owner,
the Only to the extent of
interest is to the the debt secured
extent of the value of
the
property,
regardless
of
whether it equals to
the mortgage debt or
not
His interest lies in
that the loss or
destruction of the
property will not
extinguish
his
mortgage debt
What is insured is not
the property, but his
interest
as
mortgagee,
which
subsists until the
mortgage debt is
extinguished
[Carale].
When mortgagee takes out insurance
policy
a. When a mortgagee insures his own
interest in the mortgaged property
without reference to the right of the
mortgagor, the mortgagee is entitled to
the proceeds of the policy in case of
loss to the extent of his credit [De
Leon].
b. If the proceeds are more than the total
amount of credit, then the mortgagee
has no right to the excess.
c. If the proceeds are equal to the credit,
then the insurer is subrogated to the
mortgagee’s rights and the mortgagee
can no longer recover the mortgagor’s
indebtedness.
d. If the proceeds are less than the credit,
then the mortgagee may recover from
the mortgagor the deficiency. Upon
payment, the insurer is subrogated to
the rights of the mortgagee against the
mortgagor to the extent of the amount
paid.
When a mortgagee insured his own interest
and a loss occurs, he is entitled to recover on
the insurance. The mortgagee, however, is not
allowed to retain his claim against the
mortgagor, but it passes by subrogation to the
insurer, to the extent of the insurance money
paid [Palileo v. Cosio, G.R. No. L- 7667
(1955)].
When a mortgagor takes out an insurance for
his own benefit, only he can recover from the
insurer but the mortgagee has a lien on the
proceeds by virtue of the mortgage. A
mortgagor can make the proceeds payable to
or assigned to the mortgagee [De Leon].
Ways where a mortgagee may be the
beneficial payee:
a. As assignee with the consent of the
insurer
b. A pledge without such consent;
c. The original policy may contain a
mortgage clause;
d. A rider making the policy payable to the
mortgagee “as his interest may appear”
may be attached;
e. A “standard mortgage clause,”
containing a collateral independent
contract between the mortgagee and
the insurer may be attached;
f. The policy, though by its terms payable
absolutely to the mortgagor, may have
been procured by a mortgagor under a
contract duty to insure for the
mortgagee's benefit [Geagonia v. CA,
G.R. No. 114427 (1995)].
ii. Open Loss Payable Mortgage Clause
An open loss payable clause states that the
proceeds of the insurance contract is payable
to the mortgagee as beneficiary.
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The contract, however, is procured by the
mortgagor for his interest in the property. He is
the party to the contract, not the mortgagee.
The acts of the mortgagor prior to the loss,
which would otherwise avoid the insurance,
affects the mortgagee, even if the property is in
the hands of said mortgagee.
3. Union Mortgage or Standard Mortgage
Clause
A standard or union mortgage clause makes a
separate and distinct contract of insurance on
the interest of the mortgagee, thus any act of
the mortgagor will not affect the mortgagee
[Carale].
This clause is like an open loss payable clause,
except that it is stipulated that the acts of the
mortgagor cannot invalidate the insurance,
provided that if the mortgagor fails to pay the
premiums due, the mortgagee shall, on
demand, pay said premiums [De Leon].
b. Suicide Clause
[See IV. Classes, E. Life, 3. Risks, b) Suicide,
p. 16]
c. Incontestability Clause
[See VIII. Rescission of Insurance Contracts,
A. Concealment, 7. Incontestability Clause, p.
35]
II. Perfection of the
Insurance Contract
1. Offer and
Acceptance/Consensuality
An insurance contract is consensual, it is
therefore perfected by mere consent. Consent
is manifested by the meeting of the offer and
the acceptance upon the object or the cause
which are to constitute the contract.
There is an offer when the insured submits an
application to the insurer. There is acceptance
when the insurer approves the application.
So long as an application for insurance has not
been either accepted or rejected, it is merely a
proposal or an offer to make a contract [Perez
v. CA, G.R. No. 112329 (2000)].
The insurance contract becomes effective
upon payment of first premium, provided there
has been an approval of the application.
The parties may impose additional conditions
precedent to the validity of the policy as a
contract as they see fit. Usually, it is stipulated
in the application that the contract shall not
become binding until the policy is delivered and
the first premium is paid [De Leon].
Cognition Theory: An acceptance made by
letter shall not bind the person making the offer,
except from the time it came to his knowledge.
In Enriquez v. Sun Life Assurance Co. [G.R.
No. L-15895 (1920)] the Court held that:
a. The submission of an application, even
with premium payment is a mere offer
on the part of the applicant, and does
not bind the insurer;
b. An insurance contract is also not
perfected where the applicant dies
before the approval of his application or
it does not appear that the acceptance
of the application ever came to the
knowledge of the applicant.
a. Delay in Acceptance
Delay in acting on the application does not
constitute acceptance even though the insured
has forwarded his first premium with his
application [Perez v. CA, G.R. No. 112329
(2000)].
When there is delay in acceptance due to the
negligence of the insurance company which
takes unreasonably long time before the
application is processed and the applicant dies,
the contract is not perfected.
The insurer can be liable for damages in
accordance with the “tort theory:” An
insurance contract is imbued with public
interest. Thus, the insurer should act on an
application for insurance within a reasonable
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time, otherwise the applicant loses the
opportunity to obtain insurance from other
sources. Unreasonable delay in the
acceptance or rejection of these applications
can constitute negligence under Art. 2176 of
the Civil Code.
An acceptance made by letter shall bind the
person making the offer from the date it came
to his knowledge [Enriquez v. Sun Life, 41 Phil.
269 (1920)].
The insurance business is imbued with public
interest; thus, it is the duty of the insurer to act
with reasonable promptness in acting on
applications submitted to it [Wallace v. Hartford
Fire Insurance Co, 31 Idaho 48r (1918)].
b. Delivery of Policy
Delivery is the act of placing the insurance
policy (i.e. the physical document) into the
possession of the insured.
The delivery can be proof of the acceptance of
the insurer of the offer of the insured.
It is not, however, a pre-requisite of a valid
contract of insurance.
Note: Actual manual delivery is not necessary
[Vda. De Sindayen v. Insular Life, 62 Phil 51
(1935)].
Delivery to the agent cannot be considered
delivery to the insured, as the agent of the
insurance company is not the agent of the
insured [Bradley v. New York Life Ins., 275 F.
657 (1921)].
Exceptions:
a. Whenever the grace period provision
applies in the case of a life or an
industrial life policy [Sec. 77].
b. Whenever under the broker and
agency agreements with duly licensed
intermediaries, a 90-day credit
extension is given.
Note: No credit extension to a duly
licensed intermediary should exceed
90 days from the date of issuance of
the policy [Sec. 77].
c. When there is an acknowledgment in
the contract that the premium has been
paid [Sec. 79].
d. Payment to an agent [South Sea
Surety v. CA 244 SCRA 744 (1995);
Arreola v. CA 236 SCRA 643 (1994)].
Now included In Section 315 of the
Insurance Code [American Home
Assurance v. Chua 309 SCRA 250
(1999)].
e. Credit Extension [UCPB General
Insurance v. Masagana 356 SCRA 307
(2001)].
Jurisprudence decided before the enactment of
RA 10607 has provided two further exceptions:
a. Agreement to grant payment of
premium in installment basis and
partial payment has been made
[Makati Tuscany v. CA, G.R. No. 95546
(1992)].
b. When parties are barred by estoppel
[UCPB v. Masagana Telemart, G.R.
No. 137172 (2001)].
a. Authority of Agent to Receive
Premium
2. Premium Payment
An insurance premium is the agreed price for
assuming and carrying the risk, i.e. the
consideration paid to an insurer for undertaking
to indemnify the insured against the specified
peril.
General Rule: No insurance policy issued or
renewal is valid and binding until actual
payment of the premium. Any agreement to
the contrary is void [Sec. 77].
Where an insurer authorizes an insurance
agent or broker to deliver a policy to the
insured, it is deemed to have authorized said
agent to receive the premium on its behalf.
The insurer is bound by its agent’s
acknowledgement of receipt of payment of
premium [American Home Assurance Co. v.
Chua, G.R. No. 130421 (1999)].
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b. Payment by Post-Dated Check
d. Non-Default Options in Life Insurance
The payment of premium by a postdated check
at a stated maturity subsequent to the loss is
insufficient to put the insurance into effect.
In the case of individual life or endowment
insurance, the policy shall contain a provision
specifying the options to which the policyholder
is entitled to in the event of default in a premium
payment after three (3) full annual premiums
shall have been paid [Sec. 233(f)].
But payment by a check bearing a date prior
to the loss, assuming availability of funds,
would be sufficient, even if it remains
unencashed at the time of the loss. The
subsequent effects of encashment would
retroact to the date of the instrument and its
acceptance by the creditor [Vitug].
Such option shall consist of:
• A cash surrender value payable upon
surrender of the policy which shall not
be less than the reserve on the policy.
c. Non-Payment of Premium
1. Effects
a. Prevents the contract from becoming
binding, unless waived [Philippine
Phoenix Surety and Insurance v.
Woodworks, G.R. No. L-25317 (1979)].
b. Does not affect the validity of the
contracts
unless,
by
express
stipulation, it is provided that the policy
shall, in that event, be suspended or
shall lapse.
2. Applicable Grace Periods
In case of individual life insurance, the policy
holder is entitled a grace period of either 30
days or one month within which payment of any
premium after the first may be made [Sec. 233].
In cases of industrial life insurance, the grace
period is four weeks, and where premiums are
paid monthly, either 30 days or one month
[Sec. 236].
3. Excuses for Non-Payment
a. Fortuitous events which render
payment by the insured wholly
impossible will not prevent forfeiture of
the policy when the premium remains
unpaid. In other words, it is not an
excuse.
b. Non-payment of premiums occasioned
by war causes an insurance to be not
merely suspended, but completely
abrogated [Constantino v. Asia Life
Ins. Co. G.R. No. L-1669 (1950)].
The basis of which shall be indicated,
for the then current policy year; and
Any dividend additions thereto, shall be
reduced by a surrender charge, which
shall not be more than one-fifth (1/5) of
the entire reserve or two and one-half
percent (2½%) of the amount insured
and any dividend additions thereto
•
One or more paid-up benefits on a plan
or plans specified in the policy of such
value as may be purchased by the cash
surrender value [Sec. 233(f)].
1. Cash Surrender Value (CSV)
The CSV is the amount that the insured is
entitled to receive if he surrenders the policy
and releases his claims upon it.
a. The right to CSV accrues only after
three full annual premium payments.
b. The insured is given the right to claim
the amount less than the reserve,
reduced by surrender charge [Sec.
233(f)(1)].
The CSV is an amount which the insurance
company holds in trust for the insured to be
delivered to him upon demand. When the
company’s credit for advances is paid out of the
cash value or cash surrender value, that value
and the company’s liability is diminished
[Manufacturer’s Life Ins. v. Meer, G.R. No. L2910 (1951)].
Ratio: The premium is uniform throughout a
lifetime, but the risk is varied (i.e. higher risk
when older, lower when young). Thus, the cost
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of protection is more expensive during the early
years of the policy.
In effect, the insurance policy continues in
force for a period covered by the payment.
2. Alternatives to CSV
After the period, if the insured still does not
resume paying his premiums, the policy
lapses, unless CSV still remains. If there is still
CSV, APL continues until CSV is exhausted.
Extended Insurance / Term Insurance
This is where the insured, after having paid
three full annual premiums, is given the right
to have the policy continued in force from date
of default for a time either stated or equal to the
amount of the CSV, taken as a single premium.
The face value of the policy remains the same
but only within the term.
If death occurs during this period, the
beneficiary can recover the face value of the
policy, but if the insured survives, the
beneficiary gets nothing.
Reinstatement is allowed if made within the
term purchased; no reinstatement after the
lapse of the term purchased.
Paid-up insurance
This is where, after the insurance is “paid-up,”
the insured who has paid three full annual
premiums is given the right, upon default, to
have the policy continued from the date of
default for the whole period of insurance
without further payment of premiums.
It is also called “reduced paid-up'' because, in
effect, the policy, terms, and conditions are the
same but the face value is reduced to the “paidup” value.
The terms and conditions of the original policy
remain the same, however, the amount will be
less than the original face value.
Automatic premium loan (APL)
This is where, upon default, the insurer lends
or advances to the insured without any need of
application on his part, the amount necessary
to pay overdue premium, but not to exceed the
CSV of the policy.
It only applies if requested in writing by the
insured either in the application or at any time
before expiration of the grace period.
e. Reinstatement of a Lapsed Policy of
Life Insurance
In the case of individual life or endowment
insurance, the policy shall contain a provision
that the policyholder shall be entitled to have
the policy reinstated:
1. At any time within three (3) years from
the date of default of premium payment
a. Unless the cash surrender
value has been duly paid
b. Unless the extension period
has expired
2. Upon production of evidence of
insurability
satisfactory
to
the
company; and
3. Upon payment of all overdue premiums
and any indebtedness to the company
upon said policy, with interest rate not
exceeding that which would have been
applicable to said premiums and
indebtedness in the policy years prior
to reinstatement [Sec. 233(j)].
Reinstatement of a lapsed life insurance policy
is NOT a non-default option. It does not create
a new contract, but merely revives the original
policy so the insurer cannot require a higher
premium than the amount stipulated in the
contract. It does not apply to group/industrial
life insurance.
Requisites [Sec. 233(j)]:
• It must be exercised within three years
from date of default;
• The insured must present evidence of
insurability satisfactory to the insurer;
• He must pay all back premiums and all
indebtedness to the insurer (with
interest);
• The CSV must not have been duly paid
to the insured nor the extension period
expired;
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The application must be filed during the
insured’s lifetime [Andres v. Crown Life
Ins., G.R. No. L-10874 (1958)].
f. Refund of Premiums
Return of premiums can be made in the
following cases:
1. If the thing insured was never exposed
to the risks insured against, the whole
premium should be refunded [Sec.
80(a)].
2. When the contract is voidable due to
the fraud or misrepresentation of the
insurer or his agent, the whole
premium should be refunded [Sec. 82].
3. When by any default of the insured
other than actual fraud, the insurer
never incurred any liability under the
policy and the whole premium should
be refunded [Sec. 82].
4. When the contract is voidable because
of the existence of facts of which the
insured was ignorant without his fault,
the whole premium should be refunded
[Sec. 82].
5. Where the insurance is for a definite
period and the insured surrenders his
policy, to such portion of the premium
as corresponds with the unexpired time
at a pro rata rate, unless a short period
rate has been agreed upon and
appears on the face of the policy, the
premium should be returned [Sec.
80(b)].
6. When there is over-insurance by
several insurers, the return premiums
should be proportioned to the amount
by which the aggregate sum insured in
all the policies exceeds the insurable
value of the thing at risk [Sec. 83].
7. When rescission is granted due to the
insurer’s breach of contract.
III. Rights and Obligations
of Parties
A. Insurer
The party who assumes or accepts the risk of
loss and undertakes for a consideration to
indemnify the insured or to pay him a certain
sum on the happening of a specified
contingency or event;
An insurer may be:
(1) A foreign or domestic company or
corporation; or
(2) A partnership or an association
Insurance Corporations are corporations
formed or organized:
1. To save any person or persons or other
corporations
harmless
from
loss,
damage, or liability from any unknown or
future or contingent event, or
2. To indemnify or to compensate any
person or persons or other corporations
for any such loss, damage, or liability, or
3. To guarantee the performance of, or
compliance with, contractual obligations
or the payment of debt of others.
An Insurance Corporation must have:
1. Sufficient Capital and assets required
under the Insurance Code and pertinent
regulations issued by the Commission;
and
2. A Certificate of Authority to operate
issued by the Insurance Commission
which should be renewable every 3
years. (New Insurance Code, Sec. 193)
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Rights
●
●
●
●
Right to receive ●
premium
payment (Sec.
77)
Right
to
be
subrogated
to
the rights of the ●
insured
upon
payment of the
claim (Art. 2207,
Civil Code)
Right to cancel
the
non-life
insurance policy
in cases covered
by Sec. 64
Right
not
to
renew the nonlife
insurance
policy provided
notice is given at
least 45 days in
advance
(sec.
66)
On Subrogation
●
●
●
●
COMMERCIAL LAW
Obligations
To
obtain
a
certificate
of
authority
from
the office of the
Insurance
Commission
Honor
the
insurance policy
and
promptly
settle the claim
(within 60 days in
case of policy
payable
upon
death, or within
30 days in case
of NL policy; See
Sec. 248 and
249)
●
If the insurance company, however,
has already recovered the amount it
paid from its reinsurer, it has no more
right of subrogation. [Pioneer v. CA,
175 SCRA 668 (1989)]
B. Insured
The person in whose favor the contract is
operative and who is indemnified against or is
to receive a sum upon the happening of a
specified event.
Requisites in Order that a Person May Be
Insured Under a Contract of Insurance:
(CIP) (Insurance Code, Sec. 3)
1. He must be competent to enter into a
contract;
2. He must possess an insurable interest in
the subject of the insurance; and
3. He must not be a public enemy (citizen or
subject of a country with whom the
Philippines is at war) (Insurance Code,
Sec. 7)
Rights
● Right
to
be ●
Insurance company which has paid the
indemnified by
insured is subrogated to the rights of
the insurer
●
the insured as against the wrongdoer.
● Right to change
If the amount paid by the insurance
beneficiary
in ●
company does not fully cover the injury
Life
Insurance
or loss, aggrieved party can recover
when
the deficiency from the person who
designation
is
caused the loss or injury. (Art. 2207,
revocable
Civil Code)
● Right to grace
Insurer steps into the shoes of the
period in Life
insured and becomes entitled to claim
Insurance
whatever the insured can claim from
● Non-default
the third party responsible for the loss.
options in Life
If the insured did not file a notice of loss
Insurance
with the carrier within the time
● Right to reinstate
prescribed by law, no right would be
subject to certain
subrogated to the insurer despite its
conditions
payment to the insured. [Federal
● Right to refund of
Express v. American Home, 473 SCRA
premium (Sec.
50 (2004)]
80-83)
If the insured releases the party at fault,
● Right to abandon
insurer can no longer have the right of
in
case
of
subrogation. [Manila Mahogany v. CA,
constructive total
164 SCRA 652 (1957)]
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Obligations
To
pay
the
premium
To
disclose
material facts
To comply with
representations
and warranties
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COMMERCIAL LAW
Rights
●
Obligations
loss in marine
insurance
Right to assign
Effect of
Contracts
War
on
C. Beneficiary
Person designated to receive proceeds of
policy when risk attaches since it is possible
that the insured may assign the proceeds of the
insurance to someone else.
Existing
Insurance
1. Property Insurance
An insurance policy ceases to become valid
and enforceable as soon as the insured
becomes a public enemy.
However, premium paid by the insured (public
enemy) shall be returned by the insurer
(Filipinas Compania de Seguros v. Christern
Huenefield & Co., G.R. No. L-2294, 1951)
2. Life Insurance
The contract is abrogated but the insured is
entitled to the case or reserve value of the
policy (if any), which is the excess of the
premiums paid over the actual risk carried
during the years when the policy had been in
force (Constantino v. Asia Life Insurance, G.R.
No. L-1669, 1950)
Note: Where the loss occurs after the end of
the war, the contract is not revived.
Rule on Married Persons
The consent of the spouse is not necessary for
the validity of an insurance policy taken out by
a married person on his or her life or that or his
or her children (Insurance Code, Sec. 3, 2) or
that of her husband (Insurance Code, Sec. 10)
She may also take out insurance on her
paraphernal or separate property, or on
property given to her by her husband (Harding
v. Commercial Union Assurance, G.R. No. L12707, 1918)
Note: Family Code, Art. 73: While either
spouse may exercise any legitimate activity
without the consent of the other, the latter may
object on valid, serious, and moral grounds.
Note: There are only two parties to a contract
of insurance, the insured and the insurer. The
beneficiary is NOT a party to the contract
unless he is the party to be insured.
IV. Rescission of Insurance
Contracts
1. Concealment
Concealment is the failure to disclose facts
which the applicant, at the time of application,
knows or ought to know and are material to the
insurance applied for [Carale].
A neglect to communicate that which a party
knows and ought to communicate, is called a
concealment [Sec. 26].
A concealment, whether intentional or
unintentional, entitles the injured party to
rescind a contract of insurance [Sec. 27].
Ratio: The contract of insurance is one of
perfect good faith (uberrimae fides) not for the
insured alone, but equally for the insurer [Qua
Chee Gan v. Law Union & Rock Insurance,
G.R. No. L-4611(1955)].
Four primary concerns of parties to an
insurance contract
a. Correct estimation of risk – wherein the
insurer will assume the risk
b. Precise delimitation of the risk – to
determine the duty to pay of insure
c. Control of risk by insurer – to guard
against the increase of risk and change
of conditions, and
d. Determining whether loss occurred,
and if so, the amount of loss
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Five devices for ascertaining and
controlling risk and loss i.e. Risk Limiting
Devices
a. Concealment and representations –
developed to enable the insurer to
secure the same information from the
applicant so that he can form a just
estimate of its quality
b. Warranties and conditions – created to
make more definite the general words
to describe the risk as to designation of
specific property interest to be covered
and the specification of the perils
c. Exception – also makes more definite
the coverage by excluding certain
specified risks that otherwise would
have been included under the general
language
d. Executory warranties and conditions –
conditions that should no longer exist in
the future, otherwise, the insurer can
rescind the contract because he is no
longer to bear the risk
e. Conditions precedent – used by the
insurer to protect himself from
fraudulent claims of loss
a. Duty to Communicate by the Insured
Each party to a contract of insurance must
communicate to the other, in good faith, all
facts within his knowledge:
1. Which are material to the contract;
2. As to which he makes no warrant; and
3. Which the other has not the means of
ascertaining [Sec. 28].
An intentional or fraudulent omission, on the
part of one insured, to communicate
information of matters proving or tending to
prove the falsity of a warranty, entitles the
insurer to rescind [Sec. 29].
Note: If the applicant is aware of the existence
of some circumstance which he knows would
influence the insurer in acting upon his
application, good faith requires him to disclose
that circumstance, though unasked [Vance].
b. Matters which Need Not be Disclosed
1. Matters already known to the insurer
[Sec. 30(a)];
2. Matters which each party are bound to
know [Sec. 30(b) and Sec. 32];
3. Matters of which the insurer waives
communication [Sec. 30(c) and Sec.
33];
4. Matters which prove or tend to prove
the existence of a risk excluded by a
warranty and which are not otherwise
material [Sec. 30(d)];
5. Matters which relate to a risk excepted
in the policy, and which are not
otherwise material [Sec. 30(e)];
6. Information of the nature or amount of
the interest of one insured unless if
inquired upon by the insurer, except if
required by Sec. 51 [Sec. 34];
7. Matters of opinion [Sec. 35].
Each party to a contract of insurance is bound
to know all the general causes which are open
to his inquiry, equally with that of the other, and
which may affect the political or material perils
contemplated; and all general usages of trade
[Sec. 32].
c. Requisites
1. A party knows a fact which he neglects
to communicate or disclose to the
other;
2. Such party concealing is duty bound to
disclose such fact to the other;
3. Such party concealing makes no
warranty of the fact concealed;
4. The other party has not the means of
ascertaining the fact concealed;
5. The fact concealed is material.
Failure of the insured to disclose conditions
affecting the risk, of which he is aware, makes
the contract voidable at the insurer’s option, the
ratio being that a contract of insurance is of
good faith.
However, Sec. 27 uses the phrase “injured
party;” thus, the insured may also rescind the
contract.
Concealment may be committed by either the
insurer or the insure [Qua Chee Gan v. Law
Union & Rock Ins. Co. G.R. No. L-4611(1955)].
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d. Proof of Fraud in Concealment
General Rule: Fraud need not be proven in
order to prove concealment. Good faith is not a
defense [Saturnino v. Phil. American Life
Insurance, G.R. No. L-16163 (1963)].
Exception: When the concealment is made by
the insured in relation to the falsity of a
warranty, the non-disclosure must be
intentional and fraudulent in order that the
contract may be rescinded [Sec. 29].
Ratio: The insured is under no obligation to
reveal things of which he makes a warrant
because it would constitute a superfluity of
disclosure [Carale].
e. Test of Materiality
The test of materiality is whether the insurer
would have agreed to issue the policy had it
known of the facts concealed or, perhaps,
impose additional terms or require higher
premium [Carale].
Materiality relates to the probable and
reasonable influence of the facts upon the
party to whom the communication should have
been made, in:
1. Assessing the risk involved;
2. Making or omitting to make further
inquiries; and
3. Accepting the application for insurance
[Sec. 31].
Exceptions:
1. Concealment after the contract has
become
effective,
because
concealment must take place at the
time the contract is entered into in order
that the policy may be avoided [Vance];
2. Waiver or estoppel;
3. In
marine
insurance,
where
concealment of the following matters
does not vitiate the entire contract, but
merely exonerates the insurer from a
loss resulting from the risk concealed:
a. The national character of the
insured;
b. The liability of the thing insured
to capture and detention;
c. The liability to seizure from
breach of foreign laws of trade;
d. The want of necessary
documents; and
e. The use of false and simulated
papers [Sec. 112].
4. Incontestability clause: stipulates that
the policy shall be incontestable after
two years from its date of issue or of its
last reinstatement. The incontestability
clause is a mandatory provision in life
and endowment policies [Sec. 233 (b)
and Sec. 48].
g. Incontestability Clause
In the case of individual life or endowment
insurance, the policy shall contain a provision
that the policy shall be incontestable.
The test is the effect which the knowledge of
the fact in question would have on the contract.
It is sufficient if the knowledge of it would
influence the party in making the contract [De
Leon].
After it shall have been in force during the
lifetime of the insured for a period of two (2)
years from its date of issue as shown in the
policy, or date of approval of last reinstatement
[Sec. 233(b)].
In several cases, the cause of death may have
no relation to the fact or facts concealed
[Carale].
Exceptions:
1. Non-payment of premium
2. Violation of the conditions of the policy
relating to military or naval service in
time of war [Sec. 233(b)]
f. Effects
General Rule: Concealment vitiates the
contract and entitles the insurer to rescind,
even if the death or loss is due to a cause not
related to the concealed matter [Sec. 27].
Effect
The insurer cannot prove that the policy is void
ab initio or is rescindable by reason of the
fraudulent concealment or misrepresentation
of the insured or his agent:
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1. After a policy of life insurance made
payable on the death of the insured
shall have been in force during the
lifetime of the insured for a period of
two (2) years from the date of its issue
or of its last reinstatement [Sec. 48]
2. The insurer’s right to rescind a contract
is not exercised previous to the
commencement of an action on the
contract [Sec. 48].
The incontestability clause is made for the
benefit of the insured, and not the insurer,
considering that its effect and purpose is to cut
off, after a considerable period, any assertion
that the policy is invalid.
Defenses,
other
than
concealment,
misrepresentation and breach of warranty are
still available to the insurer, subsequent to the
2-year period [Carale].
Grounds still available:
1. Non-payment of premium to make the
policy effective or remain in force
2. Lack of insurable interest
3. Coverage such that the loss/damage
did not arise from the risks covered
4. Violation of military or naval service
provisions of the policy (also an issue
of coverage)
5. Failure to commence action within
reglementary period
6. Failure to comply with conditions (proof
of loss, etc.) after the loss; or
7. The viciousness of the fraud employed
by the insured to procure the contract,
such as:
Where the policy was taken
pursuant to a scheme to murder the
insured, or
the insured substitutes himself with
another during the medical
examination.
h. Concealment in Marine and Ordinary
Private Insurance Distinguished
Marine
Insurance
Required
Disclosure
Ordinary
Insurance
Exact
and Substantial
whole truth
truth
Effect of
Concealment
Concealment of the matters
specified
in
Sec. 112 will
not
entirely
avoid
the
contract but
will
merely
exonerate the
insurer from
losses
resulting from
the
risk
concealed.
i.
Concealment
Insurance
in
Any kind of
concealme
nt will make
the insurer
not liable.
Non-Medical
The cause of death is not important because it
is well settled that the insured need not die of
the disease he had failed to disclose to the
insurer. It is sufficient that his nondisclosure
misled the insurer in forming his estimates of
the risks of the proposed policy or in making
inquiries [Sunlife v. Sps. Bacani G.R. No.
105135 (1995)].
Where matters of opinion or judgment are
called for, answers made in good faith and
without intent to deceive will not avoid the
policy even though they are untrue. The reason
for this is because the insurer cannot simply
rely on those statements; he must make further
inquiry [Philamcare Health Systems v. CA,
G.R. No. 125678 (2002)].
2. Misrepresentation/Omissions
Representations are factual statements made
by the insured at the time of, or prior to, the
issuance of the policy, which give information
to the insurer and induce him to enter the
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insurance contract. It may be about a past, an
existing fact, or a future happening [Carale].
b. Kinds
1. Affirmative
A representation:
a. May be oral or written [Sec. 36].
b. May be made at the time of or before,
the issuance of the policy [Sec. 37].
c. May be altered or withdrawn before the
insurance is effected, but not
afterwards [Sec. 41].
d. Must be presumed to refer to the date
on which the contract goes into effect
[Sec. 42].
Misrepresentation is a false representation
which the insured states with knowledge that is
untrue, intended to deceive the insurer into
accepting risk. It can be distinguished from
concealment in a sense that it is an active form
of deception, while concealment is the passive
form thereof [Carale].
Just like concealment, misrepresentation is
committed before or at the time of the
commencement of the insurance contract.
After this time, an insured may no longer be
guilty of misrepresentation as the insurer had
already been persuaded to assume the risk
[Carale].
There is no false representation if the matter is
true at the time the contract takes effect
although false at the time it was
made/represented.
a. Requisites of misrepresentation
1. The insured stated a fact which is
untrue;
2. Such fact was stated with knowledge
that it is untrue and with intent to
deceive or which he states positively as
true without knowing it to be true and
which has a tendency to mislead;
3. Such fact in either case is material to
the risk.
Like in concealment, fraud or intent is not
essential to entitle the insurer to rescind on the
ground of misrepresentation [Sec. 45].
This refers to any allegation as to the existence
or non-existence of a fact when the contract
begins [De Leon].
2. Promissory
This refers to any promise to be fulfilled after
the contract has come into existence, or any
statement concerning what is to happen during
the existence of the insurance [Sec. 39]. A
promissory representation is substantially a
condition or warranty [De Leon].
c. Test of Materiality
The materiality of a representation is
determined by the same rules as the materiality
of a concealment [Sec. 46].
Materiality is a judicial question and not left to
the insurance company’s sole discretion.
d. Effects
General Rule: The injured party is entitled to
rescind from the time when the representation
becomes false [Sec. 45].
Exceptions:
1. Incontestability clause;
2. Misrepresentation after contract takes
effect;
3. Waiver, made by acceptance of insurer
of
premium
payments
despite
knowledge of the ground for rescission
[Sec. 45];
4. A representation of the expectation,
belief, opinion, or judgment of the
insured, although false, and even if
material to the risk [Philamcare Health
Systems, Inc. v. CA, G.R. No. 125678
(2002)];
5. Representation by insured based on
information obtained from third persons
(not his agent), provided the insured:
a. Has no personal knowledge of
the facts;
b. Believes them to be true; and
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c. Explains to the insurer that he
does so on the information of
others;
6. A misrepresentation as to age does not
constitute a ground for rescission. If the
age of the insured was considered in
determining the premium and the
benefits under the policy and the age is
misstated, the amount payable for the
policy shall be as if the policy was
purchased at the correct age [Sec.
233(d); Carale].
A representation cannot qualify an express
provision or an express warranty of insurance
[Sec. 40] because a representation is not part
of the contract but only a collateral inducement
to it. However, it may qualify as an implied
warranty.
It is sufficient that the representation is
substantially or materially true, and in case of
promissory representation, it is sufficient that it
is substantially complied with [Carale].
The insurer is not entitled to rescission for
misrepresentation of age if the birth date on the
policy leads to the conclusion that the insured
is beyond the age covered. Insurer is deemed
estopped [Edillon v. Manila Bankers Life, G.R.
No. L-34200 (1982)].
Despite not answering the questions and
keeping blank certain questions in the
application regarding ailments he has suffered,
when the insured signed the pension plan
application,
he
adopted
the
written
representations and declarations embodied in
as his own. Therefore, it is clear from these
representations that he concealed his chronic
heart ailment and diabetes [Florendo v. Philam
Plans, G.R. No. 186983 (2012)].
e. Concealment vs. Misrepresentation
Concealment
Misrepresentation
Who may commit
May be committed Committed
by either insured insured
or insurer
only
by
Concealment
Misrepresentation
Passive form
Active form
Insured
withholds
information
of
material facts from
the insurer; he
maintains silence
when he ought to
speak
Insured
makes
erroneous statements
of facts with the intent of
inducing the insurer to
enter into the insurance
contract
Materiality
Determined by the same rules
Effects
Same effects on the part of the insured;
insurer has right to rescind
Injured party is entitled to rescind a contract
of insurance on the ground of concealment
or false representation, whether intentional
or not.
3. Breach of Warranties
A warranty is a statement or promise by the
insured set forth in the policy itself or
incorporated in it by proper reference, the
untruth or nonfulfillment of which in any respect
and without reference to whether the insurer
was in fact prejudiced by such untruth or nonfulfillment, renders the policy voidable by the
insurer [Vance].
Statements or promises agreed upon by both
parties to the insurance contract which are
contained in the contract or properly
incorporated constitute warranties [Carale].
A warranty may:
a. Relate to the past, the present, the
future, or to all of these [Sec. 68]
b. Be made in any form of words [Sec. 69]
c. Also be made by the insurer [Carale].
Act involved
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and
the person or thing insured or to the risk as a
fact [Sec. 71].
A rider is a printed or typed stipulation
contained in a slip of paper attached to the
policy and forming an integral part thereof.
Thus, it does not need to be signed by the
insured.
Thus, it is not enough, for a stipulation to
become a warranty, that the parties intended it
as such. It must form part of the contract of
insurance.
a.
Warranties,
Endorsements
Riders,
The signature of the insured is required only if
the warranties, or endorsements are in another
instrument.
For any rider, clause, warranty, or
endorsement to be binding on the insured [Sec.
50]:
1. Such rider, clause, warranty or
endorsement, must be pasted or
attached to the policy;
2. The descriptive title or name of the
rider, clause, warranty or endorsement
must also be mentioned and written on
the blank spaces provided in the policy;
3. Such rider, clause, warranty or
endorsement issued after the original
policy must be countersigned by the
insured or owner.
a. Unless the same is applied for
by the insured or owner
b. Such countersignature shall be
taken as his agreement to the
contents of such rider, clause,
warranty or endorsement
Notwithstanding the foregoing, the policy may
be in electronic form subject to the pertinent
provisions of Republic Act No. 8792,
(Electronic Commerce Act) and to such rules
and regulations as may be prescribed by the
Commissioner.
b. Kinds
1. Express Warranty
The Code does not prescribe a particular form
for a warranty to be considered as such [Sec.
69].
However, the Code prescribes a requirement
for express warranties. It must be an
agreement contained in the policy or clearly
incorporated therein as part thereof, relating to
2. Implied Warranty
This is deemed included in the contract
although not expressly mentioned (e.g. implied
warranty of seaworthiness of the vessel in
marine insurance and implied warranty not to
alter the circumstances of the thing insured).
This is only available for marine insurance.
3. Affirmative Warranty
This asserts the existence of a fact or condition
at the time it is made.
c. Effect of Breach
1. Material Warranty
The violation of a material warranty, or other
material provision of the policy, on the part of
either the insured or insurer, entitles the other
to rescind [Sec. 74].
Breach of a material warranty may either be:
a. Without fraud, in which case, the
insurer will be exonerated from the time
it occurs. If made during the inception,
it will prevent the policy from taking
effect [Sec. 76].
b. With fraud, in which case, the policy is
avoided ab initio and the insured is not
entitled to the return of the premiums
paid [De Leon].
Exceptions:
a. Loss occurs before the time of
performance of the warranty [Sec. 73];
b. Performance becomes unlawful [Sec.
73];
c. Performance becomes impossible
[Sec. 73];
d. Waiver or estoppel.
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2. Immaterial Warranty
Warranty
A policy may declare that a violation of
specified provisions thereof shall avoid it,
otherwise the breach of an immaterial provision
does not avoid the policy [Sec. 75].
Applicability of incontestability clause
Does not apply
General Rule: Breach of an immaterial
provision does not avoid the policy [Sec. 75].
Exception: The parties stipulate that violation
of a particular provision, though immaterial,
shall avoid the policy. In effect, the parties
converted the immaterial provision into a
material one [Sundiang and Aquino].
A condition in the policy which requires the
insured to disclose to the insurer of any
insurance that, if violated by the insured, would
ipso facto avoid the contract [Pioneer v. Yap,
G.R. No. L-36232 (1974)].
Insurer is barred by waiver (or estoppel) to
claim violation of the so-called hydrants
warranty when, despite knowing fully that only
2 fire hydrants existed (out of the 11 hydrants
required), it still issued the insurance policies
and received the premiums [Qua Chee Gan v.
Law Union, G.R. No. L-4611 (1955)].
Warranty
Representation
Nature
Part
of
contract
the Mere
inducement
collateral
Form
Written on the May be written in the
policy, actually or policy or may be oral
by reference
Materiality
Presumed
material
Representation
Must be proved to be
material
Compliance
Must be strictly Requires
only
complied with
substantial truth and
compliance
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b. Engaged in the business of carrying or
transporting;
c. Passengers or goods or both,
d. By land, water, or air;
e. For compensation,
f. Offering their services to the public [Art.
1732, NCC].
TRANSPORTATION LAW
A. Common Carriers
1. Common Carriers
Contract of Transportation
A contract of transportation is one whereby a
certain person or association of persons
obligate themselves to transport persons,
things, or news from one to another for a fixed
price [Crisostomo v. CA, G.R. No. 138334
(2003)].
Parties
a. Shipper - one who gives rise to the
contract of transportation by agreeing
to deliver the things or news to be
transported, or to present his own
person or those of other/s in the case
of transportation of passengers.
b. Carrier (may sometimes be referred to
as conductor) - one who binds himself
to transport persons, things, or news,
or one employed in or engaged in the
business of carrying goods for others
for hire.
c. Consignee - The party to whom the
carrier is to deliver the things being
transported, or to whom the carrier may
lawfully make delivery in accordance
with its contract of carriage; the shipper
and the consignee may be the same
person.
Carriers are persons or corporations who
undertake to transport or convey goods,
property, or persons, from one place to
another, gratuitously or for hire, and are
classified as:
a. Private or special carriers, who
transport or undertake to transport in a
particular instance for hire or reward
[Agbayani, Commercial Laws of the
Philippines (1987)]; and
b. Common or public carriers [Art. 1732,
Civil Code].
Common carriers are:
a. Persons, corporations,
associations;
firms
Art. 1732, Civil Code makes no distinction:
a. Between one whose principal business
activity is the carrying of persons or
goods or both, and one who does such
carrying only as an ancillary activity
[Fabre v. CA, G.R. No. 111127 (1996)];
b. Between a person or enterprise
offering transportation service on a
regular or scheduled basis and one
offering such service on an occasional,
episodic, or unscheduled basis
[Loadstar Shipping Co., Inc. v. CA,
G.R. No. 131621 (1999)];
c. Between a carrier offering its services
to the general public and one who
offers services or solicits business only
from a narrow segment of the general
population [De Guzman v. CA, G.R.
No. L-47822 (1988)];
d. Between a carrier that maintains
terminals or issues tickets with fixed
and publicly known routes and one that
does not [Asia Lighterage and Shipping
v. CA, G.R. No. 147246 (2003)].
