Special Commercial Laws Midterm Notes

Notes
in Special Commercial Law (MIDTERM)

Letters of Credit

The old definition of letters of credit has now been
rendered obsolete. The governing rules now involving
letters of credit is Uniform Customs and Practices for
Documentary Credits adopted by the International
Chamber of Commerce which is applicable also here in
our jurisdiction.
Modern day LC transactions are bank to bank
transactions so the old definition under Commerce Code
is no longer applicable.
What is a LC?
-
-
-
Historically LC was developed by merchants to

facilitate sale of goods between buyers and
sellers who are unfamiliar.
Ex. Buyer in PH Seller abroad. (Buyer and seller
are located in different places theres no trust
between them yet)
Essentially it is a bank to bank transaction
An engagement by a bank who undertakes to
honor drafts or other forms of demands for
payment issued by the bank upon request of the
customer. Engaging that once the draft is issued
by the seller he will undertake to honor and pay
the draft also upon issue of certain documents of
fulfillment of certain conditions specified in the
LC.
It reconciles the seemingly irreconcilable interest
of the seller and the buyer, in a way that when a
bank issues a LC it substitutes its promise to pay
for that of the promise to pay of its customer or
in this case buyer with the corresponding
promise from the buyer to reimburse the bank as
soon as the goods are shipped or he obtains the
possession of the cargo.
LC is not only applicable to sale of goods but also
applicable to contracts involving services (ex.
Contracts of construction of loan agreements,
etc).
How does it work?

- Applying it in the sale of goods, we have:
BUYER --- SELLER

BUYERS BANK --- SELLERS BANK
So between Buyer and Seller there should be a contract
of SALE.

Ex.
Buyer

Seller
Buyer refuses to pay

Seller refuses to deliver until he receives the goods,
until he is paid.

How do we break the deadlock/ impasse?
Under the LC the Buyer would now be required to
contact a bank and request for the issue of an LC in
favor of seller. Once seller is informed that the LC has
already been issued in his favor, the seller now will be
assured of payment. The bank will undertake to pay the
seller as soon as he issues the draft and submits the
documents specified in the LC.

What are these documents?
Documents evidencing shipment ( Bill of Lading,
Invoice, Insurance contract, Warehouse receipt,
delivery receipt, certification of quality, it DEPENDS ON
THE STIPULATION OF THE PARTIES, certificate of origin
of goods (because you might need it for customs
purposes). Basically documents of title evidencing
OWNERSHIP and FACT that goods have been shipped.

What does Seller do?
He would now ship the goods and secure the necessary
documents of title -> Bring these documents and issue
a draft (Bill of Exchange BOE drawn on the bank) ->
Presents it on the issuing bank -> Issuing bank checks if
the documents are in order -> If in order, obtain
possession of such documents -> Pay Seller

How is transaction completed?
Although documents are addressed or consigned to the
Buyer, he cannot obtain possession of the goods until
1 Letters of Credit Trust Receipts Law SRC New Central Bank Act | CHINKY.LING.LORDIE.MARGA.BARBS

Notes in Special Commercial Law (MIDTERM)

he has the documents of title. To get possession of the
documents, he must go to the issuing bank to
reimburse it in exchange for the documents of title
then the transaction is completed.
BUT in cases where the Buyer and Seller is located in
different places/ countries:
Buyer (Cebu)
Issuing Bank
-------------------- Correspondent Bank

(located in the place where the seller is;
or sellers bank)
Seller (US)
It is important for the Buyer to choose an issuing

bank, to make sure that the issuing bank is large,
strong enough and well known in international
trading. Kung gamay imo banko there is a
tendency that it does not have a correspondent
bank. It becomes complicated now when there is
a correspondent bank.
Why would a bank issue a LC? Does it get revenue out of

it? YES.
-
The buyer when it contracts for a LC with issuing

bank, aside from the credit extended it has also
to pay fees or service fees.
Basically, that is how a LC works especially in a sale of

goods.
Who are the parties?
Main
1. Buyer-Applicant (Importer) the one who applies
for a LC and who purchases something
2. Seller-Beneficiary - the one who engages to sell
the goods; the one who issues the draft against
bank so he will be paid for the shipment, and he
is the one who should secure the documents
specified under the LC
3. Issuing Bank/ Opening Bank the bank who
issues the LC; undertakes to pay the LC; the one
primarily and solidarily liable with the Buyer to

pay the LC
Others
1. Correspondent Bank could either act as an (a)
advising or notifying bank; (b) negotiating bank;
or (c) confirming bank.
2. Advising Bank notifies that such LC is issued;
responsibility is simply to inform or notify or
convey to the beneficiary or seller that there is a
LC issued in his favor
3. Confirming Bank bank who confirms that LC is
good, genuine; nature of obligation is solidary
with that of the issuing bank you also undertake
to pay the LC or draft issued under the LC
Why do we have Confirming Bank when we
already have issuing bank?
If issuing bank is not well-known and you only
have correspondent bank, aside from having
correspondent bank the seller or beneficiary will
request that correspondent bank to confirm the
LC.

Ex.
BDO -> Seller (foreign company not familiar with
BDO)

Unless that bank confirms dili sila liable. If you
only have an advising or notifying bank and
something goes wrong, the advising bank or
notifying bank does not undertake to pay. So if
youre the seller and you want to be assured you
would require that the correspondent bank will
also be the confirming bank.
4. Paying Bank undertakes to pay or honor the
draft; draft that will be drawn to the seller will be
drawn against the paying bank; it could either be
the notifying bank or confirming bank or other
bank
5. Negotiating Bank - if the paying bank or
confirming bank is located in a different state


where the seller or beneficiary is , instead of

going to the place where the paying or confirming
bank is located, you will just have the draft still
drawn against either the paying or confirming
bank negotiated with a negotiating bank. (This is
a negotiable bill of exchange, you have a drawee
and a drawer. You make it payable to yourself
also and youll just have to indorse in favor of the
negotiating bank.) It acts as an indorsee, and
eventually to get money it will have to indorse to
the paying bank.

It is important to take note of the obligations and
responsibilities of the different correspondent
banks because their liability would depend on
those obligs and responsibilities.
Between issuing bank and corresponding bank: Issuing

bank would now issue a LC, it will give correspondent
bank a copy of that LC and in turn corresponding bank
will be the one to inform the seller If correspondent bank
becomes paying bank or confirming bank, it undertakes
now to pay the seller -> he receives documents of title ->
forward these docs to issuing bank -> issuing bank could
now reimburse the correspondent bank. It presupposes
that between the issuing bank and correspondent bank,
there is an arrangement. Theres also an element of
TRUST.
Does correspondent bank get any payment?
YES. Notifying fees, advising fees, confirming fees,
negotiating fees, etc. There is always a fee for everything,
nothing is free J Whatever fee is charged by the
correspondent bank it passes on to the issuing bank and
issuing bank ultimately passes it on to the buyer.
Marginal Deposit
-
For example a LC that you applied for is for

P5,000,000 assuming that is the price of the
goods you are importing, some banks require you
to make a marginal deposit. Out of the amount
you will open, you should make a deposit of lets

say P1,000,000. In effect the credit extended by
the bank is only P4,000,000.
Question: Is there a need for the issuing bank to get
consent from the Buyer before or when it contracts
with a correspondent bank? Can the Buyer choose
who the correspondent bank will be?
In the process of applying for a LC, the issuing bank
would already inform the buyer that theres a need to
contract with a correspondent bank. The
arrangement is already made known to the buyer at
the time he applies for an LC. So consent, yes because
it is already presented to the buyer that this will be
the arrangement, these will be the fees, charges, etc.
But as to the choice of what correspondent bank,
pwede ka pili but it depends if the issuing bank has an
existing arrangement with the choice of the buyer.

Case: Pru Bank vs IAC
Correspondent bank could either be

notifying bank, confirming bank, paying
bank or negotiating bank or combinations.
Liability will depend on obligation it
assumes.
Bank of America vs CA
What is the obligation of an advising bank?

Only to advise. The fact that it paid the
draft does not necessarily make it a

confirming bank. Bank of America is only
considered a negotiating bank (merely an

indorsee), it does not become a confirming

bank hence, it does not warrant the
genuineness and due execution of the LC.

It only warrants the APPARENT

authenticity.
What is the nature of an obligation of an LC: Guaranty or

Solidary?



The liability of the bank in an LC is primary and solidary as
that of the buyer-applicant and hence not covered by
stay order.
Nature: Primary, direct and absolute.
Stages in Perfection of LC
1.
2.
3.
4.
5.
6.
7.
Underlying contract
Apply for LC
Issuance of LC in favor of seller
Shipment of goods (commercial)
Seller to present necessary documents
Payment of issuing bank/ corresponding bank
Redemption of issuing bank from buyer
Is LC necessary for validity of underlying contract?

NO. Because an LC is only a mode of payment it is not
one of the elements of a contract.
Contracts involved in an LC (3 main)
1. Underlying contract contract of sale or contract
of service -> governs relationship between buyer
and seller or applicant and beneficiary
2. Contract between Buyer and Issuing Bank
(Issuance of LC) governed by terms in
application for a LC; separate contract
3. Contract of LC (LC proper) governs relation of
Issuing Bank and Seller
(Others)
Insurance contract
Contract of carriage
Principle (Contracts): Separate and distinct from each

other. Maintained in a state of PERPETUAL separation.
Independence Principle LC is distinct and different
from other contracts and vice versa. Applies mainly in
obligation of the bank, bank is precluded from
determining whether the underlying contract has been
complied with. It is only limited to checking if the
documents stated in LC are complied with. One involving

paper transaction only look at the docs and see if it
complies with docs required in the LC, banker is not
expected to go out in the field and check the cargoes
whether it complied with that stated on the Bill of Lading
or Sales Document.
Regardless of the breach of the underlying contract, so
long as the seller or beneficiaries complies with the LC,
then the obligation of the bank is to pay.
Bank is not liable for the accuracy, legal effect, or
genuineness of shipping document. It is not even liable
for the quantity or quality, or whether or not the goods
actually exist or the value is actually that as stated or
correct. Its only obligation is simply to look at the
documents and determine whether they are complete
and they are those specified in LC.
CASE: KENG HUA PAPER PRODUCTS

What governs the rights and obligations of

parties is their respective contracts,
independent from each other.
CASE: (Fraud Exception Rule) TRANSFIELD CASE

If it is established that there is fraud on the part

of the seller/ beneficiary in drawing the LC, or
theres a fraud in presenting the documents
(docs are complete BUT fictitious or spurious
meaning there was really no bill of lading or
underlying contract etc), this can be invoked as
an exception to the independence principle rule
-> issuing bank has right to refuse payment.
Strict Compliance Rule Bank must strictly
comply with requirements or instructions of LC.
If LC states we need this doc, bank must require
doc, compliance must be complete. Such that if
bank pays even in the absence of such doc, it
does so on its risk.
Can bank add or impose an additional
requirement? NO.

4 Letters of Credit Trust Receipts Law SRC New CASE:

Central
Bank
Act | CHINKY.LING.LORDIE.MARGA.BARBS
FEATI
BANK


Guaranty vis--vis LC
CASE: Filam vs Insular

Guarantor Liable only if one primarily liable
cannot pay.

LC absolute undertaking to pay

Kinds of LC
CASE: Phil. Virginia Tobacco
Irrevocable LC issuing bank cannot alter

tenor of LC, cancel it or revoke without
conformity of the applicant and beneficiary
or the consent of all the parties (re: right of
parties to cancel or revoke)
Revocable LC while it is a security
arrangement it does not assure payment
because it can be revoked anytime
Confirmed LC correspondent bank confirms
LC or undertakes the obligation to pay;
confirming bank becomes solidarily liable
with issuing bank and buyer
Unconfirmed LC - only issuing bank can be
held primarily and solidarily liable (re:
obligation of correspondent bank)
Commercial - involves sale of goods; requires
performance
Standby involves sale of service or service
transaction (loan agreement, contract of
services); proof of non performance
Revolving LC secures several transactions
(ex. Security of several importations)
Back-to-Back LC normally in an LC
transaction it only involves an buyer-
applicant, seller-beneficiary, and issuing
bank, in this case, the beneficiary also applies
for a LC so seller-beneficiary also becomes a
seller-applicant and buyer-applicant now
becomes buyer-beneficiary
Cumulative LC normally in a bank there

exist a limit or threshold amount, in this LC if
you have not utilized the limit or threshold
amount it will be carried over to a next
period
Non Cumulative if you are allowed a credit
line for example of 1M and you do not use it
up, it cannot be carried over to the
succeeding periods or LCs
IMPORTANT POINTS TO REMEMBER IN LETTERS OF

CREDIT:
-
-
-
3 Principles: Independence Principle, Fraud

Exception Rule, Strict Compliance Rule
Obligations of Diff. Correspondent Banks
Nature of obligation under LC
TRUST RECEIPTS
Governed by PD 115 Trust Receipts Law

Trust Receipt Transaction form of security transaction
whereby it involves:
Entruster someone who either owns the goods,
documents and instruments, holds title to the
goods or holds security interest. He releases
possession of these goods, documents and
instruments to the Entrustee and in exchange
Entrustee executes document called Trust
Receipt; it undertakes the following obligations;
a) Hold the goods in trust
b) Sell or dispose the goods, docs, or
instruments
c) Return or Turn-over the proceeds or the
goods if they are unsold
d) Section 9. Obligations of the entrustee. The
entrustee shall (1) hold the goods,
documents or instruments in trust for the
entruster and shall dispose of them strictly


in accordance with the terms and conditions
of the trust receipt; (2) receive the proceeds
in trust for the entruster and turn over the
same to the entruster to the extent of the
amount owing to the entruster or as appears
on the trust receipt; (3) insure the goods for
their total value against loss from fire, theft,
pilferage or other casualties; (4) keep said
goods or proceeds thereof whether in
money or whatever form, separate and
capable of identification as property of the
entruster; (5) return the goods, documents
or instruments in the event of non-sale or
upon demand of the entruster; and (6)
observe all other terms and conditions of
the trust receipt not contrary to the
provisions of this Decree.
e) Section 10. Liability of entrustee for loss.
The risk of loss shall be borne by the
entrustee. Loss of goods, documents or
instruments which are the subject of a trust
receipt,
pending
their
disposition,
irrespective of whether or not it was due to
the fault or negligence of the entrustee,
shall not extinguish his obligation to the
entruster for the value thereof.
Why do they enter into this transaction?
To aid importers or merchants who do not

have enough or necessary funds to finance
importation of goods and cannot likewise
apply for a LC (ex. No credit line etc). They
can use their goods as collateral.
It is a security device.
SCENARIO: In an LC the bank holds title to or
documents of the goods, but what if you
cannot reimburse the bank, you cannot get
hold of documents or the goods. To solve this
problem we have the TR. The buyer will issue
a TR to the bank and the bank becomes an
entruster, so possession of goods will be
released to him. Subsequently the entrustee

(buyer/importer) will sell or dispose off goods
and realize proceeds and pay the
bank/entruster. (In this transaction bank
holds SECURITY INTEREST)
NOTE: It is not required or it does not happen
all the time that there should be a prior LC
transaction before a TR transaction takes
place.
Section 5. Form of trust receipts; contents. A trust
receipt need not be in any particular form, but every
such receipt must substantially contain (a) a
description of the goods, documents or instruments

subject of the trust receipt; (2) the total invoice value
of the goods and the amount of the draft to be paid by
the entrustee; (3) an undertaking or a commitment of
the entrustee (a) to hold in trust for the entruster the
goods, documents or instruments therein described;

(b) to dispose of them in the manner provided for in
the trust receipt; and (c) to turn over the proceeds of
the sale of the goods, documents or instruments to the
entruster to the extent of the amount owing to the
entruster or as appears in the trust receipt or to return

the goods, documents or instruments in the event of
their non-sale within the period specified therein.
The trust receipt may contain other terms and
conditions agreed upon by the parties in addition to
those hereinabove enumerated provided that such
terms and conditions shall not be contrary to the

provisions of this Decree, any existing laws, public
policy or morals, public order or good customs.

FORM: Does the law require a specific form as to a TR?

NO. But it should comply or substantially contain
the following information:
1. DESCRIBE goods, documents or instruments
released under the TR.


2. Invoice or VALUE of such goods, documents
or instruments.
3. UNDERTAKING OF ENTRUSTEE:
a) HOLD goods, docs or instrument in
TRUST.
b) Undertaking of entrustee to SELL or
DISPOSE off goods. (Dispose also
contemplates processing or
manufacturing of raw materials; not
necessarily sale.)
c) RETURN GOODS if unsold or undisposed;
TURN-OVER PROCEEDS in case of sale or
disposal.

