University of Santo Tomas
FACULTY OF CIVIL LAW (1734)
COMMERCIAL LAW
2024 GOLDEN NOTES
FACULTY OF CIVIL LAW
UNIVERSITY OF SANTO TOMAS
MANILA
The UST GOLDEN NOTES is the annual student-edited bar review material of
the University of Santo Tomas, Faculty of Civil Law. Communications regarding
the Notes should be addressed to the Academics Committee of the Team: BarOps.
Address:
Academics Committee
UST Bar Operations
Faculty of Civil Law
University of Santo Tomas
España, Manila 1008
Tel. No:
(02) 8731-4027
(02) 8406-1611 loc. 8578
Academics Committee
Faculty of Civil Law
University of Santo Tomas
España, Manila 1008
All rights reserved by the Academics Committee of the Faculty of Civil Law of the Pontifical
and Royal University of Santo Tomas, the Catholic University of the Philippines.
2024 Edition.
No portion of this material may be copied or reproduced in books, pamphlets, outlines or
notes, whether Px rinted, mimeographed, typewritten, copied in different electronic
devises or in any other form, for distribution or sale, without a written permission.
A copy of this material without the corresponding code either proceeds from an illegal source
or is in possession of one who has no authority to dispose the same.
Released in the Philippines, 2024.
2024 UST BAR OPERATIONS
GABRIEL C. LAPID
ANNE ARNET YSABEL C. PAGUIRIGAN
BEA V. BRINGAS
ANNE FRANCES B. GRANDE
ANGELO RAFAEL V. CO
DAVE FIEL A. RELLESIVA
FRITZ N. CANTERO
ALONDRA MARIE F. STO. DOMINGO
JUSTINE RENEE GERVACIO
KATHERINE S. POLICARPIO
PAULINNE STEPHANY G. SANTIAGO
RALPH DOMINIC V. MARTINEZ
RON-SOPHIA NICOLE C. ANTONIO
HERLENE MAE D. CALILUNG
HANNAH JOY C. IBARRA
JEDIDIAH R. PADUA
DIANNE MICHA ANGELA D. YUMANG
RAUL GABRIEL M. MANALO
ASTRID A. SOLIS
NORIEL C. BERNABE
MIKKAH F. FACTOR
JENELYN D. GALVEZ
CHAIRPERSON
VICE CHAIRPERSON
HEAD, SECRETARIAT COMMITTEE
HEAD, PUBLIC RELATIONS COMMITTEE
HEAD, FINANCE COMMITTEE
HEAD, HOTEL COMMITTEE
HEAD, LOGISTICS COMMITTEE
HEAD, CREATIVES COMMITTEE
SENIOR MEMBER
SENIOR MEMBER
SENIOR MEMBER
SENIOR MEMBER
SENIOR MEMBER
SENIOR MEMBER
SENIOR MEMBER
SENIOR MEMBER
SENIOR MEMBER
SENIOR MEMBER
SENIOR MEMBER
SENIOR MEMBER
SENIOR MEMBER
SENIOR MEMBER
2024 UST LAW REVIEW
RAUL GABRIEL MANALO
BIANCA MAY LINGAT DORADO
ORLHEE MAR S MEGARBIO
AXELE ESCANER BAYOMBONG
MICHAEL JOHN D. NATABLA
CINDEL JOY S.Y. ONG
DANICA ELLA C. NAGORITE
IVAN VERNA S. RAMOS
JOHN ANNDREW S. TENACIO
EDITOR-IN-CHIEF
MANAGING EDITOR
EXECUTIVE EDITOR
ASSOCIATE MANAGING EDITOR
JURISPRUDENCE EDITOR
ARTICLES EDITOR
RESEARCH EDITOR
SENIOR ASSOCIATE ARTICLES EDITOR
ASSOCIATE JURISPRUDENCE EDITOR
ACADEMICS COMMITTEE 2024
ANGELA BEATRICE S. PEÑA
PATRISHA LOUISE E. DUMANIL
SECRETARIES-GENERAL
RAIAH CASSANDRA O. GUITAN
ASST. SECRETARY-GENERAL
ANGELA BEATRICE S. PEÑA
CIVIL LAW
MICHAELA THELMA B. BRAVO
TAXATION LAW
CAMILLE RAZEN D. SUMERA
CRIMINAL LAW
PAULINNE STEPHANY G. SANTIAGO
LABOR LAW AND
SOCIAL LEGISLATION
PHILLINE KATE M. DUGAYO
LEGAL AND JUDICIAL ETHICS
SARAH MAY D. MEDALLE
POLITICAL LAW AND
PUBLIC INTERNATIONAL LAW
DIANNE TRICIA M. INIEGO
COMMERCIAL LAW
MARY GENELLE S. CLEOFAS
REMEDIAL LAW
EXECUTIVE COMMITTEE
ALEA CHAIRMANE A. LOQUINARIO
COVER DESIGN ARTIST
COMMERCIAL LAW COMMITTEE 2024
KRISTINE ALEXIS UY
COMMERCIAL LAW SUBJECT HEAD
MEMBERS
PATRISHA LOUISE E. DUMANIL
ANGELA BEATRICE S. PEÑA
ADVISERS
ATTY. MARIANE JOANNE K. CO-PUA
ATTY. AMADO TAYAG
ATTY. MARY ANN L. REYES
ATTY. FE T. BECINA-MACALINO
ATTY. JOSHUA BARRIETTA
ATTY. JAY-R IPAC
ATTY. MA. NINNA ROEM A. BONSOL
ATTY. DARWIN R. BAWAR
FACULTY OF CIVIL LAW
UNIVERSITY OF SANTO TOMAS
ACADEMIC OFFICIALS
ATTY. NILO T. DIVINA
REV. FR. ISIDRO C. ABAÑO, O.P.
DEAN
REGENT
ATTY. ARTHUR B. CAPILI
FACULTY SECRETARY
ATTY. ELGIN MICHAEL C. PEREZ
LEGAL COUNSEL
UST CHIEF JUSTICE ROBERTO CONCEPCION LEGAL AID CLINIC
JUDGE PHILIP A. AGUINALDO
SWDB COORDINATOR
LENY G. GADIANA, R.G.C.
GUIDANCE COUNSELOR
OUR DEEPEST APPRECIATION TO OUR
MENTORS AND INSPIRATION
Dean Nilo T. Divina
Dean Amado L. Dimayuga
Atty. Marian Joanne K. Co-Pua
Dean Eduardo Juan F. Abella
Atty. Allan B. Gepty
Justice Japar B. Dimaampao
Atty. Jacinto D. Jimenez
Justice Gabriel T. Robeniol
Atty. Albert R. Palacios
Judge Maria Ella Cecilia D. Escalante
Atty. Ma. Ninna Roem A. Bonsol
Judge Edith Cynthia A. Wee
Atty. Teofilo R. Ragadio
Atty. Emma Ruby Aguilar-Aprado
Atty. Amado E. Tayag
Atty. Fe T. Becina-Macalino
Atty. Janna Mae B. Tecson
Atty. Mercy Jane B. Paras-
Atty. Maria Zarah R. Villanueva-
Leynes
Castro
Atty. Ronel U. Buenaventura
Atty. Mary Ann L. Reyes
Atty. Anna Katrina T. Singcol
Atty. Darwin R. Bawar
For being our guideposts in understanding the intricate sphere of Commercial Law
-Academics Committee 2024
DISCLAIMER
THE RISK OF USE OF THIS BAR
REVIEW MATERIAL SHALL BE
BORNE BY THE USER
COMMERCIAL LAW
Table of Contents
I. CORPORATION LAW (R.A. No. 11232, Revised Corporation Code) ....................................................................... 1
A. GENERAL PRINCIPLES ...................................................................................................................................................... 1
1. NATURE AND ATTRIBUTES (Sec. 2) ........................................................................................................................ 1
2. NATIONALITY OF CORPORATIONS ......................................................................................................................... 5
a. CONTROL TEST ......................................................................................................................................................... 5
b. GRANDFATHER RULE ............................................................................................................................................. 6
3. DOCTRINE OF SEPARATE JURIDICAL PERSONALITY ....................................................................................... 8
4. DOCTRINE OF PIERCING OF CORPORATE VEIL ................................................................................................12
5. TRUST FUND DOCTRINE ...........................................................................................................................................18
B. KINDS OF CORPORATION ..............................................................................................................................................20
1. STOCK CORPORATION (Sec. 3) ...............................................................................................................................20
2. NON-STOCK CORPORATION (Secs. 86-87) ..........................................................................................................20
3. CLOSE CORPORATION (Sec. 95) .............................................................................................................................24
4. EDUCATIONAL CORPORATIONS (Sec. 105) ........................................................................................................26
5. RELIGIOUS CORPORATIONS (Secs. 107-108).....................................................................................................27
6. ONE PERSON CORPORATION (Sec. 115) ..............................................................................................................28
7. HOLDING/PARENT AND SUBSIDIARY CORPORATION ..................................................................................31
C. INCORPORATION AND ORGANIZATION ...................................................................................................................31
1. NUMBER AND QUALIFICATIONS OF INCORPORATORS (Sec. 10) ...............................................................31
2. CORPORATE NAME (Secs. 14 and 17-18) ...........................................................................................................32
3. CAPITALIZATION (Sec. 12).......................................................................................................................................33
4. CORPORATE TERM (Sec. 11) ...................................................................................................................................33
5. CLASSIFICATION OF SHARES (Secs. 6-9) .............................................................................................................34
6. ARTICLES OF INCORPORATION (Secs. 13-15) ...................................................................................................39
7. BY-LAWS (Secs. 45-47)..............................................................................................................................................40
8. CORPORATE OFFICERS (Sec. 24) ............................................................................................................................42
9. DE FACTO CORPORATION (Sec. 19) ......................................................................................................................42
10. CORPORATION BY ESTOPPEL (Sec. 20) ............................................................................................................42
D. DIRECTORS, TRUSTESS AND OFFICERS ...................................................................................................................43
1. QUALIFICATIONS AND DISQUALIFICATIONS (Secs. 22-26) .........................................................................43
2. ELECTIONS (Secs. 23,25, and 91) ..........................................................................................................................46
3. INDEPENDENT DIRECTORS (Sec. 22) ...................................................................................................................47
4. TERM, HOLDOVER, AND REMOVAL (Secs. 22 and 27) ....................................................................................48
5. COMPENSATION (Sec. 29).........................................................................................................................................48
6. VACANCY (Secs. 28 and 25) .....................................................................................................................................49
7. VOTING REQUIREMENTS ..........................................................................................................................................51
8. DUTIES AND LIABILITIES .........................................................................................................................................53
2024 GOLDEN NOTES
9. DOCTRINE OF CENTRALIZED MANAGEMENT .................................................................................................. 60
10. BUSINESS JUDGMENT RULE ................................................................................................................................. 60
11. DOCTRINE OF APPARENT AUTHORITY ........................................................................................................... 62
12. DOCTRINE OF RATIFICATION OR ESTOPPEL ................................................................................................ 63
E. POWERS OF CORPORATIONS, INCIDENTAL POWERS, ULTRA VIRES DOCTRINE (Secs. 35-44) .......... 63
F. STOCKHOLDERS AND MEMBERS ................................................................................................................................ 80
1. DOCTRINE OF EQUALITY OF SHARES .................................................................................................................. 80
2. PARTICIPATION IN MANAGEMENT; VOTING REQUIREMENTS .................................................................. 80
3. PROPRIETARY RIGHTS............................................................................................................................................. 85
a. RIGHT TO DIVIDENDS (Sec. 42) ....................................................................................................................... 85
b. RIGHT TO INSPECTION (Secs. 73-74) ............................................................................................................ 86
c. PRE-EMPTIVE RIGHT (Sec. 38).......................................................................................................................... 90
d. APPRAISAL RIGHT (Secs. 80-85) ...................................................................................................................... 92
4. DERIVATIVE SUIT/INTRA-CORPORATE SUIT .................................................................................................. 94
5. DELINQUENCY (Secs. 67-70) ................................................................................................................................... 95
6. CERTIFICATE OF STOCK (Secs. 62-63) ................................................................................................................ 96
G. MERGERS, CONSOLIDATIONS, AND ACQUISITIONS (Secs. 39 and 75-79)................................................ 103
1. ASSET ONLY TRANSFER ......................................................................................................................................... 109
2. BUSINESS ENTERPRISE TRANSFER .................................................................................................................... 109
H. CORPORATE DISSOLUTION AND LIQUIDATION (Secs. 133-138) ................................................................ 109
I. FOREIGN CORPORATIONS (Secs. 140-153) .......................................................................................................... 115
1. PERSONALITY TO SUE AND SUABILITY ............................................................................................................ 116
2. FOREIGN INVESTMENTS ACT (R.A. No. 7042, as amended by R.A. No. 11647 .................................. 119
a. “DOING BUSINESS IN THE PHILIPPINES” .................................................................................................... 120
b. REGISTRATION REQUIREMENT (Sec. 5 of R.A. No. 7042, as amended by R.A. No. 11647) ...... 122
c. NATIONALIZED ACTIVITIES AND THE NEGATIVE LIST ......................................................................... 123
II. PARTNERSHIP ..................................................................................................................................................................... 126
A. GENERAL PROVISIONS ................................................................................................................................................ 126
1. DEFINITION (Art. 1767, NCC) ............................................................................................................................... 126
2. RULES TO DETERMINE EXISTENCE (Art. 1769, NCC) ................................................................................... 129
3. SEPARATE PERSONALITY (Art. 1768, NCC) ..................................................................................................... 129
4. PARTNERSHIP BY ESTOPPEL (Art. 1825, NCC) .............................................................................................. 130
5. KINDS OF PARTNERSHIP (Arts. 1776-1785, NCC) ......................................................................................... 130
B. OBLIGATIONS OF PARTNERS AMONG THEMSELVES (Arts. 1784-1809, NCC) ......................................... 131
C. PROPERTY RIGHTS OF PARTNERS (Arts. 1810-1814, NCC) ............................................................................ 134
D. OBLIGATIONS OF PARTNERSHIP/PARTNERS TO THIRD PERSONS (Arts. 1815-1827, NCC).............. 135
E. DISSOLUTION AND WINDING UP (Arts. 1828-1842, NCC) ............................................................................... 139
F. LIMITED PARTNERSHIP (Arts. 1843-1867, NCC) ................................................................................................ 145
COMMERCIAL LAW
III. INSURANCE LAW (P.D. No. 612, as amended by R.A. No. 10607) ....................................................................... 150
A. CONCEPT OF INSURANCE (Secs. 2-9) ..................................................................................................................... 150
B. INSURABLE INTEREST (Secs. 10-25)....................................................................................................................... 152
C. CONCEALMENT (Secs. 26-35 and 51) ...................................................................................................................... 159
D. REPRESENTATION (Secs. 36-48 and 51) ............................................................................................................... 163
E. POLICY (Secs. 49-66)..................................................................................................................................................... 165
F. WARRANTIES (Secs. 67-76) ........................................................................................................................................ 167
G. PREMIUM (Secs. 77-84) ............................................................................................................................................... 168
1. CASH AND CARRY RULE ......................................................................................................................................... 169
2. EXCEPTIONS ............................................................................................................................................................... 169
H. LOSS (Secs. 85-89) ......................................................................................................................................................... 170
1. NOTICE AND PROOF OF LOSS (Secs. 90-94) .................................................................................................... 171
I. DOUBLE INSURANCE; OVERINSURANCE (Secs. 95-96) ...................................................................................... 171
J. REINSURANCE (Secs. 97-100) ..................................................................................................................................... 175
K. CLASSES OF INSURANCE ............................................................................................................................................. 176
1. FIRE INSURANCE (Secs. 169-175) ....................................................................................................................... 176
2. CASUALTY (Sec. 176) ............................................................................................................................................... 176
3. SURETYSHIP (Secs. 177-180) .............................................................................................................................. 177
4. LIFE INSURANCE (Secs. 181-186) ........................................................................................................................ 178
5. COMPULSORY MOTOR VEHICLE LIABILITY INSURANCE (Secs. 286-402) ............................................ 179
6. MARINE INSURANCE (Secs. 115-122) ................................................................................................................ 179
IV. TRANSPORTATION LAW ................................................................................................................................................ 180
A. GENERAL PRINCIPLES OF COMMON CARRIERS (Art. 1732, NCC) ................................................................. 180
1. COMMON CARRIER VS. PRIVATE CARRIER ..................................................................................................... 183
2. DILIGENCE REQUIRED (Art. 1733, NCC) ........................................................................................................... 183
3. VIGILANCE OVER GOODS (Arts. 1744-1754, NCC) ......................................................................................... 186
4. SAFETY OF PASSENGERS (Arts. 1755-1763, NCC) ......................................................................................... 190
5. SOURCES OF LIABILITY .......................................................................................................................................... 191
B. THE MONTREAL CONVENTION ................................................................................................................................ 195
1. APPLICABILITY ......................................................................................................................................................... 195
2. EXTENT OF LIABILITY OF AIR CARRIER .......................................................................................................... 196
a. PASSENGER ........................................................................................................................................................... 196
b. BAGGAGE ............................................................................................................................................................... 196
3. LIABILITY FOR DELAY ............................................................................................................................................ 198
2024 GOLDEN NOTES
V. BANKING LAWS ................................................................................................................................................................... 200
A. THE NEW CENTRAL BANK ACT (R.A. No. 7653, as amended by R.A. No. 11211) ...................................... 200
1. BANKS IN DISTRESS (Secs. 29-30) ...................................................................................................................... 200
2. REMEDY OF CLOSED BANKS (Sec. 30, R.A. No. 7653, as amended by R.A. No. 11211) .................... 206
B. SECRECY OF BANK DEPOSITS (R.A. No. 1405 and R.A. No. 6426, as amended) ........................................ 206
1. PROHIBITED ACTS ................................................................................................................................................... 206
2. EXCEPTIONS FROM COVERAGE ........................................................................................................................... 208
3. GARNISHMENT OF DEPOSITS .............................................................................................................................. 212
C. GENERAL BANKING LAW (R.A. No. 8791) ............................................................................................................. 212
1. NATURE OF BANK FUNDS AND BANK DEPOSITS .......................................................................................... 212
2. REQUIRED DILIGENCE OF BANKS; LIABILITY AS DRAWEE BANK .......................................................... 215
3. PROHIBITED TRANSACTIONS BY BANK DIRECTORS AND OFFICERS ................................................... 217
D. ANTI-MONEY LAUNDERING ACT (R.A. No. 9160, as amended by R.A. Nos. 9194, 10167, 10365,10927,
and 11521)............................................................................................................................................................................ 218
1. POLICY (Sec. 2) .......................................................................................................................................................... 218
2. COVERED INSTITUTIONS AND THEIR OBLIGATIONS (Sec. 3,) ................................................................. 218
3. COVERED TRANSACTIONS (Sec. 3) ..................................................................................................................... 221
4. SUSPICIOUS TRANSACTIONS (Sec. 3) ................................................................................................................ 222
5. SAFE HARBOR PROVISION (Sec. 9) ..................................................................................................................... 222
6. MONEY LAUNDERING.............................................................................................................................................. 222
a. HOW COMMITTED (Sec. 4) ............................................................................................................................... 222
b. PREDICATE CRIMES (Sec. 3) ............................................................................................................................ 223
7. AUTHORITY TO INQUIRE; FREEZING AND FORFEITURE (Secs. 10-12) ................................................ 225
VI. INTELLECTUAL PROPERTY CODE OF THE PHILIPPINES (R.A. No. 8293) ...................................................... 232
A. PATENTS........................................................................................................................................................................... 233
1. PATENTABLE vs. NON-PATENTABLE INVENTIONS (Sec. 22) .................................................................... 234
2. OWNERSHIP OF A PATENT (Secs. 28-30) ......................................................................................................... 236
3. RIGHTS AND LIMITATIONS OF A PATENT OWNER (Secs. 71-77) ............................................................ 237
4. PATENT INFRINGEMENT (Secs. 76-84) ............................................................................................................. 240
5. REMEDIES FOR INFRINGEMENT (Secs. 79-80) ............................................................................................... 242
6. CANCELLATION (Secs. 61-66) ............................................................................................................................... 244
7. COMPULSORY LICENSING (Secs. 93-102) ......................................................................................................... 244
8. VOLUNTARY LICENSING (Secs. 85-92) .............................................................................................................. 247
B. TRADEMARKS ................................................................................................................................................................. 249
1. MARKS vs. COLLECTIVE MARKS vs. TRADE NAMES (Sec. 121) ................................................................. 249
2. NON-REGISTRABLE MARKS .................................................................................................................................. 255
3. OWNERSHIP AND REGISTRATION (Sec. 152) ................................................................................................. 257
COMMERCIAL LAW
4. RIGHTS AND LIMITATIONS OF TRADEMARK OWNER (Sec. 147) ........................................................... 261
5. TRADEMARK INFRINGEMENT (Sec. 155) ......................................................................................................... 265
6. UNFAIR COMPETITION (Sec. 168) ...................................................................................................................... 267
7. CANCELLATION (Secs. 151)................................................................................................................................... 270
C. COPYRIGHTS ................................................................................................................................................................... 271
1. COPYRIGHTABLE WORKS (Secs. 172-173) ...................................................................................................... 272
2. NON-COPYRIGHTABLE WORKS (Secs. 175-176) ........................................................................................... 273
3. RIGHTS CONFERRED BY COPYRIGHT (Secs. 177 and 193-199) ............................................................... 275
4. OWNERSHIP OF A COPYRIGHT (Sec. 178) ....................................................................................................... 280
5. LIMITATIONS ON COPYRIGHT (Secs. 184-185).............................................................................................. 282
6. COPYRIGHT INFRINGEMENT (Sec. 216) ........................................................................................................... 284
VII. DATA PRIVACY ACT OF 2000 (R.A. No. 10173) ..................................................................................................... 288
A. PERSONAL vs. SENSITIVE PERSONAL INFORMATION (Sec. 3) ....................................................................... 288
B. SCOPE (Sec. 4) ................................................................................................................................................................. 289
C. PROCESSING OF PERSONAL AND SENSITIVE PERSONAL INFORMATION; LAWFUL BASIS (Secs. 12-13)
.................................................................................................................................................................................................. 290
D. GENERAL DATA PRIVACY PRINCIPLES (Sec. 11) ................................................................................................ 291
E. RIGHTS OF DATA SUBJECT (Sec. 16) ....................................................................................................................... 291
VIII. SECURITIES REGULATION CODE (R.A. No. 8799) ............................................................................................... 293
A. FRAMEWORK FOR REGULATING OF SECURITIES TRADING (Secs. 8-10) .................................................. 293
B. CONCEPT OF SECURITIES; HOWEY TEST (Sec. 3)............................................................................................... 294
C. REGISTRATION OF SECURITIES (Sec. 8) ................................................................................................................ 297
1. EXEMPT SECURITIES (Sec. 9) ............................................................................................................................... 300
2. EXEMPT TRANSACTIONS (Sec. 10) ..................................................................................................................... 301
IX. ELECTRONIC COMMERCE ACT (R.A. No. 8792) ........................................................................................................ 303
A. LEGAL RECOGNITION OF ELECTRONIC DATA MESSAGES, DOCUMENTS, AND SIGNATURES (Secs. 611) ........................................................................................................................................................................................... 303
B. OBLIGATION OF CONFIDENTIALITY (Sec. 32)..................................................................................................... 305
X. ACCESS DEVICES REGISTRATION ACT (R.A. No. 8484) .......................................................................................... 306
A. ACCESS DEVICE (Sec. 3) ............................................................................................................................................... 306
B. PROHIBITED ACTS (Sec. 9) ........................................................................................................................................ 306
C. FRUSTRATED AND ATTEMPTED ACCESS DEVICE FRAUD (Sec. 12) ............................................................. 307
XI. PHILIPPINE COMPETITION ACT (R.A. No. 10667) ................................................................................................. 308
2024 GOLDEN NOTES
A. ANTI-COMPETITIVE AGREEMENTS (Sec. 14) ....................................................................................................... 308
B. ABUSE OF DOMINANT POSITION (Sec. 15) ........................................................................................................... 309
C. MERGERS AND ACQUISITIONS (Secs. 16-22) ........................................................................................................ 314
XII. PUBLIC SERVICE ACT (C.A. No. 146, as amended by R.A. No. 11659) .............................................................. 320
A. PUBLIC SERVICE AS PUBLIC UTILITY (Sec. 13) ................................................................................................... 320
B. CRITICAL INFRASTRUCTURE (Sec. 2(e)) ............................................................................................................... 321
C. POWERS OF THE PRESIDENT .................................................................................................................................... 321
D. RECIPROCITY (Sec. 25) ................................................................................................................................................ 322
COMMERCIAL LAW
The Creation of a Corporation is by Operation of
Law
I. CORPORATION LAW
(R.A. No. 11232, Revised Corporation Code)
A corporation is not created by mere agreement of
the incorporators nor by their execution of the
Articles of Incorporation (AOI). There ought to be a
law from which the corporation derives its legal
existence. This may be a general law governing the
formation of private corporations, which is the RCC,
or a special law passed by Congress to create a
government-owned and controlled corporation.
(Divina, 2021)
A. GENERAL PRINCIPLES
Definition of Corporation
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 incidental to its existence. (Sec.
2, RCC)
NOTE: Philippine jurisprudence adopted the
Concession or Fiat Theory, which states that a
corporation is conceived as an artificial person
owing its existence through creation by a sovereign
power. Further, a corporation is without any
existence until it has received the imprimatur of the
State acting according to law, through the SEC.
(Tayag v. Benguet Consolidated, Inc., G.R. No. L23145, 29 Nov. 1968)
Attributes of a Corporation (A-L-S-P-A-P-I)
1.
2.
3.
4.
It is an Artificial being;
It is created by operation of Law;
It enjoys the right of Succession; and
It has the Powers, Attributes, and
Properties expressly authorized by law or
Incidental to its existence.
Q: Since Feb. 8, 1935, the legislature has not
passed even a single law creating a private
corporation. What provision of the constitution
precludes the passage of such law? (2008 BAR)
1. NATURE AND ATTRIBUTES
(Sec. 2)
A: Sec. 16, Art. XII of the 1987 Constitution provides
that the Congress shall not, except by general law,
provide for the formation, organization, or
regulation of private corporations. Governmentowned and controlled corporations may be created
or established by special charters in the interest of
the common good and subject to the test of
economic viability.
Corporation as an Artificial Being
A corporation is a legal or juridical person with a
personality separate and distinct from its individual
stockholders or members and from any other legal
entity into which it may be connected or related.
Government Corporations
A corporation is entitled to the rights of a person
under the Bill of Rights. It may even invoke the right
against unreasonable search and seizure. (Divina,
2021 citing Stonehill v. Diokno, G.R. No. L-19550, 19
June 1967)
Q: A Special Audit Team from Commission on
Audit (COA) audited the accounts of Leyte
Metropolitan
Water
District
(LMWD).
Subsequently, LMWD received a request for
payment of auditing fees from COA. LMWD
General Manager Feliciano sent a reply
informing COA that the water district could not
pay the auditing fees, citing as basis for his
action P.D. 198 as well as R.A. No. 6758.
Thereafter, Feliciano asked COA for a refund of
NOTE: It cannot invoke the right against selfincrimination. (Divina, 2021 citing BASECO v PCGG,
G.R. No. 75885, 27 May 1987)
1
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
2024 GOLDEN NOTES
all auditing fees LMWD previously paid to COA.
The COA Chairman denied LMWD’s request.
commitments under international law. The court
cannot all of a sudden refuse to recognize its
existence, especially since the issue of the
constitutionality of the PNRC Charter was never
raised by the parties. (Liban, et al., v. Gordon, G.R.
No. 175352, 18 Jan. 2011)
Feliciano maintains that Local Water Districts
(LWDs) are not GOCCs with original charters. He
argues that LWDs are private corporations, and
thus, not subject to COA’s jurisdiction. Is an LWD
created under P.D. 198, as amended, a GOCC
subject to the audit jurisdiction of COA?
Q: Pursuant to E.O. 123, the Ministry of National
Defense and the Philippine Tourism Authority
executed a MOA for the development of
Corregidor. The Philippine Tourism Authority
Board of Directors adopted a Resolution,
approving the creation of a foundation for the
development of Corregidor. The Corregidor
Foundation, Inc. was incorporated.
A: YES. LWDs are GOCCs subject to the audit
jurisdiction of COA. The Constitution and existing
laws mandate COA to audit all government agencies,
including GOCCs with original charters. An LWD is a
GOCC with an original charter.
The Constitution recognizes two classes of
corporations. The first refers to private
corporations created under a general law. The
second refers to GOCCs created by special charters.
Congress cannot enact a law creating a private
corporation with a special charter. Such legislation
would be unconstitutional. Private corporations
may exist only under a general law. The Constitution
authorizes Congress to create GOCCs through
special charters. Since private corporations cannot
have special charters, it follows that Congress can
create corporations with special charters only if
such corporations are government-owned or
controlled. Obviously, LWDs are not private
corporations because they are not created under the
Corporation Code. (Feliciano v. COA, et al., G.R. No.
147402, 14 Jan. 2004)
The COA issued an Audit Observation
Memorandum noting that certain personnel of
the Philippine Tourism Authority who were
concurrently rendering services in Corregidor
Foundation, Inc. received honoraria and cash
gifts. The Legal and Adjudication OfficeCorporate of the COA issued Notice of
Disallowance, disallowing in audit the
honoraria and cash gift paid to said
personnel. The personnel argue that Corregidor
Foundation, Inc. is a private corporation created
under the Corporation Code and, therefore,
cannot be audited by the COA. Is Corregidor
Foundation, Inc. a GOCC under the audit
jurisdiction of the COA?
A: YES. The Corregidor Foundation, Inc. is a
government-owned or controlled corporation
under the audit jurisdiction of the COA. Corregidor
Foundation, Inc. was organized as a non-stock
corporation under the Corporation Code. It was
issued a certificate of registration by the SEC on 28
October 1987 and, according to its Articles of
Incorporation, Corregidor Foundation, Inc. was
organized and to be operated in the public interest.
Corregidor Foundation, Inc. was organized
primarily to maintain and preserve the war relics in
Corregidor and develop the area's potential as an
international and local tourist destination.
Corregidor Foundation, Inc.'s purposes as stated in
its AOI are related to the promotion and
development of tourism in the country, a declared
state policy and, therefore, a function public in
Q: Is the Philippine National Red Cross (“PNRC”)
a GOCC?
A: Initially, the Supreme Court held PNRC is not a
GOCC. Although the PNRC was created by a special
charter, it cannot be considered a GOCC in the
absence of the essential elements of ownership and
control by the government.
Although it is neither a subdivision, agency, or
instrumentality of the government nor a
government-owned or -controlled corporation or a
subsidiary thereof, the PNRC enjoys a special status
as an important ally and auxiliary of the government
in the humanitarian field in accordance with its
UNIVERSITY OF SANTO TOMAS
2024 GOLDEN NOTES
2
COMMERCIAL LAW
character. Even a cursory reading of the statutory
definitions of "government owned-or controlled
corporation" readily reveals that a non-stock
corporation may be government-owned or
controlled. Further, there is nothing in the law
which provides that government-owned or
controlled corporations are always created under
an original charter or special law. (Oriondo v. COA,
G.R. No. 211293, 04 June 2019)
Engagement into a Contract of Partnership or a
Joint Venture
Corporations are empowered to enter into a
partnership, joint venture, merger, consolidation, or
any other commercial agreement with natural and
juridical persons. (Sec. 35(h), RCC)
Another significant revision under the new law is
the express grant of power to corporations to enter
into any commercial agreement, including but not
limited to partnership, joint venture, merger,
consolidation.
Right to Succession
The right of succession of a corporation does not
connote that a corporation is immortal. It simply
means that it has the power to exist continuously,
either by opting to have perpetual existence or to
extend its corporate life if a fixed term is specified in
its AOI. Its capacity for continued existence is not
affected by any changes in the composition of
corporators. (Divina, 2020)
NOTE: Under Sec. 36 of the Old Corporation Code,
corporations were expressly allowed to only enter
into merger or consolidation with other
corporations as a form of corporate combination.
Q: May a corporation enter into a joint venture?
(1996 BAR)
Powers, Attributes and Properties of a
Corporation
A: YES. A corporation may enter into a joint venture
with another where the nature is in line with the
business authorized by its charter. (Tuason v.
Bolaños, G.R. No. L-4935, 28 May 1954)
A corporation can only exercise powers conferred
upon it by law, its AOI, those implied from the
conferred powers, or incidental to its existence. Any
act of the corporation contrary to or outside these
powers is ultra vires. (Divina, 2020)
As far back as the case of Aurbach v. Sanitary Wares
Manufacturing Corporation, (G.R. No. 75875, 75951,
75975-76, 15 Dec. 1989) the Supreme Court had
already ruled that a joint venture is a form of
partnership and should thus be governed by the law
of partnerships. The Supreme Court, however,
recognized a distinction between these two
business forms and held that although a corporation
cannot enter into a partnership contract, it may
however engage in a joint venture with others.
(Divina, 2020)
TEST: Whether the corporate act or transaction
is related to or in furtherance of the purposes of
the corporation.
For instance, whether or not a corporation may
acquire property will not only be tested by the
lawfulness of the consideration but whether such
property is necessary to achieve the purpose of the
corporation.
Thus, a corporation engaged in mining cannot
acquire properties for urban development. (Heirs of
Antonio Pael v. CA, G.R. No. 133547, 07 Dec. 2001) A
corporation organized as a lending investor cannot
engage in pawnbroking. (Divina, 2020)
3
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
2024 GOLDEN NOTES
Advantages vs. Disadvantages of a Corporation
ADVANTAGES
It may sue and be
sued,
enter
into
contracts, and acquire
properties in its own
name and in its own
right.
Stockholders are not
liable
for
the
obligations of the
corporation beyond
their subscription.
It continues to exist
despite changes in
corporators’
composition.
Shares
are
transferable
even
without the consent of
the corporation and
other stockholders.
Management
is
clearly defined and
centralized through
its board of directors
or trustees.
It can mobilize more
capital through the
issuance of its shares.
Partnership vs. Corporation
DISADVANTAGES
PARTNERSHIP
CORPORATION
As to the creation and governing Law
Created
by
the
Created by mere
operation of law and
agreement of the
governed
by
the
parties and governed
Revised
Corporation
by the Civil Code.
Code.
As to the commencement of juridical
personality and term of existence
The ability of the
stockholder to transfer
shares without having
to secure the consent of
the corporation and/or
other stockholders may
result in persons having
conflicting
interests
against
the
same
corporation.
From the moment of
the meeting of minds
of the partners.
The term of a
partnership may be
established for any
period
of
time
stipulated by the
partners.
It is subject to more
stringent
administrative
and
reportorial
requirements.
Existence
of
the
corporation commences
from the date of
issuance
of
the
Certificate
of
Incorporation by the
SEC.
Has perpetual existence,
unless its AOI provides
otherwise.
As to number of formators
Minority stockholders
may be denied the right
to actively participate
in the management of
the corporation and are
subject to the will of the
majority stockholders.
May be organized by
at least 2 persons.
NOTE: A corporation
with
a
single
stockholder
is
considered a one person
corporation.
Business activities are
limited by the powers
provided by law, its
AOI, and those which
are incidental thereto.
As to Powers
GR: May exercise any
power authorized by
the partners.
(Divina, 2020)
XPN: Acts which are
contrary
to
law,
morals,
good
customs,
public
order, public policy.
UNIVERSITY OF SANTO TOMAS
2024 GOLDEN NOTES
Any
person,
partnership,
association,
or
corporation, singly or
jointly with others but
not more than 15.
4
May exercise only such
powers as may be
conferred by law and its
AOI, those implied
therefrom, or those
incidental thereto.
COMMERCIAL LAW
As to Management
Managed
by
the
Managing Partner, or
in the absence of
designation, by any of
the General Partners.
2. NATIONALITY OF CORPORATIONS
Tests in Determining
Corporations
The business of a
corporation is generally
conducted by the Board
of Directors.
1.
2.
As to the extent of liability to third persons
GR: Partners are
liable personally and
subsidiarily
(sometimes
solidarily)
for
partnership debts to
third persons,
Stockholders are liable
only to the extent of the
shares subscribed by
them whether paid or
not.
Control Test; and
Grandfather Rule
In determining the nationality of a corporation, the
control test uses the nationality of the controlling
stockholders or members of the corporation.
A corporation organized/incorporated abroad and
registered as doing business in the Philippines
under the Corporation Code, of which 100% of the
capital stock outstanding and entitled to vote is
wholly owned by Filipinos, may be considered a
Philippine National under the Foreign Investments
Act of 1991. This is the only exception to the place
of incorporation test. (SEC Opinion No. 04-14, 3 a.
2004; De Leon, 2010)
A stockholder has the
right to transfer his
shares without prior
consent of the other
stockholders, subject to
limitations embodied in
the AOI.
As to dissolution
Death,
civil
interdiction,
and
insolvency
of
a
partner dissolve the
partnership.
of
It is a mode of determining the nationality of a
corporation engaged in nationalized areas of
activities, provided for under the Constitution and
other
applicable
laws,
where
corporate
shareholders with foreign shareholdings are
present, by ascertaining the nationality of the
controlling stockholder of the corporation. If the
capital of the investing Corporation is at least 60%
owned by Filipinos, then the entire shareholdings of
the investing Corporation shall be recorded as
Filipino-owned thus making both the investing and
investee - corporations Philippine national. (Divina,
2021)
As to the right of succession
No
right
of
succession.
(i.e., a partnership Has right of succession.
dissolves upon death
of a partner)
As to transferability of interest
May be dissolved any
time by the will of any
or all of the partners.
Nationality
a. CONTROL TEST
XPN: Limited partner
A partner cannot
transfer his interest
in the partnership
without the consent
of all the other
existing partners.
the
The Gamboa Decision already held, in no uncertain
terms, that what the Constitution requires is: full
and legal beneficial ownership of 60 percent of the
outstanding capital stock, coupled with 60 percent
of the voting rights must rest in the hands of Filipino
nationals. And, precisely that is what SEC-MC No. 8
provides, viz.: "For purposes of determining
compliance [with the constitutional or statutory
ownership], the required percentage of Filipino
ownership shall be applied to both:
Can only be dissolved
with the consent of the
State.
Death or insolvency of
shareholders will not
result to dissolution of
the corporation.
(Divina, 2021)
5
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
2024 GOLDEN NOTES
(a) the total number of outstanding shares of
stock entitled to vote in the election of
directors; and
cases where corporate shareholders with foreign
shareholdings are present, by attributing the
nationality of the second or even subsequent tier of
ownership to determine the nationality of the
corporate shareholder.
(b) the total number of outstanding shares of
stock, whether or not entitled to vote.” (Roy
III v. Chairperson Herbosa, G.R. No. 207246,
18 Apr 2017)
Thus, to arrive at the actual Filipino ownership and
control in a corporation, both the direct and indirect
shareholdings in the corporation are determined. In
the case of a multi-tiered corporation, the stock
attribution rule must be allowed to run
continuously along the chain of ownership until it
finally reaches the individual stockholders. (Divina,
2020)
Who are Considered as Philippine Nationals
Under R.A. No. 7042 (Foreign Investments Act of
1991), other than a citizen of the Philippines, the
following are also considered Philippine Nationals:
1.
Corporations organized under Philippine laws
of which at least 60% of the capital stock
outstanding and entitled to vote is owned and
held by Filipino citizens.
2.
Corporations organized abroad and registered
as doing business in the Philippines under the
Corporation Code of which 100% of the capital
stock outstanding and entitled to vote is wholly
owned by Filipinos or a trustee of funds for
pension or other employee retirement or
separation benefits, where the trustee is a
Philippine national and at least sixty percent
(60%) of the fund will accrue to the benefit of
Philippine nationals:
The purpose of this rule is to trace the nationality of
the stockholder of investor corporations to
ascertain the nationality of the corporation where
the investment is made. (SEC Opinion, 4 May 1987,
as cited in Divina, 2020)
The Grandfather Rule implements the intent of the
Filipinization provisions of the Constitution. (Narra
Nickel Mining and Development Corp., et al. v.
Redmont Consolidated Mines Corp., G.R. No. 195580,
28 Jan. 2015; SEC Opinion No. 16-15)
Rules Governing
Grandfather Rule
NOTE: R.A. No. 7042 provides that where a
corporation and its non-Filipino stockholders
own stocks in a SEC-registered enterprise, at
least 60% of the capital stock outstanding and
entitled to vote of each of both corporations and
at least 60% of the members of the Board of
Directors of each of both corporations must be
citizens, in order that the corporation shall be
considered a Philippine national. (Double 60%
Rule)
b. GRANDFATHER RULE
This is the method by which the percentage of
Filipino equity in a corporation engaged in
nationalized and/or partly nationalized areas of
activities, provided for under the Constitution and
other applicable laws, is accurately computed, in
UNIVERSITY OF SANTO TOMAS
2024 GOLDEN NOTES
6
the
Application
of
the
1.
The grandfather rule should be used in
determining the nationality of a corporation
engaged in a partly nationalized activity. This
applies in cases where the stocks of a
corporation are owned by another corporation
with foreign stockholders exceeding 40% of the
capital stock of the corporation. (SEC-OGC
Opinion No. 10-31, 09 Dec. 2010)
2.
The Grandfather Rule will not apply in cases
where the 60-40 Filipino-alien equity
ownership in a particular natural resource
corporation is not in doubt. If the stockholder
corporation is 60% or more owned by Filipinos,
all the stock held by the stockholder
corporation is deemed to be held by Filipinos.
(DOJ Opinion No. 19, s. 1989)
COMMERCIAL LAW
3.
When there is doubt as to the actual extent of
Filipino equity in the investee corporation, the
SEC is not precluded from using the
Grandfather Rule. (SEC-OGC Opinion No. 22-07,
07 Dec. 2007)
Q: Following the decision of the Court in the case
of Gamboa v. Teves, the SEC issued a
Memorandum Circular (SEC-MC No. 8), which
are guidelines on compliance with the Filipinoforeign ownership requirement prescribed in
the Constitution and/or existing laws by
corporations engaged in nationalized and partly
nationalized activities. The dispositive portion
of the Gamboa Decision stated that the term
“capital” referred only to shares of stock entitled
to vote in the election of directors, while there
were certain statements made in the body of the
Resolution to the effect that the 60-40 Filipinoforeign ownership requirement applies to each
class of shares, whether voting or non-voting.
Hence, Roy filed a case alleging that SEC-MC No.
8 is not compliant with the Gamboa Decision and
Resolution as it did not apply the 60 to 40
Filipino-foreign
ownership
requirement
separately to each class of share. Is Roy correct?
Q: What is the prevailing mode of determining
the nationality of corporations engaged in
nationalized activities?
A: The "control test" is the prevailing mode of
determining the nationality of corporations
engaged in nationalized activities. However, when
in the mind of the Court there is doubt as to where
beneficial ownership and control reside, based on
the attendant facts and circumstances of the case,
then it may apply the "grandfather rule." (Narra
Nickel Mining and Development Corp. v. Redmont
Consolidated Mining Corp., G.R. No. 195580, 21 Apr.
2014)
The Grandfather Rule, standing alone, should not be
used to determine the 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 the Control Test is
first complied with that the Grandfather Rule may
be applied.
A: NO. While there is a passage in the body of the
Gamboa Resolution that might have appeared
contrary to the fallo of the Gamboa Decision, the
definiteness and clarity of the fallo of the Gamboa
Decision must control over the obiter dictum in the
Gamboa Resolution.
The Gamboa Decision already held, in no uncertain
terms, that what the Constitution requires is "full
and legal beneficial ownership of 60 percent of the
outstanding capital stock, coupled with 60 percent
of the voting rights must rest in the hands of Filipino
nationals." and, precisely that is what SEC-MC No. 8
provides, viz.: “For purposes of determining
compliance with the constitutional or statutory
ownership, the required percentage of Filipino
ownership shall be applied to both (a) the total
number of outstanding shares of stock entitled to
vote in the election of directors; and (b) the total
number of outstanding shares of stock, whether or
not entitled to vote." (Roy v. Herbosa, G.R. No.
207246, 18 Apr. 2017)
The Supreme Court stressed, however, that when
the 60% Filipino ownership, is never in doubt, the
control test prevails. In the relevant case, it was held
that the petition is severely wanting in facts and
circumstances to raise legitimate challenges to the
joint venture company's 60-40 Filipino-Foreigner
ownership. The application of the control test will
already yield the result that the company is a
Philippine national. The grandfather rule no longer
applies. (Leo Querubin v. COMELEC, G.R. No. 218787,
08 Dec. 2015)
NOTE: "Corporate layering" is admittedly allowed
by the FIA; but if it is used to circumvent the
Constitution and pertinent laws, then it becomes
illegal.
7
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
2024 GOLDEN NOTES
and Richard. Will the action prosper? Explain
(1996 BAR)
3. DOCTRINE OF SEPARATE JURIDICAL
PERSONALITY
A: The action will prosper against GOM Corporation
but not against Richard. Richard has a separate and
distinct personality from GOM. His mere ownership
of 90% of the shares of the capital stock of GOM does
not make him one and the same as the corporation.
Mere ownership by a single stockholder, or by
another corporation, of all or nearly all of the capital
stock of a corporation is not itself a sufficient ground
for disregarding the separate corporate personality.
(Secosa v. Heirs of Erwin Suarez Francisco, G.R. No.
160039, 29 June 2004)
The doctrine of corporate juridical personality
states that a corporation is a juridical entity with
legal personality separate and distinct from those
acting for and, in its behalf, and, in general, from the
people comprising it. (Francisco v. Mallen Jr., G.R. No.
173169, 22 Sept. 2010)
Q: An employee of Price Richardson Corporation
executed a sworn affidavit at the NBI’s Interpol
Division, alleging that Price Richardson was
"engaged in boiler room operations, wherein
the company sells non-existent stocks to
investors using high pressure sales tactics." The
SEC filed before the DOJ its complaint against,
along with its incorporators and directors, Price
Richardson, for violation of Art. 315(1)(b) of the
Revised Penal Code (RPC) and Secs. 26.3 and 28
of the Securities Regulation Code (SRC). VelardeAlbert was its Director for Operations and
Resnick was its Associated Person. Can VelardeAlbert and Resnick be indicted for violations of
the SRC and the RCC?
Significance of the Doctrine of Separate Juridical
Personality
1.
A corporation may not, generally, be made to
answer for acts or liabilities of its stockholders
or those of the legal entities to which it may be
connected, and vice versa. (Cease v. CA, G.R. No.
L-33172, 18 Oct. 1979)
A: NO. Velarde-Albert and Resnick cannot be
indicted for violations of the SRC and the RPC.
Petitioner failed to allege the specific acts of
respondents Velarde-Albert and Resnick that could
be interpreted as participation in the alleged
violations. There was also no showing, based on the
complaints, that they were deemed responsible for
Price Richardson's violations. To be held criminally
liable for the acts of a corporation, there must be a
showing that its officers, directors, and
shareholders actively participated in or had the
power to prevent the wrongful act. A corporation’s
personality is separate and distinct from its officers,
directors, and shareholders. (SEC v. Price Richardson
Corp, G.R. No. 197032, 26 July 2017)
2.
Right to bring actions – may bring civil and
criminal actions in its own name in the same
manner as natural persons. (Art. 46, NCC)
NOTE: Rights belonging to the corporation
cannot be invoked by the stockholders (or
directors and officers) even if the latter own
substantial majority of the shares in that
corporation; and rights of the stockholders,
directors and officers cannot be invoked by the
corporation. (Stonehill v. Diokno, G.R. No. L19550, 19 June 1967)
3.
Q: Richard owns 90% of the shares of the capital
stock of GOM Co. On one occasion, GOM
represented by Richard as President and
General Manager executed a contract to sell a
subdivision lot in favor of Tomas. For failure of
GOM to develop a subdivision, Tomas filed an
action for rescission and damages against GOM
UNIVERSITY OF SANTO TOMAS
2024 GOLDEN NOTES
Liability for acts or contracts – As a general
rule, the obligation of the corporation is not the
liability of the stockholders, directors, or
officers. (2010,1996, 1992 BAR)
8
Right to acquire and possess property –
property conveyed to or acquired by the
corporation is in law the property of the
corporation itself as a distinct legal entity and
not that of the stockholders or members.
(Boyer-Roxas v. CA, G.R. No. 100866, 14 July
1992)
COMMERCIAL LAW
4.
and procedures for the protection of corporate
creditors are followed. (Yamamoto v. Nishino
Leather Industries, Inc., G.R. No. 150283, 16 Apr.
2008)
Acquisition of jurisdiction – When the
defendant is a corporation, partnership or
association organized under the laws of the
Philippines with a juridical personality, service
of summons may be made on the president,
managing partner, general manager, corporate
secretary, treasurer, or in-house counsel of the
corporation wherever they may be found, or in
their absence or unavailability, on their
secretaries.
Q: RISCO ceased operation due to business
reverses. Due to Aznar et. al’s desire to
rehabilitate RISCO, they contributed a total
amount of P212,720.00 which was used in the
purchase of three (3) parcels of land located in
various areas in the Cebu Province. Pursuant to
the Minutes of the Special Meeting of the Board
of Directors of RISCO, the contributed amounts
constitute liens and encumbrances on the
aforementioned properties as annotated in the
titles of the said parcels of land. Thereafter,
various subsequent annotations were made on
the same titles in favor of PNB. As a result, a
Certificate of Sale was issued in favor of PNB,
being the lone and highest bidder of the three
parcels of land and was also issued Transfer
Certificate of Title over the said parcels of land.
If such service cannot be made upon any of the
foregoing persons, it shall be made upon the
person who customarily receives the
correspondence for the defendant at its
principal office. (Sec. 12, Rule 14, ROC)
5.
Changes in individual membership –
corporation remains unchanged and unaffected
in its identity by changes in its individual
membership or ownership of its stocks.
Stockholders are Not the Owners of Corporate
Properties and Assets (2000, 1996 BAR)
Aznar, et. al filed a complaint seeking the
quieting of their supposed title to the subject
properties. They alleged that the subsequent
annotations on the titles are subject to the prior
annotation of their liens and encumbrances. On
the other hand, PNB assert that, as mere
stockholders of RISCO, they do not have any
legal or equitable right over the properties of
the corporation. Do Aznar et. al. have the legal or
equitable rights over the subject properties?
A corporation is a juridical person distinct from the
members composing it. Properties in the name of
the corporation are owned by it as an entity
separate and distinct from its members. While
shares of stocks constitute personal property, they
do not represent property of the corporation. The
corporation has properties of its own. A share of
stock only represents an aliquot part of the
corporation’s property, or the right to share in its
proceeds but its holder is not the owner of any.
(Silverio v. Filipino Business Consultants, Inc., G.R. No.
143312, 12 Aug. 2005; Saw v. CA, G.R. No. 90580, 08
Apr. 1991)
A: NO. Aznar, et al., have no right to ask for the
quieting of title of the properties at issue because
they have no legal and/or equitable rights over the
properties that are derived from the previous
registered owner which is RISCO.
Moreover, under the trust fund doctrine, the capital
stock, property, and other assets of a corporation
are regarded as equity in trust for the payment of
corporate creditors which are preferred over the
stockholders in the distribution of corporate assets.
The distribution of corporate assets and property
cannot be made to depend on the whims and
caprices of the stockholders, officers, or directors of
the corporation unless the indispensable conditions
Aznar, et al., who are stockholders of RISCO, cannot
claim ownership over the properties at issue in this
case on the strength of the Minutes which, at most,
is merely evidence of a loan agreement between
them and the company. There is no indication or
even a suggestion that the ownership of said
properties were transferred to them which would
require no less that the said properties be registered
under their names. While a share of stock
9
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
2024 GOLDEN NOTES
represents a proportionate or aliquot interest in the
property of the corporation, it does not vest the
owner thereof with any legal right or title to any of
the property, his interest in the corporate property
being equitable or beneficial in nature.
Shareholders are in no legal sense the owners of
corporate property, which is owned by the
corporation as a distinct legal person. (PNB v. Aznar,
et al, G.R. No. 171805, 30 May 2011)
2. He consents to the issuance of watered stocks or
who, having knowledge thereof, does not forthwith
file with the corporate secretary his written
objection thereto;
3. He agrees to hold himself personally and
solidarily liable with the corporation; or
4. He is made, by a specific provision of law, to
personally answer for his corporate action. (Atienza
v. Golden Ram Engineering Supplies & Equipment
Corporation, G.R. No. 205405, 28 June 2021)
NOTE: Where stockholders granted a loan to the
corporation to finance the acquisition of property
which was eventually mortgaged to a bank to secure
a corporate loan, the right of the stockholders is
subordinate to the mortgagee. The stockholder has
the right to be paid the loan but not to the property
of the corporation. (Divina, 2021 citing PNB v. Aznar,
supra)
When
director/officer/trustee
personally liable
Stockholders are Not Real Parties in Interest to
Claim Damages and Recover Compensation
The stockholders were clearly not vested with any
direct interest in the personal properties coming
under the levy on attachment by virtue alone of
their being stockholders of the corporation. Their
stockholdings represented only their proportionate
or aliquot interest in the properties of the
corporation but did not vest in them any legal right
or title to any specific properties of the corporation.
Without doubt, the corporation remained the owner
as a distinct legal person. Given the separate and
distinct legal personality of the corporation, the
stockholders lacked the legal personality to claim
the damages sustained from the levy of the former’s
properties. (Stronghold Insurance Company, Inc. v.
Cuenca, G.R. No. 173297, 06 Mar. 2013)
becomes
Basic is the principle that a corporation is vested by
law with a personality separate and distinct from
that of each person composing or representing it.
Equally fundamental is the general rule that
corporate officers cannot be held personally liable
for the consequences of their acts, for as long as
these are for and in behalf of the corporation, within
the scope of their authority and in good faith. The
separate corporate personality is a shield against
the personal liability of corporate officers, whose
acts are properly attributed to the corporation.
In Tramat Mercantile v. CA, the Court ruled that
personal liability of a corporate director, trustee or
officer along (although not necessarily) with the
corporation may so validly attach, as a rule, only
when:
Q: Ronald Sham, doing business under the name
of SHAMRON Machineries (Shamron), sold to
Turtle Mercantile (Turtle) a diesel farm tractor.
In payment, Turtle’s President and Manager
Dick Seldon issued a check for P50,000 in favor
of Shamron. A week later, Turtle sold the tractor
to Briccio Industries (Briccio) for P60,000.
Briccio discovered that the engine of the tractor
was reconditioned so it refused to pay Turtle. As
a result, Dick Seldon ordered the “Stop
Payment” of the check issued to Shamron.
Shamron sued Turtle and Dick Seldon. Shamron
obtained a favorable judgment holding codefendants Turtle and Dick Seldon jointly and
1. He assents:
(a) to a patently unlawful act of the
corporation, or
(b) for bad faith or gross negligence in
directing its affairs, or
(c) for conflict of interest, resulting in
damages to the corporation, its
stockholders or other persons;
UNIVERSITY OF SANTO TOMAS
2024 GOLDEN NOTES
10
COMMERCIAL LAW
severally liable. Comment on the decision of the
trial court. Discuss fully. (1995 BAR)
against Symex and its President and Chairman of
the Board, Arcega. Capt. Cura, the operations
manager of Symex, told respondents that they
would not be given a duty assignment unless
they withdrew the complaint they filed.
Respondents refused to obey Capt. Cura, who
then told them that they were dismissed. Is
Arcega solidarily liable for the obligations of
Symex to respondents?
A: The trial court’s ruling is erroneous. Dick Seldon
should not be held solidarily liable with Turtle in his
capacity as President and Manager of Turtle. Turtle
has a separate juridical personality from its
officers. (Consolidated Bank and Trust Corp. v. CA,
G.R. No. 114286, 19 Apr. 2001)
Non-applicability of Doctrine of Separate
Juridical Personality in Examination of Officers
to ascertain Properties, Income which can be
subjected to Execution
A: NO, there was no showing that Arcega, as
President of Symex, willingly and knowingly voted
or assented to the unlawful acts of the company. A
corporation is a juridical entity with a legal
personality separate and distinct from those acting
for and, in its behalf, and, in general, from the people
comprising it. Thus, as a rule, an officer may not be
held liable for the corporation's labor obligations
unless he acted with evident malice and/or bad faith
in dismissing an employee. To hold a director or
officer personally liable for corporate obligations,
two requisites must concur: (1) it must be alleged in
the complaint that the director or officer assented to
patently unlawful acts of the corporation or that the
officer was guilty of gross negligence or bad faith;
and (2) there must be proof that the officer acted in
bad faith. (Symex Security Services, Inc. v. Rivera, Jr.,
G.R. No. 202613, 08 Nov. 2017)
The doctrine of separate juridical personality
provides that a corporation has a legal personality
separate and distinct from those individuals acting
for and in its behalf and, in general, from those
comprising it. Any obligation incurred by the
corporation, acting through its directors, officers
and employees, is therefore its sole liability. This
legal fiction may only be disregarded if it is used as
a means to perpetrate fraud or an illegal act, or as a
vehicle for the evasion of an existing obligation, the
circumvention of statutes, or to confuse legitimate
issues.
It is imperative for the judgment court to issue an
order for examination of respondent after the writ
of execution was returned unsatisfied. Such order
would have ensured the satisfaction of its judgment,
all the more so if it has already attained finality. In
other words, the RTC, pursuant to its residual
authority, should have issued auxiliary writs and
employed processes and other means necessary to
execute its final judgment. (Linden Suites, Inc. v.
Meridien Far East Properties, Inc., G.R. No. 211969, 04
Oct. 2021)
LIABILITY FOR TORTS AND CRIMES
A Corporation may be held Liable for Torts
A corporation is liable whenever a tortious act is
committed by an officer or agent under express
direction or authority from the stockholders or
members acting as a body, or, generally, from the
directors as the governing body. (PNB v. CA, G.R. No.
L-27155, 18 May 1978)
Officers Not Liable for Dismissal of Employee
except in Cases of Evident Malice and/or Bad
Faith
Q: Respondents had been employed as security
guards by petitioner Symex. They were not given
a rest day, and were not paid their overtime pay,
five-day service incentive leave pay, and 13th
month pay. Thus, respondents filed a complaint
11
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
2024 GOLDEN NOTES
Liability of a Corporation in Case of
Crimes under PD 115 and other statutes which
define a crime that may be committed by a
corporation but prescribe the penalty therefor
to be suffered by the officers, directors, or
employees of such corporation, or other persons
responsible for the offense
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 petitioner’s acts.
(MERALCO v. T.E.A.M. Electronics Corp., et. al.,
G.R. No. 131723, 13 Dec. 2007)
GR: If the crime is committed by a corporation or
other juridical entity, the directors, officers,
employees, or other officers thereof responsible for
the offense shall be charged and penalized for the
crime, precisely because of the nature of the crime
and the penalty therefor. A corporation cannot be
arrested and imprisoned; hence, cannot be
penalized for a crime punishable by imprisonment.
(Ching v. Secretary of Justice, G.R. No. 164317, 06 Feb.
2006)
NOTE: While the court may allow the grant of moral
damages to corporations, it is not automatically
granted; there must still be proof of the existence of
the factual basis of the damage and its causal
relation to the defendant’s acts. This is so because
moral damages, though incapable of pecuniary
estimation, are in the category of an award designed
to compensate the claimant for actual injury
suffered and not to impose a penalty on the
wrongdoer. (Crystal v. BPI, G.R. No. 172428, 28 Nov.
2008)
XPN: However, a corporation may be charged and
prosecuted for a crime if the imposable penalty is
fine. Even if the statute prescribes both fine and
imprisonment as penalty, a corporation may be
prosecuted and, if found guilty, may be fined. (Ibid.)
4. DOCTRINE OF PIERCING OF CORPORATE VEIL
The Doctrine of Piercing the Corporate Veil is the
doctrine that allows the State to disregard, for
certain justifiable reasons, the notion that a
corporation has a personality separate and distinct
from the persons composing it.
RECOVERY OF DAMAGES
Recovery of Moral Damages
Where it appears that business enterprises are
owned, conducted, and controlled by the same
parties, law and equity will disregard the legal
fiction that these corporations are distinct entities
and shall treat them as one. This is in order to
protect the rights of third persons. (Vicmar
Development Corporation v. Elarcosa, et al., G.R. No.
202215, 09 Dec. 2015)
GR: A corporation is not entitled to moral damages
because, being an artificial person and having
existence only in legal contemplation, it has no
feelings, no emotions, no senses. (ABS-CBN
Broadcasting Corp. v. CA, G.R. No. 128690, 21 Jan.
1999)
XPNs:
1. A corporation may recover moral damages
under item 7 of Art. 2219 of the NCC because
said provision expressly authorizes the
recovery of moral damages in cases of libel,
slander, or any other form of defamation. Said
provision does not qualify whether the injured
party is a natural or juridical person. (Filipinas
Broadcasting Network, Inc. v. AMEC-BCCM, G.R.
No. 141994, 17 Jan. 2005)
2.
Absent any allegation or proof of fraud or other
public policy considerations, the existence of
interlocking directors, officers and stockholders is
not enough justification to pierce the veil of
corporate fiction as in the instant case. (Hacienda
Luisita Incorporated v. Presidential Agrarian Reform
Council, G.R. No. 171101, 22 Nov. 2011)
Effect of Piercing the Corporate Veil
When the corporation has a reputation that is
debased, resulting in its humiliation in the
UNIVERSITY OF SANTO TOMAS
2024 GOLDEN NOTES
1.
12
The corporation will be treated merely as an
association of persons, undertaking a business
COMMERCIAL LAW
2.
and the liability will attach directly to the
officers and stockholders.
affirmed the RTC. Did the RTC properly apply
the doctrine?
Where there are two (2) corporations, they will
be merged into one, the one being merely
regarded as the instrumentality, agency,
conduit, or adjunct of the other.
A: NO. The principle of piercing the veil of corporate
fiction, and the resulting treatment of two related
corporations as one and the same juridical person
with respect to a given transaction, is basically
applied only to determine established liability; it is
not available to confer on the court a jurisdiction it
has not acquired over a party not impleaded in a
case. Elsewise put, a corporation not impleaded in a
suit cannot be subject to the courts process by
piercing the veil of its corporate fiction. In that
situation, the court has not acquired jurisdiction
over the corporation and, hence, any proceedings
taken against that corporation and its property
would infringe on its right to due process.
NOTE: Notwithstanding that the corporate veil has
been pierced, the corporation continues for other
legitimate objectives, the corporate character is not
necessarily abrogated. (Reynoso IV v. CA, G.R. Nos.
116124-25, 22 Nov. 2000)
Grounds for Application of Doctrine of Piercing
the Corporate Veil
It applies upon the following circumstances:
(F-A-C-O)
Two-fold Implication
1.
If the fiction is used to perpetrate fraud (Fraud
Test);
1.
2.
If a certain corporation is only an adjunct or an
extension of the personality of the corporation
(Alter Ego or Instrumentality Test);
The court must first acquire jurisdiction over
the corporation or corporations involved
before its or their separate personalities are
disregarded; and
2.
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 International Corp v. Reyes, G.R. No.
182729, 29 Sept. 2010)
3.
If the complete control of one corporate entity
to another which perpetuated the wrong is the
proximate cause of the injury (Control Test); or
4.
If the fiction is pierced to make the stockholders
liable for the obligation of the corporation
(Objective Test).
NOTE: The Supreme Court, however, ruled
differently in Gold Line Tours v. Lacsa (G.R. No.
159108, 18 June 2012). It held that if the RTC had
sufficient factual basis to conclude that the two
corporations are one and the same entity as when
they have the same president and controlling
shareholder and it is generally known in the place
where they do business that they are one, the thirdparty claim filed by the other corporation was
properly set aside and the levy on its property held
valid even though the latter was not made a party
to the case. The judgment may be enforced against
the other corporation to prevent multiplicity of
suits and save the parties unnecessary expenses
and delays. (Divina, 2021)
Q: Romeo Morales was able to obtain a favorable
judgment for a sum of money against Kukan, Inc.
With the judgment attaining finality, the sheriff
levied on execution various personal properties
found at what was supposed to be Kukan’s office.
Kukan International Corporation (KIC) filed a
third-party complaint, alleging that it was the
owner of the levied properties. Morales prayed
that the principle of piercing the veil of
corporate fiction be applied in order to satisfy
the judgment debt of Kukan. The RTC granted
the motion of Morales and declared KIC and
Kukan as one and the same corporation. The CA
13
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
2024 GOLDEN NOTES
Q: Ma. Concepcion Lacsa was riding a Goldline
passenger bus owned and operated by Travel &
Tours Advisers, Inc. (TTAI) when the bus collided
with a passenger jeepney, causing her instant
death. The Heirs of Concepcion instituted a suit in
the RTC for damages due to breach of contract,
with the complaint set against “Travel & Tours
Advisers, Inc. (Goldline)” and the bus driver. The
RTC ruled in favor of the Heirs, holding TTAI
liable to pay the heirs damages and expenses. A
writ of execution was served upon TTAI and
Cheng, operator of the Goldline bus. Cheng failed
to settle the judgment; thus a tourist bus was
levied.
Representatives of CyberOne AU. They were
asked to become dummy directors and/or
incorporators of CyberOne PH. They were
promoted as Managers and were given increases
in their salaries, which were made to appear as
paid for by CyberOne PH. Mikrut made them
choose one from three options: (a) to take an
indefinite furlough and be placed in a manpower
pool to be recalled in case there is an available
position; (b) to stay with CyberOne AU but with an
entry level position; or (c) to tender their
irrevocable resignation.
Petitioners alleged that they were constrained to
pick the first option in order to save their jobs.
They later filed a case against respondents and
CyberOne AU for illegal dismissal; and claimed
for non-payment or underpayment of their
salaries and 13th month pay. CyberOne PH,
Mikrut and Juson denied that any employeremployee
relationship
existed
between
petitioners and CyberOne PH. They insisted that
petitioners were incorporators or directors and
not regular employees of CyberOne PH. They
claimed that petitioners were employees of
CyberOne AU. Should the doctrine of piercing the
corporate veil be applied in this case?
Gold Line Tours Inc. filed a third-party claim,
claiming that the levied tourist bus be returned to
it because it was its owner, it had not been made
a party to the case, and it was a corporation
entirely different from TTAI. Is Gold Line’s
contention, correct?
A: NO. Whenever necessary for the interest of the
public or for the protection of enforcement of their
rights, the notion of legal entity should not and is not
to be used to defeat public convenience, justify
wrong, protect fraud, or defend crime. There is
sufficient factual basis to find that Goldline and TTAI
were one and the same entity, specifically: (a)
documents submitted showing that Cheng, who
claimed to be the operator of TTAI, is also the
President/Manager and an incorporator of Gold Line;
and (b) Travel and Tours Advisers, Inc. had been
known in Sorsogon as Goldline.
A: NO, the application of the doctrine of piercing the
corporate veil is unwarranted in the present case.
No evidence was presented to prove that CyberOne
PH was organized for the purpose of defeating public
convenience or evading an existing obligation.
Petitioners failed to allege any fraudulent acts
committed by CyberOne PH to justify a wrong,
protect a fraud, or defend a crime. The mere fact that
CyberOne PH's major stockholders are CyberOne AU
and respondent Mikrut does not prove that CyberOne
PH was organized and controlled, and its affairs
conducted in a manner that made it merely an
instrumentality, agency, conduit or adjunct of
CyberOne AU.
The RTC was correct in finding that the two
companies are actually one and the same, hence the
levy for the bus in question was proper. The RTC thus
rightly ruled that Goldline might not be shielded from
liability under the final judgment through the use of
the doctrine of separate corporate identity. Truly,
this fiction of law could not be employed to defeat the
ends of justice. (Gold Line Tours, Inc. v. Heirs of Maria
Concepcion Lacsa, G.R. No. 159108, 18 June 2012)
Petitioners failed to prove that CyberOne AU and
Mikrut, acting as the Managing Director of both
corporations, had absolute control over CyberOne
PH. Even granting that CyberOne AU and Mikrut
exercised a certain degree of control over the
finances, policies, and practices of CyberOne PH,
Q: Gesolgon and Santos (Petitioners) alleged that
they were hired by Mikrut, the CEO of both
CyberOne AU and CyberOne PH (Respondents), as
part-time home-based remote Customer Service
UNIVERSITY OF SANTO TOMAS
2024 GOLDEN NOTES
14
COMMERCIAL LAW
such control does not necessarily warrant piercing
the veil of corporate fiction since there was not a
single proof that CyberOne PH was formed to
defraud petitioners or that CyberOne PH was guilty
of bad faith or fraud. Hence, the doctrine of piercing
the corporate veil cannot be applied in the instant
case. (Gesolgon v. CyberOne PH., Inc., G.R. No.
210741, 14 Oct. 2020)
3. The aforesaid control and breach of duty must
have proximately caused the injury or unjust
loss complained of. (Harm test)
INSTRUMENTALITY OR CONTROL TEST
This test requires that the subsidiary be completely
under the control and domination of the parent. It
examines the parent corporation’s relationship with
the subsidiary. It inquires whether a subsidiary
corporation is so organized and controlled and its
affairs are so conducted as to make it a mere
instrumentality or agent of the parent corporation
such that its separate existence as a distinct
corporate entity will be ignored. It seeks to establish
whether the subsidiary corporation has no
autonomy and the parent corporation, though
acting through the subsidiary in form and
appearance, “is operating the business directly for
itself.”
Circumstances which did NOT result to the
Piercing of the Corporate Veil
The mere fact that: (Fi-Co-S)
1. A corporation owns Fifty (50%) of the capital
stock of another corporation, or the majority
ownership of the stocks of a corporation is not
per se a cause for piercing the veil.
2. Two corporations have Common directors or
same or single stockholder who has all or
nearly all of the capital stock of both
corporations is not in itself sufficient ground to
disregard separate corporate entities.
FRAUD TEST
This test requires that the parent corporation’s
conduct in using the subsidiary corporation be
unjust, fraudulent, or wrongful. It examines the
relationship of the plaintiff to the corporation. It
recognizes that piercing is appropriate only if the
parent corporation uses the subsidiary in a way that
harms the plaintiff creditor. As such, it requires a
showing of “an element of injustice or fundamental
unfairness.”
3. There is a Substantial identity of the
incorporators of the two (2) corporations does
not necessarily imply fraud and does not
warrant piercing the corporate veil.
Three-pronged Test to Determine the
Application of the Alter Ego or Instrumentality
Theory (C-F-H)
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 transaction attacked so that the
corporate entity as to this transaction had at
the time no separate mind, will or existence of
its own (Instrumentality or Control test);
HARM TEST
This test requires the plaintiff to show that the
defendant’s control, exerted in a fraudulent, illegal,
or otherwise unfair manner toward it, caused the
harm suffered. A causal connection between the
fraudulent conduct committed through the
instrumentality of the subsidiary and the injury
suffered or the damage incurred by the plaintiff
should be established. The plaintiff must prove that,
unless the corporate veil is pierced, it would have
been treated unjustly by the defendant’s exercise of
control and improper use of the corporate form and,
thereby, suffer damages.
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 plaintiff’s legal right
(Fraud test); and
15
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
2024 GOLDEN NOTES
NOTE: Piercing the corporate veil based on the alter
ego theory requires the concurrence of the three
elements – (1) control, (2) fraud or fundamental
unfairness, and (3) harm or damage. The absence of
any of these elements prevents piercing the
corporate veil. (DBP v. Hydro Resources Contractors
Corp., G.R. Nos. 167603, 167561, & 167530, 13 Mar.
2013)
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;
Piercing the Veil of Corporate Fiction on the
Basis of Equity
Equity cases applying the piercing doctrine are what
are termed the "dumping ground," where no fraud
or alter ego circumstances can be culled by the
Court to warrant piercing.
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;
Specifically, the equity test can be applied when:
1. The corporate personality would be inconsistent
with the business purpose of the legal fiction;
11. The formal legal requirements of the subsidiary
are not observed. (PNB v. Ritratto Group, G.R. No.
142616, 13 July 2001)
2. The piercing the corporate fiction is necessary to
achieve justice or equity for those who deal in
good faith with the corporation; or
Piercing the Corporate Veil May Apply to Natural
Persons
3. The use of the separate juridical personality is
used to confuse legitimate issues.
1.
When the Corporation is the Alter Ego of a
Natural Person – the piercing of the corporate
veil may apply to corporations as well as
natural persons involved with corporations.
The "corporate mask may be lifted and the
corporate veil may be pierced when a
corporation is just but the alter ego of a person
or of another corporation."
2.
Reverse Piercing of the Corporate Veil – from
American parlance of what is called Reverse
Piercing or Reverse Corporate Piercing or
piercing the corporate veil "in reverse." As held
in the U.S. Case, C.F. Trust, Inc., v. First Flight
Limited Partnership, "in a traditional veilpiercing action, a court disregards the
existence of the corporate entity so a claimant
can reach the assets of a corporate insider. In a
reverse piercing action, however, the plaintiff
seeks to reach the assets of a corporation to
satisfy claims against a corporate insider.
Indications that a Subsidiary Corporation is a
Mere Instrumentality of its Parent Corporation
1. The parent corporation owns all or most of the
capital stock of the subsidiary;
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;
UNIVERSITY OF SANTO TOMAS
2024 GOLDEN NOTES
16
COMMERCIAL LAW
Reverse-piercing flows in the opposite
direction (of traditional corporate veilpiercing) and makes the corporation liable for
the debt of the shareholders." (IAM/E v. Litton
and Company Inc., G.R. No. 191525, 13 Dec.
2017)
or alter ego, of Y Corporation and that the fiction of
corporate entities, separate and distinct from each,
should be disregarded. (CIR v. Norton & Harrison
Company, G.R. No. L‐17618, 31 Aug. 1964)
NOTE: There is no hard and fast rule when to apply
the doctrines of separate legal entity and piercing
the veil of corporate fiction. Each case must be
judged based on its own particular circumstances.
The undeniable yardstick though is that lacking any
harm or injury to another, or in the absence of
abuse of the legal fiction of the corporation, the
doctrine of separate legal entity stands. (Divina,
2020)
Two (2) Types of Reverse Piercing
1.
Outsider reverse piercing occurs when a
party with a claim against an individual or
corporation attempts to be repaid with assets
of a corporation owned or substantially
controlled by the defendant.
2.
Insider reverse piercing occurs when the
controlling members will attempt to ignore the
corporate fiction in order to take advantage of
a benefit available to the corporation, such as
an interest in a lawsuit or protection of
personal assets. (IAM/E v. Litton and Company
Inc., supra)
Q: Plaintiffs filed a collection action against X
Corporation. Upon execution of the court's
decision, X Corporation was found to be without
assets. Thereafter, the plaintiffs filed an action
against its present and past stockholder, Y
Corporation, which owned substantially all of
the stocks of X corporation. The two
corporations have the same board of directors
and Y Corporation financed the operations of X
corporation. May Y Corporation be held liable
for the debts of X Corporation? Why? (2001
BAR)
A: YES. Y Corporation may be held liable for the
debts of X Corporation. The doctrine of piercing the
veil of corporation fiction applies to this case. The
two corporations have the same board of directors,
Y Corporation owns substantially all of the stocks of
X Corporation, and Y Corporation controls the
finances of X Corporation. These facts justify the
conclusion that the latter is merely an extension of
the personality of the former, and that the former
controls the policies of the latter. An overall
appraisal of the circumstances presented by the
facts of the case, yields to the conclusion that the X
Corporation is merely an adjunct, business conduit
17
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
2024 GOLDEN NOTES
Incorporator v. Corporator
Filipino Citizenship
GR: Filipino citizenship is not a requirement.
INCORPORATOR
CORPORATOR
Who are they
Those who compose a
corporation, whether
as stockholders or as
members.
Those stockholders or
members mentioned in A stockholder may or
the AOI as originally may
not
be
a
forming
and subscriber.
composing
the Subscribers
are
corporation and who persons who have
are signatories thereof. agreed to take and pay
for original, unissued
shares
of
a
corporation formed or
to be formed.
Signatory of the AOI
A signatory of the AOI.
XPN: When engaged in a business which is
wholly or partly-nationalized. In the case of
partly-nationalized, the requisite percentage of
Filipino stockholdings/membership must be
attained, and the Board of Directors/Trustees
must be to the same extent.
5. TRUST FUND DOCTRINE
Trust Fund Doctrine (2015, 2019 BAR)
The trust fund doctrine provides that subscriptions
to the capital stock of a corporation constitute a
fund to which the creditors have a right to look for
the satisfaction of their claims. (Ong v. Tiu, G.R. Nos.
144476 and 144629, 08 Apr 2003)
May or may not be
signatory of the AOI.
In a sense, they have to be unimpaired for the
protection of creditors. These cover the entire
consideration received for the issuance of no par
value shares or the aggregate amount for the par
value shares issued by the corporation. (Divina,
2020)
Effect upon the Sale of his Shares
Ceases to be a
corporator by sale of
his shares in case of
Does not cease to be an stock corporation.
incorporator upon sale
of his shares.
In case of a non-stock
corporation,
the
corporator ceases to
be a member.
Number of Incorporators/Corporators
GR: No limit.
Not more than 15.
Trust fund doctrine is not limited to the
stockholders’ subscriptions. The scope of the
doctrine when the corporation is insolvent
encompasses not only the capital stock, but also
other property 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. (Halley v. Printwell, Inc., G.R.
No. 157549, 30 May 2011)
XPN:
Close
corporations – not
more than a specified
number of persons,
not exceeding 20. (Sec.
95, RCC)
Effects of the Trust Fund Doctrine
NOTE: There must
only
be
one
stockholder in a One
Person Corporation.
UNIVERSITY OF SANTO TOMAS
2024 GOLDEN NOTES
1.
18
Dividends must never impair the subscribed
capital stock; (NTC v. CA, G.R. No. 127937, 28 July
1999)
COMMERCIAL LAW
2.
3.
Subscription commitments cannot be condoned
or remitted; (Ibid.)
Exceptions to the Trust Fund Doctrine
The Code allows the distribution of corporate
capital only in the instances of:
GR: The corporation cannot buy its own shares
using the subscribed capital as the
consideration therefor. (Ibid.)
1.
Amendment of the AOI to reduce authorized
capital stock;
2.
Purchase of redeemable shares by the
corporation regardless of existence of
unrestricted retained earnings; or
3.
Dissolution and eventual liquidation of the
corporation.
XPNs:
a.
b.
Redeemable shares may be acquired even
without surplus profit for as long as it will
not result to the insolvency of the
Corporation; (Republic Planters Bank v.
Hon. Agana, G.R. No. 51765, 03 Mar. 1997)
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; (Sec. 104,
RCC)
When Creditor is Allowed to Maintain an Action
Upon Unpaid Subscriptions
A corporate creditor cannot immediately invoke the
trust fund doctrine to proceed against unpaid
subscriptions of stockholders of the debtor
corporation except in these two (2) instances when
the creditor is allowed to maintain an action upon
any unpaid subscriptions based on the trust fund
doctrine:
c. In case of a close corporation, if the
directors or stockholders are so divided on
the management of the corporation’s
business and affairs that the votes required
for a corporate action cannot be obtained,
with the consequence that the business and
affairs of the corporation can no longer be
conducted to the advantage of the
stockholders generally, the SEC, upon
written petition by any stockholder, may
require the purchase at their fair value of
shares of any stockholder, either by the
corporation regardless of the availability of
unrestricted retained earnings in its books,
or by the other stockholders. (Sec. 103(d),
RCC)
4.
1.
Where the debtor corporation released the
subscriber to its capital stock from the
obligation of paying for their shares, in whole or
in part, without a valuable consideration, or
fraudulently, to the prejudice of creditors; and
2.
Where the debtor corporation is insolvent or
has been dissolved without providing for the
payment of its creditors. (Enano-Bote v. Alvarez,
G.R. No. 223572, 10 Nov. 2020)
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 v. Tiu, G.R.
No. 144476, 08 Apr. 2003)
19
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
2024 GOLDEN NOTES
purpose or purposes for which it was
organized, subject to the provisions of Title XII
of the RCC; (Sec. 86, RCC)
B. KINDS OF CORPORATION
1. STOCK CORPORATION
(Sec. 3)
4.
Membership in a non-stock corporation and all
rights arising therefrom are personal and nontransferable, unless the AOI or the bylaws
otherwise provide. (Sec. 89, RCC)
5.
The right of the members of any class or classes
to vote may be limited, broadened, or denied to
the extent specified in the AOI or the bylaws.
Unless so limited, broadened, or denied, each
member, regardless of class, shall be entitled to
one; (Sec. 88, RCC)
6.
The provisions of specific provisions of the RCC
to the contrary notwithstanding, non-stock, or
special corporations may, through their AOI or
their bylaws, designate their governing boards
by any name other than as board of trustees;
and (Sec. 174, RCC)
7.
The bylaws may provide that the members of a
non-stock corporation may hold their regular or
special meetings at any place even outside the
place where the principal office of the
corporation is located: Provided, That proper
notice is sent to all members indicating the date,
time and place of the meeting: Provided,
further, That the place of meeting shall be
within Philippine territory; (Sec. 92, RCC)
Stock Corporation
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 on the basis of the shares held.
2. NON-STOCK CORPORATION
(Secs. 86-87)
Non-Stock Corporation
One where no part of its income is distributable as
dividends to its members, trustees, or officers. Any
profit which it may obtain as an incident to its
operations shall whenever necessary or proper, be
used in furtherance of the purpose or purposes for
which it was organized. (Sec. 86, RCC)
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 Title XI of the RCC governing
particular classes of non-stock corporations. (Sec.
87, RCC)
Characteristics of Non-Stock Corporation
1.
It does not have capital stock divided into
shares;
2.
No part of its income during its existence is
distributable as dividends to its members,
trustees, or officers;
3.
Any profit which it obtains incidental to its
operations shall, whenever necessary or
proper, be used for the furtherance of the
UNIVERSITY OF SANTO TOMAS
2024 GOLDEN NOTES
20
COMMERCIAL LAW
Stock Corporation vs. Non-stock Corporation
STOCK CORPORATION
NON-STOCK CORPORATION
Existence of Capital Stock
No capital stock.
Has capital stock divided into shares. (Sec. 3, RCC)
Non-stock corporations only have contributions or
donations.
Purpose
Organized for profit.
Not organized for profit.
Distribution of Profit
Profits are distributed to the stockholders through
dividends. (Sec. 3, RCC)
Profits are not distributed to members. Any profit
earned by the non-stock corporation is used for the
furtherance of the purpose or purposes for which it
was organized. (Sec. 86, RCC)
Number of Directors or Trustees
May or may not be more than fifteen (15) (Sec. 91,
RCC)
One (1) in the case of OPC, two to fifteen (2-15) in the
case of Ordinary Stock Corporations. (Sec. 121, 13,
RCC)
XPN: Banks (in case of merger or consolidation)
which can have a maximum of 21 directors.
XPNs:
Non-stock educational institutions – not less than five
(5) nor more than fifteen (15): Provided, That the
number of trustees shall be in multiples of five (5).
(Sec. 106, RCC)
Religious Societies – not less than five (5) nor more
than fifteen (15) (Sec. 114, RCC)
Term of Office of the Board of Directors / Trustees
Term of one year until their successors are elected
and qualified, subject to the provisions of AOI and Bylaws. (Sec. 22, RCC)
Shall hold office for not more than three (3) years
until their successors are elected and qualified. (Sec.
22 and 91, RCC)
Election of Officers
Officers are elected by the BOD.
Unless otherwise provided in the AOI or the bylaws,
the members may directly elect officers of a nonstock corporation. (Sec. 91, RCC)
21
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
2024 GOLDEN NOTES
Place of Meeting
Stockholders’ or members’ meetings, whether
regular or special, shall be held in the principal office
of the corporation as set forth in the AOI, or, if not
practicable, in the city or municipality where the
principal office of the corporation is located. (Sec. 50,
RCC)
The bylaws may provide that the members of a nonstock corporation may hold their regular or special
meetings at any place even outside the place where
the principal office of the corporation is located:
Provided, That proper notice is sent to all members
indicating the date, time and place of the meeting:
Provided, further, That the place of meeting shall be
within Philippine territory. (Sec. 92, RCC)
Right to Vote
Stockholders can resort to cumulative voting. (Sec. 23,
RCC)
Only preferred and redeemable shares can be denied
the right to vote, but will still be entitled to vote in the
8 instances provided in Sec. 6.
Unless otherwise provided in the AOI or in the
bylaws, members of non-stock 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. (Sec. 23, RCC)
The right of the members of any class or classes to
vote may be limited, broadened, or denied to the
extent specified in the AOI or the bylaws. Unless so
limited, broadened, or denied, each member,
regardless of class, shall be entitled to one (1) vote.
(Sec. 88, RCC)
Transferability of Shares/ Membership
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 infact, or any other person legally authorized to make
the transfer. No transfer, however, shall be valid,
except as between the parties, until the transfer is
recorded in the books of the corporation 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. No shares of
stock against which the corporation holds any unpaid
claim shall be transferable in the books of the
corporation. (Sec. 62, RCC)
Membership in a non-stock corporation and all rights
arising therefrom are personal and non-transferable,
unless the AOI or the bylaws otherwise provide. (Sec.
89, RCC)
Right to Expel Members
Stockholders may be expelled only for grounds
provided by law.
UNIVERSITY OF SANTO TOMAS
2024 GOLDEN NOTES
Membership shall be terminated in the manner and
for the causes provided in the AOI or the bylaws.
Termination of membership shall extinguish all
rights of a member in the corporation or in its
property, unless otherwise provided in the AOI or the
bylaws. (Sec. 90, RCC)
22
COMMERCIAL LAW
Distribution of Assets in case of Dissolution
The assets of a non-stock corporation undergoing the
process of dissolution for reasons other than those
set forth in Sec. 139 of the RCC, shall be applied and
distributed as follows:
(a) All liabilities and obligations of the corporation
shall be paid, satisfied and discharged, or
adequate provision shall be made therefor;
(b) Assets held by the corporation upon a condition
requiring return, transfer or conveyance, and
which condition occurs by reason of the
dissolution, shall be returned, transferred or
conveyed in accordance with such requirements;
Assets of stock corporation shall be distributed in the
following order:
1.
Payment of claims of creditors who are not
stockholders (based on preference of credit);
2.
Payment of claims of stockholders as creditors;
3.
Residual balance is distributed proportionately
to preferred shares, if any, then to common
stock.
(c) Assets received and held by the corporation
subject to limitations permitting their use only
for charitable, religious, benevolent, educational
or similar purposes, but not held upon a
condition requiring return, transfer or
conveyance by reason of the dissolution, shall be
transferred or conveyed to one (1) or more
corporations, societies or organizations engaged
in activities in the Philippines substantially
similar to those of the dissolving corporation
according to a plan of distribution adopted
pursuant to the Chapter II, Title XI of the RCC,;
(d) Assets other than those mentioned in the
preceding paragraphs, if any, shall be distributed
in accordance with the provisions of the AOI or
the bylaws, to the extent that the AOI or the
bylaws determine the distributive rights of
members, or any class or classes of members, or
provide for distribution; and
(e) In any other case, assets may be distributed to
such persons, societies, organizations or
corporations, whether or not organized for
profit, as may be specified in a plan of
distribution adopted pursuant to Chapter II, Title
XI of the RCC. (Sec. 93, RCC)
23
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
2024 GOLDEN NOTES
Treatment of Profits
others, unless after having knowledge thereof,
the director promptly files his written objection
with the secretary of the corporation.
Since profits of non-stock corporations cannot be
distributed to the members, trustees, or officers,
such profits will form part of the income of the
corporation.
The income can be used to invest in shares of stock,
bonds and other securities provided that such
investments is used in furtherance of the purpose
for which the non-stock corporation was organized.
(Divina, 2021)
3. CLOSE CORPORATION
(Sec. 95)
6.
Pre-emptive right extends to all stocks issued,
including re-issuance of treasury shares,
whether for money or for property or personal
services, or in payment of corporate debts,
unless the AOI provides otherwise.
7.
Deadlocks in the board may be settled by the
SEC, on a written petition by any stockholder.
8.
A stockholder may withdraw for any reason and
avail himself of his right of appraisal when the
corporation has sufficient assets in its books to
cover its debts and liabilities exclusive of capital
stock. (Divina, 2020)
Characteristics of a Close Corporation
The principal characteristics of close corporations
are the following:
1.
Validity of Restrictions on Transfer of Shares
Restrictions on the right to transfer shares must:
The business of the corporation may be
managed by the stockholders of the corporation
rather than by a board of directors.
1.
However, the mere constitution of the
corporation as a close corporation does not
automatically make its stockholders the board
directors or allow the stockholders to directly
elect or appoint the corporation’s board
officers. It is imperative that such intention be
indicated in its AOI. (Marasigan v. Marasigan,
G.R. No. 261125, 26 Jul. 2023)
2.
If the corporation is classified as a close
corporation, a board resolution authorizing the
sale or mortgage of the corporate property is
not necessary to bind the corporation for the
action of its president.
3.
Quorum may be greater than a mere majority.
4.
Transfers of stocks to others which would
increase the number of stockholders to more
than the maximum are invalid.
5.
Corporate actions may be binding even without
a formal board meeting, if the director had
knowledge or ratified the informal action of the
UNIVERSITY OF SANTO TOMAS
2024 GOLDEN NOTES
Appear in:
a. The AOI;
b. The by-laws; and
c. The certificate of stock;
NOTE: Otherwise, the same shall not be binding
on any purchaser in good faith.
2.
Said restrictions shall not be more onerous than
granting the existing stockholders or the
corporation the option to purchase the shares
of the transferring stockholder with such
reasonable terms, conditions or period stated. 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)
NOTE: The above describes a right of first refusal.
24
COMMERCIAL LAW
Effects of Issuance or Transfer of Stock in Breach
of Qualifying Conditions
stockholders of the close corporation, or if the close
corporation has amended its AOI.
1.
NOTE: “Transfer” is not limited to a transfer for
value.
2.
3.
4.
If a stock of a close corporation is issued or
transferred to any person who is not eligible
thereof under any provision of the AOI, and if
the certificate for such stock conspicuously
shows the qualifications of the persons entitled
to be holders of record thereof, such person is
conclusively presumed to have notice of the fact
of the ineligibility to be a stockholder.
The provisions of Sec. 98 shall not impair any right
which the transferee may have to either rescind the
transfer or recover the stock under any express or
implied warranty. (Sec. 98, RCC)
Effects When Board Meeting is Unnecessary or
Improperly Held
If the AOI of a close corporation states the
number of persons, not exceeding twenty (20),
who are entitled to be stockholders of record,
and if the certificate for such stock
conspicuously states such number, and the
issuance or transfer of stock to any person
would cause the stock to be held by more than
such number of persons, the person to whom
such stock is issued or transferred is
conclusively presumed to have notice of this
fact.
Unless the by-laws provide otherwise, any action
taken by the directors of a close corporation without
a meeting called properly and with due notice shall
nevertheless be deemed valid if:
If a stock certificate of a close corporation
conspicuously shows a restriction on transfer of
the corporation’s stock and the transferee
acquires the stock in violation of such
restriction, the transferee is conclusively
presumed to have notice of the fact that the
stock was acquired in violation of the
restriction.
Whenever a person to whom stock of a close
corporation has been issued or transferred has,
or is conclusively presumed under this section
to have notice of: (1) the person’s ineligibility to
be a stockholder of the corporation, or (2) that
the transfer of stock would cause the stock of
the corporation to be held by more than the
number of persons permitted under its AOI; or
(3) that the transfer violates a restriction on
transfer of stock, and the corporation may, at its
option, refuse to register the transfer in the
name of the transferee.
1.
Before or after such action is taken, provided a
written consent thereto is signed by all the
directors;
2.
All the stockholders have actual or implied
knowledge of the action and make no prompt
objection in writing;
3.
The directors are accustomed to take informal
action with the express or implied
acquiescence of all the stockholders; or
4.
All the directors have express or implied
knowledge of the action in question and none
of them makes a prompt objection in writing.
(Sec. 100, RCC)
NOTE: An action within the corporate powers taken
at a meeting held without proper call or notice, is
deemed ratified by a director who failed to attend,
unless after having knowledge thereof, the director
promptly files his written objection with the
secretary of the corporation. (Ibid.)
Pre-Emptive Right in Close Corporations
The preemptive right of stockholders in close
corporations shall extend to all stock to be issued,
including reissuance of treasury shares, whether for
money, property, or personal services, or in
NOTE: The provisions under par. 4 shall not be
applicable if the transfer of stock, though contrary
to par. 1-3, has been consented to by all the
25
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
2024 GOLDEN NOTES
payment of corporate debts, unless the AOI provide
otherwise. (Sec. 101, RCC)
stockholders, officers, or other persons party to
the action;
Amendment of AOI
4.
Any amendment to the AOI which seeks to delete or
remove any provision required by this Title or to
reduce a quorum or voting requirement stated in
said AOI shall require the affirmative vote of at least
two-thirds (2/3) of the outstanding capital stock
(OCS), whether with or without voting rights, or of
such greater proportion of shares as may be
specifically provided in the AOI for amending,
deleting or removing any of the aforesaid
provisions, at a meeting duly called for the purpose.
(Sec. 102, RCC)
Requiring the purchase at their fair value of
shares of any stockholder, either by the
corporation regardless of the availability of
unrestricted retained earnings in its books, or
by the other stockholders;
5.
6.
7.
Appointing a provisional director;
Dissolving the corporation; or
Granting such other relief as the circumstances
may warrant. (Ibid.)
Provisional Director
A provisional director shall be an impartial person
who is neither a stockholder nor a creditor of the
corporation or any of its subsidiaries or affiliates,
and whose further qualifications, if any, may be
determined by the Commission. (Ibid.)
Power to Arbitrate in case of a Deadlock
Notwithstanding any contrary provision in the close
corporation’s AOI, bylaws, or stockholders’
agreement, if the directors or stockholders are so
divided on the management of the corporation’s
business and affairs that the votes required for a
corporate action cannot be obtained, with the
consequence that the business and affairs of the
corporation can no longer be conducted to the
advantage of the stockholders generally, the SEC,
upon written petition by any stockholder, shall have
the power to arbitrate the dispute. (Sec. 103, RCC)
A provisional director is not a receiver of the
corporation and does not have the title and powers
of a custodian or receiver. (Ibid.)
A provisional director shall have all the rights and
powers of a duly elected director, including the right
to be notified of and to vote at meetings of directors
until removed by order of the Commission or by all
the stockholders. (Ibid.)
Appropriate Orders of the SEC in case of
Deadlocks
Compensation of Provisional Director
In the exercise of its power to arbitrate in case of
deadlock, the SEC shall have authority to make
appropriate orders, such as:
1.
Cancelling or altering any provision contained
in the AOI, bylaws, or any stockholder’s
agreement;
2.
Cancelling, altering, or enjoining a resolution or
act of the corporation or its board of directors,
stockholders, or officers;
3.
Directing or prohibiting any act of the
corporation or its board of directors,
UNIVERSITY OF SANTO TOMAS
2024 GOLDEN NOTES
The compensation of the provisional director shall
be determined by agreement between such director
and the corporation, subject to approval of the
Commission, which may fix the compensation
absent an agreement or in the event of
disagreement between the provisional director and
the corporation. (Ibid.)
4. EDUCATIONAL CORPORATIONS
(Sec. 105)
Educational corporations are those organized for
educational
purposes,
particularly
the
establishment and maintenance of a school, college
or university. (Divina, 2021)
26
COMMERCIAL LAW
Organization of Educational Corporations
temporalities of such religious denomination, sect
or church. (Divina, 2021 citing Sec. 108, RCC)
Educational corporations may be organized as a
stock or nonstock corporation. These corporations
are governed by the general provisions of the RCC
and by special laws, such as R.A. No. 7798, otherwise
known as the Education Act of 1982, as amended.
(Divina, 2021)
Acquisition of Real Property if the presiding
bishop, priest, minister or rabbi is a foreigner
A corporation sole, regardless of the nationality of
the presiding bishop, priest, minster, rabbi or
presiding elder, may acquire real property in the
Philippines, Provided that at least 60% of the
members of such religious denomination are
Filipino citizens and the real property is necessary
and convenient for the lawful use of the corporation.
(Divina, 2021)
Number and Term of Trustees
The number of trustees in educational institutions
organized as nonstock corporations shall not be less
than five nor more than 15; Provided, that the
number of trustees shall be in multiples of five (5).
(Sec. 106, RCC)
RELIGIOUS SOCIETIES
Unless, otherwise provided in the AOI or bylaws, the
board of trustees of incorporated schools, colleges,
or other institutions of learning shall so classify
themselves that the term of office of one-fifth (1/5)
of their number shall expire every year. (Ibid.)
The following must be set forth in incorporating
religious societies:
For institutions organized as stock corporations, the
number and term of directors shall be governed by
the provisions on stock corporation. (Ibid.)
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 2/3 of its membership has given
written consent or has voted to incorporate, at
a duly convened meeting of the body;
3.
That the incorporation of the religious society
or religious order, or 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, or
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 5 nor
more than 15, elected by the religious society or
5. RELIGIOUS CORPORATIONS
(Secs. 107-108)
Religious Corporations may be incorporated by one
or more persons. Such corporations may be
classified as corporations sole or religious societies.
(Sec. 107, RCC)
These corporations are governed by Chapter II, Title
XIII of the RCC and by the general provisions on
nonstock corporations insofar as applicable. (Ibid.)
CORPORATION SOLE
A corporation sole is one formed by the chief
archbishop, bishop, priest, minister, rabbi, or other
presiding elder of a religious denomination, sect or
church. (Sec. 108, RCC)
It is formed for the purpose of administering and
managing, as trustee, the affairs, property and
27
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
2024 GOLDEN NOTES
religious order, or the dioceses, 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)
Corporation for the purpose of exercising such
profession except as otherwise provided under
special laws. (Ibid.)
Q: A single parent started a plant-based/vegan
meal delivery service during the COVID-19
pandemic using only the resources available in
the kitchen and in a nearby market. After just six
months, the single parent needed to expand by
hiring cooks, kitchen staff, and finance and
administrative personnel. A bank told the single
parent that it was ready to fund the small
business but the parent needed to be registered
with the proper government regulatory
agencies.
Number and Term of trustees
The trustees of religious societies shall not be less
than five (5) nor more than fifteen (15). Note,
however, that the term of these trustees can be one
(1) 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)
Friends advised the single parent that
registering as a single proprietorship would
make their personal assets vulnerable in case
the business takes a downturn. The single
parent now comes to you for legal advice,
wanting to have the limited liability of a
corporation but is unwilling to take in partners
in the business that would stifle their culinary
creativity.
6. ONE PERSON CORPORATION
(Sec. 115)
A One Person Corporation (OPC) is a corporation
with a single stockholder: Provided, that only a
natural person, trust, or an estate may form an OPC.
(Sec, 116, RCC)
In case of a natural person, the only requirement
under the RCC is that he/she must be of legal age.
There is no provision on any nationality
requirement. Thus, subject to the applicable
constitutional and statutory restrictions on foreign
participation in certain investment areas or
activities, a foreign natural person may organize an
OPC. (Divina, 2021 citing Sec. 15, SEC MC No. 7)
Under the Revised Corporation Code, is it legally
possible for the single parent to register as a
corporation with only the single parent as
stockholder? Explain briefly. (2020-21 BAR)
A: Yes. The Revised Corporation Code eliminated
the minimum number of incorporators for
corporations (Sec. 10, RCC). It also allows natural
persons, trust and estate to organize a corporation
with a single stockholder (Sec. 116, RCC). The law
makes no distinction as to the civil status of natural
persons who can organize a one person corporation.
Thus, a single parent may register as a corporation
with only himself/herself as stockholder.
EXCEPTED CORPORATIONS
The following are not allowed to incorporate as a
One Person Corporation: (B-P-T-I-P-Non)
1.
2.
3.
4.
5.
6.
Banks and quasi-banks;
Pre-need;
Trust;
Insurance;
Public and publicly listed companies; and
Non-chartered GOCCs. (Sec. 116, RCC)
Minimum Capital Stock Not Required
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)
Further, no portion of the authorized capital is
required to be paid at the time of the incorporation,
NOTE: A natural person who is licensed to exercise
a profession may not organize as a One Person
UNIVERSITY OF SANTO TOMAS
2024 GOLDEN NOTES
28
COMMERCIAL LAW
unless otherwise required by applicable laws or
regulations. (Divina, 2021)
Within fifteen (15) days from the issuance of its
certificate of incorporation, the One Person
Corporation shall appoint a treasurer, corporate
secretary, and other officers as it may deem
necessary, and notify the Commission thereof
within five (5) days from appointment. (Sec. 122,
RCC)
ARTICLES OF INCORPORATION
AND BY-LAWS
Contents of the AOI
The single stockholder may not be appointed as
corporate secretary. A single stockholder who is
likewise the self-appointed treasurer of the
corporation shall give a bond to the Commission in
such a sum as may be required. The bond shall be
renewed every two (2) years or as often as may be
required.
A One Person Corporation shall file AOI in
accordance with the requirements under Sec. 14 of
the RCC. It shall likewise substantially contain the
following:
1.
2.
If the single stockholder is a trust or an estate,
the name, nationality, and residence of the
trustee, administrator, executor, guardian,
conservator, custodian, or other person
exercising fiduciary duties together with the
proof of such authority to act on behalf of the
trust or estate; and
Provided, That, the said stockholder/treasurer shall
undertake in writing to faithfully administer the
One Person Corporation’s funds to be received as
treasurer, and to disburse and invest the same
according to the AOI as approved by the
Commission. (Ibid.)
Name, nationality, residence of the nominee
and alternate nominee, and the extent,
coverage, and limitation of the authority. (Sec.
118, RCC)
Nominee and Alternate Nominee
The single stockholder shall designate a nominee
and an alternate nominee who shall, in the event of
the single stockholder’s death or incapacity, take the
place of the single stockholder as director and shall
manage the corporation’s affairs.
By-Laws
The One Person Corporation is not required to
submit and file corporate bylaws. (Sec. 119, RCC)
The AOI shall state the names, residence addresses
and contact details of the nominee and alternate
nominee, as well as the extent and limitations of
their authority in managing the affairs of the One
Person Corporation.
Display of Corporate Name
A One Person Corporation shall indicate the letters
“OPC” either below or at the end of its corporate
name. (Sec. 120, RCC)
The written consent of the nominee and alternate
nominee shall be attached to the application for
incorporation. Such consent may be withdrawn in
writing any time before the death or incapacity of
the single stockholder. (Sec. 124, RCC)
CORPORATE STRUCTURE AND OFFICERS
Single Stockholder as Director, President
The single stockholder shall be the sole director and
president of the One Person Corporation. (Sec. 121,
RCC)
Term of Nominee and Alternate Nominee
1.
Treasurer, Corporate Secretary, and Other
Officers
29
When the incapacity of the single stockholder
is temporary – the nominee shall sit as director
and manage the affairs of the One Person
Corporation until the stockholder, by self-
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
2024 GOLDEN NOTES
determination, regains the capacity to assume
such duties.
2.
CONVERSION OF CORPORATION TO ONE
PERSON CORPORATIONS AND VICE-VERSA
In case of death or permanent incapacity of
the single stockholder – the nominee shall sit
as director and manage the affairs of the One
Person Corporation until the legal heirs of the
single stockholder have been lawfully
determined, and the heirs have designated one
of them or have agreed that the estate shall be
the single stockholder of the One Person
Corporation.
Conversion from an Ordinary Corporation to a
One Person Corporation
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 SEC
may require. If the application for conversion is
approved, the SEC shall issue a certificate of filing of
amended AOI reflecting the conversion.
The alternate nominee shall sit as director and
manage the One Person Corporation in case of the
nominee’s inability, incapacity, death, or refusal to
discharge the functions as director and manager of
the corporation, and only for the same term and
under the same conditions applicable to the
nominee. (Sec. 125, RCC)
The One Person Corporation 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)
Conversion from a One Person Corporation to an
Ordinary Stock Corporation
Change of Nominee or Alternate Nominee
The single stockholder may, at any time, change its
nominee and alternate nominee by submitting to
the SEC the names of the new nominees and their
corresponding written consent. For this purpose,
the AOI need not be amended. (Sec. 126, RCC)
A One Person Corporation may be converted into an
ordinary stock corporation after due notice to the
Commission of such fact and of the circumstances
leading to the conversion, and after compliance with
all other requirements for stock corporations under
this Code and applicable rules. Such notice shall be
filed with the Commission within sixty (60) days
from the occurrence of the circumstances leading to
the conversion into an ordinary stock corporation.
If all requirements have been complied with, the
Commission shall issue an amended certificate of
incorporation reflecting the conversion. (Sec. 132,
RCC)
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 One Person Corporation is
independent of the stockholder’s personal property,
the stockholder shall be jointly and severally liable
for the debts and other liabilities of the One Person
Corporation.
In case of death of the single stockholder, the
nominee or alternate nominee shall transfer the
shares to the duly designated legal heir or estate
within seven (7) days from receipt of either an
affidavit of heirship or self-adjudication executed by
a sole heir, or any other legal document declaring
the legal heirs of the single stockholder and notify
the Commission of the transfer. Within sixty (60)
days from the transfer of the shares, the legal heirs
shall notify the Commission of their decision to
either wind up and dissolve the One Person
The principle of piercing the corporate veil applies
with equal force to One Person Corporations as with
other corporations. (Sec. 130, RCC)
UNIVERSITY OF SANTO TOMAS
2024 GOLDEN NOTES
30
COMMERCIAL LAW
Corporation or convert it into an ordinary stock
corporation. (Ibid.)
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. (Ibid.)
3.
A natural person incorporator must be of legal
age;
4.
Each must own or subscribe to at least one (1)
share of the capital stock. (Sec. 10, RCC)
Q: Must all incorporators and directors be
residents of the Philippines? (2006 BAR)
7. HOLDING/PARENT AND SUBSIDIARY
CORPORATION
A: NO. The RCC has removed the residency
requirement. Thus, incorporators and directors do
not need to be residents of the Philippines
Holding Corporation – a corporation that holds
stocks in other companies for purposes of control
rather than for mere investment.
Subscription and Capital Requirements
Subsidiary Corporation – a company that is owned
or controlled by another company, called the parent
company.
Under the old law, at least 25% of the authorized
capital stock must be subscribed and at least 25% of
the subscribed capital should be paid at the time of
incorporation. However, Sec. 12, RCC provides that
stock corporations are no longer required to have a
minimum subscription and paid-up capital
requirement, except as otherwise provided by a
special law. (Divina, 2021)
Affiliates – two companies are affiliates when one
company owns less than the majority of the voting
stock of the other.
Parent Company – a corporation that owns enough
voting stock in another company to control
management and operation by influencing or
electing its board of directors. Companies that
operate under this management are deemed
subsidiaries of the parent company. (Divina, 2020)
NOTE: The 25%-25% rule, though not applicable in
incorporation, should still be complied with in case
of increase of capital stock.
Q: Sec. 11, Art. 12 of the 1987 Constitution
provides that “at least 60% of the ‘capital’ of
corporations engaged in public utility should be
owned by Filipinos.” What does the term
“capital” in the aforementioned provision refer
to?
C. INCORPORATION AND ORGANIZATION
1. NUMBER AND QUALIFICATIONS OF
INCORPORATORS
(Sec. 10)
A: The SC clarified that the term “capital” in Sec. 11,
Art. 12 of the 1987 Constitution refers to shares
with voting rights, as well as with full beneficial
ownership. This is precisely because the right to
vote in the election of directors, coupled with full
beneficial ownership of stocks, translates to
effective control of a corporation. (Divina, 2021
citing Roy III v. Herbosa, G.R. No. 207246, 22 Nov.
2016)
1. The RCC provides that any person, partnership,
association, or corporation, singly or jointly with
others;
NOTE: The word “singly” pertains to a One
Person Corporation, which may only be
incorporated by a natural person, trust, or
estate;
2. Incorporators must not be more than 15;
31
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
2024 GOLDEN NOTES
civilly and/or criminally liable under this Code and
other applicable laws and/or revoke the
registration of the corporation. (Sec. 17, RCC)
2. CORPORATE NAME
(Secs. 14 and 17-18)
Corporate Name
NOTE: A name is not distinguishable even if it
contains one or more of the following:
No corporate name shall be allowed by the
Commission if it is not distinguishable from that
already reserved or registered for the use of another
corporation, or if such name is already protected by
law, or when its use is contrary to existing law, rules
and regulations.