2. Test for a Common Carrier
Whether the undertaking is a part of the activity
engaged in by the carrier, which it has held out
to the public as its business or occupation.
a. Determined by the character of the
business carried on by the carrier; Not
the quantity or extent of the business
transacted [Bascos v. Court of
Appeals, G.R. No. 101089 (1993)].
b. If the undertaking is a single
transaction, not a part of the general
business or occupation engaged in, as
advertised and held out to the general
public, the individual or the entity
rendering such service is a private, not
a common, carrier [Perena v. Nicolas,
G.R. No. 157917 (2012)].
or
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Test for a Common Carrier
a. He must be engaged in the business of
carrying goods for others as a public
employment and must hold himself out
as ready to engage in the
transportation of goods for persons
generally as a business and not a
casual occupation.
b. He must undertake to carry goods of
the kind to which his business is
confined.
c. He must undertake to carry by the
methods of which his business is
conducted and over his established
roads.
d. The transportation must be for hire
[Agbayani].
One engaged in the business of transporting
petroleum products from refineries via pipeline
is a common carrier. It is engaged in the
business of transporting or carrying goods, i.e.,
petroleum products, for hire as a public
employment. It undertakes to carry for all
persons indifferently, that is, to all persons who
choose to employ its services, and transports
the goods by land and for compensation. The
fact that it has a limited clientele does not
exclude it from the definition of a common
carrier [First Phil. Industrial v. CA, G.R. No.
125948 (1998)].
A customs broker may be regarded as a
common carrier as long as a person holds itself
to the public for the purpose of transporting
goods as a business, regardless of if it owns
the vehicle used or has to hire one [Schmitz
Transport v. CA, G.R. No. 150255 (2005)].
A travel agency is not a common carrier. It is
not an entity engaged in the business of
transporting either passengers or goods and is
therefore neither a private nor a common
carrier. Its covenant with its customers is
simply to make travel arrangements on their
behalf [Crisostomo v. CA, G.R. No. 138334
(2003)].
A beach resort may be regarded as a common
carrier when its ferry services are so
intertwined with its main business as to be
properly considered ancillary thereto. In this
case, the constancy of respondent’s ferry
services in its resort operations is underscored
by having its own boats [Cruz v. Sun Holidays,
G.R. No. 186312 (2010)].
Operators of a school bus service were: (a)
engaged in transporting passengers generally
as a business, not just as a casual occupation;
(b) undertaking to carry passengers over
establishing roads by the method by which the
business was conducted; and (c) transporting
students for a fee [Teodoro v. Nicolas, G.R. No.
157917 (2012)].
3. Common Carrier vs. Private Carrier
Common Carrier
Private Carrier
Availability
Holds himself out in
common, that is, to all
persons who choose
to employ him, as
ready to carry for
hire.
Agrees in some
special case with
some
private
individual to carry for
hire.
Binding Effect
Bound to carry all
who offer and tender
reasonable
compensation
for
carrying them.
Not bound to carry
for any reason, such
goods as it is
accustomed to carry,
unless it enters into a
special agreement to
do so.
Diligence Required
Extraordinary
diligence.
Ordinary diligence.
Governing Law
Civil Code; Code of Law on obligations
Commerce
and and contracts.
special laws, if not
regulated by the Civil
Code (Art. 1766, Civil
Code); law of the
country to which the
goods are to be
transported,
if
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2. For the safety of the passengers
transported by them [Art. 1733, Civil
Code].
Private Carrier
regarding liability for
loss, destruction, or
deterioration
of
goods (Art. 1753,
Civil Code).
Regulation
A public service, Not
subject
therefore subject to regulation
as
provisions governing common carrier.
common carriers and
public utilities.
to
a
It is not necessary that the carrier be issued a
certificate of public convenience [Loadstar
Shipping Co., Inc. v. CA, G.R. No. 131621
(1999)].
The owner and driver of a vehicle owe to
accommodation passengers (passengers
which are merely accommodated and who do
not pay fees for the service) or invited guests
merely the duty to exercise reasonable care
so that they may be transported safely to their
destination. Thus, the rule is established by
weight of authority that the owner or operator
of an automobile owes the duty to an invited
guest to exercise reasonable care in its
operation, and not unreasonably to expose him
to danger and injury by increasing the hazard
of travel. [Lara v. Valencia, G.R. No. L-9907
(1968)]. In other words, since driver is not a
common carrier, he is only required to observe
ordinary diligence and not extraordinary
diligence.
4. Diligence Required of Common
Carrier
a. Standard of Diligence
Common carriers, from the nature of their
business and for reasons of public policy, are
bound to observe extraordinary diligence,
according to all the circumstances of each
case:
1. In the vigilance over the goods, [Arts.
1734, 1735, and 1745, Nos. 5, 6, and
7, Civil Code] and
Extraordinary Diligence
Requires carrying passengers safely:
1. As far as human care and foresight can
provide;
2. Using the utmost diligence of very
cautious persons;
3. With a due regard for all the
circumstances [Art. 1755, Civil Code].
Note: A common carrier is not an insurer of the
safety of its passengers and is not bound
absolutely and at all events to carry them safely
and without injury [Yobido v. CA, G.R. No.
113003 (1997)].
b. Presumption of Negligence
For Carriage of Goods
The mere proof of:
1. Delivery of goods in good order to a
carrier; and
2. Their arrival at the place of destination
in bad order
makes out a prima facie case against the
carrier, so that if no explanation is given as to
how the injury occurred, the carrier must be
held responsible [Ynchausti Steamship v.
Dexter and Unson, G.R. No. L-15652 (1920)].
Effects of Presumption
1. Makes out a prima facie case against
the carrier - i.e., the carrier is presumed
to have been at fault or to have acted
negligently;
2. Makes it incumbent upon the carrier to
prove that the loss/death/injury was
due to some other circumstance
inconsistent with its liability, or that it
observed extraordinary diligence [Art.
1756, Civil Code; Ynchausti Steamship
v. Dexter and Unson, G.R. No. L-15652
(1920)].
Burden of Proof
It is incumbent upon the carrier to prove that
the loss was due to accident or some other
circumstance inconsistent with its liability
[Ynchausti Steamship v. Dexter and Unson,
G.R. No. L-15652 (1920)].
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Note: While delay in the delivery of goods is a
breach of contract of carriage, it does not raise
the presumption of negligence because the
goods are not lost, deteriorated, or destroyed
[Art. 1735, Civil Code].
For Carriage of Passengers
In case of death of or injuries to passengers,
common carriers are presumed to have been
at fault or to have acted negligently, unless they
prove that they observed extraordinary
diligence as prescribed in Arts 1733 and 1755
[Art. 1756, Civil Code].
Note: Mere failure to reach one’s destination,
absent injury or death, does not raise the
presumption of negligence because it does not
involve safety of the passengers.
5. Liabilities of Common Carriers
The obligation of the common carrier consists
in the transportation of passengers or goods or
both [Art. 1732, Civil Code].
a. Principles Governing the Liability of
Common Carriers
1. The liability of a carrier is contractual
and arises upon breach of its
obligation.
a. There is breach if it fails to exert
extraordinary
diligence
according to all circumstances
of each case;
2. A carrier is obliged to carry its
passenger with the utmost diligence of
a very cautious person, having due
regard for all the circumstances;
3. A carrier is presumed to be at fault or
to have acted negligently in case of
loss of goods and/or death of, or injury
to, passengers, it being its duty to
prove that it exercised extraordinary
diligence; and
4. The carrier is not an insurer against all
risks of travel [Isaac v. A.L. Ammen,
G.R. No. L-9671 (1957)].
b. Registered Owner Rule
The person who is the registered owner of a
vehicle is liable for any damage caused by the
negligent operation of the vehicle although the
same was already sold [Filcar Transport v.
Espinas, G.R. No. 174156 (2012)].
c. Kabit System
1. It is an arrangement whereby a person
who has been granted a certificate of
convenience allows another person
who owns motor vehicles to operate
under such franchise for a fee [Lita
Enterprises, Inc. v. IAC, G.R. No. L64693 (1984)].
2. It is invariably recognized as being
contrary to public policy and therefore
void and inexistent under Art. 1409.
Thus, for the safety of passengers and
the public, the registered owner of the
vehicle is not allowed to prove that
another person has become the owner
so that he may be thereby relieved of
responsibility [Lim v. CA, G.R. No.
125817 (2002)].
3. One of the primary factors considered
in the granting of a certificate of public
convenience for the business of public
transportation is the financial capacity
of the holder of the license, so that
liabilities arising from accidents may be
duly compensated. The kabit system
renders illusory such purpose and,
worse, may still be availed of by the
grantee to escape civil liability caused
by a negligent use of a vehicle owned
by another and operated under his
license [Dizon v. Octavio (1955)].
4. However, one who has availed of the
kabit system is not precluded from filing
for damages against another who
caused the injury, as the policy against
the kabit system will not be defeated by
giving such person standing to sue
[Lim v. CA, G.R. No. 125817 (2002)].
d. Classification of Transport Network
Vehicle
Services
and
Transport
Network Companies
1. Transport Network Company or TNC is
defined as an organization whether a
corporation, partnership, or sole
proprietor, that provides pre-arranged
transportation
services
for
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compensation using an internet-based
technology application or a digital
platform technology to connect
passengers with drivers using their
personal vehicles [DOTC D.O. No.
2015-011].
2. Transport Network Vehicle Service or
TNVS refers to a TNC-accredited
private vehicle owner, which is a
common carrier, using the internetbased technology application or digital
platform
technology
transporting
passengers from one point to another,
for compensation. The TNVS cannot
operate as a common carrier outside of
or independent from the use of the
internet-based technology of the TNC
or TNCs to which they are accredited
[DOTr D.O. No. 2018-012].
TNVs and TNCs are expressly
considered common carriers. They are
subject to full regulation and
supervision by the LTFRB, including
but not limited to:
• Application and approval/ denial of
franchise,
• Setting of fares, routes, operating
conditions, and
• Imposition of fines, suspension,
and cancellation of franchise.
Note re: (b) setting of fares: In 2017,
MyTaxi.PH, Inc. (GRAB) filed a case
before the LTFRB which did not reach
the Supreme Court, LTFRB held that
under D.O. 2015-011 then in force, a
TNC is not granted unilateral authority
to set fares as the same would be
constitutive of an undue delegation of
legislative authority. Subsequently,
D.O. 2017-011 and D.O. 2018-013
were issued, removing the “confusing
language” of D.O. 2015-011 and
explicitly stating that rate-fixing
authority shall be limited to the LTFRB
in accordance with the law [Case No.
CO-EB-2018-04-0039, Accreditation
No. 2015-TNC-001].
The LTFRB shall grant the TNCs and
their accredited TNVS a Certificate of
Public Convenience (CPC) upon full
compliance
of
jurisdictional
requirements, as may be determined
by LTFRB. The LTFRB shall also set
the fare for the TNVS after public
hearing or in consultation with the
TNCs and TNVS [DOTr D.O. No. 2018012].
Despite the limited market scope of its
app, Angkas’ bikers offer transportation
services to willing public consumers
and these services may be readily
accessed by anyone who chooses to
download the Angkas app. While they
may refuse to offer their service by
simply not going online or not logging
in, when they do log in, they make their
services publicly available. As such,
DBDOYC (Angkas) is a transportation
provider and its accredited drivers are
common
carriers
[LTFRB
v.
Valenzuela and DBDOYC, Inc. G.R.
No. 242860 (2019)].
B. Obligations and Liabilities
1. Vigilance Over Goods
The liability of the common carrier with respect
to vigilance over goods, in general, are as
follows:
a. Common carriers are responsible for
the loss, destruction, or deterioration of
the goods [Art. 1734, Civil Code]. In
fact, they are liable even in those cases
where the cause of the loss or damage
is unknown [Agbayani].
b. If the goods are lost, destroyed, or
deteriorated, common carriers are
presumed to have been at fault or to
have acted negligently [Art. 1735, Civil
Code].
Note: Two-pronged analysis in determining
liability:
a. Whether or not the cause of the loss,
destruction, or deterioration is included
under Art. 1734;
b. If not, whether the common carrier
exercised extraordinary diligence or
not.
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a. Presumption of Negligence
2. Act of Public Enemy
General Rule: Common carriers are
responsible for the loss, destruction, or
deterioration of the goods.
Requisites
a. The act of the public enemy was
committed either in an international or
civil war [Art. 1734 (2), Civil Code];
b. The act of the public enemy must have
been the proximate and only cause;
and
c. The common carrier must exercise due
diligence to prevent or minimize the
loss before, during and after the act of
the public enemy causing the loss,
destruction or deterioration of the
goods [Art. 1739, Civil Code].
Exception: Common carriers are not liable
when such loss, destruction, or deterioration is
due to any of the following causes only:
1. Flood, storm, earthquake, lightning, or
other natural disaster or calamity;
2. Act of the public enemy in war, whether
international or civil;
3. Act of omission of the shipper or owner
of the goods;
4. The character of the goods or defects
in the packing or in the containers;
5. Order or act of competent public
authority [Art. 1734, Civil Code].
In all other cases of loss, destruction, or
deterioration, the common carrier is presumed
to have been at fault or to have acted
negligently, unless they prove that they
observed extraordinary diligence [Art. 1735,
Civil Code].
Thieves, rioters, robbers, and insurrectionists,
though at war with social order, are not in a
legal sense classed as public enemies, but are
merely private depredators for whose acts a
carrier is answerable. Pirates on the high seas,
however, stand as an exception to this rule.
They are considered the enemies of all civilized
nations, and indeed of the human race, and
consequently their depredations on a common
carrier will excuse him from liability [Aquino].
b. Exempting Causes
3. Act or omission of shipper or owner
1. Natural Disaster or Calamity
The act or omission of the shipper must have
been the proximate and only cause of the
loss, destruction, or deterioration of the goods.
Requisites:
a. The natural disaster must have been
the proximate and only cause of the
loss;
b. The common carrier must exercise due
diligence to prevent or minimize the
loss before, during and after the
occurrence of the flood, storm, or
natural disaster [Art. 1739, Civil Code];
and
c. The common carrier must not have
negligently incurred delay [Art. 1740,
Civil Code].
Fire may not be considered a natural disaster
or calamity because it arises almost invariably
from some act of man or by human means. It
does not fall within the category of an act of
God unless caused by lightning or by other
natural disaster or calamity [Eastern Shipping
Lines v. IAC, G.R. No. L-69044 (1987)].
If the shipper or owner merely contributed to
the loss, destruction or deterioration of the
goods, the proximate cause being the
negligence of the common carrier, the latter
shall be liable for the damages, which shall,
however, be equitably reduced [Art. 1741, Civil
Code].
4. Character of Goods
Requisites
a. The loss, destruction, or deterioration
of the goods is due to the character of
the goods or defects in the packing or
in the containers [Art. 1734 (4), Civil
Code]; and
b. The common carrier must exercise due
diligence to forestall or lessen the loss
[Art. 1742, Civil Code].
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If the fact of improper packing is known to the
carrier or its servants or apparent upon
ordinary observation, but it accepts the goods
notwithstanding such condition, it is not
relieved of liability for loss or injury resulting
therefrom [Southern Lines v. CA, G.R. No. L16629 (1962)].
5. Order of Competent Authority
Requisites
a. There must be an order or act of
competent public authority through
which the goods are seized or
destroyed [Art. 1734 (5), Civil Code];
and
b. The said public authority must have
had the power to issue the order [Art.
1743, Civil Code].
To be exempted from liability, the intervention
of the competent public authority must be of a
character that would render impossible the
fulfillment by the carrier of the obligation
[Ganzon v. CA, G.R. No. L-48757 (1988)].
Note: There must be an entire exclusion of
human agency from the cause of injury or loss.
A common carrier may not be absolved from
liability in case of force majeure or fortuitous
event alone. The common carrier must still
prove:
a. That it was not negligent in causing the
death or injury resulting from an
accident [Yobido v. CA, G.R. No.
113003 (1997)];
b. That the loss or destruction of the
merchandise was due to accident and
force majeure and not fraud, fault, or
negligence on the part of the captain or
owner of the ship [Tan Chiong Sian v.
Inchausti, G.R. No. L-6092 (1912)].
Loss of a ship and of its cargo, in a wreck due
to accident or force majeure must, as a general
rule, fall upon their respective owners, except
in cases where the wrecking or stranding of the
vessel occurred through the malice,
carelessness, or lack of skill on the part of the
captain or because the vessel put to sea is
insufficiently repaired and prepared.
6. Force Majeure
Force majeure – in general, has also been
invoked as an exempting cause based on Art.
1174, which states that no person shall be
responsible for a fortuitous event which could
not be foreseen, or which, though foreseen,
was inevitable.
A fortuitous event has the following
characteristics:
a. The cause of the unforeseen and
unexpected occurrence, or the failure
of the debtor to comply with his
obligations, must be independent of
human will;
b. It must be impossible to foresee the
event which constitutes the caso
fortuito, or if it can be foreseen, it must
be impossible to avoid;
c. The occurrence must be such as to
render it impossible for the debtor to
fulfill his obligation in a normal manner;
and
d. The obligor must be free from any
participation in the aggravation of the
injury resulting to the creditor.
In order that the exemption due to force
majeure would apply, the carrier must prove
that the loss or destruction of the merchandise
was due to accident and force majeure and not
to fraud, fault, or negligence on the part of the
captain or owner of the ship [Tan Chiong Sian
v. Inchausti, G.R. No. L-6092 (1912)].
Requirement of Absence of Negligence
If the common carrier is found to have acted
negligently, it is precluded from invoking the
exempting causes under Art. 1734, and will be
liable for damages suffered by the goods it
carried if such damages arise from its
negligence [Agbayani].
The exempting circumstance should be the
proximate and only cause of the loss,
destruction, or deterioration of the goods for
the common carrier to be exempted from
liability on any of the ff. grounds:
a. Natural Disaster/Calamity
b. Act of Public Enemy
c. Character of the Goods [Art. 1739,
1742, Civil Code]
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When the common carrier’s negligence is the
proximate cause of the loss, destruction, or
deterioration of the goods, the act or omission
of the shipper will only mitigate the carrier’s
liability [Art. 1741, Civil Code].
Absence of Delay
To be free from responsibility on the ground of
natural disaster/calamity, the common carrier
should not have negligently incurred in delay
[Art. 1740, Civil Code].
Due Diligence to Prevent or Lessen the
Loss
The common carrier should have exercised
due diligence to prevent, forestall or lessen the
loss, destruction, or deterioration of the goods,
to be exempted from liability on any of the ff.
grounds:
a. Natural Disaster/Calamity
b. Act of Public Enemy
c. Character of the Goods [Art. 1739,
1742, Civil Code]
Meeting a typhoon head-on falls short of due
diligence required from a common carrier [Asia
Lighterage and Shipping Inc. v. CA, G.R. No.
147246 (2000)].
c. Contributory Negligence
The liability of the common carrier shall be
equitably reduced when the loss, destruction,
or deterioration of the goods when:
1. The negligence of the common carrier
was the proximate cause thereof; and
2. The shipper or owner merely
contributed to such loss, destruction, or
deterioration [Art. 1741, Civil Code].
d. Duration of Liability
Instances when carrier has responsibility to
exercise extraordinary diligence:
1. From the time the goods are
unconditionally
placed
in
the
possession of, and received by the
carrier [Art 1736, Civil Code] or its
authorized agent [Compania Maritima
v. Insurance Co., G.R. No. L-18965
(1964)], until the same are delivered
actually and constructively by the
carrier to the consignee or to the
person who has a right to receive them;
2. When goods are temporarily unloaded
or stored in transit, unless the shipper
or owner has made use of the right of
stoppage in transitu [Art 1737, Civil
Code];
3. During storage in a warehouse of the
carrier at the place of destination, until
consignee has been advised of the
arrival of the goods and has had
reasonable opportunity to remove or
dispose them [Art 1738, Civil Code].
In dealing with the contract of common carriage
of passengers, for purpose of accuracy, there
are two (2) aspects of the same, namely:
1. Contract ‘to carry (at some future
time),’ which contract is consensual
and is necessarily perfected by mere
consent; and
2. Contract ‘of carriage’ or ‘of common
carriage,’ which should be considered
as a real contract for not until the carrier
is used can the carrier be said to have
already assumed the obligation of a
carrier [Paras, Civil Code Annotated,
11th Ed].
Note: The distinction is important in
determining when the common carrier is
required
to
exercise
extraordinary
responsibility. The birth of the contract is not
necessarily the birth of the duty to exercise
extraordinary responsibility.
1. Delivery of Goods to Common Carriers
Delivery means unconditionally placing the
goods in the possession of the carrier and the
carrier receiving them for transportation [Art.
1736, Civil Code].
Unconditionally placing the goods in the
possession of the carrier means the shipper
cannot get them back from the common carrier
at will.
Thus, the liability of the carrier as common
carrier and its duty of extraordinary diligence
begins with the actual delivery of the goods,
NOT:
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a. When the common carrier received the
goods not for transportation but only for
safekeeping; or
b. When a receipt or bill of lading is
formally executed, since the issuance
of a bill of lading is not necessary to
complete delivery and acceptance
[Compania Maritima v. Insurance Co.,
G.R. No. L-18965 (1964)].
2. Actual or Constructive Delivery
The extraordinary responsibility of the common
carrier ends when, subject to Art. 1738, the
goods
are
delivered
actually
or
constructively by the carrier to:
a. The consignee; or
b. The person who has a right to receive
them, such as agents, brokers, and the
like.
Art. 1738 provides that the extraordinary
liability of the common carrier continues to be
operative even during the time the goods are
stored in a warehouse of the carrier at the place
of destination, until the consignee has:
a. Been advised of the arrival of the
goods; and
b. Had reasonable opportunity thereafter
to remove them or otherwise dispose of
them.
Delivery of the cargo to the customs authorities
is not delivery to the consignee or “to the
person who has a right to receive them” as
contemplated in Art. 1736 because in such
case the goods are still in the hands of the
government and the owner cannot exercise
dominion over them. However, the parties may
agree to limit the liability of the carrier
considering that the goods still have to go
through the inspection of the customs
authorities before they are actually turned over
to the consignee. It is unfair that the carrier be
made responsible for what may happen during
the interregnum [Lu Do v. Binamira, G.R. No.
L-9840 (1957)].
It is settled in maritime law jurisprudence that
cargoes while being unloaded generally remain
under the custody of the carrier [Asian
Terminals, Inc. v. Philam Insurance Co., G.R.
No. 181163 (2013)].
The common carrier remains liable to the
consignee when the goods were lost because
the ports authorities released them to
unauthorized persons, absent a stipulation in
the bill of lading [Nedlloyd Lijnen B.V.
Rotterdam v. Glow Laks Enterprises, Ltd. G.R.
No. 156330 (2014)].
3. Temporary Unloading or Storage
General Rule: Extraordinary diligence over the
goods remains even when the goods are
temporarily unloaded or stored in transit.
Exception: The duty to observe such diligence
ceases when shipper or owner makes use of
the right of stoppage in transitu [Art 1737,
Civil Code].
Stoppage in transitu is the act by which the
unpaid vendor of goods stops their progress
and
resumes
possession
of
them
constructively, while they are during transit
from him to the purchaser and not yet actually
delivered to the latter [Agbayani].
Basis: Under Art. 1530, when the buyer of the
goods becomes insolvent, the unpaid seller
who has parted with the possession of the
goods, at any time while they are in transit, may
resume the possession of the goods as he
would have had if he had never parted with the
possession.
When the right of stoppage in transitu is
exercised, the common carrier holds the goods
in the capacity of an ordinary bailee or
warehouseman upon the theory that the
exercise of the right of stoppage in transitu
terminates the contract of carriage. Hence,
only ordinary diligence is required
[Agbayani].
e. Stipulations for Limitation of Liability
There are two possible stipulations limiting the
liability of the common carrier:
1. Stipulation limiting the common
carrier’s liability as to the diligence
required;
2. Stipulation limiting the common
carrier’s liability as to the amount of
liability.
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An agreement limiting the common carrier’s
liability for delay on account of strikes or riots is
also valid [Art. 1748, Civil Code].
As to Diligence Required
A stipulation between the common carrier and
the shipper or owner limiting the liability of the
former for the loss, destruction, or deterioration
of the goods to a degree less than
extraordinary diligence shall be valid,
provided it be:
1. In writing, signed by the shipper or
owner;
2. Supported by a valuable consideration
other than the service rendered by the
common carrier; and
3. Reasonable, just and not contrary to
public policy [Art. 1744, Civil Code].
Void Stipulations
Any of the following or similar stipulations shall
be considered unreasonable, unjust and
contrary to public policy:
1. That the goods are transported at the
risk of the owner or shipper;
2. That the common carrier will not be
liable for any loss, destruction, or
deterioration of the goods;
3. That the common carrier need not
observe any diligence in the custody of
the goods;
4. That the common carrier shall exercise
a degree of diligence less than that of
a good father of a family, or of a man of
ordinary prudence in the vigilance over
the movables transported;
5. That the common carrier shall not be
responsible for the acts or omission of
his or its employees;
6. That the common carrier’s liability for
acts committed by thieves, or of
robbers who do not act with grave or
irresistible threat, violence or force, is
dispensed with or diminished;
7. That the common carrier is not
responsible for the loss, destruction, or
deterioration of goods on account of
the defective condition of the car,
vehicle, ship, airplane or other
equipment used in the contract of
carriage [Art. 1745, Civil Code];
8. That the common carrier is exempt
from any and all liability for loss or
damage occasioned by its own
negligence;
9. Stipulation providing for an unqualified
limitation of such liability to an agreed
stipulation [Heacock v. Macondray,
G.R. No. L-16598 (1921)];
10. Stipulation which practically leaves the
date of arrival of the subject shipment
on the sole determination and the will
of the carrier [Maersk Line v. CA, G.R.
No. 94761 (1993)].
Note: Under Art. 1745 (6), Civil Code, a
common carrier cannot be held liable where
the thieves or robbers acted with grave or
irresistible threat, violence, or force [De
Guzman v. CA, G.R. No. L-47822 (1988)].
Limitation of Liability to Fixed Amount
A contract fixing the sum that may be
recovered by the owner or shipper for the loss,
destruction or deterioration of the goods is valid
if:
1. It is reasonable and just under
circumstances; and
2. It has been fairly and freely agreed
upon [Art. 1750, NCC].
While a passenger may not have signed the
plane ticket, he is nevertheless bound by the
provision thereof, regardless of the latter’s lack
of knowledge or assent to the regulation. It is
what is known as a contract of adhesion
wherein one party imposes a ready-made form
of contract on the other. The one who adheres
to the contract is free to reject it entirely. A
contract limiting liability upon an agreed
valuation does not offend against the policy of
the law forbidding one from contracting against
his own negligence [Ong Yiu v. CA, G.R. No.
L-40597 (1979)].
[However], the fact that the conditions are
printed at the back of the ticket stub in letters
so small that they are hard to read would not
warrant the presumption that the [shipper] was
not aware of those conditions such that he had
“fairly and freely agreed” to those conditions
[Shewaram v. PAL, G.R. No. L-20099 (1966)].
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Factors Affecting Agreement
The effect of these stipulations is subject to the
following provisions:
1. An agreement limiting the common
carrier’s liability may be annulled by the
shipper or owner if the common carrier
refuses to carry the goods unless the
former agreed to such stipulation [Art.
1746, Civil Code];
2. If the common carrier, without just
cause, delays the transportation of the
goods or changes the stipulated or
usual route, the contract limiting the
common carrier’s liability cannot be
availed of in case of the loss,
destruction, or deterioration of the
goods [Art. 1747, Civil Code];
3. The fact that the common carrier has
no competitor along the line or route, or
a part thereof, to which the contract
refers shall be taken into consideration
on the question of whether or not a
stipulation limiting the common
carrier’s liability is reasonable, just, and
in consonance with public policy [Art.
1751, Civil Code];
4. Even when there is an agreement
limiting the liability of the common
carrier in the vigilance over the goods,
the common carrier is disputably
presumed to have been negligent in
case of their loss, destruction or
deterioration [Art. 1752, Civil Code].
5. An agreement limiting the common
carrier's liability for delay on account of
strikes or riots is valid [Art. 1748, Civil
Code].
Limitation of Liability in Absence of
Declaration of Greater Value
A stipulation that the common carrier’s liability
is limited to the value of the goods appearing in
the bill of lading, unless the shipper or owner
declares a greater value, is binding [Art. 1749,
Civil Code].
Where the liability has been limited due to a
stipulation written at the back of a ticket, to the
effect that the liability is limited to a certain
amount unless the passenger declares a
higher valuation, a passenger who did not
declare a higher valuation, or did not pay
additional charges, cannot increase the liability
of the carrier [Ong Yiu v. CA, G.R. No. L40597(1979)].
f. Liability for Baggage of Passengers
Baggage are things that a passenger will bring
with him consistent with a temporary absence
from where he lives. Passenger’s baggage
must have a direct relationship with the
passenger who is traveling.
For instance, a balikbayan box or suitcase is a
passenger’s baggage. However, 500 boxes of
perfume are not considered as passenger
baggage. They are considered goods and are
not part of the contract of carriage [of the
passenger]. A separate contract of carriage [or
bill of lading] must be entered into to transport
them [Agbayani].
There are two kinds of passenger’s baggage,
which are governed differently:
1. Passenger baggage in the custody of
the passenger (or carry-on luggage);
and
2. Passenger baggage NOT in the
custody of the passenger (or checkedin baggage).
The liability is greater for baggage that is in the
custody of the carrier (checked-in baggage) as
compared to those in the possession of the
passenger.
1. Checked-In baggage
The provisions of Arts. 1733-1753 shall not
apply to passenger’s baggage which is not in
his personal custody or in that of his employee
[Art. 1754, Civil Code].
In other words, the rules governing the
responsibility of a common carrier in the
transportation of goods apply. Thus,
extraordinary diligence is required.
2. Baggage in Possession of Passengers
As to baggage other than checked-in baggage,
they are governed by Arts. 1998 and 20002003, concerning the responsibility of
hotelkeepers [Art. 1754, Civil Code].
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Art. 1998, as applied by analogy, the baggage
of passengers in their personal custody or in
that of their employees, while being
transported, are regarded as necessary
deposits. The common carriers are responsible
as depositaries, provided that:
a. Notice was given to them, or to their
employees, of the effects brought by
the passengers; and
b. The passengers take the precautions
which the common carrier advised
relative to the care and vigilance of
their baggage.
Note: In one case, the Court held that there
was sufficient notice under Art. 1998 when the
common carrier allowed the passenger to
board the vessel with his belongings without
any protest [Sulpicio Lines v. CA, G.R. No.
172682 (2016)].
In case of loss or injury to the baggage of
passengers in their personal custody, or in that
of their employees, while being transported,
the carrier is liable if the loss or injury is
caused by:
a. His servants;
b. His employees;
c. Strangers [Art. 2000, Civil Code]; or
d. A thief or robber, without the use of
arms or irresistible force [Art. 2001,
Civil Code].
The carrier is not liable if loss or injury is
caused by:
a. Force majeure [Art. 2000, Civil Code];
b. Theft or robbery with the use of arms or
irresistible force [Art. 2001, Civil Code];
c. The acts of the passenger, his family,
servants, or visitors;
d. The character of the baggage [Art.
2002, Civil Code].
The following provisions also figure in
determining the liability of the common carrier:
a. The fact that passengers are
constrained to rely on the vigilance of
the common carrier shall be
considered in determining the degree
of care required of him [Art. 2000, Civil
Code];
b. The common carrier cannot free
himself from responsibility by posting
notices to the effect that he is not liable
for the articles brought by the
passenger;
c. Any
stipulation
whereby
the
responsibility of the common carrier as
set forth in Arts. 1998-2001 is
suppressed or diminished shall be void
[Art. 2003, Civil Code].
Checked-In
Baggage
Baggage in
Custody of
Passenger
Legal
Nature of
Baggage
Considered
as “Goods”
Necessary
Deposit
Diligence
Required
Extraordinary
Diligence
Ordinary
Diligence
Applicable
Rules
Arts. 1733 to Arts. 1998,
1735
2000 to 2003
2. Safety of Passengers
The liability of the common carrier with respect
to the safety of passengers, in general, are as
follows:
1. A common carrier is bound to carry the
passengers safely as far as human
care and foresight can provide, using
the utmost diligence of very cautious
persons, with a due regard for all the
circumstances [Art. 1755, Civil Code];
2. In case of death of or injuries to
passengers, common carriers are
presumed to have been at fault or to
have acted negligently, unless they
prove that they observed extraordinary
diligence [Art. 1756, Civil Code].
Note: It is not enough that the accident was
caused by force majeure, the common carrier
must still prove that it was not negligent in
causing the injuries resulting from such
accident [Bachelor Express v. CA, G.R. No.
85691 (1990)]. Bachelor Express illustrates
that force majeure is not itself a defense; the
exercise of the diligence required by law is the
defense.
Certain instances wherein the common carrier
was held liable:
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1. Defects in the automobile – passenger
has neither the choice nor control over
the selection and use of the carrier’s
equipment and appliances [Landingin
v. Pantranco, G.R. No. L-28014-15
(1970)].
2. Defect in an appliance purchased by
the carrier from a manufacturer – the
manufacturer is considered as an
agent of the common carrier [Necesito
v. Paras, G.R. No. L-10605 (1958)].
3. Injuries suffered by a crew member or
employee – utmost diligence is not only
for the safety of passengers, but also
for the members of the crew or the
complement operating the carrier [PAL
v. CA, G.R. No. L-46558 (1981)].
4. Injuries suffered by an individual whose
presence was called for by the contract
of carriage (e.g. stevedore) [Sulpicio
Lines v. CA, G.R. No. 106279 (1995)].
As in the contract of carriage of goods, the
perfection of the contract of carriage of
passengers does not necessarily coincide with
the commencement of the duty of extraordinary
diligence. It may occur at the same time or
later.
Note: A common carrier is not liable for its
failure to deliver the passenger to the agreed
destination because of sovereign acts [JAL v.
Asuncion, G.R. No. 161730 (2005)].
In maritime commerce, Art. 698, Code of
Commerce relates to the period of the voyage:
a. Void Stipulations
General Rule: The responsibility of a common
carrier for the safety of passengers cannot be
dispensed with or lessened by stipulation by
the posting of notices, by statements on tickets,
or otherwise [Art. 1757, Civil Code].
Exception: When a passenger is carried
gratuitously, a stipulation limiting the common
carrier’s liability for negligence is valid [Art.
1758, Civil Code].
Exception to the exception: Even when a
passenger is carried gratuitously, a stipulation
limiting the common carrier’s liability for willful
acts or gross negligence is invalid [Art. 1758,
Civil Code].
The reduction of fare does not justify any
limitation of the common carrier’s liability [Art.
1758, Civil Code].
b. Duration of Liability
Based on jurisprudence, the duty that the
carrier of passengers owes to its patrons
extends to persons boarding the cars as well
as those alighting therefrom [Del Prado v.
Manila Electric Company, G.R. No. L-29462
(1929)].
This is also reflected in Art. 17, Warsaw
Convention, which applies to international air
carriage. It provides that the liability of a
common carrier for injury to the passenger
lasts from embarkation to disembarkation,
including the period when the passenger is on
board the aircraft.
In case a voyage already begun should be
interrupted:
1. The passengers shall be obliged to pay
the fare in proportion to the distance
covered; and
2. Have the following reliefs:
Cause of
Interruption
Relief
An accidental cause Without right
to
of force majeure
recover for losses
and damages
By
the
exclusively
captain With a right
indemnity
to
1. Caused by the 1. He may not be
disability of the
required to pay
vessel and
any
increased
2. A
passenger
price of passage;
should agree to
but
await the repairs 2. His
living
expenses during
the stay shall be
for
his
own
account.
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In case of delay in the departure of the vessel,
the passengers have:
1. The right to remain on board
2. If the delay is not due to a
fortuitous event or force
majeure, the right to be
furnished with food for the
account of the vessel;
3. If the delay should exceed ten
days:
4. Passengers requesting the
same shall be entitled to the
return of the fare; and
5. If it is due exclusively to the
fault of the captain or ship
agent, they may also demand
indemnity for losses and
damages.
A vessel exclusively devoted to the
transportation of passengers must take them
directly to the port or ports of destination, no
matter what the number of passengers may be,
making all the stops indicated in its itinerary.
1. Waiting for Carrier or Boarding of
Carrier
The duty that the carrier of passengers owes to
its patrons extends to persons boarding the
cars as well as those alighting therefrom.
It is the duty of common carriers of passengers
to stop their conveyances at a reasonable
length of time to afford passengers an
opportunity to bard and enter:
a. Carriers are liable for injuries suffered
by boarding passengers resulting from
the sudden starting up or jerking of their
conveyances while they are doing so
[Dangwa Transportation v. CA, G.R.
No. 95582 (1991)].
b. However, a person boarding a moving
car must be taken to assume the risk of
injury from boarding the car under the
conditions open to his view.
Nonetheless, he cannot fairly be held
to assume the risk that the motorman,
having the situation in view, will
increase the peril by accelerating the
speed of the car before he is planted
safely on the platform [Del Prado v.
Manila Electric Company, G.R. No. L29462 (1929)].
The extraordinary responsibility of common
carriers commences:
a. With respect to carriage of passengers
by trains: The moment the person who
purchases the ticket from the carrier
presents himself at the proper place
and in a proper manner to be
transported with a bona fide intent to
ride the coach [Aquino citing Vda. De
Nueca, et . al. v. Manila Railroad
Company].
b. With respect to carriage of passengers
by sea: As soon as the person with
bona fide intention of taking passage
places himself in the care of the carrier
or its employees and is accepted as
passenger [Aquino].
2. Arrival at Destination
The relation of carrier and passenger does not
cease at the moment the passenger flights
from the carrier’s vehicle at a place selected by
the carrier at the point of destination, but
continues until the passenger has had a
reasonable time or a reasonable opportunity to
leave the carrier’s premises.
What is a reasonable time or a reasonable
delay within this rule is to be determined from
all the circumstances such as the kind of
common carrier, the nature of its business, the
customs of the place, and so forth, and
therefore precludes a consideration of the time
element per se without taking into account
such other factors.
The primary factor to be considered is the
existence of a reasonable cause as will justify
the presence of the victim on or near the
petitioner’s vessel:
a. A person who, after alighting from a
train, walks along the station platform is
considered still a passenger;
b. A passenger, who has alighted at his
destination and is proceeding by the
usual way to leave the company’s
premises, but before actually doing so
is halted by the report that his brother,
a fellow passenger, has been shot, and
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he in good faith, returns to relieve his
brother, is deemed reasonably and
necessarily
delayed
and
thus
continues to be a passenger entitled as
such to the protection of the railroad
and company and its agents [La
Mallorca v. CA, G.R. No. L-20761
(1996)];
c. In the cases of a shipper, the
passengers of vessels are allotted a
longer period of time to disembark from
the ship than other common carriers
such as a passenger bus, since such
vessels are capable of accommodating
a bigger volume of both passenger and
baggage as compared to the capacity
of
a
regular
commuter
bus.
Consequently, a ship passenger will
need at least an hour as is the usual
practice, to disembark from the vessel
and claim his baggage [Aboitiz
Shipping v. CA, G.R. No. 84458
(1989)];
d. The carrier necessarily would still have
to exercise extraordinary diligence in
safeguarding the comfort, convenience
and safety of its stranded passengers
until they have reached their final
destination [PAL v. CA, G.R. No. L82619 (1993)].
Note: Despite the Court’s pronouncement in
PAL v. CA, note that common carriers are
bound to observe extraordinary diligence in the
‘safety’ of its passengers. The law does not
mention the words ‘comfort’ and ‘convenience.’
c. Liability for Acts of Others
1. Employees
General Rule: Common carriers are liable for
the death of or injuries to passengers through
the negligence or willful acts of the former’s
employees, although such employees may
have acted beyond the scope of their authority
or in violation of the orders of the common
carriers.