May additional stipulations be supplied? YES.
It depends on agreement of parties, as long
as it is not contrary to law, good customs and
public morals.
Turn-over finished goods. Law states that

entruster should retain his title to the goods
whether it is in original or processed form
until the entrustee has complied with its
obligation. So even if raw material has been
converted to a processed product, security
interest of entruster still subsists. But the
interest of the entruster there is only to the
extent of the value of the raw materials.
Rights of BA Finance under the TR is

only alternative. It depends on the
discretion of an entruster, either the
cancellation of the trust and possession
of the goods or if he does not want
that, he can file for collection of sum of
money. Option is with BA Finance or
entruster.

How does TR transaction differ from CONSIGNMENT?

RAW MATERIALS: What if raw materials were already
processed and manufactured BUT was not subsequently
sold, what happens to the security interest of the
entruster?
CASE: SOUTH CITY HOMES vs BA FINANCE
Consignment release possession of goods

and consignee undertakes to sell, turn-over
proceeds or if unsold return goods. If he
doesnt return liability is under the RPC.
TR transaction distinction is issuance of a
TR; violation can be under RPC or under PD
115.
Question: Is there a pro forma TR?

NO. As discussed, law does not require a specific form so
long as it contains the 3 basic info: DESCRIPTION, VALUE
and UNDERTAKING. Normally in printed form but can also
be handwritten (no prescribed form).
Why would people opt for a TR rather than Consignment,
is penalty under PD 115 heavier?
PD 115 is malum prohibitum, no need to prove deceit
whereas estafa you need to establish deceit. But violation
of PD 115 is also one mode of committing estafa but it is
easier to prove.



CASE: CHING vs CA

Held: NO. The second loan

is not secured by the

real estate mortgage, but only by the TR.

Not only because the loan consisted of different

parties but also because the nature of a TR is that
it is a security transaction already. Thus, real
anymore necessary. By
estate mortgage is not
virtue of the TR, since it is already a security in
don't go after the real
itself, you go after the TR,
mortgage. The bank should go after the goods

which were the machineries.

TR covers only the goods that were released
under the TR. So, it cannot happen that a TR

agreement would include another security
other than those goods released under the
TR.

Note: In TR, there has to be goods, documents or
instruments involved. TRs do not just cover
money. Otherwise, it would amount to a simple

loan.
A trust receipt is a principal contract and

not an accessory contract even if it is a
security device. Nature of a TR is a
security transaction it is not a side
contract hence the consequences or
obligations under this transaction cannot
be brushed aside. By executing a TR one
undertakes certain obligations failure to
comply will result to liabilities.
Violation of PD 115 is only a mode of
committing estafa, it is not a prejudicial
question to the criminal case. Estafa, even
without the resolution of the nature of
the document, can still be established by
other evidence.

TR can also cover machineries and equipment used in
operation of business or even supply used in manufacture
business (not necessarily only goods for sale).
NACU V. CA

THE FACT THAT THERE WAS ALREADY A TRUST
ST
RECEIT MEANS THAT THE 1 REAL ESTATE
MORTGAGE WAS NO LONGER EXISTING BECAUSE IF
IT IS STILL EXISTING THERE IS NO NEED FOR THE
PARTIES TO HAVE ANOTHER SECURITY DEVICE (THE
TRUST RECEIT). SO CLEARLY THE FIRST REM WAS
ALREADY CANCELLED AS PAYMENT FOR THE
PREVIOUS LOAN.

FACTS

There was a first loan obtained which was secured
by a real estate mortgage. After the loan was paid,
another set of parties (Nacu spouses remained
parties to both first and second loans) obtained a
loan. The second loan was made thru a LC to pay for
the purchase of machineries, and this time, the
second loan was secured by TR. Now, the bank is
saying that the 2nd loan is as well secured by the
real mortgage owned by Nacu spouses.

COVERAGE OF TR TRANSACTION
Goods, documents, instruments which may or may

not be obtained for the purpose of sale.
Goods- intended for sale and those necessary for
production
Instruments- negotiable instrument
Documents- warehouse receipts
It could also include machineries and equipments
used in the processing or manufacturing of raw
materials.

TRUST RECEIPT VS CONSIGNMENT

In consignment if the consignee fails to sell the goods he
simply returns. No more liability after that.

In TR mere turnover of goods is not enough, does not
extinguish CIVIL liability only CRIMINAL liability. Only
when the goods are sold in a public/private and the
proceeds are applied. In fact if there is a deficiency the
enturster can still recover. If there is surplus it goes to the
entrustee.


But, in this case contract of adhesion rule was not
ROBLES V. CA
since, Robles was considered as a
applied

knowledgeable
man (a college professor)
WHAT DISTINGUISHED THE TRANSACTION OF MR.

contracting
a
TR
with
PBM. Thus, the court said
ROBLES FROM A MERE SALE ON CREDIT IS THE
must have known what he was entering
that
he
EXECUTION OF A DOCUMENT. IT WAS VERY CLEAR
into.
FROM SUCH DOCUMENT THAT IT WAS REALLY A TRUST

RECEIPT TRANSACTION BECAUSE IT WAS STATED THERE

F What
if in the same situation there was no
THAT IT WAS HELD IN TRUST. SINCE IT WAS A TRUST
TR executed?
RECEIT TRANSACTION HE CANT SAY THAT HE IS ONLY IS
- It could just be a mere consignment.
JUST CIVIL BECAUSE THE FAILUTRE TO TURN OVER THE
Then, he would not be liable under PD
PROCEEDS OR RETURN THE GOODS WILL HOLD HIM
115. But, he can still be sued for estafa as
LIABLE FOR PD 115.
long as there is FRAUD. Again, PD 115 is

only one of the ways to commit estafa.
Robles received goods (office equipment) under the TR.

It was stated in the TR: "goods are released under the TR

executed in favor of Paramount Business Machines.

PARTIES
Robles contended that what he executed was not a TR
agreement. He said that what he signed was not a TR but
Entruster - seller, lender, the financier. He is the
a mere formality to evidence that he received the goods.
one who holds either title of goods, documents, or
Further, he said that the transaction was only a sale on
instruments or has security interest over the same.
trial basis for 2 days. Such that if it is not sold, he only

has to return the goods. Also if he cannot return the
Entrustee - buyer, borrower, or it could be the
same, his obligation is only a civil one, and not estafa.
importer. He is the one having or taking possession

of the goods, documents or instruments released
DECISION: Court said that by virtue of the document he
under the TR transaction.
executed, it was very clear that it was a TR transaction.

In the document, the wordings state "in trust for" PBM
xxx. So it is clear that it was a TR and not just a mere
RIGHTS AND OBLIGATIONS OF THE PARTIES
formality. Therefore, Robles is liable under PD 115.
Moreover, he must have fully understood the contents ENTRUSTER
of the stipulations appearing on the face of the delivery
trust receipts which he actually signed as he is "an RIGHTS
intelligent man, a college professor, and thus, he should
1. He is entitled to the proceeds from the sale of the
have known what it is that he has entered into.
goods, documents or instruments released under a

trust receipt to the entrustee to the extent of the
F Is a TR a contract of adhesion?
amount owing to the entruster, or as appears in the
- YES, but you only apply the contract of
trust receipt,
adhesion rule if there are ambiguities. But, if
2. He has the right to the return of the goods,
the language of the law is clear, whatever is
documents or instruments in case of non-sale, and
written should govern the parties.
to the enforcement of all other rights conferred on
- In one case it was considered as a contract of
him in the trust receipt provided such are not
adhesion since the TR was already prepared
contrary to the provisions of PD115.
for by the bank. And the customer merely
3. He may cancel the trust and take possession of the
signs it if he wants for the loan to be approved.
goods, documents or instruments subject of the

trust or of the proceeds realized therefrom. Once in

possession of the goods, he may sell them under a
public or private sale after giving notice to the
entrustee,.
4. The proceeds of any such sale shall be applied
a. to the payment of the expenses thereof;
b. to the payment of the expenses of re-taking,
keeping and storing the goods, documents or
instruments;
c. to the satisfaction of the entrustee's
indebtedness to the entruster.
5. To return the goods, documents or instruments in

the event of non-sale or upon demand of the
entruster; and
6. To observe all other terms and conditions of the
trust receipt not contrary to the provisions of PD
115

Basically, the entrustee has 2 alternative

obligations:
1. Turn over the proceeds; or
2. Turn over the goods
Take note that these two alternatives refer to the

obligation of the entrustee under the TR.
So, if you choose to turn over, can you do that? Yes,
but it does not extinguish your civil liability. Only
the criminal liability is extinguished.

F Can the entruster become the purchaser?
- Yes. So, this only shows that the entruster is
really not the owner of the goods but he only
has security interest over the goods.

F If the entruster has already opted the trust and
take possession of the goods. Can he still file a
civil case against the entrustee for recovery of
sum of money?
- Yes. The civil liability still subsists unless there is a
sale and the proceeds are applied.

SURPLUS

The entrustee shall receive the surplus.

DEFICIENCY

The entrustee shall be liable to the entruster for
any deficiency.

OBLIGATIONS OF THE ENTRUSTEE

1. To hold the goods, documents or instruments in
trust for the entruster and shall dispose of them
strictly in accordance with the terms and conditions
of the trust receipt;
2. To receive the proceeds in trust for the entruster
and turn over the same to the entruster to the
extent of the amount owing to the entruster or as
appears on the trust receipt;
3. To insure the goods for their total value against
loss from fire, theft, pilferage or other casualties;
4. To keep said goods or proceeds thereof whether in
money or whatever form, separate and capable of
identification as property of the entruster;

RIGHTS OF AN INNOCENT PURCHASER FOR VALUE AS
AGAINST THE ENTRUSTER

F Example: We have entruster and entrustee. But,
the entrustee sold the goods released by virtue of
the TR, to a third party buyer - an innocent
purchaser for value. And, assuming that after the
sale the entrustee failed to remit the proceeds to
the entruster, can the entruster go after the buyer
to enforce his lien over the goods?
- No. Section 11 of PD 115 provides:

Section 11. Rights of purchaser for value and in good
purchaser of goods from an entrustee with
faith. Any
right to sell, or of documents or instruments through

their customary form of transfer, who buys the goods,

documents, or instruments for value and in good faith

from the entrustee, acquires said goods, documents or

instruments
free from the entruster's security interest.

- So, even if the entrustee failed to remit the
proceeds, the entruster could no longer go
after the buyer. Why? Because when the
entrustee enters into a contract with the
innocent purchaser for value, the one who is
now considered as the vendor is the entrustee.
Such that, if there is now a break in the sale
(i.e. Warranty of hidden defects), the third


person-buyer could no longer go after the

entruster because the entruster is not the
vendor.
As far as the contract of sale is concerned, it is
only between the entrustee (as vendor), and
the buyer.
So, the buyer cannot go after the entruster in
the same way that the entruster cannot go
after the buyer.

F What if there is a defect in the goods, can the
buyer hold the entruster for violation warranty of
hidden defects or breach of contract of sale?
-No because if an entrustee enters into a contract
with a buyer the vendor is the entrustee even if
the real owner of the goods is the entruster. The
entruster is out of the picture.

RIGHTS OF AN ENTRUSTER AS AGAINST THE CREDITORS
OF THE ENTRUSTEE

The entruster is preferred over the creditors of the
entrustee based on Section 12 of PD 115, viz:

Section 12. Validity of entruster's security interest as

against creditors. The entruster's security interest in
goods, documents, or instruments pursuant to the
written terms of a trust receipt shall be valid as
against all creditors of the entrustee for the duration
of the trust receipt agreement.

There was one case wherein X was an importer of
gasoline from a foreign supplier. PNB opened a LC in
favor of Xs foreign supplier. The gasoline was released to
X by virtue of a TR. Now, under the TR, X entered into a
contract with T for the sale of the gasoline with an
agreement that whatever proceeds, T shall pay to PNB to
comply with the TR agreement.

Now, a judgment creditor of X, filed a writ of attachment
and execution. As a result, the proceeds of the gasoline in
the hands of T was garnished by the sheriff. Now, PNB
filed a case to recover the money garnished.

Issue: Who has the better rights ot the proceeds of the
garnished money?
PNB - based on section 12, the rights of the entruster is

preferred against all other creditors. Based also on the
preference on credits rule under the Civil Code, the right
of the entruster is preferred against a judgment creditor
since the entruster's claim is specific, whereas the
judgment creditors claim is general, which is directed to
all the properties of the debtor.

In sum:
C interest of the entruster as against an innocent
purchaser for value= not preferred
C interest of the entruster as against other creditors =
preferred

WHO SHALL BEAR THE RISK OF LOSS?

The risk of loss shall be borne by the entrustee.

F So, if the goods were lost, does it extinguish the
liability of the entrustee?
-No, he bears the loss and at the same time his
obligation shall not be extinguished.

F So, this is an exception to the Res Perit
Domino Rule

F Effect on civil obligation: it still subsist

F
Ex: goods were lost due to fortuitous
event; will there still be a CRIMINAL liability?
-it still subsist unless he gives an amount equal
to the supposed proceeds. PD 115 is a special
law so malum prohibitum, regardless of the
cause of the loss you will still be liable.

VIOLATION OF PD 115

F So, when is an entrustee considered to have
committed a breach under PD 115?
1. If he fails to comply with the terms and
conditions of the trust receipt. (like payment
of interest, etc)
2. If he fails to return the goods covered by the
trust receipt if unsold.
3. If sold, he was not able to return the proceeds



-
Note: the mere failure of the entrustee to turn

over the proceeds of the sale or to turn over
the goods themselves constitute a violation of
PD 115.
Thus, it is not necessary to prove that the
entruster suffered damage because it is
malum prohibitum: an offense against public
order or public policy.

LIABILITIES OF THE ENTRUSTEE

1. CRIMINAL LIABILTY (ESTAFA)
2. CIVIL LIABILITY- under art. 33 anyone who causes
injury by reason of defamation, fraud or physical
injury shall be liable.

EXTINGUISHMENT OF ENTRUSTEES CIVIL LIABILITY

The civil liability of the entrustee is extinguished
only when the goods are returned, and the
entruster disposes the goods in a public or private
sale, and the proceeds thereof are applied in
payment of the debt.
- Hence, the entrustee cannot extinguish his civil
obligation by just surrendering the goods to the
entruster. The mere return of the goods does
not by itself relieve entrustee of his civil
liability.

F What if the entrustee is subsequently acquitted of
his criminal liability?
- the extinguishment of his criminal liability
does not dissolve his civil liability. It is
separate form the criminal liability.

F If it is committed by a corporation who will be
liable?
-BOD and officers will be held criminally and
civilly liable.

EXTINGUISHMENT OF ENTRUSTEES CRIMINAL LIABILITY

If entrustee returns the goods, his criminal liability
is extinguished.
- Note that only his criminal liability is
extinguished, not his civil liability.
The civil liability is separate from the criminal liability.

COLINARES
VS CA

THE NATURE OF TRANSACTION ENTERED INTO BY
SO

COLINARES WITH THE BANK IT WAS ONLY A SIMLE LOAN

BECAUSE
EVEN IF THERE WAS A TRUST RECEIPT ISSUED,

THERE WAS ALREADY TRANSFER OF OWNERSHIP/GOODS

BEFORE
THE DOCUMENT WAS ISSUED (A DAY BEFORE)

WHICH
IS CONTRARY TO THE NATURE OF A TRUST

RECEIPT
TRANSACTION.

Where the debtor received the goods subject of

the trust receipt before the trust receipt itself was

entered into, the transaction in question is a simple

loan and not a trust receipt agreement.

Colinares
acquired construction materials from the seller.

So, the materials are already in the possession of

Colinares. To pay off his debts to the supplier, he availed
a loan from the bank. But, the bank was of course very
of

shrewd.
Thinking that it was only an ordinary loan, it

required Colinares to execute a TR in order to secure the

loan.

Ruling:

is no longer a TR transaction. Take note that the
It

possession
of the goods was already with Colinares when

he acquired a loan from the bank. So, when the bank

required
him to execute a TR to secure the loan, it

already
contradicted the nature of a TR transaction

because
in a TR transaction, possession of the goods is

with
the seller/entruster. It is only upon execution of the
that those goods are released to the entrustee. In
TR

here,
the entrustee is already in possession of the goods.
the possession of the goods never came to the
So,

possession
of the entruster.

is just a simple loan.
This

TIOMICO
V. CA

WON
PD 115 IS UNCONSTITUTIONAL

What
is being punished by the law is the public order,

dishonesty
and abuse of confidence in the handling of

money
or goods to the prejudice to another.



So it does not violate the constitutional

C provision that no person shall be imprisoned for
non-payment of debt.

PHILIPPINE
BLOOMING

TR covers not only goods intended for sale
but also machinery and equipment
Even if the bank already takes possession of
the goods the civil liability still subsist

C A letter of credit is a separate document from a
trust receipt. While the trust receipt may have been
executed as security on the letter of credit, still the
two documents involve different undertakings and
obligations.
- Letter of Credit covers the loan feature of
the transaction
- Trust Receipt covers the security of the
transaction
- So, even if liability is extinguished under the
trust receipt, there is still a civil liability for the
letter of credit.