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.
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
NOTE: Priority of adoption determines the right to
the exclusive use of a corporate name with freedom
from infringement. Further, to determine whether a
given corporate name is “deceptively” or
“confusingly similar” with another entity’s
corporate name, the corporate names must be
evaluated in their entirety. (Lyceum of the
Philippines v. CA, G.R. No. 101897, 05 Mar. 1993)
(b)
Punctuations,
articles,
conjunctions,
contractions, prepositions, abbreviations, different
tenses, spacing, or number of the same word or
phrase.
The Commission, upon determination that the
corporate name is:
1.
Q: When may a corporation prohibit the use of a
corporate name by another corporation?
Not distinguishable from a name already
reserved or registered for the use of another
corporation;
2.
Already protected by law; or
3.
Contrary to law, rules and regulations, may
summarily order the corporation to
immediately cease and desist from using such
name and require the corporation to register a
new one. The Commission shall also cause the
removal of all visible signages, marks,
advertisements, labels, prints and other effects
bearing such corporate name. Upon the
approval of the new corporate name, the
Commission shall issue a certificate of
incorporation under the amended name.
A:
When the complainant corporation acquired a
prior right over the use of such corporate
name through earlier registration; and
2.
The proposed name is either: not
distinguishable from that already reserved or
registered for the use of the complainant
corporation; already protected by law or; its
use is contrary to existing law, rules, and
regulations. (Divina, 2021)
A Corporation that Changes its Corporate Name
is Not considered as a New Corporation
A corporation that changes its corporate name is not
considered as a new corporation. It is the same
corporation with a different name, and its character
is in no respect changed. (Republic Planters Bank v.
CA, G.R. No. 93073, 21 Dec. 1992; Zuellig Freight and
If the corporation fails to comply with the
Commission’s order, the Commission may hold the
corporation and its responsible directors or officers
in contempt and/or hold them administratively,
UNIVERSITY OF SANTO TOMAS
2024 GOLDEN NOTES
1.
32
COMMERCIAL LAW
Cargo Systems vs. NLRC, et al., G.R. No. 157900, 22 July
2013)
Corporation’s Commencement of Corporate
Existence and Juridical Personality
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.
NOTE: A corporation does not acquire legal
personality from the mere execution of AOI or its
filing with the SEC. (Divina, 2021)
3.
No extension may be made earlier than 3 years
prior to the original or subsequent expiry
date(s), unless there are justifiable reasons;
4.
Extension of corporate term shall take effect
only on the day following the original or
subsequent expiry date(s); and
5.
The extension or shortening of term is effective
only upon approval of the SEC.
Extension of Corporate Term
The period to extend corporate term should be
made within 3 years prior to the original or
subsequent expiry date(s) unless there are
justifiable reasons for an earlier extension as may
be determined by the SEC (Sec. 11, RCC)
A corporation created under a special law acquires
legal personality upon effectivity of the special law
creating it or compliance with the conditions
imposed by such law for the commencement of
corporate existence. (Ibid.)
NOTE: Extension of corporate term shall take effect
only on the day following the original or subsequent
expiry date(s). (Divina, 2021)
3. CAPITALIZATION
(Sec. 12)
Requisites for Extension or Shortening of
Corporate Term
Capital Stock Requirements
GR: Stock corporations shall not be required to have
a minimum capital stock. (Sec. 12, RCC)
1.
Amendment of articles of incorporation;
2.
The extension must be approved by at least the
majority of the board of directors and the
stockholders rep
resenting at least 2/3 of
the outstanding capital stock;
3.
No extension may be made earlier than 3 years
prior to the original or subsequent expiry
date(s), unless there are justifiable reasons;
4.
Extension of corporate term shall take effect
only on the day following the original or
subsequent expiry date(s); and
5.
The extension or shortening of term is effective
only upon approval of the SEC.
XPN: As otherwise specifically provided by special
law.
4. CORPORATE TERM
(Sec. 11)
A corporation shall have perpetual existence unless
its articles of incorporation provides otherwise.
Requisites for Extension or Shortening of
Corporate Term
1.
Amendment of articles of incorporation;
2.
The extension must be approved by at least the
majority of the board of directors and the
stockholders representing at least 2/3 of the
outstanding capital stock;
33
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
2024 GOLDEN NOTES
No Par Value Shares
These are shares having no stated par value in the
AOI.
5. CLASSIFICATION OF SHARES
(Secs. 6-9)
Kinds or Classifications of Shares
Shares of capital stock issued without par value
shall be deemed fully paid and nonassessable and
the holder of such shares shall not be liable to the
corporation or to its creditors in respect thereto
(Sec. 6, RCC).
1. Par value shares;
2. No par value shares;
3. Common shares;
4. Preferred shares;
5. Redeemable shares;
6. Treasury shares;
7. Founder’s share;
8. Voting shares;
9. Non-voting shares; and
10. Convertible shares;
Limitations on No Par Value Shares
1. The issued price of no-par value shares may be
fixed in the AOI or by the board of directors
pursuant to authority conferred by the AOI or
the bylaws, or if not so fixed, by the stockholders
representing at least a majority of the
outstanding capital stock at a meeting duly
called for the purpose provided that the issued
price of no-par value shares shall not be less
than P5.00. (Sec. 6 in relation to Sec. 61, RCC)
Who may Classify Shares
1. Incorporators – the classes and number of
shares which a corporation shall issue are first
determined by the incorporators as stated in the
AOI filed with the SEC;
2. 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, RCC) Banks,
trust, insurance, and pre-need companies, public
utilities, building and loan associations, and
other corporations authorized to obtain or
access funds from the public, whether publicly
listed or not, shall not be permitted to issue nopar value shares of stock. (ibid.)
2. Board of directors and stockholders – after the
corporation comes into existence, classification
of shares may be altered by the board of
directors and the stockholders by amending the
AOI pursuant to Sec. 15, RCC.
Watered Stocks
These are shares of stock issued for a consideration
lower than its par or issued value, or those issued
for a consideration other than cash, valued in excess
of its fair value. (Sec. 61, RCC)
NOTE: Preferred shares of stock may be issued
only with a stated par value.
Common Shares
NOTE: Selling of watered stocks is prohibited
because it will affect the fund of the corporation
intended to protect the creditors or the Trust Fund
Doctrine.
Common shares are the basic class of stock
ordinarily and usually issued without privileges or
advantages except that they cannot be denied the
right to vote. Owners are entitled to a pro-rata share
in the profits of the corporation and in its assets
upon dissolution and liquidation, and in the
management of its affairs. (Divina, 2020)
Sale of Treasury Shares
Treasury shares may be sold for a price below par
value, provided that such price is reasonable under
the circumstances as determined by the board of
directors.
UNIVERSITY OF SANTO TOMAS
2024 GOLDEN NOTES
34
COMMERCIAL LAW
Preferred Shares
Holders of Preferred Shares are Not Creditors of
the Corporation
Preferred shares are par-value shares given
preference in the distribution of dividends and in
the distribution of corporate assets in case of
liquidation, or such other preferences. The board of
directors, where authorized in the AOI, may fix the
terms and conditions of preferred shares of stock or
any series thereof: Provided, further, That such
terms and conditions shall be effective upon filing of
a certificate thereof with the SEC. . (Sec. 6, RCC)
Preferences granted to preferred stockholders do
not give them a lien upon the property of the
corporation nor make them creditors of the
corporation, the right of the former being always
subordinate to the latter. Dividends are thus
payable only when there are profits earned by the
corporation and as a general rule, even if there are
existing profits, the board of directors has the
discretion to determine whether or not dividends
are to be declared. Shareholders, both common and
preferred, are considered risk takers who invest
capital in the business and who can look only to
what is left after corporate debts and liabilities are
fully paid. (Republic Planters Bank v. Agana, Sr., G.R.
No. 51765, 03 Mar. 1997)
Kinds of Preferred Shares
1. As to Preference –
a.
b.
Preferred shares as to assets – gives the
holder preference in the distribution of the
assets of the corporation in case of
liquidation.
Common v. Preferred shares
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.
COMMON
SHARES
Definition
Stock
which
entitles the owner
to an equal pro
rata division of
profits.
2. As to Participation –
a.
b.
Participating preferred shares – entitled
to participate with the common shares in
excess distribution.
b.
Stock which entitles the
holder to some preference,
either in the dividends, or
in distribution of assets, or
both.
Value
Depends if it is a
par or no-par Par value.
value share.
Voting Rights
Non-participating preferred shares – not
entitled to participate with the common
shares in excess distribution.
3. As to Cumulation –
a.
PREFERRED SHARES
Usually
vested
with the exclusive
right to vote.
Cumulative preferred shares – if a
dividend is omitted in any year, it must be
made up in a later year before any dividend
may be paid on the common shares in the
later year.
May be deprived of voting
rights except in the
instances provided by law.
(Sec. 6, RCC)
Preference upon liquidation
No
advantage,
priority,
or
Has
preference
over
preference over
dividends/profits/
any
other
distribution of assets.
stockholder in the
same class.
Non-cumulative preferred shares – there
is no need to make up for undeclared
dividends.
35
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
2024 GOLDEN NOTES
Redeemable Shares
Q: Planters Bank issued preferred redeemable
shares with a feature that entitles them to be
preferred in the payment of dividends.
Subsequently, the bank experienced liquidity
problems. The Central Bank ruled that the bank
has a reserve deficiency. Despite the condition,
one of the stockholders holding the preferred
shares filed an action against the corporation to
redeem his shares and pay the dividends due.
Will the suit prosper?
These 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, and upon such other
terms and conditions stated in the AOI and the
certificate of stock representing the shares, subject
to rules and regulations issued by the Commission.
(Sec. 8, RCC)
A: NO. While redeemable shares may be redeemed
regardless of the existence of unrestricted retained
earnings, this is subject to the condition that the
corporation has, after such redemption, assets in its
books to cover debts and liabilities inclusive of
capital stock. Redemption, therefore, may not be
made where the corporation is insolvent or if such
redemption will cause insolvency or inability of the
corporation to meet its debts as they
mature. (Republic Planters Bank v. Judge Agana, G.R.
No. 51765, 03 Mar. 1997)
Kinds of Redeemable Shares
1. Mandatory – the issuing corporation must
redeem the shares after the expiration of a
stated period or when demanded by the holder;
provided that the corporation has sufficient
assets to pay for the shares or the redemption
will not bring about the insolvency of the
corporation.
2. Optional – the issuing corporation may or may
not redeem the shares after a stated period.
Reissuance of Redeemed Shares
If the terms of the preferred shares are silent, the
redemption is at the option of the corporation.
(Divina, 2020)
In the case of redeemable shares reacquired, the
same shall be considered retired and no longer
issuable, unless otherwise provided in the Articles
of Incorporation. (SEC-OGC Opinion 19-20 dated 17
May 2019, citing 1982 SEC Rules Governing
Redeemable and Treasury Shares)
Limitations on Redeemable Shares (A-T-V-I)
1.
The issuance of redeemable shares must be
expressly provided in the Articles of
incorporation.
2.
The Terms and conditions affecting said shares
must be stated both in the AOI and in the
certificates of stock.
3.
Redeemable shares may be deprived of Voting
rights in the AOI, unless otherwise provided in
the Code. (Sec. 6, RCC)
4.
Redemption may not be made where the
corporation is Insolvent or if such redemption
will cause insolvency or inability of the
corporation to meet its debts as they mature.
(Republic Planters Bank v. Agana, Sr., G.R. No.
51765, 03 Mar. 1997)
UNIVERSITY OF SANTO TOMAS
2024 GOLDEN NOTES
Treasury Shares
Shares that have been earlier issued and fully paid
for, but have been reacquired by the corporation
through purchase, donation, redemption or through
some other lawful means. (Sec. 9, RCC)
NOTE: 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 sold by the corporation at a price to
be fixed by the Board of Directors. (SEC-OGC Opinion
19-20 dated 17 May 2019, citing 1982 SEC Rules
Governing Redeemable and Treasury Shares)
36
COMMERCIAL LAW
Legitimate Purpose to Acquire Own Share
Treasury Shares Distributed via Dividends
1.
To collect or compromise unpaid indebtedness
to the corporation arising out of unpaid
subscription, in a delinquency sale, and to
purchase delinquent shares sold during said
sale;
2.
To eliminate fractional shares arising out of
stock dividends;
3.
To pay dissenting or withdrawing stockholders
entitled to payment for their shares under the
provisions of this Code;
4.
Redemption of Redeemable Shares; and
They can be distributed only as property dividends.
They cannot be declared as stock or cash dividends
because they are not considered part of earned or
surplus profits. The distribution of cash or stock
dividends out of treasury shares would be
converting the corporation into both a debtor and
creditor for the same amount at the same time or
requiring it to take money or stock from one of its
pockets and putting it in another, which is absurd.
Treasury shares may be declared as property
dividend to be issued out of the retained earnings
previously used to support their acquisition
provided that the amount of the said retained
earnings has not been subsequently impaired by
losses. (SEC Opinion, 17 July 1984)
5.
Purchase of Shares when ordered by the SEC
due to a deadlock in a Close corporation.
NOTE: Although a treasury share, not having been
retired by the corporation re-acquiring it, may be
re-issued or sold again, such share, as long as it is
held by the corporation as a treasury share,
participates neither in dividends, because dividends
cannot be declared by the corporation to itself, nor
in the meetings of the corporation as voting stock,
for otherwise equal distribution of voting powers
among stockholders will be effectively lost and the
directors will be able to perpetuate their control of
the corporation, though it still represents a paid-for
interest in the property of the corporation. (CIR v.
Manning, G.R. No. L-28398, 06 Aug. 1975)
Limitations on Treasury Shares
1.
It may be re-issued or sold again as long as it is
for a reasonable price fixed by the BOD;
2.
Cannot participate in dividends;
3.
It has no voting right as long as such remains in
the Treasury, hence cannot participate in
meetings as voting stocks; and
4.
The amount of unrestricted retained earnings
(URE) equivalent to the cost of treasury shares
being held shall be restricted from being
declared and issued as dividends.
Apart from reacquiring the shares through some
lawful means, the Corporation Code is also explicit
that while a corporation has the power to purchase
or acquire its own shares, the corporation must
have unrestricted retained earnings in its books to
cover the shares to be purchased or acquired. In
addition, in cases where the reason for reacquiring
the shares is because of the unpaid subscription, the
Corporation Code is likewise explicit that the
corporation must purchase the same during a
delinquency sale. (Salido, Jr. v. Aramaywan Metals
Development Corp., G.R. No. 233857, 18 Mar. 2021)
37
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
2024 GOLDEN NOTES
Voting Shares
TREASURY SHARES REDEEMABLE SHARES
Description
Shares so acquired
by the corporation
through purchase,
donation,
redemption, or any
other lawful means.
Shares with a right to vote on all corporate acts.
Usually refers to common shares, although the
corporation may also grant voting rights to
preferred shares under its AOI.
Issued
by
the
corporation
when
expressly so provided in
the AOI.
Non-Voting Shares
Shares without the right to vote. The law only
authorizes the denial of voting rights in the case of
redeemable shares and preferred shares, provided
that there shall always be a class or series of shares
which have complete voting rights (common
shares). (Sec. 6, RCC)
Manner of Acquisition
Can only be acquired
in the presence of
unrestricted
retained
earnings
(URE).
Redeemable shares may
be
acquired
even
without URE for as long
as it will not result in the
insolvency
of
the
corporation.
Instances when Holders of Non-voting Shares
are still entitled to Vote
Applicability of the Trust Fund Doctrine
Must comply with
the
trust
fund
doctrine.
These redeemable and preferred shares, when such
voting rights are denied, shall nevertheless be
entitled to vote on the following fundamental
matters: (A-A-S-I-I-M-I-D)
Is an exception to the
trust fund doctrine.
Effect of Redemption
Are not redeemable;
they may be reissued.
1.
While redeemable, they
are not re-issued, unless
otherwise provided.
2.
3.
Founders’ Shares
4.
5.
Shares classified as such in the AOI, and which may
be given certain rights and preferences not enjoyed
by the owner of other stocks. (Sec. 7, RCC)
6.
NOTE: Where the exclusive right to vote and be
voted for in the election of directors is granted, it
must be for a limited period not to exceed five (5)
years from the date of incorporation: Provided, That
such exclusive right shall not be allowed if its
exercise will violate Commonwealth Act No. 108,
otherwise known as the “Anti-Dummy Law”; R.A.
No. 7042, otherwise known as the “Foreign
Investments Act of 1991”; and other pertinent laws.
(Sec. 7, RCC)
UNIVERSITY OF SANTO TOMAS
2024 GOLDEN NOTES
7.
Amendment of articles of incorporation;
Adoption and amendment of By-laws;
Sale, Lease, Exchange, Mortgage, Pledge or
Other disposition (Sa-Le-M-P-O) of all or
substantially all of the corporate property;
Incurring, creating, or increasing bonded
Indebtedness;
Increase or decrease of capital stock;
Merger or consolidation of the corporation
with
another
corporation
or
other
corporations;
Investment of corporate funds in another
corporation or business in accordance with
this Code; and
Dissolution of the corporation. (Sec. 6, RCC)
NOTE: Except as provided in the foregoing eight (8)
instances, the vote required under the RCC to
approve a particular corporate act shall be deemed
to refer only to stocks with voting rights (Sec. 6, RCC)
38
COMMERCIAL LAW
Convertible Shares
Three-fold nature of AOI
A share that is changeable by the stockholder from
one class to another at a certain price and within a
certain period. (Divina, 2020)
An AOI, which stands as the corporate charter, is a
contract of three-fold nature because it is a contract
between:
Conversion of shares can only be effected if the
shares have a convertibility feature expressly
provided for in the corporation’s AOI. Further,
although the shares may have a convertible feature
in the AOI, their conversion is not automatic. An
amendment of the AOI is required to formalize the
conversion which must not result in the watering of
stock or issuance of stock in excess of the authorized
capital stock of the corporation. (SEC-OGC Opinion
No. 22-17, Re: Conversion of Common/Preferred
Shares into Redeemable Shares, 23 Nov. 2022)
1. The State and the corporation;
2. The corporation and the stockholders; and
3. The stockholders inter se.
Contents of the AOI
Other Kinds of Shares:
All corporations organized under the Code shall file
with the SEC an AOI in any of the official languages
duly signed and acknowledged or authenticated, in
such form and manner as may be allowed by the
Commission, containing substantially the following
matters, except as otherwise prescribed by the Code
or by special law: (Na-P- Pla-T-I-Num-A-S-O-N-O)
1.
Fractional Share – A fractional share is a share
of equity that is less than one full share.
1.
Name of corporation;
2.
2.
Shares in Escrow – A stock deposited with a
third person to be delivered to a stockholder or
his assign, after complying with certain
conditions, usually the full payment of
subscription or purchase price. (Divina, 2020)
Purpose/s, indicating the primary
secondary purposes (Purpose clause);
and
NOTE: The purpose clause determines
whether the acts performed by the
corporation are authorized or beyond its
powers. Acts beyond the corporation’s powers
are called ultra vires acts.
NOTE: The classification of shares, their
corresponding rights, privileges, or restrictions, and
their stated par value, if any, must be indicated in
the AOI. A corporation may further classify its
shares for the purpose of ensuring compliance with
constitutional or legal requirements. (Sec. 6, RCC)
6. ARTICLES OF INCORPORATION
(Secs. 13-15)
Articles of Incorporation
It is the document prepared by the incorporators
organizing a corporation containing the matters
required by the RCC. It offers the ultimate evidence
of the nature and purpose of a corporation. (Divina,
2021)
39
3.
Place of principal office;
4.
Term of existence (if the corporation has not
elected perpetual existence);
5.
Names, nationalities
Incorporators;
6.
Number of directors, which shall not be more
than 15 or the number of trustees which may
be more than 15;
7.
Names, nationalities, and residences of the
persons who shall Act as directors or trustees
until the first regular ones are elected and
qualified;
and
residences
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
of
2024 GOLDEN NOTES
8.
9.
If a Stock corporation, the amount of its
authorized capital stock, number of shares and
in case the shares are par value shares, the par
value of each share;
7. BY-LAWS
(Secs. 45-47)
By-laws are rules and regulations or private laws
enacted by the corporation to regulate, govern and
control its own actions, affairs and concerns and of
its stockholders or members and directors and
officers in relation thereto and among themselves in
their relation to it. (Sec. 23, RCC; Valley Golf &
Country Club, Inc. vs. Vda. De Caram, G.R. No. 158805,
16 Apr. 2009)
Names, nationalities, number of shares, and
the amounts subscribed and paid by each of
the Original subscribers;
10. If Non-stock, the amount of capital, the names,
residences, and amount paid by each
contributor;
By-laws are adopted either prior
incorporation or after incorporation
11. Other matters as are not inconsistent with law
and which the incorporators may deem
necessary and convenient. (Sec. 13, RCC)
to
Prior to Incorporation:
Importance of indicating the principal office in
the AOI
The principal office of a corporation determines its
residence or domicile. As such, the place indicated
in the corporation’s AOI becomes controlling in
determining the venue for the filing of legal action
involving the corporation.
1.
By-laws shall be approved and signed by the
incorporators; and
2.
By-laws
together
with
Articles
of
Incorporation shall be submitted to the
Securities and Exchange Commission. (Sec. 46,
RCC)
After Incorporation:
NOTE: The principal office of the corporation is
that which is stated in the AOI and NOT the place of
its actual operations. (Divina, 2021)
1.
Affirmative vote of stockholders representing
at least a majority of the outstanding capital
stock or at least a majority of the members in
case of nonstock corporations;
Those matters referring to accomplished facts,
except to correct mistakes, such as:
2.
By-laws shall be signed by stockholders or
members voting for them;
1.
2.
3.
By-laws shall be kept in the principal office of
the corporation subject to the inspection of the
stockholders or members during office hours
and;
4.
A copy thereof, duly certified by a majority of
the directors or trustees and countersigned by
the secretary of the corporation, shall be filed
with the SEC and attached to the original
articles of incorporation. (Sec. 45, RCC)
Non-amendable items in the AOI
3.
4.
5.
6.
7.
Name of incorporators;
Name of original subscribers to the capital
stock of the corporation and their subscribed
and paid-up capital;
Name of the original directors;
Treasurer elected by the original subscribers;
Members who contributed to the initial capital
of the non‐stock corporation; or
Witnesses to the execution of the AOI.
Notarial Certificate
UNIVERSITY OF SANTO TOMAS
2024 GOLDEN NOTES
40
COMMERCIAL LAW
Contents of the By-Laws
1.
Time, place and manner of calling and
conducting regular or special meetings of
directors or trustees.
2.
Time and manner of calling and conducting
regular or special meetings of the stockholder
or members.
3.
The required quorum in meeting of
stockholders or members and the manner of
voting therein.
4.
The modes by which a stockholder, member,
director, or trustee may attend meetings and
cast their votes;
5.
The form for proxies of stockholders and
members and the manner of voting them.
6.
NOTE: An arbitration agreement may be provided
in the AOI or by-laws of a corporation pursuant to
Sec. 181 of RCC. It may also be stipulated in the form
of a separate agreement. (Sec. 5, SEC Memorandum
Circular No. 08, 30 Sept. 2022)
Non-submission of By-laws
Non-filing of by-laws will not result in the automatic
dissolution of corporation. In actuality, one of SEC’s
documentary requirements for incorporation is the
by-laws of the proposed corporation. Nevertheless,
it is submitted that a corporation which has not
adopted by-laws, after incorporation, should be
considered a de facto corporation. It has all the
powers and privileges of a corporation under the
RCC until the State assails its existence in a direct
proceeding. (Sawadjaan v. CA, G.R. No. 141735, 08
June 2005)
NOTE: Section 46 of the old Corporation Code
provides that there is a 1-month period to adopt bylaws after corporation, but this has been removed
by the Revised Corporation Code. (Divina, 2021)
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;
Binding Effects of By-Laws
The following are the binding effects of by-laws:
1.
7.
Time for holding the annual election of
directors or trustees and the mode or manner
of giving notice thereof.
8.
Manner of election or appointment and the
term of office of all officers other than directors
or trustees.
As to members/ stockholders, officers,
trustees/ directors and corporation - They
are bound by and must comply with it. They
are presumed to know the provisions of the
by-laws.
2. As to third persons
GR: They are not bound.
9.
Penalties for violation of the by-laws.
XPN: They have knowledge or notice of the bylaws at the time the contract was executed.
(China Banking Corp. v. CA, G.R. No. 117604, 26
Mar. 1997)
10. In case of stock corporations, the manner of
issuing certificates.
11. Such other matters as may be necessary for the
proper or convenient transaction of its
corporate business and affairs for the
promotion of good governance and anti-graft
and corruption measures. (Sec. 46, RCC)
Q: When do by-laws become effective?
A: By-laws become effective only upon issuance to
the SEC of a certification that the by-laws are in
accordance with the RCC. (Sec. 45, RCC)
41
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
2024 GOLDEN NOTES
Ways of Amending, Repealing or Adopting New
By-laws:
1.
Amendment may be made by stockholders
together with the Board – by majority vote of
directors and owners of at least a majority of
the outstanding capital stock/members; or
2.
By the board only after due delegation by the
stockholders owning 2/3 of the outstanding
capital stock/members. Provided, that such
power delegated to the board shall be
considered as revoked whenever stockholders
owning at least majority of the outstanding
capital stock or members, shall vote at a
regular or special meeting. (Sec. 47, RCC)
9. DE FACTO CORPORATION
(Sec. 19)
De Facto Corporation is one organized with
colorable compliance with the requirements of a
valid law. Its existence cannot be inquired into
collaterally. Such inquiry must be by a direct attack
by the State through a quo warranto proceeding.
Requisites
1.
2.
NOTE: The filing of articles of incorporation
and the issuance of the certificate of
incorporation are essential for the existence of
a de facto corporation. (Seventh Day
Conference Church of Southern Phils., Inc. v.
Northeastern Mindanao Mission of Seventh
Day Adventist, Inc., G.R. No. 150416, 21 July
2006)
8. CORPORATE OFFICERS
(Sec. 24)
Immediately after their election, the directors of a
corporation must formally organize and elect:
a) A president, who must be a director;
b) A treasurer, who must be a resident;
c) A secretary, who must be a citizen and
resident of the Philippines; and
d) Such other officers as may be provided in
the by-laws.
3.
Actual use or exercise in good faith of
corporate powers.
10. CORPORATION BY ESTOPPEL
(Sec. 20)
NOTE: If the corporation is vested with public
interest, the board shall also elect a compliance
officer. The same person may hold two (2) or more
positions concurrently, 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.
It exists when two or more persons assume to act as
a corporation knowing it to be without authority to
do so. They are liable as general partners for all
debts, liabilities, and damages incurred or arising as
a result thereof: Provided, however, that when any
such ostensible corporation is sued on any
transaction entered by it as a corporation or on any
tort committed by it as such, it shall not be allowed
to use as a defense its lack of corporate personality.
(Sec. 20, RCC)
Who are authorized to Sign
The chairperson and president of a corporation may
sign the verification and certification without need
of board resolution. Moreover, lack of authority of a
corporate officer to undertake an action on behalf of
the corporation may be cured by ratification
through the subsequent issuance of a board
resolution.
(Jorgenetics Swine Improvement
Corporation v. Thin Agri-Products, Inc., G.R. No.
201044 & 222691, 05 May 2021)
UNIVERSITY OF SANTO TOMAS
2024 GOLDEN NOTES
There must be a valid law under which the
corporation can be made;
An attempt in good faith to incorporate under
such valid law; and
An unincorporated association, which represents
itself to be a corporation, will be estopped from
denying its corporate capacity in a suit against it by
a third person who relies in good faith on such
representation. (Macasaet, et. al. vs. Francisco Co, Jr.,
G.R. No. 156759, 05 June 2013)
42
COMMERCIAL LAW
NOTE: Where there is no third person involved and
the conflict arises only among those assuming the
form of a corporation, who therefore know that it
has not been registered, there is no corporation by
estoppel.
existence, are held liable as general partners. (Lim
Tong Lim vs. Phil. Fishing Gear Industries, Inc., G.R.
No. 136448, 03 Nov. 1999)
The Doctrine of Corporation by Estoppel Cannot
Override Jurisdictional Requirements
De Facto v. By Estoppel
Jurisdiction is fixed by law and is not subject to the
agreement of the parties. It cannot be acquired
through or waived, enlarged or diminished by any
act or omission of the parties, neither can it be
conferred by acquiescence of the court. (Lozano vs.
Delos Santos, G.R. No. 125221, 19 June 1997)
The Missionary Sisters is a corporation by estoppel,
not a de facto corporation. The filing of articles of
incorporation and the issuance of the certificate of
incorporation are essential for the existence of a de
facto corporation. In fine, it is the act of registration
with SEC through the issuance of a certificate of
incorporation that marks the beginning of an
entity's corporate existence.
Reverse Application of
Corporation by Estoppel
The Missionary Sisters filed its Articles of
Incorporation and by-laws on August 28, 2001.
However, the SEC issued the corresponding
Certificate of Incorporation only on August 31,
2001, two (2) days after Purificacion executed a
Deed of Donation on August 29, 2001. Clearly, at the
time the donation was made, The Missionary Sisters
cannot be considered a corporation de facto. Rather,
a review of the attendant circumstances reveals that
it calls for the application of the doctrine of
corporation by estoppel as provided for under
Section 21 of the RCC. (The Missionary Sisters of Our
Lady of Fatima v. Alzona, G.R. No. 224307, 06 Aug.
2018)
the
Doctrine
of
While the doctrine is generally applied to protect
the sanctity of dealing with the public, nothing
prevents its application in the reverse, in fact the
very wording of the law which set forth the doctrine
of corporation by estoppel permits such
interpretation. Such that a person who has assumed
an obligation in favor of a non-existent corporation,
having transacted with the latter as if it was duly
incorporated, is prevented from denying the
existence of the latter to avoid the enforcement of
the contract. (The Missionary Sisters of Our Lady of
Fatima, et al., vs. Alzona, et al., G.R. No. 224307, 06
August 2018)
Liability as General Partners
D. DIRECTORS, TRUSTESS AND OFFICERS
They are liable as general partners for all debts,
liabilities, and damages, incurred or arising as a
result thereof: Provided, however, that when any
such ostensible corporation is sued on any
transaction entered by it as a corporation or on any
tort committed by it as such, it shall not be allowed
to use as a defense its lack of corporate personality.
1. QUALIFICATIONS AND DISQUALIFICATIONS
(Secs. 22-26)
Common Qualifications of Directors and Trustee
The directors and trustees must have all the
qualifications provided under Sec. 22, in relation to
Secs. 10, 13, and 91, of the RCC as well as those
provided under the bylaws, and none of the
disqualifications under Sec. 26 of the RCC and the
bylaws. (Divina, 2020)
One who assumes an obligation to an ostensible
corporation as such, cannot resist performance
thereof on the ground that there was, in fact, no
corporation.
Those acting on behalf of a corporation and those
benefited by it, knowing it to be without valid
43
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
2024 GOLDEN NOTES
Below are the qualifications for directors or trustees
under the RCC:
1.
The director or trustee must be of legal age.
(Sec. 10, RCC)
2.
The director must own at least one (1) share of
stock of the corporation and the trustee must be
a member of the corporation, (Sec. 22, RCC),
except with respect to independent trustees of
nonstock corporations vested with public
interest. (Sec. 91, RCC)
c.
The foregoing is without prejudice to qualifications
or other disqualifications, which the SEC, 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. (Sec. 26,
RCC)
NOTE: A provision in the bylaws which allots a
permanent seat in the board to a non-member
of the association is contrary to law. Similarly,
the fact that said permanent seat was held for
fifteen (15) years cannot give rise to a vested
right and estoppel cannot forestall a challenge
against an act that is contrary to law. (Grace
Christian High School v. CA, et al., G.R. No.
108905, 23 Oct. 1997),
3.
Director must be a Stockholder
A person who does not own a stock at the time of his
election or appointment does not disqualify him as
director if he becomes a shareholder before
assuming the duties of his office. (SEC Opinions, 09
Nov. 1987 & 05 Apr. 1990)
Q: Is it necessary that the director be the owner
of the share of the corporation in his own right
to qualify as such director?
Trustees of educational institutions organized
as nonstock corporations or religious societies
shall not be less than five (5) nor more than
fifteen (15). However, with respect to
educational institutions, the number of trustees
shall only be in multiples of five (5). (Secs. 106
and 114, RCC)
A: In order 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, 04 Feb. 1992)
Similarly, when a director loses his legal title over
all his shares, he automatically forfeits his director
position. (Divina, 2020)
Disqualifications
On disqualification, the RCC expanded and qualified
the grounds such that a person shall be disqualified
from being a director, trustee or officer of any
corporation if, within five (5) years prior to the
election or appointment as such, the person was:
a.
Additional Qualifications Provided by the
Revised Code of Corporate Governance (RCCG)
A director should have the following: (C-P-M-P)
Convicted by final judgment:
1.
i. Of an offense punishable by imprisonment
for a period exceeding six (6) years;
ii. For violating the RCC; and
iii. For violating R.A. No. 8799, otherwise
known as “The Securities Regulation Code”;
2.
3.
4.
b.
Found administratively liable for any offense
involving fraudulent acts; and
UNIVERSITY OF SANTO TOMAS
2024 GOLDEN NOTES
By a foreign court or equivalent foreign
regulatory authority for acts, violations, or
misconduct similar to those enumerated in
paragraphs (a) and (b) above.
44
College education or equivalent academic
degree;
Practical understanding of the business of the
corporation;
Membership in good standing in relevant
industry,
business,
or
professional
organizations; and
Previous business experience. (Art. 3(D),
RCCG)
COMMERCIAL LAW
Q: John Gokongwei Jr., as stockholder of San
Miguel Corporation, filed with SEC a petition for
declaration of nullity of amended by-laws
against the majority of the members of the
Board of Directors and San Miguel Corporation.
Gokongwei claimed that prior to the questioned
amendment, he had all the qualifications to be a
director of the corporation, being a substantial
stockholder thereof, Gokongwei had acquired
rights inherent in stock ownership, such as the
rights to vote and to be voted upon in the
election of directors, and that in amending the
by-laws, Soriano, et. al. purposely provided for
Gokongwei's disqualification and deprived him
of his vested right as aforementioned, hence the
amended by-laws are null and void.
Disqualification of Foreigners
While foreigners are disqualified from being
elected/ appointed as corporate officers in wholly
or partially nationalized business activities, they are
allowed representation in the BOD or governing
body of said entities in proportion to allowable
foreign ownership, in no case more than the actual
percentage owned by foreigners. (Sec. 2-A, AntiDummy Law; Sec. 11, Art. XII, 1987 Constitution)
Q: Are directors or trustees required to be
residents of the Philippines?
A: The requirement of the OCC which provides that
a majority of the directors or trustees of all
corporations organized under this Code must be
residents of the Philippines was removed under the
RCC. As such, it is possible that a majority or even all
directors or trustees may be non-residents. (Divina,
2020)
Is a provision on the by-laws disqualifying a
person for a position in the board of directors on
the ground that he is engaged in a business
which competes with that of the Corporation
valid?
Q: Are directors or trustees required to be
Filipino citizens?
A: YES. A corporation is authorized to prescribe the
qualifications of its directors. A provision in the bylaws of the corporation that no person shall qualify
or be eligible for nomination for elections to the
board of directors if he is engaged in any business
which compete with that of the Corporation is valid;
provided, however, that before such nominee is
disqualified, he should be given due process to show
that he is covered by the disqualification. A director
stands in fiduciary relation to the corporation and
its stockholders. The disqualification of a
competitor from being elected to the board of
directors is a reasonable exercise of corporate
authority. Sound principles of corporate
management counsel against sharing sensitive
information with a director whose fiduciary duty to
loyalty may well require that he discloses this
information to a competitive rival. When a person
buys stock in a corporation, he does so with the
knowledge that its affairs are dominated by a
majority of the stockholders. (Gokongwei v. SEC, et
al., G.R. No. L-45911, 11 Apr. 1979)
A: Similar to the OCC, the RCC does not require
Filipino citizenship for the directors or trustees of a
corporation. However, if the corporation is engaged
in nationalized activities, citizenship becomes a
qualification. Foreigners cannot be appointed to the
board of corporations engaged in wholly
nationalized activities. For partly nationalized
activities, foreigners can be elected to the board of
directors in proportion to their foreign equity, as
allowed by law. (Divina, 2020)
Q: A Korean national joined a corporation and
was elected to the Board of Directors. To
complement its furniture manufacturing
business, the corporation also engaged in the
logging business. With the additional logging
activity, can the Korean national still be a
member of the Board of Directors? Explain
(2005 BAR)
A: YES. The Korean national can still be a member
of the Board of Directors as long as 60% of the Board
of Directors are Filipinos and there is at least 20%
foreign ownership justifying one (1) board seat for
45
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
2024 GOLDEN NOTES
a foreigner. Corporations that are 60% owned by
Filipinos can engage in the business of exploration,
development, and utilization of natural resources
(Sec. 2, Art. XII, 1987 Constitution). The election of
aliens as members of the Board of Directors
engaging in partially nationalized activities is
allowed in proportion to their allowable
participation or share in the capital of such entities
(Sec. 2-A, Anti-Dummy Law). There is also nothing in
the facts that shows that more than forty percent
(40%) of the Board of Directors are foreigners.
GR: It must be authorized in the by-laws or by a
majority of the Board of Directors.
XPN: 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.
2. The election must be by ballot, if requested by
any voting stockholder or member;
Independent Directors
3. The total number of votes cast by him must not
exceed the number of shares owned by him as
shown in the books of the corporation multiplied
by the whole number of directors to be elected;
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, RCC)
4. No delinquent stock shall vote or be voted for;
5. A stockholder cannot be deprived in the articles
of incorporation or in the by-laws of his statutory
right to use any of the methods of voting in the
election of directors;
Independent directors must be elected by the
shareholders present or entitled to vote in absentia
during the election of directors. Independent
directors shall be subject to rules and regulations
governing their qualifications, disqualifications,
voting requirements, duration of term and term
limit, the maximum number of board memberships,
and other requirements that the SEC will prescribe
to strengthen their independence and align with
international best practices. (Sec. 22, RCC)
6. The candidates receiving the highest number of
votes shall be declared elected. (Sec. 23, RCC)
Reportorial Requirement
Within 30 days after the election of directors,
trustees and officers of the corporation, the
secretary or any other officer of the corporation,
shall submit to the SEC, the names, nationality,
shareholdings, and residence addresses of the
directors, trustees and officers elected. (Sec. 25,
RCC)
2. ELECTIONS
(Secs. 23,25, and 91)
Q: In cases where there are 2 lists of BOD
submitted to the SEC, which one is controlling?
Requirements and Limitations for the Election
of Directors or Trustees during the Regular
Meeting of the Stockholders or Members
A: It is the list of directors in the latest general
information sheet as filed with the SEC which is
controlling. (Premium Marble Resources, Inc. v. CA,
G.R. No. 96551, 04 Nov. 1996)
1. Presence of Stockholders representing a
majority of the outstanding capital stock of the
corporation or majority of the members, either
in person or by proxy;
NOTE: Sec. 23 of the RCC provides new ways to vote
such as through remote communication or in
absentia.
UNIVERSITY OF SANTO TOMAS
2024 GOLDEN NOTES
46
COMMERCIAL LAW
Different Methods of Voting
1.
Straight Voting - every stockholder may vote
such number of shares for as many persons as
there are directors to be elected.
2.
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.
3.
of stock or membership represented at such
meeting and entitled to vote shall constitute a
quorum for purposes of conducting an election
under this section. (Sec. 25, RCC)
3. INDEPENDENT DIRECTORS
(Sec. 22)
An independent director is a person who, apart
from the shareholdings and fees received from the
corporation, is independent of the management and
free from any business or other relationship which
could reasonably be perceived to materially
interfere with the exercise of independent judgment
in carrying out the responsibilities as a director.
(Sec. 22, RCC)
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.
Requirement of Independent Directors
Q: What happens if no election was held, or the
owners of majority of the outstanding capital
stock or majority of the members entitled to
vote are not present?
The board of the following corporations vested with
public interest shall have independent directors
constituting at least 20% of the board: (Co-B-O)
1.
A: The meeting may be adjourned, and the outgoing
directors or trustee shall serve in a hold-over
capacity. (Sec.23, RCC)
Corporations covered by Sec. 17.2 of R.A. No.
8799, otherwise known as “The Securities
Regulation Code,” such as (Re-Li-Ass):
a.
The non-holding of elections and the reasons
therefor shall be reported to the SEC within 30 days
from the date of the scheduled election. The report
shall specify a new date for the election, which shall
not be later than 60 days from the scheduled date.
b.
c.
Corporations whose securities are
Registered with the Commission;
Corporations Listed with an exchange;
Public Companies; meaning, Corporations
with:
i. Assets of at least P50 million;
ii. Having 200 or more shareholders;
iii. Each shareholder holding at least 100
shares of a class of its equity shares.
If no new date has been designated, or if the
rescheduled election is likewise not held, the SEC
may, upon the application of a stockholder, member,
director or trustee, and after verification of the
unjustified non-holding of the election, summarily
order that an election be held. The SEC shall have
the power to issue such orders as may be
appropriate, including orders directing the issuance
of a notice stating the time and place of the election,
designated presiding officer, and the record date or
dates for the determination of stockholders or
members entitled to vote.
Notwithstanding any provision of the articles of
incorporation or bylaws to the contrary, the shares
47
2.
Banks, quasi-banks, Preneed, Insurance and
trust companies, Non-stock savings and loan
associations,
Pawnshops,
corporations
Engaged in money service business and other
Financial intermediaries; (B-P-I-N-P-E-F) and
3.
Other corporations engaged in business vested
with public interest similar to the above, as may
be determined by the Commission, after taking
into account relevant factors which are
germane to the objective and purpose of
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
2024 GOLDEN NOTES
requiring the election of independent director,
such as the extent of minority ownership, type
of financial products or securities issued or
offered to investors, public interest involved in
the nature of business operations, and other
analogous factors.
one (1) year under a hold-over capacity until their
successors are elected and qualified.
Term, Tenure, and Holdover Period
Term – time during which the officer may claim to
hold the office as a matter of right and fixes the
interval after which the several incumbents shall
succeed one another. The term of office is not
affected by the holdover. It is fixed by statute and
does not change simply because the office may have
become vacant, nor because the incumbent holds
office beyond his term when a successor has not
been elected.
Q: Two years since it began to operate, a
corporation has amassed assets valued at over
Php 60,000,000.00. It also has 250 shareholders,
each holding at least 150 shares. Under the
Revised Corporation Code, is the corporation
required to have an independent director?
Explain briefly. (2020-21 BAR)
A: Under Sec. 23 of the RCC, corporations vested
with public interest are required to have
independent directors in their Boards. Corporations
vested with public interest include public
companies as described under the Securities
Regulation Code.
Tenure – represents the term during which the
incumbent actually holds office. The tenure may be
shorter (or, in case of holdover, longer) than the
term for reasons within or beyond the power of the
incumbent.
Holdover Period – the time from the lapse of one
year from a member’s election to the Board and
until his successor’s election and qualification. It is
not part of the director’s original term of office, nor
is it a new term; the holdover period, however,
constitutes part of his tenure. (Valle Verde Country
Club v. Africa, G.R. No. 151969, 04 Sept. 2009
A public company is any corporation with class of
equity shares listed for trading on an exchange OR
with assets in excess of Php 50,000,000.00 and has
200 or more stockholders, at least 200 of which hold
at least 100 shares each. (Sec. 23, RCC)
Based on the facts provided, the corporation has
assets of more than P50 million with 250
shareholders, each one holding more than 100
shares each. Thus, being a public company, the
corporation is required to have independent
directors. (UPLC Commercial Law Suggested
Answers)
5. COMPENSATION
(Sec. 29)
GR: The directors or trustees shall not receive any
compensation in their capacity as such, except for
reasonable per diems. (Sec 29, RCC)
4. TERM, HOLDOVER, AND REMOVAL
(Secs. 22 and 27)
XPN:
1.
The by-laws authorizes the said compensation;
or
2.
The stockholders representing at least a
majority of the outstanding capital stock or a
majority of the members grant the directors or
trustees with compensation and approve the
amount thereof at a regular or special meeting
(Divina, 2021)
Term of Office
Directors shall be elected for a term of one (1) year
from among the holders of stocks registered in the
corporation’s books, while trustees shall be elected
for a term not exceeding three (3) years from among
the members of the corporation. (Sec. 22, RCC)
If no election is held, the directors and officers will
continue to occupy position even after the lapse of
UNIVERSITY OF SANTO TOMAS
2024 GOLDEN NOTES
NOTE: This rule is founded upon a presumption that
48
COMMERCIAL LAW
directors/trustees render service gratuitously, and
that the return upon their shares adequately
furnishes the motives for service, without
compensation. (Western Institute of Technology, Inc.,
et. al. v. Salas, et. al., G.R. No. 113032, 21 Aug. 1997)
c.
They render services in their capacity other
than as directors or trustees, even though the
payment of compensation is not authorized by
the bylaws or the stockholders. (Divina 2021)
Limitation on the Amount of Compensation of
Directors or Trustees
Q: “A” is the President of ABC Corporation, a
corporation vested with public interest while X
is a director and at the same time Vice Chairman
of the Board with executive functions. The
Compensation Committee of the Board of
Directors fixed their compensation package as
President and Vice Chairman, respectively. The
Board of Directors thereafter confirmed it.
When their compensation package was
reported to the stockholders during the regular
meeting, a stockholder representing minority
interest argues that the compensation is invalid
and irregular because it is not authorized in the
by-laws nor approved by the stockholders. Is he
correct?
In no case shall the total yearly compensation of
directors exceed 10% percent of the net income
before income tax of the corporation during the
preceding year. (Sec. 29, RCC)
NOTE: Unlike the OCC where the 10% limit applies
on the annual compensation of directors or trustees,
as such, the 10% percent limit under the RCC does
not make any such qualifications. It should,
therefore, apply to all forms of compensation for
services rendered by the directors or trustees to the
corporation in whatever capacity. (Divina, 2021)
Prohibition of Directors and Trustees in
Participating in the Determination of Per Diems
or Compensation
A: He is not correct. The Supreme Court held in
Western Institute of Technology, Inc., et al. v. Salas, et
al. (G.R. No. 113032, 21 Aug. 1997) that the above
proscription against the granting compensation to
the directors or trustees of a corporation is not a
sweeping rule. The said provision itself delimits the
scope of the prohibition to the compensation given
to the directors for the services which were
performed purely in their capacity as directors or
trustees. The members of the board may receive
compensation, in addition to reasonable per diems,
when they render services to the corporation in a
capacity other than as directors/trustees.
Directors or trustees shall not participate in the
determination of their own per diems or
compensation. (Sec. 29, RCC)
Requirement for Corporations Vested with
Public Interest
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. (Sec. 29, RCC)
In sum, there are, therefore, three (3) instances
when directors or trustees may receive
compensation, to wit:
a.
The bylaws authorizes the said compensation;
b.
The stockholders representing at least a
majority of the outstanding capital stock or a
majority of the members grant the directors or
trustees with compensation and approve the
amount thereof at a regular or special meeting;
or
6. VACANCY
(Secs. 28 and 25)
Ways of Filling up Vacancies
1.
Vacancies to be filled up by stockholders or
members: (E-R-O-R-I)
a.
b.
c.
49
Expiration of term;
Removal;
Grounds Other than removal or expiration
of term, where the remaining directors do
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
2024 GOLDEN NOTES
d.
e.
2.
not constitute a quorum for the purpose of
filling the vacancy;
If the vacancy may be filled by the
remaining directors or trustees but the
board Refers the matter to stockholders or
members; or
Increase in the number of directors.
meeting called for the purpose pursuant to Sec. 28
of the RCC. (Divina, 2021)
Creation of Emergency Board
EMERGENCY BOARD
(Sec. 28, RCC)
When to Call for an Emergency Board
Vacancies filled up by members of the board Any vacancy occurring in the board of directors
or trustees other than by removal or by
expiration of term may be filled by the vote of at
least a majority of the remaining directors or
trustees, if still constituting a quorum. (Sec. 28,
RCC)
When the vacancy prevents the remaining
directors from constituting a quorum and
emergency action is required to prevent grave,
substantial, and irreparable loss or damage to
the corporation.
Who may Fill the Vacancy
It may be temporarily filled from among the
officers of the corporation.
NOTE: The phrase “may be filled” in Sec 28 of the
RCC indicates that the filling of vacancies in the
board by the remaining directors constituting a
quorum is merely permissive. Corporations may
choose how vacancies in their boards may be filled
up, either by the remaining directors or trustees
constituting a quorum or by the stockholders or
members, unless a specific mode if provided in the
bylaws.
Voting Requirement
He will be elected by a UNANIMOUS vote of the
remaining directors or trustees.
Limitations and Cessation
It shall be limited to the emergency action
necessary, and term shall cease within:
(a) Reasonable time from the termination of the
emergency action; or
(b) Upon election of the replacement director
or trustee, whichever comes earlier.
Term of Replacement Director
A director elected to fill a vacancy shall serve the
unexpired term of the predecessor in office. (Sec. 28,
RCC)
Reportorial Requirement
The corporation must notify the SEC within
three (3) days from the creation of the
emergency board, stating therein the reason for
its creation.
Vacancy Caused by Resignation of Director in
Hold-Over Position
Period of Filling Vacancies
Q: Who should fill the vacancy due to the
resignation of a holdover director?
WHEN VACANCY SHOULD BE FILLED
Term Expiration
A: In the case of Valle Verde Country Club, Inc., et al.
vs. Africa (G.R. No. 151969, 04 Sept. 2009), the
Supreme Court ruled the resignation as a hold-over
director will not change the nature of the cause of
the vacancy which is due to the expiration of
director's term. The term of a hold-over director has
expired. The hold-over period is not part of his term.
So, the cause of the vacancy is not resignation but
the expiration of term. As such, the vacancy must be
filled by the stockholders in a regular or special
UNIVERSITY OF SANTO TOMAS
2024 GOLDEN NOTES
No later than the day of such expiration at a
meeting called for the purpose. (Sec. 28, RCC)
Removal
May be on the same day the meeting authorizing
the removal; provided this fact is stated in the
agenda and notice of said meeting. (ibid.)
Other Cases
45 days from the time the vacancy arose. (ibid.)
50
COMMERCIAL LAW
7. VOTING REQUIREMENTS
Requirements and Limitations for the Election
of Directors or Trustees
1.
Presence of stockholders representing a
majority of the outstanding capital stock of the
corporation or majority of the members, either
in person or by proxy;
NOTE: Sec. 23 of the RCC also provides for
voting through remote communication or in
absentia. When so authorized in the bylaws or by
a majority of the board of directors,
2.
3.
4.
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
c.
distribute them on the same principle
among as many candidates as may be
seen fit: Provided, That the total number
of votes cast by him must not exceed the
number of shares owned by him as shown
in the books of the corporation multiplied
by the whole number of directors to be
elected;
Except when the exclusive right is reserved for
holders of founders’ shares under Sec. 7 of the
RCC, 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. (Sec.
24, RCC)
Q: In case where there are two (2) sets of
persons claiming to be the Board of Directors,
which one is controlling?
A: It is the Board of Directors as reported to the SEC
through the filing of a general information sheet.
By the express mandate of the Corporation Code
(Sec. 26) (now Sec. 25, RCC), all corporations duly
organized pursuant thereto are required to submit
within the period therein stated (30 days) to the SEC
the names, nationalities and residences of the
directors, trustees and officers elected. Evidently,
the objective sought to be achieved by Sec. 26 is to
give the public information, under sanction of oath
of responsible officers, of the nature of business,
financial condition and operational status of the
company together with information on its key
officers or managers so that those dealing with it
and those who intend to do business with it may
know or have the means of knowing facts
concerning the corporation’s financial resources
and business responsibility. (Premium Marble
Resources, Inc. v. CA, G.R. No. 96551, 04 Nov. 1996)
The said stockholder may:
b.
6.
Within 30 days after the election of directors,
trustees and officers of the corporation, the
secretary, or any other officer of the corporation,
shall submit to the Commission the names,
nationality, shareholdings, and residence addresses
of the directors, trustees and officers elected. (Sec.
25, RCC)
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;
vote such number of shares for as many
persons as there are directors to be
elected;
No delinquent stock shall vote or be voted for;
and
Reportorial Requirement
The right to vote through such modes (remote
communication or in absentia) may be
exercised in corporations vested with public
interest notwithstanding the absence of a
provision in the bylaws of such corporations
The election must be by ballot, if requested by
any voting stockholder or member;
a.
5.
Q: At the annual meeting of ABC Corporation for
the election of five directors as provided for in
its articles of incorporation, A, B, C, D, E, F and G
51
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
2024 GOLDEN NOTES
were nominated. A, B, C, D and E received the
highest number of votes and were proclaimed
elected. F received ten votes less than E.
number of directors to be elected and distribute
the same among as many candidates as he shall
see fit. (Sec. 23, RCC)
Subsequently, E sold all his shares to F. In the
next Board of Directors’ meeting following the
transfer of the shares in the books of the
corporation, both E and F appeared. E claimed
that notwithstanding the sale of his shares to F,
he remained a director since the Corporation
Code provides that directors “shall hold office
for 1 year and until their successors are elected
and qualified.” On the other hand, F claimed that
since he would have been elected as a director
had it not been for E’s nomination and election,
then he (F) should now be considered a director
as he had acquired all the shares of E. Decide
with reasons. (1984 BAR)
EXAMPLE: A owns 100 shares of stock in ABC Corp.
There are ten (10) directors to be elected. A has in
his power to cast 1,000 votes.
A: Neither E nor F are directors of ABC Corporation.
E automatically ceased to be a director upon the
transfer of all his shares to F in the books of the
corporation. Every director must own at least one
share of the capital stock of the corporation of which
he is a director, which share shall stand in his name
on the books of the corporation. Any director who
ceases to be the owner of at least one share of the
capital stock of the corporation of which he is a
director shall thereby cease to be a director. F’s
claims are without merit since he was not duly
elected as a director at the stockholders’ meeting.
Only the candidates receiving the highest number of
votes shall be declared elected.
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, unless otherwise provided in the AOI or
in the bylaws.
1.
Straight voting: A may give 100 votes for each
candidate.
2.
Cumulative voting for one candidate: A may
give 1,000 votes to one preferred candidate.
3.
Cumulative voting by distribution: A may
give 500 votes each to two candidates.
Cumulative Voting in Stock vs. Non-stock
Cumulative voting is mandatory in stock
corporations to protect the rights of minority
stockholders. Through cumulative voting, the
minority stockholders are given an opportunity to
cumulate their shares to improve the chance of
getting a seat in the board of directors. (Divina,
2020)
Report in case of Non-Holding of Elections
Methods of Voting
1.
Straight voting – every stockholder may vote
such number of shares for as many persons as
there are directors to be elected.
2.
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.
3.
Cumulative voting by distribution – a
stockholder may cumulate his shares by
multiplying the number of his shares by the
UNIVERSITY OF SANTO TOMAS
2024 GOLDEN NOTES
52
1.
Within 30 days from the date of the scheduled
election. The report shall specify a new date for
the election, which shall not be later than 60
days from the scheduled date. (Sec. 25, RCC)
2.
Should a director, trustee or officer die, resign
or in any manner cease to hold office, the
secretary, or the director, trustee or officer of
the corporation, shall, within seven (7) days
from knowledge thereof, report in writing such
fact to the Commission.
COMMERCIAL LAW
Summary Order of Commission
corporation to limit or deny the right to vote of any
of its members. (Mary Lim v. Moldex Land, Inc., G.R.
No. 206038, 25 Jan. 2017)
If:
1.
2.
No new date has been designated, or
The rescheduled election is likewise not held
AOI as Basis in Determining Quorum
When the stock and transfer book is inaccurate and
deficient, it cannot be the sole basis of determining
the shareholdings for purposes of quorum. The AOI
may be used as a basis in determining the
shareholdings.
The Commission, may, upon the application of the
stockholder, member, director, or trustee, and after
verification of the unjustified non-holding of the
election, summarily order that an election be held.
The Commission shall have the power to issue
orders as may be appropriate, including orders:
1.
2.
3.
To base the computation of quorum solely on the
obviously deficient, if not inaccurate stock and
transfer book, and completely disregarding the
issued and outstanding shares as indicated in the
articles of incorporation would work injustice to the
owners and/or successors in interest of the said
shares. This case is one instance where resorting to
documents other than the stock and transfer books
is necessary. The stock and transfer book of PMMSI
cannot be used as the sole basis for determining the
quorum as it does not reflect the totality of shares
which have been subscribed, more so when the
articles of incorporation show a significantly larger
amount of shares issued and outstanding as
compared to that listed in the stock and transfer
book. (Lanuza, et al. v. CA, et al., G.R. No. 131394, 28
Mar. 2005)
Directing the issuance of a notice stating the
time and place of election;
The designated presiding officer; and
The record date or dates for the determination
of stockholders or members entitled to vote.
(Sec. 25, RCC)
NOTE: Notwithstanding any provision of the AOI or
bylaws to the contrary, the shares of stock or
membership represented at such meeting and
entitled to vote shall constitute a quorum for
purposes of conducting an election under this
section.
Quorum Required in a Stock or Non-stock
Corporation
8. DUTIES AND LIABILITIES
Unless otherwise provided in this Code or in the
bylaws, a quorum shall consist of the stockholders
representing a majority of the outstanding capital
stock or a majority of the members in the case of
nonstock corporations. (Sec. 51, RCC)
SOLIDARY LIABILITIES FOR DAMAGES
Liability For Official Acts
GR: The officers of a corporation are not personally
liable for their official acts.
For stock corporations, the quorum is based on
the number of outstanding voting stocks while for
non-stock corporations, only those who are actual,
living members with voting rights shall be counted in
determining the existence of a quorum. To be clear,
the basis in determining the presence of quorum in
non-stock corporations is the numerical equivalent
of all members who are entitled to vote, unless some
other basis is provided by the By-Laws of the
corporation. The qualification "with voting rights"
simply recognizes the power of a non-stock
XPNs: The officers may be held liable if it is shown
that they exceeded their authority.
In the following instances, the directors/ trustees
may be held personally liable for damages:
1.
53
When they willfully and knowingly vote for or
assent to patently unlawful acts of the
corporation;
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
2024 GOLDEN NOTES
2.
Shangri-La’s default. It claims that Shangri-La
misrepresented that it had funds to pay for its
obligations with BF Corporation. The latter
eventually completed the construction of the
buildings. Shangri-La took possession of the
same while still owing BF Corporation an
outstanding balance.
When they are guilty of gross negligence or bad
faith in directing the affairs of the corporation;
NOTE: Bad faith or negligence is a question of
fact. Bad faith does not simply mean bad
judgment or negligence. It imparts a dishonest
purpose or some moral obliquity and conscious
doing of wrong. It means breach of a known
duty through some motive or interest or ill-will;
it partakes of the nature of fraud. (Ford Phils.,
Inc., et al. v. CA, G.R. No. 99039, 03 Feb. 1997)
3.
When they acquire any personal or pecuniary
interest in conflict with their duty as such
directors or trustees; (Sec. 30, RCC)
4.
When they consent to the issuance of watered
stocks or who, having knowledge thereof, does
not forthwith file with the corporate secretary
his written objection thereto; (Sec, 64, RCC)
5.
When they are made, by a specific provision of
law, to personally answer for their corporate
action; (Sec. 144, CC; Sec.13, P.D. 115; Uichico v.
NLRC, G.R. No. 121434, 02 June 1997)
6.
When they agree to hold themselves personally
and solidarily liable with the corporation; or
(Tramat Mercantile, Inc. vs. CA, G.R. No. 111008,
07 Nov. 1994) or
7.
When the corporate fiction is used to defeat
public convenience, justify wrong, protect
fraud, or defend crime. (Carag v. NLRC, G.R. No.
147590, 02 Apr. 2007)
Shangri-La’s BoD based their defense on the
separate personality given to juridical persons
vis-à-vis their directors, officers, stockholders,
and agents. Since they did not sign the
arbitration agreement in any capacity, they
cannot be forced to submit to the jurisdiction of
the Arbitration Tribunal in accordance with the
arbitration agreement. The Arbitral Tribunal
rendered a decision, finding that BF Corporation
failed to prove the existence of circumstances
that render Shangri-La and the other directors
solidarily liable. It ruled that Shangri-La’s Board
of Directors is not liable for the contractual
obligations of Shangri-La to BF Corporation.
Are Shangri-La’s directors liable for the
contractual obligations of Shangri-La to BF
Corporation?
A: NO. Indeed, as petitioners point out, their
personalities as directors of Shangri-La are separate
and distinct from Shangri-La. A corporation is an
artificial entity created by fiction of law. This means
that while it is not a person, naturally, the law gives
it a distinct personality and treats it as such. A
corporation, in the legal sense, is an individual with
a personality that is distinct and separate from
other persons including its stockholders, officers,
directors, representatives, and other juridical
entities. (Lanuza, Jr. v. BF Corporation, G.R. No.
174938, 01 Oct. 2014)
NOTE: When the officers of the corporation
exceeded their authority, their actions are not
binding upon the corporation unless ratified by the
corporation or is estopped from disclaiming them.
(Reyes v. RCPI Credit Employees Union, G.R. No.
146535, 18 Aug. 2006)
Participation in Arbitration
As a general rule, a corporation’s representative
who did not personally bind himself or herself to an
arbitration agreement cannot be forced to
participate in arbitration proceedings made
pursuant to an agreement entered into by the
corporation. However, there are instances when the
distinction between personalities of directors,
Q: BF Corporation, in a collection complaint filed
against Shangri-La and its Board of Directors,
alleged that Shangri-La induced BF Corporation
to continue with the construction of the
buildings using its own funds and credit despite
UNIVERSITY OF SANTO TOMAS
2024 GOLDEN NOTES
54
COMMERCIAL LAW
officers, and representatives, and of the
corporation, are disregarded. This is known as
piercing the veil of corporate fiction.
2.
Hence, when the directors are impleaded in a case
against a corporation, alleging malice or bad faith on
their part in directing the affairs of the corporation,
complainants are effectively alleging that the
directors and the corporation are not acting as
separate entities. They are alleging that the acts or
omissions by the corporation that violated their
rights are also the directors' acts or omissions. They
are alleging that contracts executed by the
corporation are contracts executed by the directors.
Complainants effectively pray that the corporate
veil be pierced because the cause of action between
the corporation and the directors is the same.
NOTE: The fact that the corporation ceased
operations the day after the promulgation of the SC
resolution finding the corporation liable does not
prove bad faith on the part of the incorporator of the
corporation. (Polymer Rubber Corp. v. Ang
Salamuding, G.R. No. 185160, 24 July 2013)
Q: Rana and Burgos are the President and
General Manager of SKILLEX. The latter entered
into a service contract with Robinsons Land
Corporation. Halfway through the service
contract, Skillex asked the respondentsemployees Seva, et al. to execute individual
contracts which stipulated that their respective
employments shall end at the last day of the
year. Skillex and Robinsons no longer extended
their
contract
of
janitorial
services.
Consequently, Skillex dismissed Seva, et al. as
they were project employees whose duration of
employment was dependent on the former's
service contract with Robinsons. Seva, et al. filed
a complaint for illegal dismissal with the NLRC.
Should Rana and Burgos be held solidarily liable
with the corporation for respondentsemployees’ monetary claims against the
corporation?
In that case, complainants have no choice but to
institute only one proceeding against the parties.
Under the Rules of Court, filing of multiple suits for
a single cause of action is prohibited. Institution of
more than one suit for the same cause of action
constitutes splitting the cause of action, which is a
ground for the dismissal of the others (Lanuza, Jr. v.
BF Corporation, ibid.)
NOTE: However, the aforementioned ruling does
not overturn Heirs of Augusto Salas Jr. v. Laperal
Realty Corporation, et al. (G.R. No. 135362, 13 Dec.
1999) wherein the court affirmed the basic
arbitration principle that only parties to an
arbitration agreement may be compelled to submit
to arbitration.
A: NO. Seva, et al. failed to show the existence of the
first requisite. They did not specifically allege in
their complaint that Rana and Burgos willfully and
knowingly assented to petitioner’s patently
unlawful act of forcing the respondents to sign the
dubious employment contracts in exchange for their
salaries. The respondents also failed to prove that
Rana and Burgos had been guilty of gross negligence
or bad faith in directing the affairs of the
corporation.
Requisites for Holding Directors or Officers
Personally Liable:
Before a director or officer of a corporation can be
held personally liable for corporate obligations, the
following requisites must concur:
1.
The complainant must clearly and convincingly
prove such unlawful acts, negligence, or bad
faith. (Heirs of Fe Tan Uy v. International
Exchange Bank, G.R. No. 166282, G.R. No.
166283, 13 Feb. 2013)
The complainant must allege in the complaint
that the director or officer assented to patently
unlawful acts of the corporation, or that the
officer was guilty of gross negligence or bad
faith; and
To hold an officer personally liable for the debts of
the corporation, and thus pierce the veil of
corporate fiction, it is necessary to clearly and
convincingly establish the bad faith or wrongdoing
of such officer, since bad faith is never presumed.
55
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
2024 GOLDEN NOTES
(FVR Skills and Services Exponents, Inc. [SKILLEX], et.
Al. v. Seva, et al., G.R. No. 200857, 22 Oct. 2014)
Liability of
Employees
Q: LMN Corporation hired X as Assistant Stage
Manager under a four-month contract on board
a vessel. While on board, X started to feel back
pains after he moved several boxes. As the pain
persisted, X was sent to an orthopedic doctor
where he was initially assessed to have lumbar
disc
disorder.
The
company-designated
physician issued a medical report declaring X
partially and permanently disabled with Grade
8 Impediment. Unsatisfied, X consulted another
doctor who declared him as permanently and
totally disabled. Thereafter, X informed LMN
Corporation of the findings of his doctor and
requested that his case be referred to a third
doctor. However, since LMN Corporation
ignored his request, X filed a complaint for
payment of total and permanent disability
benefits. LMN Corporation contended that only
those with Grade 1 disability assessment are
entitled to full disability compensation, thus X
was not entitled to the benefits under POEA
Standard employment contract.
Without any evidence of bad faith or malice,
directors may not be held personally liable. Only
when the termination is done with malice or in bad
faith on the part of the director may the director be
held solidarily liable with the corporation.
(Equitable Banking Corporation vs. NLRC, G.R. No.
02467, 13 June 1997; Rolando DS Torres v. Rural
Bank of San Juan, Inc., et al., G.R. No. 184520, 13 Mar.
2013)
for
Termination
of
Q: Rivera was employed by Genesis Transport
Service, Inc. (Genesis) as a bus conductor. He
acknowledged in his Position Paper before the
Labor Arbiter that he was dismissed by Genesis
on account of a discrepancy in the amount he
declared on bus ticket receipts. Genesis gave
him a Memorandum to explain within twentyfour (24) hours why he should not be sanctioned
for reporting and remitting the amount of
P198.00 instead of the admittedly correct
amount of P394 worth of bus ticket receipts.
Rivera responded that it was an honest mistake,
which he was unable to correct “because the bus
encountered mechanical problems.” Despite
Rivera’s explanations, his employment was
terminated through a written notice. Rivera
filed a complaint for illegal dismissal against
Genesis and Riza Moises, the General Manager
and President of Genesis. Should Riza Moises be
solidarily liable with Genesis?
Can a corporate officer who entered a contract
on behalf of a corporation be held solidarily
liable with the corporation?
A: YES. Generally, corporate directors, trustees, or
officers who entered into contracts on behalf of the
corporation cannot be personally held liable for the
liabilities of the latter. However, their personal
liability may validly attach when they are
specifically made by a particular provision of law.
A: NO. As a rule, corporate directors and officers are
not liable for the illegal termination of a
corporation’s employees. It is only when they acted
in bad faith or with malice that they became
solidarily liable with the corporation. Rivera, in this
case, has not produced proof to show that Moises
acted in bad faith or with malice as regards the
termination of his employment. Thus, she did not
incur any personal liability. (Rivera v. Genesis
Transport Service, Inc., G.R. No. 215568, 03 Aug.
2015)
Here, R.A. No. 8042 expressly provides for joint and
solidary liability of corporate directors and officers
with the recruitment/placement agency for all
money claims or damages that may be awarded to
OFWs.
Thus, the owner of LMN Corporation, is solidarily
liable with the latter for X’s partial and permanent
disability benefits. (United Philippines Lines, Inc. v.
Alkuino, Jr., G.R. No. 245960, 14 July 2021)
UNIVERSITY OF SANTO TOMAS
2024 GOLDEN NOTES
Director
Q: Jacob and Fernandez are STI officers, the
former being the President and CEO and the
latter as the Senior VP. Ico was hired as Faculty
56
COMMERCIAL LAW
Member by STI College Makati, Inc., a whollyowned subsidiary of STI. Ico was subsequently
promoted as Dean of STI College-Parañaque
and, thereafter, as COO of STI-Makati. However,
after the merger between STI and STI College
Makati (Inc.), Ico received a memorandum
cancelling her COO assignment, citing the
management’s decision to undertake an
"organizational restructuring" in line with the
merger, and further ordering Ico to turn over
her work to one Victoria Luz, who shall function
as STI-Makati’s School Administrator.
lesser than its par value or issued value (no par
value) or for a consideration other than cash, valued
in excess of its fair value. (Sec. 64, RCC)
A director or trustee who:
1.
2.
3.
Based on a report, it was recommended that an
investigation committee be formed to
investigate Ico for grave abuse of authority,
falsification, gross dishonesty, maligning and
causing intrigues, and other charges. The LA
found Ico to have been illegally, constructively
and in bad faith, dismissed by STI, Jacob and
Fernandez. On appeal, the NLRC reversed the
ruling of the LA. CA affirmed the ruling of the
NLRC. Is Jacob, as the President and CEO of STI,
solidarily liable with STI?
Consents to the issuance of stocks for a
consideration less than its par or issued value;
Consents to the issuance of stocks for a
consideration other than cash, valued in excess
of its fair value; or
Having knowledge of the insufficient
consideration, does not file a written objection
with corporate secretary
Shall be liable to the corporation or its creditors,
solidarily with the stockholder concerned for the
difference between the value received at the
issuance of the stock and the par or issued value of
the same. (Sec. 64, RCC)
NOTE: The prohibition to issue “watered stock”
refers only to the original issue of stocks (primary
issuance) but not to a subsequent transfer of such
stocks by the corporation (secondary market or
transaction). Furthermore, it is legal for a company
to issue shares at a premium or over the par value
as stated in its AOI, and for the subscribers of a
corporation to pay more than the par value of the
shares they subscribed as there is no law, rule or
regulation that prohibits the same. (SEC Opinion No.
22-12, 27 Sept. 2022)
A: NO. The Court fails to discern any bad faith or
negligence on the part of respondent Jacob. The
principal character that figures prominently in this
case is Fernandez; he alone relentlessly caused
petitioner’s hardships and suffering. He alone is
guilty of persecuting petitioner. His superior, Jacob,
may have been, for the most part, clueless of what
Fernandez was doing to petitioner. A corporation,
as a juridical entity, may act only through its
directors, officers, and employees. Obligations
incurred as a result of the directors’ and officers’
acts as corporate agents, are not their personal
liability but the direct responsibility of the
corporation they represent. As a rule, they are only
solidarily liable with the corporation for the illegal
termination of services of employees if they acted
with malice or bad faith. (Girly Ico v. STI, Inc., et al.,
G.R. No. 185100, 09 July 2014)
Liability for Attempting to Acquire Adverse
Interest on Confidential Matters
When a director, trustee, or officer attempts to
acquire or acquires, in violation of his duty, any
interest adverse to the corporation in respect of any
matter which has been reposed in him in
confidence, as to which equity imposes a disability
upon him to deal in his own behalf, he shall be liable
as a trustee for the corporation and must account
for the profits which otherwise would have accrued
to the corporation. (Sec. 30, RCC)
Liability of Directors for Issuance of Watered
Stocks
NOTE: Private or secret profits obtained must be
accounted for, even though the transaction on
which they are made is advantageous or is not
A watered stock is a stock issued in exchange for
cash, property, share, stock dividends, or services
57
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
2024 GOLDEN NOTES
harmful to the corporation, or even though the
director/ trustee or officer acted without intent to
injure the corporation.
shareholders and directors of Morning Star be
jointly and severally liable with Morning Star?
A: NO. Under Sec. 31 of the Corporation Code (now
Sec. 30, RCC), Directors or trustees who willfully and
knowingly vote for or assent to patently unlawful
acts of the corporation or who are guilty of gross
negligence or bad faith in directing the affairs of the
corporation or acquire any personal or pecuniary
interest in conflict with their duty as such directors
or trustees shall be liable jointly and severally for all
damages resulting therefrom suffered by the
corporation, its stockholders or members and other
persons.
NOTE: The members of the board of directors who
approved the payment of the cash dividends despite
the insolvency of the corporation and the
stockholders who received the payment should
make good the losses. (Steinberg v. Velasco, G.R. No.
L-30460, 12 Mar. 1929)
Q: International Air Transport Association
(IATA) and Morning Star entered a Passenger
Sales Agency Agreement such that the latter
must report all air transport ticket sales to the
former and account all payments received
through the centralized system called Billing
and Settlement Plan. IATA obtained a Credit
Insurance policy from Pioneer to assure itself of
payments by accredited travel agents for tickets
sales and monies due to the airline companies
under the Billing and Settlement Plan.
The mere fact that Morning Star has been incurring
huge losses and that it has no assets at the time it
contracted large financial obligations to IATA,
cannot be considered that its officers, Estelita Co
Wong, Benny H. Wong, Arsenio Chua, Sonny Chua
and Wong Yan Tak, acted in bad faith or such
circumstance would amount to fraud, warranting
personal and solidary liability of its corporate
officers.
The policy was made known to Morning Star,
through its President, Benny Wong, who was
among those that declared itself liable to
indemnify Pioneer for any and all claims under
the policy. Morning Star had an accrued billing
of P49,021,641.80 and US$325,865.35 for the
period from 16 Dec. 2002 to 31 Dec. 2002. It
failed to remit these amounts through the
Billing and Settlement Plan.
Piercing the corporate veil in order to hold
corporate officers personally liable for the
corporation’s debts requires that "the bad faith or
wrongdoing of the director must be established
clearly, and convincingly as bad faith is never
presumed. (Pioneer Insurance v. Morning Star Travel
and Tours, G.R. No. 198436, 08 July 2015)
IATA demanded from Pioneer the sums of
P109,728,051.00
and
US$457,834.14
representing Morning Star’s overdue account as
of 30 Apr. 2003. Pioneer investigated,
ascertained, and validated the claims, then paid
IATA the amounts of P100,479,171.59 and
US$457.834.14.
Consequently,
Pioneer
demanded these amounts from Morning Star
through a letter. IATA executed a Release of
Claim and Subrogation Receipt in favor of
Pioneer.
PERSONAL LIABILITIES
Instances when Personal Liability may Attach to
Directors, Trustees, or Officers of the
Corporation:
Pioneer filed a Complaint for Collection of Sum
of Money and Damages against Morning Star and
its shareholders and directors. Should the
UNIVERSITY OF SANTO TOMAS
2024 GOLDEN NOTES
58
1.
Knowingly voting for or assenting to patently
unlawful acts of the corporation;
2.
Gross negligence or bad faith in directing the
affairs of the corporation;
3.
Acquiring any personal or pecuniary interest
in conflict with his duty as director or trustee
or officer resulting in damage to the
corporation;
COMMERCIAL LAW
Liability of Officers Under Trust Receipts Law
4.
He consents to the issuance of watered stocks
or who, having knowledge thereof, does not
forthwith file with the corporate secretary his
written objection thereto;
5.
He agrees to hold himself personally liable
with the corporation; and
6.
He is made, by a specific provision of law, to
personally answer for the corporation’s action.
(Divina, 2021)
The Trust Receipts Law (P.D. 115) recognizes the
impossibility of imposing the penalty of
imprisonment on a corporation. Hence, if the
entrustee is a corporation, the law makes the
officers or employees or other persons responsible
for the offense liable to suffer the penalty of
imprisonment. (Ong v. CA, G.R. No. 119858, 29 Apr.
2003)
Though the entrustee is a corporation, nevertheless,
the law specifically makes the officers, employees or
other persons responsible for the offense, without
prejudice to the civil liabilities of such corporation
and or board of directors, officers, or other officials
or employees responsible for the offense. The
rationale is that such officers or employees are
vested with the authority and responsibility to
devise means necessary to ensure compliance with
the law and, if they fail to do so, are held criminally
accountable; thus, they have a responsible share in
the violations of the law. (Ching v. the Secretary of
Justice, et al., G.R. No. 164317, 06 Feb. 2006)
RESPONSIBILITY FOR CRIMES
Responsibility for Crimes
Where a law requires a corporation to do a
particular act, failure of which on the part of the
responsible officer to do so constitutes an offense,
the responsible officer is criminally liable, therefore.
The reason is that a corporation can act through its
officers and agents and where the business itself
involves a violation of law all who participate in it
are liable. While the corporation may be fined for
such criminal offense if the law so provides, only the
responsible corporate officer can be imprisoned.
(People v. Tan Boon Kong, G.R. No. L-35262, 15 Mar.
1930)
A trust receipt transaction imposes upon the
entrustee the obligation to deliver to the entruster
the price of the sale, or if the merchandise is not
sold, to return the same to the entruster. There are
two obligations in a trust receipt transaction: the
first, refers to money received under the obligation
involving the duty to turn it over to the owner of the
merchandise sold, while the second refers to
merchandise received under the obligation to
"return" it to the owner. A violation of any of these
undertakings constitutes estafa defined under Art.
315 (1) (b) of the RPC, as provided by Sec. 13 of P.D.
115.
However, a director or officer can be held liable for
a criminal offense only when there is a specific
provision of law making a particular officer liable
because being a corporate officer by itself is not
enough to hold him criminally liable.
Those with the power to prevent the illegal act can
be made criminally liable. Thus, to be held
criminally liable for the acts of a corporation, there
must be showing that its officers, directors, and
shareholders actively participated in or had the
power to prevent the wrongful act. (Securities and
Exchange Commission v. Price Richardson Corp., et
al., G.R. No. 197032, 26 July 2017; as cited in Divina,
2021)
Although these pieces of evidence show that Choa
signed the Trust Receipt Agreements, they do not
show that he signed them in his personal capacity.
Without any evidence that respondent personally
bound himself to the debts of the company he
represented, this Court cannot hold him civilly
liable under the Trust Receipt Agreements. (BDO
Unibank, Inc. v. Choa, G.R. No. 237553, 10 July 2019)
59
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
2024 GOLDEN NOTES
replacing the board members upon expiration of
their term or vote for their removal under Sec. 27 of
the RCC or file a derivative suit on behalf of the
corporation to set aside the board’s wrongful acts
but not to supplant the board’s business judgment
for their own. (Divina, 2022)
9. DOCTRINE OF CENTRALIZED MANAGEMENT
GR: The Doctrine of Centralized Management
states that all corporate powers are exercised by
the BOD or BOT. (Sec. 23, CC)
The Board is the body which:
1.
2.
3.
Save for the authority granted to them by law and
the bylaws, stockholders cannot exercise corporate
powers and have no management rights. In the
absence of gross negligence or bad faith, the board
may not even be held liable for mistakes or errors in
directing the affairs of the corporation. (Divina,
2020)
Exercises all powers provided for under the
Corporation Code;
Conducts all Business of the corporation; and
Controls and holds all the properties of the
corporation (Sec 23, CC [RCC, Sec 22])
XPN: The doctrine is not applicable to the
following instances:
XPNs: The doctrine cannot be invoked:
1.
When the act is unconscionable and
oppressive as to amount to wanton
destruction to the rights of the minority; (Ong
v Tiu, G.R. No. 144476, 18 Apr. 2003)
2.
When there is bad faith or gross negligence by
the directors; (Republic Communications Inc. v.
CA, G.R. No. 135074, 29 Jan. 1999)
3.
To declare dividends when there is no surplus
profit or to declare dividends out of reappraisal surplus; (Divina, 2020)
Questions of policy or management are left solely to
the honest decision of officers and directors of a
corporation and the courts are without authority to
substitute their judgment for the judgment of the
board of directors. The board is the business
manager of the corporation and so long as it acts in
good faith, its orders are not reviewable by the
courts or the SEC. (Montelibano v. Bacolod-Murcia
Milling Co., G.R. No. L-15092, 18 May 1962; Phil. Stock
Exchange, Inc. v. CA, G.R. No. 125469, 27 Oct. 1997)
4.
To pay compensation to directors, as the
power is lodged with the stockholders; (Ibid.)
5.
To support a request for a new stock and
transfer book on the pretext that the original is
lost (when in fact it is not) and declare entries
in the supposed lost stock and transfer book as
invalid. (Ibid., citing Provident International
Resources v. Venus, G.R. No. 167041, 17 June
2008)
Similarly, under the same business judgment rule,
stockholders cannot interfere with the board in
conducting the business affairs of the corporation.
They cannot, for instance, revoke resolutions of the
board or repudiate their acts on account of mere
disagreement. If the stockholders are not satisfied
with the way the board exercises its powers or
manages the corporation, their remedies consist of
Interference of Third Parties, Including the SEC,
in the Decrease of Capital Stock Without
Reasonable Ground Violates Business Judgment
Rule
1.
2.
3.
In case of delegation to the Executive
Committee duly authorized in the by-laws;
Authorization pursuant to a contracted
manager which may be an individual, a
partnership, or another corporation; and
In case of close corporations, the stockholders
may manage the business of the corporation
instead of a board of directors, if the articles
of incorporation so provide.
10. BUSINESS JUDGMENT RULE
UNIVERSITY OF SANTO TOMAS
2024 GOLDEN NOTES
The SEC only has the ministerial duty to approve the
decrease of a corporation’s authorized capital stock.
After a corporation faithfully complies with the
60
COMMERCIAL LAW
requirements laid down in Sec. 38 (now Sec. 37,
RCC), the SEC has nothing more to do other than
approve the same. Pursuant to Sec. 38 (now Sec. 37,
RCC), the scope of the SEC's determination of the
legality of the decrease in authorized capital stock is
confined only to the determination of whether the
corporation submitted the requisite authentic
documents to support the diminution. Simply, the
SEC's function here is purely administrative in
nature.
and (Benguet Electric Cooperative, Inc. v. NLRC,
G.R. No. 89070, 18 May 1992)
6.
The power to elect corporate officers was a
discretionary power that the law exclusively
vested in the Board of Directors and could not
be delegated to subordinate officers or agents.
(Malting
Industrial
and
Commercial
Corporation, et al. v. Coros, G.R. No. 167802, 13
Oct. 2010)
For third persons or parties outside the corporation
like the SEC to interfere to the decrease of the
capital stock without reasonable ground is a
violation of the "business judgment rule."
(Metroplex Berhad v. Sinophil Corp., G.R. No. 208281,
28 June 2021)
Requirements for Application of Business
Judgment Rule
1.
Presence of a business decision including
decisions on policy management and
administration;
Consequences of Business Judgment Rule
2.
The decision must be intra vires and must
comply with the procedural and substantive
requirements of law;
3.
Good faith;
4.
Due care in making the decision; and
5.
The director must not have personal interest
or nor self-dealing or otherwise on breach of
the duty of loyalty. (Villanueva, 2018)
1.
2.
3.
Resolutions and transactions entered into by
the Board within the powers of the corporation
cannot be reversed by the courts not even on
the behest of the stockholders;
Directors and officers acting within such
business judgment cannot be held personally
liable for such acts;
If the cause of the losses is merely an error in
business judgment, not amounting to bad faith
or negligence, directors and/or officers are not
liable; (Filipinas Port Services v. Go, G.R. No.
161886, March 16, 2007 16 Mar. 2007)
4.
The Board of Directors has the power to create
positions not provided for in the corporation's
by-laws since the board is the corporation’s
governing body, clearly upholding the power of
its board to exercise its prerogatives in
managing the business affairs of the
corporation; (Ibid.)
5.
Directors and officers who purport to act for the
corporation, keep within the lawful scope of
their authority and act in good faith, do not
become liable, whether civilly or otherwise, for
the consequences of their acts, which are
properly attributed to the corporation alone;
Q: PALI sought to offer its shares to the public in
order to raise funds for development of
properties and pay its loans with several banks.
To facilitate the trading of its shares, PALI
applied for a listing in the Philippine Stock
Exchange Inc. (PSE), a non-profit corporation.
Subsequently, PSE received a letter from the
Heirs of Marcos, requesting PSE to defer PALI’s
registration, contending that certain properties
of PALI are owned by Marcos. Consequently, PSE
rejected PALI’s application. The SEC reversed
the ruling of the PSE. Is the SEC correct?
A: NO. In applying the business judgment rule, the
SEC and the courts are barred from intruding into
business judgments of corporations, when the same
are made in good faith. The said rule precludes the
reversal of the decision of the PSE to deny PALI's
61
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
2024 GOLDEN NOTES
listing application, absent a showing of bad faith on
the part of the PSE.
Officer, learned of the debiting of the three
accounts. Caña instructed Mamalayan to book
the amount of P20.3 Million under "Accounts
Receivable" corresponding to the unrecovered
amount from the P46 Million which had been
earlier transferred to various deposit accounts.
Angela Barcelona, Region Head, Retail Banking
Group for Allied Bank's South Metro Manila
Branches, ordered the debit of the remaining
P1.1 Million from the account of the Spouses
Macam which resulted in the closure thereof.
The Sps. Macam learned of the closure after they
were unable to withdraw from their account.
Hence, the Sps. Macam filed the complaint for
Damages. Is Allied Bank liable?
Under the listing rules of the PSE, to which PALI had
previously agreed to comply, the PSE retains the
discretion to accept or reject applications for listing.
(PSE v. CA, G.R. No. 125469, 27 Oct. 1997)
11. DOCTRINE OF APPARENT AUTHORITY
If a corporation knowingly permits one of its
officers or any other agent to act within the scope of
an apparent authority, it holds him out to the public
possessing the power to do those acts; and thus, the
corporation will, as against anyone who has in good
faith dealt with it through such agent, be estopped
from denying the agent’s authority.
A: YES. All banks are charged with extraordinary
diligence in the handling and care of their deposits
as well as the highest degree of diligence in the
selection and supervision of its employees.
Its existence may be ascertained through:
1.
The general manner in which the corporation
holds out an officer or agent as having the
power to act, or in other words, the apparent
authority to act in general, with which it
clothes him; or
2.
The acquiescence in his acts of a particular
nature, with actual or constructive notice
thereof, within or beyond the scope of his
ordinary powers.
The authority of a corporate officer or agent in
dealing with third persons may be actual or
apparent. The apparent authority to act for and to
bind a corporation may be presumed from acts of
recognition in other instances, wherein the power
was exercised without any objection from its board
or shareholders.
Caña's act of approving the P46 Million fund
transfer and the subsequent transfers to different
accounts in various branches of Allied Bank leading
to the P1,590,000.00 transfer to the account of the
Spouses Mario Macam all appear to have been
clothed with authority. Indeed, the subsequent
transfers were approved by several Branch Heads.
It requires presentation of evidence of similar act(s)
executed either in its favor or in favor of other
parties. It is not the quantity of similar acts which
establishes apparent authority but the vesting of a
corporate officer with the power to bind the
corporation. (Advance Paper Corp. v. Arma Traders
Corp., G.R. No. 176897, 11 Dec. 2013)
Apparent authority is derived not merely from
practice. Its existence may be ascertained through:
Q: The Spouses Macam opened a Savings
Account in Allied Bank-Pasong Tamo (AB-PT)
Branch. The Spouses Macam were able to make
withdrawals in the total amount of P490,000.00,
leaving a balance of P1.1 Million in their savings
account with AB-PT.
Caña, head of branch, instructed the bank teller
to debit specific amounts from different
accounts. Mamalayan, the Branch Operating
UNIVERSITY OF SANTO TOMAS
2024 GOLDEN NOTES
62
1.
The general manner in which the corporation
holds out an officer or agent as having the
power to act, or in other words, the apparent
authority to act in general, with which it
clothes him; or
2.
the acquiescence in his acts of a particular
nature, with actual or constructive knowledge
thereof, within or beyond the scope of his
ordinary powers. (Allied Banking Corporation
COMMERCIAL LAW
v. Spouses Macam, G.R. No. 200635, 01 Feb.
2021)
E. POWERS OF CORPORATIONS, INCIDENTAL
POWERS, ULTRA VIRES DOCTRINE
(Secs. 35-44)
Apparent Authority is Determined by Acts of
Principal, Not by Acts of Agent
The Doctrine of Apparent Authority is determined
by the acts of the principal and not by the acts of the
agent. As applied to corporations, the doctrine of
apparent authority provides that “a corporation is
estopped from denying the officer's authority if it
knowingly permits such officer to act within the
scope of an apparent authority, and it holds him out
to the public as possessing the power to do those
acts.” (Agro Food and Processing Corp. v. Vitarich
Corp., G.R. No. 217454, 11 Jan. 2021)
Kinds of Corporate Powers
12. DOCTRINE OF RATIFICATION OR ESTOPPEL
When Corporation is Estopped to Deny
Ratification of Acts Entered by Officers or Agents
Generally, when the corporation has knowledge
that its officers or agents exceed their power, it must
promptly disaffirm the contract or act, and allow the
other party or third person to act in the belief that it
was authorized or has been ratified. Otherwise, if it
acquiesces, with knowledge of the facts, or if it fails
to disaffirm, ratification will be implied. (Premiere
Development Bank v. CA, G.R. No. 159352, 14 Apr.
2004)
1.
Express Powers – granted by law, the
Corporation Code, and its Articles of
Incorporation or Charter, and administrative
regulations;
2.
Inherent/Incidental Powers – not expressly
stated but are deemed to be within the capacity
of corporate entities; and
3.
Implied/Necessary Powers – exists as a
necessary consequence of the exercise of the
express powers of the corporation or the
pursuit of its purposes as provided for in the
Charter.
Q: Eliodoro Cruz was the former president of
Filport. During the general stockholders’
meeting, he wrote a letter to the corporation’s
Board of Directors questioning the board’s
creation of certain positions and their
corresponding monthly remuneration. Because
his letter was not heeded favorably, Cruz,
purportedly in representation of Filport and its
stockholders, filed with SEC a petition which he
describes as a derivative suit against the
incumbent members of Filport’s BOD, for
alleged acts of mismanagement detrimental to
the interest of the corporation and its
shareholders at large.
So settled is the precept that ratification can be
made by the corporate board either expressly or
impliedly. Implied ratification may take various
forms - like silence or acquiescence; by acts showing
approval or adoption of the contract; or by
acceptance and retention of benefits flowing
therefrom. (MWSS v. CA, G.R. No. 126000, 07 Oct.
1998)
Did Filport’s BOD act within its powers in
creating the executive committee and the
positions of AVPs for Corporate Planning,
Operations, Finance and Administration, and
those of the Special Assistants to the President
and the Board Chairman, each with
corresponding remuneration?
A: YES. The governing body of a corporation is its
board of directors. Sec. 22 of the RCC provides that
unless otherwise provided in this Code, the Board of
63
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
2024 GOLDEN NOTES
directors or trustees shall exercise the corporate
powers, conduct all business, and control all
properties of the corporation. Thus, with the
exception only of some powers expressly granted by
law to stockholders (or members, in case of nonstock corporations), the board of directors (or
trustees, in case of non-stock corporations) has the
sole authority to determine policies, enter into
contracts, and conduct the ordinary business of the
corporation within the scope of its charter, i.e., its
AOI, by-laws and relevant provisions of law. Verily,
the authority of the board of directors is restricted
to the management of the regular business affairs of
the corporation, unless more extensive power is
expressly conferred.
In the present case, the board’s creation of the
subject positions was in accordance with the
regular business operations of Filport as it is
authorized to do so by the corporation’s by-laws,
pursuant to the Corporation Code. (Filipinas Port
Services, Inc., v. Go, et al., G.R. No. 161886, 16 Mar.
2007)
Three (3) Levels of Control in the Corporate
Hierarchy
1.
The board of directors – responsible for
corporate policies and the general management
of the business affairs of the corporation;
2.
The officers of the corporation – execution of
the policies laid down by the board, but in
practice often have wide latitude in
determining the course of business operations;
3.
The stockholders – have the residual power
over fundamental corporate changes, like
amendments of the AOI. (Citibank, N.A. v. Chua,
G.R. No. 102300, 17 Mar. 1993)
3.
To adopt and use of Corporate seal;
4.
To amend its Articles of Incorporation;
5.
To adopt its By-laws;
6.
For stock corporations: issue and Sell stocks to
subscribers and treasury stocks; for non-stock
corporations: admit members;
7.
To Purchase, receive, take, or grant, hold,
convey, sell, lease, pledge, mortgage and deal
with real and personal property, securities, and
bonds subject to the Constitution and existing
laws;
8.
To Enter into merger or consolidation, (To
enter into a partnership, joint venture, merger,
consolidation, or any other commercial
agreement with natural and juridical persons);
9.
To make reasonable Donations, including those
for public welfare, or for hospital, charitable,
cultural, scientific, civic, or similar purposes:
Provided, that no foreign corporation shall give
donations in aid of:
Any political party;
Candidate; or
Partisan political activity.
NOTE: It shall be unlawful for any foreigner,
whether judicial or natural person, to aid any
candidate or political party, directly or
indirectly, or take part in or influence in any
manner any election, or to contribute or make
any expenditure in connection with any
election campaign or partisan political activity.
(Sec. 81, Omnibus Election Code)
Under the Theory of General Capacity, a corporation
holds such powers which are not prohibited or
withheld from it by general laws. (Divina, 2021)
10. To establish pension, Retirement, and other
plans for the benefit of its directors, trustees,
officers, and employees – basis of which is the
Labor Code; and
The general powers of a corporation are the
following: (Su-Per-C-A-B-S-P-E-D-R-O)
To Sue and be sued;
UNIVERSITY OF SANTO TOMAS
2024 GOLDEN NOTES
To have Perpetual existence unless the
certificate of incorporation provides otherwise;
a.
b.
c.
Theory of General Capacity
1.
2.
64
COMMERCIAL LAW
11. To exercise Other powers essential or
necessary to carry out its purpose or purposes
as stated in the articles of incorporation. (Sec.
35, RCC)
An Unregistered Corporation has No Right to Sue
or be Sued for Want of Corporate Personality
“Lideco Corporation” had no personality to
intervene since it had not been duly registered as a
corporation. If petitioner “Laureano Investment &
Development Corporation” legally and truly wanted
to intervene, it should have used its corporate name
as the law requires and not another name which it
had not registered. (Laureano Investment &
Development Corp. v. CA, G.R. No. 100468, 06 May
1997)
Limitation on Corporation’s Exercise of Acts of
Property of Ownership
The power of the corporation to exercise acts of
ownership over its assets and properties is limited
by the following:
1.
2.
The transaction of corporate property is
reasonably and necessarily required by the
lawful business of the corporation; and
Limitations of the Corporation in Dealing with
Property
The transaction is done within the limits
prescribed by law or Constitution. (Sec. 35(g),
RCC)
1.
It must be in the furtherance of the purpose for
which the corporation was organized;
2.
Constitutional
limitations
–
Private
corporations or associations may not hold
such alienable lands of the public domain
except by lease; (Sec. 3, Article XII, 1987
Constitution)
Commencement of the Power to Sue and be
Sued
The power to sue and be sued commences upon
issuance by SEC of the Certificate of Incorporation.
The Power of the Corporation to Sue and be Sued
is Exercised by the Board of Directors
With regard to private land, 60% of the
corporation must be owned by the Filipinos,
same with the acquisition of a condominium
unit.
The power of the corporation to sue and be sued is
exercised by the board of directors. The physical
acts of the corporation, like the signing of
documents, can be performed only by natural
persons duly authorized for the purpose by
corporate by-laws or by a specific act of the board.
Absent the said board resolution, a petition may not
be given due course. (Esguerra, et al. vs Holcim
Philippines, Inc., G.R. No. 182571, 02 Sept. 2013)
NOTE: No law disqualifies a person from
purchasing shares in a landholding
corporation even if the latter will exceed the
allowed foreign equity, what the law
disqualifies is the corporation from owning
land. (JG Summit Holdings, Inc. v. CA, G.R. No.
124293, 31 Jan. 2005)
3.
If the real party in interest is a corporate body, an
officer of the corporation can sign the verification
against forum shopping so long as he has been duly
authorized by a resolution of its board of directors.
(San Miguel Bukid Homeowners Association, Inc. v.
City of Mandaluyong, et al., G.R. No. 153653, 02 Oct.
2009; Republic v. Coalbrine International Philippines,
et al., G.R. No. 161838, 07 Apr. 2010)
Special law – subject to the provisions of the
Bulk Sales Law and law against monopoly,
illegal combination, or restraint of trade.
Requisites for a Valid Donation (P-A-I-R)
65
1.
The donation must be Reasonable;
2.
It must be for valid Purposes including public
welfare,
hospital,
charitable,
cultural,
scientific, civic, or similar purposes;
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
2024 GOLDEN NOTES
12. Create Executive Committees and Special
Committees; (Sec 34, RCC)
13. Adopt and Amend Bylaws; (Secs. 45 and 46,
RCC)
14. Enter into merger and consolidation. (Sec. 75,
RCC) and
15. Apply for voluntary dissolution. (Secs. 134 and
135, RCC)
3. The donation must bear a reasonable relation to
the corporation’s Interest and must not be so
remote and fanciful; and
4.
For foreign corporations, it must not be an Aid
in any:
.
Political party;
.
Candidate; or
.
Partisan political activity. (Divina,
2020)
Procedural Requirements in Extending or
Shortening Corporate Term
Implied Powers of a Corporation
A corporation is not restricted to the exercise of
powers expressly conferred upon it by its charter
but has the power to do what is reasonably
necessary or proper to promote the interest or
welfare of the corporation. (NAPOCOR v. Vera, G.R.
No. 83558, 27 Feb. 1989)
1.
Majority vote of the Board of Directors or Board
of Trustees;
2.
Ratification by shareholders representing at
least 2/3 of the outstanding capital stock (OCS),
or by at least 2/3 of the members in case of nonstock corporation;
3.
Written notice of the proposed action and of the
time and place of the meeting shall be
addressed to each stockholder or member at his
place of residence as shown on the books of the
corporation and deposited to the addressee in
the post office with postage prepaid, or served
personally or when allowed in the bylaws or
done with the consent of the stockholder, sent
electronically in accordance with the rules and
regulations of the Commission on the use of
electronic data messages;
4.
Copy of the amended AOI shall be submitted to
the SEC for its approval; (Sec. 36, RCC)
5.
In case of banks, banking, and quasi-banking
institutions, preneed, insurance and trust
companies, NSSLAS, pawnshops, and other
financial
intermediaries,
a
favorable
recommendation of appropriate government
agency; (Sec. 16, RCC)
6.
The extension must be done during the lifetime
of the corporation not earlier than 3 years prior
to the expiry date unless there is justifiable
reason for an earlier extension (Sec. 11, RCC)
Theory of Specific Capacity
Under the Theory of Specific Capacity, a corporation
cannot exercise powers except those expressly or
impliedly given to it. (Divina, 2021)
The specific powers of a corporation are the
following:
1.
Power to extend or shorten corporate term;
(Sec. 36, RCC)
2. Increase or decrease capital stock; (Sec. 37, RCC)
3. Incur, create, or increase bonded indebtedness;
(Sec. 37, RCC)
4. Deny pre-emptive right; (Sec. 38, RCC)
5. Sell, dispose, lease, encumber all or
substantially all of corporate assets; (Sec. 39,
RCC)
6. Purchase or acquire own shares; (Sec. 40, RCC)
7. Invest corporate funds in another corporation
or business or for other purpose other than
primary purpose; (Sec. 41, RCC)
8. Declare dividends; (Sec. 42, RCC)
9. Enter into management contract with another
corporation;(Sec. 43, RCC) and
10. Amend Articles of Incorporation. (Sec. 15, RCC)
11. Elect, Appoint, and Remove Directors and
Corporate Officers; (Secs. 23, 24, and 27, RCC)
UNIVERSITY OF SANTO TOMAS
2024 GOLDEN NOTES
66
COMMERCIAL LAW
Q: What is the effect of the failure of the
corporation to extend its corporate term?
NOTE: The following will result to decrease in
capital stock, provided the shares are cancelled or
retired thereafter:
A: In the case of PNB v. CFI of Rizal, Pasig (G.R. No.
63201, 27 May 1992), the Supreme Court ruled that
upon the expiration of the period fixed in the AOI, in
the absence of compliance with the legal requisites
for the extension of the period, the corporation
ceases to exist and is dissolved ipso facto.
1.
2.
3.
The automatic dissolution of the corporation is no
longer applicable under the RCC given the option
available to the corporation to revive the corporate
term (Sec. 11, RCC). Since the period of revival is not
indicated in the RCC, the option may be exercised
within a reasonable period, but prior to the
dissolution and liquidation of the corporation. What
is a reasonable period is for the SEC to determine.
(Divina, 2021)
Q: If the subscribed capital stock is P60,000,000
divided into 60,000,000 shares with par value of
P1.00 per share and the paid-up capital stock is
P50,000,000 divided into 50,000,000 shares
with par value of P1.00 per share, can the
corporation reduce the capital stock to
P50,000,000?
A: NO, the capital stock of the corporation may be
decreased only if it will not result in prejudice to
corporate creditors. In this case, the reduction of the
capital stock to 50,000,000 will mean the release or
condonation of the 10,000,000 unpaid subscription,
thereby causing prejudice to the creditors as
subscriptions to the capital stock are funds held in
trust for their benefit under the trust fund doctrine.
(Divina, 2021)
Remedy of the Stockholder Not in Favor of
Extending or Shortening the Corporate Term
The stockholder not in favor of extension of the
corporate term may exercise his appraisal right,
that is, he may get out of the corporation and
demand for the payment of the fair value of his
shares subject to the conditions specified in Sec. 80
of the RCC. (Ibid.)
Q: If the subscribed capital stock is P60,000,000
divided into 60,000,000 shares with par value of
P1.00 per share and the paid-up capital stock is
P50,000,000 divided into 50,000,000 shares
with par value of P1.00 per share, can the
corporation reduce the capital stock to
P50,000,000?
A stockholder may also exercise appraisal right in
case of shortening of the corporate term. While Sec.
36 of the RCC refers to the remedy of appraisal right
only in case of extension of corporate term, Sec. 80
of the RCC also provides for the same remedy in case
a stockholder votes against the shortening of
corporate term. (Ibid.)
A: NO, the capital stock of the corporation may be
decreased only if it will not result in prejudice to
corporate creditors. In this case, the reduction of the
capital stock to 50,000,000 will mean the release or
condonation of the 10,000,000 unpaid subscription,
thereby causing prejudice to the creditors as
subscriptions to the capital stock are funds held in
trust for their benefit under the trust fund doctrine.
(Divina, 2021)
Ways of Effecting the Increase or Decrease of the
Capital Stock
By increasing or decreasing the:
1.
2.
3.
Redemption of redeemable shares; (Sec. 8,
RCC)
Purchase of own shares; (Sec. 40, RCC)
Cancelling shares which have not yet been
issued.
Number of shares and retaining the par value;
Par value of existing shares and retaining the
number of shares; or
Number of shares as well as the par value.
Q: In August 1998, Sinophil entered into a Share
Swap Agreement with Metroplex and Paxell. In
2001, Sinophil and Belle executed a
67
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
2024 GOLDEN NOTES
Memorandum Of Agreement with Metroplex
and Paxell rescinding the 1998 Swap
Agreement. In 2002 and 2005, the shareholders
of Sinophil voted for the reduction of the
company's authorized capital stock. The
Company
Registration
and
Monitoring
Department (CRMD); the Corporation Finance
Department (CFD) of SEC approved the first
amendment of the AOI of Sinophil. In 2007,
Sinophil’s shareholders’ approved the further
reduction of the ACS. The CRMD and the CFD also
approved the second amendment.
meeting stating that legal requirements have
been complied with;
5.
Prior approval of the SEC; and
6.
Effects do not prejudice the rights of corporate
creditors.
So long as written notice of the proposed increase
or diminution of the capital stock was made to all
stockholders, the presence and approval of at least
2/3 of the capital stock is enough to make the
increase or diminution valid. This is the plain
language of the provision over which no other
interpretation may be made. After a corporation
faithfully complies with the requirements laid down
in Section 38, the SEC has nothing more to do other
than approve the same. For third persons or parties
outside the corporation like the SEC to interfere
with the decrease of the capital stock without
reasonable ground is a violation of the "business
judgment rule." (Metropolex Berhad v. Sinophil Corp.,
G.R. No. 208281, 28 June 2021)
Metroplex and Paxell filed a Petition for Review
Ad Cautelam Ex Abundanti before the SEC
assailing the approvals. The SEC, in denying the
petition, found that the decrease complied with
the requirements imposed by Sec. 38 of the
Corporation Code. It held that the equal or
unequal reduction of a corporation's capital
stock is a matter solely between the
stockholders and cannot be enjoined either by
the courts or the creditors. It found no basis to
grant the prayer for the issuance of a cease and
desist order. The CA upheld the findings of the
SEC. Is the CA correct in upholding the findings
of the SEC?
The Board of Directors may Issue Additional
Shares of Stock Without Stockholder Approval
A stock corporation is expressly granted the power
to issue or sell stocks. The power to issue stocks is
lodged with the Board of Directors and no
stockholders’ meeting is required to consider it
because additional issuance of stock (unlike
increase in capital stock) does not need approval of
the stockholders. What is only required is the board
resolution approving the additional issuance of the
shares. The corporation shall also file the necessary
application with the SEC to exempt these from the
registration requirements under the SRC. (Majority
Stockholders of Ruby Industrial Corp. v. Miguel Lim
and Minority Stockholders of Ruby Industrial Corp.,
G.R. Nos. 165887 & 165929, 06 June 2011)
A: YES. Sec. 38 is clear that a corporation can only
decrease its capital stock if the following are
present:
1.
Approval by a majority vote of the board of
directors;
2.
Written notice of the proposed diminution of
the capital stock, and of the time and place of a
stockholders' meeting duly called for the
purpose, addressed to each stockholder at his
place of residence;
3.
2/3 of the outstanding capital stock voting
favorably at the said stockholders' meeting
duly;
Bonded Indebtedness
Certificate in duplicate, signed by majority of
the directors and countersigned by the
chairman and secretary of the stockholders'
It is a borrowing by the corporation which is long
term in nature involving a large number of lenders
and secured by the encumbrance on corporate
assets. Since bonds are securities, they should also
be registered with the SEC. (Divina, 2021)
4.
UNIVERSITY OF SANTO TOMAS
2024 GOLDEN NOTES
68
COMMERCIAL LAW
NOTE: The requirements for the power to incur,
create or increase bonded indebtedness is also the
same with the power to increase or decrease capital
stock, except that this power may also be exercised
by a non-stock corporation.
1.
2.
Instances When Approval of Stockholders or
Members is Not Required
Procedural Requirements for Sale, Lease,
Exchange, Mortgage, Pledge, and any Other
Disposition
(Sa-L-E-M-P-O)
of
All
or
Substantially All of Corporate Assets
1.
Majority vote of the BOD or BOT;
2.
Approval by stockholders representing at least
2/3 of the OCS, or by at least 2/3 of the
members in case of nonstock corporation; and
3.
Incapable of continuing the business; or
Incapable of accomplishing the purpose for
which it was incorporated. (Sec. 39, RCC)
1.
If sale is necessary in the usual and regular
course of business; or
2.
If the proceeds of the sale or other disposition
of such property and assets are to be
appropriated for the conduct of the remaining
business.
Abandonment of the Plan for SaLEMPO Even
After Approval of the Stockholders or Members
Written notice of the proposed action and of the
time and place of the meeting addressed to each
stockholder or member at his place of residence
as shown on the books of the corporation and
deposited to the addressee in the post office
with postage prepaid, served personally, or
when allowed by the bylaws or done with the
consent of the stockholder, sent electronically:
Provided, That any dissenting stockholder may
exercise the right of appraisal under the
conditions provided in this Code. (Sec. 39, RCC)
The BOD, in its discretion, may abandon the plan for
SaLEMPO even after such authorization or approval
by the stockholders, subject to the rights of third
parties under any contract relating thereto, without
further action or approval by the stockholders or
members. (Sec. 39, RCC)
Nell Doctrine (2017 BAR)
GR: Where one corporation sells or otherwise
transfers all of its assets to another corporation, the
latter is not liable for the debts and liabilities of the
transferor.