This liability does not cease:
a. Even upon proof that they exercised all
the diligence of a good father of a
family in the selection and supervision
of their employees [Art. 1759, Civil
Code];
b. By stipulation, by the posting of
notices, nor by statements on the
tickets eliminating or limiting said
liability [Art. 1760, Civil Code].
Ratio: The servant is clothed with delegated
authority and charged with the duty to execute
the carrier’s undertaking to carry the passenger
safely [Agbayani]. Also, the defense of
diligence in the selection and supervision of
employees does not obtain because the liability
is not based on quasi-delict, but on culpa
contractual. However, there must be a
reasonable connection between the act and
the contract of carriage.
Note: The employee must be on duty at the
time of the act. It is enough that the assault
happens within the course of the
employee’s duty. It is no defense for the
carrier that the act was done in excess of
authority or in disobedience of the carrier’s
orders [Maranan v. Perez, G.R. No. L-22272
(1967)].
Exception: A common carrier is not
responsible for acts falling under force
majeure. When a party is unable to fulfill his
obligation because of force majeure, he cannot
be held liable for damages for nonperformance [Japan Airlines v. CA, G.R. No.
118664 (1998)].
Note: In order to be exempted from liability due
to a fortuitous event, a common carrier must
still prove a complete exclusion of human
agency from the cause of injury or death.
Hence, it was held that the explosions of the
new tire may not be considered a fortuitous
event as there are human factors involved in
the situation [Yobido v. CA, G.R. No. 113003
(1997)].
2. Other Passengers and Strangers
General Rule: A common carrier is not liable
for injuries inflicted by strangers or copassengers.
Exception: A common carrier is responsible
for injuries suffered by a passenger on account
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of the willful acts or negligence of other
passengers or of strangers, if the common
carrier’s employees, through the exercise of
the diligence of a good father of a family, could
have prevented or stopped the act or omission
[Art. 1763, Civil Code].
Note: The law speaks of injuries suffered by the
passenger but not death. However, there
appears to be no reason why the common
carrier should not be held liable under such
circumstances. The word “injuries” should be
interpreted to include death [Agbayani].
Under Art. 1763, a tort committed by a stranger
which causes injury to a passenger does not
accord the latter a cause of action against the
carrier. The negligence for which a common
carrier is held responsible is the negligent
omission by the carrier’s employees to prevent
the tort from being committed when the same
could have been foreseen and prevented by
them through the exercise of the diligence of a
good father of a family [Pilapil v. CA, G.R. No.
52159 (1989)].
Common carriers should be given leeway in
assuming that the passengers they take in will
not bring anything that would prove dangerous
to himself, as well as his co-passengers,
unless there is something that will indicate that
a more stringent inspection should be made.
[G.V. Florida Transport Inc., v. Heirs of
Battung, G.R. No. 208802 (2015)]
Contributory Negligence
The passenger must observe the diligence of a
good father of a family to avoid injury to himself
[Art. 1761, Civil Code].
The contributory negligence of the passenger
does not bar recovery of damages for his death
or injuries, if the proximate cause thereof is the
negligence of the common carrier, but the
amount of damages shall be equitably reduced
[Art. 1762, Civil Code].
However, when the negligence of the
passenger was the proximate cause of the
injury, the passenger is barred from recovery,
and the common carrier is exempted from
liability.
It is negligence per se to protrude one’s arm
voluntarily or inadvertently, hand, elbow, or any
other part of his body through the window of a
moving car beyond the outer edge of the
window or outer surface of the car, so as to
come in contact with objects or obstacles near
the track [Isaac v. A.L. Ammen, G.R. No. L9671 (1957)].
d. Liability for Delay in Commencement
of Voyage
A “delayed voyage” refers to a voyage
involving:
1. Late departure of the ship from its port
of origin; or
2. Late arrival thereof to its port of
destination for a period of time not
exceeding twenty-four (24) hours from
the CPC-authorized time of departure
or arrival of the ship [Maritime Industry
Authority Circular No. 2018-27].
In case of delayed voyages, passengers shall
have the following rights:
1. Right to Information
Within thirty (30) minutes of knowledge that the
voyage shall be delayed but not later than one
(1) hour before the CPC-authorized departure
schedule, the operator shall inform the
passengers of:
a. The delay;
b. The cause of the delay;
c. The new departure or expected arrival
time [Maritime Industry Authority
Circular No. 2018-27].
2. Right to Refund or Revalidation
Should the delay be for more than three (3)
hours, the passenger shall be offered the
option to request a refund of the ticket price, or
for the revalidation of the ticket [Maritime
Industry Authority Circular No. 2018-27].
3. Right to Amenities
The operator shall provide, free of charge, the
passengers with the following:
a. Snacks or refreshment, or meals
during mealtime;
b. Free access to first aid/ relief medicine,
if necessary;
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c. Free access to communication facilities
or services, if necessary;
d. Free,
decent,
and
clean
accommodation located near or
accessible from the port;
e. Free transportation to and from the port
and the place of accommodation,
should the delay require a waiting time
of more than eight (8) but not
exceeding twenty-four (24) hours
[Maritime Industry Authority Circular
No. 2018-27].
4. Right to Compensation
As an alternative to providing accommodation
or whenever the same is not practicable, the
operator
may
offer
the
passengers
corresponding compensation:
a. In an amount equivalent to the
prevailing market price of a decent and
clean accommodation in the immediate
or adjacent locality of the ship’s point of
departure;
b. Subject to the limitation of a maximum
of three (3) nights per passenger
[Maritime Industry Authority Circular
No. 2018-27].
5. Right to Remain on Board
In case the departure of the vessel is delayed
the passengers have a right to remain on board
and to be furnished with food for the account of
the vessel, unless the delay is due to an
accidental cause or to force majeure [Art. 698,
Code of Commerce].
6. Right to Return
If the delay should exceed ten days, the
passengers who request it shall be entitled to
the return of the passage [Art. 698, Code of
Commerce].
7. Right to Damages
If the delay were due exclusively to the captain
or agent, the passengers may furthermore
demand indemnity for losses and damages
[Art. 698, Code of Commerce].
e. Liability for Defects in Equipment and
Facilities
While a carrier is not an insurer of the safety of
the passengers, it should nevertheless be held
to answer for the flaws of its equipment and
mechanical defects if such flaws were at all
discoverable.
The manufacturer of the defective appliance is
considered in law, as the agent of the carrier,
and the good repute of the manufacturer will
NOT relieve the carrier from liability.
Ratio: The passenger has no privity with the
manufacturer of the defective equipment.
Hence, he has no remedy against him, while
the carrier usually has [Necesito v. Paras, G.R.
No. L-10605 (1958)].
f. Extent of Liability for Damages
Damages recoverable from common carriers,
both in cases of carriage of passengers and
goods, shall be awarded in accordance with
Title XVIII concerning Damages.
Art. 2206, on liability, in case of death, for loss
of earning capacity, support, and moral
damages for mental anguish, shall also apply
to the death of a passenger caused by the
breach of contract by a common carrier [Art.
1764, Civil Code].
Thus, the damages recoverable are:
1. Actual or compensatory damages;
2. Moral damages;
3. Exemplary damages;
4. Nominal, temperate, and liquidated
damages;
5. Attorney’s fees
1. Actual or Compensatory Damages
Actual or compensatory damages refer to
adequate compensation for such pecuniary
loss suffered as duly proved [Art. 2199, Civil
Code].
Under Art. 2201, the liability for damages
Include:
In case the common carrier acted in good faith:
a. The natural and probable consequence
of the breach of the obligation; and
b. Those which the parties have foreseen
or could have reasonably foreseen at
the time the obligation was constituted;
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In case of fraud, bad faith, malice or wanton
attitude, all damages which may be reasonably
attributed to the nonperformance of the
obligation.
In case of death, actual damages also include:
a. Loss of earning capacity, unless the
deceased had no earning capacity at
the time of death; and
b. Support for a period not exceeding five
years [Art. 2206, Civil Code].
In the absence of a showing that common
carrier’s attention was called to the special
circumstances requiring prompt delivery of a
passenger’s luggage, the common carrier
cannot be held liable for the cancellation of
passenger’s contracts [for exhibition of films]
as it could not have foreseen such an
eventuality when it accepted the luggage for
transit [Pan-Am World Airways v. IAC, G.R. No.
70462 (1988)].
Note: Only substantiated and proven expenses
or those that appear to have been genuinely
incurred in connection with the death, wake, or
burial of the victim will be recognized [Victory
Liner, Inc v. Gammad, G.R. No. 159636
(2004)].
2. Moral Damages
Moral damages, though incapable of pecuniary
computation, if they are the proximate result of
the common carrier’s wrongful act or omission,
may be recovered [Art. 2217, Civil Code].
In cases of breach of contract of carriage,
moral damages may be recovered where:
a. The common carrier acted fraudulently;
b. The common carrier acted in bad faith
[Art. 2220, Civil Code];
c. Death of a passenger resulted even in
the absence of bad faith or fraud [Art.
2206, Civil Code].
Bad faith contemplates a state of mind
affirmatively operating with furtive design or
with some motive of self-interest or will or for
ulterior purpose [Air France v. Carrascoso,
G.R. No. L-21438 (1966)].
Inattention and lack of care on the part of the
carrier, resulting in the failure of the passenger
to be accommodated in the class contracted
for, amounts to bad faith or fraud which entitles
the passenger to the award of moral damages
in accordance with Art. 2220 [Ortigas v.
Lufthansa, G.R. No. L-28773 (1975)].
Willful and deliberate overbooking on the part
of the airline carrier constitutes bad faith. Under
Section 3, Economic Regulations No. 7 of the
Civil Aeronautics Board, overbooking, which
does not exceed ten percent, is not considered
as deliberate and therefore does not amount to
bad faith [United Airlines v. CA, G.R. No.
124110 (2001)].
3. Exemplary Damages
In a contract of carriage, exemplary damages
may be awarded if the common carrier acted in
a wanton, fraudulent, reckless, oppressive, or
malevolent manner [Art. 2232, Civil Code].
Exemplary damages serve as an instrument to
serve the ends of law and public policy by
reshaping socially deleterious behaviors,
specifically, in the case, to compel the common
carrier to control their employees, to tame their
reckless instincts, and to force them to take
adequate care of human beings and their
property [Mecenas v. CA, G.R. No. 88052
(1989)].
4. Nominal, Temperate, and Liquidated
Damages
Nominal damages are adjudicated in order
that a right of the plaintiff, which has been
violated by the defendant, may be vindicated,
or recognized, not for the purpose of
indemnifying the plaintiff for any loss suffered
by him [Art. 2221, NCC]. It may be awarded in
case of breach of contract of carriage and in
every case where any property right has been
invaded [Art. 2222, Civil Code].
A violation of the passenger’s right to be
treated with courtesy in accordance with the
degree of diligence required by law to be
exercised by every common carrier entitles the
passenger to nominal damages [Saludo v. CA,
G.R. No. 95536 (1922)].
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Instances where nominal damages have been
awarded:
a. Misplacement of the passenger’s
baggage and failure to deliver at the
time appointed [Alitalia v. IAC, G.R. No.
71929 (1990)].
b. Violation of the passenger’s right to be
traded with courtesy [Saludo v. CA,
G.R. No. 95536 (1992)].
c. Failure to make the necessary
arrangements
to
transport
the
passengers on the first commercial
flight available after cancellation
[Japan Airlines v. CA, G.R. No. 118664
(1998)].
d. Rerouting the flight without the
passenger’s consent and failure to
allege the necessity to justify the
change [Savellano v. Northwest
Airlines, G.R. No. 151783 (2003)].
Temperate or moderate damages, which are
more than nominal but less than compensatory
damages, may be recovered when some
pecuniary loss has been suffered but its
amount cannot, from the nature of the case, be
proved with certainty [Art. 2224, Civil Code].
In the case of Philtranco v. Paras [G.R. No.
161909 (2012)], the Supreme Court upheld the
award of temperate damages by the CA. Paras
failed to show receipts of at least two surgeries
as well as rehabilitative therapy. Nonetheless,
the CA was convinced that Paras should not
suffer from the lack of definite proof of his
actual expenses for the surgeries and
rehabilitative therapy. Thus, the CA awarded to
him temperate damages of P50,000.00 in the
absence of definite proof of his actual
expenses towards that end.
Liquidated damages are those damages
agreed upon by the parties to a contract, to be
paid in case of breach thereof [Art. 2226, Civil
Code].
COMMERCIAL LAW
a. When exemplary damages are
awarded;
b. When the common carrier’s act or
omission has compelled the plaintiff to
litigate with third persons or to incur
expenses to protect his interest;
c. Where the common carrier acted in
gross and evident bad faith in refusing
to satisfy the plaintiff’s valid, just and
demandable claim;
d. In any other case where the court
deems it just and equitable that
attorney’s fees and expenses of
litigation should be recovered.
C. The Montreal Convention of
1999
1. Applicability
The Montreal Convention applies to:
a. All international carriage of persons,
baggage, or cargo performed by
aircraft for reward;
b. Gratuitous
carriage
by
aircraft
performed by an air transport
undertaking [Art. 1(1), Montreal
Convention].
International air carriage or international air
transport means any carriage in which,
according to the agreement between the
parties, the place of departure and the place of
destination, whether or not there be a break in
the carriage or a transshipment, are situated
either:
a. Within the territories of two State
Parties; or
b. Within the territory of a single State
Party if there is an agreed stopping
place within the territory of another
State, even if that State is not a State
Party [Art. 1(2), MC]
What is not an international carriage:
Carriage between two points within the territory
5. Attorney’s Fees
of a single State Party without an agreed
stopping place within the territory of another
Under Art. 2208, as applicable to a contract of
State is not international carriage for the
carriage, attorney’s fees and expenses of
purposes of this Convention. [Art. 1(2), MC]
litigation may be recovered in the following
A carriage to be performed by several
cases:
successive air carriers is deemed, for the
purposes of the Convention, to be one
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undivided carriage, if it has been regarded by
the parties as a single operation, whether it had
been agreed upon under the form of a single
contract or of a series of contracts and it does
not lose its international character merely
because one contract or a series of contracts
is to be performed entirely within the territory of
the same State. [Art. 1(3), MC].
2. Extent of Liability of Air Carrier
a. Death or Injury of Passengers
The carrier is liable for damage sustained in
case of death or bodily injury of a passenger
upon condition only that the accident which
caused the death or injury took place:
a. on board the aircraft or
b. in the course of any of the operations
of embarking or disembarking.
c. When there was delay [Arts. 17(1) and
19, MC]
b. Destruction, Loss, or Damage to any
Checked Baggage
The carrier is liable for damage sustained in
case of destruction or loss of, or of damage to,
checked baggage upon condition only that the
event which caused the destruction, loss or
damage took place on board the aircraft or
during any period within which the checked
baggage was in the charge of the carrier. [Art.
17(2), MC]
Exception to Damage to Checked Baggage:
The carrier is not liable when the damage
resulted from inherent defect, quality, or vice of
the baggage
c. Destruction, Loss, or Damage to any
Unchecked Baggage
In the case of unchecked baggage, including
personal items, the carrier is liable if the
damage resulted from its fault or that of its
servants or agents. [Art. 17(2), MC]
to, cargo upon condition only that the event
which caused the damage so sustained took
place during the carriage by air. [Art. 18(1),
MC]
Exceptions:
1. Inherent defect, quality or vice
of that cargo;
2. Defective packing of that cargo
performed by a person other
than the carrier or his servants
or agents;
3. An act of war or an armed
conflict;
4. An act of public authority
carried out in connection with
the entry, exit or transit of the
cargo [Art. 18(2), MC].
Meaning of carriage by air:
• The carriage by air comprises the
period during which the cargo is in
the charge of the carrier. [Art. 18,
MC]
• The period of the carriage by air
does not extend to any carriage by
land, by sea or by inland waterway
performed outside an airport.
• If, however, such carriage takes
place in the performance of a
contract for carriage by air, for the
purpose of loading, delivery or
transshipment, any damage is
presumed, subject to proof to the
contrary, to have been the result of
an event which took place during
the carriage by air.
• If a carrier, without the consent of
the consignor, substitutes carriage
by another mode of transport for
the whole or part of a carriage
intended by the agreement
between the parties to be carriage
by air, such carriage by another
mode of transport is deemed to be
within the period of carriage by air.
[Art. 18, MC]
e. Delay
d. Damage to Cargo
The carrier is liable for damage sustained in the
event of the destruction or loss of, or damage
The carrier is liable for damage occasioned by
delay in the carriage by air of passengers,
baggage or cargo. [Art. 19, MC]
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Exception:
1. Nevertheless, the carrier shall not be
liable for damage occasioned by delay if it
proves that it and its servants and agents
took all measures that could reasonably be
required to avoid the damage or that it was
impossible for it or them to take such
measures. [Art. 19, MC]
The Warsaw Convention does not provide for
an exclusive enumeration of instances when
the carrier is liable.
a. It does not provide an absolute limit of
liability and it does not preclude the
application of the Civil Code and other
pertinent
local
laws
in
the
determination of the extent of liability of
the common carrier [Philippine Airlines
v. CA, G.R. No. G.R. No. 119706
(1996)].
b. Hence, a complaint for quasi-delict can
still be filed even if the filing is beyond
the prescriptive period provided for
under the Convention so long as it is
within the prescriptive period of four
years
under
the
Civil
Code
[Villanueva].
Notice of Claim
Notice of claim with the international carrier is
a mandatory or condition precedent under the
Montreal Convention.
a. Baggage: within 7 days from receipt.
b. Cargo: within 14 days from receipt
Note: In case of delay, within 21 days from the
date on which the baggage or cargo have been
placed at his disposal [Art. 31, MC].
If no complaint is made within the times
aforesaid, no action shall lie against the carrier,
save in the case of fraud on its part. [Art. 31,
MC]
Receipt by the person entitled to delivery of
checked baggage or cargo without complaint is
prima facie evidence that the same has been
delivered in good condition and in accordance
with the document of carriage. [Art. 31, MC]
Prescriptive Period for Claims
The right to damages shall be extinguished if
an action is not brought within a period of two
years, reckoned from the date of arrival at the
destination, or from the date on which the
aircraft ought to have arrived, or from the date
on which the carriage stopped. [Art. 35, MC]
2. Limitation of Liability
General Rule: Any provision tending to relieve
the carrier of liability or to fix a lower limit than
that which is laid down shall be null and void,
but the nullity of any such provision does not
involve the nullity of the whole contract [Art.
23(1), WC as amended by the Hague Protocol
(1955)].
Exception: When the loss or damage resulted
from the inherent defect, quality or vice of the
cargo carried [Art. 23(2), WC as amended by
the Hague Protocol (1955)].
a. Liability to Passengers
Liability Limit: Death/Injury
1. For damages not exceeding 100 000 Special
Drawing Rights for each passenger, the carrier
shall not be able to exclude or limit its liability.
2. The carrier shall not be liable for damages to
the extent that they exceed for each passenger
100 000 Special Drawing Rights if the carrier
proves that:
(a) such damage was not due to the
negligence or other wrongful act or
omission of the carrier or its servants or
agents; or
(b) such damage was solely due to the
negligence or other wrongful act or
omission of a third party. [Art. 21, MC]
General Rule: In the carriage of passengers,
the liability of the carrier for each passenger is
limited to “100,000 Special Drawing Rights
for the aggregate of the claims” in respect of
damage suffered because of death or personal
injury to each passenger [Art. 22(1), WC as
amended by Additional Protocol No. 3 (1975)].
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Exception: By special contract, the carrier and
the passenger may agree to a higher limit [Art.
22(1), WC].
● This exception has been repealed by
the
amendment
introduced
by
Additional Protocol No. 3(1975).
Note:
Special
drawing
rights
are
supplementary foreign exchange reserve
assets defined and maintained by the
International Monetary Fund.
In case of delay in the carriage of persons, the
liability is limited to 4,150 Special Drawing
Rights [Art. 22(1)(b), WC as amended by
Additional Protocol No. 4 (1975)].
When limitation unavailable to the carrier:
1. Passenger
embarks
without
a
passenger ticket, with the consent of
the carrier
2. If the ticket does not include a notice a
notice to the effect that, if the
passenger's journey involves an
ultimate destination or stop in a country
other than the country of departure, the
Warsaw Convention may be applicable
and that the Convention governs and in
most cases limits the liability of carriers
for death or personal injury and in
respect of loss of or damage to
baggage [Art. 3(2), WC as amended by
the Hague Protocol (1955)].
b. Liability for Checked Baggage
COMMERCIAL LAW
delivery at destination. [Art. 22,
MC]
General Rule: In the carriage of cargo, the
liability of the carrier is limited to a sum of 17
Special Drawing Rights per kilogram [Art.
22(2)(a)].
Exception: The limit does not apply when the
consignor has made, at the time when the
package was handed over to the carrier, a
special declaration of the value at delivery and
has paid a supplementary sum if the case so
requires.
In that case, the carrier will be liable to pay a
sum not exceeding the declared sum, unless
he proves that that sum is greater than the [Art
consignor’s actual interest in delivery at
destination [Art 22(2)(a), WC].
c. Liability for Hand-Carried Baggage
As regards hand-carried baggage, the liability
of the carrier is limited to “332 Special
Drawing Rights per passenger” [Art. 22(3)
WC, as amended by Additional Protocol No. 2
(1975)].
The Guatemala Protocol of 1971 increased the
limit for passengers to $100,000 and for
baggage to $1,000. However, the Supreme
Court noted in Santos III v. Northwest Orient
Airlines [G.R. No. 101538(1992)], that the
Guatemala Protocol is still ineffective
[Sundiang and Aquino].
Liability Limit: Checked Baggage
General Rule: In the carriage of baggage, the
liability of the carrier in the case of destruction,
loss, damage or delay is limited to 1 000
Special Drawing Rights for each passenger
The Warsaw Convention should be deemed a
limit of liability only in those cases where:
1. The cause of death or injury to person,
or destruction, loss or damage to
property or delay in its transport is not
attributable to or attended by:
a. Any willful misconduct, bad
faith, recklessness; or
b. Otherwise, improper conduct
on the part of any official or
employee for which the carrier
is responsible; and
2. There is otherwise no special or
extraordinary form of resulting injury
[Alitalia v. IAC, G.R. No. 71929 (1990)].
Exception: Unless the passenger has made,
at the time when the checked baggage was
handed over to the carrier, a special
declaration of interest in delivery at destination
and has paid a supplementary sum if the case
so requires.
• In that case the carrier will be liable
to pay a sum not exceeding the
declared sum, unless it proves that
the sum is greater than the
passenger’s actual interest in
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Note:
The Montreal Convention 1999
changed the limits of liability in relation to delay,
baggage and cargo as follows:
1. In the case of damage caused by delay
as specified in Article 19 in the carriage
of persons, the liability of the carrier for
each passenger is limited to 4,150
Special Drawing Rights;
2. In the carriage of baggage, the liability
of the carrier in the case of destruction,
loss, damage or delay is limited to
1,000 Special Drawing Rights for each
passenger x x x;
3. In the carriage of cargo, the liability of
the carrier in the case of destruction,
loss, damage or delay is limited to a
sum of 17 Special Drawing Rights per
kilogramme x x x [Art. 22, Montreal
Convention].
Note: Under the Warsaw Convention, if the
carrier accepts a passenger without a ticket, or
a luggage without luggage check, or goods
without airway bill, the carrier shall not be
entitled to avail himself of those provisions of
the Convention which exclude or limit his
liability. This has been deleted by the
Montreal Convention in Art. 3(5).
d. Liability for Cargo
General Rule: In the carriage of cargo, the
liability of the carrier in the case of destruction,
loss, damage or delay is limited to a sum of 17
Special Drawing Rights per kilogramme,
Exception: Unless the consignor has made, at
the time when the package was handed over to
the carrier, a special declaration of interest in
delivery at destination and has paid a
supplementary sum if the case so requires.
• In that case the carrier will be liable
to pay a sum not exceeding the
declared sum, unless it proves that
the sum is greater than the
consignor’s actual interest in
delivery at destination. [Art. 22,
MC]
e. Liability for Delay
In the case of damage caused by delay in the
carriage of persons, the liability of the carrier
for each passenger is limited to 4 150 Special
Drawing Rights.
3. Willful Misconduct
A common carrier may not avail of the limitation
in the following cases:
a. Willful misconduct;
b. Default amounting to willful misconduct
[Art. 25, WC];
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PUBLIC SERVICE ACT
COMMERCIAL LAW
PUBLIC SERVICE
ACT
COMMONWEALTH
ACT NO. 146 AS
AMENDED BY R.A.
NO. 11659
A. Critical Infrastructure
Critical Infrastructure refers to any public
service which owns, uses, or operates
systems and assets, whether physical or
virtual, so vital to the Republic of the
Philippines that the incapacity or destruction
of such systems or assets would have a
detrimental impact on national security,
including telecommunications and other such
vital services as may be declared by the
President of the Philippines. [Sec. 2(e), R.A.
No. 11659]
Limitations on the Ownership of
Critical Infrastructures:
2. Foreign Nationals
Foreign nationals shall not be allowed
to own more than fifty percent (50%) of
the capital of entities engaged in the
operation and management of critical
infrastructure unless the country of
such
foreign
national
accords
reciprocity to Philippine Nationals [Sec.
25, R.A. No. 11659]
B.
Foreign
Enterprise
State-Owned
Foreign State-owned Enterprise refers
to an entity in which a foreign State:
(i)
directly or indirectly owns more than
fifty-percent (50%) of the capital
taking into account both the voting
rights and beneficial ownership;
(ii)
control,
through
ownership
interests, the exercise of more than
fifty percent (50%) of the voting
rights; or
(iii)
holds the power to appoint a
majority of members of the board of
directors or any other equivalent
management body. [Sec. 2(e), R.A.
No. 11659]
1. Foreign State-Owned Enterprises
For investments made after the
effectivity of R.A. No. 11659:
• An entity controlled by or acting
on behalf of the foreign
government or foreign stateowned enterprises shall be
prohibited from owning capital
in any public service classified
as public utility or critical
infrastructure.
For investments made prior to the
effectivity of R.A. No. 11659:
• Foreign
state-owned
enterprises which own capital
prior to the effectivity of R.A.
No. 11659 are prohibited from
investing in additional capital
upon the effectivity of this Act.
C. Public Service as Public
Utility
Public Utility refers to a public service that
operates, manages or controls for public use
any of the following:
1. Distribution of Electricity;
2. Transmission of Electricity;
3. Petroleum and Petroleum Products
Pipeline Transmission Systems;
4. Water Pipeline Distribution Systems and
Wastewater Pipeline Systems, including
sewerage pipeline systems;
5. Seaports; and
6. Public Utility Vehicles.
All concessionaires, joint ventures and other
similar entities that wholly operate, manage or
control for public use the sectors above are
public utilities.
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No other person shall be deemed a public
utility unless otherwise subsequently
provided by law. [Sec. 4, R.A. No. 11659]
NOTE: Previous definition of “public utility”
under C.A. No. 146, Sec. 13(b) is ejusdem
generis – meaning where general words or
phrases follow a number of specific words or
phrases, the general words are specifically
construed as limited and apply only to persons
or things of the same kind or class as those
expressly mentioned. Previously, statutes
carve out the exceptions.
Now, under R.A. No. 11659, the enumeration
is exclusive. No entity shall be considered as a
public utility unless included in the list
enumerated under Sec. 4 or unless provided
by law.
Definition of Public Utilities:
1. Distribution of Electricity
Distribution of Electricity refers to the
conveyance of electric power by a
distribution utility through its distribution
system [Sec. 2(f), R.A. No. 11659]
2. Transmission of Electricity
Transmission of Electricity refers to the
conveyance of electricity through the
high voltage backbone system. [Sec.
2(n), R.A. No. 11659]
3. Petroleum
and
Petroleum
Products Pipeline Transmission
System
Petroleum and petroleum Product
Pipeline Transmission Systems refer to
the operation and maintenance of
pipeline transmission systems to ensure
an uninterrupted and adequate supply
and transmission of petroleum and
petroleum products to the public;
EXCLUSIONS:
a. petroleum
pipeline
systems
operated exclusively for private or
own use, or incidental to the
operations of a distinct business
[Sec. 2(i), R.A. No. 11659]
4. Water
Pipeline
Distribution
Systems
and
Wastewater
Pipeline
Systems,
including
Sewerage Pipeline Systems
Water Pipeline Distribution Systems and
Wastewater Pipeline Systems refer to the
operation and maintenance of water
pipeline distribution systems to ensure an
uninterrupted and adequate supply and
distribution of potable water for domestic
and other purposes and the operation
and maintenance of wastewater pipeline
systems to ensure public health and
safety. [Sec. 2(o), R.A. No. 11659]
EXCLUSIONS:
a. desludging companies and septic
tanks [Sec. 2(o), R.A. No. 11659]
5. Seaports
Seaport refers to a place where ships
may anchor or tie up for the purpose of
shelter, repair, loading or discharge of
passengers or cargo, or for other such
activities connected with water-borne
commerce, and including all the land and
water areas and the structures,
equipment and facilities related to these
functions, as defined by the charters of
relevant authorities or agencies, such as
the Philippine Ports Authority, Subic Bay
Metropolitan
Authority,
PHIVIDEC
Industrial Estate Authority, Cebu Port
Authority, local government units, and
other similar agencies or government
bodies; [Sec. 2(l), R.A. No. 11659]
6. Public Utility Vehicles
Public Utility Vehicles (PUVs) refer to
internal combustion engine vehicles that
carry passengers and/or domestic cargo
for a fee, offering services to the public,
namely trucks-for-hire, UV express
service, public utility buses (PUBs),
public utility jeepneys (PUJs), tricycles,
filcabs, and taxis.
NOTE:
That
transport
vehicles
accredited with and operating through
transport network corporations shall not
be considered as public utility vehicles
[i.e. Grab, Angkas] [Sec. 2(k), R.A. No.
11659]
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NOTE: PUVs shall not include electric
vehicles as the definition refers to
“internal combustion engine vehicles.”
Classification of a Public Service as
Public Utility
Upon the recommendation of the National
Economic and Development Authority (NEDA),
the President may recommend to Congress
the classification of a public service as a public
utility on the basis of the following criteria:
1. The person or juridical entity regularly
supplies and transmits and distributes
to the public through a network a
commodity or service of public
consequence;
2. The commodity or service is a natural
monopoly that needs to be regulated
when the common good so requires.
For this purpose, natural monopoly
exists when the market demand for a
commodity or service can be supplied
by a single entity at a lower cost that by
two or more entities;
3. The commodity or service is necessary
for the maintenance of life and
occupation of the public; and
4. The commodity or service is obligated
to provide adequate service to the
public on demand. [Sec. 4, R.A. No.
11659]
Limitations on the Ownership,
Operation, Management, and Control
of Public Utilities
1. Ownership
2. Exclusivity
No franchise, certificate, or authorization shall
be exclusive in character.
3. Fixed Term
No franchise, certificate, or authorization shall
be for a longer period than fifty years. [Sec. 11,
Art. XII, Const.]
A toll operation agreement with an original
stipulation period of 30 years and which
granted a maximum extension of 50 years was
struck down by the court for being in violation
of Sec. 11, Art, II of the Constitution. The
agreement with the original stipulation period of
30 years and the maximum extension of 50
years would allow a concession of 80 years.
This is a violation of the 50-year franchise
threshold under the Constitution. (Francisco v.
Toll Regulatory Board, G.R. No. 166910
(2010))
4. Subject to amendment
Such franchise or right shall be subject to
amendment, alteration, or repeal by the
Congress when the common good so requires.
[Sec. 11, Art. XII, Const.]
5. Public participation
The State shall encourage equity participation
in public utilities by the general public. [Sec. 11,
Art. XII, Const.]
6. Foreign participation
No franchise, certificate, or any other form of
authorization for the operation of a public utility
shall be granted except to citizens of the
Philippines or to corporations or associations
organized under the laws of the Philippines, at
least sixty per centum of whose capital is
owned by such citizens . [Sec. 11, Art. XII,
Const.]
The citizenship requirement is intended to
prevent aliens from assuming control of public
utilities, which may be inimical to the national
interest.
The participation of foreign investors in the
governing body of any public utility enterprise
shall be limited to their proportionate share in
its capital, and all the executive and managing
officers of such corporation or association must
be citizens of the Philippines. [Sec. 11, Art. XII,
Const.]
7. Take over
In times of national emergency, when the
public interest so requires, the State may,
during the emergency and under reasonable
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terms prescribed by it, temporarily take over or
direct the operation of any privately-owned
public utility or business affected with public
interest. [Sec. 17, Art. XII, Const.]
Section 17, Article XII must be understood as
an aspect of the emergency powers clause.
The taking over of private business affected
with public interest is just another facet of the
emergency powers generally reposed upon
Congress. Thus, when Sec. 17 states that “the
State, may during the emergency and under
reasonable terms prescribed by it, temporarily
take over or direct the operation of any privately
owned public utility or business affected with
public interest,” it refers to Congress, not the
President. (David v. Arroyo, G.R. No. 171396
(2006))
COMMERCIAL LAW
payment of just compensation,
transfer to public ownership utilities
and other private enterprises to be
operated by the Government. [Sec. 17,
Art. XII, Const.]
D. Unlawful Acts
It shall be unlawful for any public service:
1. To provide or maintain any service that
is unsafe, improper, or inadequate,
or withhold or refuse any service
which can reasonably be demanded
and furnished
2. To make or give, directly or indirectly,
by itself or through its agents attorneys
or brokers, or any of them, discounts or
rebates on authorized rates, or grant
credit for the payment of freight
8. Transfer to public ownership
charges,
or
any
undue
or
unreasonable
preference
or
The State may, in the interest of national
advantage to any person or
welfare or defense, establish and operate vital
corporation or to any locality or to any
industries and, upon payment of just
particular description of traffic or
compensation, transfer to public ownership
service, or subject any particular
utilities and other private enterprises to be
person or corporation or locality or any
operated by the Government. [Sec. 18, Art. XII,
particular description of traffic to any
Const.]
prejudice or disadvantage in any
respect
whatsoever;
to
adopt,
Public Service which is Not a Public
maintain, or enforce any regulation,
Utility
practice or measurement which shall
be found or determined by the
Commission
to
be
unjust,
A public service which is not classified as a
unreasonable, unduly preferential or
public utility under this Act shall be considered
unjustly discriminatory, in a final order
a business affected with public interest for
which shall be conclusive and shall
purposes of Sections 17 and 18 of Article XII of
take effect in accordance with the
the Constitution.
provisions of this Act, upon appeal or
otherwise.
Legal Implications for Business
3.
To
refuse or neglect, when requested
Affected with Public Interest
by the Postmaster General or his
authorized representative, to carry
1. In times of national emergency, when
public mail on the regular trips of any
the public interest so requires, the
public land transportation service
State may, during the emergency and
maintained or operated by any such
under reasonable terms prescribed by
public service, upon such terms and
it, temporarily take over or direct the
conditions and for a consideration in
operation of any privately-owned public
such amounts as may be agreed upon
utility or business affected with public
between the Postmaster General and
interest. [Sec. 17, Art. XII, Const.]
the public service carrier or fixed by the
2. The State may, in the interest of
Commission in the absence of an
national welfare or defense, establish
agreement between the Postmaster
and operate vital industries and, upon
General and the carrier. In case the
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Postmaster General and the public
service carrier are unable to agree on
the amount of the compensation to be
paid for the carriage of the mail, the
Postmaster General shall forthwith
request the Commission to fix a just
and reasonable compensation for such
carriage and the same shall be
promptly fixed by the Commission in
accordance with section sixteen of this
Act.
4. To refuse or neglect, when requested
by the Administrative Agency to
urgently use, deliver or render the
public service for the purpose of
avoiding further loss on human,
material, economic, or environment
during a state of calamity. [Sec. 19,
C.A. No. 146 as amended by Sec. 9,
R.A No. 11659]
E. Powers of the President to
Suspend or Prohibit Transaction
or Investment
In the interest of national security, the
President, after review, evaluation and
recommendation of the relevant government
department or Administrative Agency, may,
within sixty (60) days from the receipt of such
recommendation, suspend or prohibit any
proposed merger or acquisition transaction,
or any investment in a public service that
effectively results in the grant of control,
whether direct or indirect, to a foreigner or
a foreign corporation. [Sec. 23, R.A No.
11659]
National Security refers to the requirements
and conditions necessary to ensure the
territorial integrity of the country and the safety,
security, and well-being of Filipino citizens.
[Sec. 2(h), R.A. No. 11659]
F. Investments by an Entity
Controlled by or Acting on
Behalf
of
the
Foreign
Government, or Foreign Stateowned Enterprises
Capital Ownership
Public
Utilities
Infrastructure:
Prohibition on
and
Critical
For investments made after the effectivity of
R.A. No. 11659:
• An entity controlled by or acting on behalf
of the foreign government or foreign
state-owned enterprises shall be
prohibited from owning capital in any
public service classified as public
utility or critical infrastructure.
For investments made prior to the effectivity of
R.A. No. 11659:
• Foreign state-owned enterprises which
own capital prior to the effectivity of R.A.
No. 11659 are prohibited from investing
in additional capital upon the effectivity
of this Act.
EXCEPTION: The sovereign wealth funds and
independent pensions funds of each state may
collectively own up to thirty percent (30%) of
the capital of such public services.
In the interest of national security, an entity
controlled by or acting on behalf of the foreign
government or foreign- owned enterprises shall
not make any date or information disclosure,
nor extend assistance, support or cooperation
to any foreign government, instrumentalities or
agents. [Sec. 24, R.A. No. 11659]
G. Reciprocity Clause
Foreign Ownership Limitation
Critical Infrastructures
for
General Rule: Foreign nationals shall not be
allowed to own more than fifty percent (50%) of
the capital of entities engaged in the operation
and management of critical infrastructure
Exception: The country of such foreign
national accords reciprocity to Philippine
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Nationals as may be provided by foreign law,
treaty or international agreement. Reciprocity
may be satisfied by according rights of similar
value in other economic sectors. The NEDA
shall promulgate rules and regulations for this
purpose.
Foreign Employment
General Rule: A public service shall employ a
foreign national only after the determination of
non-availability of a Philippine National who is
competent, able and willing to perform the
services for which the foreign national is
desired.
Exception: Unless otherwise provided by law,
or by any international agreement
Any foreign national seeking admission to the
Philippines for employment purposes and any
public service which desires to engage a
foreign national for employment in the
Philippines must obtain an employment
permit pursuant to the Labor Code of the
Philippines.
Public services employing foreign nationals
issued employment permits in industries to be
determined by the Department of Labor and
Employment (DOLE) shall implement an
understudy/skills development program to
ensure the transfer of technology/skills to
Filipinos, whether next-in-rank or otherwise,
with the potential of succeeding the foreign
national in the same establishment or its
subsidiary, within a specific period as may be
determined by the DOLE, upon consultation
with relevant government agencies and
industry experts. [Sec. 25, R.A. No. 11659]
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INTELLECTUAL PROPERTY CODE
INTELLECTUAL
PROPERTY CODE
I. Intellectual Property Code
A. In General
1. Definition
Intangible property rights granted by law to
owners of intellectual creations such as
inventions, designs, signs, and names used in
commerce, and literary and artistic Works.
2. Intellectual Property Rights under
the Intellectual Property Code (RA
8293)
These include the following:
a. Copyright and related rights –
confined to literary and artistic works
which are original creations in the
literary or artistic domain [Ching v.