THE SECURITIES REGULATION CODE
(REPUBLIC ACT NO. 8799)

Previously known as the revised securities act
SRC is also known as the BLUE SKY LAW
Blue sky - because it intends to protect the public
against unscrupulous promoters or individuals
who stake business claims or ventures with no
real basis, and sell shares or interests to investors
who are left holding certificates which represent
nothing but claims in a square in the blue sky (like
building a castle in the air). This comes in several
forms like fraud or scams.

PURPOSES

SEC. 2. Declaration of State Policy. 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. To achieve these
ends, this Securities Regulation Code is hereby enacted.

1. establish a socially conscious, free market that
regulates itself
- intends to educate the public about the risk
involved, to raise awareness among the public
2. encourage the widest participation of ownership in
enterprises
- so that ownership in businesses shall not be
limited to individuals. No monopoly in business
3. enhance the democratization of wealth
- equal distribution of wealth
4. promote the development of the capital market
protect investors,
5. ensure full and fair disclosure about securities
- transparency, so that the public will know what
it will get into
6. minimize if not totally eliminate insider trading and
other fraudulent or manipulative devices and
practices which create distortions in the free
market
- refers to the prohibited acts under the SRC

NATURE

SRC is a self-executory law. Even if the SEC has not issued
rules and regulations, it does not affect the self-executory
nature of the SRC.

FEATURES

The SRC contains regulatory controls to achieve its
objectives, to name a few:
1. requirement of registration of securities
- before a promoter or issuer will be allowed to
offer the securities for sale
2. registration of those engaged in the sale of
securities
- such as brokers, dealers, salesmen
3. expanded the power of the SEC the body which is
tasked to implement the SRC
- possesses investigatory and rule-making
powers


o
o
o
SEC has been divested with some

adjudicative powers (quasi judicial) of the
SEC which were vested before under PD
902-A
no power not to decide intra corporate
disputes (regular court na)
PURPOSE: so that SEC can focus on its
regulatory powers.

THE SECURITIES AND EXCHANGE COMMISSION

nature collegial body
composition a Chairperson and 4 Commissioners
(total of 5)
qualifications
a. natural-born citizens of the Philippines
b. at least 35 years of age for the Commissioners;
at least 40 years of age for the Chairperson
c. of good moral character
d. of unquestionable integrity
e. of known probity and patriotism
f. with recognized competence in social and
economic disciplines
g. majority of the Commissioners, including the
Chairperson, shall be members of the
Philippine bar

appointed by the president for a term of 7 years

POWERS AND FUNCTIONS OF SEC

SEC. 5. Powers and Functions of the
Commission:
(a) Have jurisdiction and supervision over all
corporations, partnerships or associations who are
the grantees of primary franchises and/or a license or
permit issued by the Government;

corporations here refer to private corporations
only, excluding public corporations
N/A to sole proprietorship because that is with DTI

(b) Formulate policies and recommendations on issues
concerning the securities market, advise Congress
and other government agencies on all aspects of the
securities market and propose legislation and
amendments thereto;
(c)
(d)
(e)
(f)
(g)
(h)
(i)

since they are the agency tasked to enforce the
SRC, they are presumed to have the expertise
regarding these matters

Approve, reject, suspend, revoke or require
amendments to registration statements, and
registration and licensing applications;
Regulate, investigate or supervise the activities of
persons to ensure compliance;
Supervise, monitor, suspend or take over the
activities of exchanges, clearing agencies and other
SROs;
Impose sanctions for the violation of laws and the
rules, regulations and orders issued pursuant
thereto;
Prepare, approve, amend or repeal rules, regulations
and orders, and issue opinions and provide guidance
on and supervise compliance with such rules,
regulations and orders;
Enlist the aid and support of and/or deputize any and
all enforcement agencies of the Government, civil or
military as well as any private institution, corporation,
firm, association or person in the implementation of
its powers and functions under this Code;
Issue cease and desist orders to prevent fraud or
injury to the investing public;
If the corporation is doing any of the prohibited

acts

(j) Punish for contempt of the Commission, both direct
and indirect, in accordance with the pertinent
provisions of and penalties prescribed by the Rules of
Court;
(k) Compel the officers of any registered corporation or
association to call meetings of stockholders or
members thereof under its supervision;

(l) Issue subpoena duces tecum and summon witnesses
to appear in any proceedings of the Commission and
in appropriate cases, order the examination, search
and seizure of all documents, papers, files and
records, tax returns, and books of accounts of any
entity or person under investigation as may be
necessary for the proper disposition of the cases
before it, subject to the provisions of existing laws;



(m) Suspend, or revoke, after proper notice and hearing
the franchise or certificate of registration of
corporations, partnerships or associations, upon any
of the grounds provided by law; and
(n) Exercise such other powers as may be provided by
law as well as those which may be implied from, or
which are necessary or incidental to the carrying out
of, the express powers granted the Commission to
achieve the objectives and purposes of these laws.

NOTE: Jurisdiction over intra-corporate controversies,
election cases, are now transferred to the regular courts
and is no longer with SEC

F Can the SEC compel a corporation to declare
dividends? Is it an exercise of regulatory power? Is
it within their exercise of supervisory power,
regulatory power?
- They cannot compel, but they can penalize the
corporation (If the corporations unrestricted
retained earnings exceed 100% of its capital,
the excess should already be declared as
dividends. It can only retain URE of up to 100%
of its capital.), and also SEC may also stop the
issuing of shares of stock. These are in the
exercise of their regulatory powers.

BAVIERA V. PAGLINAWAN Doctrine of Primary
Jurisdiction

REFER FIRST TO SEC BEFORE FILING TO DOJ (SEC
WILL NOW ENDORSE IT TO DOJ)- DOCTRINE OF
PRIMARY JURISDICTION

All complaints for violation of the Code and its
implementing rules and regulations should be filed
with the SEC. Where the complaint is criminal in
nature, the SEC shall indorse the complaint to the
DOJ for preliminary investigation and prosecution
as provided in Sec. 53.1.

Hence, the petitioner committed a fatal procedural
lapse when he filed his criminal complaint directly
with the DOJ. Verily, no grave abuse of discretion
can be ascribed to the DOJ in dismissing
petitioners complaint.

REGISTRATION OF SECURITIES

F What are securities?

SEC. 3.1. Securities are shares, participation or interests
in a corporation or in a commercial enterprise or profit-
making venture and evidenced by a certificate, contract,
instrument, whether written or electronic in character.
It includes:
(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 option and warrants;
(e) Certificates of assignments, certificates of
participation, trust certificates, voting trust certificates
or similar instruments;
(f) Proprietary or non proprietary membership
certificates incorporations; and
(g) Other instruments as may in the future be
determined by the Commission.

KINDS OF SECURITIES

1. DEBT INSTURMENTS
- Any evidence of indebtedness. Ex. bonds,
debentures, promissory notes
- Bonds are elaborate forms of promissory notes.

2. EQUITY INSTRUMENTS
- Proprietary or non-proprietary membership
certificates in corporations.
- Ex. shares in club ultima, alta vista, cebu
country club

3. INVESTMENT CONTRACTS
- A contract, transaction or scheme whereby a
person invests his money in a common
enterprise and is led to expect profits not
solely but primarily from the efforts of others.
- 4 elements:
1. Investment in money
2. Common enterprise 2 or more persons
3. Expectation of profit
4. Profits derived from efforts of others


4. DERIVATIVES
- with respect to equity securities, are financial
instruments whose value depends on the
interest in or performance of an underlying
security, but which does not require any
investment of principal in the underlying
security
- Ex. options or warrants

5. TRUST INTRUMENTS
- Ex. certificates of assignment, participation,
voting trust certificates
SITUATION

You with your friends want to establish a recreational
wellness center in SRP then the project cost is expected
to be 100M and since you only have 50M you want to
raise the other 50M by issuing membership certificates.
(will entitle member to use facilities but not to dividends)

F Before offering to sell such certificates, should
you register first to the SEC?
-Yes because it is a security. (equity instrument)

F SO CHECK FIRST IF IT IS A SECURITY OR NOT!

POWERHOMES UNLIMITED

SEC. 8. Requirement of Registration of Securities. 8.1.

Securities shall not be sold or offered for sale or
Powerhomes is a domestic corporation engaged in

distribution within the Philippines, without a registration
network marketing (not the development and

statement duly filed with and approved by the
improvement of real estate properties).

Commission. Prior to such sale, information on the

securities, in such form and with such substance as the
WON it is an INVESTMENT CONTRACT?

Commission may prescribe, shall be made available to
- SC: YES. The four elements are present: (1) an

each prospective purchaser.
investment of money, (2) in a common

enterprise, (3) with expectation of profits,

F Purpose of registration of securities? (registration
(4) primarily from efforts of others.

and approval before a security can be offered and
- An investor enrolls under the scheme of the

sold)
corporation to be entitled to recruit other

investors and to receive commissions from the

1. GIVE THE PUBLIC AND THE ISSUER FULL AND
investments of those directly recruited by him.

ADEQUATE DISCLOSURE OF THE SECURITIES,
Under the scheme, the accumulated amount

- If you look at the registration statement
received by the investor comes primarily from

SEC requires full disclosure so that by virtue
the efforts of his recruits.

of this the public can make a better

judgment whether to invest in that
WON SEC can issue cease and desist order?

company. Who are the people involve, are
- YES. Because this is an investment contract,

they of good standing all those are required
registration with the SEC is required. Therefore,

to be disclosed. If it is selling products,
the SEC was correct in issuing a cease and desist

what is the status, is it still in research or is
order.

it now being sold? What is their dividend

policy? ETC.

- With this registration statement, the public
TIMESHARE REALTY

can decide on the feasibility of investing in

such company, without such registration
Timeshare is engaged in the selling of time shares

statement the public has no idea on the
(time shares are those issued by corporations or

standing etc. of the company.
resorts or hotels which give you a right to stay in that

2. ASSURANCE TO THE PUBLIC THAT THE
hotel for a certain period of time, or day in a specific

COMPANY SELLING SECURITIES IS A
year, and you can use the facilities for free)- so a

LEGITIMATE ONE not a fly-by-night company.
security!



ISSUE: WON the shares issued prior to the
registration are valid and effective, and whether or
not the registration on 1998 had a RETROACTIVE
EFFECT?

SC: NO RETROACTIVE EFFECT, because the law is
specific that no sale of security shall be made until
unless a registration statement is filed and
approved, and so any sale made prior to that is null
and void.

Contention of time share: it was registered as a
corporation before 1996!
A: being registered as a corporation is just one of
the several requirements before it may deal with
timeshares. The registration of securities is a
separate requirement.

NOTE:
Registration is for every security that you want to
issue. For example, you want to register stocks, or
bonds, or investment contracts. The registration
statement you obtained for the shares of stocks does
not apply to the investment contracts or bonds that you
intend to issue.

Even in common stocks, if you are registered to issue
common stocks but you later on issued preferred stocks,
thats another requirement for registration because as far
as the preferred shares are concerned these are
unregistered securities.
EXAMPLE

You registered 100M worth of shares of stock, but you
only sold 50M. The period to sell such shares expired. If
you want to resell the remaining 50M you are even
required to file an UPDATED REGISTRATION
STATEMENT.

F What about the pre-selling of condominium units,
townhouse, subdivision? Is registration required?
- No need to register. You are not selling
securities.

Exceptions to the Requirement of Registration of

Securities
1. Exempt Securities
2. Exempt Transactions
Note: The exception only extends to the registration
requirement and not on any other requirements.
(Note further: take note of the exempt securities and
exempt transactions because in the exam, Atty. might
make us determine if the transaction is an exempt
security or transaction.)
EXEMPT SECURITIES
Sec. 9 Exempt Securities
What is the common denominator why these securities
are exempt?
Look into the personality of the issuer.
1. The issuer is an entity that can be trusted not to
deceive the public like the government.
2. If not the government, it is an entity which is
under regulation of another government agency
which is expected to protect the public in the
same manner as that of the SEC.
3. The nature of the offering is of a limited
character. It involves only a small amount.

SEC. 9. Exempt Securities.
9.1. The requirement of registration under Subsection
8.1 shall not as a general rule apply to any of the
following classes of securities:
(a) Any security issued or guaranteed by the
Government of the Philippines, or by any political
subdivision or agency thereof, or by any person
controlled or supervised by, and acting as an
instrumentality of said Government.
(b) Any security issued or guaranteed by the
government of any country with which the Philippines
maintains diplomatic relations, or by any state, province
or political subdivision thereof on the basis of
reciprocity: Provided, That the Commission may require


compliance with the form and content of disclosures the
Commission may prescribe.

-
2. HLURB
- something to do with housing, subdivisions,
condominiums etc. An example of a security is
time shares. (note: selling of condo units is not an
investment
product)

3. BIR
- practically all corporations are registered with BIR
but it does not mean that when you are
registered with BIR, you are already allowed to
sell securities because the BIR does not monitor
for that purpose. Its concern is more on the
payment of taxes.

It is expected that the government will never go

bankrupt because of their inherent power to tax.
GOCCs are covered (also securities issued by
GOCCs) because it is not limited to the government
but also to any person or entity controlled or
supervised by the government.
Ex. Treasury bonds issued therefore, if the
government will issue treasury bonds, there is no
need to file a registration statement.

(c) Certificates issued by a receiver or by a trustee in
bankruptcy duly approved by the proper adjudicatory
body.

-
This could refer to any security issued by any entity

but this was issued pursuant to a bankruptcy
proceeding, which was duly approved by the
courts. It is under the supervision of the courts that
is why it is considered an exempt security. Also, this
is of limited public offering (i.e not offered to the
public but only pursuant to a bankruptcy
proceeding.
(e) Any security issued by a bank except its own shares

of stock.
GR: Any bank issuing bonds, investment contracts etc.,
does not require registration because the bank is under
the supervision of the BSP.
EXC: if it pertains to the banks OWN shares of stock.
It has to be a security OTHER than its own security
-
(d) Any security or its derivatives the sale or transfer of

which, by law, is under the supervision and regulation of
the Office of the Insurance Commission, Housing and
Land Use Regulatory Board, or the Bureau of Internal
Revenue.

1. Office of the Insurance Commission
- Under here are insurance companies. Aside from
the traditional insurance products, they also sell
investment products like mutual funds or some
other form of investment products.
- If an insurance company issues investment
products or an equity or debt instruments, it does
not registration because the insurance companies
is under the supervision of the Office of the
Insurance
Commissioner.

-
-
-
-
o Ex. When a bank issues bonds.

If bank issues ITS OWN SHARES OF STOCK (bank
being a stock corporation also) it must register.
If the bank sells stocks of another company it is
exempt because it is not the banks own shares of
stock.
If a bank sells its own bonds does not require
registration. Bond is different from shares of stock.
Other than that, it can issue without the need of
registration.
So banks have a special treatment.
But if the bank (ex. BDO) will go public
and issue its own capital stock, in this
case, it already requires registration.

9.2. The Commission may, by rule or regulation after
public hearing, add to the foregoing any class of
securities if it finds that the enforcement of this Code
with respect to such securities is not necessary in the
public interest and for the protection of investors.



-
catch-all provision: any other securities added by

SEC after a public hearing.

EXEMPT TRANSACTIONS

SEC. 10. Exempt Transactions.
10.1. The requirement of registration under Subsection
8.1. shall not apply to the sale of any security in any of
the following transactions:

-
In EXEMPT TRANSACTIONS, the security issued is

NOT EXEMPT (otherwise it would fall under exempt
securities). Only that the circumstances under
which the securities are sold makes registration
unnecessary. (i.e not necessary for the protection
of the public or investors)
Perhaps the risk involved is not that great. If you
look at enumeration of exempt transactions, the
sales of securities are mostly isolated transactions,
and do not involve sales of security to the public or
general offers to the public.

(a) At any judicial sale, or sale by an executor,
administrator, guardian or receiver or trustee in
insolvency or bankruptcy.

-
-
It is exempt because it is only on a limited public

offering an isolated transaction and under the
supervision of the courts.
Example of a judicial sale: foreclosure in a public
auction

(b) By or for the account of a pledge holder, or

mortgagee or any other similar lien holder selling or
offering for sale or delivery in the ordinary course of
business and not for the purpose of avoiding the
provisions of this Code, to liquidate a bona fide debt, a
security pledged in good faith as security for such debt.

Here, you have a security and you use your

security as a collateral for a debt or as a mortgage
or pledge. You are selling your security to
liquidate a debt or in payment of a debt.
This is an isolated transaction because you are
not selling several securities but only a particular
security used as a collateral. Therefore,
registration is not necessary.

(c) An isolated transaction in which any security is sold,
offered for sale, subscription or delivery by the owner
thereof, or by his representative for the owners
account, such sale or offer for sale, subscription or
delivery not being made in the course of repeated and
successive transactions of a like character by such
owner, or on his account by such representative and
such owner or representative not being the underwriter
of such security.