NOTE: The sale of the assets shall be subject to the
provisions of existing laws on illegal combinations
and monopolies, including R.A. No. 10667,
otherwise known as the “Philippine Competition
Act.”
XPNs: The transferee of corporate assets or
property is liable for the debts of the transferor in
case of:
Further, in case of 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 for the corporation to enter
into any transaction authorized by this section. (Sec.
39, RCC)
Substantially All of Corporate Assets
A sale or other disposition shall be considered shall
be deemed to cover substantially all the corporate
property and assets if in the process thereof, the
corporation would be rendered:
69
1.
Express assumption of liability - where the
purchaser expressly or impliedly agrees to
assume such debts;
2.
Transaction amounts to a consolidation or
merger of the corporations - 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
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
2024 GOLDEN NOTES
constituent corporation, shall be deemed
transferred to and vested in such surviving or
consolidated corporation without further act or
deed; (Sec. 79 (d), RCC)
directors and approval of the stockholders
representing at least 2/3 of outstanding capital
stock. Further, the provisions of the Bulk Sales Law
must be complied with:
3.
Business Enterprise Transfer – where the
purchasing
corporation
is
merely
a
continuation of the selling corporation; and
a.
4.
Entered Fraudulently - Where the transaction
is entered into fraudulently in order to escape
liability for such debts. (Nell v. Pacific Farms,
G.R. No. L-20850, 29 Nov. 1965)
The seller must provide the buyer with a
verified list containing the names of the
creditors, their addresses, amounts owing to
each of them, and the respective maturity
dates;
b.
A full detailed inventory of the properties or
assets to be sold, including their cost or
acquisition price;
c.
and The list of inventory must be filed with the
DTI.
Q: Divine Corporation, engaged in the
manufacture of garments for export, was able to
obtain loans from individuals and financing
institutions. However, due to the drop in the
demand for garments in the international
market, Divine Corporation could not meet its
obligations. It decided to sell all its equipment
such as sewing machines, permapress machines,
high-speed sewers, cutting tables, ironing
tables, etc., as well as its supplies and materials
to Top Grade Fashion Corporation, its
competitor.
Where an asset constitutes the only property of the
corporation, its sale to a 3rd party is a sale or
disposition of all the corporate property and assets
of the corporation falling squarely within the
contemplation of Sec. 39 of the RCC. Hence, for the
sale to be valid, the majority vote of the legitimate
Board of Trustees, concurred in by the vote of at
least 2/3 of the bona fide members of the
corporation should have been obtained. (Islamic
Directorate of the Philippines, et al., v. CA, G.R. No.
117897, 14 May 1997)
. How would you classify the transaction?
A: The transaction is deemed classified as a sale of
all or substantially all of the corporate assets
because the corporation would be rendered
incapable of continuing the business or
accomplishing the purpose for which it was
incorporated.
Q: May a corporation acquire its own shares of
stock?
A: Ordinarily, a stock corporation has no power to
acquire its own shares as it is illogical for the
corporation to be its own stockholder. Moreover,
the funds of the corporation should be devoted to
attain the purposes of incorporation. However, the
RCC allows the corporation to acquire or purchase
its own shares in certain instances. (Divina, 2020)
a. Can Divine Corporation sell aforesaid items
to its competitor, Top Grade Fashion
Corporation? What are the requirements to
validly sell the items? Explain. (2005 BAR)
A: YES. The law does not prohibit sale of all or
substantially all of corporate assets to competitorcompany provided said sale is subject to laws
against illegal combination, monopoly, or restraint
of trade and Bulk Sales Law. The facts did not state
that the competitor-company lies within the
restrictions provided for by law. For the transaction
to be valid, it needs a majority vote of its board of
UNIVERSITY OF SANTO TOMAS
2024 GOLDEN NOTES
Instances When a Corporation May Acquire its
Own Shares (1991, 1992, 2005 BAR)
70
1.
To eliminate fractional shares arising out of
stock dividends; (Sec. 40, RCC)
2.
To collect or compromise an indebtedness to
the corporation, arising out of unpaid
COMMERCIAL LAW
subscription, in a delinquency sale and to
purchase delinquent shares sold during said
sale; (Ibid.)
3.
To
pay
dissenting
stockholders; (Ibid.)
4.
To acquire treasury shares; (Sec. 9, RCC)
5.
To acquire redeemable shares; (Sec. 8, RCC)
6.
To effect a decrease of capital stock; (Sec. 37,
RCC) and
7.
or
3.
withdrawing
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 circumstances. (SEC
Memorandum Circular No. 16, Series of 2023)
Stated otherwise, the corporation has retained
earnings if its assets exceed the total liabilities and
combined subscriptions to the capital stock of the
corporation. This may be expressed in the following
formula:
Retained Earnings = Assets – Liabilities and
Subscriptions
In close corporations, when there is a deadlock
in the management of the business, the SEC
may order the purchase at their fair value of
the shares of any stockholder by a corporation
(Sec. 103(1)(d), RCC)
Such retained earnings or portion thereof are
unrestricted if there are no legal and contractual
impediment for their distribution to the
stockholders.
Rule in Acquisition of Own Shares
Guidelines for Acquisition of Own Shares
GR: The corporation may only acquire its own
stocks if there are unrestricted retained earnings
(URE).
1.
2.
XPNs: (Re-Do-L-D)
1.
2.
3.
4.
3.
4.
Redemption of redeemable shares;
Donation of shares to the corporation;
Levy/garnishment of shares to satisfy the
judgment in favor of the corporation;
Conveyance of shares to the corporation in
payment of a Debt. (Divina, 2020)
5.
The capital of the corporation must not be
impaired. There shall be UREs to purchase the
shares.
Legitimate or proper corporate objective is
advanced.
Condition of the corporate affairs warrants it.
Transaction is designed and carried out in
good faith.
Interest of creditors is not impaired, that is, the
same is not violative of the trust fund doctrine.
(Sec. 41, SEC Opinions, 12 Oct. 1992, 11 Sept.
1985, and 11 Apr. 1994)
Unrestricted Retained Earnings (URE)
Trust Fund Doctrine
Unrestricted Retained Earnings represent the
amount of accumulated profits and gains realized
out of the normal and continuous operations of the
company after deducting therefrom distributions to
stockholders and transfers to capital stock or other
accounts, and which are:
The requirement of unrestricted retained earnings
to cover the share is based on the trust fund doctrine
which means that the capital stock, property, and
other assets of a corporation are regarded as equity
in trust for the payment of corporate creditors. The
reason is that the creditors of a corporation are
preferred over the stockholders in the distribution
of corporate assets. (Boman Environmental
Development Corp v. CA, G.R. No. 77860, 22 Nov.
1988)
1.
2.
Not appropriated by its BOD for definite
corporate expansion projects or programs;
Not covered by a restriction for dividend
declaration under a loan agreement; and
71
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
2024 GOLDEN NOTES
Power to Invest Corporate Funds in another
Corporation or Business
proportionately to the stockholders in the form of
cash, property, or stocks. (Divina, 2021)
Corporation may pursue the business/es as
indicated in its Articles of Incorporation under its
primary and secondary purposes. However, if the
business is listed under secondary purpose, the
corporation must follow the procedure under Sec.
41.
Q: Are profits the same as dividends?
Statutory Requirements for Investing in another
Corporation, Business, or Purpose other than
Primary Purpose (1995, 1996 BAR)
Profits belong to the corporation while dividends
once declared, belong to the stockholder. (Divina,
2021) (2005 BAR)
1.
Approval by the majority vote of the BOD or
BOT;
Requirements for the Declaration of Dividends
2.
Ratification by stockholders representing at
least 2/3 of the OCS or by at least 2/3 of the
members in case of non-stock corporations;
3.
4.
A: Profits are the sources of dividends. Profits are
dividends only when they have been set aside for
distribution to stockholders under the conditions
specified by law.
1.
2.
NOTE: In case stock dividend is to be declared, an
additional requirement of:
Ratification must be made at a meeting duly
called for the purpose; and
1.
Notice of the proposed investment and the time
and place of the meeting shall be addressed to
each stockholder or member at the place of
residence as shown in the books of the
corporation and deposited to the addressee in
the post office with postage prepaid, served
personally, or sent electronically in accordance
with the rules and regulations of the
Commission on the use of electronic data
message, when allowed by the bylaws or done
with the consent of the stockholders. (Sec. 41,
RCC)
2.
A vote representing 2/3 of outstanding
capital stock. (Sec. 42, RCC)
A corporation must also have a sufficient
number of authorized unissued shares for
distribution to stockholders or should apply
for an increase of authorized capital stock.
Q: During the annual stockholders meeting,
Riza, a stockholder proposed that a part of the
corporation’s unreserved earned surplus be
capitalized, and stock dividends be distributed
to the stockholders, arguing that as owners of
the company, the stockholders, by a majority
vote, can do anything. As chairman of the
meeting, how would you rule on the motion to
declare stock dividends? (1991, 2001 BAR)
NOTE: Any dissenting stockholder shall have
appraisal right as provided in the RCC. Ratification
of stockholders is not needed where the investment
by the corporation is reasonably necessary to
accomplish its primary purpose as stated in the AOI.
A: As the chairman of the meeting, I would rule
against the motion considering that a declaration of
stock dividends should initially be taken by the BOD
and thereafter to be concurred in by the vote of the
stockholders representing 2/3 of the outstanding
capital stock. (Sec. 42, RCC) The stockholders cannot
compel the corporation to declare dividends as the
determination thereof rests with the sound
discretion of the board.
POWER TO DECLARE DIVIDENDS
Dividends
Dividends are corporate profits allocated, lawfully
declared, and ordered by the directors to be paid
UNIVERSITY OF SANTO TOMAS
2024 GOLDEN NOTES
Existence of UREs
Resolution of the board.
72
COMMERCIAL LAW
Form of Dividends
1.
2.
3.
As to Taxability
If
received
by
individual: subject
to tax;
Cash;
Stock; and
Property.
If
received
corporation:
subject to tax.
Cash Dividends vs. Stock Dividends
CASH
STOCK
DIVIDENDS
DIVIDENDS
As to Where it Forms Part
Part of the general
Part of capital.
fund.
As to Cash Outlay
Results in cash
No cash outlay.
outlay.
As to Levy by Corporate Creditors
Not subject to levy
by
corporate
creditors.
As to Revocation
Cannot be revoked
after
announcement.
Applied
to
the
unpaid balance if
delinquent shares.
Once issued, can be levied
by creditors of the
corporate
stockholder
because they are part of
corporate asset.
Declared by the board
with the concurrence of
the
stockholders
representing at least 2/3
of the outstanding capital
stock at a regular/special
meeting.
Corporate
increased.
capital
Q: From what funds are cash and stock
dividends sourced? Explain why. (2005 BAR)
A: Dividends either cash or stock dividend must be
declared out of unrestricted retained earnings
because of the Trust Fund Doctrine. The Trust Fund
Doctrine provides that subscriptions to the capital
stock of a corporation constitute a fund to which the
creditors have the right to look for the satisfaction
of their claims. (Ong v. Tiu, G.R. No. 144476, 18 Apr.
2003) Thus, dividends must never impair the
subscribed capital stock.
is
As to whether Declaration creates Debt
Its
declaration
creates a debt from
the corporation to
each
of
its
stockholders.
Can be withheld until
payment
of
unpaid
balance if delinquent
shares.
NOTE: Declaration of cash dividends may not be
revoked since, upon declaration, a creditor-debtor
relationship is established between the stockholder
and the corporation. Hence, the debtor-corporation
is bound to make good its obligation to the creditorstockholder to pay the cash dividends. Stock
dividends may be revoked even after declaration
but prior to the actual issuance of shares because
what consummates stock dividend is not the
declaration but the share issuance. (Divina, 2022)
As to Effect on Corporate Capital
Does not increase
the
corporate
capital
Can be revoked despite
announcement but before
issuance.
As to Application on Unpaid Balance
As to how Approvals Needed
Declared only by the
board of directors at
its discretion.
(majority of the
quorum only, not
majority of all the
board)
by
not
Not subject to tax
Whether received by
individual
or
a
corporation.
No debt is created by its
declaration.
73
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
2024 GOLDEN NOTES
Stock Split vs. Stock Dividends
STOCK SPLIT
STOCK DIVIDENDS
A mere increase in the
number of shares
which
evidence
ownership without
altering the amount of
the capital, surplus, or
segregated earnings.
Capitalization
of
earnings or profits,
together
with
a
distribution of the
added shares which
evidence the assets
transferred to capital.
Q: May dividends be paid out of the paid-in
capital?
A: Additional Paid-In Capital Stock shall neither be
declared as dividend nor shall it be reclassified to
absorb deficiency except through an organizational
restructuring duly approved by the SEC. (Divina,
2021)
Wrongful or Illegal Declaration of Dividends
The Board of Directors is liable in case of wrongful
or illegal declaration of dividends. The stockholders
should return the dividends to the corporation
based on the principle of solutio indebiti.
Q: Can the board be compelled to declare
dividends every year?
A: NO. Declaration of dividends is discretionary
upon the board. Dividends are payable only when
there are profits earned by the corporation and as a
general rule, even if there are existing profits, the
Board of Directors has the discretion to determine
whether or not dividends are declared. (Republic
Planters Bank v. Agana, G.R. No. 51765, 03 Mar.
1997)
Persons Entitled to Receive Dividends
Dividends are payable to the stockholders of record
as of the date of the declaration of dividends or
holders of record on a certain future date, as the
case may be, unless the parties have agreed
otherwise. (Cojuangco and Prime Holdings, Inc., v.
Sandiganbayan G.R. No. 183278, 24 Apr. 2009)
Prohibition Imposed by Law on UREs of a Stock
Corporation
Transfers of Shares Unrecorded in the Books of
the Corporation
GR: Stock corporations are prohibited from
retaining surplus profits in excess of 100% percent
of their paid-in capital stock.
Transfer of shares which is not recorded in the
books of the corporation is valid only as between
the parties, hence, the transferor has the right to
dividends as against the corporation without notice
of transfer, but it serves as trustee of the real owner
of the dividends, subject to the contract between the
transferor and transferee as to who is entitled to
receive the dividends. (Ibid.)
XPNs: (2001 BAR)
1.
When justified by definite corporate expansion
projects or programs approved by the board of
directors;
2.
When the corporation is prohibited under any
loan agreement with any financial institution or
creditor, whether local or foreign, from
declaring dividends without its/his consent,
and such consent has not yet been secured; or
Receipt of Dividends in Case of Mortgaged or
Pledged Shares
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, RCC)
XPN: 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.
3.
UNIVERSITY OF SANTO TOMAS
2024 GOLDEN NOTES
GR: The mortgagor or the pledgor has the right to
receive the dividends.
74
COMMERCIAL LAW
Q: May stock dividends be issued to a person
who is not a stockholder in payment of services
rendered?
corporation, of both the managing and the
managed corporation, at a meeting duly called
for the purpose;
A: NO. Only stockholders are entitled to payment of
stock dividends. (Nielson & Co., Inc. v. Lepanto
Consolidated Mining Co., G.R. No. L-217601, 17 Dec.
1966)
3.
Distinction between Distribution in Liquidation
and Ordinary Dividend
If the distribution is in the nature of a recurring
return on stock, it is an ordinary dividend. However,
if the corporation is really winding up its business
or recapitalizing and narrowing its activities, the
distribution may properly be treated as incomplete
or partial liquidation and as payment by the
corporation to the stockholder for his stock or as
return of the capital invested by him. (Wise & Co.,
Inc. v. Meer, G.R. No. 48231, 30 June 1947)
4.
POWER TO ENTER INTO MANAGEMENT
CONTRACT
Management Contract
A Management Contract is any contract whereby a
corporation undertakes to manage or operate all or
substantially all of the business of another
corporation, whether such contracts are called
service contracts, operating agreements or
otherwise. (Sec. 43, RCC)
Requirements for Validity of Management
Contract
The contract must be approved by at least
majority of the BOD or BOT of both managing
and managed corporation;
2.
The contract must be approved by the
stockholders owning at least the majority of the
OCS, or members in case of a non-stock
a.
Stockholders representing the same
interest in both of the managing and the
managed corporation own or control more
than 1/3 of the total outstanding capital
stock entitled to vote of the managing
corporation (Interlocking Stockholders);
b.
Majority of the members of the BOD of the
managing corporation also constitute a
majority of the BOD of the managed
corporation. (Interlocking Directors)
No management contract shall be entered into
for a period longer than five (5) years for any
one (1) term except for service contracts or
operating agreements which relate to the
exploration, development, exploitation, or
utilization of natural resources may be entered
into for such periods as may be provided by the
pertinent laws or regulations. (Sec. 43, RCC)
Q: ABC Management Inc. presented to the DEF
Mining Co, the draft of its proposed Management
Contract. As an incentive, ABC included in the
terms of compensation that ABC would be
entitled to 10% of any stock dividend which DEF
may declare during the lifetime of the
Management Contract. Would you approve of
such provision? If not, what would you suggest
as an alternative? (1991 BAR)
NOTE: Sec. 43 refers only to a management contract
with another corporation. Hence, it does not apply
to management contracts entered into by a
corporation with natural persons.
1.
The contract must be approved by the
stockholders of the managed corporation
owning at least 2/3 of the OCS entitled to vote
or 2/3 of the members when:
A: NO. I would not approve of a proposed
stipulation in the management contract that the
managing
corporation,
as
an
additional
compensation to it, should be entitled to 10% of any
stock dividend that may be declared. Stockholders
are the only ones entitled to receive stock dividends.
(Nielson & Co., Inc. v. Lepanto Consolidated Mining,
G.R. No. L-21601, 17 Dec. 1966)
75
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
2024 GOLDEN NOTES
I would add that the unsubscribed capital stock of a
corporation may only be issued for cash or property
or for services already rendered constituting a
demandable debt. (Sec. 61, RCC) As an alternative, I
would suggest that the managing corporation
should instead be given a net profit participation
and, if it later so desires, to then convert the amount
that may be due thereby to equity or shares of stock
at no less than the par value thereof.
(Maria Clara Pirovana, et al. v. the De La Rama
Steamship Co., G.R. No. L-5377, 29 Dec. 1954)
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.
Acts entered into on behalf of the corporation
by persons who have no corporate authority or
exceeded the scope of their authority; and
3.
Acts or contracts which are per se illegal as
being contrary to law. (Divina, 2020)
Doctrine of Individuality of Subscription
A subscription is one, entire, and indivisible whole
contract. This indivisibility of subscription is
absolute as Sec. 63 of the RCC speaks no exception.
The purpose of the doctrine is to prevent the partial
disposition of a subscription, which is not fully paid,
because if it is permitted and the stockholder
subsequently becomes delinquent in the payment of
his subscription, the corporation may not be able to
sell as many of his subscribed shares as would be
necessary to cover the total amount from him
pursuant to Sec. 67 of the RCC. (Divina, 2021)
Q: When is there an ultra vires act on the part of
(a) the corporation; (b) the board of directors;
and (c) the corporate officers? (2009 BAR)
A:
a. Corporation – Under Sec. 45 (now Sec. 44, RCC)
of the Corporation Code, no corporation shall
possess or exercise any corporate power except
those conferred by the Code or by its AOI and
except such as are necessary or incidental to the
exercise of the powers so conferred. When a
corporation does an act or engages in an activity
which is outside of its express, implied, or
incidental powers set out in its AOI, the act is
deemed to be ultra vires.
ULTRA VIRES DOCTRINE
No corporation shall possess or exercise any
corporate powers except those conferred by this
Code or by its articles of incorporation and except
such as are necessary or incidental to the exercise of
the powers so conferred. (Sec. 44, RCC)
b.
Board of Directors – When the Board engages
in an activity or enters into a contract without
the ratificatory vote of the stockholders in those
instances where the Corporation Code so
requires such ratificatory vote, such as when
the corporation is made to invest in another
corporation or engage in a business which is not
in pursuit of its primary purpose, the board
resolution not ratified by stockholders owning
or representing at least 2/3 of the outstanding
capital stock would make the transaction void,
as being ultra vires.
c.
Corporate Officers – When a corporate officer
enters into a contract on behalf of the
corporation without having been so expressly
or impliedly authorized by the Board of
Ultra Vires Act
An ultra vires act is one committed outside the
object for which a corporation is created as defined
by the law of its organization and therefore beyond
the power conferred upon it by law. (Atrium
Management Corporation v. CA, G.R. No. 109491, 28
Feb. 2001)
Unlike illegal acts which contemplate the doing of an
act that is contrary to law, morals, or public policy
or public duty, and are void, ultra vires acts are not
illegal and void ab initio but are not merely within
the scope of the articles of incorporation. They are
merely voidable and may become binding and
enforceable when ratified by the stockholders.
UNIVERSITY OF SANTO TOMAS
2024 GOLDEN NOTES
76
COMMERCIAL LAW
Directors, even when the act or contract falls
within the corporation’s express, implied or
incidental power, then the unauthorized act of
the corporate officer is deemed to be ultra vires.
purpose. At the time, however, Asuncion (a
member of the board), was still out of the
country. Asuncion assailed the validity of the
said board resolution contending that the same
was ultra vires on the ground that she was not
duly notified of the special meeting in which it
was passed. Is the disputed board resolution
ultra vires as urged by Asuncion?
Ultra Vires Acts by Reason of Lack of Authority
vs. Ultra Vires Acts by Reason of Illegality (Illegal
Acts)
A: NO. The assailed resolution covers a subject
which concerns the benefit and welfare of the
company’s employees. To stress, providing gratuity
pay for its employees is one of the express powers
of the corporation under the Corporation Code,
hence, Asuncion cannot invoke the doctrine of ultra
vires to avoid any liability arising from the issuance
of the subject resolution. (Lopez Realty, Inc. v.
Fontecha, G.R. No. 76801, 11 Aug. 1995)
ULTRA VIRES ACT
ILLEGAL ACTS
Lawfulness
Unlawful; against
Not necessarily unlawful,
law, morals, public
but outside the powers of
policy, and public
the corporation.
order.
Enforceability
Merely voidable and may
be
enforced
by Void; cannot be
performance, ratification, validated.
or estoppel.
Ratification
Can be ratified.
Q: Sea Lion International Port Terminal
Services, Inc. filed a complaint for prohibition
and mandamus against National Power
Corporation (NPC) and Philippine Ports
Authority (PPA), wherein Sea Lion alleged that
NPC had acted in bad faith and with grave abuse
of discretion in not renewing its contract for
stevedoring
services
for
coal-handling
operations at NPC's plant, and in taking over its
stevedoring services. NPC seeks to annul the
order of the RTC in issuing a writ of preliminary
injunction which enjoined NPC from further
undertaking stevedoring and arrastre services
in its pier and directing it either to enter into a
contract for stevedoring and arrastre services
or to conduct a public bidding therefor. Does
NPC have the power to undertake stevedoring
and arrastre services in its pier?
Cannot be ratified.
Binding Effect
Can bind the parties if
wholly or partly executed.
Cannot bind
parties.
the
Acts that do Not Comply with Formalities vs.
Unauthorized Acts
ACTS THAT DO
NOT COMPLY
WITH
FORMALITIES
If certain procedures
or formalities are
prescribed in the AOI
or bylaws and the
same
are
not
complied with, the
resulting act is not an
ultra vires act of the
corporation.
UNAUTHORIZED ACTS
The act may be within
the powers of the
corporation but not
within the powers of the
particular officer. The
latter is sometimes
referred to as ultra vires
act of the officer. The law
on agency applies.
A: YES. NPC has the power to undertake stevedoring
and arrastre services. To carry out the national
policy of total electrification of the country, the NPC
was created and empowered not only to construct,
operate and maintain power plants, reservoirs,
transmission lines, and other works, but also to
exercise such powers and do such things as may be
reasonably necessary to carry out the business and
purposes for which it was organized, or which, from
time to time, may be declared by the Board to be
Q: The board of directors of Lopez Realty, Inc.
passed a resolution providing gratuity pay for
its employees in a special meeting called for the
77
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
2024 GOLDEN NOTES
necessary, useful, incidental or auxiliary to
accomplish said purpose.
2.
If that act is one which is lawful in itself and not
otherwise prohibited and is done for the purpose of
serving corporate ends, and reasonably contributes
to the promotion of those ends in a substantial and
not in a remote and fanciful sense, it may be fairly
considered within the corporation's charter
powers.
It requires presentation of evidence of similar act(s)
executed either in its favor or in favor of other
parties. It is not the quantity of similar acts which
establishes apparent authority but the vesting of a
corporate officer with the power to bind the
corporation. (Advance Paper Corp. v. Arma Traders
Corp., G.R. No. 176897, 11 Dec. 2013)
The rule is that a corporation is not restricted to the
exercise of powers expressly conferred upon it by
its charter but has the power to do what is
reasonably necessary or proper to promote the
interest or welfare of the corporation.
Q: The Spouses Macam opened Savings Account
Allied Bank-Pasong Tamo (AB-PT) Branch. The
Spouses Macam were able to make withdrawals
in the total amount of P490,000.00, leaving a
balance of P1.1 Million in their savings account
with AB-PT.
The stevedoring services which involve the
unloading of the coal shipments into the NPC pier
for its eventual conveyance to the power plant are
incidental and indispensable to the operation of the
plant. (NPC v. Vera, et al., G.R. No. 83558, 27 Feb.
1989)
Caña, head of branch, instructed the bank teller
to debit specific amounts from different
accounts. Mamalayan, the Branch Operating
Officer, learned of the debiting of the three
accounts. Caña instructed Mamalayan to book
the amount of P20.3 Million under "Accounts
Receivable" corresponding to the unrecovered
amount from the P46 Million which had been
earlier transferred to various deposit accounts.
Angela Barcelona, Region Head, Retail Banking
Group for Allied Bank's South Metro Manila
Branches, ordered the debit of the remaining
P1.1 Million from the account of the Spouses
Macam which resulted in the closure thereof.
The Sps. Macam learned of the closure after they
were unable to withdraw from their account.
Hence, the Sps. Macam filed the complaint for
Damages. Is Allied Bank liable?
Instances When the Acts of Officers Bind the
Corporation (P-R-A-DA)
1.
2.
3.
4.
If it is Provided in the By-laws;
When the act was Ratified;
If Authorized by the board; or
Under the Doctrine of Apparent Authority
Doctrine of Apparent Authority (2015 BAR)
If a corporation knowingly permits one of its
officers or any other agent to act within the scope of
an apparent authority, it holds him out to the public
possessing the power to do those acts; and thus, the
corporation will, as against anyone who has in good
faith dealt with it through such agent, be estopped
from denying the agent’s authority.
A: YES. All banks are charged with extraordinary
diligence in the handling and care of their deposits
as well as the highest degree of diligence in the
selection and supervision of its employees.
Its existence may be ascertained through:
1.
The general manner in which the corporation
holds out an officer or agent as having the
power to act, or in other words, the apparent
authority to act in general, with which it clothes
him; or
UNIVERSITY OF SANTO TOMAS
2024 GOLDEN NOTES
The acquiescence in his acts of a particular
nature, with actual or constructive notice
thereof, within or beyond the scope of his
ordinary powers.
The authority of a corporate officer or agent in
dealing with third persons may be actual or
apparent. The apparent authority to act for and to
bind a corporation may be presumed from acts of
78
COMMERCIAL LAW
recognition in other instances, wherein the power
was exercised without any objection from its board
or shareholders.
Consequences of Ultra Vires Acts
Caña's act of approving the P46 Million fund
transfer and the subsequent transfers to different
accounts in various branches of Allied Bank leading
to the P1,590,000.00 transfer to the account of the
Spouses Mario Macam all appear to have been
clothed with authority. Indeed, the subsequent
transfers were approved by several Branch Heads.
(Allied Banking Corporation v. Spouses Macam, G.R.
No. 200635, 01 Feb. 2021)
1.
If the contract is executed on both sides – the
courts will not set aside or interfere to deprive
either party of what has been acquired under
them.
2.
If the contract is executory on both sides – it
will not be enforced at the suit of either party,
because their enforcement is not required by
any equitable principles and will be contrary to
public policy.
3.
If the contract is executed on one side, and
executory on the other – courts in some
jurisdictions, although not in all, will enforce in
favor of the party who has executed the same on
his part against the other party who has
received and retained the benefits on the
ground that equitable principles and
outweighing considerations of public policy
require that the latter should not be permitted,
while retaining the benefits of the contract, to
escape liability on the ground that it was ultra
vires.
4.
Contracts, whether wholly executory or
executed on one side, apparently authorized,
but in fact, ultra vires because they are made
for a purpose not within the scope of the
business of the corporation, the ultra vires
purpose being unknown to the other party –
enforceable against the corporation. (Divina,
2020)
These are the effects for the specific acts:
Apparent Authority is Determined by Acts of
Principal, Not by Acts of Agent
The Doctrine of Apparent Authority is determined
by the acts of the principal and not by the acts of the
agent. As applied to corporations, the doctrine of
apparent authority provides that “a corporation is
estopped from denying the officer's authority if it
knowingly permits such officer to act within the
scope of an apparent authority, and it holds him out
to the public as possessing the power to do those
acts.” (Agro Food and Processing Corp. v. Vitarich
Corp., G.R. No. 217454, 11 Jan. 2021)
When Corporation is Estopped to Deny
Ratification of Acts Entered by Officers or Agents
Generally, when the corporation has knowledge
that its officers or agents exceed their power, it must
promptly disaffirm the contract or act, and allow the
other party or third person to act in the belief that it
was authorized or has been ratified. Otherwise, if it
acquiesces, with knowledge of the facts, or if it fails
to disaffirm, ratification will be implied. (Premiere
Development Bank v. CA, G.R. No. 159352, 14 Apr.
2004)
Remedies in Case of Ultra Vires Acts
If the act is yet to be done, the remedy is one of
injunction to enjoin the performance or continued
performance of the ultra vires act.
So settled is the precept that ratification can be
made by the corporate board either expressly or
impliedly. Implied ratification may take various
forms - like silence or acquiescence; by acts showing
approval or adoption of the contract; or by
acceptance and retention of benefits flowing
therefrom. (MWSS v. CA, G.R. No. 126000, 07 Oct.
1998)
If the act has already been performed, a stockholder
may file a derivative suit on behalf of the
corporation to set aside the ultra vires act. (Divina,
2020)
79
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
2024 GOLDEN NOTES
Q: X Corp., whose business purpose is to
manufacture and sell vehicles, invested its funds
in Y Corp., an investment firm, through a
resolution of its Board of Directors. The
investment grew tremendously on account of Y
Corp.'s excellent business judgment. But a
minority stockholder in X Corp. assails the
investment as ultra vires. Is he right and, if so,
what is the status of the investment? (2011 BAR)
A: VOIDABLE – This is an ultra vires act on part of
XL Foods Corporation and is not one of the powers
provided for in Sec. 35 of the RCC. It can be ratified
provided it is not illegal per se but merely beyond
the powers of the corporation by the approval of the
majority of the board and vote of the stockholders
representing at least two thirds of the outstanding
capital stock. Where the contract or act is not illegal
per se but merely beyond the power of the
corporation, the same is merely voidable and may
be enforced by performance, ratification, or
estoppels, or on equitable especially if no creditors
are prejudiced thereby and no rights of the state or
the public are involved. (Fletcher, p.585; Republic v.
Acoje Mining Co., Inc., G.R. No. L-18062, 28 Feb. 1963)
A: YES. It is an ultra vires act of its Board of Directors
but voidable only, subject to stockholders’
ratification.
Q: Which of the following corporate acts is valid,
void, or voidable?
a. XL Foods Corporation, which is engaged in
the fast-food business, entered into a
contract with its President, Jose Cruz,
whereby the latter would supply the
corporation with its meat and poultry
requirements.
F. STOCKHOLDERS AND MEMBERS
1. DOCTRINE OF EQUALITY OF SHARES
Under the doctrine of equality of shares, all stocks
issued by the corporation are presumed equal with
the same privileges and liabilities, provided that the
Articles of Incorporation is silent on such
differences. (CIR v. CA, G.R. No. 108576, 20 Jan. 1999)
A: VOIDABLE – A contract of the corporation with
one or more of its directors or trustees or officers is
voidable, at the option of such corporation (Sec. 31,
RCC). Such contract can be ratified by the vote of the
stockholders representing at least two-thirds of the
outstanding capital stock in a meeting called for the
purpose: Provided, that full disclosure of the
adverse interest of the directors or trustees
involved is made at such meeting: Provided,
however, That the contract is fair and reasonable
under the circumstances.
In considering the proposed dividend distribution
system, the entitlement of certain kinds of stocks to
preferences and benefits must be clearly and
expressly stated in the articles of incorporation of
BFDC. (SEC Opinion No. 10-20)
2. PARTICIPATION IN MANAGEMENT; VOTING
REQUIREMENTS
b. The Board of Directors of XL Foods
Corporation declared and paid cash
dividends without approval of the
stockholders.
Under the RCC, stockholders or members
periodically elect the board of directors or trustees,
who are charged with the management of the
corporation. The board, in turn, periodically elects
officers to carry out management functions on a
day-to-day basis. As owners, though, the
stockholders or members have residual powers
over fundamental and major corporate changes.
A: VALID – Approval of the stockholders is not
required in declaring cash dividends.
c.
XL Foods Corporation guaranteed the loan
of its sister company XL Meat Products, Inc.
(2002 BAR)
While stockholders and members (in some
instances) are entitled to receive profits, the
UNIVERSITY OF SANTO TOMAS
2024 GOLDEN NOTES
80
COMMERCIAL LAW
management and direction of the corporation are
lodged with their representatives and agents – the
board of directors or trustees. In other words, acts
of management pertain to the board; and those of
ownership, to the stockholders or members. In the
latter case, the board cannot act alone, but must
seek approval of the stockholders or members. (Tan
v. Sycip, G.R. No. 153468, 17 Aug. 2006)
3.
Who May Be a Proxy
Any person whom the stockholder or member sees
fit to represent him.
Proxy
NOTE: By-laws restricting the stockholder’s or
member’s right in this respect are void.
Stockholders and members may vote in person or
by proxy in all meetings of stockholders or
members. (Sec. 57, RCC)
Further, the same person may act as proxy for one
or several stockholders or members.
However, the right of members to vote by proxy
may be denied under the AOI or by-laws of a nonstock corporation. (Sec. 88, RCC)
Duration of Proxy
The term “proxy” is a written instrument signed by
the stockholder authorizing another person to
exercise the voting rights of the former. It may also
refer to the person exercising the voting authority
granted by the stockholder. (Divina, 2021)
It is also used to apply to the holder of the authority
or person authorized by an absent stockholder or
member to vote for him at a stockholders’ or
members’ meeting.
1.
Specific proxy – authority granted to the proxy
holder to vote only for a particular meeting on
a specific date.
2.
Continuing proxy – authority granted a proxy
to appear and vote for and on behalf of a
shareholder for a continuing period which
should not be more than five (5) years at any
one time. By-laws may provide for a shorter
duration of a continuing proxy.
Extent of Authority
NOTE: A proxy is a special form of agency. A proxy
holder is an agent and as such a fiduciary.
1.
Since a proxy acts for another, he may act as such
although he himself is disqualified to vote his
shares. A proxy-stockholder disqualified to vote
because his stock has been declared delinquent may
vote the stocks of his principal which are not
delinquent.
Assures the presence of a quorum in meetings
of stockholders of large corporations;
2.
Enables those who do not wish to attend a
stockholders’ or members’ meeting to protect
their interest by exercising their right to vote
through a representative; and
General Proxy – A general discretionary
power to attend and vote at an annual meeting,
with all the powers the undersigned would
possess if personally present, to vote for
directors and all ordinary matters that may
properly come before a regular meeting.
NOTE: A holder of a general proxy has no
authority to vote for a fundamental change in
the corporate charter or other unusual
transactions such as merger or consolidation.
Purposes of Proxies
1.
One of the devices in securing voting control or
management control in the corporation. (Ibid.)
2.
81
Limited Proxy – Restrict the authority to vote
to specified matters only and may direct the
manner in which the vote shall be cast. (Ibid.)
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
2024 GOLDEN NOTES
Requirements of a Valid Proxy
1.
2.
3.
4.
Proxies shall be in writing and shall be signed
by the stockholder or member concerned. Oral
proxies are NOT valid;
Voting by members in nonstock corporations.
(Sec. 88, RCC)
NOTE: In nonstock corporations the right to
vote by proxy, or even the right to vote may be
denied to members in the AOI or the by-laws as
long as the denial is not discriminatory.
The proxy shall be filed within a reasonable
time before the scheduled meeting with the
corporate secretary;
5.
Unless otherwise provided (continuing in
nature) in the proxy, it shall be valid only for the
meeting for which it is intended. The authority
may be general or limited; and
In considering other matters:
a.
b.
c.
4.
No proxy shall be valid and effective for a period
longer than 5 years at any one time. (Sec. 57,
RCC)
Power to Appoint a Proxy is a Purely Personal
Right
Instances when the Right to Vote by Proxy may
be Exercised
1.
The right to vote is inseparable from the right of
ownership of stock. The appointment of proxy is,
therefore, purely personal and to be valid, a proxy to
vote stock must have been given by the person who
is the legal owner of the stock entitled to vote the
same at the time it is voted. (SEC Opinion, 03 Dec.
1993, citing 5 Fletcher, Sec. 2053)
Election of the BOD/BOT; (Sec. 23, RCC)
NOTE: When proxies are solicited in relation to
the election of corporate directors, the resulting
controversy, even if it ostensibly raised the
violation of the SEC rules on proxy solicitation,
should be properly seen as an election
controversy within the original and exclusive
jurisdiction of the trial courts by virtue of Sec.
5.2 of the SRC in relation to Sec. 5(c) of P.D. No.
902-A. From the language of Sec. 5(c) of P.D. No.
902-A, it is indubitable that controversies as to
the qualification of voting shares, or the validity
of votes cast in favor of a candidate for election
to the board of directors are properly
cognizable and adjudicable by the regular
courts exercising original and exclusive
jurisdiction over election cases. (GSIS v. CA, G.R.
No. 183905, 06 Apr. 2009)
2.
3.
Unless the stockholder or member who executed a
proxy gives his consent in writing, a designated
proxy may not further re-designate another under
the same proxy. An alternate proxy can only act as
proxy in case of non-attendance of the other
designated proxy. (De Leon, supra)
Revocation of Proxy
A proxy may be revoked in writing, orally or by
conduct.
GR: One who has given a proxy the right to vote may
revoke the same at any time.
Voting in case of joint ownership of stock; (Sec.
55, RCC)
Voting by trustee under Voting
Agreements; (Sec. 58, RCC) and
Pledge or mortgage of shares; (Sec. 54,
RCC)
In all other matters as may be provided in
the by-laws; and
In all meetings of stockholders or
members. (Sec. 57, RCC)
XPN: If said proxy is coupled with interest, even if it
may appear by its terms to be revocable. (De Leon,
supra)
Trust
Last proxy given revokes all previous proxies. (SEC
Opinion, 14 Oct. 1991)
UNIVERSITY OF SANTO TOMAS
2024 GOLDEN NOTES
82
COMMERCIAL LAW
NOTE: It must be noted however that directors or
trustees cannot vote by proxy at board meetings.
(Sec. 52, RCC)
9.
Voting Trust Agreement
To aid a financially embarrassed corporation to
obtain a loan and protect its creditors.
NOTE: Unless expressly renewed, all rights granted
in a voting trust agreement shall automatically
expire at the end of the agreed period, and the
voting trust certificates as well as the certificates of
stock in the name of the trustee or trustees shall
thereby be deemed cancelled and new certificates of
stock shall be reissued in the name of the trustors.
(Sec. 58, RCC)
A voting trust agreement (VTA) is an agreement
whereby one or more stockholders confer upon a
trustee/s the right to vote and other rights
pertaining to the shares for a period generally not
exceeding five (5) years at any time and in return,
trust certificates are given to the stockholder/s,
which are transferable like stock certificates,
subject, to the trust agreement.
Effects of Voting Trust Agreement with Respect
to Trustee
Principal Purpose: To acquire control of the
corporation.
1.
To make possible a unified control of the affairs
of the corporation and a consistent policy by
binding stockholders to vote as a unit;
It is the trustee of the shares who acquires legal title
to the shares under the voting trust agreement and
thus entitled to the right to vote and the right to be
elected in the board of directors while the trustorstockholder has the beneficial title which includes
the right to receive dividends. (Lee v. CA, G.R. No.
93695, 04 Feb. 1992)
2.
To assure continuity of policy and management
especially of a new corporation desirous of
attracting investors;
But, having conveyed his legal title to the trustee,
the transferring stockholder is disqualified from
being elected as a director.
3.
To enable the owners of the majority of the
stock of the corporation to control the
corporation;
If the transferring stockholder executes the VTA
during his term as director, he shall cease to be a
director for the corporation. (Divina, 2021)
4.
To vest and retain the management of the
corporation in the persons originally promoting
it;
5.
To prevent a rival concern from acquiring
control of the corporation;
NOTE: The voting trust agreement filed with the
corporation shall be subject to examination by any
stockholder in the same manner as any other
corporate book or record. Both the transferor and
the trustee may exercise the right of inspection of all
corporate books and records. (Sec. 58, RCC)
6.
To carry out a proposed sale of the
corporation’s assets and to facilitate its
dissolution;
7.
To enable two holding companies to operate
jointly a corporation controlled by them;
8.
To effect a plan for reorganization of a
corporation in financial difficulty or in
bankruptcy proceedings;
Other Purposes
A Trustee has the right to terminate a voting trust
agreement when the trustee has committed a
breach of trust. (Everett v. Asia Banking Corp., G.R.
No. L-25241, 03 Nov. 1926)
83
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
2024 GOLDEN NOTES
Voting Trust Agreement vs. Proxy
VOTING TRUST
As to Extent of Right
A trustee can vote and
exercise all the rights
of the stockholder
even when the latter is
present.
PROXY
As to Revocability
If validly executed,
VTA is intended to be
irrevocable
for
a
definite and limited
period of time.
A
proxy,
unless
coupled with interest,
is revocable at any
time.
As to Term or Duration
An agreement must
not exceed 5 years at
any one time except
when the same is made
a condition of a loan.
As to Legal Title
Trustee acquires legal
title to the shares of the
transferring
stockholder.
Proxy has no legal title
to the shares of the
principal.
Governed by the law
on trust.
Governed by the law
on agency.
As to Right to Inspect
A trustee has the right
to inspect corporate
books.
Only the right to vote is
given.
A proxy does not have
a right of inspection of
corporate books.
Pooling Agreement
Pooling or voting agreements are agreements by
which two or more stockholders agree that their
shares shall be voted as a unit. They are usually
concerned with the election of directors to gain
control of the management. The parties remain the
legal owners of their stocks with the right to vote
them. (De Leon, supra)
As to Limitations to Act
Trustee is not limited
to act at any particular
meeting.
A proxy is usually of
shorter
duration
although under Sec. 58
it can be for a longer
period not to exceed 5
years at any one time.
As to Governing Law
As to Rights Included
Right to vote as well as
other rights may be
given except the right
to receive dividends.
The trustee may vote
in person or by proxy
unless the agreement
provides otherwise.
A proxy can only vote
in the absence of the
stockholder.
Proxy can only base on
authority given.
As to Cancellation of Stock Certificate
The stock certificate
shall be cancelled and a
new one in the name of
the trustee shall be
issued stating that they
are issued pursuant to
a VTA.
NOTE: This does not involve a transfer of stocks but
is merely a private agreement. (Sec. 99, RCC)
No cancellation of the
certificate shall be
made.
UNIVERSITY OF SANTO TOMAS
2024 GOLDEN NOTES
Example: Shareholders A, B, C, D, and E hold 50% of
the outstanding capital stock, entered into a pooling
agreement to vote for F as a member of the board of
directors.
84
COMMERCIAL LAW
Validity of Pooling Agreements
b.
Pooling agreements are valid as long as they do not
limit the discretion of the BOD in the management
of corporate affairs or work any fraud against
stockholders not party to the contract.
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
c.
Distribute them on the same principle among
as many candidates as may be seen fit.
The validity and legality of such pooling agreements
depend upon the objects sought to be attained and
the acts which are done under them, and the other
circumstances. There is some authority for holding
pooling agreements to be invalid if the
consideration for entering into the same gives a
private benefit to the stockholder.
GR: 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.
XPN: Cumulative voting is allowed in the AOI or in
the bylaws.
Pooling Agreement vs. Voting Trust Agreement
3. PROPRIETARY RIGHTS
In a Pooling Agreement, the stockholders
themselves exercise their right to vote. On the other
hand, the trustees are the ones who exercise the
right to vote under the Voting Trust Agreement.
The following are the proprietary rights of the
stockholders:
1.
2.
3.
4.
5.
When Stockholders’ Action is Required
Under Sec. 6 of the Corporation Code, each share of
stock is entitled to vote, unless otherwise provided
in the AOI or declared delinquent under Sec. 67 of
the Corporation Code (now Sec. 66, RCC). (Tan v.
Sycip, G.R. No. 153468, 17 Aug. 2006)
a. RIGHT TO DIVIDENDS
(Sec. 42)
Stockholders’ action is required either by:
1.
2.
3.
It is the right of the stockholder to demand payment
of dividends after the board’s declaration.
Stockholders are entitled to dividends pro rata
based on the total number of shares that they own
and not on the amount paid for the shares. (SEC
Opinion, 10 Oct. 1992 and 16 July 1996)
Majority vote
Two-thirds votes; or
Cumulative voting. (Divina, 2021)
Cumulative Voting
GR: Stock corporations are prohibited from
retaining surplus profits in excess of 100% of their
paid-in capital stock.
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.
Right to Dividends;
Right of Appraisal;
Right to Inspect;
Pre-emptive Right; and
Right of First Refusal.
XPNs:
1) When justified by definite corporate expansion
projects or programs approved by the board of
directors;
Vote such number of shares for as many
persons as there are directors to be elected;
2) When the corporation is prohibited under any
loan agreement with any financial institution or
85
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
2024 GOLDEN NOTES
creditor, whether local or foreign, from
declaring dividends without its/his consent,
and such consent has not yet been secured; or
No dividends can be declared out of capital, except
when liquidating dividends distributed at
dissolution. (Sec. 139, RCC)
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, RCC)
Applying Dividends to Delinquent Shares
Cash
Cash dividends due on delinquent stock shall first
be applied to the unpaid balance on the
subscription plus cost and expenses.
Entitlement to Receive Dividends
GR: Those stockholders at the time of declaration
are entitled to dividends. (Sundiang Sr. & Aquino,
2009, citing SEC Opinion, 15 July 1994)
Stock
Stock dividends are withheld from the
delinquent stockholder until his unpaid
subscription is fully paid.
NOTE: Dividends declared before the transfer of
shares belong to the transferor and those declared
after the transfer, belong to the transferee. (Ibid.)
b. RIGHT TO INSPECTION
(Secs. 73-74)
XPN: In case a record date is provided for.
The stockholder’s right of inspection of the
corporation’s book and records is based upon his
ownership of shares in the corporation and the
necessity for self-protection. (Puno v. Puno
Enterprises, Inc., G.R. No, 177066, 11 Sept. 2009)
A record date is the date fixed in the resolution
declaring dividends, when the dividend shall be
payable to those who are stockholders of record on
a specified future date or as of the date of the
meeting declaring said dividend. (De Leon, supra)
The stockholder's right of inspection of the
corporation's books and records is based upon their
ownership of the assets and property of the
corporation. It is, therefore, an incident of
ownership of the corporate property. (Republic v.
Sandiganbayan, G.R. No. 88809, 10 July 1991)
Right of Holders of Non-Delinquent, But Not
Fully Paid Shares
Holders of shares not fully paid which are not
delinquent shall have all the rights of a stockholder.
GR: Prior to the declaration of a dividend, a
stockholder cannot maintain an action at law to
recover his share of the accumulated profits
because such stockholder has no individual interest
in the profits of a corporation until a dividend has
been declared.
The mere fact that the shareholding of a stockholder
is merely .001 per cent of the issued shares of stock
does not justify the denial of the request of
inspection of the corporate records. (Terelay v. Yulo,
G.R. No. 160924, 05 Aug. 2015)
Valid Purposes for Inspection
XPN: An action at law may be maintained where it
is alleged that sufficient net profits have been
earned to obligate the corporation to pay, however,
there must be a prior application with the directors
for the relief sought. If it appears that the directors
have wantonly violated their duty, and such
application would be inefficacious, such application
need not be made.
UNIVERSITY OF SANTO TOMAS
2024 GOLDEN NOTES
1.
2.
3.
4.
86
Ascertainment of financial condition of
corporation or propriety of dividends;
Value of the shares of stock for sale or
investment;
Existence of mismanagement;
Obtainment of list of stockholders to solicit
proxies or influence voting; and
COMMERCIAL LAW
5.
Obtainment of information in aid of litigation
with the corporation or its officers regarding
corporate transactions.
XPN: The stock and transfer book may be kept in the
principal office of the corporation or in the office of
its stock transfer agent, if one has been appointed by
the corporation. (Sec. 73, RCC)
Books and Records Required to be Kept
Requirements for the Exercise of the Right of
Inspection
The following are the books and records required to
be kept by private corporations:
1.
The AOI and bylaws of the corporation and all
their amendments;
2.
The current ownership structure and voting
rights of the corporation, including lists of
stockholders or members, group structures,
intra-group relations, ownership data, and
beneficial ownership;
3.
1.
The right must be exercised during reasonable
hours on business days;
2.
The person demanding the right has not
improperly used any information obtained
through any previous examination of the books
and records of the corporation;
3.
The demand is made in writing and good faith
or for legitimate purpose germane to his
interest as a stockholder. (Sec. 73, RCC)
The names and addresses of all the members
of the board of directors or trustees and the
executive officers;
Good purposes may be:
4.
A record of all business transaction;
5.
A record of the resolutions of the board of
directors or trustees and of the stockholders
or members;
6.
Copies of the latest reportorial requirements
submitted to the Commission;
4.
It should follow the formalities that may be
required in the by-laws;
7.
The minutes of all meetings of stockholders or
members, or of the board of directors or
trustees;
5.
The right does not extend to trade secrets; and
6.
The inspecting or reproducing party shall
remain bound by confidentiality rules under
prevailing laws, such as the rules on trade
secrets or processes under R.A. No. 8293,
otherwise known as the “Intellectual Property
Code of the Philippines”, as amended, R.A. No.
10173, otherwise known as the “Data Privacy
Act of 2012”, R.A. No. 8799, otherwise known as
“The Securities Regulation Code”, and the Rules
of Court.
7.
It is subject to limitations under special laws,
e.g. Secrecy of Bank Deposits and FCDA or the
Foreign Currency Deposits Act.
8.
Corporate records; and
9.
Stock and transfer book, in case of stock
corporations. (Sec. 73, RCC)
. To investigate acts of management;
. To investigate financial conditions; fix
value of shares;
. Mailing list for proxies; or
. Information for litigation.
NOTE: The duty to keep these books is imperative
and mandatory. The stockholder can likewise
inspect the financial statements of the corporation.
(Sec. 73, RCC).
Place Where Books and Records Shall be Kept
GR: All the above books and records must be kept at
the principal office of the corporation.
87
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
2024 GOLDEN NOTES
NOTE: The right extends, in compliance with equity,
good faith, and fair dealing, to a foreign subsidiary
wholly-owned by the corporation.
rights and privileges of his late father as
stockholder of Puno, Inc. The complaint thus
prayed that Joselito be allowed to inspect its
corporate book and be given an accounting and
all the profits pertaining to the shares of Puno.
Extent of Right
The right to inspect extends to the books and
records of the wholly-owned subsidiary of the
corporation. It would be more in accord with equity,
good faith and fair dealing to construe the statutory
right of the stockholder to inspect the books and
records of the corporation as extending to books
and records of its wholly-owned subsidiary which
are in the corporation’s possession and control.
(Gokongwei v. SEC, et al., G.R. No. L-45911, 11 Apr.
1979)
May an heir of a stockholder automatically
exercise the rights (inspection, accounting,
dividends) pertaining to the deceased?
A: NO. The stockholder’s right of inspection of the
corporation’s books and records is based upon his
ownership of shares in the corporation and the
necessity for self-protection. After all, a shareholder
has the right to be intelligently informed about
corporate affairs. Such right rests upon the
stockholder’s underlying ownership of the
corporation’s assets and property. Similarly, only
stockholders of record are entitled to receive
dividends declared by the corporation, a right
inherent in the ownership of the shares.
Persons Entitled to Right
The following are entitled to inspect the corporate
books:
1.
Any director, trustee, or stockholder or member
of the corporation at reasonable hours on
business day (Sec. 73, RCC);
2.
Voting trust certificate holder – The term
“stockholder”, as used in Sec. 73, RCC means not
only a stockholder of record; it includes a voting
trust certificate holder who has become merely
an equitable owner of the shares transferred
(Sec. 58, RCC);
3.
Stockholder of a sequestered company
(Republic v. Sandiganbayan, supra); and
4.
Beneficial owner of shares – pledgee, judgment
debtor, buyer from record owner. This is
provided that his interest is clearly established
by evidence.
Upon the death of a shareholder, the heirs do not
automatically become stockholders of the
corporation and acquire the rights and privileges of
the deceased as shareholder of the corporation. The
stocks must be distributed first to the heirs in estate
proceedings, and the transfer of the stocks must be
recorded in the books of the corporation. During
such interim period, the heirs stand as the equitable
owners of the stocks, the executor or administrator
duly appointed by the court being vested with the
legal title to the stock. (Puno v. Puno Enterprises, Inc.,
G.R. No. 177066, 11 Sept. 2009)
Q: Who are the persons who may be held liable
under Sec. 73, RCC?
A: It is clear that a criminal action based on the
violation of the second or fourth paragraphs of Sec.
74 (now Sec. 73) can only be maintained against
corporate officers or such other persons that are
acting on behalf of the corporation. Violations of the
second and fourth paragraphs of Sec. 74 (now Sec.
73) contemplates a situation wherein a corporation,
acting thru one of its officers or agents, denies the
right of any of its stockholders to inspect the
records, minutes and the stock and transfer book of
Q: The deceased Carlos Puno, was an
incorporator of Puno Enterprises, Inc. (Puno,
Inc). Joselito Musni Puno, claiming to be an heir
of Carlos Puno, initiated a complaint for specific
performance against Puno, Inc. Joselito averred
that he is the son of the deceased with the
latter’s common-law wife, Amelia Puno. As
surviving heir, he claimed entitlement to the
UNIVERSITY OF SANTO TOMAS
2024 GOLDEN NOTES
88
COMMERCIAL LAW
such corporation. (Yujuico v. Quiambao, G.R. No.
180416, 02 June 2014)
Requisites for Existence of Probable Cause to
File a Criminal Case of Violation of a
Stockholder’s Right to Inspect Corporate Books
Remedies for Enforcement
1.
2.
1.
A director, trustee, stockholder or member has
made a prior demand in writing for a copy or
excerpts from the corporation’s records or
minutes;
2.
Any officer or agent of the concerned
corporation shall refuse to allow the said
director, etc., to examine and copy said
excerpts;
3.
If such refusal is made pursuant to a resolution
or order of the BOD’s the liability for such action
shall be imposed upon the directors or trustees
who voted such refusal; and
4.
Where the officer or agent of the corporation
sets up the defense that the person demanding
to examine and copy excerpts from the records
and minutes has improperly used any
information secured through any prior
examination of the same or was not acting in
good faith or for a legitimate purpose in making
his demand, the contrary must be shown or
proved. (Ang-Abaya v. Ang, G.R. No. 178511, 04
Dec. 2008)
Action for mandamus or damages; and
Civil and criminal liability.
Q: PASARC filed an Amended Petition for
Injunction and Damages with prayer for
Preliminary Injunction and/or Temporary
Restraining Order seeking to restrain
respondents, who are stockholders of the
corporation, from demanding inspection of its
confidential and inexistent records. The RTC
issued an Order granting PASAR's prayer for a
writ of preliminary injunction. On appeal, the CA
held that there was no basis to issue an
injunctive writ. Will injunction lie to prevent the
respondents from invoking their right to
inspect?
A: NO. An action for injunction filed by a corporation
generally does not lie to prevent the enforcement by
a stockholder of his or her right to inspection. The
Corporation Code provides that a stockholder has
the right to inspect the records of all business
transactions of the corporation and the minutes of
any meeting at reasonable hours on business days.
However, this right is not absolute and may be
refused when the information is not sought in good
faith or is used to the detriment of the corporation.
But the impropriety of purpose such as will defeat
enforcement must be set up by the corporation
defensively if the Court is to take cognizance of it as
a qualification.
The Corporation Code has granted to all
stockholders the right to inspect the corporate
books and records, and in so doing has not required
any specific amount of interest for the exercise of
the to inspect. (Terelay Investment and Development
Corp. v. Yulo, G.R. No. 160924, 05 Aug. 2015)
In other words, corporations may raise their
objections to the right of inspection through
affirmative defense in an ordinary civil action for
specific performance or damages, or through a
comment (if one is required) in a petition for
mandamus. In this case, the petitioner did not raise
such limitations as a matter of defense. (PASARC v.
Lim, G.R. No. 172948, 05 Oct. 2016)
Defenses that can be set up against inspecting
party
1.
2.
3.
89
Improper use of the information obtained in the
past;
Not acting in good faith or legitimate purpose;
and
Is a competitor, director, officer, controlling
stockholder or otherwise represents the
interests of a competitor. (Sec. 73, RCC
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
2024 GOLDEN NOTES
Exercise of Preemptive Right
c. PRE-EMPTIVE RIGHT
(Sec. 38)
Preemptive right must be exercised in accordance
with the AOI or the By-Laws. When the AOI and the
By-Laws are silent, the Board may fix a reasonable
time within which the stockholders may exercise
the right.
It is the right of shareholders to subscribe to all
issues or disposition of shares of any class in
proportion to their respective shareholdings, unless
such right is denied by the AOI or an amendment
thereto, and subject to certain exceptions. (Sec. 38,
RCC)
Stock transactions covered includes:
1.
NOTE: The preemptive right of stockholders in
close corporations shall extend to all stock to be
issued, including reissuance of treasury shares,
whether for money, property, or personal services,
or in payment of corporate debts, unless the AOI
provides otherwise. (Sec.101, RCC)
2.
3.
The issuance of shares pursuant to an increase
in the authorized capital stock;
Opening for subscription the unissued portion
of existing authorized capital stock; and
Re-issuance of treasury shares.
Transferability of Preemptive Right
Pre-emptive Right (2019 BAR)
Preemptive right is transferable unless there is an
express restriction in the AOI.
All stockholders shall enjoy the pre-emptive right to
subscribe to all issues or disposition of shares of any
class in proportion to their present shareholdings,
unless such right is denied by the articles of
incorporation or an amendment thereto. (Sec. 38,
RCC)
Waiver of Preemptive Right by the Stockholder
The stockholder may waive his pre-emptive right
either expressly or impliedly as when the
stockholder fails to exercise his pre-emptive right
within the applicable period after being notified and
given an opportunity to avail of such right.
This means that except in the cases provided by law,
shares of stock of the corporation should first be
offered to the stockholders prior to any offer to nonstockholders.
The stockholder must be given a reasonable time
within which to exercise their preemptive
rights. Upon the expiration of said period, any
stockholder who has not exercised such right is
deemed to have waived it. (Majority Stockholders of
Ruby Industrial Corp. v. Lim, G.R. Nos. 165887 &
165929, 06 June 2011)
Purpose of Pre-emptive Right
To enable the shareholder to retain his
proportionate control in the corporation (nondilution) and to retain his equity in the surplus.
Denial of Preemptive Right
NOTE: 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; or to shares issued in good faith with the
approval of the stockholders representing 2/3 of
the OCS, in exchange for property needed for
corporate purposes or in payment of a previously
contracted debt; (Sec. 38, RCC)
UNIVERSITY OF SANTO TOMAS
2024 GOLDEN NOTES
There is preemptive right unless such right is
denied by the AOI or an amendment thereto.
Pre-emptive Right is Available on the Reissuance of Treasury Shares
Since Sec. 38 of the RCC uses the phrase “all issues
or disposition of shares of any class”, pre-emptive
right extends not only to the issuance of new shares
resulting from an increase in capital stock but also
90
COMMERCIAL LAW
to the issuance of previously subscribed shares
which form part of the existing authorized capital
stock, as well as to the disposition of treasury
shares. (Divina, 2020)
plan the propriety or validity of which was on
question by the minority stockholders and
subsequently disapproved by the Supreme Court
amounts to unlawful dilution of the minority
shareholdings. (Majority Stockholders of Ruby
Industrial Corp. v. Miguel Lim and Minority
Stockholders of Ruby Industrial Corp., supra; Divina,
2014)
Pre-emptive Right may be Waived (2019 BAR)
The pre-emptive right may be waived by the
stockholder. However, the waiver should be given
individually by the stockholder concerned or by
another by way of Special Power of Attorney. Being
a personal right, the waiver cannot be waived by the
corporation itself through a stockholders’
resolution. (SEC Opinion, 12 Dec. 1994)
Pre-emptive Right vs. Right of First Refusal
RIGHT OF FIRST
REFUSAL
Description
PRE-EMPTIVE RIGHT
Right to subscribe to all
issuance or dispositions
of
shares
of
the
corporation even to the
subsequent
sale
of
treasury stocks.
A stockholder cannot be forced to waive the right
even if the majority of the stockholders opt to waive
it. (SEC Opinion No. 08-08, 31 Mar. 2008)
NOTE: If the board resolution approving the
issuance of shares prescribes a certain number of
days to exercise pre-emptive right and the
stockholder fails to exercise such right within the
fixed period, the stockholder is deemed to have
impliedly waived his right. (Divina, 2021)
Right to purchase
shares
of
a
stockholder.
To What does it Pertain
Pertains to the sale
Pertains to unsubscribed
of the stocks already
portion of the authorized
owned by another
capital stock.
stockholder.
Against Whom is it Exercised
Right
exercised
Right exercised against
against
a
cothe corporation.
stockholder.
Effect of the Absence of Express
Provision in the AOI
Remedies of a Stockholder whose Pre-emptive
Right is Violated
A stockholder whose pre-emptive right is violated
may maintain an action to compel the corporation
to give him that right. If the denial is by amendment
to the AOI, he may exercise his appraisal right as
such action restricts his rights as a stockholder. (Sec.
80(a), RCC)
May be exercised even
when there is no express
provision in the AOI or
amendment thereto.
Non-Existence of Pre-Emptive Right does NOT
Bar Challenge to Validity of Issuance of
Additional Shares if done in Breach of Trust
Can
only
be
exercised when so
provided in the AOI,
by-laws and printed
in
the
stock
certificate.
Treasury Shares
Even if pre-emptive right does not exist either
because the issue comes within the exceptions in
Sec. 38, RCC or because it is denied in the AOI, an
issue of shares may still be objectionable if the
directors acted in breach of trust and their primary
purpose is to perpetuate or shift control of the
corporation or to “freeze out” the minority interest.
The issuance of unissued shares out of the original
authorized capital stock pursuant to a rehabilitation
It includes
shares.
91
treasury
Does not include
treasury shares.
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
2024 GOLDEN NOTES
d. APPRAISAL RIGHT
(Secs. 80-85)
2.
The right of a stockholder to dissent and demand
payment of the fair value of the shares in the certain
instances provided in the RCC. (Sec. 80, RCC)
In case of sale, lease, exchange, transfer,
mortgage, pledge or other disposition of all or
substantially all of the corporate property and
assets as provided in the Code;
3.
In case of merger or consolidation; and
Requisites: (G-W-A-F-U)
4.
In case of investment of corporate funds for
any purpose other than the primary purpose
of the corporation; (Sec. 80, RCC)
1.
Any of the Grounds for appraisal must be
present;
2.
A Written demand on the corporation must be
made within 30 days after the date when the
vote was taken;
3.
The dissenting stockholders Attend the
meeting of the stockholders and voted against
the proposed action; and
4.
NOTE: Any stockholder of a close corporation may,
for any reason, compel said corporation to purchase
his shares at their fair value, which shall not be less
than their par or issued value, when the corporation
has sufficient assets in its books to cover its debts
and liabilities exclusive of capital stock. (Sec. 104,
RCC)
Q: Assuming a stockholder disagrees with the
issuance of new shares and the pricing for the
shares; may the stockholder invoke his
appraisal rights and demand payment for his
shareholdings? (1999 BAR)
The price of the Fair Market Value of the
shares on the day before the date of voting;
NOTE: In case of disagreement, the value will
be determined by appraisal of 3 disinterested
persons. (Sec. 81, RCC)
5.
A: NO. The stockholder may not invoke his appraisal
right because disagreement with the issuance of
new shares and its pricing do not fall under any of
the instances where the appraisal right is available.
The corporation has sufficient Unrestricted
retained earnings to pay. The trust fund
doctrine backstops the requirement of
unrestricted retained earnings to fund the
payment of the shares of stocks of the
withdrawing stockholders (Turner vs. Lorenzo
G.R. No. 157479, 24 Nov. 2010)
Effects of Exercise
1.
Once the dissenting stockholder demands
payment of the fair value of his shares:
Instances of Exercise of Appraisal Right
a.
Any stockholder of a corporation shall have the
right to dissent and demand payment of the fair
value of his shares in the following instances:
All rights accruing to such shares including
voting and dividend rights shall be
suspended;
b.
He shall be entitled to receive payment of
the fair value of his shares as agreed upon
between him and the corporation or as
determined by the appraisers chosen by
him;
c.
GR: He is not allowed to withdraw his
demand for payment of his shares
1.
In case any amendment to the AOI 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, or of extending or shortening the term of
corporate existence;
UNIVERSITY OF SANTO TOMAS
2024 GOLDEN NOTES
92
COMMERCIAL LAW
XPN: Unless the corporation consents
thereto.
2.
dissenting stockholder and his refusal to
accept payment is found by the court to be
unjustified. (Divina, 2020)
If the dissenting stockholder was not paid the
value of his shares within 30 days after the
award, his voting and dividend rights shall be
immediately restored until payment of his
shares (Sec. 82, RCC);
Q: In case of disagreement between the
corporation and a withdrawing stockholder
who exercises his appraisal right regarding the
fair value of his shares, a three-member group
shall by majority vote resolve the issue with
finality. May the wife of the withdrawing
stockholder be named to the three member
group? (2011 BAR)
NOTE: Even if his rights as stockholder are
suspended after his demand in writing is made,
he cannot be considered as an ordinary creditor
of the corporation (SEC Opinion, 11 Jan 1982);
3.
4.
A: NO. The wife of the withdrawing shareholder is
not a disinterested person.
Upon payment of the stockholder’s shares, all
his rights as stockholders are terminated, not
merely suspended (Sec. 81, RCC); and
Q: When does the right to payment cease?
If before the stockholder is paid, the proposed
corporate action is abandoned, his rights and
status as a stockholder shall thereupon be
permanently restored. (Sec. 83, RCC)
A: The right of the dissenting stockholder to be paid
the fair value of his shares shall cease, his status as
a stockholder shall thereupon be restored, and all
dividend distributions which would have accrued
on his shares shall be paid to him if:
Cost of Appraisal
1.
Demand for payment is withdrawn with the
consent of the corporation;
2.
The proposed corporate action is abandoned by
the corporation;
3.
The proposed corporate action is rescinded by
the corporation;
4.
The proposed corporate action is disapproved
by the SEC where such approval is necessary; or
5.
The SEC determines that the dissenting
stockholder is not entitled to the appraisal
right. (Sec. 83, RCC)
The costs and expenses of appraisal shall be borne
as follows:
1.
By the corporation –
a.
b.
2.
Where the price which the corporation
offered to pay the dissenting stockholder
is lower than the fair value as determined
by the appraisers named by them; or
Where an action is filed by the dissenting
stockholder to recover such fair value and
the refusal of the stockholder to receive
payment is found by the court to be
justified.
NOTE: A dissenting stockholder who demands
payment of his shares is no longer allowed to
withdraw from his decision unless the corporation
consents thereto.
By the dissenting stockholder –
a.
Where the price offered by the
corporation is approximately the same as
the fair value ascertained by the
appraisers; or
b.
Where the same action is filed by the
93
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
2024 GOLDEN NOTES
after all other remedies to obtain the relief sought
had failed. (Ago Realty & Development Corporation v.
magna Ready Mix Concrete Corporation, G.R. No.
210906/ G.R. No. 211203, 16 Oct 2019)
4. DERIVATIVE SUIT/INTRA-CORPORATE SUIT
Derivative suit
It is an action filed by stockholders in the name and
on behalf of the corporation to enforce a corporate
right or cause of action to set aside the wrongful acts
of the corporation’s directors and officers. (Divina,
2021)
Q: Royal Links Golf Club obtained a loan from a
bank which is secured by a mortgage on a titled
lot where holes 1, 2, 3 and 4 are located. The
bank informed the Board of Directors (Board)
that if the arrearages are not paid within thirty
(30) days, it will extra-judicially foreclose the
mortgage. The Board decided to offer to the
members 200 proprietary membership shares,
which are treasury shares, at the price of
P175,000.00 per share even when the current
market value is P200,000.00.
In derivative suit, the real party in interest is the
corporation, not the stockholders filing the suit. The
stockholders are technically nominal parties but are
nonetheless the active persons who pursue the
action for and on behalf of the corporation. (Florete
v. Florete, G.R. No. 174909, 20 Jan. 2016)
In behalf and for the benefit of the corporation,
Peter, a stockholder, filed a derivative suit
against the members of the Board for breach of
trust for selling the shares at P25,000.00, lower
than its market value, and asked for the
nullification of the sales and the removal of the
board members. Peter claims the Club incurred
a loss of PS million. The Board presented the
defense that in its honest belief any delay in the
payment of the arrearages will be prejudicial to
the Club as the mortgage on its assets will be
foreclosed and the sale at a lower price is the
best solution to the problem. Decide the suit.
(2016 BAR)
Requisites for the existence of a derivative suit
1.
It must be brought by one who was a
stockholder or member at the time the acts or
transactions subject of the action occurred and
the time the action was filed;
2.
Such stockholder or member has exerted all
reasonable efforts, and alleges the same with
particularity in the complaint, to exhaust all
remedies available under the articles of
incorporation, by-laws, laws or rules governing
the corporation or partnership to obtain the
relief he desires;
3.
No appraisal rights are available for the act/s
complained of; and
4.
The suit is not a nuisance or harassment suit. 5.
The suit must be brought in the name of the
corporation.
A: The derivative suit will not prosper because
while it was filed by a stockholder on behalf of the
corporation the complaint did not allege the other
elements of derivative suit namely, the exhaustion
of intra corporate remedies available, that it is not a
nuisance suit, and that appraisal right was not
available. (Ching v. Subic Bay Golf and Country Club,
G.R. No. 174353, 10 Sept. 2014)
Before instituting a derivative suit, the stockholder
must exert all reasonable efforts to exhaust all
remedies available under the articles of
incorporation, the by-laws, and the laws or rules
governing the corporation or partnership to obtain
the relief he or she desires. Such fact must then be
alleged with particularity in the complaint. The
obvious intent behind the rule is to make the
derivative suit the final recourse of the stockholder,
UNIVERSITY OF SANTO TOMAS
2024 GOLDEN NOTES
Furthermore, there was no wrongful act on the part
of the board of directors for simply selling the
treasury shares below market value given the
circumstances obtaining in the corporation. The
terms and conditions of the sale of treasury shares
are reasonably determined by the board of directors
under the business judgment rule. Under such rule,
questions of policy and management are left to the
94
COMMERCIAL LAW
sound discretion of the board of directors and their
acts are valid for as long as they acted in good faith
and not contrary to law. (Divina, 2020)
(derivative action). (Cua v. Tan, G.R. No. 182008, 04
Dec. 2009)
REPRESENTATIVE
SUIT
Q: In May 2018, ABC Corp. enters into a
merchandising contract which terms and
conditions were totally lopsided in favor of the
counterparty, XYZ, Inc. As a result, ABC Corp.
suffered tremendous financial losses.
DERIVATIVE
SUIT
As to who initiates the suit
Initiated by the
stockholder under his
own name or on behalf
of the other
stockholders
A year after, or in May 2019, Mr. X became a
stockholder of ABC Corp. Learning about the
circumstances surrounding the merchandising
contract, Mr. X filed a derivative suit against ABC
Corp. 's directors to claim damages on behalf of
ABC Corp. due to their mismanagement.
Initiated by the
stockholder on behalf
of the corporation
As to prayer
Was Mr. X's filing of a derivative suit proper?
(2019 BAR)
Seeks vindication for
injury to his or her
interest as a
stockholder
A: The filing of a derivative suit is not proper. One of
the requisites of a derivative suit is that the person
filing the suit must be a stockholder of the
corporation at the time the acts or transactions
subject of the action occurred and the time the
action was filed. (Sec. 1, Rule 8, Interim Rules) In the
present case, the transaction subject of the
derivative suit occurred when X was not yet a
stockholder. In fact, X only became a stockholder
one year thereafter. (Divina, 2020)
Seeks to recover for
the benefit of the
corporation and its
whole body of
shareholders when
injury is caused to the
corporation that may
be otherwise be
redressed because of
failure of the
corporation to act
As to rights concerned
Deals with individual
stockholder or class of
stockholder’s rights
Deals with corporate
rights
Jurisdiction Over Derivative Suits
5. DELINQUENCY
(Secs. 67-70)
Upon the transfer of the SEC’s jurisdiction over
intra-corporate disputes, pursuant to Sec. 5.2 of the
SRC, the distinction between intra-corporate and
non-intra-corporate
derivative
suits
was
obliterated. Jurisdiction over all derivative suits was
returned to the trial courts. (Metropolitan Bank &
Trust Company v. Salazar Realty Corporation, G.R.
No. 218738, 09 Mar, 2022)
Effect of Delinquency
No delinquent stock shall be voted for, be entitled to
vote, or be represented at any stockholder’s
meeting, nor shall the holder thereof be entitled to
any of the rights of a stockholder except the right to
dividends in accordance with the provisions of this
Code, until and unless payment is made by the
holder of such delinquent stock for the amount due
on the subscription with accrued interest, and the
costs and expenses of advertisement, if any. (Sec 70,
RCC)
Remedies of Representative and Derivative Suit
are Mutually Exclusive
The two actions are mutually exclusive, i.e., the right
of action and recovery belongs to either the
shareholders (direct action) or the corporation
95
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
2024 GOLDEN NOTES
Procedure of the Sale of Delinquent Shares
6. CERTIFICATE OF STOCK
(Secs. 62-63)
The board of directors may, by resolution, order the
sale of delinquent stock and shall specifically state
the amount due on each subscription plus all
accrued interest, and the date, time and place of the
sale which shall not be less than thirty (30) days nor
more than sixty (60) days from the date the stocks
become delinquent; (Sec. 67, RCC)
1.
Notice of the sale, with a copy of the resolution, shall
be sent to every delinquent stockholder either
personally, by registered mail, or through other
means provided in the bylaws. The same shall be
published once a week for two (2) consecutive
weeks in a newspaper of general circulation in the
province or city where the principal office of the
corporation is located; (ibid.)
2.
Delinquent stock shall be sold at a public auction to
such bidder who shall offer to pay the full amount of
the balance on the subscription together with
accrued interest, costs of advertisement and
expenses of sale, for the smallest number of shares
or fraction of a share; (ibid.)
3.
The stock so purchased shall be transferred to such
purchaser in the books of the corporation and a
certificate for such stock shall be issued in the
purchaser’s favor. 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; and (ibid.)
Should there be no bidder at the public auction who
offers to pay the full amount of the balance on the
subscription together with accrued interest, costs of
advertisement, and expenses of sale, for the
smallest number of shares or fraction of a share, the
corporation may, subject to the provisions of this
Code, bid for the same, and the total amount due
shall be credited as fully paid in the books of the
corporation. Title to all the shares of stock covered
by the subscription shall be vested in the
corporation as treasury shares and may be disposed
of by said corporation in accordance with the
provisions of this Code. (ibid.)
UNIVERSITY OF SANTO TOMAS
2024 GOLDEN NOTES
Definition
A certificate of stock is the paper representative or
tangible evidence of the stock itself and of the
various interests therein. The certificate is not stock
in the corporation but is merely evidence of the
holder’s interest and status in the corporation, his
ownership of the share represented thereby, but is
not in law the equivalent of such ownership. It
expresses the contract between the corporation and
the stockholder, but it is not essential to the
existence of a share in stock or the creation of the
relation of shareholder to the corporation. (Tan v.
SEC, G.R. No. 95696, 03 Mar. 1992)
CERTIFICATE OF
STOCK
SHARE OF STOCK
Usage
Unit of interest in a
corporation.
Evidence
of
the
holder’s ownership of
the stock and of his
right as a shareholder
and of his extent
specified therein.
Characteristics
It is an incorporeal or
intangible property.
It is concrete and
tangible.
Issuance
It may be recognized
by the corporation
even
if
the
subscription is not
fully paid.
It may be issued only if
the subscription is
fully paid.
The certificate of stock itself once issued is a
continuing affirmation or representation that the
stock described therein is valid and genuine and is
at least prima facie evidence that it was legally
issued in the absence of evidence to the contrary.
However, this presumption may be rebutted.
(Bitong v. CA, G.R. No. 123553, 13 July 1998)
96
COMMERCIAL LAW
Transfer of Partially Paid Shares
Alienation Despite Absence of Certificate of
Stock
The subscriber, as the owner of the shares, may
assign his right to the contract of subscription in
favor of the assignee. Partially paid shares are not
covered yet by a stock certificate, and as such, there
is no certificate which can be endorsed and
delivered to the transferee as required by Sec. 62 of
the RCC.
A stockholder may alienate his shares even if there
is no certificate of stock issued by the corporation.
The absence of a certificate of stock does not
preclude the stockholder from alienating or
transferring his shares of stock.
Transfers Involving Fully Paid Subscriptions
The corporation may, however, refuse the transfer
of shares based on Sec. 62 of the RCC, which
provides that the corporation may refuse the
transfer if it holds unpaid claim over the shares. The
term “unpaid claim” means unpaid subscription.
In case of a fully paid subscription, without the
corporation having issued a certificate of stock, the
transfer may be effected by the subscriber or
stockholder executing a contract of sale or deed of
assignment covering the number of shares sold and
submitting said contract or deed to the corporate
secretary for recording.
Consent Required in the Sale of Unpaid Shares
a.
If the subscription is fully paid, the
stockholder may sell or dispose of his shares
without having to secure the consent of the
corporation.
In case of subscription not fully paid, the
corporation may record such transfer, provided that
the transfer is approved by the board of directors
and the transferee executes a verified assumption of
obligation to pay the unpaid balance of the
subscription.
The corporation cannot require its consent for the
transfer of the shares. It will be contrary to law and
public policy. (Divina, 2020)
The SEC may require corporations whose securities
are traded in trading markets, and which can
reasonably demonstrate their ability to do so, to
issue their securities or shares of stock in
uncertificated or in scripless form in accordance
with the rules imposed by SEC. (Sec. 62, RCC)
To be valid, the restriction on transfer cannot be
more onerous than the option granted to a
stockholder to purchase the shares of a transferring
stockholder on reasonable terms and conditions, or
simply, the right of first refusal. Requiring the
consent of the corporation is certainly more
onerous than the right of first refusal. (ibid.)
b.
Uncertified Shares
If the subscription is not fully paid, the
consent of the corporation is necessary
before the subscriber may assign his right to
the contract of subscription.
The SEC may require corporations whose securities
are traded in trading markets, and which can
reasonably demonstrate their ability to do so, to
issue their securities or shares of stock in
uncertificated or in scripless form in accordance
with the rules imposed by SEC. (Sec. 62, RCC)
Assignment of shares with unpaid subscription
basically amounts to novation as there will be a
change of debtor from the subscriber to the
assignee. The obligation to pay the balance of the
subscription will be assumed by the assignee. To be
valid, novation requires consent of the creditor,
which in this case is the corporation. (ibid.)
Stock Certificate is Not Negotiable
Although a stock certificate is sometimes regarded
as quasi-negotiable, in the sense that it may be
transferred by delivery, it is well-settled that the
instrument is non-negotiable, because the holder
thereof takes it without prejudice to such rights or
97
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
2024 GOLDEN NOTES
defenses as the registered owner or creditor may
have under the law, except insofar as such rights or
defenses are subject to the limitations imposed by
the principles governing estoppel. (Republic v.
Sandiganbayan, G.R. No. 107789 & 147214, 30 Apr.
2003)
Effect of Non-Payment of Documentary Stamp
Tax
No sale, exchange, transfer, or similar transaction
intended to convey ownership of, or title to any
share of stock shall be registered in the books of the
corporation unless the receipts of payment of the
tax herein imposed is filed with and recorded by the
stock transfer agent or secretary of the corporation.
(Sec. 11, Revenue Regulations No. 6-2008)
Certificates of stock may be issued only to
registered owners of stock. The issuance of “bearer”
stock certificates is not allowed under the law. (SEC
Opinion No. 05-02, 31 Jan. 2005)
Ministerial Duty of Corporate Secretary to
Register Transfer of Stocks
Requirements for Valid Transfer of Stocks
The following are the requirements for valid
transfer of stocks:
1.
2.
In transferring stock, the secretary of a corporation
acts in purely ministerial capacity and does not try
to decide the question of ownership. If a corporation
refuses to make such transfer without good cause, it
may, in fact, even be compelled to do so by
mandamus. (Teng v. SEC, G.R. No. 184332, 17 Feb.,
2016)
If represented by a certificate, the following
must be strictly complied with: (D-En-R)
a.
Delivery of the certificate or certificates;
b.
Endorsed by the owner, his attorney-infact, or any other person legally authorized
to make the transfer;
c.
No transfer, however, shall be valid, except
as between the parties, until the transfer is
Recorded in the books of the corporation
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)
Remedies When Corporation Refuses to Record
Transfer
If the corporation wrongfully refuses to issue a
certificate of stock, the assignee or transferee of
shares of stock may: (Spec-Dam-Man)
If NOT represented by a certificate (such as
when the certificate has not yet been issued or
where for some reason is not in the possession
of the stockholder): (De-Rec)
a.
b.
By means of Deed of assignment; and
Such is duly Recorded in the books of the
corporation. (Divina, 2020)
UNIVERSITY OF SANTO TOMAS
2024 GOLDEN NOTES
1.
File a suit for Specific performance of an
express or implied contract;
2.
File for an alternative relief by way of
Damages where specific performance cannot
be granted; and
3.
File a petition for Mandamus to compel
issuance of a certificate. (SEC-OGC Opinion No.
21-06, Mar. 23, 2006, cited in Divina, 2020)
The fact that the corporate secretary asked for leave
to register the transfer five years after the sale did
not make the transfer irregular. Since the law does
not prescribe a period for such kind of registration,
the action to enforce the right to have it done does
not begin to toll until a demand for it had been made
and was refused. (Africa v. Sandiganbayan, G.R. Nos.
17222, 11 Nov. 2013 citing Lee E. Won v. Wack Wack
98
COMMERCIAL LAW
Golf & Country Club, Inc. G.R. No. L-10122, 30 Aug.
1958)
transfer of the subject certificate made by Dico to
Garcia was not valid as to the spouses Atinon, the
judgment creditors, as the same still stood in the
name of Dico, the judgment debtor, at the time of the
levy on execution. (Nemesio Garcia v. Nicolas
Jomouad, et al., G.R. No. 133969, 26 Jan. 2000)
Q: Nemesio Garcia filed an action for injunction
against spouses Jose and Sally Atinon and
Nicolas Jomouad, ex-officio sheriff. Said action
stemmed from an earlier case for collection of
sum of money, filed by the spouses Atinon
against Jaime Dico. In that case, the trial court
rendered judgment ordering Dico to pay
spouses Atinon. After said judgment became
final and executory, the sheriff proceeded with
its execution. In the course thereof, the
Proprietary Ownership Certificate (POC) in the
Cebu Country Club, which was in the name of
Dico, was levied on and scheduled for public
auction.
Q: Fil-Estate Golf and Development, Inc. (FEGDI)
is a stock corporation whose primary business
is the development of golf courses. Fil-Estate
Land, Inc. (FELI) is also a stock corporation, but
is engaged in real estate development. FEGDI
was the developer of the Forest Hills Golf and
Country Club (Forest Hills) and, in consideration
for its financing support and construction
efforts, was issued several shares of stock of
Forest Hills.
Claiming ownership over the subject certificate,
Garcia filed the action for injunction to enjoin
the spouses Atinon from proceeding with the
auction. Garcia contends that the subject stock
of certificate, albeit in the name of Dico, cannot
be levied upon the execution to satisfy his
judgment debt because even prior to the
institution of the case for collection of sum of
money against him, spouses Atinon had
knowledge that Dico already conveyed back the
ownership of the subject certificate to Garcia
and that Dico executed a deed of transfer
covering the subject certificate in favor of
Garcia.
FEGDI sold on installment, to RS Asuncion
Construction Corporation (RSACC) one common
share of Forest Hills. Prior to the full payment of
the purchase price, RSACC sold the share to
Vertex Sales and Trading, Inc. (Vertex). RSACC
advised FEGDI of the sale to Vertex and FEGDI, in
turn, instructed Forest Hills to recognize Vertex
as a shareholder. For this reason, Vertex
enjoyed membership privileges in Forest Hills.
Despite Vertex’s full payment on Feb. 11, 1999,
the share remained in the name of FEGDI. As the
demands to issue a certificate in its name went
unheeded, Vertex filed a Complaint for
Rescission with Damages and Attachment
against FEGDI, FELI and Forest Hills. It averred
that the petitioners defaulted in their obligation
as sellers when they failed and refused to issue
the stock certificate covering the subject share
despite repeated demands. Only thereafter that
the stock certificates were delivered (on Jan. 23,
2002).
Is the delay in the issuance of the stock
certificate a substantial breach of the sale which
entitles Vertex to the rescission thereof?
Is a bona fide transfer of the shares of a
corporation, not registered or noted in the
books of the corporation, valid as against a
subsequent lawful attachment of said shares,
regardless of whether the attaching creditor had
actual notice of said transfer or not?
A: NO. A transfer of shares not registered in the
books of the corporation is not valid as against
subsequent attachment of the shares. All transfers
of shares not so entered in the books of the
corporation are invalid as to attaching or execution
creditors of the assignors, as well as to the
corporation and to subsequent purchasers in good
faith, and, indeed, as to all persons interested,
except the parties to such transfers. Hence, the
A: YES. Sec. 63 (now Sec 62 of the RCC) provides,
among others, that shares of stock may be
transferred by delivery of the certificate or
certificates endorsed by the owner or his attorney-
99
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
2024 GOLDEN NOTES
in-fact or other person legally authorized to make
the transfer.
party to the sale, FEGDI is the one who may appeal
the ruling rescinding the sale.
In this case, Vertex fully paid the purchase price by
11 Feb. 1999, but the stock certificate was only
delivered on 23 Jan. 2002 after Vertex filed an action
for rescission against FEGDI.
The remedy of appeal is available to a party who
has a present interest in the subject matter of the
litigation and is aggrieved or prejudiced by the
judgment. A party, in turn, is deemed aggrieved or
prejudiced when his interest, recognized by law in
the subject matter of the lawsuit, is injuriously
affected by the judgment, order or decree. The
rescission of the sale does not in any way prejudice
Forest Hills in such a manner that its interest in the
subject matter – the share of stock – is injuriously
affected. (Forest Hills Golf & Country Club v. Vertex
Sales and Trading, Inc., G.R. No. 202205, 06 March
2013)
Under these facts, considered in relation to the
governing law, FEGDI clearly failed to deliver the
stock certificates, representing the shares of stock
purchased by Vertex, within a reasonable time from
the point the shares should have been delivered.
This was a substantial breach of their contract that
entitles Vertex the right to rescind the sale under
Art. 1191 of the Civil Code. It is not entirely correct to
say that a sale had already been consummated as
Vertex already enjoyed the rights a shareholder can
exercise. The enjoyment of these rights cannot
suffice where the law, by its express terms, requires
a specific form to transfer ownership.
Issuance of Certificate of Stock
No certificate of stock shall be issued to a subscriber
until the full amount of the subscription together
with interest and expenses (in case of delinquent
shares), if any is due, has been paid. (Sec. 63, RCC)
Mutual restitution is required in cases involving
rescission under Art. 1191 of the Civil Code; such
restitution is necessary to bring back the parties to
their original situation prior to the inception of the
contract. Accordingly, the amount paid to FEGDI by
reason of the sale should be returned to Vertex. (FilEstate Golf and Development, Inc. and Fil-Estate
Land, Inc. v. Vertex Sales and Trading, Inc., G.R. No.
202079, 10 June 2013)
Requisites for Issuance of Stock Certificates for
Fully Paid Shares
1.
2.
3.
4.
Q: Considering the same facts, may Forest Hills
appeal the CA decision which ordered the
recission of the sale?
Stock and Transfer Book
A: NO. It was not a party to the sale even though the
subject of the sale was its share of stock. The
corporation whose shares of stock are the subject
of a transfer transaction (through sale, assignment,
donation, or any other mode of conveyance) need
not be a party to the transaction, as may be inferred
from the terms of Sec. 63 (now Sec. 62 of the RCC)
of the Corporation Code. However, to bind the
corporation as well as third parties, it is necessary
that the transfer is recorded in the books of the
corporation. In the present case, the parties to the
sale of the share were FEGDI as the seller and
Vertex as the buyer (after it succeeded RSACC). As
UNIVERSITY OF SANTO TOMAS
2024 GOLDEN NOTES
Signed by the president or vice president
Countersigned by the secretary or assistant
secretary; and
Sealed with the seal of the corporation
Issued in accordance with the bylaws. (Sec. 62,
RCC)
Stock corporations must also keep a stock and
transfer book, which shall contain:
100
1.
A record of all stocks in the names of the
stockholders alphabetically arranged;
2.
The installments paid and unpaid on all stocks
for which subscription has been made, and the
date of payment of any installment;
3.
A statement of every alienation, sale or
transfer of stock made, the date thereof, by and
to whom made; and
COMMERCIAL LAW
4.
estoppel cannot operate to create stock which
under the law cannot have existence. (Bitong v. CA,
G.R. No. 123553, 13 July 1998)
Such other entries as the by-laws may
prescribe. (Sec. 73, RCC)
Entries
Stock and Transfer Book
It is the corporate secretary’s duty and obligation to
register valid transfers of stocks and if said
corporate officer refuses to comply, the transferorstockholder may rightfully bring suit to compel
performance. In other words, there are remedies
within the law that petitioners could have availed of,
instead of taking the law in their own hands, as the
cliche goes. (Torres, Jr. v. CA, G.R. No. 120138, 05 Sept.
1997)
A stock and transfer book is a record of all stocks in
the names of the stockholders alphabetically
arranged; the installments paid and unpaid on all
stocks for which subscription has been made, and
the date of the payment of any installment; a
statement of every alienation, sale or transfer of
stock made, the date thereof, by and to whom made;
and such other entries as the bylaws may prescribe.
(Sec. 73, RCC)
Probative Value of Stock and Transfer Book
Stock and Transfer Book is not a Conclusive
Evidence to Show the Outstanding Capital Stock
of the Corporation
Similarly, books and records of a corporation which
include even the stock and transfer book are
generally admissible in evidence in favor of or
against the corporation and its members to prove
the corporate acts, its financial status and other
matters including one’s status as a stockholder.
They are ordinarily the best evidence of corporate
acts and proceedings.
A stock and transfer book is necessary as a measure
of precaution, expediency, and convenience since it
provides the only certain and accurate method of
establishing the various corporate acts and
transactions and of showing the ownership of stock
and like matters. However, a stock and transfer
book, like other corporate books and records, is not
in any sense a public record, and thus is not
exclusive evidence of the matters and things which
ordinarily are or should be written therein. (Jesus v.
Court of Appeals, G.R. No. 131394, 28 Mar. 2005)
However, the books and records of a corporation
are not conclusive even against the corporation but
are prima facie evidence only. Parol evidence may
be admitted to supply omissions in the records,
explain ambiguities, or show what transpired where
no records were kept, or in some cases where such
records were contradicted. The effect of entries in
the books of the corporation which purport to be
regular records of the proceedings of its board of
directors or stockholders can be destroyed by
testimony of a more conclusive character than mere
suspicion that there was an irregularity in the
manner in which the books were kept.
Corporate Secretary’s Duty in the Registration of
Transferred Stocks
In transferring stock, the secretary of a corporation
acts in purely ministerial capacity and does not try
to decide the question of ownership. (Rural Bank of
Salinas, Inc. v. Court of Appeals, G.R. No. 96674, 26
June 1992.)
The foregoing considerations are founded on the
basic principle that stock issued without authority
and in violation of law is void and confers no rights
on the person to whom it is issued and subjects him
to no liabilities. Where there is an inherent lack of
power in the corporation to issue the stock, neither
the corporation nor the person to whom the stock is
issued is estopped to question its validity since an
It is a ministerial duty of a corporation to register
the shares of stock which were assigned in the name
of the assignees even if there is a pending action in
court questioning the validity of the assignment.
(Divina, 2021)
101
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
2024 GOLDEN NOTES
Petition for Mandamus
Registration of Transfer
to
Compel
the
Instances where the Corporation may Refuse to
Register the Transfer of the Shares in the Books
of Corporation
Whenever a corporation refuses to transfer and
register stock, mandamus will lie to compel the
officers of the corporation to transfer said stock in
the books of the corporation.
The duty of the corporation to transfer is a
ministerial one and if it refuses to make such
transaction without good cause, it may be
compelled to do so by mandamus. (Rural Bank of
Salinas, Inc. v. Court of Appeals, G.R. No. 96674, 26
June 1992.)
Who may File the Petition for Mandamus
In Ponce v. Alsons Cement Corporation (G.R. No.
139802, 10 Dec. 2002), the Supreme Court ruled that
only the transferor of shares of stock may file the
petition for mandamus. The transferee cannot
compel the corporate secretary to cause the
registration and issuance of a stock certificate
because the transferee has not acquired standing
yet in the books of the corporation and that the
transferee can only file such petition if he has been
authorized by the transferor to cause such transfer.
If the formalities prescribed by law for the
transfer of shares, which are endorsement
of the stock certificate and delivery to the
transferee, are not complied with;
2.
If the above-stated formalities have been
complied with but the corresponding taxes
for the transfer have not been paid; and
3.
If the corporation holds any unpaid claim
on the shares. (Sec. 72, RCC; Divina, 2021)
Situs of the Shares of Stocks
GR: The situs of shares of stock is the country where
the corporation is domiciled. (Wells Fargo Bank v.
CIR, G.R. No. L-46720, 28 June 1940)
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, 24 Oct.
2005)
In a later case however, the Supreme Court held that
transferees of shares of stock are real parties in
interest having a cause of action for mandamus to
compel the registration of the transfer and the
corresponding issuance of stock certificates.
(Andaya v. Rural Bank of Cabadbaran, G.R. No.
188769, 03 Aug. 2016)
In view of the foregoing cases, the prevailing rule is
either the transferor and transferee may file a
petition for mandamus to compel the corporation to
record the transfer of shares in its stock and transfer
book.
UNIVERSITY OF SANTO TOMAS
2024 GOLDEN NOTES
1.
102
COMMERCIAL LAW
Q: Where one corporation sells or otherwise
transfers all of its assets to another corporation,
is the latter liable for the debts and liabilities of
the transferor?
G. MERGERS, CONSOLIDATIONS, AND
ACQUISITIONS
(Secs. 39 and 75-79)
A:
Merger vs. Consolidation
MERGER
GR: NO. The Nell Doctrine states the general rule
that the transfer of all the assets of a corporation to
another shall not render the latter liable to the
liabilities of the transferor, unless any of the below
exceptions are present. In which case, the the
transferee corporation shall assume the liabilities of
the transferor. (2017 BAR)
CONSOLIDATION
Definition
One
where
a
corporation absorbs
another corporation
and
remains
in
existence while others
are dissolved. (Sec. 75,
RCC)
One where a new
corporation is created
and
consolidating
corporations
are
extinguished. (Ibid.)
XPNs:
1.
Where the purchaser expressly or impliedly
agrees to assume such debts;
2.
Where the transaction amounts to a
consolidation or merger of the corporations;
3.
Where the purchasing corporation is merely a
continuation of the selling corporation; and
4.
Where the transaction is entered into
fraudulently to escape liability for such debts.
(Nell Co. vs. Pacific Farms, Inc., G.R. No. L-20850,
29 Nov. 1965)
Consequent Dissolution of a Corporation/s
All of the constituent
corporations involved
are dissolved except
one.
All
consolidated
corporations
are
dissolved
without
exception.
Consequent Creation of a New Corporation
No new corporation is
created.
A new corporation
emerges.
Acquisition of Assets, Liabilities, Capital Stock
The
surviving
corporation acquires
all
the
assets,
liabilities, and capital
stock of all constituent
corporations.
All assets, liabilities,
and capital stock of all
consolidated
corporations
are
transferred to the new
corporation.
NOTE: In both cases, there is no liquidation of the
assets of the dissolved corporations, and the
surviving or consolidated corporation acquires all
their properties, rights and franchises and their
stockholders usually become its stockholders.
(Divina, 2021 citing John F. McLeod v. National Labor
Relations SEC First Division et al., G.R. No. 146667, 23
Jan. 2007)
103
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
2024 GOLDEN NOTES
Constituent
Corporation
Corporation
CONSTITUENT
CORPORATION
These are the parties
to a merger or
consolidation,
all
constituent
corporations
are
dissolved or absorbed
by
the
new
consolidated
enterprise.
In
merger,
all
constituents,
except
the
surviving
corporation
are
dissolved.
(Divina,
2021 citing John F.
McLeod v. National
Labor Relations SEC
First Division et al., G.R.
No. 146667, 23 Jan.
2007)
v.
Consolidated
4.
CONSOLIDATED
CORPORATION
Approval of the Plan of Merger or Consolidation
The plan of merger or consolidation must be
approved by:
A new corporation that
is formed by the union
of two (2) or more
existing corporations
(consolidation).
The
surviving
or
consolidated
corporation
automatically assumes
the liabilities of the
dissolved
corporations,
regardless of whether
the creditors have
consented or not to
such
merger
or
consolidation. (Ibid.)
Contents of a Plan of Merger or Consolidation
The BOD/BOT of each corporation party to the
merger or consolidation shall approve a plan of
merger or consolidation which set forth the
following:
1.
The names of the corporations proposing to
merge or consolidate, hereinafter referred to
as the constituent corporations;
2.
The terms of the merger or consolidation and
the mode of carrying the same into effect;
3.
A statement of the changes, if any, in the AOI of
the surviving corporation in case of a merger;
and, with respect to the consolidated
corporation in case of consolidation, all the
statements required to be set forth in the AOI
for corporations organized under the RCC; and
UNIVERSITY OF SANTO TOMAS
2024 GOLDEN NOTES
Such other provisions with respect to the
proposed merger or consolidation as are
deemed necessary or desirable. (Sec. 75, RCC)
1.
Majority vote of each of the BOD/ BOT of the
constituent corporations; and
2.
Submitted for approval by the stockholders or
members of each of such corporations at
separate corporate meetings duly called for
the purpose.
3.
Notice of such meetings shall be given to all
stockholders or members of the respective
corporations in the same manner as giving
notice of regular or special meetings under
Section 49 of the RCC The notice shall state the
purpose of the meeting and include a copy or a
summary of the plan of merger or
consolidation.
4.
The affirmative vote of the stockholders
representing at least 2/3 of the OCS of each
corporation in the case of stock corporations
or at least 2/3 of the members in the case of
non-stock corporations, shall be necessary for
the approval of such plan. (Sec. 76, RCC)
Amendment of
Consolidation
a
Plan
of
Merger
or
Any amendment may be made, provided such
amendment is approved by majority vote of the
respective BOD/BOT of all the constituent
corporations and ratified by the affirmative vote of
stockholders representing at least 2/3 of the OCS or
2/3 of the members of each of the constituent
corporations. (Sec. 76, RCC)
NOTE: Such plan, together with any amendment,
shall be considered as the agreement of merger or
consolidation.
104
COMMERCIAL LAW
Appraisal Right is Available to a Dissenting
Stockholder to a Plan of Merger or Consolidation
NOTE: In the case of merger or consolidation of
banks or banking institutions, loan associations,
trust companies, insurance companies, public
utilities, educational institutions, and other special
corporations governed by special laws, the
favorable recommendation of the appropriate
government agency shall first be obtained (Ibid.)
Any dissenting stockholder in stock corporations
may exercise his appraisal right in accordance with
this Code: Provided, that if after the approval by the
stockholders of such plan, the BOD should decide to
abandon the plan, the appraisal right shall be
extinguished. (Sec. 76, RCC)
When Hearing is Set
Articles of Merger or Consolidation
If, upon investigation, the SEC has reason to believe
that the proposed merger or consolidation is
contrary to or inconsistent with the provisions of
the RCC or existing laws, it shall set a hearing to give
the corporations concerned the opportunity to be
heard. Written notice of the date, time, and place of
hearing shall be given to each constituent
corporation at least two (2) weeks before said
hearing. The SEC shall thereafter proceed as
provided in the RCC. (Ibid.)
After the approval by the stockholders or members
as required by Sec. 76, articles of merger or articles
of consolidation shall be executed by each of the
constituent corporations, to be signed by the
president or vice president and certified by the
secretary or assistant secretary of each corporation
setting forth:
a.
The plan of the merger or the plan of
consolidation;
b.
As to stock corporations, the number of shares
outstanding, or in the case of nonstock
corporations, the number of members;
c.
As to each corporation, the number of shares
or members voting for or against such plan,
respectively;
d.
The carrying amounts and fair values of the
assets and liabilities of the respective
companies as of the agreed cut-off date;
Effectivity
If the SEC is satisfied that the merger or
consolidation of the corporations concerned is
consistent with the provisions of the RCC and
existing laws, it shall issue a certificate approving
the articles and plan of merger or of consolidation,
at which time the merger or consolidation shall be
effective. (Ibid.)
Effects of Merger or Consolidation
(a) 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;
e.
The method to be used in the merger or
consolidation of accounts of the companies;
f.
The provisional or pro-forma values, as
merged or consolidated, using the accounting
method; and
g.
Such other information as may be prescribed
by the Commission. (Sec. 77, RCC)
(b) The separate existence of the constituent
corporations shall cease, except that of the
surviving or the consolidated corporation;
The articles of merger or of consolidation, signed
and certified as required by the RCC, shall be
submitted to the SEC for its approval. (Sec. 78, RCC)
(c) The surviving or the consolidated corporation
shall possess all the rights, privileges,
immunities, and powers and shall be subject to
105
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
2024 GOLDEN NOTES
all the duties and liabilities of a corporation
organized under this Code;
merger” between FISLAI and DSLAI (now MSLAI)
did not take effect considering that the merging
companies did not comply with the formalities
and procedure for merger or consolidation as
prescribed by the Corporation Code of
the Philippines. Was the merger between FISLAI
and DSLAI (now MSLAI) valid and effective?
(d) 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
A: NO. The merger was not valid. Merger does not
become effective upon the mere agreement of the
constituent corporations. Since a merger or
consolidation involves fundamental changes in the
corporation, as well as in the rights of stockholders
and creditors, there must be an express provision of
law authorizing them.
(e) 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. (Sps. Ong v. BPI
Family Savings Bank, Inc., G.R. No. 208638, 24
Jan. 2018)
The merger shall only be effective upon the issuance
of a certificate of merger by the SEC, subject to its
prior determination that the merger is not
inconsistent with the Corporation Code or existing
laws.
In this case, it is undisputed that the articles of
merger between FISLAI and DSLAI were not
registered with the SEC due to incomplete
documentation. Consequently, the SEC did not issue
the required certificate of merger. Even if it is true
that the Monetary Board of the Central Bank of
the Philippines recognized such merger, the fact
remains that no certificate was issued by the SEC.
Such merger is still incomplete without
the certification.
Q: FISLAI and DSLAI entered into a merger, with
DSLAI as the surviving corporation. The articles
of merger were not registered with the SEC due
to incomplete documentation. DSLAI changed its
corporate name to MSLAI. The business of
MSLAI, however, failed. Prior to the closure of
MSLAI, Remedios Uy filed an action for
collection of sum of money against FISLAI. The
RTC ruled in favor of Uy and hence, six (6)
parcels of land owned by FISLAI were sold to
Willkom, the highest bidder.
The issuance of the certificate of merger is crucial
because not only does it bear out SEC’s approval but
it also marks the moment when the consequences of
a merger take place. By operation of law, upon the
effectivity of the merger, the absorbed corporation
ceases to exist but its rights and properties, as well
as liabilities, shall be taken and deemed transferred
to and vested in the surviving corporation.
(Mindanao Savings and Loan Association, Inc., et al.,
v. Willkom, et al., G.R. No. 178618, 11 Oct. 2010)
MSLAI filed a complaint for annulment of
sheriff’s sale. Willkom, et al., averred that MSLAI
had no cause of action against them or the right
to recover the subject properties because MSLAI
is a separate and distinct entity from FISLAI.
They further contended that the “unofficial
UNIVERSITY OF SANTO TOMAS
2024 GOLDEN NOTES
De facto merger
A De facto merger means that a corporation called
Acquiring Corporation acquired the assets and
liabilities of another corporation in exchange for an
106
COMMERCIAL LAW
equivalent value of the shares of stock of the
Acquiring Corporation making the other
corporation a stockholder of the Acquiring
Corporation. (Bank of Commerce v. Radio Philippines
Network Inc., et al., G.R. No. 195615, 21 Apr. 2014)
a.
Be responsible and liable for all the
liabilities and obligations of each of the
constituent corporations in the same
manner as if such surviving or consolidated
corporation had itself incurred such
liabilities or obligations;
b.
Any pending claim, action or proceeding
brought by or against any of such
constituent
corporations
may
be
prosecuted by or against the surviving or
consolidated corporation;
c.
The rights of creditors or liens upon the
property of any of such constituent
corporations shall not be impaired by such
merger or consolidation. (Sec. 79, RCC)
Effects of De Facto Merger
1.
The constituent corporations shall become a
single corporation which:
a.
b.
In case of merger, shall be the surviving
corporation designated in the plan of
merger.
In case of consolidation, shall be the
consolidated corporation designated in the
plan of consolidation;
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 the RCC;
4.
The surviving or the consolidated corporation
shall thereupon and thereafter possess:
a.
All the rights, privileges, immunities, and
franchises of each of the constituent
corporations;
b.
All property, real or personal, and all
receivables due on whatever account,
including subscriptions to shares and other
choses in action,
c.
5.
Garnishment Upon the Surviving Corporation
for the Liabilities of the Absorbed Corporation
Citytrust was dissolved, no winding up of its affairs
or liquidation of assets, privileges, powers, and
liabilities took place. As the surviving corporation,
BPI simply continued the combined businesses of
the two banks and absorbed all the rights,
privileges, assets, liabilities, and obligations of City
Trust, including the latter’s obligation over the
garnished deposits of the defendants.
Through the service of the writ of garnishment, the
garnishee becomes a “virtual party” to, or a “forced
intervenor” in the case and the trial court thereby
acquires jurisdiction to bind him to compliance with
all orders and processes of the trial court with a
view to the complete satisfaction of the judgment of
the court.
Citytrust, therefore, upon service of the notice of
garnishment and its acknowledgment that it was in
possession of defendants’ deposit accounts became
a “virtual party” to or “forced intervenor” in the civil
case. As such, it became bound by the orders and
processes issued by the trial court despite not
having been properly impleaded therein.
Consequently, by virtue of its merger with BPI, the
latter, as the surviving corporation, effectively
became the garnishee, thus the “virtual party” to the
civil case. (BPI v. Lee, G.R. No. 190144, 01 Aug. 2012)
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
The surviving or consolidated corporation
shall:
107
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
2024 GOLDEN NOTES
Transfer of Employees
corporate name to Associated Bank by virtue of
the Amended Articles of Incorporation.