Salinas Jr., G.R. No. 161295 (2005)].
b. Trademarks and service marks – any
visible sign capable of distinguishing
the goods or services of an enterprise
[Sec. 121.1, RA 8293].
c. Geographic indications – identifies a
good originating in the territory of a
TRIPS member, or a region or locality
in that territory, where a given quality,
reputation, or other characteristic of the
good is essentially attributable to its
geographical origin [Art. 22, TRIPS].
d. Industrial designs – any composition
of lines or colors or any threedimensional form, whether or not
associated with lines or colors;
provided, that such composition or
form gives a special appearance to and
can serve as pattern for an industrial
product or handicraft [Sec. 112, RA
8293].
e. Patents – any technical solution of a
problem in any field of human activity
which is new, involves an inventive
COMMERCIAL LAW
step, and is industrially applicable [Sec.
21, RA 8293].
f. Utility models – a technical solution,
essentially a device or useful object, in
the mechanical field, that is new and
industrially applicable, and which may
relate to a product, process, or an
improvement [Ching v. Salinas Jr.,
G.R. No. 161295 (2005)].
g. Layout designs (topographies) of
integrated circuits – the threedimensional
disposition,
however
expressed, of the elements, at least
one of which is an active element, and
of some or all of the interconnections of
an integrated circuit, or such a threedimensional disposition prepared for
an integrated circuit intended for
manufacture [Sec 112.3, RA 8293].
h. Protection
of
undisclosed
information – refers to information
which:
a. Is a secret in a sense that it is
not, as a body or in the precise
configuration and assembly of
components, generally known
among or readily accessible to
persons within the circles that
normally deal with the kind of
information in question;
b. Has commercial value because
it is a secret;
c. Has
been
subject
to
reasonable steps under the
circumstances, by the person
d. lawfully in control of the
information, to keep it secret
[Art. 9, TRIPS].
3. Differences between copyright,
trademarks, and patents
Patents
Trademarks
Scope
Any technical solution of a
problem in any field of human
activity which is new,
involves an inventive step
and is industrially applicable
[Sec. 21, RA 8293; Kho v.
Court of Appeals, 379 SCRA
410 (2002)].
Any visible sign capable of
distinguishing the goods
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Scope
(trademark)
or
services
(service
mark)
of
an
enterprise from that of
another and shall include a
stamped
or
marked
container of goods [Sec.
121.1, RA 8293].
In relation thereto, a trade
name means the name or
designation identifying or
distinguishing an enterprise.
Copyrights Literary and artistic Works
which are original intellectual
creations in the literary and
artistic domain protected
from the moment of their
creation [Sec. 172.1, RA
8293].
Where Registered
Patents
Intellectual Property Office
Trademarks Intellectual Property Office
Copyrights The National Library** [Sec.
191, RA 8293]; Bureau of
Copyright
and
Related
Rights of the IPO
When Protection Starts
Patents
Upon the issuance of the
letters of patent by the IPO
Trademarks Upon issuance of the
trademark certificate
Copyrights Upon creation
Term of Protection
Patents
20 years from the date of
filing of the patent application
Trademarks 10 years from the date of
registration
Copyrights Generally up to 50 years
after the death of the author
Mode of Acquisition
Patents
Through
registration
in
accordance with the law
[Sec. 50, RA 8293].
Trademarks Through
registration,
although well-known marks
are protected even without
[Sec. 122, RA 8293].
Copyrights Through mere creation [Sec.
172.2, RA 8293].
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** “At any time during the subsistence of the
copyright, the owner of the copyright or of any
exclusive right in the work may, for the purpose
of completing the records of the National
Library and the Supreme Court Library, register
and deposit with them… two (2) complete
copies or reproductions of the work…
Provided, That only works in the field of law
shall be deposited with the Supreme Court
Library. Such registration and deposit is not a
condition of copyright protection." [Sec. 191,
RA 8293 as amended by RA 10372]
4. Jurisdiction of the Intellectual
Property Office
The threshold in administrative complaints for
violations of laws involving intellectual property
rights is two hundred thousand pesos
(P200,000) or more in total damages claimed.
B. Patents
A patent is an exclusive right granted for an
invention, which is a product or a process that
provides, in general, a new way of doing
something, or offers a new technical solution to
a problem. To get a patent, technical
information about the invention must be
disclosed to the public in a patent application
[World Intellectual Property Organization].
1. Patentable Inventions
A patentable invention is any technical
solution of a problem in any field of human
activity which is new, involves an inventive step
and is industrially applicable. It may be, or may
relate to, a product, or process, or an
improvement of any of the foregoing [Sec. 21,
RA 8293].
Standards or requirements for registrability
1. It must be novel;
2. It must be inventive; and
3. It must be industrially applicable
a. Novelty
An invention shall not be considered new if it
forms part of a prior art [Sec. 23, RA 8293].
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Prior art shall consist of:
1. Everything which has been made
available to the public anywhere in the
world, before the filing date or the
priority date of the application claiming
the invention [Sec. 24.1, RA 8293];
2. The whole contents of an earlier
published Philippine application or
application with an earlier priority date
of a different inventor. [Sec. 24.2, RA
8293].
General Rule: When a work has already been
made available to the public, it shall be nonpatentable for absence of novelty.
Exception: The disclosure of the information
contained in the application during the 12
months preceding the filing date or the priority
date of the application shall not prejudice the
applicant on the ground of novelty if such
disclosure was made by:
1. the inventor;
2. a patent office that should not have
disclosed the information, and the
information was found in another
application by the same inventor or a
third party; or
3. a third party who obtained the
information directly or indirectly from
the inventor [Sec. 25, RA 8293].
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new product that employs at least one
new reactant [Sec. 26.2, RA 8293 as
amended by RA 9502].
Test of Obviousness
If any person possessing ordinary skill in the art
was able to draw the inferences and he
constructs that the supposed inventor drew
from prior art, then the latter did not really
invent it.
c. Industrial Applicability
An invention that can be produced and used in
any industry shall be industrially applicable
[Sec. 27, RA 8293].
This means an invention is not merely
theoretical, but it also has a practical purpose.
If the invention is a product, it should be able to
produce a product. If the invention is a process,
it should be able to lay out a process [WIPO].
2. Non-Patentable Inventions
The following shall be excluded from patent
protection:
1. Discoveries, scientific theories, and
mathematical methods, and in the case
of drugs and medicines, the mere
discovery of a new form or new
property of a known substance which
b. Inventive Step
does not result in the enhancement of
the known efficacy of that substance,
An invention involves an inventive step if,
or the mere discovery of any new
having regard to prior art, it is not obvious to a
property or new use for a known
person skilled in the art at the time of the filing
substance, or the mere use of a known
date or priority date of the application claiming
process unless such known process
the invention [Sec. 26.1, RA 8293, as amended
results in a new product that employs
by RA 9502].
at least one new reactant. Salts, esters,
ethers, polymorphs, metabolites, pure
Cheaper Medicines Act
form, particle size, isomers, mixtures of
In case of drugs and medicines, there is no
isomers, complexes, combinations,
inventive step if the invention results from:
and other derivatives of a known
1. The mere discovery of a new form or
substance shall be considered to be
new property of a known substance
the same substance, unless they differ
which does not result in enhancement
significantly in properties with regard to
of the known efficacy of that substance;
efficacy [Sec. 22.1, RA 8293 as
2. The mere discovery of any new
amended by RA 9502];
property or new use for a known
2. Schemes, rules and methods of
substance; or
performing mental acts, playing games
3. The mere use of a known process
or doing business, and programs for
unless such known process results in a
computers [Sec. 22.2, RA 8293];
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3. Methods for treatment of the human or
animal body by surgery or therapy and
diagnostic methods practiced on the
human or animal body. This provision
shall not apply to products and
composition for use in any of these
methods [Sec. 22.3, RA 8293];
4. Plant varieties or animal breeds or
essentially biological process for the
production of plants or animals. This
provision shall not apply to microorganisms and non-biological and
microbiological processes [Sec. 22.4,
RA 8293];
5. Aesthetic creations [Sec. 22.5, RA
8293];
6. Anything which is contrary to public
order or morality [Sec. 22.6, RA 8293].
3. Ownership of a Patent
a. Right to a Patent
General Rule: The right to a patent belongs to
the inventor, his heirs, or assigns. When two or
more persons have jointly made an invention,
the right to a patent shall belong to them jointly.
[Sec. 28, RA 8293].
b. First-to-File Rule
RA 8293 changed the basis of ownership of a
patent from First-to-Invent to First-to-File.
If two or more persons have made the invention
separately and independently of each other,
the right to the patent shall belong to the person
who filed an application for such invention, or
where two or more applications are filed for the
same invention, to the applicant who has the
earliest filing date or, the earliest priority date.
[Sec. 29, RA 8293]
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c. Inventions Created Pursuant to a
Commission
Exception: Inventions created pursuant to
employment or a commissioned work:
1. The person who commissions the
work shall own the patent. [Sec. 30.1,
RA 8293]
2. The employer has the right to the
patent if the invention is the result of the
performance of the employee’s
regularly assigned duties. [Sec. 30.2,
RA 8293].
d. Right of Priority
An application for patent filed by any person
who has previously applied for the same
invention in another country which by treaty,
convention, or law affords similar privileges to
Filipino citizens, shall be considered as filed as
of the date of filing the foreign application:
Provided, That:
1. the local application expressly claims
priority;
2. it is filed within twelve (12) months
from the date the earliest foreign
application was filed; and
3. a certified copy of the foreign
application together with an English
translation is filed within six (6) months
from the date of filing in the
Philippines.
4. Grounds for Cancellation of a
Patent
Any interested person may petition to cancel
the patent or any claim thereof, or parts of the
claim, on any of the following grounds:
a. That what is claimed as the invention is
not new or patentable;
b. That the patent does not disclose the
invention in a manner sufficiently clear
and complete for it to be carried out by
any person skilled in the art; or
c. That the patent is contrary to public
order or morality [Sec. 61.1, RA 8293].
The filing date of a patent application shall be
the date of receipt by the Office of at least the
following elements:
1. An express or implicit indication that a
Philippine patent is sought;
2. Information identifying the applicant;
and
Where the grounds for cancellation relate to
3. Description of the invention and one (1)
some of the claims or parts of the claim,
or more claims in Filipino or English
[Sec. 40.1, RA 8293].
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cancellation may be effected to such extent
only [Sec. 61.2, RA 8293].
5. Remedy of the True and Actual
Inventor
If a person referred to in Sec. 29, other than the
applicant, is declared by final court order or
decision as having the right to the patent, such
person may, within three (3) months after the
decision has become final:
1. Prosecute the application as his own
application in place of the applicant;
2. File a new patent application in respect
of the same invention;
3. Request that the application be
refused; or
4. Seek cancellation of the patent, if one
has already been issued. [Sec. 67, RA
8293]
If a person, who was deprived of the patent
without his consent or through fraud, is
declared by final court order or decision to be
the true and actual inventor, the court shall:
1. Order for his substitution as patentee;
or
2. At the option of the true inventor,
cancel the patent; and
3. Award actual damages in his favor if
warranted by the circumstances [Sec
68, RA 8293]
6. Rights Conferred by a Patent
Where the subject matter of a patent is a
product
The patentee shall have the exclusive rights to
restrain,
prohibit,
and
prevent
any
unauthorized person or entity from making,
using, offering for sale, selling or importing that
product. [Sec. 71.1.a, RA 8293].
Where the subject matter of a patent is a
process
The patentee shall have the exclusive rights to
restrain, prevent or prohibit any unauthorized
person or entity from using the process, and
from manufacturing, dealing in, using, selling or
offering for sale, or importing any product
obtained directly or indirectly from such
process [Sec. 71.1.b, RA 8293].
COMMERCIAL LAW
Patent owners shall also have the right to
assign, or transfer by succession the patent,
and to conclude licensing contracts for the
same [Sec. 71.2, RA 8293].
7. Limitations of Patent Rights
The owner of a patent has no right to prevent
third parties from performing, without his
authorization, the acts referred to in Section 71
(see above) in the following circumstances:
1. Owner’s Consent:
a. Domestic Exhaustion – using
a patented product which has
been put on the market in the
Philippines by the owner of the
product, or with his express
consent, insofar as such use is
performed after that product
has been so put on the said
market;
b. International Exhaustion – a
drug or medicine has been
introduced anywhere else in
the world by the patent owner,
or by any party authorized to
use the invention [Sec. 72.1,
RA 8293 as amended by RA
9502].
2. Parallel Importation – the right to
import the drugs and medicines shall
be available to any government agency
or any private third party; [Sec. 72.1,
RA 8293 as amended by RA 9502]
3. Non-commercial – where the act is
done privately and on a noncommercial scale or for a noncommercial purpose: Provided, That it
does not significantly prejudice the
economic interests of the owner of the
patent; [Sec. 72.2, RA 8293 as
amended by RA 9502]
4. Experimental Use – where the act
consists of making or using exclusively
for experimental use of the invention
for scientific purposes or educational
purposes and such other activities
directly related to such scientific or
educational experimental use; [Sec.
72.3, RA 8293 as amended by RA
9502]
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5. Bolar Exception – in the case of drugs
and medicines, where the act includes
testing, using, making or selling the
invention including any data related
thereto, solely for purposes reasonably
related to the development and
submission
of
information
and
issuance of approvals by government
regulatory agencies required under any
law of the Philippines or of another
country that regulates the manufacture,
construction, use or sale of any product
[Sec. 72.4, RA 8293].
6. Individual Preparation of Medicine –
where the act consists of the
preparation for individual cases, in a
pharmacy or by a medical professional,
of a medicine in accordance with a
medical shall apply after a drug or
medicine has been introduced in the
Philippines or anywhere else in the
world by the patent owner, or by any
party authorized to use the invention:
Provided, further, That the right to
import the drugs and medicines
contemplated in this section shall be
available to any government agency or
any private third party; [Sec. 72.5, RA
8293 as amended by RA 9502]
7. Usage in Vessels – where the
invention is used in any ship, vessel,
aircraft, or land vehicle of any other
country entering the territory of the
Philippines temporarily or accidentally:
Provided, That such invention is used
exclusively for the needs of the ship,
vessel, aircraft, or land vehicle and not
used for the manufacturing of anything
to be sold within the Philippines. [Sec.
72.6, RA 8293 as amended by RA
9502]
a. Prior User
Any prior user, who, in good faith was using the
invention or has undertaken serious
preparations to use the invention in his
enterprise or business, before the filing date or
priority date of the application on which a
patent is granted, shall have the right to
continue the use thereof as envisaged in such
preparations within the territory where the
patent produces its effect [Sec. 73.1, RA 8293].
COMMERCIAL LAW
b. Use by Government
A government agency or third person
authorized by the government may exploit the
invention even without agreement of the patent
owner where:
1. The public interest, in particular,
national security, nutrition, health or the
development of other sectors, as
determined by the appropriate agency
of the government, so requires; [Sec.
74.1(a), RA 8293]
2. A judicial or administrative body has
determined that the manner of
exploitation, by the owner of the patent
or his licensee, is anti-competitive;
[Sec. 74.1(b), RA 8293]
3. In the case of drugs and medicines,
there is a national emergency or other
circumstance of extreme urgency
requiring the use of the invention; [Sec.
74.1(c), RA 8293 as amended by RA
9502]
4. In the case of drugs and medicines,
there is public non-commercial use of
the patent by the patentee, without
satisfactory reason; [Sec. 74.1(d), RA
8293 as amended by RA 9502]
5. In the case of drugs and medicines, the
demand for the patented article in the
Philippines is not being met to an
adequate extent and on reasonable
terms, as determined by the Secretary
of the Department of Health. [Sec.
74.1(e), RA 8293, as amended by RA
9502]
c. Compulsory Licensing
The Director General of the IPO may grant a
compulsory license to exploit an invention even
without the agreement of the owner (see Letter
b on page 9).
8. Patent Infringement
Patent infringement is the making, using,
offering for sale, selling, or importing a
patented product or a product obtained directly
or indirectly from a patented process, or the
use of a patented process without the
authorization of the patentee [Sec 76.1, RA
8293].
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Anyone who actively induces the infringement
of a patent or provides the infringer with a
component of a patented product or of a
product produced because of a patented
process knowing it to be especially adopted for
infringing the patented invention and not
suitable for substantial non-infringing use shall
be liable as a contributory infringer and shall be
jointly and severally liable with the infringer
[Sec. 76.6, RA 8293].
a. Tests in Patent Infringement
Literal Infringement
In using literal infringement as a test, resort
must be had in the first instance to the words of
the claim.
To determine whether the particular item falls
within the literal meaning of the patent claims,
the court must juxtapose the claims of the
patent and the accused product within the
overall context of the claims and specifications,
to determine whether there is exact identity of
all material elements [Godinez v. CA, G.R. No.
L-97343 (1993)].
The test is satisfied if the following are met:
1. Exactness Rule – the item being sold,
made, or used conforms exactly to the
patent claim of another
2. Addition Rule – one makes, uses, or
sells an item that has all the elements
of the patent claim of another plus other
elements
Doctrine of Equivalents
Under the doctrine of equivalents, an
infringement occurs when a device:
a. Appropriates a prior invention by
incorporating its innovative concept,
albeit with some modification and
change;
b. Performs substantially the same
function in substantially the same way;
and
c. Achieves substantially the same result
[Godinez v. CA, G.R. No. L-97343
(1993)].
The doctrine of equivalents thus requires
satisfaction of the function-means-and-result
test, the patentee having the burden to show
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that all three components of such equivalency
test are met [Smith Klein Beckman Corp. v. CA,
G. R. No. 126627 (2003)].
b. Defenses in Action for Infringement
Invalidity of Patent
The defendant may show the invalidity of the
patent, or any claim thereof, on any of the
grounds on which a petition of cancellation can
be brought under Section 61 (see Number 4 on
page 4) [Sec. 81, RA 8293].
Doctrine of File Wrapper Estoppel
The patentee is precluded from claiming as
part of a patented product that which he had to
excise or modify in order to avoid patent office
rejection, and he may omit any additions he
was compelled to add by patent office
regulations [Advance Transformer Co. v.
Levinson, 837 F.2d 1081 (1988)].
9. Licensing
a. Voluntary
The grant by the patent owner to a third person
of the right to exploit a patent invention.
Voluntary licensing encourages the transfer
and dissemination of technology, prevent or
control practices and conditions that may in
particular cases constitute an abuse of
intellectual property rights having an adverse
effect on competition and trade [Sec 85, RA
8293].
To this end, all voluntary technology transfer
arrangements or licensing contract shall:
1. Not contain any of the prohibited
clauses for voluntary license contracts
under Sec. 87.
2. Contain all of the mandatory provisions
for voluntary license contracts under
Sec. 88.
3. Be approved and registered with the
Documentation,
Information
and
Technology Transfer Bureau of the
IPOPHL as an exceptional case under
Sec. 91, but only if the agreement fails
to comply with Sec. 87 and 88.
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Mandatory Provisions
1. That the laws of the Philippines shall
govern the interpretation of the same
and in the event of litigation, the venue
shall be the proper court in the place
where the licensee has its principal
office;
2. Continued access to improvements in
techniques and processes related to
the technology shall be made available
during the period of the technology
transfer arrangement.
3. In the event the technology transfer
arrangement
shall
provide
for
arbitration, the Procedure of Arbitration
of the Arbitration Law of the Philippines
or the Arbitration Rules of the United
Nations Commission on International
Trade Law (UNCITRAL) or the Rules of
Conciliation and Arbitration of the
International Chamber of Commerce
(ICC) shall apply and the venue of
arbitration shall be the Philippines or
any neutral country;
4. The Philippine taxes on all payments
relating to the technology transfer
arrangement shall be borne by the
licensor [Sec. 88, RA 8293].
Prohibited Clauses
1. Those which impose upon the licensee
the obligation to acquire from a specific
source capital goods, intermediate
products, raw materials, and other
technologies, or of permanently
employing personnel indicated by the
licensor;
2. Those pursuant to which the licensor
reserves the right to fix the sale or
resale prices of the products
manufactured on the basis of the
license;
3. Those
that
contain
restrictions
regarding the volume and structure of
production;
4. Those that prohibit the use of
competitive technologies in a nonexclusive
technology
transfer
agreement;
5. Those that establish a full or partial
purchase option in favor of the licensor;
6. Those that obligate the licensee to
transfer for free to the licensor the
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7.
8.
9.
10.
11.
12.
13.
14.
15.
inventions or improvements that may
be obtained through the use of the
licensed technology;
Those that require payment of royalties
to the owners of patents for patents
which are not used;
Those that prohibit the licensee to
export the licensed product unless
justified for the protection of the
legitimate interest of the licensor such
as exports to countries where exclusive
licenses to manufacture and/or
distribute the licensed product(s) have
already been granted;
Those which restrict the use of the
technology supplied after the expiration
of
the
technology
transfer
arrangement, except in cases of early
termination of the technology transfer
arrangement
due
to
reason(s)
attributable to the licensee;
Those which require payments for
patents and other industrial property
rights after their expiration, termination
arrangement;
Those which require that the
technology recipient shall not contest
the validity of any of the patents of the
technology supplier;
Those which restrict the research and
development activities of the licensee
designed to absorb and adapt the
transferred
technology
to
local
conditions or to initiate research and
development programs in connection
with new products, processes or
equipment;
Those which prevent the licensee from
adapting the imported technology to
local conditions, or introducing
innovation to it, as long as it does not
impair the quality standards prescribed
by the licensor;
Those which exempt the licensor for
liability for non-fulfillment of his
responsibilities under the technology
transfer arrangement and/or liability
arising from third party suits brought
about by the use of the licensed
product or the licensed technology;
Other clauses with equivalent effects
[Sec. 87, RA 8293].
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Rights of Licensor
1. Grant further licenses to third persons;
2. Exploit the subject matter of the
technology transfer agreement [Sec.
89, RA 8293].
Rights of Licensee
1. Exploit the subject matter of the
technology transfer agreement during
the whole term of the agreement [Sec.
90, RA 8293].
b. Compulsory
The Director General of the Intellectual
Property Office may grant a license to exploit a
patented invention, even without the
agreement of the patent owner, in favor of any
person who has shown his capability to exploit
the invention, under any of the following
circumstances:
1. National
emergency
or
other
circumstances of extreme urgency;
[Sec. 93.1, RA 8293 as amended by
RA 9502]
2. Where the public interest, in particular,
national security, nutrition, health or the
development of other vital sectors of
the national economy as determined by
the appropriate agency of the
Government, so requires; [Sec. 93.2,
RA 8293 as amended by RA 9502]
3. Where a judicial or administrative body
has determined that the manner of
exploitation by the owner of the patent
or his licensee is anti-competitive;
[Sec. 93.3, RA 8293 as amended by
RA 9502]
4. In case of public non-commercial use
of the patent by the patentee, without
satisfactory reason; [Sec. 93.4, RA
8293 as amended by RA 9502]
5. If the patented invention is not being
worked in the Philippines on a
commercial scale, although capable of
being worked, without satisfactory
reason: Provided, That the importation
of the patented article shall constitute
working or using the patent; [Sec. 93.5,
RA 8293 as amended by RA 9502]
6. Where the demand for patented drugs
and medicines is not being met to an
adequate extent and on reasonable
terms, as determined by the Secretary
COMMERCIAL LAW
of the Department of Health; [Sec.
93.6, RA 8293 as amended by RA
9502]
7. When semi-conductor technology is for
non-commercial use or to remedy anticompetitive practices [Sec. 96, RA
8293].
8. If the invention protected by a patent,
hereafter referred to as the "second
patent," within the country cannot be
worked without infringing another
patent, hereafter referred to as the "first
patent," granted on a prior application
or benefiting from an earlier priority, a
compulsory license may be granted to
the owner of the second patent to the
extent necessary for the working of his
invention, subject to certain conditions;
[Sec. 97, RA 8293]
9. Manufacture and export of drugs and
medicines to any country having
insufficient or no manufacturing
capacity in the pharmaceutical sector
to address public health problems:
Provided, That, a compulsory license
has been granted by such country or
such country has, by notification or
otherwise, allowed importation into its
jurisdiction of the patented drugs and
medicines from the Philippines in
compliance
with
the
TRIPS
Agreement. [Sec. 93-A.2, RA 8293 as
amended by RA 9502]
Terms and Conditions of a Compulsory
License
1. The basic terms and conditions
including the rate of royalties shall be
fixed by the Director of Legal Affairs;
2. The scope and duration of the license
shall be limited to its purpose;
3. The license shall be non-exclusive;
4. The license shall be non-assignable,
except with that part of the enterprise
or business with which the invention is
being exploited;
5. Use of the subject matter shall be
devoted predominantly for the supply
of the Philippine market, but if the
ground for approval was the anticompetitive practice of the patentee,
then this limitation shall not apply;
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6. The license may be terminated upon
proper showing that the circumstances
that led to its grant ceased to exist and
are unlikely to recur;
7. The patentee shall be paid adequate
remuneration for the grant or
authorization, but if his practices are
determined to be anti-competitive, then
the need to correct such will be taken
into account in fixing the amount [Sec.
100, RA 8293].
10. Assignment and Transmission of
Rights
Inventions and any right, title or interest in and
to patents and inventions covered thereby,
may be assigned or transmitted by inheritance
or bequest or may be the subject of a license
contract [Sec. 103.2, RA 8293].
An assignment may be of:
1. The entire right, title, or interest in and
to the patent and the invention covered
thereby, or
2. An undivided share of the entire patent
and invention, in which event the
parties become joint owners thereof.
An assignment may also be limited to a
specified territory [Sec. 104, RA 8293].
Rights of Joint Owners
If two or more persons jointly own a patent and
the invention covered thereby, each joint owner
shall be entitled to personally make, use, sell,
or import the invention for his own profit.
However, neither of the joint owners shall be
entitled to grant licenses or to assign his right,
title or interest or part thereof without the
consent of the other owner or owners, or
without proportionally dividing the proceeds
with such other owner or owners. [Sec. 107, RA
8293]
C. Trademarks
1. Marks vs. Collective Marks vs.
Trade Names
COMMERCIAL LAW
a. Definitions
Marks
Any visible sign capable of distinguishing the
goods (trademark) or services (service mark)
of an enterprise and shall include a stamped or
marked container of goods [Sec. 121.1, RA
8293].
Trademark
Any visible sign which is adopted and used to
identify the source or origin of goods; and
capable of distinguishing them from goods
emanating from a competitor.
The following are the functions of a trademark:
To point out distinctly the origin or ownership of
the goods and to which it is affixed;
To secure him, who has been instrumental in
bringing into the market a superior article of
merchandise, the fruit of his industry and skill;
To assure the public that they are producing
the genuine article;
To prevent fraud and imposition; and
To protect the manufacturer against
substitution and sale of an inferior and different
article as its product [Mirpuri v. CA, G.R. No.
114508 (1999)].
Service Mark
Any visible sign capable of distinguishing the
services of an enterprise from the service of
other enterprises.
Collective Marks
Any visible sign designated as such in the
application for registration and capable of
distinguishing the origin or any other common
characteristic, including the quality of goods or
services of different enterprises which use the
sign under the control of the registered owner
of the collective mark [Sec. 121.2, RA 8293].
Trade Name
The name or designation identifying or
distinguishing an enterprise [Sec. 121.3, RA
8293].
Any individual name or surname, firm name,
device or word used by manufacturers,
industrialists, merchants, and others to identify
their businesses, vocations or occupations
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COMMERCIAL LAW
[Converse Rubber Corp. v. Universal Rubber
Products, Inc., G.R. No. L-27906 (1987)].
b. Trademark/Service Mark vs. Trade
Name (Under the IP Code)
Trademark or
Service Mark
Trade Name
Basis of Ownership
Registration
Prior
use
Philippine
commerce
in
When Protected
Upon registration
A trade name may
be protected even if
unregistered
Remedies
A trademark or
service mark owner
can
avail
of
administrative, civil,
and
criminal
remedies
A trade name owner
only has civil and
administrative
remedies
Assignment
A trademark or A trade name can
service mark can be only be assigned
assigned
with the business
independent
of
business
c. Spectrum of Distinctiveness
These must remain in the public domain and
can never be registered as a trademark.
Examples: “SUGAR” for refined sugar, “KAPE”
for instant coffee, “WATER” for bottled water.
Descriptive Marks
Consists exclusively of signs or of indications
that may serve in trade to designate the kind,
quality, quantity, intended purpose, value,
geographical origin, time or production of the
goods or rendering of the services, or other
characteristics of the goods or services [Sec.
123(j), RA 8293].
These are words that merely describe the
product or service or refer to their quality or
characteristic.
General Rule: Descriptive marks are not
entitled to protection and are too weak to
function as a trademark.
Exception: Doctrine of Secondary meaning.
A word or phrase originally incapable of
exclusive appropriation with reference to an
article on the market, because geographically
or otherwise descriptive, might nevertheless
have been used so long and so exclusively by
one producer with reference to his article that,
in that trade and to that branch of the
purchasing public, the word or phrase has
come to mean that the article was his product
[Arce Sons v. Selecta Biscuits, G.R. No. L14761 (1961)].
Example: “YELLOW PAGES” for telephone
directory having yellow pages.
Suggestive Marks
Marks that hint or suggest the nature or quality
of the good or service without directly
describing it. They are “subtly descriptive” and
are entitled to protection despite lack of
distinctiveness.
Generic Marks
Generic Marks are those which constitute the
common descriptive name of an article or
substance, or comprise the genus of which the
particular product is a species, or are
Example: “JAGUAR” for automobile.
commonly used as the name or description of
a kind of goods, or imply reference to every
Arbitrary Marks
member of a genus and the exclusion of
Common words used as marks but are
individuating characters, or refer to the basic
unrelated to the good or service they represent.
nature of the wares or services provided rather
They neither describe nor suggest the
than to the more idiosyncratic characteristics of
characteristic of the goods or service, though
a particular product. [Societe Des Produits
Nestle v. CA, G.R. No. 112012, 2001].
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they are considered highly distinctive for
purposes of registration.
Example: “APPLE” for electronic products.
Fanciful or “Coined” Marks
These are invented or “coined” words that do
not have any meaning and are made solely for
the purpose of the mark. They are considered
“strong” marks for purposes of registration and
protection for being inherently distinctive.
Example: “KODAK” for camera.
2. Acquisition of Ownership of Mark
a. Concept of actual use
Actual use pertains to the actual use of the
mark in local (Philippine) commerce and trade
[Philip Morris v. Fortune Tobacco, G.R. No.
158589 (2006)].
Prior Use of a Mark as a Requirement
While RA 8293 no longer requires prior use
before filing the application, it still requires use
of the mark after filing, registration and
renewal.
Before the IP Code
Under the old trademark law or R.A. 166, actual
commercial use of a trademark in the
Philippines was required prior to its registration
[Sec. 2-A, RA 166].
Under the IP Code
RA 8293 no longer requires prior use before
filing the application (i.e., it shifted to an intent
to use system). However, the law still requires
use of the mark after filing.
To emphasize, following the ruling in Zuneca
Pharmaceutical v. Natrapharm [G.R. No.
211850 (2020)], for marks that are first used
and/or registered after the effectivity of the IP
Code, ownership is no longer dependent on the
fact of prior use in light of the adoption of the
first-to-file rule and the rule that ownership is
acquired through registration.
Non-Use of Mark; When Excused
Non-use caused by circumstances arising
independently of the will of the trademark
COMMERCIAL LAW
owner shall be excused. However, non-use
due to lack of funds shall not excuse non-use
of a mark [Sec. 152.1, RA 8293].
The following shall not be grounds for
cancellation or removal of a mark:
1. Use which does not alter its distinctive
character though the use is different from
the form in which it is registered [Sec.
152.2, RA 8293].
2. Use of a mark in connection with one or
more of the goods/services belonging to
the class in which the mark is registered
[Sec. 152.3, RA 8293].
3. Use of the mark by a company related
to the applicant or registrant [Sec. 152.4,
RA 8293].
4. Use of the mark by a person controlled
by the registrant [Sec. 152.4, RA 8293].
Note: The use of a mark by a company related
with or controlled by the registrant or applicant
shall inure to the latter's benefit: Provided, that
such mark is not used in such manner as to
deceive the public [Sec.152.4, RA 8293].
b. Effect of registration
General Rule: The owner of a registered mark
shall have the exclusive right to prevent all third
parties not having the owner’s consent from
using in the course of trade identical or similar
signs or containers for goods or services which
are identical or similar to those in respect of
which the trademark is registered where such
use would result in a likelihood of confusion.
In case of the use of an identical sign for
identical goods or services, a likelihood of
confusion shall be presumed [Sec. 147.1, RA
8293].
Exception: In cases of importation of drugs and
medicines allowed under Section 72.1 of this
Act (see Number 7 on page 5) and of off-patent
drugs and medicines, third parties can import
the same even without the owner’s consent,
provided that:
1. Said drugs and medicines bear the
registered marks
2. The registered marks have not been
tampered, unlawfully modified, or infringed
upon [Sec. 147.1, RA 8293 as amended by
RA 9502].
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Registration is a prerequisite before one can
file an action for trademark infringement [Sec.
147.1, RA 8293].
The exclusive right of the owner of a wellknown mark defined in Subsection 123.1(e)
(see Letter c on page 17) which is registered in
the Philippines, shall extend to goods and
services which are not similar to those in
respect of which the mark is registered:
Provided, That use of that mark in relation to
those goods or services would indicate a
connection between those goods or services
and the owner of the registered mark: Provided
further, That the interests of the owner of the
registered mark are likely to be damaged by
such use [Sec. 147.2, RA 8293].
c. Acquisition
General Rule: To acquire rights in a mark,
registration is required [Sec. 122, RA 8293].
Exception: Well-known marks are protected
even without registration.
Note: However, when the well-known mark is
not registered, its protection is limited, as it only
prevents the registration of confusingly similar
marks that are used for identical or similar
goods or services [Sec. 123.1(e), RA 8293].
On Good Faith
Being the first-to-file registrant in good faith
allows the registrant to acquire all the rights in
a mark.
When there are no grounds for cancellation especially the registration being obtained in
bad faith or contrary to the provisions of the IP
Code, which render the registration void - the
first-to-file registrant acquires all the rights in a
mark.
In the same vein, prior users in good faith are
also protected in the sense that they will not be
made liable for trademark infringement even if
they are using a mark that was subsequently
registered by another person.
Priority Right
An application for registration of a mark filed in
the Philippines by a person referred to in
COMMERCIAL LAW
Section 3, and who previously duly filed an
application for registration of the same mark in
one of those countries, shall be considered as
filed as of the day the application was first filed
in the foreign country (Provided, the Philippine
application is filed within 6 months from the
filing of the foreign application) [Sec. 131.1, RA
8293].
No registration of a mark in the Philippines by
a person described in this section shall be
granted until such mark has been registered in
the country of origin of the applicant [Sec.
131.2, RA 8293].
Note: Any person who is a national or who is
domiciled or has a real and effective industrial
establishment in a country which is a party to
any convention, treaty or agreement relating to
intellectual property rights or the repression of
unfair competition, to which the Philippines is
also a party, or extends reciprocal rights to
nationals of the Philippines by law, shall be
entitled to benefits to the extent necessary to
give effect to any provision of such convention,
treaty or reciprocal law, in addition to the rights
to which any owner of an intellectual property
right is otherwise entitled by this Act [Sec. 3,
RA 8293].
Significance of Priority Right
A Philippine application filed by another
applicant after the priority date but earlier than
the foreign applicant’s actual filing may be
refused registration if it is identical to the mark
with a priority date [Agpalo, The Law on
Trademark,
Infringement
and
Unfair
Competition (2000)].
3. Acquisition of Ownership of Trade
Name
The ownership of a trade name is acquired
through adoption and use.
Such names shall be protected, even prior to
or without registration, against any unlawful act
committed by third parties [Sec. 165.2 (a), RA
8293].
Any subsequent use of the trade name by a
third party, whether as a trade name or a mark
or collective mark, or any such use of a similar
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trade name or mark, likely to mislead the
public, shall be deemed unlawful [Sec. 165.2
(b), RA 8293].
A name or designation may not be used as a
trade name:
1. If by its nature or the use to which such
name or designation may be put, it is
contrary to public order or morals; and
2. If, in particular, it is liable to deceive
trade circles or the public as to the nature
of the enterprise identified by that name
[Sec. 165.1, RA 8293].
COMMERCIAL LAW
f.
g.
h.
Any change in the ownership of a trade name
shall be made with the transfer of the enterprise
or part thereof identified by that name [Sec.
165.4, RA 8293].
i.
4. Non-Registrable Marks
A mark cannot be registered if it:
a. Consists of immoral, deceptive or
scandalous matter, or matter which
may disparage or falsely suggest a
connection with persons, living or
dead, institutions, beliefs, or national
symbols, or bring them into contempt
or disrepute; [Sec. 123.1(a), RA 8293]
b. Consists of flags, coat of arms or other
insignia of the Philippines or any
foreign country; [Sec. 123.1(b), RA
8293]
c. Consists of a name, portrait or
signature identifying a particular living
individual except by his written
consent, or of a deceased President of
the Philippines, during the life of his
widow, except by written consent of the
widow; [Sec. 123.1(c), RA 8293]
d. Is identical with a registered mark of
another or a mark with an earlier filing
or priority date, in respect of:
i.
The same goods or services, or
ii.
Closely related goods or
services, or
iii.
If it nearly resembles such a
mark as to be likely to deceive
or cause confusion; [Sec.
123.1(d), RA 8293]
e. Is identical with, or confusingly similar
to, or constitutes a translation of a wellknown mark, whether or not registered
in the Philippines, and used for
j.
k.
l.
m.
identical or similar goods or services;
[Sec. 123.1(e), RA 8293]
Is identical with, or confusingly similar
to, or constitutes a translation of a wellknown mark which is registered in the
Philippines, and used for goods or
services which are not similar; [Sec.
123.1(f), RA 8293]
Likely to mislead the public, particularly
as to the nature, quality, characteristics
or geographical origin of the goods or
services; [Sec. 123.1(g), RA 8293]
Consists exclusively of signs that are
generic for the goods or services that
they seek to identify; [Sec. 123.1(h),
RA 8293]
Consists exclusively of signs or of
indications
that
have
become
customary or usual to designate the
goods or services in everyday
language or in a bona fide and
established trade practice; [Sec.
123.1(i), RA 8293]
Consists exclusively of signs or of
indications that may serve in trade to
designate the kind, quality, quantity,
intended purpose, value, geographical
origin, time or production of the goods
or rendering of the services, or other
characteristics of the goods or
services; [Sec. 123.1(j), RA 8293]
Consists of shapes that may be
necessitated by technical factors or by
the nature of the goods themselves or
factors that affect their intrinsic value;
[Sec. 123.1(k), RA 8293]
Consists of color alone, unless defined
by a given form; [Sec. 123.1(l), RA
8293]
Is contrary to public order or morality.
[Sec. 123.1(m), RA 8293]
Other instances when a mark may be
registered:
1. When it is part of a composite mark,
though there should be a disclaimer
and the person who registers them will
not acquire ownership thereto;
2. If they are contractions of or coined
from generic and descriptive terms;
3. If they are used in a fanciful or arbitrary
manner;
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4. If the mark falls under the Doctrine of
Secondary Meaning.
Doctrine of Secondary Meaning
Secondary meaning is acquired when a
descriptive mark or a mark that may serve in
trade that consists of a shape or color becomes
distinctive because of its exclusive and
continuous use in Philippine commerce.
A word or phrase originally incapable of
exclusive appropriation, might have been used
so long and so exclusively by one producer
with reference to his article that, in that trade
and to that branch of the purchasing public, the
word or phrase has come to mean that the
article was his product. [Ang v. Teodoro, G.R.
No. L-48226 (1942)]
Disclaimers
The Office may allow or require the applicant to
disclaim an unregistrable component of an
otherwise registrable mark but such disclaimer
shall not prejudice or affect:
a. The applicant’s or owner’s rights then
existing or thereafter arising in the
disclaimed matter; nor
b. The applicant’s or owner’s right on
another application of later date if the
disclaimed matter became distinctive
of the applicant’s or owner’s goods,
business or services. [Sec. 126]
The basic purpose of disclaimers is to make of
record, that a significant element of a
composite mark is not being exclusively
appropriated by itself apart from the composite.