An isolated transaction wherein the security is sold,
offered, sold, subscribed or delivery by the owner thereof
meaning, it is not the issuer who is selling the security
but it is issued by the owner. Therefore, previously, the
security has already been bought.
-
Ex.
1. Company A is the issuer. Mr. X bought a
security from Company A. Mr. X is now the
owner of the security and he sells the security
in an isolated transaction to Mr Y.
- does not require registration because it is an
isolated transaction. It is presumed that the
security sold by Company A to Mr. X has
already been registered before.
What do you mean by an isolated
transaction?
it is done once; not regular; not
done in a course of repeated or
successive transaction.
2. What if subsequently Mr. Y sells it again to Mr.
C, does it require registration?
- exempt from registration. It is still an isolated
transaction.
o


-
The requirement is that it should be in an isolated

transaction and not in the course of a repeated
transaction.
o What do you mean in the course of
repeated and successive transaction?
The same seller sold several
shares. (ako sabot: Mr. X selling
to Mr. Y, Z, W.) In this case, it
requires registration.
See also (h)

(d) The distribution by a corporation, actively engaged in

the business authorized by its articles of incorporation,
of securities to its stockholders or other security holders
as a stock dividend or other distribution out of surplus.

-
Here, the shares are not sold but are declared as

stock dividends. Ex. Corporation A would issue
additional 1000 shares to its existing stockholders
via stock dividends.
Why is it exempt?
o It is not sold or offered to the public
because it is offered only to its existing
stockholders. Thus, there is no risk. There
is no need to protect the existing
stockholders. Hence, registration is not
necessary.
Ex. If X corporation would increase its ACS from
100m to 200M, the increase would be subscribed
by way of stock dividends.
So, is there a need for X to file for a registration
statement to cover for the issuance of the
additional 100M shares?
NO, the issuance is an exempt transaction. It is
subscribed by its existing stock holders by way of
stock dividends.
Why is it exempt?
o It is sold to its own stockholders
exclusively the offer was made only to
existing stockholders. It is exempt
because it is not offered to the public but
only to its own stockholders.
- Aside from it being to its own stockholders
exclusively, there must be no commission or
other remuneration.
- Additional subscriptions made by stockholders.
- Compare (e) and (k):
o In letter (e), the sale is made to a stockholder;
in letter (k), it could be a sale not to an existing
stock holder.

(f) The issuance of bonds or notes secured by 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.

-

(e) The sale of capital stock of a corporation to its own
stockholders exclusively, where no commission or other
remuneration is paid or given directly or indirectly in
connection with the sale of such capital stock.

-
This one is no longer declaration of stock dividends

(d) but of sale
It talks about issuance of bonds or notes. Its a debt

instrument secured by a real estate or a tangible
personal property provided that the bonds or notes
are sold to a single purchaser at a single sale. So
again, it is an isolated transaction.
Ex. XYZ BANK plans to sell 100M 5 year term bonds
and the bonds are secured by a real estate in favor
of Mr. A.
o Is there a need for registration? NO
o Is it an exempt security? NO
o Is it an exempt transaction? YES. Single
purchaser at a single sale.
What if in the following month, the bank issued
another 5 million worth of bonds to Mr. B. Does it
still qualify in letter (f)?
o NO. But it is still exempt, not because it is an
exempt transaction but because it is an exempt
security. It is a bond (other than shares of
stock) issued by a bank! (exempt security, item
(d))
o If it was sold by a corporation (other than a
bank), it is no longer an exempt security.

(g) The issue and delivery of any security in exchange for


any other security of the same issuer pursuant to a right
of conversion entitling the holder of the security
surrendered
in
exchange
to
make
such
conversion: Provided, That the security so surrendered
has been registered under this Code or was, when sold,
exempt from the provisions of this Code, and that the
security issued and delivered in exchange, if sold at the
conversion price, would at the time of such conversion
fall within the class of securities entitled to registration
under this Code. Upon such conversion the par value of
the security surrendered in such exchange shall be
deemed the price at which the securities issued and
delivered in such exchange are sold.

-
-
-
-
About securities exchanged for another securities.

Here, its like convertible shares of stock (common
to preferred).
Ex. if the holder of a common share is given the
option to convert it into a preferred share, the law
states that in converting (common > preferred) it
would qualify as an exempt transaction. After
converting into preferred shares and after the
issuance of the preferred shares, no registration is
required. Because upon conversion you will
surrender the common shares and you will be
issued new shares of stock.
Note that the security surrendered has been
previously registered.
So, there is no risk, you are an existing stock holder
and the shares have been previously registered but
was just converted.
(i) Subscriptions for shares of the capital stock of a

corporation prior to the incorporation thereof 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.

-
(h) Brokers transactions, executed upon customers

orders, on any registered Exchange or other trading
market.

-
Brokers transactions are those transactions in the

stock exchange. Every time a broker sells a security,
he does not need to apply for registration because:
1. The shares sold have been previously
registered.
2. It is not a new offering of shares.
3. The registered exchange is probably monitored
or supervised by the SEC.
So, the circumstances under which you are selling

the shares will qualify them as exempt transactions.
In (i), subscription during incorporation is exempt

because in the first place the corporation has not
been incorporated as yet. The law provides that in
order to comply with the requirements of the law
as to percentage of capital stock of a corporation, it
should be subscribed before it can be registered or
be duly incorporated. So a corporation in the
process of registration in the SEC - subscription of
the authorized capital stock does not need
registration. But subsequent issuance of shares
after the corporation has been incorporated, then,
there is a need for registration.
Also, pursuant to an increase in authorized capital
stock (in effect, there are new shares). It is exempt
from registration because of pre-emptive right
you are offering it first to the existing stockholders
before the public.

(j) The exchange of securities by the issuer with its

existing security holders exclusively, where no
commission or other remuneration is paid or given
directly or indirectly for soliciting such exchange.
-
In (j), you exchange another security for another

security. This is similar to conversion of stocks.


There is no need for registration because you are
only issuing it to an existing stockholder.

(kani refer mos provision sa [c] kay I think adto ni

directed nga question)
-
(k) The sale of securities by an issuer to fewer than

twenty (20) persons in the Philippines during any
twelve-month period.
-
Before, there was a requirement that although it is

an exempt transaction that every time a
corporation will issue shares of stock esp. out of its
unissued shares, you need to submit to SEC a form
you have to fill up request for exemption you
would like to seek a confirmation that this issuance
of share is exempt from registration requirement.
Normally, the reason used by the corporation to be
exempt is (k), wherein sale of securities is issued to
19 or less persons within a 12-month period.
- Ex. If the corporation issues its shares to 10 new
investors this would qualify as an exempt
transaction.
- So, if the issuer sells securities to over 20 persons,
then the securities must be registered.
- However it does not invalidate the sale from 1-19
because it is still an exempt transaction.
- It is exempt because of the limited character of the
offering.

Questions raised by classmates:
1. Would this invalidate the requirement of isolated
transaction?
-
in letter (c), the person who sells is the owner

and not the issuer. As we said that the sales sold
by the owner are securities that have already
been previously registered.
in letter (k), it talks about the issuance made by
the issuer himself, basta lang di mo-exceed ug 20,
it would qualify as an exempt transaction.
Therefore, no need for registration.

2. Mr. X received 1000 shares and he wants to
subsequently sell his shares 100 shares to Mr. Y and the
rest (900 shares) to other persons. Is there a time period?
None. The law is silent. Wala siya niingon within a

12-month period unlike in letter (k).
So if Mr X, will sell the other shares after 5 years,
is he required to register such shares? Atty.
Larrobis submits YES. If you read carefully, the
law says an isolated transaction, wala siya
niingon ug two or more transactions. It does not
talk about a period or what. Then, Atty. submits
that by reading only the provision of the law, it
will only be one transaction.

3. In letter (k), how does the SEC monitor that you have
not reached 20 such that what if in a months time two
transactions per month, what happens to the 20th
transaction, does it invalidate the previous transaction?
- No. Only the 20th transaction. Based on practice, they
have to monitor whether the corporation has issued
shares out of its authorized capital stock. So that it will
not be considered as an unauthorized issuance, you need
to submit to the SEC a confirmation or notice that you are
issuing shares and in the request form for approval to
issue additional shares, you will indicate there that you
are asking for an exemption of the registration
requirements. So, in that manner, the SEC will know
whether you have issued shares which is more than 20
persons within a 12-month period.
(l) The sale of securities to any number of the following
qualified buyers:
(i) Bank;
(ii) Registered investment house;
(iii) Insurance company;
(iv) Pension fund or retirement plan maintained by
the Government of the Philippines or any political
subdivision thereof or managed by a bank or other
persons authorized by the Bangko Sentral to engage
in trust functions;
(v) Investment company; or
(vi) Such other person as the Commission may by
rule determine as qualified buyers, on the basis of
such factors as financial sophistication, net worth,


knowledge, and experience in financial and business
matters, or amount of assets under management.

Who are qualified buyers?
1.
2.
3.
4.
banks
registered investment house
insurance company
pension fund or retirement plan maintained by
the government
5. investment company
6. other persons SEC will determine as qualified
buyers (catch all phrase)

Why are they considered as qualified buyers?
-
Because these are entities which have achieved

financial sophistication meaning, they have
the necessary expertise and competence to
determine whether or not the security is good or
not; or they have experts to advise them WON
this is a good buy or not a good buy.
In effect, there is no need to protect the investor.

10.2. The Commission may exempt other transactions,

if it finds that the requirements of registration under
this 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.
10.3. Any person applying for an exemption under this
Section, shall file with the Commission a notice
identifying the exemption relied upon on such form and
at such time as the Commission by rule may prescribe
and with such notice shall pay to the Commission a fee
equivalent to one-tenth (1/10) of one percent (1%) of
the maximum aggregate price or issued value of the
securities.

Example, a corporation has this policy of encouraging
stock ownership among its employees. What if the
corporation plans to issue its own shares of stock to all its
employees numbering 1000 employees, is there a need
for the corporation to register before it can sell or offer

its securities?
Is it an exempt security? No. The issuer is not the
government etc.
Is it an exempt transaction? No. They are not
stockholders but employees; and it does not fall under
any of the categories of an exempt transaction.
Therefore, the transaction needs to be registered.

RATIONALE (why registration is not required): issuer can
be trusted not to deceive the investor, or the issuer is
regulated, supervised or monitored by another
government entity which is expected to perform the
same function as that of SEC as far as protecting the
investor is concerned.
* Stock options are not exempt securities, nor are they
exempt transactions.
PROCEDURE FOR THE REGISTRATION OF SECURITIES

1. Filing of the following with the SEC:
a. sworn registration statement (standard pro
forma form)
SIGNATORIES TO A REGISTRATION
STATEMENT (see sec. 12.4)
-the same persons who will be held liable
if there are misrepresentations in the
registration statement.
i. Chief Executive Officer
ii. Chief Operating Officer
iii. Chief Financial Officer
iv. Accounting Manager/Comptroller
v. Corporate Secretary


vi. Expert Opinion (signature is not
mandatory)
b. attach the Resolution of the Board of Directors
c. prospectus - normally contains all the
necessary information about the issuer or
about the business
d. other information that may be required (other
annexes)

2. Payment of filing feenot more than 1/10 of 1% of
the maximum aggregate price at which such
securities are proposed to be offered.
3. Publication 2 newspapers of general circulation
once a week for 2 consecutive weeks. The
publication is very important, it informs the public
that the registration statement has been filed.
F How long will the SEC issue an Order either
approving or denying the application?
- Within 45 days after the filing of the registration
statement,
- Or by such later date to which the issuer has
consented.
- TAKE NOTE! It is only upon the issuance of the
Order by the SEC approving the Registration
Statement shall the issuer be allowed to sell the
securities or offer them for sale. So any sale
made prior to the effectivity of the registration
statement is considered NULL and VOID.
GROUNDS TO REJECT/REVOKE THE REGISTRATION OF
SECURITIES

SEC. 13. Rejection and Revocation of Registration of
Securities. - 13.1. The Commission may reject a
registration statement and refuse registration of the
security thereunder, or revoke the effectivity of a
registration statement and the registration of the
security thereunder after due notice and hearing by
issuing an order to such effect, setting forth its findings
in respect thereto, if it finds that:

(a) The issuer:
(i) Has been judicially declared insolvent;
(ii) Has violated any of the provisions of this Code,
the rules promulgated pursuant thereto, or any
order of the Commission of which the issuer has
notice in connection with the offering for which a
registration statement has been filed;
(iii) Has been or is engaged or is about to engage in
fraudulent transactions;
(iv) Has made any false or misleading representation
of material facts in any prospectus concerning the
issuer or its securities;
(v) Has failed to comply with any requirement that
the Commission may impose as a condition for
registration of the security for which the registration
statement has been filed; or

(b) The registration statement is on its face incomplete
or inaccurate in any material respect or includes any
untrue 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; or

(c) The issuer, any officer, director or controlling person
of the issuer, or person performing similar functions, or
any underwriter has been convicted, by a competent
judicial or administrative body, upon plea of guilty, or
otherwise, of an offense involving moral turpitude
and/or fraud or is enjoined or restrained by the
Commission or other competent judicial or
administrative body for violations of securities,
commodities, and other related laws.

GROUNDS FOR REVOCATION OF REGISTRATION OF
SECURITIES
1. The issuer:
a. judicially declared as insolvent
b. violated provisions of the Code
c. engaged in fraudulent transactions
d. made false or misleading representation of
material facts
e. failed to comply with any requirements the
Commission may impose as a condition for
registration of security.
2. Registration Statement is on its face incomplete
or inaccurate.
3. The issuer, any officer, director or controlling
person of the issuer has been convicted by a
competent judicial or administrative body of an
offense involving moral turpitude and/or fraud.
Ex. Estafa; any manipulative devices
4. SEC requested that it produce its books and
records and it failed to comply with such order
- a ground for rejection of application
- if application has already been accepted or
approved, it will subsequently revoked.


TAKE NOTE: Judicial or administrative body here includes
decisions of a FOREIGN COURT.

GROUNDS TO SUSPEND THE SALE OF SECURITIES.

SEC. 15. Suspension of Registration. - 15.1. If, at any
time, the information contained in the registration
statement filed is or has become misleading, incorrect,
inadequate or incomplete in any material respect, or the
sale or offering for sale of the security registered
thereunder may work or tend to work a fraud, the
Commission may require from the issuer such further
information as may in its judgment be necessary to
enable the Commission to ascertain whether the
registration of such security should be revoked on any
ground specified in this Code. The Commission may also
suspend the right to sell and offer for sale such security
pending further investigation, by entering an order
specifying the grounds for such action, and by notifying
the issuer, underwriter, dealer or broker known as
participating in such offering.

15.2. The refusal to furnish information required by the
Commission may be a ground for the issuance of an
order of suspension pursuant to Subsection 15.1. Upon
the issuance of any such order and notification to the
issuer, underwriter, dealer or broker known as
participating in such offering, no further offer or sale of
any such security shall be made until the same is lifted
or set aside by the Commission. Otherwise, such sale
shall be void.

15.3. Upon issuance of an order of suspension, the
Commission shall conduct a hearing. If the Commission
determines that the sale of any security should be
revoked, it shall issue an order prohibiting 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. If, however,
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.
Now, assuming SEC has already issued an

approval of your registration statement, you will
now proceed with the sale. Can the SEC
subsequently order the suspension of the sale?
- YES. If the issuer is found to commit any of
the grounds for the revocation, SEC may
suspend such sale. The order of suspension
can be ordered at anytime.
- Any sale made even after there is already
suspension order shall be considered as null
and void.

AMENDMENTS TO THE REGISTRATION STATEMENT

SEC. 14. Amendments to the Registration Statement. -
14.1. If a registration statement is on its face incomplete
or inaccurate in any material respect, the Commission
shall issue an order directing the amendment of the
registration statement. Upon compliance with such
order, the amended registration statement shall
become effective in accordance with the procedure
mentioned in Subsection 12.6 hereof.

14.2. An amendment filed prior to the effective date of
the registration statement shall recommence the forty-
five (45) day period within which the Commission shall
act on a registration statement. An amendment filed
after the effective date of the registration statement
shall become effective only upon such date as
determined by the Commission.

14.3. If any change occurs in the facts set forth in a
registration statement, the issuer shall file an
amendment thereto setting forth the change.

14.4. If, at any time, the Commission finds that a
registration statement contains any false statement or
omits to state any fact required to be stated therein or
necessary to make the statements therein not
misleading, the Commission may conduct an
examination, and, after due notice and hearing, issue an
Order suspending the effectivity of the registration
statement. If the statement is duly amended, the
suspension order may be lifted.

14.5. In making such examination the Commission or
any officer or officers designated by it may administer


oaths and affirmations and shall have access to, and
may demand the production of, any books, records or
documents relevant to the examination. Failure of the
issuer, underwriter, or any other person to cooperate,
or his obstruction or refusal to undergo an examination,
shall be a ground for the issuance of a suspension order.