Taking a second look on this point, we have come to
agree with Justice Brion's view that it is more in
keeping with the dictates of social justice and the
State policy of according full protection to labor to
deem employment contracts as automatically
assumed by the surviving corporation in a merger,
even in the absence of an express stipulation in the
articles of merger or the merger plan. In his
dissenting opinion, Justice Brion reasoned that:
Lorenzo Sarmiento executed in favor of CBTC a
promissory note. Upon maturity and despite
repeated demands Sarmiento failed to pay the
amount due. Associated Bank filed a collection
suit against Sarmiento. Sarmiento contends that
Associated Bank is not the proper party in
interest because the promissory note was
executed in favor of Associated Citizens Bank.
To my mind, due consideration of Sec. 80 of the
Corporation Code (now Sec. 79, RCC), the
constitutionally declared policies on work, labor
and employment, and the specific FEBTC-BPI
situation -- i.e., a merger with complete "body and
soul" transfer of all that FEBTC embodied and
possessed and where both participating banks were
willing (albeit by deed, not by their written
agreement) to provide for the affected human
resources by recognizing continuity of employment
-- should point this Court to a declaration that in a
complete merger situation where there is total
takeover by one corporation over another and there
is silence in the merger agreement on what the fate
of the human resource complement shall be, the
latter should not be left in legal limbo and should be
properly provided for, by compelling the surviving
entity to absorb these employees. This is what Sec.
80 of the Corporation Code (now, Sec. 79, RCC)
commands, as the surviving corporation has the
legal obligation to assume all the obligations and
liabilities of the merged constituent corporation.
The trial court ordered Sarmiento to pay. The
CA, however, held that the Associated Bank had
no cause of action against Lorenzo Sarmiento Jr.,
since the said bank was not privy to the
promissory note executed by Sarmiento in favor
of Citizens Bank and Trust Company
(CBTC). The court ruled that the earlier merger
between the two banks could not have vested
Associated Bank with any interest arising from
the promissory note executed in favor of
CBTC after such merger.
May Associated Bank, the surviving corporation,
enforce the promissory note made by Sarmiento
in favor of CBTC, the absorbed company, after
the merger agreement had been signed?
A: YES. Associated Bank may enforce the
promissory note. Ordinarily, in the merger of two or
more existing corporations, one of the combining
corporations survives and continues the combined
business, while the rest are dissolved and all their
rights, properties and liabilities are acquired by the
surviving corporation. Although there is a
dissolution of the absorbed corporations, there is no
winding up of their affairs or liquidation of their
assets, because the surviving corporation
automatically acquires all their rights, privileges,
and powers, as well as their liabilities. All contracts
of the absorbed corporations, regardless of the date
of execution, shall pertain to the surviving
corporation. (Associated Bank v. CA, G.R. No. 123793,
29 June 1998)
Hence, there is a need for the surviving corporation
to take responsibility for the affected employees
and to absorb them into its workforce where no
appropriate provision for the merged corporation's
human resources component is made in the Merger
Plan. (BPI v. BPI Employees Union – Davao Chapter,
G.R. No. 164301, 19 Oct. 2011)
Q: Associated Banking Corporation and Citizens
Bank and Trust Company (CBTC) merged to
form just one banking corporation known as
Associated Citizens Bank, the surviving
bank. The Associated Citizens Bank changed its
UNIVERSITY OF SANTO TOMAS
2024 GOLDEN NOTES
108
COMMERCIAL LAW
“disappeared with the loot,” or against the
transferee who can claim that he is a purchaser in
good faith and for value. Based on the foregoing, as
the exception of the Nell doctrine relates to the
protection of the creditors of the transferor
corporation and does not depend on any deceit
committed by the transferee corporation, then
fraud is certainly not an element of the business
enterprise doctrine. Indeed, the transferee
corporation may inherit the liabilities of the
transferor despite the lack of fraud due to the
continuity of the latter’s business. (Y-I Leisure
Philippines, Inc. v. Yu, G.R. No. 207161, 08 Sept. 2015)
1. ASSET ONLY TRANSFER
In assets sales, the corporate entity sells all or
substantially all of its assets to another entity. The
rule is that the seller in good faith is authorized to
dismiss the affected employees, but is liable for the
payment of separation pay under the law. The
buyer in good faith, on the other hand, 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. (Divina,
2023)
Q: E Co. sold its assets to M Inc. after complying
with the requirements of the Bulk Sales Law.
Subsequently, one of the creditors of E Co. tried
to collect the amount due but found out that E
Co. had no more assets left. The creditors sued M
Inc. on the theory that M Inc. is a mere alter ego
of E Co. Will the suit prosper? (1996 BAR)
2. BUSINESS ENTERPRISE TRANSFER
Business-Enterprise Transfer
The transferee corporation’s interest goes beyond
the assets of the transferor’s assets and its desires
to acquire the latter’s business enterprise, including
its goodwill.
A: NO. The suit will not prosper. The sale by E Co. of
its assets to M Inc. did not result in the transfer of
liabilities of the latter to, nor in the assumption
therefore by, the former. The facts given do not
indicate that such transfer or assumption took place
or was stipulated upon by the parties in their
agreement. Furthermore, the sale by E Co. of its
assets is a sale of its property. It does not involve the
sale of the shares of stock of the corporation
belonging to its stockholders. There is therefore no
merger or consolidation that took place. E Co.
continues to exist and remains liable to the creditor.
Sec. 40 (now Sec. 39, RCC) suitably reflects the
business-enterprise transfer under the exception of
the Nell Doctrine because the purchasing or
transferee corporation necessarily continued the
business of the selling or transferor corporation.
Given that the transferee corporation acquired not
only the assets but also the business of the
transferor corporation, then the liabilities of the
latter are inevitably assigned to the former. Sec. 39
refers to the sale, lease, exchange or disposition of
all or substantially all of the corporation's assets,
including its goodwill. The sale under this provision
does not contemplate an ordinary sale of all
corporate assets; the transfer must be of such
degree that the transferor corporation is rendered
incapable of continuing its business or its corporate
purpose.
H. CORPORATE DISSOLUTION AND
LIQUIDATION
(Secs. 133-138)
Dissolution
The purpose of the business-enterprise transfer is
to protect the creditors of the business by allowing
them a remedy against the new owner of the assets
and business enterprise. Otherwise, creditors
would be left “holding the bag,” because they may
not be able to recover from the transferor who has
It is the extinguishment or cancellation of the
corporate franchise and the termination of its
corporate existence for business purposes. (Divina,
2020)
109
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
2024 GOLDEN NOTES
Liquidation
e.
Liquidation is the process of settling the affairs of
the corporation after its dissolution. The manner of
liquidation or winding up may be provided for in the
corporate bylaws and this would prevail unless it is
inconsistent with law. (Divina, 2020)
i. 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;
Liquidations consists of:
1.
2.
3.
4.
collection of all that is due the corporation;
the settlement and adjustment of claims against
it;
the payment of its debts; and
the distribution of the remaining assets, if any
among the stockholders thereof in accordance
with their contracts, or if there be no special
contract, on the basis of their respective
interests. (Ibid.)
ii. Committed or aided in the
commission of securities violations,
smuggling, tax evasion, money
laundering, or graft and corrupt
practices, and its stockholders knew
of the same; and
iii. Repeatedly and knowingly tolerated
the commission of graft and corrupt
practices or other fraudulent or illegal
acts by its directors, trustees, officers,
or employees. (Sec. 138, RCC)
MODES OF DISSOLUTION
The following are the modes of dissolution of the
corporation:
1.
b.
c.
d.
e.
2.
Q: Alabang Development Corporation (ADC),
developer of Alabang Hills Village, filed with the
RTC a complaint for injunction against Alabang
Hills Village Association, Inc. (AHVAI) and its
president, Rafael Tinio, alleging that AHVAI
started the construction of a multi-purpose hall
and a swimming pool on one of the parcels of
land still owned by ADC, without the latter’s
consent and approval.
Voluntary –
a.
By a verified request for dissolution filed
with the SEC where no creditors are
affected; (Sec. 134, RCC)
By a petition for dissolution filed with t
SEC where creditors are affected; (Sec.
135, RCC)
By amending the AOI to shorten the
corporate term; (Sec. 136, RCC)
Merger or consolidation; and
Affidavit of dissolution by a corporation
sole.
AHVAI claimed that ADC had no legal capacity to
sue since its existence as a registered corporate
entity was revoked by the SEC on 26 May 2003.
Does the ADC have the capacity to file the
complaint?
Involuntary –
a.
b.
c.
d.
A: NO. In the instant case, there is no dispute that
ADC's corporate registration was revoked on 26
May 2003. Based on Sec. 122 (now Sec 139, RCC), it
had three years, or until May 26. 2006, to prosecute
or defend any suit by or against it. The subject
complaint, however, was filed only on Oct. 19, 2006,
more than three years after such revocation.
Non-use of corporate charter as provided
under Sec. 21 of the RCC;
Continuous inoperation of a corporation
as provided under Sec. 21 of the RCC;
Upon receipt of a lawful court order
dissolving the corporation;
Upon finding by final judgment that the
corporation procured its incorporation
UNIVERSITY OF SANTO TOMAS
2024 GOLDEN NOTES
through fraud; and
Upon finding by final judgment that the
corporation:
In the present case, ADC filed its complaint not only
110
COMMERCIAL LAW
after its corporate existence was terminated but
also beyond the three-year period allowed by [now]
Sec. 139 of the RCC. Thus, it is clear that at the time
of the filing of the subject complaint ADC lacks the
capacity to sue as a corporation. To allow ADC to
initiate the subject complaint and pursue it until
final judgment, on the ground that such complaint
was filed for the sole purpose of liquidating its
assets, would be to circumvent the provisions of Sec.
139 of the RCC. (Alabang Development Corp. v.
Alabang Hills Village Association and Rafael Tinio,
G.R. No. 187456, 02 June 2014)
of the members in the meeting called for
the said purpose.
4.
A verified request for dissolution shall be
filed with the SEC, stating:
a.
b.
c.
d.
VOLUNTARY DISSOLUTION
e.
Dissolution Where No Creditors are Affected
1.
2.
5.
Dissolution is approved by majority vote of
the board of directors or trustees;
a.
b.
3.
The Corporation shall submit the following
to the SEC:
a.
A meeting of the Stockholders/Members
must be held upon the call of the directors
or trustees:
b.
c.
Notice of meeting must be given at least 20 days
prior to the said meeting. to each stockholder or
member either by registered mail or by
personal delivery or by any means authorized
under its bylaws whether or not entitled to vote
at the meeting, in the manner provided in Sec.
50 of the RCC.
The reason for the dissolution
The form, manner, and time when the
notices were given;
Names of the stockholders and
directors or members and trustees
who approved the dissolution;
The date, place, and time of the meeting
in which the vote was made; and
The details of publication.
A copy of the resolution authorizing
the dissolution, certified by the
majority of the BOD/BOT, and
countersigned by the secretary of the
corporation;
Proof of publication; and
Favorable recommendation from the
appropriate regulatory agency, when
necessary.
No application for dissolution of banks,
banking, and quasi-banking institutions,
preneed, insurance and trust companies,
NSSLAs, pawnshops, and other financial
intermediaries shall be approved by the
SEC unless accompanied by a favorable
recommendation of the appropriate
government agency.
Notice shall state that the purpose of the
meeting is to vote on the dissolution of the
corporation.
Notice of the time, place, and object of the
meeting shall be published once prior to
the date of the meeting 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, in a
newspaper of general circulation in the
Philippines.
6.
Within 15 days from receipt of the verified
request for dissolution, and in the absence
of any withdrawal within said period, the
SEC shall approve the request and issue the
certificate of dissolution.
NOTE: The dissolution shall take effect only upon
the issuance by the SEC of a certificate of
dissolution. (Sec. 134, RCC)
A resolution must be adopted approving
the dissolution by the affirmative vote of
the stockholders owning at least majority
of the outstanding capital stock or majority
111
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
2024 GOLDEN NOTES
Dissolution Where Creditors are Affected
1.
Approval of the stockholders representing at
least 2/3 of the OCS or by at least 2/3 of the
members at a meeting of its stockholders or
members called for that purpose;
2.
Filing of Petition for dissolution with SEC. The
petition must be:
municipality or city where the principal
office of the corporation is situated, or if
there be no such newspaper, then in a
newspaper of general circulation in the
Philippines, and
b.
a.
Signed by a majority of its board of
directors or trustees;
Verified by its president or secretary or
one of its directors or trustees;
Set forth all claims and demands against it;
5.
After expiration of the time to file objections
and upon prior 5-day notice to hear the
objections, the SEC shall proceed to hear the
petition and try any issue made by the
Objections file; and
d.
State that dissolution was resolved upon
by the affirmative vote of the stockholders
representing at least 2/3 of the OCS or at
least 2/3 of the members at a meeting of
its stockholders or members called for
that purpose ;
6.
If no objection is sufficient and the material
allegations of the petition are true, it shall
render Judgment dissolving the corporation
and directing such disposition of its assets as
justice requires and may appoint a receiver to
collect such assets and pay the debts of the
corporation.
e.
State:
i. the reason for the dissolution;
ii. the form, manner, and time when the
notices were given; and
iii. the date, place, and time of the
meeting in which the vote was made
b.
c.
NOTE: Dissolution takes effect upon the issuance of
a certificate of dissolution by the SEC. (Sec. 135, RCC)
Procedure for Dissolution
Corporate Term (A-S-A-F)
The corporation shall submit to the SEC the
following: (1) a copy of the resolution
authorizing the dissolution, certified by a
majority of the board of directors or trustees
and countersigned by the secretary of the
corporation; and (2) a list of all its creditors.
3.
4.
Posted for three (3) consecutive weeks in
three (3) public places in such
municipality or city;
1.
If the petition is sufficient in form and
substance, the SEC shall, by an Order reciting
the purpose of the petition, fix a deadline for
filing objections to the petition which date
shall not be less than 30 days nor more than 60
days after the entry of the order;
2.
Before such date, Copy of the order shall be:
a.
Published at least once a week for three
(3) consecutive weeks in a newspaper of
general circulation published in the
UNIVERSITY OF SANTO TOMAS
2024 GOLDEN NOTES
112
by
Shortening
Amending the AOI pursuant to Sec. 15: Sec. 15
of the RCC:
a.
Approved by majority vote of the board of
directors or by vote or written assent of
majority of the trustees;
b.
Vote or written assent of the stockholders
representing at least 2/3 of the OCS or of
the members;
The original and amended articles together
shall contain all provisions required by law to
be set out in the AOI. Amendments to the
articles pertaining to the shortened term shall
be indicated by underscoring the change or
changes made, and a copy thereof duly certified
under oath by the corporate secretary and a
majority of the directors or trustees, with a
COMMERCIAL LAW
statement that the amendments have been duly
approved by the required vote of the
stockholders or members, shall be submitted to
the SEC;
e) Upon finding by Final judgment that the
corporation:
1.
The amendments shall take effect upon their
Approval by the SEC Commission or from the
date of filing with the said Commission if not
acted upon within six (6) months from the date
of filing for a cause not attributable to the
corporation.
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.
NOTE: In the case of expiration of corporate term,
dissolution shall automatically take effect on the day
following the last day of the corporate term stated
in the AOI, without the need for the issuance by the
SEC of a certificate of dissolution.
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.
(Ibid.)
3.
INVOLUNTARY DISSOLUTION
Involuntary Dissolution
Forfeiture in Favor of the National Government
A corporation may be dissolved by the SEC motu
proprio or upon filing of a verified complaint by any
interested party. (Sec. 138, RCC)
If the corporation is ordered dissolved by final
judgment pursuant to the grounds mentioned in
subparagraph (e) above, its assets, after payment of
its liabilities, shall, upon petition of the SEC with the
appropriate court, be forfeited in favor of the
national government. Such forfeiture shall be
without prejudice to the rights of innocent
stockholders and employees for services rendered,
and to the application of other penalty or sanction
under the RCC or other laws. (Sec. 138, RCC)
Grounds
a) Non-use of corporate charter - if the
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;
NOTE: The SEC shall give reasonable notice to, and
coordinate with, the appropriate regulatory agency
prior to the involuntary dissolution of companies
under their special regulatory jurisdiction. (Ibid.)
b) Continuous inoperation of a corporation - if a
corporation has commenced its business but
subsequently becomes inoperative for a period
of at least five (5) consecutive years, the SEC
may after due notice and hearing, place the
corporation under delinquent status;
Methods of Liquidation
1.
2.
c) Upon receipt of a lawful court order dissolving
the corporation;
3.
d) Upon finding by final judgment that the
corporation procured its incorporation through
Fraud; and
113
By the corporation itself; (Sec. 139, RCC)
By the trustee appointed by the corporation;
(Ibid.)
By the Receiver appointed by SEC; (Sec. 135,
RCC)
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
2024 GOLDEN NOTES
4.
By the rehabilitation receiver or the liquidator
appointed by the competent RTC in cases
involving insolvent debtor. (Sec. 25, FRIA)
Where no receiver or trustee has been designated
after dissolution:
1.
The board of directors or trustees itself may be
permitted to so continue as “trustees” by legal
implication;
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, 23 July
1996)
2.
In the absence of the BoD or BoT, those having
a pecuniary interest in the corporate assets,
stockholders, or creditors, may make a proper
representations with SEC for working out a
final settlement of the corporate concerns;
(Clemente v. CA, G.R. No. 82407, 27 Mar. 1995)
Suits brought against Corporation within the
Three-Year Period but Remain Pending
3.
The only surviving stockholder or director;
(SEC Opinion No. 10-96, 29 Jan. 2010) or
Pending actions against the corporation are not
extinguished. They may still be prosecuted against
the corporation even beyond said period.
4.
The counsel who prosecuted and defended the
interest of the corporation. (Reburiano v. CA,
G.R. No. 102965, 21 Jan. 1999)
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 unless barred by prescription or
laches or disposition of said property in favor of a
purchaser in good faith.
Liquidation by a Management Committee or
Rehabilitation Receiver
Approval of the SEC is Not Required for
Liquidation and Distribution
In the case of a dissolution order where creditors
are affected, the SEC may appoint a receiver to take
charge of the liquidation of the corporation. (Sec.
135, RCC)
Q: The corporation, once dissolved, thereafter
continues to be a body corporate for three years
for purposes of prosecuting and defending suits
by and against it and of enabling it to settle and
close its affairs, culminating in the final
disposition and distribution of its remaining
assets. If the 3-year extended life expires
without a trustee or receiver being designated
by the corporation within that period and by
that time (expiry of the 3-year extended term),
the corporate liquidation is not yet over, how, if
at all, can a final settlement of the corporate
affairs be made? (1997 BAR)
Appointment of Receiver for Going Corporation
The appointment of a receiver for a going
corporation is a last resort remedy and should not
be employed when another remedy is
available. Relief by receivership is an extraordinary
remedy and is never exercised if there is an
adequate remedy at law or if the harm can be
prevented by an injunction or a restraining
order. Bad judgment by directors, or even
unauthorized use and misapplication of the
company’s funds, will not justify the appointment of
a receiver for the corporation if appropriate relief
can otherwise be had. (Rev. Ao-As v. CA, G.R. No.
128464, 20 June 2006)
A: The liquidation can continue with the winding up.
The members of the BOD can continue with the
winding of the corporate affairs until final
liquidation. They can act as trustees or receivers for
this purpose.
UNIVERSITY OF SANTO TOMAS
2024 GOLDEN NOTES
Under Sec. 135 of the RCC, the SEC shall proceed to
hear the petition (filed by a corporation where
creditors are affected) and try any issue raised in
the objections filed; and if no such objection is
114
COMMERCIAL LAW
sufficient, and the material allegations of the
petition are true, it shall render judgment dissolving
the corporation and directing such disposition of its
assets as justice requires and may appoint a
receiver to collect such assets and pay the debts of
the corporation.
in the receiver. (Yam v. CA, G.R. No. 104726, 11 Feb.
1999)
I. FOREIGN CORPORATIONS
(Secs. 140-153)
The receiver represents the SEC, as well as the
stockholders and creditors. The receiver is not
bound by the three-year liquidation period.
The appointment of a receiver operates to suspend
the authority of a corporation and its directors and
officers over its property and effects, such authority
being reposed in the receiver. Thus, a corporate
officer had no authority to condone a debt.
A foreign corporation is:
1.
2.
In BPI v. Eduardo Hong (G.R. No. 161771, 15 Feb.
2012), the Supreme Court held, however, that while
the SEC has jurisdiction to order the dissolution of a
corporation, jurisdiction over the liquidation of the
corporation now pertains to the appropriate
regional trial courts. This is the correct procedure
because the liquidation of a corporation requires
the settlement of claims for and against the
corporation, which clearly falls under the
jurisdiction of the regular courts. The trial court is
in the best position to convene all the creditors of
the corporation, ascertain their claims, and
determine their preferences.
One formed, organized or existing under any
laws other than those of the Philippines; and
Whose laws allow Filipino citizens and
corporations to do business in its own country
or State. (Sec. 140, RCC)
NOTE: The second requirement refers to Principle
of Reciprocity
It should be noted that the power of the SEC to
appoint a receiver existed even under the OCC and
retained under the RCC despite the ruling in BPI v.
Eduardo Hong. It is submitted that the receiver may
carry out the liquidation of the corporation if the
creditors and the corporation are able to agree
among themselves on how the creditors’ claims
shall be satisfied. Otherwise, the RTC should carry
out the liquidation process. (Divina, 2020)
Prohibition Against Condonation
The corporation, through its president cannot
condone penalties and charges after it had been
placed under receivership. The appointment of a
receiver operates to suspend the authority of a
corporation and of its directors and officers over its
property and effects, such authority being reposed
115
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
2024 GOLDEN NOTES
Jurisdiction over Foreign Corporation
IF THE FOREIGN
CORPORATION IS
THE PLAINTIFF
to lawfully transact
Philippines); and
IF THE FOREIGN
CORPORATION IS
THE DEFENDANT
2.
1. GR:
Voluntary
appearance of the
corporation
by
interposing
a
defense.
1.
2.
Voluntary
appearance before
the local courts by
the filing of an
action by a licensed
corporation.
XPN: A special
appearance to file a
motion to dismiss
based on lack of
jurisdiction.
If
the
foreign
corporation is a coplaintiff with a
domestic
corporation
and
latter later filed a
suit here in the
Philippines.
2. Service of summons
to
a
foreign
corporation which
has
transacted
business in the
Philippines whether
licensed
or
registered.
business
in
the
A corporation, even though not qualified (not
licensed), by engaging in sufficient activity
(doing business) within the State, established
judicial jurisdiction over the foreign
corporation. (Foreign Corporations: The
Interrelation of Jurisdiction and Qualification,
Indiana Law Journal, Art. 4, Vol. 33, Issue 3,
retrieved on 29 Apr. 2013)
Consent
Through compliance with the Philippines’ legal
requirements to lawfully engage in business within
the country’s territory, the foreign corporation
gives its actual consent to be subjected to the
jurisdiction of the Philippines. (Ibid.)
Foreign Corporations shall have the right to transact
business in the Philippines after obtaining a license
for that purpose in accordance with the RCC and a
certificate of authority from the appropriate
government agency. (Sec. 140, RCC)
1. PERSONALITY TO SUE AND SUABILITY
Personality to Sue
3. Service of summons
to its resident agent
in
an
isolated
transaction.
No foreign corporation transacting business in the
Philippines without a license, or its successors or
assigns, shall be permitted to maintain or intervene
in any action, suit or proceeding in any court or
administrative agency of the Philippines; but such
corporation may be sued or proceeded against
before Philippine courts or administrative tribunals
on any valid cause of action recognized under
Philippine laws. (Sec. 150, RCC)
Bases of Jurisdiction
XPN: Under the rule on estoppel, a party is estopped
to challenge the personality of a foreign corporation
to sue, even if it has no license, after having
acknowledged the same by entering to a contract
with it.
The following are the two bases of authority
(jurisdiction) over foreign corporations:
1.
A corporation may give actual consent to
judicial jurisdiction manifested normally by
compliance with the State’s foreign
corporation
qualification
requirements
(licensing requirements and other requisites
UNIVERSITY OF SANTO TOMAS
2024 GOLDEN NOTES
One who has dealt with a corporation of foreign
origin as a corporate entity is estopped to deny its
corporate existence. (Steel Case v. Design
116
COMMERCIAL LAW
International Selections, Inc., G.R. No. 171995, 18 Apr.
2012)
necessary if it is not engaged in business in the
Philippines. (Columbia Pictures v. CA, G.R. No.
110318, 28 Aug. 1996)
Q: Is a foreign corporation which not licensed to
do business in the Philippines absolutely
incapacitated from filing a suit in local courts?
Q: Does a foreign corporation not licensed to do
business in the Philippines have legal capacity
to sue under the provisions of the Alternative
Dispute Resolution Act of 2004?
A: NO. Only when that foreign corporation is
“transacting” or “doing business” in the country will
a license be necessary before it can institute suits. It
may, however, bring suits on isolated business
transactions, which is not prohibited under
Philippine law.
A: We answer in the affirmative. Indeed, it is in the
best interest of justice that in the enforcement of a
foreign arbitral award, we deny availment by the
losing party of the rule that bars foreign
corporations not licensed to do business in the
Philippines from maintaining a suit in our courts.
Thus, a foreign insurance company may sue in
Philippine courts upon the marine insurance
policies issued by it abroad to cover internationalbound cargoes shipped by a Philippine carrier, even
if it has no license to do business in this country. It
is the act of engaging in business without the
prescribed license and not the lack of license per se
which bars a foreign corporation from access to our
courts. (Aboitiz Shipping Corp. v. Insurance Co. of NA,
G.R. No. 168402, 6 Aug. 2008)
When a party enters into a contract containing a
foreign arbitration clause and, as in this case, in fact
submits itself to arbitration, it becomes bound by
the contract, by the arbitration and by the result of
arbitration, conceding thereby the capacity of the
other party to enter into the contract, participate in
the arbitration and cause the implementation of the
result. A foreign corporation, although not licensed
to do business in the Philippines, may seek
recognition and enforcement of the foreign arbitral
award in accordance with the provisions of the
Alternative Dispute Resolution Act of 2004. (Tuna
Processing Inc., v. Philippine Kingford Inc., G.R. No.
185582, 29 Feb. 2012)
The obtainment of a license prescribed by the
Corporation Code is not a condition precedent to the
maintenance of any kind of action in Philippine
courts by a foreign corporation. However, no
foreign corporation shall be permitted to transact
business in the Philippines, as this phrase is
understood under the Corporation Code, unless it
shall have the license required by law, and until it
complies with the law in transacting business here,
it shall not be permitted to maintain any suit in local
courts.
Suability of Foreign Corporations
A foreign corporation lawfully doing business in the
Philippines shall be bound by all laws, rules, and
regulations applicable to domestic corporations of
the same class, except those which provide for the
creation, formation, organization or dissolution of
corporations or those which fix the relations,
liabilities, responsibilities, or duties of stockholders,
members, or officers of corporations to each other
or to the corporation. (Sec. 146, RCC)
As thus interpreted, any foreign corporation not
doing business in the Philippines may maintain an
action in our courts upon any cause of action,
provided that the subject matter and the defendant
are within the jurisdiction of the court. It is not the
absence of the prescribed license but "doing
business" in the Philippines without such license
which debars the foreign corporation from access to
our courts. In other words, although a foreign
corporation is without license to transact business
in the Philippines, it does not follow that it has no
capacity to bring an action. Such license is not
A Foreign Corporation Doing Business in the
Philippines Without License may be Sued in the
Country
At this juncture it must be emphasized that a foreign
corporation doing business in the Philippines with
117
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
2024 GOLDEN NOTES
or without license is subject to process and
jurisdiction of the local courts. If such corporation is
properly licensed, well and good. But it shall not be
allowed, under any circumstances, to invoke its lack
of license to impugn the jurisdiction of our courts.
(Marubeni Nedeland BV v. Tensuan, G.R. No. 61950,
28 Sept. 1990)
agreement despite demands, Surecomp filed a
complaint for breach of contract with damages
before the RTC.
In its complaint, Surecomp alleged that it is a
foreign corporation not doing business in
the Philippines and is suing on an isolated
transaction. Pursuant to the agreement, it
installed the System in ABC’s computers for a
consideration of US$298,000.00 as license fee.
Global filed a motion to dismiss on the ground
that Surecomp had no capacity to sue because it
was doing business in the Philippines without a
license. Is Global estopped from questioning
Surecomp’s capacity to sue?
Isolated Transaction
The execution of the policy is a single act, an isolated
transaction. This Court has not construed the term
“isolated transaction” to literally mean “one” or a
mere single act. In Eriks Pte. Ltd. vs. CA, (G.R. No.
118843, 06 Feb. 1997) this Court held that:
…What is determinative of "doing business" is not
really the number or the quantity of the
transactions, but more importantly, the intention of
an entity to continue the body of its business in the
country. The number and quantity are merely
evidence of such intention. The phrase "isolated
transaction" has a definite and fixed meaning, i.e. a
transaction or series of transactions set apart from
the common business of a foreign enterprise in the
sense that there is no intention to engage in a
progressive pursuit of the purpose and object of the
business organization. Whether a foreign
corporation is "doing business" does not necessarily
depend upon the frequency of its transactions, but
more upon the nature and character of the
transactions.
A: YES, Global is estopped. A corporation has a legal
status only within the state or territory in which it
was organized. For this reason, a corporation
organized in another country has no personality to
file suits in the Philippines. In order to subject a
foreign corporation doing business in the country to
the jurisdiction of our courts, it must acquire a
license from the Securities and Exchange
Commission and appoint an agent for service of
process. Without such license, it cannot institute a
suit in the Philippines.
The exception to this rule is the doctrine of estoppel.
Global is estopped from challenging Surecomp's
capacity to sue.
A foreign corporation doing business in the
Philippines without license may sue in Philippine
courts a Filipino citizen or a Philippine entity that
had contracted with and benefited from it. A party is
estopped from challenging the personality of a
corporation after having acknowledged the same by
entering into a contract with it. The principle is
applied to prevent a person 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. (Global Business Holdings, Inc., v. Surecomp
Software, B.V., G.R. No. 173463, 13 Oct. 2010)
Q: Surecomp, a foreign corporation duly
organized and existing under the laws of the
Netherlands, entered into a software license
agreement with ABC, a domestic corporation,
for the use of its IMEX Software System (System)
in the bank’s computer system for a period of
twenty (20) years. ABC merged with Global
Business Holdings, Inc. (Global), with Global as
the surviving corporation.
When Global took over the operations of ABC, it
found the System unworkable for its operations
and informed Surecomp of its decision to
discontinue the agreement and to stop further
payments thereon. Consequently, for failure of
Global to pay its obligations under the
UNIVERSITY OF SANTO TOMAS
2024 GOLDEN NOTES
118
COMMERCIAL LAW
2. FOREIGN INVESTMENTS ACT
(R.A. No. 7042, as amended by R.A. No. 11647)
5.
State Policy of the Law
1.
2.
Recognizing that increased capital and
technology benefits the Philippines and that
global and regional economies affect the
Philippine economy, it is the policy of the State
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.
Definition
The term “foreign investment” shall mean an equity
investment made by non-Philippine national in the
form of foreign exchange and/or other assets
actually transferred to the Philippines and duly
registered with the Bangko Sentral ng Pilipinas. (Sec.
3[c], R.A. No. 7042 as amended by R.A. No. 11647)
Significant Terms
The term “investment" shall mean equity
participation in any enterprise, organized or
existing under the laws of the Philippines and duly
recorded in the enterprise's stock and transfer
book, or any equivalent registry of ownership. (Sec.
3[b], R.A. No. 7042 as amended by R.A. No. 11647)
Foreign investments shall be encouraged in
enterprises that significantly:
a.
expand livelihood and
opportunities for Filipinos;
b.
enhance economic value of agricultural
products;
c.
promote the welfare of Filipino consumers;
d.
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.
e.
The term “practice of profession" shall mean an
activity or undertaking rendered and performed by
a registered and duly licensed professional or
holder of a special temporary permit as defined in
the scope of practice of a professional regulatory
law. (Sec. 3(h), R.A. No. 7042 as amended by R.A. No.
11647)
employment
3.
Foreign investments shall be welcome as a
supplement to Filipino capital and technology
in those enterprises serving mainly the
domestic market.
4.
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.
Foreign investments shall be conducted based
on the principles of transparency, reciprocity,
equity, and economic cooperation. (Sec. 1, R.A.
No. 7042 as amended by R.A. No. 11647)
The term “pipeline transaction" shall mean the
sector which includes transport of goods or
materials through a pipeline such as crude, refined,
petroleum, natural gas, biofuels, and other
chemically stable substance. (Sec. 3(i), R.A. No. 7042
as amended by R.A. No. 11647)
119
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
2024 GOLDEN NOTES
4.
Publication of a general advertisement
through any print or broadcast media;
5.
Maintaining a stock of goods in the Philippines
solely for the purpose of having the same
processed by another entity in the Philippines;
6.
Consignment by the foreign corporation of
equipment with a local company to be used in
the processing of products for export;
7.
Collecting information in the Philippines; and
8.
Performing services auxiliary to an existing
isolated contract of sale which are not on a
continuing basis. (Sec. 1(f), IRR of R.A. No.
7042, as amended by R.A No. 8179)
a. “DOING BUSINESS IN THE PHILIPPINES”
When Foreign Corporations are considered
“Doing Business”
Foreign corporations are considered “doing or
transacting business” in the Philippines if they are:
1.
2.
Soliciting orders, service contracts, and
opening offices whether called “liaison” offices
or branches;
Appointing representatives or distributors
domiciled in the Philippines or who in any
calendar year stay for a period or periods
totaling one hundred eighty (180) days or
more;
3.
Participating in the management, supervision
or control of any domestic business, firm,
entity, or corporation in the Philippines; or
4.
Doing 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 functions normally incident
to and in progressive prosecution of, the
purpose and object of its organization. (Sec.
3(d), R.A. No. 7042)
NOTE: Most of these activities do not bring any
direct receipts or profits to the foreign corporation,
consistent with the ruling of this Court in National
Sugar Trading Corp. v. CA that activities within
Philippine jurisdiction that do not create earnings
or profits to the foreign corporation do not
constitute doing business in the Philippines. To
constitute "doing business," the activity undertaken
in the Philippines should involve profit-making.
Besides, under Sec. 3(d) of R.A. No. 7042, "soliciting
purchases" has been deleted from the enumeration
of acts or activities which constitute "doing
business." (Cargill v. Intra Strata Assurance Corp.,
G.R. No. 168266, 15 Mar. 2010)
Instances that are considered as “Not Doing or
Transacting Business” in the Philippines for
Foreign Corporations
1.
Mere investment as a shareholder in domestic
corporations duly registered to do business
and/or the exercise of rights as such investor;
2.
Having a nominee director or officer to
represent its interest in the corporation;
3.
Appointing a representative or distributor
domiciled in the Philippines which transacts
business in its own name and for its own
account;
UNIVERSITY OF SANTO TOMAS
2024 GOLDEN NOTES
Q: Petitioner Cargill, Inc. is a corporation
organized and existing under the laws of the
State of Delaware, United States of America.
Petitioner and Northern Mindanao Corporation
(NMC) executed a contract dated 16 Aug. 1989
whereby NMC agreed to sell to petitioner 20,000
to 24,000 metric tons of molasses, to be
delivered from 1 Jan. to 30 June 1990 at the price
of $44 per metric ton. NMC was only able to
deliver 219.551 metric tons of molasses out of
the agreed 10,500 metric tons. Thus, petitioner
sent demand letters to respondent claiming
payment under the performance and surety
bonds. When respondent refused to pay,
petitioner filed on 12 Apr. 1991 a complaint for
sum of money against NMC and respondent.
120
COMMERCIAL LAW
Respondent claims petitioner is barred from
filing said suit for the lack of the requisite
license under Sec. 133 of the Corporation Code. Is
petitioner doing or transacting business in the
Philippines so as to bar him from filing said suit?
number and quantity are merely evidence of such
intention. The phrase isolated transaction has a
definite and fixed meaning, i.e. a transaction or
series of transactions set apart from the common
business of a foreign enterprise in the sense that
there is no intention to engage in a progressive
pursuit of the purpose and object of the business
organization. Whether a foreign corporation is
doing business does not necessarily depend upon
the frequency of its transactions, but more upon the
nature and character of the transactions. (Eriks PTE.
LTD. v. CA, G.R. No. 118843, 06 Feb. 1997)
A: NO. The phrase "doing business" shall include
"soliciting orders, service contracts, opening offices,
whether called ‘liaison’ offices or branches;
appointing
representatives
or
distributors
domiciled in the Philippines or who in any calendar
year stay in the country for a period or periods
totaling 180 days or more; participating in the
management, supervision or control of any
domestic business, firm, entity or corporation in the
Philippines; and any other act or acts that imply a
continuity of commercial dealings or arrangements,
and contemplate to that extent the performance of
acts or works, or the exercise of some of the
functions normally incident to, and in progressive
prosecution of, commercial gain or of the purpose
and object of the business organization: Provided,
however, That the phrase ‘doing business’ shall not
be deemed to include mere investment as a
shareholder by a foreign entity in domestic
corporations duly registered to do business, and/or
the exercise of rights as such investor; nor having a
nominee director or officer to represent its interests
in such corporation; nor appointing a
representative or distributor domiciled in the
Philippines which transacts business in its own
name and for its own account.
Q: A foreign company has a distributor in the
Philippines. The latter acts in his own name and
account. Will this distributorship be considered
as doing business by the foreign company in the
Philippines? (2015 BAR)
A: The appointment of a distributor in the
Philippines is not sufficient to constitute “doing
business” unless it is under the full control of the
foreign corporation. If the distributor is an
independent entity doing business which buys and
distributes products, other than those of the foreign
corporation, for its own name and its own account,
the latter cannot be considered as doing business in
the Philippines. (Steelcase, Inc. v. Design
International Selections, Inc., GR No. 171995, 18 Apr.
2012)
A foreign which transacts business through an
indentor who, in the pursuit of its business,
represents a number of manufacturers, is not
considered as doing business in the Philippines.
(DBP v. Monsanto, G.R. No. 207153, 25 Jan. 2023)
Since respondent is relying on Sec. 133 of the
Corporation Code to bar petitioner from maintaining
an action in Philippine courts, respondent bears the
burden of proving that petitioner’s business
activities in the Philippines were not just casual or
occasional, but so systematic and regular as to
manifest continuity and permanence of activity to
constitute doing business in the Philippines. (Cargill
v. Intra Strata Assurance Corp., ibid)
Q: When is a foreign corporation deemed to be
“doing business in the Philippines?” (1998, 2016
BAR)
A: Under the Foreign Investment Act of 1991 (R.A.
No. 7402),the phrase “doing business” shall include
soliciting orders, service contracts, opening offices,
whether called “liaison” offices or branches;
appointing
representatives
or
distributors
domiciled in the Philippines or who in any calendar
year stay in the country for a period or periods
totaling 180 days or more; participating in the
Isolated Transaction
What is determinative of doing business is not really
the number or the quantity of the transactions, but
more importantly, the intention of an entity to
continue the body of its business in the country. The
121
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
2024 GOLDEN NOTES
management, supervision or control of any
domestic business, firm, entity or corporation in the
Philippines; and any other act or acts that imply a
continuity of commercial dealings or arrangements,
and contemplate to that extent the performance of
acts or works, or the exercise of some of the
functions normally incident to, and in progressive
prosecution of, commercial gain or of the purpose
and object of the business organization
constitute “minimum contacts” for jurisdictional
purposes.
The Sliding Scale Test is based on the premise that
“the likelihood that ‘personal jurisdiction’ can be
constitutionally exercised is directly proportionate
to the nature and quantity of commercial activity
that an entity conducts over the internet.”
At one end of the scale are “passive” websites, which
alone generally do not generate sufficient contacts
with a foreign state to establish personal
jurisdiction since they are only used to post
information therein.
Provided, however, That the phrase “doing
business” shall not be deemed to include mere
investment as a shareholder by a foreign entity in
domestic corporations duly registered to do
business, and/or the exercise of rights as such
investor; nor having a nominee director or officer to
represent its interests in such corporation; nor
appointing a representative or distributor
domiciled in the Philippines which transacts
business in its own name and for its own account.
At the other end of the scale are “active” websites,
which generate sufficient business over the internet
to establish personal jurisdiction.
“Interactive” websites fall in the center of the scale
since they are hybrid sites that contain elements of
both passive and active websites, and courts
determine whether to exercise personal jurisdiction
over the interactive website owner on a case-bycase basis. (Divina, 2020)
Twin Characterization Test
Under this test, a foreign corporation is considered
to be “doing business” in the Philippines when:
a.
b.
Q: What is the legal test for determining if an
unlicensed foreign corporation is doing
business in the Philippines? (2002 BAR)
The foreign corporation is maintaining or
continuing in the Philippines the body or
substance of the business or enterprise for
which it was organized or whether it has
substantially retired from it and turned it over
to another.
A: The test is whether or not the unlicensed foreign
corporation has performed an 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 corporation.
The foreign corporation is engaged in activities
which necessarily imply “continuity of
commercial dealings and arrangements, and
contemplates, to that extent, the performance
of acts or works or the exercise of some of the
functions normally incident to, and in
progressive prosecution of, the purpose and
object of its organization.” (Divina, 2020, citing
Mentholatum Co. Inc. v. Mangaliman, G.R. No. L47701, 27 June 1941)
b. REGISTRATION REQUIREMENT
(Sec. 5 of R.A. No. 7042, as amended by R.A. No.
11647)
Registration of Investments of Non-Philippine
Nationals
Sliding Scale Test
Without need of prior approval, a non-Philippine
national, as that term is defined in Section 3(a), and
not otherwise disqualified by law may, upon
registration with the Securities and Exchange
Currently, most courts in the United States apply a
Sliding Scale Test tailored to internet activities to
determine the level or types of activities that will
UNIVERSITY OF SANTO TOMAS
2024 GOLDEN NOTES
122
COMMERCIAL LAW
Commission (SEC), or of the Department of Trade
and Industry (DTI) in the case of single
proprietorships, do business as defined in Section
3(d) of this Act or invest in a domestic enterprise up
to one hundred percent (100%) of its capital, unless
participation of non-Philippine nationals in the
enterprise is prohibited or limited to a smaller
percentage by existing law and/or under the
provisions of this Act.
of the equity capital of the enterprises engaged
therein.
The latest Negative List is the 12th Foreign
Investment Negative List promulgated under
Executive Order (EO) No. 175 issued on 12 June
2022.
The Foreign Investment Negative List shall have
two (2) component lists: A and B:
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 Investment Code of 1987 must apply for
registration with the Board of Investments (BOI),
which shall process such application for registration
in accordance with the criteria for evaluation
prescribed in said Code: Provided, finally, That 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, the SEC shall disallow registration of the
applying non-Philippine 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.
NOTE: SEC shall effect registration of any enterprise
applying under this Act within 15 days upon
submission of completed requirements.
1.
List A shall enumerate the areas of activities
reserved to Philippine nationals by mandate of
the Constitution and specific laws.
2.
List B shall contain the areas of activities and
enterprises regulated pursuant to law:
a.
which are defense-related activities,
requiring prior clearance and authorization
from Department of National Defense
(DND) to engage in such activity, such as
the manufacture, repair, storage and/or
distribution of rearms, ammunition, lethal
weapons, military ordinance, explosives,
pyrotechnics and similar materials, unless
such manufacturing or repair activity is
specially authorized by the Secretary of
National Defense; or (as amended by RA No
11647)
b.
which have implications on public health
and morals, such as the manufacture and
distribution of dangerous drugs, all forms
of gambling, nightclubs, bars, beer houses,
dance halls, sauna and steam bathhouses
and massage clinics.
c. NATIONALIZED ACTIVITIES AND THE
NEGATIVE LIST
Foreign Investment Negative List
Foreign investment negative list or negative list
refers to the list of areas of economic activity whose
foreign ownership is limited to a maximum of 40%
123
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
2024 GOLDEN NOTES
List A
Foreign ownership is limited by mandate of the Constitution and specific laws
a.
b.
k.
Mass media, except recording and internet business;
Practice of professions, including radiologic and x-ray
technology, criminology, law, and marine deck officers and
marine engine officers, subject to the Annex on Professions
where: a)foreigners are allowed to practice in the Philippines
subject to reciprocity; and b) where corporate practice is
allowed. Foreigners may teach at higher education levels,
provided the subject being taught is not a professional subject
(i.e., included in a government board or bar examination);
Retail trade enterprises with paid-up capital of less than Php25
Million;
Cooperatives unless investments of former natural-born citizens
of the Philippines
Organization and operation of private detective, watchmen or
security guard agencies;
Small-scale mining;
Utilization of marine resources in archipelagic waters, territorial
sea and exclusive economic zone;
Ownership, operation, and management of cockpits;
Manufacture, repair, stockpiling, and
distribution of nuclear weapons;
Manufacture, repair, stockpiling, and/or distribution of
biological, chemical, and radiological weapons, and antipersonnel mines; and
Manufacture of firecrackers and other pyrotechnic devices.
Up to Twenty-Five Percent (25%)
Foreign Equity
a.
b.
Private recruitment, whether for local or overseas; and
Contracts for the construction of defense-related structures.
Up to Thirty Percent (30%)
Foreign Equity
Advertising
c.
d.
100% Filipino; No Foreign Equity
e.
f.
g.
h.
i.
j.
a.
b.
c.
Up to Forty Percent (40%)
Foreign Equity
d.
e.
Procurement of infrastructure and development of natural
resources;
Exploration, development and utilization of natural resources;
Ownership of private lands, except for natural-born citizens who
have lost their Philippine citizenship and who have the legal
capacity to enter into a contract under Philippine laws;
Operation of public utilities
Educational institutions other than those established by
religious groups and mission boards, foreign diplomatic
personnel and their dependents, and other foreign
temporary residents or for short-term high-level skills
UNIVERSITY OF SANTO TOMAS
2024 GOLDEN NOTES
124
COMMERCIAL LAW
f.
g.
h.
i.
j.
development that do not form part of the formal education
system;
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;
Contracts for the supply of materials goods and commodities to
government-owned or controlled corporation, company, agency
or municipal corporation.
Operation of deep sea commercial fishing vessels;
Ownership of condominium units; and
Private radio communications network
List B
Foreign ownership is Limited by Reasons of Security, Defense, Risk to Health and Morals, and
Protection of Small and Medium Scale Enterprises
a.
b.
c.
d.
Up to Forty Percent (40%)
Foreign Equity
e.
f.
Manufacture, repair, storage, and/or distribution of products
and/or ingredients requiring Philippine National Police
clearance;
Manufacture and distribution of dangerous drugs;
Sauna, steam bathhouses, massage clinics and other like
activities regulated by law because of risks posed to public
health and morals, except wellness centers;
All forms of gambling except those covered by investment
agreements with the state-run Philippine Amusement and
Gaming Corporation;
Micro and small domestic market enterprises with paid in equity
capital of less than the equivalent of USD200,000.00
Micro and small domestic market enterprises
i. that involve advanced technology; or
ii. are endorsed as startup or startup enablers by state agencies;
or
those whose majority of direct employees were Filipinos
provided that their employees should not be less than fifteen
(15), and with a paid equity capital of less than the equivalent of
USD100,000.00.
125
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
2024 GOLDEN NOTES
4.
Consensual – Perfected by mere consent, upon
the express or implied agreement of two or
more persons;
5.
Commutative – The undertaking of each of the
partners is considered as the equivalent of that
of the others;
6.
Principal – It does not depend for its existence
or validity upon some other contracts;
7.
Preparatory – Because it is entered into as a
means to an end, i.e. to engage in business or
specific venture for the realization of profits
with the view of dividing them among the
contracting parties; and
8.
Profit-oriented. (Art. 1770, NCC)
II. PARTNERSHIP
A. GENERAL PROVISIONS
1. DEFINITION
(Art. 1767, NCC)
Definition of Partnership
It is a contract whereby two or more persons bind
themselves to contribute money, property, or
industry to a common fund, with the intention of
dividing the profits among themselves. (Art. 1767,
New Civil Code)
NOTE: A partnership has a juridical personality
separate and distinct from that each of the partners.
(Art. 1768, NCC)
NOTE: Two or more persons may also form a
partnership for the exercise of a profession. (Ibid.)
Typical Incidents of Partnership
Essential Elements of Partnership
1.
2.
Agreement to contribute money, property, or
industry to a common fund (mutual
contribution to a common stock); and
Intention to divide the profits among the
contracting parties (joint interest in the
profits). (Jarantilla, Jr. v. Jarantilla,. G.R No.
154486, 01 Dec. 2010)
1.
The partners share in profits and losses (Arts.
1767, 1797-98, NCC)
2.
The partnership has a juridical personality
separate and distinct from that of each of the
partners. Such juridical personality shall be
automatically acquired despite the failure to
register in the SEC; (Art. 1768, NCC)
3.
Partners have equal rights in the management
and conduct of the partnership business; (NCC,
Art. 1803)
4.
Every partner is an agent of the partnership,
and entitled to bind the other partners by his
acts, for the purpose of its business. He may
also be liable for the entire partnership
obligations; (Art. 1818, NCC)
5.
All partners are personally liable for the debts
of the partnership with their separate
property except limited partners are not
bound beyond the amount of their investment;
(Arts. 1816, 1822-24, 1843, NCC)
Characteristics of Partnership
1.
Bilateral – It is entered into by two or more
persons and the rights and obligations arising
therefrom are always reciprocal;
2.
Onerous – Each of the parties aspires to
procure for himself a benefit through the
giving of something;
3.
Nominate – It has a special name or
designation in our law;
UNIVERSITY OF SANTO TOMAS
2024 GOLDEN NOTES
126
COMMERCIAL LAW
6.
A fiduciary relation exists between the
partners; (Art. 1807, NCC) and
7.
On dissolution, the partnership is not
terminated, but continues until the winding up
of partnership is completed. (Art. 1829, NCC)
recorded with the SEC. (Art. 1772, NCC)
Partnership with a Fixed Term
It is one in which the term of its existence has been
agreed upon by the partners either:
NOTE: These incidents may be modified by
stipulation of the partners subject to the rights of
third persons dealing with the partnership.
1.
2.
Q: TRUE or FALSE. An oral partnership is valid
(2009 BAR)
The mere expectation that the business would be
successful and that the partners would be able to
recoup their investment is not sufficient to create a
partnership for a term.
A: TRUE. An oral contract of partnership is valid
even though not in writing. However, if it involves
contribution of an immovable property or a real
right, an oral contract of partnership is void. In such
a case, the contract of partnership to be valid, must
be in a public instrument (Art. 1771, NCC), and the
inventory of said property signed by the parties
must be attached to said public instrument. (Art.
1773, NCC; Litonjua, Jr. v. Litonjua, Sr., G.R. Nos.
166299-300, 13 Dec. 2005)
Fixing the Term of the Partnership Contract
The partners may fix in their contract any term and
they shall be bound to remain under such a relation
for the duration of the term.
Expiration of the Partnership Contract
The expiration of the term fixed, or the
accomplishment of the particular undertaking
specified will cause the automatic dissolution of the
partnership.
Essential Features of Partnership
1.
2.
3.
4.
5.
Expressly – There is a definite period; or
Impliedly – A particular enterprise or
transaction is undertaken
There must be a valid contract;
The parties (two or more persons) must have
legal capacity to enter into the contract;
There must be a mutual contribution of
money, property, or industry to a common
fund;
The object must be lawful; and
The primary purpose must be to obtain profits
and to divide the same among the parties. (De
Leon, 2010)
Partnership at Will
One in which no fixed term is specified and is not
formed for a particular undertaking or venture
which may be terminated anytime by mutual
agreement of the partners, or by the will of any one
partner alone; or one for a fixed term or particular
undertaking which is continued by the partners
after the termination of such term or particular
undertaking without express agreement. (De Leon,
2014)
Q: Is a public instrument required to constitute
a partnership?
A: NO. Generally, a partnership may be constituted
in any form. However, an exception is where
immovable property or real rights are contributed,
in which case a public instrument shall be
necessary. (Art. 1771, NCC)
Termination or Dissolution of Partnership at
Will
A partnership at will may be lawfully terminated or
dissolved at any time by the express will of all or any
of the partners.
In addition, every contract of partnership having a
capital of P3,000 or more, in money or property,
shall appear in a public instrument, which must be
The partner who wants the partnership dissolved
127
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
2024 GOLDEN NOTES
must do so in good faith, not that the attendance of
bad faith can prevent the dissolution of the
partnership, but to avoid the liability for damages to
other partners.
Partnership v. Joint Venture (2015 BAR)
PARTNERSHIP
JOINT VENTURE
Coverage
Contemplates
the Ordinarily limited to a
undertaking
of
a single transaction and
general and continuous not
intended
to
business of a particular pursue a continuous
kind.
business.
Firm Name
Q: A, B, and C entered into a partnership to
operate a restaurant business. When the
restaurant had gone past break-even stage and
started to garner considerable profits, C died. A
and B continued the business without dissolving
the partnership. They in fact opened a branch of
the restaurant, incurring obligations in the
process. Creditors started demanding for the
payment of their obligations.
a.
Required to operate
under a firm name.
Has no firm name.
Transfer of property
The property used
The property used
becomes the property
remains
undivided
of the business entity
property
of
its
and hence of all the
contributor.
Partners.
Power
Who are liable for the settlement of the
partnership’s obligations? Explain.
A: The two remaining partners, A and B, are liable.
When any partner dies and the business is
continued without any settlement of accounts as
between him or his estate, the surviving partners
are held liable for continuing the business despite
the death of C. (Arts. 1785(2), 1833 & 1841, NCC)
A partner acting in
pursuance of the firm
business, binds not only
himself as a principal,
but as their agent as
well,
also
the
partnership and the
partners.
b. What is/are the creditors’ recourse/s?
Explain. (2010 BAR)
A: Creditors can file the appropriate actions. For
instance, an action for the collection of sum of
money against the “partnership at will” and if there
are no sufficient funds, the creditors may go after
the private properties of A and B. (Art. 816, NCC)
None of the coventurers can bind the
joint venture or his coventurers.
Firm Name and Liabilities
A partnership acquires
personality
after
following
the
requisites required by
law.
Creditors may also sue the estate of C. The estate is
not excused from the liabilities of the partnership
even if C is dead already but only up to the time that
he remained a partner. (Arts. 1829 and 1835(2), NCC,
Testate Estate of Mota v. Serra, G.R. No. L-22825, 14
Feb. 1925) However, the liability of C’s individual
property shall be subject first to the payment of his
separate debts. (Art. 1835, NCC)
NOTE: SEC registration
is not required before a
partnership
acquires
legal personality. (Art.
1768, NCC)
A joint venture has no
legal personality.
Joint Venture
It is an association of persons or companies jointly
undertaking
some
commercial
enterprise.
Generally, all contribute assets and share risks. It
requires a community of interest in the
performance of the subject matter, a right to direct
UNIVERSITY OF SANTO TOMAS
2024 GOLDEN NOTES
128
COMMERCIAL LAW
and govern the policy in connection therewith, and
a duty which may be altered by agreement to share
both in profits and losses.
e.
NOTE: Sec. 36(h) of R.A. 11232 or the Revised
Corporation Code (RCC) of the Philippines provides
for the power of a corporation, “to enter into a
partnership, joint venture, merger, consolidation or
other commercial agreement with natural or
juridical persons.”
NOTE: In sub-paragraphs a–e, the profits in the
business are not shared as profits of a partner as a
partner, but in some other respects or for some
other purpose.
Burden of Proving
Partnership
2. RULES TO DETERMINE EXISTENCE
(Art. 1769, NCC)
Except as provided by Art. 1825 of the NCC
(partnership by estoppel), persons who are not
partners as to each other are not partners as to
third persons;
2.
Co-ownership or co-possession does not of
itself establish a partnership, whether such coowners or co-possessors do or do not share any
profits made by the use of the property;
3.
The sharing of gross returns does not of itself
establish a partnership, whether or not the
persons sharing them have a joint or common
right or interest in any property from which the
returns are derived;
4.
The receipt by a person of a share of the profits
of a business is prima facie evidence that he is a
partner in the business, but no such inference
shall be drawn if such profits were received in
payment: (D-W-A-I-C)
a.
As a Debt by installments or otherwise;
b.
As Wages of an employee or rent to a
landlord;
c.
As an Annuity to a widow or representative
of a deceased partner;
d.
As Interest on a loan, though the amount of
payment varies with the profits of the
business;
the
Existence
of
a
The existence of a partnership must be proved and
will not be presumed.
Rules to Determine Existence of Partnership
1.
As the Consideration for the sale of a
goodwill of a business or other property by
installments or otherwise. (Art. 1769, NCC)
However, when a partnership is shown to exist, the
presumption is that it continues in the absence of
evidence to the contrary, and the burden of proof
is on the person asserting its termination. (De
Leon, 2014)
NOTE: The use of the term “partner” in popular
sense, or as a matter of business convenience, will
not necessarily import an intention that a legal
partnership should result. But while the use of
“partnership” or “partners” in an alleged oral
agreement claimed to have constituted
partnership is not conclusive that partnership did
not exist, non-use of such terms is entitled to
weight. Legal intention is the crux of partnership.
(De Leon, 2014)
3. SEPARATE PERSONALITY
(Art. 1768, NCC)
The partnership has a juridical personality separate
and distinct from that each of the partners, even in
case of failure to comply with the registration
requirement, as stated under Article 1772, first
paragraph.
129
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
2024 GOLDEN NOTES
When Liability is Separate
4. PARTNERSHIP BY ESTOPPEL
(Art. 1825, NCC)
When there is no existing partnership and not all
but only some of those represented as partners
consented to the representation, or none of the
partnership in an existing partnership consented
to such representation, then the liability will be
separate. (De Leon, 2014)
It is one who, by words or conduct, does any of the
following:
1. Directly represents himself to anyone as a
partner in an existing partnership or in a nonexisting partnership; or
5. KINDS OF PARTNERSHIP
(Arts. 1776-1785, NCC)
2. Indirectly represents himself by consenting to
another representing him as a partner in an
existing partnership or in a non-existing
partnership.
Universal Partnership of All Present Property
A universal partnership may refer to all present
property or to all the profits.
Elements before a Partner can be held Liable on
the Ground of Estoppel
1.
Defendant represented himself as partner or is
represented by others as such and did not
deny/refute such representation;
2.
Plaintiff relied on such representation; and
3.
Statement of defendant is not refuted.
The property which belonged to each of the
partners at the time of the constitution of the
partnership becomes the common property of all
the partners, as well as the profits which they may
acquire therewith.
GR: A stipulation for the common enjoyment of any
other profits may also be made
XPN: The property which the partners may acquire
subsequently by inheritance, legacy, or donation
cannot be included, except the fruits thereof.
Liabilities in case of Estoppel
When Partnership is Liable
If all actual partners consented to the
representation, then the liability of the person
who represented himself to be a partner or who
consented to such representation and the actual
partner is considered a partnership liability. (De
Leon, 2014)
Persons disqualified from entering into a
universal partnership
Persons who are prohibited from giving each other
any donation or advantage cannot enter into
universal partnership, as provided under Article
739 of the Civil Code.
When Liability is Pro Rata
a) Those made between persons who were
guilty of adultery or concubinage at the time
of the donation;
b) Those made between persons found guilty of
the same criminal offense, in consideration
thereof;
c) Those made to a public officer or his wife,
descendants, and ascendants, by reason of his
office.
When there is no existing partnership and all
those represented as partners consented to the
representation, then the liability of the person
who represented himself to be a partner, and all
who made and consented to such representation,
is joint or pro-rata. (De Leon, 2014)
UNIVERSITY OF SANTO TOMAS
2024 GOLDEN NOTES
130
COMMERCIAL LAW
Universal Partnership of Profits/Particular
Partnership
subsequent changes thereof being for the account of
the partnership. (Art. 1787, NCC)
A universal partnership of profits comprises all that
the partners may acquire by their industry or work
during the existence of the partnership.
Q: Who bears the risk of loss of things
contributed?
A:
Objects of a particular partnership
a)
b)
c)
d)
PARTNERS
Determinate things;
Their use or fruits;
Specific undertaking; or
Exercise of a profession or vacation.
The risk of specific and
determinate
things,
which are not fungible,
contributed to the
partnership so that
only their use and
fruits may be for the
common benefit, it
shall be borne by the
partner who owns
them
B. OBLIGATIONS OF PARTNERS AMONG
THEMSELVES
(Arts. 1784-1809, NCC)
Withdrawal or Disposal of Money or Property by
a Contributing Partner
Money or property contributed by a partner cannot
be withdrawn or disposed of by the contributing
partner without the consent or approval of the
partnership or of the other partners because the
money or property contributed by a partner
becomes the property of the partnership. (De Leon,
2010)
Partner becomes ipso jure a debtor of the
partnership even in the absence of any
demand; and (Art. 1786, NCC)
2.
Remedy of the other partner is not rescission
but specific performance with damages and
interest from defaulting partner from the time
he should have complied with his obligation.
In
absence
of
stipulation, the risk of
things brought and
appraised
in
the
inventory, it shall also
be borne by the
partnership, and in
such case the claim
shall be limited to the
value at which they
were appraised.
(Art. 1796, NCC)
Rules regarding Contribution of Money to the
Partnership
Effect if a Partner Fails to Contribute the
Property which he Promised to Deliver to the
Partnership
1.
PARTNERSHIP
Things contributed are
fungible, or cannot be
kept
without
deteriorating, or if they
were contributed to be
sold.
When the capital or a part hereof which a partner is
bound to contribute consists of goods, their
appraisal must be made in the manner prescribed in
the contract of partnership, and in the absence of
stipulation, it shall be current prices, the
131
1.
To contribute on the date fixed the amount the
partner has undertaken to contribute to the
partnership;
2.
To reimburse any amount the partner may have
taken from the partnership coffers and
converted to his own use;
3.
To indemnify the partnership for the damages
caused to it by delay in the contribution or
conversion of any sum for the partner’s
personal benefit; and
4.
To pay the agreed or legal interest, if the
partner fails to pay his contribution on time or
in case he takes any amount from the common
fund and converts it to his own use.
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
2024 GOLDEN NOTES
Rule regarding Obligation to Contribute to
Partnership Capital
It is to be noted that the industrial partner is
exempted from the requirement to contribute an
additional share. Having contributed his entire
industry, he can do nothing further. (De Leon, 2010)
Unless there is a stipulation to the contrary, the
partners shall contribute equal shares to the capital
of the partnership. It is not applicable to an
industrial partner unless, besides his services, he
has contributed capital pursuant to an agreement.
(Art. 1790, NCC)
Obligations of Managing Partners who Collect
his Personal Receivable from a Person who also
Owes the Partnership
1.
Apply sum collected to 2 credits in proportion
to their amounts; and
2.
If he received it for the account of partnership,
the whole sum shall be applied to partnership
credit.
Liability of a Capitalist Partner to Contribute
Additional Capital
GR: A capitalist partner is not bound to contribute
to the partnership more than what he agreed to
contribute.
Requisites
XPNs:
1.
2.
At least 2 debts, one where the collecting partner is
the creditor and the other, where the partnership is
the creditor:
In case of imminent loss of the business; and
There is no agreement to the contrary.
He is under obligation to contribute an additional
share to save the venture. If he refuses to contribute,
he shall be obliged to sell his interest to the other
partners.
Requisites before Capitalist Partners are
Compelled to Contribute Additional Capital
1.
Imminent loss
partnership;
of
the
business
of
2.
Majority of the capitalist partners are of the
opinion that an additional contribution to the
common fund would save the business;
Capitalist partner refuses deliberately to
contribute (not due to financial inability); and
4.
There is no agreement to the contrary.
2.
Partner who collects is authorized to
manage and actually manages the
partnership.
Reason for Applying Payment to Partnership
Credit
The law safeguards the interests of the partnership
by preventing the possibility of their being
subordinated by the managing partner to his own
interest to the prejudice of the other partners. (De
Leon, 2010)
NOTE: The refusal of the partner to contribute his
additional share reflects his lack of interest in the
continuance of the partnership. (De Leon, 2010) It
shall be obliged to sell his interest to the other
partners except if there is an agreement to the
contrary. (Art. 1791, NCC)
UNIVERSITY OF SANTO TOMAS
2024 GOLDEN NOTES
Both debts are demandable; and
NOTE: The debtor is given the right to prefer
payment of the credit of the partner if it should be
more onerous to him in accordance with his right to
application of payment. (De Leon, 2014) (Art. 1252,
NCC)
the
3.
1.
Obligation of a Partner who Receives Share of
Partnership Credit
To bring to the partnership capital what he has
received even though he may have given receipt for
his share only.
132
COMMERCIAL LAW
Requisites (Re-No-I)
1.
benefits which he may have earned for the
partnership by his industry.
A partner has Received in whole or in part,
his share of the partnership credit;
2.
Other partners have Not collected their
shares; and
3.
Partnership debtor has become Insolvent.
XPN: The courts may equitably lessen this
responsibility
if
through
the
partner’s
extraordinary efforts in other activities of the
partnership, unusual profit has been realized. (Art.
1794, NCC)
Set-off of Damages caused by a Partner
Liability of a Person who has not Directly
Transacted on behalf of an Unincorporated
Association for a Contract Entered into by such
Association
GR: The damages caused by a partner to the
partnership cannot be offset by the profits of
benefits which he may have earned for the
partnership by his industry.
The liability for a contract entered into on behalf of
an unincorporated association or ostensible
corporation may lie in a person who may not have
directly transacted on its behalf, but reaped benefits
from that contract. (Lim Tong Lim v. Philippine
Fishing Gear Industries Inc., G.R. No. 136448, 03 Nov.
1999)
Ratio: The partner has the obligation to secure
benefits for the partnership. Hence, the profits
which he may have earned pertain as a matter of law
or right, to the partnership
XPN: If unusual profits are realized through the
extraordinary efforts of the partner at fault, the
courts may equitably mitigate or lessen his liability
for damages. This rule rests on equity.
Q: Joe and Rudy formed a partnership to operate
a car repair shop in Quezon City. Joe provided
the capital while Rudy contributed his labor and
industry. On one side of their shop, Joe opened
and operated a coffee shop, while on the other
side, Rudy put up a car accessories store. May
they engage in such separate businesses? Why?
(2001 BAR)
NOTE: Even in this case, the partner at fault is not
allowed to compensate such damages with the
profits earned. The law does not specify as to when
profits may be considered “unusual.”
Duty of the Partners with respect to Keeping the
Partnership Books
A: Joe, the capitalist partner, may engage in the
restaurant business because it is not the same kind
of business the partnership is engaged in. On the
other hand, Rudy may not engage in any other
business unless their partnership expressly permits
him to do so because as an industrial partner, he
must devote his full time to the business of the
partnership. (Art. 1789, NCC)
The partnership books shall be kept, subject to any
agreement between partners, at the principal place
of business of the partnership. (Art. 1805, NCC)
Duty to Keep Partnership Book belongs to
Managing or Active Partner
Rule with regard to the Obligation of a Partner
as to Damages Suffered by the Partnership
through his Fault
The duty to keep true and correct books showing
the firm’s accounts, such books being at all times
open to inspection of all members of the firm,
primarily rests on the managing or active partner or
the particular partner given record-keeping duties.
(Art. 1805, NCC; De Leon, 2014)
GR: Every partner is responsible to the partnership
for damages suffered by it through his fault and he
cannot compensate them with the profits and
133
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
2024 GOLDEN NOTES
Duty of the Partners with respect to Information
Affecting the Partnership
C. PROPERTY RIGHTS OF PARTNERS
(Arts. 1810-1814, NCC)
Partners shall render on demand true and full
information of all things affecting the partnership
to:
1. Any partner; or
2. Legal representative of any deceased or
any partner under legal disability. (Art.
1806, NCC)
Property Rights of a Partner
1.
2.
3.
NOTE: Under the same principle of mutual trust and
confidence among partners, there must be no
concealment between them in all matters affecting
the partnership. The information, to be sure, must
be used only for a partnership purpose. (De Leon,
2014)
Related Rights to the Property Rights of a
Partner
1.
Right
to
the
partnership
and
to
indemnification for risks in consequence of
management; (Art. 1796, NCC)
2.
The right of access and inspection of
partnership books;(Art. 1805, NCC)
3.
The right to true and full information of all
things affecting the partnership; (Art. 1806,
NCC)
4.
The right to a formal account of partnership
affairs under certain circumstances; and (Art.
1809, NCC)
5.
The right to have the partnership dissolved
also under certain conditions. (De Leon, 2010;
Arts. 1830 and 1831, NCC)
Accountability of Partners to Each Other as
Fiduciary
Every partner must account to the partnership for
any benefit, and hold as trustee for it any profits
derived by him without the consent of the other
partners from any transaction connected with the
formation, conduct, or liquidation of the
partnership or from any use by him of its property.
(Art. 1807, NCC)
Duty of a Partner to Act with Utmost Good Faith
towards Co-partners Continues even after
Dissolution
The duty of a partner to act with utmost good faith
towards his co-partners continues throughout the
entire life of the partnership even after dissolution
for whatever reason or whatever means, until the
relationship is terminated, i.e., the winding up of
partnership affairs is completed. (De Leon, 2014)
Failure to disclose facts, when there is a duty to
reveal them, as when parties are bound by
confidential relations, constitutes fraud. (Art. 1339,
NCC)
UNIVERSITY OF SANTO TOMAS
2024 GOLDEN NOTES
Right in specific partnership property;
Interest in the partnership (share in the profits
and surplus); and
Right to participate in the management. (Art.
1803, NCC)
Nature of a Partner's
Partnership Property
134
Right
in
Specific
1.
Equal right to possession for partnership
purposes;
2.
Right is not assignable, except in connection
with assignment of rights of all partners in the
same property;
3.
Right is limited to his share of what remains
after partnership debts have been paid;
COMMERCIAL LAW
4.
Right is not subject to attachment or execution
except on a claim against the partnership; and
5.
Right is not subject to legal support
when a partner receives any money or property for
a specific purpose (such as that obtaining in the
instant case) and he later misappropriates the same,
he is guilty of estafa. (Liwanag v. CA, G.R. No. 114398,
24 Oct. 1997)
Effects of Assignment of Partner’s Whole
Interest in the Partnership
1.
D. OBLIGATIONS OF PARTNERSHIP/PARTNERS
TO THIRD PERSONS
(Arts. 1815-1827, NCC)
Rights withheld from the assignee:
Such assignment does not grant the assignee the
right to:
a.
b.
c.
2.
The
following
are
obligations
of
partnership/partners to third persons: (2010,
1993 BAR)
To interfere in the management;
To require any information or account; and
To inspect partnership books.
Rights of assignee on partner’s interest:
a.
To receive in accordance with his contract
the profits accruing to the assigning
partner;
b.
To avail himself of the usual remedies
provided by law in the event of fraud in the
management;
c.
To receive the assignor’s interest in case of
dissolution; and
d.
To require an account of partnership
affairs, but only in case the partnership is
dissolved, and such account shall cover the
period from the date only of the last
account agreed to by all the partners.
1.
Every partnership shall operate under a firm
name. (Art. 1815, NCC)
2.
All partners shall be liable for contractual
obligations of the partnership with their
property, after all partnership assets have been
exhausted:
a.
b.
Pro rata; and
Subsidiary. (Art. 1816, NCC)
XPN: All partners shall be liable solidarily with
the partnership for everything chargeable to
the partnership under Art. 1822 and 1823. (Art.
1824, NCC)
NOTE: Any stipulation against the liability laid
down in Art. 1816 shall be void except as among
the partners. (Art. 1817, NCC)
Q: Rosa received from Jois money, with the
express obligation to act as Jois’ agent in
purchasing local cigarettes, to resell them to
several stores, and to give Jois the commission
corresponding to the profits received. However,
Rosa misappropriated and converted the said
amount due to Jois to her personal use and
benefit. Jois filed a case of estafa against Rosa.
Can Rosa deny liability on the ground that a
partnership was formed between her and Rosa?
3.
Partner as an agent of the partnership; (Art.
1818, NCC) (1994 BAR)
4.
Conveyance of real property belonging to the
partnership; (Art. 1819, NCC)
5.
Admission or representation made by any
partner concerning partnership affairs within
the scope of his authority is evidence against
the partnership; (Art. 1820, NCC)
A: NO. Even assuming that a contract of partnership
was indeed entered into by and between the parties,
135
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
2024 GOLDEN NOTES
6.
Notice to partner of any matter relating to
partnership affairs operates as notice to
partnership except in case of fraud:
a.
Knowledge of partner acting in the
particular matter acquired while a partner;
b.
Knowledge of the partner acting in the
particular matter then present to his mind;
c.
7.
to dismiss the complaint against him on the
ground that it was the ABC partnership that is
liable for the debt. D replied that ABC
partnership was dissolved upon completion of
the project for which purpose the partnership
was formed. Will you dismiss the complaint
against A if you were the judge? (1993 BAR)
A: NO. As Judge, I would not dismiss the complaint
against A because A is still liable as a general partner
for his pro rata share of 1/3. (Art. 1816) Dissolution
of a partnership caused by the termination of the
particular undertaking specified in the agreement
does not extinguish obligations, which must be
liquidated during the “winding up" of the
partnership affairs. (Par. 1-a, Art. 1830, Art. 1829,
NCC)
Knowledge of any other partner who
reasonably could and should have
communicated it to the acting partner. (Art.
1821, NCC)
Partners and the partnership are solidarily
liable to third persons for the partner's tort or
breach of trust; (Arts. 1822-24, NCC)
Importance of having a Firm Name
8.
9.
Liability of incoming partner is limited to:
a.
His share in the partnership property for
existing obligations; and
b.
His separate property for subsequent
obligations. (Art. 1826, NCC)
A partnership must have a firm name under which
it will operate. It is necessary to distinguish the
partnership which has a distinct and separate
juridical personality from the individuals
composing the partnership and from other
partnerships and entities. (De Leon, 2010)
Creditors of partnership are preferred in
partnership property & may attach partner's
share in partnership assets. (Art. 1827, NCC)
Liability for the Inclusion of Name in the Firm
Name
Persons who, not being partners, include their
names in the firm name do not acquire the rights of
a partner but under Art. 1815, they shall be subject
to the liability of a partner insofar as third persons
without notice are concerned. (Art. 1816, NCC; De
Leon, 2010)
NOTE: On solidary liability, Art. 1816 should be
construed together with Art. 1824 (in connection
with Arts. 1822 & 1823). While the liability of the
partners is merely joint in transactions entered into
by the partnership, a third person who transacted
with said partnership may hold the partners
solidarily liable for the whole obligation if the case
of the third person falls under Arts. 1822 and 1823.
(Muñasque v. CA, G.R. No. L-39780, 11 Nov. 1985)
Remedies Available to the Creditors of a Partner
Q: A, B and C formed a partnership for the
purpose of contracting with the Government in
the construction of one of its bridges. On June 30,
1992, after completion of the project, the bridge
was turned over by the partners to the
Government. On 30 Aug. 1992, D, a supplier of
materials used in the project sued A for
collection of the indebtedness to him. A moved
UNIVERSITY OF SANTO TOMAS
2024 GOLDEN NOTES
136
1.
Separate or individual creditors should first
secure a judgment on their credit; and
2.
Apply to the proper court for a charging order
subjecting the interest of the debtor-partner in
the partnership for the payment of the
unsatisfied amount of the judgment debt with
interest thereon. (De Leon, 2014)
COMMERCIAL LAW
NOTE: The court may resort to other courses of
action provided in Art. 1814 of the NCC, (i.e.,
appointment of receiver, sale of the interest, etc.) if
the
judgment
debt
remains
unsatisfied,
notwithstanding the issuance of charging order. (De
Leon, 2014)
4.
Confessing
judgment;
Effects of the Acts of Partners Acting as an Agent
of the Partnership
5.
Entering into a
compromise
concerning
a
partnership claim
or liability;
6.
Submitting
partnership claim
or liability to
arbitration; and
7.
Renouncing claim
of partnership.
ACTS OF A PARTNER
Acts for apparently
carrying on in the
unusual way the
business of the
partnership
Acts not in the
ordinary course of
business
Acts
of
dominion
ownership:
1.
impossible
to
carry
on
the
ordinary business
of partnership;
EFFECT
With binding effect
except:
1. When the partner
so acting has in
fact no authority
to act for the
partnership in the
particular matter,
and
a
2. The person with
whom
he
is
dealing
has
knowledge of the
fact that he has no
such
authority.
(Art. 1818(1), NCC)
Do
not
bind
partnership
unless
authorized by other
partners. (Art. 1818,
NCC)
Acts in contravention
of a restriction or
authority
Partnership is not liable
to third persons having
actual or presumptive
knowledge
of
the
restriction.
(Art.
1818(4), NCC)
strict
or
Assigning
partnership
property in trust
for creditors;
2.
Disposing
goodwill
business;
3.
Doing
which
make
an
of
of
act
would
it
GR: One or more, but
less than all the
partners
have
no
authority.
XPNs:
1. Authorized by the
other partners; or
2. Partners
have
abandoned
the
business. (Art. 1818
(3), NCC)
137
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
2024 GOLDEN NOTES
Effect of Conveyance of Real Property
TITLE OF
CONVEYANCE
EFFECT
Conveyance
passes
title, but partnership
can recover unless:
1.
a.
b.
Title in the
partnership’s name;
Conveyance in
partnership name
Title in the name of 1
or more or all
partners or 3rd
person in trust for
partnership;
Conveyance executed
in partnership name
or in the name of the
partners
Conveyance was
done in the usual
way of business;
and
The partner so
acting has the
authority to act for
the partnership;
or
2. The property which
has been conveyed by
the grantee or a person
claiming through such
grantee to a holder for
value
without
knowledge that the
partner, in making the
conveyance,
has
exceeded his authority.
Title in the names of
all the partners.;
Conveyance executed
by all the partners
Conveyance does not
pass title but only
equitable
interest,
provided:
Title in the
partnership’s name;
Conveyance in
partner’s name
a.
Conveyance was
done in the usual
way of business;
or
b.
The partner so
acting has the
authority to act for
the partnership.
(De Leon, 2014)
UNIVERSITY OF SANTO TOMAS
2024 GOLDEN NOTES
138
Conveyance will only
pass equitable interest,
provided:
a.
The act is one
within
the
authority of the
partner; and
b.
Conveyance was
done in the usual
way
of
the
business.
(De
Leon, 2014)
Conveyance will pass
all the rights in such
property. (De Leon,
2014)
COMMERCIAL LAW
Causes of Dissolution
E. DISSOLUTION AND WINDING UP
(Arts. 1828-1842, NCC)
1.
Without violating the agreement:
a.
Termination of the definite term or specific
undertaking;
b.
Express will of any partner in good faith,
when there is no definite tern and no
specified undertaking;
c.
Express will of all partners (except those
who have 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; and
d.
Expulsion of any partner in good faith of a
member.
DISSOLUTION OF PARTNERSHIP
Final stages of partnership
1.
2.
3.
Dissolution;
Winding up; and
Termination
Dissolution, Winding-up, and Termination
DISSOLUTIO
N
WINDING- UP
TERMINATIO
N
As to Definition
A change in
the relation of
partners
caused by any
partner
ceasing to be
associated in
carrying on
business.
Settling the
partnership
business or
affairs after
dissolution
It signifies the
end of the
partnership
life.
As to When it Occurs
It is that point
in time when
the partners.
It takes place
Cease to carry
after both
on the
dissolution
It is the final
business
and winding
step after
together. It
up have
dissolution in
represents the
occurred.
the
demise of a
Point in time
termination of
partnership.
when all
the
Thus, any
partnership
partnership.
time a partner
affairs are
leaves the
wound up or
business, the
completed.
partnership is
dissolved.
2.
Violating the agreement;
3.
Unlawfulness of the business;
4.
Loss;
a.
Specific thing promised as contribution is
lost or perished before delivery; or
b.
Loss of a specific thing contributed before or
after delivery, if only the use of such is
contributed.
NOTE: The partnership shall not be dissolved
by the loss of the thing when it occurs after the
partnership has acquired the ownership
thereof.
139
5.
Death of any of the partners;
6.
Insolvency of any partner or of the partnership;
7.
Civil interdiction of any partner; and
8.
By decree of court under Art. 1831; (Art. 1830,
NCC)
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
2024 GOLDEN NOTES
a.
A partner has been declared insane or of
unsound mind;
b.
A partner becomes in any other way
incapable of performing his part of the
partnership contract;
c.
A partner has been guilty of such conduct as
tends to affect prejudicially the carrying on
of business;
d.
A partner willfully or persistently commits a
breach of the partnership agreement;
e.
The business of the partnership can only be
carried on at a loss; or
f.
Other circumstances rendering a dissolution
equitable. (Art. 1831, NCC)
Dissolution does not automatically result in the
termination of the legal personality of the
partnership, nor the relations of the partners among
themselves who remain as co-partners until the
partnership is terminated. (De Leon, 2005)
Effect of Dissolution on the Authority of a
Partner (2010 BAR)
GR: The partnership ceases to be a going concern.
XPN: The partner’s power of representation is
confined only to acts incident to winding up or
completing transactions begun but not then
finished. (Art. 1832, NCC)
NOTE: Subject to the qualifications set forth in
Articles 1833 and 1834 in relation to Article 1832: In
so far as the partners themselves are concerned –
the authority of any partner to bind the partnership
by a new contract is immediately terminated when
the dissolution is not by the act, insolvency, or death
of a partner.
Effects of Dissolution
1.
2.
3.
Partnership is not terminated;
Partnership continues for a limited purpose;
and
Transaction of new business is prohibited. (De
Leon, 2005)
When the dissolution is by the act, insolvency, or
death, the termination of authority depends upon
whether or not the partner had knowledge or notice
of dissolution. (Art. 1833, NCC)
As to previous obligations, the dissolution of
partnership does not mean that the partners can
evade previous obligations entered into. (Testate of
Motta v. Serra, G.R. No. L-22825, 14 Feb. 1925)
Q: The articles of co-partnership provide that in
case of death of one partner, the partnership
shall not be dissolved but shall be continued by
the deceased partner’s heirs. When H, a partner,
died, his wife, W, took over the management of
some of the real properties with permission of
the surviving partner, X, but her name was not
included in the partnership name. She
eventually sold these real properties after a few
years. X now claims that W did not have the
authority to manage and sell those properties as
she was not a partner. Is the sale valid?
As to new obligations, the dissolution spares the
former partners from new obligations entered into
by the partnership without their consent, implied or
express, unless the obligations are essential for the
winding up of partnership affairs. (Ibid.)
NOTE: 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, pending the
winding up of some incidents and obligations of the
partnership, but in such case, the partnership will
be reputed as existing until the juridical relations
arising out of the contract are dissolved. (Ibid.)
UNIVERSITY OF SANTO TOMAS
2024 GOLDEN NOTES
A: YES. The widow was not a mere agent, because
she had become a partner upon her husband's
death, as expressly provided by the articles of copartnership, and by authorizing the widow to
manage partnership property, X recognized her as a
general partner with authority to administer and
alienate partnership property. It is immaterial that
140
COMMERCIAL LAW
W's name was not included in the firm name, since
no conversion of status is involved, and the articles
of co-partnership expressly contemplated the
admission of the partner's heirs into the
partnership. (Goquiolay v. Sycip, G.R. No. L-11840, 26
July 1960)
b.
Did not extend credit to partnership; Had
known partnership prior to dissolution;
and
c.
Had
no
knowledge/notice
of
dissolution/fact
of
dissolution
not
advertised in a newspaper of general
circulation in the place where partnership
is regularly carried on. (Par 1, Nos. 1 &2, Art.
1834, NCC)
Liability of a Partner where the Dissolution is
caused by the Act, Death or Insolvency of a
Partner
GR: Each partner is liable to his co-partners for his
share of any liability created by any partner for the
partnership, as if the partnership had not been
dissolved.
XPNs: Partner cannot bind the partnership
anymore after dissolution:
1.
Where dissolution is due to unlawfulness to
carry on business;
XPNs: Partners shall not be liable when: (2010
BAR)
2.
Where partner has become insolvent;
1.
The dissolution, being by act of any partner,
the partner acting for the partnership had
knowledge of the dissolution; or
3.
Act is not appropriate for winding up or for
completing unfinished transactions;
4.
2.
The dissolution, being by the death or
insolvency of a partner, the partner acting for
the partnership had knowledge or notice of the
death or insolvency. (Art. 1833, NCC)
Partner is unauthorized to wind up partnership
affairs, except by transaction with one who:
Q: After the dissolution of a partnership, can a
partner still bind the partnership?
a.
Had extended credit to partnership prior to
dissolution; AND had no knowledge or
notice of dissolution; or
b.
Did not extend credit to partnership prior
to dissolution; or
c.
Had known partnership prior to
dissolution; and had no knowledge/notice
of dissolution/fact of dissolution not
advertised in a newspaper of general
circulation in the place where partnership
is regularly carried on; or (Art. 1834(3),
NCC)
A:
GR: A partner continues to bind partnership even
after dissolution in the following cases:
1.
Transactions to wind up partnership affairs or
to complete transactions unfinished at
dissolution; or
2.
Transactions which would bind partnership if
dissolution had not taken place, provided the
other party/obligee:
5.
a.
Liability of the Estate of a Deceased Partner
Had extended credit to partnership prior to
dissolution; and had no knowledge/notice
of dissolution; or
Completely new transactions which would bind
the partnership if dissolution had not taken
place with third persons in bad faith.
In accordance with Article 1816, the individual
property of a deceased partner shall be liable for all
obligations of the partnership incurred while he
141
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
2024 GOLDEN NOTES
was a partner. Note that the individual creditors of
the deceased partner are to be preferred over
partnership creditors with respect to the separate
property of said deceased partner. (De Leon, 2010)
Ways of Winding Up
Order of Priority in the Distribution of Assets
during the Dissolution of a Limited Partnership
1.
Judicially, under the control and direction of
the proper court upon cause shown by any
partner, his legal representative, or his
assignee; or
2.
Extrajudicially, by the partners themselves
without intervention of the court. (De Leon,
2014)
The winding up of the dissolved partnership may be
done either:
In setting accounts after dissolution, the liabilities of
the partnership shall be entitled to payment in the
following order:
1.
Those to creditors, in the order of priority as
provided by law, except those to limited
partners on account of their contributions, and
to general partners;
2.
Those to limited partners in respect to their
share of the profits and other compensation by
way of income on their contributions;
3.
Those to limited partners in respect to the
capital of their contributions;
4.
Action for Liquidation
An action for the liquidation of a partnership is a
personal one; hence, it may be brought in the place
of residence of either the plaintiff or the defendant.
(De Leon, 2014)
Persons Authorized to Wind Up
1.
2.
Those to general partners other than for capital
and profits;
3.
5.
6.
Those to general partners in respect to profits;
and
NOTE: The court may, in its discretion, after
considering all the facts and circumstances of the
particular case, appoint a receiver to wind up the
partnership affairs where such step is shown to be
to the best interests of all persons concerned.
Those to general partners in respect to capital.
(Art. 1863, NCC)
NOTE: Subject to any statement in the certificate or
to subsequent agreement, limited partners share in
the partnership assets in respect to their claims for
capital, and in respect to their claims for profits or
for compensation by way of income on their
contribution respectively, in proportion to the
respective amounts of such claims. (Art. 1863, NCC)
An insolvent partner does not have the right to wind
up partnership affairs. (De Leon, 2014)
Powers of Liquidating Partner
1.
2.
3.
WINDING UP OF PARTNERSHIP
It is during this time after dissolution that
partnership business or affairs are being settled. (De
Leon, 2005)
UNIVERSITY OF SANTO TOMAS
2024 GOLDEN NOTES
Partners designated by the agreement;
In the absence of such, all partners who have
not wrongfully dissolved the partnership; and
Legal representative of last surviving partner
who is not insolvent. (De Leon, 2014)
4.
142
Make new contracts;
Raise money to pay partnership debts;
Incur obligations to complete existing
contracts or preserve partnership assets; and
Incur expenses necessary in the conduct of
litigation. (De Leon, 2014)
COMMERCIAL LAW
Order of Payment in Winding Up
NOTE: The doctrine of marshalling of assets
involves the ranking of assets in a certain order
toward the payment of outstanding debts. (De Leon,
2010)
A. In a general partnership:
a.
b.
c.
d.
Those owing to creditors other than
partners;
Those owing to partners other than for
capital or profits;
Those owing to partners in respect of
capital;
Those owing to partners in respect to
profits. (Art. 1839(2), NCC)
Rights of a Partner where Dissolution is not in
Contravention of the Agreement
Unless otherwise agreed, the rights of each partner
are as follows:
1.
To have the partnership property applied to
discharge the liabilities of partnership; and
2.
To have the surplus, if any, applied, to pay in
cash the net amount owing to the respective
partners. (De Leon, 2014)
B. In a limited partnership
a.
b.
Those to creditors, in the order of priority
as provided by law, except those to limited
partners on account of their contributions,
and to general partners;
Rights of a Partner where Dissolution is in
Contravention of the Agreement
Those to limited partners in respect to their
share of the profits and other
compensation by way of income on their
contributions;
The rights of a partner vary depending upon
whether he is the innocent or guilty partner.
1.
c.
Those to limited partners in respect to the
capital of their contributions.
d.
Those to general partners other than for
capital and profits;
e.
Those to general partners in respect to
profits; and
f.
Those to general partners in respect to
capital. (Art. 1863, NCC)
Rights of partner who has not caused the
dissolution wrongfully:
a.
To have partnership property applied for
the payment of its liabilities and to receive
in cash his share of the surplus;
b.
To be indemnified for the damages caused
by the partner guilty of wrongful
dissolution;
c.
To continue the business in the same
name during the agreed term of the
partnership, by themselves or jointly with
others; and
d.
To possess partnership property should
they decide to continue the business.
Doctrine of Marshalling of Assets
The doctrine of marshalling of assets provides that:
1.
2.
3.
Partnership creditors have preference in
partnership assets.
Separate or individual creditors have
preference in separate or individual
properties.
Anything left from either goes to the other.
2.
Rights of partner who has wrongfully caused
the dissolution:
a.
143
If the business is not continued by the
other partners, to have the partnership
property applied to discharge its liabilities
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
2024 GOLDEN NOTES
and to receive in cash his share of the
surplus less damages caused by his
wrongful dissolution
b.
the partners or advances for business
expenses.
i.
ii.
To have the value of his interest in the
partnership at the time of the
dissolution, less any damage caused
by the dissolution to his co-partners,
ascertained and paid in cash, or
secured by bond approved by the
court; and
To be released from all existing and
future liabilities of the partnership.
(De Leon, 2014)
Right of a lien on, or retention of, the surplus of
partnership
property
after
satisfying
partnership liabilities for any sum of money
paid or contributed by him;
2.
Right of subrogation in place of partnership
creditors after payment of partnership
liabilities; and
3.
Right of indemnification by the guilty partner
against all debts and liabilities of the
partnership. (De Leon, 2014)
Fourth, the share of the profits, if any, due to
each partner. (De Leon, 2014)
Assets of the partnership include:
a.
b.
2.
d.
A: NO. A partner’s share cannot be returned without
first dissolving and liquidating the partnership, for
the return is dependent on the discharge of
creditors, whose claims enjoy preference over those
of the partner, and it is self- evident that all
members of the partnership are interested in its
assets and business, and are entitled to be heard in
the matter of the firm’s liquidation and distribution
of its property. The liquidation prepared by
Magdusa not signed by the other partners is not
binding on them. (Magdusa v. Albaran, G.R. No. L17526, 30 June 1962)
Settlement of Accounts between Partners
1.
Third, those owing for the return of the
capital contributed by the partners.
Q: A partnership was formed with Magdusa as
the manager. During the existence of the
partnership, two partners expressed their
desire to withdraw from the firm. Magdusa
determined the value of the partners’ share
which were embodied in the document drawn in
the handwriting of Magdusa but was not signed
by all of the partners. Later, the withdrawing
partners demanded for payment but were
refused. Hence, they filed an action for recovery
of sum of money against Magdusa. Considering
that not all partners intervened in the
distribution of all or part of the partnership
assets, should the action prosper?
Rights of Injured Partner where Partnership
Contract is Rescinded
1.
c.
If the business is continued:
Since the capital was contributed to the partnership,
not to partners, it is the partnership that must
refund the equity of the retiring partners. Since it is
the partnership, as a separate and distinct entity
that must refund the shares of the partners, the
amount to be refunded is necessarily limited to its
total resources. (Villareal v. Ramirez, G.R. No.
144214, 14 July 2003)
Partnership property (including goodwill);
and
Contributions of the partners;
Order of application of the assets:
a.
First, those owing to partnership creditors.
b.
Second, those owing to partners other than
for capital and profits such as loans given by
UNIVERSITY OF SANTO TOMAS
2024 GOLDEN NOTES
144
COMMERCIAL LAW
Partner’s Lien
the partnership, and to render an accounting of
the partnership's finances. Tabanao’s heirs filed
against Emnace an action for accounting, etc.
Emnace counters, contending that prescription
has set in. Decide.
It is the right of every partner to have the
partnership property applied, to discharge
partnership liabilities and surplus assets, if any,
distributed in cash to the respective partners, after
deducting what may be due to the partnership from
them as partners.
A: Prescription has not yet set in. Prescription of
the said right starts to run only upon the dissolution
of the partnership when the final accounting is
done. Contrary to Emnace’s protestations,
prescription had not even begun to run in the
absence of a final accounting. The right to demand
an accounting accrues at the date of dissolution in
the absence of any agreement to the contrary. When
a final accounting is made, it is only then that
prescription begins to run. (Emnace v. CA, G.R. No.
126334, 23 Nov. 2001)
Effects when the Business of a Dissolved
Partnership is Continued
1.
Creditors of old partnership are also creditors
of the new partnership who continues the
business of the old one without liquidation of
the partnership affairs.
2.
Creditors have an equitable lien on the
consideration paid to the retiring/deceased
partner
by
the
purchaser
when
retiring/deceased partner sold his interest
without final settlement with creditors.
3.
F. LIMITED PARTNERSHIP
(Arts. 1843-1867, NCC)
Rights of retiring/estate of deceased partner:
a.
To have the value of his interest
ascertained as of the date of dissolution;
and
b.
To receive as ordinary creditor the value of
his share in the dissolved partnership with
interest or profits attributable to use of his
right, at his option.
It is one formed by two or more persons having as
members one or more general partners and one or
more limited partners. The limited partners as such
shall not be bound by the obligations of the
partnership. (Art. 1843, NCC)
Characteristics of Limited Partnership
NOTE: The right to demand on accounting of the
value of his interest accrues to any partner or his
legal representative after dissolution in the absence
of an agreement to the contrary.
1.
It is formed by compliance with the statutory
requirements;
2.
One or more general partners control the
business and are personally liable to creditors;
3.
One or more limited partners contribute to the
capital and share in the profits but do not
participate in the management of the business
and are not personally liable for partnership
obligations beyond their capital contributions;
4.
The limited partners may ask for the return of
their capital contributions under conditions
prescribed by law; and
Persons that are required to Render an Account
1.
2.
3.
Winding up partner;
Surviving partner; and
Person or partnership continuing the
business.
Q: Emnace and Tabanao decided to dissolve
their partnership in 1986. Emnace failed to
submit the statement of assets and liabilities of
145
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
2024 GOLDEN NOTES
5.
Partnership debts are paid out of common fund
and the individual properties of general
partners. (De Leon, 2014)
Consequences of Separate
Limited Partnership
Personality
Cancellation of Certificate or Articles of Limited
Partnership
1.
2.
of
The personality of a limited partnership being
different from that of its members, it must, on
general principle, answer for, and suffer, the
consequence of its acts as such an entity capable of
being the subject of rights and obligations. If the
limited partnership failed to pay its obligations, this
partnership must suffer the consequences of such a
failure and must be adjudged insolvent. (Campos
Rueda & Co. v. Pacific Commercial Co., et. al, G.R. No.
L- 18703, 28 Aug. 1922)
Instances when a General Partner Needs
Consent or Ratification of all the Limited
Partners
When he:
FORMATION AND AMENDMENT OF LIMITED
PARTNERSHIP
Essential Requirements for the Formation of
Limited Partnership
1.
Certificate of articles of limited partnership
which states the matters enumerated in Art.
1844, must be signed and sworn; and
NOTE: Among the contents of the Certificate of
Articles of Partnership should be the name of
the partnership, adding thereto the word
“limited.”
2.
1.
Does any act in contravention of the
certificate;
2.
Does any act which would make it impossible
to carry on the ordinary business of the
partnership;
3.
Confesses judgment against partnership;
4.
Possesses partnership property/assigns
rights in specific partnership property other
than for partnership purpose;
5.
Admits person as general partner;
6.
Admits person as limited partner – unless
authorized in certificate; or
7.
Continues business with partnership
property on death, retirement, civil
interdiction, insanity or insolvency of general
partner unless authorized in the certificate.
(Art. 1850, NCC)
Certificate must be filed for record in the office
of the SEC. (De Leon, 2014)
NOTE:
Strict
compliance
with
legal
requirements is not necessary. It is sufficient
that there is substantial compliance in good
faith. If there is no substantial compliance, the
partnership becomes general partnership as far
as third persons are concerned, in which the
member are liable as general partners. (Jo Chun
v. Pacific Commercial Co., G.R. No. 19892, 06 Sep.
1923)
UNIVERSITY OF SANTO TOMAS
2024 GOLDEN NOTES
When the partnership is dissolved; and
When all the limited partners ceased to be
such. (Art. 1864, NCC)
RIGHTS AND OBLIGATIONS OF A LIMITED
PARTNER
Rights of a Limited Partner
146
1.
To have partnership books kept at principal
place of business;
2.
To inspect/copy books at reasonable hours;
3.
To have on demand true and full information
of all things affecting partnership;
COMMERCIAL LAW
4.
Rights and Liabilities of a Substituted Limited
Partner
To have formal account of partnership affairs
whenever circumstances render it just and
reasonable;
5.
GR: He has all the rights and powers and is subject
to all the restrictions and liabilities of his assignor.
(Art. 1859, NCC)
To ask for dissolution and winding up by
decree of court;
6.
To
receive
share
of
profits/other
compensation by way of income; and
7.
To receive return of contributions provided
the partnership assets are in excess of all its
liabilities. (De Leon, 2014) (Art. 1851, NCC)
XPN: Those liabilities which he was ignorant of at
the time that he became a limited partner and which
could not be ascertained from the certificate. (Ibid.)
Requirements for the Admission
Substituted Limited Partner
All the members must consent to the assignee
becoming a substituted limited partner or the
limited partner, being empowered by the
certificate must give the assignee the right to
become a limited partner;
2.
The certificate must be amended in accordance
with Art. 1865 of the NCC; and
3.
The certificate as amended must be registered
in the SEC.
1. Allowed:
Granting loans to partnership
Transacting business with partnership
Receiving pro rata share of partnership
assets with general creditors if he is not
also a general partner
2. Prohibited:
a.
b.
a
1.
Transactions Allowed or Prohibited in a Limited
Partnership
a.
b.
c.
of
Basis of Preference given to Limited Partners
over other Limited Partners
Receiving/holding partnership property as
collateral security
Receiving any payment, conveyance,
release from liability if it will prejudice
right of third persons
Priority or preference may be given to some limited
partners over other limited partners as to the:
1.
2.
3.
NOTE: The prohibition is not absolute because
there is no prohibition if the partnership assets are
sufficient to discharge partnership liabilities to
persons not claiming as general or limited partners.
Return of their contributions;
Their compensation by way of income; or
Any other matter.
NOTE: In the absence of such statement in the
certificate, even if there is an agreement, all limited
partners shall stand on equal footing in respect of
these matters.
Substituted Limited Partner
It is a person admitted to all the rights of a limited
partner who has died or assigned his interest in the
partnership.
Requisites for Return of Contribution of a
Limited Partner
1.
147
All liabilities of the partnership have been paid
or if they have not yet been paid, the assets of
the partnership are sufficient to pay such
liabilities;
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
2024 GOLDEN NOTES
2.
The consent of all the members (general and
limited partners) has been obtained except
when the return may be rightfully demanded;
and
partnership. The general partners cannot, however
waive any liability of the limited partners to the
prejudice of such creditors.
2.
3.
The certificate of limited partnership is
cancelled or amended. (Art. 1857, NCC)
To the partnership creditors and other
partners
a.
A limited partner is liable for partnership
obligations when he contributed services
instead of only money or property to the
partnership;
b.
When he allows his surname to appear in
the firm name;
c.
When he fails to have a false statement in
the certificate corrected, knowing it to be
false;
d.
When he takes part in the control of the
business;
e.
When he receives partnership property as
collateral security, payment, conveyance,
or release in fraud of partnership creditors;
or
f.
When there is failure to substantially
comply with the legal requirements
governing the formation of limited
partnerships.
When Return of Contribution is a Matter of Right
When all 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 and the
certificate is cancelled or so amended as to set forth
the withdrawal or reduction:
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 6-month notice in
writing given by him to the other partners if no
time is fixed in the certificate for the return of
the contribution or for the dissolution of the
partnership.
NOTE: Even if a limited partner has contributed
property, he has only the right to demand and
receive cash for his contribution.
3.
To separate creditors
XPNs:
1.
When there is stipulation to the contrary in the
certificate; or
2.
When all the partners (general and limited
partners) consent to the return other than in
the form of cash. (De Leon 2014)
As in a general partnership, the creditor of a limited
partner may, in addition to other remedies allowed
under existing laws, apply to the proper court for a
charging order subjecting the interest in the
partnership of the debtor partner for the payment
of his obligation. (De Leon, 2014)
Liabilities of a Limited Partner
1.
To the partnership
Since limited partners are not principals in the
transaction of a partnership, their liability as a rule,
is to the partnership, not to the creditors of the
UNIVERSITY OF SANTO TOMAS
2024 GOLDEN NOTES
148
COMMERCIAL LAW
Requisites for Waiver or Compromise of
Liabilities
Order of Payment
In setting accounts after dissolution, the liabilities of
the partnership shall be entitled to payment in the
following order:
The waiver or compromise:
1.
2.
Is made with the consent of all partners; and
Does not prejudice partnership creditors who
extended credit or whose claims arose before
the cancellation or amendment of the
certificate.
1.
Those to creditors, in the order of priority as
provided by law, except those to limited
partners on account of their contributions, and
to general partners;
Partner have the
2.
Those to limited partners in respect to their
share of the profits and other compensation by
way of income on their contributions;
When his demand for the return of his
contribution is denied although he has a right
to such return; or
3.
Those to limited partners in respect to the
capital of their contributions;
When his contribution is not paid although he
is entitled to its return because the other
liabilities of the partnership have not been
paid or the partnership property is insufficient
for their payment.
4.
Those to general partners other than for
capital and profits;
5.
Those to general partners in respect to profits;
and
Effect of Retirement, Death, Civil Interdiction,
Insanity or Insolvency of a Partner
6.
Those to general partners in respect to capital.
(Art. 1863, NCC)
When may a Limited
Partnership Dissolved
1.
2.
1.
General partner - The partnership is
dissolved (Art. 1860, NCC) unless the business
is continued by the remaining general
partners:
a.
b.
2.
NOTE: Subject to any statement in the certificate or
to subsequent agreement, limited partners share in
the partnership assets in respect to their claims for
capital, and in respect to their claims for profits or
for compensation by way of income on their
contribution respectively, in proportion to the
respective amounts of such claims.
Under the right stated in the certificate; or
With the consent of all the partners.
Limited partner - The partnership is not
dissolved except all limited partners cease to
be such.
GR: A limited partner is not a proper party to
proceedings:
By a partnership; or
Against a partnership.
1.
2.
Rights of the Executor/Administrator on the
Death of the Limited Partner
XPNs:
1.
All the rights of a limited partner for the
purpose of settling his estate
1.
2.
2.
To have the same power as the deceased had
to constitute his assignee as substituted
limited partner.
149
If he is also a general partner; or
Where the object is to enforce a limited
partner’s right against or liability to the
partnership. (Art. 1866, NCC)
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
2024 GOLDEN NOTES
peril. (Divina, 2021)
III. INSURANCE LAW
(P.D. No. 612, as amended by R.A. No. 10607)
NOTE: Every corporation, partnership, or
association, duly authorized to transact
insurance business by the Insurance
Commission may be an insurer. (Sec. 6, IC)
Laws Governing Contracts of Insurance in the
Philippines
1.
2.
Insurance Code (IC) (R.A. No. 10607, enacted on
23 July 2012, further amending P.D. No. 612);
New Civil Code (NCC); and
Special Laws.
2.
3.
NOTE: Anyone except a public enemy may be
insured. (Sec. 7, IC)
3.
A. CONCEPT OF INSURANCE
(Secs. 2-9)
It 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), IC)
A contract of insurance, to be binding from the date
of application, must have been a completed
contract. (Perez v. CA, G.R. No. 112329, 28 Jan. 2000)
4.
2.
Consideration, which is the premium paid by
the insured, for the insurer’s promise to
indemnify the former upon the happening of
the event or peril insured against; and
3.
“Doing an Insurance Business” or “Transacting
an Insurance Business”
The term “doing an insurance business” or
“transacting an insurance business” means:
(I-S-R-A)
Meeting of the minds of the parties. (Art.
1318, NCC)
1.
Making or proposing to make, as Insurer, any
insurance contract;
2.
Making or proposing to make, as Surety, any
contract of suretyship as a vocation and not as
merely incidental to any other legitimate
Parties to a Contract of Insurance
1.
Insurer – assumes the risk of loss and
undertakes for a consideration to indemnify the
insured upon the happening of the designated
UNIVERSITY OF SANTO TOMAS
2024 GOLDEN NOTES
Beneficiary – third person designated by the
insured to receive the proceeds. (Ibid.)
Contract of Suretyship as an Insurance Contract
A contract of suretyship shall be deemed an
insurance contract only if made by a surety who or
which, as such is doing an insurance business as
defined by the Insurance Code. (Sec. 2 (a), R.A. No.
10607)
Thus, it must have all the essential elements of a
valid contract: (SM-Co-Me)
Subject Matter in which the insured has an
insurable interest;
Assured – the insured is also the assured when
the proceeds are payable to him. (Divina, 2021)
NOTE: In property insurance, the assured must
have insurable interest over the property and
such insurable interest is covered by the
insurance policy. While in life insurance, the
insured may insure someone else’s life, and
designate himself as the beneficiary provided
that he has insurable interest over the life of the
person whom he insures. (Ibid.)
Contract of Insurance
1.
Insured – is the person whose loss is the
occasion for the payment of the insurance
proceeds by the insurer. (Divina, 2021)
150
COMMERCIAL LAW
business or activity of the surety;
3.
Doing any kind of business, including a
Reinsurance business, specifically recognized
as constituting the doing of an insurance
business within the meaning of the IC;
4.
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 IC.
employees’ medical expenses incurred by their
dependents but only up to the extent of the
expenses actually incurred. This is consistent with
the principle of indemnity which proscribes the
insured from recovering greater than the loss.
(Mitsubishi Motors Philippines Salaried Employees
Union v. Mitsubishi Motors Phil. Corp, G.R. No.
175773, 17 June 2013)
Insurance as an Uberrimae Fides contract (1993
BAR)
NOTE: In the application of the provisions of the IC,
the fact that no profit is derived from the making of
insurance contracts, agreements, or transactions or
that no separate or direct consideration is received
therefor, shall not be deemed conclusive to show
that the making thereof does not constitute the
doing or transacting of an insurance business. (Sec.
2(b), IC)
The contract of insurance is one of perfect good faith
(uberrimae fidei) not for the insured alone, but
equally so for the insurer; in fact, it is more so for
the latter, since its dominant bargaining position
carries with it stricter responsibility. (Qua Chee Gan
v. Law Union and Rock Insurance, Co. Ltd., G.R. No. L4611, 17 Dec. 1955)
It requires the parties to the contract to
communicate that which a party knows and ought
to communicate, that is, the duty to disclose in good
faith all facts material to the contract. This doctrine
is essential on account of the fact that the full
circumstances of the subject matter of insurance
are, as a rule, known to the insured only and the
insurer, in deciding whether or not to accept a risk,
must rely primarily upon the information supplied
to him by the applicant. (Sundiang Sr. & Aquino,
2014)
Principle of Indemnity
Q: The parties’ CBA contains the following
provision, “The COMPANY shall obtain group
hospitalization insurance coverage or assume
under a self-insurance basis hospitalization for
the dependents of regular employees.”