[Rule 608, Rule on Trademarks]
Disclaimed Words
Words in a mark that are not being claimed for
exclusive use, including:
1. Generic terms;
2. Descriptive words; and
3. Those that do not function as part of the
trademark. [Rule 608, Rule on
Trademarks].
The case of Kensonic, Inc. v. Uni-Line Multi
Resources, Inc.
Can the word “sakura,” a generic word for
cherry blossom flowers, be registered for
trademark for non-flowers? Yes.
COMMERCIAL LAW
Although “sakura” refers to the Japanese
flowering cherry and is, therefore, of a generic
nature, such mark did not identify Kensonic's
goods unlike the mark in Asia Brewery, Inc., v.
Court of Appeals. Kensonic's DVD or VCD
players and other products could not be
identified with cherry blossoms. Hence, the
mark can be appropriated. [Kensonic, Inc. v.
Uni-Line Multi Resources, Inc., G.R. Nos.
211820-21 and 211834-35 (2018)]
5. Test to Determine Confusing
Similarity Between Marks
Dominancy Test
The dominancy test considers the dominant
features in the competing marks in determining
whether they are confusingly similar.
Under the dominancy test:
• Greater weight is given to the similarity
of the appearance of the product
arising from the adoption of the
dominant features of the registered
mark.
• Minor
differences
between
the
registered mark and the mark in
question are disregarded.
• The aural and visual impressions
created by the marks in the public mind
are considered.
• Little weight is given to factors like
prices, quality, sales outlets and
market
segments.
[McDonald’s
Corporation v. L.C. Big Mak Burger,
Inc., et al., G.R. No. 143993 (2004)]
It is now the controlling test, as the holistic test
has been abandoned since the case of Kolin
Electronics Co., Inc. v. Kolin Philippines
International, Inc. [G.R. No. 228165 (2021)].
The case of Emzee Foods, Inc. v. Elarfoods,
Inc.
Applying the dominancy test to the case at bar,
it is very obvious that the petitioner's marks
"ELARZ LECHON" and "ELAR LECHON" bear
an indubitable likeness with respondent's
"ELARS LECHON."
As can easily be seen, both marks use the
essential and dominant word "ELAR". The only
difference between the petitioner's mark from
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that of respondent's are the last letters Z and
S, respectively.
However, the letters Z and S sound similar
when pronounced. Thus, both marks are not
only visually similar, but are phonetically and
aurally similar as well.
To top it all off, both marks are used in selling
lechon products. Verily, there exists a high
likelihood that the consumers may conclude an
association or relation between the products.
Likewise, the uncanny resemblance between
the marks may even lead purchasers to believe
that the petitioner and respondent are the
same entity. [Emzee Foods, Inc., v. Elarfoods,
Inc., G.R. No. 220558 (2021)]
6. Well-Known Marks
A well-known mark is a mark which a
competent authority of the Philippines has
designated to be well-known internationally
and in the Philippines, [Sec. 123.1(e), RA
8293].
"Competent authority" for purposes of
determining whether a mark is well-known,
means:
a. The Court;
b. The Director General;
c. The Director of the Bureau of Legal
Affairs [Rule 101 (d), Trademark
Regulations of 2017];
d. Any administrative agency or office
vested with quasi-judicial or judicial
jurisdiction to hear and adjudicate any
action to enforce the rights to a mark [Dy v.
Koninklijke Philips Electronics, N.V. G.R.
No. 186088 (2017)].
In determining whether a mark is well-known,
account shall be taken of the knowledge of the
relevant sector of the public, rather than the
public at large, including knowledge in the
Philippines which has been obtained as a
result of the promotion of the mark [Sec.
123.1(e), RA 8293].
COMMERCIAL LAW
1. The duration, extent and geographical
area of any use of the mark;
2. The market share in the Philippines
and
other
countries
of
the
goods/services to which the mark
applies;
3. The degree of the inherent or acquired
distinction of the mark;
4. The quality-image or reputation
acquired by the mark;
5. The extent to which the mark has been
registered in the world;
6. The exclusivity of the registration
attained by the mark in the world;
7. The extent of use of the mark in the
world;
8. The exclusivity of use in the world;
9. The commercial value attributed to the
mark in the world;
10. The record of successful protection of
the rights in the mark;
11. The outcome of litigations dealing with
the issue of whether the mar is wellknown; and
12. The presence or absence of identical
or similar test marks validly registered
or used on other similar goods or
services and owned by others [See
Rule 103, Trademark Regulations of
2017].
Note: The determinants need not concur.
b. Protection Extended to Well-Known
Marks
The owner of a well-known mark has the right
to be protected, whether or not the mark is
registered in the Philippines [Sec. 123.1(e), RA
8293].
c. Sec. 123.1 (e) vs. Sec. 123.1 (f)
a. Determinants
If the well-known mark is registered or not
registered in the Philippines, a mark cannot be
registered if it is identical with, or confusingly
similar to, or constitutes a translation of an
internationally well-known mark if used for
identical or similar goods or services [Sec.
123.1(e), RA 8293].
Factors to determine whether a mark is wellknown:
If the well-known mark is registered in the
Philippines, a mark cannot be registered if it is
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identical with, or confusingly similar to, or
constitutes a translation of an internationally
well-known mark even if it is used for goods or
services which are NOT similar to those with
respect to which registration is applied [Sec.
123.1(f), RA 8293].
Other persons or entities cannot use the
registered well-known mark even for unrelated
goods, provided that:
1. The use of the mark in relation to those
goods or services would indicate a
connection between those goods or
services, and the owner of the
registered mark; and
2. That the interests of the owner of the
registered mark are likely to be
damaged by such use [Sec. 123.1(f),
RA 8293].
7. Rights Conferred by Registration
The owner of a registered mark shall have the
exclusive right to prevent all third parties not
having the owner's consent from using in the
course of trade:
a. Identical or similar signs or containers,
b. For goods or services which are
identical or similar to those in respect
of which the trademark is registered,
c. Where such use would result in a
likelihood of confusion.
Note: In case of the use of an identical sign for
identical goods or services, a likelihood of
confusion shall be presumed [Sec. 147.1, RA
8293 as amended by RA 9502].
Exception: In cases of importation of drugs and
medicines allowed under Section 72.1 of this
Act (see Number 7 on page 5) and of off-patent
drugs and medicines, third parties can import
the same even without the owner’s consent,
provided that:
a. Said drugs and medicines bear the
registered marks
b. The registered marks have not been
tampered, unlawfully modified, or
infringed upon [Sec. 147.1, RA 8293 as
amended by RA 9502].
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a. When Such Rights Are Conferred
The rights of the owner are conferred upon
registration of the mark, and a mark is deemed
registered on the 31st day from the publication
for purposes of opposition, provided no
opposition is filed:
1. On the 31st day from the publication for
purposes of opposition (if no opposition
is filed)
2. On the date the decision or final order
giving due course to the application
becomes final and executory (if
opposition is filed) [See Rule 703,
Trademarks Regulations of 2017].
Certificate of Registration
A certificate of registration of a mark shall be
prima facie evidence of:
1. The validity of the registration,
2. The registrant's ownership of the mark,
and
3. The registrant's exclusive right to use
the same in connection with the goods
or services and those that are related
thereto specified in the certificate [Sec.
138, RA 8293].
Duration
A certificate of registration shall remain in force
for 10 years from registration and may be
renewed for periods of 10 years at its expiration
upon payment of the prescribed fee and upon
filing of a request [Sec. 145-146, RA 8293].
b. Limitations on Such Right
Duration
Except that, inasmuch as the registration of a
trademark could be renewed every 10 years,
provided a Declaration of Actual Use is timely
submitted, a trademark could conceivably
remain registered forever.
Territorial
While under the territoriality principle a mark
must be used in commerce in the Philippines to
be entitled to protection, internationally wellknown marks are the exceptions to this rule
[Fredco
Manufacturing
Corporation
v.
President and Fellows of Harvard College,
G.R. No. 185917 (2011)].
Fair Use
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The registration of the mark shall not confer on
the registered owner the right to preclude third
parties from using bona fide their names,
addresses, pseudonyms, a geographical
name, or exact indications concerning the kind,
quality, quantity, destination, value, place of
origin, or time of production or of supply, of their
goods or services; Provided That:
Such use is confined to the purposes of mere
identification or information; and
Such use cannot mislead the public as to the
source of the goods or services [Sec. 148, RA
8293].
Prior User
A registered mark shall have no effect against
any person who, in good faith, before the filing
date or the priority date, was using the mark for
the purposes of his business or enterprise
[Sec. 159.1, RA 8293].
Section 159.1, RA 8293, clearly contemplates
that a prior user in good faith may continue to
use its mark even after the registration of the
mark by the first-to-file registrant in good faith,
subject to the condition that any transfer or
assignment of the mark by the prior user in
good faith should be made together with the
enterprise or business or with that part of his
enterprise or business in which the mark is
used. The mark cannot be transferred
independently of the enterprise and business
using
it.
[Zuneca
Pharmaceutical
v.
Natrapharm, G.R. No. 211850 (2020)]
Non-Use
Failure to file declaration of actual use
automatically results in the denial of the
registration or the cancellation of the
registration by operation of law [Sec. 124.2, RA
8293].
8. Cancellation of Registration
A petition to cancel a registration of a mark may
be filed with the Bureau of Legal Affairs by any
person who believes that he is or will be
damaged by the registration of a mark [Sec.
151.1, RA 8293]:
a. Within five (5) years from the date of
the registration of the mark [Sec. 151.1
(a), RA 8293].
b. At any time, if the registered mark:
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1. becomes the generic name for
the goods or services, or
2. has been abandoned, or
3. has its registration obtained
fraudulently or contrary to the
provisions of RA 8293, or
4. is being used by, or with the
permission of, the registrant so
as to misrepresent the source
of the goods or services on or
in connection with which the
mark is used [Sec. 151.1 (b),
RA 8293].
c. At any time, by virtue of non-use
without legitimate reason for an
uninterrupted period of three (3) years
or longer [Sec. 151.1 (c), RA 8293].
9. Trademark Infringement
The following shall be liable in a civil action for
infringement:
a. Any person who shall, without the
consent of the owner of the registered
mark, use in commerce any
reproduction, counterfeit, copy, or
colorable imitation of a registered mark
or the same container or a dominant
feature thereof:
1. In connection with the sale,
offering for sale, distribution,
advertising of any goods or
services,
including
other
preparatory steps necessary to
carry out the sale of any goods
or services on; or
2. In connection with which such
use is likely to cause confusion,
or to cause mistake, or to
deceive [Sec. 155.1, RA 8293].
b. Any person who shall, without the
consent of the owner of the registered
mark:
1. Reproduce, counterfeit, copy
or colorably imitate a registered
mark or a dominant feature
thereof; and
2. Apply
such
reproduction,
counterfeit, copy or colorable
imitation to labels, signs, prints,
packages,
wrappers,
receptacles,
or
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advertisements, intended to be
used in commerce:
a. In connection with the
sale, offering for sale,
distribution,
or
advertising of goods or
services on; or
b. In connection with
which such use is likely
to cause confusion, or
to cause mistake, or to
deceive [Sec. 155.2,
RA 8293].
Note: The infringement takes place at the
moment any of the acts stated in Subsections
155.1 or 155.2 are committed, regardless of
whether there is actual sale of goods or
services using the infringing material.
A mere distributor, and not the owner, cannot
assert any protection from trademark
infringement as it had no right in the first place
to the registration of the disputed trademarks
[Superior Commercial Enterprises v. Kunnan
Enterprises, G.R. No. 169974 (2010)].
Under Sec. 159.1, RA 8293, only the manner
of use by the prior user in good faith — that is,
the use of its mark tied to its current enterprise
or business — is categorically mentioned as an
exception to an action for infringement by the
trademark owner. [Zuneca Pharmaceutical v.
Natrapharm, G.R. No. 211850 (2020)]
COMMERCIAL LAW
upon or in connection with such goods,
business or services;
4. The use or application of the infringing
mark or trade name is likely to cause
confusion or mistake or to deceive
purchasers or others as to the goods or
services themselves or as to the
source or origin of such goods or
services or the identity of such
business;
5. It is without the consent of the
trademark or trade name owner or the
assignee
thereof
[Prosource
International, Inc. v. Horphag Research
Management S.A., G.R. No. 180073
(2009)].
Of these, it is the element of likelihood of
confusion that is the gravamen of trademark
infringement [McDonald’s Corporation v. L.C.
Big Mak Burger, Inc., et al., G.R. No. 143993
(2004)].
Whether a trademark causes confusion and is
likely to deceive the public hinges on
“colorable imitation” which has been defined
as "such similarity in form, content, words,
sound, meaning, special arrangement or
general appearance of the trademark or trade
name in their overall presentation or in their
essential and substantive and distinctive parts
as would likely mislead or confuse persons in
the ordinary course of purchasing the genuine
article" [Mighty Corporation v. E. & J. Gallo
Winery, G.R. No. 154342 (2004)].
a. Elements of Trademark Infringement
1. The trademark being infringed is
registered in the Intellectual Property
Office; however in infringement of trade
name, the same need not be
registered;
2. The trademark or trade name is
reproduced, counterfeited, copied, or
colorably imitated by the infringer;
3. The infringing mark or trade name is
used in connection with the sale,
offering for sale, or advertising of any
goods, business or services; or the
infringing mark or trade name is
applied to labels, signs, prints,
packages, wrappers, receptacles or
advertisements intended to be used
Two types of confusion arise from the use of
similar or colorable imitation marks, namely –
1. Confusion
of
goods
(product
confusion) and
2. Confusion of business (source or origin
confusion).
While there is confusion of goods when the
products are competing, confusion of business
exists when the products are non-competing
but related enough to produce confusion or
affiliation [McDonald’s Corporation v. L.C. Big
Mak Burger, Inc., et al., G.R. No. 143993
(2004)].
Likelihood of confusion is admittedly a relative
term, to be determined rigidly according to the
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particular
(and
sometimes
peculiar)
circumstances of each case. In determining
likelihood of confusion, the court must
consider:
1. The resemblance between the
trademarks;
2. The similarity of the goods to which the
trademarks are attached;
3. The likely effect on the purchaser; and
4. The registrant’s express or implied
consent and other fair and equitable
considerations [Mighty Corporation v.
E. & J. Gallo Winery, G.R. No. 154342
(2004)].
the acts have been committed with knowledge
that such imitation is likely to cause confusion,
or to cause mistake, or to deceive.
b. Doctrine of Natural Expansion of
Business
Independent of the civil and administrative
sanctions imposed by law, a criminal penalty of
imprisonment from two (2) years to five (5)
years and a fine ranging from Fifty thousand
pesos (P50,000) to Two hundred thousand
pesos (P200,000), shall be imposed on any
person who is found guilty of committing any of
the acts mentioned in:
• Section 155 (see Number 9 on page
16)
• Section 168 (see Number 10 on page
18); and
• Subsection
169.1
(on
False
Designations
of
Origin;
False
Description or Representation) [Arts.
188 and 189, Revised Penal Code;
Sec. 170, RA 8293].
The protection to which the owner of a
trademark is entitled extends to cases in which
the use of by a junior appropriator of a
trademark of trade name is likely to lead to a
confusion of source.
As where prospective purchasers would be
misled into thinking that the complaining party
has extended his business into the field or is in
any way connected with the activities of the
infringer; or when it forestalls the normal
potential
expansion
of
the
business
[Dermaline v. Myra Pharmaceuticals, Inc., G.R.
No. 190065 (2010)].
It is the fact that the underlying goods and
services of both marks deal with inasal and
inasal-flavored products which ultimately fixes
the relations between such goods and
services. It is not unlikely that the average
buyer would be led into the assumption that the
curls are of petitioner and that the latter has
ventured into snack manufacturing or, if not,
that the petitioner has supplied the flavorings
for respondent's product. Either way, the
reputation of petitioner would be taken
advantage of and placed at the mercy of
respondent [Mang Inasal Philippines v. IFP
Manufacturing Corporation, G.R. No. 221717
(2017)].
Such knowledge is presumed if:
1. The registrant gives notice that his
mark is registered by displaying with
the mark the words “Registered Mark”
or the letter R within a circle; or
2. The defendant had otherwise actual
notice of the registration [Sec. 158, RA
8293].
d. Penalties
10. Unfair Competition
The following shall be guilty of unfair
competition, and shall be subject to an action
therefor:
a. Any person who shall employ
deception or any other means contrary
to good faith, by which he shall pass off
the goods manufactured by him or in
which he deals, or his business, or
services for those of the one having
established such goodwill; or
b. Any person who shall commit any acts
calculated to produce said result [Sec.
168.2, RA 8293].
c. Requirement of Notice
The owner of the registered mark shall not be
entitled to recover profits or damages unless
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a. Particular Acts of Unfair Competition
1. Selling one’s goods and giving them
the general appearance of goods of
another manufacturer or dealer, either:
a. As to the goods themselves or
in the wrapping of the
packages in which they are
contained, or the devices or
words thereon; or
b. In any other feature of their
appearance, which would be
likely to influence purchasers to
believe that the goods offered
are those of a manufacturer or
dealer, other than the actual
manufacturer or dealer [Sec.
168.3(a), RA 8293].
2. Clothing one’s goods with such
appearance as shall deceive the public
and defraud another of his legitimate
trade, or any subsequent vendor of
such goods or any agent of any vendor
engaged in selling such goods with a
like purpose [Sec. 168.3(a), RA 8293].
3. Using any artifice, or device, or
employing any other means calculated
to induce the false belief that such
person is offering the services of
another who has identified such
services in the mind of the public [Sec.
168.3(b), RA 8293].
4. Making any false statement in the
course of trade or committing any other
act contrary to good faith of a nature
calculated to discredit the goods,
business or services of another [Sec.
168.3(c), RA 8293].
b. Elements of an Action for Unfair
Competition
1. Confusing similarity in the general
appearance of the goods, and
2. Intent to deceive the public and defraud
a competitor.
The case of Kho v. Summerville General
Merchandising & Co., Inc.
The confusing similarity may or may not result
from similarity in the marks, but may result from
other external factors in the packaging or
presentation of the goods. Likelihood of
COMMERCIAL LAW
confusion of goods or business is a relative
concept, to be determined only according to
peculiar circumstances of each case. The
element of intent to deceive and to defraud may
be inferred from the similarity of the
appearance of the goods as offered for sale to
the public. [also from McDonald’s Corporation
v. L.G. Big Mak Burger, Inc., et al., G.R. No.
143993 (2004)]
Here, petitioners' product which is a medicated
facial cream sold to the public is contained in
the same pink oval-shaped container which
had the mark "Chin Chun Su," as that of
respondent. While petitioners indicated in their
product the manufacturer's name, the same
does not change the fact that it is confusingly
similar to respondent's product in the eyes of
the public.
As aptly found by the appellate court, an
ordinary purchaser would not normally inquire
about the manufacturer of the product.
Petitioners' product and that solely distributed
by respondent are similar in the following
respects "1. both are medicated facial creams;
2. both are contained in pink, oval-shaped
containers; and 3. both contain the trademark
"Chin Chun Su" x x x The similarities far
outweigh the differences. The general
appearance of (petitioners') product is
confusingly similar to (respondent)."
Verily, the acts complained of against
petitioners constituted the offense of Unfair
Competition and probable cause exists to hold
them for trial, contrary to the findings of RTC
Branch 46. [Elidad Kho and Violeta Kho v.
Summerville General Merchandising & Co.,
Inc., G.R. No. 213400 (2021)]
c. Who May File an Action for Unfair
Competition?
A person who has identified in the mind of the
public the goods, business, or services he
manufactures or deals in, whether or not a
registered mark is employed
Ratio: Such person has a property right in the
goodwill of the said goods, business or
services so identified, and said right shall be
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protected in the same manner as other
property rights [Sec. 168.1, RA 8293].
which refers to every literary, scientific and
artistic production [IPOPHL].
d. Trademark Infringement vs. Unfair
Competition
Note: Sec. 173, RA 8293: Works are protected
as new works: Provided however, that such
new work shall not:
● affect the force of any subsisting
copyright upon the original works
employed or any part thereof; or
● be construed to imply any right to such
use of the original works, or to secure
or extend copyright in such original
works.
The “true test”, therefore, of unfair competition
has thus been “whether the acts of the
defendant have the intent of deceiving or are
calculated to deceive the ordinary buyer
making his purchases under the ordinary
conditions of the particular trade to which the
controversy relates” [San Miguel Pure Foods
Company, Inc., v. Foodsphere, G.R. No.
217781 (2018)].
Trademark
Unfair Competition
Infringement
Unauthorized use of Passing off of one’s
a trademark or trade goods as those of
name
another
Fraudulent intent is Fraudulent intent is
unnecessary
essential
Prior registration of Registration is not
the trademark is a necessary
prerequisite to the
action
[In and Out Burger v. Sehwani, G.R. No.
179127 (2008); Prosource International, Inc. v.
Horphag Research Management S.A., G.R.
No. 180073 (2009)].
The law on unfair competition is broader and
more inclusive than the law on trademark
infringement.
● The latter is more limited but it
recognizes a more exclusive right
derived from the trademark adoption
and registration by the person whose
goods or business is first associated
with it.
● Hence, even if one fails to establish his
exclusive property right to a trademark,
he may still obtain relief on the ground
of his competitor’s unfairness or fraud
[Mighty Corporation v. E. & J. Gallo
Winery, G.R. No. 154342 (2004)].
D. Copyrights
Copyright refers to the right granted by a
statute to the proprietor of an intellectual
production to its exclusive use and enjoyment
to the extent specified in the statute [Olaño v.
Lim Eng Co, G.R. 195835 (2016)].
1. Basic Principles
a. Works are protected by the sole fact
of their creation.
Principle of Automatic Protection
Copyright is vested from the very moment of
creation irrespective of their mode or form of
expression, as well as of their content, quality,
and purpose [Sec. 171.1-172.2, RA 8293].
The enjoyment and exercise of copyright,
including moral rights, shall not be the subject
of any formality; such enjoyment and such
exercise shall be independent of the existence
of protection in the country of origin of the work
[Article 5(2), Berne Convention for the
Protection of Literary and Artistic Works].
b. Protection extends only to the
expression of an idea, not the idea
itself.
No protection shall extend, under this law, to
any idea, procedure, system method or
operation, concept, principle, discovery, or
mere data as such, even if they are expressed,
explained, illustrated or embodied in a work
[Sec. 175, RA 8293].
Copyright is the legal protection extended to
the owner of the rights in an “original work”,
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c. The copyright is distinct from the
property in the material object subject
to it.
The copyright is distinct from the property in the
material object subject to it.
Consequently:
1. The transfer or assignment of the
copyright shall NOT itself constitute a
transfer of the material object
2. The transfer or assignment of the sole
copy or of one or several copies of the
work shall NOT imply transfer or
assignment of the copyright [Sec. 181,
RA 8293].
d. Copyright, like other intellectual
property rights, is a statutory right.
Copyright, in the strict sense of the term is
purely a statutory right.
The rights are limited to what the statute
confers.
It may be obtained and enjoyed only with
respect to the subjects and by the
persons, and on terms and conditions
specified in the statute.
It can cover only the works falling within the
statutory enumeration or description
[Pearl and Dean v. Shoemart, G.R. No.
148222 (2003)].
2. Copyrightable works
a. Original Works
COMMERCIAL LAW
6. Musical compositions, with or without
words;
7. Works
of
drawing,
painting,
architecture, sculpture, engraving,
lithography or other works of art;
models or designs for works of art;
8. Original ornamental designs or models
for articles of manufacture, whether or
not registrable as an industrial design,
and other works of applied art;
9. Illustrations, maps, plans, sketches,
charts and three-dimensional works
relative to geography, topography,
architecture or science;
10. Drawings or plastic works of a scientific
or technical character;
11. Photographic works including works
produced by a process analogous to
photography; lantern slides;
12. Audiovisual
works
and
cinematographic works and works
produced by a process analogous to
cinematography or any process for
making audio-visual recordings;
13. Pictorial
illustrations
and
advertisements;
14. Computer programs; and
15. Other literary, scholarly, scientific and
artistic works [Sec. 172.1, RA 8293].
When a Work is Considered Original
The work is original when:
It is an independent creation of the author; and
It must not be copied from the work of another.
A person must be the original creator of the
work to be entitled to a copyright. He must
have created it by his own skill, labor, and
judgment without directly copying or evasively
imitating the work of another [Ching Kian
Chuan v. CA, G.R. No. 130360 (2001)].
Literary and artistic works, hereinafter referred
to as "works", are original intellectual creations
in the literary and artistic domain protected
from the moment of their creation and shall
include in particular:
Originality is not determined by novelty,
1. Books, pamphlets, articles and other
aesthetic merit, or ingenuity but that it is an
writings;
independent creation [IPOPHL].
2. Periodicals and newspapers;
3. Lectures,
sermons,
addresses,
Works are protected irrespective of their mode
dissertations prepared for oral delivery,
or form of expression [Sec. 172.2, RA 8293].
whether or not reduced in writing or
other material form;
b. Derivative Works
4. Letters;
5. Dramatic
or
dramatico-musical
The following derivative works shall also be
compositions; choreographic works or
protected by copyright:
entertainment in dumb shows;
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1. Dramatizations,
translations,
adaptations,
abridgments,
arrangements, and other alterations of
literary or artistic works; and
2. Collections of literary, scholarly, or
artistic works, and compilations of data
and other materials which are original
by reason of the selection or
coordination or arrangement of their
contents [Sec. 173.1, RA 8293].
Derivative works are protected as new works,
provided they shall not:
1. Affect the force of any subsisting
copyright upon the original works
employed or any part thereof; or
2. Be construed to imply any right to such
use of the original works, or to secure
or extend copyright in such original
works [Sec. 173.2, RA 8293].
3. Non-Copyrightable works
a. Unprotected Subject Matter
1. Any idea, procedure, system method or
operation, concept, principle, discovery
or mere data as such, even if they are
expressed, explained, illustrated or
embodied in a work;
2. News of the day and other
miscellaneous facts having the
character of mere items of press
information;
3. Any official text of a legislative,
administrative or legal nature, as well
as any official translation thereof;
4. Pleadings;
5. Original decisions of courts and
tribunals (Note: This pertains to the
“original decisions” not the SCRA
published volumes since these are
protected under derivative works under
Sec. 173.1) [Sec. 175, RA 8293].
News footages are subject to copyright.
Although news or the events themselves are
not copyrightable, expression of the news
particularly when it underwent a creative
process is entitled to copyright protection
[ABS-CBN Corp. v. Gozon, G.R. No. 195956
(2015)].
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The format or mechanics of a TV show is
not copyrightable as copyright does not
extend to ideas, procedures, processes,
systems, methods of operation, concepts,
principles or discoveries regardless of the form
in which they are described, explained,
illustrated or embodied [Joaquin Jr. et al v.
Drilon, et al, G.R. No. 108946 (1999)].
No one may claim originality as to facts as
these do not owe their origin to an act of
authorship. The first person to find and report a
particular fact has not created the same; he has
merely discovered its existence [Feist
Publication v. Rural Telephone Services, 499
U.S. 340 (1991)].
A compilation is not copyrightable per se,
but it is copyrightable only if its facts have been
selected, coordinated, or arranged in such a
way that the resulting work as a whole
constitutes an original work of authorship.
Otherwise known as the Sweat of the Brow or
Industrious Collection Test [Feist Publication
v. Rural Telephone Services, 499 U.S. 340
(1991)].
b. Works of the Government of the
Philippines
A work created by an officer or employee of the
Philippine Government or any of its
subdivisions and instrumentalities, including
government-owned or controlled corporations
as a part of his regularly prescribed official
duties [Sec. 171.11, RA 8293].
General Rule: No copyright shall subsist in any
work of the Government.
Exceptions:
1. When copyright is transferred by
assignment or bequest in favor of the
government [Sec. 176.3];
2. Author of speeches, lectures, sermons,
addresses and dissertations shall have
exclusive right of making a collection of
his work. However, prior approval of
the government agency or the office
wherein the work is created shall be
necessary for the exploitation of such
work for profit [Sec. 176.1].
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COMMERCIAL LAW
However, prior approval of the government
agency or the office wherein the work is
created shall be necessary for the exploitation
of such work for profit [Sec. 176.1, RA 8293].
incorporates a design element that is physically
or conceptually separable from the underlying
product [Olaño v. Lim Eng Co, G.R. No.
195835 (2016)].
Publication or republication by the Government
in a public document of any work in which
copyright is subsisting shall not be taken:
Useful Article Doctrine
Works whose sole purpose is utilitarian, and
have no separate artistic value are
noncopyrightable works.
1. To cause any abridgment or annulment
of the copyright; or
2. To authorize any use or appropriation
of such work without the consent of the
copyright owner [Sec. 176.3, RA 8293].
Works made by an officer or employee of
the Government as part of his regularly
prescribed duty do NOT enjoy copyright.
Works made by an employee of the
government which is not as a part of his
regularly prescribed official duties (i.e. not
considered a “Work of the Government”) may
enjoy copyright.
c. Works of the Public Domain
Works
of
the
noncopyrightable.
public
domain
are
To this class of works belong:
1. Works, whose term of copyright has
expired;
2. Works wherein the copyright over them
are waived by the owner in favor of the
public; and
3. Works which did not enjoy copyright
protection in the first place, as in the
case of unregistered works made
under previous laws that required the
registration of copyright [See: Santos v.
McCullough Printing Company, G.R.
No. L-19439 (1964)].
d. Useful Articles
A “useful article” is defined as an article “having
intrinsic utilitarian function that is not merely to
portray the appearance of the article or to
convey information” is excluded from copyright
eligibility.
The only instance when a useful article may be
the subject of copyright protection is when it
In contrast, a work of applied art, which has
utilitarian functions, but has an identifiable
artistic work or creation incorporated thereto,
can be the subject of a copyright to the extent
that the design features:
Can be identified separately from, and
Are capable of existing independently of the
utilitarian aspects of the article [Brandir Int’l v.
Cascade Pacific, 834 F. 2nd 1142 (2nd Cir.)
(1987)].
Denicola Test: Conceptual Separability
(Aesthetics vs. Functionality)
The work cannot be copyrighted if its design
elements reflect a merger of aesthetic and
functional considerations, and the artistic
aspects of the work cannot be conceptually
separable from the utilitarian aspects.
Conceptual separability exists where design
elements can be identified as reflecting the
designer's artistic judgment, exercised
independently of functional influences
The relevant question should be whether the
design of a useful article, however intertwined
with the article’s utilitarian aspects, causes an
ordinary reasonable observer to perceive an
aesthetic concept not related to the article’s
use [Brandir Int’l v. Cascade Pacific, 834 F. 2nd
1142 (2nd Cir.) (1987)].
4. Rights conferred by copyright
Economic rights vs. moral rights
Copyright confers both economic and moral
rights. Economic rights allow right owners to
derive financial reward from the use of their
works by others. On the other hand, moral
rights allow authors and creators to take certain
actions to preserve and protect their link with
their work. [Understanding Copyright and
Related Rights, World Intellectual Property
Organization (2016)].
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Works are protected by the sole fact of their
creation, irrespective of their mode or form of
expression, as well as of their content, quality
and purpose [Sec. 172.2, RA 8293].
Certificate of Registration and Deposit
The issuance of the certificates of registration
and deposit as provided by Sec. 2, Rule 7 of
the Copyright Safeguards and Regulations, are
purely for recording the date of registration and
deposit of the work, and are not conclusive as
to copyright ownership (nor does it determine
the time when copyright vests) [Manly
Sportwear v. Dadodette Enterprises, G.R. No.
165306 (2005)].
Purpose of Registration and Deposit
Completing the records of the National Library
and the Supreme Court Library; provided, that
only works in the field of law shall be deposited
with the Supreme Court Library [Sec. 191, RA
8293 as amended by RA 10372].
Note: The National Library has deputized the
IPOPHL to receive deposited works on its
behalf.
a. Economic Rights
Copyright or economic rights shall consist of
the exclusive right to carry out, authorize or
prevent the following acts:
1. Reproduction of the work or substantial
portion of the work;
2. Dramatization, translation, adaptation,
abridgment, arrangement or other
transformation of the work;
3. The first public distribution of the
original and each copy of the work by
sale or other forms of transfer of
ownership;
4. Rental of the original or a copy of:
a. An
audiovisual
or
cinematographic work,
b. A work embodied in a sound
recording,
c. A computer program,
d. A compilation of data and other
materials or a musical work in
graphic form
e. Irrespective of the ownership of
the original or the copy which is
the subject of the rental;
5. Public display of the original or a copy
COMMERCIAL LAW
of the work;
6. Public performance of the work; and
7. Other communication to the public of
the work [Sec. 177, RA 8293].
Publisher’s Copyright
In addition to the right to publish granted by the
author, his heirs, or assigns, the publisher shall
have a copyright consisting merely of the right
of reproduction of the typographical
arrangement of the published edition of the
work [Sec.174, RA 8293].
Copyright in a Work of Architecture
The copyright in any such work shall include
the right to control the erection of any building
which reproduces the whole or a substantial
part of the work either in its original form or in
any form recognizably derived from the original
However, it shall not include the right to control
the reconstruction or rehabilitation in the same
style as the original of a building to which that
copyright relates [Sec. 186, RA 8293].
Communication
to
the
Public
of
Copyrighted Works
This includes point-to-point transmission of a
work, including:
Video on demand, and
Providing access to an electronic retrieval
system
Such as computer databases, servers, or
similar electronic storage devices.
Broadcasting, rebroadcasting, retransmission
by cable, and broadcast and retransmission by
satellite are all acts of “communication to the
public” within the meaning of the IPC [Rule 11,
Copyright Safeguards and Regulations].
First Public Distribution of Work
An exclusive right of first distribution of work
includes all acts involving distribution,
specifically including the first importation of an
original and each copy of the work into the
jurisdiction of the Republic of the Philippines
[Rule 12, Copyright Safeguards and
Regulations].
b. Moral Rights
The author of a work shall, independently of the
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economic rights in Section 177 (see Letter a on
page 26) or the grant of an assignment or
license with respect to such right, have the
right:
1. To require that the authorship of the
works be attributed to him, in particular,
the right that his name, as far as
practicable, be indicated in a prominent
way on the copies, and in connection
with the public use of his work [Sec.
193.1, RA 8293];
2. To make any alterations of his work
prior to, or to withhold it from
publication [Sec. 193.2, RA 8293];
3. To object to any distortion, mutilation or
other modification of, or other
derogatory action in relation to, his
work which would be prejudicial to his
honor or reputation [Sec. 193.3, RA
8293];
4. To restrain the use of his name with
respect to any work not of his own
creation or in a distorted version of his
work [Sec. 193.4, RA 8293].
In addition to the right to publish granted by the
author, his heirs, or assigns, the publisher shall
have a copyright consisting merely of the right
of reproduction of the typographical
arrangement of the published edition of the
work [Sec.174, RA 8293].
The author of speeches, lectures, sermons,
addresses, and dissertations mentioned in the
preceding paragraphs shall have the exclusive
right of making a collection of his works [Sec.
176.2, RA 8293].
Assignment or License of Moral Rights
Moral rights cannot be assigned or licensed
[Sec. 198, RA 8293].
Waiver of Moral Rights
While Moral Rights cannot be assigned or
licensed, it can be waived [Sec. 198, RA 8293].
General Rule: Moral rights can be waived in
writing, expressly stating such waiver [Sec.
195, RA 8293].
Exceptions: Even if made in writing, waiver is
still not valid if:
COMMERCIAL LAW
Use of the name of the author, title of his work,
or his reputation with respect to any version or
adaptation of his work, which because of
alterations substantially tends to injure the
literary or artistic reputation of another author
[Sec. 195.1, RA 8293];
It uses the name of the author in a work that he
did not create [Sec. 195.1, RA 8293].
The right of attribution is waived by contribution
to a collective work unless such is expressly
reserved [Sec. 196, RA 8293].
c. Right to Transfer, Assign or License
The author has the right to assign or license the
copyright and/or the material object in whole or
in part, and they allow the owner to derive
financial reward from the use of his works by
others [Sec. 180.1, RA 8293 as amended by
RA 10372].
Rights of Assignee or Licensee
The assignee or licensee is entitled to all the
rights and remedies which the assignor or
licensor had with respect to the copyright,
within the scope of the assignment or license
[Sec. 180.1, RA 8293].
The copyright is not deemed assigned or
licensed inter vivos, in whole or in part, unless
there is a written indication of such intention
[Sec. 180.2, RA 8293].
The submission of a literary, photographic or
artistic work to a newspaper, magazine or
periodical for publication shall constitute only a
license to make a single publication unless a
greater right is expressly granted. If two (2) or
more persons jointly own a copyright or any
part thereof, neither of the owners shall be
entitled to grant licenses without the prior
written consent of the other owner or owners
[Sec. 180.3, RA 8293].
Any exclusivity in the economic rights in a work
may be exclusively licensed. Within the scope
of the exclusive license, the licensee is entitled
to all the rights and remedies which the licensor
had with respect to the copyright [Sec. 180.4,
RA 8293].
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The copyright owner has the right to regular
statements of accounts from the assignee or
the licensee with regard to assigned or
licensed work [Sec. 180.5, RA 8293 as
amended by RA 10372].
Filing of Assignment or License
An assignment or exclusive license may be
filed in duplicate with the National Library upon
payment of the prescribed fee for registration in
books and records kept for the purpose [Sec.
182, RA 8293].
d. Rights to Proceed on Subsequent
Transfers (Droit de Suite or Follow Up
Rights)
In every sale or lease of an original work of
painting or sculpture or of the original
manuscript of a writer or composer,
subsequent to the first disposition thereof by
the author, the author or his heirs shall have:
● an inalienable right to participate in the
gross proceeds of the sale or lease to
the extent of five percent (5%) [Sec.
200, RA 8293].
Duration of Right
This right shall exist during the lifetime of the
author and for 50 years after his death [Sec.
200, RA 8293].
Works not covered
Prints, etchings, engravings, works of applied
art, or works of similar kind wherein the author
primarily derives gain from the proceeds of
reproductions [Sec. 201, RA 8293].
e. Related Rights (Neighboring Rights)
Rights of Performers
As regards their performances, the right of
authorizing:
The broadcasting and other communication to
the public of their performance; and
The fixation of their unfixed performance [Sec.
203.1, RA 8293];
Such right shall be maintained and exercised
50 years after his death, by his heirs, and in
default of heirs, the government, where
protection is claimed [Sec. 204.2, RA 8293];
The right of authorizing the direct or indirect
reproduction of their performances fixed in
COMMERCIAL LAW
sound recordings, or audiovisual works or
fixations in any manner or form [Sec. 203.2, RA
8293, as amended by RA 10372];
The right of authorizing the first public
distribution of the original and copies of their
performance fixed in the sound recording or
audiovisual works or fixations through sale or
rental or other forms of transfer of ownership
[Sec. 203.3, RA 8293, as amended by RA
10372];
Subject to the provisions of Section 206 (see
Number 7 on page 25)
The right of authorizing the commercial rental
to the public of the original and copies of their
performances fixed in sound recordings or
audiovisual works or fixations, even after
distribution of them by, or pursuant to the
authorization by the performer [Sec. 203.4, RA
8293, as amended by RA 10372];
The right of authorizing the making available to
the public of their performances fixed in sound
recordings or audiovisual works or fixations, by
wire or wireless means, in such a way that
members of the public may access them from
a place and time individually chosen by them
[Sec. 203.5, RA 8293, as amended by RA
10372];
The right to claim to be identified as the
performer of his performances, and to object to
any distortion, mutilation or other modification
of his performances that would be prejudicial to
his reputation, as regards his live aural
performances or performances fixed in sound
recordings or audiovisual works or fixations;
Exception: Where the omission is dictated by
the manner of the use of the performance [Sec.