Can you amend your registration statement?
- YES, especially when the registration
statement is incomplete or inaccurate. You
are given an opportunity to still amend it.
(Atty L: Ayaw nalang huwata na ma revoke,
might as well amend it.)
- The 45 days approval will be reckoned from
the time you have submitted your amended
registration statement.

REGISTRATION OF PRE-NEED PLANS

- Pre-need plans are contracts which provide for the
performance of future services or the payment of
future monetary considerations at the time of
actual need, for which planholders pay in cash or
installment at stated prices, with or without
interest or insurance coverage and includes life,
pension, education, interment, and other plans
which the Commission may from time to time
approve.
- affects public interest that is why it is regulated by
the state (particularly the SEC)

SEC.16. Pre-Need Plans. - No person shall sell or offer for
sale to the public any pre-need plan except in
accordance with rules and regulations which the
Commission shall prescribe. Such rules shall regulate the
sale of pre-need plans by, among other things, requiring
the registration of pre-need plans, licensing persons
involved in the sale of pre-need plans, requiring
disclosures to prospective plan holders, prescribing
advertising guidelines, providing for uniform accounting
system, reports and record keeping with respect to such
plans, imposing capital, bonding and other financial
responsibility, and establishing trust funds for the
payment of benefits under such plans.

Ex. insurance; educational plans; memorial plans; pension
plans
What are the safeguards provided by the SRC on

pre-need plans to protect the interest of
planholders?
1. The issuer cannot sell or offer for sale a pre-
need plan unless the issuer is duly registered.
2. The persons involved in the sale of pre-need
plans are licensed.
3. There is a requirement of disclosure to the
respective plan holders.
4. There are guidelines with respect to
advertisements.
- advertisements
should
not
be
exaggerated or overstated.
5. There is a requirement as to capitalization
and establishment of trust funds.
- important because there is a level of trust
fund that they should maintain for these
trust funds will answer later on their
liability to the planholders.

PROTECTION OF SHAREHOLDER INTERESTS

There are several provisions in the SRC, which will protect
the shareholders interests. These are:
1. Tender Offer Rule (SEC. 19)
2. Proxy Rule (SEC. 20)
3. Disclosure Rule (SEC. 23)

I. TENDER OFFER RULE

Tender offer is a publicly announced intention by
a person acting alone or in concert with other
persons to acquire equity securities (e.g. shares
of stock) of a PUBLIC COMPANY (meaning
ownership or control over the corporation)
- Public Company is any corporation:
1. with a class of equity securities listed or
trated in a stock exchange; or
2. with assets at least 50 Million Pesos
and having 200 or more stockholders
and at least 200 of the stockholders are
holding at least 100 shares each.
any person or group of persons who intend to
acquire equity securities of a public
company/corporation is required to make his/her
intention public or made known to all


shareholders by making a tender offer such that

you are giving all stockholders an opportunity to
sell their shares at the same price, terms and
conditions as that of the majority stockholders. In
fact, if you want to make an acquisition, you have
to acquire from all stockholders (including
minority stockholders) in proportion to their
respective percentages. It has to be on a pro-rata
basis.
PURPOSES:
- to regulate activities relating to
acquisition of control of the listed
company
- to protect minority shareholders against
any scheme that will dilute the value of
their shares by giving them opportunity
to sell their shares at the same price
offered to majority shareholders.
o Situation: If you are interested in
acquiring control, you would be
interested in acquiring the shares
of the majority SH. For ex. A, B, C,
D, E and the rest are minority SH
and (ABCDE) will hold the
controlling shares of 60% and the
buyer is interested in acquiring
the control of this corporation.
Therefore, I will make my offer
only to those who hold the
controlling interest. Now once I
acquire their shares, I will no
longer be interested to acquire
the shares of the minority. Even if
these minority stockholders will
sell their shares in the future,
nobody will want to buy because
it will not give the interested
buyer control. this is what the
law tries to avoid because it will
be prejudicial to the minority
stockholders
(i.e.
secret
negotiations
with
majority
stockholders will be avoided).
Why? The value of their sales will
be reduced because they are
willing to sell but nobody will be
interested to buy.
Example: You want to acquire

only 70%. Since the tender offer
rule requires that you have to
make your offer to all
stockholders, so you have to buy
from all the stockholders on a pro
rata basis.
So, 20 (shares of the
minority) / 100 (total
shares) x 70% (shares to
be acquired)
The effect is that, even if
you hold a minority
share, you are given the
opportunity to sell.
What if all the minority
SH will sell, are you
compelled to buy all?
NO. Again you do it in a
pro rata basis.
NOTE: what the law
requires is only to give
the minority stockholders
the opportunity to sell. If
they would not, there is
no problem with that.
Are all acquisitions of equity securities in a public
company required to make a tender offer?
- No. There are thresholds provided in the
SRC and as amended by the
Implementing Rules and Regulations for
tender offer rule to be mandatory.
What are the thresholds? (WHEN TENDER OFFER
RULE IS MANDATORY)
1. single acquisition at least 35%
2. creeping acquisition within 12 mos. at least
35%
3. although you acquire less than 35% but after
the acquisition it would result to ownership
of more than 51%
- apply when you are an existing
stockholder.
- Ex. You are an existing SH of 30% and
subsequently you acquire in a single
transaction 25%. Although in a single
transaction, it was below 35% but the
total acquisition amounted to 55%, so
o


you fall under the third case. In effect,
tender offer rule is mandatory.
PROCEDURE FOR MAKING THE TENDER OFFER
1. File a declaration with the SEC
- there is a form you have to fill up and
submit that and such form will become a
public document. The form contains the
information on who is the purchaser and
the number of shares the purchaser
intends to acquire
- Together with the form, you have to
submit
the
financials
of
the
purchaser/acquirer whether he or she
has the financial capacity to make the
purchase.
2. Pay the filing fee
- not more than 1/10 of 1% of the
proposed payment in cash, and the value
of any securities or property to be
transferred in acquisition, merger or
consolidation.
3. Furnish the issuer a statement containing the
information/declaration.
4. Publication because the purpose of the
tender offer is to make public your intention
to acquire the shares.
Now what is the effect, assuming you have
already paid the tender offer and all the
shareholders are interested in selling their shares
- what if you only want to acquire 70%? How will
this be taken up?
- It will be on a pro-rata basis. Meaning, tanang
shareholders gyud will be given the opportunity
to sell their shares.
TRANSACTIONS EXEMPT FROM THE TENDER OFFER
RULE
1. Tender Offer rule will not apply to any purchase
from the UNISSUED SHARES.
- REASONS:

a. the law grants the SH the pre-emptive
right
b. the existing Stockholders are not selling
their shares, only the unissued shares.
- GR: tender offer rule not applicable in the
purchase of unissued shares.
- EXC: acquisition will not result to 50% or
more ownership. (REASON: because you
will already acquire control)
If you acquire, will it not affect the

existing ownership of the existing
stockholders?
No, it will not. The existing
stockholders enjoy a protection
through their pre-emptive right.
It is only up to the SH WON they
will waive their pre-emptive
right.
2. When there is an increase in authorized capital
stock.
- REASONS:

a. the law grants the SH the pre-emptive
right
b. the existing Stockholders are not selling
their shares, only the unissued shares.
3. Purchase of shares pursuant to a foreclosure
proceeding.
- REASON: the purchaser is not interested in
acquiring control because what is
purchased here is only the share subject of
the foreclosure proceedings.
4. Privatization undertaken by the government.
- it is a government owned and controlled
corporation which is converted into a
private corporation.
- REASON: there are no minority
stockholders. The owner of the shares is
only the government.
5. When you acquired the shares pursuant to
corporate rehabilitation.

6. When you acquired the shares in an open
market at the prevailing market price.
- REASON: there is no secret negotiation,
which is what the law tries to avoid.
7. When you acquired the shares pursuant to a
merger or consolidation.
- REASON: there is no change of
ownership.
o

CEMCO HOLDINGS V. NATIONAL LIFE
The mandatory tender offer does not only apply to a
direct acquisition but also applies to the indirect
acquisition (where it will result to an indirect control) of
a PUBLICLY-LISTED COMPANY, through the purchase of
shares in a NON-LISTED COMPANY.



Facts:
Union Cement Corp. (UCC), a publicly listed company,
has two principal stockholdersUnion Cement Holdings
Corp. (UCHC), a non-listed company, with shares
amounting to 60.51 percent, and Cemco Holdings Inc.
(Cemco) with 17.03 percent. The majority of UCHCs
stocks were owned by Bacnotan Consolidated Industries
Inc. (BCI) with 21.31 percent and Atlas Cement Corp.
(ACC) with 29.69 percent. Cemco, on the other hand,
directly owned 9 percent of UCHC stocks.
BCI and its subsidiary, ACC, sold their 21.31 percent and
29.69 percent shareholdings in the holding company
(UCHC) to Cemco. As a result of the acquisition, Cemcos
total beneficial ownership, direct and indirect, in UCC
increased by 36 percent, thereby resulting into at least
53 percent ownership of the shares of UCC.
A minority stockholder of UCC, the National Life
Insurance Co. of the Philippines Inc., sought to nullify
the sale for failure of Cemco to comply with the
mandatory tender offer rule.
Cemco argued that, based on the plain wording of
Section 19.1 of the SRC as confirmed by the SEC En Banc
before the transaction was consummated, the tender
offer rule applied only to a direct acquisition of the
shares of the listed company and did not extend to an
indirect acquisition arising from the purchase of the
shares of a holding company of the listed firm.
Issue: whether the mandatory offer rule under the SRC
applies only to direct acquisition of shares in the public
company.

Held:
The mandatory tender offer rule applies to both direct
and indirect acquisition, holding that the legislative
intent of Section 19 of the SRC is to regulate activities
relating to the acquisition of control of a public
company. Whatever may be the method by which
control of the company is obtained, either through the
direct purchase of its stocks or through an indirect
means, mandatory tender offer applies.
The bottom line of the law is to give the shareholders of

the public company the opportunity to decide whether
or not to sell their shares in connection with the transfer
of control.

THE NEW CENTRAL BANK ACT
(REPUBLIC ACT NO. 7653 Basics))
It is the policy of the state to create a central

monetary authority.
The central monetary authority is the Central Bank
or the Bangko Sentral ng Pilipinas
Functions as an independent and accountable body
to formulate policies concerning the areas of
MONEY, BANKING AND CREDIT
How is the BSP organized?
- It is a stock corporation (GOCC) and all of its
shares are fully subscribed to by the
government.
- It enjoys fiscal and administrative autonomy.
- Principal place in Manila but it also has offices
and branches all over the Philippines.

PRIMARY OBJECTIVES AND ROLES

Section 3. Responsibility and Primary Objective. - The
Bangko Sentral shall provide policy directions in the areas
of money, banking, and credit. It shall have supervision
over the operations of banks and exercise such regulatory
powers as provided in this Act and other pertinent laws
over the operations of finance companies and non-bank
financial institutions performing quasi-banking functions,
hereafter referred to as quasi-banks, and institutions
performing similar functions.

The major responsibilities of the BSP are:
1. provide policy direction in the areas of money,
banking and credit;
2. supervision and regulation of all operations of
banks, quasi banks and other financial
institution, including financial companies, non-
bank financial institutions performing quasi
banking functions


3. maintain price stability and promote monetary
stability and convertibility of the peso.
PRIMARY OBJECTIVE

BUSUEGO v. CA

There was an examination conducted by BSP over this
savings and loan association. Based on the findings,
there were irregularities, accounted bank loan
proceeds and loans to fictitious borrowers. On the
basis of that irregularity, the BSP placed the officers of
PESALA in the watch list order, meaning, it prevented
them from holding positions in entities which are
subject to the regulations of the Central Bank.

1. WON there was denial of due process.
2. WON BSP has authority of PESALA.
3. WON the resolution of the monetary board of
placing them in the watch list deprived them of a
lawful calling or profession.

SC Ruling:
1. NO, due process simply means an opportunity to be
heard. In this case, there was ample opportunity given
to
PESALA.

2. YES, it is stated in the New Central Bank Act that
BSP has regulatory powers over financial institutions
and quasi-banks. Savings and loans associations can be
considered as quasi-banks.
3. NO, the restriction is only limited to entities which
are under the regulatory and supervisory powers of
the BSP, but they are still allowed for other
employment as long as it is not under the supervision
of BSP.

ROLES OF THE BSP
1. Designated as the banker of the government, so all
the funds of the government are deposited with
the BSP. The political subdivisions and
instrumentalities of the government are required
to deposit their cash balances with the BSP, and
only a certain amount are held by other banks
2. Acts as the representative of the government to
the international monetary fund/ board
3. It also acts as representative of the government to
various foreign financial institutions (World Bank,
IMF)
4. Handles the fiscal operations of the government.

The BSP is required to open an account for the
treasurer of the Philippines wherein all funds and
money of the government are deposited with BSP
as banker of the government

PRIVILEGES OF THE BSP

F Is the BSP exempt from tax?
- NO.
- Under the New Central Bank Act, the
exemption of BSP from taxes is only within 5
years from the approval of the act. Thereafter,
the BSP is already subject to tax.
- But it is exempt from custom duties wi th
respect to importation of equipment necessary
for the printing of notes or the minting of coins.

F Can the BSP own any private bank or financial
institution?
- No, to avoid conflict of interest.
BSP cannot acquire any shares or accept any shares of
stocks as a collateral and shall not and shall not
participate in the management in any enterprise. So, BSP
cannot be a stockholder nor have an investment in any
enterprise and it cannot engage in the development of
any banking or financing.

THE MONETARY BOARD

WHO EXERCISES THE POWERS OF BSP?
- the Monetary Board
- Normally in corporations, we have BODs. But in the
BSP, we have the Monetary Board.

COMPOSITION OF THE MONETARY BOARD
- 7 members
- 1 Governor of the BSP who shall be considered as
chairman of the monetary board
- 1 member of the cabinet
- 5 members coming from the private sectors
serving full time for a period of 6 years
o 3 members serve for 6 years
o 2 members serve for 3 years
o They are appointed by the president of
the Philippines, but in case of the
governor of BSP, the appointment is


subject to confirmation by the
Commission on Appointment
o They cannot be reappointed

QUALIFICATIONS OF THE MEMBERS OF THE MONETARY
BOARD

Section 8. Qualifications. - The members of the Monetary
Board must be natural-born citizens of the Philippines, at
least thirty-five (35) years of age, with the exception of
the Governor who should at least be forty (40) years of
age, of good moral character, of unquestionable integrity,
of known probity and patriotism, and with recognized
competence in social and economic disciplines.

- Natural born citizen
- 40 years old governor
- 35 years old members
- Good moral character
- Unquestionable integrity
- Known probity and patriotism
- And with recognized competence in social and
economic disciplines.

DISQUALIFICATIONS AND INHIBITIONS OF THE
GOVERNOR AND THE BOARD MEMBERS OF THE
MONETARY BOARD

Section 9. Disqualifications. - In addition to the
disqualifications imposed by Republic Act No. 6713, a
member of the Monetary Board is disqualified from being
a director, officer, employee, consultant, lawyer, agent or
stockholder of any bank, quasi-bank or any other
institution which is subject to supervision or examination
by the Bangko Sentral, in which case such member shall
resign from, and divest himself of any and all interests in
such institution before assumption of office as member
of the Monetary Board.

The members of the Monetary Board coming from the
private sector shall not hold any other public office or
public employment during their tenure.
No person shall be a member of the Monetary Board if he
has been connected directly with any multilateral banking
or financial institution or has a substantial interest in any
private bank in the Philippines, within one (1) year prior
to his appointment; likewise, no member of the
Monetary Board shall be employed in any such institution
within two (2) years after the expiration of his term

except when he serves as an official representative of the
Philippine Government to such institution.

1. So if you are a member of the monetary board you
are disqualified from being a:
a. director
b. officer
c. employee
d. consultant
e. lawyer
f. agent
g. stock holder
- Of any bank, quasi-bank or any other
institution which is subject to supervision
or examination by the central bank
- The moment you become a member of the
monetary board, you are required to divest
yourself from all interest in any institution
which is subject to the supervision of the
BSP.
- Reason: conflict of interest

2. If you are a member of the monetary board from
the private sector, you shall not hold any other
public or private office, because you are to serve
full time.

3. Another prohibition, a person cannot be appointed
as a member of the monetary board if within a
period within 1 year prior to appointment that
person is connected directly with any bank or
private institution, or has substantial interest in
any private bank within the supervision if the BSP.
(To name a few):
- Officer
- Director
- Lawyer
- Consultant
- Stockholder

4. At the same time he cannot be employed in any
institution under the supervision of the CB within 2
years from the expiration of his term
- So there is prohibition before and after
o 1 year before, you must not be connected
with any financial institution


2 years after, you cannot work in banks or
financial institutions subject to the
supervision of the central bank
Reason: conflict of interest
o
-

5. You shall limit your professional activities to those
directly connected with your position with the BSP
and accordingly, shall not accept other
employment whether public or private, with or
without compensation. Except charitable, civic,
religious or cultural organizations or when you are
designated by the president to serve the interest of
the government.