Eventually, three members of Mitsubishi Motors
Philippines
Salaried
Employees
Union
(MMPSEU) filed claims for reimbursement of
hospitalization expenses of their dependents. In
turn, Mitsubishi Motors Philippines Corporation
(MMPC) paid only a portion of their
hospitalization insurance claims, not the full
amount. However, MMPSEU insists that MMPC is
also liable for the amounts covered under other
insurance policies; otherwise, MMPC will
unjustly profit from the premiums the
employees contribute through monthly salary
deductions. Is MMPSEU’s contention, correct?
Insurance as Contracts of Adhesion (Fine Print
Rule)
While generally stipulations in a contract come
about after deliberate drafting by the parties
thereto, there are certain contracts in which almost
all the provisions of which have been drafted only
by one party, usually a corporation. Such contracts
are called contracts of adhesion because the only
participation of the other party is the signing of his
signature or his “adhesion” thereto. Insurance
contracts fall into this category. (Sweet Lines, Inc. v.
Teves, G.R. No. L-37750, 19 May 1978)
A: NO. Since the subject CBA provision is an
insurance contract, the rights and obligations of the
parties must be determined in accordance with the
general principles of insurance law. Being in the
nature of a non-life insurance contract and
essentially a contract of indemnity, the CBA
provision obligates MMPC to indemnify the covered
151
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
2024 GOLDEN NOTES
Rules in the Construction or Interpretation of
Insurance Contracts
NOTE: The existence of insurable interest is a
matter of public policy and is not susceptible to the
principle of estoppel. The existence of an insurable
interest gives a person the legal right to insure the
subject matter of the policy of insurance. (Violeta.
Lalican v. Insular Life Assurance Co. Ltd., G.R. No.
183526, 25 Aug. 2009)
GR: If the terms of the contract clearly show the
intention of the parties, there shall be no room for
interpretation.
XPN: If there are ambiguities in the terms of an
insurance contract, they have to be resolved in favor
of the insured and strictly against the insurer
because an insurance contract being a contract of
adhesion, most of its terms is not a product of
mutual negotiation between the parties as they are
prepared by the insurance company in final printed
forms. (De Leon, 2014)
Mere Hope or Expectancy is Not Insurable
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, IC)
When does a Person have Insurable Interest?
GR: A person is deemed to have an insurable
interest in the subject matter insured when a person
has a relation or connection with or concern in the
subject matter, such that he will derive pecuniary
benefit or advantage from its preservation and will
suffer pecuniary loss from its destruction or injury
by the happening of the event insured against.
B. INSURABLE INTEREST
(Secs. 10-25)
An insurable interest 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 derive
pecuniary benefit or advantage from the
preservation of the subject matter insured and will
suffer pecuniary loss or damage from its
destruction, termination, or injury by the happening
of the event insured against. (Divina, 2021)
XPN: However, in some cases, expectation of benefit
from the continued life of that person need not
necessarily be of pecuniary nature to have an
insurable interest in the life of a person. (De Leon,
2010)
Insurable Interest in Life Insurance vs. Insurable Interest in Property Insurance (2002 BAR)
LIFE
PROPERTY
As to Extent
GR: Every person has an unlimited insurable interest
in his own life.
XPN: Where life insurance is taken out by a creditor
on the life of the debtor, insurable interest is limited
to the amount of debt.
UNIVERSITY OF SANTO TOMAS
2024 GOLDEN NOTES
Limited to the actual value of the property.
152
COMMERCIAL LAW
As to When must Insurable Interest Exist
GR: Must exist twice, i.e., both at the time the policy
takes effect and the time of loss but need not exist in
the period in between. (Sec. 19, IC)
XPNs:
1. A change in interest in a thing insured, after the
occurrence of an injury which results in a loss, does
not affect the right of the insured to indemnity for the
loss. (Sec. 21, IC)
2. A change of interest in one or more several distinct
things, separately insured by one policy, does not
avoid the insurance as to the others. (Sec. 22, IC)
Must exist at the time the policy takes effect and need
not exist thereafter. (Sec. 19, IC)
3. A change of interest, by will or succession, on the
death of the insured, does not avoid an insurance; and
his interest in the insurance passes to the person
taking his interest in the thing insured. (Sec. 23, IC)
4. A transfer of interest by one of several partners,
joint owners, or owners in common, who are jointly
insured, to the others, does not avoid an insurance
even though it has been agreed that the insurance
shall cease upon an alienation of the thing insured.
(Sec. 24, IC)
5. Every stipulation in a policy of insurance for the
payment of loss whether the person insured has or
has not any interest in the property insured, or that
the policy shall be received as proof of such interest,
and every policy executed by way of gaming or
wagering, is void. (Sec. 25, IC)
As to the Beneficiary’s Interest
GR: The beneficiary need not have insurable interest
over the life of the insured if the insured himself
secured the policy.
XPN: However, if the life insurance was obtained by
the beneficiary, the latter must have insurable
interest over the life of the insured.
The beneficiary must have insurable interest over the
thing insured.
NOTE: Insurable interest is an indispensable
requirement.
153
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
2024 GOLDEN NOTES
the interest of the creditor over the life of the debtor
ceases upon full payment. (Sundiang Sr. & Aquino,
2009)
INSURABLE INTEREST IN LIFE/HEALTH
Two (2) General Classes of Life Policies
1.
Q: Does a person have insurable interest on the
life of his parents?
Insurance upon one’s life – are those taken out
by the insured upon his own life for the benefit
of: (H-E-T)
a.
b.
c.
A: By express exclusion under Sec. 10(a) of the
Insurance Code, a person has no insurable interest
on the life of his parents and other ascendants
unless he depends upon them for education and/or
support. (par. b.) The rationale for their exclusion in
par. (a) is that the parents are logically expected to
predecease their children. (Divina, 2021)
Himself;
His Estate, in case it matures only at his
death; or
Third person who may be designated as
beneficiary.
The question of insurable interest is immaterial
where the policy is procured by the person whose
life is insured. A person who insures his own life can
designate any person as his beneficiary, whether or
not the beneficiary has an insurable interest in the
life of the insured subject to the limits under Art.
2012 in relation to Art. 739 of the NCC (De Leon,
2010)
2.
Q: On 03 July 1993, Delia Sotero (Sotero) took
out a life insurance policy from Ilocos Bankers
Life Insurance Corporation (Ilocos Life)
designating Cresencia Aban (Aban) her niece, as
her beneficiary. Ilocos Life issued Policy No. 747,
with a face value of P100,000, in Sotero’s favor
on 30 Aug. 1993, after the requisite medical
examination and payment of the premium.
Insurance upon life of another – are those
taken out by the insured upon the life of
another. Where a person names himself
beneficiary in a policy, he takes on the life of
another, he must have insurable interest in the
life of the latter. This class includes the
following: (SC-E-L-D)
a.
His Spouse and of his Children.
b.
Any person on whom he depends wholly or
in part for Education or support, or in
whom he has a pecuniary interest.
c.
d.
On 10 Apr. 1996, Sotero died. Aban filed a claim
for the insurance proceeds on 09 July 1996,
Ilocos Life conducted an investigation into the
claim and came out with the following findings:
1.
2.
3.
4.
5.
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.
For the above reasons and claiming fraud, Ilocos
Life denied Aban’s claim on 16 Apr. 1997, but
refunded the premium paid on the policy. May
Sotero validly designate her niece as
beneficiary? (2014 BAR)
Of any person upon whose life any estate or
interest vested in him Depends. (Sec. 10, IC)
A: YES. Sotero may validly designate her niece as
beneficiary. The same is not prohibited under the
Insurance Code or any other laws pertinent to the
NOTE: In paragraph (a) of Sec. 10 of the Insurance
Code, mere relationship is sufficient while the rest
(pars. b, c, and d) requires pecuniary interest. Thus,
UNIVERSITY OF SANTO TOMAS
2024 GOLDEN NOTES
Sotero did not personally apply for
insurance coverage, as she was illiterate.
Sotero was sickly since 1990.
Sotero did not have the financial capability
to pay the premium on the policy.
Sotero did not sign the application for
insurance
Aban was the one who filed the insurance
application and designated herself as the
beneficiary.
154
COMMERCIAL LAW
problem.
Insurable Interest in Property may Consist of
the Following (1991, 2019 BAR) (Ex-In-Ex)
Q: Carlo and Bianca met in the La Boracay
festivities. Immediately, they fell in love with
each other and got married soon after. They
have been cohabiting blissfully as husband and
wife, but they did not have any offspring. As the
years passed by, Carlo decided to take out
insurance on Bianca’s life for P1 million with
him as sole beneficiary, given that he did not
have a steady source of income and he always
depended on Bianca both emotionally and
financially.
1.
An Existing interest – The existing interest in
the property may be legal or equitable title.
Examples of insurable interest arising from
legal title:
a.
b.
c.
During the term of the insurance, Bianca died of
what appeared to be a mysterious cause so that
Carlo immediately requested for an autopsy to
be conducted. It was established that Bianca
was transgender all along – a fact unknown to
Carlo. Can Carlo claim the insurance benefit?
(2014 BAR)
Trustee, as in the case of the seller of
property not yet delivered;
Mortgagor of the property mortgaged; or
Lessor of the property leased. (De Leon,
supra)
Examples of insurable interest arising from
equitable title:
a.
b.
c.
A: YES, Carlo can claim the insurance benefit. He
had insurable interest on Bianca’s life under Sec.
10(b) of the Insurance Code as the problem states
that Carlo “always depended on Bianca both
emotionally and financially.” The insurable interest
upon the life of another under the aforesaid
provision need not be based on kinship or legal
obligation to give support. The fact that their
marriage may be void is irrelevant. (UPLC
Commercial Law Suggested Answers)
2.
Purchaser of property before delivery or
before he has performed the conditions
of the sale;
Mortgagee of property mortgaged; or
Mortgagor, after foreclosure but before
the expiration of the redemption period.
(De Leon, 2010)
An Inchoate interest founded on an existing
interest.
Example: A stockholder has an inchoate interest
in the property of the corporation of which he is
a stockholder, which is founded on an existing
interest arising from his ownership of shares in
the corporation. (De Leon, 2014)
INSURABLE INTEREST IN PROPERTY
3.
Insurable Interest in Property (2019 BAR)
Insurable interest in property is every interest in
property, whether real or personal, or any relation
thereto, or liability in respect thereof, of such nature
that a contemplated peril might indirectly damnify
the insured. It may consist of an existing interest, an
inchoate interest founded on an existing interest, or
an expectancy coupled with an existing interest in
that out of which the expectancy arises. (Secs. 13-14,
IC)
An Expectancy coupled with an existing interest
in that out of which the expectancy arises.
NOTE: Existence of insurable interest is a matter of
public policy. Hence, the principle of estoppel
cannot be invoked. (Sundiang Sr. & Aquino, 2014)
Q: Asgard and Milestone entered into a Toll
Manufacturing Agreement (TMA) whereby
Asgard
undertook
to
perform
tollmanufacturing of paper products for Milestone,
effective until Jan. 31, 2008. Sometime later,
Asgard needed additional capital to purchase
new equipment for its manufacturing plant. It
155
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
2024 GOLDEN NOTES
invited Milestone to invest in the company and
the latter accepted the invitation by
contributing installed equipment and infusing a
capital.
its continued existence or will suffer a direct
pecuniary loss by its destruction, his contract of
insurance will be upheld, although he has no legal or
equitable title.
In 2009, Milestone and Asgard took out an
Industrial All Risk Policy insurance from UCPB
Insurance to insure Asgard’s corrugating
machine and equipment of every kind and
description in Novaliches, Quezon City.
Afterwards, Milestone pulled out its stocks,
machinery, and equipment from Asgard’s plant
in Novaliches for relocation to Milestone own
premises in Laguna. In the course thereof, it
caused damage to several Asgard machinery
and equipment. Due to this, Asgard notified
UCPB about the loss and filed an insurance claim
under the Policy based on Malicious Damage
Endorsement provision. However, UCPB
Insurance denied the claim explaining that the
Policy had no cross-liability cover, and the
malicious damage was committed by Milestone,
one of the named insured, and not committed by
a third party.
An insurable interest in property does not
necessarily imply a property interest in, or a lien
upon, or possession of, the subject matter of the
insurance, and neither the title nor a beneficial
interest is requisite to the existence of such an
interest. It is sufficient that the insured is so situated
with reference to the property that he would be
liable to loss should it be injured or destroyed by the
peril against which it is insured. Anyone has an
insurable interest in property who derives a benefit
from its existence or would suffer loss from its
destruction. (UCPB General, Insurance Co. Inc. v.
Asgard Corrugated Box Manufacturing Corp., G.R. No.
244407, 26 Jan. 2021)
Measure of Insurable Interest in Property (2000
BAR)
Under Sec. 17, the measure of insurable interest in
property is the extent to which the insured might be
damnified by loss or injury thereof. Insurable
interest in property does not necessarily imply a
property interest in, or lien upon, or possession of,
the subject matter of the insurance, and neither title
nor a beneficial interest is requisite to the existence
thereof. It is sufficient that the insured is so situated
with reference to the property that he would be
liable to loss should it be injured or destroyed by the
peril against which it is insured. Anyone has an
insurable interest in property who derives a benefit
from its existence or would suffer loss from its
destruction. (Gaisano Cagayan, Inc. v. Insurance
Company of North America, G.R. No. 147839, 08 June
2006)
Asgard filed a Complaint for Sum of Money with
application for writ of preliminary attachment
and praying for actual damages against UCPB
Insurance. Does Milestone have insurable
interest over Asgard’s machine at the time of the
loss or damage?
A: NO. Sec. 13 of the Insurance Code defines
insurable interest as "every interest in property,
whether real or personal, or any relation thereto, or
liability in respect thereof, of such nature that a
contemplated peril might directly damnify the
insured." Parenthetically, under Sec. 14 of the same
Code, an insurable interest in property may consist
in: (a) an existing interest, like that of an owner or
lienholder; (b) an inchoate interest founded on
existing interest, like that of a stockholder in
corporate property; or (c) an expectancy, coupled
with an existing interest in that out of which the
expectancy arises, like that of a shipper of goods in
the profits he expects to make from the sale thereof.
A Common Carrier or Depository’s Extent of
Insurable Interest in a Thing Held by Him
A carrier or depositary 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, because
the loss of the thing by the carrier or depositary may
cause liability against him to the extent of its value.
(Sec. 15, IC)
Where the interest of the insured in, or his relation
to, the property is such that he will be benefitted by
UNIVERSITY OF SANTO TOMAS
2024 GOLDEN NOTES
156
COMMERCIAL LAW
Change of Interest in Any Part of a Thing Insured
insurance even though it has been agreed that
the insurance shall cease upon an alienation of
the thing insured. (Sec. 24, IC)
“Change of interest” contemplated by law is an
absolute transfer of the insured’s entire interest in
the property insured to one not previously
interested or insured. (Perez, 2006)
7.
GR: A change of interest in any part of a thing
insured unaccompanied by a corresponding change
in interest in the insurance suspends the insurance
to an equivalent extent, until the interest in the thing
and the interest in the insurance are vested in the
same person. (Sec. 20; Sec. 58, IC)
When the policy is so Framed that it will inure
to the benefit of whomsoever, during the
continuance of the risk, may become the owner
of the interest insured. (Sec. 57, IC)
Instances where more than One Insurable
Interest may Exist in the Same Property
1.
Trust – both trust or and trustee have insurable
interest over the property in trust;
2.
Corporation – both the corporation and its
stockholders have insurable interest over the
assets;
3.
Partnership – both the firm and partners have
insurable interest over its assets;
4.
Assignment – both the assignor and assignee
have insurable interest over the property
assigned;
5.
Lease – the lessor, lessee and sub-lessees have
insurable interest over the property in lease;
and
6.
Mortgage – both the mortgagor and mortgagee
have insurable interest over the property
mortgaged.
XPNs: (P-L-A-D-S-Jo-F)
1.
When there is a Prohibition against alienation
or change of interest without the consent of the
insurer in which case the policy is not merely
suspended but avoided. (Sundiang & Aquino,
2014., citing Curtis v. Girard Fire and Marine Ins.,
11 SE 3, 190 Ga. 954)
2.
In Life, accident, and health insurance. (Sec. 20,
IC)
3.
A change of interest in a thing insured, After the
occurrence of an injury which results in a loss
does NOT affect the right of the insured to
indemnity for loss. (Sec. 21, IC)
NOTE: After the occurrence of the peril insured
against, the insured acquired a vested right over
the proceeds of the policy.
4.
Insurable Interest of Mortgagor and Mortgagee
in case of a Mortgaged Property are NOT the
Same (1999, 2010 BAR)
A change of interest in one or more several
Distinct things, separately insured by one policy
does NOT avoid the insurance as to the others.
(Sec. 22, IC)
5.
A change of interest by will or Succession, on
the death of the insured, does NOT avoid an
insurance; and his interest in the insurance
passes to the person taking his interest in the
thing insured. (Sec. 23, IC)
6.
A transfer of interest by one of several partners,
Joint owners, or owners in common, who are
jointly insured, to the others does NOT avoid an
Each has an insurable interest in the property
mortgaged and this interest is separate and distinct
from the other. Therefore, insurance taken by one in
his name only and in his favor alone does not inure
to the benefit of the other. The same is not open to
objection that there is double insurance. (RCBC v.
CA, G.R. Nos. 128833-34, 128866, 20 April 1998; Sec
8, IC)
157
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
2024 GOLDEN NOTES
Extent of Insurable Interest of Mortgagor and
Mortgagee (1999 BAR)
1.
Mortgagor – The mortgagor of property, as
owner, has an insurable interest to the extent of
its value even though the mortgage debt equals
such value.
2.
Mortgagee – The mortgagee as such has an
insurable interest in the mortgaged property to
the extent of the debt secured; such interest
continues until the mortgage debt is
extinguished. (Sundiang Sr. & Aquino, 2014)
Q: To secure a loan of P10 million, Mario
mortgaged his building to Armando. In
accordance with the loan arrangements, Mario
had the building insured with First Insurance
Com for P10 million, designating Armando as
the beneficiary. Armando also took an insurance
on the building upon his own interest with
Second Insurance Company for P5 million.
The building was totally destroyed by fire, a
peril insured against under both insurance
policies. It was subsequently determined that
the fire had been intentionally started by Mario
and that in violation of the loan agreement, he
had been storing inflammable materials in the
building.
NOTE: In case of an insurance taken by the
mortgagee alone and for his benefit, the mortgagee,
after recovery from the insurer, 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. (De Leon, 2010)
a.
A: Armando can receive P5 million from Second
Insurance Company. As mortgagee, he had an
insurable interest in the building. Armando cannot
collect anything from First Insurance Co., since the
latter is not liable for the loss of the building. First,
it was due to a willful act of Mario, who committed
arson. Second, fire insurance policies contain a
warranty that the insured will not store hazardous
materials within the insured premises. Mario
breached this warranty when he stored
inflammable materials in the building. These two
factors exonerate First Insurance Co. from liability
to Armando as mortgagee even though it was Mario
who committed them. (Sec. 8; Sec. 87, IC)
Q: What are the effects if the mortgagee
procures separate insurance coverage without
reference to the right of the mortgagor?
A: The effects are as follows:
a.
The mortgagee may collect from the insurer to
the extent of his credit.
b.
The insurer, after payment to the mortgagee, is
subrogated to the rights of the latter against the
mortgagor and may collect the debt of the latter
to the extent of the amount paid to the
mortgagee. This principle applies only where
the policy obtained by the mortgagee covers his
interest alone.
c.
b. What happens to the P10 million debt of
Mario to Armando? Explain. (2010 BAR)
The mortgagee-insured can no longer collect
the mortgagor’s indebtedness after receiving
full payment of the credit from the insurer since
the latter acquires the right to collect from the
mortgagor by virtue of the subrogation.
However, if the mortgagee is not able to collect
the whole amount of the credit, he may still
collect the deficiency from the mortgagor.
(Divina, 2021)
UNIVERSITY OF SANTO TOMAS
2024 GOLDEN NOTES
How much, if any, can Armando recover
from either or both insurance companies?
A: Since Armando would have collected P5 million
from Second Insurance Company, this amount
should be considered as partial payment of the loan.
Armando can only collect the balance of P5 million.
Second Insurance Co. can recover from Mario the
amount of P5 million it paid, because it became
subrogated to the rights of Armando. (UPLC
Commercial Law Suggested Answers)
158
COMMERCIAL LAW
than inadvertent. Good faith is not a defense
because of the Uberrimae Fidei Doctrine.
C. CONCEALMENT
(Secs. 26-35 and 51)
Rules on Concealment
Concealment is a neglect to communicate that which
a party knows and ought to communicate. (Sec. 26,
IC)
Under Sec. 27 of the IC, “a concealment entitles the
injured party to rescind a contract of insurance.”
Moreover, under Sec. 168 of the IC, the insurer is
entitled to rescind the insurance contract in case of
an alteration in the use or condition of the thing
insured. (Malayan Insurance Company v. PAP Co.,
G.R. No. 200784, 07 Aug. 2013, in Divina 2014)
1.
If there is concealment under Sec. 27, the
remedy of the insurer is rescission since
concealment vitiates the contract of insurance;
(1996 BAR)
2.
The party claiming the existence of
concealment must prove that there was
knowledge of the fact concealed on the part of
the party charged with concealment.;
3.
Good faith is not a defense in concealment.
Concealment,
whether
intentional
or
unintentional entitles the injured party to
rescind the contract of insurance; (Sec. 27, IC)
Requisites (Ne-D-NoW-NoM-Ma)
1.
A party knows a fact which he Neglects to
communicate or disclose to the other party;
4.
The matter concealed need not be the cause of
loss; and (Sec. 31, IC)
2.
Such party concealing is Duty bound to
disclose such fact to the other;
5.
3.
Such party concealing makes No Warranty as
to the fact concealed;
To be guilty of concealment, a party must have
knowledge of the fact concealed at the time of
the effectivity of the policy.
4.
The other party has No Means of ascertaining
the fact concealed; and
5.
The fact must be Material.
Q: Should the fact/s concealed be the proximate
cause of the loss in order to constitute
concealment?
A: NO, the facts concealed need not be the
proximate cause of the loss in order to constitute
concealment. Materiality is to be determined not by
the event, but solely by the probable and reasonable
influence of the facts upon the party to whom the
communication is due, in forming his estimate of the
disadvantages of the proposed contract, or in
making his inquiries. The test is whether the
matters concealed would have definitely affected
the insurer’s action on the application of the
insured, either by approving it with the
corresponding adjustment for a higher premium or
rejecting the same. (Sunlife Assurance Company of
Canada v. CA, G.R. No. 105135, 22 June 1995; Divina,
2021)
Test of Materiality (2000 BAR)
It is determined not by the event, but solely by the
probable and reasonable influence of the facts upon
the party to whom the communication is due, in
forming his estimate of the disadvantages of the
proposed contract, or in making his inquiries. (Sec.
31, IC)
NOTE: As long as the facts concealed are material,
concealment, whether intentional or not, entitles
the injured party to rescind. (Sec. 27, IC)
Facts not conveyed to the insurer raises
presumption that the failure of the insured to
communicate must have been intentional rather
159
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
2024 GOLDEN NOTES
When Concealment Produces the Effect of
Avoiding the Policy
a.
Concealment should take place at the time the
contract is entered into and not afterwards in order
that the policy may be avoided. The duty of
disclosure ends with the completion of the contract.
Waiver of medical examination in a non-medical
insurance contract renders even more material the
information required of the applicant concerning
previous condition of health and diseases suffered,
for such information necessarily constitutes an
important factor which the insurer takes into
consideration in deciding whether to issue the
policy or not. Failure to communicate information
acquired after the effectivity of the policy will not be
a ground to rescind the contract.
Can the insurer raise the issue of failure to
disclose that she had cancer as a cause for
denying the claim of the beneficiaries?
A: The insurer cannot raise the issue of
concealment, because only material facts known to
the insured at the time of the issuance of the policy
should be disclosed to the insurer. (Sec. 28, IC) Yate’s
previous cancer diagnosis is no longer a material
fact at the time she procured the policy.
b. Are the beneficiaries entitled to receive the
proceeds
of
the
life
insurance
notwithstanding the fact that the cause of
death was suicide? (2018 BAR)
A: YES. The beneficiaries are entitled to receive the
proceeds. The rule is that the insurer in life
insurance is liable in case of suicide only when it is
committed after the policy has been in force for a
period of two years from the date of issue or last
reinstatement. The rule, however, admits of an
exception so that when suicide is committed in the
state of insanity, it shall be compensable regardless
of the date of commission. (Sec. 183, IC)
NOTE: The reason for this rule is that if concealment
should take place after the contract is entered into,
the information concealed is no longer material as it
will no longer influence the other party to enter into
such contract.
Q: On June 21, 2008, Yate took out a life
insurance policy on her life in the amount of P10
million and named her husband Vandy and
daughter as joint irrevocable beneficiaries.
Before the policy was issued and the premiums
were paid, Yate underwent a medical checkup
with a physician accredited by the insurer, and
the only result found was that she was suffering
from high blood pressure.
In the facts given, Yate was diagnosed with
psychotic tendency that graduated into extreme
despondency; thus, even though Yate committed
suicide 36 months from issuance of the policy, the
insurer is liable.
Concealment in Marine Insurance
Yate was previously diagnosed by a private
physician of having breast cancer which she did
not disclose to the insurer in her application,
nor to the insurer's accredited physician
because by then, she was told that she was
already cancer-free after undergoing surgery
which removed both her breasts. She was later
diagnosed with psychotic tendency that
graduated into extreme despondency.
Rules on concealment are stricter in marine
insurance since the insurer would have to depend
almost entirely on the matters communicated by the
insured. Thus, in addition to material facts, each
party must disclose all the information he possesses
which are material or the information of the belief
or expectation of a third person, in reference to a
material fact. But concealment in a marine
insurance in any of the following matters
enumerated under Sec. 112 of the IC does not vitiate
the entire contract, but merely exonerates the
insurer from a loss resulting from the risk
concealed.
She was found dead hanging in her closet 36
months after the issuance of the policy. The
police authorities declared it to be a case of
suicide. The policy did not include suicide as an
excepted risk.
UNIVERSITY OF SANTO TOMAS
2024 GOLDEN NOTES
160
COMMERCIAL LAW
Test in Ascertaining
Concealment
the
Existence
of
3.
If the applicant is aware of the existence of some
circumstances which he knows would probably
influence the insurer in acting upon his application,
good faith requires him to disclose that
circumstance, though unasked.
NOTE: Matters relating to the health of the insured
are material and relevant to the approval of the
issuance of the life insurance policy as these
definitely affect the insurer’s action to the
application. It is well-settled that the insured need
not die of the disease he had failed to disclose to the
insurer, as it is sufficient that his non-disclosure
misled the insurer in forming his estimates of the
risks of the proposed insurance policy or in making
inquiries. (Sunlife Assurance Co. of Canada v. CA,
supra)
Matters that Need NOT be Disclosed
GR: The parties are not bound to communicate
information
of
the
following
matters:
(O-W-K-E-R-I)
1.
Those which, in the exercise of ordinary care,
the other Ought to know and of which, the
former has no reason to suppose him ignorant;
2.
Those of which
communication;
3.
Those which the other Knows;
the
other
Information as to the nature of interest need not be
disclosed except in property insurance if the
insured is not the owner. If somebody is insuring
properties of which he is not the owner, he must
disclose why he has insurable interest that would
entitle him to insure it, and the extent thereof. (Secs.
34 and 51(e), IC)
Waives
4.
Those which prove or tend to prove the
Existence of a risk excluded by a warranty, and
which are not otherwise material;
5.
Those which Relate to a risk excepted from the
policy and which are not otherwise material;
and
6.
The nature or amount of the Interest of one
insured, except if he is not the owner of the
property insured. (Sec. 34, IC)
Those as to which the party with the duty to
communicate makes No warranty.
Q: X insured his life for P20 million. X plays golf
and regularly exercises, hence is considered in
good health. He did not know, however, that his
frequent headache is really caused by his being
hypertensive. In his application form for a life
insurance for himself, he did not put a check to
the question if he is suffering from
hypertension, believing that because of his
active lifestyle, being hypertensive is a remote
possibility. While playing golf one day, X
collapsed at the fairway and was declared dead
on arrival at the hospital. His death certificate
stated that X suffered a massive heart attack.
XPN: In answer to inquiries of the other. (Sec. 30, IC)
a.
NOTE: Neither party is bound to communicate, even
upon inquiry, information of his own judgment,
because such would add nothing to the appraisal of
the application. (Sec. 35, IC)
A: NO, the beneficiary of X is not entitled to the
proceeds of the life insurance. The hypertension of
X is a material fact that should have been disclosed
to the insurer. The concealment of such material
fact entitles the insurer to rescind the insurance
policy.
Matters that Must be Disclosed Even in the
Absence of Inquiry (Mat-No-No)
1.
2.
Will the beneficiary of X be entitled to the
proceeds of the life insurance under the
circumstances, despite the non-disclosure
that he is hypertensive at the time of
application?
Those Material to the contract;
Those which the other has No means of
ascertaining; and
161
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
2024 GOLDEN NOTES
b. If X died in an accident instead of a heart
attack, would the fact of X's failure to
disclose that he is hypertensive be
considered as material information? (2016
BAR)
rescinded the policy and refunded the
premiums paid. Was the insurance company
correct? (2013 BAR)
A: YES. The insurance company correctly rescinded
the policy because of concealment. Benny did not
disclose that he was suffering from diabetes,
hypertension, and hepatoma. The concealment is
material because these are serious ailments. Also,
Benny died less than two years from the date of the
issuance of the policy, hence rescission is still
possible. (Sec. 26; Sec. 48, IC)
A: It is still a material information. It is settled that
the insured cannot recover even though the
material fact not disclosed is not the cause of the
loss. (UPLC Commercial Law Suggested Answers)
Q: Ngo Hing filed an application with the Great
Pacific Life Assurance Company (Pacific Life) for
a twenty-year endowment policy on the life of
his one-year-old daughter Helen Go. Ngo Hing
supplied the essential data and filed the
application to Mondragon, the branch manager.
After some time, Helen Go died of influenza with
complication
of
bronchopneumonia.
Thereupon, Ngo Hing sought the payment of the
proceeds of the insurance, but having failed in
his effort, he filed the action for the recovery of
the same. Did Ngo Hing conceal the state of
health and physical condition of Helen Go, which
rendered void the binding receipt?
Right to Information of Material Facts May be
Waived
1.
2.
Q: Kwong Nam applied for a 20-year endowment
insurance on his life with his wife, Ng Gan Zee as
beneficiary. On the same date, Asian Crusader,
upon receipt of the required premium from the
insured, approved the application and issued
the corresponding policy. Kwong Nam died of
cancer of the liver with metastasis. All
premiums had been paid at the time of his death.
A: YES. Ngo Hing intentionally concealed the state
of health of his daughter Helen Go. He was fully
aware that his child was a typical mongoloid child
upon filling out the application form. It is evident
that he withheld a fact material to the risk to be
assumed by the insurance company had the plan be
approved. (Great Pacific Life Assurance Company v.
CA, G.R. No. L-31845, 30 Apr. 1979)
Ng Gan Zee presented a claim for payment of the
face value of the policy. Asian Crusader Life
Assurance denied the claim on the ground that
the answers given by the insured to the
questions in his application for life insurance
were
untrue,
claiming
Kwong
Nam's
misrepresentation when he answered "No" to
the question appearing in the application for life
insurance. Also, it was alleged that Kwong Nam
was examined in connection with his
application for life insurance, but he gave the
medical examiner false and misleading
information as to his ailment and previous
operation by saying that it was associated with
ulcer of the stomach. Asian Crusader contended
that he was operated on for peptic ulcer 2 years
before the policy was applied for and that he
never disclosed such an operation. Was there
Q: Benny applied for life insurance for P1.5
million. The insurance company approved his
application and issued an insurance policy
effective 06 Nov. 2008. Benny named his
children as his beneficiaries. On 06 Apr. 2010,
Benny died of hepatoma, a liver ailment.
The insurance company denied the children's
claim for the proceeds of the insurance policy on
the ground that Benny failed to disclose in his
application two previous consultations with his
doctors for diabetes and hypertension, and that
he had been diagnosed to be suffering from
hepatoma. The insurance company also
UNIVERSITY OF SANTO TOMAS
2024 GOLDEN NOTES
Expressly by the terms of the contract; or
Impliedly by the failure to make an inquiry as to
such facts, where they are distinctly implied in
other facts from which information is
communicated. (Sec. 33, IC)
162
COMMERCIAL LAW
concealment?
D. REPRESENTATION
(Secs. 36-48 and 51)
A: NO, concealment exists where the assured has
knowledge of fact material to the risk, and honesty,
good faith, and fair dealing require that he should
communicate it to the assurer, but he designedly
and intentionally withholds the same. In the
absence of evidence that the insured had sufficient
medical knowledge as to enable him to distinguish
peptic ulcer and a tumor, his statement that said
tumor was associated with ulcer of the stomach,
should be construed as an expression made in good
faith of his belief as to the nature of his ailment and
operation. (Ng Gan Zee v. Asian Crusader Life
Assurance Corporation, G.R. No. L-30685, 30 May
1983 cited in Divina, 2021)
Representation
An oral or written statement of a fact or condition
affecting the risk made by the insured to the
insurance company, tending to induce the insurer to
assume the risk.
Under Sec. 41, representation should be made,
altered or withdrawn at the time of or before the
issuance of the policy. It may be altered or
withdrawn before the insurance is effected, but not
afterwards. (IC)
Indeed, such statement must be presumed to have
been made by him without knowledge of its
incorrectness and without any deliberate intent on
his part to mislead Asian Crusader. While it may be
conceded that, from the viewpoint of a medical
expert, the information communicated was
imperfect, the same was nevertheless sufficient to
have induced Asian Crusader to make further
inquiries about the ailment and operation of the
insured.
Characteristics of representation (C-OW-D-AWBA)
1.
2.
3.
4.
Instances whereby Concealment Made by an
Agent Procuring the Insurance Binds the
Principal
1.
2.
5.
Not a part of the contract but merely a
Collateral inducement to it
Oral or Written
Must be presumed to refer to the Date the
contract goes into effect
Altered or Withdrawn before the insurance is
effected but not afterwards
Made Before or At the time of issuing the
policy and not after (Sec. 42, IC).
Similarities of concealment and representation
Where it was the duty of the agent to acquire
and communicate information of the facts in
question; or
Where it was possible for the agent, in the
exercise of reasonable diligence to have made
such communication before the making of the
insurance contract.
NOTE: Failure on the part of the insured to disclose
such facts known to his agent, or wholly due to the
fault of the agent, will avoid the policy, despite the
good faith of the insured.
163
1.
Both refer to the same subject matter and
both take place before the contract is entered.
2.
Concealment or representation prior to loss
or death gives rise to the same remedy; that
is rescission or cancellation.
3.
The test of materiality is the same. (Secs. 31,
46, IC)
4.
The rules of concealment and representation
are the same with life and non-life insurance.
5.
Whether intentional or not, the injured party
is entitled to rescind a contract of insurance
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
2024 GOLDEN NOTES
on ground of
representation.
6.
concealment
or
false
Misrepresentation
It occurs when the facts fail to correspond with its
assertions or stipulations. Misrepresentation is an
affirmative defense. To avoid liability, the insurer
has the duty to establish such a defense by
satisfactory and convincing evidence. (Sec. 44, IC; Ng
Gan Zee v. Asian Crusader Life Assn. Corp., G.R. No. L30685, 30 May 1983)
Since the contract of insurance is said to be
one of utmost good faith on the part of both
parties to the agreement, the rules on
concealment and representation apply
likewise to the insurer.
Kinds of representation
Any allegation as to the existence or non-existence
of a fact when the contract begins (e.g. the statement
of the insured that the house to be insured is used
only for residential purposes is an affirmative
representation).
NOTE: In the absence of evidence that the insured
has sufficient medical knowledge to enable him to
distinguish between “peptic ulcer” and “tumor”, the
statement of deceased that said tumor was
“associated with ulcer of the stomach” should be
considered an expression in good faith. Fraudulent
intent of insured must be established to entitle
insurer to rescind the insurance contract.
Misrepresentation, as a defense of insurer, is an
affirmative defense which must be proved. (Ng Gan
Zee v. Asian Crusader Life Assn. Corp., G.R. No. L30685, 30 May 1983)
Promissory representation
Requisites of misrepresentation
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.
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;
and
3.
Such fact in either case is material to the risk.
1. Oral or written (Sec. 36, IC)
2. Affirmative (Sec. 42, IC)
3. Promissory (Sec. 39, IC)
Affirmative representation
Representation as to a future undertaking
A representation as to the future is to be deemed a
promise unless it appears that it was merely a
statement of belief or an expectation that is
susceptible to present, actual knowledge (IC, Sec.
39).
A representation cannot qualify an express
provision in a contract of insurance, but it may
qualify an implied warranty. (Sec. 40, IC)
An erroneous opinion or belief will not avoid the
insurance policy
Test of materiality
The statement of an erroneous opinion, belief or
information, or of an unfulfilled intention, per se,
will not avoid the contract of insurance, unless
fraudulent.
It is to be determined not by the event, but solely by
the probable and reasonable influence of the facts
upon the party to whom the representation is made,
in forming his estimates of the disadvantages of the
proposed contract or in making his inquiries. (Sec.
31; 46, IC)
To avoid liability, the insurer must prove both
materiality of the insured’s opinion and the latter’s
intention to deceive.
UNIVERSITY OF SANTO TOMAS
2024 GOLDEN NOTES
164
COMMERCIAL LAW
Effects of misrepresentation
Policy of Insurance
1.
It is the written instrument in which the contract of
insurance is set forth. (Sec. 49, IC)
2.
It renders the insurance contract voidable at
the option of the insurer, although the policy is
not thereby rendered void ab initio. The
injured party entitled to rescind from the time
when the representation becomes false.
It is the written document embodying the terms and
stipulations of the contract of insurance between
the insured and insurer.
When the insurer accepted the payment of
premium with the knowledge of the ground for
rescission, there is waiver of right of
rescission.
The policy is not necessary for the perfection of the
contract. (Sundiang Sr. & Aquino, 2014)
Types of Policy of Insurance (O-Va-R)
Effect of collusion between the insurer’s agents
and the insured
1.
Open – one in which the value of the thing
insured is not agreed upon, and the amount of
the insurance merely represents the insurer’s
maximum liability. The value of such thing
insured shall be ascertained at the time of the
loss. (Sec. 60, IC)
2.
Valued – is one which expresses on its face an
agreement that the thing insured shall be
valued at a specific sum. (Sec. 61, IC)
3.
Running – one which contemplates successive
insurances, and which provides that the object
of the policy may be from time to time defined,
especially as to the subjects of insurance, by
additional statements or indorsements. (Sec. 62,
IC)
It vitiates the policy even though the agent is acting
within the apparent scope of his authority. The
agent ceases to represent his principal. He, thus,
represents himself; so, the insurer is not estopped
from avoiding the policy.
Application
of
concealment
misrepresentation in case of loss or death
and
GR: If the concealment or misrepresentation is
discovered before loss or death, the insurer can
cancel the policy. If the discovery is after loss or
death, the insurer can refuse to pay.
XPN: The incontestability clause under paragraph 2
of Section 48. (IC)
Basic Contents of a Policy (P3-A-I-R2)
1.
2.
E. POLICY
(Secs. 49-66)
3.
4.
Perfection of an Insurance Contract
5.
The contract of insurance is perfected when the
assent or consent is manifested by the meeting of
the offer and the acceptance upon the thing and the
cause which are to constitute the contract. Mere
offer or proposal is not contemplated. (De Lim v. Sun
Life Assurance Co., G.R. No. L-15774, 29 Nov. 1920)
6.
7.
165
Parties;
Period during which the insurance is to
continue
Property or life insured;
Amount of insurance, except in open or
running policies;
Interest of the insured in the property if he is
not the absolute owner;
Risk insured against; and
Rate of premium. (Sec. 51, IC)
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
2024 GOLDEN NOTES
Rider
established and the extension or renewal is not
contrary to or is not for the purpose of violating
the Insurance Code or any rule.
An attachment to an insurance policy that modifies
the conditions of the policy by expanding or
restricting its benefits or excluding certain
conditions from the coverage. (Black’s Law
Dictionary)
Cognition Theory
Mere submission of the application without the
corresponding approval of the policy does not result
in the perfection of the contract of insurance.
Riders are not binding on the insured unless the
descriptive title or name thereof is mentioned and
written on the blank spaces provided in the policy.
It should be countersigned by the insured or owner
unless he was the one who applied for the same.
(Sec. 50, IC)
Insurance contracts through correspondence follow
the “cognition theory” wherein an acceptance made
by letter shall not bind the person making the offer
except from the time it came to his knowledge.
(Enriquez v. Sun Life Assurance Co., G.R. No. L-15895,
29 Nov. 1920)
Cover Notes
Persons who wish to be insured may get protection
before the perfection of the insurance contract by
securing a cover note. The cover note issued by the
insurer shall be deemed an insurance contract as
contemplated under Sec. 1(1) of the Insurance Code
subject to the following rules:
1.
Q: On 01 June 2011, X mailed to Y Insurance Co.
his application for life insurance. On July 21,
2011, the insurance company accepted the
application and mailed, on the same day, its
acceptance plus the cover note. It reached X's
residence on Aug. 11. On Aug. 4, X figured in a car
accident. He died a day later. May X's heirs
recover on the insurance policy? (2011 BAR)
The cover note shall be issued or renewed only
upon prior approval of the Insurance
Commission;
2.
The cover note shall be valid and binding for not
more than 60 days from the date of its issuance;
3.
No separate premium (separate from the policy
or main contract) is required for the cover note;
4.
The cover note may be canceled by either party
upon prior notice to the other of at least 7 days;
The policy should be issued within 60 days after
the issuance of the cover note;
A: NO. X had no knowledge of the insurer's
acceptance of his application before he died. What is
being followed in insurance contracts is what is
known as the “cognition theory”. Where the
applicant died before he received notice of the
acceptance of his application for the insurance,
there is no perfected contract. (Perez v. CA, G.R. No.
112329, 28 Jan. 2000)
6.
The 60-day period may be extended upon
written approval of the Insurance Commission;
and
Q: Jason is the proud owner of a newly-built
house worth P5 million. As a protection against
any possible loss or damage to his house, Jason
applied for a fire insurance policy thereon with
Shure Insurance Corporation (Shure) on Oct. 11,
2016 and paid the premium in cash. It took the
company a week to approve Jason's application.
7.
The written approval of the Insurance
Commission is dispensed with upon the
certification of the president, vice-president, or
general manager of the insurer that the risk
involved, the values of such risks and premium
therefor, have not as yet been determined or
On 18 Oct. 2016, Shure mailed the approved
policy to Jason which the latter received five (5)
days later. However, Jason's house had been
razed by fire which transpired a day before his
receipt of the approved policy. Jason filed a
written claim with Shure under the insurance
5.
UNIVERSITY OF SANTO TOMAS
2024 GOLDEN NOTES
166
COMMERCIAL LAW
policy. Shure prays for the denial of the claim on
the ground that the theory of cognition applies
to contracts of insurance. Decide Jason's claim
with reasons. (2016 BAR)
non-fulfillment render the policy voidable by the
insurer.
A: Jason’s claim should be denied. What governs
insurance contract is the cognition theory whereby
the insurance contract is perfected only from the
time the applicant came to know of the acceptance
of the offer by the insurer. In this case, the loss
occurred a day prior to Jason’s knowledge of the
acceptance by Shure of Jason’s application. There
being no perfected insurance contact, Jason is not
entitled to recover from Shure.
To eliminate potentially increasing moral or
physical hazards which may either be due to the acts
of the insured or to the change of the condition of
the property.
Offer in Property and Liability Insurance
Kinds of warranties (A-P-E-I)
It is the insured who makes an offer to the insurer,
who accepts the offer, rejects it, or makes a counteroffer. The offer is usually accepted by an insurance
agent on behalf of the insurer. (De Leon, 2010)
1.
Affirmative warranty – one which relates to
matters which exist at or before the issuance of
the policy.
2.
Promissory warranty – one in which the
insured undertakes that something shall be
done or omitted after the policy takes effect and
during its continuance.
3.
Express warranty – a statement in a policy, of
a matter relating to the person or thing insured,
or to the risk, as a fact.
4.
Implied warranty – an agreement or
stipulation not expressed in the policy but the
existence of which is admitted or presumed
from the fact that the contract of insurance has
been executed.
Purpose of warranties
Basis of warranties
The insurer took into consideration the condition of
the property at the time of effectivity of the policy.
Offer in Life and Health Insurance
It depends upon whether the insured pays the
premium at the time he applies for insurance.
1.
2.
If he does not pay the premium, his application
is considered an invitation to the insurer to
make an offer, which he must then accept
before the contract goes into effect.
If he pays the premium with his application, his
application will be considered an offer. (De
Leon, 2010)
Effects of breach of warranty
F. WARRANTIES
(Secs. 67-76)
1. Material
GR: Violation of material warranty or of
material provision of a policy will entitle the
other party to rescind the contract.
Warranties (1993 Bar)
Statements or promises by the insured set forth in
the policy itself or incorporated in it by proper
reference, the untruth or non-fulfillment of which in
any respect, and without reference to whether the
insurer was in fact prejudiced by such untruth or
XPN: (with
warranties)
regard
to
“promissory”
a. Loss occurs before the
performance of the warranty;
167
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
time
of
2024 GOLDEN NOTES
b. The performance becomes unlawful at the
place of the contract; or
c. Performance becomes impossible. (Sec.
73, IC)
G. PREMIUM
(Secs. 77-84)
2. Immaterial
Insurance Premium
GR: It will not avoid the policy.
It is the amount of money a person pays for an
insurance policy, in consideration for the
assumption by the insurance of the risk of loss as a
result of the happening of the designated peril.
(Divina, 2021)
XPN: When the policy expressly provides,
or declares that a violation thereof will
avoid it.
For instance, an “Other Insurance Clause”
which is a condition in the policy requiring
the insured to inform the insurer of any
other insurance coverage of the property. A
violation of the clause by the insured will
not constitute a breach unless there is an
additional provision stating that the
violation thereof will avoid the policy (Sec.
75, IC).
Payment of Premiums
The burden is on an insured to keep a policy in force
by the payment of premiums, rather than on the
insurer to exert every effort to prevent the insured
from allowing a policy to elapse through a failure to
make premium payments. The continuance of the
insurer's obligation is conditional upon the
payment of premiums, so that no recovery can be
had upon a lapsed policy, the contractual relation
between the parties having ceased. (Philippine
Phoenix Surety & Insurance Company v. Woodworks,
Inc., G.R. No. L-25317, 06 Aug. 1979)
Effect of a breach of warranty without fraud
The policy is avoided only from the time of breach
and the insured is entitled:
1.
2.
Acceptance of Premium
To the return of the premium paid at a pro rata
from the time of breach or if it occurs after the
inception of the contract; or
Acceptance of premium within the stipulated period
for payment thereof, including the agreed grace
period, merely assures continued effectivity of the
insurance policy in accordance with its terms.
(Stokes v. Malayan Insurance Co., Inc., G.R. No. L34768, 24 Feb. 1984)
To all premiums if it is broken during the
inception of the contract.
Effect of breach of warranty with fraud
1.
Policy is avoided ab initio and never became
binding.
2.
Insured is not entitled to the return of the
premium.
Payment of the premium to agent of the insurance
company is binding on it. (Malayan Insurance v.
Arnaldo, G.R. No. L-67835, 12 Oct. 1987, and Areola v.
CA, G.R. No. 95641, 22 Sept. 1994)
NOTE: An insurance company which delivers a
policy to an insurance broker, is deemed to have
authorized the latter to receive the payment of the
premium. (Sec. 315, IC)
Omission
The failure to communicate information on matters
proving or tending to prove the falsity of warranty.
In case of omission, the aggrieved party may rescind
the contract of insurance.
UNIVERSITY OF SANTO TOMAS
2024 GOLDEN NOTES
168
COMMERCIAL LAW
Premium vs. Assessment
extension to a duly licensed intermediary
should exceed 90 days from date of issuance of
the policy. (Sec. 77, IC)
PREMIUM
ASSESSMENT
As to their Purpose
Levied and paid to
meet
anticipated
losses.
5.
When there is Acknowledgment in a policy of a
receipt of premium, which the law declares to
be conclusive evidence of payment, even if
there is stipulation therein that it shall not be
binding until the premium is actually paid. This
is without prejudice however to right of insurer
to collect corresponding premium. (Sec. 79, IC)
6.
When the Public interest so requires, as
determined by the Insurance Commissioner
Collected to meet actual
losses.
As to whether it is a Debt or Not
Assessment
when
properly levied is a
Premium is not a debt.
debt, unless otherwise
expressly agreed.
1. CASH AND CARRY RULE
Example: In compulsory motor vehicle
insurance, if the policy was issued without
payment of premium by the vehicle owner, the
insurer will still be held liable. To rule
otherwise would prejudice the third party
victim.
“Cash and Carry” Rule (2003 BAR)
GR: No policy or contract of insurance issued by an
insurance company is valid and binding unless and
until the premium thereof has been paid. Any
agreement to the contrary is void.
2. EXCEPTIONS
XPNs: (I-C-E-G-A-P) (2007 BAR)
Non-payment of Premiums
A policy is valid and binding even when there is nonpayment of premium:
1.
When there is an agreement allowing the
insured to pay the premium in Installments and
partial payment has been made at the time of
loss. (Makati Tuscany Condominium Corp. v. CA,
G.R. No. 95546, 06 Nov. 1992)
2.
When there is an agreement to grant the
insured Credit extension for the payment of the
premium and loss occurs before the expiration
of the credit term. (Art. 1306, NCC; UCPB General
Insurance v. Masagana Telemart, G.R. No.
137172, 04 Apr. 2001)
3.
When Estoppel bars the insurer to invoke nonrecovery on the policy.
4.
In case of life or industrial life policy whenever
the Grace period provision applies, or
whenever under the broker and agency
agreements with duly licensed intermediaries,
a 90-day credit extension is given. No credit
Non-payment of the premium will not entitle the
insured to recover the premium from the insurer.
The continuance of the insurer’s obligation is
conditioned upon the payment of the premium, so
that no recovery can be had upon a lapsed policy,
the contractual relation between the parties having
ceased. If the peril insured against had occurred, the
insurer would have had a valid defense against
recovery under the policy.
Non-payment of the first premium prevents the
contract from becoming binding notwithstanding
the acceptance of the application or the issuance of
the policy, unless waived. But non-payment of the
balance of the premium due does not produce the
cancellation of the contract.
With respect to subsequent premiums, nonpayment 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. (De Leon, 2010)
169
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
2024 GOLDEN NOTES
Non-payment of Premiums by reason of the
Circumstances or Conduct of the Insurer
When is insurer liable
An insurer is liable for a loss:
GR: Non-payment of premiums does not merely
suspend but put an end to an insurance contract
since the time of the payment is peculiarly of the
essence of the contract. (De Leon, 2010)
1.
If the proximate cause of the loss is the risk or
peril insured against; (Sec. 86, IC)
2.
If the immediate cause of the loss is the risk or
peril insured against, unless the proximate
cause is an excepted peril; (Sec. 88, IC)
3.
Where the thing insured is rescued from a peril
insured against that would otherwise have
caused a loss, if, in the course of such rescue,
the thing is exposed to a peril not insured
against, which permanently deprives the
insured of its possession, in whole or in part; or
where a loss is caused by efforts to rescue the
thing insured from a peril insured against; (Sec.
87, IC)
4.
Loss caused by the negligence of the insured,
or of the insurance agents or others. (Sec. 89,
IC)
XPNs: (I-W-W)
1.
The insurer has become Insolvent and has
suspended business, or has refused without
justification a valid tender of premiums;
(Gonzales v. Asia Life Ins. Co., G.R. No. L-5188, 29
Oct. 1952)
2.
Failure to pay was due to the Wrongful
conduct of the insurer; or
3.
The insurer has Waived his right to demand
payment.
Fortuitous events will not prevent forfeiture of the
policy when the premium remains unpaid. Hence,
non-payment of premium by reason of a fortuitous
event is not an excuse.
When is insurer liable despite the occurrence of
a loss
Non-payment of premiums occasioned by war
causes complete abrogation of the insurance. Hence,
war does not excuse non-payment. (Constantino v.
Asia Life Insurance Company, G.R. No. L-1669-70, 31
Aug. 1950)
An insurer is not liable
H. LOSS
(Secs. 85-89)
For a loss caused by the willful act or through
the connivance of the insured; (Sec. 89, IC)
2.
For a loss of which the peril insured against
was only a remote cause; (Sec. 86, IC)
3.
If the loss is caused by an excepted risk. (Sec.
88, IC)
Insurable Interest in property is not limited to
property ownership in the subject matter of the
insurance. Where the interest of the insured in, or
his relation to, the property is such that he will be
benefitted by its continued existence, ro will suffer
a direct pecuniary loss by its destruction, his
contract of insurance will be upheld, although he
has no legal or equitable title. (UCPB General
Insurance Co., Inc. v. Asgard Corrugated Box
Loss
The injury or damage sustained by the insured as a
consequence of the happening of the risks/s insured
against which the insurer, in consideration of the
premium, has undertaken to indemnify or pay the
insured. (Divina, 2023)
UNIVERSITY OF SANTO TOMAS
2024 GOLDEN NOTES
1.
170
COMMERCIAL LAW
Manufacturing Corporation, G.R. No. 244407, 26 Jan.
2021)
of loss is received by the insurer and
ascertainment of the loss or damage is made
either by agreement between the insured and
the insurer or by arbitration; but if such
ascertainment is not had or made within 60
days after such receipt by the insurer of the
proof of loss, then the loss or damage shall be
paid within 90 days after such receipt. (Sec.
249, IC)
1. NOTICE AND PROOF OF LOSS
(Secs. 90-94)
Notice and Proof of Loss
After the loss, the insured must submit the notice
and proof of loss within the period stipulated in the
policy.
Non-submission or delay in the submission of
the notice and/or proof of loss
When a preliminary proof of loss is required by a
policy, the insured is not bound to give such proof
as would be necessary in a court of justice but it is
sufficient for him to give the best evidence which he
has in his power at the time.
GR: The insurer shall be relieved of liability in case
of non-submission or delay in the submission of the
notice and/or proof of loss.
XPN: Unless the delay in the presentation to an
insurer or notice or proof of loss is waived by the
insurer or it omits to take objection promptly and
specifically upon that ground.
If the policy requires, by way of preliminary proof of
loss, the certificate or testimony of a person other
than the insured, it is sufficient for the insured to
use reasonable diligence to procure it, and in case of
the refusal of such person to give it, then to furnish
reasonable evidence to the insurer that such refusal
was not induced by any just grounds of disbelief in
the facts necessary to be certified or testified.
I. DOUBLE INSURANCE; OVERINSURANCE
(Secs. 95-96)
When should the insurer make the insurance
payment to the insured
Double Insurance (2005 BAR)
Insurance payment should be made within the
following periods:
Double insurance exists where the same person is
insured by several insurers separately, in respect to
the same subject and interest. (Sec. 95, IC)
1.
Requisites of Double Insurance (S-T-R-I-P)
2.
Life insurance - The proceeds of a life insurance
policy shall be paid immediately upon maturity
of the policy, unless such proceeds are made
payable in installments or as an annuity, in
which case the installments, or annuities shall
be paid as they become due: Provided,
however, that in the case of a policy maturing
by the death of the insured, the proceeds
thereof shall be paid within 60 days after
presentation of the claim and filing of the proof
of death of the insured. (Sec. 248, IC)
1.
2.
3.
4.
5.
Subject matter is the same;
Two (2) or more insurers insuring
separately;
Risk or peril insured against is the same;
Interest insured is the same; and
Person insured is the same.
There is no double insurance even though two
policies were both issued over the same subject
matter, and both covered the same peril insured
against if the two policies were issued to two
different entities which have separate and distinct
insurable interest over the said subject matter.
(Malayan Insurance Co. v. Philippine First Insurance
Property insurance - The amount of any loss or
damage for which an insurer may be liable,
under any policy other than life insurance
policy, shall be paid within 30 days after proof
171
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
2024 GOLDEN NOTES
Co., G.R. No. 184300, 11 July 2012)
they have different insurable interest therein. X, the
borrower mortgagor, has an insurable interest in
the house being the owner thereof while CCC Bank,
the lender, also has an insurable interest in the
house as mortgagee thereof. (UPLC Commercial Law
Suggested Answers)
GR: Not Prohibited.
XPN: Other Insurance Clause.
Double Insurance is Not Prohibited by Law
c.
It is not contrary to law and hence, in case of double
insurance, the insurers may still be made liable up
to the extent of the value of the thing insured but not
to exceed the amount of the policies issued.
A: YES. If X obtained an open policy then she could
claim an amount corresponding to the extent of the
damage based on the value of the house determined
as of the date the damage occurred, but not to
exceed the face value of the insurance policy;
however, if she obtained a valued policy then she
could claim an amount corresponding to the extent
of the damage based on the agreed upon valuation
of the house.
A provision in the policy that prohibits double
insurance is valid. However, in the absence of such
prohibition, double insurance is allowed. (Perez,
2006)
Q: TRUE OR FALSE: The law on life insurance
prohibits double insurance. (2017 BAR)
A: FALSE. Double insurance only applies to
property insurance.
As for CCC Bank, it could claim an amount
corresponding to the extent of the damage but not
to exceed the amount of the loan it extended to X or
so much thereof as may remain unpaid. (UPLC
Commercial Law Suggested Answers)
Nature of the Liability of the Several Insurers in
Double Insurance (2005 BAR)
In double insurance, the insurers are considered as
co-insurers. Each one is bound to contribute ratably
to the loss in proportion to the amount for which he
is liable under his contract. This is known as the
“principle of contribution” or “contribution clause.”
(Sec. 96(e), IC)
Q: Terrazas de Pation Verde, a condominium
building, has a value of P50M. The owner
insured the building against fire with three (3)
insurance companies for the following amounts:
1. Northern Insurance Corp. — P20M
2. Southern Insurance Corp. — P30M
3. Eastern Insurance Corp. — P50M
Q: X borrowed from CCC Bank. She mortgaged
her house and lot in favor of the bank. X insured
her house. The bank also got the house insured.
a.
a.
Is this double insurance? Explain your
answer.
Is the owner's taking of insurance for the
building with three (3) insurers valid?
Discuss.
A: Taking out insurance covering the same
property, same insurable interest and same risk
with three insurance companies is “double
insurance,” recognized under Sec. 95 of the
Insurance Code. However, in American Home
Assurance Co. v. Chua, G.R. No. 130421, 28 June 1999,
the court referred to the common inclusion of the
“other insurance clause” in fire insurance policies,
requiring disclosure of co-insurance of the same
A: NO, there is no double insurance. Double
insurance exists where the same person is insured
by several insurers separately with respect to the
same subject and interest. (Sec. 95, IC)
b. Is this legally valid? Explain your answer.
A: YES, X and CCC Bank can both insure the house as
UNIVERSITY OF SANTO TOMAS
2024 GOLDEN NOTES
In case of damage, can X and CCC Bank
separately claim for the insurance
proceeds? (2013 BAR)
172
COMMERCIAL LAW
property with other insurers.
under his contract.
Suggested Answers)
(UPLC
Commercial Law
ALTERNATIVE ANSWER:
c.
The taking of insurance from the three (3) insurers
is valid, there being no stipulation against obtaining
additional insurance. It is a case of double
insurance. Double insurance is valid. What is
prohibited is for the insured to recover more than
his interest or value of the property as this will
violate the indemnity principle of an insurance
contract. (UPLC Commercial Law Suggested
Answers)
Can the owner claim from Northern
Insurance
and
Southern
Insurance
Corporation? (2008 BAR)
A: If the owner has been paid in full by Eastern
Insurance, he can no longer recover from any of
Northern and Southern Insurance Corporations.
Otherwise, the owner can recover P20M and P30M,
respectively. The owner can choose who he wants
to claim against to recover the full indemnity
provided that the claim will not exceed the face
value of the insurer’s respective insurance policies.
(Divina, 2021)
b. The building was totally razed by fire. If the
owner decides to claim from Eastern
Insurance Corp, only P50M, will the claim
prosper? Explain.
Over Insurance
A: Insured can recover from Eastern Insurance
Corp. up to the extent of his loss. However, Eastern
may refuse to pay if the policy contains an “other
insurance clause” stipulating that non-disclosure of
double insurance will avoid the policy (Geagonia v.
Country Bankers Insurance, G.R. No. 114427, 06 Feb.
1995). As there is no indication of a contractual
prohibition on double or other insurance, all
insurance contracts over the building are deemed
valid and enforceable.
There is over insurance whenever the insured
obtains a policy in an amount exceeding the value of
his insurable interest. (Perez, 2006)
Double Insurance vs. Over Insurance
DOUBLE INSURANCE
OVER INSURANCE
As to the Amount of Insurance
There may be no over
insurance as when the
sum total of the
amounts of the policies
issued does not exceed
the insurable interest of
the insured.
Since Eastern insured the property up 50% of the
total coverage, it is liable for only 50% of the total
actual loss. Eastern insurance Corp. is liable to the
extent of its coverage but may recover one-half of
the total indemnity from the co-insurers in the
proportion of 60% (Southern Insurance) – 40%
(Northern Insurance).
When the amount of
the
insurance
is
beyond the value of
the
insured’s
insurable interest.
As to the Number of Insurers
ALT. ANSWER: YES, the owner may legally claim
the entire P50M from Eastern Insurance Corp. The
Insurance Code provides that where the insured is
over-insured by double insurance, 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.
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
There are two (2) or
more insurers insuring
the same subject matter.
173
There may be only
one (1) insurer, with
whom the insured
takes
insurance
beyond the value of
his insurable interest.
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
2024 GOLDEN NOTES
Rules when the Insured in a Policy Other than
Life is Over Insured by Double Insurance
1.
insurance without the consent of the insurer.
(Pioneer Insurance and Surety Corp v. Yap, G.R. No. L36232, 19 Dec. 1974)
The insured, unless the policy otherwise
provides, may claim payment from the insurers
in such order as he may select, up to the amount
which the insurers are severally liable under
their respective contracts;
2.
Where the policy under which the insured
claims is a valued 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;
3.
Where the policy under which the insured
claims is an unvalued policy, 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;
The insurer may insert an “other insurance clause”
to prevent the danger that the insured will over
insure his property and thus avert the possibility of
perpetration of fraud. It is lawful and specifically
allowed under Sec. 75 of the Insurance Code which
provides that “a policy may declare that a violation
or a specified provision thereof shall avoid it,
otherwise the breach of an immaterial provision
does not avoid it.”
Waiver of Violation
4.
5.
When the insurer, with the knowledge of the
existence of other insurances, which the insurer
deemed a violation of the contract, preferred to
continue the policy, its action amounted to a waiver
of annulment of the contract. (Perez, 2006 citing
Gonzales Lao v. Yek Tong Lin Fire & Marine Ins. Co.,
G.R. No. L-33131, 13 Dec. 1930)
Where the insured receives any sum in excess
of the valuation in the case of valued policies, or
of the insurable value in the case of unvalued
policies, he must hold such sum in trust for the
insurers, according to their right of
contribution among themselves; and
Q: Wyeth Philippines, Inc. (Wyeth) procured a
marine policy from Philippines First Insurance
Co., Inc. (PFIC) to secure its interest over its own
products while the same were being
transported or shipped in the Philippines.
Thereafter, Wyeth executed its annual contract
of carriage with Reputable Forwarder Services,
Inc. (Reputable).
Each insurer 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(e), IC)
Collateral Source Rule
Under the contract, Reputable undertook to
answer for all risks with respect to the goods
and shall be liable to Wyeth, for the loss,
destruction, or damage of the goods/products
due to any and all causes whatsoever, including
theft, robbery, flood, storm, earthquakes,
lightning, and other force majeure while the
goods/products are in transit and until actual
delivery to the customers, salesmen, and
dealers. The contract also required Reputable to
secure an insurance policy on Wyeth’s goods.
Thus, Reputable signed a Special Risk Insurance
Policy (SR Policy) with Malayan Insurance Co.,
Inc., (Malayan) for the amount of P1,000,000.00.
Under this rule, if an injured person receives
compensation for his injuries from a source wholly
independent of the tortfeasor, the payment should
not be deducted from the damages which he would
otherwise collect from the tortfeasor.
This applies in life insurance, but not in property
insurance. (Aquino, 2020)
Additional or Other Insurance Clause (2008
BAR)
A clause in the policy that provides that the policy
shall be void if the insured procures additional
UNIVERSITY OF SANTO TOMAS
2024 GOLDEN NOTES
Is there is double insurance (as prohibited
174
COMMERCIAL LAW
under Sec. 5 of the SR Policy between Malayan
and Reputable) so as to preclude PFIC from
claiming indemnity from Malayan?
only paid the first two months installments.
Despite demands, he failed to pay the
subsequent installments.
A: NO. The interest of Wyeth over the property
subject matter of both insurance contracts is
different and distinct from that of Reputable’s. The
policy issued by PFIC was in consideration of the
legal and/or equitable interest of Wyeth over its
own goods. On the other hand, what was issued by
Malayan to Reputable was over the latter’s
insurable interest over the safety of the goods,
which may become the basis of the latter’s liability
in case of loss or damage to the property and falls
within the contemplation of Sec. 15 of the IC.
Therefore, even though the two concerned
insurance policies were issued over the same goods
and cover the same risk, there arises no double
insurance since they were issued to two different
persons/entities having distinct insurable interests.
Necessarily, over insurance by double insurance
cannot likewise exist. (Malayan Insurance Co., Inc., v.
Philippine First Insurance Co., Inc. and Reputable
Forwarder Services, Inc., G.R. No. 184300, 11 July
2012)
Five months after the issuance of the policy, the
vehicle was carnapped. Francis filed with the
insurance company a claim for its value.
However, the company denied his claim on the
ground that he failed to pay the premium
resulting in the cancellation of the policy. Can
Francis recover from the Peninsula Insurance
Company? (2006 BAR)
A: YES. As a general rule, no policy is binding unless
the premiums thereof have been paid. However, one
of the exceptions is when there is an agreement
allowing the insured to pay the premium in
installments and partial payment has been made at
the time of loss. In the case at hand, Francis already
paid two installments at the time of the loss and as
such may recover on the policy (Makati Tuscany
Condominium Corp. v. CA, G.R. No. 95546, 06 Nov.
1992). Furthermore, the contention of the insurer
that the failure to pay premium resulted in the
cancellation of the policy is not tenable since no
policy of insurance shall be cancelled except upon
notice thereof to the insured. (Sec. 64, IC)
Absence of Notice of Existence of Other
Insurance constitutes Fraud
Cancellation of Policy of Insurance by Reason of
Over Insurance
When the insurance policy specifically requires that
notice should be given by the insured of the
existence of other insurance policies upon the same
property, the lack or absence of such notice nullifies
the policy. Such failure to give notice of the existence
of other insurance on the same property when
required to do so constitutes deception and it could
be inferred that had the insurer known that there
were many other insurance policies on the same
property, it could have hesitated or plainly desisted
from entering into such contract. (Perez, 2006)
Upon discovery of other insurance coverage that
makes the total insurance in excess of the value of
the property insured, the insurer may cancel such
policy of insurance; provided there is prior notice
and such circumstance occurred after the effective
date of the policy. (Ibid.)
J. REINSURANCE
(Secs. 97-100)
No Policy of Insurance shall be Cancelled Except
upon Notice thereof to the Insured
A contract of reinsurance is one by which an insurer
(“the direct insurer or cedant”) procures a third
person (“the reinsurer”) to insure him against loss
or liability by reason of such original insurance. (Sec
97, IC)
Q: The Peninsula Insurance Company offered to
insure Francis' brand-new car against all risks
in the sum of P1 million for one year. The policy
was issued with the premium fixed at
P60,000.00 payable in six (6) months. Francis
175
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
2024 GOLDEN NOTES
Reinsurance as insurance of an insurance
c.
It is a separate and distinct arrangement from the
original contract of insurance, whose contracted
risk is insured in the reinsurance agreement. The
reinsurer’s contractual relationship is with the
direct insurance, not the original insured, and the
latter has no interest in and is generally not privy to
the contract of reinsurance. (Communication and
Information Systems Corporation v. Mark Sensing
Australia Pty. LTD., G.R. No. 192159, 25 Jan. 2017)
Was made through the means
within the control of the insured.
(IC, Sec. 170)
NOTE: The fire insurance policy
forbade the removal of the insured
properties unless sanctioned by the
insurer Malayan. Any transfer effected
by the insured, without the insurer’s
consent, would free the latter from any
liability. (Malayan Insurance Company
Inc. v. PAP Co. LTD., G.R. No. 200784,
August 7, 2013)
Reinsurance as contract of indemnity
A reinsurance is presumed to be a contract of
indemnity against liability, and not merely against
damage. (Sec 99, IC)
2.
NOTE: The original insured has no interest in a
contract of reinsurance. (Sec 100, IC)
Does not affect a contract of fire insurance
if the alteration does not increase the risk.
(Sec. 171, IC)
NOTE: A contract of fire insurance is not affected by
any act of the insured subsequent to the execution
of the policy, which does not violate its provisions,
even though it increases the risk and is the cause of
the loss. (Sec. 172, IC)
K. CLASSES OF INSURANCE
Measure of indemnity
1. FIRE INSURANCE
(Secs. 169-175)
1.
If there is no valuation in the policy, the
measure of indemnity in an insurance against
fire is the expense it would be to the insured at
the time of the commencement of the fire to
replace the thing lost or injured in the
condition in which it was at the time of the
injury. (Sec. 173, IC)
2.
If there is a valuation in a policy of fire
insurance, the effect shall be the same as in a
policy of marine insurance where valuation is
conclusive between the parties in adjusting the
loss. (Sec. 158, IC)
Fire Insurance is a property insurance that covers
damage and losses caused by fire.
It includes insurance against loss by fire, lightning,
windstorm, tornado or earthquake and other allied
risks, when such risks are covered by extension to
fire insurance policies or under separate policies.
(Sec. 169, IC)
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.
2. CASUALTY
(Sec. 176)
Entities an insurer to rescind a contract of
fire insurance if such alteration:
a.
b.
Casualty Insurance is an insurance covering loss or
liability arising from accident or mishap, excluding
certain types of loos which by law or custom are
considered as falling exclusively within the scope of
other types of insurance such as fire or marine. It
includes, but is not limited to employer's liability
Increases the risks;
Was made without the consent of
the insurer; and
UNIVERSITY OF SANTO TOMAS
2024 GOLDEN NOTES
176
COMMERCIAL LAW
insurance, motor vehicle liability insurance, plate
glass insurance, burglary and theft insurance,
personal accident and health insurance as written
by non-life insurance companies, and other
substantially similar kinds of insurance. (Sec. 176,
IC)
and the obligee. (Sec. 178, IC)
Types of surety bonds
1.
3. SURETYSHIP
(Secs. 177-180)
Suretyship is an agreement whereby a party called
the surety guarantees the performance by another
party called the principal or obliger of an obligation
or undertaking in favor of a third party called the
obligee.
It includes official recognizances, stipulations,
bonds, or undertakings issued by any company by
virtue of and under the provisions of Act No. 536, as
amended by Act No. 2206. (Sec. 177, IC)
2.
The extent of the surety’s liability is determined by
the language of the suretyship contract or bond
itself. It cannot be extended by implications beyond
the terms of the contract. Having accepted the bond,
the creditor is bound by the recital in the surety
bond that the terms and conditions of
distributorship contract be reduced in writing or at
the very least communicated in writing to the
surety. Such non-compliance by the creditor
impacts not on the validity or legality of the suretycontract but on the creditor’s right to demand
performance. (First Lepanto-Taisho Insurance
Corporation vs. Chevron Philippines, G.R. No. 177839,
18 Jan. 2012)
3.
Nature of liability of surety
Solidary – Joint and several with the obligor
2.
Limited or fixed – Limited to the amount of
the bond (it cannot be extended by
implication)
3.
Contractual – it is determined strictly by the
terms of the contract of suretyship in relation
to the principal contract between the obligor
a.
Performance bond – covers the faithful
performance of the contract; and
b.
Payment bond – covers the payment of
laborers and material men.
Fidelity bonds – they pay an employer for loss
growing out of a dishonest act of his employee.
For the purposes of underwriting, they are
classified as:
a.
Industrial bond – required by private
employers to cover loss through dishonesty
of employees; and
b.
Public official bond – required of public
officers for the faithful performance of their
duties and as a condition of entering upon
the duties of their offices.
Judicial bonds – required in connection with
judicial proceedings. (Ibid)
Rules of payment of premiums in suretyship
The liability of the surety or sureties shall be:
1.
Contract bonds – these are connected with
construction and supply contracts. It protects
the owner against a possible default by the
contractor or his possible failure to pay
materials, men, laborers, and sub-contractors.
The position of surety, therefore, is to answer
for a failure of the principal to perform in
accordance with the terms and specifications of
the contract. There may be two bonds:
1. The premium becomes a debt as soon as the
contract of suretyship or bond is perfected and
delivered to the obligor; (Sec. 179, IC)
2. The contract of suretyship or bonding shall not
be valid and binding unless and until the
premium thereof has been paid;
3. Where the obligee has accepted the bond, it
shall be valid and enforceable notwithstanding
177
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
2024 GOLDEN NOTES
that the premium has not been paid;
(Philippine Pryce Assurance Corp. v. CA, G.R. No.
107062, 21 Feb. 1994)
exceed P500,000.00 or in such reasonable amount
as may be determined by the Commissioner. Such
right may include, but shall not be limited to,
obtaining a policy loan, surrendering the policy,
receiving the proceeds of the Policy, and giving the
minor’s consent to any transaction on the policy.
4. If the contract of suretyship or bond is not
accepted by, or filed with the obligee, the
surety shall collect only a reasonable amount;
6. In the case of continuing bond (for a term longer
than one year or with no fixed expiration date),
the obligor shall pay the subsequent annual
premium as it falls due until the contract is
cancelled. (Sec. 179, IC; De Leon, 2010)
In the absence or in case of the incapacity of the
father or mother, the grandparent, the eldest
brother or sister at least 18 years of age, or any
relative who has actual custody of the minor insured
or beneficiary, shall act as a guardian without need
of a court order or judicial appointment as such
guardian, as long as such person is not otherwise
disqualified or incapacitated. Payment made by the
insurer pursuant to this section shall relieve such
insurer of any liability under the contract. (Sec. 182.
IC)
4. LIFE INSURANCE
(Secs. 181-186)
Measure of indemnity under a policy of
insurance upon life or health
5. If the non-acceptance of the bond be due to the
fault or negligence of the surety, no service fee,
stamps, or taxes imposed shall be collected by
the surety; and
GR: The measure of indemnity under a policy of
insurance upon life or health is the sum fixed in the
policy
Life Insurance is an insurance on human lives and
insurance appertaining thereto or connected
therewith. (Sec. 181, IC) It includes every contract or
pledge for the payment of endowments or annuities.
It may be made payable on the death of the person,
or on his surviving a specified period, or otherwise
contingently on the continuance or cessation of life.
(Sec. 182, IC)
XPN: The interest of a person insured is susceptible
of exact pecuniary measurement. (Sec. 186, IC)
Liability of the insurer in case of suicide
The insurer shall be liable in case of suicide by the
insured if:
NOTE: 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 shall be
considered a life insurance contract for purposes of
this Code. (Sec. 181, IC)
1.
The 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.
2.
The suicide is committed within a shorter
period as provided in the policy.
3.
The suicide is committed in the state of
insanity regardless of the date of commission.
(Sec. 183, IC)
Who may exercise any right under the policy
In the absence of a judicial guardian, the father, or
the in the latter’s absence or incapacity, the mother,
of any minor, who is an insured or a beneficiary
under a contract of life, health, or accident
insurance, may exercise, in behalf of said minor, any
right under the policy, without necessity of court
authority or the giving of a bond, where the interest
of the minor in the particular act involved does not
UNIVERSITY OF SANTO TOMAS
2024 GOLDEN NOTES
NOTE: Any stipulation extending the two (2)-year
period is null and void.
178
COMMERCIAL LAW
5. COMPULSORY MOTOR VEHICLE LIABILITY
INSURANCE
(Secs. 286-402)
Compulsory Motor Vehicle Liability Insurance
refers to a contract of insurance on passenger and
third-party liability for death or bodily injuries and
damage to property arising from motor vehicle
accidents. (Sec. 386[f], IC)
It provides compensation for the death or bodily
injuries suffered by innocent third parties or
passengers as a result of a negligent operation and
use of motor vehicles. (GSIS v. Court of Appeals, G.R.
No. 101439, 21 June 1999)
2.
6. MARINE INSURANCE
(Secs. 115-122)
A marine insurance is an insurance against loss or
damage to any kind of property or loss of life or
injury to person in connection with any and all risks
or peril of navigation, transit, or transportation.
(Divina, 2021)
c.
Precious stones, jewels, jewelry, precious
metals, whether in the course of
transportation or otherwise; and
d.
Instrumentalities of transportation and
communication, excluding buildings, aids
to navigation and transportation, and
appurtenant facilities for the control of
waterways. (Sec. 101 (a), IC)
Marine protection and indemnity insurance
against legal liability of the insured for loss,
damage, or expense incident to ownership,
operation, chartering, maintenance, use, repair,
or construction of any vessel, craft or
instrumentality in use of ocean or inland
waterways, including liability of the insured for
personal injury, illness or death or for loss of or
damage to the property of another person. (Sec.
101 (b), IC)
It also covers marine protection and indemnity
insurance, meaning insurance against, or against
legal liability of the insured for loss, damage, or
expense incident to ownership, operation,
chartering,
maintenance,
use,
repair,
or
construction of any vessel, craft, or instrumentality
in use of ocean or inland waterways, including
liability of the insured for personal injury, illness, or
death or for loss of or damage to the property of
another person. (Ibid.)
Marine insurance includes:
1.
Loss of 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;
179
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
2024 GOLDEN NOTES
However, a train hit the rear end of the van
driven by Alfaro, and the impact threw nine (9)
students in the rear, including Aaron, out of the
van. Aaron landed on the path of the train, which
dragged his body and severed his head,
instantaneously killing him.
IV. TRANSPORTATION LAW
A. GENERAL PRINCIPLES OF COMMON
CARRIERS
(Art. 1732, NCC)
The Zarates commenced an action for damages
against Alfaro, the Pereñas, PNR, and Alano. The
Zarates’ claim against the Pereñas was based on
breach of the contract of carriage and based on
quasi-delict under Art. 2176 of the Civil Code
against PNR.
Definition
A common carrier is a person, corporation, firm, or
association engaged in the business of carrying or
transporting passengers or goods or both, by land,
water, or air for compensation, offering its services
to the public. (Art. 1732, NCC)
The Pereñas argued that they exercised the
diligence of a good father of a family in the
selection and supervision of Alfaro by making
sure that Alfaro had been issued a driver’s
license and had not been involved in any
vehicular accident prior to the collision. Is the
operation of a school bus service considered as
a private carrier?
Requisites for an Entity to be Classified as a
Common Carrier (1996, 1997, 2000, 2002 BAR)
(PeCoFA-B-LWA-F-P)
1.
2.
3.
4.
5.
Must be a Person, Corporation, Firm, or
Association;
Engaged in the Business of carrying or
transporting passengers or goods or both;
The carriage or transport must either be by
Land, Water or Air;
The service is for a Fee; and
The service is offered to the Public. (Art.
1732, NCC)
A: NO. The Pereñas, as the operators of a school bus
service, were:
NOTE: A pipeline operator who carries oil and other
petroleum products through pipes or pipelines is a
common carrier. The law does not distinguish as to
the means by which transportation is carried out, as
long as it is by land, water, or air. Neither does the
law require that transportation be through a motor
vehicle. (First Phil. Industrial Corp. v. CA, G.R. No.
125948, 29 Dec. 1998)
Engaged in transporting passengers generally
as a business, not just as a casual occupation;
2.
Undertaking to carry passengers over
established roads by the method by which the
business was conducted; and
3.
Transporting students for a fee.
Despite catering to a limited clientele, the Pereñas
operated as a common carrier because they held
themselves out as a ready transportation
indiscriminately to the students of a particular
school living within or near where they operated
the service and for a fee. (Sps. Pereña v. Sps. Zarate,
G.R. No. 157917, 29 Aug. 2012)
Q: The Pereñas were engaged in the business of
transporting students from their respective
residences in Parañaque City to Don Bosco in
Pasong Tamo, Makati City and back. They
employed Alfaro as driver of the van. The
Zarates contracted the Pereñas to transport
their son, Aaron, to and from Don Bosco.
UNIVERSITY OF SANTO TOMAS
2024 GOLDEN NOTES
1.
Test for Determining whether One is a Common
Carrier (1996 BAR)
The true test for a common carrier is not the
quantity or extent of the business actually
transacted, or the number and character of the
180
COMMERCIAL LAW
conveyances used in the activity, but whether the
undertaking is a part of the activity engaged in by
the carrier that he has held out to the general public
as his business or occupation. The question must be
determined by the character of the business actually
carried on by the carrier, not by any secret intention
or mental reservation it may entertain or assert
when charged with the duties and obligations that
the law imposes. (Sps. Pereña v. Sps. Zarate, supra
ibid)
6.
The Civil Code does not provide that the
transportation should be by motor vehicle.
(Ibid.)
7.
A person or entity may be a common carrier
even if he has no fixed and publicly known
route, maintains no terminals, and issues no
tickets. (Asia Lighterage and Shipping, Inc. v. CA,
G.R. No. 147246, 19 Aug. 2003)
8.
A person or entity need not be engaged in the
business of public transportation for the
provisions of the Civil Code on common carriers
to apply to them. (Fabre, Jr. v. CA, G.R. No.
111127, 26 July 1996)
9.
The carrier can also be a common carrier even
if the operator does not own the vehicle or
vessel that he or she operates. (Cebu Salvage
Corp. v. Philippine Home Assurance Corp., G.R.
No. 150403, 25 Jan. 2007; Aquino and Hernando,
2016)
The concept of common carriers contemplated
under Art. 1732 of the NCC and the fact that the said
concept corresponds to the concept of “public
service” under the Public Service Act results in the
application of the following rules or principles:
1.
Art. 1732 makes no distinction 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. (De Guzman v. CA, G.R. No. L-47822, 22
Dec. 1988)
2.
Art. 1732 also carefully avoids making any
distinction 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. (Ibid.)
3.
Art. 1732 does not distinguish between a carrier
offering its services to the “general public,” and
one who offers services or solicits its business
only from a narrow segment of the general
population. (Ibid.)
4.
A person or entity is a common carrier and has
the obligations of the common carrier under the
Civil Code even if he did not secure a Certificate
of Public Convenience. (Ibid.)
5.
The Civil Code makes no distinction as to the
means of transporting, as long as it is by land,
water or air. (First Philippine Industrial
Corporation v. CA, G.R. No. 125948, 29 Dec. 1998)
Q: Alejandro Camaling is engaged in buying
copra, charcoal, firewood, and used bottles and
in reselling them in Cebu City. He uses two (2)
big Isuzu trucks for the purpose; however, he
has no certificate of public convenience or
franchise to do business as a common carrier.
On the return trips to Alegria, he loads his trucks
with various merchandise of other merchants in
Alegria and in the two neighboring
municipalities. He charges them freight rates
much lower than the regular rates. In one of the
return trips, one cargo truck was loaded with
several boxes of sardines, owned by Pedro
Rabor. While passing the zigzag road between
Carcar and Barili, the truck was hijacked by
three (3) armed men who took all the boxes of
sardines and kidnapped the driver and his
helper, releasing them only two (2) days later.
Rabor sought to recover from Alejandro the
value of the sardines. The latter argued that he
is not a common carrier. If you were the judge,
would you sustain the contention of Alejandro?
(1991 BAR)
A: NO. If I were the judge, I would rule that
Alejandro is a common carrier. A person who offers
181
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
2024 GOLDEN NOTES
his services to carry passengers or goods for a fee is
a common carrier, regardless of whether he has a
certificate of public convenience or not, whether it
is his main business or is incidental to such
business, whether it is scheduled or unscheduled
service, and whether he offers his services to the
general public or to a limited few. (De Guzman v. CA,
G.R. No. L-47822, 22 Dec. 1988)
Private Carrier
A private carrier is one who, without making the
activity a vocation, or without holding himself or
itself out to the public as ready to act for all who may
desire his or its services, undertakes, by special
agreement in a particular instance only, to transport
goods or persons from one place to another either
gratuitously or for hire. (Sps. Pereña v. Sps. Zarate,
supra) A carrier which does not qualify under the
requisites of a common carrier is deemed a private
carrier. (National Steel Corporation v. CA, G.R. No.
112287, 12 Dec. 1997)
Q: Maria shipped 3,000 bags of Australian
delicacies to Pauline in the Philippines. Such
goods were insured with PH Insurance. Pauline
then hired B Brokerage as its customs broker.
When the goods arrived at the Port of Manila,
the same was loaded into the barge owned by
AVL Shipping’s barge, called ANYA-I. When the
barge traversed Pasig River, the goods got wet as
it was found that the barge had a hole, thereby
allowing river water to flow inside the same.
This resulted to the goods being wet which now
became inedible. Pauline asserted her
insurance claim with PH Insurance, to which the
latter paid. PH Insurance now filed a claim
against B Brokerage and AVL Shipping. AVL
Shipping contends that its barge, ANYA-I cannot
be considered as a common carrier. Is ANYA-I a
common carrier?
A: YES. ANYA-I is a common carrier. Art. 1732 of the
NCC defines common carriers as “persons,
corporations, firms, or associations engaged in the
business of carrying or transporting passengers or
goods or both, by land, water, or air, for
compensation, offering their services to the public.”
Art. 1732 does not make any distinction between
one whose principal business activity is the carrying
of persons or goods or both, and one who does the
carrying only as an ancillary activity; between a
person or enterprise offering transportation service
on a regular or scheduled basis, and one offering the
service on an occasional, episodic or unscheduled
basis; and 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. (C.V. Gaspar Salvage &
Lighterage Corporation v. LG Insurance Company
Ltd., G.R. Nos. 206892 & 207035, 03 Feb. 2021)
UNIVERSITY OF SANTO TOMAS
2024 GOLDEN NOTES
182
COMMERCIAL LAW
1. COMMON CARRIER VS. PRIVATE CARRIER
2. DILIGENCE REQUIRED
(Art. 1733, NCC)
Common Carrier vs. Private Carrier (2002
BAR)
The diligence required of common carriers is
extraordinary diligence. (Art. 1733, NCC)
COMMON CARRIER
PRIVATE CARRIER
To whom the Carrier Caters its Services
Carriage is generally
undertaken by special
Undertakes to carry
agreement and it does
passengers or goods
not hold itself out to
for the public.
carry goods for the
general public.
Governing Laws
Civil Code Provisions
on Common Carriers,
Public Service Act, and
Civil Code provisions
other Special laws
on ordinary contracts
relating
to
transportation
(CI-COCA-PSA-SPEC)
Degree of Diligence Required
Ordinary diligence or
Extraordinary
diligence of a good
diligence
father of a family
Presumption of Negligence
1. If the goods are lost,
destroyed
or
deteriorated; or
No presumption as to
negligence.
2. In case of death of or
injuries to passengers.
Whether Subject to Regulation or Not
Not
subject
to
Subject to regulation
regulation
by
a
by a regulatory agency
regulatory agency
Exemption from Liability
A common carrier
cannot stipulate that it
is exempt from liability A private carrier may
for negligence of its validly enter into a
agents or employees. stipulation exempting
Such stipulation is void it from liability.
as it is against public
policy.
Extraordinary diligence is that extreme measure of
care and caution which persons of unusual
prudence and circumspection use for securing and
preserving their own property or rights. The law
requires common carriers to render service with
the greatest skill and utmost foresight.
(Loadmasters Customs Services, Inc. v. Glodel
Brokerage Corp., G.R. No. 179446, 10 Jan. 2011)
Reasons for the Requirement of Extraordinary
Diligence
1.
Because of the nature of the business of
common carrier, which is public service; and
2.
For public policy consideration - the common
carriers are supposed to serve the public
interest and therefore, they have to exercise
extraordinary diligence. (Martin, 1989)
Q: Are common carriers liable for injuries to
passengers even if they have observed ordinary
diligence and care? Explain. (2015 BAR)
A: YES, common carriers are liable to injuries to
passengers even if the carriers observed ordinary
diligence and care because the obligation imposed
upon them by law is to exercise extraordinary
diligence. Common carriers are 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.
183
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
2024 GOLDEN NOTES
Exercise of Extraordinary Diligence in the
Carriage of Goods and Transport of Passengers
The requirement to observe extraordinary diligence
begins with the actual delivery of the goods for
transportation, and not merely with the formal
execution of a receipt or bill of lading; the issuance
of a bill of lading is not necessary to complete
delivery and acceptance by the carrier. (Compañia
Maritima v. Insurance Co. of North America, G.R. No.
L-18965, 30 Oct. 1964)
CARRIAGE OF
TRANSPORT OF
GOODS
PASSENGERS
Commencement
From the moment the
From the time the
person who purchases
goods
are
the ticket from the
unconditionally placed
carrier
presents
in the possession of
himself at the proper
and received by the
place and in a proper
carrier
for
manner
to
be
transportation.
transported.
Duration
1. Continues until the
goods are delivered,
actually
or
constructively, by the
carrier
to
the
consignee or to the
person who has a right
to receive them, and
even when they are
temporarily unloaded
or stored in transit.
XPN: The shipper or
owner had made use of
the right or stoppage in
transit.
2. Continues even
during the time the
goods are stored in a
warehouse of the
carrier at the place of
destination until the
consignee has been
advised of the arrival
of the goods and has
been
given
a
reasonable
opportunity thereafter
to remove them or
otherwise dispose of
them.
Q: In cases where the cargoes are damaged when
it is being unloaded from the vessel, is the vessel
owner relieved of its responsibility to observe
extraordinary diligence from the moment the
cargoes were delivered to the arrastre
operator?
A: NO. Under the Civil Code, other pertinent laws
and jurisprudence, the extraordinary responsibility
of common carriers lasts until the time the goods
are actually or constructively delivered by the
carrier to the consignee or the person who has the
right to receive. There is actual delivery in contracts
for the transport of goods when possession has
been turned over to the consignee or to his duly
authorized agent and a reasonable time is given him
to remove the goods. In this case, since the
discharging of the containers had not yet been
completed at the time the damage occurred, there
was still no delivery, actual or constructive, of the
cargoes. (Westwind Shipping Corp. v. UCPB General
Insurance Co., G.R. No. 200289, 25 Nov. 2013)
Continues until the
passenger has been
landed at the port of
destination and has
left the vessel owner’s
dock or premises.
UNIVERSITY OF SANTO TOMAS
2024 GOLDEN NOTES
Q: X, while driving his Toyota Altis, tried to cross
the railway tract of PNR along Blumentritt
Avenida Ext., Manila. The train, as it approached
Blumentritt Avenida Ext., applied its horn as a
warning to all the vehicles that might be
crossing the railway tract, but there was really
nobody manning the crossing. X was listening to
his iPod Touch, hence, he did not hear the sound
of the horn of the train and so his car was hit by
the train. As a result of the accident, X suffered
some injuries and his car was totally destroyed
as a result of the impact. Is PNR liable? (2012
BAR)
A: NO. PNR is not liable because X should have
known that he was crossing a place designated as
184
COMMERCIAL LAW
crossing for train, and therefore should have been
more careful.
Causes of Action for Failure to Observe Diligence
Required
Causes of Action of the Injured Passenger or his
Heirs, if the Passenger Dies
AGAINST WHOM
Against the Negligent
Driver
Against the Carrier
and Driver Operating
the Other Vehicle
PERSON WHO HAS
CAUSE OF ACTION
BASIS OF CAUSE OF
ACTION
Culpa criminal
Third person who
Suffered Damages
If the driver is
convicted and it turns
out that he is insolvent,
the heirs/passengers
may run after the
employer of the driver,
pursuant
to
the
employer’s subsidiary
liability under Art. 103,
in relation to Arts. 100
and 102 of the RPC.
Shipper of the
Damaged Goods
Heir/s of the
Deceased Passengers
or the Passenger
Himself for the
Injuries Sustained by
him
Breach of the contract
of carriage
(Culpa contractual)
Q: Fil-Asia Air Flight 916 was on a scheduled
passenger flight from Manila when it crashed as
it landed at the Cagayan de Oro airport. The pilot
miscalculated the plane's approach and
undershot the runway. Ten passengers died at
the crash scene.
Tort
Culpa
contractual;
Direct and primary
Against the Common
Carrier at Fault
BASIS OF CAUSE OF
ACTION AGAINST
THE COMMON
CARRIER
Tort
(Extra-contractual
negligence)
Breach of the contract
of carriage
(Culpa contractual)
The liability of the
common carrier and
his driver as well as
the operator of the
other vehicle and his
driver is joint and
several.
(Tiu
v.
Arriesgado, G.R. No.
138060, 01 Sept. 2004)
One of them managed to leave the plane but was
run over by an ambulance coming to the rescue.
Another was an airline employee who hitched a
free ride to Cagayan de Oro and who was not in
the passenger manifest.
The Civil Aeronautics Authority investigation
showed that the co-pilot who had control of the
plane's landing had less than the required flying
and landing time experience, and should not
have been in control of the plane at the time. He
was allowed to fly as a co-pilot because of the
scarcity of pilots - Philippine pilots have been
recruited by foreign airlines under vastly
improved flying terms and wages so that newer
and less trained pilots are being locally
deployed. The main pilot, on the other hand, had
a very high level of blood alcohol at the time of
the crash.
185
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
2024 GOLDEN NOTES
You are part of the team that the victims hired to
handle the case for them as a group. In your case
conference, the following questions came up:
a.
3. VIGILANCE OVER GOODS
(Arts. 1744-1754, NCC)
Presumption on the Loss, Destruction, or
Deterioration of Goods
Explain the causes of action legally possible
under the given facts against the airline and
the pilots; who will you specifically implead
in these causes of action?
GR: The common carrier is presumed to have been
at fault or to have acted negligently when the goods
transported are lost, destroyed, or deteriorated.
(Art. 1735, NCC)
A: A complaint for breach of contract of carriage can
be filed against Fil-Asia Air for failure to carry the
passengers safely as far as human care and foresight
can provide, using the utmost diligence of a very
cautious person, with a due regard for all the
circumstances. (Art. 1755, NCC)
XPNs: When the same is due to any of the following
causes only: (F-A2–C-O)
1.
A complaint based on a quasi-delict can be filed
against the pilots because of their fault and
negligence. (Art. 2176, NCC) Fil-Asia Air can be
included for negligence in the selection and
supervision of the pilots. (Art. 2180, NCC)
A third cause of action may be a criminal
prosecution for the reckless imprudence resulting
in homicide against two pilots. The airline will be
subsidiary liable for the civil liability, only after the
pilots are convicted and found to be insolvent.
b. How will you handle the cases of the
passenger run over by the ambulance and
the airline employee allowed to hitch a free
ride to Cagayan de Oro? (2013 BAR)
2.
A: It is the driver of the ambulance and his employer
who should be held liable for damages because a
passenger was run over. This is in accordance with
Arts. 2176 and 2180 of the NCC. There could also be
a criminal prosecution for reckless imprudence
resulting in homicide against the ambulance driver
and his consequent civil liability.
3.
Since the airline employee was being transported
gratuitously, Fil-Asia Air was not required to
exercise extraordinary diligence for his safety and
only ordinary care. (Lara v. Valencia, G.R. No. L-9907,
30 June 1958)
UNIVERSITY OF SANTO TOMAS
2024 GOLDEN NOTES
4.
186
Fortuitous events (flood, storm, earthquake,
lightning, or other natural disaster or calamity).
Provided, the following conditions are present:
a.
Natural disaster was the proximate and
only cause;
b.
Carrier exercised due diligence to prevent
or minimize loss before, during, and after
the occurrence of the natural disaster; and
c.
The common carrier has not negligently
incurred delay in transporting the goods.
(Art. 1739-1740, NCC)
Act of the public enemy in war, whether
international or civil, provided:
a.
Act was the proximate and only cause; and
b.
Carrier exercised due diligence to prevent
or minimize loss before, during, and after
the act. (Ibid.)
Act or omission of the shipper or owner of the
goods, provided:
a.
If proximate and only cause – exempting
b.
If contributory negligence – mitigating.
(Art. 1741, NCC)
The Character of the goods or the faulty nature
of the packing or of the containers; provided,
carrier exercised due diligence to forestall or
prevent loss. (Art 1742, NCC)
COMMERCIAL LAW
NOTE: 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 from responsibility for loss or injury
resulting therefrom. (Southern Lines Inc., v. CA,
G.R. No. L-16629, 31 Jan. 1962)
5.
two strangers suddenly stopped the truck and
hijacked the cargo. Investigation by the police
disclosed that one of the hijackers was armed
with a bladed weapon while the other was
unarmed. For failure to deliver the 400 sacks,
Fairgoods sued Dizon for damages. Dizon in turn
set up a third-party complaint against Reyes
which the latter registered on the ground that
the loss was due to force majeure. Did the
hijacking constitute force majeure to exculpate
Reyes from any liability? (1995 BAR)
Order or act of competent authority; provided,
the authority is with power to issue the order.
(Art. 1743, NCC)
NOTE: There must be an order or act of
competent public authority through which the
goods are seized or destroyed. (Art. 1734, NCC)
A: NO. The hijacking in this case cannot be
considered as force majeure. Only one of the two
hijackers was armed with a bladed weapon. As
against four male employees of Reyes, two (2)
hijackers, with only one of them being armed with a
bladed weapon, cannot be considered force majeure.
In De Guzman v. Court of Appeals, the Supreme Court
held that hijacking, not being included in Art. 1734,
must be dealt with under Art. 1735 and thus, the
common carrier is presumed to have been at fault or
negligent. To exculpate the carrier from liability
arising from hijacking, he must prove that the
robbers or the hijackers acted with grave or
irresistible threat, violence, or force. (Bascos v. CA,
G.R. No. 101089, 07 Apr. 1993)
If the officer acts without legal process or
authority, the common carrier will be held
liable. (Ganzon v. CA, G.R. No. L-48757, 30 May
1988)
In all cases other than those enumerated above,
there is presumption of negligence even if there is
an agreement limiting the liability of the common
carrier in the vigilance over the goods.
Common Carrier’s Liability for the Acts of
Strangers or Criminals
When an airline company was not authorized to
search passengers for firearms, the loss of the
jewelry and cash of a passenger because of an
armed robbery committed by other passengers is a
force majeure, for which the airline company is not
liable. (Quisumbing, Sr. v. CA, G.R. No L-50076, 14
Sept. 1990)
GR: A common carrier is liable even for acts of
strangers like thieves or robbers.
XPN: Where such thieves or robbers acted "with
grave or irresistible threat, violence or force." The
common carrier is not liable for the value of the
undelivered merchandise which was lost because of
an event that is beyond his control. (De Guzman v.
CA, supra)
Other Invalid Defenses (Ba-W-E-D)
Barratry – The ship owner cannot escape liability
to third persons if the cause of damage is barratry.
It is an act committed by the master or crew of the
ship for some unlawful or fraudulent purpose,
contrary to their duty to the owner;
Q: M. Dizon Trucking entered into a hauling
contract with Fairgoods Co. whereby the former
bound itself to haul the latter’s 2000 sacks of
soya bean meal from Manila Port Area to
Calamba, Laguna. To carry out faithfully its
obligation, Dizon subcontracted with Enrico
Reyes the delivery of 400 sacks of the soya bean
meal. Aside from the driver, three male
employees of Reyes rode on the truck with the
cargo. While the truck was on its way to Laguna,
Worms and Rats – Whenever the ship is damaged
by worms resulting in damage to the cargo, the
carrier cannot cite the same as an excuse. The same
is true with respect to damage of the cargo by rats
whether the cargo was directly damaged by the rats
187
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
2024 GOLDEN NOTES
or by the water let in through holes gnawed by rats
in the ship or her fixtures;
Explosion – Damage to cargo from explosion of
another cargo is not ordinarily attributable to peril
of the sea or accidents of navigation particularly
where it occurs after the vessel has ended its voyage
and is finally moored to unload; and
Water Damage – Damage by seawater is not a valid
excuse where the water gains entrance through a
port that had been left open or insufficiently
fastened on sailing. (Aquino and Hernando, 2016)
Rules regarding the Time of Delivery of Goods
and Delay
1.
If there is an agreement as to time of delivery –
delivery must be within the time stipulated in
the contract or bill of lading.; and
2.
If there is no agreement – delivery must be
within a reasonable time. (Saludo, Jr. v. CA, G.R.
No. 95536, 23 Mar. 1992)
2.
Excusable delay in carriage merely suspends
and generally does not terminate the contract of
carriage;
3.
The carrier shall be made liable when vessel or
vehicle is Unreasonably delayed;
4.
Carrier remains duty bound to exercise
Extraordinary Diligence; and
5.
Natural disaster shall not free the carrier from
responsibility. (Dimaampao & DumlaoEscalante, 2014)
However, where the delay in the transportation of
the remains of a deceased person was due to the
fault of the mortuary service, who erroneously
switched the casket with that of another deceased
person, the airline company cannot be held liable
for damages because of the delay. (Saludo, Jr. v. CA,
supra)
The carrier shall be liable for damages immediately
and proximately resulting from such neglect of duty.
(Ibid; Art. 1170, NCC)
Although the delivery of the suitcase of a passenger
was delayed by eleven days, an airline company
cannot be held liable for moral damages, exemplary
damages, and attorney’s fees, where the airline
company was not guilty of bad faith and exerted
efforts in tracing the suitcase. (Philippine Air Lines v.
Miano, G.R. No. 106664, 08 Mar. 1995)
Effects of Delay of Delivery of Goods
Due Diligence to Prevent or Lessen Loss
In the absence of a special contract, a carrier is not
an insurer against delay in the transportation of
goods. The effects of delay are as follows:
(J-Ex-Un-ED-N)
To free the common carrier from liability in case of
flood, storm or other natural disaster or an act of a
public enemy:
Delay in the Delivery of Goods
1.
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, NCC)
The common carrier must exercise due
diligence to prevent or minimize loss before,
during, and after the occurrence; and
2.
The natural disaster or the act of the public
enemy is the proximate and only cause of the
loss. (Art. 1739, NCC)
NOTE: If the common carrier negligently incurs
delay in transporting the goods, a natural disaster
shall not free such carrier from responsibility.
NOTE: An agreement limiting the common
carrier’s liability for delay on account of strikes
or riots is valid. (Art. 1748, NCC)
UNIVERSITY OF SANTO TOMAS
2024 GOLDEN NOTES
1.
188
COMMERCIAL LAW
Loss due to Character of the Goods or the Faulty
Nature of its Containers
A Mechanical Defect is not a Fortuitous Event
Mechanical defects in the carrier are not considered
a caso fortuito that exempts the carrier from
responsibility. (Sweet Lines, Inc. v. CA, G.R. No. L46340, 28 Apr. 1983)
If the loss, destruction, or deterioration of the goods
was caused by the character of the goods, or the
faulty nature of the packing or the containers, the
common carrier must exercise due diligence to
forestall or lessen the loss. (Art. 1742, NCC)
Tire blowout of a jeep is not a fortuitous event
where there exists a specific act of negligence by the
carrier consisting of the fact that the jeepney was
overloaded and speeding at the time of the incident.
(Juntilla v. Fontanar, G.R. No. L-45637, 31 May 1985)
Q: Because of spillage of the rice during the trip
from Davao to Manila due to the bad condition of
the sacks, there was a shortage in the rice
delivered by the Provident Lines, Inc. to the
consignee XYZ Import and Export Corporation.
The carrier accepted the shipment, knowing
that the sacks had holes, and some had broken
strings. When sued, Provident Lines, Inc. alleged
that the loss was caused by the spillage of the
rice on account of the defective condition of the
sacks, at the time it received the shipment, and
therefore, it cannot be held liable. Decide and
give reasons. (1978 BAR)
Defective brakes cannot be considered fortuitous in
character. (Vergara v. CA, G.R. No. 77679, 30 Sept.
1987)
Fire is not Considered a Natural Disaster
GR: Fire arises almost invariably from some act of
man or by human means. It does not fall within the
category of an act of God.
A: The maritime carrier is liable. Where the fact of
improper packing is known to the carrier or its
servants, or apparent upon ordinary observations,
but the carrier accepts the goods notwithstanding
such conditions, it is not relieved of liability for loss
or injury resulting therefrom. (Southern Lines, Inc. v.
CA, supra)
XPN: If the fire is caused by lightning or by other
natural disaster or calamity. (Eastern Shipping Lines,
Inc. v. IAC, G.R. No. L-69044, 29 May 1987)
NOTE: In case that the goods have already been
deposited in the warehouse of the Bureau of
Customs and the goods were then destroyed by fire,
the carrier is not anymore liable. (Servando v.
Philippine Steam Navigation Co., G.R. No. L-36481-2,
23 Oct. 1982)
Requisites of a Fortuitous Event (F-Ev-Un-I)
1.
The common carrier must be Free from any
participation in or aggravation of the injury to
the creditor;
2.
The Event must be such as to render it
impossible for the common carrier to fulfill his
obligation in a normal manner;
3.
The event must be Unforeseen or unavoidable;
and
4.
The cause of the breach of obligation must be
Independent of the will of the common carrier.
(Real v. Belo, G.R. No. 146224, 26 Jan. 2007)
Typhoon as a Fortuitous Event
GR: If all the elements of a natural disaster or
calamity concur and there was no contributory
negligence or delay, the occurrence of a typhoon is
a fortuitous event. This holds true especially if the
vessel was seaworthy at the time it undertook that
fateful voyage and that it was confirmed with the
Coast Guard that the weather condition would
permit safe travel of the vessel to its destination.
(The Philippine American General Insurance Co. Inc.
v. MGG Marine Services, Inc., G.R. No. 135645, 08 Mar.
2002)
189
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
2024 GOLDEN NOTES
The loss of cargoes due to the sinking of a seaworthy
tugboat which was suddenly tossed by waves of
extraordinary height is due to a force majeure.
(PhilAm Gen. v. PKS Shipping Company, G.R. No.
149038, 09 Apr. 2003)
a common carrier is still required to exercise due
diligence to prevent or minimize loss before, during
and after the occurrence of the natural disaster, for
it to be exempt from liability under the law for the
loss of the goods. Such deviation is just proper in its
exercise of extraordinary diligence. (The Philippine
American General Insurance Co., Inc. v. MGC Marine
Services, Inc. supra)
XPN: If a vessel sank due to a typhoon, and there
was failure to ascertain the direction of the storm
and the weather condition of the path they would be
traversing, it constitutes lack of foresight and
minimum vigilance over its cargoes taking into
account the surrounding circumstances of the case.
Thus, the common carrier will still be liable. (Arada
v. CA, G.R. No. 98243, 01 July 1992)
Q: Philip Mauricio shipped a box of cigarettes to
a dealer in Naga City through Bicol Bus Company
(BBC). When the bus reached Lucena City, the
bus developed engine trouble. The driver
brought the bus to a repair shop in Lucena
where he was informed by the mechanic that an
extensive repair was necessary, which would
take at least 2 days. While the bus was in the
repair shop, Typhoon Coring lashed Quezon
Province. The cargoes inside the bus, including
Mauricio’s cigarettes, got wet and were totally
spoiled. Mauricio sued BBC for damage to his
cargoes. Decide. (1987 BAR)
Where a vessel encountered stormy weather and
the coils of wire it was transporting became rusty
because rain entered the hatch of the vessel, the
damage was not due to a fortuitous event, because
heavy rains are foreseeable, and rain would not
have entered the hatch if it was closed properly.
(Eastern Shipping Lines, Inc. v. CA, G.R. No. 97412, 12
July 1994)
A: BBC is liable for damages to the cargoes lost by
Mauricio. A natural disaster would relieve liability if
it is the proximate and only cause of the damage.
The carrier itself, in this case, had been negligent.