204.1, RA 8293, as amended by RA 10372].
The right to an additional remuneration
equivalent to at least five percent (5%) of the
original compensation he or she received for
the first communication or broadcast, in every
communication to the public or broadcast of a
performance subsequent to the first
communication or broadcast thereof by the
broadcasting organization [Sec. 206, RA
8293].
Unless otherwise provided in the contract.
Rights of Producers of Sound Recordings
The right to authorize the direct or indirect
reproduction of their sound recordings, in any
manner or form; the placing of these
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reproductions in the market and the right of
rental or lending [Sec. 208.1, RA 8293];
The right to authorize the first public distribution
of the original and copies of their sound
recordings through sale or rental or other forms
of transferring ownership [Sec. 208.2, RA
8293];
The right to authorize the commercial rental to
the public of the original and copies of their
sound recordings, even after distribution by
them by or pursuant to authorization by the
producer [Sec. 208.3, RA 8293].
COMMERCIAL LAW
5. Ownership of a copyright
Work
Ownership
Single Creator
of an Original
Work
Belongs to the author of
the work [Sec. 178.1, RA
8293].
Works of Joint
Authorship
Belongs of the coauthors; in the absence
of agreement, their rights
shall be governed by the
rules on co-ownership.
However, if the work
consists of parts that can
be used separately and
identified, the author of
each part owns the
copyright of the part he
has created [Sec. 178.2,
RA 8293].
Work created
during the
course of
employment
Belongs to the employee
if the creation is not a part
of his regular duties,
even if he used the time,
facilities and materials of
the employer. However,
copyright belongs to the
employer if the work is in
the performance of the
employee’s
regular
duties unless there is an
agreement
to
the
contrary [Sec. 178.3, RA
8293].
Must-Carry Rule
This rule prevents cable television companies
from excluding broadcasting organization
especially in those places not reached by
signal.
Work
commissioned
by a person
other than the
employer
Also, the rule prevents cable television
companies from depriving viewers in far-flung
areas the enjoyment of programs available to
city viewers [ABS-CBN Broadcasting v.
Philippine Multi-Media System, G.R. Nos.
175769-70 (2009)].
The
person
who
commissioned the work
and pays for it holds
ownership of the work
per se, but copyright
remains with the creator
unless there was a
stipulation to the contrary
[Sec. 178.4, RA 8293].
Audio visual
works
Belongs to the producer,
author of the scenario,
composer of the music,
film director, and author
of the adapted work.
However, subject to
Single Equitable Remuneration
The right to be paid a single equitable
remuneration by the user to be shared with the
performers equally, in the absence of any
agreement, when a sound recording published
for commercial purposes, or a reproduction of
such sound recording, is:
Used directly for broadcasting or
Used for other communication to the public; or
Publicly performed with the intention of making
and enhancing profit [Sec. 209, RA 8293].
Rights of Broadcasting Organizations
The rebroadcasting of their broadcasts [Sec.
211.1, RA 8293];
The recording in any manner, including the
making of films or the use of video tape, of their
broadcasts for the purpose of communication
to the public of television broadcasts of the
same; [Sec. 211.2, RA 8293];
The use of such records for fresh
transmissions or for fresh recording [Sec.
211.3, RA 8293].
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Work
Ownership
stipulations,
the
producers shall exercise
the copyright as may be
required for the exhibition
of the work, except for
the right to collect license
fees for the performance
of musical compositions
in the work [Sec. 178.5,
RA 8293].
Letters
Anonymous
and
pseudonymous
works
Belongs to the writer, but
the court may authorize
their
publication
or
dissemination of the
public good or interest of
justice requires, pursuant
to Art. 723, New Civil
Code [Sec. 178.6, RA
8293].
Publishers are deemed
to represent the authors,
unless
the
contrary
appears,
the
pseudonyms or adopted
names leave no doubt as
to the author’s identity or
if the author discloses his
identity [Sec. 179, RA
8293].
COMMERCIAL LAW
This presumption however is rebuttable and
cannot be sustained where other evidence in
the record casts doubt on the question of
ownership [Olaño v. Lim Eng Co, G.R. 195835
(2016)].
Valid
copyright
ownership
denotes
originality of the copyrighted material.
Originality means that the material was not
copied, evidences at least minimum creativity
and was independently created by the author
[Olaño v. Lim Eng Co, G.R. 195835 (2016)].
a. Presumption of Ownership
General Rule: The natural person whose name
is indicated on a work in the usual manner as
the author shall, in the absence of proof to the
contrary, be presumed to be the author of the
work.
The person or body corporate, whose name
appears on an audio-visual work in the usual
manner, shall, in the absence of proof to the
contrary, be presumed to be the maker of said
work [Sec. 219, RA 8293].
Use of Pseudonym
This provision shall be applicable even if the
name is a pseudonym, where the pseudonym
leaves no doubt as to the identity of the author
[Sec. 219, RA 8293].
b. Transfer or Assignment of Copyright
Collective
works
A contributor is deemed
to have waived his right
unless he expressly
reserves it [Sec. 196, RA
8293].
A person to be entitled to copyright must be
the original creator of the work. He must
have created it by his own skill, labor and
judgment without directly copying or evasively
imitating the work of another [Wilson Ong
Ching Kian Chuan v. CA, G.R. 130360 (2001)].
Ownership of copyrighted material is
shown by proof of originality and
copyrightability. While it is true that where the
complainant presents a copyright certificate in
support of the claim of infringement, the validity
and ownership of the copyright is presumed.
The copyright may be assigned or licensed in
whole or in part [Sec. 180.1, RA 8293].
1. The copyright is not deemed assigned
or licensed inter vivos in whole or in
part unless there is a written indication
of such intention [Sec. 180.2, RA 8293
as amended by RA 10372];
2. If two or more persons jointly own a
copyright or any part thereof, neither of
the owners shall be entitled to grant
licenses without the prior written
consent of the other owner or owners
[Sec. 180.3, RA 8293].
Submitted Work
General Rule: The submission of a literary,
photographic, or artistic work to a newspaper,
magazine or periodical for publication shall
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constitute only a license to make a single
publication.
Unless a greater right is expressly granted
[Sec. 180.3, RA 8293].
c. Collective Management Organizations
(CMO)
CMOs are entities composed of artists, writers,
composers
and
other
creators,
or
copyright/related rights holders that manage
the bundle of copyrights that their members
own by providing the legal platform to efficiently
enforce their intellectual property rights.
The owners of copyright and related rights or
their heirs may designate a society of artists,
writers, composers, and other right-holders to
collectively manage their economic or moral
rights on their behalf.
For the said societies to enforce the rights of
their members, they shall first secure the
necessary accreditation from the Intellectual
Property Office [Sec. 183, RA 8293 as
amended by RA 10372].
The primary purpose of a CMO is to collectively
manage copyright and/or related rights,
including any or all of the following activities:
1. Negotiation with and grant of licenses
to users of protected literary, scholarly,
scientific and artistic works, derivative
works,
performances,
sound
recordings, audiovisual works and
broadcasts;
2. Collection of royalties and other forms
of remuneration for the use of
protected literary, scholarly, scientific
and artistic works, derivative works,
performances,
sound
recordings,
audiovisual works and broadcasts;
3. Collection of proceeds in subsequent
transfers of the originals of paintings,
sculptures and manuscripts;
4. Collection of additional remuneration
for subsequent communication or
broadcast of a performance;
5. Collection
of
single
equitable
remuneration for the broadcast, other
communication to the public or public
performance of a sound recording; and
COMMERCIAL LAW
6. Distribution of the abovementioned
collections to the rights holders
[IPOPHL Office Order 13-173 s.2013].
Filipino Society of Composers, Authors and
Publishers, Inc. (FILSCAP)
FILSCAP is a non-profit society of composer,
authors, and publishers that owns public
performance rights over the copyrighted
musical works of its members.
It also owns the right to license public
performances in the Philippines of copyrighted
foreign musical works of its members and
affiliate performing rights societies abroad.
It is deputized to enforce and protect the
copyrighted works of its members or affiliates
by issuing licenses and collecting royalties
and/or license fees from anyone who publicly
exhibits or performs music belonging to
FILSCAP’s worldwide repertoire. FILSCAP has
a legal standing to sue for copyright
infringement.
It has the authority to collect royalties and/or
license fees and sue for copyright infringement.
As an assignee of copyright, it is entitled to all
the rights and remedies which the assignor had
with respect to the copyright [FILSCAP v.
Anrey, Inc., G.R. No. 233918 (2022)].
6. Limitations on copyright
a. Fair Use
Doctrine of Fair Use
The fair use of copyrighted work for criticism,
news reporting, teaching (including multiple
copies for classroom use), research and similar
purposes is not an infringement of copyright
[Sec. 185.1, RA 8293].
A privilege, in persons other than the owner of
the copyright, to use the copyrighted material
in a reasonable manner without his consent,
notwithstanding the monopoly granted to the
owner by the copyright. It is meant to balance
the monopolies enjoyed by the copyright owner
with the interests of the public and of society.
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COMMERCIAL LAW
Decompilation
Refers to the reproduction of the code and
translation of the forms of the computer
program to achieve the inter-operability of an
independently created computer program with
other programs. This may also constitute fair
use [Sec. 185.1, RA 8293].
current events;
3. Use solely for the purpose of teaching
or for scientific research; and
4. Fair use of the broadcast subject to
certain conditions [Sec. 212, RA 8293].
c. Term of Protection
Factors to consider in determining Fair Use
The purpose and character of the use,
including whether such use is of a commercial
nature or is for non-profit educational
purposes;
The nature of the copyrighted work;
The amount and substantiality of the portion
used in relation to the copyrighted work as a
whole; and
The effect of the use upon the potential market
for or value of the copyrighted work [Sec.
185.1, RA 8293 as amended by RA 10372;
Harper & Row v. Nation Enterprise, 471 US
539 (1985)].
Duration of Copyright
The fact that a work is unpublished shall not
by itself bar a finding of fair use if such
finding is made upon consideration of all the
above factors [Sec. 185.2, RA 8293].
Joint Authorship
Commercial use of the copyrighted work can
be weighed against fair use [ABS–CBN Corp.
v. Gozon, G.R. No. 195956 (2015)].
Parody, like other comment and criticism,
may claim fair use. The more transformative
the new work, the less will be the significance
of other factors, like commercialism. The heart
of any parodist's claim to quote from existing
material is the use of some elements of a prior
author's composition to create a new one that,
at least in part, comments on that author's work
[Campbell v. Acuff-Rose Music Inc., 510 U.S.
569 (1994)].
b. Limitations on
Neighboring Rights
Protection
of
Sections 203, 208 and 209 (see Letter e on
page 28) shall not apply where the acts
referred to in those Sections are related to:
1. The use by a natural person
exclusively for his own personal
purposes;
2. Using short excerpts for reporting
Works
Term
Original Literary and
Artistic
Works
including
Posthumous Works
Lifetime of author
and for 50 years
after his death
[Sec. 213.1, RA
8293]
Derivative
Works Lifetime of author
including
and for 50 years
Posthumous Works after his death
[Sec. 213.1, RA
8293]
Anonymous
Pseudonymous
Works
Lifetime of the last
surviving
author
and for 50 years
after his death
[Sec. 213.2, RA
8293]
or 50 years from date
of
first
lawful
publication
[Sec.
213.3, RA 8293]
Applied Art
25 years from date
of making [Sec.
213.4, RA 8293]
Published
Photographic Works
50
years
from
publication
[Sec.
213.5, RA 8293]
Unpublished
Photographic Works
50 years from the
making
[Sec.
213.5, RA 8293]
Published
Audiovisual Works
50
years
from
publication
[Sec.
213.6, RA 8293]
Unpublished
Audiovisual Works
50 years from the
making
[Sec.
213.6, RA 8293]
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The term of protection subsequent to the
death of the author shall run from the date
of his death or of publication, but such terms
shall always be deemed to begin on the first
day of January of the year following the event
which gave rise to them [Sec. 214, RA 8293].
Term of Protection of Moral Rights
Moral Right
Term
Right of Attribution or Lifetime of author
Right of Paternity and in perpetuity
(Sec. 193.1)
after his death [Sec.
198.1, RA 8293 as
amended by RA
10372].
Other Moral Rights Coterminous with the
[Sec. 193.2- 193.4]
economic
rights
[Sec. 198, RA 8293
as amended by RA
10372].
Term of Protection of Neighboring Rights
Works
Term
For performances 50 years from the
not incorporated in end of the year in
recordings
which
the
performance
took
place [Sec. 215.1(a),
RA 8293].
COMMERCIAL LAW
A person infringes a right protected under this
Act when one:
a. Directly commits an infringement;
b. Benefits from the infringing activity of
another person who commits an
infringement if the person benefiting:
1. Has been given notice of the
infringing activity; and
2. Has the right and ability to
control the activities of the
other person;
c. With knowledge of infringing activity,
induces,
causes
or
materially
contributes to the infringing conduct of
another [Sec. 216, RA 8293 as
amended by RA 10372].
It also includes the act of any person who at the
time when copyright subsists in a work has in
his possession an article which he known, or
ought to know, to be an infringing copy of the
work for the purpose of:
a. Selling, letting for hire, or by way of
trade offering or exposing for sale, or
hire, the article
b. Distributing the article for purpose of
trade, or for any other purpose to an
extent that will prejudice the rights of
the copyright owner in the work; or
c. Trade exhibit of the article in public
[Sec. 217.3, RA 8293].
a. What Constitutes Infringement
For sound or image
and
sound
recordings and for
performances
incorporated
therein
50 years from the
end of the year in
which the recording
took place [Sec.
215.1(b), RA 8293].
Infringement consists in the doing by any
person, without the consent of the owner of the
copyright, of anything the sole right to do which
is conferred by statute on the owner of the
copyright.
Broadcasts
20 years from the
date the broadcast
took place [Sec.
215.2, RA 8293]
It can cover a whole range of acts from
copying, assembling, packaging to marketing,
including the mere offering for sale of
counterfeit goods [Habana et al v. Robles et al.,
G.R. No. 131522 (1999)].
7. Copyright infringement
The IP Code was amended to expand
infringement not only to cover direct
infringement but also third-party infringement.
Copyright infringement is thus committed by
any person who shall use original literary or
artistic works, or derivative works, without the
copyright owner’s consent in such a manner as
to violate the foregoing copy and economic
rights.
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For a claim of copyright to prevail, the
evidence on record must demonstrate:
a. ownership of a validly copyrighted
material by the complainant; and
b. infringement of the copyright by the
respondent.
[W]hat
was
copyrighted
were
their
sketches/drawings only, and not the actual
hatch doors themselves. To constitute
infringement, the usurper must have copied or
appropriated the original work of an author or
copyright proprietor, absent copying, there can
be no infringement of copyright. Absent
originality and copyrightability as elements of a
valid copyright ownership, no infringement can
subsist [Olaño v. Lim Eng Co, G.R. 195835
(2016)].
The free use by commercial establishments of
radio broadcasts is beyond the normal
exploitation of the copyright holder’s creative
work. This gravely affect the copyright holder’s
market where instead of paying royalties, they
use free radio reception.
A radio reception creates a performance
separate from the broadcast, which is
otherwise known as the doctrine of multiple
performances which provides that a radio (or
television) transmission or broadcast can
create multiple performances at once. Thus, on
whether the reception of a broadcast may be
publicly performed, it is immaterial if the
broadcasting station has been licensed by the
copyright owner because the reception
becomes a new public performance requiring
separate protection.
Radio
reception
transmitted
through
loudspeakers to enhance profit does not
constitute, and is not analogous to, fair use
[FILSCAP v. Anrey, Inc., G.R. No. 233918
(2022)].
b. Substantial Reproduction
It is not necessarily required that the entire
copyrighted work, or even a large portion of
it, be copied. If so much is taken that the value
of the original work is substantially diminished,
there is an infringement of copyright and to an
injurious extent, the work is appropriated.
COMMERCIAL LAW
In cases of infringement, copying alone is
not what is prohibited. The copying must
produce an “injurious effect” [Habana et al v.
Robles et al., G.R. No. 131522 (1999)].
c. Knowledge
Infringement
not
an
Element
of
Knowledge of infringement is material only
when a person is charged of aiding and
abetting a copyright infringement. The
liability for copyright infringement is in the
nature of strict liability. It does not require mens
rea or culpa [ABS–CBN Corp v. Gozon, G.R.
No. 195956 (2015)].
d. What Does
Infringement
NOT
Constitute
The
following
shall
NOT
constitute
infringement of copyright:
1. Recitation or performance of a work
once it has been made accessible to
the public if
a. privately done AND free of
charge OR
b. strictly for a charitable or
religious
institution
[Sec.
184.1(a), RA 8293];
2. Making of quotations from a published
work:
a. compatible with fair use,
b. extent is justified by the
purpose,
c. source and name of the author,
appearing on work, must be
mentioned [Sec. 184.1(b), RA
8293];
3. Reproduction or communication to the
public by mass media of articles on
current political, social, economic,
scientific, or religious topic, lectures,
addresses and other works, delivered
in public:
a. for information purposes,
b. not expressly reserved, and
c. source is already indicated
[Sec. 184.1(c), RA 8293];
4. Reproduction and communication to
the public of literary, scientific or artistic
works as part of reports of current
events by means of photography,
cinematography or broadcasting to the
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5.
6.
7.
8.
9.
10.
11.
12.
extent necessary for the purpose [Sec.
184.1(d), RA 8293];
Inclusion of a work in a publication,
broadcast or other communication to
the public, sound recording or film if
made by way of illustration for teaching
purposes compatible with fair use and
the source and the name of the author
appearing on work, must be mentioned
[Sec. 184.1(e), RA 8293];
Recording
made
in
schools,
universities, or educational institutions
of a work included in a broadcast for
the use of schools, universities or
educational
institutions.
Such
recording must be deleted within a
reasonable period; such recording may
not be made from audio-visual works
which are part of the general cinema,
repertoire of feature films except of
brief excerpts of the work [Sec.
184.1(f), RA 8293];
Making of ephemeral recordings;
a. by a broadcasting organization,
b. by means of its work or
facilities,
c. for use in its own broadcast
[Sec. 184.1(g), RA 8293];
Use made of a work by or under the
direction or control of the government
for public interest compatible with fair
use [Sec. 184.1(h), RA 8293];
Public
performance
or
the
communication to the public of a work
in a place where no admission fee is
charged by a club on institution for
charitable or educational purpose only
and the aim is not profitmaking [Sec.
184.1(i), RA 8293];
Public display of the original or a copy
of the work not made by means of a
film, slide, television, image or
otherwise on screen or by means of
any other device or process either the
work has been published, sold, given
away, or transferred to another person
by the author or his successor in title
[Sec. 184.1(j), RA 8293];
Use made of a work for the purpose of
any judicial proceedings or for the
giving of professional advice by a legal
practitioner [Sec. 184.1(k), RA 8293].
The reproduction or distribution of
COMMERCIAL LAW
published articles or materials in a
specialized format exclusively for the
use of the blind, visually- and readingimpaired persons: Provided, That such
copies and distribution shall be made
on a nonprofit basis and shall indicate
the copyright owner and the date of the
original publication [Sec. 184.1(l), RA
8293 as amended by RA 10372].
e. Reproduction of Published Work
General Rule: The private reproduction of a
published work in a single copy, where the
reproduction is made by a natural person
exclusively for research and private study, shall
be permitted, without the authorization of the
owner of copyright in the work [Sec. 187.1, RA
8293].
Exceptions: Such permission shall not extend
to:
1. A work of architecture in the form of
building or other construction;
2. An entire book, or a substantial part
thereof, or of a musical work in graphic
form by reprographic means;
3. A compilation of data and other
materials;
4. A computer program except as
provided in Section 189 (see Letter g
on page 36); and
5. Any work in cases where reproduction
would unreasonably conflict with a
normal exploitation of the work or
would
otherwise
unreasonably
prejudice the legitimate interests of the
author [187.2, RA 8293].
f. Reprographic
Libraries
Reproduction
by
Any library or archive whose activities are not
for profit may, without the authorization of the
author of copyright owner, make a single copy
of the work by reprographic reproduction:
1. Where the work by reason of its fragile
character or rarity cannot be lent to
user in its original form;
2. Where the works are isolated articles
contained in composite works or brief
portions of other published works and
the reproduction is necessary to supply
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them, when this is considered
expedient, to persons requesting their
loan for purposes of research or study
instead of lending the volumes or
booklets which contain them; and
3. Where the making of such a copy is in
order to preserve and, if necessary in
the event that it is lost, destroyed or
rendered unusable, replace a copy, or
to replace, in the permanent collection
of another similar library or archive, a
copy which has been lost, destroyed or
rendered unusable and copies are not
available with the publisher [Sec.
188.1, RA 8293 as amended by RA
10372].
It shall not be permissible to produce a volume
of a work published in several volumes or to
produce missing tomes or pages of magazines
or similar works, unless the volume, tome or
part is out of stock:
● Provided, That every library which, by
law, is entitled to receive copies of a
printed work, shall be entitled, when
special reasons so require, to
reproduce a copy of a published work
which is considered necessary for the
collection of the library but which is out
of stock [Sec. 188.2, RA 8293].
g. Reproduction of Computer Program
The reproduction in one back-up copy or
adaptation of a computer program shall be
permitted, without the authorization of the
author of, or other owner of copyright in, a
computer program, by the lawful owner of that
computer program: Provided, That the copy or
adaptation is necessary for:
1. The use of the computer program in
conjunction with a computer for the
purpose, and to the extent, for which
the computer program has been
obtained; and
2. Archival purposes, and, for the
replacement of the lawfully owned copy
of the computer program in the event
that the lawfully obtained copy of the
computer program is lost, destroyed or
rendered unusable [Sec. 189.1, RA
8293].
COMMERCIAL LAW
h. Importation for Personal Purposes
Sec. 190.2 of RA 8293 that limited the
importation of books was repealed by RA
10372.
RA 10372 expressly limited the prohibition to
import or export only to counterfeit goods.
i. Remedies for Infringement
a. An
injunction
restraining
such
infringement [Sec. 216.1(a), RA 8293];
b. Actual damages, including legal costs
and other expenses, as he may have
incurred due to the infringement, as
well as the profits the infringer may
have made due to such infringement;
c. In proving profits: The plaintiff shall be
required to prove sales only, and the
defendant shall be required to prove
every element of cost which he claims
[Sec. 216.1(b), RA 8293];
d. Such damages which to the court shall
appear to be just and shall not be
regarded as penalty, in lieu of actual
damages and profits [Sec. 216.1(b),
RA 8293];
e. Impounding during the pendency of the
action, upon such terms and conditions
as the court may prescribe, sales
invoices
and
other
documents
evidencing sales, all articles and their
packaging alleged to infringe a
copyright and implements for making
them [Sec. 216.1(c), RA 8293];
f. Deliver under oath for destruction
without any compensation all infringing
copies or devices, as well as all plates,
molds, or other means for making such
infringing copies as the court may order
[Sec. 216.1(d), RA 8293];
g. Such other terms and conditions,
including the payment of moral and
exemplary damages, which the court
may deem proper, wise and equitable
and the destruction of infringing copies
of the work even in the event of
acquittal in a criminal case [Sec.
216.1(e), RA 8293];
h. Criminal liability
The copyright owner may elect, at any time
before final judgment is rendered, to recover
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instead of actual damages and profits, an
award of statutory damages for all
infringements involved in an action in a sum
equivalent to the filing fee of the infringement
action but not less than Php50,000.00. In
awarding statutory damages, the court may
consider the following factors:
5. The nature and purpose of the
infringing act;
6. The flagrancy of the infringement;
7. Whether the defendant acted in bad
faith;
8. The need for deterrence;
9. Any loss that the plaintiff has suffered
or is likely to suffer by reason of the
infringement; and
10. Any benefit shown to have accrued to
the defendant by reason of the
infringement.
In case the infringer was not aware and had no
reason to believe that his acts constitute an
infringement of copyright, the court in its
discretion may reduce the award of statutory
damages to a sum of not more than Ten
thousand pesos (Php10,000.00) [Sec. 216.1,
RA 8293].
The amount of damages to be awarded shall
be doubled against any person who:
1. Circumvents effective technological
measures; or
2. Having reasonable grounds to know
that it will induce, enable, facilitate or
conceal the infringement:
a. Remove or alter any electronic
rights management information
from a copy of a work, sound
recording, or fixation of a
performance; or
b. Distribute,
import
for
distribution,
broadcast,
or
communicate to the public
works or copies of works
without authority, knowing that
electronic rights management
information has been removed
or altered without authority
[Sec. 216.1(b), RA 8293].
However, no damages may be recovered
under this Act after the lapse of four (4) years
from the time the cause of action arose [Sec.
COMMERCIAL LAW
226, RA 8293].
Criminal Penalties for Infringement
Any person infringing any right secured by
provisions of Part IV of this Act or aiding or
abetting such infringement shall be guilty of a
crime punishable by:
a. Imprisonment of one (1) year to three
(3) years plus a fine ranging from Fifty
thousand pesos (P50,000) to One
hundred
fifty
thousand
pesos
(P150,000) for the first offense.
b. Imprisonment of three (3) years and
one (1) day to six (6) years plus a fine
ranging from One hundred fifty
thousand pesos (P150,000) to Five
hundred thousand pesos (P500,000)
for the second offense.
c. Imprisonment of six (6) years and one
(1) day to nine (9) years plus a fine
ranging from Five hundred thousand
pesos (P500,000) to One million five
hundred thousand pesos (P1,500,000)
for the third and subsequent offenses.
d. In all cases, subsidiary imprisonment in
cases of insolvency [Sec. 217.1, RA
8293 as amended by RA 10372].
Determination of Penalty
In determining the number of years of
imprisonment and the amount of fine, the court
shall consider:
a. The value of the infringing materials
that the defendant has produced or
manufactured; and
b. The damage that the copyright owner
has suffered by reason of the
infringement [Sec. 217.2, RA 8293 as
amended by RA 10372].
The respective maximum penalty stated in
Section 217.1 (see Criminal Penalties on
pages 33-34) for the first, second, third and
subsequent offense, shall be imposed when
the infringement is committed by:
1. The
circumvention
of
effective
technological measures;
2. The removal or alteration of any
electronic
rights
management
information from a copy of a work,
sound recording, or fixation of a
performance, by a person, knowingly
and without authority; or
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3. The distribution, importation for
distribution,
broadcast,
or
communication to the public of works
or copies of works, by a person without
authority, knowing that electronic rights
management information has been
removed or altered without authority
[Sec. 217.2, RA 8293 as amended by
RA 10372].
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ELECTRONIC COMMERCE ACT
COMMERCIAL LAW
FOR UP CANDIDATES ONLY
ELECTRONIC COMMERCE ACT
II. ELECTRONIC
COMMERCE ACT
The section numbers hereinafter generally
pertain to RA 8792 or the Electronic Commerce
Act of 2000, unless otherwise indicated.
I. Policy of the Law
The Electronic Commerce Act shall apply to
any kind of data message and electronic
document used in the context of commercial
and non-commercial activities to include
domestic
and
international
dealings,
transactions,
arrangements,
agreements
contracts and exchanges and storage of
information [Sec. 4].
COMMERCIAL LAW
global information networks, with the
necessary and appropriate legal,
financial, diplomatic and technical
framework, systems and facilities.
[Sec. 2]
The objective of the law is to facilitate domestic
and international dealings, transactions,
arrangements agreements, contracts and
exchanges and storage of information through
the utilization of electronic, optical and similar
medium, mode, instrumentality and technology
to recognize the authenticity and reliability of
electronic documents related to such activities
and to promote the universal use of electronic
transaction in the government and general
public [Sec. 3].
II. Definition of terms
Electronic Data Messages
It refers to information generated, sent,
The State recognizes:
received or stored by electronic, optical or
1. The vital role of information and
similar means [Sec. 5].
communications technology (ICT) in
nation- building
2. The need to create an informationElectronic Document
friendly environment which supports
It refers to information or the representation of
and ensures the availability, diversity
information, data, figures, symbols or other
and affordability of ICT products and
modes of written expression, described or
services
however represented, by which a right is
3. The primary responsibility of the private
established or an obligation extinguished, or by
sector in contributing investments and
which a fact may be prove and affirmed, which
services in telecommunications and
is receive, recorded, transmitted, stored,
information technology;
processed, retrieved or produced electronically
4. The need to develop, with appropriate
[Sec. 5].
training programs and institutional
policy changes, human resources for
Electronic Signature
the information technology age, a labor
It refers to any distinctive mark, characteristic
force skilled in the use of ICT and a
and/or sound in electronic form, representing
population capable of operating and
the identity of a person and attached to or
utilizing electronic appliances and
logically associated with the electronic data
computers;
message or electronic document or any
5. Its obligation to facilitate the transfer
methodology or procedures employed or
and promotion of technology; to ensure
adopted by a person and executed or adopted
network security, connectivity and
by such person with the intention of
neutrality of technology for the national
authenticating or approving an electronic data
benefit; and
message or electronic document [Sec. 5].
6. The need to marshal, organize and
deploy
national
information
infrastructures, comprising in both
telecommunications
network
and
strategic
information
services,
including their interconnection to the
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III. Legal Recognition of
Electronic Data Messages,
Documents, and Signatures
Legal Recognition of Electronic Data
Messages [Sec. 6]
Information shall not be denied legal effect,
validity or enforceability solely on the grounds
that it is in the data message purporting to give
rise to such legal effect, or that it is merely
referred to in that electronic data message.
Legal Recognition of Electronic Documents
[Sec. 7]
Electronic documents shall have the legal
effect, validity or enforceability as any other
document or legal writing.
Where the law (1) requires a document to be in
writing; (2) requires a form of an obligation; (3)
provides consequences for the document not
being presented or retained in its original from,
that requirement is met if the electronic
document maintains its integrity and reliability
and can be authenticated so as to be usable for
subsequent reference, in that:
a. The electronic document has
remained complete and unaltered
Apart from: Any endorsement and any
authorized change, or any change
which arises in the normal course of
communication, storage
and display.
b. The electronic document is reliable
in the light of the purpose for which it
was generated and in the light of all
relevant circumstances [Sec. 7].
Where the law requires that a document be
presented or retained in its original form, that
requirement is met by an electronic document
if:
a. There exists a reliable assurance as
to the integrity of the document from
the time when it was first generated in
its final form; and
COMMERCIAL LAW
b. That document is capable of being
displayed to the person to whom it is to
be presented: Provided, that no
provision of this Act shall apply to vary
any and all requirements of existing
laws on formalities required in the
execution of documents for their
validity.
For evidentiary purposes, an electronic
document shall be the functional equivalent of
a written document under existing laws.
This Act does not modify any statutory rule
relating to the admissibility of electronic data
messages or electronic documents, except the
rules relating to authentication and best
evidence.
Legal Recognition of Electronic Signatures
[Sec. 8]
An electronic signature on the electronic
document shall be equivalent to the signature
of a person on a written document if that
signature is proved by showing that a
prescribed procedure, not alterable by the
parties interested in the electronic document,
existed under which:
a. A method is used to identify the party
sought to be bound and to indicate said
party's access to the electronic
document necessary for his consent or
approval through the electronic
signature;
b. Said method is reliable and
appropriate for the purpose for which
the
electronic
document
was
generated or communicated, in the
light of all circumstances, including any
relevant agreement;
c. It is necessary for the party sought to
be bound, in or order to proceed further
with the transaction, to have executed
or provided the electronic signature;
and
d. The other party is authorized and
enabled to verify the electronic
signature and to make the decision to
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proceed
with
the
transaction
authenticated by the same.
The Court recognized the broadness of what
may be considered an electronic signature.
Thus, a machine signature of a Precinct Count
Optical Scan (PCOS) machine may be
considered the functional equivalent of a digital
signature as it represents the identity of the
individual, such digital signature naturally being
created specifically for the person himself or
herself inputting the details. [BagumbayanVNP Movement, Inc. v. COMELEC, (2019)]
Original Documents [Sec. 10]
Where the law (1) requires a document to be in
writing; (2) requires a form of an obligation; (3)
provides consequences for the document not
being presented or retained in its original from,
that requirement is met by an electronic data
message or electronic document if:
1. The integrity of the information from the
time when it was first generated in its
final form, as an electronic data message
or electronic document is shown by
evidence aliunde or otherwise; and
a. Criteria for assessing integrity whether the information has
remained
complete
and
unaltered, apart from the
addition of any endorsement
and any change which arises in
the
normal
course
of
communication, storage and
display
b. Standard
of
reliability
assessed in the light of
purposed for
which the
information was generated and
in the light of all the relevant
circumstances.
COMMERCIAL LAW
Before any private electronic document offered
as authentic is received in evidence, its
authenticity must be proved by any of the
following means:
1. By evidence that it had been digitally
signed by the person purported to have
signed the same;
2. By evidence that other appropriate
security procedures or devices as may
be authorized by the Supreme Court or
by law for authentication of electronic
documents were applied to the
document; or
3. By other evidence showing its integrity
and reliability to the satisfaction of the
judge. [Sec. 2, Rules on Electronic
Evidence]
Note: The terms electronic data message
and electronic document, as defined under
the Electronic Commerce Act of 2000, do
not include a facsimile transmission.
Accordingly, a facsimile transmission cannot
be considered as electronic evidence. It is not
the functional equivalent of an original under
the Best Evidence Rule and is not admissible
as electronic evidence. Since a facsimile
transmission is not an electronic data message
or an electronic document, and cannot be
considered as electronic evidence by the
Court, with greater reason is a photocopy of
such a fax transmission not electronic
evidence. In the present case, therefore, Pro
Forma Invoice Nos. ST2-POSTS0401-1 and
ST2-POSTS0401-2,
which
are
mere
photocopies of the original fax transmittals, are
not electronic evidence [MCC Industrial Sales
Corporation v Ssangyong Corporation, G.R.
No. 170633 (2007)].
IV. Presumption Relating to
Electronic Signatures
Where it is required that information be
resented, that the information is capable of
being displayed to the person to whom it is to
be presented.
Presumption Relating to Electronic
Signatures [Sec. 9]
Authentication of Electronic Data
Messages and Electronic Documents
In any proceeding involving an electronic
signature, it shall be presumed that:
1. The electronic signature is the signature
of the person to whom it correlates; and
Now governed by: A.M. No. 01-7-10-SC –
RULES ON ELECTRONIC EVIDENCE
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2. The electronic signature was affixed by
that person with the intention of signing
or approving the electronic document.
Except: When the person relying on the
electronically signed electronic document
knows or has notice of defects in or unreliability
of the signature or reliance on the electronic
signature is not reasonable under the
circumstances.
V. Admissibility and
Evidential Weight of
Electronic Data Message or
Electronic Document
COMMERCIAL LAW
VI. Obligation of
Confidentiality
Except for the purposes authorized under this
Act, any person who obtained access to any
electronic key, electronic data message, or
electronic
document,
book,
register,
correspondence, information, or other material
pursuant to any powers conferred under this
Act, shall not convey to or share the same with
any other person [Sec. 32].
VII. Punishable Acts &
Penalties
Hacking or cracking [Sec. 33(a)]
Admissibility
In any legal proceeding, nothing in the
application of the rules on evidence shall deny
the admissibility of an electronic data message
or electronic document in evidence:
a. On the sole ground that it is in
electronic form; or
b. On the ground that it is not in the
standard written form, and the
electronic data message or electronic
document meeting, and complying with
the requirements (under Sections 6 or
7) shall be the best evidence of the
agreement and transaction contained
therein [Sec. 12].
Note: This Act does not modify any statutory
rule relating to admissibility of electronic data
massages or electronic documents, except the
rules relating to authentication and best
evidence [Sec. 7].
Evidential weight
The following shall be given due regard In
assessing the evidential weight of an electronic
data message or electronic document:
a. the reliability of the manner in which it
was
generated,
stored
or
communicated,
b. the reliability of the manner in which its
originator was identified, and
c. other relevant factors. [Sec. 12]
Unauthorized access into or interference in a
computer system/server or information and
communication system; or any access in order
to corrupt, alter, steal, or destroy using a
computer or other similar information and
communication devices, without the knowledge
and consent of the owner of the computer or
information and communication system,
including the introduction of computer viruses
and the like, resulting in the corruption,
destruction, alteration, theft or loss of electronic
data messages or electronic documents
Piracy [Sec. 33(b)]
Unauthorized
copying,
reproduction,
dissemination, distribution, importation, use,
removal, alteration, substitution, modification,
storage,
uploading,
downloading,
communication, making available to the public,
or broadcasting of protected material,
electronic signature or copyrighted works
including legally protected sound recordings or
phonograms or information material on
protected works, through the use of
telecommunication networks, such as, but not
limited to, the internet, in a manner that
infringes intellectual property rights
Violations of the RA No. 7394 or the
Consumer Act [Sec. 33(c)]
In relation to transactions covered by or using
electronic data messages or electronic
documents
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ELECTRONIC COMMERCE ACT
Other violations of the provisions of
the Electronic Commerce Act [Sec.
33(d)]
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COMMERCIAL LAW
FOR UP CANDIDATES ONLY
FOREIGN INVESTMENTS
ACT
COMMERCIAL LAW
FOR UP CANDIDATES ONLY
FOREIGN INVESTMENTS ACT
FOREIGN
INVESTMENTS ACT
(R.A. No. 7042, as
amended by R.A. No.
11647)
I. Declaration of Policy [Sec.
2]
a. To attract, promote and welcome
productive investments from foreign
individuals, partnerships, corporations,
and governments, including their
political subdivisions, in activities which
significantly contribute to sustainable,
inclusive, resilient, and innovative
economic growth, productivity, global
competitiveness,
employment
creation, technological advancement,
and countrywide development to the
extent that foreign investment is
allowed in such activity by the
Constitution and relevant laws, and
consistent with the protection of
national security.
Foreign
investments
shall
be
encouraged in enterprises that
significantly expand livelihood and
employment opportunities for Filipinos;
enhance economic value of agricultural
products; promote the welfare of
Filipino consumers; expand the scope,
quality and volume of exports and their
access to foreign markets; and/or
transfer relevant technologies in
agriculture, industry and support
services. Foreign investments shall be
welcome as a supplement to Filipino
capital and technology in those
enterprises
serving
mainly
the
domestic market.
COMMERCIAL LAW
c. Foreign
investments
shall
be
conducted based on the principles of
transparency, reciprocity, equity, and
economic cooperation.
As a general rule, there are no
restrictions on extent of foreign
ownership of export enterprises.
In domestic market enterprises,
foreigners can invest as much as one
hundred percent (100%) equity except
in areas included in the negative list.
Foreign owned firms catering mainly to
the domestic market shall be
encouraged to undertake measures
that will gradually increase Filipino
participation in their businesses by
taking in Filipino partners, electing
Filipinos to the board of directors,
implementing transfer of technology to
Filipinos, generating more employment
for the economy and enhancing skills
of Filipino workers.
II. Definitions [Sec. 3]
1. Foreign Investment [Sec. 3(c)]
Equity investment made by a nonPhilippine national in the form of
foreign exchange and/or other assets
actually transferred to the Philippines
and duly registered with the Bangko
Sentral ng Pilipinas;
2. “Doing business” [Sec. 3(d)]
Includes:
• Soliciting orders, service contracts,
opening offices, whether called
"liaison" offices or branches;
• Appointing representatives or
distributors domiciled in the
Philippines or who in any calendar
year stay in the country for a period
or periods totaling 180 days or
more
• Participating in the management,
supervision or control of any
domestic business, firm, entity or
corporation in the Philippines; and
b. The State shall promote accountability
and integrity in public office, as well as
the promotion and administration of
efficient public service to entice foreign
investments.