6. AND during the meeting of the monetary board, if
you have a pecuniary interest taken up as agenda
of the monetary board, you shall disclose such
interest and retire, or not participate in that
meeting.

GROUNDS FOR REMOVAL FROM THE MONETARY
BOARD

Section 10. Removal. - The President may remove any
member of the Monetary Board for any of the following
reasons:
(a) If the member is subsequently disqualified under
the provisions of Section 8 of this Act; or
(b) If he is physically or mentally incapacitated that
he cannot properly discharge his duties and
responsibilities and such incapacity has lasted for
more than six (6) months; or
(c) If the member is guilty of acts or operations which
are of fraudulent or illegal character or which are
manifestly opposed to the aims and interests of the
Bangko Sentral; or
(d) If the member no longer possesses the
qualifications specified in Section 8 of this Act.

MEETINGS

Section 11. Meetings. - The Monetary Board shall meet at
least once a week. The Board may be called to a meeting
by the Governor of the Bangko Sentral or by two (2)
other members of the Board.
The presence of four (4) members shall constitute a
quorum: Provided, That in all cases the Governor or his
duly designated alternate shall be among the four (4).
Unless otherwise provided in this Act, all decisions of the

Monetary Board shall require the concurrence of at least
four (4) members.
The Bangko Sentral shall maintain and preserve a
complete record of the proceedings and deliberations of
the Monetary Board, including the tapes and transcripts
of the stenographic notes, either in their original form or
in microfilm.

The governor or his duly designated alternative (the
deputy governor) must be around. Otherwise, there shall
be no quorum.
To have a quorum in a meeting, you need 4 and 1 of them
is the governor.
To pass a board resolution, you still need 4.

SCOPE OF THE AUTHORITY OF THE MONETARY BOARD

Section 15. Exercise of Authority. - In the exercise of its
authority, the Monetary Board shall:
(a) issue rules and regulations it considers necessary for
the effective discharge of the responsibilities and exercise
of the powers vested upon the Monetary Board and the
Bangko Sentral. The rules and regulations issued shall be
reported to the President and the Congress within fifteen
(15) days from the date of their issuance;
(b) direct the management, operations, and
administration of the Bangko Sentral, reorganize its
personnel, and issue such rules and regulations as it may
deem necessary or convenient for this purpose. The legal
units of the Bangko Sentral shall be under the exclusive
supervision and control of the Monetary Board;
(c) establish a human resource management system
which shall govern the selection, hiring, appointment,
transfer, promotion, or dismissal of all personnel. Such
system shall aim to establish professionalism and
excellence at all levels of the Bangko Sentral in
accordance with sound principles of management.
A compensation structure, based on job evaluation
studies and wage surveys and subject to the Board's
approval, shall be instituted as an integral component of
the Bangko Sentral's human resource development
program: Provided, That the Monetary Board shall make
its own system conform as closely as possible with the
principles provided for under Republic Act No. 6758:
Provided, however, That compensation and wage
structure of employees whose positions fall under salary
grade 19 and below shall be in accordance with the rates


prescribed under Republic Act No. 6758.
On the recommendation of the Governor, appoint, fix the
remunerations and other emoluments, and remove
personnel of the Bangko Sentral, subject to pertinent civil
service laws: Provided, That the Monetary Board shall
have exclusive and final authority to promote, transfer,
assign, or reassign personnel of the Bangko Sentral and
these personnel actions are deemed made in the interest
of the service and not disciplinary: Provided, further, That
the Monetary Board may delegate such authority to the
Governor under such guidelines as it may determine.
(d) adopt an annual budget for and authorize such
expenditures by the Bangko Sentral as are in the interest
of the effective administration and operations of the
Bangko Sentral in accordance with applicable laws and
regulations; and
(e) indemnify its members and other officials of the
Bangko Sentral, including personnel of the departments
performing supervision and examination functions
against all costs and expenses reasonably incurred by
such persons in connection with any civil or criminal
action, suit or proceedings to which he may be, or is,
made a party by reason of the performance of his
functions or duties, unless he is finally adjudged in such
action or proceeding to be liable for negligence or
misconduct.
In the event of a settlement or compromise,
indemnification shall be provided only in connection with
such matters covered by the settlement as to which the
Bangko Sentral is advised by external counsel that the
person to be indemnified did not commit any negligence
or misconduct.
The costs and expenses incurred in defending the
aforementioned action, suit or proceeding may be paid
by the Bangko Sentral in advance of the final disposition
of such action, suit or proceeding upon receipt of an
undertaking by or on behalf of the member, officer, or
employee to repay the amount advanced should it
ultimately be determined by the Monetary Board that he
is not entitled to be indemnified as provided in this
subsection.

What is the scope of authority of the monetary board?
1. issue rules and regulations
2. direct the management and operation of the BSP
3. establish human resource management system
4. adopt budget
5. indemnify any member if that member is sued

criminally or civilly, civil or criminal action
particularly those engaged in the supervision and
examination of banks

SUPERVISION AND EXAMINATION OF BANKS

Section 25. Supervision and Examination. - The Bangko
Sentral shall have supervision over, and conduct periodic
or special examinations of, banking institutions and quasi-
banks, including their subsidiaries and affiliates engaged
in allied activities.

For purposes of this section, a subsidiary means a
corporation more than fifty percent (50%) of the voting
stock of which is owned by a bank or quasi-bank and an
affiliate means a corporation the voting stock of which, to
the extent of fifty percent (50%) or less, is owned by a
bank or quasi-bank or which is related or linked to such
institution or intermediary through common stockholders
or such other factors as may be determined by the
Monetary Board.

The department heads and the examiners of the
supervising and/or examining departments are hereby
authorized to administer oaths to any director, officer, or
employee of any institution under their respective
supervision or subject to their examination and to
compel the presentation of all books, documents, papers
or records necessary in their judgment to ascertain the
facts relative to the true condition of any institution as
well as the books and records of persons and entities
relative to or in connection with the operations, activities
or transactions of the institution under examination,
subject to the provision of existing laws protecting or
safeguarding the secrecy or confidentiality of bank
deposits as well as investments of private persons,
natural or juridical, in debt instruments issued by the
Government.

No restraining order or injunction shall be issued by the
court enjoining the Bangko Sentral from examining any
institution subject to supervision or examination by the
Bangko Sentral, unless there is convincing proof that the
action of the Bangko Sentral is plainly arbitrary and made
in bad faith and the petitioner or plaintiff files with the
clerk or judge of the court in which the action is pending


a bond executed in favor of the Bangko Sentral, in an
amount to be fixed by the court. The provisions of Rule
58 of the New Rules of Court insofar as they are
applicable and not inconsistent with the provisions of this
section shall govern the issuance and dissolution of the
restraining order or injunction contemplated in this
section.

The BSP is vested with the authority to supervise
and conduct a periodic or special examination of all
banking institutions and quasi banks INCLUDING
THEIR SUBSIDIARIES AND AFFILIATES. Do you
understand what a subsidiary or affiliate is?
- Subsidiary If the bank owns more than 50% of
the shares
- Affiliate if it is for a lesser percentage, 50% or
less

The BSP examines not only banks but including
their subsidiaries and affiliates as well, PROVIDED
THE SUBSIDARIES AND AFFILIATES ARE
PERFORMING ALLIED ACTIVITIES or activities
related to banking, like insurance, credit card and
mutual fund operations. Those activities could be
financial or non-financial in nature.
Why? Because it is possible that some of the
transactions and funds of the bank may be diverted
to these subsidiaries and affiliates.
Example of allied activities: credit card services,
insurance policies.

BSP could also require the production of books and
documents

F Can the act of BSP in examining any institution be
subject to a restraining order?
- GENERAL RULE: NO, because it would subject
the officers of BSP to undue harassment.
- EXCEPTION: Unless, it is found that the act of
BSP was plainly arbitrary and was done in bad
faith. But first you have to file a petition and
prove in court that there was bad faith or that
the act was arbitrary upon posting of a BOND.

Section 26. Bank Deposits and Investments. - Any
director, officer or stockholder who, together with his
related interest, contracts a loan or any form of financial
accommodation from: (1) his bank; or (2) from a bank (a)
which is a subsidiary of a bank holding company of which

both his bank and the lending bank are subsidiaries or (b)
in which a controlling proportion of the shares is owned
by the same interest that owns a controlling proportion
of the shares of his bank, in excess of five percent (5%) of
the capital and surplus of the bank, or in the maximum
amount permitted by law, whichever is lower, shall be
required by the lending bank to waive the secrecy of his
deposits of whatever nature in all banks in the
Philippines. Any information obtained from an
examination of his deposits shall be held strictly
confidential and may be used by the examiners only in
connection with their supervisory and examination
responsibility or by the Bangko Sentral in an appropriate
legal action it has initiated involving the deposit account.

EFFECT ON DOSRI ACCOUNTS (Director, Officer,
Stockholder and Related Interest)
- Can a DOSRI obtain a loan from his OWN bank or a
bank which is an affiliate or from one under the
same parent company that of his bank? YES.
- CONDITION: You are required to waive the secrecy
of your deposits in whatever nature in all banks in
the Philippines.
- REASON: To protect the bank so they would know
the DOSRIs financial standing. He might just secure
the approval of the loan even if he is not a qualified
borrower.
- But under the General Banking Law, there are other
several requirements:
o Approval by BODs of the bank
o Adequately secured
o There is a certain limit, a certain
percentage of the banks total loan
portfolio that can be extended to DOSRIs.

PROHIBITIONS ON BANK OFFICERS, DIRECTORS,
LAWYERS, AGENTS

Section 27. Prohibitions. - In addition to the prohibitions
found in Republic Act Nos. 3019 and 6713, personnel of
the Bangko Sentral are hereby prohibited from:
(a) being an officer, director, lawyer or agent,
employee, consultant or stockholder, directly or
indirectly, of any institution subject to supervision or
examination by the Bangko Sentral, except non-stock
savings and loan associations and provident funds
organized exclusively for employees of the Bangko


Sentral, and except as otherwise provided in this Act;
(b) directly or indirectly requesting or receiving any
gift, present or pecuniary or material benefit for
himself or another, from any institution subject to
supervision or examination by the Bangko Sentral;
(c) revealing in any manner, except under orders of
the court, the Congress or any government office or
agency authorized by law, or under such conditions
as may be prescribed by the Monetary Board,
information relating to the condition or business of
any institution. This prohibition shall not be held to
apply to the giving of information to the Monetary
Board or the Governor of the Bangko Sentral, or to
any person authorized by either of them, in writing,
to receive such information; and
(d) borrowing from any institution subject to
supervision or examination by the Bangko Sentral
shall be prohibited unless said borrowings are
adequately secured, fully disclosed to the Monetary
Board, and shall be subject to such further rules and
regulations as the Monetary Board may prescribe:
Provided, however, That personnel of the supervising
and examining departments are prohibited from
borrowing from a bank under their supervision or
examination.

Prohibitions of a personnel of the BSP
a. You cannot be an officer, director, lawyer or agent,
employee, consultant or stockholder, directly or
indirectly, of any institution subject to supervision
or examination by the Bangko Sentral ng Pilipinas.

EXCEPTION: with respect to non-stock savings and
loan associations and provident funds organized
exclusively for employees of the Bangko Sentral.

Again, this is to avoid conflict of interest.

b. You cannot directly or indirectly requesting or
receiving any gift, present or pecuniary or material
benefit for himself or another, from any institution
subject to supervision or examination by the
Bangko Sentral. This prohibition applies to all
government employees under the anti-graft and
corrupt practices act.

c. If you work with BSP you cannot reveal information
relating to the condition or business of any
institution under the supervision of BSP. For

example you work with BSP and examined this
particular bank, and you found out that this bank is
going down, you are not supposed to disclose that
information to your brothers and sisters and
friends. It might cause of panic. So again,
confidentiality of information.

EXCEPTION: upon order of the court, congress, or
any government office; or when you are required
to disclose by the monetary board.

d. Can you obtain a loan from a bank if you work with
BSP? If you are an auditor of BSP, whats the rule?
If you are a personnel of BSP, you cannot obtain or
you are prohibited from borrowing.

EXCEPTION: provided the loan in adequately
secured and fully disclosed with the monetary
board.

And there is a stricter prohibition if you are
assigned to the supervision and examination
department. These are personnel who conduct
regular audit of banks. They are prohibited from
obtaining a loan from banks under the said
personnels supervision. This is an absolute
prohibition.

CONSERVATORSHIP, RECEIVERSHIP AND LIQUIDATION

BANKS IN DISTRESS

The bank under distress is placed under:
1. conservatorship
2. receivership
3. liquidation

So these are the stages, depending on the condition of
the bank.

I. CONSERVATORSHIP

When does the BSP place a bank under conservatorship?
- when a bank or a quasi-bank is in a state of
continuing inability or unwillingness to maintain a


condition of liquidity deemed adequate to protect
the interest of depositors and creditors
o inability in a state of financial difficulty. You
are in a tight cash position. But it does not
mean that the bank is insolvent
o liquidity the ability to convert assets into cash
- EXAMPLE: when the assets of the banks are all
receivables and past due accounts, here a bank can
be placed under conservatorship
- ANOTHER EXAMPLE: the bank declares huge
dividends or anything irregular, because that would
have an effect to the financials of the bank

What are the responsibilities/functions of the
conservator?
- take charge of the assets, liabilities, and the
management thereof
- reorganize the management, collect all monies and
debts due said institution, and exercise all powers
necessary to restore its viability
- overrule or revoke the actions of the previous
management and board of directors of the bank or
quasi-bank
o But not all actions. In the case of FIRST
PHILIPPINE INTERNATIONAL BANK v. CA, the
authority of the conservator to overrule or
revoke does not extend to:
Perfected contracts which are valid and
enforceable.
o Authority refers to actions of the board which
are defective (i.e. unenforceable contracts).
o Otherwise it would violate the non-impairment
clause.
o Conservator merely steps into the shoes of the
BOD. He cannot do those acts which the BOD
themselves cannot do.

FIRST PHILIPPINE INTERNATIONAL BANK vs. CA

Prior to placing the bank under conservatorship, the bank

entered into a perfected contract of sale involving real

property. When the conservator was appointed, the

conservator sought to revoke the contract of sale because

according to the conservator, such sale will be prejudicial

to the bank because the selling price was very low

compared to the market value of the property which was

already very high.

Issue: Can a conservator revoke a contract of sale that

was already perfected prior to the appointment of the

conservator? Is still included in the powers of the

conservator to overrule and revoke decisions of the

previous management?

SC Ruling:

NO, the authority of the conservator to revoke actions or

previous decisions of the board refer only to contracts

which are voidable, recissible and unenforceable but it

does not include contracts which are already perfected.

Otherwise, it would violate the constitutional prohibition

on non-impairment of contracts.

For how long will the conservatorship last?

- It shall not exceed 1 year. So within 1 year the

conservator must submit a report to the monetary

board whether (1) the bank can operate on its own

or rehabilitated or (2) the bank cannot continue

without incurring probable loss, so the bank will

now be placed under receivership.

Is the conservator entitled to compensation?

- YES. He is entitled to an amount not exceeding 2/3

of the salary of the president of the bank for a

period of 1 year. If the conservatorship was

terminated before 1 year, it depends.

o If the conservatorship is terminated on the

ground that the institution can operate on its

own, then you are entitled to 2/3 as if you

worked for whole year.

o Otherwise, you will not be entitled for the

remaining balance.



Can the Monetary Board appoint a conservator
connected with the Bangko Sentral?
- Yes, in which case he shall not be entitled to
receive any remuneration or emolument from the
Bangko Sentral during the conservatorship. The
expenses attendant to the conservatorship shall be
borne by the bank or quasi-bank concerned.
- He is still entitled to compensation. The
compensation shall not come from his employment
at the Bangko Sentral but compensation shall be as
a conservator.

Effect if bank is placed under Conservatorship:
- Does not mean that the bank is closed and cannot
transact business
- The effect is that the control now will be exercised
by the conservator, instead of the BOD

II. RECEIVERSHIP

The bank does not necessarily have to undergo
conservatorship. The BSP may immediately place the
bank under receivership.

Instances when a bank may be placed under receivership:
- So after conservatorship, if the conservator would
determine that the bank cannot continue without
incurring probable loss then the monetary board
would now put the bank under receivership. That is
one instance.

- Other Instances:
1. The bank is unable to pay its current liabilities
as they become DUE in the ordinary course of
business
o Example: they cannot service their
withdrawals to depositors
o EXCEPT: when you cannot service
withdrawals due to extra ordinary demands
influence by financial panic, bank run.
Example: during the global crisis when the
big companies went down
2. Its liabilities are more than its assets, or when
in a state of insolvency
3. if the continuation of the business would
probably result in a loss
4. the bank has willfully violated a cease and
desist order under Section 37 that has become
final, involving acts or transactions which

amount to fraud or a dissipation of the assets
of the institution; in which cases, the Monetary
Board may summarily and without need for
prior hearing forbid the institution from doing
business in the Philippines and designate the
Philippine Deposit Insurance Corporation as
receiver of the banking institution

Is it necessary that a bank be placed under
conservatorship first before it shall be placed under
receivership?
NO, conservatorship is not a precondition in placing a
bank under receivership as long as the aforementioned
conditions or instances are met.