The presumption of negligence in culpa contractual
is not overcome by invoking the defense that there
has been engine trouble, for such defense does not
preclude it having been due to the fault of the
common carrier. The fact that an extensive repair
work was necessary which, in fact, took 2 days to
complete, somehow justifies an impression that the
engine trouble could have been detected, if not
already known, well before the actual breakdown.
Q: On a clear weather, M/V Sundo, carrying
insured cargo, left the port of Manila bound for
Cebu. While at sea, the vessel encountered a
strong typhoon forcing the captain to steer the
vessel to the nearest island where it stayed for
seven days. The vessel ran out of provisions for
its passengers. Consequently, the vessel
proceeded to Leyte to replenish its supplies.
Assuming that the cargo was damaged because
of such deviation, who between the insurance
company and the owner of the cargo bears the
loss? Explain. (2005 BAR)
A: The insurance company is liable. It is an instance
of a valid deviation because the strong typhoon is a
fortuitous event over which neither the master nor
the owner has any control. Deviation is likewise
proper in order to avoid a peril. Common carriers
are responsible for the loss, destruction,
deterioration of the goods unless the same is due to
any of the causes provided by law – which includes,
among others, is when there is flood, storm,
earthquake, lightning, or other natural disaster or
calamities. Moreover, even in cases where a natural
disaster is the proximate and only cause of the loss,
UNIVERSITY OF SANTO TOMAS
2024 GOLDEN NOTES
4. SAFETY OF PASSENGERS
(Arts. 1755-1763, NCC)
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, NCC)
190
COMMERCIAL LAW
Who are Not Considered Passengers (W-A-M-U)
1.
One who has boarded a Wrong vehicle, has been
properly informed of such fact, and on alighting,
is injured by the carrier;
2.
Invited guests and Accommodation passengers;
3.
One who attempts to board a Moving vehicle,
although he has a ticket, unless the attempt be
with the knowledge and consent of the carrier;
and
4.
One who remains on a carrier for an
Unreasonable length of time after he has been
afforded every safe opportunity to alight.
suffered serious physical injuries. What are
WTC's liabilities, if any, in favor of Aurelio,
Jerome and Florencio? Explain your answer.
(2017 BAR)
A: As a common carrier, WTC is liable to Aurelio for
breach of contract of carriage, the latter being a
passenger who purchased a ticket for himself. WTC
is also liable to Jerome for breach of contract of
carriage because he was a passenger although he
was being transported gratuitously. However, WTC
has no liability in favor of Florencio for breach of
contract of carriage. A stowaway like Florencio, who
secures passage by fraud, is not considered as a
passenger.
NOTE: As accommodation passengers or invited
guests, defendant as owner and driver of the pickup owes to them merely the duty to exercise
reasonable care so that they may be transported
safely to their destination. The rule is established by
the 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. (Arts. 1755
and 1756, NCC; Lara v. Valencia, G.R. No. L-9907, 30
June 1958)
The carrier is thus not obliged to exercise
extraordinary diligence but only ordinary diligence
in these instances.
Assumption of Risk on the Part of Passengers
Passengers must take such risks incident to the
mode of travel. The passenger must observe the
diligence of a good father of a family to avoid injury
to himself. (Art. 1761, NCC)
Carriers are not insurers of any and all risks to
passengers and goods. It merely undertakes to
perform certain duties to the public as the law
imposes and holds itself liable for any breach
thereof. (Pilapil v. CA, G.R. No. 52159, 22 Dec. 1989)
5. SOURCES OF LIABILITY
Common Carriers are Liable for the Acts of their
Employees
Q: Wisconsin Transportation Co., Inc. (WTC)
owned and operated an inter-island deluxe bus
service plying the Manila-Batangas-Mindoro
route. Three friends, namely: Aurelio, Jerome
and Florencio rode on the same WTC bus from
Manila bound for Mindoro. Aurelio purchased a
ticket for himself. Jerome, being a boyhood
friend of the bus driver, was allowed a free ride
by agreeing to sit during the trip on a stool
placed in the aisle. Florencio, already penniless
after spending all his money on beer the night
before, just stole a ride in the bus by hiding in
the on-board toilet of the bus. During the trip,
the bus collided with another bus coming from
the opposite direction. The three friends all
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. The liability of the common
carriers does not cease 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, NCC)
NOTE: By express provision of Art. 1759, it is no
defense that the employee acted beyond the scope
of his authority because the riding public is not
expected to inquire from time to time before they
191
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
2024 GOLDEN NOTES
board the carrier whether or not the driver or any
other employee is authorized to drive the vehicle or
that said driver is acting within the scope of his
authority and observing the existing rules and
regulations required of him by management.
(Aquino and Hernando, 2016)
Q: P rode a Sentinel Liner bus going to Baguio
from Manila. At a stop-over in Tarlac, the bus
driver, the conductor, and the passengers
disembarked for lunch. P decided, however, to
remain in the bus, the door of which was not
locked. At this point, V, a vendor, sneaked into
the bus and offered P some refreshments. When
P rudely declined, V attacked him, resulting in P
suffering from bruises and contusions. Does P
have cause to sue Sentinel Liner? (2011 BAR)
Q: At around 8:45 in the morning, A, after having
alighted from a passenger bus in front of
Robinsons Galleria along the north-bound lane
of EDSA, was hit and run over by a bus driven by
B, who was then employed by C Transport
Company. A was immediately rushed to the
hospital where she was pronounced dead on
arrival. By reason of the quasi-delict, who
should be held liable for the death of A? B, the
bus driver, C Transport Company, or both?
A: YES, since the carrier's crew did nothing to
protect the passenger P who remained in the bus
during the stop-over. (UPLC Commercial Law
Suggested Answers)
Q: In a jeepney, Angela, a passenger, was injured
because of the flammable material brought by
Antonette, another passenger. Antonette denied
her baggage to be inspected invoking her right
to privacy.
A: Both B and C Transport Company should be held
solidarily liable as joint tortfeasors. Under Art. 2180
of the NCC, employers are liable for the damages
caused by their employees acting within the scope
of their assigned tasks. Once negligence on the part
of the employee is established, a presumption
instantly arises that the employer was remiss in the
selection and/or supervision of the negligent
employee. It is incumbent upon the employer to
rebut this presumption by presenting adequate and
convincing proof that it exercised the care and
diligence of a good father of a family in the selection
and supervision of its employees. Failing to do this,
a common carrier cannot avoid liability for the
quasi-delict committed by its negligent employee.
The responsibility of two or more persons who are
liable for a quasi-delict is solidary. (R Transport
Corp. v. Yu, G.R. No. 174161, 18 Feb. 2015)
a.
Should the jeepney operator be held liable
for damages?
A: NO. The operator is not liable for damages. In
overland transportation, the common carrier is not
bound nor empowered to make an examination on
the contents of packages or bags, particularly those
hand carried by passengers. (Nocum v. Laguna
Tayabas Bus Company, G.R. No. L-23733, 31 Oct.
1969)
b. If it were an airline company involved,
would your answer be the same? (1992
BAR)
A: NO. The common carrier should be made liable.
In case of air carriers, it is unlawful to carry
flammable materials in passenger aircrafts, and
airline companies may open and investigate
suspicious packages and cargoes pursuant to R.A.
No. 6235.
Extent of Liability of Common Carriers for Acts
of Co-Passengers or Strangers (1997, 2005 BAR)
A common carrier is responsible for injuries
suffered by a passenger on account of the willful
acts or negligence of other passengers or of
strangers, if the 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, NCC)
UNIVERSITY OF SANTO TOMAS
2024 GOLDEN NOTES
Q: Marites, a paying bus passenger, was hit
above her left eye by a stone hurled at the bus by
an unidentified bystander as the bus was
speeding through the national highway. The bus
owner’s personnel lost no time in bringing
Marites to the provincial hospital where she was
192
COMMERCIAL LAW
confined and treated. Marites wants to sue the
bus company for damages and seeks your advice
whether she can legally hold the bus company
liable. What will you advise her? (1994 BAR)
Rights of Passengers in case of Delayed Voyages
In case of delay of the voyage attributable to the
operator, a passenger shall have the following
rights:
A: I will advise Marites that she cannot legally hold
the bus company liable if the stone throwing was
entirely unforeseeable and the carrier exercised
utmost diligence. However, I will also inform her
that the burden is on the carrier to prove such
exercise of due diligence. If she decides to file a case
in court, all that she will prove is that she was a
passenger and she was injured while on board the
bus. (Pilapil v. CA, G.R. No. 52159, 22 Dec. 1989)
1.
The operator shall, within 30 minutes from
receipt of information or from knowledge that
the voyage shall be delayed, but not later than
one (1) hour before the CPC-authorized
departure schedule, inform the passengers of
the delay and the cause thereof, as well as of the
new departure or expected arrival time.
The Registered Owner of the Vehicle may be
held Liable for Damages Suffered by a Third
Person in the Course of the Operation of the
Vehicle
NOTE: The information shall be made by public
announcement
through
the
Public
Announcement System, written and/or
published notice, or through SMS, electronic or
any other available means.
The registered owner of a public service vehicle is
responsible for damages that may arise from
consequences incident to its operation or that may
be caused to any of the passengers therein. (Gelisan
v. Alday, G.R. No. L-30212, 30 Sept. 1987)
2.
Right to Refund or Revalidation
Should the delay be for more than three (3)
hours, the passenger shall be offered by the
operator the option to request a refund of the
ticket price or for the revalidation of the ticket.
3.
Right to Amenities
The operator shall provide, free of charge, the
passengers waiting for their re-scheduled trip
with the following:
Liability for Delayed Voyage
Delayed voyage refers to a voyage involving:
1.
Late departure of the ship from its port of
origin; or
2.
Late arrival to its port of destination for a
period of time not exceeding 24 hours from the
Certificate of Public Convenience (CPC)authorized time of departure or arrival of the
ship. (Sec. III, Maritime Industry Authority
Circular No. 2018-07)
Right to Information
193
a.
Snacks or refreshments, or meals during
mealtime;
b.
Free access to first aid/relief medicine, if
necessary;
c.
Free access to communication facilities or
services, if necessary;
d.
Free, decent, and clean accommodation
that must be located near or accessible
from the port; and
e.
Free transportation to and from the port
and place of accommodation, should the
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
2024 GOLDEN NOTES
4.
delay require a waiting time of more than
eight (8) but not exceeding 24 hours.
Extent of Damages in case of Death or Injury of
Passengers
NOTE: The passengers shall be entitled to these
amenities for as long as may be required by the
period for which they have to wait for their next
scheduled voyage.
A common carrier that is in breach of its contract of
carriage for the death of a passenger is liable to pay:
Right to Compensation
Factors to Determine the Reasonableness of
Damages Awarded
a.
The following are the factors to be considered in
determining the reasonableness of the damages
awarded:
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;
1.
Subject to the same limitation of a
maximum of three (3) nights per
passenger. (Sec. V, Maritime Industry
Authority Circular No. 2018-07)
2.
3.
Right to Remain on Board
The carrier, while not an insurer of the safety of his
passengers, should nevertheless be held to answer
for the flaws of his equipment if such flaws were at
all discoverable.
The preponderance of authority is in favor of the
doctrine that a passenger is entitled to recover
damages from a carrier for an injury resulting from
a defect in an appliance purchased from a
manufacturer, whenever it appears that the defect
would have been discovered by the carrier if it had
exercised the degree of care which under the
circumstances was incumbent upon it, with regard
to inspection and application of the necessary tests.
Right to Return
If the delay should exceed ten (10) days, the
passengers who request it shall be entitled to
the return of the passage. (Art. 698, COC)
7.
Right to Damages
The manufacturer is considered in law the agent or
servant of the carrier, as far as regards the work of
constructing the appliance. According to this theory,
the good repute of the manufacturer will not relieve
the carrier from liability. (Necesito v. Paras, G.R. No.
L-10605, 30 June 1958)
If the delay were due exclusively to the captain
or agent, the passengers may furthermore
demand indemnity for losses and damages.
(Art. 698, COC)
UNIVERSITY OF SANTO TOMAS
2024 GOLDEN NOTES
Life expectancy (considering the health of the
victim, and mortality table which is deemed
conclusive) and loss of earning capacity;
Pecuniary loss, loss of support and service; and
Moral and mental sufferings. (Divina, 2021)
Liability for Defects in Equipment and Facilities
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 [COC])
6.
Indemnity for death;
Indemnity for loss of earning capacity; and
Moral damages. (Victory Liner, Inc. v. Rosalito
Gammad, G.R. No. 159636, 25 Nov. 2004)
As an alternative to providing accommodation
or whenever the provision of the same is not
practicable, the operator may offer the
passengers corresponding compensation:
b.
5.
1.
2.
3.
194
COMMERCIAL LAW
Rationale of the Carrier’s Liability
to gratuitous carriage by aircraft performed by an
air transport undertaking. (Art. 1(1), MC)
The rationale is the fact that the passenger has
neither choice nor control over the carrier in the
selection and use of the equipment and appliances
in use by the carrier. Having no privity whatever
with the manufacturer or vendor of the defective
equipment, the passenger has no remedy against
him, while the carrier usually has. (Ibid)
International Carriage
International carriage 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:
No person shall be responsible for a fortuitous event
which could not be foreseen, or which, though
foreseen, was inevitable. (Art. 1174, NCC)
1.
2.
Within the territories of two States Parties; or
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.
B. THE MONTREAL CONVENTION
Carriage between two points within the territory of
a single State Party without an agreed stopping
place within the territory of another State is not
international carriage for the purposes of the
Montreal Convention. (Art. 1(2), MC)
Montreal Convention
On 10 Aug. 2015, the Philippine Senate ratified the
Convention for the Unification of Certain Rules for
International Carriage by Air, Montreal, on 28 May
1999.
Q: How is carriage performed by several
successive air carriers treated under the
Montreal Convention?
Warsaw Convention
A: Carriage to be performed by several successive
carriers is deemed, for the purposes of this
Convention, to be one 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)
The Warsaw Convention for Unification of Certain
Rules Relating to International Carriage by Air (WC)
provides for rules applicable to international
transportation by air. The Philippines is one of the
signatories to the Warsaw Convention. (Santos III v.
Northwest Orient Airlines, G.R. No. 101538, 23 June,
1992)
One of the purposes of the Montreal Convention
(MC) was to harmonize and consolidate the Warsaw
Convention and related instruments. (Preamble,
MC)
Right of Disposition of Cargo
Subject to its liability to carry out all its obligations
under the contract of carriage, the consignor has the
right to dispose of the cargo by:
1. APPLICABILITY
Applicability of the Montreal Convention
The Montreal Convention applies to all
international carriage of persons, baggage or cargo
performed by aircraft for reward. It applies equally
195
a.
Withdrawing it at the airport of departure or
destination; or by
b.
Stopping it in the course of the journey on any
landing; or by
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
2024 GOLDEN NOTES
c.
d.
2. EXTENT OF LIABILITY OF AIR CARRIER
Calling for it to be delivered at the place of
destination or in the course of the journey to
a person other than the consignee originally
designated; or by
Liability under the Montreal Convention
The carrier is liable for damage under the following
instances:
Requiring it to be returned to the airport of
departure. (Art. 12, MC)
a.
b.
The consignor must not exercise this right of
disposition in such a way as to prejudice the carrier
or other consignors and must reimburse any
expenses occasioned by the exercise of this right.
(Ibid.)
a. PASSENGER
Death or Bodily Injury of Passenger
If it is impossible to carry out the instructions of the
consignor, the carrier must so inform the consignor
forthwith. (Ibid.)
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 on
board the aircraft or in the course of any of the
operations of embarking or disembarking. (Art.
17(1), MC)
If the carrier carries out the instructions of the
consignor for the disposition of the cargo without
requiring the production of the part of the air
waybill or the cargo receipt delivered to the latter,
the carrier will be liable, without prejudice to its
right of recovery from the consignor, for any
damage which may be caused thereby to any person
who is lawfully in possession of that part of the air
waybill or the cargo receipt. (Ibid.)
Requisites (DB-A-BED)
1.
2.
3.
The right conferred on the consignor ceases at the
moment when that of the consignee begins in
accordance with the Convention’s provisions on
delivery of the cargo. Nevertheless, if the consignee
declines to accept the cargo, or cannot be
communicated with, the consignor resumes its right
of disposition. (Ibid.)
A passenger Died or sustained Bodily injury;
The same was due to an Accident; and
Which took place on Board the aircraft or in the
course of Embarkation or Disembarkation.
b. BAGGAGE
Destruction, Loss or Damage to Checked and
Unchecked Baggage
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)
Where the supervisor of the consignee signed the
delivery receipt for the goods shipped, the
consignee cannot sue the shipping company for
non-delivery of the goods. (National Trucking and
Forwarding Corp. v. Lorenzo Shipping Corp., G.R. No.
153563, 07 Feb. 2005)
UNIVERSITY OF SANTO TOMAS
2024 GOLDEN NOTES
Death or Injury to Passengers; and
Destruction, loss, damage, or delay in
carrying baggage.
NOTE: The carrier is not liable if and to the extent
that the damage resulted from the inherent defect,
quality or vice of the 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. (Ibid.)
196
COMMERCIAL LAW
If the carrier admits the loss of the checked baggage,
or if the checked baggage has not arrived at the
expiration of 21 days after the date on which it
ought to have arrived, the passenger is entitled to
enforce against the carrier the rights which flow
from the contract of carriage. (Art. 17(3), MC)
transport is deemed to be within the period of
carriage by air. (Art. 18(4), MC)
Damage Occasioned by Delay in the Carriage of
Passengers, Baggage or Cargo
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)
Unless otherwise specified in the Montreal
Convention, the term “baggage” means both
baggage and unchecked baggage. (Art. 17(4), MC)
Damage to Cargo
Damage sustained in the event of the destruction or
loss of, or damage 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)
When Limits Not Applicable
The provisions concerning the limitation of liability
in cases of death or bodily injury of a passenger and
delay in carriage of persons shall not apply if it is
proved that the damage resulted from:
NOTE: The carrier is not liable if and to the extent it
proves that the destruction, or loss of, or damage to,
the cargo resulted from one or more of the
following:
1.
2.
a. Inherent defect, quality or vice of that cargo;
b. Defective packing of that cargo performed by a
person other than the carrier or its servants or
agents;
c. An act of war or an armed conflict; or
d. An act of public authority carried out in
connection with the entry, exit or transit of the
cargo. (Art. 18(2), MC)
3.
4.
An act or omission of the carrier, its servants
or agents;
Done with intent to cause damage or
recklessly;
With knowledge that damage would probably
result; and
In the case of such act or omission of a servant
or agent, it is also proved that such servant or
agent was acting within the scope of its
employment. (Art. 22, MC)
Court Not Prevented from Awarding Costs,
Expenses
For purposes of Art. 18(1) of MC, carriage by air
comprises the period during which the cargo is in
the charge of the carrier. (Art. 18(3), MC)
The limitations of liability shall not prevent the
court from awarding, in accordance with its own
law, in addition, the whole or part of the court costs
and of the other expenses of the litigation incurred
by the plaintiff, including interest.
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
The foregoing provision shall not apply if the
amount of the damages awarded, excluding court
costs and other expenses of the litigation, does not
exceed the sum which the carrier has offered in
writing to the plaintiff within a period of six (6)
months from the date of the occurrence causing the
damage, or before the commencement of the action,
if that is later. (Ibid.)
197
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
2024 GOLDEN NOTES
Venue for Actions under Montreal Convention
wrongful act or omission caused or contributed to
the damage.
An action for damages must be brought, at the
option of the plaintiff, in the territory of one of the
States Parties, either before the court of:
(Do-Pri-C-Des)
1.
2.
3.
4.
When by reason of death or injury of a passenger
compensation is claimed by a person other than the
passenger, the carrier shall likewise be wholly or
partly exonerated from its liability to the extent that
it proves that the damage was caused or contributed
to by the negligence or other wrongful act or
omission of that passenger. (Art. 20, MC)
The Domicile of the carrier;
The carrier’s Principal place of business;
Where the carrier has a place of business
through which the Contract has been made;
Before the court at the place of Destination.
(Art. 33(1), MC)
NOTE: This exoneration provision applies to all
liability provisions in the Montreal Convention.
(Ibid.)
In respect of damage resulting from the death or
injury of a passenger, an action may be brought
before:
1.
One of the aforementioned courts; or
2.
In the territory of a State Party in which at the
time of the accident, the passenger has his or
her principal and permanent residence and to
or from which the carrier operates services for
the carriage of passengers by air. (Art. 33(2),
MC)
Death of Person Liable
In the case of the death of the person liable, an
action for damages lies in accordance with the terms
of this Convention against those legally
representing his or her estate. (Art. 32, MC)
Arbitration
The parties to the contract of carriage for cargo may
stipulate that any dispute relating to the liability of
the carrier under this Convention shall be settled by
arbitration. Such agreement shall be in writing.
(Art. 34(1), MC)
NOTE: The carrier operates services either on
its own aircraft, or on another carrier’s aircraft
pursuant to a commercial agreement, and in
which that carrier conducts its business of
carriage of passengers by air from premises
leased or owned by the carrier itself or by
another carrier with which it has a commercial
agreement. (Ibid.)
3. LIABILITY FOR DELAY
Delay in carriage of persons
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. (Art. 22, MC)
NOTE: Questions of procedure shall be
governed by the law of the court seized of the
case.
Destruction, loss, damage or delay in carriage of
baggage
Exoneration from Liabilities
If the carrier proves that the damage was caused or
contributed to by the negligence or other wrongful
act or omission of the person claiming
compensation, or the person from whom he or she
derives his or her rights, the carrier shall be wholly
or partly exonerated from its liability to the
claimant to the extent that such negligence or
UNIVERSITY OF SANTO TOMAS
2024 GOLDEN NOTES
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 unless the passenger:
1.
198
Has made, at the time when the checked
baggage was handed over to the carrier. A
COMMERCIAL LAW
special declaration of interest in delivery at
destination, and
2.
Has paid a supplementary sum if the case so
requires.
NOTE: In the 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 delivery at destination.
Destruction, loss, damage or delay in carriage of
cargo
In the carriage of cargo, the liability of the carrier is
limited to a sum of 17 Special Drawing Rights per
kilogram, unless the consignor:
1.
Has made, at the time when the package was
handed over to the carrier, a special
declaration of interest in delivery at
destination; and
2.
Has paid a supplementary sum if the case so
requires.
NOTE: 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.
199
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
2024 GOLDEN NOTES
receiver or direct the closure and liquidation of the
financially distressed bank. (Divina, 2021)
V. BANKING LAWS
CONSERVATORSHIP
Conservator (2006 BAR)
A. THE NEW CENTRAL BANK ACT
(R.A. No. 7653, as amended by R.A. No. 11211)
In Conservatorship, the bank still has more assets
than its liabilities, but its assets are not liquid or not
in cash thus it cannot pay its obligation when it falls
due. The bank, not the BSP, pays for fees.
1. BANKS IN DISTRESS
(Secs. 29-30)
Q: When may a bank be placed under
conservatorship?
Illiquidity
This occurs when the bank cannot meet its current
liabilities. In a state of illiquidity, the bank is handled
thru conservatorship. (Divina, 2021)
A: Whenever on the basis of the report of the
appropriate supervising and examining department
(SED), the MB finds that a bank or quasi-bank is in a
state of continuing inability or unwillingness to
maintain a condition of liquidity deemed adequate
to protect its depositors and creditors, the MB may
appoint a conservator to take charge of the assets,
liabilities and management of that institution,
reorganize management, collect all monies and
debts due said institution, and exercise all powers
necessary to restore its viability. The conservator
shall have the power to overrule or revoke the
actions of the previous management and board of
directors of the bank or non-bank financial
intermediary performing quasi-banking functions.
(Sec. 29, NCBA; Divina, 2021)
Liquidity
It is the ability of an asset to be converted into cash.
An entity is liquid when it is able to pay its liabilities
when they fall due. (Divina, 2021)
Insolvency
This occurs when the actual market value of the
assets is insufficient to pay its liabilities, not
considering capital stock and surplus which are not
liabilities for such purpose. An entity is insolvent
when it is unable to meet current and long-term
obligations and has insufficient realizable assets.
This is handled by receivership or closure.
NOTE: The designation of a conservator under Sec.
29 of the NCBA or appointment of a receiver shall be
vested exclusively with the MB. Furthermore, the
designation of a conservator is not a precondition to
the designation of a receiver.
Insolvency also refers to the financial incapacity of
the debtors to pay their liabilities as they fall due in
the ordinary course of business or whenever their
liabilities are greater than their assets. (A.M. No. 1212-11-SC, Financial Rehabilitation Rules of
Procedure)
NOTE: A conservator, once appointed, merely takes
over the management of the bank and assumes
exclusive powers to oversee every aspect of the
bank’s operations and affairs. However, the bank
retains its juridical personality even if placed under
the conservatorship, it is neither replaced nor
subsisted by the conservator. (Central Bank of the
Philippines v. CA, G.R. No. 88353, 08 May 1992)
The duration of conservatorship shall not exceed
one (1) year. (NCBA, Sec. 29)
Q: What are the tools/remedies available to BSP
to handle banks in financial distress?
A; The BSP may either appoint a conservator, or a
UNIVERSITY OF SANTO TOMAS
2024 GOLDEN NOTES
200
COMMERCIAL LAW
Powers of a Conservator (C-A-Re-B-E-AR)
1.
Grounds for Closure of a Bank or a Quasi-bank
(1997 BAR)
Collect all monies and debts due to the said
institution;
To take charge of the Assets, liabilities, and the
management thereof;
Reorganize, the management thereof;
Such other powers as the monetary Board
deems necessary;
Exercise all powers necessary to restore its
viability, with the power to overrule or revoke
the actions of the previous management and
board of directors of the bank or quasi-bank;
and
To bring court actions to Assail or Repudiate
contracts entered into by the bank. (First
Philippine International Bank v. CA, G.R. No.
115849, 24 Jan. 1996)
1.
Cash Flow test - Unable to pay its liabilities as
they become due in the ordinary course of
business.
2.
Balance sheet test – Insufficiency of realizable
assets to meet its liabilities.
3.
Inability to continue business without
involving probable losses to its depositors and
creditors.
4.
Willful violation of a cease-and-desist order
under Sec. 37 that has become final, involving
acts or transactions which amount to fraud or
a dissipation of the assets;
Powers of a Conservator do not extend to the
Revocation of Valid and Perfected Contracts
5.
Notification to the BSP or public
announcement of a unilateral closure;
The powers of a conservator cannot extend to post
facto repudiation of valid and perfected
transactions. Thus, the law merely gives the
conservator power to revoke contracts that are
deemed to be defective void, voidable,
unenforceable, or rescissible. The conservator
merely takes the place of the bank’s Board of
Directors. (First Philippine International Bank v. CA,
G.R. No. 115849, 24 Jan. 1996)
6.
Has been dormant for at least 60 days or in any
manner has suspended the payment of its
deposit/deposit substitute; (Sec. 30, NCBA)
and
7.
Persisting in conducting its business in an
unsafe or unsound manner. (Sec. 56, GBL)
2.
3.
4.
5.
6.
“Close Now-Hear Later” Doctrine
Termination of Conservatorship
1.
Conservatorship is terminated when the
Monetary Board is satisfied that the institution
can operate on its own and the
conservatorship is no longer necessary; or
2.
When 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 on
Receivership and Liquidation shall apply. (Sec.
29, NCBA)
The doctrine is founded on practical and legal
considerations to obviate unwarranted dissipation
of the bank’s assets and as a valid exercise of police
power to protect the depositors, creditors,
stockholders, and the general public. The law does
not contemplate prior notice and hearing before the
bank may be directed to stop operations and placed
under receivership. (Central Bank of the Philippines
v. CA, G.R. No. 76118 30 Mar. 1993)
BSP may order the closure of the bank even without
prior hearing. BSP may rely on the report of either
the conservator, receiver, or the head of the
supervising and examining department (SED). It is
not required to conduct a thorough audit of the bank
before ordering its closure. The "close now, hear
later’’ doctrine justifies BSP in ordering bank
201
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
2024 GOLDEN NOTES
closures even without prior hearing. Thus,
injunction does not lie against BSP in the exercise of
the power and function. A contrary rule may lead to
dissipation of assets and trigger bank run. Judicial
review comes only after action of the MB if the same
was attended with bad faith and grave abuse of
discretion. (BSP v. Valenzuela, G.R. No. 184778, 02
Oct. 2009)
Q: When may the MB of the BSP appoint a
receiver?
A: A receiver is appointed when the MB, upon report
of the head of the SED, finds that a bank or quasibank:
1.
The writ of preliminary injunction cannot prevent
the MB from taking action, by preventing the
submission of the Report of Examinations (ROEs)
and worse, by preventing the MB from acting on
such ROEs. 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. (BSP v. Valenzuela, G.R. No.
184778, 02 Oct. 2009)
Has notified the BSP or publicly announced a
unilateral closure, or has been dormant for at
least 60 days or in any manner has suspended
the payment of its deposit or deposit
substitute liabilities, or is unable to pay its
liabilities as they become due in the ordinary
course of business: Provided, that this shall not
include inability to pay caused by
extraordinary demands induced by financial
panic in the banking community;
2.
NOTE: The probability of bank runs may give rise to
the right to invoke borrowing of emergency loans
and advancements under Sec. 84 of NCBA.
Has insufficient realizable assets, as
determined by the BSP, to meet its liabilities
(Balance Sheet Test);
3.
The Closure and Liquidation of a Bank, which is
considered an Exercise of Police Power may be
the Subject of Judicial Inquiry
Unable to continue business without involving
probable losses to its depositors or creditors;
and
4.
Has willfully violated the cease-and-desist
order under Sec. 37 of the NCBA that has
become final, involving acts or transactions
which amount to fraud or a dissipation of the
assets of the institution. (Sec. 30, NCBA)
The validity of such exercise of police power is
subject to judicial inquiry and could be set aside if it
is either capricious, discriminatory, whimsical,
arbitrary, unjust or a denial or due process and
equal protection clause of the Constitution. (Central
Bank v. CA, G.R. No. L-50031-32, 27 July 1981)
NOTE: In case of banks, the receiver shall be the
Philippine
Deposit
Insurance
Corporation
(PDIC). In case of quasi-banks and non-stock
savings and loan associations, any person of
recognized competence in banking, credit, or
finance may be designated by the BSP as receiver.
(Sec. 30, NCBA)
RECEIVERSHIP
Receiver (2006 BAR)
A receiver is generally appointed if the bank is
insolvent. The receiver immediately gathers and
takes charge of all the assets and liabilities of the
institution, administer the same for the benefit of its
creditors, and exercise the general powers of the
receiver under the Rules of Court. (Divina, 2021)
UNIVERSITY OF SANTO TOMAS
2024 GOLDEN NOTES
Q: What is the nature of power of the receiver?
A: A receiver only has powers of administration. It
cannot exercise acts of strict ownership. The
properties of the bank may be sold only to pay its
debts. (Divina, 2021)
202
COMMERCIAL LAW
General Powers of a Receiver under the ROC
intermeddling with the property of the bank in any
way. (Villanueva v. CA, G.R. No. 114870, 26 May 1995)
1.
Bring and defend in his or her capacity as a
receiver, actions in his or her own name;
2. Take and keep possession of the property in
controversy;
3. Receive rents;
4. Collect debts due to himself or herself as
receiver or to the fund, property, estate,
person or corporation of which he or she is a
receiver;
5. Compound for and compromise debts
collected;
6. Make transfers;
7. Pay outstanding debts;
8. Divide money and other property that shall
remain among the persons legally entitled to
receive the same;
9. Do such acts respecting the property as the
court may authorize; and
10. Invest funds in his or her hands only by order
of the court upon the written consent of all the
parties. (Sec. 6, Rule 59, ROC, as amended)
The Receiver is not Authorized to Transact
Business in Connection with the Bank’s Assets
and Property
A receiver can only perform acts of administration
and not acts of dominion. The receiver cannot
approve an option to purchase real property. He has
only the authority to administer the same for the
benefit of the creditors. (Abacus Real Estate
Development Center, Inc. v. Manila Banking Corp, G.R.
No. 162270, 06 Apr. 2005)
Moreover, in relation to Sec. 30 of the NCBA, the
receiver cannot exercise acts of strict ownership.
The properties of the bank may be sold to pay its
debts. (Divina, 2021)
NOTE: Granting or approving an "exclusive option
to purchase" is not an act of administration, but an
act of strict ownership, involving the disposition of
property of the bank. Not being an act of
administration, the so-called "approval" by Atty.
Renan Santos amounts to no approval at all, a bank
receiver not being authorized to do so on his own.
(Abacus Real Estate Development Center, Inc. v.
Manila Banking Corp, G.R. No. 162270, 06 Apr. 2005)
Functions of the PDIC as a Receiver
PDIC, as a receiver, shall control, manage, and
administer the affairs of the closed bank. Assets of
the closed bank under receivership shall be deemed
in custodia legis in the hands of the receiver. (Divina,
2021)
Nature of Order of Receivership
The Insolvency of a Bank and the Consequent
Appointment of a Receiver Restrict the Bank's
Capacity to Act, especially in relation to its
Property
While resolutions of the MB forbidding a bank to do
business on account of a condition of insolvency and
appointing a receiver to take charge of the bank’s
assets or determining whether the bank may be
rehabilitated or should be liquidated are by law
“final and executory.” However, they can be set
aside by the court on one specific ground - if the
action is plainly arbitrary and made in bad faith.
Such contention can be asserted as an affirmative
defense or a counterclaim in the proceeding for
assistance in liquidation. (Salud v. Central Bank, G.R.
No. L-17620, 19 Aug. 1986)
It has been said that where upon the insolvency of a
bank, a receiver therefor is appointed, the assets of
the bank pass beyond its control into the possession
and control of the receiver whose duty 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 this respect, the receivership is equivalent to an
injunction to restrain the bank officers from
A bank under receivership can only sue or be sued
through its receiver, the PDIC. Thus, a petition filed
on behalf of a bank under receivership that is
203
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
2024 GOLDEN NOTES
neither filed through nor authorized by the PDIC
must be dismissed for want of jurisdiction.
LIQUIDATION
Liquidation of a Bank
Conservator vs. Receiver (2015 BAR)
Acts of liquidation are those which constitute the
conversion of the assets of the banking institution to
money or the sale, assignment, or disposition of the
same to creditors and other parties for the purpose
of paying debts of such institution. (Banco Filipino v.
Central Bank, G.R. No. 70054, 11 Dec. 1991)
CONSERVATOR
RECEIVER
As to appointment
He is appointed if the
bank is in a continuing
state of lack of
liquidity adequate to
protect the interest of
He
is
generally
the bank’s creditors
appointed of the bank
and
depositors
is insolvent
(meaning, its assets
are
more
than
liabilities but not in
cash
or
readily
convertible to cash)
As to exercise of power
A
receiver
shall
immediately
gather
and take charge of all
the
assets
and
A conservator takes
liabilities
of
the
charge of the assets,
institution, administer
liabilities
and
the same for the
management of the
benefit of its creditors,
bank in distress
and the exercise of
general powers of the
receiver under the
ROC.
As to conduct of business
When a conservator is When a receiver is
appointed, the bank is appointed, the bank
allowed to do business cannot do business
As to their obligations
A receiver, upon his
A conservator has one
appointment based on
(1)
year
from
any statutory grounds,
appointment
to
must proceed with the
restore the bank’s
liquidation of the
financial viability
closed bank
(Divina, 2021)
Liquidator of a Distressed Bank can Prosecute
and Defend Suits Against the Bank
Prosecution of suits, collection, and the foreclosure
of mortgages against debtors of the bank by the
liquidator are among the usual and ordinary
transactions pertaining to the administration of a
bank. (Banco Filipino v. Central Bank, G.R. No. 70054,
11 Dec. 1991)
A Liquidator may Foreclose Mortgages Due to a
Bank while the Issue of Receivership is Pending
A liquidator can foreclose mortgages for and on
behalf of the bank even if the issue on receivership
and liquidation is still pending. (ibid.)
Q: An intra-corporate case was filed before RTC.
On the other hand, another complaint was filed
before BSP to compel a bank to disclose its
stockholdings invoking the supervisory power
of the latter. Is there forum shopping?
A: NONE. The two proceedings are of different
nature praying for different reliefs. The complaint
filed with the BSP was an invocation of its
supervisory powers over banking operations which
does not amount to a judicial proceeding. (Suan v.
Gonzalez A.C. No. 6377, 12 Mar. 2007)
Commencement of Liquidation Proceedings Bar
the Filing of a Separate Action or Petition to
Assail the Order of Closure
Once liquidation proceedings have been initiated,
the majority stockholders of the bank can no longer
file a separate action or petition to assail the order
of closure. Instead, issues on validity of closure
UNIVERSITY OF SANTO TOMAS
2024 GOLDEN NOTES
204
COMMERCIAL LAW
should be raised as affirmative defenses in the
liquidation proceeding. This is necessary to prevent
multiplicity of suits or conflicting resolutions. (Salud
v. Central Bank of the Philippines, G.R. No. 71630, 19
Aug. 1986)
Rule of Promissory Estoppel
The BSP may not thereafter renege on its
representation and liquidate the bank after majority
stockholders of the bank complied with the
conditions and parted with value to the profit of CB,
which thus acquired additional security for its own
advances, to the detriment of the bank’s
stockholders, depositors and other creditors.
(Ramos v. Central Bank of the Philippines, G.R. No. L29352, 04 Oct. 1971)
Filing of the Claims against the Insolvent Bank
GR: All claims against the insolvent bank should be
filed in the liquidation proceeding. It is not
necessary that a claim be initially disputed in a court
or agency before it is filed with the liquidation court.
(Ong v. CA, G.R. No. 112830, 1 Feb. 1996)
The doctrine of 'promissory estoppel' is by no
means new, although the name has been adopted
only in comparatively recent years. Ac-cording to
that doctrine, an estoppel may arise from the
making of a promise, even though without
consi-deration, if it was intended that the promise
should be relied upon and in fact it was relied upon,
and if a refusal to enforce it would be virtually to
sanction the perpetration of fraud or would result in
other injustice. (ibid.)
XPN: Where it is the bank that files a claim against
another person or legal entity, the claim should be
filed in the regular courts.
Reason: It 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.
A Final and Executory Judgment against an
Insolvent Bank may be Stayed
Bank Deposits as a Rule are NOT Preferred
Credits
After the Monetary Board has declared that a bank
is insolvent and has ordered it to cease operations,
the Board becomes the trustee of its assets for the
equal benefit of all creditors, including depositors.
One cannot obtain an advantage or preference over
another by attachment, execution or otherwise. The
final judgment against the bank should be stayed as
to execute the judgment would unduly deplete the
assets of the banks to the obvious prejudice of other
depositors and creditors. (Lipana v. Development
Bank of Rizal, G.R. No. L-73884, 24 Sept. 1987)
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. PDIC, G.R. No. 169334, 08 Sept.
2006)
Q: MATAH Bank suffered extreme financial
losses for five years since 2009. The BSP,
through the Monetary Board, placed MATAH
Bank under the receivership of PDIC. After two
(2) public sale attempts, PDIC informed BSP that
MATAH Bank can hardly be rehabilitated. BSP
ordered the PDIC to commence the liquidation
of the bank. However, the stockholders
representing the majority stock of MATAH Bank
filed a petition for certiorari before the CA
challenging the order of the Monetary Board to
205
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
2024 GOLDEN NOTES
commence the liquidation proceedings. It
alleged that the Monetary Board must first
conduct
its
own
independent
factual
determination on the bank's viability before
ordering its liquidation. Is their contention
correct?
NOTE: Appeal is not the remedy if it wants to
question the order putting such bank under
conservatorship, receivership, or closure. (Divina,
2021)
Assailing the Order of Closure (Receivership or
Conservatorship)
A: NO. Nothing in Sec. 30 of RA 7653 requires the
BSP, through the MB, to make an independent
determination of whether a bank may still be
rehabilitated or not. Once the receiver determines
that rehabilitation is no longer feasible, the
Monetary Board is simply obligated to notify in
writing the bank's board of directors of the same
and direct the PDIC to proceed with liquidation.
(Apex Bancrights Holdings v. BSP, G.R. No. 214866, 02
Oct. 2017)
The order may be assailed by the stockholders
representing at least majority of the outstanding
capital stock. (Sec. 30, R.A. No. 7653, as amended by
R.A. No. 11211)
Through a petition for certiorari on the ground that
the action taken by the BSP was in excess of
jurisdiction or with such grave abuse of discretion
as to amount to lack or excess of jurisdiction. (Sec.
30, R.A. No. 7653, as amended by R.A. No. 11211)
NOTE: Sec. 30 of NCBA, as amended, no longer refer
to rehabilitation. Moreover, Sec. 12 of R.A. No. 3591
as amended by R.A. No. 10846 provides that banks
closed by the MB shall no longer be rehabilitated.
Q: Upon maturity of the time deposits, the bank
failed to remit. Meanwhile, by reason of punitive
action taken by Central Bank, the bank has been
prevented from performing banking operations.
Is the bank still obligated to pay the time
deposits despite the fact that its operations were
suspended by the Central Bank?
2. REMEDY OF CLOSED BANKS
(Sec. 30, R.A. No. 7653, as amended by
R.A. No. 11211)
Q: What is the remedy available to the bank to
set aside the order of BSP designating a
conservator, appointing a receiver, or directing
the closure and liquidation of the bank?
A: YES. The suspension of operations of a bank
cannot excuse non-compliance with the obligation
to remit the time deposits of depositors that
matured before the bank’s closure. (Overseas Bank
of Manila v. CA, G.R. No. L-45866, 19 Apr. 1989)
A: The remedy available to the bank is to file a
petition for certiorari with the CA on the ground that
the action taken by BSP was in excess of jurisdiction
or with such grave abuse of discretion as to amount
to lack or excess of jurisdiction.
B. SECRECY OF BANK DEPOSITS
(R.A. No. 1405 and R.A. No. 6426, as amended)
It may only be filed by the stockholders of record
representing the majority of the capital stock within
10 days from receipt by the board of directors of the
institution of the order directing receivership,
closure/liquidation or conservatorship. The BODs
of a bank may also question the validity of the
conservator's (or receiver's) fraudulent acts and
abuses and the arbitrary action of the MB but
subject to the same requisites above-mentioned.
(Divina, 2021)
UNIVERSITY OF SANTO TOMAS
2024 GOLDEN NOTES
1. PROHIBITED ACTS
Q: What are the prohibited acts under R.A. No.
1405?
A: It shall be unlawful for any official or employee of
a banking institution to disclose or allow the
examination or inquiry by any person, government
official, bureau, or office, other than those excepted
by law, any information concerning Philippine
206
COMMERCIAL LAW
currency bank deposits of whatever nature and
kind, as well as investment in government
securities. (Divina, 2021)
unlawful for any official or employee of a banking
institution to disclose to any person other than
those mentioned in the said law any information
concerning said deposits. Manosa, as a columnist, is
not one of those persons contemplated under the
law. Furthermore, he merely overheard what
appeared to be a vague remark of the bank teller
therefore is not in a sense an inquiry or a disclosure.
Q: Who are covered by the prohibition?
A: Bank officials and employees. A non-bank official
or employee is not covered by the prohibition.
Disclosure by a bank official or employee of
information about bank deposit in favor of a coemployee in the course of the performance of his
duties is not covered by the prohibition. (Divina,
2021)
b.
Items Covered by the Prohibition Against
Unauthorized Disclosure Under R.A. No. 1405
1.
2.
3.
All Philippine currency bank deposits of
whatever nature with banks, including
investment in bonds issued by the government
of the Philippines, its political subdivisions and
instrumentalities.
A: NO. Gigi cannot oppose the said issuance because
the law provides as an exception from the coverage
of R.A. 1405 that upon order of a competent court in
cases of bribery or dereliction of duty of public
official, the examination of the deposits may be
allowed. (Sec. 2, R.A. No. 1405)
Trust funds and any sum of money invested in
the bank which the bank may use for loans and
similar transactions are now included in the
term “deposits.”
FOREIGN CURRENCY DEPOSITS
Secrecy of Foreign Currency Deposits
Deposits are thus no longer limited to those
governed by the law on loans giving rise to
creditor-debtor relationships.
All foreign currency deposits are absolutely
confidential and cannot be examined, inquired, or
looked into by any person, government official,
bureau or office, whether judicial or administrative
or legislative, or any other private or public entity.
(Sec. 8, R.A. No. 6426)
Q: Manosa, a newspaper columnist, while
making a deposit in a bank, overheard a pretty
bank teller informing a co-employee that Gigi, a
well-known public official, has just a few
hundred pesos in her bank account and that her
check will in all probability bounce. Manosa
wrote this information in his newspaper
column. Thus, Gigi filed a complaint with the City
Fiscal of Manila for unlawfully disclosing
information about her bank account. (1990
BAR)
a.
Supposing that Gigi is charged with
unlawfully acquiring wealth under R.A.
1379 and that the fiscal issued a subpoena
duces tecum for the records of the bank
account of Gigi. Can Gigi validly oppose the
said issuance on the ground that the same
violated the law on secrecy of bank
deposits? Explain your answer.
R.A. No. 6426 is a special law designed especially for
foreign currency deposits in the Philippines. R.A. No.
1405 which covers all bank deposits in the
Philippines is the general law which does not nullify
the special law on foreign currency deposits.
The surety which issued a bond to secure the
obligation of the principal debtor cannot inquire
into the foreign currency deposits of the debtor
even if its purpose is to determine whether or not
the loan proceeds were used for the purpose
specified in the surety agreement. The foreign
currency deposits cannot be examined without the
Will the said suit prosper? Explain your
answer.
A: NO. The suit will not prosper. It is clear as
provided in Sec. 3 of R.A. 1405 that it shall be
207
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
2024 GOLDEN NOTES
written consent of the depositor. The subpoena
issued by the bank should be quashed because
foreign currency deposits are not subject to court
order except for violation of the anti-money
laundering law. (GSIS v. Court of Appeals, G.R. No.
189206, 08 June 2011; Divina, 2014)
Cases When Information on Philippine Currency
Bank Deposits, and Investment in Government
Securities, may be Disclosed, Examined, or
Looked Into Without Violating the Law (2006,
2005, 2004, 2001, 2000, 1998, 1997, 1995,
1994, 1992, 19911, 1990 BAR) (W-I-C-S)
1.
2.
3.
2. EXCEPTIONS FROM COVERAGE
EXCEPTIONS TO SECRECY OF
PHILIPPINE DEPOSITS
Upon Written consent of the depositor;
In cases of Impeachment;
Upon order of Competent court in any of the
following cases :
a.
b.
c.
In case of bribery or dereliction of duty of
public officials;
Where the subject matter of litigation is the
money deposited;
Prosecution for unexplained wealth
(plunder is akin to unexplained wealth);
(PNB v. Gancayco, G.R. No. L-18343, 30 Sept.
1965)
NOTE: In Marquez v. Desierto (G.R. No.
135882, 27 June 2001), the Court ruled that
inspection would only be allowed in the
following instances:
i. There is a case pending before a court
of competent jurisdiction;
ii. The account holder and the bank
official must be informed of the
examination;
iii. The account to be examined must be
clearly identified; and
iv. The examination must be limited to the
account specified.
d.
e.
f.
4.
UNIVERSITY OF SANTO TOMAS
2024 GOLDEN NOTES
208
Prosecution for violation of the
anti-graft and corrupt practices
act;
In case of violation of the antimoney laundering law; and
Garnishment of bank deposits.
The BIR may inquire into the deposit and other
related information to determine the gross
estate of the deceased taxpayer for computation
of estate tax; (Sec. 6(F)(1) of the Tax Code, as
amended)
COMMERCIAL LAW
5.
The BIR may also inquire into bank deposits if
there is an offer of compromise of tax liability
on account of financial incapacity to pay his tax
liability; (Sec. 6(F)(2) of the Tax Code, as
amended) and
6.
Disclosure by the bank to the National
Treasurer of information concerning dormant
deposits under the Unclaimed Balances law;
(Art. 3936, as amended)
7.
PDIC and/or BSP may inquire into or examine
deposit accounts and all information related
thereto in case there is a finding of unsafe and
unsound banking practice; (Sec. 8, R.A. No. 3591,
as amended)
8.
9.
NOTE: The prohibition against examination of or
inquiry into a bank deposit under R.A. No. 1405 does
not preclude its being garnished to insure
satisfaction of a judgment. Indeed there is no real
inquiry in such a case, and if the existence of the
deposit is disclosed the disclosure is purely
incidental to the execution process. 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.
Q: The Bank Secrecy Law (R.A. No. 1405)
prohibits disclosing any information about
deposit records of an individual without court
order, except: (2012 BAR)
BSP may, the course of a periodic or special
examination, check the compliance of a covered
institution with the requirements of AMLA and
its implementing rules and regulations; (Sec. 11,
R.A. No. 9160, as amended) and
a.
In an examination to determine gross
estate of a decedent.
b. In an investigation for violation of
Anti-Graft and Corrupt Practices.
c. In an investigation by the Ombudsman.
d. In an impeachment proceeding.
In case of amendment or repeal of the law.
(Divina, 2023)
A: C. In an investigation by the Ombudsman.
Authorized Disclosures
The Test to Consider in Determining Whether or
Not the Subject Matter of Litigation is the Money
Deposited
Disclosures by authorized and responsible bank
officials are allowed in the following instances:
1.
Reporting of unclaimed balances to the
Treasurer of the Philippines (Secs. 1 & 2, Act No.
3936);
2.
Turn-over to the Commissioner of Internal
Revenue of the amount in bank accounts as may
be sufficient to satisfy the writ of garnishment
issued to collect delinquent taxes (Secs. 205 &
208, R.A. No. 8424); and
3.
Submission of report, and turn-over to, the
court officer or executing sheriff of garnished
amounts pursuant to a writ of garnishment in
satisfaction of a judgment. (Sec. 9(c), Rule 39,
Rules of Court; See China Banking Corporation v.
Ortega, G.R. No. L-34964, 31 Jan. 1973)
The inquiry into bank deposits allowable under R.A.
No. 1405 must be premised on the fact that the
money deposited in the account is itself the subject
of the action. Thus, where the information filed in
court charged respondent with qualified theft, the
subject matter of litigation is the money alleged to
have been stolen by the respondent. Where the
subject matter of the testimonial and documentary
evidence is not at all relevant to the case, the
suppression of such testimony is valid, otherwise, it
constitutes an attempt by the prosecution at an
impermissible inquiry into a bank deposit account,
the privacy and confidentiality of which is protected
by law. (BSB Group, Inc. v. Go, G.R. No. 168644, 16 Feb.
2010)
In Mellon Bank v. Hon. Magsino, et al. (G.R. No, 71479,
18 Oct. 1990), a wire transfer erroneously indicated
209
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
2024 GOLDEN NOTES
$1,000,000 when it was supposed to be for $1,000
only. It was held that Sec. 2 of R.A. No. 1405 allows
the disclosure of bank deposits in cases where the
money deposited is the subject matter of the
litigation. Inasmuch as the civil case is aimed at
recovering the amount converted by the payees for
their own benefit, necessarily, an inquiry into the
whereabouts of the illegally acquired amount
extends to whatever is concealed by being held or
recorded in the name of persons other than the one
responsible for the illegal acquisition. (Divina, 2023)
NOTE: If there is no pending ease yet, but only an
investigation by the Ombudsman, any order for the
examination of the bank account is premature.
Q: GP is a suspected jueteng lord who is rumored
to be enjoying police and military protection.
The envy of many drug lords who had not
escaped the dragnet of the law., GP was
summoned to a hearing of the Committee on
Racketeering and Other Syndicated Crimes of
the House of Representatives, which was
conducting congressional investigation-in aid of
legislation on the involvement of police and
military personnel, and possibly even of local
government officials, in the illegal activities of
suspected gambling and drug lords. Subpoenaed
to attend the investigation were officers of
certain identified banks with a directive to them
to bring the records and documents of bank
deposits of individuals mentioned in the
subpoenas, among them GP. GP and the banks
opposed the production of the bank records of
deposits on the ground that no such inquiry is
allowed under the Law on Secrecy of Bank
Deposits (R.A. No. 1405, as amended). Is the
opposition of GP and the banks valid? Explain.
(2010 BAR)
In Oñate v. Abrogar (G.R. No. 107303, 23 Feb. 1995),
the examination of bank books and records cannot
be justified if the only issue is whether the money
paid and deposited to an account was the
consideration for the sale of treasury bills or
whether it was money intended for placement.
Hence, whether the transaction is considered a sale
or money placement does not make the money the
“subject matter of litigation.” (Divina, 2023)
AMLC need a court order to be able to inquire
into such deposits, funds or investments
AMLC needs to obtain a bank inquiry order from the
Court of Appeals. The application can be done exparte.'x However, AMLC must establish probable
cause that the deposits, funds or investments relate
to unlawful activity under AMLA and the Court
ofAppeals, independently ofAMLC, must make itself
a finding that such probable cause exists before the
bank inquiry order may be issued. (Divina, 2023)
A: YES. The opposition is valid. GP is not a public
official. The investigation does not involve one of
the exceptions to the prohibition against the
disclosure of any information concerning bank
deposits under the Law on Secrecy of Bank
Deposits. The Committee conducting the
investigation is not a competent court nor the
Ombudsman authorized under the law to require
such disclosure.
Inspection by the Ombudsman
In order that the Ombudsman may inspect a bank
deposit: (P-I-L-A-Ho)
1.
2.
3.
4.
EXCEPTIONS TO SECRECY OF
FOREIGN CURRENCY DEPOSITS
There is a case pending before a court of
competent jurisdiction;
The account holder and the bank official must
be informed of the examination;
The account to be examined must be clearly
identified; and
The examination must be limited to the
account specified. (Divina, 2021 citing Marquez
v. Desierto, G.R. No. 135882, 27 June 2001)
UNIVERSITY OF SANTO TOMAS
2024 GOLDEN NOTES
210
1.
Written permission of the depositor;
2.
The AMLC may inquire into or examine bank
deposits or investments, including related
accounts, with any banking institution or nonbank financial institution upon order of a
competent court when it has been established
that there is a probable cause that the deposits
COMMERCIAL LAW
or investments, including related accounts
involved, are related to unlawful activity, as
defined by AMLA or a money laundering offense
under the same law;
3.
the transient committed a wrongdoing (e.g.,
rape of a minor). The law is intended to
encourage foreign currency deposits to beef up
the country’s international reserves. It cannot
be invoked for a purpose contrary to what the
law intended. (Divina, 2023)
The AMLC, either upon its own initiative or at
the request of the Anti-Terrorism Council, is
authorized to investigate:
a.
any property or funds that are in any way
related to financing of terrorism or acts of
terrorism; or
b.
property or funds of any person or persons
in relation to whom there is probable cause
to believe that such person or persons are
committing or attempting or conspiring to
commit, or participating in or facilitating the
financing of terrorism or acts of terrorism as
defined in the law.
Q: Michael withdrew without authority funds of
the partnership in the amounts of P500,000 and
US$50,000 for services he claims rendered for
the benefit of the partnership. He deposited the
P500,000 in his personal peso current account
with Prosperity Bank and the US$50,000 in his
personal foreign currency savings account with
Eastern Bank. The partnership instituted an
action in court against Michael, Prosperity, and
Eastern to compel Michael to return the subject
funds to the partnership and pending litigation
to order both banks to disallow any withdrawal
from his accounts. At the initial hearing of the
case, the court ordered Prosperity to produce
the records of Michael’s peso current account
and Eastern to produce the records of his
foreign currency savings account. Can the court
compel Prosperity and Eastern to disclose the
bank deposits of Michael? Discuss fully. (1995
BAR)
NOTE: For purposes of this section and
notwithstanding the provisions of the “Law
on Secrecy of Bank Deposits”, as amended;
“Foreign Currency Deposit Act of the
Philippines”, as amended; GBL and other
laws, the AMLC is authorized to inquire into
or examine deposits and investments with
any banking institution or non-bank
financial institution and their subsidiaries
and affiliates without a court order. (Divina,
2023)
4.
If the account holder is not the owner of foreign
currency account as when he holds the deposits
in trust for another;
A: YES, with respect to Michael’s peso current
account. Sec. 2 of RA 1405 allows the disclosure of
bank deposits in case where the money deposited is
the subject matter of litigation. However, with
respect to his foreign currency savings account, the
court cannot compel the bank to disclose deposits of
Michael, except upon written permission of the
depositor.
5.
If the person asking for the court relief is a coowner of the account;
When Inquiry into Deposits are Allowed by
virtue of Distinctive Circumstances
6.
If the foreign currency deposit is made by a
transient or a tourist.
A father who sued his daughter for illegally
withdrawing funds from his foreign currency
deposit and transferring to another bank in the
name of her sister, can inquire into the deposit of the
sister, because the money deposited belongs to him.
(China Banking Corp. v. CA, G.R. No. 140687, 18 Dec.
2006)
NOTE: This is not the kind of deposit
encouraged by the law and given incentives and
protection by said laws because such depositor
stays only for a few days in the country and,
therefore, will maintain his deposit in the bank
only for a short time. This is particularly true if
211
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
2024 GOLDEN NOTES
NOTE: This is a pro hac vice ruling by the Supreme
Court in view of the distinctive circumstances of the
case.
and not to benefit a wrongdoer. The application of
Sec. 8 of RA 6426 depends on the extent of its justice.
The garnishment of a foreign currency deposit
should be allowed to prevent injustice and for
equitable grounds, otherwise, it would negate Art.
10 of the NCC, which provides that “in case of doubt
in the interpretation or application of laws, it is
presumed that the lawmaking body intended right
and justice to prevail.” (Salvacion v. Central Bank of
the Philippines, G.R. 94723, 21 Aug. 1997)
Q: A, an individual, secured a loan from XYZ
Company. C, a surety company, issued a bond to
secure the obligation. A has dollar deposits with
ABC Bank. Can C inquire from ABC Bank about
the foreign currency deposits of A to determine
whether or not the loan proceeds were used for
the purpose specified in their surety
agreement?
NOTE: Where the funds deposited in a joint foreign
currency savings account belonged exclusively to
one of the depositors and were held in trust for him
by the other depositor and the other depositor
unilaterally closed the joint account and transferred
the funds to her personal account, the latter cannot
invoke the exemption from court processes under
R.A. No. 6426 because she is not the owner of the
deposit in the account. Consequently, the depositor
who owned the funds can have her enjoined from
making withdrawals from her personal account.
(Van Twest v. Court of Appeals, G.R. No. 106235, 10
Feb. 1994)
A: NO. The surety company which issued the bond
cannot inquire into the foreign currency deposits. It
cannot be examined without the consent of the
depositor except in certain situations like violation
of anti-money laundering law. (GSIS v. CA, G.R. No.
189206, 08 June 2011)
3. GARNISHMENT OF DEPOSITS
Garnishment of a Bank Deposit does not Violate
the Law
The prohibition against examination or inquiry does
not preclude its being garnished for satisfaction of
judgment. The disclosure is purely incidental to the
execution process and it was not the intention of the
legislature to place bank deposits beyond the reach
of the judgment creditor. (PCIB v. CA, G.R. No. 84526,
28 Jan. 1991)
C. GENERAL BANKING LAW
(R.A. No. 8791)
1. NATURE OF BANK FUNDS AND BANK
DEPOSITS
Garnishment of Foreign Currency Deposits
Bank
GR: 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, R.A. No. 6426)
It is an entity engaged in the lending of funds
obtained from the public in the form of deposits. It
has three elements:
1.
2.
XPN: The exemption from garnishment of foreign
currency deposits under R.A. 6426 cannot be
invoked to escape liability for the damages to the
victim. The garnishment of the transient foreigner’s
foreign currency deposit should be allowed to
prevent injustice and for equitable grounds. The law
was enacted to encourage foreign currency deposit
UNIVERSITY OF SANTO TOMAS
2024 GOLDEN NOTES
3.
It is engaged in the lending of funds;
The funds are obtained from the public,
which means, 20 or more lenders; and
The funds are obtained from the public in the
form of deposits. (Divina, 2023)
NOTE: unlike the old law, these activities need not
be performed with habituality. (Divina, 2023)
212
COMMERCIAL LAW
Nature of Bank Funds and Bank Deposits
the necessary withdrawal slips, except for
banks authorized by the Bangko Sentral to
adopt the no passbook withdrawal system
(Manual of Regulations for Banks, Sec. 211)
Bank deposits are governed by the law on loans. A
creditor and debtor relationship is created between
the Bank and its depositors. The fiduciary nature of
a bank-depositor relationship does not convert the
contract between the bank and its depositors from
a loan to trust agreement. Failure by the bank to pay
the depositor is failure to pay a simple loan and not
a breach of trust. (Divina, 2023)
NOTE: Under the rules, to be able to
withdraw from the savings account deposit
under the Philippine foreign currency
deposit system, two requisites must be
presented to petitioner bank by the person
withdrawing an amount: (a) a duly filled-up
withdrawal slip, and (b) the depositor's
passbook. (BPI v. CA, G.R. No. 112392, 29 Feb.
2000)
Deposit Function of Banks
The function of the bank to receive a thing, primarily
money, from depositors with the obligation of safely
keeping it and returning the same.
c.
Negotiable order of withdrawal account
(NOWA) – Interest-bearing deposit accounts
that combine the payable on demand feature
of checks and investment feature of saving
accounts.
d.
Time deposit – an account with fixed term;
payment of which cannot be legally required
within such a specified number of days.
Kinds of Deposits between a Bank and its
Depositors
1. As debtor-creditor
Bank deposits are governed by the law on loans. The
fiduciary nature of the bank-depositor relationship
does not convert the contract between banks and
depositors to a trust agreement. Thus, failure by the
bank to pay the depositor is failure to pay simple
loan, and not a breach of trust. (Consolidated Bank
and Trust Corporation v. Court of Appeals, G.R. No.
138569, 11 Sept. 2003)
3. As trustee-trustor
Trust account – a savings account,
established under a trust agreement
containing funds administered by the bank
for the benefit of the trustor or another
person or persons.
2. Special Kinds of Deposits
a.
b.
Demand deposits – all those liabilities of
banks which are denominated in the
Philippine currency and are subject to
payment in legal tender upon demand by the
presentation of checks; (Sec. 58, NCBA)
4. As agent-principal
Savings deposits – the most common type of
deposit and is usually evidenced by a
passbook.
Types of Deposit Accounts
a.
b.
c.
1.
2.
3.
Banks
are
prohibited
from
issuing/accepting withdrawal slips or any
other similar instruments designed to effect
withdrawals of savings deposits without
requiring the depositors concerned to
present their passbooks and accomplishing
213
Deposit of checks for collection
Deposit for specific purpose
Deposit for safekeeping
Savings;
Current; and
Time.
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
2024 GOLDEN NOTES
Classification of Deposit Accounts
1.
2.
money into the account, each of the named account
holder has an undivided right to the entire balance,
and any of them may deposit and/or withdraw,
partially or wholly, the funds without the need or
consent of the other, during their lifetime.
Nevertheless, as between the account holders, their
right against each other may depend on what they
have agreed upon, and the purpose for which the
account was opened and how it will be operated.
Individual; or
Joint:
a.
“And” account – the signature of both codepositors are required for withdrawals.
b.
“And/or” account – either one of the codepositors may deposit and withdraw from
the account without the knowledge consent
and signature of the other.
In this case, the account opened by Evangeline and
Dominador was a joint “or” account for a specific
purpose of facilitating the transfer of needed funds
for Evangeline’s projects. Dominador may withdraw
therefrom "if" there is a need to meet Evangeline's
financial obligations arising from said projects.
Hence, while Dominador is a co-owner of the subject
account as far as the bank is concerned — and may,
thus, validly deposit and/or withdraw funds
without the consent of his co-depositor, Evangeline
— as between him and Evangeline, his authority to
withdraw, as well as the amount to be withdrawn, is
circumscribed by the purpose for which the subject
account was opened. Nonetheless, the initial
amount deposited by Dominador should be
deducted from the amount to be returned to
Evangeline. (Dominador Apique V. Evangeline
Fahnenstich, G.R. No. 205705, 05 Aug. 2015)
NOTE: Joint accounts may be subject of a
survivorship agreement whereby the co-depositors
agree to permit either of them to withdraw the
whole deposit during their lifetime and transferring
the balance to the survivor upon the death of one of
them. (Vitug v. CA, G.R. No. 82027, 29 Mar. 1990)
Q: Evangeline executed General and Special
Powers of Attorney constituting her brother
Dominador as her attorney-in-fact to purchase
real property for her, and to manage or
supervise her business affairs in the Philippines.
Thereafter, she (Evangeline) and Dominador
opened a joint savings account with Equitable
PCI Bank. However, Dominador withdrew the
amount of P980,000.00 from the account and
deposited the money to his own savings account.
Evangeline then filed a complaint after her
demand for the return of the money withdrawn
from the joint account remained unheeded.
Evangeline claimed to be the sole owner of the
money deposited. Dominador on his part
asserted that he was authorized to withdraw
funds from the subject account to answer for the
expenses of Evangeline's projects, considering:
(a) that it was a joint account, and (b) the
general and special powers of attorney executed
by Evangeline in his favor. Is Evangeline entitled
to the return of the amount of P980,000.00
Dominador withdrew from their joint savings
account?
A: Partly YES. A joint account is one that is held
jointly by two or more natural persons, or by two or
more juridical persons or entities. The common
banking practice is that regardless of who puts the
UNIVERSITY OF SANTO TOMAS
2024 GOLDEN NOTES
214
COMMERCIAL LAW
Banks Deposits v. Deposit Substitutes (2010
BAR)
BANK DEPOSITS
Bank deposits are
funds obtained by a
bank from the public
which are relent by
such bank to its own
borrowers. They are
governed by the law on
loans. They give rise to
creditor-debtor
relationship between
the bank as debtor, and
the
depositors
as
creditors.
trust arising from a depository's failure to return
the subject matter of the deposit. The relationship
being contractual in nature, mandamus is therefore
not an available remedy since mandamus does not
lie to enforce the performance of contractual
obligations. (Lucman v. Alimatar Malawi, G.R. No.
159794, 19 Dec. 2006, citing Guingona, Jr., et al. v. The
City Fiscal of Manila, et al. G.R. No. 60033, 04 Apr.
1984, citing Serrano v. Central Bank of the
Philippines, G.R. No. L-30511, 14 Feb. 1980)
DEPOSIT
SUBSTITUTES
Deposit substitutes are
alternative forms of
obtaining funds from
the public, other than
deposits, through the
issuance,
endorsement,
or
acceptance of debt
instruments for the
own account of the
borrower, for the
purpose of relending
or
purchasing
of
receivables and other
obligations.
Nature of Safety Deposit Box
The contract for the use of a safety deposit box
should be governed by the law on lease.
Sec. 53 of the GBL is clear that with respect to
renting out of safety deposit boxes, the bank does
not perform the service as depositary or as agent.
2. REQUIRED DILIGENCE OF BANKS; LIABILITY
AS DRAWEE BANK
These
instruments
may include, but need
not be limited to,
bankers' acceptances,
promissory
notes,
participations,
certificates
of
assignment and similar
instruments
with
recourse,
and
repurchase
agreements
Nature of Banking Business and Responsibility
of Banks
The banking system is an indispensable institution
in the modern world and plays a vital role in the
economic life of every civilized nation. (Simex
International (Manila) Inc. v. CA, G.R. No. 88013, 19
Mar. 1990 as cited in the case of Land Bank of the
Philippines vs. Oñate, G.R. No. 192371, 15 Jan. 2014)
(Divina, 2023)
In every case, the depositor expects the bank to
treat his account with the utmost fidelity, whether
such account consists of only a few hundred pesos
or of millions. The bank must record every single
transaction accurately, down to the last centavo and
as promptly as possible. This has to be done if the
account is to reflect at any given time the amount of
money the depositor can dispose of as he sees fit,
confident that the bank will deliver it as and to
whomever he directs. (Ibid.)
Mandamus will not lie in the Enforcement of
Obligations concerning Deposit
Bank deposits are in the nature of irregular
deposits. They are really loans because they earn
interest. All kinds of bank deposits, whether fixed,
savings, or current are to be treated as loans and are
to be covered by the law on loans. (Art. 1980, NCC;
Gullas v. PNB, G.R. No. L- 43191, 13 Nov. 1935)
As a business affected with public interest and
because of the nature of its functions, the bank is
under obligations to treat the accounts of its
depositors with meticulous care, always having in
Current and savings deposits are loans to a bank
because it can use the same. Failure of the
respondent Bank to honor the time deposit is failure
to pay its obligation as a debtor and not a breach of
215
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
2024 GOLDEN NOTES
mind the fiduciary nature of their relationship.
(Ibid.)
for the re-credit of the amount withdrawn to her
account which was not complied with by PS
Bank.
Degree of Diligence Required of Banks in
Handling Deposits
PS Bank claimed that the checks were validly
encashed since Sakata authorized her mother to
request and receive two additional checkbooks
bearing the serial numbers appearing on the
checks. Also, even assuming that there was
forgery, the doctrine of shared responsibility
should apply since Sakata was also negligent in
handling her accounts since she failed to inquire
about its status. Is PS Bank correct?
The GBL of 2000 requires banks the highest
standards of integrity and performance. The
banking business is impressed with public interest.
Of paramount importance is the trust and
confidence of the public in general in the banking
industry. Consequently, the diligence required of
banks is more than that of a Roman pater familias or
a good father of a family. The highest degree of
diligence is expected. (PCI Bank v. Balmaceda, G.R.
No. 158143, 21 Sept. 2011)
A: NO. Banking institutions are imbued with public
interest, and the trust and confidence of the public
to them are of paramount importance. As such, they
are expected to exercise the highest degree of
diligence, and high standards of integrity and
performance. By the nature of its functions, a bank
is under obligation to treat the accounts of its
depositors with meticulous care, always having in
mind the fiduciary nature of their relationship.
Thus, the prime duty of a bank is to ascertain the
genuineness of the signature of the drawer or the
depositor on the check being encashed, with
reasonable business prudence.
The high standards are also necessary to ensure
public confidence in the banking system, for,
according to Philippine National Bank v. Pike, the
stability of banks largely depends on the confidence
of the people in the honesty and efficiency of banks.
(Philippine National Bank v. Sps. Tajonera, G.R. No.
195889, 24 Sept. 2014; Comsavings Bank v. Sps.
Capistrano, G.R No. 170942, 28 Aug. 2013)
But the same degree of diligence is not expected to
be exerted by banks in commercial transactions that
do not involve their fiduciary relationship with
depositors, such as sale and issuance of demand
draft or in acting as advising bank in a latter credit.
(Gregorio Reyes v. Court of Appeals, G.R. No. 118492,
15 Aug. 2001)
A bank is bound to know the signatures of its
customers; and if it pays a forged check, it must be
considered as making the payment out of its own
funds, and cannot ordinarily charge the amount so
paid to the account of the depositor whose name
was forged. Being negligent in failing to detect the
forgery, the bank bears the loss. Even assuming that
her mother indeed presented the questioned checks
while the respondent was in Japan, she cannot be
held negligent in entrusting the same to her mother.
(Philippine Savings Bank v. Maria Cecilia Sakata, G.R.
No. 229450, 17 June 2020)
Q: Maria Sakata opened a Savings and Current
account with PS Bank in 2002. A year after, she
left for Japan to work and came home in 2006.
When she updated her accounts, she found that
instead of P1,000,000, she only had a remaining
balance of P391 in her Savings account and that
there were deposit and withdrawal entries in
her passbook from 2003 to 2005. Sakata talked
to the manager of PS Bank who instructed her to
write a letter of request for her current account
statements. Afterwards, she found out that there
were 25 checks debited from her account which
she claimed she did not issue nor signed. Also,
she stated that the serial numbers of the checks
were never in her possession. Thus, she asked
UNIVERSITY OF SANTO TOMAS
2024 GOLDEN NOTES
Degree of Diligence Required of Banks with its
other Dealings
The diligence more than that of a Roman pater
familias only applies in cases where banks act under
their fiduciary capacity, that is, as depositary of the
deposits of their depositors. The same degree of
diligence is not expected to be exerted by banks in
216
COMMERCIAL LAW
commercial transactions. (Reyes v. CA, G.R. No.
118492. 15 Aug. 2001)
extending loans secured by real estate mortgage,
banks are also expected to exercise the highest
degree of diligence. This is especially true when
investigating real properties offered as security,
since they are aware that such property may be
passed on to an innocent purchaser in the event of
foreclosure.
Q: Poole-Blunden came across an advertisement
placed by Union Bank in the Manila Bulletin. The
ad was for the public auction of certain
properties. One of these properties was a
condominium unit. The Unit was advertised to
have an area of 95 square meters. Thinking that
it was sufficient and spacious enough for his
residential needs, Poole-Blunden decided to
register for the sale and bid on the unit. PooleBlunden placed his bid and won the unit for
₱2,650,000.00. In late 2003, Poole-Blunden
decided to construct two (2) additional
bedrooms in the Unit. Upon examining it, he
noticed apparent problems in its dimensions. He
took rough measurements of the Unit, which
indicated that its floor area was just about 70
square meters, not 95 square meters, as
advertised by UnionBank. Did respondent Union
Bank of the Philippines committ such a degree
of fraud as would entitle petitioner Joseph Harry
Walter Poole-Blunden to the voiding of the
Contract to Sell the condominium unit?
Indeed, the ascertainment of the status or condition
of a property offered to it as security for a loan must
be a standard and indispensable part of a bank's
operations. Whether it was unaware of the unit's
actual interior area; or, knew of it, but wrongly
thought that its area should include common spaces,
respondent's predicament demonstrates how it
failed to exercise utmost diligence in investigating
the Unit offered as security before accepting it. This
negligence is so inexcusable; it is tantamount to bad
faith. (Poole-Blunden v. Union Bank, G.R. No. 205838,
29 Nov, 2017)
3. PROHIBITED TRANSACTIONS BY BANK
DIRECTORS AND OFFICERS
No director, officer, employee, or agent of any bank
shall:
A: YES. Banks are required to observe a high degree
of diligence in their affairs. This encompasses their
dealings concerning properties offered as security
for loans. A bank that wrongly advertises the area of
a property acquired through foreclosure because it
failed to dutifully ascertain the property's
specifications is grossly negligent as to practically
be in bad faith in offering that property to
prospective buyers. Any sale made on this account
is voidable for causal fraud. In actions to void such
sales, banks cannot hide under the defense that a
sale was made on an as-is-where-is basis. As-iswhere-is stipulations can only encompass physical
features that are readily perceptible by an ordinary
person possessing no specialized skills.
The high degree of diligence required of banks
equally holds true in their dealing with mortgaged
real properties, and subsequently acquired through
foreclosure, such as the Unit purchased by
petitioner. In the same way that banks are
presumed to be familiar with the rules on land
registration, given that they are in the business of
217
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;
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
2024 GOLDEN NOTES
d.
e.
Overvalue or aid in overvaluing any security
for the purpose of influencing in any way the
actions of the bank or any bank; or
D. ANTI-MONEY LAUNDERING ACT
(R.A. No. 9160, as amended by R.A. Nos. 9194,
10167, 10365,10927, and 11521)
Outsource inherent banking functions. (Sec.
55, R.A. No. 8791)
1. POLICY
(Sec. 2)
Restrictions on Bank Exposure to Directors,
Officers, Stockholders, and Their Related
Interest (DOSRI)
Policy of AMLA
DOSRI transactions are subject to the following
rules/restrictions:
1.
Approval requirement - the transactions must
be approved by at least majority of the entire
board excluding the director concerned;
2.
Reportorial Requirement - The required
approval shall be entered upon the records of
the bank and copy of such entry shall be
submitted to the BSP; and
3.
Ceiling Requirement - Unless the loan is nonrisk, the loan must not exceed the book value of
the paid-up shares of the borrowing DOSRI and
the amount of unencumbered deposits. (Sec. 36,
GBL)
1.
To protect and preserve the integrity and
confidentiality of bank accounts and to ensure
that the Philippines shall not be used as a
money laundering site for the proceeds of any
unlawful activity;
2.
To pursue the State’s foreign policy to extend
cooperation in transnational investigation and
prosecutions of persons involved in money
laundering activities wherever committed as
well as the implementation of targeted financial
sanctions related to the financing of the
proliferation of weapons of mass destruction,
terrorism, and financing of terrorism, pursuant
to the resolutions of the United Nations Security
Council. (as amended by Sec. 1, R.A. No. 11521)
However, if there is no loan component to the
transaction, as when a director, officer or
stockholder buys a property of the bank, only the
first two restrictions shall apply. (Divina, 2023)
2. COVERED INSTITUTIONS AND THEIR
OBLIGATIONS
(Sec. 3,)
Covered
Institutions
(M-I-S-S-M-S-B-C-C-R-O-P)
Q: How many criminal offenses are committed
by the failure to observe the approval, reporting
and ceiling requirements?
Banks, non-banks, quasi-banks, trust entities,
and all other institutions 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 (IC);
i.
218
Persons
1.
A: Three different offenses are committed by those
who fail to observe the board approval, reporting
and ceiling requirements. (Divina, 2023)
UNIVERSITY OF SANTO TOMAS
2024 GOLDEN NOTES
or
Securities dealers, brokers, salesmen,
investment houses and other similar
persons managing securities or rendering
COMMERCIAL LAW
services as investment agent, advisor, or
consultant;
ii.
iii.
Mutual funds, close-end investment
companies, common trust funds, and
other similar persons;
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);
3.
Jewelry dealers in precious Metals, who, as a
business, trade in precious metals, for
transactions in excess of P1 million pesos;
4.
Jewelry dealers in precious Stones, who, as a
business, trade in precious stones, for
transactions in excess of P1 million pesos;
5.
Company service providers which, as a
business, provide any of the following services
to third parties:
i.
Acting as a formation agent of juridical
persons;
ii.
Acting as (or arranging for another
person to act as) a director or corporate
secretary of a company, a partner of a
partnership, or a similar position in
relation to other juridical persons;
iii.
iv.
6.
Persons, including lawyers, accountants, and
other professionals, who provide any of the
following services (Sec. 1, Rule 4, 2018 IRR of
R.A. No. 9160, as amended):
i.
Managing of client money, securities, or
other assets;
ii.
Management of bank,
securities accounts;
iii.
Organization of contributions for the
creation, operation, or management of
companies; and
iv.
Creation, operation or management of
juridical persons or arrangements, and
buying and selling business entities.
savings,
or
NOTE: Notwithstanding the foregoing, the
term ‘covered persons’ shall exclude lawyers
and accountants acting as independent legal
professionals in relation to information
concerning their clients or where disclosure of
information would compromise client
confidences
or
the
attorney-client
relationship: Provided, That these lawyers and
accountants are authorized to practice in the
Philippines and shall continue to be subject to
the provisions of their respective codes of
conduct and/or professional responsibility or
any of its amendments. (Sec. 1, R.A. No. 10365)
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
Acting as (or arranging for another
person to act as) a nominee shareholder
for another person; and
219
7.
Casinos, including internet and ship-based
casinos, with respect to their casino cash
transactions related to the gaming operations;
(Sec. 3(a)(8), R.A. 9160, as amended by R.A. No.
10927)
8.
Real estate developers and brokers; (as
amended by Sec. 2, R.A. No. 11521)
9.
Offshore gaming operators, as well as their
service providers, supervised, accredited, or
regulated by PAGCOR or any government
agency. (as amended by Sec. 2, R.A. No. 11521)
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
2024 GOLDEN NOTES
Q: Are lawyers and accountants considered as
covered persons?
A: YES. Lawyers and accountants are considered as
Covered Persons under the definition under the
AMLA except if they act as an “Independent
Legal/Accounting Professional” in relation to
information concerning their clients or where
disclosure of information would compromise client
confidences or the attorney-client relationship:
Provided, That these lawyers and accountants are
authorized to practice in the Philippines and shall
continue to be subject to the provisions of their
respective codes of conduct and/or professional
responsibility or any of its amendments. (Sec.1, R.A.
No. 10365)
NOTE:
“Independent
Legal/Accounting
Professional” refers to lawyers/accountants
working in a private firm or as a sole practitioner
who, by way of business or occupation, provides
purely legal or accounting services to their clients.
(Sec. 1, Rule 2, 2018 Implementing Rules and
Regulations of R.A. No. 9160, as amended)
2.
Internet-based casinos shall refer to casinos
in which persons participate by the use of
remote communication facilities such as, but
not limited to, internet, telephone, television,
radio or any other kind of electronic or other
technology for facilitating communication; and
3.
Ship-based casino shall refer to casinos, the
operation of which is undertaken on board a
vessel, ship, boat, or any other water-based
craft wholly or partly intended for gambling;
4.
Casino
cash
transaction
refers
to
transactions involving the receipt of cash by a
casino paid by or on behalf of a customer, or
transactions involving the payout of cash by a
casino to a customer or to any person in
his/her behalf; and
5.
Gaming operations refer to the activities of
the casino offering games of chance and any
variations thereof approved by the
appropriate government authorities. (as
amended by Sec. 3, R.A. No. 10927)
Requisites for Exclusion
1.
OBLIGATIONS OF COVERED
INSTITUTIONS/PERSONS
They must be lawyers/accountants acting as
independent legal professionals in relation to
information concerning their clients or where
disclosure or information would compromise
client confidences or the attorney-client
relationship;
2.
Authorized to practice in the Philippines; and
3.
Continue to be subject to the provisions of
their respective codes of conduct and/or
professional responsibility or any of its
amendments. (Sec. 1, R.A. No. 10365)
a.
i.
ii.
iii.
For purposes of covered persons under Sec. 3(a)(8),
the following terms are hereby defined as follows:
1.
Establish and record the true identity
of its clients based on official
documents;
Maintain a system of verifying the true
identity of their clients; and
In case of corporate clients, require a
system of verifying their legal existence
and organizational structure, as well as
the authority and identification of all
persons purporting to act on their
behalf.
NOTE: The provisions of existing laws to the
contrary
notwithstanding,
anonymous
accounts, accounts under fictitious names, and
all other similar accounts shall be absolutely
prohibited. Peso and foreign currency
Casino refers to a business authorized by the
appropriate government agency to engage in
gaming operations;
UNIVERSITY OF SANTO TOMAS
2024 GOLDEN NOTES
Customer Identification - Covered persons
shall:
220
COMMERCIAL LAW
nonchecking numbered accounts shall be
allowed. (Sec.9(a), R.A. No. 9160, as amended)
b.
3. COVERED TRANSACTIONS
(Sec. 3)
Record Keeping - All records of all transactions
of covered persons shall be maintained and
safely stored for 5 years from the date of
transactions.
Covered Transactions (Sec. 3(b), R.A. 9160, as
amended)
A transaction in cash or other equivalent monetary
instrument involving a total amount in excess of
P500,000.00 within one (1) banking day.
XPN: If a case has been filed in court involving
the account, records must be retained and
safely kept beyond the five (5)-year period,
until it is officially confirmed by the AMLC
Secretariat that the case has been resolved,
decided or terminated with finality. (Sec. 3, Rule
20, 2018 IRR of R.A. No. 9160, as amended):
For casinos, a single casino cash transaction
involving an amount in excess of P5,000,000.00 or
its equivalent in any other currency.
For real estate developers and brokers, a single cash
transaction involving an amount in excess of
P7,500,000.00 or its equivalent in any other
currency. (as amended by Sec. 2, R.A. No. 11521)
NOTE: With respect to closed accounts, the
records shall be preserved and safely stored for
at least five (5) years from the dates when they
were closed.
c.
Reporting of
Transactions.
Covered
and
Q: Lionair, Inc. sold helicopters as brand new
when in fact they were already used. Lionair’s
president alleged that Lionair imported the
helicopters from the United States and sold
them to Arroyo, who, in turn, deposited partial
payment to Lionair’s account with the Union
Bank. The Office of the Special Prosecutor (OSP)
presented the Manager of the Union Bank
Branch where the account was maintained to
verify the source of deposits. The manager
suggested that the BSP or the AMLC may have
reports on the transaction. Thus, the
Sandiganbayan, upon the OSP’s request, issued a
subpoena duces tecum and ad testificandum
directing the Secretariat of the AMLC, to testify
and to produce Lionair’s bank records. The
AMLC moved to quash the subpoena, arguing
that whatever information it has on Lionair’s
bank account is confidential under R.A. No.
9160. AMLC argues that the prohibition under
R.A. No. 9160 extends to it. It claims that as a
covered institution, it cannot be forced to
disclose such prohibited information. Is the
AMLC’s argument tenable?
Suspicious
GR: Covered persons shall report to the AMLC
all covered transactions and suspicious
transactions within five (5) working days from
occurrence thereof.
XPN: a) The AMLC prescribes a different period
not exceeding 15 working days.
b) Lawyers and accountants acting as
independent legal professionals are not
required to report covered and suspicious
transactions if the relevant information was
obtained in circumstances where they are
subject to professional secrecy or legal
professional privilege. (Sec.7, R.A. No. 10365)
NOTE: Should a transaction be determined to
be both a covered transaction and a suspicious
transaction, the covered person shall be
required to report the same as a suspicious
transaction. (Sec. 9, R.A. No. 9160, as amended by
Sec. 7, R.A. No. 10365)
A: NO. According to the wording of R.A. No. 9160,
the AMLC “is not one of the covered institutions
prohibited from disclosing information on covered
and suspicious transactions,” and that the rationale
for the prohibition does not extend to the AMLC.
221
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
2024 GOLDEN NOTES
Unlike covered institutions, the AMLC is mandated
to investigate and file a case against violators based
on the information it obtains. Furthermore, the
prohibition and confidentiality cannot apply to the
AMLC; otherwise, it would contravene its direct
mandate under Sec. 7 of R.A. No. 9160. (Republic of
the Philippines v. Sandiganbayan, G.R. Nos. 23272427, 15 Feb. 2021)
reporting results in any criminal prosecution under
the AMLA or any other Philippine law. (Sec. 9(c), R.A.
No. 9160, as amended; Rule 9.3.e, IRR of R.A. No.
9160)
When reporting covered or suspicious transactions
to the AMLC, covered persons and their officers and
employees shall not be deemed to have violated:
1.
4. SUSPICIOUS TRANSACTIONS
(Sec. 3)
2.
Suspicious transactions are transactions with
covered persons, regardless of the amounts
involved, where any of the following circumstances
exist:
1.
2.
3.
4.
5.
6.
7.
3.
4.
There is no underlying legal or trade
obligation, purpose or economic justification;
The client is not properly identified;
The amount involved is not commensurate
with the business or financial capacity of the
client;
Taking into account all known circumstances,
it may be perceived that the client’s
transaction is structured in order to avoid
being the subject of reporting requirements
under the Act;
Any circumstance relating to the transaction
which is observed to deviate from the profile of
the client and/or the client’s past transactions
with the covered person;
The transaction is in any way related to an
unlawful activity or offense under the Act that
is about to be, is being or has been committed;
or
Any transaction that is similar or analogous to
any of the foregoing. (Sec. 3(b.l), R.A. No. 9160,
as amended by R.A. No. 11521)
6. MONEY LAUNDERING
a. HOW COMMITTED
(Sec. 4)
Money laundering is a crime whereby the proceeds
of an unlawful activity are transacted thereby
making them appear to have originated from
legitimate sources. (Divina, 2023)
Money laundering is committed by any person who,
knowing that any monetary instrument or property
represents, involves, or relates to the proceeds of
any unlawful activity:
a) Transacts
property;
said
monetary
instrument
or
b) Converts, transfers, disposes of, moves,
acquires, possesses, or uses said monetary
instrument or property;
c) Conceals or disguises the true nature, source,
location, disposition, movement, or ownership
of or rights with respect to said monetary
instrument or property;
5. SAFE HARBOR PROVISION
(Sec. 9)
No administrative, criminal, or civil proceedings
shall lie against any person for having made a
covered transaction report (CTR) or a suspicious
transaction report (STR) in the regular performance
of his duties and in good faith, whether or not such
UNIVERSITY OF SANTO TOMAS
2024 GOLDEN NOTES
The Law on Secrecy of Bank Deposits or R.A.
No. 1405, as amended;
Foreign Currency Deposit Act of the
Philippines or R.A. No. 6426, as amended;
General Banking Law of 2000 or R.A. No. 8791;
and
Other similar laws. (Sec. 9(c), R.A. No. 9160, as
amended by Sec. 6, R.A. No. 9194)
d) Attempts or conspires to commit money
laundering offenses referred to in paragraphs
(a), (b) or (c);
222
COMMERCIAL LAW
e) Aids, abets, assists in or counsels the
commission of the money laundering offenses
referred to in paragraphs (a), (b) or (c) above;
and
f)
Performs or fails to perform any act as a result
of which he facilitates the offense of money
laundering referred to in paragraphs (a), (b) or
(c) above.
Money laundering is also committed by any covered
person who, knowing that a covered or suspicious
transaction is required under this Act to be reported
to the AMLC, fails to do so. (Sec. 4, R.A. No. 9160, as
amended by Sec. 4, R.A. No. 10365)
7.
Piracy on the high seas under the RPC, as
amended and P.D. No. 532;
8.
Qualified theft under Art. 310 of the RPC, as
amended;
9.
Swindling under Art. 315 and Other Forms of
Swindling under Art. 316 of the RPC, as
amended;
10. Smuggling under R.A. Nos. 455 and 1937;
11. Violations of R.A. No. 8792, otherwise known as
the Electronic Commerce Act of 2000;
12. Hijacking and other violations under R.A. No.
6235; destructive arson and murder, as defined
under the RPC, as amended;
b. PREDICATE CRIMES
(Sec. 3)
Unlawful Activities or Predicated Crimes (Sec.
3(i), R.A. 9160, as amended by R.A. No.10365 and
R.A. No. 11521)
13. Terrorism and conspiracy to commit terrorism
as defined and penalized under Secs. 3 and 4 of
R.A. No. 9372; (as amended by Sec. 2, R.A. No.
10365)
Unlawful activity refers to any act or omission or
series or combination thereof involving or having
relation to the following:
14. Financing of terrorism under Sec. 4 and offenses
punishable under Secs. 5, 6, 7, and 8 of R.A. No.
10168, otherwise known as the Terrorism
Financing Prevention and Suppression Act of
2012; (Ibid.)
1.
Kidnapping for ransom under Art. 267 of Act No.
3815, otherwise known as the Revised Penal
Code, as amended;
2.
Secs. 4, 5, 6, 8, 9, 10, 11, 12, 13, 14, 15, and 16 of
R.A. No. 9165, otherwise known as the
Comprehensive Dangerous Drugs Act of 2002;
15. Bribery under Arts. 210, 211, and 211-A of the
RPC, as amended, and Corruption of Public
Officers under Art. 212 of the RPC, as amended;
(Ibid.)
3.
Sec. 3(B), (C), (E), (G), (H), and (I) of R.A. No.
3019, as amended, otherwise known as the
Anti-Graft and Corrupt Practices Act;
16. Frauds and Illegal Exactions and Transactions
under Arts. 213, 214, 215, and 216 of the RPC,
as amended; (Ibid.)
4.
Plunder under R.A. No. 7080, as amended;
5.
Robbery and extortion under Arts. 294, 295,
296, 299, 300, 301, and 302 of the RPC, as
amended;
17. Malversation of Public Funds and Property
under Arts. 217 and 222 of the RPC, as
amended; (Ibid.)
6.
18. Forgeries and Counterfeiting under Arts. 163,
166, 167, 168, 169, and 176 of the RPC, as
amended; (Ibid.)
Jueteng and Masiao punished as illegal
gambling under P.D. No. 1602;
223
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
2024 GOLDEN NOTES
19. Violations of Secs. 4 to 6 of R.A. No. 9208,
otherwise known as the Anti-Trafficking in
Persons Act of 2003; (Ibid.)
30. Violation of Sec. 4 of R.A. No. 9995, otherwise
known as the Anti-Photo and Video Voyeurism
Act of 2009; (Ibid.)
20. Violations of Secs. 78 to 79 of Chapter IV, of P.D.
No. 705, otherwise known as the Revised
Forestry Code of the Philippines, as amended;
(Ibid.)
31. Violation of Sec. 4 of R.A. No. 9775, otherwise
known as the Anti-Child Pornography Act of
2009; (Ibid.)
32. Violations of Secs. 5, 7, 8, 9, 10(c), (d), and (e),
11, 12, and 14 of R.A. No. 7610, otherwise
known as the Special Protection of Children
Against Abuse, Exploitation and Discrimination;
(Ibid.)
21. Violations of Secs. 86 to 106 of Chapter VI, of
R.A. No. 8550, otherwise known as the
Philippine Fisheries Code of 1998; (Ibid.)
22. Violations of Secs. 101 to 107, and 110 of R.A.
No. 7942, otherwise known as the Philippine
Mining Act of 1995; (Ibid.)
33. Fraudulent practices and other violations under
R.A. No. 8799, otherwise known as the
Securities Regulation Code of 2000; (as
amended by Sec. 2, R.A. No. 11521)
23. Violations of Sec. 27(c), (e), (f), (g), and (i), of
R.A. No. 9147, otherwise known as the Wildlife
Resources Conservation and Protection Act;
(Ibid.)
34. Violation of Sec. 19(a)(3) of R.A. No. 10697,
otherwise known as the ‘Strategic Trade
Management Act’, in relation to the
proliferation of weapons of mass destruction
and its financing pursuant to United Nations
Security Council Resolution Nos. 1718 of 2006
and 2231 of 2015; (Ibid.)
24. Violation of Sec. 7(b) of R.A. No. 9072, otherwise
known as the National Caves and Cave
Resources Management Protection Act; (Ibid.)
25. Violation of R.A. No. 6539, otherwise known as
the Anti-Carnapping Act of 2002, as amended;
(Ibid.)
35. Violations of Sec. 254 of Chapter II, Title X of the
National Internal Revenue Code of 1997, as
amended, where the deficiency basic tax due in
the final assessment is in excess of P25 million
per taxable year, for each tax type covered and
there has been finding of probable cause by the
competent authority: Provided, further, that
there must be a finding of fraud, willful
misrepresentation or malicious intent on the
part of the taxpayer: Provided, finally, that in no
case shall the AMLC institute forfeiture
proceedings to recover monetary instruments,
property or proceeds representing, involving or
relating to a tax crime, if the same has already
been recovered or collected by the BIR in a
separate proceeding; and (Ibid.)
26. Violations of Secs. 1, 3 and 5 of P.D. No. 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; (Ibid.)
27. Violation of P.D. No. 1612, otherwise known as
the Anti-Fencing Law; (Ibid.)
28. Violation of Sec. 6 of R.A. No. 8042, otherwise
known as the Migrant Workers and Overseas
Filipinos Act of 1995, as amended by Republic
Act No. 10022; (Ibid.)
36. Felonies or offenses of a similar nature that are
punishable under the penal laws of other
countries. (Ibid.)
29. Violation of R.A. No. 8293, otherwise known as
the Intellectual Property Code of the
Philippines; (Ibid.)
UNIVERSITY OF SANTO TOMAS
2024 GOLDEN NOTES
224
COMMERCIAL LAW
Limitations on Examination
7. AUTHORITY TO INQUIRE; FREEZING AND
FORFEITURE
(Secs. 10-12)
The authority to inquire into or examine the main
account and the related accounts shall comply with
the requirements of Sec. 2 and 3, Art. III of the 1987
Constitution. (Sec. 2, R.A. No. 10167)
Authority to Inquire into Bank Deposits
The AMLC may inquire into or examine any
particular deposit or investment, including related
accounts, with any banking institution or non-bank
financial institution provided:
1.
Similarities of a Freeze Order under Sec. 10 and
a Bank Inquiry Order under Sec. 11
The freeze order under Sec. 10 and the bank inquiry
order under Sec. 11 are similar in that they are
extraordinary provisional reliefs which the AMLC
may avail of to effectively combat and prosecute
money laundering offenses. (Republic v. Eugenio,
G.R. No. 174629, 15 Feb. 2008)
It is upon order of any competent court;
NOTE: Competent court under Sec. 11 of R.A.
9160, as amended, refers to the Court of
Appeals (A.M. No. 21-03-05-CA)
2.
Based on an ex parte application; and
3.
In cases of violations of this Act, when it has
been established that there is probable cause
that the deposits or investments, including
related accounts involved, are related to an
unlawful activity or a money laundering
offense.
Cases where no Court Order shall be required in
order for the AMLC to Inquire into Deposit,
Investment, or Related Accounts
No need of court order in cases of activities
involving (KD-HAM-STF):
1.
2.
3.
4.
5.
6.
NOTE: The inquiry conducted by the AMLC is
not violative of The Law on Secrecy of Bank
Deposits or R.A. No. 1405, as amended; Foreign
Currency Deposit Act or R.A. No. 6426, as
amended; General Banking Law or R.A. No.
8791; and other similar laws. (Sec. 2, R.A. No.
10167)
7.
The Court of Appeals shall act on the application to
inquire into or examine any deposit or investment
with any banking institution or non-bank financial
institution within 24 hours from filing of the
application. (Ibid.)
8.
Kidnapping;
Violation of Dangerous Drugs Act;
Hijacking;
Arson;
Murder;
Felonies or offenses of a nature Similar to
those mentioned in Sec. (i)(1), (2), and (12),
which are punishable under the penal laws of
other countries;
Terrorism and conspiracy to commit
terrorism; and (as amended by Sec. 2, R.A. No.
10167)
Financing of terrorism. (Sec. 11, R.A. No.
10168)
NOTE: In the above mentioned circumstances, the
AMLC shall issue an ex parte order authorizing its
Secretariat to inquire into or examine any particular
deposit or investment account, including related
accounts, with any banking institution or non-bank
financial institution and their subsidiaries and
affiliates when it has been established that probable
cause exists that the deposits or investments
involved, including related accounts, are in any way
related to any of the above-mentioned activities.
Related Accounts
Refers to accounts, the 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). (Sec. 2, R.A. No. 10167)
225
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
2024 GOLDEN NOTES
(Sec. 2, Rule 11, 2018 Implementing Rules and
Regulations of R.A. No. 9160, as amended)
accounts of Congressman Abner. It is the Court of
Appeals which has the power to issue a freeze order
over the accounts upon petition of the Anti-Money
Laundering Council. (Republic v. Cabrini Green Ross,
G.R. No. 154522, 05 May 2006)
Q: From his first term in 2007, Congressman
Abner has been endorsing his pork barrel
allocations to Twin Rivers in exchange for a
commission of 40% of the face value of the
allocation. Twin Rivers is a non-governmental
organization whose supporting papers, after
audit, were found by the Commission on Audit to
be fictitious. Other than to prepare and submit
falsified papers to support the encashment of
the pork barrel checks, Twin Rivers does not
appear to have done anything on the endorsed
projects and Congressman Abner likewise does
not appear to have bothered to monitor the
progress of the projects he endorsed. The
congressman
converted
most
of
the
commissions he generated into US dollars and
deposited these in a foreign currency account
with Banco de Plata (BDP). Based on amply
supported tips given by a congressman from
another political party, the Anti-Money
Laundering Council sent BDP an order:
Q: Prosperous Bank is a domestic bank with
head office in Makati. It handles the banking
requirements of thousands of clients. The AMLC
initiated a discreet investigation of the financial
transactions of Lorenzo, a suspected drug
trafficker based in Naga City. The intelligence
group of the AMLC, in coordination with the
counterpart group from the PDEA and the NBI,
gathered ample evidence establishing Lorenzo's
unlawful drug activities. The AMLC had
probable cause that his deposits and
investments in various banks, including
Prosperous Bank, were related to money
laundering. Accordingly, the AMLC now
transmits to Prosperous Bank a formal demand
to allow its agents to examine the banking
transactions of Lorenzo, but Prosperous Bank
refuses the demand. Is Prosperous Bank's
refusal justified? Explain your answer. (2017
BAR)
(1) to confirm Cong. Abner's deposits
with the bank and to provide details of
these deposits; and
A: NO. While, as a general rule, the AMLC may
inquire into bank deposits only upon order of any
competent court, there is no need for such court
order in cases of kidnapping, hijacking, violation of
the Dangerous Drugs Act, arson, and murder. Given
that there is probable cause that Lorenzo is engaged
in unlawful activities as a drug trafficker, the AMLC
is authorized to inquire into his bank deposits with
Prosperous Bank.
(2) to hold all withdrawals and other
transactions
involving
the
congressman's bank accounts.
As counsel for BDP, would you advise the bank
to comply with the order? (2013 BAR)
A: NO. I shall advise Banco de Plata not to comply
with the order of the AMLC. It cannot inquire into
the deposits of Congressman Abner, regardless of
currency, without a bank inquiry order from a
competent court, because crimes involved are not
kidnapping for ransom, violations of the
Comprehensive Dangerous Drugs Act, hijacking and
other violations of R.A. No. 6235, destructive arson,
murder, and terrorism and conspiracy to commit
terrorism.
Q: Rudy is jobless but is reputed to be a jueteng
operator. He has never been charged or
convicted of any crime. He maintains several
bank accounts and has purchased 5 houses and
lots for his children from the Luansing Realty I
Inc. Since he does not have any visible job, the
company reported his purchases to the AntiMoney Laundering Council (AMLC). Thereafter,
AMLC charged him with violation of the AntiMoney Laundering Law. Upon request of the
AMLC, the bank disclosed to it Rudy's bank
deposits
amounting
to
P100
Million.
The AMLC cannot order Banco de Plata to hold all
withdrawals and other transactions involving the
UNIVERSITY OF SANTO TOMAS
2024 GOLDEN NOTES
226
COMMERCIAL LAW
Subsequently, he was charged in court for
violation of the Anti-Money Laundering Law.
(2006 BAR)
a.
A: YES. The properties are validly sold in favor of
Rudy and as such Luansing Realty is under the
obligation to deliver the titles to the buyer. This is
without prejudice to the application of freeze order
by the OSG on behalf of the AMLC.
Can Rudy move to dismiss the case on the
ground that he has no criminal record?
FREEZING AND FORFEITURE
A: NO. The contention of Rudy is not tenable
because under AMLA, "money laundering “is
committed when the proceeds of an "unlawful
activity," like jueteng operations, are made to
appear as having originated from legitimate
sources. Money laundering is separate from the
unlawful activity of being a jueteng operator and
requires no previous conviction for the unlawful
activity. (Sec. 3, R.A. No. 9160, as amended)
The AMLC has no authority to freeze deposits
The authority to freeze deposits is lodged with and
based upon the order of the CA. Similarly, the bank
does not have the unilateral right to freeze the
accounts of its clients on mere suspicion that the
depositor does not have a right over them. However,
a bank has the authority to temporarily freeze the
bank account of a deceased depositor under Sec. 97
of the Tax Reform Act of 1997. Sec. 97(2) provides
that, "If a bank has knowledge of the death of a
person, who maintained a bank deposit account
alone, or jointly with another, it shall not allow any
withdrawal from the said deposit account.” (Divina,
2023)
b. To raise funds for his defense, Rudy sold the
houses and lots to a friend. Can Luansing
Realty, Inc. be compelled to transfer to the
buyer ownership of the houses and lots?
A: YES. Rudy is still the owner of the house and lot
in question and as such he may dispose the same as
he pleases. Absent any freeze order filed by the OSG
on behalf of the AMLC, Rudy may dispose said
properties and compel Luansing Realty to transfer
to the buyer ownership of the properties sold.
c.
NOTE: The TRAIN law has amended Sec. 97 of the
Tax Code to allow any withdrawal from the deposit
account of a deceased depositor but will be subject
to a final withholding tax of 6%. For this purpose, all
withdrawal slips shall contain a statement to the
effect that all of the joint depositors are still living at
the time of withdrawal by any one of the joint
depositors and such statement shall be under oath
by the said depositors. (Divina, 2023)
In disclosing Rudy's bank accounts to the
AMLC, did the bank violate any law?
A: YES. Under the Anti-money Laundering Law, as
amended, the AMLC may inquire into bank accounts
upon order of any competent court based in an ex
parte application when it has been established that
said accounts are related to an unlawful activity. In
the case at hand, the AMLC merely requested the
disclosure of said accounts without court order. The
bank therefore violated the secrecy of bank account
of Rudy when it allowed the AMLC to look into said
accounts without court order. (Sec. 11, R.A. No. 9160
as amended by Sec. 2, R.A. No. 10167)
Purpose of a Freeze Order
To give the government the necessary time to
prepare its case and to file the appropriate charges
without having to worry about the possible
dissipation of the assets that are in any way related
to the suspected illegal activity. (Ligot v. Republic,
G.R. No. 176944, 06 Mar. 2013)
Objective of a Freeze Order
d. Supposing the titles of the houses and lots
are in possession of the Luansing Realty Inc.,
is it under obligation to deliver the titles to
Rudy?
The primary objective of a freeze order is to
temporarily preserve monetary instruments or
property that are in any way related to an unlawful
activity or money laundering, by preventing the
227
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
2024 GOLDEN NOTES
owner from utilizing them during the duration of
the freeze order. (Ligot v. Republic, G.R. No. 176944,
06 Mar. 2013)
that the RTC having jurisdiction over the
appropriate anti-money laundering case or civil
forfeiture case may issue on the same account
depending upon the circumstances of the case,
where the CA will remand the case and its records:
When may a Freeze Order be Issued
The Court of Appeals may issue a freeze order which
shall be effective immediately, for a period of 20
days:
a.
b.
Provided, that if there is no case filed against a
person whose account has been frozen within the
period determined by the CA, not exceeding 6
months, the freeze order shall be deemed ipso facto
lifted; Provided further, that this new rule shall not
apply to pending cases in the courts. In any case, the
court should act on the petition to freeze within 24
hours from filing of the petition. If the application is
filed a day before a non-working day, the
computation of the 24-hour period shall exclude the
non-working days.
Upon a verified ex parte petition by the AMLC;
and
After determination that probable cause exists
that any monetary instrument or property is in
any way related to an unlawful activity.
NOTE: No court shall issue a TRO or a writ of
injunction against any freeze order, except the
Supreme Court. (Sec.10, R.A. No. 9160 as amended by
Sec. 4, R.A. No. 10927)
The freeze order or asset preservation order issued
under the law shall be limited only to the amount of
cash or monetary instrument or value of property
that the court finds there is probable cause to be
considered as proceeds of a predicate offense and
the freeze order or asset preservation order shall
not apply to amounts in the same account in excess
of the amount or value ofthe proceeds of the
predicate offense
A freeze order is not dependent on a separate
criminal charge, much less does it depend on a
conviction. (Ret. Lt. Gen. Jacinto Ligot v. Republic of
the Philippines, G.R No. 176944, 06 Mar. 2013)
There are only two requisites for the issuance of a
freeze order: (1) the application ex-parte by the
AMLC, and (2) the determination of probable cause
by the CA. Probable cause refers to the sufficiency of
the relation between an unlawful activity and the
property or monetary instrument which is the focal
point of Sec. 10 of R.A. No. 9160, as amended.
(Yambao v. Republic of the Philippines, G.R. No.
171054, 26 Jan. 2021)
NOTE: If the application is filed a day before a no
working day, the computation of the 24-hour period
shall exclude the nonworking days.
Freeze Order under Section 10 vs. Bank Inquiry
Order under Sec. 11
A freeze order under Sec. 10 on the one hand is
aimed at preserving monetary instruments or
property in any way deemed related to unlawful
activities as defined in Sec. 3(i) of the AMLA. The
owner of such monetary instruments or property
would thus be inhibited from utilizing the same for
the duration of the freeze order.
The freeze order is effective for a period of 20
days
The freeze order shall be effective immediately for a
period of 20 days. Within the 20-day period, the CA
shall conduct a summary hearing, with notice to the
parties, to determine whether or not to modify or
lift the freeze order or extend its effectivity. (Sec. 10,
R.A. No. 9160 as amended by Sec. 4, R.A. No. 10927)
On the other hand, a bank inquiry order under
Section 11 does not necessitate any form of physical
seizure of property of the account holder. What the
bank inquiry order authorizes is the examination of
the particular deposits or investments in banking
institutions or non-bank financial institutions. The
The total period of the freeze order issued by the CA
under this provision shall not exceed 6 months. This
is without prejudice to an asset preservation order
UNIVERSITY OF SANTO TOMAS
2024 GOLDEN NOTES
228
COMMERCIAL LAW
monetary instruments or property deposited with
such banks or financial institutions are not seized in
a physical sense, but are examined on particular
details such as the account holder’s record of
deposits and transactions. (Republic v. Eugenio, G.R.