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FOREIGN INVESTMENTS ACT
•
•
•
•
Any other act or acts that imply a
continuity of commercial dealings
or arrangements, and contemplate
to that extent the performance of
acts or works, or the exercise of
some of the functions normally
incident to, and in progressive
prosecution of, commercial gain or
of the purpose and object of the
business organization.
Does not include:
Mere investment as a shareholder
by a foreign entity in domestic
corporations duly registered to do
business, and/or the exercise of
rights as such investor;
Having a nominee director or
officer to represent its interests in
such corporation; and
Appointing a representative or
distributor
domiciled
in
the
Philippines
which
transacts
business in its own name and for its
own account.
The IRR of RA No. 7042 also states the
following as not to be deemed “doing business”
in the Philippines:
• Publication
of
a
general
advertisement through any print or
broadcast media
• Maintaining a stock of goods in the
Philippines solely for the purpose
of having the same processed by
another entity in the Philippines
• Consignment by a foreign entity of
equipment with a local company to
be used in the processing of
products for export
• Collecting information in the
Philippines
• Performing services auxiliary to an
existing isolated contract of sale
which are not on a continuing
basis, such as installing in the
Philippines machinery it has
manufactured or exported to the
Philippines, servicing the same,
training domestic workers to
operate it, and similar incidental
services.
COMMERCIAL LAW
It should be kept in mind that the
determination of whether a foreign
corporation is doing business in the
Philippines must be judged in light of
the
attendant
circumstances
[Steelcase, Inc. v. Design International
Selections, Inc., G.R. No. 171995, 18
April 2012]
Factors used by the Supreme Court to
determine
whether
a
foreign
corporation is doing business in the
Philippines:
a. Should be active and continuous;
isolated business transactions or
occasional, incidental and casual
transactions are not within the
context of doing business (Antam
Consolidated, Inc. v. CA, G.R. No.
L-61523 (1986)]
b. Intention of an entity to continue the
body of its business in the country;
number and quantity are merely
evidence of such intention [Eriks
Pte. Ltd. v. CA, G.R. No. 118843
(2007)]
c. Single act may be considered as
doing business if it implies a
continuity of commercial dealings
and contemplates the performance
of acts or the exercise of functions
normally incidental to and in the
progessive pursuit of its purpose
[Magna Ready Mix Concrete
Corporation v. Andersen Bjornstad
Kane Jacobs, Inc., G.R. No.
196158, (2021)]
Two general tests to determine whether or
not a foreign corporation can be considered
as “doing business” in the Philippines:
1. Substance Test – whether the
foreign corporation is continuing
the body of the business or
enterprise for which it was
organized or whether it has
substantially retired from it and
turned it over to another
2. Continuity
Test
–
implies
continuity of commercial dealings
and
arrangements,
and
contemplates, to that extent, the
performance of acts or works or the
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exercise of some of the functions
normally incident to, and in the
progressive prosecution of, the
purpose and object of its
organization [Agilent Technologies
v. Integrated Silicon, G.R. No.
156416 (2004)]
3. Export enterprise [Sec. 3(e)]
An enterprise wherein a manufacture,
processor or service (including
tourism) enterprise exports sixty per
cent (60%) or more of its output, or
wherein a trader purchases products
domestically and exports sixty per cent
(60%) or more of such purchases.
4. Domestic market enterprise [Sec.
3(f)]
An enterprise which produces goods
for sale, or renders services to the
domestic market entirely or if exporting
a portion of its output fails to
consistently export at least sixty
percent (60%) thereof.
5. Negative List [Sec. 3(g)]
List of areas of economic activity
whose foreign ownership is limited to a
maximum of forty percent (40%) of the
equity capital of the enterprises
engaged therein.
III. Inter-Agency Investment
Promotion Coordination
Committee (IIPCC) [Sec. 4]
The IPCC shall be composed of the:
1. Secretary of the DTI, to preside as
Chairperson;
2. Secretary/Undersecretary of the
Department of Finance (DOF) as
Vice-Chairperson;
3. One (1) representative from the
DTI-Board of Investments (BOI);
COMMERCIAL LAW
4. One (1) representative from the
DTI-Philippine Economic Zone
Authority (PEZA);
5. One (1) representative from the
Department of Foreign Affairs
(DFA),Office
of
the
Undersecretary for Multilateral
Affairs and International Economic
Relations (OUMAIER);
6. One (1) representative from the
National
Economic
and
Development Authority (NEDA);
7. One (1) representative from the
Department of Information and
Communications
Technology
(DICT);
8. One (1) representative from the
Commission on Higher Education
(CHED);
9. One (1) representative from the
Technical Education and Skills
Development Authority (TESDA);
and
10. Four
(4)
representatives
composed
of
one
(1)
representative each from the
National Capital Region, Luzon,
Visayas and Mindanao, to be
chosen from a list of nominees
prepared and submitted by
nationally recognized leading
industry or business chambers,
who
shall
be
of
known
competence, probity, integrity and
expertise in any of the fields of
investment, advertising, banking,
finance management and law, with
at least ten (10) years of
outstanding
management
or
leadership experience.
Powers and Functions of the IIPCC:
1. To establish both a medium- and
long-term Foreign Investment
Promotion and Marketing Plan
(FIPMP),coordinating all existing
investment development plans and
programs under the BOI, PEZA,
and various investment promotion
agencies (IPAs),LGUs, and other
agencies, as delineated in Section
4-B of this Act;
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FOREIGN INVESTMENTS ACT
2. To design a comprehensive
marketing strategy and campaign,
promoting the country as a
desirable investment area;
3. To support inbound and outbound
foreign direct and trade missions
for new international markets to
explore the country as a possible
location to do business;
4. To encourage and support
research and development in
priority areas indicated by the
FIPMP;
5. To monitor actual performance
against measurable and time
bound targets in the FIPMP, to
include job generation;
6. To submit annual evaluation and
reports to the President of the
Philippines and the Congress
regarding the activities of the
IIPCC;
7. To establish and regularly update
an online database including a
directory of ready local partners
from priority sectors under the
FIPMP, as a tool for promoting
investments
and
business
matching in local supply chains;
and
8. To support local government
efforts to promote foreign direct
investments, expedite compliance
with national requirements and
address other safeguards and
services requested by foreign
investors in their different localities
involved
with
said
foreign
investments.
IV. Registration of
Investments of NonPhilippine Nationals [Sec. 5]
General Rule: Without prior approval, a nonPhilippine national may do business as defined
in Sec. 3(d) or invest in a domestic enterprise
up to one hundred percent (100%) of its capital:
• Upon registration with SEC, or
• With the the DTI for single
proprietorships
COMMERCIAL LAW
Exception: unless participation of nonPhilippine nationals in the enterprise is
prohibited or limited to a smaller percentage by
existing law and/or under the provisions of this
Act
The SEC or the DTI, as the case may be, shall
not impose any limitations on the extent of
foreign ownership in an enterprise additional to
those provided in this Act: Provided,
however,That any enterprise seeking to avail of
incentives under the Omnibus Investments
Code of 1987 must apply for registration with
the BOI, which shall process such application
for registration in accordance with the criteria
for evaluation prescribed in said Code.
A non-Philippine national intending to engage
in the same line of business as an existing joint
venture, in which he or his majority shareholder
is a substantial partner, must disclose the fact
and the names and addresses of the partners
in the existing joint venture in his application for
registration with SEC. During the transitory
period as provided in Section 15 hereof, SEC
shall disallow registration of the applying nonPhilippine national if the existing joint venture
enterprise, particularly the Filipino partners
therein, can reasonably prove they are capable
to make the investment needed for the
domestic market activities to be undertaken by
the competing applicant. Upon effectivity of this
Act, SEC shall effect registration of any
enterprise applying under this Act within fifteen
(15) days upon submission of completed
requirements."
cf. Registration Process Of Philippine
Nationals
Who are Philippine nationals?
a. Citizen of the Philippines
b. Domestic partnership or association wholly
owned by citizens of the Philippines
c. Corporation organized under the laws of the
Philippines of which at least 60% of the capital
stock outstanding and entitled to vote is owned
and held by citizens of the Philippines
d. Corporation organized abroad and
registered as doing business in the Philippines
under the Corporation Code of which 100% of
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FOREIGN INVESTMENTS ACT
the capital stock outstanding and entitled to
vote is wholly owned by Filipinos
e. A trustee of funds for pension or other
employee retirement, where the trustee is a
Philippine national and at least 60% of the fund
will accrue to the benefit of Philippine nationals
Where a corporation and its non-Filipino
stockholders own stocks in a Securities and
Exchange Commission (SEC) registered
enterprise, the corporation is a Filipino national
under the following conditions:
a. At least sixty percent (60%) of the capital
stock outstanding and entitled to vote of each
of both corporations must be owned and held
by citizens of the Philippines;
b. At least sixty percent (60%) of the members
of the Board of Directors of each of both
corporations must be citizens of the
Philippines.
The control test shall be applied for this
purpose.
COMMERCIAL LAW
"Export enterprises shall register and comply
with the export requirements in accordance
with Title XIII of the National Internal Revenue
Code (NIRC),as amended, for purposes of
availing any tax incentive or benefit.
VI. Foreign Investments in
Domestic Enterprises [Sec.
7]
Non-Philippine nationals may own up to one
hundred percent (100%) of domestic market
enterprises unless foreign ownership therein is
prohibited or limited by the Constitution and
existing law or the Foreign Investment
Negative List under Section 8 hereof."
VII. Foreign Investment
Negative List [Sec. 8]
The Foreign Investment Negative List shall
have two (2) component lists: A and B:
a) List A shall enumerate the areas of
activities reserved to Philippine nationals
by mandate of the Constitution and specific
Foreign investment in export enterprises
laws.
whose products and services do not fall within
b) List B shall contain the areas of activities
Lists A and B of the Foreign Investment
and enterprises regulated pursuant to law:
Negative List provided under Section 8 hereof
a. which
are
defense-related
is allowed up to one hundred percent (100%)
activities, requiring prior clearance
ownership.
and authorization from Department
of National Defense (DND) to
Export enterprises which are non-Philippine
engage in such activity, such as the
nationals shall register with BOI and submit the
manufacture,
repair,
storage
reports that may be required to ensure
and/or distribution of firearms,
continuing compliance of the export enterprise
ammunition,
lethal
weapons,
with its export requirement. BOI shall advise
military ordnance, explosives,
SEC or DTI, as the case may be, of any export
pyrotechnics and similar materials,
enterprise that fails to meet the export ratio
unless such manufacturing or
requirement. The SEC or DTI shall thereupon
repair activity is specifically
order the non-complying export enterprise to
authorized by the Secretary of
reduce its sales to the domestic market to not
National Defense; or
more than forty percent (40%) of its total
b. which have implications on public
production; failure to comply with such SEC or
health and morals, such as the
DTI order, without justifiable reason, shall
manufacture and distribution of
subject the enterprise to cancellation of SEC or
dangerous drugs, all forms of
DTI registration, and/or the penalties provided
gambling, nightclubs, bars, beer
in Section 14 hereof.
houses, dance halls, sauna and
steam bathhouses and massage
clinics.
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V. Foreign Investments in
Export Enterprises [Sec. 6]
FOR UP CANDIDATES ONLY
FOREIGN INVESTMENTS ACT
General Rule: Small and medium-sized
domestic market enterprises with paid-in equity
capital less than the equivalent of Two hundred
thousand US dollars (US$200,000.00), are
reserved to Philippine nationals
Exceptions:
1. Otherwise provided under RA No. 8762,
otherwise known as the Retail Trade
Liberalization Act of 2000 and other
relevant laws
2. A minimum paid-in capital of One hundred
thousand dollars (US$100,000.00) if they
prove:
a. they involve advanced technology as
determined by the Department of
Science and Technology, or
b. they are endorsed as startup or startup
enablers by the lead host agencies
pursuant to RA No. 11337, or
c. a majority of their direct employees are
Filipinos, but in no case shall the
number of Filipino employees be less
than fifteen (15)
Registered foreign enterprises employing
foreign nationals and enjoying fiscal incentives
shall implement an understudy or skills
development program to ensure the transfer of
technology or skills to Filipinos. Compliance
with this requirement shall be regularly
monitored by the DOLE.
Nothing in this Act shall operate as a cause for
termination of employees hired prior to the
effectivity of this Act. In all cases, the provisions
of Presidential Decree No. 442, otherwise
known as the "Labor Code of the Philippines"
and other applicable laws, rules and
regulations issued by DOLE shall prevail.
Who may recommend amendments to List
B:
1. Secretary of National Defense, or
2. the Secretary of Health, endorsed
by the NEDA, or
3. upon
recommendation
motu
proprio, of NEDA, approved by the
President, and promulgated by a
Presidential Proclamation
Amendments to the Foreign Investment
Negative List shall not be made more often
COMMERCIAL LAW
than once every two (2) years: Provided, That
the NEDA, in consultation and cooperation with
the BOI, DTI, SEC, DICT, IPAs and other
pertinent government agencies, shall, every
two (2) years, (i) review the Foreign Investment
Negative List, and (ii) submit to Congress an
analysis of foreign investment performance
economic activities of the industries under the
Foreign Investment Negative List and the
reasons for the recommended amendments, if
any: Provided, further,That NEDA shall
recommend to Congress investment-related
matters requiring necessary legislation."
THE TWELFTH REGULAR FOREIGN
INVESTMENT NEGATIVE LIST
EO No. 175, promulgated on June 27,
2022
Nationality
Industry
Requireme
nt
LIST A: Foreign Ownership is Limited
by Mandate of the Constitution and
Specific Laws
No Foreign 1. Mass media, except
Equity
recording
2. Practice of professions,
except in cases specifically
allowed by law following the
prescribed conditions stated
therein. The Annex on
Professions
attached
herewith and forming an
integral
part
of
this
document, indicates:
a.
professions
where
foreigners are not allowed to
practice in the Philippines,
except
if
subject
to
reciprocity as provided in
pertinent laws; and
b. corporate practice of
professions with foreign
equity restrictions under
pertinent laws.
3. Retail trade enterprises
with paid-up capital of less
than PhP25,000,000.00
4. Cooperatives,
investments
of
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except
former
FOR UP CANDIDATES ONLY
FOREIGN INVESTMENTS ACT
COMMERCIAL LAW
THE TWELFTH REGULAR FOREIGN
INVESTMENT NEGATIVE LIST
EO No. 175, promulgated on June 27,
2022
Nationality
Industry
Requireme
nt
natural born citizens of the
Philippines
5.
Organization
and
operation
of
private
detective, watchmen or
security guards agencies
6. Small-scale mining
16.
Exploration,
development and utilization
of natural resources
7. Utilization of marine
resources in archipelagic
waters, territorial sea and
exclusive economic zone, as
well as small-scale utilization
of natural resources in rivers,
lakes, bays and lagoons
17. Ownership of private
lands except a natural born
citizen who has lost his
Philippine citizenship and
who has the legal capacity to
enter into a contract under
Philippine laws
8. Ownership, operation and
management of cockpits
18. Operation
utilities
9.
Manufacture,
stockpiling
distribution
of
weapons
19. Educational institutions
other than those established
by religious groups and
mission boards, for foreign
diplomatic personnel and
their dependents, and other
foreign temporary, or for
short-term high-level skills
development that do not
form part of the formal
education system as defined
in Section 20 of Batas
Pambansa No. 232
repair,
and/or
nuclear
10. Manufacture, repair,
stockpiling
and/or
distribution of biological,
chemical and radiological
weapons and anti-personnel
mines
Up to 25%
foreign
equity
Up to 30%
foreign
equity
THE TWELFTH REGULAR FOREIGN
INVESTMENT NEGATIVE LIST
EO No. 175, promulgated on June 27,
2022
Nationality
Industry
Requireme
nt
Up to 40%
15.
Procurement
of
foreign
infrastructure
projects
equity
pursuant to Sec. 23.4.2.1 (b),
(c), and (e) of IRR of RA No.
9184
11.
Manufacture
of
firecrackers
and
other
pyrotechnic devices
12. Private recruitment,
whether for local or overseas
employment
13. Contracts for the
construction of defenserelated structures
14. Advertising
of
public
20. Culture, production,
milling, processing, trading
except retailing, of rice and
corn and acquiring, by
barter,
purchase
or
otherwise, rice and corn and
the by-products thereof ,
subject
to
period
of
divestment
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COMMERCIAL LAW
THE TWELFTH REGULAR FOREIGN
INVESTMENT NEGATIVE LIST
EO No. 175, promulgated on June 27,
2022
Nationality
Industry
Requireme
nt
21. Contracts for the supply
of materials, goods and
commodities to governmentowned
or
-controlled
corporations
(GOCCs),
company,
agency
or
municipal corporation
22. Operation of deep sea
commercial fishing vessels
23.
Ownership
condominium units
of
24.
Private
radio
communications network
LIST B: Foreign Ownership is Limited
for Reasons of Security, Defense, Risk
to Health and Morals and Protection of
Small and Medium Scale Enterprises
Up to 40% 1.
Manufacture,
repair,
foreign
storage, and/or distribution
equity
of
products
and/or
ingredients
requiring
Philippine National Police
(PNP) clearance:
a. Firearms (handguns to
shotguns), parts of firearms
and ammunition therefore,
instruments or implements
used or intended to be used
in the manufacture of
firearms;
b. Gunpowder;
c. Dynamite;
d. Blasting supplies;
e. Ingredients used in
making explosives:
i.
Chlorates
of
potassium
and
sodium;
ii.
Nitrates
of
ammonium,
potassium,
sodium
barium, copper (11),
THE TWELFTH REGULAR FOREIGN
INVESTMENT NEGATIVE LIST
EO No. 175, promulgated on June 27,
2022
Nationality
Industry
Requireme
nt
lead (11), calcium and
cuprite;
iii. Nitric acid;
iv. Nitrocellulose;
v. Perchlorates of
ammonium,
potassium
and
sodium;
vi. Dinitrocellulose;
vii. Glycerol;
viii.
Amorphousphosphoru
s;
ix.
Hydrogen
peroxide;
x. Strontium nitrate
powder;
xi. Toluene; and
f. Telescopic sights, sniper
scope and other similar
devices.
However, the manufacture or
repair of these items may be
authorized by the Chief of
the PNP to non-Philippine
nationals; Provided that a
substantial percentage of
output, as determined by the
said agency, is exported.
Provided further that the
extent of foreign equity
ownership allowed shall be
specified
in
the
said
authority/clearance.
2.
Manufacture
and
distribution of dangerous
drugs
3.
Sauna
and
steam
bathhouses, massage clinics
and other like activities
regulated by law because of
risks posed to public health
and morals, except wellness
centers
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THE TWELFTH REGULAR FOREIGN
INVESTMENT NEGATIVE LIST
EO No. 175, promulgated on June 27,
2022
Nationality
Industry
Requireme
nt
4. All forms of gambling
except those covered by
investment agreements with
PAGCOR
5. Micro and small domestic
market enterprises with paid
in equity capital of less than
the
equivalent
of
US$200,000
6. Micro and small domestic
market enterprises: (i) that
involve advance technology
as determined by the
Department of Science and
Technology (DOST); or (ii)
are endorsed as startup or
startup enablers by the lead
host agencies, namely the
Department of Trade and
Industry, Department of
Information
and
Communications
Technology
or
DOST,
pursuant to RA No. 11337,
otherwise known as the
"Innovative Startup Act"; or
(iii) with a majority of their
direct
employees
as
Filipinos, but in no case shall
the number of Filipino
employees be less than
fifteen (15), with paid-in
equity capital of less than the
equivalent of US$100,000
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FOR UP CANDIDATES ONLY
TAXATION 1
TAXATION LAW
FOR UP CANDIDATES ONLY
TAXATION 1
TAXATION LAW
I. GENERAL PRINCIPLES
OF TAXATION
A. POWER OF TAXATION AS
DISTINGUISHED FROM POLICE
POWER AND EMINENT DOMAI
When the distinction of exercise of
powers is relevant
Taxation
Authority
exercises
Power)
(who
the
May be exercised only by:
the government; or
its political subdivisions.
The property (generally in the
form of money) is taken for
the
support
of
the
government.
Purpose
If the primary purpose is to
raise revenue, it represents
an exercise of taxing power.
[71 Am. Jur. 2d 395–396]
Operates upon:
a community;
or class of individuals.
The
money
contributed
becomes part of the public
funds.
Protection and benefits he
receives.
The enjoyment of the
privileges of living in an
organized
society,
established and safeguarded
by the devotion of taxes to
public purpose.
Persons
Affected
Effect
Benefits
Received
Amount
Imposition
of
Relationship to
the Constitution
The distinction is important when the one
exercising it is the LGU (mere delegated
authority).
Since Congress has the power to exercise the
State inherent powers of Police Power,
Eminent Domain and Taxation, the distinction
between police power and the power to tax xxx
would not be of any moment when Congress
itself exercises the power. [NTC v. CA, G.R.
No. 127937 (1999)]
Eminent Domain
May be exercised by:
the government;
its political subdivisions;
or may be granted to public
service companies or public
utilities.
Police Power
May be exercised only by:
the government; or
its political subdivisions.
The use of the property is
“regulated” for the purpose of
promoting the general
welfare;
it
is
not
compensable.
To facilitate the taking of
private property for public
use.
Operates on:
an individual as the owner of
a particular property.
There is a transfer of the right
to property.
Market
value
property
of
the
He receives the market value
of the property taken from
him.
Generally, there is no limit on
the amount of tax that may be
imposed.
No amount imposed but
rather the owner is paid the
market value of property
taken.
Subject to constitutional
limitations, including the
prohibition
against
impairment of the obligation
Inferior to the impairment
prohibition;
government
cannot expropriate private
property, which under a
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If the primary purpose is the
regulation of some particular
occupation,
calling,
or
activity, it is an exercise of
police power even if it
incidentally
produces
revenue. [71 Am. Jur. 2d
395–396]
Operates upon:
a community;
or a class of individuals.
There is no transfer of title. At
most, there is restraint on the
injurious use of property.
Indirect benefits
The person affected receives
indirect benefits as may arise
from the maintenance of a
healthy economic standard of
society.
Amount imposed should just
be commensurate to cover
the cost of regulation,
issuance of a license or
surveillance
Relatively
free
from
constitutional limitations and
is superior to the impairment
of contract provision.
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Taxation
of contracts.
Eminent Domain
contract
had
previously
bound itself to purchase from
the other contracting party.
[MAMALATEO, Reviewer on Taxation 2nd Edition (2008), pp. 11-1
B. INHERENT AND
CONSTITUTIONAL
LIMITATIONS OF TAXATION
1. Inherent Limitations
The following are the inherent limitations of
taxation:
a. Public Purpose
b. Inherently Legislative
c. Territorial
d. International Comity
e. Exemption of Government Entities,
Agencies, and Instrumentalities
a. Public Purpose
The proceeds of the tax must be used:
i.
for the support of the State; or
ii.
for some recognized objects of
government or directly to promote the
welfare of the community.
Test: Whether the statute is designed to
promote the public interest, as opposed to the
furtherance of the advantage of individuals,
although each advantage to individuals might
incidentally serve the public. [Pascual v. Sec.
of Public Works, G.R. No. L-10405 (1960)]
The public purpose of a tax may legally exist
even if the motive which impelled the
legislature to impose the tax was to favor one
industry over another. [Tio v. Videogram, G.R.
No. L-75697 (1987)]
Public use is no longer confined to the
traditional notion of use by the public but held
synonymous with public interest, public benefit,
public welfare, and public convenience.
(Commissioner of Internal Revenue v. Central
Luzon Drug Corporation, G.R. No. 159647
(2005)]
Police Power
character of the tax law, not the number of
persons
benefited.
[Dimaampao,
Tax
Principles and Remedies (2015)]
Tests in Determining Public Purpose:
a. Duty Test – Whether the thing to be
furthered by the appropriation of public
revenue is something which is the duty of
the State as a government to provide.
b. Promotion of General Welfare Test –
Whether the proceeds of the tax will directly
promote the welfare of the community in
equal measure.
c. Character of the Direct Object of the
Expenditure – It is the essential character
of the direct object of the expenditure which
must determine its validity as justifying a
tax and not the magnitude of the interests
to be affected nor the degree to which the
general advantage of the community, and
thus the public welfare, may be ultimately
benefited by their promotion. [Pascual v.
Sec. of Public Works, supra]
b. Inherently Legislative
General Rule: Delegata potestas non potest
delegari. (No delegated powers can be further
delegated.)
The power to tax is exclusively vested in the
legislative body and it may not be re-delegated.
Judge Cooley enunciates the doctrine in the
following oft-quoted language: "One of the
settled maxims in constitutional law is that the
power conferred upon the legislature to make
laws cannot be delegated by that department
to any other body or authority.” [People v. Vera,
G.R. No. L-45685 (1937)]
Stated in another way, taxation may
exceptionally be delegated, subject to such
well-settled limitations as:
a. The delegation shall not contravene any
constitutional provision or the inherent
limitations of taxation;
It is the purpose which determines the public
b. The delegation is effected either by:
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§
§
the Constitution; or
by validly enacted legislative
measures or statute; and
c. The delegated levy power, except when the
delegation is by an express provision of the
Constitution itself, should only be in favor
of the local legislative body of the local or
municipal government concerned. [VITUG
and ACOSTA]
For a valid delegation of power, it is essential
that the law delegating the power must be:
(1) complete in itself, that is, it must set forth
the policy to be executed by the delegate
and,
(2) it must fix a standard — limits of which are
sufficiently determinate or determinable —
to which the delegate must conform.
[Osmeña v. Orbos, G.R. No. 99886 (1993)]
Legislature has the power to determine the:
a. Nature (kind),
b. Object (purpose),
c. Extent (rate),
d. Coverage (subjects) and
e. Situs (place) of taxation.
Exceptions
a. Delegation to local governments
This exception is in line with the general
principle that the power to create municipal
corporations for purposes of local selfgovernment carries with it, by necessary
implication, the power to confer the power
to tax on such local governments. (1
Cooley 190). This is logical for after all,
municipal
corporations
are
merely
instrumentalities of the state for the better
administration of the government in respect
to matters of local concern. [Pepsi-Cola
Bottling Co. of the Phil. Inc. v. Mun. of
Tanauan, G.R. No. L-31156 (1976)].
Under the new Constitution, however,
LGUs are now expressly given the power
to create its own sources of revenue and to
levy taxes, fees and charges, subject to
such guidelines and limitations as the
Congress may provide which must be
consistent with the basic policy of local
autonomy. [Sec 5, Art. X, 1987
Constitution]
b. Delegation to the President
1. Tariff powers by Congress under the
Flexible Tariff Clause
The Congress may, by law, authorize
the President to fix within specified
limits, and subject to such limitations
and restrictions as it may impose, tariff
rates, import and export quotas,
tonnage and wharfage dues, and other
duties or imposts within the framework
of the national development program of
the Government. [Sec. 28(2), Art. VI,
1987 Constitution]
2. Emergency Powers [Sec. 23(2), Art. VI,
1987 Constitution.
3. To enter into Executive agreements;
and
4. To ratify treaties which grant tax
exemption
subject
to
Senate
concurrence.
c. Delegation to administrative agencies
Limited
to
the
administrative
implementation that calls for some degree
of discretionary powers under sufficient
standards expressed by law or implied
from the policy and purposes of the Act.
There are certain aspects of the taxing
process that are not legislative and they
may, therefore, be vested in an
administrative body. The powers which are
not legislative include:
1. The power to value property for
purposes of taxation pursuant to fixed
rules;
2. The power to assess and collect the
taxes; and
3. The power to perform any of the
innumerable details of computation,
appraisement, and adjustment, and the
delegation of such details.
The exercise of the above powers is really
not an exception to the rule as no
delegation of the strictly legislative power
to tax is involved.
The powers which cannot be delegated
include:
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The determination of the subjects to be
taxed;
The purpose of the tax, the amount or
rate of the tax;
The manner, means, and agencies of
collection; and
The prescribing of the necessary rules
with respect thereto.
c. Territorial
Rule: A state may not tax property lying outside
its borders or lay an excise or privilege tax upon
the exercise or enjoyment of a right or privilege
derived from the laws of another state and
therein exercise and enjoyed. [51 Am.Jur. 8788].
Reasons:
a. Tax laws do not operate beyond a
country’s territorial limits.
b. Property which is wholly and exclusively
within the jurisdiction of another state
receives none of the protection for which a
tax is supposed to be a compensation.
Note: Where privity of relationship exists. It
does not mean, however, that a person outside
of state is no longer subject to its taxing
powers. The fundamental basis of the right to
tax is the capacity of the government to provide
benefits and protection to the object of the tax.
A person may be taxed where there is between
him and the taxing state, a privity of the
relationship justifying the levy. In these cases,
the State can exercise its taxing powers over
the taxpayer even outside its territorial
jurisdiction, such as the taxation of resident
citizens for income from sources worldwide.
The basis of the power to tax is not dependent
on the source of the income nor upon the
location of the property nor upon the residence
of the taxpayer but upon his relation as a citizen
to the state. As such a citizen, he is entitled,
wherever he may be, inside or outside of his
country, to the protection of his
government.
d. International Comity
Comity – respect accorded by nations to each
other because they are sovereign equals.
Thus, the property or income of a foreign state
or government may not be the subject of
taxation by another state.
Reasons:
a. In par in parem non habet imperium. As
between equals there is no sovereign
(Doctrine of Sovereign Equality among
states under international law). One state
cannot exercise its sovereign powers over
another. All states, including the smallest
and least influential, are also entitled to
their dignity and the protection of their
honor and reputation. [Dimaampao, Tax
Principles and Remedies (2015)]
b. In international law, a foreign government
may not be sued without its consent.
Therefore, it is useless to impose a tax
which could not be collected.
c. Usage among states that when a foreign
sovereign enters the territorial jurisdiction
of another, there is an implied
understanding that the former does not
intend to degrade its dignity by placing
itself under the jurisdiction of the other.
e. Exemption of Government Entities,
Agencies, and Instrumentalities
If the taxing authority is the National
Government:
General Rule: Agencies and instrumentalities
of the government are exempt from tax. Their
exemption rests on the State's sovereign
immunity from taxation. The State cannot be
taxed without its consent and such consent,
being in derogation of its sovereignty, is to be
strictly construed. [Gomez v. Palomar, GR No.
L-23645, 29 October 1968]
Note: Unless otherwise provided by law, the
exemption applies only to government entities
through which the government immediately
and directly exercises its sovereign powers.
With respect to government-owned or
controlled corporations performing proprietary
(not governmental) functions, they are
generally subject to tax unless exempted under
Section 27(C) of the Tax Code or, in certain
cases, if there is a tax exemption provisions in
their charters or the law creating them in line
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with the rule that a specific law overrides a
general law.
If the taxing authority is a local government
unit: RA 7160 expressly prohibits LGUs from
levying tax on the National Government, its
agencies and instrumentalities and other
LGUs. [Sec. 133 (o), LGC]
Reasons for the exemption:
a. To levy a tax upon public property would
render necessary new taxes on other
public property for the payment of the tax
so laid and thus, the government would be
taxing itself to raise money to pay over for
itself.
b. This immunity also rests upon fundamental
principles of government, being necessary
in order that the functions of government
shall not be unduly impeded. [1 Cooley
263.]
c. The practical effect of an exemption
running to the benefit of the government is
merely to reduce the amount of money that
has to be handled by the government in the
course of its operations:
For these
reasons,
provisions
granting
exemptions to government agencies
may be construed liberally in favor of
non-tax liability of such agencies.
[Maceda v. Macaraig, Jr., G.R. No. 88291
(1991)].
Exception: Government-owned or controlled
corporations (GOCCs) perform proprietary
functions hence, they are subject to taxation.
[Dimaampao, Tax Principles and Remedies
(2015)]
Exception to the Exception: The following
GOCCs are considered tax exempt as
provided under Sec. 27(c) of the NIRC, as
amended:
1. Government Service Insurance System
(GSIS) (Sec. 39, RA 8291)
2. Social Security System (SSS) (Sec. 16, RA
8282)
Home Development Mutual Fund
3.
(HDMF) (Sec. 19, RA 9679)
4. Philippine Health Insurance Corporation
(PHIC)
5. Local Water Districts
There is no constitutional prohibition against
the government taxing itself. [Coll. v. Bisaya
Land Transportation, 105 Phil. 338 (1959)].
2. Constitutional Limitations
The following are the constitutional limitations
of taxation:
1. Provisions directly affecting taxation:
1. Prohibition against imprisonment for
non-payment of poll tax;
2. Uniformity and equality of taxation;
3. Grant by Congress of authority to the
President to impose tariff rates;
4. Prohibition against taxation of religious,
charitable entities, and educational
entities;
5. Prohibition against taxation of nonstock,
non-profit
educational
institutions;
6. Majority vote of Congress for grant of
tax exemption;
7. Prohibition on use of tax levied for
special purpose;
8. President’s veto power on appropriation,
revenue, tariff bills;
9. Tax bills should originate exclusively in
the House of the Representatives;
10. Concurrence of at least 2/3 of the
Senate with tax treaties
11. Non-impairment of jurisdiction of the
Supreme Court;
12. Grant of power to the local government
units to create its own sources of
revenue;
13. Flexible tariff clause;
14. Exemption from real property taxes;
and
15. No appropriation or use of public
money for religious purposes;
2. Provisions indirectly affecting taxation:
1. Due process
2. Equal protection;
3. Religious freedom;
4. Non-impairment of obligations of
contracts;
5. Freedom of speech and expression;
6. Presidential power to grant reprieves,
communications, and pardons, and
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remit fines and forfeitures after
conviction by final judgement; and
7. No taking of private property for public
use without just compensation
ii.
a. Provisions directly affecting Taxation
1. Prohibition against imprisonment for
non-payment of poll tax
No person shall be imprisoned for debt or
non-payment of a poll tax. [Sec. 20, Art. III,
1987 Constitution]
Capitation or poll taxes are taxes of a
fixed amount upon all persons, or upon all
the persons of a certain class, resident
within a specified territory, without regard
to their property or the occupations in
which they may be engaged. Taxes of a
specified amount upon each person
performing a certain act or engaging in a
certain business or profession are not,
however, poll taxes. [51 Am. Jur. 66-67]
b. Equity
i.
Uniformity in taxation is
effected
through
the
apportionment of the tax
burden among the taxpayers
which under the Constitution
must be equitable. “Equitable”
means fair, just, reasonable
and proportionate to the
taxpayer’s ability to pay.
Taxation may be uniform but
inequitable where the amount
of the tax imposed is excessive
or unreasonable.
ii.
The constitutional requirement
of equity in taxation also
implies an approach which
employs
a
reasonable
classification of the entities or
individuals who are to be
affected by a tax. Where the
“tax differentiation is not based
on material or substantial
differences,” the guarantee of
equal protection of the laws
and the uniformity rule will
likewise be infringed.
2. Uniformity and equality of taxation
The rule of taxation shall be uniform and
equitable. Congress shall evolve a
progressive system of taxation. [Sec.
28(1), Art. VI, 1987 Constitution]
a. Uniformity – All taxable articles or
properties of the same class shall be
taxed at the same rate. [City of Baguio
v. De Leon, G.R. No. L-24756 (1968)]
i.
Uniformity
of
operation
throughout tax unit – The rule
requires
the
uniform
application and operation,
without discrimination, of the
tax in every place where the
subject of it is found. This
means, for example, that a tax
for a national purpose must be
uniform and equal throughout
the country and a tax for a
province, city, municipality, or
barangay must be uniform and
equal throughout the province,
city, municipality or barangay.
Equality
in
burden
–
Uniformity implies equality in
burden, not equality in amount
or equality in its strict and literal
meaning. The reason is simple
enough. If legislation imposes
a single tax upon all persons,
properties, or transactions, an
inequality would obviously
result considering that not all
persons,
properties,
and
transactions are identical or
similarly situated. Neither does
uniformity demand that taxes
shall be proportional to the
relative value or amount of the
subject thereof. Taxes may be
progressive.
Taxation does not require identity or
equality under all circumstances, or negate
the authority to classify the objects of
taxation.
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Equality and Uniformity distinguished:
Equality in taxation is accomplished when the
burden of the tax falls equally and impartially
upon all the persons and property subject to it.
Uniformity has been defined as that principle
by which all taxable articles or kinds of property
of the same class shall be taxed at the same
rate. A tax is uniform when it operates with the
same force and effect in every place where the
subject of it is found. It does not signify an
intrinsic but simply a geographical uniformity
[Churchill v Concepcion, GR No. 11572, 22
September 1916]
Test of Valid Classification: Classification, to
be valid, must be reasonable and this
requirement is not deemed satisfied unless:
a. It is based upon substantial distinctions
which make real differences;
b. These are germane to the purpose of the
legislation or ordinance;
c. The classification applies not only to
present conditions but also to future
conditions substantially identical to those of
the present; and
d. The classification applies equally to all
those who belong to the same class.
[Pepsi-Cola v. Butuan City, G.R. No. L22814 (1968)]
The progressive system of taxation would
place stress on direct rather than indirect taxes,
on non-essentiality rather than essentiality to
the taxpayer of the object of taxation, or on the
taxpayer’s ability to pay. Example is that
individual income tax system that imposes
rates progressing upwards as the tax base
(taxpayer’s taxable income) increases. A
progressive tax, however, must not be
confused with a progressive system of
taxation.
While equal protection refers more to like
treatment of persons in like circumstances,
uniformity and equity refer to the proper relative
treatment for tax purposes of persons in unlike
circumstances.
3. Grant by Congress of authority to the
President to impose tariff rates
Delegation of Tariff powers to the President
under the flexible tariff clause [Sec. 28(2), Art.
VI, 1987 Constitution], which authorizes the
President to modify import duties. [Sec. 1608,
Customs Modernization and Tariff Act]
4. Prohibition against taxation of religious,
charitable entities, and educational
entities
Sec. 28(3), Art. VI, 1987 Constitution:
a. Charitable institutions, churches and
personages or convents appurtenant
thereto, mosques, non-profit cemeteries,
and all lands, buildings, and improvements,
b. Actually, directly, and exclusively used for
religious, charitable, or educational
purposes shall be exempt from taxation.
c. The tax exemption under this constitutional
provision covers property taxes only and
not other taxes [Lladoc v. Commissioner,
G.R. No. L-19201 (1965)].
d. In general, special assessments are not
covered by the exemption because by
nature they are not classified as taxes.
[Apostolic Prefect v. City Treasurer of
Baguio, G.R. No. L-47252 (1941)]
To be entitled to the exemption, the
petitioner must prove that:
a. It is a charitable institution
b. Its real properties are actually, directly and
exclusively used for charitable purposes.
Revenue or income from trade, business or
other activity, the conduct of which is not
related to the exercise or performance of
religious, educational and charitable purposes
or functions shall be subject to internal revenue
taxes when the same is not actually, directly or
exclusively used for the intended purposes.
[BIR Ruling 046-2000]
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Test
of Use of the property, and not
Exemption
the ownership [Abra Valley
College v. Aquino, G.R. No.
L-39086 (1988)]
Nature
Use
of Actual, direct and exclusive
use for religious, charitable
or educational purposes.
[Lladoc v. CIR, supra]
Scope
of Real property taxes on
Exemption
facilities which are actual,
incidental to, or reasonably
necessary
for
the
accomplishment of said
purposes such as in the case
of hospitals, a school for
training nurses, a nurses’
home, property to provide
housing facilities for interns,
resident doctors and other
members of the hospital
staff,
and
recreational
facilities for student nurses,
interns and residents, such
as athletic fields. [Abra
Valley College v. Aquino,
supra]
TEST: Whether an enterprise is charitable or
not:
• Whether it exists to carry out a purpose
recognized in law as charitable; or
• Whether it is maintained for gain, profit, or
private advantage.
A charitable institution does not lose its
character as such and its exemption from taxes
simply because it derives income from paying
patients, whether out-patient, or confined in the
hospital, or receives subsidies from the
government, so long as the money received is
devoted or used altogether to the charitable
object which it is intended to achieve; and no
money inures to the private benefit of the
persons managing or operating the institution
(including honoraria to members of the board
of trustees; BIR Ruling No. 558-18, among
others).