Who could be appointed as a receiver?
- BANKS: PDIC (Philippine Deposit Insurance
Corporation)
- QUASI BANKS: Any person of recognized
competence in banking or finance may be designed
as receiver.
o Quasi-banks obtain money or funds not from
deposits but from the issuance of deposit
substitutes. Deposit substitutes are debt
instruments.

What are the obligations of the receiver?
- gather and take charge of all the assets and
liabilities of the institution
- administer the same for the benefit of its creditors
- exercise the general powers of a receiver under the
Revised Rules of Court
- but shall not, with the exception of administrative
expenditures, pay or commit any act that will
involve the transfer or disposition of any asset of
the institution

Within how many days shall the receiver determine
whether or not the bank can still be rehabilitated?
- It should be within the period of 90 days from the
time of take-over. In a certain case it was
mentioned 60 days, but it in the provision of the
New Central Bank Act, it should be 90 days.
- The receiver is given 90 days from the take-over to
determine whether the bank can still be
rehabilitated or not. If based on the determination
of the receiver it can no longer be rehabilitated,


then it will proceed with liquidation. In this case,

the receiver will now file for a petition in the
assistance for liquidation.
If it is already in liquidation, the court will convert
the assets of the bank in money, and use such
money in payment of the creditors. The creditors
will be paid in accordance with preference of
credits as mentioned in your credit transaction.

Is there a need for notice and hearing before a bank can
be placed under receivership?
- NO, as we will discuss later on, BSP can summarily
place a bank under receivership without prior
notice and hearing. CLOSE NOW HEAR LATER.

Is there a violation of due process?
- NO. There is a reason why its close now hear
later. Hearing would cause unnecessary delay. By
that time, the assets would already be dissipated.
Another reason is that it might give the erring
officers an opportunity to destroy evidence of
fraud. It is a valid exercise of police power.
- Moreover, the bank is not without remedy. The
bank could question the act of the monetary board,
whether or not it was arbitrary and made in bad
faith. The act of the monetary board in placing the
bank under receivership could always be subject to
judicial review.

Who can file a petition for judicial review?
- It is the majority of the stockholders of the bank.
NOT the director. NOT the officer. NOT the bank! It
should be the majority of its stockholders.

What's the reason for this?
- Because normally, the officers and directors are at
fault. That is why the order is directed to the
responsible or erring directors or officers, since it is
usually them who are the ones involved. So, if they
are also the same persons who may file the
petition, then, naturally they would always say that
the decision of the Monetary Board was arbitrary
or done in bad faith. Of course, you would always
go for the cancellation of the issuance by the
Monetary Board.
- While in the case of the stockholders, it would
seem that they are more objective and less biased
in determining whether or not the issuance of the
resolution was really arbitrary. Otherwise, if the

directors or stockholders can make the questioning,
there would be no objectivity. This is the reason
why the power to question the issuance is lodge
upon the stockholders.

CENTRAL BANK V. CA - CLOSE NOW HEAR LATER

This case involves Triumph Savings Bank which after
examination was found out to be insolvent. So it was
placed by SEC under receivership. In court, they raised
the issue of unconstitutionality of the provision in the
law which allows SEC to close banks now even without
prior notice.

Issue: May a Monetary Board resolution validly place a
bank under receivership in absence of prior notice and
hearing?

Ruling: Absence of prior notice and hearing constitutes
no denial of due process. Close now, pay later principle
is grounded on practical and legal considerations. As
what we said, if we would conduct hearing first, it
would cause not only unnecessary delay but also to
bank run and public panic. As well as to prevent further
dissipating of bank's assets; to prevent destruction of
evidence; to prevent the stockholders further anomalies
in frustrating or defeating justice.

Anyway, in cases like this, the bank is not without
remedies. Since, if they feel that the decision was
arbitrary or done in bad faith, they can always resort to
judicial review and file a petition before the RTC.

WHO CAN FILE A PETITION OF ANNULMENT OF THE
RESOLUTION OF THE MB regarding
receivership/liquidation cases?
The stockholders representing majority of the capital
stock. They are more objective in determining WON there
was ARBITRARINESS or BAD FAITH on the MB resolution.
The BOD is expected to question the resolution since the
resolution is directed to them. (usually they are ones
under investigation/suspension)


WITHIN WHAT PERIOD CAN THEY FILE A PETITION OF
ANNULMENT?
Within 10 days from the time the bank was placed under
receivership or liquidation.
EFFECTS of RECEIVERSHIP
1. The bank still retains its juridical personality. It is
not replaced by the
conservator/receiver/liquidator. It can still sue
and be sued but all actions will be brought
through the receiver.
2. Its operations are completely suspended. It can
no longer enter into new transactions (new loans,
new deposits)
- It can still pursue/file actions
on existing loans, collect debts,
close mortgage (part of
receivers duty collect, pursue
all amounts owing to the bank)
3. The assets of the bank are considered custodia
legis, meaning exempt from garnishment,
execution and levy)
4. The bank is not liable to pay interests on the
deposits of its clients during the period of
receivership. The bank derives its income from its
operations. So if its operations are suspended, it
cannot earn income to pay for the interests.
- But under General Banking Act:
if it is the bank that obtained a
loan from BSP, it is still liable to
pay interests on such loans
even if placed under
receivership.
- The clients deposit does not
become a preferred credit. Still
has to follow the order of
preference of credit.
(remember credit transactions)
5. The banks capacity to act is restricted. Authority
of the banks officers is suspended and instead
transferred to the receiver. It is the receiver that

has the authority to deal with the banks assets.
VILLANUEVA V. CA

Villanueva was an owner of several parcels of land. He
undertook a loan with the bank but the contract was
made to appear as if the agreement was that of a sale.
As a result, the property was foreclosed and was
scheduled for a public sale. Before the public sale was
conducted, a certain Ong made an offer to the bank to
purchase the said property. Such offer was accepted by
the bank (Phil. Veteran's Bank). Ong insisted that there
was already perfected contract between him and the
bank even before Villanueva made his offer. Since he
made an offer with the bank which was also accepted by
the bank, Ong now insists that he has the better right to
buy the property. In fact, Ong filed a case before the
court to enforce the contract.

At the same time, upon learning that the property is to
be sold in a public sale, Villanueva also offered to buy
back the property.

The problem, however, was that the bank was already
placed under receivership and is now undergoing the
process of liquidation.

Issue 1: What was the effect of the offer made by Ong
which was accepted by the bank? Was there a perfected
contract between the bank and Ong?

NO, there was no perfected contract between Ong and
the bank. The acceptance of the bank of Ongs offer was
made through correspondence. But before Ong could
have known the banks acceptance, the bank was
already placed under receivership. (remember OBLICON
on perfection of contracts) Now, since all the assets of
the bank are considered in custodia legis, the bank has
no power to accept any offer. All the powers of the bank
involving the disposal or management of its properties
is now transferred to the receiver.

Issue 2: Who has a better right on the parcel of land
between Ong and Villanueva? NEITHER OF THEM.

The bank should return the payment made by Ong
because it had no authority to accept such payments.


Just because Ong has no right over the property, it does
not mean that Villanueva now has better rights to the
property. Like Ong, VIllanueva has no rights over the
property. But, he may resort in making a claim before
the liquidation court for the recovery of the properties.

Bottom line in this case is that once a bank is placed
under receivership, the authority to dispose of its
properties is now transferred to the receiver. And, if it is
already undergoing liquidation; the authority is with the
liquidation court. So, any sale made by the directors or
officers is invalid.

WHO HAS JURISDICTION OVER THE CLAIMS AGAINST
THE BANK?
When the bank is placed under liquidation, all or any
claims against the bank should be filed in the liquidation
court.
ONG VS. CA

RDO (Rural Bank of DO) was the owner of 2 parcels of
land which were mortgaged to Ong to secure the
liability of Omnibus Finance to another entity. Since, the
obligation was not paid, Ong (mortgagee) moved for the
extra-judicial foreclosure. Thus, the properties were
auctioned and the purchaser was Ong. So, a certificate
of sale was issued and registered. However, the TCT of
the said parcels of land were not transferred in his name
immediately due to the refusal of RD.

Now, Ong sought to have the TCTs transferred in his
name before a regular court. But, the problem was the
bank was already under liquidation.

Issue: Who has jurisdiction over the relief prayed for by
Ong before non-liquidation court (to have the TCTs
transferred in his name)?

Ruling: Only the liquidation court has the jurisdiction
over the issue. Since, Liquidation Courts have authority
on all assets of the subject bank and not only limited to
disputed claims So long as the property forms part of
the asset of the bank, it is under the jurisdiction of the
liquidation court. It is not necessary that there has to be

a dispute over a property before the liquidation court
can have jurisdiction over such property.

In this case, the problem was that, to the prejudice of
Ong, the TCTs were still in the name of RDO. So, as far as
the liquidation court is concerned, it still considered as
assets of the bank.

Nonetheless, the court says that this is without
prejudice for Ong to file his case before the liquidation
court. The only disadvantage is that, once he files his
case before the liquidation court, his claim is not a
preferred claim anymore. There is no assurance that he
can have the property since there will be an order for
preference of credit.

III. LIQUIDATION
The next step after receivership is liquidation.
STEPS:
1. After 90 days of receivership, the receiver makes
a report to the Monetary Board regarding the
status of the bank and recommends: either to
resume bank operations or proceed with
liquidation.
2. IF the MB decides to conform with the receivers
recommendation to proceed with liquidation, the
MB notifies the BOD of the bank and directs
receiver to proceed with liquidation.
3. The receiver shall then file ex parte with the
proper RTC and without requirement of prior
notice or any other action, a petition for
assistance in the liquidation of the institution
pursuant to a liquidation plan adopted by the
PDIC for general application to all closed banks. In
case of quasi-banks, the liquidation plan shall be
adopted by the Monetary Board.
4. All disputed claims will be resolved in the
liquidation court and all claims against
individuals, officers will also be pursued with the
end view of liquidating assets.


5. Converting assets into cash.
6. Once these are liquidated, they will be
distributed according to the order of preference
of credit.
If naay sobra, the depositor can go after it. If
wala, he can go after PDIC.
7. The franchise of the bank may be sold to other
interested parties.
RECAP:
HOW BSP HANDLES BANK IN DISTRESS?
1. Conservatorship if di pa kaayo grabe
2. Receivership pwede ra diritso ani
3. Liquidation
SEC 34, 35, 36 talks about penalties for violation of the
New Central Bank and other banking laws.
Sec 37 is important
Section 37. Administrative Sanctions on Banks and
Quasi-banks. - Without prejudice to the criminal
sanctions against the culpable persons provided in
Sections 34, 35, and 36 of this Act, the Monetary Board
may, at its discretion, impose upon any bank or quasi-
bank, their directors and/or officers, for any willful
violation of its charter or by-laws, willful delay in the
submission of reports or publications thereof as required
by law, rules and regulations; any refusal to permit
examination into the affairs of the institution; any willful
making of a false or misleading statement to the Board or
the appropriate supervising and examining department
or its examiners; any willful failure or refusal to comply
with, or violation of, any banking law or any order,
instruction or regulation issued by the Monetary Board,
or any order, instruction or ruling by the Governor; or any
commission of irregularities, and/or conducting business
in an unsafe or unsound manner as may be determined
by the Monetary Board, the following administrative
sanctions, whenever applicable:
(a) fines in amounts as may be determined by the
Monetary Board to be appropriate, but in no case to
exceed Thirty thousand pesos (P30,000) a day for each
violation, taking into consideration the attendant
circumstances, such as the nature and gravity of the
violation or irregularity and the size of the bank or quasi-

bank;
(b) suspension of rediscounting privileges or access to
Bangko Sentral credit facilities;
(c) suspension of lending or foreign exchange operations
or authority to accept new deposits or make new
investments;
(d) suspension of interbank clearing privileges; and/or
(e) revocation of quasi-banking license.

Resignation or termination from office shall not exempt
such director or officer from administrative or criminal
sanctions.

The Monetary Board may, whenever warranted by
circumstances, preventively suspend any director or
officer of a bank or quasi-bank pending an investigation:
Provided, That should the case be not finally decided by
the Bangko Sentral within a period of one hundred
twenty (120) days after the date of suspension, said
director or officer shall be reinstated in his position:
Provided, further, That when the delay in the disposition
of the case is due to the fault, negligence or petition of
the director or officer, the period of delay shall not be
counted in computing the period of suspension herein
provided.

The above administrative sanctions need not be applied
in the order of their severity.

Whether or not there is an administrative proceeding, if
the institution and/or the directors and/or officers
concerned continue with or otherwise persist in the
commission of the indicated practice or violation, the
Monetary Board may issue an order requiring the
institution and/or the directors and/or officers concerned
to cease and desist from the indicated practice or
violation, and may further order that immediate action
be taken to correct the conditions resulting from such
practice or violation. The cease and desist order shall be
immediately effective upon service on the respondents.

The respondents shall be afforded an opportunity to
defend their action in a hearing before the Monetary
Board or any committee chaired by any Monetary Board
member created for the purpose, upon request made by
the respondents within five (5) days from their receipt of
the order. If no such hearing is requested within said


period, the order shall be final. If a hearing is conducted,
all issues shall be determined on the basis of records,
after which the Monetary Board may either reconsider or
make final its order.

The Governor is hereby authorized, at his discretion, to
impose upon banking institutions, for any failure to
comply with the requirements of law, Monetary Board
regulations and policies, and/or instructions issued by the
Monetary Board or by the Governor, fines not in excess
of Ten thousand pesos (P10,000) a day for each violation,
the imposition of which shall be final and executory until
reversed, modified or lifted by the Monetary Board on
appeal.

ADMINISTRATIVE SANCTIONS:
1. Fines (aside from criminal and civil liability);
2. suspension of rediscounting privileges or access
to Bangko Sentral credit facilities;
3. suspension of lending or foreign exchange
operations or authority to accept new deposits or
make new investments;
4. suspension of interbank clearing privileges;
and/or
5. revocation of quasi-banking license.

Section 48. The Peso. - The unit of monetary value in the
Philippines is the "peso," which is represented by the sign
"P."
The peso is divided into one hundred (100) equal parts
called "centavos," which are represented by the sign "c."

Section 49. Definition of Currency. The word
"currency" is hereby defined, for purposes of this Act, as
meaning all Philippine notes and coins issued or
circulating in accordance with the provisions of this Act.

Section 50. Exclusive Issue Power. The Bangko Sentral
shall have the sole power and authority to issue currency,
within the territory of the Philippines. No other person or
entity, public or private, may put into circulation notes,
coins or any other object or document which, in the
opinion of the Monetary Board, might circulate as
currency, nor reproduce or imitate the facsimiles of

Bangko Sentral notes without prior authority from the
Bangko Sentral.

The Monetary Board may issue such regulations as it may
deem advisable in order to prevent the circulation of
foreign currency or of currency substitutes as well as to
prevent the reproduction of facsimiles of Bangko Sentral
notes.

The Bangko Sentral shall have the authority to
investigate, make arrests, conduct searches and seizures
in accordance with law, for the purpose of maintaining
the integrity of the currency.

Violation of this provision or any regulation issued by the
Bangko Sentral pursuant thereto shall constitute an
offense punishable by imprisonment of not less than five
(5) years but not more than ten (10) years. In case the
Revised Penal Code provides for a greater penalty, then
that penalty shall be imposed.

Peso unit of monetary value in the Philippines
Currency the notes and coins in circulation
BSP has exclusive authority to issue notes and coins; its
criminally punishable for any other person/entity to
produce notes or coins

Section 51. Liability for Notes and Coins. Notes and
coins issued by the Bangko Sentral shall be liabilities of
the Bangko Sentral and may be issued only against, and in
amounts not exceeding, the assets of the Bangko Sentral.
Said notes and coins shall be a first and paramount lien
on all assets of the Bangko Sentral.

The Bangko Sentral's holdings of its own notes and coins
shall not be considered as part of its currency issue and,
accordingly, shall not form part of the assets or liabilities
of the Bangko Sentral.

Notes and coins are liabilities of Central Bank and the
government of the Philippines.
Notes and coins may be issued only in an amount not
exceeding the assets of Central Bank. That is the


reason why we cannot just print more money to solve
poverty. The Central Bank cannot issue notes and
coins more than its assets and reserves (the gold and
foreign currencies). To have it otherwise, the money
would have no value at all. If it would be that easy to
print money, then the money would be rendered
valueless or worthless. The effect would then be that
the money is just a mere piece of paper.
Section 52. Legal Tender Power. All notes and coins
issued by the Bangko Sentral shall be fully guaranteed
by the Government of the Republic of the Philippines
and shall be legal tender in the Philippines for all debts,
both public and private: Provided, however, That, unless
otherwise fixed by the Monetary Board, coins shall be
legal tender in amounts not exceeding Fifty pesos
(P50.00) for denominations of Twenty-five centavos and
above, and in amounts not exceeding Twenty pesos
(P20.00) for denominations of Ten centavos or less.