No. 174629, 15 Feb. 2008)
The silence of the law, however, does not in any way
affect the Court’s own power under the Constitution
to ‘promulgate rules concerning the protection and
enforcement of constitutional rights and procedure
in all courts.’ Pursuant to this power, the Court
issued A.M. No. 05-11-04 SC, limiting the effectivity
of an extended freeze order to six months – to
otherwise leave the grant of extension to the sole
discretion of the CA, which may extend a freeze
order indefinitely or to an unreasonable amount of
time – carries serious implications on an
individual’s substantive right to due process.
(Yambao v. Republic, G.R. No. 171054, 26 Jan. 2021)
NOTE: The Eugenio ruling with regard to the
distinction of a Freeze Order and Bank Inquiry
Order is no longer applicable since the amendment
in R.A. No. 10167 as it explicitly states that the
proceedings in application for bank inquiry is ex
parte.
Q: The CA, upon the finding of probable cause
and through a Resolution dated 5 July 2005,
issued a Freeze Order against the subject
monetary instruments of petitioners Ligot and
Yambao. Thereafter, petitioner filed a Motion to
Lift Freeze Order against the monetary
instruments and properties of Edgardo Yambao.
On 20 Sept. 2005, the CA issued a Resolution
wherein the motion to lift the freeze order was
denied and that the urgent motion for the
extension of effectivity of freeze order was
granted. Meanwhile, A.M. No. 05-11-04-SC or the
Rule of Procedure in Cases of Civil Forfeiture,
Asset Preservation, and Freezing of Monetary
Instrument,
Property,
or
Proceeds
Representing, Involving, or Relating to an
Unlawful Activity or Money Laundering Offense
under R.A. No. 9160, as amended, took effect on
15 Dec. 2005. Asserting the applicability of the
said Rule, petitioner filed an Urgent Motion for
Summary Hearing to Limit the Effectivity of
Freeze Order and/or to Declare the Expiration
of the Freeze Order. On 4 Jan. 2006, the CA
issued the challenged Resolution, denying all
pending motions, including those of petitioner’s.
Limitation of Freeze Order
The freeze order or asset preservation order issued
under this Act shall be limited only to the amount of
cash or monetary instrument or value of property
that the court finds there is probable cause to be
considered as proceeds of a predicate offense, and
the freeze order or asset preservation order shall
not apply to amounts in the same account in excess
of the amount or value of the proceeds of the
predicate offense. (Sec.10, R.A. No. 9160 as amended
by Sec. 4, R.A. No. 10927)
Q: SPCMB was most concerned with the article
published in the Manila Times on 25 February
2015 which read: “The Anti-Money Laundering
Council asked the Court of Appeals to allow the
Council to peek into the bank accounts of the
Beenays, their corporations, and a law office
where a family member was once a partner. Also
the bank accounts of the law office linked to the
family, the SPCMB, where the Vice President's
daughter Abigail was a former partner.
By 8 Mar. 2015, the Manila Times published
another article reporting that the appellate
court had issued a Resolution granting the exparte application of the AMLC to examine the
bank accounts of SPCMB. SPCMB undertook this
petition for certiorari and prohibition on the
following grounds that the Anti-Money
Laundering Act is unconstitutional insofar as it
allows the examination of a bank account
Is the petitioner entitled to due process as
guaranteed by the Constitution and the New
Rules?
A: YES. The Court, in Ligot’s case, clarified that a
freeze order cannot be issued for an indefinite
period. In fact, the continued extension of the freeze
order beyond the six-month period violated Ligot’s
right to due process.
229
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
2024 GOLDEN NOTES
without any notice to the affected party; Does it
violate the following:
body exercising quasi-judicial powers. Hence, Sec.
11 of the AMLA, authorizing a bank inquiry court
order, cannot be said to violate SPCMB's
constitutional right to due process.
(1) right to substantive due process;
A: NO. Sec. 11 of the AMLA providing for ex-parte
application and inquiry by the AMLC into certain
bank deposits and investments does not violate
substantive due process, there being no physical
seizure of property involved at that stage.
(3) right to privacy.
A bank inquiry order under Sec. 11 does not
necessitate any form of physical seizure of property
of the account holder. What the bank inquiry order
authorizes is the examination of the particular
deposits or investments in banking institutions or
non-bank financial institutions. The monetary
instruments or property deposited with such banks
or financial institutions are not seized in a physical
sense but are examined on particular details such as
the account holder's record of deposits and
transactions.
a.
The AMLC is required to establish probable
cause as basis for its ex-parte application for
bank inquiry order;
b.
The CA, independent of the AMLC's
demonstration of probable cause, itself makes
a finding of probable cause that the deposits or
investments are related to an unlawful activity
under Sec. 3(i) or a money laundering offense
under Sec. 4 of the AMLA;
c.
A bank inquiry court order ex-parte for related
accounts is preceded by a bank inquiry court
order ex-parte for the principal account which
court order ex-parte for related accounts is
separately based on probable cause that such
related account is materially linked to the
principal account inquired into; and
d.
The authority to inquire into or examine the
main or principal account and the related
accounts shall comply with the requirements
of Secs. 2 and 3, Art. III, of the Constitution.
A: NO. To ensure adherence to the general state
policy of preserving the absolutely confidential
nature of Philippine bank accounts:
(2) right to procedural due process; or
A: NO. The AMLC functions solely as an
investigative body in the instances mentioned in
Rule 5.b.26. Thereafter, the next step is for the AMLC
to file a Complaint with either the DOJ or the
Ombudsman pursuant to Rule 6b. Even in the case
of Estrada v. Office of the Ombudsman, where the
conflict arose at the preliminary investigation stage
by the Ombudsman, we ruled that the
Ombudsman's denial of Senator Estrada's Request
to be furnished copies of the counter-affidavits of
his co-respondents did not violate Estrada's
constitutional right to due process where the sole
issue is the existence of probable cause for the
purpose of determining whether an information
should be filed and does not prevent Estrada from
requesting a copy of the counter-affidavits of his corespondents during the pre-trial or even during
trial.
The foregoing demonstrates that the inquiry and
examination into the bank account are not
undertaken whimsically and solely based on the
investigative discretion of the AMLC. In particular,
the requirement of demonstration by the AMLC, and
determination by the CA, of probable cause
emphasizes the limits of such governmental action.
(Subido v. CA, G.R. No. 216914, 06 Dec. 2016)
Plainly, the AMLC's investigation of money
laundering offenses and its determination of
possible money laundering offenses, specifically its
inquiry into certain bank accounts allowed by court
order, does not transform it into an investigative
UNIVERSITY OF SANTO TOMAS
2024 GOLDEN NOTES
Penalties for Violation of R.A. No. 1405
1.
2.
230
Imprisonment of not more than five (5) years
Fine of not more than P20,000.00
COMMERCIAL LAW
3.
Both, in the discretion of the court (Sec. 5, R.A.
No. 1405)
Q: R.A. 6832 creating a Commission to conduct a
thorough fact-finding investigation of the failed
Coup d’etat of December 1989, recommended
measures to prevent the occurrence of similar
attempts at a violent seizure of power and for
other purposes, provides that the Commission
may ask the Monetary Board to disclose
information on and/or to grant authority to
examine any bank deposits, trust or investment
funds, or banking transactions in the name of
and/or utilized by a persons, natural or
juridical,
under
investigation
by
the
Commission, in any bank or banking institution
in the Philippines, when the Commission has
reasonable ground to believe that said deposits,
trust or investment funds, or banking
transactions have been used in support or in
furtherance of the objectives of the said coup
d’etat. Does the above provision violate the Law
on Secrecy of Bank Deposits? (1991 BAR)
A: The above provision does not violate R.A. 1405
because the enactment of R.A. 6832 is a valid
exercise of police power. R.A. 1405 is in itself a
statutory enactment which can be validly modified,
amended or repealed by a subsequent law. The
Secrecy of Bank Deposits Act did not amount to a
contract between the depositors and depository
banks within the meaning of the non-impairment
clause of the Constitution. Even if it did, the police
power of the State is superior to the nonimpairment clause.
231
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
2024 GOLDEN NOTES
Property Compendium citing WIPO, 2019, as
cited in Divina, 2023)
VI. INTELLECTUAL PROPERTY CODE OF THE
PHILIPPINES
(R.A. No. 8293)
Q: What are the kinds of intellectual property
rights under the Intellectual Property Code of
the Philippines (IPC)?
Intellectual Property (TULIPS-IO)
A: The following are the kinds of IPRs under the IPC:
Intellectual Property shall include the rights
relating to:
1.
2.
3.
4.
5.
6.
7.
8.
Literary, artistic, and scientific works;
Performances
of
performing
artists,
phonograms, and broadcasts;
Inventions in all fields of human endeavor;
Scientific discoveries;
Industrial designs;
Trademarks, service marks, and commercial
names and designations;
Protection against Unfair competition; and
All Other rights resulting from intellectual
activity in the industrial, scientific, literary or
artistic fields. (Art. 2(viii), Convention
Establishing the World Intellectual Property
Organization, as amended)
1.
Copyright and related rights - Exist over
original and derivative intellectual creations in
the literary and artistic domain protected from
the moment of creation;
2.
Trademark and service marks - Any visible
sign capable of distinguishing the goods
(trademark) or services (service mark) of an
enterprise and shall include a stamped or
marked container of goods;
3.
Geographic indications - Indications which
identify a good as originating from a given
territory, a region or locality where a given
quality, reputation or other characteristic of the
good is essentially attributable to its geographic
indication;
Intellectual Property Rights
Ex. Bordeaux (for wine), Grasse (for perfume)
and Tuscany (for olive oil).
Intellectual property rights (IPR) are rights given to
persons over the creation of their minds. It has two
categories:
a.
Industrial designs - Any composition of line or
colors or any three-dimensional form, whether
or not associated with lines or colors; provided
that such composition or form gives a special
appearance to and can serve as a pattern for an
industrial product or handicraft;
5.
Patents - Any technical solution of a problem
with any field of human activity which is new,
involves an inventive step and is industrially
applicable;
6.
Layout designs (Topography) - 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 three-dimensional disposition prepared
Industrial property which includes
1.
2.
3.
4.
b.
4.
inventions (patents);
trademarks;
industrial design; and
geographic indications of source; and
Copyright and related rights.
Copyright includes literary and artistic works.
Rights related to copyright include those of
performing artists in their performances,
producers of phonograms in their recordings,
and those of broadcasters in their radio and
television programs. (Gepty: Intellectual
UNIVERSITY OF SANTO TOMAS
2024 GOLDEN NOTES
232
COMMERCIAL LAW
for an integrated
manufacture;
7.
8.
circuit
intended
for
NOTE: The right is also not absolute. It is subject to
certain limitations and exceptions as may be
provided by law depending on the kind of
Intellectual Property Rights involved. (Divina, 2023)
Integrated circuit - A product, in its final form
or an intermediate form, in which the elements
are integrally formed in and/or on a piece of
material and which is intended to perform an
electronic function;
Intellectual Property as Property
Protection of undisclosed information Means protection of information lawfully held
from being disclosed to, acquired by, or used by
others without their consent in a manner
contrary to honest commercial practices so long
as such information:
a.
is secret in the sense that it is not, as a body
or in the precise configuration and
assembly of its components, generally
known among or readily 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;
and
c.
has been subject to reasonable steps under
the circumstances, by the person lawfully
in control of the information, to keep it
secret. (Divina, 2023)
1.
Ownership is acquired by occupation and by
intellectual creation.
2.
Ownership and other real rights over property
are acquired and transmitted by law, by
donation, by testate and intestate succession,
and in consequence of certain contracts, by
tradition.
3.
They may also be acquired by means of
prescription. (Art. 712, NCC)
4.
Ownership may be exercised over things or
rights. (Art. 427, NCC)
A. PATENTS
Definition
A patent is an exclusive right granted to an inventor
over an invention or a utility model or industrial
design to sell, use, and make the same for commerce
and industry. (Divina, 2023)
Intellectual Property as a Right
Three-fold Purpose of Patent Law
IPR is statutory in nature. The rights conferred on
Intellectual Property must be provided by law and
can only be enjoyed on the terms specified by
statute. (Divina, 2023)
It is also an incorporeal right which exists separate
and distinct from the material object to which it is
attached. Thus, ownership in one does not
necessarily vest ownership in the other. The
transfer of assignment of the Intellectual Property
will not constitute a conveyance of the thing it
covers, nor would a conveyance of the latter imply
the transfer of the Intellectual Property Right.
(Divina, 2023)
233
1.
To foster and reward invention;
2.
To promote disclosures of inventions to
stimulate further innovation and to permit the
public to practice the invention once the patent
expires; and
3.
To ensure that ideas in the public domain
remain there for the free use of the public.
(Pearl & Dean (Phil.), Inc. v. Shoemart, Inc., G.R.
No. 148222, 15 Aug. 2003)
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
2024 GOLDEN NOTES
Types of Patents
The assignment must be: (W-A-C)
1.
1.
In Writing;
2.
Acknowledged before a notary public or other
officer authorized to administer oath or
perform notarial acts; and
3.
Certified under the hand and official seal of the
notary or such other officer. (Sec. 105, IPC)
2.
3.
Patentable Invention – 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, IPC)
Utility Model – an invention qualifies for
registration as a utility model if it is new and
industrially applicable. (Sec. 109, IPC)
1. PATENTABLE vs. NON-PATENTABLE
INVENTIONS
(Sec. 22)
Industrial Design – any composition of lines or
colors or any three-dimensional form, whether
or not associated with lines or colors, provided
that such composition or form gives a special
appearance to and can serve as pattern for an
industrial product or handicraft and must be
new or ornamental. (Secs. 112 and 113, IPC)
PATENTABLE INVENTIONS
What may be Patented
Any technical solution of a problem in any field of
human activity which is: (N-I-I)
Generally, an industrial design is the
ornamental or aesthetic aspect of a useful
article. (Amador, 2007)
1.
2.
3.
An industrial design is not considered new if it
differs from prior designs only in minor
respects that can be mistaken as such prior
designs by an ordinary observe. (WIPO, 2004)
New;
Involves an Inventive step; and
Is Industrially applicable.
NOTE: It may be, or may relate to, a product or
process or an improvement of any of the foregoing.
(Sec. 21, IPC)
Right to a Patent
Improvement
The right to a patent belongs to the inventor, his
heirs, or assigns. When two (2) or more persons
have jointly made an invention, the right to a patent
shall belong to them jointly. (Sec. 28, IPC)
An enhancement or modification of any of the
foregoing subject to patentability criteria.
For example, an improvement in the tile-making
process is indeed inventive and goes beyond the
exercise of mechanical skill. The applicant has
introduced a new kind of tile for a new purpose. He
has improved the old method of making tiles and
pre-cast articles which were not satisfactory
because of an intolerable number of breakages,
especially if deep engravings are made on the tile.
He has overcome the problem of producing
decorative tiles with deep engraving, but with
sufficient durability. (Aguas v. De Leon, G.R. No. L32160, 30 Jan. 1982)
Assignment of Patent 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, IPC)
UNIVERSITY OF SANTO TOMAS
2024 GOLDEN NOTES
234
COMMERCIAL LAW
Three Elements for Patentability
1.
2.
3.
application during the 12 months preceding the
filing date or priority date of the application shall
not prejudice the applicant on the ground of lack of
novelty if such disclosure was made by the inventor
himself. (Sec. 25, IPC; Divina, 2023)
Novelty or newness;
Inventive Step; and
Industrially Applicable. (Divina, 2023)
Doctrine of Non-Prejudicial Disclosure
NON-PATENTABLE INVENTIONS
Under the doctrine of non-prejudicial disclosure,
the disclosure of information contained in the
application during the 12 months preceding the
filing date or priority date of the application shall
not prejudice the applicant on the ground of lack of
novelty if such disclosure was made by the inventor
himself. (Sec. 25, IPC, as amended; Divina, 2023)
Non-Patentable Inventions
The following are non-patentable inventions:
(Tr-A-P-S-A-D2)
Q: Yosha was able to put together a mechanical
water pump in his garage consisting of suction
systems capable of drawing water from the
earth using less human effort than what was
then required by existing models. The water
pump system provides for a new system which
has the elements of novelty and inventive steps.
Yosha, while preparing to have his invention
registered with the IPO, had several models of
his new system fabricated and sold in his
province.
Is Yosha's invention no longer patentable by
virtue of the fact that he had sold several models
to the public before the formal application for
registration of patent was filed with the IPQ?
(2018 BAR)
A: NO, it is still patentable despite the fact he had
sold several models to the public before the formal
application for registration of the patent was filed
with the IPO. It is true that an invention shall not be
considered new if it forms part of a prior art and that
prior art shall consist of everything which has been
made available to the public anywhere in the world,
before the filing date or the priority date of the
application claiming the invention. This, however,
presupposes that the one who has made available
the patentable invention to the public is a person
other than the applicant for patent.
Under the doctrine of non-prejudicial disclosure,
the disclosure of information contained in the
235
1.
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;
2.
Aesthetic creations;
3.
Plant varieties or animal breeds or essentially
biological process for the production of plants
or animals. This provision shall not apply to
micro-organisms and non-biological and
microbiological processes;
4.
Schemes, rules and methods of performing
mental acts, playing games or doing business,
and programs for computers;
5.
Anything which is contrary to public order or
morality;
6.
In the case of Drugs and medicines, mere
discovery of a new form or new property of a
known substance which does not result in the
enhancement of the efficacy of that substance
or the new use for a known substance, or the
mere use of a known process unless such
known process results in a new product that
employs at least one new reactant; and
7.
Discoveries,
scientific
theories
and
mathematical methods. (Sec. 22, IPC, as
amended)
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
2024 GOLDEN NOTES
Q: Dr. Nobel discovered a new method of
treating Alzheimer’s involving a special method
of diagnosing the disease, treating it with a new
medicine that has been discovered after long
experimentation and field testing, and novel
mental isometric exercises. He comes to you for
advice on how he can have his discoveries
protected. Can he legally protect his new
method of diagnosis, the new medicine, and the
new method of treatment? If no, why? If yes,
how? (2010 BAR)
A: NO. X may not apply for a patent since the
gambling device referred to in the problem is itself
prohibited and against public order. But if the
machine is used in legalized gambling, such device
can be patented. (Divina, 2023)
2. OWNERSHIP OF A PATENT
(Secs. 28-30)
PERSONS ENTITLED TO A PATENT
A: YES, Dr. Nobel can be protected by a patent for
the new medicine as it falls within the scope of Sec.
21 of the IPC. (R.A. No. 8293, as amended). However,
no protection can be legally extended to him for the
method of diagnosis and method of treatment which
are expressly non-patentable. (Sec. 22, IPC)
Patentability of Computer Programs
1.
Inventor, his heirs, or assigns;
2.
Joint invention – jointly by the inventors; (Sec.
28, IPC)
3.
Two or more persons invented separately
and independently of each other – to the
person who filed an application; or
4.
Two (2) or more applications are filed – the
applicant who has the earliest filing date or, the
earliest priority date. (Sec. 29, IPC)
GR: Computer programs are not patentable but are
copyrightable.
XPN: They can be patentable if they are part of a
process. (e.g., business process with a step involving
the use of a computer program)
FIRST-TO-FILE RULE
Q: Supposing Albert Einstein were alive today
and he filed with the Intellectual Property Office
(IPO) an application for patent for his theory of
relativity expressed in the formula E=mc 2. The
IPO disapproved Einstein’s application on the
ground that his theory of relativity is not
patentable. Is the IPO’s action correct? (2006
BAR)
A: YES. The IPO is correct because under the
Intellectual Property Code, discoveries, scientific
theories, and mathematical methods are classified
to be as “non-patentable inventions”. Einstein’s
theory of relativity falls within the category of being
a non-patentable “scientific theory”. (UPLC
Commercial Law Suggested Answers)
If two (2) or more persons have made the
invention separately and independently of each
other, the right to the patent shall belong to the
person who filed an application for such
invention; or
2.
Where two or more applications are filed for the
same invention, to the applicant which has the
earliest filing date. (Sec. 29, IPC)
INVENTIONS CREATED PURSUANT TO A
COMMISSION
The person who commissions the work shall own
the patent, unless otherwise provided in the
contract. (Sec. 30.1, IPC)
Q: X invented a bogus coin detector which can be
used exclusively on self-operating gambling
devices otherwise known as one-armed bandits.
Can X apply for a patent? (1989 BAR)
UNIVERSITY OF SANTO TOMAS
2024 GOLDEN NOTES
1.
236
COMMERCIAL LAW
Inventions Pursuant to Employment
manufacturing, dealing in, using, selling or offering
for sale, or importing any product obtained directly
or indirectly from such process (as the case may be)
in the following circumstances:
In case the employee made the invention in the
course of his employment contract, the patent shall
belong to:
a.
1.
2.
The employee, if the inventive activity is not a
part of his regular duties even if the employee
uses the time, facilities, and materials of the
employer;
The employer, if the inventive activity is the
result of the performance of his regularly
assigned duties, unless there is an agreement,
express or implied, to the contrary. (Sec. 30.2,
IPC)
In case of drugs or medicines, the said limitation
applies 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. This
allows parallel importation for drugs and
medicines.
3. RIGHTS AND LIMITATIONS OF A PATENT
OWNER
(Secs. 71-77)
The right to import the drugs and medicines
shall be available to any government agency or
any private third party; (Sec. 72.1, IPC)
Rights Conferred by a Patent
1.
2.
3.
Using a patented product after it has been put
on the market in the Philippines by the owner
of the product, or with his express consent.
In case of a Product – Right to restrain,
prohibit and prevent any unauthorized person
or entity from making, using, offering for sale,
selling, or importing the product;
In case of Process – Right to restrain prohibit
and prevent any unauthorized person or entity
from manufacturing, dealing in, using, offering
for sale, selling, or importing any product
obtained directly or indirectly from such
process. ; and (Sec. 71.1, IPC)
b.
Where the act is done privately and on a noncommercial scale or for a non-commercial
purpose: Provided that it does not significantly
prejudice the economic interest of the owner of
the patent.; (Sec. 72.2, IPC)
c.
Exclusively for experimental use of the
invention for scientific purposes or educational
purposes; (Sec. 72.3, IPC)
d.
In the case of drugs and medicines, where the
act includes testing, using, making, or selling the
invention including any data related thereto,
solely for purposes reasonably related to the
development and submission of information
and issuance of approvals by government
regulatory agencies required under any law of
the Philippines or of another country that
regulates the manufacture, construction, use or
sale of any product.
Right to assign the patent, to transfer by
succession, and to conclude licensing
contracts. (Sec. 71.2, IPC)
NOTE: The rights conferred by a patent application
take effect after publication in the IPO Gazette. (Sec.
46, IPC)
The data submitted by the original patent
holder may be protected from unfair
commercial use provided in Art. 39.3 of the
TRIPS Agreement; (Sec. 72.4, IPC)
Limitations of Patent Rights
The owner of a patent has no right to prevent third
parties from making, using, offering for sale, selling
or importing a patented product (as the case may
be), or from using the patented process, and from
e.
237
Where the act consists of the preparation for
individual cases, in a pharmacy or by a medical
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
2024 GOLDEN NOTES
f.
professional, of a medicine in accordance with a
medical prescription; and (Sec. 72.5, IPC)
such preparations within the territory where the
patent produces its effects. (Sec. 73.1, IPC)
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, IPC)
To protect the patent owner, however, the prior
user may only transfer or assign the right if it is
transferred or assigned together with his enterprise
or business, or with that part of his enterprise or
business in which is the use or preparation for use
have been made. (Sec. 73.2, IPC)
In other words, the prior user cannot assign the
right to use the patented product or process without
giving up entirely his enterprise. (Salao, 2019)
Q: Yosha was able to put together a mechanical
water pump in his garage consisting of suction
systems capable of drawing water from the
earth using less human effort than what was
then required by existing models. The water
pump system provides for a new system which
has the elements of novelty and inventive steps.
Yosha, while preparing to have his invention
registered with the IPO, had several models of
his new system fabricated and sold in his
province.
If Yosha is able to properly register his patent
with the IPO, can he prevent anyone who has
possession of the earlier models from using
them? (2018 BAR)
Prior use in good faith is generally considered as a
defense against patent infringement. This defense
permits a person to continue their use of an
invention even if that invention is subsequently
patented by another. (Gepty, 2019)
Q: X invented a device which, through the use of
noise, can recharge a cellphone battery. He
applied for and was granted a patent on his
device, effective within the Philippines. As it
turns out, a year before the grant of X's patent, Y,
also an inventor, invented a similar device
which he used in his cellphone business in
Manila. But X files an injunctive suit against Y to
stop him from using the device on the ground of
patent infringement. Will the suit prosper?
(2011 BAR)
A: NO, Yosha can no longer prevent anyone who has
possession of the earlier models from using them
even if Yosha is able to properly register the patent
with the IPO. One of the limitations of patent rights
is the use of the patented product which has been
put on the market in the Philippines by the owner of
the product insofar as such use is performed after
the product has been so put on the said market. (Sec.
72, IPC; Divina, 2023)
A: NO, since Y is a prior user in good faith. (UPLC
Commercial Law Suggested Answers)
USE BY GOVERNMENT
Use by the Government
PRIOR USER
A Government agency or third person authorized by
the Government may exploit the invention even
without agreement of the patent owner where:
(PI-JA-Na-No-D)
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 in which a patent is granted, shall have
the right to continue the use thereof as envisaged in
UNIVERSITY OF SANTO TOMAS
2024 GOLDEN NOTES
a.
238
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;
COMMERCIAL LAW
b.
A Judicial or Administrative body has
determined that the manner of exploitation, by
the owner of the patent or his licensee, is anticompetitive;
4.
The scope and duration of such use shall be
limited to the purpose for which it was
authorized;
5.
Such use shall be non-exclusive;
c.
In the case of drugs and medicines, there is a
National emergency or other circumstance of
extreme urgency requiring the use of the
invention;
6.
The right holder shall be paid adequate
remuneration in the circumstances of each case,
taking into account the economic value of the
authorization; and
d.
In the case of drugs and medicines, there is a
public Non-commercial use of the patent by the
patentee, without satisfactory reason; or
7.
e.
In the case of drugs and medicines, the Demand
for the patented article in the Philippines is not
being met to an adequate extent and on
reasonable terms, as determined by the
Secretary of the Department of Health. (Sec. 74,
IPC)
The existence of national emergency or other
circumstances of extreme urgency, in the case
of drugs and medicines shall be subject to the
determination of the President of the
Philippines for the purpose of determining the
need for such use or other exploitation, which
shall be immediately executory. (Sec. 74.2, IPC)
Doctrine of Exhaustion
Also known as the Doctrine of First Sale, it provides
that the patent holder has control of the first sale of
his invention. He has the opportunity to receive the
full consideration for his invention from his sale.
Hence, he exhausts his rights in the future control of
his invention.
Unless otherwise provided herein, the use by the
Government, or third person authorized by the
Government shall be subject, where applicable, to
the following provisions:
1.
2.
In situations of national emergency or other
circumstances of extreme urgency, the right
holder shall be notified as soon as reasonably
practicable;
It espouses that the patentee who has already sold
his invention and has received all the royalty and
consideration for the same will be deemed to have
released the invention from his monopoly. The
invention thus becomes open to the use of the
purchaser without further restriction. (Adams v.
Burke, 84 U.S. 17, 1873)
In the case of public non-commercial use of the
patent by the patentee, without satisfactory
reason, the right holder shall be informed
promptly;
GR: Patent rights are exhausted by first sale in the
Philippines (Domestic exhaustion).
Provided, that, the Government or third person
authorized by the Government, without making
a patent search, knows or has demonstrable
ground to know that a valid patent is or will be
used by or for the Government.
3.
XPN: On drugs and medicines: first sale in any
jurisdiction exhausts the rights of the owner thereof
(International exhaustion). (R.A. No. 9502)
If 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 Health, the right holder shall
be informed promptly;
239
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
2024 GOLDEN NOTES
substantially the same. (Del Rosario v. CA, G.R. No.
115106, 15 Mar. 1996)
4. PATENT INFRINGEMENT
(Secs. 76-84)
DOCTRINE OF EQUIVALENTS
Tests in Determining Patent Infringement
The following are the two (2) tests in determining
patent infringement:
1.
2.
Doctrine of Equivalents (2015 BAR)
Due account shall be taken of elements which are
equivalent to the elements expressed in the claims,
so that a claim shall be considered to cover not only
all the elements expressed therein, but also
equivalents. (Sec. 75, IPC)
Literal Infringement; and
Doctrine of Equivalents.
LITERAL INFRINGEMENT
According to the Doctrine of Equivalents, an
infringement also occurs when a device
appropriates a prior invention by incorporating its
innovative concept and, despite some modification
and change, performs substantially the same
function in substantially the same way to achieve
substantially the same result. (Godines v. CA, supra)
There is infringement of patent under this test if one
makes, uses, or sells an item that contains all
elements of the patent claim. The test is satisfied in
either of the following:
a.
b.
Exactness rule: The item being sold, made, or
used conforms exactly to the patent claim of
another; or
The Doctrine of Equivalents thus requires
satisfaction of the function-means-and-result test,
the patentee having the burden to show that all
three components of such equivalency test are met.
(Smith Kline Beckman Co. v. CA, G.R. No. 126627, 14
Aug. 2003)
Additional rule: One makes, uses, or sells an
item that has all the elements of the patent
claim of another plus other elements. (Aquino,
2019)
In using literal infringement, resort must be had, in
the first instance, to the words of the claim. If
accused matter clearly falls within the claim,
infringement is made out and that is the end of it. 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 exactly identity of all material elements.
(Godines v. CA, G.R. No. 97343, 13 Sept. 1993)
Meaning of “Equivalent Device”
An Equivalent Device is such as a mechanic of
ordinary skill in construction of similar machinery,
having the forms, specifications, and machine
before him, could substitute in the place of the
mechanism described without the exercise of the
inventive faculty. (Gsell v. Yap-Jue, G.R. No. L-4720,
19 Jan. 1909, citing Burden v. Corning)
Steps in Determining
Infringement:
A patent may be infringed where the essential or
substantial features of the patented invention are
taken or appropriated, or the device, machine or
other subject matter to infringe is substantially
identical with the patented invention. In order to
infringe a patent, a machine or device must perform
the same function, or accomplish the same result by
identical or substantially identical means and the
principle or mode of operation must be
UNIVERSITY OF SANTO TOMAS
2024 GOLDEN NOTES
240
the
Presence
of
1.
Determine if there is literal infringement. If
there is, defendant is liable; and
2.
If there is no literal infringement, then the
doctrine of equivalents should be applied.
(Funa, 2017)
COMMERCIAL LAW
Process Patent Infringement
directly or indirectly from a patented process, or the
use of a patented process without the authorization
of the patentee constitutes patent infringement.
(Sec. 76.1, IPC)
If the subject matter of a patent is a process for
obtaining a product, any identical product shall be
presumed to have been obtained through the use of
the patented process if the product is new or there
is substantial likelihood that the identical product
was made by the process and the owner of the
patent has been unable despite reasonable efforts,
to determine the process actually used. (Sec. 78, IPC)
XPNs:
Q: Does the use of a patented process by a third
person constitute an infringement when the
alleged infringer has substituted, in lieu of some
unessential part of the patented process, a wellknown mechanical equivalent?
A: YES. Under the Doctrine of Mechanical
Equivalents, the patentee is protected from
colorable invasions of his patent under the guise of
substitution of some part of his invention by some
well-known mechanical equivalent. It is an
infringement of the patent if the substitute performs
the same function and was well known at the date of
the patent as a proper substitute for the omitted
ingredient. (Gsell v. Yap-Jue, supra)
Doctrine of File Wrapper
Prosecution History Estoppel
Estoppel
a.
Using a patented product which has been put on
the market in the Philippines by the owner of
the product, or with his express consent, insofar
as such use is performed after that product has
been so put on the said market. (Sec. 72.1, IPC)
b.
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; (Ibid.)
c.
Compulsory licensing; (Sec. 76.1, IPC,)
d.
Use of Invention by Government; (Ibid.) and
e.
Procedures on Issuance of a Special
Compulsory License under the TRIPS
Agreement for patented drugs and medicines.
(Ibid.)
or
Prosecution History Estoppel applies when an
applicant during a patent prosecution narrows a
claim to avoid the prior art, or otherwise to address
specific concern that arguably would have rendered
the claimed subject matter unpatentable. In these
instances, estoppel bars the applicant from later
invoking the doctrine of equivalents. (Funa, 2012)
Contributory Infringement
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 noninfringing use shall be liable as a contributory
infringer and shall be jointly and severally liable
with the infringer. (Sec. 76.6, IPC)
The doctrine precludes a patentee from obtaining
under the doctrine of equivalents coverage of
subject matter that has been relinquished during
the process of its patent application. (Pharmacia &
Upjohn Co. v. Mylan Pharm., Inc., 170 F. 3d1373, 1376,
31 Mar. 1998)
Civil Infringement
To succeed on a claim of inducement, patentee must
show, first, that there has been direct infringement,
and second, that the alleged infringer knowingly
induced infringement and possessed of specific
GR: The making, using, offering for sale, selling, or
importing a patented product or a product obtained
241
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
2024 GOLDEN NOTES
intent to encourage
(Amador, 2007)
another’s
infringement.
damages a sum equivalent to reasonable
royalty. (Sec 76.3, IPC)
In patent infringement, one who induced someone
to make, use, offer for sale, sell, or import a patented
product or a product obtained directly or indirectly
from a patented process, or facilitated the use of a
patented process without the authorization of the
patentee will also be held liable for patent
infringement. (Gepty, 2019)
d.
Criminal Infringement
If the infringement is a continuing activity, the
aggrieved patent holder retains his cause of action
for damages and injunction but may not claim
damages beyond 4 years counted back from the
institution of the action. (Amador, 2007)
If infringement is repeated by the infringer or by
anyone in connivance with him after finality of the
judgment of the court against the infringer, the
offenders shall, without prejudice to the institution
of a civil action for damages, be criminally liable.
(Sec. 84, IPC)
A civil action for infringement of a patent may be
filed despite the pendency of a petition in the IPO
for cancellation of the patent. (Luchan v. Honrado,
CA-G.R. No. 04706-SP, 06 July 1976)
5. REMEDIES FOR INFRINGEMENT
(Secs. 79-80)
2.
Remedies of a Patent Owner
1.
Civil action for infringement – The owner may
bring a civil action with the appropriate
Regional Trial Court to recover from infringer
the damages sustained by the former, plus
attorney’s fees and other litigation expenses,
and to secure an injunction for the protection of
his rights. (Sec 76.2, IPC)
b.
c.
No damages can be recovered for acts of
infringement committed more than four
(4) years before the filing of the action for
infringement. (Sec. 79, IPC)
NOTE: Infringement entails only civil liability in the
first instance, but it becomes a criminal offense
when it is repeated by the infringer after finality of
the judgment of the court against the infringer.
(Amador, 2007)
Damages cannot be recovered for acts of
infringement committed before the
infringer had known or had reasonable
grounds to know of the patent. (Sec. 80, IPC)
3.
If the damages are inadequate or cannot be
reasonably ascertained with reasonable
certainty, the court may award by way of
UNIVERSITY OF SANTO TOMAS
2024 GOLDEN NOTES
Criminal action for repetition of infringement
– If the infringement is repeated by the
infringer or by anyone in connivance with him
after finality of the judgment of the court
against the infringer, the infringer offender
shall be criminally liable and upon conviction,
shall suffer imprisonment of not less than six
(6) months but not more than three (3) years
and/or a fine not less than P100,000.00 but not
more than P300,000.00. (Sec. 84, IPC)
Limitation: The criminal action prescribes
three (3) years from the commission of the
crime. (Ibid.)
Limitations:
a.
The court may, according to the
circumstances of the case, award damages
in a sum above the amount found as actual
damages sustained: Provided, That the
award does not exceed three (3) times the
amount of such actual damages. (Sec. 76.4,
IPC)
242
Administrative remedy – Where the number of
damages claimed is not less than P200,000.00,
the patentee may choose to file an
administrative action against the infringer with
the Bureau of Legal Affairs (BLA). The BLA can
issue injunctions and order direct infringer to
COMMERCIAL LAW
pay patentee damages. However, unlike regular
courts, the BLA may not issue search and
seizure warrants or warrants of arrest. (Sec.
10.2(a), IPC)
for infringement because the right to maintain
an infringement suit depends on the existence
of the patent. (Ibid.)
2.
4.
5.
Disposal or Destruction of Infringing
material – The court may, in its discretion,
order that the infringing goods, materials and
implements predominantly used in the
infringement be disposed of outside the
channels of commerce of destroyed, without
compensation. (Sec.76.5, IPC)
A patent holder cannot enforce his rights if he has
committed inequitable conduct in the prosecution
of his patent application. (Amador, 2007)
Provisional measures - Any patentee, or
anyone possessing any right, title, or interest in
and to the patented invention, whose rights
have been infringed, may bring a civil action
before a court of competent jurisdiction, to
recover from the infringer such damages
sustained thereby, plus attorney’s fees and
other expenses of litigation, and to secure an
injunction for the protection of his rights. (Sec.
76.2, IPC)
Burden of Proof in an Action for Infringement
The burden of proof to substantiate a charge of
infringement is with the plaintiff. Where the
plaintiff introduces the patent in evidence, and the
same is due in form, there is created a prima facie
presumption of correctness and validity. The
decision of the IPO in granting the patent is
presumed to be correct. The burden of going
forward with the evidence then shifts to the
defendant to overcome by competent evidence this
legal presumption. (Maguan v. Court of Appeals, G.R.
No. L-45101, 28 Nov. 1986)
Exclusive right to monopolize the subject
matter of the patent exists only within the term
of the patent. Upon the expiration of the term,
there is no more basis for the issuance of a
restraining order or injunction. (Phil.
Pharmawealth, Inc. v. Pfizer, Inc., G.R. No.
167715, 17 Nov. 2010)
DEFENSES IN ACTION FOR INFRINGEMENT
Jurisdiction
An action for infringement of patent falls within the
jurisdiction of the regular courts rather than the
Intellectual Property Office. (Amancor, Inc. v. Salas,
CA-G.R. No. 06049-SP, 10 Oct. 1985)
1.
Invalidity of the patent; (Sec. 81, IPC);
2.
Any of the grounds for cancellation of patents:
Persons who can File an Action for Infringement
1.
Any foreign national or juridical entity who
meets the requirements of Sec. 3 and not
engaged in business in the Philippines, to which
a patent has been granted or assigned, whether
or not it is licensed to do business in the
Philippines. (Sec. 77, IPC)
The patentee or his successors-in-interest may
file an action for infringement. (Creser Precision
Systems, Inc. v. CA, G.R. No. 118708, 02 Feb. 1998)
A person or entity who has not been granted
letters patent over an invention and has not
acquired any light or title thereto either as
assignee or as licensee, has no cause of action
3.
243
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, IPC) and
Prescription. (Sec. 84, IPC)
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
2024 GOLDEN NOTES
Q: In an action for infringement of patent, the
alleged infringer defended himself by stating 1)
that the patent issued by the Patent Office was
not really an invention which was patentable; 2)
that he had no intent to infringe so that there
was no actionable case for infringement; and 3)
that there was no exact duplication of the
patentee’s existing patent but only a minor
improvement.
receipt of the final judgement of cancellation by the
court, shall record that fact in the registrar of the
Office and shall publish a notice to that effect in the
IPO Gazette. (Sec. 82, IPC)
6. CANCELLATION
(Secs. 61-66)
Grounds for Cancellation
With those defenses, would you exempt the
alleged violator from liability? Why? (1992 BAR)
Any interested party may petition to cancel any
patent or any claim or parts of a claim any of the
following grounds:
A: NO, I would not exempt the alleged violator from
liability for the following reasons:
a.
b.
c.
1.
2.
A patent once issued by the Patent Office raises
a presumption that the article is patentable. The
validity of the patent and the question over the
inventiveness, novelty and usefulness of the
product are matters which are better
determined by the Patent Office. There is a
presumption that the Philippine Patent Office
has correctly determined the patentability of
the model and such action must not be
interfered with in the absence of competent
evidence to the contrary. A mere statement or
allegation is not enough to destroy that
presumption;
3.
4.
5.
NOTE: If the ground for cancellation relates to some
of the claims or parts of the claim only, cancellation
may be effected to such extent only. (Sec. 61.2, IPC)
An intention to infringe is not necessary nor an
element in a case for infringement of a patent;
7. COMPULSORY LICENSING
(Secs. 93-102)
There is no need of exact duplication of the
patentee’s existing patent such as when the
improvement made by another is merely minor.
Under the doctrine of equivalents, infringement
is committed if the accused product introduced
only minor innovations or improvement but
performs the same function in the same way to
accomplish the same result. Exact duplication of
the patentee’s existing patent is not necessary
for infringement to lie. (Divina, 2023)
Compulsory Licensing
It is when the government allows another person to
produce the patented product or process without
the consent of the patent owner or plans to use the
patented invention itself. (Divina, 2023)
Grounds for Compulsory Licensing
The Director General of the IPO 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
Effect of Invalid Patent
In an action for infringement, if the court shall find
the patent or any claim to be invalid, it shall cancel
the same, and the Director of Legal Affairs upon
UNIVERSITY OF SANTO TOMAS
2024 GOLDEN NOTES
Invention is not new or patentable;
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;
The patent is contrary to public order or
morality; (Sec. 61.1, IPC)
The patent is found invalid in an action for
infringement; (Sec. 82, IPC) or
The patent includes matters outside the scope
of the disclosure contained in the application.
(Sec. 1, Rule 3, Regulations on Inter Partes
Proceeding)
244
COMMERCIAL LAW
invention, under
circumstances:
any
of
the
following
1.
National emergency or other circumstances of
extreme urgency;
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;
3.
4.
NOTE: On certain grounds such as public interest,
anti-competitive conduct, and failure to meet
demand of patented drugs and medicines, there has
to be a prior determination of the appropriate
government agency, court or tribunal, or the
Secretary of Health, as the case may be. (Gepty,
2019)
Procedure on Issuance of a Special Compulsory
License under the TRIPS Agreement
The grant of a special compulsory license shall be
immediately executory.
Where a judicial or administrative body has
determined that the manner of exploitation by
the owner of the patent or his licensee is anticompetitive;
No court, except the Supreme Court of the
Philippines, shall issue any TRO or preliminary
injunction or such other provisional remedies that
will prevent the grant of the special compulsory
license.
In case of public non-commercial use of the
patent by the patentee, without satisfactory
reason;
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; or
6.
Where the demand for patented drugs and
medicines is not being met to an adequate
extent and on reasonable terms, as determined
by the Secretary of the Department of Health.
(Sec. 93, IPC)
A compulsory license shall also be available for the
manufacture and export of drugs and medicines to
any country having insufficient or no manufacturing
capacity in the pharmaceutical sector to address
public health problems: Provided, That, a
compulsory license has been granted by such
country or such country has, by notification or
otherwise, allowed importation into its jurisdiction
of the patented drugs and medicines from the
Philippines in compliance with the TRIPS
Agreement.
The right to grant a special compulsory license
under this section shall not limit or prejudice the
rights, obligations and flexibilities provided under
the TRIPS Agreement and under Philippine laws,
particularly Secs. 72.1 and 74 of the IPC, as amended.
It is also without prejudice to the extent to which
drugs and medicines produced under a compulsory
license can be exported as allowed in the TRIPS
Agreement and applicable laws. (Sec. 93-A, IPC)
NOTE: A compulsory license shall also be available
for the manufacture and export of drugs and
medicines to any country having insufficient or no
manufacturing capacity in the pharmaceutical
sector to address public health problems: provided,
that, a compulsory license has been granted by such
country or such country has, by notification or
otherwise, allowed importation into its jurisdiction
of the patented drugs and medicines from the
Philippines in compliance with the TRIPS
Agreement. (Sec. 93-A.2, IPC, as amended; Divina,
2023)
Requirement to Obtain Authorization from the
Patent Owner on Reasonable Commercial Terms
and Conditions
GR: The license will only be granted after the
petitioner has made efforts to obtain authorization
from the patent owner on reasonable commercial
245
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
2024 GOLDEN NOTES
terms and conditions but such efforts have not been
successful within a reasonable period of time. (Sec.
95.1, IPC)
4.
The terms and conditions of Secs. 95, 96 and
98 to 100 of IP Code. (Sec. 97, IPC)
Compulsory Licensing of Patents Involving
Semi-Conductor Technology
XPNs:
1.
Where the petition for compulsory license
seeks to remedy a practice determined after
judicial or administrative process to be anticompetitive;
The license may only be granted in case of public
non-commercial use or to remedy a practice
determined after judicial or administrative process
to be anti-competitive. (Sec. 96, IPC)
2.
In situations of national emergency or other
circumstances of extreme urgency;
Terms and Conditions of Compulsory License
3.
In cases of public non-commercial use; and
4.
In cases where the demand for the patented
drugs and medicines in the Philippines is not
being met to an adequate extent and on
reasonable terms, as determined by the
Secretary of the Department of Health. (Sec.
95.2, IPC)
Compulsory License based on Interdependence
of Patents
If the invention protected by a patent, hereafter
referred to as the "second patent," within the
country cannot be worked without infringing
another patent, hereafter referred to as the "first
patent," granted on a prior application or benefiting
from an earlier priority, a compulsory license may
be granted to the owner of the second patent to the
extent necessary for the working of his invention,
subject to the following conditions:
1.
The invention claimed in the second patent
involves an important technical advance of
considerable economic significance in
relation to the first patent;
2.
The owner of the first patent shall be entitled
to a cross-license on reasonable terms to use
the invention claimed in the second patent;
3.
The use authorized in respect of the first
patent shall be non-assignable except with
the assignment of the second patent; and
UNIVERSITY OF SANTO TOMAS
2024 GOLDEN NOTES
246
1.
The scope and duration of such license shall be
limited to the purpose for which it was
authorized;
2.
The license shall be non-exclusive;
3.
The license shall be non-assignable, except with
that part of the enterprise or business with
which the invention is being exploited;
4.
Use of the subject matter of the license shall be
devoted predominantly for the supply of the
Philippine market: Provided that this limitation
shall not apply where the grant of the license is
based on the ground that the patentee's manner
of exploiting the patent is determined by
judicial or administrative process, to be anticompetitive.
5.
The license may be terminated upon proper
showing that circumstances which led to its
grant have ceased to exist and are unlikely to
recur: Provided, That adequate protection shall
be afforded to the legitimate interest of the
licensee; and
6.
The patentee shall be paid adequate
remuneration taking into account the economic
value of the grant or authorization, except that
in cases where the license was granted to
remedy a practice which was determined after
judicial or administrative process, to be anticompetitive, the need to correct the anticompetitive practice may be taken into account
in fixing the amount of remuneration. (Sec. 100,
IPC)
COMMERCIAL LAW
NOTE: A compulsory license may be granted over
the entire patented invention for there is no law
requiring that the license be limited to a specific
embodiment of the invention or to a particular
claim. (Price v. United Laboratories, G.R. No. 82542,
29 Sept. 1988, as cited in Divina, 2023)
licensor whatever he may have received as royalties
under the license. (Sec. 102, IPC)
8. VOLUNTARY LICENSING
(Secs. 85-92)
Voluntary License
Amendment of Compulsory License
It is an authorization given by the patent holder to
another person allowing him to produce the
patented article. The license usually fixes the
amount of royalties, sets quality requirements and
defines the markets in which the licensee can sell
the product. (Divina, 2023)
Upon the request of the patentee or the licensee, the
Director of Legal Affairs may amend the decision
granting the compulsory license, upon proper
showing of new facts or circumstances justifying
such amendment. (Sec. 101.1, IPC)
Cancellation of Compulsory License
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, IPC)
Upon the request of the patentee, the Director may
cancel the compulsory license:
1.
2.
3.
If the ground for the grant of the compulsory
license no longer exists and is unlikely to recur;
If the licensee has neither begun to supply the
domestic market nor made serious preparation
therefor;
If the licensee has not complied with the
prescribed terms of the license. (Sec. 101.2, IPC)
NOTE: The licensee shall be entitled to exploit the
subject matter of the technology transfer
arrangement during the whole term of the
technology transfer arrangement. (Sec. 90, IPC, as
amended)
Surrender of Compulsory License
Rights of a Licensor and Licensee in Voluntary
Licensing
The licensee may surrender the license by a written
declaration submitted to the Intellectual Property
Office.
In the absence of any provision to the contrary in
the technology transfer arrangement, the grant of a
license shall not prevent the licensor from granting
further licenses to third person nor from exploiting
the subject matter of the technology transfer
arrangement himself. (Sec. 89, IPC)
The Director shall cause the amendment, surrender,
or cancellation in the Register, notify the patentee,
and/or the licensee, and cause notice thereof to be
published in the IPO Gazette. (Sec. 101.3 and 101.4,
IPC)
Licensee shall be entitled to exploit the subject
matter of the technology transfer arrangement
during the whole term of the technology transfer
arrangement. (Sec. 90, IPC)
Licensee’s Exemption from Liability
Any person who works a patented product,
substance and/or process under a license granted
under this Chapter, shall be free from any liability
for infringement: Provided however, that in the case
of voluntary licensing, no collusion with the licensor
is proven. This is without prejudice to the right of
the rightful owner of the patent to recover from the
Contractual Stipulations Required in All
Technology Transfer Agreements (2004 BAR)
1.
247
The laws of the Philippines shall govern its
interpretation and in the event of litigation, the
venue shall be the proper court in the place
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
2024 GOLDEN NOTES
where the licensee has its principal place of
business;
2.
3.
4.
Continued access to improvements in
techniques and processes related to the
technology shall be made available during the
period of the technology transfer arrangement;
In case it shall provide for arbitration, the
Procedure of Arbitration of the Arbitration Law
of the Philippines or the Arbitration Rules of the
International Chamber of Commerce (ICC) shall
apply and the venue of arbitration shall be the
Philippines or any neutral country;
The Philippine taxes on all payments relating to
the technology transfer agreement shall be
borne by the licensor. (Sec. 88, IPC, as amended;
Divina, 2023)
Stipulations that are Prohibited in Technology
Transfer Agreements
1.
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 non-exclusive 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 inventions or
improvements that may be obtained through
the use of the licensed technology;
UNIVERSITY OF SANTO TOMAS
2024 GOLDEN NOTES
Those that require payment of royalties to the
owners of patents for patents which are not
used;
8.
Those that prohibit the licensee to export the
licensed product unless justified for the
protection of the legitimate interest of the
licensor such as exports to countries where
exclusive licenses to manufacture and/or
distribute the licensed product(s) have already
been granted;
9.
Those which restrict the use of the technology
supplied after the expiration of the technology
transfer arrangement, except in cases of early
termination of the technology transfer
arrangement due to reason(s) attributable to
the licensee;
10. Those which require payments for patents and
other industrial property rights after their
expiration, termination arrangement;
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.
7.
11. Those which require that the technology
recipient shall not contest the validity of any of
the patents of the technology supplier;
12. Those which restrict the research and
development activities of the licensee designed
to absorb and adapt the transferred technology
to local conditions or to initiate research and
development programs in connection with new
products, processes or equipment;
13. Those which prevent the licensee from
adapting the imported technology to local
conditions, or introducing innovation to it, as
long as it does not impair the quality standards
prescribed by the licensor;
14. Those which exempt the licensor for liability for
non-fulfillment of his responsibilities under the
technology transfer arrangement and/or
liability arising from third party suits brought
about by the use of the licensed product or the
licensed technology; and
248
COMMERCIAL LAW
15. Other clauses with equivalent effects. (Secs.
87.4-87.15, IPC, as amended; Divina, 2023)
Trademark
It is any distinctive word, name, symbol, emblem,
sign or device or any combination thereof, adopted
and used by a manufacturer or merchant on his
goods to identify and distinguish them from those
manufactured, sold or dealt by others. (Dermaline,
Inc. v. Myra Pharmaceuticals, Inc., G.R. No. 190065, 26
Aug. 2010)
Exception on Prohibited Clauses
In exceptional or meritorious cases where
substantial benefits will accrue to the economy,
such as high technology content, increase in foreign
exchange earnings, employment generation,
regional dispersal of industries and/or substitution
with or use of local raw materials, or in the case of
Board of Investments, registered companies with
pioneer status, exemption from any of the above
requirements may
be
allowed by
the
Documentation, Information and Technology
Transfer Bureau after evaluation thereof on a case
by case basis. (Sec. 91, IPC)
Purpose of Trademark
1.
2.
3.
Effect of Non-conformance with the Prohibited
Clauses and Mandatory Provisions
To indicate origin or ownership of the articles
to which they are attached;
To guarantee that those articles come up to a
certain standard of quality; and
To advertise the articles they symbolized.
(Mirpuri v. CA, G.R. No. 114508, 19 Nov. 1999)
Functions of Trademark
GR: Non-conformance shall automatically render
the
technology
transfer
arrangement
unenforceable.
1.
Economic Function - serve as essential means
of distinguishing the products of one
manufacturer or dealers from those of others;
XPN: Unless said technology transfer arrangement
is approved and registered with the Documentation,
Information and Technology Transfer Bureau under
the provisions of Sec. 91 on exceptional cases. (Sec.
92, IPC)
2.
Source-Indicating Function - indicate the
source or origin of the goods on which it is used.
Its immediate object is to distinguish the goods
of one manufacturer from those of his
competitors through the association of goods
thus marked with a particular producer;
B. TRADEMARKS
3.
Guarantee Function - guarantee that the
product to which it is affixed comes up to a
certain standard of quality;
1. MARKS vs. COLLECTIVE MARKS vs.
TRADE NAMES
(Sec. 121)
4.
Advertisement Function – the more widely
advertised the product is, the more readily may
courts concede that it has become distinctive of
its proprietor’s goods. (Amador, 2017)
Mark
Marks which may be Registered
Any visible sign capable of distinguishing the goods
(trademark) or services (service mark) of an
enterprise and shall include a stamped or marked
container of goods. (Sec. 121.1, IPC)
Any word, name, symbol, emblem, device, figure,
sign, phrase, or any combination thereof except
those enumerated under Sec. 123 of the IPC.
249
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
2024 GOLDEN NOTES
Obligations under the Paris Convention
A "collective mark" or “collective trade-name" is a
mark or tradename used by the members of a
cooperative, an association or other collective group
or organization. (Sec. 40, RA. No. 166)
The Philippines is obligated to assure nationals of
the signatory-countries that they are afforded an
effective protection against violation of their
intellectual property rights in the Philippines in the
same way that their own countries are obligated to
accord similar protection to Philippine nationals.
Transliteration vs. Translation of Mark
TRANSLATION OF
MARK
Definition
TRANSLITERATION
Thus, under Philippine law, the trade name of a
national of a State that is a party to the Paris
Convention is protected, whether or not the trade
name forms part of a trademark, without the
obligation of filing or registration.
An act, process, or
instances
of
representing
or
spelling of words,
letters, or characters of
one language in the
letters and characters
of another language or
alphabet.
Therefore, the applicant for trademark registration
is not the lawful owner and is not entitled to
registration if the trademark (which must be wellknown for the Paris Convention to apply) has been
previously used by a national of a country that is a
signatory to the Paris Convention.
In order to register a trademark, one must be the
owner thereof and must have actually used the
mark in commerce in the Philippines for 2 months
prior to the application for registration. It is clear
that actual use in commerce is also the test of
ownership, but the provision went further by saying
that the mark must not have been so appropriated
by another. Thus, one may be an owner of a mark
due to its actual use but may not yet have the right
to register such ownership here due to the owner’s
failure to use the same in the Philippines for two (2)
months prior to registration. (Sec. 2, R.A. No. 166)
Trade Name
It is the name or designation identifying or
distinguishing an enterprise. (Sec. 121.3, IPC)
A name or designation may not be used as a trade
name
In any case, the IPC has already dispensed with the
requirement of prior actual use at the time of
registration. Thus, there is more reason to allow the
registration of the subject mark under the name of
Cointreau as its true and lawful owner. (Ibid.)
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,
IPC, as amended)
Any individual name or surname, firm name, device
or word used by manufacturers, industrialists,
merchants, and others to identify their businesses,
vocations, or occupants. (Converse Rubber Corp. v.
Universal Rubber Products Inc., G.R. No. L-27906, 08
Jan. 1987)
Collective Mark
Any visible sign designated as such in the
application for registration and capable of
distinguishing the origin or any other common
characteristic, including the quality of goods or
services of different enterprises which use the sign
under the control of the registered owner of the
collective mark. (Sec. 121.2, IPC)
UNIVERSITY OF SANTO TOMAS
2024 GOLDEN NOTES
An act, process, or
instance of translating
as rendering from one
language
or
representational
system into another.
A trade name need not be registered with the IPO
before an infringement suit may be filed by its
owner against the owner of an infringing
250
COMMERCIAL LAW
trademark. All that is required is that the trade
name is previously used in trade or commerce in the
Philippines. (Coffee Partners Inc. v. San Francisco
Coffee and Roastery, Inc., G.R. No. 169504, 03 Mar.
2010)
Similarity between Marks
The likelihood of confusion is a relative concept; to
be determined only according to the particular and
sometimes peculiar circumstances of each case. In
trademark cases, even more than in any other
litigation, precedent must be studied in light of the
facts of the particular case. The wisdom of the
likelihood of confusion test lies in its recognition
that each trademark infringement case presents its
own unique set of facts. (Societe Des Produits Nestle,
S.A. and Nestle Philippines, Inc. v. CA and CFC
Corporation, G.R. No. 112012, 04 Apr. 2001)
Limitations on Use of Trade Name or Business
Name
A person may NOT:
1.
Use a name if the word is generic; (Lyceum of the
Philippines v. CA, G.R. No. 101897, 05 Mar. 1993)
2.
Use any name indicating geographical
locations; (Ang Si Heng v. Wellington
Department Store, Inc., G.R. No. L-4531, 10 Jan.
1953)
3.
Use any name or designation contrary to public
order or morals;
4.
Use a name if it is liable to deceive trade circles
or the public as to the nature of the enterprise
identified by that name; (Sec. 165.1, IPC)
5.
Subsequent use of the trade name by a third
party, whether as a trade name or a mark or
collective mark, or any such use of a similar
trade name or mark, likely to mislead the public,
shall be deemed unlawful; (Sec. 165.2(b), IPC)
6.
Copy or simulate the name of any domestic
product (for imported products);
Two (2) Types of Confusion
1.
Confusion of goods (product confusion) –
where the ordinarily prudent purchaser would
be induced to purchase one product in the
belief that he was purchasing the other; and
2.
Confusion of business (source or origin
confusion) – where, although the goods of the
parties are different, the product, the mark of
which registration is applied for by one party,
is such as might reasonably be assumed to
originate with the registrant of an earlier
product, and the public would then be
deceived either into that belief or into the
belief that there is some connection between
the two parties, though inexistent. (Mang
Inasal Philippines, Inc. v. IFP Manufacturing
Corporation, G.R. No. 221717, 19 June 2017)
Dominancy Test
7.
8.
Copy or simulate a mark registered in
accordance with the provisions of IPC (for
imported products); and
The test of dominancy focuses on the similarity of
the prevalent features of the competing
trademarks which might cause confusion or
deception. (Divina, 2021)
Use mark or trade name calculated to induce
the public to believe that the article is
manufactured in the Philippines, or that it is
manufactured in any foreign country or locality
other than the country or locality where it is in
fact manufactured.
If the competing trademark contains the main or
essential or dominant features of another, and
confusion and deception is likely to result,
infringement takes place. (UFC Philippines, Inc. v.
Fiesta Barrio Manufacturing Corp., G.R. No. 198889,
20 Jan. 2016)
NOTE: Change in the ownership of a trade name is
made with the transfer of the enterprise or part
thereof identified by that name. (Sec. 165.4, IPC)
251
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
2024 GOLDEN NOTES
Q: Kolin Philippine International (KPII), an
affiliate of TKC, filed Trademark Application
No. 4-2006-010021 for the mark under Class 9
covering “television and DVD players. Kolin
Electronics Co., Inc (KECI) filed an opposition
against KPII’s trademark application for the
reason that it is the registered owner of the
mark and that the registration of KPII will
cause confusion among customers. The
Intellectual Property Office Bureau of Legal
Affairs (IPO-BLA) and the Director General of
the Intellectual Property Office (IPO-DG) ruled
in favor of KECI, rejecting KPII's application.
Whether or not Kolin Philippines International
Inc., should be allowed to register its mark?
Electronics v. Kolin Philippines, G.R. No. 228165, 09
Feb. 2021)
Holistic Test, Abandoned
The use of the Holistic Test in determining the
resemblance of marks has been abandoned. (Kolin
Electronics v. Kolin Philippines, G.R. No. 228165, 09
Feb. 2021)
Q: Petitioner Levi Strauss & Co. is a foreign
corporation and owner of the word mark
"LEVI'S". It filed before the IPO a petition for
cancellation of the trademark “LIVE’S” on the
ground that it is confusingly similar with
petitioner's "LEVI'S" mark. Both marks cover
the same goods under Class 25 of the Nice
Classification. Respondent Guevarra alleged
that its mark is not confusingly similar with
petitioner's "LEVI'S" mark, claiming that the
probability of confusion arising from the
alleged similarity of the marks is negligible due
to the attention given by the purchasers to the
goods they are purchasing; and that there are
sufficient differences in the price, hand tags,
and other markings of the products. Should the
Petition for Cancellation be granted?
A: NO. To summarize the above discussion: (1)
there is resemblance between KECI's and KPII's
marks; (2) the goods covered by KECI's are related
to the goods covered by KPII's ; (3) there is
evidence of actual confusion between the two
marks; (4) the goods covered by KPII's fall within
the normal potential expansion of business of KECI;
(5) sophistication of buyers is not enough to
eliminate confusion; (6) KPII's adoption of KECI's
coined and fanciful mark would greatly contribute
to likelihood of confusion; and (7) KPII applied for
in bad faith. Thus, KPII's application should be
denied because it would cause likelihood of
confusion and KECI's rights would be damaged.
A: YES. The Holistic Test in determining trademark
resemblance has been abandoned. The Dominancy
Test must be used in determining the existence of
confusing similarity between the "LEVI'S" and
“LIVE’S” marks. This test relies not only on the
visual but also on the aural and connotative
comparisons and overall impressions between the
two trademarks. The dominant feature of
petitioner's "LEVI'S" marks is the word "LEVI'S"
composed of five (5) letters, namely "L", "E", "V",
"I", and "S" with an apostrophe separating the
fourth and fifth letters. Notably, for petitioner's
stylized marks, the letter "E" is in lowercase format
with the rest in uppercase format. On the other
hand, the dominant feature of respondents'
“LIVE’S” stylized mark is the word "LIVE'S" also
composed of the same five (5) letters; and its only
difference with petitioner's marks is that the
positioning of the letters "E" and "I" are
interchanged. Furthermore, respondents' mark
Further, KECI was already declared as the owner of
the mark under Trademark Law. The existence of
likelihood of confusion is already considered as
damage that would be sufficient to sustain the
opposition and rejection of KPII's trademark
application. The Court is likewise cognizant that,
by granting this registration, KPII would acquire
exclusive rights over the stylized version of KOLIN
for a range of goods/services, 172 i.e., covered
goods, related goods/services, goods/services
falling within the normal potential expansion of
KPII's business. Owing to the peculiar
circumstances of this case, this will effectively
amount to a curtailment of KECI's right to freely
use and enforce the KOLIN word mark, or any
stylized version thereof, for its own range of
goods/services, especially against KPII, regardless
of the existence of actual confusion. (Kolin
UNIVERSITY OF SANTO TOMAS
2024 GOLDEN NOTES
252
COMMERCIAL LAW
also depicts the letter "E" in lowercase format with
the rest in uppercase format.
2.
Need not be used or registered in the
Philippines; and
From the foregoing, it is thus readily apparent that
although petitioner's and respondents' marks are
neither spelled identically nor pronounced in the
same way, nor possess the same meaning, they
both begin with the same letter and are in the
possessive form as denoted by the apostrophe
before the letter "S" at the end, with only the
second and fourth letters re-arranged. Simply put,
respondents' “LIVE’S” mark is but a mere anagram
of petitioner's "LEVI'S" marks. It would not be
farfetched to imagine that a buyer, when
confronted with such striking similarity would be
led to confuse one over the other. Thus, by simply
applying the Dominancy Test, it can already be
concluded that there is a likelihood of confusion
between petitioner's "LEVI'S" marks and
respondents' “LIVE’S” mark. (Levi Strauss & Co. v.
Sevilla, G.R. No. 219744, 01 Mar. 2021)
3.
Need not be known by the public at large but
only by relevant sector of the public. (Sec.
123.1(e), IPC)
Well-known Marks
Rules regarding Internationally Well-Known
Marks
NOTE: If a well-known mark is registered in the
Philippines, any mark that is identical to,
confusingly identical to, or confusingly similar to, or
constitutes a translation of a mark considered wellknown according to the preceding paragraph, and is
registered in the Philippines for goods or services
that are not similar to those applied for; Provided,
That use of the mark in relation to those goods or
services would indicate a connection between those
goods or services, and the owner of the registered
mark: Provided further, That the interests of the
owner of the registered mark are likely to be
damaged by such use. (Sec. 123.1(f) IPC; Divina,
2022)
A well-known mark is a mark which is considered
by the competent authority of the Philippines to be
well-known internationally and in the Philippines,
whether or not it is registered here, as being already
the mark of a person other than the applicant for
registration. (Divina, 2021; Sec. 123.1(e), IPC)
A mark cannot be registered if it is identical with, or
confusingly similar to, or constitutes a translation of
a mark which is considered by the competent
authority of the Philippines to be well-known
internationally and in the Philippines, whether or
not it is registered here, as being already the mark
of a person other than the applicant for registration
and used for identical or similar goods or services.
Provided. that in determining whether a mark is
well-known, account shall be taken of the
knowledge of the relevant sector of the public,
rather than of the public at large, including
knowledge in the Philippines which has been
obtained as a result of the promotion of the mark.
Scope of Protection of the Paris Convention
The scope of protection initially afforded by the
Paris Convention has been expanded via a
nonbinding recommendation that a well-known
mark should be protected in a country even if the
mark is neither registered nor used in that country.
(Sehwani, Incorporated v. In-N-Out Burger, Inc., G.R.
No. 171053, 15 Oct. 2007)
Internationally Well-known Mark
Factors to be considered in Determining WellKnown Marks
1.
1.
Considered by the competent authority of the
Philippines to be “well-known” internationally
and in the Philippines as the mark of a person
other than the applicant or registrant;
253
Duration, extent, and geographical area of any
use of the mark; in particular, the duration,
extent and geographical area of any promotion
of the mark, including advertising or publicity
and the presentation, at fairs or exhibitions, of
the goods and/or services to which the mark
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
2024 GOLDEN NOTES
applies;
2.
Market share, in the Philippines and in other
countries, of the goods and/or services to which
the mark applies;
3.
Degree of the inherent or acquired distinction
of the mark;
4.
Quality image or reputation acquired by the
mark;
5.
Extent to which the mark has been registered in
the world;
6.
Exclusivity of registration attained by the mark
in the world;
7.
Extent to which the mark has been used in the
world;
8.
Exclusivity of use attained by the mark in the
world;
9.
Commercial value attributed to the mark in the
world;
In Fredco Manufacturing Corp. v. President and
Fellows of Harvard College, (G.R. No. 185917, 01 June
2011) Fredco Manufacturing Corp. (Fredco) filed
before the IPO a Petition for Cancellation of
Registration issued to Harvard University for the
mark “Harvard Veritas Shield Symbol”. Fredco
claims that as early as 1982 the mark was already
used in the Philippines by its predecessor-ininterest. Harvard University, on the other hand,
claimed that the name and mark “Harvard” was
adopted in 1639 as the name of Harvard College of
Cambridge, Massachusetts, USA. The mark had been
used in commerce since 1872 and was registered in
more than 50 countries.
The Supreme Court ruled that "Harvard" is the trade
name of the world-famous Harvard University, and
it is also a trademark of Harvard University. Under
Art. 8 of the Paris Convention, as well as Sec. 37 of R.A.
No. 166, Harvard University is entitled to protection
in the Philippines of its trade name "Harvard" even
without registration of such trade name in the
Philippines. This means that no educational entity
in the Philippines can use the trade name "Harvard"
without the consent of Harvard University.
Likewise, no entity in the Philippines can claim,
expressly or impliedly through the use of the name
and mark "Harvard," that its products or services
are authorized, approved, or licensed by, or sourced
from, Harvard University without the latter's
consent.
10. Record of successful protection of the rights in
the mark;
11. Outcome of litigations dealing with the issue of
whether the mark is a well-known mark; and
To be protected under the two directives of the
Ministry of Trade, an internationally well-known
mark need not be registered or used in the
Philippines. All that is required is that the mark is
well-known internationally and in the Philippines
for identical or similar goods, whether or not the
mark is registered or used in the Philippines. Sec.
123.1(e) of R.A. No. 8293 now categorically states
that "a mark which is considered by the competent
authority of the Philippines to be well-known
internationally and in the Philippines, whether or
not it is registered here," cannot be registered by
another in the Philippines. Sec. 123.1(e) does not
require that the well-known mark be used in
commerce in the Philippines but only that it be wellknown in the Philippines.
12. Presence or absence of identical or similar
marks validly registered for or used on identical
or similar goods or services and owned by
persons other than the person claiming that his
mark is a well-known mark.
NOTE: The mark must be well-known both
internationally and in the Philippines.
NOTE: Account shall be taken of the knowledge of
the relevant sector of the public, rather than of the
public at large, including knowledge in the
Philippines which has been obtained as a result of
the promotion of the mark.
UNIVERSITY OF SANTO TOMAS
2024 GOLDEN NOTES
254
COMMERCIAL LAW
Division of Application
3.
Any application referring to several goods or
services, hereafter referred to as the "initial
application," may be divided by the applicant into
two (2) or more applications, hereafter referred to
as the "divisional applications," by distributing
among the latter the goods or services referred to in
the initial application. The divisional applications
shall preserve the filing date of the initial
application or the benefit of the right of priority.
(Sec. 129, IPC)
The interests of the owner of the well-known mark
are likely to be damaged. (246 Corporation, doing
business under the name and style of Rolex Music
Lounge v. Hon. Reynaldo B. Daway, in his capacity as
Presiding Judge of RTC Br. 90, Quezon City, G.R. No.
157216, 20 Nov. 2003)
Priority Right
An application for registration of a mark filed in the
Philippines by a person referred to Sec. 3 of the IPC,
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.
No registration of a mark shall be granted until such
mark has been registered in the country of origin of
the applicant. (Sec. 131, IPC)
2. NON-REGISTRABLE MARKS
Non-Registrable Marks (Im-F-L-E-W-Re-Mi-GCu-De-S-Co-Con)
The owner of a mark seeking priority right is not
entitled to sue for acts committed prior to the date
on which his mark was registered in the Philippines:
except in the case of an owner of a well-known mark
where he can oppose its registration or petition the
cancellation of its registration or sue for unfair
competition, without prejudice to availing himself
of other remedies provided for under the law. (Ibid.)
a.
Consists of Immoral, deceptive, or scandalous
matter or falsely suggest a connection with
persons, institutions, beliefs, or national
symbols;
b.
Consists of the Flag or coat of arms or other
insignia of the Philippines or any of its political
subdivisions, or of any foreign nation;
c.
Consists of a name, portrait or signature
identifying a particular Living individual
except by his written consent, or the name,
signature, or portrait of a deceased President
of the Philippines, during the life of his widow
except by written consent of the widow;
d.
Identical with a registered mark belonging to a
different proprietor or a mark with an Earlier
filing or priority date, in respect of:
When the Well-Known Mark is Used on
Unrelated Goods
A junior user of a well-known mark on goods or
services which are not similar to the goods or
services, and are therefore unrelated, to those
specified in the certificate of registration of the wellknown mark is precluded from using the same on
the entirely unrelated goods or services, subject to
the following requisites, to wit:
1.
The mark is well-known internationally and in
the Philippines;
2.
The well-known mark must be registered.
The use of the well-known mark on the entirely
unrelated goods or services would result to the
likelihood of confusion of origin or business or
some business connection or relationship
between the registrant and the user of the
mark; and
a.
b.
c.
e.
255
The same goods or services;
Closely related goods or services; or
If it nearly resembles such a mark as to
be likely to deceive or cause confusion;
Is identical with an internationally well-known
mark, Whether or not it is registered here, used
for identical or similar goods or services
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
2024 GOLDEN NOTES
Provided, that in determining whether a mark
is well-known, account shall be taken of;
f.
manufactures briefs and underwear, wants to
know whether, under our laws, he can use and
register the trademark “PRUTE” for his
merchandise. Can JG register the trademark?
Is identical with an internationally well-known
mark which is Registered in the Philippines
with respect to non-similar goods or services.
Provided, that the interests of the owner of the
registered mark are likely to be damaged by
such use;
g.
Is likely to Mislead the public as to the nature,
quality, characteristics or geographical origin
of the goods or services;
h.
Consists exclusively of signs that are Generic
for the goods or services that they seek to
identify;
i.
Consists exclusively of signs or of indications
that have become Customary or usual to
designate the goods or services in everyday
language or in bona fide and established trade
practice.
j.
Consists exclusively of signs or indications that
may serve in trade to Designate the kind,
quality, quantity, intended purpose, value,
geographical origin, time or production of the
goods or rendering of the services, or other
characteristics of the goods or services;
k.
Consists of Shapes that may be necessitated by
technical factors or by the nature of the goods
themselves or factors that affect their intrinsic
value;
l.
Consists of Color alone, unless defined by a
given form; or
m.
Is Contrary to public order or morality (Sec.
123, IPC)
A: YES. The trademark registered in the name of
Laberge, Inc. covers only after-shave lotion, shaving
cream, deodorant, talcum powder and toilet soap. It
does not cover briefs and underwear. The limit of
the trademark is stated in the certificate issued to
Laberge Inc. It does not include briefs and
underwear which are different products protected
by Laberge’s trademark. JG can register the
trademark “PRUTE” to cover its briefs and
underwear. (Faberge Inc. v. IAC, G.R. No. 71189, 04
Nov. 1992)
Q: CPI was registered with the SEC in January
2001. It has a franchise agreement with Coffee
Partners Ltd. (CPL) for a non-exclusive right to
operate coffee shops in the Philippines using
trademarks designed by CPL such as SAN
FRANCISCO COFFEE.
SFCRI was registered with the SEC in May 1995.
It registered the business name SAN FRANCISCO
COFFEE & ROASTERY, INC. with the DTI in June
1995.
In June 2001, SFCRI discovered that CPI was
about to open a coffee shop under the name SAN
FRANCISCO COFFEE in Libis, Quezon City. SFCRI
sent a letter to CPI demanding that the latter
stop using the name SAN FRANCISCO COFFEE.
Does CPI ‘s use of the trademark SAN FRANCISCO
COFFEE constitutes infringement of SFCRI ‘s
trade name SAN FRANCISCO COFFEE &
ROASTERY, INC., even if the trade name is not
registered with the Intellectual Property Office
(IPO)?
A: YES. Petitioner’s argument that “San Francisco”
is just a proper name referring to the famous city in
California and that “coffee” is simply a generic term,
is untenable. Respondent has acquired an exclusive
right to the use of the trade name “SAN FRANCISCO
COFFEE & ROASTERY, INC.” since the registration of
the business name with the DTI in 1995. Thus,
respondent’s use of its trade name from then on
Q: Laberge, Inc., manufactures and markets
after-shave lotion, shaving cream, and
deodorants using the trademark “PRUT”, which
is registered with the Intellectual Property
Office. Laberge does not manufacture briefs and
underwear and these items are not specified in
the certificate of registration.
JG who
UNIVERSITY OF SANTO TOMAS
2024 GOLDEN NOTES
256
COMMERCIAL LAW
must be free from any infringement by similarity. Of
course, this does not mean that respondent has
exclusive use of the geographic word “San
Francisco” or the generic word “coffee.” Geographic
or generic words are not, per se, subject to exclusive
appropriation. It is only the combination of the
words “SAN FRANCISCO COFFEE,” which is
respondent’s trade name in its coffee business, that
is protected against infringement on matters
related to the coffee business to avoid confusing or
deceiving the public. (Divina, 2014; Coffee Partners,
Inc. v. San Francisco Coffee and Roastery, Inc., G.R. No.
169504, 03 Mar. 2010)
adoption of the first-to-file rule and the rule that
ownership is acquired through registration. (Zuneca
Pharmaceutical v. Natrapharm, Inc., G.R. No. 211850,
08 Sept. 2020)
Q: Is there an infringement of trademark when
two similar goods use the same words, ‘PALE
PILSEN’?
Q: KPII filed a trademark application for kolin
mark under class 9 covering “Television sets
and DVD players.” KECI opposed KPII’s
trademark application based on the fact that it
is the registered owner of the KOLIN mark and
the registration of KPII’s kolin mark will cause
confusion among consumers. KPII asserted that
KECI’s ownership over the mark is limited only
in connection with the goods specified in KECI’s
certificate of registration and those related
thereto. KPII insisted that the “Television sets
and DVD players” are not related to the goods
covered by KECI’s registered mark. Should
KPII’s trademark application be granted?
Rights Over
Registration
a
Trademark
Conferred
by
The rights in a mark shall be acquired through
registration made validly in accordance with the
provisions of the IP Code. (Sec. 122, IPC) The filing
date of application is the operative act to acquire
trademark rights.
A: NONE, because “pale pilsen” are generic words
descriptive of the color (pale) and of a type of beer
(pilsen), which is a light bohemian beer with strong
hops flavor that originated in the City of Pilsen in
Czechoslovakia. Pilsen is a primarily geographically
descriptive word, hence, non-registrable and not
appropriable by any beer manufacturer. (Asia
Brewery, Inc. v. CA, G.R. No. 103543, 05 July 1993)
3. OWNERSHIP AND REGISTRATION
(Sec. 152)
A: NO. KECI was already declared owner of the
KOLIN mark under the Trademark Law. Section 236
of the Intellectual Property Code states that nothing
in the IP Code – which includes registrations made
pursuant thereto – shall adversely affect the rights
of the enforcement of marks acquired in good faith
prior to the effective date of said law. Furthermore,
Section 122 of the same code provides that the
rights in a mark shall be acquired through
registration made validly in accordance with the
provisions of the IP Code.
The right to register a trademark should be based
on ownership. When the applicant is not the owner
of the trademark being applied for, he has no right
to apply for the registration of the same. Under the
Trademark Law, only the owner of the trademark,
trade name or service mark used to distinguish his
goods, business or service from the goods, business
or service of others is entitled to register the same.
An exclusive distributor does not acquire any
proprietary interest in the principal's trademark
and cannot register it in his own name unless it has
been validly assigned to him. (Superior Commercial
Enterprises, Inc. v. Kunnan Enterprises, G.R. No.
169974, 20 Apr. 2010)
By granting KPII’s trademark application, KPII
would acquire exclusive rights over the stylized
version of KOLIN (“kolin”) for a range of
good/services falling within the normal potential
expansion of its business. This will effectively
amount to a curtailment of KECI’s right to freely use
and enforce the KOLIN word mark, or any stylized
version thereof, for its own range of goods/services,
Trademark is acquired solely through registration.
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
257
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
2024 GOLDEN NOTES
especially against KPII, regardless of the existence
of actual confusion. Based on Section 122 vis-à-vis
Section 236 of the Intellectual Property Code, KPII’s
trademark application for kolin cannot be given
due course. (Kolin Electronics Co, Inc. v. Kolin
Philippines International, Inc, G.R. No. 228165, 9 Feb.
2021)
the same. The mark displayed over the website no
less serves its functions of indicating the goods or
services' origin and symbolizing the owner's
goodwill than a mark displayed in the physical
market. Therefore, there is no less premium to
recognize actual use of marks through websites
than their actual use through traditional means.
(Kolin Electronics v. Taiwan Kolin, supra)
Q: Does KECI have the right to register and use
the mark “www.kolin.ph” consistent with its
exclusive right to use the “KOLIN” mark in
relation to the goods /services covered by Class
35.
Prior Use of Mark as a Requirement
Actual prior use in commerce in the Philippines has
been abolished as a condition for the registration of
trademark.
A: YES. KECI has the right to register and use the
mark “www.kolin.ph”.
Q: S Development Corporation sued Shangri-La
Corporation for using the “S” logo and the trade
name “Shangrila.” The former claims that it was
the first to register the logo and the trade name
in the Philippines and that it had been using the
same in its restaurant business. Shangrila
Corporation counters that it is an affiliate of an
international organization which has been using
such logo and trade name “Shangrila” for over
20 years. However, Shangrila Corporation
registered the trade name and logo in the
Philippines only after the suit was filed.
Moreover, it is settled that a certificate of
registration of a mark is prima facie evidence of the
validity of the registration, the registrant's
ownership of the mark, and of the registrant's
exclusive right to use the same in connection with
the goods or services and those that are related
thereto specified in the certificate.
KECI, having been issued Certificate of Registration,
is the registered owner of the "KOLIN" mark under
Class 35, specifically for "the business of
manufacturing, importing, assembling, or selling
electronic equipment or apparatus." This certificate
of registration vests KECI the exclusive right to use
the "KOLIN" mark in relation to the services covered
by the registration. Unless and until the said
registration of KECI is nullified or cancelled through
the proper proceeding, the rights emanating from
the said registration should be respected.
a.
A: S Corporation. Rights in a trademark are
acquired through valid registration. (Sec. 122, IPC)
S Development Corporation has a better right to use
the logo and the tradename, since the protective
benefits of the law are conferred by the fact of
registration and not by use. Although Shangrila
Corporation's parent had used the tradename and
logo long before, the protection of the laws will be
for S Development Corporation because it was the
first entity to register the intellectual properties.
(UPLC Commercial Law Suggested Answers)
Having been granted the right to exclusively use the
"KOLIN" mark for the business of manufacturing,
importing, assembling, or selling electronic
equipment or apparatus, KECI's application for
registration of its domain name containing the
"KOLIN" mark for the same goods and services as its
Class 35 registration for "KOLIN" is merely an
exercise of its right under its Class 35 registration.
The use of a registered mark representing the
owners’ goods or services by means of an
interactive website may constitute proof of actual
use that is sufficient to maintain the registration of
UNIVERSITY OF SANTO TOMAS
2024 GOLDEN NOTES
Which of the two corporations has a better
right to use the logo and the trade name?
Explain.
b. How does the international affiliation of
Shangri-La Corporation affect the outcome
of the dispute? Explain. (2005 BAR)
258
COMMERCIAL LAW
A: Shangri-La's international affiliation shall
result in a decision favorable to it. The Paris
Convention mandates that protection should be
afforded to internationally known marks as
signatory to the Paris Convention, without regard as
to whether the foreign corporation is registered,
licensed, or doing business in the Philippines.
Shangri-La's separate personalities from their
mother corporation cannot be an obstacle in the
enforcement of their rights as part of the Kuok
Group of Companies and as official repository,
manager and operator of the subject mark and logo.
Besides, R.A. No. 166 did not require the party
seeking relief to be the owner of the mark but "any
person who believes that he is or will be damaged
by the registration of a mark or trade name".
(Shangri-la International Hotel Management, LTD.,
et.al v. Developers Group of Companies, Inc. G.R. No.
159938, 31 March 2006)
amended, the first user of the mark had the right to
file a cancellation case against an identical or
confusingly mark registered in good faith by
another person. However, with the omission in the
IP Code provision of the phrase "previously used in
the Philippines by another and not abandoned," said
right of the first user is no longer available. In effect,
based on the language of the provisions of the IP
Code, even if the mark was previously used and not
abandoned by another person, a good faith
applicant may still register the same and thus
become the owner thereof, and the prior user
cannot ask for the cancellation of the latter's
registration. If the lawmakers had wanted to retain
the regime of acquiring ownership through use, this
phrase should have been retained in order to avoid
conflicts in ownership. The removal of such a right
unequivocally shows the intent of the lawmakers to
abandon the regime of ownership under the
Trademark
Law,
as
amended.
(Zuneca
Pharmaceutical v. Natrapharm Inc, G.R. No. 211850,
08 Sept. 2020)
Q: Natrapharm Corp. is selling citicoline under
the trademark ZYNAPSE that is used for treating
stroke and registered it with the IPO. In 2007, It
filed a complaint against Zuneca for injunction
and trademark infringement. Zuneca is selling a
drug called carbamezipine under the brand
name ZYNAPS that is used to control seizure
disorders. Natrapharm claimed that the term
ZYNAPSE was registered in IPO upon
researching that there is no product using the
same. On the other hand, Zuneca alleged that it
has been using the term ZYNAPS since 2004 and
already secured a certificate of product listing
from BFAD. Also, it claimed that it was
impossible for Natrapharm not to have known
the existence of ZYNAPS before registration of
ZYNAPSE since Natrapharm promoted its
products in the same publication where ZYNAPS
was advertised. RTC ruled in favor of
Natrapharm stating that it is the first filer in
good faith thus, it may prevent others. Is the
court correct?
Acquisition of Trade Names
A name or designation may not be used as a trade
name if by its nature or the use to which such name
or designation may be put, it is contrary to public
order or morals and if, in particular, it is liable to
deceive trade circles or the public as to the nature of
the enterprise identified by that name. (Sec. 165.1,
IPC)
In particular, any subsequent use of the trade name
by a third party, whether as a trade name or a mark
or collective mark, or any such use of a similar trade
name or mark, likely to mislead the public, shall be
deemed unlawful. (Sec. 165.2(b), IPC)
Ownership of a trade name may be acquired not
necessarily by registration but by adoption and use
in trade or commerce. As between actual use of a
mark without registration, and registration of the
mark without actual use thereof, the former prevails
over the latter. For a rule widely accepted and firmly
entrenched is that actual use in commerce or
business is a prerequisite to the acquisition of the
right of ownership. (Shangri-La International Hotel
A: YES. Under the IP Code, ownership of a mark is
acquired through registration. Subparagraph (d) of
the provision of the Trademark Law was amended
in the IP Code to, among others, remove the phrase
''previously used in the Philippines by another and
not abandoned." Under the Trademark Law, as
259
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
2024 GOLDEN NOTES
Management, Ltd. v. Developers Group of Companies,
Inc., G.R. No. 159938, 31 Mar. 2006)
registrant's ownership of the mark, and of the
registrant's exclusive right to use the same in
connection with the goods or services and those
that are related thereto specified in the certificate.
(Sec. 138, IPC)
The two concepts of corporate name or business
name and trademark or service mark are not
mutually exclusive. It is common, indeed likely, that
the name of a corporation or business is also a trade
name, trademark, or service mark. (Shangri-La
International Hotel Management, Ltd. v. Developers
Group of Companies, Inc., supra)
Who May File Opposition to Trademark
Registration; Grounds
Any person who believes that he would be damaged
by the registration of a mark may, upon payment of
the required fee and within 30 days after the
publication referred to in Subsection 133.2, file with
the Office an opposition to the application. (Sec. 134,
IPC)
A trade name of a national of a State that is a party
to the Paris Convention, whether or not the trade
name forms part of a trademark, is protected
“without the obligation of prior filing or
registration.” (Fredco Manufacturing Corporation v.
President and Fellows of Harvard College (Harvard
University), G.R. No. 185917, 01 June 2011; Art. 8,
Paris Convention for the Protection of Industrial
Property)
Q: ABC Appliances Corporation (ABC) is a
domestic corporation engaged in the production
and sale of televisions and other appliances. YYY
Engineers, a Taiwanese company, is the
manufacturer of televisions and other
appliances from whom ABC actually purchases
appliances. From 2000, when ABC started doing
business with YYY, it has been using the mark
"TTubes" in the Philippines for the television
units that were bought from YYY. In 2015, YYY
filed a trademark application for "TTubes."
Later, ABC also filed its application. Both claim
the right over the trademark "TTubes" for
television products. YYY relies on the principle
of "first to file" while ABC involves the "doctrine
of prior use. (2016 BAR)
A trade name need not be registered with the IPO
before an infringement suit may be filed by its
owner against the owner of an infringing
trademark. All that is required is that the trade
name is previously used in trade or commerce in the
Philippines. A corporation has the exclusive right to
use its name. The right proceeds from the theory
that it is a fraud on the corporation which has
acquired a right to that name and perhaps carried
on its business thereunder, that another should
attempt to use the same name, or the same name
with a slight variation in such a way as to induce
persons to deal with it in the belief that they are
dealing with the corporation which has given a
reputation to the name. (Coffee Partners, Inc. v. San
Francisco Coffee & Roastery, Inc., G.R. No. 169504, 03
Mar. 2010)
a.
A: NO. Since YYY is not the owner of the trademark,
it has no right to apply for registration. Registration
of trademark, by itself, is not a mode of acquiring
ownership. It is the ownership of a trademark that
confers the right to register the same. (Birkenstock
Orthopedia GMBH and Co. v. Philippines Shoe Expo
Marketing Corp., G.R. No. 194307, 20 Nov. 2013)
Effect of Registration
The rights in a mark shall be acquired through
registration made validly in accordance with the
provisions of the IPC. (Sec. 122, IPC)
Certificate of Registration
b. Does the prior registration also mean a
conclusive assumption that YYY Engineers is
in fact the owner of the trademark
“TTubes?” Briefly explain your answer.
A certificate of registration of a mark shall be prima
facie evidence of the validity of the registration, the
UNIVERSITY OF SANTO TOMAS
2024 GOLDEN NOTES
Does the fact that YYY filed its application
ahead of ABC mean that YYY has the prior
right over the trademark? Explain briefly.
260
COMMERCIAL LAW
Dean, Inc. v. Shoemart, Inc., G.R. No. 148222, 15 Aug.
2003)
A: NO. Registration merely creates a prima facie
presumption of validity of the registration of the
registrant’s ownership of the trademark and the
exclusive right to the use thereof. The presumption
of ownership accorded to a registrant is rebuttable
and must yield to evidence to the contrary. (Zuneca
Pharmaceutical v. Natrapharm, Inc., G.R. No. 211850,
08 Sept. 2020)
Concept of Actual Use
The actual use of the mark representing the goods
or services introduced and transacted in commerce
over a period of time creates that goodwill which
the law seeks to protect.
The use of a registered mark representing the
owner's goods or services by means of an
interactive website may constitute proof of actual
use that is sufficient to maintain the registration of
the same (W Land Holdings, Inc., v. Starwood Hotels
and Resorts Worldwide, Inc., G.R. No. 222366, 04 Dec.
2017)
4. RIGHTS AND LIMITATIONS OF TRADEMARK
OWNER
(Sec. 147)
Rights of a Trademark Owner
The owner of a registered mark shall have the
exclusive right to:
1.
Use the mark for one’s own goods or services;
and
2.
Prevent third parties from using, without his
consent, signs or containers which are
identical or similar to the registered
trademark where such use would result in a
likelihood of confusion.
It must be emphasized, however, that the mere
exhibition of goods or services over the internet,
without more, is not enough to constitute actual use.
To reiterate, the "use" contemplated by law is
genuine use – that is, a bona fide kind of use tending
towards a commercial transaction in the ordinary
course of trade. Since the internet creates a
borderless marketplace, it must be shown that the
owner has actually transacted, or at the very least,
intentionally targeted customers of a particular
jurisdiction in order to be considered as having used
the trademark in the ordinary course of his trade in
that country. A showing of an actual commercial link
to the country is therefore imperative. (W Land
Holdings, Inc., v. Starwood Hotels and Resorts
Worldwide, Inc., supra.)
In case of the use of an identical sign for identical
goods or services, a likelihood of confusion shall be
presumed. (Secs. 147 and 147.1, IPC)
Trademark owner enjoys protection in product and
market areas that are the normal potential
expansion of his business. (Dermaline Inc.. v. Myra
Pharmaceuticals, Inc., GR No. 190065, 16 Aug. 2010)
Evidence of Actual Use
The following shall be accepted as proof of actual
use of the mark:
Doctrine of Secondary Meaning
Secondary meaning means that a word or phrase
originally incapable of exclusive appropriation with
reference to an article in the market (because it is
geographically or otherwise descriptive) might
nevertheless have been used for so long and so
exclusively by one producer with reference to his
article that, in the trade and to that branch of the
purchasing public, the word or phrase has come to
mean that the article was his property. (Pearl &
261
1.
downloaded pages from the website clearly
showing that the goods are being sold or the
services are being rendered or made available
in the Philippines;
2.
photographs (including digital photographs
printed on ordinary paper) of the following:
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
2024 GOLDEN NOTES
a.
b.
c.
3.
4.
labels or packaging bearing the mark as
actually used on the goods;
the stamped or marked container of goods;
or
signages bearing the mark on the facade or
any area in the establishment/s where the
mark is displayed.
4.
Instances when Non-Use of a Mark is Excused
1.
brochures or advertising materials showing the
actual use of the mark on the goods being sold
or services being rendered in the Philippines;
copies of contracts for services showing the use
of the mark; or
6.
such other evidence of similar nature that the
Director may determine as acceptable. (Sec.
210, IPOPHL MC NO. 2023-001)
Admission of non-compliance with the requirement
of filing a Declaration of Actual Use is tantamount to
a judicial admission of abandonment of trademark.
(Mattel, Inc. v. Francisco, G.R. No. 166886, 30 July
2008)
3.
3.
Use of mark in connection with one or more of
the goods/services belonging to the class in
which the mark is registered shall prevent its
cancellation or removal in respect of all other
goods or services of the same class.; (Sec. 152.3,
IPC)
4.
Use of a mark by a company related to the
applicant/registrant; (Sec. 152.4, IPC)
5.
Use of a mark by a person controlled by the
registrant. (Sec. 152.4, IPC)
Effectivity
of
Trademark
The registrant is required to file a declaration of
actual use and evidence to that effect, or show valid
reasons based on the existence of obstacles to such
use, within one (1) year from the fifth anniversary
of the date of the registration of the mark.
Otherwise, the mark shall be removed from the
Register by the IPO. (Secs. 145 and 146, IPC)
Three (3) years from the filing date of the
application;
One (1) year from the 5th anniversary of the
date of registration of the mark;
Within one year from date of renewal; and
UNIVERSITY OF SANTO TOMAS
2024 GOLDEN NOTES
A use which does not alter its distinctive
character though the use is different from the
form in which it is registered; (Sec. 152.2, IPC)
The trademark registration remains in force for 10
years, subject to indefinite renewals of 10 years
each.
Periods to File Declaration of Actual Use
2.
2.
Duration or
Registration
NOTE: Failure to file a Declaration of Actual Use
(DAU) within the required period results in the
automatic cancellation of registration of a
trademark. In turn, such failure is tantamount to the
abandonment or withdrawal of any right or interest
the registrant has over his trademark. (Birkenstock
Orthopaedie GMBH and Co. KG v. Philippine Shoe
Expo Marketing Corporation, G.R. No. 194307, 20
Nov. 2013)
1.
If
caused
by
circumstances
arising
independently of the will of the owner; (Sec.
152.1, IPC)
NOTE: Lack of funds shall not excuse non-use of
a mark. (Sec. 152.1, IPC)
receipts or invoices of sale of the goods or
services rendered or other similar evidence of
use, showing that the goods are placed on the
market or the services are available in the
Philippines;
5.
Within one year from the 5th anniversary of
each renewal. (Sec. 204, IPOPHL MC NO. 2023001)
262
COMMERCIAL LAW
Application for Registration of a Mark by a
Foreign National
ownership of a trademark that confers the right to
register the same. A trademark is an industrial
property over which its owner is entitled to
property rights which cannot be appropriated by
unscrupulous entities that, in one way or another,
happen to register such trademark ahead of its true
and lawful owner. The presumption of ownership
accorded to a registrant must then necessarily yield
to superior evidence of actual and real ownership of
a trademark. (Divina, 2014; Birkenstock Orthopaedie
GMBH and Co. KG v. Philippine Shoe Expo Marketing
Corporation, G.R. No. 194307, 20 Nov. 2013)
An application for registration of a mark filed in the
Philippines by a foreign national of a country with
whom the Philippines extends reciprocity rights,
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.
(Sec. 131.1, IPC)
However, the owner of a well-known mark in the
Philippines that is identical with, or confusingly
similar to, or constitutes a translation of a mark,
although not registered, may oppose the application
of a mark of foreign origin, or petition the
cancellation of its registration or sue for unfair
competition. (Sec. 131.3, IPC)
NOTE: The rights in a mark shall be acquired
through registration made validly in accordance
with the provisions of the IP Code. (Sec. 122, IPC;
Zuneca Pharmaceutical v. Natrapharm, Inc., G.R. No.
211850, 08 Sept. 2020)
Q: E.Y. Industrial is a domestic corporation
engaged in the production, distribution and sale
of air compressors and other industrial tools
and equipment. Shen Dar is a Taiwan-based
foreign corporation engaged in the manufacture
of air compressors. Both companies claimed to
have the right to register the trademark
"VESPA" for air compressors.
Q: Birkenstock, applied for various trademark
registrations before the IPO. However,
registration proceedings of the subject
applications were suspended in view of an
existing registration of the mark "BIRKENSTOCK
AND DEVICE" in the name of STIIC, predecessorin-interest of PSEMC. Birkenstock filed a
cancellation case on the ground that it is the
lawful and rightful owner of the Birkenstock
marks. However, STIIC/PSEMC’s registration
expired, thereby resulting in the cancellation of
such mark. Accordingly, the cancellation case
was dismissed for being moot and academic.
On 09 June 1997, Shen Dar filed Trademark
Application with the IPO for the mark "VESPA,
Chinese Characters and Device" for use on air
compressors and welding machines. On 28 July
1999, EYIS filed Trademark Application also for
the mark "VESPA," for use on air compressors.
The aforesaid cancellation paved the way for the
publication of the subject applications in the IPO
e-Gazette. In response, STIIC/PSEMC filed three
(3) separate Inter Partes Cases. The BLA-IPO
sustained STIIC/PSEMC’s opposition. IPO
Director General reversed and set aside the
ruling of the BLA. The CA reversed and set aside
the ruling of the IPO Director General and
reinstated that of the BLA.
On 21 June 2004, Shen Dar filed a Petition for
Cancellation of EYIS’ COR. Shen Dar primarily
argued that the issuance of the COR in favor of
EYIS violated Sec. 123.1(d), (e), and (f) of R.A. No.
8293, otherwise known as the Intellectual
Property Code (IP Code), having first filed an
application for the mark.
Who is the true owner of the mark?
Should registration of the subject marks be
allowed in favor of Birkenstock?
A: E.Y. Industrial is the true owner of the mark.
Under the Intellectual Property Code, the
registration of a mark is prevented with the filing of
an earlier application for registration. This must
A: YES. It is not the application or registration of a
trademark that vests ownership thereof, but it is the
263
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
2024 GOLDEN NOTES
not, however, be interpreted to mean that
ownership should be based upon an earlier filing
date. Notably, the Court has ruled that the prior and
continuous use of a mark may even overcome the
presumptive ownership of the registrant and be
held as the owner of the mark. Registration, without
more, does not confer upon the registrant an
absolute right to the registered mark. The certificate
of registration is merely a prima facie proof that the
registrant is the owner of the registered mark or
trade name. Evidence of prior and continuous use of
the mark or trade name by another can overcome
the presumptive ownership of the registrant and
may very well entitle the former to be declared
owner in an appropriate case.
There shall be no infringement of trademarks or
trade names of imported or sold patented drugs and
medicines allowed under Sec. 72.1 of the IPC, as well
as imported or sold off-patent drugs and medicines;
Provided, That said drugs and medicines bear the
registered marks that have not been tampered,
unlawfully modified, or infringed upon, under Sec.
155 of the IPC. (Sec. 147, IPC, as amended by R.A. No.
9502)
When the Rights Terminate
The rights conferred by trademark registration end
upon cancellation of the certificate of registration by
the IPO in the cases allowed by law. (Divina, 2021)
E.Y. Industrial’s prior adoption and continuous use
of the mark "VESPA" on air compressors is
bolstered by numerous documentary evidence. The
use by E.Y. Industrial in the concept of owner is
shown by commercial documents, sales invoices
unambiguously describing the goods as "VESPA" air
compressors. E.Y. Industrial have sold the air
compressors bearing the "VESPA" to various
locations in the Philippines, as far as Mindanao and
the Visayas since the early 1990s.
Certificate of Registration Prima Facie Evidence
of Validity
A certificate of registration of a mark shall be prima
facie evidence of the validity of the registration, the
registrant’s ownership of the mark, and of the
registrant’s exclusive right to use the same in
connection with the goods or services and those
that are related thereto specified in the certificate.
(Sec. 138, IPC)
As such, E.Y. Industrial must be considered as the
prior and continuous user of the mark "VESPA" and
its true owner and is entitled to the registration of
the mark in its name. (E.Y. Industrial Sales v. Shen
Dar Electricity and Machinery Co., Ltd., G.R. No.
184850, 20 Oct. 2010)
Issuance and Publication of Certificate of
Registration
The certificate of registration shall be issued when
the period for filing the opposition has expired, or
when the Director of Legal Affairs shall have denied
the opposition, and upon payment of the required
fee. (Sec. 136, IPC)
Limitations
Except in cases of importation of drugs and
medicines allowed under Sec. 72.1 of the IPC and of
off-patent drugs and medicines, 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.
UNIVERSITY OF SANTO TOMAS
2024 GOLDEN NOTES
The registered mark shall be published, in the form
and within the period fixed by the Regulations.
Marks registered at the Office may be inspected free
of charge and any person may obtain copies thereof
at his own expense. This provision shall also be
applicable to transactions recorded in respect of
any registered mark. (Sec. 138, IPC)
264
COMMERCIAL LAW
Effect of Failure to file Declaration of Actual Use
precedents must be studied in the light of each
particular case. (Mighty Corporation v. E. & J. Gallo
Winery, G.R. No. 154342, 14 July 2004)
The applicant or the registrant shall file a
declaration of actual use (DAU) of the mark with
evidence to that effect, as prescribed by the
Regulations within three (3) years from the filing
date of the application. Otherwise, the application
shall be refused, or the mark shall be removed from
the Register by the Director. (Sec. 124.2, IPC)
Less Stringent Standard of Likelihood of
Confusion
Failure to present proof of actual confusion does not
negate their claim of trademark infringement.
Trademark infringement requires the less stringent
standard of “likelihood of confusion” only. While
proof of actual confusion is the best evidence of
infringement, its absence is inconsequential.
(McDonalds Corporation v. L. C. Big Mak Burger, Inc.,
G.R. No. 143993, 18 Aug. 2004)
A fifth anniversary use is also required. This is done
by filing a declaration of actual use and evidence to
that effect within one year from the fifth
anniversary of the registration. The form and
evidence of use required are similar to the third
year DAU. Failure to submit the fifth anniversary
use and evidence to that effect shall merit the
cancellation of the mark. (Sec. 145, IPC)
Elements
of
Trademark
(Reg-Rep-Use-Co-Co)
5. TRADEMARK INFRINGEMENT
(Sec. 155)
Infringement is the use, without consent of the
trademark owner, of any "reproduction, counterfeit,
copy or colorable imitation of any registered mark
or tradename in connection with the sale, offering
for sale, or advertising of any goods, business or
services on or in connection with which such use is
likely to cause confusion or mistake or to deceive
purchasers or others as to the source or origin of
such goods or services, or identity of such business;
or reproduce, counterfeit, copy or colorably imitate
any such mark or tradename and apply such
reproduction, counterfeit, copy or colorable
limitation to labels, signs, prints, packages,
wrappers, receptacles or advertisements intended
to be used upon or in connection with such goods,
business or services." (Esso Standard Eastern, Inc. v.
CA, G.R. No. L-29971, 31 Aug. 1982)
A crucial issue in any trademark infringement case
is the likelihood of confusion, mistake, or deceit as
to the identity, source or origin of the goods or
identity of the business as a consequence of using a
certain mark. Likelihood of confusion is admittedly
a relative term, to be determined rigidly according
to the particular (and some- times peculiar)
circumstances of each case. Thus, in trademark
cases, more than in other kinds of litigation,
Infringement
1.
The trademark being infringed is Registered in
the Intellectual Property Office;
2.
The trademark is Reproduced, counterfeited,
copied, or colorably imitated by the infringer;
3.
The infringing mark is Used in connection with
the sale, offering for sale, or advertising of any
goods, business, or services; or the infringing
mark is applied to labels, signs, prints,
packages,
wrappers,
receptacles
or
advertisements intended to be used upon or in
connection with such goods, business or
services;
4.
The use or application of the infringing mark is
likely to cause Confusion or mistake or to
deceive purchasers or others as to the goods or
services themselves or as to the source or origin
of such goods or services or the identity of such
business; and
5.
The use or application of the infringing mark is
without the Consent of the trademark owner or
the assignee thereof. (Divina, 2021; Diaz v.
People, G.R. No. 180677, 18 Feb. 2013)
Q: ELARS Lechon was established and marketed
in 1970 by Sps. Lontoc. In 1989, the Sps. Lontoc
incorporated their food business. Elarfoods was
265
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
2024 GOLDEN NOTES
granted a Certificate of Registration by the
Securities and Exchange Commission. Since
then, the Sps. Lontoc actively managed and used
Elarfoods as its business name and marketed its
roasted pig products as “ELARS LECHON ON A
BAMBOO TRAY,” popularly known by the public
as “Elar’s Lechon.” However, without Elarfoods’
knowledge and permission, Emzee sold and
distributed roasted pigs using the marks “ELARZ
LECHON” “ELAR LECHON” “PIG DEVICE” and “ON
A BAMBOO TRAY” making it appear that Emzee
was a branch or franchisee of Elarfoods. Emzee’s
officers and incorporators were former
Elarfoods employees. Is Emzee guilty of
trademark
infringement
and
unfair
competition?
Counterfeit Goods vs. Colorable Imitation
COUNTERFEIT
COLORABLE
GOODS
IMITATION
Definition
Any goods, including
packaging,
bearing
without authorization
a trademark which is
identical
to
the
trademark
validly
registered in respect of
such goods, or which
cannot
be
distinguished in its
essential aspects from
such a trademark, and
which
thereby
infringes the rights of
the owner of the
trademark in question
under the law of the
country of importation.
(Art. 51, footnote 14(a),
TRIPS Agreement)
A: YES. Applying the dominancy test to the case at
bar, it is very obvious that the Emzee's marks
"ELARZ LECHON” and "ELAR LECHON'' bear an
indubitable likeness with Elarfoods' "ELARS
LECHON." As can easily be seen, both marks use the
essential and dominant word "ELAR". The only
difference between the Emzee's mark from that of
Elarfoods' 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
Emzee and Elarfoods are the same entity. In fine,
Emzee's use of marks similar to those of the
Elarfoods' constitutes a violation of the latter's
intellectual property rights. (Emzee Foods, Inc. v.
Elarfoods, Inc., G.R. No. 220558, 17 Feb. 2021)
Unauthorized Use of Container Bearing a
Registered Trademark
The mere unauthorized use of a container bearing a
registered trademark in connection with the sale,
distribution or advertising of goods or services
which is likely to cause confusion, mistake or
deception among the buyers or consumers can be
considered as trademark infringement. (Republic
Gas Corporation v. Petron Corporation, G.R. No.
194062, 17 June 2013)
Remedies of the Owner of the Trademark
Against Infringers
1.
UNIVERSITY OF SANTO TOMAS
2024 GOLDEN NOTES
Such a close or
ingenious imitation as
to be calculated to
deceive
ordinary
purchasers, or such
resemblance of the
infringing mark to the
original as to deceive
an ordinary purchaser
giving such attention
as a purchaser usually
gives, and to cause him
to purchase the one
supposing it to be the
other. (Emerald v. CA,
G.R. No. 100098, 29
Dec. 1995)
266
Civil – filed with the Regional Trial Courts. The
owner of the registered mark may ask the court
to issue a preliminary injunction to quickly
prevent infringer from causing damage to his
business. Furthermore, the court will require
infringer to pay damages to the owner of the
mark provided defendant is shown to have had
notice of the registration of the mark (which is
COMMERCIAL LAW
presumed if a letter R within a circle is
appended) and stop him permanently from
using the mark.
2.
Criminal – the owner of the trademark may ask
the court to issue a search warrant and in
appropriate cases, remedies available shall also
include the seizure, forfeiture, and destruction
of the infringing goods and of any materials and
implements the predominant use of which has
been in the commission of the offense.
3.