“Exclusive" – possessed and enjoyed to the
exclusion of others; debarred from participation
or enjoyment;
"Exclusively" - “in a manner to exclude; as
enjoying a privilege exclusively.”
If real property is used for one or more
commercial purposes, it is not exclusively used
for the exempted purposes but is subject to
taxation. The words "dominant use" or
"principal use" cannot be substituted for the
words "used exclusively" without doing
violence to the Constitution and the law. Solely
is synonymous with exclusively. [Lung Center
of the Philippines v. Quezon City, G.R. No.
144104 (2004)]
Note: Lung Center did not necessarily overturn
the case of Abra Valley College v. Aquino, G.R.
No. L-39086 (1988). Lung Center just provided
a stricter interpretation. In Abra Valley, the
Court held: The primary use of the school lot
and building is the basic and controlling guide,
norm and standard to determine tax
exemption, and not the mere incidental use
thereof. Under the 1935 Constitution, the trial
court correctly held that the school building as
well as the lot where it is built, should be taxed,
not because the second floor of the same is
being used by the Director and his family for
residential purposes (incidental to its
educational purpose), but because the first
floor thereof is being used for commercial
purposes. However, since only a portion is
used for purposes of commerce, it is only fair
that half of the assessed tax be returned to the
school involved.
5. Prohibition against taxation of nonstock,
non-profit
educational
institutions
Sec. 4, Art. XIV, 1987 Constitution.
All revenues and assets of non-stock, non-profit
educational institutions used actually, directly, and
exclusively for educational purposes shall be
exempt from taxes and duties.
Proprietary educational institutions, including those
cooperatively owned, may likewise be entitled to
such exemptions subject to the limitations provided
by law, including restrictions on dividends and
provisions for reinvestment.
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Subject to conditions prescribed by law, all grants,
endowments, donations, or contributions used
actually, directly, and exclusively for educational
purposes shall be exempt from tax.
This provision covers only non-stock, nonprofit educational institutions.
The exemption covers income, property, and
donor’s taxes, custom duties, and other taxes
imposed by either or both the national
government or political subdivisions on all
revenues, assets, property or donations, used
actually,
directly
and
exclusively
for
educational purposes. (In the case of religious
and charitable entities and non-profit
cemeteries, the exemption is limited to property
tax.)
Sec. 28, par. 3,
Art. VI
Charitable
Non-stock, non-profit
institutions, churches educational
and parsonages or institutions.
convents
appurtenant thereto,
mosques, non-profit
cemeteries, and all
lands, buildings, and
improvements,
actually, directly, and
exclusively used for
religious, charitable,
or
educational
purposes.
Property taxes
The exemption does not cover revenues
derived from, or assets used in, unrelated
activities or enterprise.
Revenues derived from assets used in the
operation of cafeterias, canteens, and
bookstores are also exempt if they are owned
and operated by the educational institution as
ancillary activities and the same are located
within the school premises [RMC No. 76-2003]
Similar tax exemptions may be extended to
proprietary
(for
profit)
educational
institutions by law subject to such
limitations as it may provide, including
restrictions on dividends and provisions for
reinvestment. The restrictions are designed to
ensure that the tax-exemption benefits are
used for educational purposes.
Lands, buildings, and improvements
actually, directly and exclusively used for
educational purposes are exempt from
property tax [Sec. 28(3), Art. VI, 1987
Constitution],
whether
the
educational
institution is proprietary or non-profit.
Sec. 4, par. 3,
Art. XIV
Income,
property,
and donor’s taxes
and custom duties.
6. Majority vote of Congress for grant of
tax exemption
Sec. 28, Art. VI, 1987 Constitution.
No law granting any tax exemption shall be passed
without the concurrence of a majority of all the
Members of the Congress.
Basis: The inherent power of the state to
impose taxes carries with it the power to grant
tax exemptions.
Exemptions may be created by:
a. The Constitution, or
subject
to
constitutional
b. Statutes,
limitations
Vote required for the grant of exemption:
Absolute majority of the members of Congress
(at least ½ + 1 of ALL the members voting
SEPARATELY)
Vote required for withdrawal of such grant
of exemption: Relative majority is sufficient
(MAJORITY of the QUORUM).
The provision guaranteeing equal protection of
the laws and that mandating the rule of taxation
shall be uniform and equitable likewise limit,
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although not expressly, the legislative power to
grant tax exemption.
Grants in the nature of tax exemptions:
a. Tax amnesties
b. Tax condonations
c. Tax refunds
Note:
a. Local government units may, through
ordinances duly approved, grant tax
exemptions, incentives or reliefs under
such terms and conditions as they may
deem necessary. [Sec. 192, LGC]
b. The President of the Philippines may, when
public interest so requires, condone or
reduce the real property tax and interest for
any year in any province or city or a
municipality within the Metropolitan Manila
Area. [Sec. 277, LGC]
7. Prohibition on use of tax levied for
special purpose
All money collected on any tax levied for a
special purpose shall be treated as a special
fund and paid out for such purpose only.
If the purpose for which a special fund was
created has been fulfilled or abandoned, the
balance, if any, shall be transferred to the
general funds of the Government. [Gaston v.
Republic Planters Bank, G.R. No. L-77194
(1988)].
8. President’s
veto
power
appropriation, revenue, tariff bills
on
Sec. 27(2), Art. VI, 1987 Constitution.
The President shall have the power to veto any
particular item or items in an appropriation,
revenue, or tariff bill, but the veto shall not affect the
item or times to which he does not object.
9. Non-impairment of jurisdiction of the
Supreme Court
Sec. 2, Art. VIII, 1987 Constitution.
The Congress shall have the power to define,
prescribe, and apportion the jurisdiction of the
various courts but may not deprive the Supreme
Court of its jurisdiction over cases enumerated in
Section 5 hereof.
Sec. 5(2(b)), Art. VIII, 1987 Constitution. The
Supreme Court shall have the following powers: xxx
(2) Review, revise, modify or affirm on appeal or
certiorari, as the laws or the Rules of Court may
provide, final judgments and orders of lower courts
in xxx
(b) all cases involving the legality of any tax, impost,
assessment or toll or any penalty imposed in relation
thereto.
Even the legislative body cannot deprive the
SC of its appellate jurisdiction over all cases
coming from inferior courts where the
constitutionality or validity of an ordinance or
the legality of any tax, impost, assessment, or
toll is in question. [San Miguel Corp v. Avelino,
G.R. No. L-39699 (1979)]
Sec. 30, Art. VI, 1987 Constitution.
No law shall be passed increasing the appellate
jurisdiction of the Supreme Court without its advice
and concurrence.
Scope of Judicial Review in taxation: limited
only to the interpretation and application of tax
laws. Its power does not include inquiry into the
policy of legislation. Neither can it legitimately
question or refuse to sanction the provisions of
any law consistent with the Constitution. [Coll.
v. Bisaya Land Transportation, 105 Phil. 338
(1959)].
10. Grant of power to the local government
units to create its own sources of
revenue
LGUs have power to create its own sources of
revenue and to levy taxes, fees and charges,
subject to such guidelines and limitations as
the Congress may provide which must be
consistent with the basic policy of local
autonomy. [Sec. 5, Art. X, 1987 Constitution]
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11. Flexible tariff clause
methods or procedure prescribed by law.
Delegation of tariff powers to the President
under the flexible tariff clause [Sec. 28(2), Art.
VI, 1987 Constitution]
Due Process in Taxation requirements:
(a) Public purpose
(b) Imposed within taxing authority’s territorial
jurisdiction
(c) Assessment or collection is not arbitrary or
oppressive
Flexible tariff clause: the authority given to the
President, upon the recommendation of NEDA,
to adjust the tariff rates under Sec. 1608 of the
CMTA in the interest of national economy,
general welfare and/or national security.
12. Exemption from real property taxes
Sec. 28(3), Art. VI, 1987 Constitution.
Charitable institutions, churches and personages or
convents appurtenant thereto, mosques, non-profit
cemeteries, and all lands, buildings, and
improvements, actually, directly, and exclusively
used for religious, charitable, or educational
purposes shall be exempt from taxation.
13. No appropriation or use of public
money for religious purposes
Sec. 29, Art. VI, 1987 Constitution
No public money or property shall be appropriated,
applied, paid, or employed, directly or indirectly, for
the use, benefit, or support of any sect, church,
denomination, sectarian institution, or system of
religion, or of any priest, preacher, minister, other
religious teacher, or dignitary as such, except when
such priest, preacher, minister, or dignitary is
assigned to the armed forces, or to any penal
institution, or government orphanage or leprosarium.
b. Provisions
Taxation
Indirectly
Affecting
1. Due process
Sec. 1, Art. III, 1987 Constitution.
No person shall be deprived of life, liberty, or
property without due process of law, nor shall any
person be denied the equal protection of the laws.
Substantive Due Process – An act is done
under the authority of a valid law or the
Constitution itself.
Procedural Due Process – An act is done
after compliance with fair and reasonable
The due process clause may be invoked where
a taxing statute is so arbitrary that it finds no
support in the Constitution, as where it can be
shown to amount to the confiscation of
property. [Sison v. Ancheta, G.R. No. L59431(1984)]
Due process is usually violated where:
● The tax imposed is for private, as
distinguished from, public purposes
● A tax is imposed on property outside the
State, i.e., extra-territorial taxation; or
● Arbitrary or oppressive methods are used
in assessing and collecting taxes.
But, a tax does not violate the due process
clause, as applied to a particular taxpayer,
although the purpose of the tax will result in an
injury rather than a benefit to such taxpayer.
Due process does not require that the property
subject to the tax or the amount to be raised
should be determined by judicial inquiry, and a
notice and hearing as to the amount of the tax
and the manner in which it shall be apportioned
are generally not necessary to due process of
law. [Pepsi-Cola Bottling Co. of the Philippines,
Inc. v. Municipality of Tanauan, G.R. No. L31156 (1976)]
Instances of violations of the due process
clause:
• If the tax amounts to confiscation of
property;
• If the subject of confiscation is outside the
jurisdiction of the taxing authority;
• If the tax is imposed for a purpose other
than a public purpose;
• If the law which is applied retroactively
imposes just and oppressive taxes.
• If the law violates the inherent limitations
on taxation.
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2. Equal protection
Sec. 1, Art. III, 1987 Constitution.
No person shall be deprived of life, liberty, or
property without due process of law, nor shall any
person be denied the equal protection of the laws.
What the Constitution prohibits is class
legislation which discriminates against some
and favors others. As long as there are rational
or reasonable grounds for so doing, Congress
may, therefore, group the persons or properties
to be taxed and it is sufficient “if all of the same
class are subject to the same rate and the tax
is administered impartially upon them.” [1
Cooley 608].
The equal protection clause is subject to
reasonable classification [See requisites for
valid classification, supra].
TAXATION LAW
•
•
This is different from a tax in the income of
one who engages in religious activities or a
tax on property used or employed in
connection with those activities.
It is one thing to impose a tax on the
income or property of a preacher. It is quite
another thing to exact a tax for the privilege
of delivering a sermon.
The Constitution, however, does not prohibit
imposing a generally applicable tax on the sale
of religious materials by a religious
organization. [Tolentino v. Secretary of
Finance, G.R. No. 115455 (1994)]
4. Non-impairment
contracts
of
obligations
of
Sec. 10, Art. III, 1987 Constitution.
No law impairing the obligation of contracts shall be
passed.
3. Religious freedom
Sec. 5, Art. III, 1987 Constitution.
No law shall be made respecting an establishment
of religion, or prohibiting the free exercise thereof.
(Non-establishment clause)
The free exercise and enjoyment of religious
profession and worship, without discrimination or
preference, shall forever be allowed. (Free exercise
clause)
No religious test shall be required for the exercise of
civil and political rights.
The free exercise clause is the basis of tax
exemptions.
The Contract Clause has never been thought
as a limitation on the exercise of the State's
power of taxation save only where a tax
exemption has been granted for a valid
consideration. [Tolentino v. Secretary of
Finance, supra]
REQUISITES OF A VALID TAX
1. It must be for a public purpose;
2. Rule of taxation should be uniform;
3. The person or property taxed is within the
jurisdiction of the taxing authority;
4. Assessment and collection is in
consonance with the due process clause;
AND
5. The tax must not infringe on the inherent
and constitutional limitations of the
power of taxation.
The imposition of license fees on the
distribution and sale of bibles and other
religious literature by a non-stock, non-profit
TAX AS DISTINGUISED FROM OTHER
missionary organization not for purposes of
FORMS OF EXACTIONS
profit amounts to a condition or permit for the
exercise of their right, thus violating the
Tariff
constitutional guarantee of the free exercise
Taxes
Tariff
and enjoyment of religious profession and
worship which carries with it the right to
All embracing term A
kind
of
tax
disseminate religious beliefs and information.
to include various imposed on articles
[American Bible Society v. City of Manila, G.R.
kinds of enforced which are traded
No. L-9637 (1957)]
contributions upon internationally
• It is actually in the nature of a condition or
persons
for
the
permit for the exercise of the right.
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Taxes
attainment of public
purposes
TAXATION LAW
Tariff
Tariff may be used in one of three (3) senses:
1. A book of rates drawn usually in
alphabetical order containing the names of
several kinds of merchandise with the
corresponding duties to be paid for the
same; or
2. The duties payable on goods imported or
exported; or
3. The system or principle of imposing duties
on the importation (or exportation of goods)
Toll
Taxes
Paid for the support
of the government
Demand
of
sovereignty
Generally, no limit on
the amount collected
as long as it is not
excessive,
unreasonable
or
confiscatory
Imposed only by the
government
Toll
Paid for the use of
another’s property.
Demand
of
proprietorship
Amount
paid
depends upon the
cost of construction
or maintenance of
the
public
improvement used.
Imposed by the
government or by
private individuals or
entities.
A toll is a sum of money for the use of
something,
generally
applied
to
the
consideration which is paid for the use of a
road, bridge or the like, of a public nature. [1
Cooley 77]
License fee
License and
Regulatory Fee
exceed
the
expenses of issuing
the license and of
supervision.
Imposed on persons, Imposed only on the
property and the right to exercise a
right to exercise a privilege
privilege.
Failure to pay does Failure to pay makes
not
necessarily the act or business
make the act or illegal.
business illegal.
Taxes
Penalty for nonpayment:
Surcharges; or
Imprisonment
(except poll tax).
License or permit fee is a charge imposed
under the police power for purposes of
regulation.
License is in the nature of a special privilege,
of a permission or authority to do what is within
its terms. It makes lawful an act which would
otherwise be unlawful. A license granted by the
State is always revocable. [Gonzalo Sy Trading
v. Central Bank of the Phil., G.R. No. L-41480
(1976)]
Importance of the distinctions
1. It is necessary to determine whether a
particular imposition is a tax or a license fee
because some limitations apply only to one
and not to the other, and for the reason that
exemption from taxes may not include
exemption from license fee.
2. The power to regulate as an exercise of
police power does not include the power to
impose fees for revenue purposes.
[Progressive Development Corp. v.
Quezon City, G.R. No. L-36081 (1989)]
3. An exaction, however, may be considered
both a tax and a license fee. This is true in
the case of car registration fees which may
be regarded as taxes even as they also
serve as an instrument of regulation. If the
purpose is primarily revenue, or if revenue
is, at least, one of the real and substantial
License and
Regulatory Fee
Imposed under the Levied under the
taxing power of the police power of the
state for purposes of state.
revenue.
Forced contributions Exacted primarily to
for the purpose of regulate
certain
maintaining
businesses
or
government
occupations.
functions.
Generally unlimited Should
not
as to amount
unreasonably
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purposes, then the exaction is properly
called a tax. [Phil. Airlines, Inc. v. Edu, G.R.
No. L- 41383 (1988)]
4. But it is possible that a tax may only have
a regulatory purpose. The general rule,
however, is that the imposition is a tax if its
primary purpose is to generate revenue,
and regulation is merely incidental; but if
regulation is the primary purpose, the fact
that incidentally revenue is also obtained
does not make the imposition a tax.
[Progressive Development Corp. v.
Quezon City, supra]
Primary purpose test (as seen in Progressive
Development Corp v. QC, supra):
1. Imposition must relate to an occupation or
activity that so engages the public interest
in health, morals, safety and development
as to require regulation for the protection
and promotion of such public interest;
2. Imposition must bear a reasonable relation
to the probable expenses of regulation,
taking into account not only the costs of
direct regulation but also its incidental
consequences as well.
Note: Taxes may also be imposed for
regulatory purposes. It is called regulatory tax.
Special assessment
Taxes
Special
Assessment
Levied not only on Levied only on land
land
Imposed regardless Imposed because of
of
public an increase in value
improvements
of land benefited by
public improvement
Contribution of a Contribution of a
taxpayer for the person
for
the
support
of
the construction of a
government
public improvement
It
has
general Exceptional both as
application both as to time and locality
to time and place
A special assessment is not a personal liability
of the person assessed, i.e., his liability is
limited only to the land involved. It is based
wholly on benefits (not necessity).
A charge imposed only on property owners
benefited is a special assessment rather than
a tax notwithstanding that the statute calls it a
tax. The rule is that an exemption from taxation
does not include exemption from special
assessment. But the power to tax carries with
it the power to levy a special assessment.
Note: The term "special levy" is the name used
in the present Local Government Code (RA.
No. 7160). A province, city, or municipality, or
the National Government, may impose a
special levy on lands especially benefited by
public works or improvements financed by it.
[Sec. 240, RA 7160]
Debt
Taxes
Based on laws
Debt
Generally based on
contract, express or
implied.
Generally cannot be Assignable
assigned
Generally paid in May be paid in kind
money
Cannot be a subject Can be a subject of
of
set
off
or set
off
or
compensation
compensation (see
Art.
1279,
Civil
Code)
Imprisonment is a A person cannot be
sanction for non- imprisoned for nonpayment of tax, payment of debt
except poll tax
(except
when
it
arises from a crime)
Governed by the Governed by the
special prescriptive ordinary periods of
periods provided for prescription
in the NIRC
Does
not
draw Draws interest when
interest except only it is so stipulated or
when delinquent
where
there
is
default
Imposed only by Can be imposed by
public authority
private individual
A tax is not a debt in the ordinary sense of the
word.
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Penalty
Taxes
Penalty
Violation of tax laws Any
sanction
may give rise to imposed
as
a
imposition of penalty punishment
for
violation of law or
acts
deemed
injurious
Primarily intended to Designed to regulate
raise revenue
conduct
May be imposed May be imposed by
only
by
the the government or
government
private individuals or
entities
Cannot be a subject Can be a subject of
of
set
off
or set
off
or
compensation
compensation (see
Art.
1279,
Civil
Code)
C. KINDS OF TAXES
1. As to object
a. Personal, Poll or Capitation Tax – tax of
a fixed amount imposed on persons
residing within a specified territory, whether
citizens or not, without regard to their
property or the occupation or business in
which they may be engaged (e.g.
community (formerly residence) tax).
b. Property Tax – tax imposed on property,
real or personal, in proportion to its value
or in accordance with some other
reasonable method of apportionment (e.g.,
real estate tax). The obligation to pay the
tax is absolute and unavoidable and is not
based upon the voluntary action of the
person assessed.
c. Privilege/Excise Tax – it is said that an
excise tax is a charge imposed upon:
i.
the performance of an act,
ii.
the enjoyment of a privilege, or
iii.
the
engagement
in
an
occupation,
profession,
or
business.
The obligation to pay excise tax is based
on the voluntary action of the person taxed
in performing the act or engaging in the
activity which is subject to the excise. The
term “excise tax” is synonymous with
“privilege tax” and the two are often used
interchangeably (e.g., income tax, value
added tax, estate tax, donor’s tax).
2. As to burden or incidence
a. Direct Taxes – taxes which are
demanded from persons who also
shoulder them; taxes for which the
taxpayer is directly or primarily liable, or
which he cannot shift to another. The
liability for the payment of the tax
(incidence) and the burden (impact) of the
tax falls on the same person. (e.g., income
tax, estate tax, donor’s tax, community tax)
b. Indirect Taxes – taxes which are
demanded from one person in the
expectation and intention that he shall
indemnify himself at the expense of
another, falling finally upon the ultimate
purchaser or consumer; taxes levied upon
transactions or activities before the articles
subject matter thereof, reach the
consumers who ultimately pay for them not
as taxes but as part of the purchase price.
Thus, the person who absorbs or bears the
burden of the tax is other than the one on whom
it is imposed and required by law to pay the tax.
Practically all business taxes are indirect (e.g.,
VAT, percentage tax, excise taxes on specified
goods, customs duties).
3. As to tax rates
a. Specific Tax – a tax of a fixed amount
imposed by the head or number or by some
other standard of weight or measurement.
It requires no assessment (valuation) other
than the listing or classification of the
objects to be taxed (e.g., taxes on distilled
spirits, wines, and fermented liquors; cigars
and cigarettes)
b. Ad Valorem Tax – a tax of a fixed
proportion of the value of the property with
respect to which the tax is assessed. It
requires the intervention of assessors or
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appraisers to estimate the value of such
property before the amount due from each
taxpayer can be determined. The phrase
“ad valorem” means literally, “according to
value.” (e.g., real estate tax, excise tax on
automobiles, non-essential goods such as
jewelry and perfumes, customs duties.
c. Mixed – a tax that has both the
characteristics of specific tax and ad
valorem tax
4. As to purpose
a. General or Fiscal Tax – levied for the
general or ordinary purposes of the
Government, i.e., to raise revenue for
governmental needs (e.g., income tax,
VAT, and almost all taxes).
b. Special/Regulatory/Sumptuary Tax –
levied for special purposes, i.e., to achieve
some social or economic ends irrespective
of whether revenue is actually raised or not
(e.g., protective tariffs or customs duties on
imported goods to enable similar products
manufactured locally to compete with such
imports in the domestic market).
Tariff duties intended mainly as a source of
revenue are relatively low so as not to
discourage imports.
5. As to scope (or authority imposing
the tax)
a. National – taxes imposed by the national
government, through Congress and
administered by the Bureau of Internal
Revenue (BIR) or the Bureau of Customs
(BOC) (e.g., national internal revenue
taxes, customs duties, and national taxes
imposed by laws).
b. Municipal or Local – taxes imposed by
local governments, through their respective
Sanggunians, and administered by the
local executive through the local treasurer
(e.g., business taxes that may be imposed
under the Local Government Code,
professional tax).
6. As to graduation
a. Progressive – The rate of tax increases as
the tax base or bracket increases, e.g.,
income tax on individuals
b. Regressive – The rate of tax decreases as
the tax base or bracket increases. There is
no regressive tax in the Philippines.
c. Proportionate – The rate of tax is based
on a fixed percentage of the amount of the
property, receipts or other basis to be
taxed, e.g., real estate tax, VAT, and other
percentage taxes.
d. Digressive – A fixed rate is imposed on a
certain amount and diminishes gradually
on sums below it. The tax rate in this case
is arbitrary because the increase in tax rate
is not proportionate to the increase of tax
base.
Regressive/Progressive system of taxation
A regressive tax must not be confused with the
regressive system of taxation.
In a society where the majority of the people
have low incomes, a regressive taxation
system exists when there are more indirect
taxes imposed than direct taxes. Since the lowincome sector of the population as a whole
buys more consumption goods on which the
indirect taxes are collected, the burden of
indirect taxes rests more on them than on the
more affluent groups.
A progressive tax is, therefore, also different
from a progressive system of taxation.
Regressivity is not a negative standard for
courts to enforce. What Congress is required
by the Constitution to do is to "evolve a
progressive system of taxation." These
provisions are put in the Constitution as moral
incentives to legislation, not as judicially
enforceable rights. [Tolentino v. Secretary of
Finance, GR No. 115455, 25 August 1994]
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D. DOCTRINES IN TAXATION
1. Construction and Interpretation of
Tax Laws, Rules, and Regulations
General Rules on the Construction of Tax
Laws
a. Public purpose is always presumed
b. If the law is clear, apply the law in
accordance to its plain and simple
tenor
c. A statute will not be construed as
imposing a tax unless it does so clearly,
expressly and unambiguously
· In case of doubt, it is construed
most
strongly
against
the
Government and liberally in favor
of the taxpayer since it is an
imposition of a burden (Lifeblood
Theory).
d. Tax laws may not be extended by
implication beyond the clear import of
their language, nor their operation
enlarged so as to embrace matters not
specifically provided
e. Tax laws operate prospectively unless
the purpose of the legislature to give
retroactive effect is expressly declared
or may be implied from the language
used
f. Tax laws are special laws and prevail
over a general law
a. Tax Laws
General Rule: Tax laws are construed strictly
against the government and liberally in favor of
the taxpayer. [Manila Railroad Co. v. Coll. Of
Customs, G.R. No. L-30264 (1929)].
No person or property is subject to taxation
unless within the terms or plain import of a
taxing statute. [see 72 Am. Jur. 2d 44] Taxes,
being burdens, are not to be presumed beyond
what the statute expressly and clearly
declares. [Coll. V. La Tondena, G.R. No. L10431 (1962)].
Thus, a tax payable by “individuals” does not
apply to “corporations.”
Tax statutes offering rewards are liberally
construed in favor of informers. [Penid v.
Virata, G.R. No. L-44004 (1983)].
Exceptions:
a. The rule of strict construction as against the
government is not applicable where the
language of the statute is plain and there is
no doubt as to the legislative intent [see 51
Am. Jur. 368]. E.g. Word “individual” was
changed by the law to “person”. This clearly
indicates that the tax applies to both natural
and juridical persons, unless otherwise
expressly provided.
b. The rule does not apply where the
taxpayer claims exemption from the tax.
Tax statutes are to receive a reasonable
construction or interpretation with a view to
carrying out their purpose and intent. They
should not be construed as to permit the
taxpayer easily to evade the payment of tax.
[Carbon Steel Co. v. Lewellyn, 251 U.S. 201].
Thus, the good faith of the taxpayer is not a
sufficient justification for exemption from the
payment of surcharges imposed by the law for
failing to pay tax within the period required by
law.
b. Tax Exemption and Exclusion
Tax exemptions must be shown to exist clearly
and categorically, and supported by clear
legal provisions. [NPC v. Albay, G.R. No.
87479 (1990)]
General Rule:
In the construction of tax statutes, exemptions
are not favored and are construed strictissimi
juris against the taxpayer. [Republic Flour Mills
v. Comm. & CTA, G.R. No. L-25602 (1970)]
a. NPC v. Albay [supra]: Tax exemptions
must be shown to exist clearly and
categorically, and supported by clear
legal provisions.
b. Floro Cement v. Gorospe [supra]: Claims
for an exemption must be able to point out
some provision of law creating the right,
and cannot be allowed to exist upon a
mere vague implication or inference.
c. RCPI v Provincial Assessor of South
Cotabato [G.R. No. 144486 (2005)]:
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Exemptions are strictly construed against
the taxpayer and liberally in favor of the
taxing authority—it is the taxpayer’s duty to
justify the exemption by words too plain to
be mistaken and too categorical to be
misinterpreted.
d. CIR v. CA [supra]: Refunds are in the
nature of exemption and must be
construed
strictly
against
the
grantee/taxpayer.
e. Quezon City v. ABS-CBN Broadcasting
Corporation [G.R. No. 166408 (2008)]:
Since taxation is the rule and exemption
the exception, the intention to make an
exemption ought to be expressed in clear
and unambiguous terms
Exceptions:
a. When the law itself expressly provides for
a liberal construction, that is, in case of
doubt, it shall be resolved in favor of
exemption;
b. When the exemption is in favor of the
government itself or its agencies, or of
religious, charitable, and educational
institutions because the general rule is that
they are exempt from tax.
c. When the exemption is granted under
special circumstances to special classes of
persons.
d. If there is an express mention or if the
taxpayer falls within the purview of the
exemption by clear legislative intent, the
rule on strict construction does not apply.
[Comm. V. Arnoldus Carpentry Shop, Inc.,
G.R. No. 71122 (1988)].
of legality [Gonzales v. Land Bank, G.R. No.
76759 (1990)]
It is of course axiomatic that a rule or regulation
must bear upon, and be consistent with, the
provisions of the enabling statute if such rule or
regulation is to be valid. In case of conflict
between a statute and an administrative order,
the former must prevail. [Fort Bonifacio
Development Corp v. CIR, GR 175707 (2014)]
Requisites for validity and effectivity of
regulations
a. Reasonable;
b. Within the authority conferred;
c. Not contrary to law and the Constitution
[Art. 7, NCC]; and
d. Must be published.
Tax regulations whose purpose is to enforce or
implement existing law must comply with the
following requisites to be effective [RP v.
Pilipinas Shell Petroleum Corp., G.R. No.
173918 (2008)]:
a. Be published in a newspaper of general
circulation [Art. 2, NCC]; AND
b. Filed with the UP Law Center Office of the
National Administrative Register (ONAR)
[Ch 2, Book VII, EO 292]
c. Tax Rules and Regulations
Note: Administrative rules and regulations
must always be in harmony with the provisions
of the law. In case of conflict with the law or
the Constitution, the administrative rules and
regulations are null and void. As a matter of
policy, however, courts will declare a regulation
or provision thereof invalid only when the
conflict with the law is clear and unequivocal.
General Rule:
The
Secretary
of
Finance,
upon
recommendation of the CIR, shall promulgate
all needful rules and regulations for the
effective enforcement of the provisions of the
NIRC. [Sec. 244, NIRC]
Administrative interpretations and opinions
The power to interpret the provisions of the Tax
Code and other tax laws is under the exclusive
and original jurisdiction of the Commissioner of
Internal Revenue subject to review by the
Secretary of Finance [Sec. 4, par.1, NIRC].
It is an elementary rule in administrative law
that administrative regulations and policies
enacted by administrative bodies to interpret
the law which they are entrusted to enforce
have the force of law and are entitled to great
respect. They have in their favor a presumption
Revenue regulations are the formal
interpretation of the provisions of the NIRC and
other laws by the Secretary of Finance upon
the recommendation of the Commissioner of
Internal Revenue.
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General rule: The Commissioner has the sole
authority to issue rulings but he also has the
power to delegate said authority to his
subordinates with the rank equivalent to a
division chief or higher.
Exceptions: The Commissioner may not
delegate the following:
a. The power to recommend the promulgation
of rules and regulations by the Secretary of
Finance;
b. The power to issue rulings of first
impression or to reverse, revoke, or modify
any existing ruling of the Bureau; and
c. The power to compromise or abate any tax
liability as provided by Sec. 204 and 205 of
the NIRC
Exception
to
the
exception:
BUT
assessments issued by RDOs involving (a)
Php500,000 or less, and (b) minor criminal
violations as determined by the Secretary of
Finance
as
recommended
by
the
Commissioner, may be compromised by a
Regional Evaluation Board [Sec. 7, NIRC].
Decisions of the Supreme Court applying or
interpreting existing tax laws are binding on all
subordinate courts and have the force and
effect of law. As provided for in Article 8 of the
Civil Code, they “form part of the law of the
land.”
d. Penal Provisions of Tax Laws
Penal provisions of tax laws must be strictly
construed. It is not legitimate to stretch the
language of a rule, however beneficent its
intention, beyond the fair and ordinary meaning
of its language.
A penal statute should be construed strictly
against the State and in favor of the accused.
The reason for this principle is the tenderness
of the law for the rights of individuals and the
object is to establish a certain rule by
conformity to which mankind would be safe,
and the discretion of the court limited. [People
v. Purisima, G.R. No. L-42050-66 (1978)]
2. Prospectivity of Tax Laws
General rule:
Tax laws are prospective in operation.
Reason: Nature and amount of the tax under
tax laws enacted after the transaction could not
have been foreseen and understood by the
taxpayer at the time of the transaction.
Exception:
Tax laws may be applied retroactively provided
it is expressly declared or it is clearly the
legislative intent (e.g., increase taxes on
income already earned) except when
retroactive application would be so harsh
and oppressive. [Republic v. Fernandez, G.R.
No. L-9141 (1956)]
Statutes are prospective and not retroactive in
their operation, laws being the formulation of
rules for the future, not the past. [Curata v.
Philippine Ports Authority, G.R. Nos. 15421112 (2009)]
The language of the statute must clearly
demand or press that it shall have a retroactive
effect. [Lorenzo v. Posadas, supra]
Exception to the exception:
Collection of interest in tax cases is not penal
in nature; it is but a just compensation to the
State. Thus, the constitutional prohibition
against ex post facto laws is not applicable to
the collection of interest on back taxes. [Central
Azucarera v. CTA, G.R. No. L-23236 (1967)]
Non-retroactivity of rulings [Sec. 246, NIRC]
General rule:
Rulings do not have retroactive application if
the revocation, modification, or reversal will be
prejudicial to the taxpayer.
Exceptions:
a. Taxpayer’s deliberate misstatement or
omission of facts
b. BIR’s gathered facts is materially
different from the facts from which the
ruling was based on
c. Taxpayer acted in bad faith
Note: The rule on non-retroactivity of rulings
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may be applied only if the parties in the ruling
involve the taxpayer himself/itself. The
taxpayer cannot invoke the rulings granted in
favor of the other taxpayers.
3. Imprescriptibility of Taxes
The law on prescription, being a remedial
measure, should be liberally construed in order
to afford such protection. As a corollary, the
exceptions to the law on prescription should
perforce be strictly construed. [Commissioner
v. Standard Chartered Bank, G.R. No. 192173
(2015)]
a. Prescriptions found in statutes
(1) National Internal Revenue Code –
statute of limitations in the assessment
and collection of taxes therein
imposed.
Summary of prescription on assessment
and collection:
3 YEARS
10
YEARS
Prescription of assessment AND
collection from:
(a) the prescribed last day of
filing of returns (even if the
return was filed earlier than the
deadline); OR
(b) the day when the return was
actually filed if filed later than the
last day of filing [Sec. 203,
NIRC], whichever comes later.
Prescription of assessment in
cases of:
(a) false or fraudulent return with
intent to evade tax; OR
(b) failure or omission to file a
return [Sec. 222, NIRC]
Counted from the discovery of
the fraud, falsity, or omission.
5 YEARS
Prescription of collection of tax
if:
(1) assessed within the 3-year
and
10-year
prescriptive
periods;
(2)
assessed
within
the
extended period agreed upon by
the Commissioner and taxpayer
(waiver of the prescriptive
period); and
(3) Collected by distraint, levy,
or by a proceeding in court.
[Sec. 222, NIRC]
Note: The prescriptive period from final
liquidation (i.e., the ascertainment of the duties
that have to be paid on imported goods) is
three (3) years, except in cases of:
1. Tentative liquidation;
2. Payment under protest;
3. Fraud; and
4. Compliance audit.
(2) Customs Modernization and Tariffs Act
(CMTA)
Under Sec. 430, it provides that “[i]n the
absence of fraud and when the goods have
been finally assessed and released, the
assessment shall be conclusive upon all
parties three (3) years from the date of final
payment or duties, or upon completion of the
post-clearance audit.”
(3) Local Government Code
The LGC prescribes the following prescriptive
periods for the assessment and collection of
local taxes, fees, or charges [Sec. 194, LGC]:
a. Taxes, fees, and charges shall be
assessed five (5) years from the date
they become due;
b. Taxes, fees, and charges must be
collected five (5) years from the date of
assessment by administrative or
judicial action;
c. The prescriptive period for assessment
and collection shall be three (3) years
if the tax accrued before the effectivity
of the Local Government Code [Sec.
194 and 270, LGC].
d. In case of fraud or intent to evade the
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payment of taxes, fees, or charges, the
same may be assessed within ten (10)
years from the discovery of the fraud or
intent to evade payment.
The prescriptive period is tolled when:
a. The treasurer is legally prevented from
making the assessment or collection;
b. The taxpayer requests for a
reinvestigation and executes a waiver
in writing before expiration of the period
within which to assess or collect; and
c. The taxpayer is out of the country or
otherwise cannot be located.
imposed by two different states.
Double taxation, standing alone and not being
forbidden by our fundamental law, is not a valid
defense against the legality of a tax measure
[Pepsi Cola v. Mun. of Tanauan, G.R. No. L31156 (1976)].
Constitutionality of double taxation
There is no constitutional prohibition
against double taxation in the Philippines. It is
something not favored, but is permissible,
provided some other constitutional requirement
is not thereby violated. [Villanueva v. City of
Iloilo, G.R. No. L-26521 (1968)]
4. Double Taxation
Double taxation means taxing the same
property twice when it should be taxed only
once; that is, “taxing the same person twice by
the same jurisdiction for the same thing.”
[Swedish Match Phils., Inc. v. Treasurer, G.R.
No. 181277 (2013)]
a. Strict sense
Taxation)
(Direct
Duplicate
The same property must be taxed twice when
it should be taxed once. The requisites are:
1. Both taxes must be imposed on the same
property or subject matter;
2. For the same purpose;
3. By the same State, Government, or
taxing authority;
4. Within the same territory, jurisdiction or
taxing district;
5. During the same taxing period; and
6. Of the same kind or character of tax.
[Swedish Match Phils., Inc. v. Treasurer,
supra]
b. Broad sense
Taxation)
(Indirect
Duplicate
There is double taxation in the broad sense or
indirect duplicate taxation if any of the
elements for direct duplicate taxation is
absent.
If the tax law follows the constitutional rule on
uniformity, there can be no valid objection to
taxing the same income, business or property
twice. [China Banking Corp. v. CA, G.R. No.
146749 (2003)]
Double taxation in its narrow sense is
undoubtedly unconstitutional but in the broader
sense is not necessarily so. [DE LEON, citing
26 R.C.L 264-265]. Where double taxation (in
its narrow sense) occurs, the taxpayer may
seek relief under the uniformity rule or the
equal protection guarantee. [DE LEON, citing
84 C.J.S.138].
International Double Taxation
Double taxation usually takes place when a
person is resident of a contracting state and
derives income from, or owns capital in, the
other contracting state and both states impose
tax on that income or capital. In order to
eliminate double taxation, a tax treaty resorts
to several methods.
The purpose of these international agreements
is to reconcile the national fiscal legislations of
the contracting parties in order to help the
taxpayer avoid simultaneous taxation in two
different jurisdictions. More precisely, the tax
conventions are drafted with a view towards
the elimination of international juridical
double taxation, which is defined as the
imposition of comparable taxes in two or more
states on the same taxpayer in respect of the
same subject matter and for identical periods.
It extends to all cases in which there is a
burden of two or more pecuniary impositions.
For example, a tax upon the same property
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The apparent rationale for doing away with
double taxation is to encourage the free flow
of goods and services and the movement of
capital, technology and persons between
countries, conditions deemed vital in creating
robust and dynamic economies. [CIR v. SC
Johnson & Sons, Inc., G.R. No. 127105 (1999)]
Modes of eliminating double taxation
a. Allowing reciprocal exemption either by law
or by treaty;
b. Allowance of tax credit for foreign taxes
paid;
c. Allowance of deductions such as for
foreign taxes paid, and vanishing
deductions in estate tax; or
d. Reduction of Philippine tax rate.
5. Escape from Taxation
a. Shifting of Tax Burden
Shifting
The act of transferring the burden of a tax from
the original payer or the one on whom the tax
was assessed or imposed to someone else.
What is transferred is not the payment of the
tax but the burden of the tax.
All indirect taxes may be shifted; direct taxes
cannot be shifted.
Ways of shifting the tax burden
1. Forward shifting - When the burden of the
tax is transferred from a factor of
production through the factors of
distribution until it finally settles on the
ultimate purchaser or consumer.
● Examples: VAT, percentage tax.
2. Backward shifting - When the burden of
the tax is transferred from the consumer or
purchaser through the factors of
distribution to the factor of production.
● Example: Consumer or purchaser
may shift tax imposed on him