What are considered legal tender in the Philippines?
-
Only notes and coins issued by the BSP
Check, even if managers check is not legal tender

LEGAL TENDER FOR COINS
-
-
25-centavo coins (and above) still considered

legal tender in amounts not exceeding Php 50.00
10-centavo coins (or less) still considered legal
tender in amounts not exceeding Php 20.00
BAR EXAM PROBLEM:

A paid P1,000 worth of 25c. The cashier of the store
rejected payment saying it was not legal tender. Is
the cashier correct?
No, it is not legal tender. According to sec 52, it is
only legal tender up to P50.00
Why is it considered legal tender?
-
Because it is fully guaranteed by the government

of the Philippines.
CHARACTERISTICS of the Currency:

-
-
Refers to the dimensions, design, denomination

of the notes, coins
Prescribed by the Monetary Board with the
approval of the President
ALL NOTES SHOULD CONTAIN:

-
-
Signature of the governor of the BSP and the

president of the Philippines.
"ANG SALAPING ITO AY BAYARIN NG BANGKO
SENTRAL AT PANANAGUTAN NG REPUBLIKA
NG PILIPINAS".
Section 54. Printing of Notes and Minting of Coins.

The Monetary Board shall prescribe the amounts of notes
and coins to be printed and minted, respectively, and the
conditions to which the printing of notes and the minting
of coins shall be subject. The Monetary Board shall have
the authority to contract institutions, mints or firms for
such operations.
All expenses incurred in the printing of notes and the
minting of coins shall be for the account of the Bangko
Sentral.

Section 55. Interconvertibility of Currency. The
Bangko Sentral shall exchange, on demand and without
charge, Philippine currency of any denomination for
Philippine notes and coins of any other denomination
requested. If for any reason the Bangko Sentral is
temporarily unable to provide notes or coins of the
denominations requested, it shall meet its obligations by
delivering notes and coins of the denominations which
most nearly approximate those requested.

Interconvertibility of Currency:
-
the ability of the currency to be exchanged

for other denominations
Section 56. Replacement of Currency Unfit for

Circulation. The Bangko Sentral shall withdraw from
circulation and shall demonetize all notes and coins which
for any reason whatsoever are unfit for circulation and
shall replace them by adequate notes and


coins: Provided, however, That the Bangko Sentral shall
not replace notes and coins the identification of which is
impossible, coins which show signs of filing, clipping or
perforation, and notes which have lost more than two-
fifths (2/5) of their surface or all of the signatures
inscribed thereon. Notes and coins in such mutilated
conditions shall be withdrawn from circulation and
demonetized without compensation to the bearer.

The Central Bank shall replace notes and coins which are
already considered as unfit for circulation. Those notes
and coins will be withdrawn from circulation and
demonetized.

When is it considered as unfit for circulation?
- When it is already too old, tattered or mutilated.

But, take note that the central bank will NOT ACCEPT
notes and coins whose identification are already
impossible to determine.
1. coins which show signs of filing, clipping or
perforation
2. notes which have lost more than two-fifths (2/5) of
their surface or all of the signatures inscribed
thereon.
- Kung gisi pa na bisag naay scotch tape, pwede pa
na as long as not more than 2/5 of their surface is
lost

Notes and coins in such mutilated conditions shall be
withdrawn from circulation and demonetized without
compensation to the bearer.

Section 57. Retirement of Old Notes and Coins. The
Bangko Sentral may call in for replacement notes of any
series or denomination which are more than five (5) years
old and coins which are more than (10) years old.

Notes and coins called in for replacement in accordance
with this provision shall remain legal tender for a period
of one (1) year from the date of call. After this period,
they shall cease to be legal tender but during the
following year, or for such longer period as the Monetary
Board may determine, they may be exchanged at par and
without charge in the Bangko Sentral and by agents duly
authorized by the Bangko Sentral for this purpose. After
the expiration of this latter period, the notes and coins
which have not been exchanged shall cease to be a
liability of the Bangko Sentral and shall be demonetized.

The Bangko Sentral shall also demonetize all notes and
coins which have been called in and replaced.

RETIREMENT OF OLD NOTES AND COINS:
- NOTES: more than 5 years old
- COINS: more than 10 years old

However, the old notes and coins called for retirement
shall remain legal tender for a period of 1 year. After
that 1 year, it would no longer be legal tender but may
still be replaced with the BSP. After such year will the BSP
no longer replaced such money. Technically speaking, it is
after the lapse of 2 years from the order of recall will the
BSP no longer accept to replace the recalled money.

Example:
In 2013, notes issued in 2007 and coins issued in 2002 are
recalled from circulation. BSP will advise the banks and
the banks will inform the public.

Within 1 yr from the order to recall (until 2014) still
considered legal tender; or may have them replaced

Another 1 yr (until 2015) no longer legal tender but
may still be exchanged/replaced with the banks at par
(with value)

After that year (which is 2016) no longer legal tender
and can no longer be replaced; ceases to be the liability
of the BSP

This is usually done with the help of private banks.

SEC. 58. Definition. _ For purposes of this Act, the term
"demand deposits" means all those liabilities of the
Bangko Sentral and of other banks which are
denominated in Philippine currency and are subject to
payment in legal tender upon demand by the
presentation of checks.

SEC. 59. Issue of Demand Deposits. _ Only banks duly
authorized to do so may accept funds or create liabilities
payable in pesos upon demand by the presentation of
checks, and such operations shall be subject to the
control of the Monetary Board in accordance with the
powers granted it with respect thereto under this Act.



SEC. 60. Legal Character. _ Checks representing demand
deposits do not have legal tender power and their
acceptance in the payment of debts, both public and
private, is at the option of the creditor: Provided,
however, That a check which has been cleared and
credited to the account of the creditor shall be equivalent
to a delivery to the creditor of cash in an amount equal to
the amount credited to his account.

Demand Deposit
- Considered checking accounts; not considered
legal tender

Section 61. Guiding Principle. - The Monetary Board shall
endeavor to control any expansion or contraction in
monetary aggregates which is prejudicial to the
attainment or maintenance of price stability.
Section 63. Action When Abnormal Movements Occur in
the Monetary Aggregates, Credit, or Price Level. -
Whenever abnormal movements in the monetary
aggregates, in credit, or in prices endanger the stability of
the Philippine economy or important sectors thereof, the
Monetary Board shall:
(a) take such remedial measures as are appropriate
and within the powers granted to the Monetary
Board and the Bangko Sentral under the provisions of
this Act; and
(b) submit to the President of the Philippines and the
Congress, and make public, a detailed report which
shall include, as a minimum, a description and
analysis of:
(1) the causes of the rise or fall of the monetary
aggregates, of credit or of prices;
(2) the extent to which the changes in the
monetary aggregates, in credit, or in prices have
been reflected in changes in the level of domestic
output, employment, wages and economic
activity in general, and the nature and
significance of any such changes; and
(3) the measures which the Monetary Board has
taken and the other monetary, fiscal or
administrative measures which it recommends to
be adopted.

Whenever the monetary aggregates, or the level of
credit, increases or decreases by more than fifteen
percent (15%), or the cost of living index increases by
more than ten percent (10%), in relation to the level
existing at the end of the corresponding month of the

preceding year, or even though any of these quantitative
guidelines have not been reached when in its judgment
the circumstances so warrant, the Monetary Board shall
submit the reports mentioned in this section, and shall
state therein whether, in the opinion of the Board, said
changes in the monetary aggregates, credit or cost of
living represent a threat to the stability of the Philippine
economy or of important sectors thereof.

The Monetary Board shall continue to submit periodic
reports to the President of the Philippines and to
Congress until it considers that the monetary, credit or
price disturbances have disappeared or have been
adequately controlled.

DOMESTIC MONETARY STABILIZATION

- one of the functions of the BSP (through
monetary board) is to maintain monetary, price
stability and convertibility of peso.
- monetary board shall control the supply of
money to stabilize the economy.
- Refers to monetary policy of the BSP

MONETARY POLICY
- Has something to do with monitoring or altering
the supply of money in the economy to achieve
the purpose mentioned above

HOW to ALTER THE SUPPLY OF MONEY IN THE
ECONOMY
- Either to increase or decrease the supply of
money

INCREASE THE SUPPLY
- During the times of rescission
- To increase people to spend
- Extend loans at a reduced interest

DECREASE THE SUPPLY
- During the times of inflation
- To discourage or curtail spending
HOW DOES BSP CONTROL the SUPPLY?
There are 3 tools that BSP uses:
1. Discount Policy (mao ni term ni mam but sa
provision kay credit policy?) (Sec 81)
2. Open Market Operations (Sec 90)


3. Reserve Requirements (Sec 94)

A. CREDIT POLICY
SEC. 81. Guiding Principles. _ The rediscounts, discounts,
loans and advances which the Bangko Sentral is
authorized to extend to banking institutions under the
provisions of the present article of this Act shall be used
to influence the volume of credit consistent with the
objective of price stability

DISCOUNT POLICY (term used by mam)
- Power of the BSP to extend loans and
advances to banks and quasi-banking
institutions
- BSP has also the power to fix the interest rate
it will charge to the bank
- To increase the supply of money, BSP would
open its discount window by extending loans
at lower rates
- But if it would want to decrease the supply of
money, BSP would increase its interest rates

LOANS may be in the form of those granted in the:
1. Normal credit operations (usual extension of
credit to banks)
2. Special Credit Operations
- Granted to help banks having problem
with their liquidity
- Maturity period: not exceeding 7days
- Granted by the BSP without collateral
3. Emergency Credit Operations
- Extend emergency loans and advances in
time of FINANCIAL PANIC (national, local
or international panic)

SEC. 90. Principles of Open Market Operations. _ The
open market purchases and sales of securities by the
Bangko Sentral shall be made exclusively in accordance
with its primary objective of achieving price stability.
SEC. 91. Purchases and Sales of Government Securities.
_ In order to achieve the objectives of the national
monetary policy, the Bangko Sentral may, in accordance
with the principle stated in Section 90 of this Act and with
such rules and regulations as may be prescribed by the
Monetary Board, buy and sell in the open market for its
own account:
(a) evidences of indebtedness issued directly by the
Government of the Philippines or by its political
subdivisions; and
(b) evidences of indebtedness issued by government
instrumentalities and fully guaranteed by the
Government.
The evidences of indebtedness acquired under the
provisions of this section must be freely negotiable and
regularly serviced and must be available to the general
public through banking institutions and local government
treasuries in denominations of a thousand pesos or more.

OPEN MARKET OPERATIONS
- the open market will buy and sell securities or
evidence of indebtedness issued by the
government like treasury bonds
- To increase the supply of money, BSP would
buy securities (in this case, BSP mupagawas
ug kwarta)
- To decrease the supply of money, BSP would
sell. It would encourage people to spend and
money will be kept by the BSP

SEC. 94. Reserve Requirements. _ In order to control the
volume of money created by the credit operations of the
banking system, all banks operating in the Philippines
shall be required to maintain reserves against their
deposit liabilities: Provided, That the Monetary Board
may, at its discretion, also require all banks and/or quasi-
banks to maintain reserves against funds held in trust and
liabilities for deposit substitutes as defined in this Act.
The required reserves of each bank shall be proportional
to the volume of its deposit liabilities and shall ordinarily
take the form of a deposit in the Bangko Sentral. Reserve
requirements shall be applied to all banks of the same
category uniformly and without discrimination.
Reserves against deposit substitutes, if imposed, shall be
determined in the same manner as provided for reserve
requirements against regular bank deposits, with respect
to the imposition, increase, and computation of reserves.
The Monetary Board may exempt from reserve
requirements deposits and deposit substitutes with
remaining maturities of two (2) years or more, as well as
interbank borrowings.
Since the requirement to maintain bank reserves is
imposed primarily to control the volume of money, the
Bangko Sentral shall not pay interest on the reserves
maintained with it unless the Monetary Board decides
otherwise as warranted by circumstances.



RESERVE REQUIREMENTS
- Banks are required to maintain a certain
reserve corresponding/in proportion to their
deposit liabilities
- Your deposits in the banks are considered
liabilities of the bank
- This reserve cannot be lent out by the bank
instead this amount of money is deposited
with the BSP
- To increase the supply of money, lower the
reserve requirements; so that bank can use
that part of the reserve to lend to people
therefore releasing money
- To decrease the supply of money, increase
the reserve requirements; pra ang kwarta
mapahuwam sa bangko sa mga taw, gamay

Section 65. International Reserves. - In order to maintain
the international stability and convertibility of the
Philippine peso, the Bangko Sentral shall maintain
international reserves adequate to meet any foreseeable
net demands on the Bangko Sentral for foreign
currencies.

In judging the adequacy of the international reserves, the
Monetary Board shall be guided by the prospective
receipts and payments of foreign exchange by the
Philippines. The Board shall give special attention to the
volume and maturity of the Bangko Sentral's own
liabilities in foreign currencies, to the volume and
maturity of the foreign exchange assets and liabilities of
other banks operating in the Philippines and, insofar as
they are known or can be estimated, the volume and
maturity of the foreign exchange assets and liabilities of
all other persons and entities in the Philippines.

INTERNATIONAL MONETARY
STABILIZATION/CONVERTABILITY OF PESO
- Something to do with international reserves

INTERNATIONAL RESERVES
- BSP will maintain sufficient international
reserves adequate to meet any demand like
foreign trade
- Consists of gold and foreign currencies
(usually remittance from OFW, exports, BPO)
- Effect on the peso if we have many
international reserves: strengthen the peso

Special Commercial Laws Midterm Notes

Diunggah oleh

Informasi Dokumen

Deskripsi Asli:

Hak Cipta

Format Tersedia

Bagikan dokumen Ini

Bagikan atau Tanam Dokumen

Opsi Berbagi

Apakah menurut Anda dokumen ini bermanfaat?

Apakah konten ini tidak pantas?

Hak Cipta:

Format Tersedia

Special Commercial Laws Midterm Notes

Diunggah oleh

Hak Cipta:

Format Tersedia

Notes

in Special Commercial Law (MIDTERM)

Historically LC was developed by merchants to

How does it work?

Notes in Special Commercial Law (MIDTERM)

-------------------- Correspondent Bank

It is important for the Buyer to choose an issuing

Why would a bank issue a LC? Does it get revenue out of

The buyer when it contracts for a LC with issuing

Basically, that is how a LC works especially in a sale of

primarily and solidarily liable with the Buyer to

Notes in Special Commercial Law (MIDTERM)

where the seller or beneficiary is , instead of

Between issuing bank and corresponding bank: Issuing

For example a LC that you applied for is for

you will open, you should make a deposit of lets

Case: Pru Bank vs IAC

Correspondent bank could either be

What is the obligation of an advising bank?

Notes in Special Commercial Law (MIDTERM)

Is LC necessary for validity of underlying contract?

Principle (Contracts): Separate and distinct from each

documents stated in LC are complied with. One involving

What governs the rights and obligations of

CASE: (Fraud Exception Rule) TRANSFIELD CASE

If it is established that there is fraud on the part

4 Letters of Credit Trust Receipts Law SRC New CASE:

Notes in Special Commercial Law (MIDTERM)

CASE: Filam vs Insular

Irrevocable LC issuing bank cannot alter

Cumulative LC normally in a bank there

IMPORTANT POINTS TO REMEMBER IN LETTERS OF

3 Principles: Independence Principle, Fraud

Governed by PD 115 Trust Receipts Law

Notes in Special Commercial Law (MIDTERM)

To aid importers or merchants who do not

released to him. Subsequently the entrustee

Notes in Special Commercial Law (MIDTERM)

Turn-over finished goods. Law states that

Rights of BA Finance under the TR is

CASE: SOUTH CITY HOMES vs BA FINANCE

Consignment release possession of goods

Question: Is there a pro forma TR?

Notes in Special Commercial Law (MIDTERM)

Held: NO. The second loan

A trust receipt is a principal contract and

Goods, documents, instruments which may or may

Notes in Special Commercial Law (MIDTERM)

Notes in Special Commercial Law (MIDTERM)

5. To return the goods, documents or instruments in

Basically, the entrustee has 2 alternative

Take note that these two alternatives refer to the

Notes in Special Commercial Law (MIDTERM)

person-buyer could no longer go after the

PNB - based on section 12, the rights of the entruster is

Notes in Special Commercial Law (MIDTERM)

Note: the mere failure of the entrustee to turn

Notes in Special Commercial Law (MIDTERM)

So it does not violate the constitutional

promote the development of the capital market, protect

Notes in Special Commercial Law (MIDTERM)

SEC has been divested with some

If the corporation is doing any of the prohibited