Administrative – same as in patent
infringement cases. If the amount of damages
claimed is not less than P200,000.00, the
registrant may choose to seek redress against
the infringer by filing an administrative action
against the infringer with the Bureau of Legal
Affairs.
any acts calculated to produce said result. (Sec.
168.2, IPC)
It is the passing off (or palming off) or attempting to
pass off upon the public of the goods or business of
one person as the goods or business of another with
the end and probable effect of deceiving the public.
Passing off (or palming off) takes place where the
defendant, by imitative devices on the general
appearance of the goods, misleads prospective
purchasers into buying his merchandise under the
impression that they are buying that of his
competitors. Thus, the defendant gives his goods the
general appearance of the goods of his competitor
with the intention of deceiving the public that the
goods are those of his competitor. (Republic Gas
Corporation v. Petron Corporation, supra)
Infringement of Trademark
Competition (2015 BAR)
vs.
Unfair
Limitations on the Actions for Infringement
1.
Right of prior user – a registered mark shall be
without effect against any person who, in good
faith, before filing or priority date, was using the
mark for purposes of his business; (Sec. 159.1,
IPC)
2.
Relief against publisher – injunction is limited
to the future printing against an innocent
infringer who is engaged solely in the business
of printing the mark; (Sec. 159.2, IPC) and
3.
Relief against newspaper – injunction against
the presentation of advertising matter in future
issues of the newspaper, magazine or in
electronic communications in case the
infringement complained of is contained in or is
part of paid advertisement in such materials.
(Sec. 159.3, IPC)
INFRINGEMENT OF
UNFAIR
TRADEMARK
COMPETITION
Definition
The passing off of one’s
Unauthorized use of a
goods as those of
trademark.
another.
Requirement of Fraudulent Intent
Fraudulent intent is Fraudulent intent is
unnecessary.
essential.
Requirement of Prior Registration
GR: Prior registration
of the trademark is a
Registration is not
prerequisite to the
necessary. (Del Monte
action.
Corp. v. CA, G.R. No. L78325, 23 Jan. 1990)
XPN:
Well-known
marks.
NOTE: There can be unfair competition and
infringement at the same time.
6. UNFAIR COMPETITION
(Sec. 168)
Q: In what way is an infringement of a trademark
similar to that which pertains to unfair
competition? (2003 BAR)
Employing deception or any other means contrary
to good faith by which a person passes off his goods
or business or services for those of one who has
already established goodwill, or who shall commit
A: The similarity lies in both their ability to disrupt
fair competition amongst business enterprises and
other businesses. They can also create confusion,
267
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
2024 GOLDEN NOTES
mistake, and deception as to the minds of the
consumers with regard to the source or identity of
their products or services due to its similarity in
appearance or packaging.
Essential 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.
Unfair Competition Violates Property Rights
A person who has identified in the mind of the
public the goods he manufactures or deals in, his
business or services from those of others, whether
or not a registered mark is employed, has a property
right in the goodwill of the said goods, business or
services so identified, which will be protected in the
same manner as other property rights. (Sec. 168.1,
IPC)
Persons Guilty of Unfair Competition
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. The intent to deceive and defraud may be
inferred from the similarity of the appearance of the
goods as offered for sale to the public. (McDonalds
Corporation v. L. C. Big Mak Burger, Inc., G.R. No.
143993, 18 Aug. 2004)
1.
The Element of Passing-off
Any person, who is selling his goods and gives
them the general appearance of goods of
another manufacturer or dealer, either as to the
goods themselves or in the wrapping of the
packages in which they are contained, or the
devices or words thereon, or in any other
feature of their appearance, which would be
likely to influence purchasers to believe that the
goods offered are those of a manufacturer or
dealer, other than the actual manufacturer or
dealer, or who otherwise clothes the goods with
such appearance as shall deceive the public and
defraud another of his legitimate trade, or any
subsequent vendor of such goods or any agent
of any vendor engaged in selling such goods
with a like purpose;
2.
Any person who by any artifice, or device, or
who employs any other means calculated to
induce the false belief that such person is
offering the services of another who has
identified such services in the mind of the
public; or
3.
Any person who shall make any false statement
in the course of trade or who shall commit any
other act contrary to good faith of a nature
calculated to discredit the goods, business or
services of another. (Sec. 168.3, IPC)
UNIVERSITY OF SANTO TOMAS
2024 GOLDEN NOTES
In order to prove a case of unfair competition, it is
sufficient to show that such deception will be the
natural and probable effect of defendant’s acts.
(Superior Enterprises, Inc. v. Kunnan Enterprises Ltd.,
G.R. No. 169974, 20 Apr. 2010)
Q: Petitioners Elidad and Violeta were charged
with Unfair Competition by respondent
Summerville. 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. 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". Is there probable
cause to charge petitioners with unfair
competition?
A: YES. The essential elements of an action for
unfair competition are: (1) confusing similarity in
the general appearance of the goods, and (2) intent
to deceive the public and defraud a competitor. 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 confusion of goods or
268
COMMERCIAL LAW
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.
violation of intellectual property rights occurred
shall have concurrent jurisdiction to issue search
warrants.
The "true test" of unfair competition has thus been
"whether the acts of the defendant have the intent
of deceiving or are calculated to deceive the
ordinary buyer making his purchases under the
ordinary conditions of the particular trade to which
the controversy relates." It is therefore essential to
prove the existence of fraud, or the intent to deceive,
actual or probable, determined through a judicious
scrutiny of the factual circumstances attendant to a
particular case. (Shang Properties Realty
Corporation and Shang Properties, Inc. v. St. Francis
Development Corporation, G.R. No. 190706, 21 July
2014)
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. In this case, the
similarities far outweigh the differences. The
general appearance of petitioners' product is
confusingly similar to respondent." (Kho v.
Summerville General Merchandising & Co., Inc., G.R.
No 213400, 04 Aug. 2021)
Q: The NBI found that SG Inc. is engaged in the
reproduction and distribution of counterfeit
"playstation games" and thus applied with the
Manila RTC warrants to search respondent's
premises in Cavite. RTC granted such warrants
and thus, the NBI served the search warrants on
the subject premises. SG Inc. questioned the
validity of the warrants due to wrong venue
since the RTC of Manila had no jurisdiction to
issue a search warrant enforceable in Cavite. Is
the contention of SG Inc., correct?
Q: San Miguel started selling its FIESTA ham in
1980. In 2006, it filed for trademark
infringement and unfair competition against
Foodsphere for selling its PISTA ham. San Miguel
alleged that there is confusing similarity in the
general appearance of the goods and that
Foodsphere intended to deceive the public.
According to San Miguel, both products have a
picture of a partly sliced ham served on a plate
of fruits and both FIESTA and PISTA were
printed in white bold stylized font. Further, the
packaging for both consists of box-typed paper
bags made of cardboard materials with cut-out
holes on the middle top portion for use as
handles and predominantly red in color with a
background design of Christmas balls, stars,
snowflakes, and ornate scrolls. On the other
hand, Foodsphere claimed that the marks were
not confusingly similar and visually and aurally
distinct from each other. This is because PISTA
is always in conjunction with its house mark
“CDO” and FIESTA bears house mark
“PUREFOODS” rendering confusion impossible.
Further, Foodsphere claimed that San Miguel
does not have the monopoly to the term FIESTA
since there are other products in the
supermarket using the same term. Was there
unfair competition?
A: NO. Unfair competition is a transitory or
continuing offense under Sec. 168 of the IPC. As such,
petitioner may apply for a search warrant in any
court where any element of the alleged offense was
committed, including any of the courts within Metro
Manila and may be validly enforced in Cavite. (Sony
Computer Entertainment Inc. v. Supergreen Inc. G.R.
No. 161823, 22 Mar. 2007)
NOTE: Section Sec. 2, Rule 10 of the Rules of
Procedure on IP Cases (A.M. No. 10-3-10 SC, as
amended October 6, 2020 16 Nov. 2020) provides
that Special Commercial Courts in Quezon City,
Manila, Makati, Pasig, Baguio City, Iloilo City, Cebu
City, Cagayan de Oro City, and Davao City shall have
authority to act on applications for the issuance of
search warrants involving violations of the
Intellectual Property Code IPC, which search
warrants shall be enforceable nationwide. Within
their respective territorial jurisdictions, the Special
Commercial Courts in the judicial regions where the
A: YES. The Court has held that unfair competition
consists of the passing off (or palming off) or
269
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
2024 GOLDEN NOTES
attempting to pass off upon the public of the goods
or business of one person as the goods or business
of another with the end and probable effect of
deceiving the public. Passing off (or palming off)
takes place where the defendant, by imitative
devices on the general appearance of the goods,
misleads prospective purchasers into buying his
merchandise under the impression that they are
buying that of his competitors. In other words, the
defendant gives his goods the general appearance of
the goods of his competitor with the intention of
deceiving the public that the goods are those of his
competitor. 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."
b. If the mark has been abandoned;
c. If its registration was obtained fraudulently
or contrary to the provisions of the IPC;
d. If the registered mark is being used by, or
with the permission of, the registrant so as
to misrepresent the source of the goods or
services on or in connection with which the
mark is used; or
e. Non-use of the mark within the Philippines,
without legitimate reason, for an
uninterrupted period of three (3) years.
(Sec. 151, IPC)
Q: K-9 Corporation, a foreign corporation
alleging itself to be the registered owner of
trademark “K-9” and logo “K”, filed an Inter
Partes case with the IPO against Kanin
Corporation for the cancellation of the latter’s
mark “K-9” and logo “K.” During the pendency of
the case before the IPO, Kanin Corporation
brought suit against K-9 Corporation before the
RTC for infringement and damages. Could the
action before the RTC prosper? Why? (2003
BAR)
Thus, the essential elements of an action for unfair
competition are: (1) confusing similarity in the
general appearance of the goods; and (2) intent to
deceive the public and defraud a competitor. 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. The intent to deceive and defraud may be
inferred from the similarity of the appearance of the
goods as offered for sale to the public. Actual
fraudulent intent need not be shown. (San Miguel
Pure Foods Company, Inc. v. Foodsphere, G.R. No.
217781, 20 June 2018)
A: YES. The action before the RTC can prosper.
According to Sec. 151.2 of the IPC, the filing of a suit
to enforce the registered mark with the proper
court or agency shall exclude any other court or
agency from assuming jurisdiction over a
subsequently filed petition to cancel the same
mark. On the other hand, the earlier filing of
petition to cancel the mark with the Bureau of Legal
Affairs shall not constitute a prejudicial question
that must be resolved before an action to enforce
the rights to same registered mark may be decided.
The issues raised before the different the IPO and
the RTC are different. The issue raised before the
IPO is whether or not the cancellation of the
subsequent trademark is proper because of the
prior ownership of the disputed mark by K-9. While
the issue raised before the RTC pertains to
infringement. Furthermore, an action for
infringement or unfair competition, as well as the
remedy of injunction and relief for damages, is
explicitly and unquestionably within the
7. CANCELLATION
(Secs. 151)
A trademark registration may be cancelled by any
person who believes that he will be damaged by the
registration of the mark: GRAFMU
1.
Within five (5) years from the date of the
registration of the mark; or
2.
At any time;
a. If the registered mark becomes the generic
name for the goods or services, or a portion
thereof, for which it is registered;
UNIVERSITY OF SANTO TOMAS
2024 GOLDEN NOTES
270
COMMERCIAL LAW
competence and jurisdiction of ordinary courts.
(Shangri-la International Hotel Management, Ltd., v.
CA, G.R. No. 111580, 21 June 2001)
C. COPYRIGHTS
Q: Alice Corp had been using the trademark “Mr.
Gulaman” for gulaman powder jelly mix. It
registered the same in 2006, but it found out
that there was a pending registration for the
same trademark filed on 2005 by Q Corp. Alice
Corp. opposed Q’s registration on the ground
that it had been using the logo since 2000 and
the logo it had been using was a registered
copyright from the artist that it had
commissioned to create such logo. The artist
then assigned such copyrighted logo in its favor.
Despite such opposition, the Certificate of
Registration was issued in favor of Q Corp. Alice
Corp then decides to file a petition for
cancellation of the certificate of registration.
This was granted by the BLA-IPO on the ground
of that was substantial evidence to prove Alice
Corp’s prior use of mark due to its actual use in
commerce since 1996 and that the competing
logos are identical and the same in all aspects. Is
the BLA-IPO correct in cancelling the Certificate
of Registration issued in favor of Q Corp?
Copyright
A right over literary and artistic works which are
original intellectual creations in the literary and
artistic domain protected from the moment of
creation.
It is an intangible, incorporeal right granted by
statute to the author or originator of certain literary
or artistic productions, whereby he or she is
invested, for a specific period, with the sole and
exclusive privilege of multiplying copies of the same
and publishing and selling them. (Black’s Law
Dictionary, 1990)
Copyright, in the strict sense of the term, is purely a
statutory right. Being a mere statutory grant, 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. Accordingly, it
can only cover the works falling within the statutory
enumeration or description. Only the expression of
an idea is protected by copyright, not the idea itself.
(Pearl & Dean Inc. v. Shoemart, Inc., G.R. No. 148222,
15 Aug. 2003; Joaquin, Jr. v. Drilon, G.R. No. 108946,
28 Jan. 1999; Ching v. Salinas, G.R. No. 161295, 29
June 2005)
A: YES. Pursuant to the case of Zuneca v.
Natrapharm, trademark can be acquired only
through registration and not through prior use.
However, when a certificate of registration is
already issued in favor of a person, it is only
considered as prima facie evidence of the ownership
of such trademark. The same can be rebutted. While
registration vests ownership over a mark, bad faith
may still be a ground for the cancellation of
trademark registrations. In cancelling petitioner's
certificate of registration, the BLA-IPO concluded
that petitioner copied respondent's mark. It
compared the two and found that petitioner's mark
is identical with respondent's. It noted that the word
"Mr. Gulaman" in both of their marks are "exactly
the same in all aspects" This conclusion was
bolstered by its finding that in petitioner's
Declaration of Actual Use, she submitted
photographs of a packaging showing respondent's
"Mr. Gulaman" and its logo design. (Medina v. Global
Quest Ventures, G.R. No. 213815, 08 Feb. 2021)
Functional components of useful articles, no matter
how artistically designed, have generally been
denied copyright protection unless they are
separable from the useful article A useful article
may be copyrightable only if and only to the extent
that such design incorporates pictorial, graphic, and
sculptural features that can be identified separately
from and are capable of existing independently of
the utilitarian aspects of the article. (Ching v. Salinas,
G.R. No. 161295, 29 June 2005)
Duration of the Author’s Copyright
Copyright shall last during the lifetime of the author
and 50 years after his death. (Sec. 213.1, IPC)
271
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
2024 GOLDEN NOTES
Copyright protection is not absolute. (ABS-CBN
Corporation v. Gozon, G.R. No. 195956, 11 Mar. 2015)
There is no absolute protection unlike the
protection in tangible properties where one can do
anything so long as you will not violate the rights of
others. In the case of copyright, there is a limitation
on the term of protection.
of the deposit requirement and to recover damages
in an infringement suit. While under R.A. No. 8293,
the purpose of registration/deposit is limited to
avoiding fine. However, under RA 8293 as amended
by R.A. No. 10372, non-registration/deposit of
copies of the work will not result in the imposition
of the fine nor forfeiture of the right to recover
damages.
Requirement of Originality
Copyright as Distinct from Material Object
Originality means that it must have been created by
the author’s own skill, labor, and judgment without
directly copying or evasively imitating the work of
another.; and (Ching Kian Chuan v. CA, G.R. No.
130360, 15 Aug. 2001)
GR: The copyright is distinct from the property in
the material object subject to it. Consequently, the
transfer or assignment of the copyright shall not
itself constitute a transfer of the material object. Nor
shall a transfer or assignment of the sole copy or of
one or several copies of the work imply transfer or
assignment of the copyright. (Sec. 181, IPC)
NOTE: Minimal degree of creativity suffices.
Elements of Originality
1.
2.
XPN: Work of Architecture - Copyright in a work of
architecture shall include the right to control the
erection of any building which reproduces the
whole or a substantial part of the work either in its
original form or in any form recognizably derived
from the original: Provided, That the copyright in
any such work 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, IPC)
Independently created by the author; and
Possesses some minimal degree of creativity.
1. COPYRIGHTABLE WORKS
(Secs. 172-173)
Time when Copyright Vests
Principle of Automatic Protection – Works are
protected from the moment of their creation,
irrespective of their mode or form of expression, as
well as of their content, quality, and purpose (Sec.
172.2, IPC).
ORIGINAL WORKS
Original works refer to intellectual creation in the
literary, scientific and artistic domain.
The certificates of registration and deposit issued by
the National Library and the Supreme Court Library
serve merely as a notice of recording and
registration of the work but do not confer any right
or title upon the registered copyright owner or
automatically put his work under the protective
mantle of the copyright law. It is not a conclusive
proof of copyright ownership. As it is, nonregistration and deposit of the work within the
prescribed period only makes the copyright owner
liable to pay a fine. (Manly Sportswear
Manufacturing Inc. v. Dadodette Enterprises and/or
Hermes Sports Center, G.R. No. 165306, 20 Sept. 2005)
NOTE: Under PD 49, registration of copyright is
necessary to avoid the penalty for non-compliance
UNIVERSITY OF SANTO TOMAS
2024 GOLDEN NOTES
The following are literary and artistic works:
1.
2.
3.
4.
5.
6.
7.
8.
9.
272
Books, pamphlets, articles, and other writings;
Lectures, sermons, addresses, dissertations
prepared for oral delivery, whether or not
reduced in writing or other material form;
Letters;
Dramatic, choreographic works;
Musical compositions;
Works of Art;
Periodicals and Newspapers;
Works relative to Geography, topography,
architecture, or science;
Works of Applied art;
COMMERCIAL LAW
10. Works of a Scientific or technical character;
11. Photographic works;
12. Audiovisual works and cinematographic works;
13. Pictorial illustrations and advertisements;
14. Computer programs; and
15. Other literary, scholarly, scientific, and artistic
works. (Sec. 172.1, IPC)
boxes itself. (Pearl and Dean Inc. v. Shoemart Inc.,
supra)
Q: Juan Xavier wrote and published a story
similar to an unpublished copyrighted story of
Manoling
Santiago.
It
was,
however,
conclusively proven that Juan Xavier was not
aware that the story of Manoling Santiago was
protected by copyright. Manoling Santiago sued
Juan Xavier for infringement of copyright. Is
Juan Xavier liable? (1998 BAR)
DERIVATIVE WORKS
1.
2.
Dramatizations, translations, adaptations,
abridgements, arrangements, and other
alterations of literary or artistic works; and
A: YES. Juan Xavier is liable for infringement of
copyright. It is not necessary that Juan Xavier is
aware that the story of Manoling Santiago was
protected by copyright. The work of Manoling
Santiago is protected from the time of its creation.
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, IPC)
There will still be originality sufficient to warrant
copyright protection if “the author, through his skill
and effort, has contributed a distinguishable
variation from the older works.” In such a case, of
course, only those parts which are new are
protected by the new copyright. Hence, in such a
case, there is no case of infringement. Juan Xavier is
no less an “author” because others have preceded
him. (Habana v. Robles, G.R. No. 131522, 19 July
1999)
NOTE: Derivative works shall be protected as new
works, provided 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. (Sec. 173.2, IPC)
Q: P&D was granted a copyright on the technical
drawings of light boxes as "advertising display
units". SMI, however, manufactured similar or
identical to the light box illustrated in the
technical drawings copyrighted by P&D for
leasing out to different advertisers. Was this an
infringement of P&D’s copyright over the
technical drawings?
2. NON-COPYRIGHTABLE WORKS
(Secs. 175-176)
Non-Copyrightable Works
A: NO. P&D’s copyright protection extended only to
the technical drawings and not to the light box itself.
The light box was not a literary or artistic piece
which could be copyrighted under the copyright
law. If SMI reprinted P&D’s technical drawings for
sale to the public without license from P&D, then no
doubt they would have been guilty of copyright
infringement. Only the expression of an idea is
protected by copyright, not the idea itself. If what
P&D sought was exclusivity over the light boxes, it
should have instead procured a patent over the light
273
1.
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 items of press
information;
3.
Any official text of a legislative, administrative,
or legal nature, as well as any official translation
thereof; (Sec. 175, IPC)
4.
Any work of the Government of the Philippines;
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
2024 GOLDEN NOTES
GR: No copyright shall subsist in any work of
the Government of the Philippines. However,
prior approval of the government agency or
office wherein the work is created shall be
necessary for exploitation of such work for
profit. Such agency or office may, among other
things, impose as a condition the payment of
royalties.
Q: ABS-CBN conducted a live audio-video
coverage of and broadcasted the arrival of
Angelo dela Cruz at the Ninoy Aquino
International
Airport
(NAIA)
and
the
subsequent press conference. ABS-CBN allowed
Reuters Television Service (Reuters) to air the
footages it had taken earlier under a special
embargo agreement. It received a live video feed
of the coverage of Angelo dela Cruz’s arrival
from Reuters. GMA-7 immediately carried the
live news feed in its program "Flash Report,"
together with its live broadcast. ABS-CBN filed
the Complaint for copyright infringement. Are
news footages considered copyrightable under
the law?
XPN: No prior approval or conditions shall be
required for the use of any purpose of statutes,
rules and regulations, and speeches, lectures,
sermons, addresses, and dissertations,
pronounced, read, or rendered in courts of
justice, before administration agencies, in
deliberative assemblies and in meetings of
public character. (Sec. 176, IPC)
5.
A: YES. The arrival of Angelo dela Cruz is not
copyrightable because that is the newsworthy
event. However, any footage created from the event
itself, in this case the arrival of Angelo dela Cruz, are
intellectual creations which are copyrightable. The
IPC does not state that expression of the news of the
day, particularly when it underwent a creative
process, is not entitled to protection. News coverage
in television involves framing shots, using images,
graphics, and sound effects. It involves creative
process and originality. Television news footage is
an expression of the news. Thus, being an
expression, it is considered copyrightable under the
law. (ABS-CBN Corp. v. Gozon, supra)
Statutes, rules and regulations, and speeches
made in courts of justice, administrative
agencies and in meetings of public character.
(Sec.176.1, IPC)
NOTE: The author of the works mentioned shall
have the exclusive right of making a collection
of his works. (Sec. 176.2, IPC)
6.
TV programs, format of TV programs; and
(Joaquin v. Drilon, G.R. No. 108946, 28 Jan. 1999)
7.
Systems of bookkeeping.
An Object of Utility is not Copyrightable
Q: X, an amateur astronomer, stumbled upon
what appeared to be a massive volcanic
eruption in Jupiter while peering at the planet
through his telescope. The following week, X,
without notes, presented a lecture on his
findings before the Association of Astronomers
of the Philippines. To his dismay, he later read
an article in a science journal written by Y, a
professional astronomer, repeating exactly
what X discovered without any attribution to
him. Has Y infringed on X's copyright, if any?
(2011 BAR)
A copyrightable work refers to literary and artistic
works defined as original intellectual creations in
the literary and artistic domain. A hatch door, by its
nature is an object of utility. It is defined as a small
door, small gate or an opening that resembles a
window equipped with an escape for use in case of
fire or emergency. It is thus by nature, functional
and utilitarian serving as egress access during
emergency. It is not primarily an artistic creation
but rather an object of utility designed to have
aesthetic appeal. It is intrinsically a useful article,
which, as a whole, is not eligible for copyright.
A: NO, because no protection extends to any
discovery, even if expressed, explained, illustrated,
or embodied in a work. (Sec. 175, IPC)
UNIVERSITY OF SANTO TOMAS
2024 GOLDEN NOTES
The only instance when a useful article may be the
subject of copyright protection is when it
incorporates a design element that is physically or
274
COMMERCIAL LAW
conceptually separable from the underlying
product. This means that the utilitarian article can
function without the design element. In such an
instance, the design element is eligible for copyright
protection. (Olaño, et al. v. Lim Eng Co, G.R. No.
195835, 14 Mar. 2016)
Q: How many works are protected if the author,
or another person with the consent of the
author, makes a transformation of the original
work?
A: There are two works protected and covered by
copyright, the original and the derivative work.
However, if the transformation of the original work
was done after the term of the copyright, then, only
one copyright subsists-that of the derivative work.
(Divina, 2023)
3. RIGHTS CONFERRED BY COPYRIGHT
(Secs. 177 and 193-199)
ECONOMIC RIGHTS
Q: Who can carry out derivative work on the
original work of the author?
Copyright or economic rights shall consist of the
exclusive right to carry out, authorize or prevent the
following acts: (Re-Ca- F-Re-P2-O)
a.
b.
c.
d.
e.
f.
g.
A: The author has the exclusive privilege to carry
out derivative work of his original work. During the
term of the copyright, the author may authorize
person to carry out the derivative work. (Divina,
2023)
Reproduction of the work or substantial
portion thereof;
Carry-out derivative work (dramatization,
translation,
adaptation,
abridgement,
arrangement, or other transformation of the
work) ;
First distribution of the original and each copy
of the work by sale or other forms of transfer
of ownership;
Rental right;
Public display;
Public performance;
Other communications to the public. (Sec. 177,
IPC as amended; Divina, 2023)
First Sale Doctrine or the Exhaustion Principle
An individual who knowingly purchases a copy of a
copyrighted work from the copyright holder
receives the right to sell, display or otherwise
dispose of that particular copy, notwithstanding the
interests of the copyright owner. (Divina, 2023)
NOTE: This also applies to patent. (Divina, 2023)
Droit de Suite or “Art Proceeds Right”
NOTE: Assignment of rights must be in writing to
be valid.
It is the artist’s resale right, which requires that a
percentage of the resale price of an artistic work is
paid to the author. The right is exercisable even
after the author’s death, provided the work is still in
copyright.
Reproduction; Test of Substantiality
To constitute infringement, it is not necessary that
the whole or even a large portion of the work shall
have been copied. If so much is taken that the value
of the original is sensibly diminished, or the labors
of the original author are substantially and to an
injurious extent appropriated by another, that is
sufficient in point of law to constitute piracy. In
cases of infringement, copying alone is not what is
prohibited, The copying must produce an injurious
effect. (Pacita et al. v. Robles and Goodwill Trading
Co., Inc., G.R. No. 131522, 19 July 1999)
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 5%.
(Sec. 200, IPC)
275
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
2024 GOLDEN NOTES
Rights which are not Covered under a Droit de
suite
1.
2.
3.
4.
5.
MORAL RIGHTS
Moral rights – For reasons of professionalism and
propriety, the author has the right:
Prints;
Etchings;
Engravings;
Works of applied art; or
Similar works wherein the author
primarily derives gain from the proceeds of
reproductions. (Sec. 201, IPC)
Q: May the purchaser of a copyrighted book
reproduce it or create a derivative work out of
it?
A: NO, the purchaser may only distribute the work,
without incurring liability, but cannot reproduce or
carry out derivative work out of it. The rights of
reproduction and transformation are distinct from
the right of first public distribution. (Divina, 2023)
Q: May the buyer or assignee of an audiovisual
or cinematographic work, work embodied in a
sound recording, a computer program, or
musical work lease or rent such work without
the consent of its creator following the first sale
doctrine?
a.
Right of attribution - To require that the
authorship of the works be attributed to him;
b.
To make any alterations of his work prior to,
or to withhold it from publication;
c.
Right of integrity - To preserve integrity of
work, object to any distortion, mutilation or
other modification which would be prejudicial
to his honor or reputation; and
d.
Right against false attribution - 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, IPC, as amended;
Divina, 2023)
Moral Rights May be Waived
An author may waive his rights by a written
instrument but no such waiver shall be valid where
its effect is to permit another
A: NO, the above-enumerated works cannot be
rented out to others without the consent of the
copyright holder. The right of rental is a distinct
economic right which is not covered by the first sale
doctrine. However, works not covered by the
foregoing enumeration, like books, may be leased
out for profit by the buyer, without the consent of
the copyright owner.
Communication to the Public, as an Economic
Right
"Communication to the public" or "communicate to
'the public" means the making of a work available to
the public by wire or wireless means in such a way
that members of the public may access these works
from a place and time individually chosen by them.
(Sec. 171.3, IPC, as amended; Divina, 2023)
a.
To use the name of the author, or the title of his
work or otherwise to make use of his reputation
with respect to any version or adaptation of his
work which, because of alterations therein,
would substantially tend to injure the literary
or artistic reputation of another author; or
b.
To use the name of the author with respect to a
work he did not create; (195, IPC, as amended)
c.
Also, when an author contributes to a collective
work, his right to have his contribution
attributed to him is deemed waived unless he
expressly reserves it. (Sec. 196, IPC, as amended;
Divina, 2023)
Term of Moral Right
All moral rights shall be coterminous with the
economic rights of the author or creator of the work
except the right of attribution, which is in
UNIVERSITY OF SANTO TOMAS
2024 GOLDEN NOTES
276
COMMERCIAL LAW
perpetuity. (Sec. 198.1, IPC, as amended; Divina,
2023)
held liable for damages for breach of such contract.
(Sec. 194, IPC)
Q: ABC is the owner of certain musical
compositions among which are the songs
entitled: "Dahil Sa Iyo", "Sapagkat Ikaw Ay
Akin," "Sapagkat Kami Ay Tao Lamang" and "The
Nearness Of You.” Soda Fountain Restaurant
hired a combo with professional singers to play
and sing musical compositions to entertain and
amuse customers. They performed the abovementioned compositions without any license or
permission from ABC to play or sing the same.
Accordingly, ABC demanded from Soda Fountain
payment of the necessary license fee for the
playing and singing of aforesaid compositions,
but the demand was ignored. ABC filed an
infringement case against Soda Fountain. Does
the playing and singing of musical compositions
inside an establishment constitute public
performance for profit?
Nature of Moral Rights
These are personal rights independent from the
economic rights. Being a personal right, it can only
be given to a natural person. Hence, even if he has
licensed or assigned his economic rights, he
continues to enjoy the above-mentioned moral
rights. (Amador, 2007)
Term of Moral Rights
The rights of an author shall last during the lifetime
of the author and in perpetuity after his death while
the rights under Sections 193.2, 193.3, and 193.4
shall be coterminous with the economic rights, the
moral rights shall not be assignable or subject to
license. The person or persons to be charged with
the posthumous enforcement of these rights shall be
named in a written instrument which shall be filed
with the National Library. In default of such person
or persons, such enforcement shall devolve upon
either the author’s heirs, and in default of the heirs,
the Director of the National Library. (Sec. 198, IPC,
as amended by Sec. 17 of R.A. No. 10372 )
A: YES. The patrons of the Soda Fountain pay only
for the food and drinks and apparently not for
listening to the music, but the music provided is for
the purpose of entertaining and amusing the
customers in order to make the establishment more
attractive and desirable. For the playing and singing
the musical compositions involved, the combo was
paid as independent contractors by Soda Fountain.
Exceptions to Moral Rights
1.
It is therefore obvious that the expenses entailed
thereby are added to the overhead of the restaurant
which are either eventually charged in the price of
the food and drinks or to the overall total of
additional income produced by the bigger volume of
business
which
the
entertainment
was
programmed to attract. Consequently, it is beyond
question that the playing and singing of the combo
in Soda Fountain Restaurant constituted
performance for profit. (Filipino Society of
Composers, Authors, Publishers, Inc. (FILSCAP) v. Tan,
G.R., No. L-36402, 16 Mar. 1987)
Absent any special contract at the time creator
licenses/permits another to use his work, the
following are deemed not to contravene
creator’s moral rights, provided they are done
in accordance with reasonable customary
standards or requisites of the medium:
a.
b.
c.
d.
e.
2.
Performance of a Contract
Editing;
Arranging;
Adaptation;
Dramatization; or
Mechanical and electric reproduction.
Complete destruction of work unconditionally
transferred by creators. (Sec. 197, IPC)
An author cannot be compelled to perform his
contract to create a work or for the publication of
his work already in existence. However, he may be
277
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
2024 GOLDEN NOTES
Waiver of Moral Rights
performances fixed in sound recordings or
audiovisual works or fixations, even after
distribution of them by, or pursuant to the
authorization by the performer; and
GR: Moral rights can be waived in writing, expressly
so stating such waiver.
XPN: Even in writing, no such waiver shall be valid
where its effects are to permit another to:
1.
Use the name of the author, title of his work, or
his reputation with respect to any
version/adaptation of his work, which because
of alterations, substantially tend to injure
literary/artistic reputation of another author;
or
2.
Use the name of the author in a work that he
did not create. (Sec. 195, IPC)
5.
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, IPC, as amended by Sec. 18 of R.A. No.
10372)
Loss of Performer’s Rights
Once the performer has authorized the
broadcasting or fixation of his performance, his
performer’s rights provided for in Sec. 203 shall
have no further application.
Neighboring Rights
1.
2.
3.
Performer’s Rights
Producers of Sound Recordings
Broadcasting Organizations
Fair use and limitations to copyrights shall apply
mutatis mutandis to performers. (Sec. 205, IPC)
Performer’s Rights
Moral Rights of Performers
Performers shall enjoy the following exclusive
rights:
The performer, shall, as regards his live aural
performances or performances fixed in sound
recordings, have the right to claim to be identified
as the performer of his performances, except where
the omission is dictated by the manner of the use of
the performance, and to object to any distortion,
mutilation or other modification of his
performances that would be prejudicial to his
reputation. (Sec. 204, IPC)
1.
As regards their performances, the right of
authorizing the:
a.
b.
2.
3.
4.
Broadcasting and other communication to
the public of their performance; and
Fixation of their unfixed performance.
Right of authorizing the direct or indirect
reproduction of their performances fixed in
sound recordings or audiovisual works or
fixations in any manner or form;
Broadcasting Organization’s Rights
Broadcasting organizations shall enjoy the
exclusive right to carry out, authorize or prevent
any of the following acts:
Right of authorizing the first public distribution
of the original and copies of their performance
fixed in sound recordings or audiovisual works
or fixations through sale or rental of other
forms of transfer of ownership;
1. Rebroadcasting of their broadcasts;
2. 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; and
Right of authorizing the commercial rental to
the public of the original and copies of their
UNIVERSITY OF SANTO TOMAS
2024 GOLDEN NOTES
278
COMMERCIAL LAW
of the “television and broadcast markets” under Sec.
2 of E.O. 205. (GMA Network, Inc. v. Central CATV, Inc.,
G.R No. 176694, 18 July 2014)
3. Use of such records for fresh transmissions or
for fresh recording. (Sec. 211, IPC)
Broadcasting
NOTE: The provisions of IPC shall also apply to
works, performers, producers of sound recordings
and broadcasting organizations that are to be
protected by virtue of and in accordance with any
international convention or other international
agreement to which the Philippines is a party. (Sec.
221.2 and 224.2, IPC)
It is the transmission by wireless means for the
public reception of sounds or of images or of
representations thereof; such transmission by
satellite is also broadcasting where the means for
decrypting are provided to the public by the
broadcasting organization or with its consent. (ABSCBN Broadcasting Corp. v. Philippine Multimedia
System, Inc., G.R. Nos. 175769-70, 19 Jan. 2009)
Applicability of Rights
The provisions of Chapter VIII shall apply mutatis
mutandis to the rights of performers, producers of
sound recordings and broadcasting organizations,
as an exception to infringement and allowing the
following:
Rebroadcasting
It is the simultaneous broadcasting by one
broadcasting organization of the broadcast of
another broadcasting organization. While the Rome
Convention gives broadcasting organizations the
right to authorize or prohibit the rebroadcasting of
its broadcast, however, this protection does not
extend to cable retransmission. (Ibid.)
1.
2.
3.
Must-Carry Rule
4.
It is limitation on copyright which obligates
operators to carry the signals of local channels
within their respective systems. This is to give the
people wider access to more sources of news,
information, education, sports event and
entertainment programs other than those provided
for by mass media and afforded television programs
to attain a well-informed, well-versed and culturally
refined citizenry and enhance their socio-economic
growth. (ABS-CBN Broadcasting Corp. v. Philippine
Multimedia System, supra)
Exclusive use of a natural person for own
personal purposes;
Short excerpts for reporting current events;
Sole use for the purpose of teaching or for
scientific research;
Fair use of the broadcast. (Sec. 212, IPC, as
amended by Sec. 21 of R.A. No. 10372)
Term of Protection
This rule mandates that the local television (TV)
broadcast signals of an authorized TV broadcast
station, such as the GMA Network, Inc., should be
carried in full by the cable antenna television
(CATV) operator, without alteration or deletion. In
this case, the Central CATV, Inc. was found not to
have violated the must-carry rule when it solicited
and showed advertisements in its cable television
(CATV) system. Such solicitation and showing of
advertisements did not constitute an infringement
279
1.
For performances not incorporated in
recordings, 50 years from the end of the year in
which the performance took place;
2.
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;
3.
In case of broadcasts, the term shall be 20 years
from the date the broadcast took place. The
extended term shall be applied only to old
works with subsisting protection under the
prior law. (Sec. 215, IPC)
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
2024 GOLDEN NOTES
Persons to whom the Rights are Granted
(Copyrightable Works applicable)
b.
1. For works
Sound recordings that were first published
in the Philippines. (Sec. 223, IPC)
4. For broadcasts
a.
Works of authors who are nationals of, or
have their habitual residence in, the
Philippines;
a.
Broadcasts of broadcasting organizations
the headquarters of which are situated in
the Philippines; and
b.
Audio-visual works the producer of which
has his headquarters or habitual residence
in the Philippines;
b.
Broadcasts transmitted from transmitters
situated in the Philippines. (Sec. 224, IPC)
c.
Works of architecture erected in the
Philippines or other artistic works
incorporated in a building or other
structure located in the Philippines;
d.
Works first published in the Philippines;
and
e.
Works first published in another country
but also published in the Philippines within
thirty days, irrespective of the nationality
or residence of the authors. (Sec. 221.1, IPC)
4. OWNERSHIP OF A COPYRIGHT
(Sec. 178)
Rules on Ownership of Copyright
OWNER OF COPYRIGHT
Original Literary and Artistic Works
Author of the work. (Sec. 178.1, IPC)
Joint Authorship
Co-authors – in case of works of joint authorship;
in the absence of agreement, their rights shall be
governed by the rules on co-ownership.
NOTE: If work of joint authorship consists of
parts that can be used separately, then the author
of each part shall be the original owner of the
copyright in the part that he has created. (Sec.
178.2, IPC)
Audiovisual Work
GR: Producer, the author of the scenario, the
composer of the music, the film director, and the
author of the work so adapted.
2. For performers
a.
Performers who are nationals of the
Philippines;
b.
Performers who are not nationals of the
Philippines but whose performances:
i.
Take place in the Philippines;
ii.
Are
incorporated
in
sound
recordings that are protected under
IPC; or
iii.
Which has not been fixed in sound
recording but are carried by
broadcast qualifying for protection
under the IPC. (Sec. 222, IPC)
XPN: Unless otherwise provided in an
agreement, the producers shall exercise the
copyright to an extent required for the exhibition
of the work in any manner, except for the right to
collect performing license fees for the
performance of musical compositions, with or
without words, which are incorporated into the
work. (Sec. 178.5, IPC)
3. Of sound recordings
a.
Sound recordings the producers of which
are nationals of the Philippines; and
UNIVERSITY OF SANTO TOMAS
2024 GOLDEN NOTES
280
COMMERCIAL LAW
letter. T also requested the firm’s messenger to
deliver the letter to the publisher. Who owns the
copyright to the letter? (2011 BAR)
Anonymous and Pseudonymous Works
The publishers shall be deemed to represent the
authors of articles and other writings published
without the names of the authors or under
pseudonyms, unless the contrary appears, or the
pseudonyms or adopted name leaves no doubt as
to the author's identity, or if the author of the
anonymous works discloses his identity. (Sec.
179, IPC)
A: T, since he is the original creator of the contents
of the letter.
Q: Solid Investment House commissioned Mon
Blanco and his son Steve, both noted artists, to
paint a mural for the Main Lobby of the new
building of Solid for a contract price of P2M.
(1995 BAR)
Commissioned Work
The person who commissioned the work shall
own the work but the copyright thereto shall
remain with the creator, unless there is a written
stipulation to the contrary. (Sec. 178.4, IPC)
a.
Collective Works
When an author contributes to a collective work,
his right to have his contribution attributed to
him is deemed waived unless he expressly
reserves it. (Sec. 196, IPC)
In the Course of Employment
The employee, if not a part of his regular duties
even if the employee uses the time, facilities and
materials of the employer.
Who owns the mural? Explain.
A: The mural is owned by Solid. It commissioned the
work and paid Mon and Steve Blanco P2M for the
mural.
b. Who owns the copyright of the mural?
Explain.
A: Even though Solid owns the mural, the copyright
of the mural is jointly owned by Mon and Steve,
unless there is a written stipulation to the contrary.
(Sec. 178.4, IPC)
The employer, if the work is the result of the
performance of his regularly-assigned duties,
unless there is an agreement, express or implied,
to the contrary. (Sec. 178.3, IPC)
Letters
Q: Rudy is a fine arts student in a university. He
stays in a boarding house with Bernie as his
roommate. During his free time, Rudy would
paint and leave his finished works lying around
the boarding house. One day, Rudy saw one of
his works—an abstract painting entitled Manila
Traffic Jam—on display at the university
cafeteria. The cafeteria operator said he
purchased the painting from Bernie who
represented himself as its painter and owner.
In respect of letters, the copyright shall belong to
the writer subject to the provisions of Art. 723 of
the Civil Code. (Sec. 178.6, IPC)
Letters and other private communications in
writing are owned by the person to whom they
are addressed and delivered, but they cannot be
published or disseminated without the consent of
the writer or his heirs. However, the court may
authorize their publication or dissemination if
the public good or the interest of justice so
requires. (Art. 723, NCC)
Rudy and the cafeteria operator immediately
confronted Bernie. While admitting that he did
not do the painting, Bernie claimed ownership
of its copyright since he had already registered
it in his name with the National Library as
provided in the Intellectual Property Code.
Q: T, an associate attorney in XYZ Law Office,
wrote a newspaper publisher a letter disputing
a columnist’s claim about an incident in the
attorney’s family. T used the law firm’s
letterhead and its computer in preparing the
Who owns the copyright to the painting?
Explain. (2013 BAR)
281
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
2024 GOLDEN NOTES
A: Rudy owns the copyright to the painting because
he was one who actually created it. His rights
existed from the moment of its creation. The
registration of the painting by Bernie with the
National Library did not confer copyright upon him.
The registration is merely for the purpose of
completing the records of the National Library.
strictly for a charitable or religious institution
or society;
Q: BR and CT are noted artists whose paintings
are highly prized by collectors. Dr. DL
commissioned them to paint a mural at the main
lobby of his new hospital for children. Both
agreed to collaborate on the project for a total
fee of 2 million pesos to be equally divided
between them. It was also agreed that Dr. DL had
to provide all the materials for the painting and
pay for the wages of technicians and laborers
needed for the work on the project.
Assume that the project is completed and both
BR and CT are fully paid the amount of P2M as
artists' fee by DL. Under the law on intellectual
property, who will own the mural? Who will own
the copyright in the mural? Why? Explain. (2004
BAR)
A: DL owns the mural, while both BR and CT jointly
own the copyright thereto. This is so because the
mural was commissioned by DL and a consideration
was paid to BR and CT in exchange thereof.
According to Sec. 178.4 of the IPC, when the work is
commissioned by a person other than an employer
of the author, the owner of the work shall be the one
who commissioned the work, but the copyright of
the work shall be owned by the person who is
responsible for its creation, unless there is a written
stipulation to the contrary.
5. LIMITATIONS ON COPYRIGHT
(Secs. 184-185)
2.
Making of quotations from a published work if
they are compatible with fair use and only to the
extent justified for the purpose, including
quotations from newspaper articles and
periodicals in the form of press summaries:
Provided, That the source and the name of the
author, if appearing on the work, are
mentioned;
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 of the same
nature, which are delivered in public if such use
is for information purposes and has not been
expressly reserved: Provided, That the source is
clearly indicated;
4.
Reproduction and communication to the public
of literary, scientific, or artistic works as Part of
reports of current events (e.g. music played or
tunes on the occasion of a sporting event and
such tunes were picked up during a new
coverage of the event) by means of
photography, cinematography or broadcasting
to the extent necessary for the purpose;
5.
Inclusion of a work in a publication, broadcast,
or other communication to the public, sound
recording or film, if such inclusion is made by
way of illustration for teaching purposes and is
compatible with fair use: Provided, That the
source and of the name of the author, if
appearing in the work, are mentioned;
6.
Recording made in educational institutions of a
work included in a broadcast for the use of such
educational institutions, provided that such
recording must be deleted within a reasonable
period after they were first broadcast;
7.
Making of ephemeral recordings by a
broadcasting organization by means of its own
facilities and for use in its own broadcast;
General Limitations on Copyright
The following acts shall not constitute infringement
of copyright:
1.
Recitation or performance of a work, once it has
been lawfully made accessible to the public, if
done privately and free of charge or if made
UNIVERSITY OF SANTO TOMAS
2024 GOLDEN NOTES
282
COMMERCIAL LAW
8.
9.
Use made of a work by or under the direction or
control of the government, by the National
Library or by educational, scientific, or
professional institutions where such use is in
the public interest and is compatible with fair
use;
the reconstruction or rehabilitation in the same
style as the original of a building to which that
copyright relates. (Sec. 186, IPC)
2.
Public performance or the communication to
the public of a work, in a place where no
admission fee is charged in respect of such
public performance or communication, by a
club or institution for charitable or educational
purpose only, whose aim is not profit making,
subject to such other limitations as may be
provided in the Regulations;
10. 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 (e.g.
Public display using posters mounted on walls
and display boards), Provided, That either the
work has been published, or, that original or the
copy displayed has been sold, given away or
otherwise transferred to another person by the
author or his successor in title;
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 but shall not extend to the
reproduction of:
a.
A work of architecture in the form of
building or other construction;
b.
An entire book, or a substantial part
thereof, or of a musical work in graphic
form by reprographic means;
c.
A compilation of data and other materials;
d.
A computer program except as provided in
Sec. 189; and
e.
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. (Sec. 187,
IPC)
11. Any use made of a work for the purpose of any
judicial proceedings or for the giving of
professional advice by a legal practitioner;
12. Reproduction or distribution of published
articles or materials in a specialized format
exclusively for the use of the blind, visually- and
reading-impaired persons: Provided, that such
copies and distribution shall be made on a
nonprofit basis and shall indicate the copyright
owner and the date of the original publication.
(Sec. 184, IPC, as amended by R.A. No. 10372)
3.
The reproduction in one back-up copy or
adaptation of a computer program shall be
permitted, without the authorization of the
author of, or other owner of copyright in, a
computer program, by the lawful owner of that
computer program, provided, the copy or
adaptation is necessary for:
a.
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
b.
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
Other Limitations on Copyright
1.
Copyright in a work of architecture shall
include the right to control the erection of any
building which reproduces the whole or a
substantial part of the work either in its original
form or in any form recognizably derived from
the original, provided, that the copyright in any
such work shall not include the right to control
283
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
2024 GOLDEN NOTES
lost, destroyed, or rendered unusable. (Sec.
189, IPC)
whether or not he was infringing any copyright; he
at least knew that what he was copying was not his,
and he copied at his peril. (Habana v. Robles, G.R. No.
131522, 19 July 1999)
Q: In a written legal opinion for a client on the
difference
between
apprenticeship
and
learnership, Liza quoted without permission a
labor law expert’s comment appearing in his
book entitled “Annotations on the Labor Code.”
Can the labor law expert hold Liza liable for
infringement of copyright for quoting a portion
of his book without his permission?
The gravamen of copyright infringement is not
merely the unauthorized "manufacturing" of
intellectual works but rather the unauthorized
performance of any of the rights exclusively granted
to the copyright owner. Hence, any person who
performs any of such acts under without obtaining
the copyright owner’s prior consent renders himself
civilly and criminally liable for copyright
infringement. (NBI-Microsoft Corp. v. Hwang, G.R.
No. 147043, 21 June 2005)
A: NO. Liza cannot be held liable for infringement of
copyright. Any use made of a work for the purpose
of judicial proceedings or for giving of professional
advice by a legal proceedings or for giving of
professional advice by a legal practitioner shall not
constitute infringement of copyright. (Sec. 184(k),
IPC)
Infringement
A person infringes a right protected under this Act
when one:
Q: May a person have photocopies of some pages
of the book of Professor Rosario made without
violating the copyright law?
A: YES. 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.
This rule contemplates that reproduction of the
book shall not extend to an entire book or a
substantial part thereof. (Secs. 187.1 to 187.(b), IPC)
6. COPYRIGHT INFRINGEMENT
(Sec. 216)
Directly commits an infringement;
2.
Benefits from the infringing activity of another
person who commits an infringement if the
person benefiting has been given notice of the
infringing activity and has the right and ability
to control the activities of the other person; or
3.
With knowledge of infringing activity, induces,
causes, or materially contributes to the
infringing conduct of another. (Sec. 216, IPC, as
amended by Sec. 22 of R.A. No. 10372)
Q: Diana and Piolo are famous personalities in
showbusiness who kept their love affair secret.
They use a special instant messaging service
which allows them to see one another’s typing
on their own screen as each letter key is pressed.
When Greg, the controller of the service facility,
found out their identities, he kept a copy of all
the messages Diana and Piolo sent each other
and published them. Is Greg liable for copyright
infringement? Reason briefly. (2007 BAR)
It is 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. The act of lifting from another’s book
substantial portions of discussions and examples
and the failure to acknowledge the same is an
infringement of copyright. (Habana v. Robles, G.R.
No. 131522, 19 July 1999)
A: YES. The messages which Diana and Pablo sent
each other fall under the category of letters as
provided in Sec. 172.1.d 172.1(d) which provides
that literary and artistic works, hereinafter referred
Copying alone is not what is prohibited. The copying
must produce an “injurious effect”. A copy of a
piracy is an infringement of the original, and it is no
defense that the pirate, in such cases, did not know
UNIVERSITY OF SANTO TOMAS
2024 GOLDEN NOTES
1.
284
COMMERCIAL LAW
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, among others, letters. Infringement of
such consist 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. Reproduction and first
public distribution of the work are economic rights
of the authors of the work. Such cannot be done by
the person not the author of the work.
doctrine permitted importation and resale without
the publisher’s further permission.
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. It is no defense that the
pirate did not know whether or not he was
infringing any copyright; he at least knew that what
he was copying was not his, and he copied at his
peril. In cases of infringement, copying alone is not
what is prohibited. The copying must produce an
“injurious effect”. (Habana v. Robles, supra)
In this instance, Greg is not the owner of the
messages. He merely copied it without the consent
of the authors thereof and subsequently published
the same in violation of the latter’s economic rights.
Q: In an action for damages on account of an
infringement of a copyright, the defendant (the
alleged pirate) raised the defense that he was
unaware that what he had copied was a
copyright material. Would this defense be valid?
(1997 BAR)
How Copying is Demonstrated
Copying is demonstrated by:
A: NO. In copyright infringement, intent is
irrelevant. A person may consciously or
unconsciously copy or infringe a copyrighted
material and still be held liable for such act.
1.
Direct evidence; or
2.
Circumstantial evidence of access and
substantial inquiry or the most common test.
(Amador, 2007).
Q: May a person have photocopies of some pages
of the book of Professor Rosario made without
violating the copyright law? (1998 BAR)
Q: KK is from Bangkok, Thailand. She studies
medicine in the Pontifical University of Santo
Tomas (UST). She learned that the same foreign
books prescribed in UST are 40-50% cheaper in
Bangkok. So she ordered 50 copies of each book
for herself and her classmates and sold the
books at 20% less than the price in the
Philippines. XX,
the
exclusive
licensed
publisher of the books in the Philippines, sued
KK for copyright infringement. Decide. (2014
BAR)
A: YES, a person may photocopy some of pages of
Professor Rosario’s book for as long as it is not for
public use or distribution, and it does not copy the
substantial text or “heart” of the book. It is
considered as fair use of the copyrighted work.
Plagiarism
Plagiarism means the theft of another person’s
language, thoughts, or ideas. To plagiarize is to take
(ideas, writings, etc.) from (another) and pass them
off as one’s own. The passing off of the work of
another as one’s own is thus an indispensable
element of plagiarism.
A: KK did not commit copyright infringement.
Under the “first sale” doctrine, the owner of a
particular copy or phonorecord lawfully made is
entitled, without the authority of the copyright
owner, to sell or otherwise dispose of the
possession of that copy or phonorecord. Hence,
there is no infringement by KK since the said
Plagiarism presupposes intent and a deliberate,
conscious effort to steal another’s work and pass it
285
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
2024 GOLDEN NOTES
off as one’s own. (In the matter of the charges of
plagiarism against Associate Justice Mariano C. Del
Castillo, A.M. No. 10-7-17-SC, 15 Oct. 2010)
Copyright Infringement vs. Plagiarism
COPYRIGHT
PLAGIARISM
INFRINGEMENT
Definition
Remedies in case of Copyright Infringement
(I2-D2-M-S)
1.
Injunction;
2.
Impounding during the pendency of the action
sales invoices and other documents evidencing
sales;
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;
3.
4.
The unauthorized use
of
copyrighted
material in a manner
that violates one of the
copyright
owner’s
exclusive rights, such
as
the
right
to
reproduce or perform
the copyrighted work,
or to make derivative
works that build upon
it.
Destruction without any compensation all
infringing copies;
5.
Moral and Exemplary damages (Sec. 216.1, IPC);
or
6.
Seizure and impounding of any article, which
may serve as evidence in the court proceedings.
(Sec. 216.2, IPC)
Coverage
Copyright
infringement is a very
broad
term
that
describes a variety of
acts, such as the
duplication of a work,
rewriting a piece,
performing a written
work or doing anything
that
is
normally
considered to be the
exclusive right of the
copyright holder.
The copyright owner may elect, at any time before
final judgment is rendered, to recover instead of
actual damages and profits, an award of statutory
damages for all infringements involved in an action
in a sum equivalent to the filing fee of the
infringement action but not less than P50,000.00.
(Sec. 216.1, IPC, as amended by R.A. No. 10372)
6.
There is no copyright
infringement on public
documents.
Nature and purpose of the infringing act;
Flagrancy of the infringement;
Whether the defendant acted in bad faith;
Need for deterrence;
Any loss that the plaintiff has suffered or is
likely to suffer by reason of the infringement;
and
Any benefit shown to have accrued to the
defendant by reason of the infringement. (Sec.
216.1, IPC, as amended by R.A. No. 10372)
UNIVERSITY OF SANTO TOMAS
2024 GOLDEN NOTES
Plagiarism is specific
as it refers only to
using someone else’s
work without proper
acknowledgment.
Public Document
Factors to be considered by the Court in
Awarding Statutory Damages
1.
2.
3.
4.
5.
The use of another’s
information, language,
or writing, when done
without
proper
acknowledgment
of
the original source.
Public documents can
be plagiarized so long
as
it
is
not
acknowledged.
Manner of Copying
The copying must be The copying need not
substantial.
be substantial.
Expression
The copying must refer
to an expression of an
idea.
286
Plagiarism may exist
even if none of the
same words are used
to express an idea.
COMMERCIAL LAW
Double Damages
The amount of damages to be awarded shall be
doubled against any person who:
1.
Circumvents effective technological measures;
or
2.
Having reasonable grounds to know that it will
induce, enable, facilitate or conceal the
infringement, remove or alter any electronic
rights management information from a copy of
a work, sound recording, or fixation of a
performance, or distribute, import for
distribution, broadcast, or communicate to the
public works or copies of works without
authority, knowing that electronic rights
management information has been removed or
altered without authority. (Sec. 216.1, IPC, as
amended by R.A. No. 10372)
287
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
2024 GOLDEN NOTES
hospital is concerned as holder (or more
accurately, controller) of the information.
VII. DATA PRIVACY ACT OF 2000
(R.A. No. 10173)
3.
Policy of the Law
It is the policy of the State to protect the
fundamental human right of privacy, of
communication while ensuring free flow of
information to promote innovation and growth. The
State recognizes the vital role of information and
communications technology in nation-building and
its inherent obligation to ensure that personal
information in information and communications
systems in the government and in the private sector
are secured and protected.
Examples:
1.
A. PERSONAL vs. SENSITIVE PERSONAL
INFORMATION
(Sec. 3)
2.
3.
A personal information which refers to:
Personal information refers to any information
whether recorded in a material form or not, from
which the identity of an individual is apparent or
can be reasonably and directly ascertained by the
entity holding the information, or when put
together with other information would directly and
certainly identify an individual. (Sec. 3(g), R.A. No.
10173)
1.
an individual’s race, ethnic origin, marital
status, age, color, and religious, philosophical
or political affiliations;
2.
an individual’s health, education, genetic or
sexual life of a person, or to any proceeding for
any offense committed or alleged to have been
committed by such person, the disposal of
such proceedings, or the sentence of any court
in such proceedings;
3.
Issued by government agencies peculiar to an
individual which includes, but not limited to,
social security numbers, previous or current
health records, licenses or its denials,
suspension or revocation, and tax returns; and
4.
Specifically established by an executive order
or an act of Congress to be kept classified. (Sec.
3(l), R.A. No. 10173)
Three instances when an information may be
considered personal information:
From which the identity of an individual is
apparent - information relates to an identified
person (e.g. President Ferdinand Marcos, Jr.).
2.
From which the identity of an individual can be
reasonably and directly ascertained by the
entity holding the information - the identity of
the person is not apparent but he is
nonetheless identifiable by the holder of the
information (e.g. patient “X” confined at ABC
hospital is personal information insofar as ABC
UNIVERSITY OF SANTO TOMAS
2024 GOLDEN NOTES
the image of a person recorded by a camera
constitutes personal data; (Rynes v. Urad, CJEU,
11 Dec. 2014)
The plate number of a car owner; or
The telephone number of a person. (Divina,
2023)
Sensitive personal information
Personal information
1.
When put together with other information
would directly and certainly identify an
individual - the identity of the person is also
not apparent but he is nonetheless identifiable
if other available information is used (e.g. your
IP address that falls under a certain geographic
location is personal information insofar as
your ISP is concerned because the ISP can link
the IP address and its geographic location with
other information they have on you as
subscriber to establish your identity. (Ipac,
2024)
288
COMMERCIAL LAW
NOTE: Information required to be stated in the
SALN. (Divina, 2023)
B. SCOPE
(Sec. 4)
b.
Applies to the processing of all types of personal
information and to any natural and juridical person
involved in personal information processing
including those personal information controllers
and processors who, although not found or
established in the Philippines, use equipment that
are located in the Philippines, or those who
maintain an office, branch, or agency in the
Philippines.
NOTE: information about the contractor of a
government project may be disclosed to other
agencies of the government. (Divina, 2023)
c.
NOTE: Nothing in this Act shall be construed as to
have amended or repealed the provisions of R.A. No.
53, which affords the publishers, editors or duly
accredited reporters of any newspaper, magazine or
periodical of general circulation protection from
being compelled to reveal the source of any news
report or information appearing in said publication
which was related in any confidence to such
publisher, editor, or reporter.
Information relating to any discretionary
benefit of a financial nature, such as the
granting of a license or permit given by the
government to an individual, including the
name of the individual and the exact nature of
the benefit;
NOTE: the license or permit to operate ports or
explore natural resources may be disclosed.
(Divina, 2023)
NOTE: The Data Privacy Act (DPA) and its IRR state
that they apply to the processing of personal data,
even if the act or practice is performed outside of
the country, provided that the personal data relates
to a Filipino citizen or a resident of the Philippines,
and/or the personal information controller or
personal information processor has an established
link to the Philippines. Thus, as long as any of the
foregoing conditions are met, processing of
personal data, whether or not involving a crossborder dimension, will be covered by the DPA, the
IRR, and other applicable issuances by the National
Privacy Commission (NPC).
d.
Personal information processed for journalistic,
artistic, literary, or research purposes; and
NOTE: information about the number of
patients afflicted with COVID-19 can be
reported by journalists, and the age, religion,
and affiliations of a particular group may be
processed for research. (Divina, 2023)
e.
Data Privacy Act does not apply to the following
types of information since the Data Privacy Act
continues to apply to the controller of the same
personal information enumerated below:
a.
Information about an individual who is or was
performing service under contract for a
government institution that relates to the
services performed, including the terms of the
contract, and the name of the individual given
in the course of the performance of those
services;
Information necessary in order to carry out the
functions of public authority, which includes
the processing of personal data for the
performance by the independent, central
monetary authority and law enforcement and
regulatory agencies of their constitutionally
and statutorily mandated functions. (Divina,
2023)
NOTE: information about penalties imposed on
persons aspiring to be appointed directors of
banks and corporations vested with public
interest may be processed by the BSP and the
SEC. (Divina, 2023)
Information about a former or current public
officer or employee in relation to the position or
functions of the individual;
289
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
2024 GOLDEN NOTES
Sensitive Personal Information and Privileged
Information
C. PROCESSING OF PERSONAL AND SENSITIVE
PERSONAL INFORMATION; LAWFUL BASIS
(Secs. 12-13)
a.
The processing of sensitive personal
information and privileged information shall be
prohibited, except in the following cases: The
data subject has given his or her consent,
specific to the purpose prior to the processing,
or in the case of privileged information, all
parties to the exchange have given their consent
prior to processing;
b.
The processing of the same is provided for by
existing laws and regulations: Provided, That
such regulatory enactments guarantee the
protection of the sensitive personal information
and the privileged information: Provided,
further, That the consent of the data subjects
are not required by law or regulation
permitting the processing of the sensitive
personal information or the privileged
information;
c.
The processing is necessary to protect the life
and health of the data subject or another
person, and the data subject is not legally or
physically able to express his or her consent
prior to the processing;
d.
The processing is necessary to achieve the
lawful and noncommercial objectives of public
organizations
and
their
associations: Provided, That such processing is
only confined and related to the bona
fide members of these organizations or their
associations: Provided,
further, That
the
sensitive personal information are not
transferred
to
third
parties: Provided,
finally, That consent of the data subject was
obtained prior to processing;
e.
The processing is necessary for purposes of
medical treatment, is carried out by a medical
practitioner or a medical treatment institution,
and an adequate level of protection of personal
information is ensured; or
f.
The processing concerns such personal
information as is necessary for the protection of
Criteria for Lawful Processing of Personal
Information
The processing of personal information shall be
permitted only if not otherwise prohibited by law,
and when at least one of the following conditions
exists:
a.
The data subject has given his or her consent;
b.
The processing of personal information is
necessary and is related to the fulfillment of a
contract with the data subject or in order to
take steps at the request of the data subject
prior to entering into a contract;
c.
The processing is necessary for compliance
with a legal obligation to which the personal
information controller is subject;
d.
The processing is necessary to protect vitally
important interests of the data subject,
including life and health;
e.
The processing is necessary in order to respond
to national emergency, to comply with the
requirements of public order and safety, or to
fulfill functions of public authority which
necessarily includes the processing of personal
data for the fulfillment of its mandate; or
f.
The processing is necessary for the purposes of
the legitimate interests pursued by the personal
information controller or by a third party or
parties to whom the data is disclosed, except
where such interests are overridden by
fundamental rights and freedoms of the data
subject which require protection under the
Philippine Constitution. (Sec. 12, R.A. No. 10173)
UNIVERSITY OF SANTO TOMAS
2024 GOLDEN NOTES
290
COMMERCIAL LAW
lawful rights and interests of natural or legal
persons in court proceedings, or the
establishment, exercise or defense of legal
claims, or when provided to government or
public authority. (Sec. 13, RA 10173)
6.
Kept in a form which permits identification of
data subjects for no longer than is necessary
for the purposes for which the data were
collected and processed: Provided, That
personal information collected for other
purposes may lie processed for historical,
statistical or scientific purposes, and in cases
laid down in law may be stored for longer
periods: Provided, further, That adequate
safeguards are guaranteed by said laws
authorizing their processing. (Sec. 11, RA
10173)
D. GENERAL DATA PRIVACY PRINCIPLES
(Sec. 11)
General Data Privacy Principles.
NOTE: The personal information controller must
ensure implementation of personal information
processing principles set out herein.
The processing of personal information shall be
allowed, subject to compliance with the
requirements of this Act and other laws allowing
disclosure of information to the public and
adherence to the principles of transparency,
legitimate purpose and proportionality.
E. RIGHTS OF DATA SUBJECT
(Sec. 16)
Personal information must be:
1.
Collected for specified and legitimate purposes
determined and declared before, or as soon as
reasonably practicable after collection, and
later processed in a way compatible with such
declared, specified and legitimate purposes
only;
2.
Processed fairly and lawfully;
3.
Accurate, relevant and, where necessary for
purposes for which it is to be used the
processing of personal information, kept up to
date; inaccurate or incomplete data must be
rectified, supplemented, destroyed or their
further processing restricted;
4.
5.
Rights of the Data Subject
The data subject is entitled to:
a.
Be informed whether personal information
pertaining to him or her shall be, are being or
have been processed;
b.
Be furnished the information indicated
hereunder before the entry of his or her
personal information into the processing
system of the personal information controller,
or at the next practical opportunity:
1.
Adequate and not excessive in relation to the
purposes for which they are collected and
processed;
2.
Retained only for as long as necessary for the
fulfillment of the purposes for which the data
was obtained or for the establishment,
exercise or defense of legal claims, or for
legitimate business purposes, or as provided
by law; and
4.
3.
5.
291
Description of the personal information to
be entered into the system;
Purposes for which they are being or are to
be processed;
Scope and method of the personal
information processing;
The recipients or classes of recipients to
whom they are or may be disclosed;
Methods utilized for automated access, if the
same is allowed by the data subject, and the
extent to which such access is authorized;
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
2024 GOLDEN NOTES
6.
7.
8.
The identity and contact details of the
personal information controller or its
representative;
The period for which the information will be
stored; and
The existence of their rights, i.e., to access,
correction, as well as the right to lodge a
complaint before the Commission.
Any information supplied or declaration
made to the data subject on these matters
shall not be amended without prior
notification of data subject: Provided, That
the notification under subsection (b) shall
not apply should the personal information
be needed pursuant to a subpoena or when
the collection and processing are for
obvious purposes, including when it is
necessary for the performance of or in
relation to a contract or service or when
necessary or desirable in the context of an
employer-employee relationship, between
the collector and the data subject, or when
the information is being collected and
processed as a result of legal obligation;
c.
d.
Rectification - Dispute the inaccuracy or error
in the personal information and have the
personal information controller correct it
immediately and accordingly, unless the
request is vexatious or otherwise unreasonable.
If the personal information have been
corrected, the personal information controller
shall ensure the accessibility of both the new
and the retracted information and the
simultaneous receipt of the new and the
retracted
information
by
recipients
thereof: Provided, That the third parties who
have previously received such processed
personal information shall he informed of its
inaccuracy and its rectification upon reasonable
request of the data subject;
e.
Erasure / Blocking / Objection - Suspend,
withdraw or order the blocking, removal or
destruction of his or her personal information
from the personal information controller’s
filing system upon discovery and substantial
proof that the personal information is
incomplete, outdated, false, unlawfully
obtained, used for unauthorized purposes or
are no longer necessary for the purposes for
which they were collected. In this case, the
personal information controller may notify
third parties who have previously received
such processed personal information; and
f.
Indemnification - Be indemnified for any
damages sustained due to such inaccurate,
incomplete, outdated, false, unlawfully
obtained or unauthorized use of personal
information. (Sec. 16, R.A. No. 10173)
Reasonable access to, upon demand, the
following:
1.
2.
3.
4.
5.
6.
7.
8.
Contents of his or her personal information
that were processed;
Sources from which personal information
were obtained;
Names and addresses of recipients of the
personal information;
Manner by which such data were processed;
Reasons for the disclosure of the personal
information to recipients;
Information on automated processes where
the data will or likely to be made as the sole
basis for any decision significantly affecting
or will affect the data subject;
Date when his or her personal information
concerning the data subject were last
accessed and modified; and
The designation, or name or identity and
address of the personal information
controller;
UNIVERSITY OF SANTO TOMAS
2024 GOLDEN NOTES
292
COMMERCIAL LAW
VIII. SECURITIES REGULATION CODE
(R.A. No. 8799)
A. FRAMEWORK FOR REGULATING OF
SECURITIES TRADING
(Secs. 8-10)
Policy of the Law
Requirement before securities are sold or
offered for sale or distribution within the
Philippines
The State shall establish a socially conscious, free
market that regulates itself, encourage the widest
participation of ownership in enterprises, enhance
the democratization of wealth, promote the
development of the capital market, protect
investors, ensure full and fair disclosure about
securities, minimize if not totally eliminate insider
trading and other fraudulent or manipulative
devices and practices which create distortions in
the free market.
They are required to be registered. Thus, the proper
registration statement therefor must be filed with
and approved by the SEC. Registration also includes
the disclosure to the SEC of all material and relevant
information about the issuer of the security. Prior to
the sale, the information on the securities, in such
form and with such substance as the SEC may
prescribe, shall be made available to each
prospective purchaser (SRC, Sec. 8.1).
Nature of the Securities Regulation Code (SRC)
The SRC is the law that regulates securities (its
issuance, distribution and sale) and the person who
deals with such securities. It is enacted to protect
the public from unscrupulous promoters, who stake
business or venture claims which have really no
basis, and sell shares or interests therein to
investors. It also serves to protect investors,
promote investor confidence, and stabilize the
financial markets.
GR: Securities must be registered with the SEC.
REASON: To protect the public investors from
fraudulent schemes (Securities and Exchange
Commission v. Court of Appeals, G.R. Nos. 106425 &
106431-32, 21 Jul. 1996)
XPNs: The following need not be registered:
1.
2.
The law does not guarantee that a person who
invests in securities will make money. The law only
ensures that there will be a fair and full disclosure
of information regarding securities so that, the
investor could make an informed judgment (Divina,
2014).
Exempt securities; and
Securities sold in exempt transactions.
Effect of non-registration
The issuer would be penalized. Issuers of securities
not registered shall be subjected to criminal, civil
and administrative charges. (i.e., upon conviction, a
fine of P50,000 to P5M and/or imprisonment of 721 years).
It also carries civil liabilities in that the purchaser
can recover from the seller (i) the consideration
paid with interest thereon, less the amount of any
income received on the purchased securities, upon
the tender of such securities, or (ii) damages if the
purchaser no longer owns such securities.
Furthermore, the SEC may issue a cease-and-desist
order.
293
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
2024 GOLDEN NOTES
mortgaged-based securities, hence, the risk
involved in ABS is greater.
B. CONCEPT OF SECURITIES; HOWEY TEST
(Sec. 3)
Securities
Securities are shares, participation or interests in a
corporation or in a commercial enterprise or profitmaking venture and evidenced by a certificate,
contract, instrument, whether written or electronic
in character.
a) Shares of stock, bonds, debentures, notes,
evidences of indebtedness, asset-backed
securities;
b) Investment contracts, certificates of interest or
participation in a profit sharing agreement,
certificates of deposit for a future
subscription;
c) Fractional undivided interests in oil, gas or
other mineral rights;
d) Derivatives like options and warrants;
e) Certificates of assignments, certificates of
participation, trust certificates, voting trust
certificates or similar instruments;
f) Proprietary or nonproprietary membership
certificates in corporations; and
g) Other instruments as may in the future be
determined by the Commission.
3.
Derivatives– options and warrants
Kinds of Options:
a. Call option – _option to buy
b. Put option – _option to sell
c. Straddle – _combination of both call and put
option.
Warrants - are rights to subscribe or purchase
new shares or existing shares in a company, on
or before a predetermined date called the
expiry date, which can only be extended in
accordance with Exchange rules. Warrants
generally have a longer exercise period than
options.
Investments instruments – Investment
contracts, fractional undivided interests in oil,
gas, or other mineral rights.
Kinds of securities (DO DET)
Investment Contract – is a contract,
transaction or scheme whereby a person
invests his money in a common enterprise and
is led to expect profits primarily from the
efforts of others.
Debt instruments – bonds, debentures, notes,
evidence of indebtedness, asset-backed
securities.
Asset-backed securities (ABS) - These are
financial securities the value of which depends
on the assets underlying it. For investors, ABS
are alternative to investing in corporate debt.
An ABS is essentially the same thing as a
mortgage-backed security, except that the
securities backing it are assets such as loans,
leases, credit card debt, a company’s
receivables, royalty and so on, and not
UNIVERSITY OF SANTO TOMAS
2024 GOLDEN NOTES
Other instruments as may in the future be
determined by the SEC. 3.
Options– _are contracts that give the buyer
the right, but not the obligation, to buy or sell
an underlying security at a predetermined
price called the exercise or strike price, on or
before a predetermined date, called the expiry
date, which can only be extended in
accordance with Exchange rules (Sundiang Sr.
& Aquino, 2014).
It includes:
1.
2.
Howey Test
(as modified by Turner ruling in Power Homes
Unlimited Corp vs. Securities and Exchange
Commission, G.R. No. 164182, 26 Feb. 2008)
For an investment contract to exist, the
following elements must concur:
294
COMMERCIAL LAW
a.
b.
c.
d.
e.
A contract, transaction or scheme;
An investment of money;
Investment is made in a common
enterprise;
Expectation of profits; and
Profits arising primarily from the
effort of others. (Rule 26.3, SRC IRR)
complaints by Gabionza, et al., for Estafa under
Article 315 (2)(a) and (2)(D) of the Revised
Penal Code, Estafa under PD No. 1689, violation
of the Revised Securities Act and violation of the
General Banking Act.
The DOJ concluded that ASBHI, et al., are liable
for violating such prohibition against the sale of
unregistered securities. However, the CA
reversed the DOJ holding that the postdated
checks issued by the ASBHI did not constitute a
security under the Revised Securities Act. Are
the checks issued by ASBHI “securities?”
Network marketing - a scheme adopted by
companies to get people to buy their
products outside the usual retail system
where products are brought from the
store’s shelf and where the buyer can
become a down-line seller, earning
commissions from purchases made by new
buyers whom he refers to the person who
sold the product to him, is not an
investment contract. The commissions are
incentives to down-line sellers to bring in
other customers. These can hardly be
regarded as profits from investment of
money under the Howey Test. (SEC v.
Prosperity.Com, Inc., G.R. No. 164197, 25 Jan.
2012)
4.
Equity instruments – Shares of stock, certificates
of interest or participation in a profit sharing
agreement, certificates of deposit for a future
subscription, proprietary or non-proprietary
membership certificates in corporations.
5.
Trust instruments – Certificates of assignments,
certificates of participation, trust certificates,
voting trust certificates or similar instruments.
[Sec. 3.1 (e), SRC]
A: YES. The checks issued constitute securities;
hence, the non-registration thereof is a violation of
the Revised Securities Act. It is one thing for a
corporation to issue checks to satisfy isolated
individual obligations, and another for a
corporation to execute an elaborate scheme where
it would portray itself to the public as a pseudoinvestment house and issue postdated checks
instead of stocks or traditional securities to
evidence the investments of its patrons. The
Revised Securities Act is geared towards the
maintenance of the stability of the national
investment market against activities such as those
apparently engaged in by ASBHI. ASBHI adopted
this scheme in an attempt to circumvent the Revised
Securities Act, which requires a prior license to sell
or deal in securities.
It bears pointing out that the definition of
“securities” set forth in Section 2 of the Revised
Securities Act includes “commercial papers
evidencing indebtedness of any person, financial or
non-financial entity, irrespective of maturity,
issued, endorsed, sold, transferred or in any manner
conveyed to another. A check is a commercial paper
evidencing indebtedness of any person, financial or
non-financial entity. Since the checks in this case
were generally rolled over to augment the creditor’s
existing investment with ASBHI, they most
definitely take on the attributes of traditional
stocks. A different rule would open the floodgates
for a similar scheme, by companies without prior
license or authority from the SEC. This cannot be
countenanced. (Gabionza v. CA, G.R. No. 161057, 12
Sept. 2008)
Q: Betty Go Gabionza and other investors lent,
invested or deposited money with ASBHI. For
this, ASBHI, issued two (2) postdated checks to
its lenders, one representing the principal
amount and the other covering the interest
thereon. On the maturity of checks, the
individual lenders renewed the loans, either
collecting only the interest earnings or rolling
over the same with the principal amounts.
After sometime, DBS Bank refused to pay for the
checks by virtue of “stop payment” orders from
ASBHI. The series of events led to the filing of the
295
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
2024 GOLDEN NOTES
Test on determining whether or not it is a
security
Despite repeated demands, Timeshare Corp.
failed and refused to refund the same.
Timeshare Corp. contends that its mere
registration as a corporation already authorized
it to deal with unregistered timeshares. Does the
registration of Timeshare Corp. as a corporation
authorize it to deal with unregistered
timeshares?
Does it represent a share, participation, or interest
in a commercial enterprise or any profit-making
venture? If Yes, then, it is a security.
If it is a security, then it cannot be sold, or
distribution within the Philippines without a
registration statement duly filed with and approved
by the SEC. (Divina, 2014)
A: NO. Mere registration as a corporation does not
authorize it to deal with unregistered timeshares.
Corporate registration is just one of several
requirements before it may deal with timeshares.
Prior to fulfillment of all the other requirements of
Section 8, Timeshare Corp. is absolutely proscribed
from dealing with unregistered timeshares. No
securities, except of a class exempt under the SRC or
unless sold in any transaction exempt under the
same, shall be sold or offered for sale or distribution
to the public within the Philippines unless such
securities shall have been registered and permitted
to be sold as provided by the SRC (Timeshare Realty
Corporation v. Cesar Lao, G.R. No. 158941, February
11, 2008).
Q: ABC Corp. is engaged in the pawnshop
business involving cellphones, laptops and
other gadgets of value. In order to expand its
business and attract investors, it offered to any
person who invests at least P100,000.00 a
“promissory note” where it was obligated itself
to pay the holder a 50% return on investment
within one month. Due to the attractive offer,
many individuals invested in the company but
not one of them was able to realize any profit
after one month.
Has ABC Corp. violated any law with its scheme?
Explain.
Q: Petitioners filed before the RTC a Complaint
for declaration of nullity of contract and sums of
money with damages against respondent,
Citibank. They discovered that the securities
sold to them were not registered with the
Securities and Exchange Commission (SEC) in
violation of the "Securities Regulation Code"
(SRC). Respondent invoked Doctrine of Primary
Jurisdiction and contended the complaint
should be first filed with the SEC and not directly
before the RTC. Should the complaint be
dismissed for lack of jurisdiction of the RTC?
A: YES. ABC Corp. violated the provisions of the
Securities Regulation Code that prohibits sale of
securities to the public, like promissory notes,
without a registration statement filed with and
approved by the Securities and Exchange
Commission.
Q: Timeshare Corp. sold to Spouses Cortez one
timeshare of Laguna de Boracay. After
sometime, the SEC issued a resolution to the
effect that Timeshare Corp. was without
authority to sell securities, like timeshares. It
held therefore that the purchaser may exercise
the option to unilaterally rescind the purchase
agreement and receive the refund of money paid
applies to all purchase agreements entered into
by Timeshare Corp. prior to the effectivity of the
Registration Statement. Hence, Spouses Cortez
demanded their right to cancel their contract, as
it appears that Laguna de Boracay is selling said
shares without license or authority from the
SEC.
UNIVERSITY OF SANTO TOMAS
2024 GOLDEN NOTES
A: NO. Petitioner’s complaint constitutes a civil suit
for declaration of nullity of contract and sums of
money with damages, which stemmed from
respondent’s alleged sale of unregistered securities,
in violation of the various provisions of the SRC.
Civil suits falling under the SRC are under the
exclusive original jurisdiction of the regional trial
courts and, hence, need not be first filed before the
SEC, unlike criminal cases wherein the latter body
exercises primary jurisdiction. (PUA V. CITIBANK
G.R. No. 1980064, 16 Sept. 2013)
296
COMMERCIAL LAW
Validity of the sale of shares acquired 12 months
after the approval of the Registration Statement
Securities Corp. v. Ampil, G.R. No. 160922, 27 Feb.
2006)
If the person who acquired the security sued any of
the enumerated persons under Sec. 56.1 for
recovery of damages after the issuer has made
generally available to its security holders an income
statement covering a period of at least 12 months
beginning from the effective date of the registration
statement, then the right of recovery shall be
conditioned on proof that such person who
acquired the security relying upon such untrue
statement in the registration statement or relying
upon the registration statement and not knowing of
such income statement, but such reliance may be
established without proof of the reading of the
registration statement by such person (SRC, Sec.
56.2).
NOTE: Since a brokerage relationship is essentially
a contract for the employment of an agent, the law
on contracts governs the broker-principal
relationship.
Registration of security market professionals
Security market professionals are required to be
registered. No broker shall sell any securities unless
he is registered with the SEC (Sec. 1, Revised
Securities Act) (Nicolas v. CA, et al., G.R. No. 12285, 27
Mar. 1998).
Q: Can a stockbroker without license from the
SEC, recover management fees allegedly earned
from handling the securities transactions of a
client?
Securities market professionals (persons who
deal with securities)
1.
Broker – A person engaged in the business of
buying and selling securities for the account of
others. (Sec.3.3, SRC)
2.
Dealer– Any person who buys and sells
securities for his/her own account in the
ordinary course of business. (Sec. 3.4, SRC)
3.
Associated person of a broker or dealer –
He is an employee of a broker or dealer who
directly exercises control of supervisory
authority, but does not include a salesman, or
an agent, or a person, whose functions are
solely clerical or ministerial. (Sec. 3.5, SRC)
4.
A: NO. An unlicensed person may not recover
compensation for services as a broker where a
statute or ordinance is applicable, and such is of a
regulatory nature.
C. REGISTRATION OF SECURITIES
(Sec. 8)
Purpose for registration of securities
Registration of securities allows the subsequent
release of these securities to the investing public
and serves to protect investors.
Procedure for registration of securities
Salesman – He is a natural person, employed
as such, or as an agent, by a dealer, issuer or
broker to buy and sell securities; but for the
purpose of registration, shall not include any
employee of an issuer whose compensation is
not determined directly or indirectly on sales
of securities of the issuer. (Sec 3.13, SRC)
1.
Application – All securities required to be
registered shall be registered through the
filing by issuer with SEC, of a sworn
registration statement with respect to such
securities in such form and containing such
information or documents as the SEC shall
prescribe.
2.
Prospectus – The registration statement shall
include any prospectus required or permitted
to be delivered.
Obligation of the broker to his client
The primary obligation of the broker is to ensure his
account’s compliance with the law. (Abacus
297
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
2024 GOLDEN NOTES
3.
4.
Other information – The information required
for the registration of any kind and all
securities shall include, among others, the
effect of the securities’ issue on ownership, on
the mix of ownership, especially foreign and
local ownership.
NOTE: This fee paid to the SEC is called a
“diminishing fee.”
Notice and Publication – Notice of the filing of
the registration statement shall be
immediately published by the issuer, at its own
expense, in two newspapers of general
circulation in the Philippines; once a week for
two consecutive weeks, or in such other
manner as the Commission by rule shall
prescribe, reciting that:
Signatories to registration statement – The
registration statement shall be signed by the
issuers:
a.
b.
c.
d.
e.
f.
Executive officer
Principal operating officer
Principal financial officer
Comptroller
Principal accounting officer
Corporate
secretary
or
performing similar functions
Written Consent of Expert – The written
consent of the expert named as having
certified any part of the registration statement
or any document used in connection therewith
shall also be filed.
6.
Certification by Selling stockholders – Where
the registration statement includes shares to
be sold by the selling shareholders, a written
certification by such selling shareholders as to
the accuracy of any part of the registration
statement contributed by such selling
shareholders shall also be filed.
7.
Fees – Upon the filing of the registration
statement, the issuer shall pay to the SEC a fee
of not more than one-tenth of one percent
(1/10 of 1%) of the maximum aggregate price
at which such securities are proposed to be
offered; the SEC shall prescribe by rule,
diminishing the fees in inverse proportion, the
value of the aggregate price of the offering.
UNIVERSITY OF SANTO TOMAS
2024 GOLDEN NOTES
A registration statement for the sale of
such security has been filed;
b.
The aforesaid registration statement as
well as the papers attached thereto is open
to inspection at the Commission during
business hours; and
c.
Copies thereof, photo static or otherwise,
shall be furnished to interested parties at
such reasonable charges as the
Commission may prescribe.
persons
NOTE: It shall be accompanied by a duly
verified resolution of the Board of Directors
of the issuer corporation.
5.
a.
298
8.
Ruling – Within 45 days after the date of the
filing of the registration statement, or by such
later date to which the issuer has consented,
the SEC shall declare the registration
statement effective or rejected, unless the
applicant is allowed to amend the registration
statement. The Commission shall enter an
order declaring the registration statement to
be effective if it finds that the registration
statement together with all the other papers
and documents attached thereto is on its face
complete and that the requirements have been
complied with. The Commission may also
impose such terms and conditions as may be
necessary or appropriate for the protection of
the investors.
9.
Effectivity – Upon effectivity of the registration
statement, the issuer shall state under oath in
every prospectus that all registration
requirements have been met and that all
information are true and correct as
represented by the issuer or the one making
the statement (Sec. 12, SRC).
COMMERCIAL LAW
3.
The issuer, any officer, director or controlling
person of the issuer, or any person performing
similar functions, or any underwriter has been
convicted by a competent judicial or
administrative body, upon plea of guilty, or
otherwise, of an offense involving moral
turpitude and/or fraud or is enjoined or
restrained by the SEC or other competent
judicial or administrative body for violations
of securities, commodities and other related
laws; and
4.
Any issuer who refuses to permit the
examination to be made by the Commission
(Sec. 13, SRC).
NOTE: Any untrue statement or fact of
omission to state a material fact required to be
stated therein or necessary to make the
statement therein not misleading shall
constitute fraud.
Grounds for rejection of a registration
statement and revocation of the effectivity of a
registration statement and the registration of a
security
After due notice and hearing by issuing an order to
such effect, the Commission may reject the
registration statement or revoke the registration of
a security based on the following grounds:
1.
NOTE: The Commission may compel the production
of all the books and papers of the issuer, and may
administer oaths to, and examine the officers of
such issuer or any other person connected
therewith as to its business and affairs.
The Issuer:
a) Has been judicially declared Insolvent;
b) Has violated any of the provisions of the
Code, the Rules promulgated pursuant
thereto, or any order of the SEC of which the
issuer has notice in connection with the
offering for which a registration statement
has been filed;
Grounds for suspension of registration
c) Has been or is engaged or is about to engage
in fraudulent transactions;
d) Has made any false or misleading
representation of material facts in any
prospectus concerning the issuer or its
securities; or
e) Has failed to comply with any requirement
that the Commission may impose as a
condition for registration of the security for
which registration statement has been filed.
2.
The registration statement is on its face
incomplete or inaccurate in any material
respect or includes any untrue statement of a
material fact or omits to state a material fact
required to be stated therein or necessary to
make the statements therein not misleading;
1.
If any time, the information contained in the
registration statement filed is or has become
misleading,
incorrect,
inadequate
or
incomplete in any material respect.
2.
The sale or offering for sale of the security
registered thereunder may work or tend to
work a fraud.
3.
Pending investigation of the security
registered, if the Commission deems it
necessary, to ascertain whether the
registration of such security should be
revoked on any ground specified in the SRC.
4.
Refusal to furnish information required by the
Commission. (Sec. 15, SRC)
Grounds for suspension or cancellation of
certificate of registration
1.
2.
3.
299
Fraud in procuring registration.
Serious misrepresentation as to objectives of
corporation.
Refusal to comply with the lawful order of SEC.
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
2024 GOLDEN NOTES
4.
5.
6.
7.
Continuous non-operation for at least 5 years.
Failure to file by-laws within the required
period.
Failure to file reports.
Other similar grounds (Sec. 6 [L], SRC)
such cause of action accrued). 2 years having
already elapsed since the time that X had discovered
the misrepresentation in the registration statement
of the corporation, the registration statement of the
corporation, the latter’s civil liability has prescribed.
X, however, is not prevented from invoking SEC’s
regulatory powers against the corporation. (Sec. 62,
SRC)
Order of suspension by the SEC requires a
subsequent hearing
An order of suspension must be followed by a
hearing to be conducted by the Commission. If the
Commission determines that the sale of any security
should be revoked, it shall issue an order
prohibiting the sale of such security. Until the
issuance of a final order, the suspension of the right
to sell, though binding upon the persons notified
thereof, shall be deemed confidential, and shall not
be published, unless it shall appear that the order of
suspension has been violated after notice. However,
if the Commission finds that the sale of the security
will neither be fraudulent nor result in fraud, it shall
forthwith issue an order revoking the order of
suspension, and such security shall be restored to
its status as a registered security as of the date of
such order of suspension.
1. EXEMPT SECURITIES
(Sec. 9)
Q: Philippine Chromite, Inc., after registration of
its securities, sold P10 M worth of common
stocks to the public at P.01 per share. In its
registration statement, it alleged that it holds a
perfected mining claim on 100 hectares of
chromite land in Botolan, Zambales. X, a Botolan
resident, bought P50,000 worth of stocks of the
corporation from the stock exchange. After its
public offering, the value of the stock dropped to
half its price. X made some investigations and
discovered that the mining claims of the
corporation had not been perfected at the time
of the issuance of its securities. The stock,
however, rallied and after 2 years, commanded
a price of 1 ½ centavo per share. On its third
year, the company collapsed and its stocks
became totally valueless. What is the remedy of
X?
A: The remedy of X for damages is lost by
prescription. Any suit therefore must be filed within
2 years after the discovery of the facts constituting
the cause of action (but not beyond 5 years after
UNIVERSITY OF SANTO TOMAS
2024 GOLDEN NOTES
300
1.
Any security issued or guaranteed by the
Government of the Philippines, or by any
political subdivision or agency thereof, or by
any person controlled or supervised by, and
acting as an instrumentality of said
government.
2.
Any security issued or guaranteed by the
government of any Country with which the
Philippines maintains diplomatic relations, or
by any state, province, or political subdivision
thereof on the basis of reciprocity. Provided, that
the SEC may require compliance with the form
and content of disclosures the Commission may
prescribe.
3.
Certificates issued by a Receiver or by a trustee
in bankruptcy duly approved by the proper
adjudicatory body.
4.
Any security or its derivatives the sale or
transfer of which, by law, is under the
supervision and regulation of the Office of
Insurance Commission, Housing and Land Use
Regulatory Board (now Human Settlements
Adjudication Commission), or the Bureau of
Internal Revenue.
5.
Any security issued by a Bank except its own
shares of stock (which serves to promote the
sale of securities issued by heavily regulated
banks).
6.
Other securities as determined by the SEC by
rule or regulation, after public hearing. (Sec. 9,
SRC)
COMMERCIAL LAW
Being an issuer of an exempt security does not
exempt such issuer from the requirement of
submission of reports under the regime of full and
fair disclosure.
holder of the security surrendered in exchange
to make such conversion.
RATIONALE: The listed securities are exempted
because they are either guaranteed by the
government or they are already approved by the
proper adjudicatory body or by another
governmental regulatory agency other than the SEC.
2. EXEMPT TRANSACTIONS
(Sec. 10)
1.
Any judicial sale, or sale by an executor,
administrator, guardian, receiver or trustee in
insolvency or bankruptcy.
2.
Those sold by a pledge holder, mortgagee, or
any other similar lien holder, to liquidate a bona
fide debt a security pledged in good faith as
security for such Debt.
3.
Those sold or offered for sale in an Isolated
transaction for the owner’s account and owner
not being an underwriter.
4.
Distribution by the corporation of Securities to
its stockholders or other security holders as
stock dividends or distribution out of surplus.
5.
Sale of Capital stock of a corporation to its own
stockholders
exclusively
wherein
no
commission or remuneration is paid or given
directly or indirectly in connection with the sale
of such capital stock.
7.
Broker’s transaction executed upon customer’s
Orders, on any registered Exchange or other
Trading market.
9.
Share Subscriptions in capital stock prior to
incorporation or in pursuance of an increase in
its authorized capital stock under the
Corporation Code when no expense is incurred,
or no commission, compensation or
remuneration is paid or given in connection
with the sale or disposition of such securities,
and only when the purpose for soliciting, giving
or taking of such subscriptions is to comply
with the requirements of such law as to the
percentage of the capital stock of a corporation
which should be subscribed before it can be
registered and duly incorporated, or its
authorized capital increased.
10. Exchange of securities by the issuer with its
existing security holders exclusively when no
commission or other remuneration is paid or
given directly or indirectly for soliciting such
exchange.
11. Sale by issuer to fewer than 20 persons in the
Philippines during any 12-month period,
otherwise known as private placement
transactions. (19 Lender Rule)
Requisites:
1. Sale to not more than 19 non-institutional
retail investors;
NOTE: Also, this sale must not involve an
underwriter or financial advisor.
6.
8.
2. The security is made payable to a specific
person;
Bonds or notes secured by a mortgage upon
Real estate or tangible personal property,
where the entire mortgage together with all the
bonds or notes secured thereby are sold to a
single purchaser at a single sale.
3. Security is non-negotiable
assignable; and
and
non-
4. It is in an amount not exceeding fifty (50)
million pesos.
Issue and delivery of any security in exchange
for any other security of the same Issuer
pursuant to the right of conversion entitling the
12. Sale of securities to any number of the following
Qualified Buyers:
301
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
2024 GOLDEN NOTES
a) banks;
b) registered investment houses;
c) insurance companies;
d) pension funds or retirement plans
maintained by the Government of the
Philippines or any political subdivision
thereof or managed by a bank or other
persons authorized by the Bangko Sentral
to engage in trust functions, investment
companies;
e) investment companies; and
f)
other persons or entities ruled qualified
by the SEC on the basis of such factors
such as financial sophistication, net
worth, knowledge, and experience in
financial and business matters, or amount
of assets under management. (Sec. 10.1,
SRC)
RATIONALE: Although the securities themselves
must still be registered, the sale or issue need not be
registered because the investors involved herein
are considered as highly sophisticated investors or
specialized investors and as such, have a greater
risk tolerance or do not need strict protection from
the Commission.
List of exempt transactions under SRC is not
exclusive
The list is not exclusive. The Commission may
exempt other transactions, if it finds that the
requirements of registration under the Code is not
necessary in the public interest or for the protection
of the investors such as by reason of the small
amount involved or the limited character of the
public offering (Sec. 10.02, SRC).
UNIVERSITY OF SANTO TOMAS
2024 GOLDEN NOTES
302
COMMERCIAL LAW
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
IX. ELECTRONIC COMMERCE ACT
(R.A. No. 8792)
Policy of the Law
2.
The law is a recognition by the State of:
1.
The vital role of information and
communications technology (ICT) in nationbuilding;
2.
The need to create an information-friendly
environment which supports and ensures the
availability, diversity and affordability of ICT
products and services;
3.
The primary responsibility of the private sector
in contributing investments and services in
telecommunications
and
information
technology;
4.
5.
Promote the universal use of electronic
transaction in the government and general
public. (Sec. 3, R.A. No. 8792)
Sphere of Application
This 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,
R.A. No. 8792)
A. LEGAL RECOGNITION OF ELECTRONIC DATA
MESSAGES, DOCUMENTS, AND SIGNATURES
(Secs. 6-11)
The need to develop, with appropriate training
programs and institutional policy changes,
human resources for the information
technology age, a labor force skilled in the use
of ICT and a population capable of operating
and utilizing electronic appliances and
computers;
Legal Recognition of Electronic Data Messages
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. (Sec. 6, R.A. No. 8792)
Its obligation to facilitate the transfer and
promotion of technology and to ensure network
security, connectivity, and neutrality of
technology for the national benefit; and
Electronic Data Messages
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 global
information networks. (Sec. 2, R.A. No. 8792)
This refers to information generated, sent, received,
or stored by electronic, optical, or similar means.
(Sec. 5(c), R.A. No. 8792)
Legal Recognition of Electronic Documents
Objectives of the Law
Electronic documents shall have the legal effect,
validity, or enforceability as any other document or
legal writing. (Sec. 7, R.A. No. 8792)
The Act aims to:
1.
Facilitate domestic and international dealings,
transactions,
arrangements
agreements,
303
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
2024 GOLDEN NOTES
Electronic Document
Is publication of the Senate’s Rules of Procedure
in its website sufficient to comply with the
Tañada v. Tuvera ruling?
This refers to information or the representation of
information, data, figures, symbols, or other mode
of written expression, described or however
represented, by which a right is established, or an
obligation extinguished, or by which a fact may be
proved and affirmed, which is received, recorded,
transmitted, stored, processed, retrieved, or
produced electronically. (Sec. 5(f), R.A. No. 8792)
The invocation by the respondents of the provisions
of R.A. No. 8792, otherwise known as the Electronic
Commerce Act of 2000, to support their claim of
valid publication through the internet is all the more
incorrect. R.A. 8792 considers an electronic data
message or an electronic document as the functional
equivalent of a written document only for
evidentiary purposes. In other words, the law
merely recognizes the admissibility in evidence (for
their being the original) of electronic data messages
and/or electronic documents. It does not make the
internet a medium for publishing laws, rules and
regulations. (Ranada and Agcaoili v. Senate, G.R. No.
179275, 23 Dec. 2008)
This includes digitally signed documents and any
print-out or output, readable by sight or other
means, which accurately reflects the electronic data
message or electronic document. (Sec. 1(h), Rule 2,
A.M. No. 01-7-01-SC or the Rules on Electronic
Evidence)
NOTE: Under the Rules on Electronic Evidence, the
term “electronic document” may be used
interchangeably with “electronic data message”.
(Divina, 2021; Sec. 1(h), Rules on Electronic
Evidence)
Legal Recognition of Electronic Signatures
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:
Is an original printout of a facsimile
transmission an electronic data message or
electronic document?
In an ordinary facsimile transmission, there exists
an original paper-based information or data that is
scanned, sent through a phone line, and re-printed
at the receiving end. Be it noted that in enacting the
Electronic Commerce Act of 2000, Congress
intended virtual or paperless writings to be the
functional equivalent and to have the same legal
function as paper-based documents.
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. (MCC Industrial Sales
Corporation v. Ssangyong Corporation, G.R. No.
170633, 17 Oct. 2007)
UNIVERSITY OF SANTO TOMAS
2024 GOLDEN NOTES
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
The other party is authorized and enabled to
verify the electronic signature and to make the
decision to proceed with the transaction
authenticated by the same. (Sec. 8, R.A. No.
8792)
d.
304
COMMERCIAL LAW
Electronic Signature
specifically for the person him or herself inputting
the details. In Archbishop Capalla (687 Phil. 617
[2012]), the Court categorically stated that the PCOS
machines produce digitally-signed signatures.
(BAGUMBAYAN-VNP
MOVEMENT,
INC.
V.
COMELEC, G.R. No. 206719, 10 Apr. 2019)
This refers to any distinctive mark, characteristic
and/or sound in electronic form, representing the
identity of a person, and attached to or logically
associated with the electronic data message or
electronic document or any methodology or
procedures employed or adopted by a person and
executed or adopted by such person with the
intention of authenticating or approving an
electronic data message or electronic document.
(Sec. 5(e), R.A. No. 8792)
B. OBLIGATION OF CONFIDENTIALITY
(Sec. 32)
NOTE: For the purposes of the Rules on Electronic
Evidence, an electronic signature includes digital
signature. (Sec. 1(j), Rule 2, Rules on Electronic
Evidence)
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,
R.A. No. 8792)
Digital Signature
This refers to an electronic signature consisting of a
transformation of an electronic document or an
electronic data message using an asymmetric or
public cryptosystem, such that a person has the
initial untransformed electronic document and the
signer’s public key can accurately determine the
following:
i.
Whether the transformation was created using
the private key that corresponds to the
signer’s public key; and
ii.
Whether the initial electronic document had
been altered after the transformation was
made. (Sec. 1(e), Rule 2, Rule on Electronic
Evidence)
May a machine signature of a PCOS machine be
deemed the functional equivalent of a digital
signature?
As gleaned from the wording of the law, the
signature may be any distinctive mark or
characteristic that represents the identity of a
person. Thus, a machine signature of a PCOS
machine may validly be considered the functional
equivalent of the aforementioned "digital
signature," as it represents the identity of the
individual, said signature naturally being created
305
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
2024 GOLDEN NOTES
information, fictitious identities and addresses, or
any form of false pretense or misrepresentation;
X. ACCESS DEVICES REGISTRATION ACT
(R.A. No. 8484)
B. PROHIBITED ACTS
(Sec. 9)
Policy of the Law
The law is a recognition by the State of the recent
advances in technology and the widespread use of
access devices in commercial transactions. Toward
this end, the State shall protect the rights and define
the liabilities of parties in such commercial
transactions by regulating the issuance and use of
access devices.
Prohibited acts
The following acts shall constitute access device
fraud and are hereby declared to be unlawful:
a) producing, using, trafficking in one or more
counterfeit access devices;
b) trafficking in one or more unauthorized access
devices or access devices fraudulently applied
for;
A. ACCESS DEVICE
(Sec. 3)
c) using, with intent to defraud, an unauthorized
access device;
Access Device
Any card, plate, code, account number, electronic
serial number, personal identification number, or
other telecommunications service, equipment, or
instrumental identifier, or other means of account
access that can be used to obtain money, good,
services, or any other thing of value or to initiate a
transfer of funds (other than a transfer originated
solely by paper instrument).
d) using an access device fraudulently applied for;
e) possessing one or more counterfeit access
devices or access devices fraudulently applied
for;
f)
Counterfeit Access Device
Any access device that is counterfeit, fictitious,
altered, or forged, or an identifiable component of
an access device or counterfeit access device.
g) inducing, enticing, permitting or in any manner
allowing another, for consideration or
otherwise to produce, use, traffic in counterfeit
access devices, unauthorized access devices or
access devices fraudulently applied for;
Unauthorized Access Device
Any access device that is stolen, lost, expired,
revoked, canceled, suspended, or obtained with
intent to defraud.
h) multiple imprinting on more than one
transaction record, sales slip or similar
document, thereby making it appear that the
device holder has entered into a transaction
other than those which said device holder had
lawfully contracted for, or submitting, without
being an affiliated merchant, an order to collect
Access Device Fraudulently Applied for
Any access device that was applied for or issued on
account of the use of falsified document, false
UNIVERSITY OF SANTO TOMAS
2024 GOLDEN NOTES
producing, trafficking in, having control or
custody of, or possessing device-making or
altering equipment without being in the
business or employment, which lawfully deals
with the manufacture, issuance, or distribution
of such equipment;
306
COMMERCIAL LAW
from the issuer of the access device, such extra
sales slip through an affiliated merchant who
connives therewith, or, under false pretenses of
being an affiliated merchant, present for
collection such sales slips, and similar
documents;
i)
j)
p) without the authorization of the credit card
system member or its agent, causing or
arranging for another person to present to the
member or its agent, for payment, one or more
evidence or records of transactions made by
credit card.
disclosing any information imprinted on the
access device, such as, but not limited to, the
account number or name or address of the
device holder, without the latter's authority or
permission;
C. FRUSTRATED AND ATTEMPTED ACCESS
DEVICE FRAUD
(Sec. 12)
obtaining money or anything of value through
the use of an access device, with intent to
defraud or with intent to gain and fleeing
thereafter;
Any person who performs all the acts of execution
which would produce any of the unlawful acts
enumerated in Section 9 of this Act, but which
nevertheless does not produce it by reason of
causes independent of the will of said person, shall
be punished with two-thirds (2/3) of the fine and
imprisonment provided for the consummated
offenses listed in said section.
k) having in one's possession, without authority
from the owner of the access device or the
access device company, an access device, or any
material, such as slips, carbon paper, or any
other medium, on which the access device is
written, printed, embossed, or otherwise
indicated;
l)
Any person who commences the commission of any
of the unlawful acts enumerated in Section 9 of this
Act directly by overt acts and does not perform all
the acts of execution which would produce the said
acts by reason of some cause or accident other than
said person's own spontaneous desistance, shall be
punished with one-half (1/2) of the fine and
imprisonment provided for the consummated
offenses listed in the said section.
writing or causing to be written on sales slips,
approval numbers from the issuer of the access
device of the fact of approval, where in fact no
such approval was given, or where, if given,
what is written is deliberately different from
the approval actually given;
m) making any alteration, without the access
device holder's authority, of any amount or
other information written on the sales slip;
n) effecting transaction, with one or more access
devices issued to another person or persons, to
receive payment or any other thing of value;
o) without the authorization of the issuer of the
access device, soliciting a person for the
purpose of:
1) offering an access device; or
2) selling information regarding or an
application to obtain an access device; or
307
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
2024 GOLDEN NOTES
PCA may continue to be prosecuted unless the same
have been barred by prescriptions, and subject to
the procedure under Section 31 of this Act. (Sec. 55,
PCA)
XI. PHILIPPINE COMPETITION ACT
(R.A. No. 10667)
Nature and Jurisdiction of the Commission
Purpose
The Philippine Competition Commission (PCC) has
been created as an independent quasi-judicial body
to implement the national competition policy and
attain the objectives and purposes of the Act. (Sec. 5,
PCA)
The passage of the Act is the Government’s
recognition that:
1) The efficiency of market competition is a
mechanism for allocating goods and services;
It has original and primary jurisdiction over the
enforcement and implementation of the provisions
of the Act, and its implementing rules and
regulations. (Sec. 12, PCA)
2) Past measures undertaken to liberalize key
sectors in the economy need to be reinforced by
measures
that
safeguard
competitive
conditions;
The sole and exclusive authority to initiate and
conduct a fact-finding or preliminary inquiry for the
enforcement of this Act based on reasonable
grounds. (Sec. 31, PCA)
3) The provision of equal opportunities to all
promotes entrepreneurial spirit, encourages
private investments, facilitates technology
development and transfer and enhances
resource productivity; and
4)
NOTE: The Act explicitly adopts the doctrine of
primary jurisdiction in recognition of the highly
technical character of the contemplated cases,
requiring a specialized administrative agency to
have primary jurisdiction to dispose of them. (Lim
and Recalde, 2016)
Unencumbered market competition serves the
interest of consumers by allowing them to
exercise their right of choice over goods and
services offered in the market. (Sec. 2, RA
10667)
NOTE: The Act is meant to make the Philippine
competition law in sync with similar legislation
of other countries, more importantly within the
Association of South East Asian Nations
(ASEAN) region (Lim and Recalde, 2016).
A. ANTI-COMPETITIVE AGREEMENTS
(Sec. 14)
Per se cartel agreements
Prospective Application
The following agreements, between or among
competitors, are per se prohibited:
GR: The Act shall have no retroactive effect. (Sec. 56,
PCA)
XPN: An existing business structure, conduct,
practice or any act that may be in violation of the Act
shall be subject to penalties only if it is not cured or
is continuing upon the expiration of 2 years after the
effectivity of the Act. (Sec. 53, PCA)
NOTE: Violations of Articles 186 of the Revised
Penal Code committed before the effectivity of the
UNIVERSITY OF SANTO TOMAS
2024 GOLDEN NOTES
308
a.
Price fixing - Restricting competition as to
price, or components thereof, or other terms of
trade;
b.
Bid rigging - Fixing price at an auction or in
any form of bidding including cover bidding,
bid suppression, bid rotation and market
allocation and other analogous practices of bid
manipulation;
COMMERCIAL LAW
the object or effect of substantially preventing,
restricting or lessening competition shall also be
prohibited.
Elements:
i.
ii.
iii.
There is an agreement;
The parties are competitors or do not
belong to a single economic entity; and
The subject of the agreement is either to
fix price or order terms of trade or rig a
competitive bidding.
NOTE: Those which contribute to improving the
production or distribution of goods and services or
to promoting technical or economic progress, while
allowing consumers a fair share of the resulting
benefits, may not necessarily be deemed a violation
of this Act (RA 10667, Sec. 14).
NOTE: Substantial foreclosure effect is not required,
and objective justification may not be raised as
defense. This penalizes competitors making
particular stipulations and is not subject to the
object or effect test defense.
B. ABUSE OF DOMINANT POSITION
(Sec. 15)
Non-per se cartel agreements
The following are the potential abusive conduct
of coercive monopolists:
The following agreements, between or among
competitors which have the object or effect of
substantially preventing, restricting or lessening
competition shall be prohibited:
a.
Limiting production - Setting, limiting, or
controlling production, markets, technical
development, or investment;
b.
Market sharing - Dividing or sharing the
market, whether by volume of sales or
purchases, territory, type of goods or services,
buyers or sellers or any other means;
1.
2.
3.
4.
5.
6.
7.
Innocent Monopolist may not